As filed with the Securities and Exchange Commission on September 15, 1997
REGISTRATION NO. 333-32753
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2 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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<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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<S> <C>
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 ...... 2,645,000 Shares(1) $ 11.00(2) $ 29,095,000(2) $ 8,817(3)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 345,000 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) $7,284 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 SEPTEMBER 15, 1997
2,300,000 SHARES
[GRAPHIC OMITTED]
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 $9.00 and $11.00 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 345,000 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 ...... 2,300,000 shares
Common Stock to be Outstanding After the
Offering .............................. 7,697,999 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 Right," 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>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
-------- ----------- ----------- ------------ ------------ --------- --------
(UNAUDITED) (UNAUDITED)
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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 $ (0.34) $ (0.20) $ (0.22) $ (0.50) $(0.17) $ 0.06
Weighted average common and equiva-
lent shares outstanding 4,868 4,888 4,888 5,609 5,695 5,695 5,695
</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 $19,966
Working capital .................................... (7,293) 10,567
Total assets ....................................... 14,265 32,125
Long-term obligations, net of current portion ...... 759 1,801
Stockholders' (deficit) equity ..................... $ (5,714) $15,424
</TABLE>
- ----------
(1) Adjusted to give effect to (i) the sale of the 2,300,000 shares of Common
Stock offered hereby (at an assumed initial public offering price of $10.00
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
prior to the Offering, because of time constraints, the Company may not have
obtained such approval from the seven 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. 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 Group." 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 48.5% 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 ($53,979,990, assuming an Offering price per share of $10.00). 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 2,300,000 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 $20.4 million ($23.5 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 $13.0 million to acquire cable facilities, switching, compression
and other related telecommunications equipment; approximately $4.2 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 August
31, 1997, at a rate of 9.8%; 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 2,300,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $10.00 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 $14.2
million, or $1.85 per share. This represents an immediate increase in net
tangible book value of $2.99 per share to existing stockholders and an immediate
dilution of $8.15 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 .................................... $10.00
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 ................................................... 2.99
-------
Pro forma net tangible book value per share as adjusted for this
Offering ............................................................ 1.85
--------
Dilution in net tangible book value per share to new investors ...... $ 8.15
========
</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 70% $ 1,003,259 4% $ 0.19
New investors ............... 2,300,000 30% 23,000,000 96% 10.00
--------- ---- ------------ ---- -------
Total ..................... 7,697,999 100% $24,003,259 100% $ 3.12
========= ==== ============ ==== =======
</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 716,800 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 2,300,000 shares of Common
Stock by the Company in the Offering (at an assumed initial public offering
price of $10.00 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 $ 19,966
======== ======== ========
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 7,697,999 as ad-
justed(3) 54 54 77
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 20,653
Unearned compensation(2) ............................................. (108) (108) -
Warrants(2) ............................................................ - - 1,548
Accumulated deficit(2) ................................................ (6,746) (6,746) (6,854)
-------- -------- --------
Total Stockholders' (deficit) equity ................................. (5,714) (5,759) 15,424
-------- -------- --------
Total capitalization ................................................ $ (277) $ (322) $ 17,538
======== ======== ========
</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 $ (0.34) $ (0.20) $ (0.22) $ (0.50) $(0.17) $ 0.06
======= ======== ======= ======== ======== ======= ========
Weighted average common and equiva-
lent shares outstanding 4,868 4,888 4,888 5,609 5,695 5,695 5,695
</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
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<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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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.
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<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. In five of these states, the Company's intrastate
revenues for the first six months of 1997 were less than $4,000 per state. In
the remaining state, New York, the intrastate revenues exceeded $17,000 for the
first six months but were only 1.2% of the Company's total residential revenues
from that state. Although the necessary approvals will be sought prior to the
offering, because of time constraints, the Company may not have obtained such
approval from the seven 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.
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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.
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.
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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 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. 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
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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.
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
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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 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.
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<PAGE>
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 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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<PAGE>
per year, is entitled to participate in the Company's 1997 Performance Incentive
Plan, is eligible to receive a bonus, 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, 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 10% 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 September 12, 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% 43.3%
Blue Carol Enterprises Ltd(5) ............... 807,124 13.5% 9.8%
Vijay Srinivas(6) ........................... 311,200 5.2% 3.8%
Prabhav V. Maniyar ........................... 107,616 1.8% 1.3%
Signet Bank(7) .............................. 269,900 4.5% 3.3%
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% 48.5%
---------- ------ ------
</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 August 31, 1997, there were 5,397,999 shares of Common Stock
outstanding held of record by 15 stockholders. As of August 31, 1997, options to
purchase an aggregate of 269,766 shares of Common Stock were outstanding, of
which none were exercisable. Warrants and other rights to purchase an aggregate
of 563,800 shares of Common Stock were also outstanding, of which options and
warrants to purchase 269,900 shares were then exercisable. An additional 257,250
options and warrants were issued effective September 12, 1997. After giving
effect to the sale of 2,300,000 shares of Common Stock by the Company in this
Offering, there will be 7,697,999 shares of Common Stock outstanding (8,042,999
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
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<PAGE>
outstanding Common Stock at the time the Signet Warrants were issued, vested
fully on the date of 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
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the shares of Common Stock underlying the Representatives' Warrants under the
Securities Act, in 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 7,697,999
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 $11.00 per share.
Of the Common Stock outstanding upon completion of the Offering, the
2,300,000 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 2,073,790 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:
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------- ----------
Ferris, Baker Watts, Incorporated ......
Boenning & Scattergood, Inc ............
Total ................................. 2,300,000
=========
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 345,000 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 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. Pursuant to an arrangement between Ferris, Baker Watts, Incorporated
and Richard K. Prins, a Senior Vice President of Ferris, Baker Watts,
Incorporated and a director of the Company, 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 financial statements of the Company included in this Prospectus and the
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.
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
62
<PAGE>
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) $ (0.22) $ (0.50) $ (0.17) $ 0.06
========== ============ ============ =========== ===========
Weighted average common and equivalent
shares outstanding ........................ 4,888,176 5,609,059 5,695,300 5,695,300 5,695,300
========== ============ ============ =========== ===========
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) ..............................
5,977,717 5,977,717 5,977,717
============ =========== ===========
</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 $0.22 and $0.50 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>
<TABLE>
<CAPTION>
<S> <C>
======================================================== ========================================================
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 2,300,000 SHARES
COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
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 STARTEC
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE The Star of Worldwide Communications
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 COMMON STOCK
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
-------------------------------
PAGE
------ PROSPECTUS
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 Finan-
cial Condition and Results of Operations 21
Business .................................... 29
Management ................................. 47
Principal Stockholders ..................... 53
Certain Transactions ........................ 54
Description of Capital Stock ............... 55
Shares Eligible for Future Sale ............ 60 FERRIS, BAKER WATTS
Underwriting ................................. 61 Incorporated
Legal Matters .............................. 62
Experts .................................... 62
Available Information ........................ 62
Glossary of Terms ........................... G-1 BOENNING & SCATTERGOOD, INC.
Index to Financial Statements ............... F-1
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 ___________, 1997
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
======================================================== ========================================================
</TABLE>
<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 .............................. $ 8,817
-------
NASD filing fee .................................... *
-------
Nasdaq National Market listing fee .................. *
-------
Legal fees and expenses ........................... *
Accounting fees and expenses ........................ *
Blue Sky fees and expenses ........................... *
Printing and engraving expenses ..................... *
Transfer Agent and Registrar fees and expenses ...... *
Miscellaneous ....................................... *
Total ......................................................... $ *
=======
- ----------
* To be completed by amendment.
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 the Company's 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.
*** To be filed by amendment.
+ 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. 2 to its Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Montgomery
County, State of Maryland, on the 12th day of September, 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 President, Chief Executive Officer, September 12, 1997
- -------------------------
Treasurer and Director (Principal
Ram Mukunda
Executive Officer)
/s/ * Senior Vice President, Chief Financial September 12, 1997
- -------------------------
Officer, Secretary and Director
Prabhav V. Maniyar
Officer)al Financial and Accounting
/s/ * Director September 12, 1997
- -------------------------
Vijay Srinivas
By: /s/ Ram Mukunda
---------------------
Attorney-in-Fact
</TABLE>
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 ___, 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.
*** To be filed by amendment.
+ 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.
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
STARTEC GLOBAL COMMUNICATIONS CORPORATION
ARTICLE I -- NAME
The name of the corporation (which is hereinafter called the
"Corporation") is: Startec Global Communications Corporation.
ARTICLE II -- PURPOSE
(a) The purposes for which and any of which the Corporation is formed
and the business and objects to be carried on and promoted by it are:
(1) To seek out, identify, and engage in any lawful business acts
or activities now or hereafter permitted by the laws of the State of
Maryland.
(2) To engage in any one or more businesses or transactions, or
to acquire all or any portion of any entity engaged in any one or more
businesses or transactions which the Board of Directors may from time
to time authorize or approve, whether or not related to the business
described elsewhere in this Article or to any other business at the
time or theretofore engaged in by the Corporation.
(3) To have one or more offices and places of business, and to
carry on any and all of its operations and business without
restriction or limitation as to amount or place in any other State of
the United States of America, or the District of Columbia, or any
foreign country, subject to the laws of the State of Maryland.
(4) To conduct and promote any business or purpose for which the
Corporation may be organized in any and all parts of the world,
subject to the laws of the State of Maryland, or to the laws of the
United States of America.
<PAGE>
(b) The foregoing enumerated purposes and objects shall be in no way
limited or restricted by reference to, or inference from, the terms of any
other clause of this or any other Article of the charter of the
Corporation, and each shall be regarded as independent; and they are
intended to be and shall be construed as powers as well as purposes and
objects of the Corporation and shall be in addition to and not in
limitation of the general powers of corporations under the General Laws of
the State of Maryland.
ARTICLE III -- PRINCIPAL OFFICE; RESIDENT AGENT
(a) The address of the principal office of the Corporation in this
State is 10411 Motor City Drive, Bethesda, Maryland 20817.
(b) The name and address of the resident agent of the Corporation in
this State is Ram Mukunda, 10411 Motor City Drive, Bethesda, Maryland
20817.
ARTICLE IV -- AUTHORIZED CAPITAL
(a) The total number of shares of capital stock of all classes which
the Corporation has authority to issue is Twenty Million One Hundred
Thousand (20,100,000) shares, Twenty Million (20,000,000) shares of which
are shares of common stock, par value one cent ($.01) per share ("Common
Stock") and One Hundred Thousand (100,000) shares of which are shares of
blank check preferred stock, par value One Dollar ($1.00) per share
("Preferred Stock"). The Board of Directors may classify and reclassify any
unissued shares of capital stock by setting or changing in any one or more
respects the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares of stock.
(b) The following is a description of the preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the Common Stock
of the Corporation:
(1) Each share of Common Stock shall have one vote, and, except
as otherwise provided in respect of any class of stock hereafter
classified or reclassified, the exclusive voting power for all
purposes shall be vested in the holders of the Common Stock.
<PAGE>
(2) Subject to the provisions of law and any preferences of any
class of stock hereafter classified or reclassified, dividends,
including dividends payable in shares of another class of the
Corporation's stock, may be paid on the Common Stock of the
Corporation at such time and in such amounts as the Board of Directors
may deem advisable.
(3) In the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the holders of the
Common Stock shall be entitled, after payment or provision for payment
of the debts and other liabilities of the Corporation and the amount
to which the holders of any class of stock hereafter classified or
reclassified having a preference on distributions in the liquidation,
dissolution or winding up of the Corporation shall be entitled,
together with the holders of any other class of stock hereafter
classified or reclassified not having a preference on distributions in
the liquidation, dissolution or winding up of the Corporation, to
share ratably in the remaining net assets of the Corporation.
(c) Subject to the foregoing, the power of the Board of Directors to
classify and reclassify any of the shares of capital stock shall include,
without limitation, subject to the provisions of the charter, authority to
classify or reclassify any unissued shares of such stock into a class or
classes of preferred stock, preference stock, special stock or other stock,
and to divide and classify shares of any class into one or more series of
such class, by determining, fixing, or altering one or more of the
following:
(1) The distinctive designation of such class or series and the
number of shares to constitute such class or series; provided that,
unless otherwise prohibited by the terms of such or any other class or
series, the number of shares of any class or series may be decreased
by the Board of Directors in connection with any classification or
reclassification of unissued shares and the number of shares of such
class or series may be increased by the Board of Directors in
connection with any such classification or reclassification, and any
shares of any class or series which have been redeemed, purchased,
otherwise acquired or converted into shares of Common Stock or any
other class or series shall become part of the authorized capital
stock and be subject to classification and reclassification as
provided in this sub-paragraph.
<PAGE>
(2) Whether or not and, if so, the rates, amounts and times at
which, and the conditions under which, dividends shall be payable on
shares of such class or series, whether any such dividends shall rank
senior or junior to or on a parity with the dividends payable on any
other class or series of stock, and the status of any such dividends
as cumulative, cumulative to a limited extent or non-cumulative and as
participating or non-participating.
(3) Whether or not shares of such class or series shall have
voting rights, in addition to any voting rights provided by law and,
if so, the terms of such voting rights.
(4) Whether or not shares of such class or series shall have
conversion or exchange privileges and, if so, the terms and conditions
thereof, including provision for adjustment of the conversion or
exchange rate in such events or at such times as the Board of
Directors shall determine.
(5) Whether or not shares of such class or series shall be
subject to redemption and, if so, the terms and conditions of such
redemption, including the date or dates upon or after which they shall
be redeemable and the amount per share payable in case of redemption,
which amount may vary under different conditions and at different
redemption dates; and whether or not there shall be any sinking fund
or purchase account in respect thereof, and if so, the terms thereof.
(6) The rights of the holders of shares of such class or series
upon the liquidation, dissolution or winding up of the affairs of, or
upon any distribution of the assets of, the Corporation, which rights
may vary depending upon whether such liquidation, dissolution or
winding up is voluntary or involuntary and, if voluntary, may vary at
different dates, and whether such rights shall rank senior or junior
to or on a parity with such rights of any other class or series of
stock.
<PAGE>
(7) Whether or not there shall be any limitations applicable,
while shares of such class or series are outstanding, upon the payment
of dividends or making of distributions on, or the acquisition of, or
the use of moneys for purchase or redemption of, any stock of the
Corporation, or upon any other action of the Corporation, including
action under this sub-paragraph, and, if so, the terms and conditions
thereof.
(8) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of such
class or series, not inconsistent with law and the charter of the
Corporation.
(d) For the purposes hereof and of any articles supplementary to the
charter providing for the classification or reclassification of any shares
of capital stock or of any other charter document of the Corporation
(unless otherwise provided in any such articles or document), any class or
series of capital stock of the Corporation shall be deemed to rank:
(1) prior to another class or series either as to dividends or
upon liquidation, if the holders of such class or series shall be
entitled to the receipt of dividends or of amounts distributable on
liquidation, dissolution or winding up, as the case may be, in
preference or priority to holders of such other class or series;
(2) on a parity with another class or series either as to
dividends or upon liquidation, whether or not the dividend rates,
dividend payment dates or redemption or liquidation price per share
thereof be different from those of such others, if the holders of such
class or series of stock shall be entitled to receipt of dividends or
amounts distributable upon liquidation, dissolution or winding up, as
the case may be, in proportion to their respective dividend rates or
redemption or liquidation prices, without preference or priority over
the holders of such other class or series; and
<PAGE>
(3) junior to another class or series either as to dividends or
upon liquidation, if the rights of the holders of such class or series
shall be subject or subordinate to the rights of the holders of such
other class or series in respect of the receipt of dividends or the
amounts distributable upon liquidation, dissolution or winding up, as
the case may be.
ARTICLE V -- DIRECTORS
(a) The number of directors of the Corporation shall be five, which
number may only be increased or decreased, in the manner prescribed in the
By-Laws, by at least two-thirds of the directors then in office, but shall
never be less than the minimum number permitted by the General Laws of the
State of Maryland now or hereafter in force.
(b) Subject to the rights of the holders of any class of Preferred
Stock then outstanding, newly created directorships resulting from any
increase in the authorized number of directors or any vacancies on the
Board of Directors resulting from death, resignation, retirement,
disqualification, removal from office, or other cause shall be filled by a
majority vote of the stockholders or the directors then in office. A
director so chosen by the stockholders shall hold office for the balance of
the term then remaining. A director so chosen by the remaining directors
shall hold office until the next annual meeting of stockholders, at which
time the stockholders shall elect a director to hold office for the balance
of the term then remaining. No decrease in the number of directors
constituting the Board of Directors shall affect the tenure of office of
any director.
(c) Whenever the holders of any one or more series of Preferred Stock
of the Corporation shall have the right, voting separately as a class, to
elect one or more directors of the Corporation, the Board of Directors
shall consist of said directors so elected in addition to the number of
directors fixed as provided above in paragraph (a) of this Article FIFTH or
in the By-Laws. Notwithstanding the foregoing, and except as otherwise may
be required by law, whenever the holders of any one or more series of
Preferred Stock of the Corporation shall have the right, voting separately
as a class, to elect one or more directors of the Corporation, the terms of
the director or directors elected by such holders shall expire at the next
succeeding annual meeting of stockholders.
<PAGE>
(d) Subject to the rights of the holders of any class separately
entitled to elect one or more directors, any director, or the entire Board
of Directors, may be removed from office at any time, but only for cause
and then only by the affirmative vote of the holders of at least 80% of the
combined voting power of all classes of shares of capital stock entitled to
vote in the election for directors voting together as a single class.
(e) The Board of Directors shall be divided into three classes
(denominated Class I, Class II and Class III), as nearly equal in number as
reasonably possible, with the term of office of the Class I Directors to
expire at the 1998 annual meeting of stockholders, the term of office of
the Class II Directors to expire at the 1999 annual meeting of
stockholders, and the term of office of the Class III Directors to expire
at the 2000 annual meeting of stockholders. At each annual meeting of
stockholders beginning in 1998, successors to the class of directors whose
term expires at that annual meeting shall be elected for a three year term.
(1) The following persons shall serve as directors until the 1998
annual meeting of stockholders (Class I Directors):
Nazir G. Dossani
Richard K. Prins
(2) The following persons shall serve as directors until the 1999
annual meeting of stockholders (Class II Directors):
Prabhav V. Maniyar
Vijay Srinivas
(3) The following person shall serve as directors until the 2000
annual meeting of stockholders (Class III Directors):
Ram Mukunda
<PAGE>
ARTICLE SIXTH -- POWERS
(a) The following provisions are hereby adopted for the purpose of
defining, limiting, and regulating the powers of the Corporation and of the
directors, officers and stockholders:
(1) The Board of Directors is hereby empowered to authorize the
issuance from time to time of shares of the Corporation's capital
stock of any class, whether now or hereafter authorized, or securities
convertible into shares of its capital stock of any class or classes,
now or hereafter authorized, for such consideration as may be deemed
advisable by the Board of Directors and without any action by the
stockholders.
(2) No holder of any stock or any other securities of the
Corporation, whether now or hereafter authorized, shall have any
preemptive right to subscribe for or purchase any stock or any other
securities of the Corporation other than such, if any, as the Board of
Directors, in its sole discretion, may determine and at such price or
prices and upon such other terms as the Board of Directors, in its
sole discretion, may fix; and any stock or other securities which the
Board of Directors may determine to offer for subscription may, as the
Board of Directors in its sole discretion shall determine, be offered
to the holders of any class, series or type of stock or other
securities at the time outstanding to the exclusion of the holders of
any or all other classes, series or types of stock or other securities
at the time outstanding.
(3) The Board of Directors of the Corporation shall, consistent
with applicable law, have power in its sole discretion to determine
from time to time, in accordance with sound accounting practice or
other reasonable valuation methods, what constitutes annual or other
net profits, earnings, surplus, or net assets in excess of capital; to
fix and vary from time to time the amount to be reserved as working
capital, or determine that retained earnings or surplus shall remain
in the hands of the Corporation; to set apart out of any funds of the
Corporation such reserve or reserves in such amount or amounts and for
such proper purpose or purposes as it shall determine and to abolish
any such reserve or any part thereof; to distribute and pay
distributions or dividends in stock, cash or other securities or
property, out of surplus or any other funds or amounts legally
available therefor, at such times and to the stockholders of record on
such dates as it may, from time to time, determine; and to determine
whether and to what extent and at what times and places and under what
conditions and regulations the books, accounts and documents of the
Corporation, or any of them, shall be open to the inspection of
stockholders, except as otherwise provided by statute or by the
By-Laws, and, except as so provided, no stockholder shall have any
right to inspect any book, account or document of the Corporation
unless authorized so to do by resolution of the Board of Directors.
<PAGE>
(4) Except as otherwise expressly provided in the charter of the
Corporation, notwithstanding any provision of law requiring the
authorization of any action by a greater proportion than a majority of
the total number of shares of all classes of capital stock or of the
total number of shares of any class of capital stock, such action
shall be valid and effective if authorized by the affirmative vote of
the holders of a majority of the total number of shares of all classes
outstanding and entitled to vote thereon.
ARTICLE VII -- LIMITATION OF LIABILITY
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.
<PAGE>
ARTICLE VIII -- INDEMNIFICATION
(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
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).
<PAGE>
(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.
ARTICLE IX - MISCELLANEOUS
(a) Any director of the Corporation, individually, or any corporation,
association, firm or other entity of which any director may be an officer,
director or member or in which any director may otherwise be interested, as
a holder of any amount of its capital stock or otherwise, may be a party to
or may be pecuniarily or otherwise interested in, any contract or
transaction of the Corporation, and, in the absence of fraud, no contract
or other transaction shall be affected thereby or invalidated, provided
that the fact of the common directorship or interest shall be disclosed or
shall have been known either (i) to the Board a committee thereof and the
Board or committee authorizes, approves, or ratifies the contract or
transaction by the affirmative vote of a majority of disinterested
directors, even if the disinterested directors constitute less than a
quorum, or (ii) to the stockholders entitled to vote, and the contract or
transaction is authorized, approved or ratified by a majority of the votes
cast by the shareholders entitled to vote other than the votes owned of
record or beneficially by the interested director or corporation,
association, firm, or other entity; or the contract or transaction is fair
and reasonable to the Corporation. Any director of the Corporation who is
also a director or officer of or interested in such other corporation,
association, firm or entity may be counted in determining the existence of
a quorum at any meeting of the Board which shall authorize any such
contract or transaction, and may vote thereat to authorize any such
contract or transaction. Any contract, transaction or act of the
Corporation or of the directors which shall be ratified by a majority of a
quorum of the shareholders having voting powers at any annual meeting, or
at any special meeting called for such purposes, so far as permitted by
law, shall be as valid and as binding as though ratified by every member of
the Corporation.
<PAGE>
(b)(1) Nominations for the election of directors and proposals for any
new business to be taken up at any annual or special meeting of
stockholders may be made by the Board of Directors of the Corporation or by
any stockholder of the Corporation entitled to vote generally in the
election of directors. In order for a stockholder of the Corporation to
make any such nominations and/or proposals, he or she shall give notice
thereof in writing, delivered or mailed by first class United States mail,
postage prepaid, to the Secretary of the Corporation not less than 60 days
nor more than 90 days prior to any such meeting; provided, however, that if
less than 61 days notice of the meeting is given to stockholders, such
written notice shall be delivered or mailed, as prescribed, to the
Secretary of the Corporation not later than the close of the tenth day
following the day on which notice of the meeting was mailed to
stockholders. Each such notice given by a stockholder with respect to
nominations for the election of directors shall set forth (i) the name,
age, business address and, if known, residence address of each nominee
proposed in such notice, (ii) the principal occupation or employment of
each such nominee, (iii) the number of shares of capital stock of the
Corporation which are beneficially owned by each such nominee, (iv) such
other information as would be required to be included in a proxy statement
soliciting proxies for the election of the proposed nominee pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended,
including, without limitation, such person's written consent to being named
in the proxy statement as a nominee and to serving as a director, if
elected, and (v) as to the stockholder giving such notice, his name and
address as they appear on the Corporation's books and the class and number
of shares of capital stock of the Corporation which are beneficially owned
by such stockholder. In addition, the stockholder making such nomination
shall promptly provide any other information reasonably requested by the
Corporation.
(b)(2) Each such notice given by a stockholder to the Secretary of the
Corporation with respect to business proposals to bring before a meeting
shall set forth in writing as to each matter: (i) a brief description of
the business desired to be brought before the meeting and the reasons for
conducting such business at the meeting; (ii) the name and address, as they
appear on the Corporation's books, of the stockholder proposing such
business; (iii) the class and number of shares of the capital stock of the
Corporation which are beneficially owned by the stockholder; and (iv) any
material interest of the stockholder in such business. Notwithstanding
anything in this charter to the contrary, no business shall be conducted at
the meeting except in accordance with the procedures set forth in this
sub-paragraph (a)(2).
<PAGE>
(b)(3) The Chairman of the annual or special meeting of stockholders
may, if the facts warrant, determine and declare to such meeting that a
nomination or proposal was not made in accordance with the foregoing
procedure, and, if he should so determine, he shall so declare to the
meeting, and the defective nomination or proposal shall be disregarded and
laid over for action at the next succeeding adjourned, special or annual
meeting of the stockholders taking place 30 days or more thereafter. This
provision shall not require the holding of any adjourned or special meeting
of stockholders for the purpose of considering such defective nomination or
proposal.
(c) In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors of the Corporation is expressly authorized
to make, repeal, alter, amend and rescind the bylaws of the Corporation
upon vote of not less than two-thirds of the directors then in office.
Notwithstanding any other provision of this charter or the bylaws of the
Corporation (and notwithstanding the fact that some lesser percentage may
be specified by law), the bylaws shall not be made, repealed, altered,
amended or rescinded by the stockholders of the Corporation except by the
vote of the holders of not less than 80% of the outstanding shares of
capital stock of the Corporation entitled to vote generally in the election
of directors (considered for this purpose as one class) cast at a meeting
of the stockholders called for that purpose (provided that notice of such
proposed adoption, repeal, alteration, amendment or rescission is included
in the notice of such meeting), or, as set forth above, by the Board of
Directors.
(d) The Corporation reserves the right from time to time to make any
amendments of its charter which may now or hereafter be authorized by law,
including any amendments changing the terms or contract rights, as
expressly set forth in its charter, of any of its outstanding capital stock
by classification, reclassification or otherwise, but no such amendment
which changes such terms or contract rights of any of its outstanding
capital stock shall be valid unless such amendment shall have been
authorized by not less than a majority of the aggregate number of the votes
entitled to be cast thereon, by a vote at a meeting or in writing with or
without a meeting; provided, however, that any amendment to, repeal or
adopt any provision inconsistent with Article FIFTH shall have been
authorized by not less than 80% of the aggregate votes entitled to be cast
thereon (considered for this purpose as a single class), by vote at a
meeting or in writing with or without a meeting.
(e) The enumeration and definition of particular powers of the Board
of Directors included in the foregoing shall in no way be limited or
restricted by reference to or inference from the terms of any other clause
of this or any other Article of the charter of the Corporation, or
construed as or deemed by inference or otherwise in any manner to exclude
or limit any powers conferred upon the Board of Directors under the General
Laws of the State of Maryland now or hereafter in force.
ARTICLE X -- DURATION
The duration of the Corporation shall be perpetual.
AMENDED AND RESTATED BY-LAWS
OF
STARTEC GLOBAL COMMUNICATIONS CORPORATION
--------------------
ARTICLE I -- OFFICES
Section 1.01 -- Principal Office. The principal office of the Corporation
shall be located at 10411 Motor City Drive, Bethesda, Maryland 20817. The
location of the principal office of the Corporation, however, may be changed
from time to time by the Board of Directors.
Section 1.02 -- Other Offices. The Corporation may also maintain offices at
such other places within or without the State of Maryland, and within or without
the United States, as the Board of Directors may determine or the business of
the Corporation may require.
ARTICLE II -- STOCKHOLDERS
Section 2.01 -- Annual Meeting. The Corporation shall hold an annual
meeting of its stockholders to elect directors and transact any other business
within its powers, either at 10:00 a.m. on the last Thursday of May in each year
if not a legal holiday, or at such other time on such other day falling on or
before the 30th day thereafter as shall be set by the Board of Directors. Except
as the Charter or statute provides otherwise, any business may be considered at
an annual meeting without the purpose of the meeting having been specified in
the notice. Failure to hold an annual meeting does not invalidate the
Corporation's existence or affect any otherwise valid corporate acts.
Section 2.02 -- Special Meetings. At any time in the interval between
annual meetings, a special meeting of the stockholders may be called by the
President or by a majority of the Board of Directors by vote at a meeting or in
writing (addressed to the Secretary of the Corporation) with or without a
meeting. Special meetings of the stockholders shall be called by the Secretary
at the request of the stockholders only as may be required by law. A request for
a special meeting shall state the purpose of the meeting and the matters
proposed to be acted on at it. The Secretary shall inform the stockholders who
make the request of the reasonably estimated costs of preparing and mailing a
notice of the meeting and proxy and, on payment of these costs to the
Corporation, notify each stockholder entitled to notice of the meeting. Unless
requested by stockholders entitled to cast a majority of all the votes entitled
to be cast at the meeting, a special meeting need not be called to consider any
matter which is substantially the same as a matter voted on at any special
meeting of stockholders held in the preceding 12 months.
<PAGE>
Section 2.03 -- Place of Meetings. Meetings of stockholders shall be held
at such place in the United States as is set from time to time by the Board of
Directors.
Section 2.04 -- Notice of Meetings; Waiver of Notice. Not less than ten nor
more than 90 days before each stockholders' meeting, the secretary of the
Corporation shall give written notice of the meeting to each stockholder
entitled to vote at the meeting and each other stockholder entitled to notice of
the meeting. The notice shall state the time and place of the meeting and, if
the meeting is a special meeting or notice of the purpose is required by
statute, the purpose of the meeting. Notice is given to a stockholder when it is
personally delivered to him or her, left at his or her residence or usual place
of business, or mailed to him or her at his or her address as it appears on the
records of the Corporation. Notwithstanding the foregoing provisions, each
person who is entitled to notice waives notice if he or she before or after the
meeting signs a waiver of the notice which is filed with the records of
stockholders' meetings, or is present at the meeting in person or by proxy.
Section 2.05 -- Quorum; Voting. Unless statute or the Charter provides
otherwise, at a meeting of stockholders the presence in person or by proxy of
stockholders entitled to cast a majority of all the votes entitled to be cast at
the meeting constitutes a quorum, and a majority of all the votes cast at a
meeting at which a quorum is present is sufficient to approve any matter which
properly comes before the meeting, except that a plurality of all the votes cast
at a meeting at which a quorum is present is sufficient to elect a director.
Section 2.06 -- Adjournments. Whether or not a quorum is present, a meeting
of stockholders convened on the date for which it was called may be adjourned
from time to time without further notice by a majority vote of the stockholders
present in person or by proxy to a date not more than 120 days after the
original record date. Any business which might have been transacted at the
meeting as originally notified may be deferred and transacted at any such
adjourned meeting at which a quorum shall be present.
<PAGE>
Section 2.07 -- General Right to Vote; Proxies. Unless the Charter provides
for a greater or lesser number of votes per share or limits or denies voting
rights, each outstanding share of stock, regardless of class, is entitled to one
vote on each matter submitted to a vote at a meeting of stockholders. In all
elections for directors, each share of stock may be voted for as many
individuals as there are directors to be elected and for whose election the
share is entitled to be voted. A stockholder may vote the stock the stockholder
owns of record either in person or by proxy. A stockholder may sign a writing
authorizing another person to act as proxy. Signing may be accomplished by the
stockholder or the stockholder's authorized agent signing the writing or causing
the stockholder's signature to be affixed to the writing by any reasonable
means, including facsimile signature. A stockholder may authorize another person
to act as proxy by transmitting, or authorizing the transmission of, a telegram,
cablegram, datagram, or other means of electronic transmission to the person
authorized to act as proxy or to a proxy solicitation firm, proxy support
service organization, or other person authorized by the person who will act as
proxy to receive the transmission. Unless a proxy provides otherwise, it is not
valid more than 11 months after its date. A proxy is revocable by a stockholder
at any time without condition or qualification unless the proxy states that it
is irrevocable and the proxy is coupled with an interest. A proxy may be made
irrevocable for so long as it is coupled with an interest. The interest with
which a proxy may be coupled includes an interest in the stock to be voted under
the proxy or another general interest in the Corporation or its assets or
liabilities.
Section 2.08 -- List of Stockholders. At each meeting of stockholders, a
full, true and complete list of all stockholders entitled to vote at such
meeting, showing the number and class of shares held by each and certified by
the transfer agent for such class or by the secretary of the Corporation, shall
be furnished by the secretary.
Section 2.09 -- Conduct of Business and Voting. At all meetings of
stockholders, unless the voting is conducted by inspectors, the proxies and
ballots shall be received, and all questions touching the qualification of
voters and the validity of proxies, the acceptance or rejection of votes and
procedures for the conduct of business not otherwise specified by these Bylaws,
the Charter or law, shall be decided or determined by the chairman of the
meeting. If demanded by stockholders, present in person or by proxy, entitled to
cast 10% in number of votes entitled to be cast, or if ordered by the chairman,
the vote upon any election or question shall be taken by ballot and, upon like
demand or order, the voting shall be conducted by two inspectors, in which event
the proxies and ballots shall be received, and all questions touching the
qualification of voters and the validity of proxies and the acceptance or
rejection of votes shall be decided, by such inspectors. Unless so demanded or
ordered, no vote need be by ballot and voting need not be conducted by
inspectors. The stockholders at any meeting may choose an inspector or
inspectors to act at such meeting, and in default of such election the chairman
of the meeting may appoint an inspector or inspectors. No candidate for election
as a director at a meeting shall serve as an inspector thereat.
<PAGE>
Section 2.10 -- Informal Action by Stockholders. Any action required or
permitted to be taken at a meeting of stockholders may be taken without a
meeting if there is filed with the records of stockholders meetings an unanimous
written consent which sets forth the action and is signed by each stockholder
entitled to vote on the matter and a written waiver of any right to dissent
signed by each stockholder entitled to notice of the meeting but not entitled to
vote at it.
Section 2.11 -- Stockholder Proposals. For any stockholder proposal to be
presented in connection with an annual meeting of stockholders of the
Corporation, including any proposal relating to the nomination of a director to
be elected to the Board of Directors of the Corporation, the stockholders must
have given timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice shall be delivered to the Secretary at the
principal executive offices of the Corporation not less than 60 days nor more
than 90 days prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is advanced by more than 30 days or delayed by more than 60 days from
such anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the 90th day prior to such annual meeting and not
later than the close of business on the later of the 60th day prior to such
annual meeting or the tenth day following the day on which public announcement
of the date of such meeting is first made. Such stockholder's notice shall set
forth (a) as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); (b) as to any other
business that the stockholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and of the beneficial owner, if any, on whose
behalf the proposal is made; and (c) as to the stockholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is
made, (i) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner and (ii) the class and number
of shares of stock of the Corporation which are owned beneficially and of record
by such stockholders and such beneficial owner. For the 1998 annual meeting the
previous year's meeting shall be deemed to have take place on May 31, 1997;
provided that this sentence shall cease to be a part of the Bylaws after the
holding of the 1998- annual meeting and any adjournments thereof.
<PAGE>
ARTICLE III -- BOARD OF DIRECTORS
Section 3.01 -- Function of Directors. The business and affairs of the
Corporation shall be managed under the direction of its Board of Directors. All
powers of the Corporation may be exercised by or under authority of the Board of
Directors, except as conferred on or reserved to the stockholders by statute or
by the Charter or Bylaws of the Corporation.
Section 3.02 -- Number of Directors. The Corporation shall have at least
three directors; provided that, if there is no stock outstanding, the number of
Directors may be less than three but not less than one, and, if there is stock
outstanding and so long as there are less than three stockholders, the number of
Directors may be less than three but not less than the number of stockholders.
The Corporation shall have the number of directors provided in the Charter until
changed as herein provided. A majority of the entire Board of Directors may
alter the number of directors set by the Charter to not exceeding 25 nor less
than the minimum number then permitted herein, but the action may not affect the
tenure of office of any director.
Section 3.03 -- Election and Tenure of Directors. The directors shall be
divided into three classes as nearly equal in number as possible. At each
successive annual meeting of stockholders, the holders of stock present in
person or by proxy at such meeting and entitled to vote thereat shall elect
members of each successive class to serve for three year terms and until their
successors are elected and qualify. If the number of directors is changed, any
increase or decrease shall be apportioned among the classes so as to maintain
the number of directors in each class as nearly equal as possible, and any
additional director of any class shall, subject to Section 3.05, hold office for
a term that shall coincide with the remaining term of that class, but in no case
shall a decrease in the number of directors shorten the term of any incumbent
director.
<PAGE>
Section 3.04 -- Removal of Director. Subject to the rights of the holders
of any class separately entitled to elect one or more directors, any director,
or the entire Board of Directors, may be removed from office at any time, but
only for cause and then only by the affirmative vote of the holders of at least
80% of the combined voting power of all classes of shares of capital stock
entitled to vote in the election for directors.
Section 3.05 -- Vacancy on Board. Subject to the rights of the holders of
any class of stock separately entitled to elect one or more directors, the
stockholders may elect a successor to fill a vacancy on the Board of Directors
which results from the removal of a director. A director elected by the
stockholders to fill a vacancy which results from the removal of a director
serves for the balance of the term of the removed director. Subject to the
rights of the holders of any class of stock separately entitled to elect one or
more directors, a majority of the remaining directors, whether or not sufficient
to constitute a quorum, may fill a vacancy on the Board of Directors which
results from any cause except an increase in the number of directors, and a
majority of the entire Board of Directors may fill a vacancy which results from
an increase in the number of directors. A director elected by the Board of
Directors to fill a vacancy serves until the next annual meeting of stockholders
and until his successor is elected and qualifies.
Section 3.06 -- Regular Meetings. After each meeting of stockholders at
which directors shall have been elected, the Board of Directors shall meet as
soon as practicable for the purpose of organization and the transaction of other
business. In the event that no other time and place are specified by resolution
of the Board, the President or the Chairman, with notice in accordance with
Section 3.08, the Board of Directors shall meet immediately following the close
of, and at the place of, such stockholders' meeting. Any other regular meeting
of the Board of Directors shall be held on such date and at any place as may be
designated from time to time by the Board of Directors.
<PAGE>
Section 3.07 -- Special Meetings. Special meetings of the Board of
Directors may be called at any time by the Chairman of the Board or the
President or by one-third of the Board of Directors by vote at a meeting, or in
writing with or without a meeting. A special meeting of the Board of Directors
shall be held on such date and at any place as may be designated from time to
time by the Board of Directors. In the absence of designation such meeting shall
be held at such place as may be designated in the call.
Section 3.08 -- Notice of Meeting. Except as provided in Section 3.06, the
Secretary shall give notice to each director of each regular and special meeting
of the Board of Directors. The notice shall state the time and place of the
meeting. Notice is given to a director when it is delivered personally to him or
her, left at his or her residence or usual place of business, or sent by
telegraph, facsimile transmission or telephone, at least 24 hours before the
time of the meeting or, in the alternative by mail to his or her address as it
shall appear on the records of the Corporation, at least 72 hours before the
time of the meeting. Unless the Bylaws or a resolution of the Board of Directors
provides otherwise, the notice need not state the business to be transacted at
or the purposes of any regular or special meeting of the Board of Directors. No
notice of any meeting of the Board of Directors need be given to any director
who attends except where a director attends a meeting for the express purpose of
objecting to the transaction of any business because the meeting is not lawfully
called or convened, or to any director who, in writing executed and filed with
the records of the meeting either before or after the holding thereof, waives
such notice. Any meeting of the Board of Directors, regular or special, may
adjourn from time to time to reconvene at the same or some other place, and no
notice need be given of any such adjourned meeting other than by announcement.
Section 3.09 -- Action by Directors. Unless statute or the Charter or
Bylaws requires a greater proportion, the action of a majority of the directors
present at a meeting at which a quorum is present is action of the Board of
Directors. A majority of the entire Board of Directors shall constitute a quorum
for the transaction of business. In the absence of a quorum, the directors
present by majority vote and without notice other than by announcement may
adjourn the meeting from time to time until a quorum shall attend. At any such
adjourned meeting at which a quorum shall be present, any business may be
transacted which might have been transacted at the meeting as originally
notified. Any action required or permitted to be taken at a meeting of the Board
of Directors may be taken without a meeting, if an unanimous written consent
which sets forth the action is signed by each member of the Board and filed with
the minutes of proceedings of the Board.
<PAGE>
Section 3.10 -- Meeting by Conference Telephone. Members of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
constitutes presence in person at a meeting, but shall not constitute attendance
for the purpose of compensation pursuant to Section 3.11.
Section 3.11 -- Compensation. By resolution of the Board of Directors a
fixed sum and expenses, if any, for attendance at each regular or special
meeting of the Board of Directors or of committees thereof, and other
compensation for their services as such or on committees of the Board of
Directors, may be paid to directors. Directors who are full-time employees of
the Corporation need not be paid for attendance at meetings of the Board or
committees thereof for which fees are paid to other directors. A director who
serves the Corporation in any other capacity also may receive compensation for
such other services, pursuant to a resolution of the directors.
Section 3.12 -- Resignation. Any director may resign at any time by sending
a written notice of such resignation to the home office of the Corporation
addressed to the Chairman of the Board or the President. Unless otherwise
specified herein such resignation shall take effect upon receipt thereof by the
Chairman of the Board or the President.
Section 3.13 -- Presumption of Assent. A director of the Corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his dissent or abstention shall be entered in the minutes of the meeting or
unless he shall file his written dissent to such action with the person acting
as the secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the secretary of the Corporation immediately
after the adjournment of the meeting. Such right to dissent shall not apply to a
director who votes in favor of such action.
<PAGE>
Section 3.14 -- Advisory Directors. The Board of Directors may by
resolution appoint advisory directors to the Board, who may also serve as
directors emeriti, and shall have such authority and receive such compensation
and reimbursement as the Board of Directors shall provide. Advisory directors or
directors emeriti shall not have the authority to participate by vote in the
transaction of business.
Section 3.15 -- Indemnification of Directors. The Corporation shall
indemnify its officers and directors to the full extent allowed under Section
2-418 of the Corporations and Associations Article of the Annotated Code of
Maryland. The Corporation shall indemnify its present and former 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 such 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.
Section 3.16 -- Advancing Expenses Prior to a Decision. The Corporation
shall advance expenses to its directors and officers entitled to mandatory
indemnification to the maximum extent permitted by the Maryland General
Corporation Law, as from time to time amended, and may in the discretion of the
Board of Directors advance expenses to employees, agents and others who may be
granted indemnification.
<PAGE>
Section 3.17 -- Other Provisions for Indemnification. The Board of
Directors may, by bylaw, resolution or agreement, make further provision for
indemnification of directors, officers, employees and agents. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the Corporation
pursuant to the foregoing provisions, or otherwise, the Corporation has been
advised that in the opinion of the Securities and Exchange 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 of 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.
Section 3.18 -- Limiting Liability of Directors. 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.
ARTICLE IV -- COMMITTEES
Section 4.01 -- Committees. The Board of Directors may appoint from among
its members an Audit Committee, a Compensation Committee, and other committees
composed of at least the number of directors required under Maryland General
Corporation Law, as in effect from time to time, and delegate to these
committees any of the powers of the Board of Directors, except the power to
declare dividends or other distributions on stock, elect directors, issue stock
other than as provided in the next sentence, recommend to the stockholders any
action which requires stockholder approval, amend the Bylaws, or approve any
merger or share exchange which does not require stockholder approval. If the
Board of Directors has given general authorization for the issuance of stock, a
committee of the Board, in accordance with a general formula or method specified
by the Board by resolution or by adoption of a stock option or other plan, may
fix the terms of stock subject to classification or reclassification and the
terms on which any stock may be issued, including all terms and conditions
required or permitted to be established or authorized by the Board of Directors.
<PAGE>
Section 4.02 -- Committee Procedure. Each committee may fix rules of
procedure for its business. A majority of the members of a committee shall
constitute a quorum for the transaction of business and the act of a majority of
those present at a meeting at which a quorum is present shall be the act of the
committee. The members of a committee present at any meeting, whether or not
they constitute a quorum, may appoint a director to act in the place of an
absent member. Any action required or permitted to be taken at a meeting of a
committee may be taken without a meeting, if an unanimous written consent which
sets forth the action is signed by each member of the committee and filed with
the minutes of the committee. The members of a committee may conduct any meeting
thereof by conference telephone in accordance with the provisions of Section
3.10.
Section 4.03 -- Audit Committee. The principal functions of the Audit
Committee, if one shall be formed, shall include making recommendations to the
Board of Directors regarding the annual selection of independent public
accountants, reviewing the proposed scope of each annual audit and reviewing the
recommendations of the independent public accountants as a result of their audit
of the Corporation's financial statements. In general, the Audit Committee shall
perform such duties as are customarily performed by an audit committee of a
corporation and shall perform such other duties and have such other powers as
are from time to time assigned to it by the Board of Directors.
Section 4.04 -- Compensation Committee. The principal functions of the
Compensation Committee, if one shall be formed, shall include establishing the
compensation of officers of the Corporation and to establish and administer the
Corporation's compensation programs, including the grant of options under the
Corporation's incentive compensation plans. In general, the Compensation
Committee shall perform such duties as are customarily performed by a
compensation committee of a corporation and shall perform such other duties and
have such other powers as are from time to time assigned to it by the Board of
Directors.
<PAGE>
ARTICLE V -- OFFICERS
Section 5.01 -- Executive and Other Officers. The Corporation shall have a
Chairman of the Board, a President, one or more Vice Presidents, a Secretary,
and a Treasurer. The Board of Directors shall designate who shall serve as chief
executive officer, who shall have general supervision of the business and
affairs of the Corporation, and may designate a chief operating officer, who
shall have supervision of the operations of the Corporation; a chief financial
officer, who shall have supervision of the financial and accounting functions of
the Corporation; and a chief information officer, who shall have supervision of
the Corporation's information systems. In the absence of any designation the
Chairman of the Board shall serve as chief executive officer and the President
shall serve as chief operating officer. The same person may hold the offices of
Chairman of the Board and President. The Corporation may also have one or more
Vice-Presidents, assistant officers, and subordinate officers as may be
established by the Board of Directors. A person may hold more than one office in
the Corporation except that no person may serve concurrently as both President
and Vice-President of the Corporation. The Chairman of the Board shall be a
director; the other officers may be directors.
Section 5.02 -- Chairman of the Board. The Chairman of the Board shall
preside at all meetings of the Board of Directors and of the stockholders at
which he or she shall be present. Unless otherwise specified by the Board of
Directors, he or she shall be the chief executive officer of the Corporation. In
general, he or she shall perform such duties as are customarily performed by the
chief executive officer of a corporation and may perform any duties of the
President and shall perform such other duties and have such other powers as are
from time to time assigned to him or her by the Board of Directors.
Section 5.03 -- President. Unless otherwise provided by resolution of the
Board of Directors, the President, in the absence of the Chairman of the Board,
shall preside at all meetings of the Board of Directors and of the stockholders
at which he or she shall be present. Unless otherwise specified by the Board of
Directors, the President shall be the chief operating officer of the Corporation
and perform the duties customarily performed by chief operating officers. He or
she may execute, in the name of the Corporation, all authorized deeds,
mortgages, bonds, contracts or other instruments, except in cases in which the
signing and execution thereof shall have been expressly delegated to some other
officer or agent of the Corporation. In general, he or she shall perform such
other duties customarily performed by a president of a corporation and shall
perform such other duties and have such other powers as are from time to time
assigned to him or her by the Board of Directors or the chief executive officer
of the Corporation.
<PAGE>
Section 5.04 -- Vice-Presidents. The Vice-President or Vice-Presidents, at
the request of the chief executive officer or the President, or in the
President's absence or during his or her inability to act, shall perform the
duties and exercise the functions of the President, and when so acting shall
have the powers of the President. If there be more than one Vice-President, the
Board of Directors may determine which one or more of the Vice-Presidents shall
perform any of such duties or exercise any of such functions, or if such
determination is not made by the Board of Directors, the chief executive
officer, or the President may make such determination; otherwise any of the
Vice-Presidents may perform any of such duties or exercise any of such
functions. Each Vice-President shall perform such other duties and have such
other powers, and have such additional descriptive designations in their titles
(if any), as are from time to time assigned to them by the Board of Directors,
the chief executive officer, or the President.
Section 5.05 -- Secretary. The Secretary shall keep the minutes of the
meetings of the stockholders, of the Board of Directors and of any committees,
in books provided for the purpose; he or she shall see that all notices are duly
given in accordance with the provisions of the Bylaws or as required by law; he
or she shall be custodian of the records of the Corporation; he or she may
witness any document on behalf of the Corporation, the execution of which is
duly authorized, see that the corporate seal is affixed where such document is
required or desired to be under its seal, and, when so affixed, may attest the
same. In general, he or she shall perform such other duties customarily
performed by a secretary of a corporation, and shall perform such other duties
and have such other powers as are from time to time assigned to him or her by
the Board of Directors, the chief executive officer, or the President.
Section 5.06 -- Treasurer. The Treasurer, who shall also be the Chief
Financial Officer if one shall be elected, shall have charge of and be
responsible for all funds, securities, receipts and disbursements of the
Corporation, and shall deposit, or cause to be deposited, in the name of the
Corporation, all moneys or other valuable effects in such banks, trust companies
or other depositories as shall, from time to time, be selected by the Board of
Directors; he or she shall render to the President and to the Board of
Directors, whenever requested, an account of the financial condition of the
Corporation. In general, he or she shall perform such other duties customarily
performed by a treasurer of a corporation, and shall perform such other duties
and have such other powers as are from time to time assigned to him or her by
the Board of Directors, the chief executive officer, or the President.
<PAGE>
Section 5.07 -- Assistant and Subordinate Officers. The assistant and
subordinate officers of the Corporation are all officers below the office of
Vice-President, Secretary, or Treasurer. The assistant or subordinate officers
shall have such duties as are from time to time assigned to them by the Board of
Directors, the Chief Executive Officer, or the President.
Section 5.08 -- Election, Tenure and Removal of Officers. The Board of
Directors shall elect the officers of the Corporation. The Board of Directors
may from time to time authorize any committee or officer to appoint assistant
and subordinate officers. Election or appointment of an officer, employee or
agent shall not of itself create contract rights. All officers shall be
appointed to hold their offices, respectively, during the pleasure of the Board.
The Board of Directors (or, as to any assistant or subordinate officer, any
committee or officer authorized by the Board) may remove an officer at any time.
The removal of an officer does not prejudice any of his or her contract rights.
The Board of Directors (or, as to any assistant or subordinate officer, any
committee or officer authorized by the Board) may fill a vacancy which occurs in
any office for the unexpired portion of the term.
Section 5.09 -- Compensation. The Board of Directors shall have power to
fix the salaries and other compensation and remuneration, of whatever kind, of
all officers of the Corporation. No officer shall be prevented from receiving
such salary by reason of the fact that he or she is also a director of the
Corporation. The Board of Directors may authorize any committee or officer, upon
whom the power of appointing assistant and subordinate officers may have been
conferred, to fix the salaries, compensation and remuneration of such assistant
and subordinate officers.
<PAGE>
ARTICLE VI -- DIVISIONAL TITLES
Section 6.01 -- Conferring divisional titles. The Board of Directors may
from time to time confer upon any employee of a division of the Corporation the
title of President, Vice President, Director, Treasurer or Controller of such
division or any other title or titles deemed appropriate, or may authorize the
Chairman of the Board or the President to do so. Any such titles so conferred
may be discontinued and withdrawn at any time by the Board of Directors, or by
the Chairman of the Board or the President if so authorized by the Board of
Directors. Any employee of a division designated by such a divisional title
shall have the powers and duties with respect to such division as shall be
prescribed by the Board of Directors, the Chairman of the Board or the
President.
Section 6.02 -- Effect of Divisional Titles. The conferring of divisional
titles shall not create an office of the Corporation under Article V unless
specifically designated as such by the Board of Directors; but any person who is
an officer of the Corporation may also have a divisional title.
ARTICLE VII -- STOCK
Section 7.01 -- Certificates for Stock. Each stockholder is entitled to
certificates which represent and certify the shares of stock he or she holds in
the Corporation. Each stock certificate shall include on its face the name of
the Corporation, the name of the stockholder or other person to whom it is
issued, and the class of stock and number of shares it represents. It shall be
in such form, not inconsistent with law or with the Charter, as shall be
approved by the Board of Directors or any officer or officers designated for
such purpose by resolution of the Board of Directors. Each stock certificate
shall be signed by the Chairman of the Board, the President, or a
Vice-President, and countersigned by the Secretary, an Assistant Secretary, the
Treasurer, or an Assistant Treasurer. Each certificate may be sealed with the
actual corporate seal or a facsimile of it or in any other form and the
signatures may be either manual or facsimile signatures. A certificate is valid
and may be issued whether or not an officer who signed it is still an officer
when it is issued.
Section 7.02 -- Transfers. The Board of Directors shall have power and
authority to make such rules and regulations as it may deem expedient concerning
the issue, transfer and registration of certificates of stock; and may appoint
transfer agents and registrars thereof. The duties of transfer agent and
registrar may be combined.
<PAGE>
Section 7.03 -- Record Dates or Closing of Transfer Books. The Board of
Directors may set a record date or direct that the stock transfer books be
closed for a stated period for the purpose of making any proper determination
with respect to stockholders, including which stockholders are entitled to
notice of a meeting, vote at a meeting, receive a dividend, or be allotted other
rights. The record date may not be prior to the close of business on the day the
record date is fixed nor, subject to Section 2.06, more than 90 days before the
date on which the action requiring the determination will be taken; the transfer
books may not be closed for a period longer than 20 days; and, in the case of a
meeting of stockholders, the record date or the closing of the transfer books
shall be at least ten days before the date of the meeting.
Section 7.04 -- Stock Ledger. The Corporation shall maintain a stock ledger
which contains the name and address of each stockholder and the number of shares
of stock of each class which the stockholder holds. The stock ledger may be in
written form or in any other form which can be converted within a reasonable
time into written form for visual inspection. The original or a duplicate of the
stock ledger shall be kept at the offices of a transfer agent for the particular
class of stock, or, if none, at the principal office in the State of Maryland or
the principal executive offices of the Corporation.
Section 7.05 -- Certification of Beneficial Owners. The Board of Directors
may adopt by resolution a procedure by which a stockholder of the Corporation
may certify in writing to the Corporation that any shares of stock registered in
the name of the stockholder are held for the account of a specified person other
than the stockholder. The resolution shall set forth the class of stockholders
who may certify; the purpose for which the certification may be made; the form
of certification and the information to be contained in it; if the certification
is with respect to a record date or closing of the stock transfer books, the
time after the record date or closing of the stock transfer books within which
the certification must be received by the Corporation; and any other provisions
with respect to the procedure which the Board considers necessary or desirable.
On receipt of a certification which complies with the procedure adopted by the
Board in accordance with this Section, the person specified in the certification
is, for the purpose set forth in the certification, the holder of record of the
specified stock in place of the stockholder who makes the certification.
Section 7.06 -- Lost Stock Certificates. The Board of Directors of the
Corporation may determine the conditions for issuing a new stock certificate in
place of one which is alleged to have been lost, stolen, or destroyed, or the
Board of Directors may delegate such power to any officer or officers of the
Corporation. In their discretion, the Board of Directors or such officer or
officers may refuse to issue such new certificate save upon the order of some
court having jurisdiction in the premises.
<PAGE>
ARTICLE VIII -- FINANCE
Section 8.01 -- Checks, Drafts, etc. All checks, drafts and orders for the
payment of money, notes and other evidences of indebtedness, issued in the name
of the Corporation, shall, unless otherwise provided by resolution of the Board
of Directors, be signed by the President, a Vice-President or an Assistant
Vice-President and countersigned by the Treasurer, an Assistant Treasurer, the
Secretary or an Assistant Secretary.
Section 8.02 -- Annual Statement of Affairs. The President or chief
accounting officer shall prepare annually a full and correct statement of the
affairs of the Corporation, to include a balance sheet and a financial statement
of operations for the preceding fiscal year. The statement of affairs shall be
submitted at the annual meeting of the stockholders and, within 20 days after
the meeting, placed on file at the Corporation's principal office.
Section 8.03 -- Fiscal Year. The fiscal year of the Corporation shall be
the twelve calendar months period ending December 31 in each year, unless
otherwise provided by the Board of Directors.
Section 8.04 -- Dividends. If declared by the Board of Directors at any
meeting thereof, the Corporation may pay dividends on its shares in cash,
property, or in shares of the capital stock of the Corporation, unless such
dividend is contrary to law or to a restriction contained in the Charter.
Section 8.05 -- Contracts. To the extent permitted by applicable law, and
except as otherwise prescribed by the Charter or these Bylaws with respect to
certificates for shares, the Board of Directors may authorize any officer,
employee, or agent of the Corporation to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the Corporation. Such
authority may be general or confined to specific instances.
<PAGE>
Section 8.06 -- Loans. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the Board of Directors. Such authority may be general or confined
to specific instances.
Section 8.07 -- Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in any of its duly authorized depositories as the Board of Directors may select.
ARTICLE IX -- INDEMNIFICATION
Section 9.01 -- Procedure. Any indemnification, or payment of expenses in
advance of the final disposition of any proceeding, shall be made promptly, and
in any event within 60 days, upon the written request of the director or officer
entitled to seek indemnification (the "Indemnified Party"). The right to
indemnification and advances hereunder shall be enforceable by the Indemnified
Party in any court of competent jurisdiction, if (i) the Corporation denies such
request, in whole or in part, or (ii) no disposition thereof is made within 60
days. The Indemnified Party's costs and expenses incurred in connection with
successfully establishing his or her right to indemnification, in whole or in
part, in any such action shall also be reimbursed by the Corporation. It shall
be a defense to any action for advance for expenses that (a) a determination has
been made that the facts then known to those making the determination would
preclude indemnification or (b) the Corporation has not received both (i) an
undertaking as required by law to repay such advances in the event it shall
ultimately be determined that the standard of conduct has not been met and (ii)
a written affirmation by the Indemnified Party of such Indemnified Party's good
faith belief that the standard of conduct necessary for indemnification by the
Corporation has been met.
Section 9.02 -- Exclusivity, etc. The indemnification and advance of
expenses provided by the Charter and these Bylaws shall not be deemed exclusive
of any other rights to which a person seeking indemnification or advance of
expenses may be entitled under any law (common or statutory), or any agreement,
vote of stockholders or disinterested directors or other provision that is
consistent with law, both as to action in his or her official capacity and as to
action in another capacity while holding office or while employed by or acting
as agent for the Corporation, shall continue in respect of all events occurring
while a person was a director or officer after such person has ceased to be a
director or officer, and shall inure to the benefit of the estate, heirs,
executors and administrators of such person. All rights to indemnification and
advance of expenses under the Charter of the Corporation and hereunder shall be
deemed to be a contract between the Corporation and each director or officer of
the Corporation who serves or served in such capacity at any time while this
Bylaw is in effect. Nothing herein shall prevent the amendment of this Bylaw,
provided that no such amendment shall diminish the rights of any person
hereunder with respect to events occurring or claims made before its adoption or
as to claims made after its adoption in respect of events occurring before its
adoption. Any repeal or modification of this Bylaw shall not in any way diminish
any rights to indemnification or advance of expenses of such director or officer
or the obligations of the Corporation arising hereunder with respect to events
occurring, or claims made, while this Bylaw or any provision hereof is in force.
<PAGE>
Section 9.03 -- Severability; Definitions. The invalidity or
unenforceability of any provision of this Article IX shall not affect the
validity or enforceability of any other provision hereof. The phrase "this
Bylaw" in this Article IX means this Article IX in its entirety.
ARTICLE X -- SUNDRY PROVISIONS
Section 10.01 -- Books and Records. The Corporation shall keep correct and
complete books and records of its accounts and transactions and minutes of the
proceedings of its stockholders and Board of Directors and of any executive or
other committee when exercising any of the powers of the Board of Directors. The
books and records of a Corporation may be in written form or in any other form
which can be converted within a reasonable time into written form for visual
inspection. Minutes shall be recorded in written form but may be maintained in
the form of a reproduction. The original or a certified copy of the Bylaws shall
be kept at the principal office of the Corporation.
Section 10.02 -- Corporate Seal. The Board of Directors shall provide a
suitable seal, bearing the name of the Corporation, which shall be in the charge
of the secretary of the Corporation. The Board of Directors may authorize one or
more duplicate seals and provide for the custody thereof. If the Corporation is
required to place its corporate seal to a document, it is sufficient to meet the
requirement of any law, rule, or regulation relating to a corporate seal to
place the word "Seal" adjacent to the signature of the person authorized to sign
the document on behalf of the Corporation.
<PAGE>
Section 10.03 -- Bonds. The Board of Directors may require any officer,
agent or employee of the Corporation to give a bond to the Corporation,
conditioned upon the faithful discharge of his or her duties, with one or more
sureties and in such amount as may be satisfactory to the Board of Directors.
Section 10.04 -- Voting stock in other corporations. Stock of other
corporations or associations, registered in the name of the Corporation, may be
voted by the President, a Vice-President, or a proxy appointed by either of
them. The Board of Directors, however, may by resolution appoint some other
person to vote such shares, in which case such person shall be entitled to vote
such shares upon the production of a certified copy of such resolution.
Section 10.05 -- Mail. Any notice or other document which is required by
these Bylaws to be mailed shall be deposited in the United States mails, postage
prepaid.
Section 10.06 -- Execution of Documents. A person who holds more than one
office in the Corporation may not act in more than one capacity to execute,
acknowledge, or verify an instrument required by law to be executed,
acknowledged, or verified by more than one officer.
Section 10.07 -- Amendments. Subject to the special provisions of Section
3.02, these Bylaws may be repealed, altered, amended or rescinded and new Bylaws
may be adopted (a) by the stockholders of the Corporation by vote of not less
than 80% of the outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors (considered for this purpose as
one class) cast at any meeting of the stockholders called for that purpose
(provided that notice of such proposal is included in the notice of such
meeting) or (b) by the Board of Directors by a vote of not less than two-thirds
of the Board of Directors at a meeting held in accordance with the provisions of
these Bylaws.
Section 10.07 -- Reliance. Each director, officer, employee and agent of
the Corporation shall, in the performance of his or her duties with respect to
the Corporation, be fully justified and protected with regard to any act or
failure to act in reliance in good faith upon the books of account or other
records of the Corporation, upon an opinion of counsel or upon reports made to
the Corporation by any of its officers or employees or by the adviser,
accountants, appraisers or other experts or consultants selected by the Board of
Directors or officers of the Corporation, regardless of whether such counsel or
expert may also be a director.
Section 10.08 -- Certain Rights of Directors, Officers, Employees and
Agents. The directors shall have no responsibility to devote their full time to
the affairs of the Corporation. Any director or officer, employee or agent of
the Corporation, in his or her personal capacity or in a capacity as an
affiliate, employee, or agent of any other person, or otherwise, may have
business interests and engage in business activities similar to or in addition
to those of or relating to the Corporation.
[FORM OF SPECIMEN STOCK CERTIFICATE]
[FRONT OF CERTIFICATE]
[TELECOMMUNICATIONS EQUIPMENT DEPICTION]
STARTEC GLOBAL COMMUNICATIONS CORPORATION
Authorized Capital of 20,000,000 shares
of Common Stock, $.01 par value
CUSIP 85569E 10 3
NUMBER _____ SHARES ______
This certifies that ________________ is the registered holder of
_____________ Shares of STARTEC GLOBAL COMMUNICATIONS CORPORATION, a Maryland
corporation, transferable only on the books of the corporation by the holder
hereof in person or by Attorney upon surrender of this Certificate properly
endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed the ___ day of _________ A.D. 19___.
- -------------------------- ---------------------------
Prabhav V. Maniyar Ram Mukunda
Secretary President
[REVERSE OF CERTIFICATE]
For Value Received, _______________ hereby sell, assign and transfer unto
______________ ____________ Shares represented by the within Certificate, and do
hereby irrevocably constitute and appoint ___________________ Attorney to
transfer the said Shares on the books of the within named Corporation with full
power of substitution in the premises,
Dated _________ 19___ __________________________
In the presence of
- -------------------------
NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.
VOTING AGREEMENT
AND
IRREVOCABLE PROXY
THIS VOTING AGREEMENT ("Agreement") is made as of July 31, 1997 by and
between Ram Mukunda ("Mukunda") and Vijay and Usha Srinivas ("Srinivas").
Mukunda and Srinivas are sometimes referred to herein as the "Stockholders."
WHEREAS, the Stockholders are the beneficial owners of shares
of common stock, $.01 par value per share, of Startec, Inc. (to be
re-named Startec Global Communications Corporation)(the "Company");
and
WHEREAS, the Stockholders desire that Mukunda retain voting control over a
majority of the issued and outstanding common stock of the Company following the
completion of the Company's initial public offering of its common stock;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. Voting of Shares. Srinivas hereby appoints Mukunda as proxy to vote all
shares which Srinivas beneficially owns (the "Srinivas Shares") with respect to
all matters submitted to the Company's stockholders at all meetings of the
Company's stockholders, or any adjournments thereof, and in all consents to any
actions taken without a meeting. During the term of this Agreement, Mukunda
shall have all of the power that Srinivas would possess with respect to the
voting of the Srinivas Shares and granting of any consent with respect to the
Srinivas Shares. By executing this Agreement, Srinivas hereby ratifies and
confirms all acts that Mukunda shall do or cause to be done by virtue of and
within the limitations set forth in this Agreement.
2. Term of Agreement. This Agreement and the appointment made pursuant to
paragraph 1 above shall continue from July 31, 1997 until January 1, 1998.
3. No Revocation. The agreements and appointments contained herein with
respect to the voting of the Srinivas Shares are coupled with an interest and
may not be revoked, except by written consent of each of the Stockholders.
4. Restrictive Legend. All certificates representing Srinivas Shares owned
or hereafter acquired by Srinivas shall have affixed thereto a legend
substantially in the following form:
The shares represented by this certificate are subject to a Voting
Agreement and Irrevocable Proxy dated as of July 31, 1997, a copy of which
is on file with the Secretary of the Corporation. Any purchaser of such
shares prior to January 1, 1998 shall be bound by such agreement.
5. Transfers of Rights. Any transferee to whom any Srinivas Shares may be
transferred, whether voluntarily or by operation of law, shall be bound by the
agreements and obligations under this Agreement.
6. Specific Performance. In addition to any and all remedies that may be
available at law in the event of any breach of this Agreement, each Stockholder
shall be entitled to specific performance of the agreements and obligations of
the other Stockholders hereunder and to such other injunctive or other equitable
relief as may be granted by a court of competent jurisdiction.
7. Governing Law. This Agreement shall be governed by the laws of the State
of Maryland.
8. Entire Agreement. This Agreement contains all of the agreements and
understandings between the parties hereto with respect to the subject matter
hereof, and supersedes all prior agreements, arrangements and understandings
related to the subject matter hereof. No oral agreements or written
correspondence shall be held to affect the provisions hereof.
IN WITNESS THEREOF, this Agreement has been executed by the parties hereto
as of the day and year first above written.
- --------------------
Ram Mukunda
- --------------------
Vijay Srinivas
- --------------------
Usha Srinivas
CO-LOCATION AND FACILITIES MANAGEMENT
SERVICES AGREEMENT
This CO-LOCATION AND FACILITIES MANAGEMENT SERVICES AGREEMENT (this
"Agreement") is made as of the 28th August, 1997 by and between EXTRANET
TELECOMMUNICATIONS, INC., (ETI) located at 111 Eighth Avenue, Suite 1533 New
York, N.Y. 10011 U.S.A. and STARTEC INC., (STC) located at 10411 Motor City
Drive, Suite 301 Bethesda, MD 20817 USA,
WHEREAS, ETI has entered into a lease (the "Lease") with P.A. Building
Company ("Landlord") pursuant to which Landlord has leased to ETI, and ETI has
leased from Landlord, nine thousand four hundred and fifty five (9455) square
feet of rentable area (the "Leased Premises" or the "Co-location Center")
located on the fifth (5th) floor of that certain building located at 111 Eighth
Avenue, New York, New York 10011 (the "Building"); and,
WHEREAS, ETI desires to license to STC, and STC desires to license from
ETI, the right to use and occupy approximately two-thousand one hundred and ten
(2,110) rentable square feet of area with a loss factor of twenty-six percent
(26%) for a total of one-thousand five hundred and sixty (1,560) usable square
feet of area (the "Premises"), which Premises is located within the Leased
Premises and which is more particularly described on the floor plan which is
attached to and made a part hereof as Exhibit A; and,
WHEREAS, STC desires to locate in the Premises certain computer and
telecommunications equipment and cabling (hereinafter "Equipment") for the
purpose of interconnecting with ETI's telecommunications network and or other
telecommunications networks as required; and,
WHEREAS, ETI has also agreed to provide STC with co-location and facilities
management services and the parties desire to memorialize their intent.
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, and in consideration of the foregoing recitals, each of
which is incorporated in and made a part of this Agreement, the parties hereto,
intending to be legally bound, hereby agree as follows:
<PAGE>
DESCRIPTION OF SERVICES
1. PERMISSIBLE USE; CONTINGENCY:
a. ETI hereby licenses the Premises to STC, and STC hereby licenses the
Premises from ETI upon and subject to the terms, covenants, rentals and
conditions herein set forth. The term (the "Term") of this Agreement shall
be for a period of five (5) years and shall commence (the "Commencement
Date") which shall automatically occur on the earlier of either the date
that STC first causes any of its equipment to be delivered to the Premises
or ninety (90) days from the date of this Agreement; provided, however,
that any construction and/or installations by Time-Warner shall not be
considered deliveries of STC's equipment to the Premises for purposes of
this paragraph. Notwithstanding anything in this Agreement to the contrary,
STC shall have no obligation to commence business operations in the
Premises until ETI has provided STC with reasonable evidence that ETI has
complied with all applicable governmental requirements with respect to the
build-out of the Premises, including obtaining any necessary occupancy or
use permits, and the improvements constructed by ETI in the Premises
conform to the drawings and plans for the build-out of the Premises and
STC's power and VAC requirements. In the event that the Commencement Date
has not occurred by the date which occurs sixty (60) days after the date
that the "Contingency" (as hereinafter defined) is fully satisfied, then,
STC shall have the right, at any time thereafter, to terminate this
Agreement by delivering a notice of termination to ETI. In the event STC
delivers such notice of termination to ETI, ETI shall immediately pay to
STC all amounts that STC has previously paid to ETI in connection with this
Agreement, except that ETI shall not be required to pay to STC any amounts
paid to ETI by STC for the one time electrical power purchased by ETI from
its Landlord on behalf of STC. The parties shall then be relieved of all
liability hereunder, at law or in equity. ETI shall, upon STC's written
request, provide certain other services in order to comply with the
applicable specifications set forth in the Co-location Schedule attached
hereto.
b. This entire Agreement and the obligations of STC to perform its
obligations hereunder shall be contingent upon the occurrence of the
following events (the events that are listed in the following clauses (i)
and (ii) shall hereinafter be collectively referred to as the
"Contingency"): (i) ETI and STC agreeing in writing upon the drawings,
plans and specifications for the build-out of the Premises (the
"Construction Work"); and (ii) ETI's delivery to STC of a fully executed
acknowledgment from the Landlord, substantially in the form of Exhibit B
attached hereto and made a part hereof whereby the Landlord consents to
ETI's use of the Leased Premises as a co-location center and which
authorizes ETI to issue occupancy licenses to third parties who desire
access to the Leased Premises for the purpose of co-locating therein.
<PAGE>
c. Promptly after the execution of this Agreement, ETI shall diligently
pursue satisfaction of the Contingency at the earliest possible date. In
the event that the Contingency is not fully satisfied within thirty (30)
days from the effective date of this Agreement, then STC shall have the
right prior to final satisfaction of the Contingency to terminate this
Agreement by written notice to ETI. Upon such termination, ETI shall
immediately refund to STC any amounts that were previously paid by STC to
ETI in connection with this Agreement, except that ETI shall not be
required to pay to STC, all amounts paid to ETI by STC for the one time
electrical power purchased by ETI from its Landlord on behalf of STC. The
parties shall then be relieved of all liability hereunder, at law or in
equity. Despite the foregoing, STC shall have the right in the exercise of
its sole and absolute discretion, to waive the satisfaction of all or any
portion of the Contingency. To be effective, any such waiver must be in a
writing that is signed by STC.
2. RESPONSIBILITY AND UNDERTAKINGS
a. ETI represents and warrants to STC that the Premises is sufficient for
the placement of STC provided switching and telecommunications equipment,
as well as such other peripheral computer and networking equipment that may
be required within the Co-location Center, and that ETI shall provide to
STC the services described in paragraph 6 of the Co-location Schedule
attached hereto.
b. Both ETI and STC hereby acknowledge and accept that ETI shall, as part
of this Agreement, furnish and install an FM-200 type fire protection
system within the Premises. The existing landlord provided building
sprinkler system will be decommissioned and removed from service. STC
acknowledges further that the FM-200 fire protection system may not be
removed, reconfigured, modified, or otherwise altered or replaced without
the prior written consent of ETI and its Landlord which approval shall not
be unreasonably withheld, conditioned or delayed.
<PAGE>
c. Additional space within the Leased Premises is available from ETI in
single rack or cabinet increments or on a per square foot basis. Additional
measured square footage will be provided to STC, upon their request,
according to the same terms, conditions and rates as established in this
Agreement. If ETI no longer has additional space available, ETI shall so
inform STC upon STC's request for additional space; and if STC is still
interested in additional space, ETI may be required to contract with its
Landlord for additional space, provided that it is available from the
Landlord, as a result of an STC request for additional measured square
footage. Upon STC's request to ETI to obtain additional space from
Landlord, ETI shall negotiate to lease additional space from Landlord and,
if STC approves the terms of such lease, then and in that event, ETI shall
pass on to STC and STC agrees to pay to ETI, any additional costs or
increases imposed on ETI by its Landlord as a result of the STC request.
d. A single rack or cabinet is defined as a volume not greater than
nineteen (19") inches wide, twenty-eight (28") inches deep and eighty-four
(84") inches high. The height and depth specifications are physical
limitations of ETI's Co-location Center and cannot be exceeded. A rack or
cabinet in excess of nineteen (19") inches in width will be considered to
be multiple racks or cabinets. A rack, cabinet, or equipment enclosure of a
width less than nineteen (19") inches will still be considered a complete
rack under this Agreement. Space for additional racks or cabinets will be
billed by ETI and paid for by STC in accordance with the attached
Co-location Schedule. Pricing dos not include power distribution or usage,
phone expenses, or normal hours support.
e. ETI currently employs technical staff to maintain and manage technical
facilities. Upon STC's written request, ETI technical staff shall perform
necessary technical work related specifically to STC owned or leased
equipment and/or services to STC's facilities on a "time and material"
basis as set forth in the attached Co-location Schedule. Such work and or
services will be performed only at STC's request and under STC's direction.
Request for all adds, moves, and changes, must be in writing from STC to
ETI.
<PAGE>
f. ETI shall, in good faith, use commercially reasonable efforts to cause
Landlord to (i) comply with the terms and conditions of the Lease as the
same relate to STC's use and occupancy of the Premises, and (ii) cooperate
with STC in connection with any consents or approvals that ETI and/or STC
may be required to obtain from Landlord in connection with STC's use or
occupancy of the Premises.
g. As part of the Construction Work (defined in Paragraph l(b)), ETI shall
equip the Premises with; (i) a key or card access entry system; and, (ii) a
remote alarm notification system which shall be connected to the Utility
Systems; and, (iii) an FM-200 type fire protection system. All systems as
identified in (i) thru (iii) are more particularly described in Schedule 1
to the Co-location Schedule.
h. ETI shall also provide to the Premises, as part of the Construction Work
(defined in Paragraph 1 (b)); (i) sufficient -48VDC power resources to meet
the STC stated DC power resource requirement of six-hundred (600) amps with
one (1) hour back-up battery support; and, (ii) sufficient inverted power
resources to meet the STC stated inverted power resource requirement of
forty (40) amps at 110VAC with one (1) hour battery back-up support; and,
(iii) sufficient commercial building power resources to meet the STC stated
AC power requirement of seventy (70) amps at 110VAC. All systems as
identified in (i) thru (iii) are more particularly described in Schedule 1
to the Co-location Schedule.
i. ETI shall at all times during the Term of this Agreement maintain or
cause the maintenance of the back-up generator, electrical system and
equipment and heating, ventilating and air-conditioning system and
equipment (collectively, "Utility Systems") serving the Premises in good
condition and repair, adequate at all times to provide, without
interruption, all of the Services described in Paragraph 6 of the attached
Co-location Schedule. On or before the Commencement Date, ETI shall provide
STC with a schedule showing all of the procedures to be utilized by ETI to
ensure that all of the Utility Systems will function in accordance with the
terms of this Paragraph 2(i) at all times. Throughout the Term of this
Agreement, ETI shall provide STC with written reports showing that ETI is
following such procedures. Such reports shall be provided within seven (7)
business days after any such procedure is performed, and not less often
than quarterly for heating, ventilating and air-conditioning Utility
Systems, and not less often than monthly for electrical and power
generating Utility Systems. All of the Utility Systems shall be equipped
with alarms programmed to alert both ETI and STC of any failure of such
systems to function in accordance with the terms of this Paragraph 2(i).
<PAGE>
j. Upon STC's request, ETI shall, on behalf of STC or its designated
service provider, install a microwave antenna on the roof of the Building,
provided that STC shall obtain ETI's prior written approval of such
antenna, which approval shall not be unreasonably withheld, conditioned or
delayed, and provided that STC shall obtain any necessary governmental
permits and Landlord's approval, if necessary, for such antenna.
3. ADDITIONAL TERMS GOVERNING THE USE OF THE CO-LOCATION SPACE; INSTALLATION
OF EQUIPMENT.
a. Before beginning any infrastructure work, such as cable, ironwork or
relay rack installation, including delivery, replacement, or removal work,
but not including the rearrangement of existing items that are not affixed
to a wall, STC must obtain ETI's written approval of STC's choice of
suppliers and contractors, which approval shall not be unreasonably
withheld, conditioned or delayed and in any event, any objection must be
provided within two (2) business days of receipt of a request for consent,
failing which the proposed supplier(s) and/or contractor(s) shall be deemed
approved. ETI may request reasonable additional information before granting
approval and may require reasonable scheduling changes and substitution of
suppliers and contractors as conditions of its approval, provided in no
event shall any such substitution cause STC to incur any extra costs or
expenses that STC would not have incurred had such substitution not been
required. Approval by ETI shall not be construed as an endorsement of STC's
supplier or contractor, and STC will remain solely responsible for the
selection of the supplier or contractor and all payments for such work.
Only contractors approved by ETI and its Landlord, which approval shall not
be unreasonably withheld, conditioned or delayed, will be permitted to work
within the Premises.
b. STC shall not make any construction changes or material alterations to
the interior or exterior portions of the Premises, including building of
walls or partitions, drop ceilings, lighting, HVAC, plumbing or any
electrical distribution or power supplies for equipment, without ETI's
prior written approval, which approval shall not be unreasonably withheld,
conditioned or delayed, and in any event any objection must be provided
within ten (10) business days of receipt of a request for consent, failing
which the proposed construction change(s) and/or material alteration(s)
shall be deemed approved. ETI reserves the right to perform and manage any
construction or material alterations within the Co-location Center areas at
rates to be negotiated between the parties hereto, which rates shall not
exceed the generally prevailing market rate that is then being charged to
perform such services.
<PAGE>
c. STC's use of the Premises, installation of Equipment, and access to the
Premises shall at all times be subject to STC's adherence to generally
accepted industry standards for facility security and rules of conduct
provided, however, STC shall be permitted to use the Premises and shall
have access through the Leased Premises to the Premises, twenty-four (24)
hours per day, three hundred sixty-five (365) days per year. STC agrees not
to erect any signs or devices to the exterior portion of the Premises
without ETI's prior written approval. ETI agrees that STC shall have the
right to install signage identifying STC on or adjacent to the suite entry
door to the Leased Premises and on or adjacent to the door to the Premises
from the Leased Premises. STC shall obtain ETI's prior approval of STC's
suite entry sign, which approval shall not be unreasonably withheld,
conditioned or delayed. ETI shall use reasonable efforts to cause its
Landlord to insert a listing identifying STC in the directory in the
Building lobby.
d. STC shall not market, license or sell co-location services to any third
party in competition with ETI, except that STC is permitted to allow its
vendors and customers to co-locate within the Premises if such co-location
is needed for purposes of permitting the vendor or customer to connect to
STC's network. However, STC may not market, license or sell co-location
services to other local, interexchange, long distance carriers, or internet
service providers, or other such service providers or carriers for the
purpose of utilizing the Co-location Center as a point of presence from
which the service provider or carrier would provision interconnect services
to other users within the Leased Premises. Except as expressly permitted in
this Paragraph 3(d), if STC should provide or attempt to make available to
any third party use of STC's co-location space in the Premises without
obtaining the prior written consent of ETI, STC shall be in breach of this
Agreement and ETI may pursue any legal or equitable remedy it is entitled
to pursue under Paragraph 10 of this Agreement. Notwithstanding anything to
the contrary in this Paragraph 3(d) or any other provision of this
Agreement, ETI acknowledges and agrees that STC is entitled to engage
Time-Warner (or such other service provider(s) that STC may reasonably
select) to provide interconnection or other services to STC, provided that
such services are provided directly to STC within the Premises, and ETI
agrees to admit Time-Warner or such other service provider(s) onto the
Leased Premises and to cooperate with Time-Warner or such other service
provider(s) (including obtaining all necessary approvals from the Landlord,
(as evidenced by Exhibit C) to permit Time-Warner or such other service
provider to provide such services. ETI further acknowledges and agrees that
STC will be permitted to interconnect with any carrier and to provide
interconnection services to other carriers, in either case other than a
carrier that is an ETI licensee, within the Leased Premises.
<PAGE>
4. PAYMENT
a. STC shall pay ETI a monthly recurring fee for use and occupancy of the
Premises (the "Occupancy Fee") as set forth in the Co-location Schedule
attached hereto. In addition to the Occupancy Fee, in the event that STC
requests, in writing, that ETI provide any additional services, STC may be
charged non-recurring fees for the provision of such services or for any
requested build-out of the Premises, including, where applicable,
cross-connect installation fees and/or Dispatch Labor Charges as set forth
in the Co-location Schedule. If STC requests in writing, that ETI provide
services not delineated herein or in the Co-location Schedule, STC agrees
to pay ETI's then current standard charge for such service as in effect at
the time such service was rendered or such charge as the parties may
mutually agree upon prior to the delivery of the service.
b. Commencing on the Commencement Date, monthly installments of the
Occupancy Fee shall be payable in advance on the first day of each calendar
month.
c. Any charges delineated in the Co-location Schedule for build-out of the
Premises ("Build-Out Fees") shall be paid by STC to ETI in accordance with
the following schedule:
<PAGE>
i. One-hundred and seventy-five thousand dollars and no cents
($175,000.00) of the Build-Out Fees upon execution of this
Agreement; and
ii. One-hundred and twenty-thousand dollars ($120,000.00) of the
Build-Out Fees fifteen (15) days from the date of this Agreement;
and
iii. One-hundred and twenty-thousand dollars ($120,000.00) of the
Build-Out Fees thirty (30) days from the date of this Agreement;
and
iv. Payment of the remaining seventy-nine thousand dollars
($79,000.00) of the Build-Out Fees will be made sixty (60) days
from the date of this Agreement.
d. Both ETI and STC agree to reimburse the other for all reasonable repair
or restoration costs associated with damage or destruction caused by the
other's personnel, agents, suppliers, contractors or visitors or as a
consequence of any removal of Equipment or other property installed in the
Premises or the Leased Premises. Such reimbursement shall be made within
thirty (30) days of the damage or destruction.
e. The monthly charges for all services used shall be payable in U.S.
dollars within thirty (30) days from the date of ETI's invoice. Payment
shall be remitted to ETI at the address or wired to the account set forth
in Paragraph 16, and will not be deemed to have been made until the funds
are received by ETI.
f. Any payment (including monthly service charges due under this Paragraph
or any other amount due hereunder) not made when due will be subject to a
late charge of one percent (1%) per month, provided, however, ETI shall
provide STC with a written notice of any payment which is overdue, and if
STC makes any such payment to ETI within five (5) days after receiving such
written notice, the late charge shall be deemed waived.
g. ETI hereby grants STC a right of first refusal to assume ETI's rights
and obligations under its Lease with ETI's Landlord in the event of a
default by ETI which remains uncured by ETI for a period of not less than
thirty (30) days after notice of the default has been received by ETI from
its Landlord pursuant to the written lease. ETI shall give STC prompt
written notice of any default by ETI under the Lease, which notice shall
include any offer by ETI to assign to STC, ETI's interest as tenant under
the Lease (any such notice being hereinafter referred to as "Offer"). In
the event that STC desires to exercise its right to assume ETI's interest
as tenant under the Lease pursuant to an Offer from ETI, then, within
fifteen (15) days after its receipt of the Offer, STC shall deliver a
notice of acceptance to ETI. In the event STC delivers such notice to ETI,
then ETI shall immediately take all affirmative steps necessary and
reasonable to effect an STC assumption of ETI's Lease.
<PAGE>
5. TAXES
STC shall submit to ETI the appropriate tax certificates as required by any
city, state, federal or other lawful taxing authority within ten (10) days
from date of written request by ETI. STC shall submit such other documents
and certificates related to taxes as ETI shall reasonably request. STC
shall be responsible for the prompt payment of all federal, state and local
taxes, except ETI's income and franchise taxes, upon the use of or sale of
services hereunder or STC's use of or resale of property of ETI. If ETI
should pay or become obligated to pay any such taxes, STC shall, within
thirty (30) days, reimburse ETI therefor.
6. HOURLY RATES FOR ADDITIONAL SERVICES
a. When ETI technical support assistance is requested by STC in writing for
resolution or coordination of problems, STC agrees to pay ETI a per hour
rate set forth in the attached Co-location Schedule. ETI will inform STC in
advance and in writing, if any services to be performed by ETI for STC are
billable and ETI will provide STC with a reasonable estimate prior to
performance of the services.
b. For any services which it may require, STC shall contact ETI customer
service as specified in Paragraph 16.
7. INTERCONNECT TO PRIVATE LINE CUSTOMERS
a. STC may arrange for its own interconnection facilities with the carriers
or providers of its choice. Any interconnection facilities arranged by STC
shall be provisioned solely to the STC occupied Premises within the Leased
Premises. Subject to the provisions of Paragraph 3(d) herein, STC shall not
market, license or sell interconnection facilities or services to others
located within the Leased Premises, except existing clients of STC, without
the express written authorization of ETI. All costs and arrangements for
local interconnect will be STC's responsibility, unless otherwise agreed to
by the parties in writing. If STC is utilizing ETI's services under this
Paragraph 7(a), STC's facilities management personnel must coordinate with
ETI in the exchange of technical information relating to their requirements
for local interconnect in order for ETI to provide the necessary support to
STC with the provisioning and installation of the interconnect facilities.
In addition, for all services to be provided by ETI under this Paragraph
7(a), STC agrees to provide ETI notice at least thirty (30) days prior to
the commencement date of the services. Coordination regarding exchange of
technical information relating to local interconnects shall be provided to
ETI as specified in Paragraph 16.
<PAGE>
b. Upon STC's request, ETI shall, on behalf of STC, install intra building
conduit and cable to allow STC to interconnect with other carriers within
the Building. STC shall select the contractors to perform any such
installations, subject to the approval of ETI and its Landlord, as set
forth in Paragraph 3(a). ETI shall use reasonable efforts to promptly
obtain its Landlord's approval of any such contractors. STC's facilities
management personnel must coordinate with ETI in the exchange of technical
information relating to their requirements for intra building conduit and
cable in order for ETI to provide the necessary support to STC with the
provisioning and installation of the facilities. ETI will invoice, and STC
shall pay to ETI, a project management fee equal to ten percent (10%) of
the total cost to provision and install the intra building conduit and
cable. STC shall, at its own discretion utilize ETI or another Landlord
approved contractor to install the conduit and cable on behalf of STC. All
intra building conduit and cable requested by and installed for STC will
terminate within the Premises occupied by STC and will remain under the
direct management and control of STC. In addition, for all services to be
provided by ETI under this Paragraph 7(b), STC agrees to provide ETI notice
at least thirty (30) days prior to the commencement date of the services to
be provided by ETI. Coordination regarding exchange of technical
information relating to intra building conduit and cable shall be provided
to ETI as specified in Paragraph 16.
c. ETI shall invoice and STC shall pay to ETI, all one-time and monthly
usage charges normally imposed by its Landlord plus a ten (10%) percent fee
to ETI for the allocation and provision of all intra building conduit and
cable as specified in the attached Co-location Schedule. STC acknowledges
that the Landlord's rates are subject to change at any time.
Notwithstanding anything herein or in the Co-location Schedule to the
contrary, all such fees that are payable to ETI for the allocation and
provision of any intra building conduit and cable shall be due and payable
prior to the allocation and provision of any intra building conduit and
cable. All of the fees that are payable to ETI for the installation of the
intra building conduit and cable shall be payable in accordance with the
following terms: fifty (50%) percent shall be due and payable upon written
approval by STC of the specifications for the installation of the intra
building conduit and cable, and fifty (50%) percent shall be due and
payable upon completion of the intra building conduit and cable system.
d. Upon STC's written request, ETI shall authorize STC, on an as required
basis, to utilize any available ETI owned intra building conduit and cable.
In such event, ETI shall invoice and STC shall pay to ETI, a monthly usage
charge as specified in Paragraph 13 of the attached Co-location Schedule.
e. Upon STC's written request, ETI shall on an as required basis, act as
STC's agent in the turning-up of local interconnects and to provide
on-going loop maintenance between the ETI Co-location Center and any
third-party facilities of STC's customers. In such event, ETI shall invoice
and STC shall pay to ETI, a monthly usage charge as specified in Paragraph
12 of the attached Co-location Schedule.
f. All interconnects must be at the DS3, DS1 or DSO level utilizing up to
28 T1's per DS3, 24 ports per DS1 and 8 ports per DSO. The interface point
for ETI's service will be ETI's DSX "CROSS-CONNECT" panel.
<PAGE>
8. FORCE MAJEURE
Neither party shall be liable for any failure or delay in performance
caused by labor dispute, fire or other casualty, weather or natural
disaster, damage to facilities, the conduct of third parties, or other
cause beyond its reasonable control ("Force Majeure"). Performance times
under this Agreement shall be automatically extended for the period of time
equivalent to the time lost because of any delay or failure to perform by
either party; provided, however, that any such delay or failure shall not
last for a period of more than thirty (30) days. After this thirty (30) day
maximum extension has elapsed, this paragraph shall have no further force
nor effect on either party's obligation to perform.
9. EMERGENCIES AND INTERRUPTIONS
In case of an interruption of any services furnished hereunder, including
but not limited to power, back-up power, HVAC, and transmission services
(the "Services"), ETI shall use its best efforts to restore service as soon
as possible. If ETI elects, it may substitute an equivalent service. ETI's
liability for all mistakes, errors, omissions, interruptions, delays or
defects in Services occurring in the course of engineering, installation
and operation of its system or the provision of Services shall in no event
exceed the charges paid by STC for the period of time during which
mistakes, errors, omissions, interruptions, delays or defects in Services
occurred. In no event shall ETI be liable for any special, consequential or
incidental damages. In the event STC experiences an interruption of
transmission services for reasons other than Force Majeure which results in
the loss of fifty percent (50%) of STC's service for a period of three (3)
hours or more, or if ETI fails to provision transmission service in
accordance with industry standards and fails to cure its failure within
fifteen (15) days, STC shall have the right to terminate this Agreement
upon ten (10) days notice to ETI. In the event STC experiences an
interruption of power services for any cause within ETI's control, which
results in the loss of fifty percent (50%) of STC's service for a period of
three (3) hours or more, or if ETI fails to promptly commence or diligently
pursue restoration of any interrupted power services, STC shall have the
right to terminate this Agreement upon ten (10) days notice to ETI. In the
event STC experiences an interruption of back-up power which is the direct
result of ETI's Landlord's gross negligence or willful misconduct, ETI
shall pay STC's proportionate share (based upon the ratio of the rentable
area of the Premises to the rentable area of the Leased Premises) of any
damages collected by ETI from its Landlord for such interruption of back-up
power. In the event STC experiences an interruption of HVAC services (in
season) for any cause within ETI's control, which lasts for more than one
(1) day, the Occupancy Fee shall be abated from the second such day until
the date on which such HVAC services are restored, and if such HVAC
services are not restored within fifteen (15) days, STC shall have the
right to terminate this Agreement upon ten (10) days notice to ETI.
<PAGE>
10. DEFAULT
a. Either party shall be in default if it fails to timely perform its
material obligations under this Agreement or any other Agreement with the
other, or becomes the subject of any voluntary proceedings under any
bankruptcy or insolvency laws, or becomes the subject of any involuntary
proceedings under any bankruptcy or insolvency laws which are not dismissed
or withdrawn within sixty (60) days after the filing thereof. Upon such
default by a party (other than a service interruption as described in
Paragraph 9 hereof), the other party shall provide written notice to the
defaulting party within ten (10) days of such default, allowing thirty (30)
days for the default to be cured. If the default is not cured within that
thirty (30) days, the non-defaulting party may, upon ten (10) days notice
to the other, terminate this Agreement, and pursue all other available
remedies at law and in equity, all of which shall be cumulative.
b. If this Agreement or any addendum is terminated by ETI during the Term
as a result of STC's material default or is terminated or repudiated by STC
in the absence of a material default hereunder by ETI (in either case, an
"STC Termination"), in addition to any other damages or remedies to which
ETI is entitled, STC shall be liable to ETI for liquidated damages (due to
the difficulty in projecting and establishing actual damages) for the
terminated Services, as provided for below:
i. If an STC Termination occurs within twelve (12) months from the
Commencement Date, then, STC shall pay to ETI fifty (50%) percent
of the monthly Occupancy Fees for the remainder of the Term.
ii. If an STC Termination occurs after twelve (12) months but prior
to twenty-four (24) months from the Commencement Date, then, STC
shall pay to ETI forty (40%) percent of the monthly Occupancy
Fees for the remainder of the Term.
<PAGE>
iii. If an STC Termination occurs after twenty-four (24) months but
prior to thirty-six (36) months from the Commencement Date, then,
STC shall pay to ETI thirty (30%) percent of the monthly
Occupancy Fees for the remainder of the Term.
iv. If an STC Termination occurs after thirty-six (36) months but
prior to forty-eight (48) months from the Commencement Date, then
STC shall pay to ETI twenty (20%) percent of the monthly
Occupancy Fees for the remainder of the Term.
v. If an STC Termination occurs after forty-eight (48) months from
the Commencement Date, then, STC shall not be required to pay any
liquidated damages to ETI.
c. Subsequent to termination of Services for cause and prior to any
reinstatement of ETI's Services to STC, the parties shall agree upon
the amount of any reconnect charges, increase in service rates and/or
security deposit required hereunder; it being understood, however,
that in the event of a termination by ETI for cause, ETI may sell the
Services to others.
d. In the event that the Term of this Agreement, as such Term is extended
by STC, would end on a date which is after the expiration of the
initial term of the Lease, then ETI shall cause the term of the Lease
to be extended such that the term of the Lease shall expire after the
date that the Term of this Agreement, as such Term is extended by STC,
is scheduled to end.
e. Upon termination or expiration of the Term of this Agreement, STC
agrees to remove Equipment and other property which has been installed
by STC or STC's agents. In the event such Equipment or property has
not been removed within ninety (90) days following the effective
termination or expiration date, ETI shall have the right to remove,
relocate, or otherwise store such Equipment or property at STC's
expense.
f. In the event the Premises should become the subject of a taking by
eminent domain by any authority having such power, either party hereto
shall have the right to terminate this Agreement. ETI shall give STC
reasonable advance notice of an eminent domain proceeding and the
removal schedule applicable to the Leased Premises. In the event of
such a taking, STC shall have no claim against ETI for any relocation
expenses, any part of any award that may be made for such taking, the
value of any unexpired term or renewal periods that may result from a
termination by ETI under this provision, or any loss of business from
full or partial interruption or interference due to any termination.
However, nothing contained in this Agreement shall prohibit STC from
seeking any relief or remedy against the condemning authority in the
event of an eminent domain proceeding or condemnation which affects
the Premises
<PAGE>
11. TERM OF THIS AGREEMENT
Unless sooner terminated as herein provided, the Term of this Agreement
shall be for a FIVE (5) YEAR period, commencing on the Commencement Date,
and after the expiration of such five (5) year period, this Agreement shall
remain in force until terminated by either party upon one hundred eighty
(180) days written notice. STC may, upon expiration of the Term, extend the
term of this Agreement for another five (5) year period. In the event that
STC elects to extend the term of this Agreement, STC shall pay, on a
prorated basis (by usable square feet), all increases in costs incurred by
ETI from its Landlord as a result of STC's extension of its Agreement.
12. APPROVALS
ETI acknowledges that STC intends to install computer and
telecommunications equipment in the Co-location Center and approves STC's
use of the Premises for this purpose. ETI represents and warrants that all
necessary approvals and occupancy permits have been obtained from building
owners, zoning authorities, tax authorities, and other authorities and
there is no restriction on STC's intended use of the Premises.
13. RIGHT OF SELF-HELP AND ASSIGNMENT OF LEASE
a. On or before the tenth (10th) day of every third month during the Term
of this Agreement, ETI shall provide STC with documentation (such as a
written confirmation from ETI's Landlord or a canceled check) showing that
ETI has paid the rent and all other sums due under the Lease. In addition,
ETI shall promptly provide to STC copies of all notices from Landlord (if
any) alleging nonpayment of rent or other amounts due under the Lease or
any other default by ETI under the Lease.
<PAGE>
b. In the event ETI at any time during the term of this Agreement fails to
pay rent, taxes, assessments or to make any other payment or to perform any
act required by the terms of the Lease with Landlord so as to constitute an
event of default under the Lease, STC may (but shall be under no obligation
to) at any time thereafter make such payment for the account and at the
expense of ETI. All sums so paid by STC and all costs and expenses incurred
in connection therewith will constitute a sum payable by ETI to STC upon
billing by STC and ETI agrees to promptly reimburse STC for such payments,
costs and expenses. In the event that ETI fails to promptly reimburse STC
for any such payment, cost or expense, STC shall have the right to deduct
such payment from the amount that is owed by STC to ETI hereunder.
c. In the event that STC makes any payment or performs any act to cure a
default by ETI under the Lease, ETI, in order to secure payment of any
amounts expended by STC to cure ETI's default, may, at its option: (1)
assign the Lease to STC, or (2) assign some or all of ETI's rights to
receive any income from its operation or use of the real property leased to
ETI in the Lease. ETI shall remain entitled to exclusively enjoy all of the
benefits of a tenant so long as STC has not made any payment or performed
any act to cure ETI's default under this Paragraph 13. In the event that
and only for so long as STC makes any payment or performs any act to cure
ETI's default under this Paragraph 13, the cost of which is not reimbursed
by ETI within seven (7) days after ETI's receipt of an invoice therefor
(which invoice shall specifically reference this paragraph of this
agreement by paragraph and page number), ETI hereby authorizes STC to send
a notice to each licensee, user or occupant of real property leased to ETI
in the Lease (a "Licensee") in the name of ETI, advising each such licensee
to thereafter make all payments due to ETI under such licensee's agreement
with ETI to STC, until such time as STC has been repaid in full for its
advances (together with interest at the rate of fifteen percent (15%) per
annum, from the date of STC's advance to the date of repayment). STC shall
remit to ETI all amounts collected from the other licensees in excess of
the amounts due to STC by ETI within five (5) days after ETI's written
demand for repayment.
14. INDEMNIFICATION
a. STC shall indemnify ETI against all losses, claims damages, expenses and
liabilities (including reasonable attorneys' fees and court costs) arising
out of or relating to (I) personal injury or property damage (including any
damage to the facilities or equipment of ETI, any connecting carrier, or
any other third party), caused by any act, error or omission of, or any
condition created by, STC or its employees, agents, equipment or other
property; or (II) any breach of any representation, warranty or covenant
made by STC herein except as otherwise stated in this agreement.
<PAGE>
b. ETI shall indemnify STC against all losses, claims damages, expenses and
liabilities (including reasonable attorneys' fees and court costs) arising
out of or relating to (I) personal injury or property damage (including any
damage to the facilities or equipment of STC, any connecting carrier, or
any other third party), caused by any act, error or omission of, or any
condition created by, ETI or its employees, agents, equipment or other
property; or (II) any breach of any representation, warranty or covenant
made by ETI herein except as otherwise stated in this agreement.
15. NOTICES AND OTHER COMMUNICATIONS
a. Unless written notice of a change is given to STC, payments to ETI shall
be sent via wire transfer, or other immediate credit method, as follows:
i. Extranet Telecommunications, Inc.
ii. CITIBANK, N.A.
iii. 250 Broadway
iv. New York, N.Y. 10007
v. ABA Routing Number: 0210-00089
vi. Account Number: 96620641
b. Documentation and coordination regarding exchange of technical
information relating to interface circuitry and local interconnects shall
be sent to:
i. Manager of Telecom & Network Systems
ii. Extranet Telecommunications, Inc.
iii. 111 8th Avenue, Suite 1533
iv. New York, N.Y. 10011
v. Fax 212.206 2550
c. Telephone notification of need for assistance for resolution or
coordination of service problems shall be reported to the ETI at
800-289-3987.
d. All other notices to ETI relating to this Agreement shall be in writing
and personally delivered, telecopied and sent by certified mail, return
receipt requested, or overnight courier service to:
i. Extranet Telecommunications, Inc.
ii. 111 8th Avenue, Suite 1533
iii. New York, N.Y. 10011 U.S.A.
iv. Attention: Michael A. Collado
v. Fax 212.206.2550
<PAGE>
e. Unless written notice of a change is given by STC to ETI, all notices
and other communications to STC shall be in writing and personally
delivered or sent by certified mail, return receipt requested, or overnight
delivery service, to STC's address as set forth on the face of this
Agreement, or telecopied to STC's facsimile number at 301.365.8969, with
copies personally delivered or sent by certified mail, return receipt
requested, or overnight delivery service to STC's address as set forth on
the face of this Agreement.
f. Written notices shall be deemed to be effective when delivered by
telecopier, with written confirmation of receipt, or upon receipt or
refusal, when delivered in person, overnight delivery service, or certified
mail, unless otherwise stipulated herein.
16. FUTURE OPPORTUNITIES
STC and ETI may elect to combine areas of expertise and customer base to
establish specific joint venture opportunities.
17. INSURANCE
a. STC agrees to maintain, at STC's expense, during the entire time this
Agreement is in effect for the Premises (i) Comprehensive General Liability
Insurance in an amount not less than Two Million Dollars ($2,000,000.00)
per occurrence for bodily injury or property damage, (ii) Employer's
Liability in an amount not less than One Million Dollars ($1,000,000.00)
per occurrence, (iii) Worker's Compensation in an amount not less than that
prescribed by statutory limits, and (iv) adequate insurance coverage to
protect STC owned Equipment and property installed within the Premises.
Under no circumstances shall ETI provide insurance coverage for any STC
owned Equipment or property installed within the ETI Co-location Center.
Prior to taking occupancy of the Premises, STC shall furnish ETI with
certificates of insurance which evidence the minimum levels of insurance
set forth herein and which name ETI as an additional insured.
b. ETI agrees to maintain, at ETI's expense, during the entire time this
Agreement is in effect (i) Comprehensive General Liability Insurance in an
amount not less than Two Million Dollars ($2,000,000.00) per occurrence for
bodily injury or property damage, (ii) Employer's Liability in an amount
not less than Five Hundred Thousand Dollars ($500,000.00) per occurrence,
and (iii) Worker's Compensation in an amount not less than that prescribed
by statutory limits. ETI shall furnish STC with certificates of insurance
which evidence the minimum levels of insurance set forth herein.
<PAGE>
18. COMPLIANCE WITH LAWS
Each party shall comply with all federal, state and local laws with respect
to the Services and this Agreement.
19. MISCELLANEOUS
a. This Agreement may not be assigned by either party in whole or in part
without the prior written consent of the other party, which consent shall
not be unreasonably withheld, except that STC and ETI shall have the right
to assign this Agreement to an affiliate or division, provided that ETI or
STC exercise management control over and/or own a controlling interest in
such affiliate or division.
b. This Agreement shall become effective when accepted by an authorized
officer of STC and ETI. The negotiation of any check representing a payment
or security deposit under this Agreement or any addendum shall not in
itself constitute an acceptance thereof.
c. The terms and provisions of this Agreement may only be waived, modified
or changed by an amendment in writing signed by both parties hereto. No
failure by either party to insist upon the other's performance of any
obligation hereunder shall constitute a waiver of the obligation and the
parties may require compliance with any such obligation at any time.
d. If any provision of this Agreement shall be determined to be invalid or
unenforceable, the remainder of the Agreement shall continue in full force
and effect.
e. This Agreement shall be governed in all respects by the internal laws of
the State of New York. The parties hereby solely subject themselves to the
jurisdiction of the State of New York, for the resolution of any dispute
arising hereunder and agree that venue in any suit filed in those courts
shall be proper.
f. ETI shall not use or disclose, or allow its representatives, agents or
employees to use or disclose any information concerning the rates or terms
upon which services are provided hereunder by STC.
g. This Agreement may be executed in two or more counterparts, each of
which shall be an original, and all of which, taken together, shall
constitute one and the same Agreement.
i. Both ETI and STC each represent and warrant to the other that the
person executing this Agreement (or any amendments and changes) on its
behalf is its duly authorized representative.
ii. This Agreement and any documents attached hereto constitute the
entire Agreement between the parties and supersede all prior
agreements, whether written or oral, with respect to the specific
services being provided hereunder. In case of any conflict between
this Agreement and the terms of any documents attached hereto, the
terms of the documents attached shall control insofar as the services
covered thereby are concerned.
<PAGE>
20. BUILD-OUT
a. On or before the date that occurs sixty (60) days after the date that
the Contingency is fully satisfied, ETI shall perform the Construction
Work. ETI shall perform the Construction Work in a good and workmanlike
manner, in accordance with the plans and specifications approved by STC,
and in accordance with all applicable governmental laws, statutes, codes,
and regulations. Upon ETI's completion of the Construction Work, ETI and
STC shall jointly inspect the Construction Work and shall prepare a punch
list of items of the Construction Work that need to be completed or
corrected. ETI agrees to fully correct or complete the items that are set
forth on the punch list within thirty (30) days after the date that such
punch list is prepared.
b. STC shall be given access to the Premises commencing thirty (30) days
before the Commencement Date, for the purpose of installing fixtures and
equipment therein. STC shall coordinate such installations with ETI's
contractors. STC shall indemnify ETI against any and all damages sustained
in connection with the installation of such fixtures and equipment, unless
such damage is caused by the negligence or willful misconduct of ETI, its
agents, employees or contractors.
21. ADDITIONAL SPACE
The parties agree that if ETI intends to sublease, license or make
available portions of the Leased Premises (the "Open Space") other than the
Premises to other parties that are not related to or affiliated with either
party hereto, (i) ETI shall not sublease, license or make available for use
any Open Space (or grant any party any rights with respect to such space)
that is located adjacent to the Premises (the "Adjacent Space") without
first offering in writing (the "Offer"), for an exclusive fifteen (15) day
period, to sublease, license or make available for use such space to STC;
and (ii) ETI shall, in good faith, attempt to sublease, license or make
available for use the Open Space that is located within the Leased Premises
that does not constitute the Adjacent Space prior to entering into any
agreement to sublease, license or make available for use the Adjacent
Space. In the event that STC desires to accept an Offer then, within
fifteen (15) days after its receipt of the Offer, STC shall deliver a
notice of acceptance to ETI. In the event STC delivers such notice of
acceptance to ETI, then ETI shall license the Adjacent Space to STC, and
STC shall license the Adjacent Space from ETI, upon the same terms and
conditions that it licenses the Premises, except that: (i) the Occupancy
Fee with respect to the Adjacent Space shall be the same amount per
rentable square foot that STC is paying ETI with respect to the Premises,
except as otherwise provided in Paragraph 15(b) of the Co-location Schedule
attached hereto, (ii) the term of the license with respect to the Adjacent
Space shall be coterminous with the term of this Agreement with respect to
the Premises, (iii) STC's obligation to pay the Occupancy Fee with respect
to the Adjacent Space shall commence upon the date that ETI completes the
build-out of the Adjacent Space for STC and obtains any necessary occupancy
permit therefor and STC is lawfully permitted to occupy the Adjacent Space.
The scope of the build-out of the Adjacent Premises and the cost of
performing the same shall be subject to the parties mutual agreement which
shall be negotiated in good faith and at the then market price.
IN WITNESS WHEREOF, the undersigned hereby acknowledge that they have read
and fully understand the foregoing Agreement and, further, that they agree to
each of the terms and conditions contained herein.
Accepted and Agreed by:
STARTEC INC.
By: /S/ PRINT: RAM MAKUNDA
DATE: 9/2/97 TITLE: CFO
Accepted and Agreed by:
Extranet Telecommunications, Inc.
By: /s/ PRINT: MICHAEL A. COLLADO
DATE: 28 AUGUST 1997 TITLE: CEO
<PAGE>
CO-LOCATION SCHEDULE
CO-LOCATION AND FACILITIES MANAGEMENT SERVICE AGREEMENT
CLIENT: STARTEC INC. (STC)
1. Address Of Co-location Center:
111 Eighth Avenue, 5th Floor
New York, NY 10011
2. Space Allocation:
2110 sq. ft. Rentable Square Feet, 1560 sq. ft. Usable
Square Feet.
3. Initial Term:
Five (5) Years
4. Renewal Terms:
Additional Five (5) years
<PAGE>
5. Requested Commencement Date:
Within ninety (90) days from the date of this Agreement.
6. Monthly Occupancy Fee:
Seven-thousand and thirty-four dollars and no cents ($7034.00) for the
period beginning upon the date of commencement to and including month
twenty-four of the term and seven-thousand five-hundred and sixty dollars
and no cents ($7560.00) the period beginning in month twenty-five of the
term to and including month sixty of the term. (includes the back-up
generator power and HVAC requirements described on Schedule 1 attached
hereto).
7. Additional Occupancy Fees:
Payable at the times and in the amounts as agreed by STC and ETI when
additional services are requested by STC from ETI.
8. Security Deposit:
Seven thousand five hundred and sixty dollars ($7560.00) which shall be
held by ETI until and applied as a payment by STC of the last month of the
term of this Agreement.
9. Electric Power Charges:
The Premises will be separately sub-metered for electricity at STC's
expense. ETI's charges for the actual electricity consumption shown on such
sub-meter, at the rates charged by the local electric company, will be
payable within fifteen (15) days after STC's receipt of an invoice
therefor.
10. Non-Recurring Build-out Fees:
Four-hundred and ninety-six thousand dollars no cents ($494,000.00).
11. Installation Charge:
None
12. Dispatch Labor Charges:
The following charges apply to work done on STC's behalf on STC equipment
located in the Premises ("Dispatch Labor Charges").
<PAGE>
a. Normal ETI business hours one hour per week (accrued) included (Mon. -
Fri. 8:00 a.m. to 6:00 p.m. except ETI holidays) at no charge to STC
under this Agreement. Additional hours will be billed to STC at the
rate of $95.00 per hour with a one hour minimum.
b. Off Hour Support shall be billed at a rate of $125.00 per hour with a
two (2) hour minimum (All other times and ETI holidays).
c. Technical Labor Charges apply only if STC requests and authorizes
dispatch of ETI personnel to perform work on STC's behalf. ETI
reserves the right to accept or reject any such requests. ETI dispatch
of personnel to work on STC's equipment is also premised on STC
furnishing written instructions to ETI prior to commencement of any
work.
13. Support Services:
Optional on-site technical support will be provided according to the
following schedule:
Operations & Management Support $2000.00
for a 40 Hours per Month Subscription.
Time & Materials Support $ 95.00
per hour for each additional hour
provided hereunder.
14. Intra building Conduit and Cable Service Fees:
a. The fees described in this Paragraph 14a. shall be payable directly to
ETI.
One-time conduit space allocation charge: $25,000.00
One-time conduit provision charge: $ 3,500.00
Monthly recurring charge: $ 350.00
b. The charges described in Paragraph 14a. do not include any costs
associated with the installation of the intra-building conduit and
cable. Prior to the full installation of the conduit, STC shall pay to
ETI the ten percent (10%) fee that is payable to ETI pursuant to the
provisions of Paragraph 7(c) of the Agreement.
15. ETI provided carrier and customer interconnection monthly charges:
DS1 (On-net only) $ 225.00
DS3 (within 111 8th Avenue) $2,000.00
DS3 (From 111 8th Avenue to anywhere in 60 Hudson) $2,200 00
No installation or mux charges apply. No minimum or term commitments.
<PAGE>
16. ETI provided intra-building carrier and customer interconnection:
Service Type Monthly Charges
DS1 $ 80.00
DS3 $1,200.00
17. Additional Space within the ETI Co-Location Center:
a. Rack Space as defined in this Agreement will be
provided by ETI to STC according to the following
schedule:
Number of Racks/ Monthly Charge One-time Charge
1-3 Racks or Cabinets $450.00 $1200.00
4-9 Racks or Cabinets $400.00 $1000.00
10+ $350.00 $ 800.00
b. Additional measured square footage will be provided to STC according
to the same terms, conditions and rates as established in this
Agreement plus any increases imposed on ETI by its Landlord.
Accepted and Agreed by:
STARTEC INC.
By: /s/ PRINT: RAM MUKUNDA
DATE: 9/2/97 TITLE: CEO
Accepted and Agreed by:
Extranet Telecommunications, Inc.
By: /S/ PRINT: MICHAEL A. COLLADO
DATE: 28 AUGUST 1997 TITLE: CEO
<PAGE>
SCHEDULE 1
CO-LOCATION AND FACILITIES MANAGEMENT SERVICE AGREEMENT
CLIENT: STARTEC INC. (STC)
Description of the Premises to be provided to STC by ETI:
1. General Conditions:
a. The Premises shall be approximately two-thousand one hundred and ten
(2110) rentable square feet in size with a loss factor of twenty-six
percent (26%) for a total usable space of approximately one-thousand
five hundred and sixty (1560) square feet.
b. The Premises shall be equipped with a separate entrance for the sole
use of STC. ETI shall install full interior walls to secure the STC
Premises within the Leased Premises.
c. ETI reserves the right to equip the Premises with an open ceiling plan
and overhead hung lighting or a dropped ceiling with recessed
lighting.
d. A twelve (12") inch raised floor will be installed throughout the
facility.
e. ETI shall secure the Premises from the remainder of the Leased
Premises by means of a key or card access entry system.
f. ETI shall install, within the Premises, a maximum of one (1) duplex
convenience AC outlet and one (1) duplex voice (RJ11) and data (RJ45)
outlet for every one-hundred square feet of usable space as part of
this Agreement.
2. Electrical Resources:
a. ETI shall provision, maintain and manage an expandable negative 48VDC
power plant (the "DC Plant") sufficient to supply STC with their
stated -48VDC power resource requirement of six-hundred (600) amps
with one (1) hour back-up battery support. The DC Plant shall, as a
minimum, be capable of intelligent paralleling or proportional load
sharing, and shall be equipped with an automatic equalize function for
managed subsequent battery recharge in the event of a commercial power
failure. The DC Plant shall also be equipped with and support remote
extendable alarming capabilities. The DC Plant shall at all times be
connected to the building emergency generator plant. The six-hundred
(600) amps of -48VDC power resources supplied by ETI to STC shall
terminate on a main distribution panel with the -48VDC power resources
allocated as follows:
i. 2 x 200 amp fusing (Bkrs)
ii. 2 x 50 amp fusing (Bkrs)
iii. 3 x 20 amp fusing (Bkrs)
iv. 4 x 10 amp fusing (Bkrs)
<PAGE>
b. ETI shall provision, maintain and manage an expandable inverted DC-AC
power plant (the "Inverted Plant") with a maximum of one (1) hour
battery support. The Inverted Plant shall be sufficient to supply STC
with their stated inverted power requirements of (40) AMPS @ 110VAC.
The Inverted Plant shall, as a minimum, be capable of intelligent
paralleling or proportional load sharing, and shall be equipped with
an automatic equalize function for managed subsequent battery recharge
in the event of a power failure as well as extendable alarming
capabilities. The Inverted Plant shall at all times be connected to
the building emergency generator plant. The forty (40) AMPS @ 110VAC
inverted power resources supplied by ETI to STC shall terminate on a
main distribution panel and shall be allocated as follows:
i. 2 x 20 amp fusing (Bkrs)
c. ETI shall provision and maintain AC commercial power resources (the
"AC Plant") sufficient to supply STC with a rated output of seventy
(70) AMPS @ 110VAC of non-battery, non-generator supported commercial
power for general office use which shall be allocated as follows:
i. 3 X 20 amp fusing (Bkrs)
ii. 1 x 10 amp fusing (Bkrs)
d. ETI shall furnish, install, manage and maintain a 750MCM ground window
which STC shall access at an ETI provided ground bar system. The ETI
provided ground bar system shall support an impedance of less than one
(1) ohm, clear of noise and voltage transients and shall electrically
isolate the power plant from the intregrated grounding at the ground
window.
3. Air Conditioning (hvac) Resources:
a. ETI shall furnish, install, manage and maintain sufficient air
conditioning resources to meet the STC stated heat load of
approximately 180,000 BTU/hr. ETI shall at all times during the term
of this Agreement maintain a required operating temperature of 65-75
degrees with humidity between 30% & 55%.
b. ETI may, in its sole discretion, provision the cooling resources as
provided in Paragraph 3a via free blow units, overhead ducts and or
under-floor hvac systems in order to permit the free flow of the
shared cooling system resources.
4. Fire Protection System:
a. ETI shall, as part of this Agreement, furnish and install an FM-200
type fire protection system within the Premises. The FM-200 fire
protection system shall be provisioned in a manner such that the
Premises will not be effected in the event of a system discharge in
another space within the Leased Premises. The existing landlord
provided building sprinkler system will be decommissioned and removed
from service.
b. ETI shall furnish, install maintain and manage interior smoke, water,
fire and entry detection equipment to monitor the Premises and Leased
Premises.
5. Alarm Notification System:
a. ETI shall furnish, install, maintain and manage a remote alarm
notification system within the Premises which shall be connected to
the Utility Systems to provide STC with full alarm notification
capability over the Utility Systems.
END OF SCHEDULE
<PAGE>
CO-LOCATION AND FACILITIES MANAGEMENT SERVICE AGREEMENT CLIENT:
STARTEC INC. (STC)
EXHIBIT "A"
Premises
1. Depict the Premises:
<PAGE>
CO-LOCATION AND FACILITIES MANAGEMENT SERVICE AGREEMENT
CLIENT: STARTEC INC. (STC)
(FLOOR PLAN)
<PAGE>
CO-LOCATION AND FACILITIES MANAGEMENT SERVICE AGREEMENT
CLIENT: STARTEC INC. (STC)
EXHIBIT "B"
LANDLORD ACKNOWLEDGMENT
<PAGE>
CO-LOCATION AND FACILITIES MANAGEMENT SERVICE AGREEMENT
CLIENT: STARTEC INC. (STC)
EXHIBIT "C"
LANDLORD LETTER FOR TIME WARNER
<PAGE>
Sylvan Lawrence Company, Inc.
- ----------------------------------------------------------------
111 EIGHTH AVENUE NEW YORK; N.Y. 10011-5201 TEL. (212) 243-5060
FAX NO. (212) 969-0615
- ----------------------------------------------------------------
August 6, 1997
HAND DELIVER
Mr. Michael A. Collado
Chief Executive Officer
ExtraNet
111 Eighth Avenue
New York, New York 10011
Re: 111 Eighth Avenue
Dear Michael:
It is my understanding that you require Time Warner Communications to access
your co-location facility in Room 518. As I mentioned during our telephone
conversation, building management will consider allowing Time Warner to enter
the building to provide services to Room 518.
This authorization is subject to Landlord's acceptance of the manner, plans,
fees, specifications of the overall installation and any other agreement
necessary.
Please provide me with your detailed installation plans including layout and
schematic drawings, so that I may address your request.
Do not hesitate to call if I can be of further assistance.
Very truly yours,
SYLVAN LAWRENCE COMPANY, INC.
Eric O. Hallman
Owner's Representative
EOH:pt
cc: Jack Garvey
ALL INFORMATION FURNISHED REGARDING PROPERTY FOR SALE, RENTAL OR FINANCING IS
FROM SOURCES DEEMED RELIABLE, BUT NO WARRANTY OR REPRESENTATION IS MADE AS TO
THE ACCURACY THEREOF AND SAME IS SUBMITTED SUBJECT TO ERRORS, OMISSIONS, CHANGE
OF PRICE, RENTAL OR OTHER CONDITIONS. PRIOR SALE LEASE OR FINANCING OR
WITHDRAWAL WITHOUT NOTICE
<PAGE>
THE OFFICE OF THE UNDERSIGNED
100 William Street
New York, N.Y. 10038
(212) 344-0044
April 1, 1997
ExtraNet Telecormunications, Inc.
111 Eighth Avenue
New York, New York 10011
Re: Lease (the "Lease") dated April l, 1997 by and between P.A.
BUILDING COMPANY (the "Landlord") and EXTRANET
TELECOMMUNICATIONS, INC. (the "Tenant") covering Room 518
(the "Demised Premises") located in the building (the
"Building") known as lll Eighth Avenue, New York, New York.
Gentlemen:
This letter confirms that Tenant is authorized to enter into license
agreements with third parties under which Tenant shall provide co-location
services to said third parties and make the demised premises available for
Tenant to fulfill Tenant's subscribers' co-location requirements subject to the
terms and conditions of the Lease, including, without limitation, Article 41(k),
a copy of which is annexed hereto, and in this regard and subject thereto Tenant
shall be permitted to enter into license agreements with subscribers of Tenant's
co-location facilities solely in order for said subscribers to place
telecommunications equipment (e.g., switch, router, compression equipment,
mixing equipment) within the demised premises and for no other purpose.
Very truly yours,
P.A. BUILDING COMPANY (Landlord)
By: Sylvan Lawrence Company, Inc., Agent
By:_____________________________________
Title
<PAGE>
Article 41. Assignment, Subletting, Mortgaging (continued)
(k) Anything to the contrary contained in this Article 41 notwithstanding,
provided Tenant is not then in default beyond any applicable cure
period, Tenant shall be permitted without the prior consent of
Landlord, to issue licenses to subscribers of Tenant's co-location and
facilities management services solely for the purpose of said
subscribers placing telecommunications equipment (e.g., switch,
router, compression equipment, mixing equipment) in the demised
premises and for no other purpose. Tenant shall simultaneously upon
the execution of said licenses furnish Landlord with copies of same.
Nothing to the contrary contained herein shall confer any rights upon
said licensees by Landlord or create any costs or obligations upon
Landlord nor shall any privity exist or be created between said
licensees and Landlord, it being understood that the only relationship
of said licensees shall be solely with Tenant and shall be subject to,
otherwise limited and governed by the terms and conditions of this
Lease.
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of July 1, 1997, between STARTEC, INC., a Maryland
corporation ("Employer"), and Ram Mukunda (the "Executive").
R E C I T A L S
WHEREAS, the Employer and the Executive are desirous of entering into an
Employment Agreement setting forth the terms and conditions of Employee's
employment with Employer for a three (3) year period with two (2) annual
extensions.
ACCORDINGLY, in consideration of the mutual covenants and agreements
contained in this Agreement, the parties agree as follows:
1. EMPLOYMENT AND DUTIES. Employer hereby employs Executive and Executive
hereby accepts employment as President, Chief Executive Officer and Treasurer of
Employer and, if Employer so elects, as an executive officer or director of any
of the direct or indirect subsidiaries of Employer (the "Subsidiaries").
Executive agrees to serve without additional remuneration in such capacities for
the Subsidiaries of Employer, with responsibilities and authority commensurate
with the nature of Executive's responsibility and authority with Employer as the
Board of Directors of Employer (the "Board of Directors") may from time to time
request, subject to appropriate authorization by the Subsidiaries involved and
any limitations under applicable law. Executive shall perform such duties and
have such powers and authority as the Board of Directors shall determine,
commensurate with Executive's position as an executive officer of Employer. The
Executive also agrees to serve as a member and Chairman of the Board of
Directors until his successor shall be duly elected and qualified. The
Executive's failure to discharge an order or perform a function because the
Executive reasonably and in good faith believes such would violate a law or
regulation or be dishonest shall not be deemed a breach by him of his
obligations or duties hereunder.
2. SERVICES AND EXCLUSIVITY OF SERVICES.
2.1 So long as this Agreement shall continue in effect, Executive
shall devote his full business time and energy to the business, affairs and
interests of Employer and its Subsidiaries and matters related thereto and shall
faithfully and diligently endeavor to promote such business, affairs and
interests.
<PAGE>
2.2 Executive may serve as a director or in any other capacity of any
business enterprise, including an enterprise whose activities may involve or
relate to the business of the Employer and its Subsidiaries, provided that such
service is expressly approved by the Board of Directors of the Employer.
Executive may make and manage personal business investments of his choice
(provided such investments are in businesses which do not directly compete with
Employer and its Subsidiaries or such investments satisfy the standards set
forth in the proviso to Section 6.1.1. and, in either case, do not require any
services on the part of Executive in the affairs of the companies in which such
investments are made) and may serve in any capacity with any civic, educational
or charitable organization, or any governmental entity or trade association,
without seeking or obtaining approval by the Board of Directors of Employer,
provided such activities and service do not materially interfere or conflict
with the performance of his duties hereunder.
3. COMPENSATION, EXPENSES AND OTHER BENEFITS.
3.1 BASE SALARY. During the Term (as defined in Section 4.1), the
Executive shall receive for the services to be rendered hereunder a base salary
at an annual rate of $250,000 per annum (the "Base Salary"). The Base Salary
shall be paid in substantially equal installments consistent with the Employer's
normal payroll schedule, but in no event less frequently than bi-weekly, subject
to applicable withholding and other taxes. The Executive's Base Salary shall be
reviewed at least annually and may be increased but may not be decreased. If
Base Salary is so increased, the amount of such increase shall thereafter be
included in Base Salary.
3.2 BONUS. In addition to the Base Salary, the Executive shall also be
eligible to receive an annual bonus (the "Bonus") of up to 40% of the Base
Salary. The amount of the Bonus shall be determined by the Board of Directors of
Employer and shall be based on the financial and operating performance of
Employer. The Board of Directors may, in its sole and absolute discretion, award
additional bonuses to Executive on any other basis as it deems appropriate from
time to time.
3.3 STOCK OPTIONS. Executive shall be entitled to receive grants of
stock options or other awards, which options or awards will be subject to the
terms and conditions of Employer's 1997 Performance Incentive Plan (the "Plan"),
when, as and if adopted, in amounts determined by the Board of Directors (or a
committee thereof) in its sole and absolute discretion.
<PAGE>
3.4 EXPENSES. Employer shall promptly reimburse Executive for all
reasonable expenses incurred by him in connection with the performance of his
services under this Agreement upon presentation of appropriate documentation in
accordance with Employer's and its Subsidiaries' customary procedures and
policies applicable to its and their senior executives.
3.5 DISABILITY INSURANCE. Employer shall obtain a disability policy
covering the Executive in the event he becomes disabled, in a monthly amount
equal to at least 60% of Executive's then-current monthly Base Salary.
3.6 OTHER BENEFITS. Executive shall be eligible to participate in any
accident, health, medical, disability, pension, savings and any other employee
benefit plans (other than any stock option or similar plans) that may from time
to time be provided by the Employer to its executive personnel.
3.7 VACATION. Executive shall be entitled to reasonable vacations
during each year of the Term (as defined in Section 4.1 hereof), the timing and
duration thereof to be determined by mutual agreement between Executive and the
Employer.
3.8 AUTOMOBILE ALLOWANCE. Executive shall be entitled to receive an
automobile allowance of One Thousand Five Hundred and No/Dollars ($1,500.00) per
month payable on the first day of each month.
4. TERM AND TERMINATION.
4.1 TERM. The term of Employee's employment hereunder (the "Term")
shall begin on the date of this Agreement (the "Effective Date"), shall continue
through the third anniversary of the Effective Date (the "Initial Term") and
shall automatically extend each year until the fifth anniversary of the
Effective Date, unless notice of termination is given by either party hereto at
least ninety (90) days prior to the end of the Initial Term or the first annual
extension.
4.2 TERMINATION.
4.2.1 Employer may, at its election, subject to the provisions of
Section 4.3 hereof, terminate Executive's employment hereunder as follows:
(i) for "Cause" upon notice of such termination to
Executive;
<PAGE>
(ii) upon the death of Executive; or
(iii) upon 10 days' notice to Executive if Executive
becomes "Disabled".
4.2.2 As used in this Agreement, the following terms shall have
the meanings ascribed to them below:
(i) "Cause" shall mean (A) Executive's final conviction of a
felony involving a crime of moral turpitude, (B) acts of Executive which, in the
reasonable judgment of the Board, constitute willful fraud on the part of
Executive in connection with his duties under this Agreement, including but not
limited to misappropriation or embezzlement in the performance of duties as an
employee of the Company, or willfully engaging in conduct materially injurious
to the Company and in violation of the covenants contained in this Agreement, or
(C) gross misconduct, including but not limited to the willful failure of
Executive either to (1) continue to obey lawful written instruction of the Board
after thirty (30) days notice in writing of Executive's failure to do so and the
Board's intention to terminate Executive if such failure is not corrected, or
(2) correct any conduct of Executive which constitutes a material breach of this
Agreement after thirty (30) days notice in writing of Executive's failure to do
so and the Board's intention to terminate Executive if such failure is not
corrected.
(ii) "Disabled" or "Disability" shall mean a written
determination by a physician mutually agreeable to the Company and Executive
(or, in the event of Executive's total physical or mental disability,
Executive's legal representative) that Executive is physically or mentally
unable to perform his duties of Chief Executive Officer under this Agreement and
that such disability can reasonably be expected to continue for a period of six
(6) consecutive months or for shorter periods aggregating one hundred and eighty
(180) days in any twelve-(12)-month period.
(iii) "Termination Without Cause" shall mean any termination
of employment of Executive (A) by the Employer for reasons other than (a) as set
forth in Section 4.2.1(i) through (iii) and (b) by the Executive for Good
Reason, or (B) by the Executive following the willful and material breach by
Employer of its obligations under Section 1 of this Agreement, which breach is
not cured within 30 days of notice of such breach to the Board of Directors.
(iv) "Good Reason" shall mean the occurrence, without
Executive's express written consent, of any of the following circumstances
following a Change in Control unless such circumstances are fully corrected
prior to the date of termination specified in the termination notice given in
respect thereof (A) the failure of Executive to be retained as an employee in a
senior executive position; (B) a reduction by the Employer in Executive's salary
payable pursuant to Section 3.1 hereof; or (C) a relocation of Executive's
office to a location more than twenty (20) miles from the current executive
office of the Employer and (i) a failure to make Executive whole for all losses
and costs reasonably incurred in connection with the relocation including, but
not limited to, moving expenses, forfeited bonds, fees or escrows to clubs or
other organizations and losses from the sale of Executive's personal residence
and (ii) the failure of Executive to obtain an agreement in form and substance
reasonably satisfactory to Executive from any successor to provide employment to
Executive in the capacity of a senior executive, at his then current Base
Salary, for a period of at least two years from the date of the Change in
Control.
<PAGE>
(v) "Change in Control" shall be deemed to have occurred if:
(A) any "person", as such term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the
Employer, any trustee or other fiduciary holding securities under any employee
benefit plan of the Employer or any company owned, directly or indirectly, by
the shareholders of the Employer in substantially the same proportions as their
ownership of the Employer's voting common stock, $.01 par value per share (the
"Common Stock"), becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of Employer
representing 30% or more of the combined voting power of all classes of the
Employer's then outstanding voting securities; (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
Employer's shareholders 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; (C) the shareholders of the Employer
approve a merger or consolidation of the Employer with any other corporation or
legal entity, other than a merger or consolidation that would result in the
voting securities of the Employer outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than 50% of the combined
voting power of the voting securities of the Employer or such surviving entity
outstanding immediately after such merger or consolidation; provided, however,
that a merger or consolidation effected to implement a recapitalization of the
Employer (or similar transaction) in which no person acquires more than 30% of
the combined voting power of the Employer's then outstanding securities shall
not constitute a Change in Control of the Employer; or (D) the shareholders of
the Employer approve a plan of complete liquidation of the Employer or an
agreement for the sale or disposition by the Employer of all or substantially
all of the Employer's assets.
4.3 RIGHTS UPON TERMINATION.
4.3.1 Upon any termination of this Agreement for Cause, Employer
shall not have any other or further obligations to the Executive under this
Agreement (except (i) as may be provided in accordance with the terms of
retirement and other benefit plans pursuant to Section 3, (ii) as to that
portion of any unpaid Base Salary and other benefits accrued and earned under
this Agreement through the date of such termination, (iii) as to benefits, if
any, provided by any insurance policies in accordance with their terms, and (iv)
for reasonable business expenses incurred prior to the date of termination,
subject to the provisions of Section 3.4. hereof).
<PAGE>
4.3.2 Upon termination of this Agreement because of the death or
Disability of Executive, Employer shall pay to Executive or Executive's estate,
any unpaid Base Salary and Bonus accrued through the date of termination
specified in the termination notice, plus an additional amount equal to the
Severance Payment (as defined in Section 4.3.3), and shall reimburse Executive
(or his estate) for reasonable business expenses incurred prior to the date of
termination, subject to the provisions of Section 3.4. hereof. Employer shall
pay such amounts within 10 days following such termination, provided, that, at
Employer's option, the Severance Payment (as defined in Section 4.3.3) may be
made in equal monthly installments over the 12-month period subsequent to the
date of termination specified in the termination notice.
4.3.3 Upon a Termination Without Cause, the Executive shall be
entitled to receive (i) severance compensation equal to what would have been his
Base Salary under Section 3.1, payable at such times as his Base Salary would
have been paid if his employment hereunder had not been terminated, for the
longer of twelve (12) months or the remainder of what would have been the Term,
as well as a pro rata portion of the Bonus applicable to the calendar year in
which such termination occurs, payable when and as such Bonus is determined
under Section 3.2, (ii) Base Salary and other benefits, payable within sixty
(60) days after the date of such termination, accrued by him hereunder up to and
including the date of such termination, and (iii) the benefits set forth in
Sections 3.5 and 3.6 for the longer of twelve (12) months or the remainder of
what would have been the Term (and subsequent to which Executive will be
entitled to any COBRA benefits). In addition, Employer shall reimburse Executive
for reasonable business expenses incurred prior to the date of termination,
subject to the provisions of Section 3.4. hereof.
4.3.4 Upon termination of this Agreement by Executive for Good
Reason, Employer shall pay to Executive any unpaid Base Salary and Bonus accrued
through the date of termination specified in the termination notice, plus an
additional payment equal to the unpaid Base Salary for the balance of the Term
and shall reimburse Executive for reasonable business expenses incurred prior to
the date of termination, subject to the provisions of Section 3.4 hereof.
4.3.5 Upon any termination provided for in this Agreement, any
outstanding options or other awards granted to Executive by the Employer shall
be treated in the manner set forth in the 1997 Performance Incentive Plan or
similar or subsequent incentive plan, and any applicable stock option agreements
associated with such options or awards.
4.3.6 Except as provided herein, Employer shall have no further
liability to Executive under this Agreement in respect of any termination of
this Agreement.
<PAGE>
5. CONFIDENTIALITY. Executive agrees that he will not make use of, divulge
or otherwise disclose, directly or indirectly, any trade secret or other
confidential information concerning the business, operations, practices, or
financial condition of Employer or any of its Subsidiaries ("Confidential
Information"), which he may have learned as a result of his employment by the
Employer during the Term or as a shareholder, officer or director of Employer or
any of its Subsidiaries, except to the extent such use or disclosure is (a)
necessary to the performance of this Agreement and in furtherance of the best
interests of Employer and its Subsidiaries, (b) required by applicable law, (c)
authorized by Employer or its Subsidiaries, or (d) is of information which is in
the public domain through no unlawful act of the Executive or which the
Executive lawfully acquires subsequent to termination of his employment with the
Employer from any person not subject to a confidentiality obligation to the
Employer or its Subsidiaries. The Executive acknowledges and recognizes that the
Confidential Information is essential to the unique nature of the Employer's
business and for that reason, all such materials and information shall at all
times remain the exclusive property of the Employer. Upon the termination of
this Agreement, all such Confidential Information furnished and supplied to the
Executive during the Term shall be returned by the Executive to the Employer.
Executive, in the event of such termination, will not at any time impart to
anyone or use any such Confidential Information. The provisions of Sections 5
and 6 shall survive the expiration, suspension or termination, for any reason,
of this Agreement. Executive acknowledges that the Executive's obligations under
Sections 5 and 6 shall survive regardless of whether the Executive's employment
by the Employer is terminated, voluntarily or involuntarily by the Employer or
the Executive, with Cause or without Cause.
6. RESTRICTIVE COVENANTS.
6.1 NON-COMPETITION.
6.1.1 The Executive agrees that he shall not, until the first
anniversary of the date this Agreement is terminated, without the prior written
consent of the Employer, directly or indirectly (whether as a sole proprietor,
partner, venturer, shareholder, director, officer, employee, or in any other
capacity as principal or agent or through any person, corporation, partnership,
entity or employee acting as nominee or agent) conduct or engage in or be
interested in or associated with any person, firm, association, syndicate,
partnership, company, corporation, or other entity which conducts or engages in
the international telecommunications business in any geographic areas in which
Employer or any Subsidiary is then so engaged in business or proposes to engage
in business in accordance with its then-current strategic plan, nor shall
Executive interfere with, disrupt or attempt to disrupt the relationship,
contractual or otherwise, between Employer or any of its Subsidiaries, on the
one hand, and any customer, supplier, lessor, lessee or employee of the Employer
or any of its Subsidiaries, on the other hand; provided, however, that this
Section 6.1.1. shall not prohibit the Executive from owning beneficially or of
record more than 5% of the outstanding equity securities of any entity whose
equity securities are registered under the Securities Act of 1933, as amended,
or are listed for trading on any United States or foreign stock exchange.
6.1.2 It is the desire and intent of the parties that the
provisions of this Section 6 shall be enforced to the full extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular portion of this Section 6
shall be adjudicated to be invalid or unenforceable, this Section 6 shall be
deemed amended to delete therefrom the portion thus adjudicated to be invalid or
unenforceable, such deletion to apply only with respect to the operation of this
paragraph in the particular jurisdiction in which such adjudication is made.
7. INJUNCTIVE RELIEF. If there is a breach or threatened breach of the
provisions of Sections 5 or 6 of this Agreement, the Employer shall be entitled
to an injunction restraining the Executive from such breach. Nothing herein
shall be construed as prohibiting the Employer from pursuing any other remedies
for such breach or threatened breach.
<PAGE>
8. INSURANCE. The Employer may, at its election and for its benefit, insure
the Employee against accidental loss or death, and the Executive shall submit to
such physical examination and supply such information as may be reasonably
required in connection therewith.
9. MISCELLANEOUS. This Agreement: (a) constitutes the entire agreement of
the parties with respect to its subject matter and supersedes all previous
agreements or understandings, whether oral or written; (b) may not be amended or
modified except by a written instrument signed by all the parties; (c) is
binding upon and will inure to the benefit of the parties and their respective
successors, transferees, personal representatives, heirs, beneficiaries and
permitted assigns; (d) may not be assigned or the obligations of any party
delegated except with the prior written consent of all the parties; (e) may be
executed in duplicate originals; and (f) shall be governed by and interpreted in
accordance with the laws of the State of Maryland, without regard to its
conflict of laws rules.
10. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be delivered by hand delivery by
independent courier service or by registered or certified mail, return receipt
requested, postage prepaid, in either case addressed as follows:
If to the Executive: Mr. Ram Mukunda
8909 Tuckerman Lane
Potomac, Maryland 20854
If to the Employer: STARTEC, INC.
10411 Motor City Drive
Bethesda, Maryland 20817
Attention: Secretary
or to such other address as either party hereto may from time to time give
notice of to the other in the aforesaid manner. Any notice delivered in the
manner set forth in this Section 10 shall be deemed given as of the date of
delivery.
11. INDEMNIFICATION; D&O INSURANCE. Employer shall indemnify Executive, in
his capacity as an executive officer or director of Employer or any of its
Subsidiaries, to the full extent permissible under the laws of the State of
Maryland, or of the state of incorporation of the relevant Subsidiary as the
case may be. Employer shall purchase and maintain directors and officers
insurance coverage in such amounts and on such terms as are customary for
companies within the Employer's industry.
<PAGE>
12. WAIVER. The failure of any party to exercise any right or remedy under
this Agreement shall not constitute a waiver of such right or remedy, and the
waiver of any violation or breach of this Agreement by a party shall not
constitute a waiver of any prior or subsequent violation or breach. No waiver
under this Agreement shall be valid unless in writing and executed by the
waiving party.
13. SEVERABILITY. If any provision of this Agreement is determined by a
court or other governmental authority to be invalid, illegal or unenforceable,
such invalidity, illegality or unenforceability shall not affect the validity,
legality or enforceability of any other provision of this Agreement. Further,
the provision that is determined to be invalid, illegal or unenforceable shall
be reformed and construed to the extent permitted by law so that it will be
valid, legal and enforceable to the maximum extent possible.
14. HEADINGS. The headings used in this Agreement are included for the
convenience of the parties for reference purposes only and are not to be used in
construing or interpreting this Agreement.
15. NO THIRD PARTY BENEFICIARIES. This Agreement shall not be deemed to
confer in favor of any third parties any rights whatsoever as a third-party
beneficiary.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
EMPLOYER:
STARTEC, INC.
By:________________________________
Title: ____________________________
EXECUTIVE:
-----------------------------------
Ram Mukunda
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of July 1, 1997, between STARTEC, INC., a Maryland
corporation ("Employer"), and Prabhav Maniyar (the "Executive").
R E C I T A L S
WHEREAS, the Employer and the Executive are desirous of entering into an
Employment Agreement setting forth the terms and conditions of Employee's
employment with Employer for a three (3) year period with two (2) annual
extensions.
ACCORDINGLY, in consideration of the mutual covenants and agreements
contained in this Agreement, the parties agree as follows:
1. EMPLOYMENT AND DUTIES. Employer hereby employs Executive and Executive
hereby accepts employment as Vice President, Chief Financial Officer and
Secretary of Employer and, if Employer so elects, as an executive officer or
director of any of the direct or indirect subsidiaries of Employer (the
"Subsidiaries"). Executive agrees to serve without additional remuneration in
such capacities for the Subsidiaries of Employer, with responsibilities and
authority commensurate with the nature of Executive's responsibility and
authority with Employer as the Board of Directors of Employer (the "Board of
Directors") may from time to time request, subject to appropriate authorization
by the Subsidiaries involved and any limitations under applicable law. Executive
shall perform such duties and have such powers and authority as the Board of
Directors shall determine, commensurate with Executive's position as an
executive officer of Employer. The Executive also agrees to serve as a member of
the Board of Directors until his successor shall be duly elected and qualified.
The Executive's failure to discharge an order or perform a function because the
Executive reasonably and in good faith believes such would violate a law or
regulation or be dishonest shall not be deemed a breach by him of his
obligations or duties hereunder.
<PAGE>
2. SERVICES AND EXCLUSIVITY OF SERVICES.
2.1 So long as this Agreement shall continue in effect, Executive
shall devote his full business time and energy to the business, affairs and
interests of Employer and its Subsidiaries and matters related thereto and shall
faithfully and diligently endeavor to promote such business, affairs and
interests.
2.2 Executive may serve as a director or in any other capacity of any
business enterprise, including an enterprise whose activities may involve or
relate to the business of the Employer and its Subsidiaries, provided that such
service is expressly approved by the Board of Directors of the Employer.
Executive may make and manage personal business investments of his choice
(provided such investments are in businesses which do not directly compete with
Employer and its Subsidiaries or such investments satisfy the standards set
forth in the proviso to Section 6.1.1. and, in either case, do not require any
services on the part of Executive in the affairs of the companies in which such
investments are made) and may serve in any capacity with any civic, educational
or charitable organization, or any governmental entity or trade association,
without seeking or obtaining approval by the Board of Directors of Employer,
provided such activities and service do not materially interfere or conflict
with the performance of his duties hereunder.
3. COMPENSATION, EXPENSES AND OTHER BENEFITS.
3.1 BASE SALARY. During the Term (as defined in Section 4.1), the
Executive shall receive for the services to be rendered hereunder a base salary
at an annual rate of $175,000 per annum (the "Base Salary"). The Base Salary
shall be paid in substantially equal installments consistent with the Employer's
normal payroll schedule, but in no event less frequently than bi-weekly, subject
to applicable withholding and other taxes. The Executive's Base Salary shall be
reviewed at least annually and may be increased but may not be decreased. If
Base Salary is so increased, the amount of such increase shall thereafter be
included in Base Salary.
3.2 BONUS. In addition to the Base Salary, the Executive shall also be
eligible to receive an annual bonus (the "Bonus") of up to 40% of the Base
Salary. The amount of the Bonus shall be determined by the Board of Directors of
Employer and shall be based on the financial and operating performance of
Employer. The Board of Directors may, in its sole and absolute discretion, award
additional bonuses to Executive on any other basis as it deems appropriate from
time to time.
3.3 STOCK OPTIONS. Executive shall be entitled to receive grants of
stock options or other awards, which options or awards will be subject to the
terms and conditions of Employer's 1997 Performance Incentive Plan (the "Plan"),
when, as and if adopted, in amounts determined by the Board of Directors (or a
committee thereof) in its sole and absolute discretion.
<PAGE>
3.4 EXPENSES. Employer shall promptly reimburse Executive for all
reasonable expenses incurred by him in connection with the performance of his
services under this Agreement upon presentation of appropriate documentation in
accordance with Employer's and its Subsidiaries' customary procedures and
policies applicable to its and their senior executives.
3.5 DISABILITY INSURANCE. Employer shall obtain a disability policy
covering the Executive in the event he becomes disabled, in a monthly amount
equal to at least 60% of Executive's then-current monthly Base Salary.
3.6 OTHER BENEFITS. Executive shall be eligible to participate in any
accident, health, medical, disability, pension, savings and any other employee
benefit plans (other than any stock option or similar plans) that may from time
to time be provided by the Employer to its executive personnel.
3.7 VACATION. Executive shall be entitled to reasonable vacations
during each year of the Term (as defined in Section 4.1 hereof), the timing and
duration thereof to be determined by mutual agreement between Executive and the
Employer.
3.8 AUTOMOBILE ALLOWANCE. Executive shall be entitled to receive an
automobile allowance of Seven Hundred Fifty and No/Dollars ($750.00) per month
payable on the first day of each month.
4. TERM AND TERMINATION.
4.1 TERM. The term of Employee's employment hereunder (the "Term")
shall begin on the date of this Agreement (the "Effective Date"), shall continue
through the third anniversary of the Effective Date (the "Initial Term") and
shall automatically extend each year until the fifth anniversary of the
Effective Date, unless notice of termination is given by either party hereto at
least ninety (90) days prior to the end of the Initial Term or the first annual
extension.
<PAGE>
4.2 TERMINATION.
4.2.1 Employer may, at its election, subject to the provisions of
Section 4.3 hereof, terminate Executive's employment hereunder as follows:
(i) for "Cause" upon notice of such termination to
Executive;
(ii) upon the death of Executive; or
(iii) upon 10 days' notice to Executive if Executive
becomes "Disabled".
4.2.2 As used in this Agreement, the following terms shall have
the meanings ascribed to them below:
(i) "Cause" shall mean (A) Executive's final conviction of a
felony involving a crime of moral turpitude, (B) acts of Executive which, in the
reasonable judgment of the Board, constitute willful fraud on the part of
Executive in connection with his duties under this Agreement, including but not
limited to misappropriation or embezzlement in the performance of duties as an
employee of the Company, or willfully engaging in conduct materially injurious
to the Company and in violation of the covenants contained in this Agreement, or
(C) gross misconduct, including but not limited to the willful failure of
Executive either to (1) continue to obey lawful written instruction of the Board
after thirty (30) days notice in writing of Executive's failure to do so and the
Board's intention to terminate Executive if such failure is not corrected, or
(2) correct any conduct of Executive which constitutes a material breach of this
Agreement after thirty (30) days notice in writing of Executive's failure to do
so and the Board's intention to terminate Executive if such failure is not
corrected.
(ii) "Disabled" or "Disability" shall mean a written
determination by a physician mutually agreeable to the Company and Executive
(or, in the event of Executive's total physical or mental disability,
Executive's legal representative) that Executive is physically or mentally
unable to perform his duties of Chief Executive Officer under this Agreement and
that such disability can reasonably be expected to continue for a period of six
(6) consecutive months or for shorter periods aggregating one hundred and eighty
(180) days in any twelve-(12)-month period.
(iii) "Termination Without Cause" shall mean any termination
of employment of Executive (A) by the Employer for reasons other than (a) as set
forth in Section 4.2.1(i) through (iii) and (b) by the Executive for Good
Reason, or (B) by the Executive following the willful and material breach by
Employer of its obligations under Section 1 of this Agreement, which breach is
not cured within 30 days of notice of such breach to the Board of Directors.
<PAGE>
(iv) "Good Reason" shall mean the occurrence, without
Executive's express written consent, of any of the following circumstances
following a Change in Control unless such circumstances are fully corrected
prior to the date of termination specified in the termination notice given in
respect thereof (A) the failure of Executive to be retained as an employee in a
senior executive position; (B) a reduction by the Employer in Executive's salary
payable pursuant to Section 3.1 hereof; or (C) a relocation of Executive's
office to a location more than twenty (20) miles from the current executive
office of the Employer and (i) a failure to make Executive whole for all losses
and costs reasonably incurred in connection with the relocation including, but
not limited to, moving expenses, forfeited bonds, fees or escrows to clubs or
other organizations and losses from the sale of Executive's personal residence
and (ii) the failure of Executive to obtain an agreement in form and substance
reasonably satisfactory to Executive from any successor to provide employment to
Executive in the capacity of a senior executive, at his then current Base
Salary, for a period of at least two years from the date of the Change in
Control.
(v) "Change in Control" shall be deemed to have occurred if:
(A) any "person", as such term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the
Employer, any trustee or other fiduciary holding securities under any employee
benefit plan of the Employer or any company owned, directly or indirectly, by
the shareholders of the Employer in substantially the same proportions as their
ownership of the Employer's voting common stock, $.01 par value per share (the
"Common Stock"), becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of Employer
representing 30% or more of the combined voting power of all classes of the
Employer's then outstanding voting securities; (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
Employer's shareholders 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; (C) the shareholders of the Employer
approve a merger or consolidation of the Employer with any other corporation or
legal entity, other than a merger or consolidation that would result in the
voting securities of the Employer outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than 50% of the combined
voting power of the voting securities of the Employer or such surviving entity
outstanding immediately after such merger or consolidation; provided, however,
that a merger or consolidation effected to implement a recapitalization of the
Employer (or similar transaction) in which no person acquires more than 30% of
the combined voting power of the Employer's then outstanding securities shall
not constitute a Change in Control of the Employer; or (D) the shareholders of
the Employer approve a plan of complete liquidation of the Employer or an
agreement for the sale or disposition by the Employer of all or substantially
all of the Employer's assets.
4.3 RIGHTS UPON TERMINATION.
4.3.1 Upon any termination of this Agreement for Cause, Employer
shall not have any other or further obligations to the Executive under this
Agreement (except (i) as may be provided in accordance with the terms of
retirement and other benefit plans pursuant to Section 3, (ii) as to that
portion of any unpaid Base Salary and other benefits accrued and earned under
this Agreement through the date of such termination, (iii) as to benefits, if
any, provided by any insurance policies in accordance with their terms, and (iv)
for reasonable business expenses incurred prior to the date of termination,
subject to the provisions of Section 3.4. hereof).
<PAGE>
4.3.2 Upon termination of this Agreement because of the death or
Disability of Executive, Employer shall pay to Executive or Executive's estate,
any unpaid Base Salary and Bonus accrued through the date of termination
specified in the termination notice, plus an additional amount equal to the
Severance Payment (as defined in Section 4.3.3), and shall reimburse Executive
(or his estate) for reasonable business expenses incurred prior to the date of
termination, subject to the provisions of Section 3.4. hereof. Employer shall
pay such amounts within 10 days following such termination, provided, that, at
Employer's option, the Severance Payment (as defined in Section 4.3.3) may be
made in equal monthly installments over the 12-month period subsequent to the
date of termination specified in the termination notice.
4.3.3 Upon a Termination Without Cause, the Executive shall be
entitled to receive (i) severance compensation equal to what would have been his
Base Salary under Section 3.1, payable at such times as his Base Salary would
have been paid if his employment hereunder had not been terminated, for the
longer of twelve (12) months or the remainder of what would have been the Term,
as well as a pro rata portion of the Bonus applicable to the calendar year in
which such termination occurs, payable when and as such Bonus is determined
under Section 3.2, (ii) Base Salary and other benefits, payable within sixty
(60) days after the date of such termination, accrued by him hereunder up to and
including the date of such termination, and (iii) the benefits set forth in
Sections 3.5 and 3.6 for the longer of twelve (12) months or the remainder of
what would have been the Term (and subsequent to which Executive will be
entitled to any COBRA benefits). In addition, Employer shall reimburse Executive
for reasonable business expenses incurred prior to the date of termination,
subject to the provisions of Section 3.4. hereof.
4.3.4 Upon termination of this Agreement by Executive for Good
Reason, Employer shall pay to Executive any unpaid Base Salary and Bonus accrued
through the date of termination specified in the termination notice, plus an
additional payment equal to the unpaid Base Salary for the balance of the Term
and shall reimburse Executive for reasonable business expenses incurred prior to
the date of termination, subject to the provisions of Section 3.4 hereof.
4.3.5 Upon any termination provided for in this Agreement, any
outstanding options or other awards granted to Executive by the Employer shall
be treated in the manner set forth in the 1997 Performance Incentive Plan or
similar or subsequent incentive plan, and any applicable stock option agreements
associated with such options or awards.
4.3.6 Except as provided herein, Employer shall have no further
liability to Executive under this Agreement in respect of any termination of
this Agreement.
<PAGE>
5. CONFIDENTIALITY. Executive agrees that he will not make use of, divulge
or otherwise disclose, directly or indirectly, any trade secret or other
confidential information concerning the business, operations, practices, or
financial condition of Employer or any of its Subsidiaries ("Confidential
Information"), which he may have learned as a result of his employment by the
Employer during the Term or as a shareholder, officer or director of Employer or
any of its Subsidiaries, except to the extent such use or disclosure is (a)
necessary to the performance of this Agreement and in furtherance of the best
interests of Employer and its Subsidiaries, (b) required by applicable law, (c)
authorized by Employer or its Subsidiaries, or (d) is of information which is in
the public domain through no unlawful act of the Executive or which the
Executive lawfully acquires subsequent to termination of his employment with the
Employer from any person not subject to a confidentiality obligation to the
Employer or its Subsidiaries. The Executive acknowledges and recognizes that the
Confidential Information is essential to the unique nature of the Employer's
business and for that reason, all such materials and information shall at all
times remain the exclusive property of the Employer. Upon the termination of
this Agreement, all such Confidential Information furnished and supplied to the
Executive during the Term shall be returned by the Executive to the Employer.
Executive, in the event of such termination, will not at any time impart to
anyone or use any such Confidential Information. The provisions of Sections 5
and 6 shall survive the expiration, suspension or termination, for any reason,
of this Agreement. Executive acknowledges that the Executive's obligations under
Sections 5 and 6 shall survive regardless of whether the Executive's employment
by the Employer is terminated, voluntarily or involuntarily by the Employer or
the Executive, with Cause or without Cause.
6. RESTRICTIVE COVENANTS.
6.1 NON-COMPETITION.
6.1.1 The Executive agrees that he shall not, until the first
anniversary of the date this Agreement is terminated, without the prior written
consent of the Employer, directly or indirectly (whether as a sole proprietor,
partner, venturer, shareholder, director, officer, employee, or in any other
capacity as principal or agent or through any person, corporation, partnership,
entity or employee acting as nominee or agent) conduct or engage in or be
interested in or associated with any person, firm, association, syndicate,
partnership, company, corporation, or other entity which conducts or engages in
the international telecommunications business in any geographic areas in which
Employer or any Subsidiary is then so engaged in business or proposes to engage
in business in accordance with its then-current strategic plan, nor shall
Executive interfere with, disrupt or attempt to disrupt the relationship,
contractual or otherwise, between Employer or any of its Subsidiaries, on the
one hand, and any customer, supplier, lessor, lessee or employee of the Employer
or any of its Subsidiaries, on the other hand; provided, however, that this
Section 6.1.1. shall not prohibit the Executive from owning beneficially or of
record more than 5% of the outstanding equity securities of any entity whose
equity securities are registered under the Securities Act of 1933, as amended,
or are listed for trading on any United States or foreign stock exchange.
6.1.2 It is the desire and intent of the parties that the
provisions of this Section 6 shall be enforced to the full extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular portion of this Section 6
shall be adjudicated to be invalid or unenforceable, this Section 6 shall be
deemed amended to delete therefrom the portion thus adjudicated to be invalid or
unenforceable, such deletion to apply only with respect to the operation of this
paragraph in the particular jurisdiction in which such adjudication is made.
<PAGE>
7. INJUNCTIVE RELIEF. If there is a breach or threatened breach of the
provisions of Sections 5 or 6 of this Agreement, the Employer shall be entitled
to an injunction restraining the Executive from such breach. Nothing herein
shall be construed as prohibiting the Employer from pursuing any other remedies
for such breach or threatened breach.
8. INSURANCE. The Employer may, at its election and for its benefit, insure
the Employee against accidental loss or death, and the Executive shall submit to
such physical examination and supply such information as may be reasonably
required in connection therewith.
9. MISCELLANEOUS. This Agreement: (a) constitutes the entire agreement of
the parties with respect to its subject matter and supersedes all previous
agreements or understandings, whether oral or written; (b) may not be amended or
modified except by a written instrument signed by all the parties; (c) is
binding upon and will inure to the benefit of the parties and their respective
successors, transferees, personal representatives, heirs, beneficiaries and
permitted assigns; (d) may not be assigned or the obligations of any party
delegated except with the prior written consent of all the parties; (e) may be
executed in duplicate originals; and (f) shall be governed by and interpreted in
accordance with the laws of the State of Maryland, without regard to its
conflict of laws rules.
10. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be delivered by hand delivery by
independent courier service or by registered or certified mail, return receipt
requested, postage prepaid, in either case addressed as follows:
If to the Executive: Mr. Prabhav Maniyar
c/o STARTEC, INC.
10411 Motor City Drive
Bethesda, Maryland 20817
If to the Employer: STARTEC, INC.
10411 Motor City Drive
Bethesda, Maryland 20817
Attention: Secretary
<PAGE>
or to such other address as either party hereto may from time to time give
notice of to the other in the aforesaid manner. Any notice delivered in the
manner set forth in this Section 10 shall be deemed given as of the date of
delivery.
11. INDEMNIFICATION; D&O INSURANCE. Employer shall indemnify Executive, in
his capacity as an executive officer or director of Employer or any of its
Subsidiaries, to the full extent permissible under the laws of the State of
Maryland, or of the state of incorporation of the relevant Subsidiary as the
case may be. Employer shall purchase and maintain directors and officers
insurance coverage in such amounts and on such terms as are customary for
companies within the Employer's industry.
12. WAIVER. The failure of any party to exercise any right or remedy under
this Agreement shall not constitute a waiver of such right or remedy, and the
waiver of any violation or breach of this Agreement by a party shall not
constitute a waiver of any prior or subsequent violation or breach. No waiver
under this Agreement shall be valid unless in writing and executed by the
waiving party.
13. SEVERABILITY. If any provision of this Agreement is determined by a
court or other governmental authority to be invalid, illegal or unenforceable,
such invalidity, illegality or unenforceability shall not affect the validity,
legality or enforceability of any other provision of this Agreement. Further,
the provision that is determined to be invalid, illegal or unenforceable shall
be reformed and construed to the extent permitted by law so that it will be
valid, legal and enforceable to the maximum extent possible.
14. HEADINGS. The headings used in this Agreement are included for the
convenience of the parties for reference purposes only and are not to be used in
construing or interpreting this Agreement.
15. NO THIRD PARTY BENEFICIARIES. This Agreement shall not be deemed to
confer in favor of any third parties any rights whatsoever as a third-party
beneficiary.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
EMPLOYER:
STARTEC, INC.
By:________________________________
Title: ____________________________
EXECUTIVE:
-----------------------------------
Prabhav Maniyar
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 ......... - - - - 52,729
Effect of cheap stock ............... 291,950 291,950 291,950 291,950 239,221
----------- ------------- ------------- ----------- -----------
Total weighted average common and
equivalent shares outstanding ...... 4,888,176 5,609,059 5,695,300 5,695,300 5,695,300
=========== ============= ============= =========== ===========
Net (loss) income per share ......... $ (0.20) $ (0.22) $ (0.50) $ (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.
ARTHUR ANDERSEN LLP
Washington, D.C.
September 11, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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> 0 0
<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> (0.50) 0.06
<EPS-DILUTED> (0.50) 0.06
</TABLE>
