UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER : 0-23087
STARTEC GLOBAL COMMUNICATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1660985
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
10411 MOTOR CITY DRIVE, BETHESDA, MD 20817
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(301) 365-8959
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [] No
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
OUTSTANDING AS OF
CLASS APRIL 20, 1998
----- --------------
Common Stock, $.01 par value 8,938,615
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION
INDEX TO FORM 10-Q
------------------
<TABLE>
<CAPTION>
Page
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<S> <C>
Statements of Operations ........................................... 3
Balance Sheets....................................................... 4
Statements of Cash Flows............................................. 5
Notes to Financial Statements........................................ 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .................................. 9
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............... 10
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS........................................... 11
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................... 11
Item 3. DEFAULTS UPON SENIOR SECURITIES............................. 11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.......... 11
Item 5. OTHER INFORMATION........................................... 11
Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 11
SIGNATURE ............................................................................ 12
EXHIBIT INDEX ......................................................................... 13
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
STARTEC GLOBAL COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1997 1998
----------- ----------
<S> <C> <C>
Net revenues................................. $ 12,372 $ 29,891
Cost of services.............................. 10,765 25,655
----------- ----------
Gross margin............................ 1,607 4,236
General and administrative expenses........... 1,151 2,691
Selling and marketing expenses ............... 104 648
Depreciation and amortization................. 96 184
----------- ----------
Income from operations................. 256 713
Interest expense.............................. 117 153
Interest income............................... 1 359
----------- ----------
Income before income tax provision...... 140 919
Income tax provision.......................... 3 20
----------- ----------
Net income.............................. $ 137 $ 899
=========== ==========
Basic earnings per share...................... $ 0.03 $ 0.10
=========== ==========
Weighted average common shares outstanding -
basic .................................... 5,403 8,909
=========== ==========
Diluted earnings per share.................... $ 0.03 $ 0.10
=========== ==========
Weighted average common and equivalent shares
outstanding - diluted .................... 5,474 9,365
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................................. $ 26,114 $ 24,067
Accounts receivable, net of allowance for doubtful accounts of approximately
$2,353 and $3,485 respectively.................................................... 16,980 20,307
Accounts receivable, related party.................................................... 377 945
Other current assets.................................................................. 1,743 802
---------- ----------
Total current assets.............................................................. 45,214 46,121
---------- ----------
PROPERTY AND EQUIPMENT:
Long distance communications equipment................................................ 3,305 6,763
Computer and office equipment......................................................... 1,024 1,494
Less - Accumulated depreciation and amortization...................................... (1,240) (1,424)
---------- -----------
3,089 6,833
Construction in progress.............................................................. 2,095 992
---------- ----------
Total property and equipment, net................................................. 5,184 7,825
---------- ----------
Deferred debt financing costs, net.................................................... 952 832
Restricted cash....................................................................... 180 180
---------- ----------
Total assets...................................................................... $ 51,530 $ 54,958
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 15,420 $ 18,378
Accrued expenses...................................................................... 3,728 3,033
Capital lease obligations............................................................. 331 377
---------- ----------
Total current liabilities......................................................... 19,479 21,788
---------- ----------
Capital lease obligations, net of current portion..................................... 417 365
Notes payable to individuals and other, net of current portion........................ 44 44
---------- ----------
Total liabilities................................................................. 19,940 22,197
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY:
Preferred stock; $1.00 par value; 100,000 shares authorized; no shares issued and
outstanding -- --
Common stock; $0.01 par value; 20,000,000 shares authorized;
8,811,999 shares issued and outstanding at December 31,
1997; 8,938,615 shares issued and outstanding at March 31, 1998................... 88 89
Additional paid-in capital............................................................ 35,528 35,786
Warrants.............................................................................. 1,693 1,693
Unearned compensation................................................................. (241) (228)
Accumulated deficit .................................................................. (5,478) (4,579)
---------- -----------
Total stockholders' equity............................................................ 31,590 32,761
---------- ------------
Total liabilities and stockholders' equity............................................ 51,530 54,958
========== ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------------
1997 1998
--------- ---------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income...................................................... $ 137 $ 899
Adjustments to net income -
Depreciation and amortization................................ 96 184
Compensation pursuant to stock options ...................... 11 13
Amortization of deferred debt financing costs, net........... -- 120
Changes in operating assets and liabilities:
Accounts receivable, net................................... (585) (3,327)
Accounts receivable, related party......................... (300) (568)
Other current assets....................................... (15) 941
Accounts payable .......................................... 761 2,958
Accrued expenses........................................... 73 (695)
-------- ---------
Net cash provided by operating activities............ 178 525
-------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment............................ (64) (2,741)
-------- ---------
Net cash used in investing activities.................. (64) (2,741)
-------- --------
FINANCING ACTIVITIES:
Net borrowings under receivables-based credit facility......... 34 --
Proceeds from exercises of stock options....................... -- 259
Repayments under capital lease obligations..................... (57) (90)
-------- --------
Net cash (used in) provided by financing activities .. (23) 169
-------- --------
Net increase (decrease) in cash and cash equivalents.......... 91 (2,047)
Cash and cash equivalents at the beginning of the period ... 148 26,114
-------- --------
Cash and cash equivalents at the end of the period ........... 239 24,067
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid..................................................... $ 99 $ 32
========= ========
Income taxes paid................................................. $ -- $ --
========= ========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Equipment acquired under capital lease............................ $ 48 $ 84
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS DESCRIPTION:
ORGANIZATION
Startec Global Communications Corporation (the "Company", formerly Startec,
Inc.), is a Maryland corporation founded in 1989 to provide long-distance
telephone services. The Company currently offers U.S.-originated long-distance
service to residential and carrier customers through a flexible network of owned
and leased transmission facilities, resale arrangements, and foreign termination
arrangements. The Company's marketing targets specific ethnic residential market
segments in the United States that are most likely to seek low-cost
international long-distance service to specific and identifiable country
markets. The Company is headquartered in Bethesda, Maryland.
INITIAL PUBLIC OFFERING
In October 1997, the Company completed an initial public offering of its
common stock (the "Offering"). Together with the exercise of the underwriters'
overallotment option in November 1997, the Offering placed 3,277,500 shares of
common stock, yielding net proceeds to the Company of approximately $35 million.
The Company is using the net proceeds of the Offering to acquire cable
facilities, switching, compression and other related telecommunications
equipment, for marketing programs, and for working capital and other gerneral
corporate purposes.
RISKS AND OTHER IMPORTANT FACTORS
The Company is subject to various risks in connection with the operation of
its business. These risks include, but are not limited to, dependence on
operating agreements with foreign partners, significant foreign and U.S.-based
customers and suppliers, availability of transmission facilities, U.S. and
foreign regulations, international economic and political instability,
dependence on effective billing and information systems, customer attrition, and
rapid technological change. Many of the Company's competitors are significantly
larger and have substantially greater financial, technical, and marketing
resources than the Company; employ larger networks and control transmission
lines; offer a broader portfolio of services; have stronger name recognition and
loyalty; and have long-standing relationships with the Company's target
customers. In addition, many of the Company's competitors enjoy economies of
scale that can result in a lower cost structure for transmission and related
costs, which could cause significant pricing pressures within the long-distance
telecommunications industry. If the Company's competitors were to devote
significant additional resources to the provision of international long-distance
services to the Company's target customer base, the Company's business,
financial condition, and results of operations could be materially adversely
affected.
In the United States, the Federal Communications Commission ("FCC") and
relevant state Public Service Commissions have the authority to regulate
interstate and intrastate telephone service rates, respectively, ownership of
transmission facilities, and the terms and conditions under which the Company's
services are provided. Legislation that substantially revised the U.S.
Communications Act of 1934 was signed into law on February 8, 1996. This
legislation has specific guidelines under which the Regional Bell Operating
Companies ("RBOCs") can provide long-distance services, which will permit the
RBOCs to compete with the Company in providing domestic and international
long-distance services. Further, the legislation, among other things, opens
local service markets to competition from any entity (including long-distance
carriers, such as AT&T, cable television companies and utilities).
Because the legislation opens the Company's markets to additional
competition, particularly from the RBOCs, the Company's ability to compete may
be adversely affected. Moreover, certain Federal and other governmental
regulations may be amended or modified, and any such amendment or modification
could have material adverse effects on the Company's business, results of
operations, and financial condition.
2. SIGNIFICANT ACCOUNTING PRINCIPLES:
GENERAL
In addition to the principles identified below, Note 2 of the Notes to
Financial Statements, as set forth in the Company's Annual Report on Form 10-K,
summarizes the Company's 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.
BASIS OF PREPARATION OF INTERIM FINANCIAL INFORMATION
The financial statements included herein are unaudited and have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the financial statements reflect all
adjustments (of a normal and recurring nature) which are necessary to present
fairly the financial position, results of operations and cash flows for the
interim periods. These unaudited financial statements should be read in
conjunction with the audited financial statements and notes thereto for the year
ended December 31, 1997, included in the Company's most recently filed Annual
Report on Form 10-K. The results for the three months ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
6
<PAGE>
CONCENTRATIONS OF RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk are accounts receivable. Residential accounts
receivable consist of individually small amounts due from geographically
dispersed customers. Carrier accounts receivable represent amounts due from
long-distance carriers. The Company's allowance for doubtful accounts is based
on current market conditions. The Company's four largest carrier customers
represented approximately 44 and 37 percent of gross accounts receivable as of
December 31, 1997, and March 31, 1998, respectively. The Company's five largest
carrier customers represented approximately 47 percent of net revenues for the
three month period ended March 31, 1998. Purchases from the five largest
suppliers represented approximately 44 percent of cost of services for three
month period ended March 31, 1998.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board released Statement No.
128, "Earnings Per Share." Statement No. 128 requires dual presentation of basic
and diluted earnings per share on the face of the statements of operations for
all periods presented. Basic earnings per share excludes dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. In February 1998, the SEC released Staff
Accounting Bulletin ("SAB") No. 98, which revised the previous "cheap stock"
rules for earnings per share calculations in initial public offerings under SAB
No. 83. SAB No. 98 essentially replaces the term "cheap stock" with "nominal
issuances" of common stock. Nominal issuances arise when a company issues common
stock, options, or warrants for nominal consideration in the periods preceding
the initial public offering. SAB No. 98 was effective immediately, and also
reflects the requirements of SFAS No. 128. The Company restated its earnings per
share for all periods presented to be consistent with SFAS No. 128 and SAB No.
98. Weighted average common and equivalent share amounts are derived as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS
ENDED
MARCH 31,
--------------------------
1997 1998
----------- ------------
(unaudited)
<S> <C> <C>
Weighted average common shares
outstanding - basic ..................... 5,403 8,909
Dilutive effect of stock options
and warrants ............................ 71 456
--------- --------
Weighted average common and equivalent
shares outstanding-diluted .............. 5,474 9,365
========= ========
Per Share Amounts:
Basic ................................... $ 0.03 $ 0.10
========= ========
Diluted ................................. $ 0.03 $ 0.10
========= ========
</TABLE>
3. STOCK AND STOCK RIGHTS:
STOCK OPTION PLAN
Amended and Restated Stock Option Plan
The Company maintains a stock option plan, reserving 270,000 shares of
voting common stock to be issued to officers and key employees under terms and
conditions to be set by the Company's Board of Directors. Options granted under
this plan may be exercised only upon the occurrence of any of the following
events: (i) a sale of more than 50 percent of the issued and outstanding shares
of stock in one transaction, (ii) a dissolution or liquidation of the Company,
(iii) a merger or consolidation in which the Company is not the surviving
corporation, (iv) a filing by the Company of an effective registration statement
under the Securities Act of 1933, as amended, or (v) the seventh anniversary of
the date of full-time employment of the optionee. As a result of the Company's
offering, all options under this plan are currently exercisable.
1997 Performance Incentive Plan
In August 1997, the stockholders of the Company approved the 1997
Performance Incentive Plan (the "Performance Plan"). The Performance Plan
provides for the award to eligible employees of the Company and others of stock
options, stock appreciation rights, restricted stock, and other stock-based
awards, as well as cash-based annual and long-term incentive awards. The
Performance Plan reserves 750,000 shares of Common Stock for issuance, and the
Company may grant options covering up to 480,000 shares of Common Stock without
triggering the antidilution provisions of certain warrants issued in connection
with an existing credit facility. The options expire 10 years from the date of
grant and vest ratably over five years. The Performance Plan provides that all
outstanding options become fully vested in the event of a change in control, as
defined. As of March 31, 1998, approximately 419,000 options have been granted
under the Performance Plan. The Performance Plan constitutes an unfunded plan
for incentive compensation purposes.
7
<PAGE>
STOCKHOLDER RIGHTS PLAN
The Board of Directors has adopted a stockholder rights plan ("Rights" and
"Rights Plan"), which is designed to protect the rights of its Stockholders and
to deter coercive or unfair takeover tactics. It is not in response to any
acquisition proposal. Preferred stock purchase rights have been granted as a
dividend at the rate of one Right for each outstanding share of Common Stock
held of record as of the close of business on April 3, 1998.
Each Right, when exercisable, would entitle the holder thereof to purchase
1/1,000th of a share of Series A Junior Participating Preferred Stock ("Junior
Preferred Stock"), at a price of $175 per 1/1000th share. The Company's Board of
Directors designated 25,000 shares of the authorized Preferred Stock for this
purpose. The Rights, which have no voting rights, will expire on March 25, 2008.
At the time of adoption of the Rights Plan, the Rights are neither
exercisable nor traded separately from the Common Stock. Subject to certain
limited exceptions, the Rights will be exercisable only if a person or group,
other than an Exempt Person, as defined in the Rights Plan, becomes the
beneficial owner of 10% or more of the Common Stock or announces a tender or
exchange offer which would result in its ownership of 10% or more of the Common
Stock. Ten days after a public announcement that a person has become the
beneficial owner of 10% or more of the Common Stock or ten days following the
commencement of a tender or exchange offer which would result in a person
becoming the beneficial owner of 10% or more of the Common Stock (the earlier of
which is called the "Distribution Date"), each holder of a Right, other than the
acquiring person, would be entitled to purchase a certain number of shares of
Common Stock for each Right at one-half of the then-current market price. If the
Company is acquired in a merger, or 50% or more of the Company's assets are sold
in one or more related transactions, each Right would entitle the holder thereof
to purchase common stock of the acquiring company at one half of the then-market
price of such common stock.
At any time after a person or group becomes the beneficial owner of 10% or
more of the Common Stock, the Board of Directors may exchange one share of
Common Stock for each Right, other than Rights held by the acquiring person.
Generally, the Board of Directors may redeem the Rights at any time until 10
days following the public announcement that a person or group of persons has
acquired beneficial ownership of 10% or more of the outstanding Common Stock.
The redemption price is $.001 per Right.
4. COMMITMENTS AND CONTINGENCIES:
LITIGATION
Certain claims and suits have been filed or are pending against the
Company. In management's opinion, resolution of these matters will not have a
material impact on the Company's financial position or results of operations and
adequate provision for any potential losses has been made in the accompanying
financial statements.
OTHER
As of March 31,1998, the Company committed to purchase approximately $3.0
million in switching equipment and transmission capacity.
5. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." The Company adopted both of these
standards during the three month period ended March 31, 1998.
SFAS No. 130 requires "comprehensive income" and the components of "other
comprehensive income", to be reported in the financial statements and/or notes
thereto. Since the Company does not have any components of "other comprehensive
income," reported net income is the same as "total comprehensive income" for the
three months ended March 31, 1997 and 1998.
SFAS No. 131 requires an entity to disclose financial and descriptive
information about its reportable operating segments. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. SFAS No. 131 is not required for interim financial
reporting purposes during 1998. The Company is in the process of assessing the
additional disclosures, if any, required by SFAS No. 131. However, such adoption
will not impact the Company's results of operations or financial position, since
it relates only to disclosures.
<PAGE>
6. SUBSEQUENT EVENTS
The Company plans to reorganize into a holding company structure and to
make a private offering of $225 million of high yield notes. The unsecured notes
will be offered in a private placement exempt from the registration requirements
of the Securities Act of 1933 ("the Act"), and will be eligible for resale
pursuant to Rule 144A of the Act. As part of the first stage of reorganization,
the Company has organized a wholly-owned Delaware subsidiary corporation to act
as a holding company for a series of additionally formed Delaware subsidiary
corporations. See further discussion under Item 2, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company and First Union National Bank (as successor to Signet Bank)
have agreed in principle to amend the Company's existing credit facility with
Signet Bank in the second quarter of 1998. In conjunction with this amendment,
the Company expects to expense, as an extraordinary item, approximately $800,000
of unamortized deferred debt financing costs, in the second quarter of 1998. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
The following discussion and analysis of the financial condition and
results of operations should be read in conjunction with the financial
statements, related notes, and other detailed information included elsewhere in
this Quarterly Report on Form 10-Q. This Quarterly Report contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Forward-looking statements are statements other than historical
information or statements of current condition. Some forward looking statements
may be identified by use of such terms as "believes", "anticipates", "intends",
or "expects". These forward-looking statements relate to plans, objectives and
expectations of the Company for future operations. In light of the risks and
uncertainties inherent in all such projected operation matters, the inclusion of
forward-looking statements in this report should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved or that any of the Company's operating
expectations will be realized. The Company's revenues and results of operations
are difficult to forecast and could differ materially from those projected in
the forward-looking statements contained in this report as a result of certain
factors including, but not limited to, dependence on operating agreements with
foreign partners, significant foreign and U.S.-based customers and suppliers,
availability of transmission facilities, U.S. and foreign regulations,
international economic and political instability, dependence on effective
billing and information systems, customer attrition, and rapid technological
change. These factors should not be considered exhaustive; the Company
undertakes no obligation to release publicly the results of any future revisions
it may make to forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
Results of Operations
The following table sets forth certain financial data as a percentage of
net revenues for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
--------------------------
1997 1998
----------- ------------
<S> <C> <C>
Net revenues ................................. 100.0 % 100.0 %
Cost of services ............................. 87.0 85.8
-------- --------
Gross margin ............................... 13.0 14.2
General and adminsitrative expenses .......... 9.3 9.0
Selling and marketing expenses ............... 0.8 2.2
Depreciation and amortization ................ 0.8 0.6
-------- --------
Income from operations...................... 2.1 2.4
Interest expense ............................. (1.0) (0.5)
Interest income .............................. -- 1.2
-------- --------
Income before income tax provision ......... 1.1 3.1
Income tax provision ......................... -- (0.1)
-------- --------
Net income ................................. 1.1% 3.0%
======== ========
</TABLE>
THREE MONTH PERIOD ENDED MARCH 30, 1998 COMPARED TO THREE MONTH PERIOD ENDED
MARCH 31, 1997
Net Revenues. Net revenues for the three-month period ended March 31, 1998
increased approximately $17.5 million or 141.1 percent, to approximately $29.9
million from $12.4 million for the three-month period ended March 31, 1997.
Residential revenue increased in comparative periods by approximately $6.6
million or 143.5 percent, to approximately $11.2 million for the three-month
period ended March 31, 1998, from approximately $4.6 million during three month
period ended March 31, 1997. The increase in residential revenue was due to an
increase in residential customers to over 83,900 at March 31, 1998 from
approximately 33,700 at March 31, 1997. Carrier revenue for the three-month
period ended March 31, 1998 increased approximately $10.9 million or 139.7
percent, to approximately $18.7 million from approximately $7.8 million for the
three-month period ended March 31, 1997. The increase in carrier revenues was
due to the execution of the Company's strategy to optimize its capacity on its
facilities, which has resulted in sales to additional carrier customers and
increased sales to existing carrier customers.
Gross Margin. Gross margin increased by approximately $2.6 million to $4.2
million for the three-month period ended March 31, 1998 from $1.6 million for
the three-month period ended March 31, 1997. Gross margin improved as a
percentage of net revenues for the three-month period ended March 31, 1998 to
14.2 percent from 13.0 percent for the three-month period ended March 31, 1997.
Gross margin for the three-month period ended March 31, 1998 improved due to an
increase in the traffic originated on the Company's own network and improved
termination costs.
9
<PAGE>
General and Administrative. General and administrative expenses for the
three-month period ended March 31, 1998 increased 125 percent to approximately
$2.7 million from $1.2 million for the three-month period ended March 31, 1997.
As a percentage of net revenues, general and administrative expenses declined to
9.0 percent from 9.3 percent for the respective periods. The increase in dollar
amounts was primarily due to an increase in personnel to 177 employees at March
31, 1998 from 54 employees at March 31, 1997, and to a lesser extent, an
increase in billing processing fees.
Selling and Marketing. Selling and marketing expenses for the three-month
period ended March 31, 1998 increased to approximately $648,000 from
approximately $104,000 for the three-month period ended March 31, 1997. As a
percentage of net revenues, selling and marketing expenses increased to 2.2
percent from 0.8 percent in the respective periods. The increase in dollar
amounts was primarily due to the Company's efforts to market to new customers,
and increased efforts to market to existing customer groups.
Depreciation and Amortization. Depreciation and amortization expenses for
the three-month period ended March 31, 1998 increased to approximately $184,000
from $96,000 for the three-month period ended March 31, 1997, primarily due to
increases in capital expenditures pursuant to the Company's strategy of
expanding its network infrastructure.
Interest. Interest expense for the three month period ended March 31, 1998
increased to approximately $153,000 from $117,000 for the three month period
ended March 31, 1997, as a result of additional debt incurred by the Company to
fund working capital needs. The Company also recorded interest income of
approximately $359,000 for the three-month period ended March 31, 1998
representing interest earned on cash remaining from the Offering.
Net Income. Net income was approximately $899,000 for the three-month
period ended March 31, 1998 as compared to net income of approximately $137,000
for the three-month period ended March 31, 1997.
Liquidity and Capital Resources
The Company's liquidity requirements arise from cash used in operating
activities, purchases of network equipment, and payments on outstanding
indebtedness. Prior to the completion of the Offering, the Company financed its
activities through capital lease financing, notes payable from individuals, a
credit and billing arrangement with a third party company (since terminated) and
a loan facility with Signet Bank ("Signet Facility"). The Company has financed
its activities since the completion of the Offering using the net proceeds
therefrom along with amounts available under the Signet Facility and cash
generated from operations. The Company and First Union National Bank (as
successor to Signet Bank) have agreed in principle to amend the existing Signet
Facility in the second quarter of 1998. The parties intend to amend the terms of
the credit facility to provide for First Union's consent to the holding company
reorganization and high-yield note offering described above and its waiver of
compliance with certain affirmative and negative covenants that may be in
conflict with certain terms of such reorganization and high-yield note offering.
In particular, the parties contemplate that the credit facility will be amended
such that certain key financial covenants will apply only in the event that the
Company attempts to borrow amounts under the amended credit facility. As of the
date hereof, assuming completion of the high-yield note offering, the Company
would not be in compliance with these covenants, and, therefore, would be unable
to borrow any amounts under the facility. First Union has also indicated that it
will release the security interest it holds in the Company's common stock owned
by Ram Mukunda and Vijay and Usha Srinivas. In conjunction with this amendment,
the Company expects to expense, as an extraordinary item, approximately $800,000
of unamortized deferred debt financing costs, in the second quarter of 1998.
The Company completed its initial public offering of 3,277,500 shares of
its common stock in October 1997, the net proceeds of which (after underwriting
discounts, commissions and other professional fees) approximated $35.0 million.
The Company used a portion of the net proceeds to acquire cable facilities and
switching, compression and related telecommunications equipment. Proceeds were
also used for marketing programs, to pay down amounts due under the Signet
Facility, for working capital and general corporate purposes.
The Company's cash and cash equivalents increased to approximately $24.1
million at March 31, 1998 from approximately $239,000 at March 31, 1997. Net
cash provided by operating activities was approximately $525,000 for the three-
month period ended March 31, 1998, as compared to net cash provided by operating
activities of $178,000 for the three-month period ended March 31, 1997. The
increase in cash from operations for the three-month period ended March 31, 1998
was primarily the result of an increase in net income.
Net cash used in investing activities was approximately $2.7 million and
$64,000 for the three-month periods ended March 31, 1998 and 1997, respectively.
Net cash used in investing activities for the three-month period ended March 31,
1998 primarily related to capital expenditures to expand the Company's network
infrastructure.
Net cash provided by financing activities was approximately $169,000 for
the three-month ended March 31, 1998, and net cash used in financing activities
was approximately $23,000 for the three-month ended March 31, 1997. Cash
provided by financing activities for the three-month ended March 31, 1998
primarily related to the exercise of employee stock options.
The Company's business strategy contemplates aggregate capital expenditures
(including working capital and other general corporate purposes) of
approximately $152.8 million through December 31, 2000. Of such amount, the
Company intends to use approximately $147.0 million to fund capital expenditures
to expand and develop the Company's network, including the purchase and
installation of switches and related network equipment, the acquisition of fiber
optic cable capacity and the acquisition of satellite earth stations.
In order to fund these planned expenditures, the Company is proposing to
make a private placement of $225 million in high-yield notes (see Note 6 to the
financial statements included in Item I hereof). In the event that this offering
is completed, the Company expects that it will incur negative EBITDA and
significant operating losses and net losses for the next several years as it
incurs additional costs associated with the development and expansion of its
network, the expansion of its marketing programs and its entry into new markets,
the introduction of new telecommunications services, and as a result of the
interest expense associated with its financing activities, including the
high-yield debt offering.
The Company has accrued approximately $2.1 million as of March 31, 1998,
for disputed vendor obligations asserted by one of the Company's foreign
carriers for minutes processed in excess of the minutes reflected on the
Company's records. If the Company prevails in its disputes, these amounts or
portions thereof would be credited to operations in the period of resolution.
Conversely, if the Company does not prevail in its disputes, these amounts or
portions thereof may be paid in cash.
The Company's management is currently in the process of assessing the
nature and extent of the potential impact of the Year 2000 issue on its systems
and applications, including its billing, credit and call tracking systems, and
intends to take steps to prevent failures in its systems and applications
relating to Year 2000. Although many of the Company's operating systems are
relatively new and have been certified to the Company as being Year 2000
compliant, there can be no assurance that the Company's systems will not be
adversely affected by the Year 2000 issue. In addition, computers used by the
Company's vendors providing services to the Company or computers used by the
Company's customers that interface with the Company's computer systems may have
Year 2000 problems, any of which may adversely affect the ability of those
vendors to provide services to the Company, or in the case of the Company's
carrier customers, to make payments to the Company. If any such system fails or
experiences processing errors, such failures or errors may disrupt or corrupt
the Company's systems. The Company is in the initial stages of verifying the
Year 2000 compliance efforts of the third parties with which the Company's
computer systems interface. Although management has not yet finalized its
analysis, it does not expect that the costs to properly address the Year 2000
issue will have a material adverse effect on its results of operations or
financial position. Failure of any of the Company's systems or applications, or
the failure of the computer systems of its vendors or carrier customers could
materially adversely affect the Company's business, financial condition and
results of operations.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." The Company adopted both of these
standards during the three-month period ended March 31, 1998.
See "Notes to Financial Statements" in Item I for further discussion.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
This requirement is not currently applicable to the Company.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
See Note 3 of the "Notes to the Financial Statements" for a discussion of
this item.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
--------
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
-------------------
No reports on Form 8-K were filed by the Company during the quarter ended
March 31, 1998.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undesigned, thereunto duly authorized, in Montgomery County,
State of Maryland, on the 28th day of April, 1998.
STARTEC GLOBAL COMMUNICATIONS CORPORATION
-----------------------------------------
(Registrant)
/s/ Prabhav V. Maniyar
----------------------
Prabhav V. Maniyar
Chief Financial Officer
12
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
-----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 24,067
<SECURITIES> 0
<RECEIVABLES> 24,737
<ALLOWANCES> 3,485
<INVENTORY> 0
<CURRENT-ASSETS> 46,121
<PP&E> 9,249
<DEPRECIATION> 1,424
<TOTAL-ASSETS> 54,958
<CURRENT-LIABILITIES> 21,788
<BONDS> 0
0
0
<COMMON> 89
<OTHER-SE> 32,672
<TOTAL-LIABILITY-AND-EQUITY> 54,958
<SALES> 0
<TOTAL-REVENUES> 29,891
<CGS> 0
<TOTAL-COSTS> 25,655
<OTHER-EXPENSES> 832
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 153
<INCOME-PRETAX> 919
<INCOME-TAX> 20
<INCOME-CONTINUING> 899
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 899
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
