AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 28, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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STARTEC GLOBAL COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
---------------
<TABLE>
<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)
</TABLE>
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10411 MOTOR CITY DRIVE
BETHESDA, MD 20817
(301) 365-8959
(Address, including zip code, and telephone number,
including area code, of Registrant's
principal executive offices)
RAM MUKUNDA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
10411 MOTOR CITY DRIVE
BETHESDA, MD 20817
(301) 365-8959
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
Thomas L. Hanley, Esq.
Robert B. Murphy, Esq.
Schnader Harrison Segal & Lewis LLP
1300 I Street, NW, 11th Floor East
Washington, DC 20005
(202) 216-4200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: FROM TIME TO
TIME 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. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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 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 number of the earlier effective registration statement for the same
offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED
MAXIMUM
OFFERING PROPOSED AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE PRICE MAXIMUM AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE
<S> <C> <C> <C> <C>
Warrants to purchase Common Stock 160,000 24.20(1) $ 3,872,000 $ 1,143
Common Stock, $0.01 par value(2) 200,226 -- -- --
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(g).
(2) Represents shares of Common Stock issuable upon the exercise of the
Warrants. Pursuant to Rule 416, this Registration Statement also covers
such indeterminate number of shares of Common Stock as may be issuable upon
exercise of the Warrants pursuant to the anti-dilution provisions thereof.
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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, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 28, 1998
PROSPECTUS
[STARTEC LOGO]
160,000 WARRANTS TO PURCHASE SHARES OF COMMON STOCK
AND
200,226 SHARES OF COMMON STOCK
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This Prospectus relates to (i) 160,000 warrants (the "Warrants") to
purchase the common stock, par value $0.01 per share (the "Common Stock") of
Startec Global Communications Corporation (the "Company") and (ii) 200,226
shares of Common Stock (the "Warrant Shares") that may be issued from time to
time upon the exercise of the Warrants. The Warrants and Warrant Shares may be
offered and sold by the holders thereof or by their transferees, pledgees,
donees, or successors (collectively the "Selling Holders") from time to time
following the effective date of the registration statement (the "Warrant
Registration Statement") of which this Prospectus forms a part. The Warrants and
the Warrant Shares may be sold by the Selling Holders from time to time in
privately negotiated transactions, in transactions in the over-the-counter
market, on the Nasdaq National Market, or by a combination of such methods of
sale, at fixed prices that may be changed, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices, at varying
prices determined at the time of sale or at negotiated prices. The Selling
Holders may sell the Warrants and the Warrant Shares directly to purchasers or
through underwriters, broker-dealers or agents. See "Plan of Distribution."
The Warrants were originally issued and sold by the Company on May 21, 1998
as a part of an offering of 160,000 Units (the "Units"), each Unit consisting of
$1,000 principal amount of its 12% Senior Notes due 2008 (the "Notes") and one
Warrant, in an offering that was exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
Section 4(2), Rule 144A and Regulation S thereunder. The 160,000 Warrants
entitle the holders thereof to acquire an aggregate of 200,226 Warrant Shares,
and are exercisable at any time and from time to time after November 15, 1998
through May 15, 2008 (the "Expiration Date"). Each Warrant entitles the holder
thereof to purchase 1.25141 shares of Common Stock at an exercise price of
$24.20 per share (the "Exercise Price"), subject to certain anti-dilution
provisions. The Notes and the Warrants will not be separately transferable until
the earliest of (i) November 15, 1998, (ii) an Exercise Event (as defined
herein), (iii) the date the Exchange Offer Registration Statement (as defined
herein) or the Shelf Registration Statement (as defined herein) is declared
effective by the Securities and Exchange Commission (the "SEC") or (iv) such
other date as Lehman Brothers Inc. shall determine. The registration of the
Warrants and the Warrant Shares pursuant to the Warrant Registration Statement
is intended to satisfy certain obligations of the Company under the registration
rights provisions of an agreement relating to the Warrants between the Company
and First Union National Bank, as Warrant Agent, dated May 21, 1998 (the
"Warrant Agreement").
The Company will not receive any proceeds from the sale of the Warrants or
the Warrant Shares by the Selling Holders. To the extent that any Warrants are
exercised, the Company will receive the Exercise Price for the Warrant Shares.
Pursuant to the terms of the Warrant Agreement, the Company has agreed to bear
the expenses incurred in connection with the registration of the Warrants and
Warrant Shares being offered hereby; provided, however, that the Selling Holders
will any underwriting discounts, selling commissions and transfer taxes (if
any), applicable to their sales. In addition, the Company has agreed to
indemnify the Selling Holders against certain liabilities, including liabilities
under the Securities Act.
The Selling Holders and any broker-dealers, agents or underwriters that
participate in the distribution of the Warrants and the Warrant Shares may be
deemed to be "underwriters" and any discounts, commissions, concessions or other
compensation received by them and any profit on the resale of shares purchased
by them may be deemed to be underwriting compensation within the meaning of the
Securities Act. To the extent required, the names of any such agents or
underwriters involved in the sale of the Warrants and the Warrant Shares and the
applicable commissions and discounts, if any, and any other information with
respect to a particular offer or sale will be set forth in an accompanying
supplement to this Prospectus. See "Plan of Distribution."
The Common Stock is listed on the Nasdaq National Market under the symbol
"STGC." On September 23, 1998, the last reported sale price of the Common Stock
on the Nasdaq National Market was $7.00 per share. Application will be made to
have the Warrant Shares approved for quotation on the Nasdaq National Market.
Prior to this offering, there has been no public market for the Warrants and
there can be no assurance that an active public market for the Warrants will
develop or that, if a such a market develops, it will be maintained. The Company
does not intend to apply for quotation of the Warrants on the Nasdaq Stock
Market or for listing of the Warrants on any national securities exchange.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE WARRANTS AND WARRANT
SHARES.
---------------
THE WARRANTS AND THE WARRANT SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES
COMMISSION OR REGULATORY AUTHORITY NOR HAS THE COMMISSION OR ANY
STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
THE DATE OF THIS PROSPECTUS IS _________, 1998.
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>
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical facts
are "forward-looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995), which can be identified by the use of
forward-looking terminology such as "believes," "expects," "intends,"
"foresees," "plans," "may," "will," "should," or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by discussions
of strategy that involve risks and uncertainties. In addition, from time to
time, the Company or its representatives have made or may make forward- looking
statements, orally or in writing. Furthermore, such forward-looking statements
may be included in, but are not limited to, press releases or oral statements
made by or with the approval of an authorized executive officer of the Company.
Management wishes to caution the reader that the forward-looking statements
contained in this Prospectus involve predictions. No assurance can be given that
anticipated results will be achieved; actual events or results may differ
materially as a result of risks facing the Company. Such risks include, but are
not limited to, those set forth in "Risk Factors" beginning on page 9 of this
Prospectus.
ii
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information, including the risk factors
and the financial statements (including the notes thereto) appearing elsewhere
in this Prospectus. References in this Prospectus to "Startec Global" and the
"Company" refer to Startec Global Communications Corporation and its
subsidiaries, and give effect to the Reorganization, except where the context
otherwise requires. See "-- Holding Company Reorganization." References herein
to numbers of residential customers and carrier customers as of any particular
date are, in each instance, calculated on the basis of the 30-day measuring
period ended on the reference date and the 90-day measuring period ended on the
reference date, respectively. For definitions of certain technical and other
terms used in this Prospectus, see "Glossary of Terms."
THE COMPANY
OVERVIEW
Startec Global is a rapidly growing, facilities-based international long
distance telecommunications service provider. The Company markets its services
to select ethnic residential communities throughout the United States and to
leading international long distance carriers. The Company provides its services
through a flexible, high-quality network of owned and leased transmission
facilities, operating and termination agreements and resale arrangements. The
Company currently owns and operates an international gateway switch in New York
City and has ordered another international gateway switch expected to be
deployed in Los Angeles in 1998. The Company also owns an international gateway
switch in Washington, D.C. that is expected to be redeployed as a domestic
switch during the fourth quarter of 1998. Including the Los Angeles switch, the
Company expects to install up to 20 switches worldwide through 2000.
Additionally, the Company has interests in several undersea cable facilities and
plans to acquire additional interests in cable facilities linking North America
with Europe, the Pacific Rim, Asia and Latin America, as well as linking the
East Coast and West Coast of the United States. The Company operates seven
points-of-presence ("P.O.P.") sites in the United States and the United Kingdom
and plans to install up to three more in Europe by the end of 1998. The Company
also plans to invest in or acquire two satellite earth stations during 1998 and
1999. As the Company executes its expansion strategy and encounters new
marketing opportunities, management may elect to relocate or redeploy certain
switches, P.O.P. sites and other network equipment to alternate locations from
what is outlined above. For the year ended December 31, 1997 and the six months
ended June 30, 1998, the Company had revenues of $85.9 million and $63.4
million, respectively.
Startec Global was founded in 1989 to capitalize on the significant
opportunity to provide international long distance services to select ethnic
communities in major U.S. metropolitan markets that generate substantial
long-distance traffic to their countries of origin. Until 1995, the Company
concentrated its marketing efforts in the New York-Washington, D.C. corridor and
focused on the delivery of international calling services to India. At the end
of 1995, the Company expanded its marketing efforts to include the West Coast of
the United States, and began targeting other ethnic groups in the United States,
such as the Middle Eastern, Filipino and Russian communities. International
traffic generated by the Company currently terminates primarily in Asia, the
Pacific Rim, the Middle East, Africa, Eastern and Western Europe and North
America. The number of the Company's residential customers has grown from 10,675
customers as of December 31, 1995 to 93,500 customers as of June 30, 1998.
The Company uses sophisticated database marketing techniques and a variety
of media to reach its targeted residential customers, including focused print
advertising in ethnic newspapers, advertising on ethnic radio and television
stations, direct mail, sponsorship of ethnic events and customer referrals. The
Company's strategy is to provide overall value to its customers and combine
competi-
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tive pricing with high levels of service, rather than to compete on the basis of
price alone. The Company provides responsive customer service 24 hours a day,
seven days a week, in each of the languages spoken by the Company's targeted
residential customers. The Company believes that its focused marketing programs
and its dedication to customer service enhance its ability to attract and retain
customers in a low-cost, efficient manner. Residential customers access the
Company's network by dialing a carrier identification code prior to dialing the
number they are calling. This service, known as "dial-around" or "casual
calling," enables customers to use the Company's services without changing their
existing long distance carriers. For the year ended December 31, 1997 and the
six months ended June 30, 1998, residential customers accounted for
approximately 33% and 38%, respectively, of the Company's net revenues. As part
of its overall strategy, the Company seeks to increase the proportion of its net
revenues derived from residential customers.
In order to achieve economies of scale in its network operations and to
balance its residential international traffic, in late 1995, the Company began
marketing its excess network capacity to international carriers seeking
competitive rates and high-quality transmission capacity. Since initiating its
international wholesale services, the Company has expanded its number of carrier
customers to 55 at June 30, 1998. For the year ended December 31, 1997 and the
six months ended June 30, 1998, carrier customers accounted for approximately
67% and 62%, respectively, of the Company's net revenues.
BUSINESS STRATEGY
The Company's objectives are to (i) become the leading provider of
international long distance services to select ethnic residential communities in
the United States, Canada and Europe with significant international long
distance usage and (ii) leverage its residential long distance business to
become a leading provider of wholesale carrier services on corresponding
international routes. In order to achieve its objectives, the Company's strategy
relies on the following elements:
o Expand the addressable market. The Company currently serves
residential customers in 17 major U.S. metropolitan markets and
expects to enter up to three new metropolitan markets in 1998. The
Company has also identified over 40 major markets outside the United
States, primarily in Canada, Europe and Southeast Asia, which the
Company believes are attractive for entry based on the demographic
characteristics, traffic patterns, regulatory environment and
availability of appropriate advertising channels. The Company
anticipates entering up to 20 of these markets by the end of 2000. In
addition, the Company seeks to increase its penetration of its
existing and prospective markets by (i) targeting additional ethnic
communities and (ii) marketing additional routes to existing customers
who principally use the Company's services for one route.
o Achieve "first-to-market" entry of select ethnic residential markets.
The Company believes that it enjoys significant competitive advantages
by establishing a customer base and brand name in select ethnic
residential communities ahead of its competitors. The Company intends
to capitalize on its proven marketing strategy to further penetrate
select ethnic residential communities in the United States, Canada and
Europe ahead of its competitors. The Company selects its target
markets based on favorable demographics with respect to long distance
telephone usage, including geographic immigration patterns, population
growth and income levels. Targeting select ethnic communities also
enables the Company to aggregate traffic along certain routes (which
reduces its costs) and to focus on rapidly expanding and deregulating
telecommunications markets. The Company's target residential customer
base is comprised of emigrants from emerging markets in Asia, Eastern
Europe, the Middle East, the Pacific Rim, Latin America and Africa.
o Expand international network facilities. The Company plans to expand
its international network facilities during 1998 and through 2000 by
deploying 20 additional switches, installing P.O.P. sites, securing
additional ownership interests in undersea cable facilities and
investing in
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domestic cable facilties, investing in or acquiring two satellite
earth stations and entering into operating agreements. By building
network facilities and expanding operating agreements that enable it
to carry an increasing percentage of its traffic on its own network
("on-net"), the Company believes that it will be able to reduce its
transmission costs and reliance on other carriers and ensure greater
control over quality of service. For the six months ended June 30,
1998, approximately 65% of the Company's residential traffic
originated on-net. During the next three years, the Company expects to
increase significantly the volume of its traffic that is originated,
carried and terminated on-net.
The Company intends to implement a network hubbing strategy,
linking its existing and prospective customer base in the United
States, Canada and Europe to call destinations in foreign countries
through a network of foreign-based switches and other
telecommunications equipment. The Company also plans to continue to
enhance its termination options through additional operating
agreements, transit arrangements and, if appropriate opportunities
arise, strategic acquisitions and alliances. The Company has also
taken steps to improve the quality of its network by upgrading its
network monitoring and customer service centers, and plans to install
enhanced software that will enable it to better monitor call traffic
routing, capacity and quality.
o Maximize network utilization and efficiency through wholesale carrier
business. The Company intends to continue to market its international
long distance services to existing and new carrier customers. Because
the Company's residential minutes of use are generated primarily
during non-business hours or on weekends, the Company has substantial
capacity to offer to international carriers. The significant carrier
traffic volume that the Company generates allows it to capture
additional revenues, to increase economies of scale and to improve
network efficiency.
o Build customer loyalty. The Company seeks to build long-term customer
loyalty through tailored in-language marketing efforts focusing on
each target ethnic group's specific needs and cultural backgrounds,
responsive customer service offering in-language services and
involvement in its customers' communities through sponsorship of local
events and other activities. The Company markets its residential
services under the "STARTEC" name to enhance its name recognition and
build brand loyalty in its target communities. The Company maintains a
detailed information database of its customers, which it uses to
monitor usage, track customer satisfaction and analyze a variety of
customer behaviors, including retention and frequency of usage.
o Pursue strategic acquisitions and alliances. In order to accelerate
its business plan and take advantage of the rapidly changing
telecommunications environment, the Company intends to carefully
evaluate and pursue strategic acquisitions, alliances and investments.
The Company, however, has no present commitments, agreements or
understandings with respect to any particular acquisition, alliance or
investment.
The Company believes that, with the remaining net proceeds of the Notes
Offering, it will have sufficient capital resources to fund its expansion plans
through the end of the first quarter of 2000. The Company's ability to complete
its strategic plan thereafter, however, will require significant additional
capital.
MARKET OPPORTUNITY
According to industry sources, the international telecommunications
industry generated approximately $67 billion in revenues and 81 billion minutes
of use during 1997. Industry sources indicate that the international
telecommunications market is one of the fastest growing and most profitable
segments of the global telecommunications industry. It is estimated that by the
end of 2001 this market will have expanded to $98 billion in revenues and 153
billion minutes of use, representing
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<PAGE>
compound annual growth rates from 1997 of 10% and 17%, respectively. The highly
competitive and rapidly changing international telecommunications market has
created a significant opportunity for carriers that can offer high-quality,
low-cost international long distance service.
Based on industry estimates, in 1997 approximately 70% of international
long distance traffic was generated between North America and Western Europe.
The Company's target market consists of a significant portion of the remaining
30% of the international long distance traffic, or approximately $20 billion in
revenues and 24 billion minutes of use. The Company believes that international
long distance usage in its target markets will grow at rates in excess of the
international telecommunications market as a whole, primarily as a result of (i)
continuing economic development in these markets with a corresponding investment
in telephone and telecommunications infrastructure and (ii) continuing
deregulation of these markets.
RECENT DEVELOPMENTS
HOLDING COMPANY REORGANIZATION
In March 1998, the Company's Board of Directors approved a plan pursuant to
which the Company's assets, liabilities and operations will be reorganized into
a Delaware holding company structure (the "Reorganization"). The Reorganization
was approved by the Company's stockholders at their annual meeting on July 31,
1998. Accordingly, the Company has incorporated a wholly-owned subsidiary
corporation in Delaware ("Subsidiary Holdings") that is the owner of all of the
outstanding voting capital stock of certain other newly-formed lower-tier
subsidiaries, each of which will be responsible for distinct aspects of the
Company's pre-Reorganization business, including separate subsidiaries
responsible for (i) U.S. operations, (ii) finance and investments, and (iii)
ownership of licenses. The Company has formed five additional lower-tier
subsidiaries under the laws of foreign countries in order to optimize tax
benefits and other advantages associated with such jurisdictions and the Company
anticipates forming additional foreign subsidiaries as needed.
The Reorganization will consist of (i) the transfer of substantially all of
the Company's assets to the appropriate lower-tiered subsidiaries and (ii) the
merger (the "Merger") of the Company with and into Subsidiary Holdings. Certain
transfers are subject to federal and state regulatory approvals. On July 31,
1998, the Company received stockholder approval for the Merger and is awaiting
such regulatory approvals. The Company anticipates completing the Reorganization
in the fourth quarter of 1998. Pursuant to the Merger, the present holders of
shares of Common Stock of the Company will receive shares of common stock in
Subsidiary Holdings on a share-for-share basis. Upon completion of the transfers
and the Merger, it is expected that Subsidiary Holdings will remain as the
surviving entity and the Warrants will become warrants to purchase shares of the
common stock of Subsidiary Holdings on the same terms and conditions as
described herein. It is expected that Subsidiary Holdings' only assets will be
its equity interests in its subsidiaries.
NOTES OFFERING
On May 21, 1998, the Company completed an offering (the "Notes Offering")
of 160,000 Units, each Unit consisting of $1,000 principal amount of its 12%
Notes and one Warrant, in an offering that was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2), Rule 144A and
Regulation S thereunder. The Notes, in aggregate principal amount of
$160,000,000, were issued pursuant to an indenture (the "Indenture") dated May
21, 1998 between the Company and First Union National Bank, as Trustee (the
"Trustee").
In order to fulfill its obligations under a Registration Rights Agreement
by and among the Company, Lehman Brothers Inc., Goldman, Sachs & Co. and ING
Barings (U.S. Securities, Inc. as the Initial Purchasers of the Units (the
"Initial Purchasers"), the Company has filed a registration
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statement (the "Exchange Offer Registration Statement") with the Commission and
will conduct an exchange offer (the "Exchange Offer") pursuant to which it will
offer to exchange up to $160,000,000 aggregate principal amount of its Series A
Senior Notes due 2008 (the "Exchange Notes") for a like principal amount of the
Notes. The terms of the Exchange Notes are identical in all material respects to
those of the Notes, except that the Exchange Notes have been registered under
the Securities Act, and, therefore, will not bear legends restricting their
transfer. Under certain circumstances described in the Registration Rights
Agreement, the Company may also be obligated to file an additional registration
statement (the "Shelf Registration Statement") in order to permit holders of the
Notes to resell such Notes. Upon completion of the transfers and the
Reorganization (including the Merger) described above, it is expected that
Subsidiary Holdings will remain as the surviving entity and as the obligor under
the Notes and the Exchange Notes. Unless the context otherwise requires, the
Notes and the Exchange Notes are referred to herein collectively as the "Notes."
Interest on the Notes is payable semiannually in arrears on May 15 and
November 15 of each year, commencing on November 15, 1998. The Notes are
redeemable at the option of the Company in whole or in part at any time on or
after May 15, 2003, at specified redemption prices plus accrued and unpaid
interest and Liquidated Damages (as defined in the Indenture), if any, thereon
to the date of redemption. In addition, at any time prior to May 15, 2001, the
Company may, from time to time, redeem up to 35.0% of the originally issued
aggregate principal amount of the Notes at the specified redemption prices plus
accrued interest and Liquidated Damages, if any, to the date of redemption with
the Net Cash Proceeds (as defined in the Indenture) of one or more Public Equity
Offerings (as defined in the Indenture); provided that at least 65.0% of the
originally issued aggregate principal amount of the Notes remains outstanding
after such redemption. In the event of a Change of Control (as defined in the
Indenture), each holder of the Notes has the right to require the Company to
purchase all or any of such holder's Notes at a purchase price in cash equal to
101.0% of the aggregate principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, to the date of purchase.
The Company used approximately $52.4 million of the proceeds from the Notes
Offering to purchase a portfolio of Pledged Securities (as defined in the
Indenture) consisting of U.S. Governmental Obligations (as defined in the
Indenture), which are pledged as security and restricted for use as the first
six scheduled interest payments on the Notes.
The Notes are unsecured obligations of the Company, rank senior in right of
payment to any existing and future obligations of the Company expressly
subordinated in right of payment to the Notes and will be pari passu in right of
payment with all other existing and future unsecured and unsubordinated
obligations of the Company. The Notes require maintenance of certain financial
and nonfinancial covenants, including limitations on additional indebtedness,
restricted payments (including dividends), transactions with affiliates, liens
and asset sales.
The Notes and the Warrants will not be separately transferable until the
earliest of (i) November 15, 1998, (ii) an Exercise Event, (iii) the date the
Exchange Offer Registration Statement or the Shelf Registration Statement is
declared effective by the Securities and Exchange Commission and (iv) such other
date as Lehman Brothers Inc. shall determine.
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THE WARRANTS AND WARRANT SHARES OFFERING
The Warrants were originally issued by the Company in the Notes Offering,
pursuant to which 160,000 Units were issued and sold, with each Unit consisting
of $1,000 principal amount of Senior Notes and one Warrant. The 160,000 Warrants
entitle the holders thereof to acquire an aggregate of 200,226 Warrant Shares.
The registration of the Warrants and the Warrant Shares pursuant to this Warrant
Registration Statement is intended to satisfy certain obligations of the Company
under the registration rights provisions of the Warrant Agreement. For
additional information concerning the Warrants and the definitions of certain
capitalized terms used below, see "Description of Warrants" and "Description of
Capital Stock."
Warrants offered by the Selling
Holders.................... Up to 160,000 Warrants.
Common Stock offered by the
Selling Holders............ Up to 200,226 shares of Common Stock.
Common Stock outstanding be
fore the Offering (1) ..... 8,964,315 shares.
Common Stock to be outstand-
ing after the Offering(1)(2) 9,164,541 shares.
Exercisability.............. The Warrants are exercisable at any time or from
time to time after November 15, 1998 until the
Expiration Date.
Expiration Date............. May 15, 2008.
Exercise Price............. Each Warrant entitles the holder thereof to
purchase 1.25141 shares of Common Stock at an
exercise price of $24.20 per share.
Anti-Dilution
Provisions................. The number of shares of Common Stock for which
each Warrant is exercisable and the price per
share at which each Warrant is exercisable are
subject to adjustment upon the occurrence of
certain events as provided in the Warrant
Agreement. See "Description of Warrants --
Adjustments."
Registration Rights........ Pursuant to the Warrant Agreement, the Company
is required to keep the Warrant Registration
Statement effective, subject to certain
exceptions, until the second anniversary of the
last date on which a Warrant was exercised when
the Warrant Registration Statement was not
effective or when the Warrant Registration
Statement was suspended, or such earlier time
when all of the Warrants and/or Warrant Shares
have been sold pursuant to the Warrant
Registration Statement. See "Description of
Warrants -- Registration Rights."
Use of Proceeds........... The Company will not receive any proceeds from
either the sale of the Warrants or the sale of
the Warrant Shares by the Selling Holders.
Proceeds received by the Company from the
exercise of the Warrants, if any, will be used
for the purchase of telecommunications and
related network equipment and general corporate
purposes. See "Use of Proceeds."
6
<PAGE>
Nasdaq Listing............. The Warrants will not be quoted on the Nasdaq
Stock Market or listed or traded on any national
securities exchange. Application will be made to
have the Warrant Shares quoted along with the
Company's Common Stock on the Nasdaq National
Market.
Nasdaq National Market
symbol..................... STGC
- -----------
(1) Excludes (i) 7,950 shares of Common Stock issuable upon the exercise of
options outstanding as of August 31, 1998 under the Company's Amended and
Restated Stock Option Plan; (ii) 510,900 shares of Common Stock issuable
upon the exercise of options outstanding as of August 31, 1998 under the
Company's 1997 Performance Incentive Plan; and (iii) 620,126 shares of
Common Stock issuable pursuant to the exercise of certain outstanding
warrants.
(2) Assumes that all of the Warrants are exercised.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Warrants or
the Warrant Shares by the Selling Holders. To the extent that any Warrants are
exercised, the Company will receive the proceeds from such exercises. The
Company intends to use the proceeds, if any, from the exercise of the Warrants
for the purchase of telecommunications and related network equipment and general
corporate purposes. The net proceeds to the Company from the Notes Offering,
after deducting discounts, commissions and expenses paid by the Company, were
approximately $154.4 million. The Company applied approximately $52.4 million of
such net proceeds to purchase the Pledged Securities. The Company intends to
apply approximately $102.0 million to fund capital expenditures through the end
of the first quarter of 2000 to expand and develop the Company's network,
including the purchase and installation of switches and related network
equipment (including software and hardware upgrades for current equipment), the
acquisition of fiber optic cable facilities, and investments in and the
acquisition of satellite earth stations.
-----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE WARRANTS AND WARRANT
SHARES.
-----------------
The Company's executive offices are located at 10411 Motor City Drive,
Bethesda, Maryland 20817, and its telephone number at that address is (301)
365-8959. The Company changed its name in 1997 from STARTEC, Inc. to Startec
Global Communications Corporation.
7
<PAGE>
SUMMARY FINANCIAL AND OTHER DATA
The summary financial data presented below for the fiscal years ended
December 31, 1995, 1996 and 1997 has been derived from the financial statements
of the Company, which have been audited by Arthur Andersen LLP, independent
public accountants. The financial data for the six months ended June 30, 1997
and 1998 has been derived from the Company's unaudited financial statements. In
the opinion of the Company's management, these unaudited financial statements
include all adjustments (consisting only of normal, recurring 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 in this Prospectus. See "Selected Financial and Other Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ---------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT RATIOS AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues .................................. $ 10,508 $ 32,215 $ 85,857 $ 28,836 $ 63,353
Cost of services .............................. 9,129 29,881 75,783 25,250 54,485
-------- -------- -------- -------- --------
Gross margin ................................ 1,379 2,334 10,074 3,586 8,868
General and administrative expenses ........... 2,170 3,996 6,288 2,461 6,852
Selling and marketing expenses ................ 184 514 1,238 306 1,761
Depreciation and amortization ................. 137 333 451 214 708
-------- -------- -------- -------- --------
Income (loss) from operations ............... (1,112) (2,509) 2,097 605 (453)
Interest expense .............................. 116 337 762 252 2,577
Interest income ............................... 22 16 313 5 1,302
-------- -------- -------- -------- --------
Income (loss) before income tax provi-
sion ....................................... (1,206) (2,830) 1,648 358 (1,728)
Income tax provision .......................... -- -- 29 7 30
-------- -------- -------- -------- --------
Net income (loss) ........................... $ (1,206) $ (2,830) $ 1,619 $ 351 $ (1,758)
======== ======== ======== ======== ========
Basic earnings (loss) per share ............. $ (0.23) (0.52) 0.26 0.06 (0.20)
Diluted earnings (loss) per share ........... (0.23) (0.52) 0.25 0.06 (0.20)
Weighted average common shares out-
standing basic -- .......................... 5,317 5,403 6,136 5,403 8,926
Weighted average common and equiva-
lent shares outstanding -- diluted ......... 5,317 5,403 6,423 5,589 8,926
OTHER FINANCIAL DATA:
EBITDA(1) ..................................... $ (975) $ (2,176) $ 2,548 $ 819 $ 255
Capital expenditures .......................... 200 520 3,881 184 5,672
OTHER DATA:
Residential customers ......................... 10,675 27,797 71,583 43,700 93,500
Carrier customers ............................. 7 27 34 32 55
Number of employees (full- and part-time
at period end) .............................. 41 54 124 72 266
</TABLE>
- -----------
(1) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation and amortization. EBITDA should not be considered as a
substitute for operating earnings, net income, cash flow or other statement
of income or cash flow data computed in accordance with generally accepted
accounting principles ("GAAP") or as a measure of a company's results of
operations or liquidity. Although EBITDA is not a measure of performance or
liquidity calculated in accordance with GAAP, the Company nevertheless
believes that investors consider it a useful measure in assessing a
company's ability to incur and service indebtedness.
8
<PAGE>
RISK FACTORS
Prospective investors should consider carefully the risk factors set forth
below, as well as the other information appearing in this Prospectus, before
making an investment in the Warrants and the Warrant Shares.
SUBSTANTIAL INDEBTEDNESS; LIQUIDITY
The Company has substantial indebtedness as a result of the Notes Offering.
As of June 30, 1998, the Company had total assets of approximately $215.3
million, total Indebtedness (as defined in the Indenture) of approximately
$158.6 million (including approximately $647,000 of Indebtedness, excluding the
Notes) and stockholders' equity of approximately $32.3 million. For the fiscal
year ended December 31, 1997, after giving pro forma effect to the Notes
Offering and the application of the net proceeds therefrom as if the Notes
Offering had been consummated on January 1, 1997, the Company's EBITDA would
have been approximately $2.5 million and its EBITDA would have been insufficient
to cover fixed charges by approximately $17.4 million. The Indenture limits, but
does not prohibit, the incurrence of Indebtedness by the Company and certain of
its subsidiaries and does not limit the amount of Indebtedness that may be
incurred to finance the cost of Telecommunications Assets (as defined in the
Indenture). In the event of a bankruptcy, liquidation, dissolution or similar
proceeding with respect to the Company, the holders of any secured indebtedness
will be entitled to proceed against the collateral that secures such secured
indebtedness and such collateral will not be available for satisfaction of any
amounts owed under the Notes. The Company anticipates that it and its
subsidiaries will incur substantial additional Indebtedness in the future. See
"-- Future Capital Needs; Uncertainty of Additional Funding; Discretion in Use
of Proceeds of the Notes Offering," "Selected Financial and Other Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Company's financial statements and notes thereto presented
elsewhere in this Prospectus.
The level of the Company's indebtedness could have important consequences
to investors, including the following: (i) the debt service requirements of any
additional indebtedness could make it more difficult for the Company to make
payments of interest on the Notes; (ii) the ability of the Company to obtain any
necessary financing in the future for working capital, capital expenditures,
debt service requirements or other purposes may be limited; (iii) a substantial
portion of the Company's cash flow from operations, if any, must be dedicated to
the payment of principal and interest on its indebtedness and other obligations
and will not be available for use in its business; (iv) the Company's level of
indebtedness could limit its flexibility in planning for, or reacting to,
changes in its business; (v) the Company may become more highly leveraged than
some of its competitors, which may place it at a competitive disadvantage; and
(vi) the Company's high degree of indebtedness will make it more vulnerable in
the event of a downturn in its business.
The Company must substantially increase its net cash flow in order to meet
its debt service obligations, and there can be no assurance that the Company
will be able to meet such obligations, including interest payments on the Notes
after May 15, 2001 and principal due at maturity. If the Company is unable to
generate sufficient cash flow or otherwise obtain funds necessary to make
required payments, or if it otherwise fails to comply with the various covenants
under its indebtedness, it would be in default under the terms thereof, which
would permit the holders of such indebtedness to accelerate the maturity of such
indebtedness and could cause defaults under other indebtedness of the Company.
Such defaults could result in a default on the Notes and could delay or preclude
payments of interest or principal thereon. Any such default could have a
material adverse effect on the Company.
HOLDING COMPANY STRUCTURE; RELIANCE ON SUBSIDIARIES FOR DISTRIBUTIONS
Upon consummation of the Reorganization, Startec Global will be a holding
company, the principal assets of which will be the outstanding capital stock of
its operating subsidiaries. As a holding company, the Company's internal sources
of funds to meet its cash needs, including payment of principal and interest on
the Notes, will be dividends from its subsidiaries, intercompany loans and other
permitted payments from its direct and indirect subsidiaries, as well as its own
credit arrangements, if any. Such operating subsidiaries of the Company will be
legally distinct from the Company and will have no
9
<PAGE>
obligation, contingent or otherwise, to pay amounts due with respect to the
Notes or other indebtedness of the Company or to make funds available for such
payments, and will not guarantee the Notes (except in limited circumstances).
Additionally, the Company is in the process of organizing operating subsidiaries
in jurisdictions outside the United States. The ability of the Company's
operating subsidiaries to pay dividends, repay intercompany loans or make other
distributions to Startec Global may be restricted by, among other things, the
availability of funds, the terms of the indebtedness incurred by such operating
subsidiaries, as well as statutory and other legal restrictions. The failure to
pay any such dividends, repay intercompany loans or make any such other
distributions would restrict Startec Global's ability to repay the Notes or
other indebtedness of the Company and its ability to utilize cash flow from one
subsidiary to cover shortfalls in working capital at another subsidiary, and
could otherwise have a material adverse effect upon the Company's business,
financial condition and results of operations.
Following the Reorganization, the Company will be a holding company that
will conduct its business through its subsidiaries and, accordingly, claims of
creditors of such subsidiaries will generally have priority on the assets of
such subsidiaries over the claims of the Company and the holders of the
Company's indebtedness (including the Notes). As a result, the Notes and certain
other indebtedness of the Company will be effectively subordinated to all then
existing and future indebtedness and other liabilities and commitments of the
Company's subsidiaries, including trade payables. As of June 30, 1998, after
giving pro forma effect to the Reorganization, the Company's consolidated
subsidiaries would have had aggregate liabilities of $25.1 million, including
approximately $647,000 of Indebtedness. Any right of the Company to receive
assets of any subsidiary upon the liquidation or reorganization of such
subsidiary (and the consequent rights of the holders of the Notes or certain
other creditors of the Company to participate in those assets) will be
effectively subordinated to the claims of such subsidiary's creditors, except to
the extent that the Company is itself recognized as a creditor, in which case
the claims of the Company would still be subordinate to any security in the
assets of such subsidiary and any indebtedness of such subsidiary senior to that
held by the Company. In addition, holders of secured indebtedness of the Company
would have a claim on the assets securing such indebtedness that is prior to the
holders of the Notes and would have a claim that is pari passu with the holders
of the Notes to the extent such security did not satisfy such indebtedness.
After the consummation of the Reorganization, the Company will have no
significant assets other than its equity interests in the Company's
subsidiaries, which may be pledged in the future to secure one or more credit
facilities.
HISTORY OF LOSSES; NEGATIVE EBITDA; UNCERTAINTY OF FUTURE OPERATING RESULTS
Although the Company has experienced significant revenue growth in recent
years, the Company had an accumulated deficit of approximately $7.2 million as
of June 30, 1998 and its operations have generated a net loss in three of the
last four fiscal years and negative cash used in operating activities in each of
the last four fiscal years. The Company expects to generate negative EBITDA and
significant operating losses and net losses for the foreseeable future as a
result of its significant debt service requirements and the additional costs it
expects to incur in connection with the development and expansion of its
network, the expansion of its marketing programs and its entry into new markets
and the introduction of new telecommunications services. Furthermore, the
Company expects that its operations in new target markets will experience
negative cash flows until an adequate customer base and related revenues have
been established. The Company must substantially increase its net cash flow in
order to meet its debt service obligations. 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 and sustain profitability or positive
cash flow from operating activities in any future period. In the event the
Company cannot achieve and sustain operating profitability or positive cash flow
from operations, it may not be able to meet its debt service obligations or
working capital requirements, which could have a material adverse effect on the
Company's business, financial condition, and results of operations. See "--
Future Capital Needs; Uncertainty of Additional Funding; Discretion in Use of
Proceeds of the Notes Offering" and "Selected Financial and Other Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
10
<PAGE>
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING; DISCRETION IN USE OF
PROCEEDS OF THE NOTES OFFERING
The implementation of the Company's strategic plan, including the
development and expansion of its network facilities, expansion of its marketing
programs and funding of operating losses and working capital needs, will require
significant investment. The Company expects that the net proceeds of the Notes
Offering, together with cash on hand and cash flow from operations, will provide
the Company with sufficient capital to fund currently planned capital
expenditures and anticipated operating losses until approximately the end of the
first quarter of 2000. Based on its current plans, however, the Company will
require approximately $40 million of additional capital to complete its network
deployment plans through the end of 2000. Moreover, there can be no assurance
that the Company will not need additional financing sooner than currently
anticipated. The need for additional financing will depend on a variety of
factors, including the rate and extent of the Company's expansion in existing
and new markets, the cost of an investment in additional switching and
transmission facilities and ownership rights in fiber optic cable, the
incurrence of costs to support the introduction of additional or enhanced
services, and increased sales and marketing expenses. In addition, the Company
may need additional financing to fund unanticipated working capital needs or to
take advantage of unanticipated business opportunities, including acquisitions,
investments or strategic alliances. The amount of the Company's actual future
capital requirements also will depend upon many factors that are not within the
Company's control, including competitive conditions and regulatory or other
government actions. In the event that the Company's plans or assumptions change
or prove to be inaccurate or the net proceeds of the Notes Offering, together
with cash on hand and internally generated funds, prove to be insufficient to
fund the Company's growth and operations as currently anticipated through the
end of the first quarter of 2000, then some or all of the Company's development
and expansion plans could be delayed or abandoned, or the Company may be
required to seek additional financing or to sell assets. In addition, although
the deposit of the Pledged Securities assures holders of the Notes that they
will receive all scheduled cash interest payments on the Notes through May 15,
2001, the Company may require additional financing in order to pay interest on
the Notes thereafter and to repay the Notes at maturity. See "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Company expects that it will seek to raise additional capital from
public and/or private equity and/or debt sources to fund the shortfall in its
cash resources expected to occur at the end of the first quarter of 2000. There
can be no assurance, however, that the Company will be able to obtain additional
financing or, if obtained, that it will be able to do so on a timely basis or on
terms favorable to the Company. If the Company is able to raise additional funds
through the incurrence of debt, it would likely become subject to additional
restrictive financial covenants. In the event that the Company is unable to
obtain such additional capital or is unable to obtain such additional capital on
acceptable terms, the Company may be required to reduce the scope of its
expansion, which could adversely affect the Company's business, financial
condition and results of operations, its ability to compete and its ability to
meet its obligations under the Notes.
Although the Company intends to implement the capital spending plan
described in this Prospectus, it is possible that unanticipated business
opportunities may arise which the Company's management may conclude are more
favorable to the long-term prospects of the Company than those contemplated by
the current capital spending plan. The Company's management has significant
discretion in its decisions with respect to when and how to utilize the proceeds
of the Notes Offering.
INTENSE COMPETITION
The international telecommunications industry is intensely competitive and
subject to rapid change precipitated by changes in the regulatory environment
and advances in technology. The Company's success depends upon its ability to
compete with a variety of other telecommunications providers in the United
States and in each of its international markets, including the respective PTT in
many of the countries in which the Company operates or plans to operate in the
future. Other competitors of the Company include large, facilities-based,
multinational carriers such as AT&T, Sprint and MCI World-
11
<PAGE>
Com and smaller facilities-based wholesale long distance service providers in
the United States and overseas that have emerged as a result of deregulation,
switched-based resellers of international long distance services, and global
alliances among some of the world's largest telecommunications carriers, such as
Global One (Sprint, Deutsche Telekom and France Telecom). The telecommunications
industry is also being impacted by a large number of mergers and acquisitions
including recent announcements regarding a proposed joint venture between the
international operations of AT&T and British Telecom, the proposed acquisition
of TCI by AT&T, and the proposed mergers of SBC and Ameritech and GTE and Bell
Atlantic. International telecommunications providers such as the Company compete
for residential customers on the basis of price, customer service, transmission
quality, breadth of service offerings and value-added services, and compete for
carrier customers primarily on the basis of price and network quality.
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 currently a dial-around provider, its 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. However, as a result of revisions to FCC regulations,
beginning on July 1, 1998, all telecommunications companies were required to
migrate from their existing five digit CIC codes to new seven-digit CIC codes.
Though the Company experienced no material impact on its residential business in
July 1998 as a result of the migration, the migration to seven-digit CIC Codes
may adversely affect revenues from the Company's residential customers as a
result of actual or perceived difficulties in making long distance calls using
the longer code. The Company's carrier customers generally also use the services
of a number of international long distance telecommunications providers, and
these carrier customers are especially price sensitive. In addition, many of the
Company's competitors enjoy economies of scale that can result in a lower cost
structure for termination and network costs, which could cause significant
pricing pressures within the international communications industry. Several long
distance carriers in the United States have introduced pricing strategies that
provide for fixed, low rates for both international and domestic calls
originating in the United States. Such a strategy, if widely adopted, could have
an adverse effect on the Company's business, financial condition and results of
operations if increases in telecommunications usage do not result or are
insufficient to offset the effects of such price decreases. In recent years,
prices for international long distance services have decreased substantially,
and are expected to continue to decrease, in most of the markets in which the
Company currently competes or which it may enter in the future. The intensity of
such competition has recently increased, and the Company expects that such
competition will continue to intensify as the number of new entrants increases
as a result of the competitive opportunities created by the Telecommunications
Act of 1996 (the "1996 Telecommunications Act"), implementation by the FCC of
the commitment of the United States to the World Trade Organization ("WTO") and
changes in legislation and regulation in various foreign markets. There can be
no assurance that the Company will be able to compete successfully in the
future.
The telecommunications industry is also experiencing change as a result of
rapid technological evolution, marked by the introduction of new product and
service offerings and increasing satellite and undersea cable transmission
capacity for services similar to those provided by the Company. Such
technologies include satellite-based systems, such as those proposed by Iridium
LLC and Globalstar, L.P., utilization of the Internet for international voice
and data communications, and digital wireless communication systems such as
Personal Communications Systems ("PCS"). The Company is unable to predict which
of many possible future product and service offerings will be important to
maintain its competitive position or what expenditures will be required to
develop and provide such products and services.
RISKS OF INTERNATIONAL TELECOMMUNICATIONS BUSINESS; ENTRY INTO DEVELOPING
MARKETS
To date, the Company has generated substantially all of its revenues from
international long distance calls originating in the United States. However, the
Company's expansion strategy will require it to commence operations in a number
of foreign countries, which will expose the Company to the risks inherent in
doing business on an international level. These risks include unexpected changes
in regulatory requirements or administrative practices; value added tax,
tariffs, customs, duties and other trade barriers; difficulties in staffing and
managing foreign operations; problems in collecting accounts receiv-
12
<PAGE>
able; political risks; fluctuations in currency exchange rates; foreign exchange
controls which restrict or prohibit repatriation of funds; technology export and
import restrictions or prohibitions; delays from customs brokers or government
agencies; seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world; potential adverse tax consequences
resulting from operating in multiple jurisdictions with different tax laws; and
other factors which could materially adversely impact the Company's current and
planned operations. Moreover, the international telecommunications industry is
changing rapidly due to deregulation, 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 international markets, including markets in which it has limited or no
operating experience. 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, in many
international markets, the PTTs control access to the local networks, enjoy
better brand name recognition and customer loyalty and possess significant
operational economies, including a larger backbone network and operating
agreements with other PTTs. Pursuit of international growth opportunities may
require significant investments for extended periods of time before returns, if
any, on such investments are realized. Obtaining licenses in certain targeted
countries may require the Company to commit significant financial resources,
which investments may not yield positive net returns in such markets for
extended periods of time, if ever. Further, there can be no assurance that the
Company will be able to obtain all or any of the permits and licenses required
for it to operate, obtain access on a timely basis (or at all) to local
transmission facilities or sell and deliver competitive services in these
markets. Incumbent U.S. carriers serving international markets also may have
better brand recognition and customer loyalty, and significant operational
advantages over the Company. 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. Although
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.
SUBSTANTIAL GOVERNMENT REGULATION
As a multinational telecommunications company, the Company is subject to
varying regulation in each jurisdiction in which it provides services, and it
may be affected indirectly by the laws of other jurisdictions insofar as they
affect foreign carriers with which the Company does business. 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 or
state law. Fines or other penalties also may be imposed for such violations.
Because regulatory frameworks in many countries are relatively new, it is
difficult to assess the potential for enforcement action in such countries. Any
regulatory enforcement action by U.S. or foreign authorities could have a
material adverse effect on the Company's business, financial conditions and
results of operations. See "Business -- Government Regulation."
United States Domestic Regulations
In the United States, the Company's provision of services is subject to the
Communications Act of 1934, as amended, and FCC regulations thereunder, as well
as the applicable law and regulations of the various states. Regulatory
requirements have recently changed and will continue to change. Among other
things, such changes may affect the ability of the Company to compete with other
service providers, continue providing the same services, or introduce new
services. The impact on the Company's operations of any changes in applicable
regulatory requirements cannot be predicted.
13
<PAGE>
Federal and State Transactional Approvals. The FCC and certain PSCs require
telecommunications carriers to obtain prior approval for providing certain
telecommunications services, assignment or transfer of control of licenses,
corporate reorganizations, acquisition of operations, and assignment of assets.
Such requirements may have the effect of delaying, deterring or preventing a
change in control of the Company. Six of the states in which the Company is
certificated provide for prior approval or notification of the issuance of
securities by the Company. Because of time constraints, the Company may not have
obtained such approval from all of the states prior to consummation of the
Exchange Offer. The Company's intrastate revenues for the second quarter of 1998
for each of these states was less than $5,000. After consultation with
regulatory counsel, the Company believes that such approvals will be granted and
that obtaining such approvals subsequent to the Exchange Offer should not result
in any material adverse consequences to the Company, although there can be no
assurance that such consequences will not result.
Access Charges. Under alternative rate structures being considered by the
FCC, LECs would be permitted to allow volume discounts in the pricing of
interstate access charges that long distance carriers such as the Company pay to
originate and terminate calls. The RBOCs and other LECs also have been seeking
greater pricing flexibility and reduction of intrastate access charges from the
PSCs. Although the outcome of these proceedings is uncertain, if LECs are
permitted to utilize more flexible rate structures, smaller long distance
carriers like the Company could be placed at a significant cost disadvantage
with respect to larger competitors.
Universal Service. The Company and its U.S. competitors are required to
make FCC-mandated contributions to a universal service fund to subsidize
telecommunications services for low-income persons and certain other users. The
level of such contributions for 1998 and future years is unclear, and there can
be no assurance that the Company will be able fully to pass these costs on to
its customers or that doing so will not result in a loss of customers. Although
the Company has filed a request for forebearance/exemption from the universal
service fund with the FCC, there can be no assurance that this request will be
granted.
United States International Regulations
WTO Agreement. Pursuant to an agreement on basic telecommunications
services concluded under the auspices of the World Trade Organization (the "WTO
Agreement"), 69 countries comprising more than 90% of the global market for
telecommunications services have agreed to permit varying degrees of competition
from foreign carriers. The WTO Agreement is expected to be implemented by most
signatory countries in 1998, although there may be substantial delays. The
Company believes that the WTO Agreement will increase opportunities for the
Company and its competitors. The precise scope and timing of the implementation
of the WTO Agreement, however, remain uncertain, and there can be no assurance
that the WTO Agreement will result in beneficial regulatory liberalization.
On November 26, 1997, the FCC adopted a new order (the "Foreign
Participation Order") to implement U.S. obligations under the WTO Agreement. The
Foreign Participation Order establishes an open entry standard for carriers from
WTO member countries, generally facilitating market entry for such applicants by
eliminating certain existing tests. These tests remain in effect, however, for
carriers from non-WTO member countries. Petitions for reconsideration of the
Foreign Participation Order are pending at the FCC. Implementation of the
Foreign Participation Order could increase competition in the Company's markets.
United States International Settlements Policy and Foreign Entry and
Affiliate Rules. The FCC's International Settlements Policy ("ISP") governs the
settlement between U.S. carriers and their foreign correspondents of the cost of
terminating their calls in the other's network. U.S. international carriers,
including the Company, are subject to the FCC's international accounting
"benchmark" rates, which are the FCC's ceilings for prices that U.S. carriers
should pay for international settlements. The FCC could find that certain
settlement rate terms of the Company's foreign carrier agreements do not meet
the ISP requirements, absent a waiver. Although the FCC generally has not issued
penalties in this area, it could, among other things, issue a cease and desist
order or impose fines if it finds that these agreements conflict with the ISP.
The Company does not believe that any such fine or order would have a material
adverse effect on the Company.
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In the recently-adopted International Settlement Rates Order, the FCC
conditioned facilities-based authorizations for service on a route on which a
carrier has a foreign affiliate upon the foreign affiliate offering all other
U.S. carriers a settlement rate at or below the relevant benchmark. The FCC also
conditioned any authorization to provide switched services over either
facilities-based or resold international private lines upon the condition that
at least half of the facilities-based international message telephone service
("IMTS") traffic on the subject route is settled at or below the relevant
benchmark rate. Under the Foreign Participation Order, however, if the subject
route does not comply with the benchmark requirement, a carrier can demonstrate
that the foreign country provides "equivalent" resale opportunities.
Accordingly, the Company is permitted to resell private lines for the provision
of switched services to any country that either has been found to comply with
the benchmarks or to offer equivalent resale opportunities, but must obtain
prior FCC approval in order to provide resold private lines to any country in
which it has an affiliated carrier that has not been found by the FCC to lack
market power. The International Settlement Rates Order has been appealed before
the courts and the FCC. These proceedings are still pending. The Company cannot
predict the outcome of these preceding or their possible impact on the Company.
Alternative Routing Through Transiting, Refiling and ISR. The FCC is
currently considering whether to limit or prohibit certain procedures whereby a
carrier routes, through facilities in a third or intermediate country, traffic
originating from one country and destined for another country. The FCC has
permitted third country calling under certain pricing and settlement rules,
where all countries involved consent to this type of routing arrangement,
referred to as "transiting." Under certain arrangements referred to as
"refiling," however, traffic appears to originate in the intermediate country
and the carrier in the ultimate destination country does not necessarily
recognize or consent to the receipt of traffic from the originating country. The
FCC to date has made no pronouncement as to whether refile arrangements, which
avoid settlements between the actual originating and destination countries,
comport either with U.S. or ITU regulations. A 1995 petition for a declaratory
ruling on these issues remains pending. To the extent that the Company utilizes
transiting or refiling, an FCC determination with respect to the permissibility
of, or conditions on, these international routing arrangements could have a
material adverse effect on the Company's business, financial condition or
results of operations.
United States Regulation of Internet Telephony. The Company knows of no
domestic or foreign laws that prohibit voice communications over the Internet.
In December 1996, the FCC initiated a Notice of Inquiry (the "Internet NOI")
regarding whether to impose regulations or surcharges upon providers of Internet
access and Information Services. In April 1998, the FCC filed a report with
Congress stating that Internet access falls into the category of information
services, and hence should not be subject to common carrier regulation,
including the obligation to pay access charges, but that the record suggests
that some forms of Internet Telephony may be more like telecommunications
services then information services, and hence subject to common carrier
regulation. In addition, federal legislation that would either regulate or
exempt from regulation services provided over the Internet has been proposed.
PSCs may also retain jurisdiction to regulate the provision of intrastate
Internet telephone services. The Company cannot predict the likelihood that
state, federal or foreign governments will impose additional regulation or
charges on Internet Telephony or other Internet-related services, nor can it
predict the impact that future regulation will have on the Company's operations.
There can be no assurances that any such regulation will not materially
adversely affect the Company's business, financial condition or results of
operation.
European Union Regulations
EU member states are required to adopt national legislation to implement EU
directives aimed at liberalizing telecommunications markets in their countries.
Some EU member states have so far failed to implement such directives properly.
This could limit, constrain or otherwise adversely affect the Company's ability
to provide certain services. Even if a national government enacts appropriate
regulations within the time frame established by the EU, there may be
significant resistance to the implementation of such legislation from incumbent
telecommunications operators, regulators, trade unions and other sources. For
example, in France, the telecommunications workers union has stated its
objection to the
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current move towards liberalization. In some EU member states,
telecommunications operators that do not operate their own infrastructure are
subject to less favorable terms of interconnection to the local PTT.
Furthermore, the ease with which new entrants may obtain telecommunications
licenses varies greatly among EU member states. The above factors could have a
material adverse effect on the Company's operations by preventing the Company
from expanding its operations as currently intended, as well as a material
adverse effect on the Company's business, financial conditions and results of
operations. The Company's provision of services in Western Europe may also be
affected if any EU member state imposes greater restrictions on non-EU
international service than on such service within the EU. Moreover, the EU
regime on data protection is fairly strict with respect to the processing of
personal data, which may adversely affect the Company's marketing in Europe.
Other Jurisdictions
The Company intends to expand its operations into other jurisdictions as
such markets are liberalized and the Company is able to offer a full range of
switched public telephone services to its customers. In countries that enact
legislation intended to deregulate the telecommunications sector or that have
made commitments to open their markets to competition in the WTO Agreement,
there may be significant delays in the adoption of implementing regulations and
uncertainties as to the implementation of the liberalization programs which
could delay or make more expensive the Company's entry into such additional
markets. The ability of the Company to enter a particular market and provide
telecommunications services, particularly in developing countries, is dependent
upon the extent to which the regulations in a particular market permit new
entrants. In some countries, regulators may make subjective judgments in
awarding licenses and permits, without any legal recourse for unsuccessful
applicants. In the event the Company is able to gain entry to such a market, no
assurances can be given that the Company will be able to provide a full range of
services in such market, that it will not have to significantly modify its
operations to comply with changes in the regulatory environment in such market,
or that any such changes will not have a material adverse effect on the
Company's business, results of operations or financial condition.
MANAGEMENT OF GROWTH
The Company's recent growth and expansion and its strategy to continue such
growth and expansion 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. The Company's
growth also has increased responsibilities for its management personnel. In
order to manage its growth effectively, the Company must continue to expand its
network and infrastructure, enhance its management, financial and information
systems, attract additional managerial, technical and customer service
personnel, and train and manage its personnel base. 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 who may be available to the Company.
Inaccuracies in the Company's forecasts of traffic could result in insufficient
or excessive transmission facilities and disproportionately high fixed expenses.
In addition, as the Company increases its service offerings and expands its
target markets in the U.S. and overseas, there will be additional demands on its
customer service, marketing and administrative resources. Failure of the Company
to successfully manage its expansion could materially adversely affect the
Company's business, financial condition and results of operations.
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 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. Additionally,
the FCC mandated that as of July 1, 1998, all telecommunications companies must
migrate from their existing five-digit CIC codes (10+XXX) to seven-digit CIC
codes (10+10+XXX). This mandate has necessitated changes in the
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dialing patterns of the Company's residential customers in order to use the
Company's dial-around services. Though the Company experienced no material
impact on its residential business since July 1, 1998 as a result of the
migration, actual or perceived difficulties in making long distance calls using
the longer code could have a material adverse effect on the Company's
residential business.
RISKS ASSOCIATED WITH EXPANSION AND OPERATION OF THE NETWORK
The success of the Company is largely dependent upon its ability to
operate, expand, manage and maintain its network so that it is able to deliver
high quality, uninterrupted telecommunications services. In particular, the
Company's ability to increase revenues will depend on its ability to expand the
capacity of, and eliminate bottlenecks that have developed from time to time on,
the Company's network. 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, including adverse effects on its
customer relationships. The Company's operations are also dependent on its
ability to successfully integrate new technologies and equipment into the
network. Increases in the Company's traffic, the build-out of its network, and
the integration of new technologies and equipment into the network will place
additional strains on the Company's systems, and there can be no assurance that
the Company will not experience system failures. In addition, while the Company
performs the majority of the maintenance of its owned transmission facilities,
it depends upon services provided by Nortel under a service and support contract
to resolve problems with its New York City-based switch that the Company is
unable to resolve. The Company also depends upon third parties for maintenance
of facilities which it leases and fiber optic cable lines in which the Company
has an IRU or other use arrangement. 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, result in customer attrition and have a material adverse effect on
its business, financial condition or results of operations.
DEPENDENCE ON KEY CUSTOMERS; BAD DEBT EXPOSURE
Although the composition of the Company's carrier customer base varies from
period to period, during the year ended December 31, 1997, the Company's five
largest carrier customers accounted for approximately 47% of the Company's net
revenues, with WorldCom and Frontier accounting for approximately 23% and 14%,
respectively. In addition, for the six months ended June 30, 1998, the Company's
five largest carrier customers accounted for approximately 33% of the Company's
net revenues, with WorldCom accounting for approximately 19% of net revenues
during that period. No other carrier customer accounted for more than 10% of the
Company's net revenues during 1997 or the first six months of 1998. 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. The Company's
carrier customers tend to be price sensitive and often move their business based
solely on incremental changes in price. Carriers also may terminate their
relationship with the Company or substantially reduce their use of the Company's
services for a variety of other reasons, including problems with transmission
quality and customer service, changes in the regulatory environment, increased
use of the carriers' own transmission facilities, and other factors which may be
beyond the Company's control. In addition, the effect of proposed mergers and
alliances in the telecommunications industry may potentially reduce the number
of customers that purchase wholesale international long distance services from
the Company. 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.
The concentration of carrier customers also increases the risk of
non-payment or difficulties in collecting the full amounts due from customers.
The Company's four largest carrier customers represented approximately 44% and
31% of gross accounts receivable as of December 31, 1997 and June 30, 1998,
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 custom-
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ers, its business, financial condition and results of operations could be
materially adversely affected. In addition, although the Company reserves for
the risk of non-payment with respect to its residential customers taken as a
whole, the Company does not believe that the risk of non-payment with respect to
any single or concentrated group of residential customers is significant. See
"Business -- Customers."
DEPENDENCE ON AVAILABILITY OF TRANSMISSION FACILITIES
Historically, substantially all of the telephone calls made by the
Company's customers have been carried and terminated through transmission lines
of facilities-based long distance carriers, which provide the Company
transmission capacity through a variety of lease and resale arrangements
("off-net"). For both the year ended December 31, 1997 and the six months ended
June 30, 1998, 95% of the Company's traffic was terminated off-net. The
Company's ability to maintain and expand its business is dependent, in part,
upon the Company's ability 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 maintain satisfactory
relationships with one or more of these carriers could have a material adverse
effect upon the Company's business, financial condition and results of
operations. During the fiscal year ended December 31, 1997, WorldCom and Pacific
Gateway Exchange accounted for approximately 13% and 12%, respectively, of the
Company's acquired transmission capacity (on a cost of services basis). During
the six months ended June 30, 1998, Pacific Gateway Exchange accounted for
approximately 11% 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 1997 or the first six months of 1998. See
"Business -- The Startec Global Network."
The future profitability of the Company will depend in part on its ability
to obtain and utilize 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
intends to reduce its use of variable usage arrangements and, to the extent
feasible and cost-justified, 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. See "-- Substantial Government Regulation" and
"Business -- Government Regulation."
The Company owns IRUs in, and has other access rights to, a number of
undersea fiber optic cable systems, and the acquisition of additional IRUs in,
and other access rights to, undersea fiber optic cable transmission lines is a
key element of the Company's business strategy. Because undersea fiber optic
lines typically take several years to plan and construct, international long
distance service providers generally make investments based on forecasts of
anticipated traffic. Inaccuracies in the Company's forecasts of traffic could
result in insufficient or excessive investments by the Company in undersea cable
and disproportionately high fixed expenses. The Company will be subject to
similar risks with respect to its decisions to invest in and acquire satellite
earth stations. The Company generally does not control the planning or
construction of 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 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 Global Network."
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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
markets is an essential component of its service. The ability to terminate
traffic on a cost-effective basis is an essential component of the Company's
business plan. Accordingly, the Company is dependent upon its operating
agreements and other termination arrangements. The Company's strategy is based
on its ability to enter into and maintain: (i) operating agreements with PTTs in
countries that have yet to become deregulated so it will be able to terminate
traffic in, and receive return traffic from, those countries; (ii) operating
agreements with PTTs and emerging carriers in foreign countries whose
telecommunications markets have been deregulated so it will be able to terminate
traffic in those countries; and (iii) interconnection agreements with the PTT in
each of the countries in which the Company has operating facilities so it will
be able to terminate traffic in each such country. Although 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 such existing or additional
agreements or arrangements 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 and control its costs.
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS; YEAR 2000 TECHNOLOGY RISKS
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 provides to customers, to ensure that it is properly charged by
vendors for services it uses and to achieve operating efficiencies and otherwise
manage its growth. Although the Company believes that its current management
information systems are sufficient to meet its present demands, these systems
have not grown at the same rate as the Company's business and it is anticipated
that additional investments in these systems will be needed. 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. In addition, the LECs currently provide billing
services for long distance providers such as the Company, although they are not
obligated to do so. As a result, any change in billing practices by the LECs,
including termination of billing services for long distance providers, may
disrupt the Company's operations and materially and adversely affect its
business, results of operations and financial condition. See "Business --
Management Information and Billing Systems."
A significant percentage of the software that runs many computer systems
relies on two-digit date codes to perform computations and decision-making
functions. Commencing on January 1, 2000, these computer programs may fail to
properly interpret these two-digit date codes, misinterpreting "00" as the year
1900 rather than 2000, which could result in processing errors or system
failures. 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. The majority of the Company's operating systems are
relatively new and have been certified to the Company as being Year 2000
compliant. Despite the fact that the majority of the Company's systems have been
certified as 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 of
such systems fails or experiences processing errors, such failures or errors may
disrupt or corrupt the Company's systems. The Company is utilizing
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its current management information systems staff to conduct its third party
compliance analysis and has sent requests to 12 of its top telephony carrier
customers and vendors requesting a detailed written description of the status of
their Year 2000 compliance efforts. 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, or errors in, the computer systems of its vendors or carrier
customers could materially adversely affect the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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 or advances in Internet Telephony allowing
the simultaneous transmission of voice, data and video, and the commercial
availability of 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, continue to offer competitive services at
competitive 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.
RISKS ASSOCIATED WITH STRATEGIC ALLIANCES, ACQUISITIONS AND INVESTMENTS
As part of its business strategy, the Company may enter into strategic
alliances with, or acquire 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 particular alliance, acquisition or investment. Any future
strategic alliances, investments or acquisitions would be accompanied by the
risks commonly encountered in such transactions, including those associated with
assimilating the operations and personnel of acquired 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 strategic alliances, investments or acquisitions.
Expansion through joint ventures may involve additional risks for the
Company. The Company may not have a majority or controlling ownership interest
in the joint venture entity, may not control the joint venture's board of
directors or similar governing authority, and may not otherwise control its
operations or assets. There is also a risk that the Company's joint venture
partner or partners may have economic, business or legal interests or goals that
are not consistent with those of the joint venture or the Company, or that such
goals will diverge over time. In addition, there is a risk that a joint venture
partner may be unable to meet its economic or other obligations to the joint
venture, in which case it may become necessary for the Company to fulfill those
obligations.
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, the Company may incur Indebtedness or use
a substantial portion of its available cash to consummate such transactions.
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.
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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 including, in particular, Ram Mukunda, President, Chief
Executive Officer and Treasurer, and Prabhav V. Maniyar, Senior Vice President,
Chief Financial Officer and Secretary, of the Company. Messrs. Mukunda and
Maniyar have employment agreements with the Company. See "Management --
Employment Agreements." The Company maintains "key man" life insurance on Mr.
Mukunda.
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
who may be available to the Company. 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, especially management
personnel and personnel for foreign offices. The loss 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 or results of operations. See "Management."
CONTROL OF COMPANY BY CURRENT STOCKHOLDERS
As of August 31, 1998, the executive officers and directors of the Company
beneficially owned 4,078,491 shares of Common Stock, representing approximately
45.5% of the outstanding shares Common Stock, including options to purchase an
aggregate of 10,000 shares of Common Stock. Of these amounts, Mr. Mukunda
beneficially owns 3,583,675 shares of Common Stock. The Company's executive
officers and directors as a group, or Mr. Mukunda, acting individually, will be
able to exercise significant influence over such matters as the election of the
directors of the Company and other fundamental corporate transactions such as
mergers, asset sales and the sale of the Company. See "Principal Stockholders"
and "Description of Capital Stock."
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. Further, the Company has filed for federal
registration of the trademark "Startec Global Communications Corporation."
Although 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."
ABSENCE OF PUBLIC MARKET FOR THE WARRANTS
There is no existing public market for the Warrants and there can be no
assurance that an active public market for the Warrants will develop as a result
of the offering of the Warrants by any Selling Holder or that, if a such a
market develops, it will be maintained. The Company does not intend to apply for
quotation of the Warrants on the Nasdaq Stock Market or for listing of the
Warrants on any national securities exchange. Future trading prices of the
Warrants will depend on many factors, including the Company's operating results,
the market for similar securities and the performance of the Company's Common
Stock.
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POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the completion of the initial public offering of the Company's
Common Stock on October 9, 1997 there had been no public market for the Common
Stock. 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 those with respect to
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 market recently has
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 may not have been directly related
to the operating performance of those companies. Such market fluctuations may
materially adversely affect the market price of the Common Stock. See "Price
Range of 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 Indenture and under the Signet Facility. See "Dividend Policy."
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USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Warrants or
the Warrant Shares by the Selling Holders. To the extent that any Warrants are
exercised, the Company will receive the proceeds from such exercises. The
Company intends to use the proceeds, if any, from the exercise of the Warrants
for the purchase of telecommunications and related network equipment and general
corporate purposes.
The net proceeds of the Notes Offering were approximately $154.4 million
after deducting discounts, commissions and expenses payable by the Company. The
Company has used or intends to use the net proceeds from the Notes Offering as
follows: (i) approximately $52.4 million was used to acquire the Pledged
Securities, which provides funds for the first six interest payments on the
Notes; and (ii) approximately $102.0 million will be used to fund capital
expenditures through the end of the first quarter of 2000 to expand and develop
the Company's network, including the purchase and installation of switches and
related network equipment (including software and hardware upgrades for current
equipment), the acquisition of fiber optic cable facilities, investments in and
the acquisition of satellite earth stations.
During 1998, the Company plans to install a new international gateway
switch in Los Angeles and redeploy its Washington, D.C. switch. In addition, the
Company plans to acquire (i) six additional switches during 1998 to be deployed
during 1998 and early 1999 in Chile, France, Germany, Japan, the Netherlands and
the United Kingdom; (ii) nine additional switches during 1999 to be deployed
during 1999 and early 2000 in Australia, Belgium, Canada (two), Hong Kong,
Italy, Mexico, Switzerland and Uganda; and (iii) four additional switches in
2000 to be deployed during 2000 and early 2001 in Argentina, Brazil, India and
Singapore. The Company also intends to invest in domestic land-based fiber optic
cable facilities linking the East Coast and West Coast of the United States, and
undersea fiber optic transmission facilities linking North America with Europe,
the Pacific Rim, Asia and Latin America. Moreover, the Company plans to invest
in or acquire two satellite earth stations and to install multiple P.O.P. sites
during 1998 and 1999. As the Company executes its expansion strategy and
encounters new marketing opportunities, management may elect to relocate or
redeploy certain switches, P.O.P. sites and other network equipment to alternate
locations from what is outlined above. The Company's business strategy
contemplates aggregate expenditures (including capital expenditures, working
capital and other general corporate purposes) of approximately $165.8 million
through December 31, 2000. Of such amount, the Company intends to use
approximately $152.8 million (including $5.8 million which has already been
allocated to purchase the Los Angeles switch) to fund capital expenditures to
expand and develop the Company's network. Consequently, after taking into
account the net proceeds to the Company of the Notes Offering, together with the
Company's cash on hand and anticipated cash from operations, the Company expects
that it will need approximately $40.0 million of additional financing to
complete its capital spending plan through the end of 2000. Although the Company
believes that it should be able to obtain this required financing from
traditional lending sources, such as bank lenders, asset-backed financiers or
equipment vendors, there can be no assurance that the Company will be successful
in arranging such financing on terms it considers acceptable or at all. In the
event that the Company is unable to obtain additional financing, it will be
required to limit or curtail its expansion plans. See "Risk Factors - Future
Capital Needs; Uncertainty of Additional Funding; Discretion in Use of Proceeds
of the Notes Offering."
The Company regularly reviews opportunities to further its business
strategy through strategic alliances with, investment in, or acquisitions of
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 particular strategic alliance, acquisition
or investment. The Company's ability to consummate strategic alliances and
acquisitions, and to make investments that may be of strategic significance to
the Company, may require the Company to obtain additional debt and/or equity
financing. There can be no assurance that the Company will be successful in
arranging such financing on terms it considers acceptable or at all.
23
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock has been quoted on the Nasdaq National Market under the
symbol "STGC" since the completion of the Company's initial public offering on
October 9, 1997. The following table sets forth, for each of the periods
indicated, the high and low closing prices per share of the Common Stock on the
Nasdaq National Market.
HIGH LOW
---------- ----------
1997
Fourth Quarter (from October 9) .............. $22 3/8 $14 1/2
1998
First Quarter ................................ 26 3/8 18 3/8
Second Quarter ............................... 28 1/2 9 3/8
Third Quarter (through September 15) ......... 14 3/8 5 3/4
As of August 31, 1998, there were approximately 41 record holders of the
Common Stock. On September 23, 1998, the last reported sale price of the Common
Stock on the Nasdaq National Market was $7.00 per share.
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 sole 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
Indenture and the Signet Facility place significant limitations on the payment
of cash dividends.
24
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following table presents selected financial and other data of the
Company as of and for the fiscal years ended December 31, 1993, 1994, 1995, 1996
and 1997 and for the six months ended June 30, 1997 and 1998. The financial data
as of and for the fiscal years ended December 31, 1994, 1995, 1996 and 1997 has
been derived from the financial statements of the Company which have been
audited by Arthur Andersen LLP, independent public accountants. The financial
data as of and for the fiscal year ended December 31, 1993, and as of and for
the six months ended June 30, 1997 and 1998 has been derived from the Company's
unaudited financial statements. In the opinion of the Company's management,
these unaudited financial statements include all adjustments (consisting only of
normal, recurring 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 in this Prospectus. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
----------- --------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT RATIOS AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues .................................. $ 3,288 $ 5,108 $ 10,508 $ 32,215 $ 85,857
Cost of services .............................. 3,090 4,701 9,129 29,881 75,783
-------- ------- -------- -------- --------
Gross margin ................................ 198 407 1,379 2,334 10,074
General and administrative expenses ........... 1,491 1,159 2,170 3,996 6,288
Selling and marketing expenses ................ 232 91 184 514 1,238
Depreciation and amortization ................. 85 90 137 333 451
-------- ------- -------- -------- --------
Income (loss) from operations ............... (1,610) (933) (1,112) (2,509) 2,097
Interest expense .............................. 71 70 116 337 762
Interest income ............................... 13 24 22 16 313
-------- ------- -------- -------- --------
Income (loss) before income tax provision..... (1,668) (979) (1,206) (2,830) 1,648
Income tax provision .......................... -- -- -- -- 29
-------- ------- -------- -------- --------
Net income (loss) ........................... $ (1,668) $ (979) $ (1,206) $ (2,830) $ 1,619
======== ======= ======== ======== ========
Basic earnings (loss) per share ............. $ (0.36) (0.21) (0.23) (0.52) 0.26
Diluted earnings (loss) per share ........... (0.36) (0.21) (0.23) (0.52) 0.25
Weighted average common shares outstand-
ing basic -- ............................... 4,596 4,596 5,317 5,403 6,136
-------- ------- -------- -------- ---------
Weighted average common and equivalent
shares outstanding -- diluted .............. 4,596 4,596 5,317 5,403 6,423
-------- ------- -------- -------- ---------
OTHER FINANCIAL DATA:
EBITDA(1) ..................................... $ (1,525) $ (843) $ (975) $ (2,176) $ 2,548
Capital expenditures .......................... 45 44 200 520 3,881
OTHER DATA:
Residential customers ......................... 4,549 6,329 10,675 27,797 71,583
Carrier customers ............................. -- -- 7 27 34
Number of employees (full- and part-time at
period end) ................................. 29 31 41 54 124
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1997 1998
------------ ------------
(IN THOUSANDS, EXCEPT RATIOS
AND OTHER RATIOS AND OTHER
DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues .................................. $ 28,836 $ 63,353
Cost of services .............................. 25,250 54,485
-------- --------
Gross margin ................................ 3,586 8,868
General and administrative expenses ........... 2,461 6,852
Selling and marketing expenses ................ 306 1,761
Depreciation and amortization ................. 214 708
-------- --------
Income (loss) from operations ............... 605 (453)
Interest expense .............................. 252 2,577
Interest income ............................... 5 1,302
-------- --------
Income (loss) before income tax provision..... 358 (1,728)
Income tax provision .......................... 7 30
-------- --------
Net income (loss) ........................... $ 351 $ (1,758)
======== ========
Basic earnings (loss) per share ............. 0.06 (0.20)
Diluted earnings (loss) per share ........... 0.06 (0.20)
Weighted average common shares outstand-
ing basic -- ............................... 5,403 8,926
--------- --------
Weighted average common and equivalent
shares outstanding -- diluted .............. 5,589 8,926
--------- --------
OTHER FINANCIAL DATA:
EBITDA(1) ..................................... $ 819 $ 255
Capital expenditures .......................... 184 5,672
OTHER DATA:
Residential customers ......................... 43,700 93,500
Carrier customers ............................. 32 55
Number of employees (full- and part-time at
period end) ................................. 72 266
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------- AS OF JUNE 30,
1993 1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- ---------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ........................ $ 194 $ 257 $ 528 $ 148 $26,114 $120,121
Total assets ..................................... 1,176 1,954 4,044 7,327 51,530 215,275
Long-term obligations (including capital leases),
net of current maturities ...................... 248 6 361 646 461 158,183
Stockholders' equity (deficit) ................... (1,824) (2,803) (3,259) (6,089) 31,590 32,271
</TABLE>
- ----------
(1) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation and amortization. EBITDA should not be considered as a
substitute for operating earnings, net income, cash flow or other statement
of income or cash flow data computed in accordance with GAAP or as a
measure of a company's results of operations or liquidity. Although EBITDA
is not a measure of performance or liquidity calculated in accordance with
GAAP, the Company nevertheless believes that investors consider it a useful
measure in assessing a company's ability to incur and service indebtedness.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto presented elsewhere in this
Prospectus. Certain information contained below and elsewhere in this
Prospectus, including information regarding the Company's plans and strategy
for its business, are forward-looking statements. See "Note Regarding
Forward-Looking Statements."
OVERVIEW
Startec Global is a rapidly growing, facilities based international long
distance telecommunications service provider. The Company markets its services
to select ethnic residential communities throughout the United States and to
leading international long distance carriers. The Company's annual revenues have
increased more than eight-fold over the last three years from approximately
$10.5 million for the year ended December 31, 1995 to approximately $85.9
million for the year ended December 31, 1997. The number of the Company's
residential customers increased from 10,675 customers as of December 31, 1995 to
93,500 customers as of June 30, 1998.
The Company was founded in 1989 to capitalize on the significant
opportunity to provide international long distance services to select ethnic
communities in major U.S. metropolitan markets that generate substantial
long-distance traffic to their countries of origin. Until 1995, the Company
concentrated its marketing efforts in the New York-Washington, D.C. corridor and
focused on the delivery of international calling services to India. At the end
of 1995, the Company expanded its marketing efforts to include the West Coast of
the United States, and began targeting other ethnic groups in the United States,
such as the Middle Eastern, Filipino and Russian communities. The Company
currently originates traffic that terminates in Asia, the Pacific Rim, the
Middle East, Africa, Eastern and Western Europe and North America.
In order to achieve economies of scale in its network operations and
balance its residential international traffic, the Company, in late 1995, began
marketing its excess network capacity to international carriers seeking
competitive rates and high quality capacity. Since initiating its international
wholesale services, the Company has expanded its number of carrier customers to
55 at June 30, 1998.
A key component of the Company's strategy is to build its own global
network, which will allow it to originate, transmit and terminate a substantial
portion of its calls utilizing network capacity the Company manages. The
facilities currently owned by the Company only provide a cost advantage with
respect to traffic origination costs. The Company anticipates that this network
expansion will allow it to achieve a per-minute cost advantage. 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. The Company realizes a per-minute cost savings
when it is able to originate calls on-net. For the year ended December 31, 1997
and the six months ended June 30, 1998, approximately 60% and 65%, respectively,
of the Company's residential revenues were originated on-net. 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.
Revenues for telecommunication services are recognized as those 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 PTTs, as described
below, are recognized as revenue as the return traffic is received and
processed. There can be no assurance that traffic will be returned 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.
26
<PAGE>
Substantially all of the Company's revenues for the past three fiscal years
and for the six months ended June 30, 1997 and 1998 have been derived from calls
terminated outside the United States. The percentages of net revenues
attributable to traffic terminating on a region-by-region basis are set forth in
the table below.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Asia/The Pacific Rim ............. 66.4% 43.0% 49.0% 41.9% 46.8%
Middle East/North Africa ......... 6.6 25.7 24.7 28.1 20.1
Sub-Saharan Africa ............... 0.3 3.5 7.4 8.2 6.8
Eastern Europe ................... 3.0 8.2 9.3 9.9 10.5
Western Europe ................... 15.7 5.5 2.2 3.1 2.1
North America .................... 4.7 11.5 4.0 5.4 4.5
Other ............................ 3.3 2.6 3.4 3.4 9.2
----- ----- ----- ----- -----
Total ......................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
The Company's cost of services consists of origination, transmission and
termination expenses. Origination costs include the amounts paid to LECs, and,
in areas where the Company does not have its own network facilities, to other
telecommunication network providers for originating calls ultimately carried to
the Company's switches. Transmission expenses are fixed month-to-month payments
associated with capacity on domestic and international leased lines, satellites
and undersea fiber optic cables. 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 risks associated with price
fluctuations and the relative costs of transmission are expected to decrease;
however, fixed costs will increase. When billing disputes between the Company
and other telecommunication network providers arise, the Company accrues the
full amount in dispute within cost of services and, upon resolution, only the
amount actually agreed upon is treated by the Company as a "credit" to cost of
services. The Company's experience to date has been that the resolution of such
disputes occurs primarily in the fourth quarter of each year, and, therefore,
the related adjustments to cost of services may have a disproportionate impact
on its fourth quarter results of operations. Accordingly, adjustments to the
Company's cost of services arising from the resolution of billing disputes with
other telecommunication network providers may have a positive impact on gross
margins in any particular year.
Termination expenses consist of variable per minute charges paid to foreign
PTTs and alternative carriers to terminate the Company's international
long-distance traffic. 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 to the
United States is routed through U.S.-based international carriers such as the
Company in the same proportion as traffic carried into the foreign country from
the United States ("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. Revenue recognized from return traffic was
approximately $2.0 million, $1.1 million, $1.4 million and $706,000, or 19%, 3%,
2% and 1% of net revenues in 1995, 1996, 1997 and for the six months ended June
30, 1998, respectively. There can be no assurance that traffic will be delivered
back to the United States or that changes in future settlement rates,
allocations among carriers or levels of traffic will not adversely affect net
payments made and revenues received by the Company.
In addition to operating agreements, the Company utilizes alternative
termination arrangements offered by third party vendors. The Company seeks to
maintain vendor diversity for countries where
27
<PAGE>
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 price reductions, although there can be no assurance that
this will continue. The Company expects selling, general and administrative
costs to increase as it develops its infrastructure to manage higher business
volume.
The Company expects to 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, its entry into new markets and the introduction of new
telecommunications services, and, in the case of net losses, as a result of the
interest expense associated with its financing activities.
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
FISCAL YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues ................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services ............................ 86.9 92.8 88.3 87.6 86.0
----- ----- ----- ----- -----
Gross margin ............................... 13.1 7.2 11.7 12.4 14.0
General and administrative expenses ......... 20.7 12.4 7.3 8.5 10.8
Selling and marketing expenses .............. 1.8 1.6 1.4 1.1 2.8
Depreciation and amortization ............... 1.3 1.0 0.5 0.7 1.1
----- ----- ----- ----- -----
Income (loss) from operations .............. (10.7) ( 7.8) 2.5 2.1 ( 0.7)
Interest expense ............................ ( 1.1) ( 1.1) ( 0.9) ( 0.9) ( 4.1)
Interest income ............................. 0.2 0.1 0.3 -- 2.1
----- ----- ----- ----- -----
Income (loss) before income tax provi-
sion ..................................... (11.6) ( 8.8) 1.9 1.2 ( 2.7)
Income tax provision ........................ -- -- -- -- ( 0.1)
----- ----- ----- ----- -----
Net income (loss) .......................... (11.6)% ( 8.8)% 1.9% 1.2% ( 2.8)%
===== ===== ===== ===== =====
</TABLE>
SIX MONTH PERIOD ENDED JUNE 30, 1998 COMPARED TO SIX MONTH PERIOD ENDED JUNE
30, 1997
Net Revenues. Net revenues for the six months ended June 30, 1998 increased
approximately $34.6 million or 120.1 percent, to approximately $63.4 million
from $28.8 million for the six months ended June 30, 1997. Residential revenue
increased in comparative periods by approximately $13.7 million or 130.5
percent, to approximately $24.2 million for the six months ended June 30, 1998
from approximately $10.5 million in the six months ended June 30, 1997. The
increase in residential revenue is due to an increase in the number of
residential customers to over 93,500 as of June 1998 from approximately 43,700
as of June 1997. Carrier revenue for the six months period ended of June 30,
1998 increased approximately $20.9 million or 114.2 percent, to approximately
$39.2 million from approximately $18.3 million for the six months ended June 30,
1997. The increase in carrier revenues is due to the execution of the Company's
strategy to optimize its capacity on its facilities, which has resulted in sales
to new carrier customers and increased sales to existing carrier customers.
Gross Margin. Gross margin increased by approximately $5.3 million to $8.9
million for the six month period ended June 30, 1998 from $3.6 million for the
six month period ended June 30, 1997. Gross margin improved as a percentage of
net revenues for the six-month period ended June 30, 1998 to
28
<PAGE>
14.0 percent from 12.4 percent for the six-month period ended June 30, 1997.
Gross margin for the six-month period ended June 30, 1998 improved due to an
increase in the traffic originated on the Company's own network and improved
termination costs.
General and Administrative. General and administrative expenses for the six
month period ended June 30, 1998 increased 176 percent to approximately $6.9
million from $2.5 million for the six month period ended June 30, 1997. As a
percentage of net revenues, general and administrative expenses increased to
10.8 percent from 8.5 percent for the respective periods. The increase in dollar
amounts was primarily due to an increase in personnel to 266 at June 30, 1998
from 73 at June 30, 1997, and to a lesser extent, an increase in billing
processing fees.
Selling and Marketing. Selling and marketing expenses for the six month
period ended June 30, 1998 increased 488.2 percent to approximately $1.8 million
from approximately $306,000 for the six month period ended June 30, 1997. As a
percentage of net revenues, selling and marketing expenses increased to 2.8
percent from 1.1 percent for the respective periods. The increase in dollar
amounts is primarily due to Company's efforts to market to new, and increased
efforts to market to existing, customer groups.
Depreciation and Amortization. Depreciation and amortization expenses for
the six month period ended June 30, 1998 increased to approximately $708,000
from $214,000 for the six month period ended June 30, 1997, primarily due to
increases in capital expenditures pursuant to the Company's strategy of
expanding its network infrastructure.
Interest. Interest expense for the six month period ended June 30, 1998
increased to approximately $2.6 million from $252,000 for the six month period
ended June 30, 1997, as a result of the Old Notes Offering. The Company also
recorded interest income of approximately $1.3 million for the six-month period
ended June 30, 1998 as a result of the investing the offering proceeds.
Net Loss. Net loss was approximately $1.8 million for the six month period
ended June 30, 1998 as compared to a net income of approximately $351,000 in for
the six month period ended June 30, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net revenues for the year ended December 31, 1997 increased approximately
$53.7 million or 166.8%, to approximately $85.9 million from $32.2 million for
the year ended December 31, 1996. Residential revenue increased in comparative
periods by approximately $16.6 million or 138.3%, to approximately $28.6 million
for the year ended December 31, 1997 from approximately $12.0 million in 1996.
The increase in residential revenue was due to an increase in residential
customers to over 71,500 at December 31, 1997 from approximately 27,800 at
December 31, 1996. Carrier revenue for the year ended December 31, 1997
increased approximately $37.1 million or 183.7%, to approximately $57.3 million
from approximately $20.2 million for the year ended December 31, 1996. The
increase in carrier revenues was due to the execution of the Company's strategy
to optimize capacity on its facilities, which resulted in sales to additional
carrier customers and increased sales to existing carrier customers.
Gross margin increased approximately $7.7 million to approximately $10.0
million for the year ended December 31, 1997 from approximately $2.3 million for
the year ended December 31, 1996. Gross margin improved as a percentage of net
revenues for the year ended December 31, 1997 to 11.7% from 7.2% for the year
ended December 31, 1996. The gross margin on residential revenue increased to
approximately 14.9% for the year ended December 31, 1997 from approximately
10.1% for the year ended December 31, 1996, due to an increase in the percentage
of residential traffic originated on-net and improved termination costs. In the
year ended December 31, 1997, 59.8% of residential traffic originated on-net as
compared to 44.9% for the year ended December 31, 1996.
The reported gross margin for the years ended December 31, 1997 and
December 31, 1996 included the effect of accrued disputed charges of
approximately $67,000 and $1.4 million, respectively, which represented less
than 1% and 5% of reported net revenues, respectively.
29
<PAGE>
General and administrative expenses for the year ended December 31, 1997
increased approximately $2.3 million or 57.5% to approximately $6.3 million from
$4.0 million for the year ended December 31, 1996. As a percentage of net
revenues, general and administrative expenses declined to 7.3% from 12.4% for
the respective periods. The increase in dollar amounts was primarily due to an
increase in personnel to 124 at December 31, 1997 from 54 at December 31, 1996,
and to a lesser extent, an increase in billing processing fees as a result of
the increased residential customer base.
Selling and marketing expenses for the year ended December 31, 1997
increased approximately $686,000 or 133.5% to approximately $1.2 million from
approximately $514,000 for the year ended December 31, 1996. As a percentage of
net revenues, selling and marketing expenses declined to 1.4% from 1.6% in the
respective periods. The increase in dollar amounts was primarily due to the
Company's efforts to market to new customer groups.
Depreciation and amortization expenses for the year ended December 31, 1997
increased to approximately $451,000 from approximately $333,000 for the year
ended December 31, 1996, primarily due to increases in capital expenditures
pursuant to the Company's strategy of expanding its network infrastructure.
Interest expense for the year ended December 31, 1997 increased to
approximately $762,000 from $337,000 for the year ended December 31, 1996, as a
result of additional debt incurred by the Company to fund expansion and working
capital needs.
Net income was approximately $1.6 million in 1997 as compared to a net loss
of approximately $2.8 million in 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net revenues for the year ended December 31, 1996 increased approximately
$21.7 million or 206.7%, to approximately $32.2 million from $10.5 million for
the year ended December 31, 1995. Residential revenue increased in comparative
periods by approximately $6.6 million or 122.2%, to approximately $12.0 million
in 1996 from $5.4 million in 1995. The increase in residential revenue was 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 27,797
customers as of December 31, 1996 from 10,675 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 was 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 increased approximately $900,000 to $2.3 million for the year
ended December 31, 1996 from $1.4 million for the year ended December 31, 1995.
Gross margin declined as a percentage of net revenues to approximately 7.2% for
the year ended December 31, 1996 from 13.1% for the year ended December 31,
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 62.7% 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 expenses for the year ended December 31, 1996
increased approximately $1.8 million, or 81.8%, to $4.0 million from $2.2
million for the year ended December 31, 1995. As a percentage of net revenues,
general and administrative expenses declined to approximately 12.4% from 20.7%
for the respective periods. The increase in dollar amounts was primarily due to
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.
30
<PAGE>
Selling and marketing expenses for the year ended December 31, 1996
increased to approximately $514,000 from approximately $184,000 for the year
ended December 31, 1995. As a percentage of net revenues, selling and marketing
expenses declined to 1.6% from 1.8% in the respective periods. The increase in
dollar amounts was attributable to the Company's efforts to enter additional
ethnic markets and new geographic areas.
Depreciation and amortization expenses grew to approximately $333,000 in
1996 from $137,000 in 1995, primarily due to increased capital expenditures.
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.
The Company experienced a net loss of approximately $2.8 million in 1996
compared to a net loss of $1.2 million in 1995.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial data
for each of the quarters in the years ended December 31, 1996 and 1997, and for
the first two quarters of 1998. This quarterly information has been derived from
and should be read in conjunction with the Company's financial statements and
the notes thereto, and, in management's opinion, reflects all adjustments
(consisting only of normal recurring adjustments except as discussed in Notes
(1), (2) and (3) below) 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
-----------------------------------------------------------------------------------------------
1996 1997 1998
-------------------------------------------- ---------------------------------------- ---------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
--------- ----------- ---------- ----------- --------- --------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues(1) ............. $4,722 $ 8,485 $ 7,652 $ 11,356 $12,372 $16,464 $25,757 $31,264 $29,891
Cost of services(2) ......... 4,467 7,922 6,763 10,729 10,765 14,485 22,668 27,865 25,655
------ ------- ------- -------- ------- ------- ------- ------- -------
Gross margins (2)(3)(1)..... 255 563 889 627 1,607 1,979 3,089 3,399 4,236
General and administrative
expenses(2) ................ 595 778 1,370 1,253 1,151 1,310 1,820 2,007 2,691
Selling and marketing ex-
penses ..................... 52 101 166 195 104 202 391 541 648
Depreciation and amortiza-
tion ....................... 52 93 93 95 96 118 140 97 184
------ ------- ------- -------- ------- ------- ------- ------- -------
Income (loss) from oper-
ations ................... (444) (409) (740) (916) 256 349 738 754 713
Interest expense ............ 58 60 80 139 117 135 326 184 153
Interest income ............. 5 4 5 2 1 4 9 299 359
------ ------- ------- -------- ------- ------- ------- ------- -------
Income (loss) before in-
come tax provision ....... (497) (465) (815) (1,053) 140 218 421 869 919
Income tax provision ........ -- -- -- -- 3 4 8 14 20
------ ------- ------- -------- ------- ------- ------- ------- -------
Net income (loss) .......... $ (497) $ (465) $ (815) $ (1,053) $ 137 $ 214 $ 413 $ 855 $ 899
====== ======= ======= ======== ======= ======= ======= ======= =======
<CAPTION>
QUARTERS
ENDED
------------
1998
------------
JUNE 30
------------
<S> <C>
Net revenues(1) ............. $ 33,462
Cost of services(2) ......... 28,830
--------
Gross margins (2)(3)(1)..... 4,632
General and administrative
expenses(2) ................ 4,161
Selling and marketing ex-
penses ..................... 1,113
Depreciation and amortiza-
tion ....................... 524
--------
Income (loss) from oper-
ations ................... (1,166)
Interest expense ............ 2,424
Interest income ............. 943
--------
Income (loss) before in-
come tax provision ....... (2,647)
Income tax provision ........ 10
--------
Net income (loss) .......... $ (2,657)
========
</TABLE>
- ----------
(1) During the second quarter of 1998, upon receipt of favorable collection
data, the Company reduced its allowance for doubtful accounts by
approximately $337,000.
(2) Vendor disputes and other disputed charges resolved in the fourth quarter
of 1997 resulted in net credits as estimated by management of approximately
$300,000 recognized as lower cost of services and general and
administrative expenses.
(3) During the first quarter of 1997, the Company's gross margin improved by
approximately $1.0 million over the fourth quarter of 1996. The improvement
was due to (i) approximately $500,000 in costs accrued in the fourth
quarter of 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)
to a lesser extent, an increase in the percentage of residential traffic
originated on-net.
31
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from cash used in operating
activities, purchases of network equipment and payments on outstanding
indebtedness. Prior to the completion of its Initial Public Offering (as defined
herein), the Company financed its activities through capital lease financings,
notes payable from individuals, a credit and billing arrangement with a third
party company (since terminated) and a secured revolving line of credit with
Signet Bank ("Signet Facility"). The Signet Facility provides for maximum
borrowings of up to 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 Facility 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 Facility is secured by substantially all of
the Company's assets. The Signet Facility was amended in connection with the
Notes Offering and the Reorganization. As of the date hereof, as a result of the
Indebtedness incurred in connection with the Notes Offering, the Company is not
in compliance with certain financial covenants contained in the Amended Credit
Facility and is therefore unable to borrow any amounts thereunder.
The Company completed its initial public offering of 3,277,500 shares of
its common stock ("Common Stock") in October 1997 ("Initial Public Offering"),
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. As a result, the Company's cash and cash equivalents
increased to approximately $26.1 million at December 31, 1997 from approximately
$148,000 at December 31, 1996. Net cash used in operating activities was
approximately $1.7 million for the year ended December 31, 1997, as compared to
net cash used in operating activities of approximately $1.4 million for the year
ended December 31, 1996. The increase in cash used in operating activities was
the result of the significant growth in net revenues offset in part by an
increase in accounts payable for the period.
Net cash used in investing activities was approximately $3.9 million and
$520,000 for the year ended December 31, 1997 and 1996, respectively. Net cash
used in investing activities for the year ended December 31, 1997 primarily
related to capital expenditures made to expand the Company's network
infrastructure.
Net cash provided by financing activities was approximately $31.6 million
and $1.5 million for the year ended December 31, 1997 and 1996, respectively.
Cash provided by financing activities for the year ended December 31, 1997
primarily resulted from net proceeds from the Initial Public Offering, as
previously discussed, offset by the repayment of amounts under the
receivables-based credit facility, capital lease obligations, and various notes
payable. Any borrowings under the Signet Facility were repaid by December 31,
1997.
On May 21, 1998, the Company consummated the Notes Offering, which yielded
net proceeds of approximately $155 million, of which approximately $52.4 million
was used to purchase the Pledged Securities, which are pledged as security and
restricted for use as the first six interest payments due on the Notes. The
Company intends to apply approximately $102.0 million to fund capital
expenditures through the end of the first quarter of 2000 to expand and develop
the Company's network, including the purchase and installation of switches and
related network equipment (including software and hardware upgrades for current
equipment), the acquisition of fiber optic cable facilities, and investments in
and the acquisition of satellite earth stations. The Notes are unsecured and
require semi-annual interest payments beginning November 15, 1998. The Notes and
Warrants have certain registration rights discussed elsewhere herein.
As a result of the Notes Offering, the Company's cash and cash equivalents
increased to approximately $120.1 million at June 30, 1998 from approximately
$2.1 million at June 30, 1997. Net cash used by operating activities was
approximately $2.3 million for the six months ended June 30, 1998, as compared
to net cash provided by operating activities of $514,000 for the three months
ended June 30, 1997. The decrease in cash
32
<PAGE>
from operations for the six months ended June 30, 1998 was primarily the result
of the net loss and an increase in accounts receivable, which was partially
offset by an increase in accounts payable and accrued expenses.
Net cash used in investing activities was approximately $5.7 million and
$184,000 for the six-month periods ended June 30, 1998 and 1997, respectively.
Net cash used in investing activities for the six months ended June 30, 1998 was
primarily related to capital expenditures made in connection with its network
expansion.
Net cash provided by financing activities was approximately $102 million
and $1.6 million for the six months ended June 30, 1998 and 1997, respectively.
Cash provided by financing activities for the six months ended June 30, 1998
primarily resulted from the Notes Offering.
The Company's principal cash requirements will be for capital expenditures
related to the Company's network development plan, and for interest payments on
the Notes. The Notes bear an annual rate of interest of 12%, payable
semi-annually in arrears. A portion of the net proceeds of the Notes Offering
were used to purchase the Pledged Securities, which assures holders of the Notes
that they will receive all scheduled cash interest payments on the Notes through
May 15, 2001. The Company may be required to obtain additional financing in
order to pay interest on the Notes after May 15, 2001 and to repay the Notes at
their maturity.
The Company's business strategy contemplates aggregate capital expenditures
(including capital expenditures, working capital and other general corporate
purposes) of approximately $165.8 million through December 31, 2000. Of such
amount, the Company intends to use approximately $152.8 million to fund capital
expenditures to expand and develop the Company's network (including $5.8 million
which has already been allocated to purchase the Los Angeles switch).
During 1998, the Company plans to install a new international gateway
switch in Los Angeles and to redeploy its Washington, D.C. switch. In addition,
the Company plans to acquire (i) six additional switches during 1998 to be
deployed during 1998 and early 1999 in Chile, France, Germany, Japan, the
Netherlands and the United Kingdom; (ii) nine additional switches during 1999 to
be deployed during 1999 and early 2000 in Australia, Belgium, Canada (two), Hong
Kong, Italy, Mexico, Switzerland and Uganda; and (iii) four additional switches
in 2000 to be deployed during 2000 and early 2001 in Argentina, Brazil, India
and Singapore. The Company also intends to invest in domestic land-based fiber
optic cable facilities linking the East Coast and West Coast of the United
States, and undersea fiber optic transmission facilities linking North America
with Europe, the Pacific Rim, Asia and Latin America. Moreover, the Company
plans to invest in or acquire two satellite earth stations and to install
multiple P.O.P. sites during 1998 and 1999. As the Company executes its
expansion strategy and encounters new marketing opportunities, management may
elect to relocate or redeploy certain switches, P.O.P. sites and other network
equipment to alternate locations from what is outlined above
After taking into account the net proceeds to the Company of the Notes
Offering and the purchase of the Pledged Securities, together with the Company's
cash on hand and anticipated cash from operations, the Company expects that it
will need approximately $40.0 million of additional financing to complete its
capital spending plan through the end of 2000. Although the Company believes
that it should be able to obtain this required financing from traditional
lending sources, such as bank lenders, asset-based financiers or equipment
vendors, there can be no assurance that the Company will be successful in
arranging such financing on terms its considers acceptable or at all. In the
event that the Company is unable to obtain additional financing, it will be
required to limit or curtail its expansion plans.
The Company regularly reviews opportunities to further its business
strategy through strategic alliances with, investment in, or acquisitions of
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 particular strategic alliance, acquisition
or investment. The Company's ability to consummate strategic alliances and
acquisitions, and to make investments that may be of strategic significance to
the Company, may require the Company to obtain additional debt and/or equity
financing. There can be no assurance that the Company will be successful in
arranging such financing on terms it considers acceptable or at all.
33
<PAGE>
The implementation of the Company's strategic plan, including the
development and expansion of its network facilities, expansion of its marketing
programs, and funding of operating losses and working capital needs, will
require significant investment. The Company expects that the net proceeds of the
Notes Offering, together with cash on hand and cash flow from operations, will
provide the Company with sufficient capital to fund currently planned capital
expenditures and anticipated operating losses through the end of the first
quarter of 2000. There can be no assurance, however, that the Company will not
need additional financing sooner than currently anticipated. The need for
additional financing depends on a variety of factors, including the rate and
extent of the Company's expansion in existing and new markets, the cost of an
investment in additional switching and transmission facilities and ownership
rights in fiber optic cable, the incurrence of costs to support the introduction
of additional or enhanced services, and increased sales and marketing expenses.
In addition, the Company may need additional financing to fund unanticipated
working capital needs or to take advantage of unanticipated business
opportunities, including acquisitions, investments or strategic alliances. The
amount of the Company's actual future capital requirements also will depend upon
many factors that are not within the Company's control, including competitive
conditions and regulatory or other government actions. In the event that the
Company's plans or assumptions change or prove to be inaccurate or the remaining
net proceeds of the Notes Offering, together with cash on hand and internally
generated funds, prove to be insufficient to fund the Company's growth and
operations, then some or all of the Company's development and expansion plans
could be delayed or abandoned, or the Company may be required to seek additional
financing or to sell assets, to the extent permitted by the Indenture.
The Company may seek to raise such additional capital from public or
private equity or debt sources. There can be no assurance that the Company will
be able to obtain additional financing or, if obtained, that it will be able to
do so on a timely basis or on terms favorable to the Company. If the Company is
able to raise additional funds through the incurrence of debt, it would likely
become subject to additional restrictive financial covenants. In the event that
the Company is unable to obtain such additional capital or is unable to obtain
such additional capital on acceptable terms, the Company may be required to
reduce the scope of its expansion, which could adversely affect the Company's
business, financial condition and results of operations, its ability to compete
and its ability to meet its obligations under the Notes.
Although the Company intends to implement the capital spending plan
described above, it is possible that unanticipated business opportunities may
arise which the Company's management may conclude are more favorable to the
long-term prospects of the Company than those contemplated by the current
capital spending plan. Management will have significant discretion in its
decisions with respect to when and how to utilize the remaining net proceeds of
the Notes Offering.
The Company has accrued approximately $2.1 million as of June 30, 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. The majority of the Company's operating systems are
relatively new and have been certified to the Company as being Year 2000
compliant. Despite the fact that the majority of the Company's systems have been
certified as 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 of
such systems fails or experiences processing errors, such failures or errors may
disrupt or corrupt the Company's systems. The Company is utilizing its current
management information systems staff to conduct its third party compliance
analysis and has sent requests to 12 of its top telephony carrier customers and
vendors requesting a detailed written description of the status of their Year
2000 compliance efforts. Although management
34
<PAGE>
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, or errors in, 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."
SFAS No. 130 requires "comprehensive income" and the components of "other
comprehensive income," to be reported in the financial statements and/or notes
thereto. Because the Company does not have any components of "other
comprehensive income," reported net income is the same as "total comprehensive
income" for all periods presented.
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, adoption will
not impact the Company's results of operations or financial position since it
relates only to disclosures.
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.
35
<PAGE>
THE INTERNATIONAL TELECOMMUNICATIONS INDUSTRY
The international telecommunications industry consists of transmissions of
voice and data that originate in one country and terminate in another. The
industry is undergoing a period of fundamental change, which has resulted in
significant growth in the usage of international telecommunications services.
From the standpoint of U.S.-based long distance carriers, the international
market can be divided into two major segments: the U.S.-originated market, which
consists of all international calls that 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 industry sources and the Company's
market research, the international telecommunications services market generated
approximately $67 billion in revenues and 81 billion minutes of use during 1997.
The international telecommunications market is currently recognized as one of
the fastest growing and most profitable segments of the global
telecommunications industry. According to industry estimates, international long
distance minutes are projected to grow at approximately 17% per year through the
year 2001. Based on publicly-available information, from 1990 to 1996, the
U.S.-originated international telecommunications market grew at a compound
annual growth rate of approximately 11% (from $7.6 billion to $14.1 billion) and
is expected to grow at approximately 14% per year through 2001.
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:
o 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 initiatives and technological advancements, is expected to
lead to increased demand for international telecommunications services
in those markets.
o Liberalization of telecommunications markets. The continuing
liberalization and privatization of telecommunications markets has
provided, and continues to provide, opportunities for new carriers who
desire to penetrate those markets, thereby increasing competition.
o 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.
o 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.
o 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.
o 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.
Liberalization has encouraged competition, which in turn has prompted
carriers to offer a wider selection of products and services at lower prices. In
recent years, prices for international long distance services have decreased
substantially and are expected to continue to decrease in many of the markets in
which the Company currently competes. Several long distance carriers in the
United States have introduced pricing strategies that provide for fixed, low
rates for both domestic and international calls originating in the United
States. The Company believes that revenue losses resulting from competition-
induced price decreases have been more than offset by cost decreases, as well as
an increase in telecommunications usage. For example, based on FCC data for the
period 1990 through 1996, per minute settlement payments by U.S.-based carriers
to foreign PTTs fell 38.6%, from $0.70 per minute to $0.43 per minute. Over this
same period, however, per minute international billed revenues fell only 30.2%,
from $1.06 in 1990 to $0.74 in 1996. The Company believes that as settlement
rates and costs for leased capacity continue to decline, international long
distance will continue to provide high revenues and gross margin per minute. See
"Risk Factors -- Intense Competition."
36
<PAGE>
Regulatory and Competitive Environment
In the United States, one of the first liberalized markets in the world,
competition began in the late 1960's with MCI's authorization to provide
long-distance service. The 1984 court-ordered dissolution of AT&T's monopoly
over local and long distance telecommunications fostered the emergence of new
U.S.-based long distance companies. Today, there are over 600 U.S.-based long
distance companies, most of which are small- or medium-sized companies, serving
residential and business customers and other carriers. Liberalization has
occurred and is occurring elsewhere around the world, including in most EU
nations, several Latin American nations and certain Asian nations.
On February 15, 1997, the United States and 68 other countries signed the
WTO Agreement and agreed to open their telecommunications markets to competition
and foreign ownership starting January 1, 1998. These 69 countries represent
approximately 90% of worldwide telecommunications traffic. The Company believes
that the WTO Agreement will provide it with significant opportunities to compete
in markets where the Company could not previously access, and to provide
end-to-end, facilities-based services to and from these countries.
Set forth below is a timetable summarizing the commitments made by parties
to the WTO Agreement to implement its provisions. Special conditions and/or
restrictions apply to those countries marked with an asterisk (*).
<TABLE>
<CAPTION>
1998-1999 2000 AND THEREAFTER
-------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
EUROPE Austria Netherlands Bulgaria Romania
Belgium Norway Czech Republic Slovak Republic
Denmark Portugal Greece Turkey
Finland Spain Poland
France Sweden
Germany Switzerland
Italy United Kingdom
Luxembourg
AMERICAS Brazil* El Salvador Antigua Jamaica
Canada Guatemala Argentina Peru
Chile Iceland Bolivia Trinidad
Dominican Mexico Grenada Venezuela
Republic
ASIA/PACIFIC Australia Malaysia Brunei Thailand
RIM Hong Kong* New Zealand Pakistan*
Japan Phillipines Singapore
Korea
AFRICA/MIDDLE Ivory Coast* Israel Senegal
EAST Mauritius
</TABLE>
The FCC recently released an order that significantly changes U.S.
regulation of international services in order to implement the United States'
"open market" commitments under the WTO Agreement. Among other measures, the
FCC's order (i) eliminated the FCC's Effective Competitive Opportunities ("ECO")
test for applicants affiliated with carriers in WTO member countries, while
imposing new conditions on participation by dominant foreign carriers, (ii)
allowed non-dominant U.S.-based carriers to enter into exclusive arrangements
with non-dominant foreign carriers and scaled back the prohibition on exclusive
arrangements with dominant carriers and (iii) adopted rules that will facilitate
approval of flexible alternative settlement payment arrangements.
The Company believes that the recent FCC order will have the following
effects on U.S.-based carriers: (i) fewer impediments to investments in
U.S.-based carriers by foreign entities; (ii) increased opportunities to enter
into innovative traffic arrangements with foreign carriers located in WTO mem-
37
<PAGE>
ber countries; (iii) new opportunities to engage in international simple resale
("ISR") to additional foreign countries; and (iv) modified settlement rates
offered by foreign affiliates of U.S.-based carriers to U.S.-based carriers to
comply with the FCC's settlement rate benchmarks.
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 United States, 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.
The following chart illustrates an international long distance call
originating in the United States under a traditional operating agreement.
"International telephone call diagram"
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, satellite-based
facilities and switches, to those that are purely resellers of another carrier's
transmission facilities. The largest U.S.-based carriers, such as AT&T, MCI,
Sprint and 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.
Accounting Rate Mechanism. Under the Accounting Rate Mechanism, which has
been the traditional model for handling traffic between international carriers,
traffic is exchanged under bilateral carrier agreements, or operating
agreements, between carriers in two countries. Operating agreements generally
are three to five years in length and provide for the termination of traffic in,
and return of traffic to, the carriers' respective countries at a negotiated
accounting rate, known as the Total Accounting Rate ("TAR"). In addition,
operating agreements provide for network coordination and accounting and
settlement procedures between the carriers. Both carriers are responsible for
costs and expenses related to operating their respective halves of the
end-to-end international connection.
38
<PAGE>
Settlement costs, which typically equal one-half of the TAR, are the fees
owed to another international carrier for transporting traffic on its
facilities. Settlement costs are reciprocal between each party to an operating
agreement at a negotiated rate (which must be the same for all U.S.-based
carriers, unless the FCC approves an exception). Additionally, the TAR is the
same for all carriers transporting traffic into a particular country, but varies
from country to country. The term "settlement costs" arises because carriers
essentially pay each other on a net basis determined by the difference between
inbound and outbound traffic between them.
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 fiber optic cables 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 IRUs 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 IRUs, however, require a carrier to make an initial capital
commitment based on anticipated usage.
In addition to using traditional operating agreements, an international
long distance provider may use transit arrangements, resale arrangements and
alternative transit/termination arrangements.
Transit Arrangements. Transit arrangements involve a long distance provider
in an intermediate country carrying the long distance traffic originating in a
second country to the destination third 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.
Resale Arrangements. Resale arrangements typically involve the wholesale
purchase and sale of transmission and 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 that rely, at least in part, on transmission capacity
acquired on a wholesale 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 that 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 international long distance resale market is continually
changing as new long distance resellers emerge and existing providers respond to
changing costs and competitive pressures.
Alternative Transit/Termination Arrangements. As the international long
distance market has become increasingly competitive, long distance providers
have 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 transmission and switching facilities in foreign
countries, which enables a provider to terminate its traffic on its own
facilities. 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 United States and other applicable regulatory authorities only on some
routes, ISR services are increasing and are expected to expand significantly as
liberalization continues in the international telecommunications market. As with
transit arrangements, refiling involves the use of an intermediate country to
carry the long-distance traffic originating in a second country to the
destination third country. However, the key difference between transit and
refile arrangements is that under a transit arrangement the operator in the
destination country has a direct relationship with the originating operator and
is aware of the transit arrangement, while with refiling, the operator in the
destination country typically is not aware that the received traffic originated
in another country with another carrier. Refiling of traffic
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takes advantage of disparities in settlement rates between different countries
by allowing 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. In addition, new
market access agreements, such as the WTO Agreement, have made it possible for
many international long distance providers to establish their own switching
facilities in certain foreign countries, allowing them to directly terminate
traffic, including traffic which they have originated.
Internet Telephony
The Internet is an interconnected global computer network of tens of
thousands of packet-switched networks using Internet protocols. Technology
trends over the past decade have removed the distinction between voice and data
segments. Traditionally, voice conversations have been routed on analog lines.
Today, voice conversations are routinely converted into digital signals and sent
together with other data over high-speed lines. In order to satisfy the high
demand for low-cost communication, software and hardware developers began to
develop technologies capable of allowing the Internet to be utilized for voice
communications. Several companies now offer services that provide real-time
voice conversations over the Internet ("Internet Telephony"). Current Internet
Telephony does not provide comparable sound quality to traditional long distance
service. The sound quality of Internet Telephony, however, has improved over the
past few years.
The FCC and most foreign regulators have not yet attempted to regulate the
companies that provide the software and hardware for Internet Telephony, the
access providers that transmit their data, or the service providers, as common
carriers or telecommunications services providers. Therefore, the existing
systems of access charges and international accounting rates, to which
traditional long distance carriers are subject, are not imposed on providers of
Internet Telephony services. As a result, such providers may offer calls at a
significant discount to standard international calls.
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BUSINESS
OVERVIEW
Startec Global is a rapidly growing, facilities-based international long
distance telecommunications service provider. The Company markets its services
to select ethnic residential communities throughout the United States and to
leading international long distance carriers. The Company provides its services
through a flexible, high-quality network of owned and leased transmission
facilities, operating and termination agreements and resale arrangements. The
Company currently owns and operates an international gateway switch in New York
City and has ordered another international gateway switch expected to be
deployed in Los Angeles in 1998. The Company also owns an international gateway
switch in Washington, D.C. that is expected to be redeployed as a domestic
switch during the fourth quarter of 1998. Including the Los Angeles switch, the
Company expects to install up to 20 switches worldwide through 2000.
Additionally, the Company has interests in several undersea cable facilities and
plans to acquire additional interests in cable facilities linking North America
with Europe, the Pacific Rim, Asia and Latin America, as well as linking the
East Coast and West Coast of the United States. The Company operates seven
P.O.P. sites in the United States and the United Kingdom and plans to install up
to three more in Europe by the end of 1998. The Company also plans to invest in
or acquire two satellite earth stations during 1998 and 1999. As the Company
executes its expansion strategy and encounters new marketing opportunities,
management may elect to relocate or redeploy certain switches, P.O.P. sites and
other network equipment to alternate locations from what is outlined above. For
the year ended December 31, 1997 and the six months ended June 30, 1998, the
Company had revenues of $85.9 million and $63.4 million, respectively.
Startec Global was founded in 1989 to capitalize on the significant
opportunity to provide international long distance services to select ethnic
communities in major U.S. metropolitan markets that generate substantial
long-distance traffic to their countries of origin. Until 1995, the Company
concentrated its marketing efforts in the New York-Washington, D.C. corridor and
focused on the delivery of international calling services to India. At the end
of 1995, the Company expanded its marketing efforts to include the West Coast of
the United States, and began targeting other ethnic groups in the United States,
such as the Middle Eastern, Filipino and Russian communities. International
traffic generated by the Company currently terminates primarily in Asia, the
Pacific Rim, the Middle East, Africa, Eastern and Western Europe and North
America. The number of the Company's residential customers has grown from 10,675
customers as of December 31, 1995 to 93,500 customers as of June 30, 1998.
The Company uses sophisticated database marketing techniques and a variety
of media to reach its targeted residential customers, including focused print
advertising in ethnic newspapers, advertising on ethnic radio and television
stations, direct mail, sponsorship of ethnic events and customer referrals. The
Company's strategy is to provide overall value to its customers and combine
competitive pricing with high levels of service, rather than to compete on the
basis of price alone. The Company provides responsive customer service 24 hours
a day, seven days a week, in each of the languages spoken by the Company's
targeted residential customers. The Company believes that its focused marketing
programs and its dedication to customer service enhance its ability to attract
and retain customers in a low-cost, efficient manner. Residential customers
access the Company's network by dialing a carrier identification code prior to
dialing the number they are calling. This service, known as "dial-around" or
"casual calling," enables customers to use the Company's services without
changing their existing long distance carriers. For the year ended December 31,
1997 and the six months ended June 30, 1998, residential customers accounted for
approximately 33% and 38%, respectively, of the Company's net revenues. As part
of its strategy, the Company seeks to increase the proportion of its net
revenues derived from residential customers.
In order to achieve economies of scale in its network operations and to
balance its residential international traffic, in late 1995, the Company began
marketing its excess network capacity to international carriers seeking
competitive rates and high-quality transmission capacity. Since initiating its
international wholesale services, the Company has expanded its number of carrier
customers to 55 at June 30, 1998. For the year ended December 31, 1997 and the
six months ended June 30, 1998, carrier customers accounted for approximately
67% and 62%, respectively, of the Company's net revenues.
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BUSINESS STRATEGY
The Company's objectives are to (i) become the leading provider of
international long distance services to select ethnic residential communities in
the United States, Canada and Europe with significant international long
distance usage and (ii) leverage its residential long distance business to
become a leading provider of wholesale carrier services on corresponding
international routes. In order to achieve its objectives, the Company's strategy
relies on the following elements:
o Expand the addressable market. The Company currently serves
residential customers in 17 major U.S. metropolitan markets and
expects to enter up to three new metropolitan markets in 1998. The
Company has also identified over 40 major markets outside the United
States, primarily in Canada, Europe and Southeast Asia, which the
Company believes are attractive for entry based on the demographic
characteristics, traffic patterns, regulatory environment and
availability of appropriate advertising channels. The Company
anticipates entering up to 20 of these markets by the end of 2000. In
addition, the Company seeks to increase its penetration of its
existing and prospective markets by (i) targeting additional ethnic
communities and (ii) marketing additional routes to existing customers
who principally use the Company's services for one route.
o Achieve "first-to-market" entry of select ethnic residential markets.
The Company believes that it enjoys significant competitive advantages
by establishing a customer base and brand name in select ethnic
residential communities ahead of its competitors. The Company intends
to capitalize on its proven marketing strategy to further penetrate
select ethnic residential communities in the United States, Canada and
Europe ahead of its competitors. The Company selects its target
markets based on favorable demographics with respect to long distance
telephone usage, including geographic immigration patterns, population
growth and income levels. Targeting select ethnic communities also
enables the Company to aggregate traffic along certain routes (which
reduces its costs) and to focus on rapidly expanding and deregulating
telecommunications markets. The Company's target residential customer
base is comprised of emigrants from emerging markets in Asia, Eastern
Europe, the Middle East, the Pacific Rim, Latin America and Africa.
o Expand international network facilities. The Company plans to expand
its international network facilities during 1998 and through 2000 by
deploying 20 additional switches, securing additional ownership
interests in undersea cable facilities and investing in domestic cable
facilties, investing in or acquiring two satellite earth stations and
entering into operating agreements. By building network facilities and
expanding operating agreements that enable it to carry an increasing
percentage of its traffic on its own network, the Company believes
that it will be able to reduce its transmission costs and reliance on
other carriers and ensure greater control over quality of service. For
the six months ended June 30, 1998, approximately 65% of the Company's
residential traffic originated on-net. During the next three years,
the Company expects to increase significantly the volume of its
traffic that is originated, carried and terminated on-net.
The Company intends to implement a network hubbing strategy,
linking its existing and prospective customer base in the United
States, Canada and Europe to call destinations in foreign countries
through a network of foreign-based switches and other
telecommunications equipment. As part of this hubbing strategy, the
Company has installed P.O.P. sites throughout the United States in the
cities of Los Angeles, Chicago, Dallas, Detroit , Miami and
Washington, D.C. Additionally, the Company has installed a P.O.P. site
in London and plans to install three more throughout Europe by the end
of 1998 in Paris, Amsterdam, and Frankfurt. The P.O.P. sites aggregate
traffic originating from the region around the city in which it is
located and route the traffic to the Company's international gateway
switch in New York. Each of the P.O.P. sites contains
telecommunications equipment that is scaleable to accommodate the
traffic volume demands of each region.
The Company also plans to continue to enhance its termination
options through additional operating agreements, transit arrangements
and, if appropriate opportunities arise, strategic acquisitions
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and alliances. The Company has also taken steps to improve the quality
of its network by upgrading its network monitoring and customer
service centers, and plans to install enhanced software that will
enable it to better monitor call traffic routing, capacity and
quality.
o Maximize network utilization and efficiency through wholesale carrier
business. The Company intends to continue to market its international
long distance services to existing and new carrier customers. Because
the Company's residential minutes of use are generated primarily
during non-business hours or on weekends, the Company has substantial
capacity to offer to international carriers. The significant carrier
traffic volume that the Company generates allows it to capture
additional revenues, to increase economies of scale and to improve
network efficiency.
o Build customer loyalty. The Company seeks to build long-term customer
loyalty through tailored in-language marketing efforts focusing on
each target ethnic group's specific needs and cultural backgrounds,
responsive customer service offering in-language services and
involvement in its customers' communities through sponsorship of local
events and other activities. The Company markets its residential
services under the "STARTEC" name to enhance its name recognition and
build brand loyalty in its target communities. The Company maintains a
detailed information database of its customers, which it uses to
monitor usage, track customer satisfaction and analyze a variety of
customer behaviors, including retention and frequency of usage.
o Pursue strategic acquisitions and alliances. In order to accelerate
its business plan and take advantage of the rapidly changing
telecommunications environment, the Company intends to carefully
evaluate and pursue strategic acquisitions, alliances and investments.
The Company, however, has no present commitments, agreements or
understandings with respect to any particular acquisition, alliance or
investment.
The Company believes that, with the remaining net proceeds of the Old Notes
Offering, it will have sufficient capital resources to fund its expansion plans
through the end of the first quarter of 2000. The Company's ability to complete
its strategic plan thereafter, however, will require significant additional
capital.
MARKET OPPORTUNITY
According to industry sources, the international telecommunications
industry generated approximately $67 billion in revenues and 81 billion minutes
of use during 1997. Industry sources indicate that the international
telecommunications market is one of the fastest growing and most profitable
segments of the global telecommunications industry. It is estimated that by the
end of 2001, this market will have expanded to $98 billion in revenues and 153
billion minutes of use, representing compound annual growth rates from 1997 of
10% and 17%, respectively. The highly competitive and rapidly changing
international telecommunications market has created a significant opportunity
for carriers that can offer high-quality, low-cost international long distance
service.
Based on industry estimates, in 1997 approximately 70% of international
long distance traffic was generated between North America and Western Europe.
The Company's target market consists of a significant portion of the remaining
30% of the international long distance traffic, or approximately $20 billion in
revenues and 24 billion minutes of use. The Company believes that international
long distance usage in its target markets will grow at rates in excess of the
international telecommunications market as a whole, primarily as a result of (i)
continuing economic development in these markets with a corresponding investment
in telephone and telecommunications infrastructure and (ii) continuing
deregulation of these markets.
CUSTOMERS
The Company markets its international long distance services primarily to
two customer groups: residential ethnic communities with significant
international long distance usage and international long distance carriers. The
Company's residential customers generally are members of ethnic groups that tend
to be concentrated in major U.S. metropolitan areas, including Asian, Middle
Eastern, Sub-Saharan African and European communities. The number of such
customers has grown significantly over the past
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three years, from 10,675 as of December 31, 1995 to 93,500 as of June 30, 1998.
Net revenues from residential customers accounted for approximately 51%, 37% and
33% of the Company's net revenues in the years ended December 31, 1995, 1996 and
1997, respectively, and 38% of net revenues for the six months ended June 30,
1998. As part of its strategy, the Company seeks to increase the proportion of
its net revenues derived from residential customers.
[GRAPHIC OMITTED]
The Company also offers wholesale telecommunications services to other
international long distance carriers, which allows the Company to balance its
residential customer base and efficiently use its network capacity. These
carrier customers include first- and second-tier long distance carriers seeking
competitive rates and high-quality transmission capacity. The number of the
Company's carrier customers has grown significantly since the Company first
began marketing its services to this segment in late 1995. As of June 30, 1998,
the Company had 55 carrier customers. Revenues from carrier customers accounted
for 49%, 63% and 67% of the Company's net revenues in the years ended December
31, 1995, 1996 and 1997, respectively and 62% of net revenues for the six months
ended June 30, 1998. During the six months ended June 30, 1998, the Company's
five largest carrier customers accounted for 33% of net revenues, with one of
these carriers, WorldCom, accounting for 19% of net revenues during that period.
During the year ended December 31, 1997, the Company's five largest carrier
customers accounted for 47% of net revenues, with WorldCom and Frontier
accounting for 23% and 14% of net revenues, respectively. No other customer
accounted for 10% or more of the Company's net revenues during 1997 or the first
six months of 1998. In a number of cases, the Company provides services to
carriers that are also suppliers to the Company.
SERVICES AND MARKETING
Residential Customers
The Company generally provides international and interstate residential
long distance customers with dial-around long distance service. Residential
customers access Startec Global's network by dialing its CIC code before dialing
the number they are calling, enabling them to use the Company's services at any
time without changing their existing long distance carrier.
The Company invests substantial resources in identifying and evaluating
potential markets for its services. In particular, the Company seeks to identify
ethnic groups with demographic profiles that suggest significant 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
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of media, including focused print advertising in ethnic newspapers, advertising
on ethnic radio and television stations, direct mail and sponsorship of ethnic
events and customer referrals. The Company also sponsors and attends community
events.
Potential customers call a toll free number that appears in Company
advertising 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
Startec Global's services. Once the customer begins to use the services, the
Company routinely monitors usage and periodically communicates with the customer
to gauge service satisfaction. Startec Global 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's
customer service center, which services the Company's residential customer base,
is staffed by trained, multilingual customer service representatives, and
operates 24 hours a day, seven days a week. The Company currently employs 157
customer service representatives.
Although the Company is sensitive to the role that the price of long
distance service plays in consumer decision-making, it generally does not
attempt to be the low-price leader. Instead, the Company focuses on providing
overall value to its customers, combining competitive pricing with high levels
of service, customer representatives fluent in the customers' native languages,
focused marketing campaigns directed at their ethnic groups, and involvement in
their communities through sponsorship of local events and other activities. The
Company believes that this strategy increases usage of Startec Global's services
and enhances customer loyalty and retention.
In addition to its current long distance services, the Company continually
evaluates potential new service offerings in order to increase traffic and
enhance customer loyalty and retention. New services the Company expects to
introduce include Home Country Direct Services, which will provide customers
with access to Startec Global's network from any country and will allow them to
place either collect or credit/debit card calls, and prepaid domestic and
international calling cards, which may be used from any touchtone 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 Global 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
has a dedicated marketing team serving the carrier market, including 18 carrier
service representatives. In addition, the Company participates in international
carrier membership organizations, trade shows, seminars and other events that
provide its carrier marketing staff with additional opportunities to establish
and maintain relationships with other carriers that are potential customers. The
Company's strategy is to focus its marketing efforts on first- and second-tier
carriers. The Company generally avoids providing services to lower-tiered
carriers because of potential difficulties in collecting accounts receivable.
Because carrier customers generally are extremely price sensitive, the Company
closely tracks the prices of competitors serving the carrier market and monitors
its own network costs to ensure optimal pricing for its carrier customers.
THE STARTEC GLOBAL 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 the over 200 countries that have telecommunication
capabilities. The Company has been expanding its network to match increases in
its long distance traffic volume. The network employs advanced switching
technologies and is supported by monitoring facilities and the Company's
technical support personnel.
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"Expected Startec International Telephone call diagram"
Switching and Transmission Facilities
The Company currently has a Nortel DMS-250/300 international gateway switch
in New York City and a Siemens international gateway switch in Washington, D.C.
The Company substantially completed the migration of its traffic from its
Washington, D.C. switch to the New York switch by March 31, 1998. The Company
plans to redeploy the Washington, D.C. switch as a domestic switch by the end of
1998.
The Company also intends to expand its switching capabilities in the United
States by installing a Nortel DMS-250/300 SE international gateway switch in Los
Angeles. This switch has been ordered and is expected to be installed during
1998. The Company's international expansion strategy is also predicated on the
installation of multiple switches throughout the world. The Company plans to
acquire (i) six additional switches during 1998 to be deployed during 1998 and
early 1999 in Chile, France, Germany, Japan, the Netherlands and the United
Kingdom; (ii) nine additional switches during 1999 to be deployed during 1999
and early 2000 in Australia, Belgium, Canada (two), Hong Kong, Italy, Mexico,
Switzerland and Uganda; and (iii) four additional switches in 2000 to be
deployed during 2000 and early 2001 in Argentina, Brazil, India and Singapore.
As the Company executes its expansion strategy and encounters new marketing
opportunities, management may elect to relocate or redeploy certain switches,
P.O.P. sites and other network equipment to alternate locations from what is
outlined above
The Company generally installs switches in regions where it believes it can
achieve one or more of the following goals: (i) originate calls from its own
customer base, (ii) transit calls originated elsewhere on its network to the
call's final destination on a more cost-efficient basis, or (iii) terminate
calls originated and carried on its own network. The Company intends to use the
switches to be installed in Canada and Europe over the next two years primarily
to carry calls originated in those countries by the Company's customers. The
switches that the Company plans to install in Latin America and Japan will be
used both as "hubbing" or transit switches and to terminate calls originated in
other countries. The switches to be installed in Asia (other than Japan) and the
Pacific Rim, such as in Hong Kong and Australia, will be used primarily to
terminate traffic (in the case of Hong Kong), or for hubbing or transit purposes
(in the case of Australia).
Startec Global currently owns IRUs in the Canus-1, Cantat-3, Columbus II
and Gemini digital fiber optic undersea cables, and is a signatory owner on the
Columbus III and Sea-Me-We cable projects. It accesses additional cables and
satellite facilities through arrangements with other carriers. During 1998 and
1999, the Company intends to invest in domestic land-based fiber optic cable
facilities linking the East Coast and West Coast of the United States and in
undersea fiber optic transmission facilities linking North America with Europe,
the Pacific Rim, Asia and Latin America. The Company believes that it may
achieve substantial savings by acquiring additional interests in fiber optic
cable, which would reduce its dependence on leased cable access. Having an
ownership interest rather than a lease interest in such cable enables the
Company to increase its capacity without a significant increase in cost, by
utilizing
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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. In addition to
increasing its interests in fiber optic cable facilities, the Company intends to
invest in or acquire two satellite earth stations in 1998 and 1999, which will
provide it with additional routing flexibility, and the ability to connect with
carriers on lower-volume routes and carriers in countries where international
cable capacity has not yet become available.
Although the Company believes that, with the remaining net proceeds of the
Old Notes Offering, it will have sufficient capital resources to fund its
expansion plans through the end of the first quarter of 2000, the Company's
ability to complete its strategic plan thereafter will require substantial
additional capital. See "Risk Factors -- Future Capital Needs; Uncertainty of
Additional Funding; Discretion in Use of Proceeds of the Old Notes Offering;
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
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 40 carriers. 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. As traffic across its owned facilities
increases, management believes the Company will realize operating efficiencies
and improve its margins.
The Company intends to incorporate additional state-of-the-art facilities
in its network architecture, including Internet protocol telephony. The Company
is evaluating a number of existing products for implementation into its network.
By incorporating this technology, the Company expects to realize lower overall
transmission costs.
Operating Agreements and Other Termination Arrangements
Startec Global 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.
The Company's strategy is based on its ability to enter into and maintain:
(i) operating agreements with PTTs in countries that have yet to become
liberalized so that the Company would then be permitted to terminate traffic in,
and receive return traffic from, that country; (ii) operating agreements with
PTTs and emerging carriers in foreign countries whose telecommunications markets
have liberalized so it can terminate traffic in such countries; (iii) resale
agreements and transit and refile arrangements to terminate its traffic in
countries with which it does not have operating agreements so as to provide the
Company multiple options for routing traffic; and (iv) interconnection
agreements with the PTT in each of the countries where the Company plans to have
operating facilities so that it can terminate traffic in that country. As of
August 31, 1998, Startec Global had operating agreements with 17 PTTs and seven
second network operators. These operating agreements allow the Company to
terminate traffic at lower rates than by resale in markets where it cannot
establish an on-net connection due to the current regulatory environment. The
Company believes that it would not be able to serve its customers at competitive
prices without such operating or interconnection agreements. In addition, these
operating agreements provide a source of profitable return traffic for the
Company. Termination of such operating agreements by certain of the Company's
foreign carriers or PTTs could have a material adverse effect on the Company's
business.
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The following table provides a summary of the Company's current operating
agreements:
COUNTRY CARRIER CARRIER STATUS
- --------------------------------------- --------------------- --------------
Australia ............................. Telstra PTT
Bangladesh ............................ BTTB PTT
Cyprus ................................ CYta PTT
Democratic Republic of Congo .......... AFRITEL SNO
Denmark ............................... Tele Danmark PTT
Dominican Republic .................... Tricom SNO
India ................................. VSNL PTT
Israel ................................ Incom Group SNO
Israel ................................ Bezek PTT
Italy ................................. Telecom Italia PTT
Malaysia .............................. Mutiara Telecom SNO
Malta ................................. Maltacom PTT
Monaco ................................ Monaco Telecom PTT
Netherlands ........................... PTT Netherlands PTT
New Zealand ........................... Telecom New Zealand PTT
Philippines ........................... SMARTCom SNO
Portugal .............................. Marconi Portugal PTT
Russia ................................ Rustelnet SNO
Sao Tome .............................. Companhia Sao Tome PTT
South Korea ........................... One-Tel SNO
Sweden ................................ Telia PTT
Switzerland ........................... Swisscom PTT
Syria ................................. STE PTT
Uganda ................................ UPTC PTT
Network Operations and Technical Support
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, and has developed and uses proprietary
software that enables 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. While the Company
performs the majority of the maintenance of its network, it also has service and
support agreements with Nortel and Siemens covering its New York City and
Washington, D.C. switches. The Company expects to have similar arrangements with
Nortel for its Los Angeles switch. The Company depends upon third parties with
respect to the maintenance of facilities which the Company leases and fiber
optic cable lines in which it has an IRU or other use arrangements.
The Company utilizes 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
the utilization of 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.
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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 uses 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 call data to corporate
headquarters for use in customer service and traffic analysis. The Company
maintains these independent and redundant billing systems in order to 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.
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 the customer's LEC. The Company utilizes a third party
billing company which has arrangements with the LECs 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 its own billing and collection agreements directly with certain LECs, which
management expects will provide the Company with opportunities to reduce the
costs currently associated with billing and collection practices. Carrier
customers are billed directly by the Company.
COMPETITION
The international telecommunications industry is intensely competitive and
subject to rapid change precipitated by changes in the regulatory environment
and advances in technology. The Company's success depends upon its ability to
compete with a variety of other telecommunications providers in the United
States and in each of its international markets, including the respective PTT in
each country in which the Company operates or plans to operate in the future.
Other competitors of the Company include large, facilities-based multinational
carriers such as AT&T, Sprint and MCI WorldCom, smaller facilities-based
wholesale long distance service providers in the United States and overseas that
have emerged as a result of deregulation, switched-based resellers of
international long distance services and global alliances among some of the
world's largest telecommunications carriers, such as Global One (Sprint,
Deutsche Telekom and France Telecom). The telecommunications industry is also
being impacted by a large number of mergers and acquisitions including recent
announcements regarding a proposed joint venture between the international
operations of AT&T and British Telecom, the proposed acquisition of TCI by AT&T,
and the proposed mergers of SBC and Amertech and GTE and Bell Atlantic.
International telecommunications providers such as the Company 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. In general, because the Company is currently a
dial-around provider, its 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, and are especially
price sensitive. In addition, many of the Company's competitors enjoy economies
of scale that can result in a lower cost structure for termination and network
costs, which could cause significant pricing pressures within the international
communications industry. Several long
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distance carriers in the United States have introduced pricing strategies that
provide for fixed, low rates for both international and domestic calls
originating in the United States. Such a strategy, if widely adopted, could have
an adverse effect on the Company's business, financial condition and results of
operations if increases in telecommunications usage do not result or are
insufficient to offset the effects of such price decreases. In recent years,
competition has intensified causing prices for international long distance
services to decrease substantially. Prices are expected to continue to decrease
in most of the markets in which the Company currently competes. The Company
believes, however, that these reductions in prices have been and will continue
to be more than offset by reduction in the cost to the Company of providing such
services. The Company expects that competition will continue to intensify as the
number of new entrants increases as a result of the new opportunities created by
the 1996 Telecommunications Act, implementation by the FCC of the United States'
commitment to the WTO and changes in legislation and regulation in various
foreign target markets. There can be no assurance that the Company will be able
to compete successfully in the future.
The telecommunications industry is also experiencing change as a result of
rapid technological evolution, marked by the introduction of new product and
service offerings and increasing satellite and undersea cable transmission
capacity for services similar to those provided by the Company. Such
technologies include satellite-based systems, such as those proposed by Iridium
LLC and Globalstar, L.P., utilization of the Internet for international voice
and data communications and digital wireless communication systems such as PCS.
The Company is unable to predict which of many possible future product and
service offerings will be important to maintain its competitive position or what
expenditures will be required to develop and provide such products and services.
GOVERNMENT REGULATION
Overview
As a multinational telecommunications company, the Company is subject to
varying degrees of regulation in each of the jurisdictions in which it provides
services, both in the United States and abroad. Applicable laws and regulations,
and the interpretation of such laws and regulations, differ significantly in
these jurisdictions. In addition, the Company may be affected indirectly by the
laws of other jurisdictions insofar as they affect foreign carriers with which
the Company does business. 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. Because regulatory frameworks in many countries are relatively new,
the potential for enforcement action in these countries is difficult to assess.
Any regulatory enforcement action by United States or foreign authorities could
have a material adverse effect on the Company's business, financial conditions
and results of operations. See "Risk Factors - Substantial Government
Regulation." The regulatory framework in certain jurisdictions in which the
Company provides its services is briefly described below.
United States Domestic Regulations
In the United States, the Company's provision of services is subject to the
Communications Act of 1934, as amended, and the FCC regulations thereunder with
respect to interstate and international operations, as well as the applicable
law and regulations of the various states with respect to intrastate operations.
Federal and State Transactional Approvals. The FCC and certain PSCs require
telecommunications carriers to obtain prior approval for assignment or transfer
of control of licenses, corporate reorganizations, acquisitions of operations,
assignments of assets, carrier stock offerings, and assumption of significant
debt obligations. State requirements vary. Such federal and state requirements
may have the effect of delaying, deterring or preventing a change in control of
the Company. Six of the states in which the Company is certificated provide for
prior approval or notification of the issuance of securities by the Company.
Because of time constraints, the Company may not have obtained such approval
from all of these states prior to consummation of the Offering. The Company's
intrastate revenues for the second quarter of 1998 for each of the these states
was less than $5,000 for each such state.
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Federal and State Licenses and Tariffs. The Company is classified as a
non-dominant carrier for domestic services and is not required to obtain
specific prior FCC approval to initiate or expand domestic interstate services.
The Company currently is 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 has adopted a new policy requiring that non-dominant interstate carriers,
such as the Company, eliminate FCC tariffs for domestic interstate long distance
service. Should pending court appeals concerning this new policy 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 agreements with its customers regarding its existing tariffs or face
potential 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 absence of tariffs would require the Company to limit
potential liability by contractual means. 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.
The Company also currently has the certifications required to provide
service in 48 states, and has filed or is in the process of filing requests for
certification in one 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 the Company will succeed. To the
extent that any incidental intrastate service is provided in any state where the
Company has not yet obtained any required certification, the applicable state
commission may impose penalties for any such unauthorized provision of service.
The Company monitors regulatory developments in all 50 states to ensure
regulatory compliance.
Interexchange Competition Under The 1996 Telecommunications Act ("1996
Act"). Under the 1996 Act, RBOCs are permitted to provide out-of-region long
distance (or inter-LATA) services upon receipt of standard state and/or federal
regulator approvals for long distance service. The GTE Operating Companies
("GTOCs") also are permitted to enter the long distance market without regard to
limitations by region. An RBOC may provide in-region long distance services,
however, only after satisfying a 14-point "checklist" for nondiscriminatory
competitive access to its local network. The grant of long distance authority
could permit RBOCs and GTOCs to compete with the Company in the provision of
domestic and international long distance services. To date, the FCC has denied
several applications for in-region long distance authority filed by RBOCs. These
denials remain in effect pending further appeals to the U.S. Court of Appeals
for the D.C. Circuit.
Two RBOCs have recently entered into agreements with long distance service
providers that would allow the RBOCs to provide, indirectly, in-region long
distance services. Both of the proposals have been challenged, on the basis,
among other things, that these RBOCs cannot enter into such partnerships or
agreements until they have satisfied the 14-point checklist. Both of these
challenges are now pending before the FCC. If the partnerships or agreements are
allowed to stand, it may result in RBOCs being allowed to provide interexchange
service in their operating regions sooner than previously expected. The Company
cannot predict the outcome of these proceedings or their possible impact on the
Company.
The 1996 Act also addresses a wide range of other telecommunications issues
that could impact the Company's operations, including, for example, access
charges and universal service. As required by the legislation, the FCC and the
PSCs have initiated a number of proceedings to adopt regulations to implement
the 1996 Act. Many of these regulations have been, and others likely will be,
judicially challenged. It is not possible to assess what impact the 1996 Act,
the rulemakings, or related litigation will have on the Company's business,
financial conditions and results of operations.
Access Charges. To originate and terminate calls, 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 costs of United States
domestic long distance services. Interstate access charges are regulated by the
FCC. Under alternative rate structures being considered by the FCC, LECs would
be permitted to allow volume discounts in the pricing of access charges. PSCs
regulate intrastate access charges. The RBOCs and other local exchange carriers
also have been seeking greater pricing flexibility and reduction
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of intrastate access charges. While the outcome of these proceedings is
uncertain, if LECs are permitted to utilize more flexible rate structures for
access charges, smaller long distance carriers such as the Company, could be
placed at a significant cost disadvantage with respect to larger competitors.
International and Foreign Regulations
WTO Agreement. Pursuant to the WTO Agreement, 69 countries, comprising more
than 90% of the global market for telecommunications services have agreed to
permit varying degrees of competition from foreign carriers.
As a result of the WTO Agreement, telecommunications markets in countries
representing more than 90% of the global telecommunications markets are expected
to be significantly liberalized. As explained further below, implementation of
the WTO Agreement in the United States already has resulted in a lessening of
regulatory burdens on the Company and the facilitation of the Company's
international expansion. Implementation of the WTO Agreement in foreign
countries is expected to create additional competitive opportunities in
international and foreign markets 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 honor their commitments in a timely manner or at all. Also, since
the regulatory frameworks are not yet well established in all countries,
specific foreign regulatory requirements that the Company will face in carrying
out its business plan are not yet known.
U.S. International Authorizations. International common carriers, such as
the Company, are required to obtain authority from the FCC under Section 214 of
the Communications Act to provide international telecommunications services that
originate or terminate in the U.S., and 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,
Kenya, India, Iran, Saudi Arabia, Pakistan, Sri Lanka, South Korea and the
United Arab Emirates. At the same time, the Company also was 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 and international television services to various overseas
points. On August 27, 1997, the Company was granted global facilities-based
Section 214 authorization under streamlined processing rules adopted in 1996 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 Section 214 authorizations and tariff regulation
processes provide for shorter tariff notice and review periods for certain U.S.
international carriers, including the Company, as well as for other streamlined
regulatory requirements for "non-dominant" carriers found to lack market power
on the routes served. The Company is classified by the FCC as a non-dominant
international and domestic carrier.
U.S. International Settlements Policy. All U.S. international switched
services carriers, including the Company, must comply with the FCC's
international settlements policy ("ISP"). The ISP establishes the parameters by
which U.S. carriers and their foreign correspondents settle international
revenues to recover the cost of terminating each other's traffic over their
respective networks. The ISP is designed to eliminate foreign carriers'
incentives and opportunities to discriminate in their operating agreements among
different U.S.-based carriers. Under the ISP, the amount of payments is
determined by applying a "settlement rate" (generally one-half of the negotiated
accounting rate) to net billed minutes for a particular month. Two other
features of the ISP are uniformity, i.e., that accounting rates must be uniform
for all U.S. carriers interconnecting with a particular country, and
proportionate return, i.e., that each U.S. carrier may accept return traffic
from a foreign country only in the same proportion as its share of total U.S.
traffic delivered to that country. The FCC is currently considering whether to
discontinue applying the ISP to arrangements between U.S. carriers and: (1) any
foreign carrier from a WTO member country that lacks market power on the
relevant route; and (2) any foreign carrier from a WTO member country with a
liberalized market.
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The precise terms of settlement between a U.S. carrier and a foreign
correspondent carrier, as well as the terms and conditions for the provision of
service, are established in an "operating agreement." The Company has operating
agreements with correspondents in 24 countries. U.S. international carriers,
including the Company, are required to file copies of operating agreements with
the FCC within 30 days of execution. The Company has filed 21, and will timely
file the remaining three, of its operating agreements with the FCC. The FCC is
currently considering whether to allow carriers to obtain authority to enter
into flexible settlement arrangements without naming the foreign correspondent
and without filing the terms and conditions of the actual agreement under
certain circumstances.
Consistent with the ISP, the FCC has prohibited U.S. carriers from agreeing
to accept special concessions from foreign carriers or administrations. The no
special concessions rule currently prohibits only those exclusive arrangements
granted to a U.S. carrier by a foreign correspondent with market power and that
affect traffic flow to or from the U.S. The FCC is currently considering
modifications to the no special concession rule in light of the proposal to
modify the ISP. However, a U.S. carrier may negotiate an accounting rate that is
lower than the accounting rate offered to any other U.S. carrier on the same
route, upon the filing of a notification letter with the FCC. If the U.S.
carrier negotiating the lower rate does not already have an operating agreement
in effect with the foreign carrier, the U.S. carrier must file a request with
the FCC to modify the accounting rate for that country. U.S. carriers 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.
Additionally, in 1996, the FCC established an alternative settlements policy
permitting U.S. companies to be authorized to enter into non-uniform settlement
arrangements with carriers from countries that meet the effective competitive
opportunities ("ECO") test or where the U.S. carrier can demonstrate that an
alternative settlement arrangement would promote competition. Recently, the FCC
has further liberalized this policy, replacing the ECO test with a rebuttable
presumption in favor of alternative arrangements for 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 ceilings for
prices that U.S. carriers should pay for international settlements. Certain
foreign carriers have challenged the FCC decision in court appeals as well as
petitions for reconsideration filed with the FCC. These proceedings are
currently pending. 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.
U.S. Policies on Alternative Routing Through Transiting, Refiling and ISR.
The FCC is currently considering whether to limit or prohibit certain procedures
whereby a carrier routes, through facilities in a third or intermediate country,
traffic originating from one country and destined for another country. The FCC
has permitted third country calling under certain pricing and settlement rules,
where all countries involved consent to this type of routing arrangement,
referred to as "transiting." Under certain arrangements referred to as
"refiling," however, traffic appears to originate in the intermediate country
and the carrier in the ultimate destination country does not expressly 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, which avoid settlements between the actual originating and
destination countries, comport either with United States or ITU regulations. A
1995 petition for a declaratory ruling on these issues remains pending. It is
possible that the FCC may determine that transiting or refiling violates United
States and/or international law.
The FCC decides on a case-by-case basis whether to grant Section 214
authority to United States carriers to resell international private lines for
the provision of switched services interconnected on one or both ends to the
public network ("International Simple Resale" or "ISR"). To date, the FCC has
Under new rules implementing the WTO Agreement, the FCC will authorize the
provision of ISR
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between the U.S. and a WTO member country if either the settlement rates for at
least 50% of the settled U.S.-billed traffic between the United States and that
country are at or below the FCC's benchmark settlement rate for that country or
the country satisfies the FCC's equivalency test. The FCC will authorize ISR
between the United States and a non-WTO member country only if both the
settlement rates for at least 50% of the settled U.S.-billed traffic between the
United States and that country are at or below the relevant benchmark and the
country satisfies the FCC's equivalency test. To date, the FCC has granted U.S.
carriers ISR authority to Australia, Austria, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Sweden,
Switzerland and the U.K. The FCC has found that equivalent resale opportunities
do not exist in Chile or Hong Kong. Once ISR authority for a particular country
has been granted to one U.S. telecommunications operator, the Company will also
be able to provide ISR to the same country over resold facilities. The FCC is
currently considering permitting carriers to provide ISR for a limited amount of
traffic on routes where it would otherwise not authorize the provision of ISR.
U.S. Reporting Requirements. The FCC's international service rules require
the Company to file periodically a variety of reports regarding its
international traffic flows and use of international facilities. The Company has
filed each of its annual circuit status and traffic data reports. 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.
United States Foreign Entry and Foreign Affiliate Rules. The FCC's rules
implementing the WTO Agreement generally ease restrictions on entry by foreign
telecommunications operators from WTO member countries into the United States
and streamline FCC regulation of such operators. Foreign entry restrictions and
full FCC regulation remain in effect for foreign telecommunications operators
from non-WTO countries. There are no limits on foreign ownership except that the
Communications Act limits the foreign ownership of an entity holding a common
carrier radio license. The Company does not currently hold any radio licenses.
The FCC regulates the ability of United States international carriers
affiliated with foreign carriers to serve markets where the foreign affiliate is
dominant. The FCC presumes a foreign-affiliated U.S. carrier to be dominant on
foreign routes where the foreign affiliate is a monopoly or has more than 50%
market share in international or local telecommunications. A U.S. carrier
affiliated with a dominant foreign carrier may still be entitled to streamlined
regulation by the FCC if it agrees to be regulated as dominant on routes between
the United States and the country of the foreign affiliate. Moreover, as a
result of the WTO Agreement, the FCC has adopted a rebuttable presumption in
favor of entry into the U.S. market by foreign carrier affiliates from WTO
member countries. The presumption can be rebutted if the foreign country of the
affiliate does not meet FCC settlement rate benchmarks. 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. Previously U.S. carriers were required to report any
investment by a foreign carrier of 10% or greater, and the Company has reported
the 15% investment in the Company by an affiliate of Portugal Telecom, a foreign
carrier from a WTO member country and a signatory to the WTO Agreement.
U.S. Regulation of Internet Telephony. The Company knows of no domestic or
foreign laws that prohibit voice communications over the Internet. In December
1996, the FCC initiated a Notice of Inquiry (the "Internet NOI") regarding
whether to impose regulations or surcharges upon providers of Internet access
and information services. The Internet NOI specifically identifies Internet
Telephony as a subject for FCC consideration. In April 1998, the FCC filed a
report with Congress stating that Internet access falls into the category of
information services, and hence should not be subject to common carrier
regulation, including the obligation to pay access charges, but that the record
suggests that some forms of Internet Telephony may be more like
telecommunications services then information services, and hence subject to
common carrier regulation. In addition, several efforts have been made to enact
federal legislation that would either regulate or exempt from regulation
services provided over the Internet. State public utility commissions may also
retain jurisdiction to regulate the provision of intrastate
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Internet telephone services. If a foreign government, Congress, the FCC, or a
state utility commission begins to regulate Internet Telephony, there can be no
assurances that any such regulation will not materially adversely affect the
Company's business, financial condition or results of operations. The Company
cannot predict the likelihood that state, federal or foreign governments will
impose additional regulation on the Company's Internet-related services, nor can
it predict the impact that future regulation will have on the Company's
operations.
European Union Regulations
The EU's 15 member states (Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain,
Sweden and the U.K.) are free to regulate their respective telecommunications
markets subject to compliance with any EU and WTO rules. EU legislative
initiatives in this area aim at ensuring a harmonized regulatory framework and
an open, competitive telecommunications market throughout the EU.
In March 1996, the EU adopted the "Full Competition Directive" requiring EU
member states to allow the creation of alternative telecommunications
infrastructures by July 1, 1996, and to abolish the PTTs' monopolies in voice
telephony by January 1, 1998. Certain EU countries may delay the abolition of
the voice telephony monopoly based on exemptions established in the Full
Competition Directive. These countries include Luxembourg (July 1, 1998), Spain
(November 30, 1998), Portugal and Ireland (January 1, 2000) and Greece (December
31, 2000). As a complement to the Full Competition Directive, the EU issued two
further important Directives in 1997: the "Licensing Directive" and the
"Interconnection Directive".
The Licensing Directive sets out framework rules for the national
authorizations for telecommunications services and networks. In practice,
however, these authorization requirements still vary considerably from country
to country, and certain EU countries have introduced or are likely to introduce
licensing requirements that are disproportionate. This could have a material
adverse effect on the Company's future operations in the EU. The Interconnection
Directive sets out rules to secure the interconnection of telecommunications
networks in the EU. Telecommunications operators that may invoke rights to
interconnect under this regime are primarily those operating a transmission
network. Operators that provide telecommunications services but do not have
their own network facilities do not enjoy full interconnection rights, but may
benefit from "access rights", which are generally more limited and less clearly
defined than interconnection rights. The new interconnection regimes in several
EU member states reflect this discrimination against telecommunications service
providers that do not have their own network. Therefore, for as long as the
Company does not operate as an authorized network operator in the EU, it may not
be in a position to benefit directly from the optimum interconnection regime in
the EU. Similar discriminations currently exist in several EU countries with
respect to prefixes that may be used for "dial-around" or "casual calling". It
is generally easier for large network operators with nationwide domestic
coverage to obtain short prefixes for such calls. New entrants with limited
facilities are generally entitled to longer prefixes.
Despite various EU regulatory initiatives supporting the liberalization of
the telecommunications market, most EU Member States are still in the initial
stages of liberalizing their telecommunications markets and establishing
competitive regulatory structures to replace the monopolistic environment in
which the PTTs previously operated. For example, most EU member states have only
recently established a national regulatory authority. In addition, the
implementation, interpretation and enforcement of these EU directives differs
significantly among the EU Member States. While some EU Member States have
embraced the liberalization process and achieved a high level of openness,
others have delayed the full implementation of the directives and maintain
several levels of restrictions on full competition.
The Company is also subject to general European law, which, among other
things, prohibits certain anti-competitive agreements and abuses of dominant
market positions through Articles 85 and 86 of the Treaty of Rome. The EU has
introduced strict rules governing the processing of personal data by private
parties, including telecommunications operators. Among other restrictions, the
EU data protection regime does not allow the processing of data revealing ethnic
origin without the explicit consent of the
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data subject. Moreover, Member States are allowed to prohibit such processing
even if the data subject has given its explicit consent. Furthermore, EU data
protection rules prohibit the transfer of personal data to third countries that
do not ensure an adequate level of data protection. The United States is likely
to be included among these countries. These restrictions may have a material
adverse effect on the Company's database marketing techniques and its ability to
target customers in the EU.
United Kingdom. The Company has an International Facilities License
("IFL"), which entitles it to run its own international telecommunications
systems in the UK.
The Company appears on the Office of Telecommunications list (as of March
24, 1998) of operators deemed to have rights and obligations to interconnect (to
other telecommunications operators networks) pursuant to "Annex II" of the EU
Interconnection Directive. Currently, the main implication of the Company's
"Annex II" status is that it is entitled to wholesale interconnect rates from
British Telecommunications, plc., the former monopoly provider.
In addition to the obligations imposed on Startec Global (as a licensed
telecommunications operator) by the Telecommunications Act 1984, the Company is
also subject to general UK and European Union law as well as specific EU
telecommunications and competition legislation.
Switzerland. The Company has recently received approval for an
International Simple Resale ("ISR") License, which will allow it to resell
traffic originating in Switzerland.
Regulations In Other Jurisdictions
The Company's ability to enter a foreign Country's telecommunications
market depends upon, among other things, the extent to which that country
permits access by United States carriers. As previously noted, pursuant to the
WTO Agreement, the telecommunications markets of countries representing more
than 90% of the global market in telecommunications services have committed in
varying degrees to allow telecommunications suppliers from WTO countries access
to their domestic and international markets. Although most WTO member states
have embraced the liberalization process and should achieve a high level of
openness, some have delayed full implementation of their respective commitments
under the WTO Agreement and maintain several levels of restrictions on full
competition. In addition, a number of countries have committed to open certain
telecommunications markets to competition in future years rather than
immediately.
The countries that the Company plans to enter in 1998 include Chile and
Japan. Although Chile has not yet formally ratified the WTO Agreement, both
Chile and Japan have committed to allow full competition in domestic and
international long distance services in 1998 and have taken significant steps to
implement their commitments. The countries that the Company plans to enter in
1999 (including
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Australia, Canada, Hong Kong and Mexico) and in 2000 (including Argentina,
Brazil, India and Singapore), are in the process of liberalizing, in varying
degrees, certain telecommunications services in their respective jurisdictions
based on the WTO Agreement. Although implementation of the WTO Agreement should
create significant competitive opportunities in each of these countries, there
can be no assurance that these countries will honor their commitments in a
timely manner or at all. Moreover, since the regulatory frameworks are not yet
well established in all of these countries, the specific regulatory requirements
that the Company will face in these countries in carrying out its business plan
are not yet known.
EMPLOYEES
As of August 31, 1998, the Company had 244 full-time employees and 83
part-time employees. None of the Company's employees are currently represented
by a collective bargaining agreement. Management believes that the Company's
relationship with its employees is good.
PROPERTIES
The Company's headquarters are located in approximately 46,000 square feet
of space in Bethesda, Maryland. The Company leases this space under an agreement
which expires October 31, 2002. The Company also is a party to a co-location
agreement pursuant to which it has the right to occupy certain space in
Washington, D.C. as a site for its switching facilities. In addition, the
Company 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 month-to-month basis, and the New York
City co-location agreement has a five-year initial term expiring in 2002, 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 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 results of operations.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding the Company's
directors, executive officers and key employees as of August 31, 1998.
Directors and Executive Officers
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- ----- --------------------------------------------------
<S> <C> <C>
Ram Mukunda ................. 39 President, Chief Executive Officer, Treasurer and
Director
Prabhav V. Maniyar .......... 39 Senior Vice President, Chief Financial Officer,
Secretary and Director
Nazir G. Dossani ............ 56 Director
Richard K. Prins ............ 41 Director
Vijay Srinivas .............. 45 Director
</TABLE>
Certain Key Employees
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- ----- ---------------------------------------------------
<S> <C> <C>
Anthony Das .............. 44 Vice President of Corporate and International
Affairs
Subhash Pai .............. 32 Vice President, Controller and Assistant Secretary
Gustavo Pereira .......... 44 Vice President of Engineering
Dhruva Kumar ............. 28 Vice President of Global Carrier Services
Tracy Behzad ............. 35 Vice President of Human Resources
Ron Vassallo ............. 32 Director, Global Marketing
</TABLE>
RAM MUKUNDA is the founder of Startec Global. Prior to founding STARTEC in
1989, Mr. Mukunda was an Advisor in 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. Prior to joining INTELSAT, he
worked as a fixed-income analyst with Caine, Gressel. 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 Global 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 known 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 joined Startec Global as a director in October 1997 at
the completion of the Initial Public 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 Science from
the University of Pennsylvania and an M.B.A. from the Wharton School of the
University of Pennsylvania.
RICHARD K. PRINS joined Startec Global as a director in October 1997 at
the completion of the Initial Public 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 of Path Net, Inc., a domestic telecommunications company, and The
Association for Corporate Growth, National Capital Chapter.
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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.
ANTHONY DAS joined Startec Global in February 1997 and is Vice President of
Corporate and International Affairs. 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.
SUBHASH PAI joined Startec Global in January 1992 and serves as Vice
President, Controller and Assistant Secretary. He is a CA/CPA. Prior to joining
the Company, Mr. Pai held various positions with a multinational shipping
company.
GUSTAVO PEREIRA joined Startec Global 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.
DHRUVA KUMAR joined Startec Global in April 1993 and is Vice President of
Global Carrier Services. Prior to managing the Carrier Services group, Mr. Kumar
held a series of progressively more responsible positions within the Company.
TRACY BEHZAD joined Startec Global in January 1998 and is Vice President of
Human Resources. Ms. Behzad's background includes over 15 years of progressively
responsible positions in human resources management, including experience in
labor relations and in the development of human resources departments within
organizations.
RON VASSALLO joined Startec Global in January 1998 and serves as Director,
Global Marketing. Prior to joining the Company, Mr. Vassallo was Vice President
and a founding partner of MultiServices, Inc., a strategic marketing firm, and
General Manager of World Access, Inc., an international affinity marketing
company.
CLASSIFIED BOARD OF DIRECTORS
Pursuant to its Articles of Incorporation, 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. Upon completion of the Reorganization, the Company will continue to have
a classified Board of Directors. See "Risk Factors -- Control of Company by
Current Stockholders."
COMMITTEES OF THE BOARD
The Board of Directors has established two standing committees: the Audit
Committee and the Compensation Committee.
The Audit Committee is 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. Messrs. Dossani and Prins currently serve as the
members of the Audit Committee.
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The Compensation Committee is 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 also
administers the Amended and Restated Option Plan and 1997 Performance Incentive
Plan. Messrs. Dossani and Prins currently serve as the members of the
Compensation Committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the completion of the Initial Public Offering, the Board of
Directors did not have a Compensation Committee or committee performing a
similar function. Accordingly, the entire Board of Directors, including
directors who are executive officers of the Company, historically had made all
determinations concerning compensation of executive officers. As discussed above
under "-- Committees of the Board," the Board of Directors has established a
Compensation Committee which consists entirely of directors who are not
employees of the Company.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This report is not deemed to be "soliciting material" or deemed to be
"filed" with the Commission or subject to the Commission's proxy rules or to the
liabilities of Section 18 of the Exchange Act, and the report shall not be
deemed to be incorporated by reference into any prior or subsequent filing by
the Company under the Securities Act or the Exchange Act.
General. In connection with its Initial Public Offering, the Company formed
a Compensation Committee of the Board of Directors consisting of Messrs. Prins
and Dossani. The Compensation Committee evaluates and recommends to the Board
the base salary and incentive compensation for the Chief Executive Officer of
the Company, as well as its senior officers. The Compensation Committee also
administers and grants awards under the 1997 Plan. The Committee consists solely
of non-employee directors whose participation in the 1997 Plan is under the
control of the Board. The Committee intends to retain a professional consultant
to research the executive compensation levels of similar companies and to assist
and advise it in the future in the setting of the Company's own executive
compensation levels.
Executive Compensation. The Company's executive compensation program as
implemented by the Compensation Committee is intended to provide a competitive
compensation program that will enable the Company to attract, retain and reward
experienced and highly motivated executive officers who have the skills,
experience and talents required to promote the short- and long-term financial
performance and growth of the Company. The compensation policy is generally
based on the principle that the financial rewards to the executive must be
aligned with the financial interests of the stockholders of the Company.
Officers of the Company are paid salaries in line with their
responsibilities and generally comparable to industry standards. Senior officers
are also eligible to receive discretionary bonuses based upon the overall growth
in revenue and profit and the performance of the Company. Likewise, stock option
or other stock-based awards to officers and other employees are intended to
promote the success of the Company by aligning employee financial interests with
long-term stockholder value. Such awards are generally based on various
subjective factors primarily relating to the responsibilities of the individual
officers or employees, and also their expected future contributions and prior
awards.
The Committee will consider establishing standard salary ranges for all
executive positions below the level of the chief executive officer in the future
with the assistance of experienced compensation consultants. These salary ranges
will be developed in coordination with such consultants and the Company's human
resources staff from surveys using competitive market data from similarly sized
companies in the telecommunications industry, as well as other industry groups.
An executive's salary within these ranges will depend upon the executive's
experience and capabilities, the executive's unique talents and strengths and
the executive's overall contribution to the Company.
Compensation of the Chief Executive Officer. The Compensation Committee
will annually review and approve the compensation of Mr. Mukunda, the Chief
Executive Officer of the Company. The compensation package for the Chief
Executive Officer includes elements of base salary, annual incentive
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compensation and long-term incentive compensation. Mr. Mukunda's total
compensation is designed to be competitive within the industry while creating
rewards for short- and long-term performance in line with the financial
interests of the Company's stockholders.
With regard to Mr. Mukunda's compensation, the Committee considers in
particular the Company's performance as evidenced by changes in the market price
of the Common Stock during the year as compared to changes in the
telecommunications industry and the broader economic environment. Mr. Mukunda is
a significant stockholder in the Company, and to the extent his performance as
Chief Executive Officer translates into an increase in the value of the Common
Stock, all Company stockholders, including him, share the benefits. The
Committee also considers the Chief Executive Officer's leadership in continuing
to improve the strategic position of the Company and its positive financial
performance during 1997 with respect to revenue growth, expense control, net
income, and earnings per share, compared to other telecommunications companies.
Section 162(m). The Commission requires that this report comment upon the
Company's policy with respect to Section 162(m) of the Code, which limits the
deductibility on the Company's tax return of compensation over $1 million to any
of the named executive officers of the Company unless, in general, the
compensation is paid pursuant to a plan which is performance related,
non-discretionary and has been approved by the Company's stockholders. The
Company's policy with respect to Section 162(m) is to make every reasonable
effort to insure that compensation is deductible to the extent permitted, while
simultaneously providing Company executives with appropriate awards for their
performance. None of the Company's executives earned sufficient compensation
income in 1997 nor are any of the Company's executives anticipated to have
sufficient compensation in the near future to be subject to Section 162(m). The
Compensation Committee, however, reserves the right to use its judgment, where
merited by the Committee's need for flexibility to respond to changing business
conditions or by an executive's individual performance, to authorize
compensation which may not, in a specific case, be fully deductible by the
Company.
Conclusion. The Compensation Committee intends to base its executive
compensation practices on stock price and other financial performance criteria,
as well as on its qualitative evaluation of individual performance. In addition,
the Committee will augment these components of the compensation process with
quantitative measures of individual performance. The Committee believes that its
compensation policies promote the goals of attracting, motivating, rewarding and
retaining talented executives who will maximize value for the Company's
stockholders.
THE COMPENSATION COMMITTEE
Nazir G. Dossani
Richard K. Prins
COMPENSATION OF DIRECTORS
Currently, the Company's directors do not receive cash compensation for
their service on the Board of Directors. In the future, however, directors who
are not executive officers or employees of the Company may receive meeting fees,
committee fees and other compensation relating to their service. The Company's
practice is to grant to each member of the Board of Directors who is not an
officer of the Company an award of options to purchase 5,000 shares of Company
Common Stock upon joining the Board and an additional option to purchase 2,000
shares of Company Common Stock per year of service 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 table sets forth certain summary information concerning
compensation for services in all capacities awarded to, earned by or paid to,
the Company's Chief Executive Officer and the other most highly compensated
officers of the Company, whose aggregate cash and cash equivalent compensation
exceeded $100,000 (the "Named Officers"), with respect to the last three fiscal
years.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------------------------- ---------------------------------------
OTHER RESTRICTED SECURITIES ALL
NAME AND ANNUAL STOCK UNDERLYING OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARDS($) OPTIONS(#) COMPENSATION
- ----------------------------- ------ ---------------- ---------- ----------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ram Mukunda ................. 1997 345,833(1) -- 30,800(2) -- -- --
President & Chief 1996 165,872 -- 18,000(2) -- -- --
Executive Officer 1995 150,000 -- -- -- -- --
Prabhav Maniyar(3) .......... 1997 149,585 -- -- -- 157,616 --
Chief Financial Officer & 1996 -- -- -- -- -- --
Secretary 1995 -- -- -- -- -- --
Gustavo Pereira(4) .......... 1997 110,000 -- -- -- 7,500 --
Vice President--Engineering 1996 110,000 -- -- -- -- --
1995 32,000 -- -- -- -- --
</TABLE>
- ----------
(1) Includes $150,000 accrued salary for prior periods.
(2) This amount includes the value of an automobile allowance.
(3) Mr. Maniyar joined the Company in January 1997.
(4) Mr. Pereira joined the Company in August 1995.
STOCK OPTION GRANTS
The following table sets forth certain information regarding grants of
options to purchase Common Stock made by the Company during the fiscal year
ended December 31, 1997 to each of the Named Officers. No stock appreciation
rights were granted during fiscal 1997.
OPTION GRANTS IN 1997 -- INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL RATES
OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE/ EXPIRATION ---------------------
NAME GRANTED(#) 1997(%)(1) SHARE($)(2) DATE 5% 10%
- ------------------------- ------------ -------------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ram Mukunda ............. -- -- -- -- -- --
Prabhav Maniyar ......... 107,616 16.10 1.85 1/19/2007 125,206 317,297
50,000 7.48 10.00 8/17/2007 314,447 796,871
Gustavo Pereira ......... 7,500 1.12 10.00 8/17/2007 47,167 119,530
</TABLE>
- ----------
(1) During 1997, the Company granted options to purchase a total of 668,366
shares of Common Stock.
(2) The exercise price was equal to the fair market value of the shares of
Common Stock underlying the options on the date of grant.
(3) Amounts reflected in these columns represent amounts that may be realized
upon exercise of options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on the
Common Stock over the term of the options. Actual gains, if any, on the
stock option exercises and Common Stock holdings are dependent upon the
timing of such exercise and the future performance of the Common Stock.
There can be no assurance that the rates of appreciation assumed in this
table can be achieved or that the amounts reflected will be received by the
holder of the option.
OPTION EXERCISES AND HOLDINGS
The following table sets forth certain information as of December 31, 1997
regarding the number and year end value of unexercised options to purchase
Common Stock held by each of the Named Officers. No stock appreciation rights
were exercised during fiscal 1997.
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FISCAL 1997 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED "IN-THE-MONEY"
OPTIONS AT FISCAL OPTIONS AT
YEAR END(#) FISCAL YEAR-END
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE ($)(1)
- ------------------------- --------------------------- ---------------------------------
<S> <C> <C>
Ram Mukunda ............. -- --
Prabhav Maniyar ......... 107,616/50,000 2,208,818/618,750
Gustavo Pereira ......... 0/7,500 0/92,813
</TABLE>
- ----------
(1) Options are "in-the-money" if the fair market value of underlying
securities exceeds the exercise price of the options. The amounts set forth
represent the difference between $22.375 per share, the fair market value
of the Common Stock issuable upon exercise of options at December 31, 1997
and the exercise price of the option, multiplied by the applicable number
of shares underlying the options. On July 31, 1998, the closing price of
the Company Common Stock was $11.00.
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 per year, is entitled to
participate in the Company's 1997 Performance Incentive Plan, is eligible to
receive a bonus of up to 40% of his base salary, as determined by the
Compensation Committee of Board of Directors of the Company based upon the
financial and operating performance of the Company, and is entitled to receive
an automobile allowance of $1,500 per month. In addition, the Mukunda Employment
Agreement provides that if there is a "Change of Control" (as defined herein),
Mr. Mukunda will receive, for the longer of 12 months or the balance of the term
under his employment agreement (which initially could be for a period of up to
three years), the following benefits: (1) a severance payment equal to $20,830
per month; (2) a pro rata portion of the bonus applicable to the calendar year
in which such termination occurs; (3) all accrued but unpaid base salary and
other benefits as of the date of termination; and (4) such other benefits as he
was eligible to participate in at and as of the date of termination.
The Company also entered into an employment agreement with Prabhav Maniyar
on July 1, 1997 (the "Maniyar Employment Agreement"), pursuant to which Mr.
Maniyar holds the positions of Senior Vice President, Chief Financial Officer
and Secretary of the Company, is paid an annual base salary of $175,000 per
year, is entitled to participate in the Company's 1997 Performance Incentive
Plan, is eligible to receive a bonus of up to 40% of his base salary, as
determined by the Compensation Committee of Board of Directors of the Company
based upon the financial and operating performance of the Company, and is
entitled to receive an automobile allowance of $750 per month. In addition, the
Maniyar Employment Agreement provides that if there is a "Change of Control" (as
defined herein), 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.
For purposes of the Mukunda Employment Agreement and the Maniyar Employment
Agreement, a "Change of Control" shall be deemed to have occurred 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
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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 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.
The Board of Directors in consultation with the Compensation Committee
recently approved increases in the Compensation of Messrs. Mukunda and Maniyar,
which increases are consistent with compensation levels of other comparable
companies in the telecommunications industry. Effective July 1, 1998 Mr.
Mukunda's annual base salary was increased to $325,000 and Mr. Maniyar's annual
base was increased to $225,000.
STOCK OPTION PLANS
Amended and Restated 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 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
"Amended and 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 Amended and 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. All such options terminate and
expire 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. Pursuant to resolution of the
Board of Directors, no further awards may be made under the Amended and Restated
Option Plan. As of August 31, 1998, options to purchase a total of 7,950 shares
of Common Stock were outstanding under the Amended and 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 is administered by the Compensation
Committee of the Board of Directors. The Board of Directors recently adopted
and, at the annual stockholder meeting on July 31, 1998, the Company's
stockholders approved, an amendment and restatement of the Performance Plan
that, among other things, increases the number of shares available for issuance
thereunder to an amount equal to 18.5% of the issued and outstanding shares of
Common Stock (determined at the time of grant on an award under the Performance
Plan). Based upon the presently outstanding 8,964,315
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<PAGE>
shares of Common Stock, the Performance Plan would authorize awards of up to
1,658,398 shares of Common Stock. 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. 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. As of August 31, 1998,
options to purchase a total of 510,900 shares of Common Stock were outstanding
under the Performance Plan.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Company's current charter and Bylaws (the "Maryland 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 Maryland 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 Maryland Charter further provides that
the Company may, by action of its Board of 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 maintains 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 Maryland 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 Articles of Incorporation, 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.
Upon completion of the Reorganization, the Company will be governed by the
laws of the State of Delaware as well as a new charter and bylaws (together, the
"Delaware Charter").
The Delaware Charter incorporates indemnification provisions to the maximum
extent permitted by Delaware law and provides that directors, officers,
employees and other individuals shall be indemnified against liability to the
Company or its stockholders, other than an action by or in the right of the
Company, if the indemnified person acted in good faith and in a manner such
person reasonably believed to be in or
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not opposed to the best interests of the Company and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. With respect to this standard, under Delaware law,
termination of any proceeding by conviction or upon a plea of nolo contendre or
its equivalent, shall not, of itself, create a presumption that such person is
prohibited from being indemnified. In the event of any action by or in the right
of the Company, indemnification extends only to expenses incurred in connection
with defense or settlement of such an action. In addition, under Delaware law,
upon court approval, a corporation may indemnify an individual found liable to
the corporation, whereas under Maryland law, a corporation may not indemnify an
individual who has been found liable to the corporation in a proceeding brought
by or in the right of the corporation or on the basis that a personal benefit
was improperly received except, as specified above, for expenses upon a court
order.
Delaware law states that the indemnification provided by statute shall not
be deemed exclusive of any other rights under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise. Under Delaware law,
therefore, the Company is permitted to enter into indemnification agreements
with its directors. Under Delaware law, directors' liability for monetary
damages cannot be limited by the charter for (i) breaches of their duty of
loyalty to the Company and its stockholders; (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law;
(iii) monetary damages relating to willful or negligent violations regarding the
prohibition on the payment of unlawful dividends or unlawful stock purchases or
redemptions; or (iv) transactions from which a director derives improper
personal benefit. The liability of officers may not be limited under Delaware
law, unless the officers are also directors. In contrast, under Maryland law,
the charter of a corporation may include any provision expanding or limiting the
liability of its directors and officers to the corporation and its stockholders.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of August 31, 1998,
regarding beneficial ownership of the Company's Common Stock, by (i) each person
or group known by the Company to beneficially own more than 5% or more of the
Common Stock; (ii) each director of the Company; (iii) each executive officer of
the Company that is a Named Officer; 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>
NUMBER OF SHARES
BENEFICIALLY PERCENT OF
BENEFICIAL OWNER(1) OWNED(2) CLASS
- --------------------------------------------------------------------- ----------------- -----------
<S> <C> <C>
Ram Mukunda ......................................................... 3,583,675 40.1%
Blue Carol Enterprises Ltd(3) ....................................... 807,124 9.0%
Vijay Srinivas(4) ................................................... 311,200 3.5%
Prabhav V. Maniyar .................................................. 118,616 1.3%
Nazir G. Dossani(5) ................................................. 14,000 *
Richard K. Prins(6) ................................................. 51,000 *
All directors and executive officers as a group (5 persons) ......... 4,078,491 45.5%
</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 July 31, 1998, 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) The address of Blue Carol Enterprises Ltd. is 930 Ocean Center Harbour
City, Kowloon, Hong Kong. Blue Carol Enterprises Ltd. is an affiliate of
Portugal Telecom International.
(4) Such shares are held by Mr. Srinivas and his wife as joint tenants. Mr. and
Mrs. Srinivas are the brother-in-law and sister of Ram Mukunda, the
Company's President and Chief Executive Officer.
(5) Consists of options to purchase 5,000 shares of Common Stock.
(6) Consists of options to purchase 5,000 shares of Common Stock and a warrant
to purchase 33,000 shares of Common Stock. In addition, Mr. Prins is a
Senior Vice President of Ferris, Baker Watts, Incorporated, one of the
underwriters of the Initial Public Offering, which received warrants to
purchase up to 150,000 shares of the Common Stock in connection with the
closing of Initial Public Offering, of which Mr. Prins received the warrant
to purchase 33,000 shares referred to above.
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<PAGE>
COMPARATIVE STOCK PERFORMANCE
The graph below compares the cumulative total stockholder return on the
Common Stock for the period from October 9, 1997 (the date the Common Stock
began trading on the Nasdaq/National Market) through December 31, 1997 with the
cumulative total return on (i) the "NASDAQ-US Index", and (ii) the "NASDAQ
Telecommunications Index." The comparisons assume the investment of $100 on
October 9, 1997 in the Common Stock and in each of the indices and, in each
case, assumes reinvestment of all dividends. The Company has not paid any
dividends on the Common Stock and does not intend to do so in the foreseeable
future. The performance graph is not necessarily indicative of future
performance.
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
MONTHLY CUMULATIVE TOTAL VALUES($)*
------------------------------------------------------------------------
1997 THE NASDAQ THE NASDAQ
MONTH-END THE COMPANY STOCK MARKET -- U.S. INDEX TELECOMMUNICATIONS INDEX
- ------------------ ------------- ---------------------------- -------------------------
<S> <C> <C> <C>
10/31/97 ......... 88.81 91.28 95.44
11/28/97 ......... 95.52 91.68 95.79
12/31/97 ......... 133.58 89.95 99.27
</TABLE>
- ----------
* Assumes $100 invested on October 9, 1997 in Common Stock or an index,
including reinvestment of dividends.
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<PAGE>
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 9% of the outstanding shares of Common Stock, for
the purchase and sale of long distance services. Revenues generated from this
affiliate amounted to approximately $1,035,000, $1,501,000 and $1,900,000, or
10%, 5% and 2% of the Company's total revenues for the years ended December 31,
1995, 1996 and 1997, respectively. Services provided to the Company by this
affiliate amounted to approximately $134,000, $663,000 and $680,000 of the
Company's costs of services for the years ended December 31, 1995, 1996 and
1997, respectively. The Company also has a lease agreement with an affiliate of
Blue Carol, Companhia Portuguesa Radio Marconi, S.A. ("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.
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. No services were provided in 1997 or the first two quarter of
1998. Accounts receivable from EAA were $167,000 and $64,000 as of December 31,
1995 and 1996, respectively. 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, which amounts were repaid in July 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%.
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.
During the second quarter of 1998, the Company made loans to certain of its
employees, including executive officers. These loans were all made on
substantially the same terms, including interest rates. In this regard, the
Company advanced an aggregate of $736,676 to such employees, including $550,000
to the Company's Senior Vice President and Chief Financial Officer, Prabhav V.
Maniyar, in connection with the exercises of certain outstanding options to
purchase Common Stock and the payment of taxes related thereto. The loans bear
interest at a rate of 7.87% per year with interest payable quarterly in arrears.
Principal and any unpaid interest are due and payable on December 31, 1998, and
may not be pre-paid. The loan to Mr. Maniyar is secured by a pledge of all of
his assets other than assets that may be subject to any pre-existing security
interests.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company is currently 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. Upon completion of the Reorganization, the Company will
be authorized to issue 40,000,000 shares of Common Stock, par value $.01 per
share, and 1,000,000 shares of preferred stock, par value $1.00 per share.
As of August 31, 1998, there were 8,964,315 shares of Common Stock
outstanding, held of record by 41 stockholders. In addition, as of August 31,
1998, options, warrants and other rights to purchase an aggregate of 1,138,976
shares of Common Stock were outstanding, of which 454,480 were currently
exercisable.
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 fully paid and nonassessable.
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.
REGISTRATION RIGHTS
Certain holders of outstanding warrants (other than the Warrants) and
shares of Common Stock have the right to request the Company to register their
shares under the Securities Act. First Union, as the successor to Signet Bank,
has the right to request the Company to register 269,900 shares of Common Stock
underlying their warrants on two occasions. In addition, the holders of warrants
to purchase Common Stock that were issued to the representatives of the
underwriters of the Company's initial public offering have the right to request
the Company to register the 150,000 shares of Common Stock underlying their
warrants on one occasion following the vesting of those warrants in October
1998. First Union, the holders of the representatives' warrants and a beneficial
owner of 3,000 shares of Common Stock also have "piggy-back" registration rights
with respect to certain registered offerings of securities by the Company that
are registered under the Securities Act. Each of these parties waived their
registration rights in connection with the Notes Offering, including the Warrant
Registration Statement.
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION, BYLAWS, MARYLAND
LAW AND
DELAWARE LAW
Amended and Restated Articles of Incorporation and Bylaws
The Maryland Charter includes 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.
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<PAGE>
In this regard, the Maryland Charter provides that the number of directors
shall be five but may not be fewer than three nor more than twenty-five members.
The Maryland 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 Maryland
Charter provides 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 Maryland Charter also provides 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 Maryland 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 Maryland Charter also contains 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 Maryland Charter establishes 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.
The Maryland 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 Maryland 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 Maryland 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.
Upon completion of the Reorganization, the Delaware Charter will be the
charter documents of the Company. Although the provisions of the Delaware
Charter are similar in many respects to those of the Maryland Charter, the
Reorganization includes implementation of provisions in the Delaware Charter
that affect the rights of stockholders and management. In addition, certain
other changes altering the rights of stockholders and powers of management could
be implemented in the future by amendment of
71
<PAGE>
the Company's Certificate of Incorporation following stockholder approval, and
certain changes could be implemented by amendment of the Bylaws without
stockholder approval.
Change in Authorized Stock. The Maryland Charter authorizes a total of
20,100,000 shares of stock, of which 20,000,000 are shares are classified as
common stock, $.01 par value, and 100,000 shares are classified as preferred
stock, $1.00 par value ("Preferred Stock"). Of the authorized shares of
Preferred Stock, 25,000 shares are classified as Series A Junior Participating
Preferred Stock in connection with the adoption by the Board of a Preferred
Stock Purchase Rights Agreement dated as of March 26, 1998 ("Rights Plan"). The
Board of Directors has the authority to classify and issue the remaining shares
of Preferred Stock in one or more series and to fix the price, rights,
preferences, privileges and restriction thereof. The Delaware Charter authorizes
Startec-Delaware to classify and issue an aggregate of 41,000,000 shares of
stock, of which 40,000,000 shares shall be common stock, $.01 par value per
share, and 1,000,000 shares shall be preferred stock, $1.00 par value per share.
Elimination of Stockholders' Power to Call Special Stockholders' Meeting
and to Act by Unanimous Written Consent. The Delaware Charter provides that
stockholders may act only at an annual or special meeting of stockholders and
not by written consent. Although the current Bylaws authorize the stockholders
of the Company to take action by unanimous written consent without a meeting,
this method of obtaining stockholder approval has not been used since the
Company became a public company in 1997. Because of the large number of
stockholders of the Company and its current practice of soliciting proxies and
holding meetings, the Company does not expect to use this procedure in the
future. In addition, the Delaware Bylaws of the Company provide that a special
meeting of the stockholders may only be called by the Board of Directors, the
Chairman of the Board of Directors, or the President. The Maryland Bylaws
authorize a special meeting of the stockholders to be called by the Board of
Directors, the President, or the holders of stock entitled to cast not less than
25% of the votes at such meeting. Although such a provision is permitted by
Delaware law, the Delaware Bylaws will prohibit stockholders from calling a
special meeting. As a result, after the Reorganization, the stockholders of the
Company will be permitted to act only at a duly called annual or special meeting
of the stockholders.
The provisions prohibiting stockholder action by written consent will give
all stockholders of the Company the opportunity to participate in determining
any proposed stockholder action and will prevent the holders of a majority of
the voting power of the Company from using the written consent procedure to take
stockholder action. Persons attempting hostile takeovers of corporations have
attempted to use written consent procedures to deal directly with stockholders
and avoid negotiations with the boards of directors of such corporations. The
provisions eliminating the right of stockholders to call a special meeting would
mean that a stockholder could not force stockholder consideration of a proposal
over the opposition of the Board of Directors by calling a special meeting of
the stockholders prior to such time as the Board of Directors believed such
consideration to be appropriate. By eliminating the use of the written consent
procedure and the ability of stockholders to call a special meeting, the Company
intends to encourage persons seeking to acquire control of the Company to
initiate an acquisition through arm's-length negotiations with the Company's
management and its Board of Directors.
The provisions restricting stockholder action by written consent and the
elimination of the stockholders' ability to call special meetings may have the
effect of delaying consideration of a stockholder proposal until the next annual
meeting unless a special meeting is called by the Board of Directors. Because
elimination of the procedures for stockholders to act by written consent or to
call special meetings could make more difficult an attempt to obtain control of
the Company, such action could have the effect of discouraging a third party
from making a tender offer or otherwise attempting to obtain control of the
Company. Because tender offers for control usually involve a purchase price
higher than the prevailing market price, the provisions restricting stockholder
action by written consent and the elimination of the stockholders' ability to
call special meetings may have the effect of preventing or delaying a bid for
the Company's shares that could be beneficial to the Company and its
stockholders. Elimination of the written consent procedure also means that a
meeting of the stockholders would be required in order for the Company's
stockholders to replace the Board of Directors. The restriction on the ability
of stockholders to call a special meeting means that a proposal to replace the
Board of Directors could be delayed until the next annual meeting. These
provisions thus will make the removal of directors more difficult.
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Maryland and Delaware 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
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
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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.
Following the Reorganization, the Company will be subject to the provisions
of the Delaware General Corporation Law, which contains provisions similar to
the Maryland laws summarized above. The following is a summary of certain
similarities and differences between Delaware law and Maryland law. The
discussion is not exhaustive and is qualified in its entirety by reference to
the specific provisions of Delaware law and Maryland law.
Redemption Retirement. Delaware law prohibits the purchase or redemption of
stock when the capital of a corporation is or will be impaired; except that a
corporation may purchase or redeem out of capital any of its own shares which
are entitled upon any distribution of its assets, whether by dividend or in
liquidation, to a preference over another class or series of its stock. Maryland
law, on the other hand, prohibits the purchase or redemption of stock if the
corporation would be unable to pay its indebtedness as the indebtedness becomes
due in the usual course of business, or if the corporations's total assets are,
or would be, less than the sum of the total liabilities plus, unless the charter
provides otherwise, the amount needed to satisfy preferential rights.
Dividends. Delaware law provides that a corporation can pay dividends out
of capital surplus or out of net profits for the current or immediately
preceding fiscal year. Maryland law, however, restricts the payment of dividends
if the corporation is, or would be unable to, pay its indebtedness as the
indebtedness becomes due in the usual course of business or the corporation's
total assets are, or would be, less than the sum of the total liabilities plus,
unless the charter provides otherwise, the amount needed to satisfy preferential
rights of stockholders whose preferential rights are superior to those receiving
the distribution.
Dissenters' Rights. Under Delaware law and Maryland law, a dissenting
stockholder of a corporation participating in certain transactions such as
certain mergers or consolidations, may, under varying circumstances, receive
cash in the amount of the fair value of such stockholder's shares (as determined
by a court) in lieu of the consideration such stockholder otherwise would have
received in such transaction. Delaware law does not generally require such
dissenters' rights of appraisal with respect to (i) a sale of assets, (ii) an
amendment of the certificate of incorporation (unless otherwise provided for in
the certificate of incorporation), (iii) a merger or consolidation by a
corporation, the shares of which are either listed on a national securities
exchange or designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc. or held
of record by more than 2,000 stockholders, if such stockholders received shares
of the surviving corporation or of another listed or widely-held corporation, or
(iv) stockholders of a corporation surviving a merger if no vote of the
stockholders of the surviving corporation is required to approve the merger.
Maryland law has similar provisions, but under Maryland law, dissenters' rights
of appraisal would apply: (i) with respect to a sale of all or substantially all
of a corporation's assets (except a transfer of assets by a corporation to one
or more persons if all of the equity interests of the person or persons are
owned directly or indirectly by the transferor, in which event dissenters'
rights of appraisal would not apply) or
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(ii) if a corporation amends its charter in a way that would alter express
contractual rights of any outstanding stock and substantially adversely affect
the existing stockholder's rights unless the corporation's charter reserves the
right to do so. Under Maryland law, a stockholder does not generally have
appraisal rights in a merger or consolidation if such stockholder's stock is
listed on a national exchange or if such stockholder's stock is that of the
surviving corporation in the merger and the merger does not change such stock.
Inspection of Stockholder List. The rights of stockholders of a Maryland
corporation and a Delaware corporation to inspect and copy corporation records
differ in certain respects. Under Maryland law, any stockholder may inspect the
bylaws, minutes of the proceedings of stockholders, annual statements of
affairs, and voting trust agreements of the corporation at the corporation's
principal office. Any stockholder may also present a written request for a
statement showing all stock and securities issued by the corporation during a
specified period of not more than 12 months before the date of the request, the
consideration received per share or unit and the value of any consideration
other than money as set forth in a resolution of the board of directors. In
addition, stockholders of record who own and have owned for at least six months
at least five percent of the outstanding stock of any class may inspect and copy
the corporation's books of account and its stock ledger, and request an account
of the corporation's affairs with no statutory restriction upon the purpose of
such inspection. Under Delaware law, on the other hand, any stockholder may upon
written demand under oath stating the stockholder's purpose, inspect and copy
for any proper purpose the corporation's stock ledger, list of stockholders, and
its other books and records. A proper purpose is one reasonably related to such
person's interest as a stockholder. Accordingly, for stockholders holding less
than five percent of the outstanding stock of any class, the right of inspection
of some records may be broader under Delaware law than under Maryland law. For
some stockholders, however, the Maryland rights of inspection that are available
may be less restrictive with respect to the purpose for which the right may be
exercised, and the lack of access to stockholder records under Delaware law
could result in the impairment of the stockholder's ability to coordinate
opposition to management proposals, including proposals with respect to a change
in control of the corporation.
Limitation of Liability. Under Delaware law, directors' liability for
monetary damages cannot be limited by the charter for (i) breaches of their duty
of loyalty to the Company and its stockholders; (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law; (iii) monetary damages relating to willful or negligent violations
regarding the prohibition on the payment of unlawful dividends or unlawful stock
purchases or redemptions; or (iv) transactions from which a director derives
improper personal benefit. The liability of officers may not be limited under
Delaware law, unless the officers are also directors. Under Maryland law, the
charter of a corporation may include any provision expanding or limiting the
liability of its directors and officers to the corporation and its stockholders.
Restrictions on Voting of Securities. Maryland law provides for
control-share voting restrictions. If applicable, the Maryland law restriction
provides that the voting rights of the persons who make a "control-share"
acquisition of a corporation's stock (at least 20% of the voting power of the
corporation) are eliminated unless the acquisition is exempt from the
restriction or the holders of two-thirds of the non-control share stock of the
corporation vote in favor of the acquisition. In contrast, Delaware Law does not
provide for a similar control-share voting restriction.
Voting Requirements for Business Combination. Maryland law requires a vote
of two-thirds of all stockholders entitled to vote to approve a business
combination, although, as permitted by Maryland law, the Maryland Charter
provides for the effectiveness and validity of such an action if authorized by
the affirmative vote of a majority of the total number of votes entitled to be
cast thereon. Delaware law and the Delaware Charter require the vote of a
majority of the shares represented at a stockholder meeting for all corporate
actions requiring stockholder approval. In addition, Delaware law requires that
certain transactions between a corporation and an "interested stockholder"
(generally, a stockholder acquiring 15% or more of the voting stock of a
corporation) may not occur for three years following the date such person became
an interested stockholder unless (i) prior to such date the board of directors
of the corporation approved either the business combination or the transaction
that resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction that resulted in
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the stockholder becoming an interested stockholder, the interested stockholder
owns at least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced (excluding shares controlled by the interested
stockholder); (iii) the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders by
two-thirds of the outstanding voting stock not held by the interested
stockholder; or (iv) an exemption is available. In contrast, Maryland law
provides that, unless the Board of Directors has approved the acquisition of
voting stock pursuant to which a person becomes an interested stockholder
(generally, a stockholder acquiring 10% or more of the voting stock of a
corporation), a Maryland corporation may not engage in certain business
combinations with any interested stockholder for five years following the most
recent date on which the interested stockholder became an interested
stockholder. Moreover, Maryland law provides that business combinations with an
interested stockholders after such five-year period must be recommended by the
board of directors and approved by (i) at least 80% of the outstanding shares of
the voting stock of the corporation and (ii) at least two-thirds of the
outstanding shares of voting stock (other than voting stock held by an
interested stockholder or an affiliate thereof), unless certain value and other
standards are met or an exemption is available.
STOCKHOLDER RIGHTS PLAN
The Board of Directors has adopted a stockholder rights plan (the "Plan").
In implementing the Plan, the Board of Directors declared a dividend of one
right (collectively, the "Rights") for each outstanding share of Common Stock.
Each Right, when exercisable, would entitle the holder thereof to purchase
1/1,000th of a share of Series A Junior Participating Preferred Stock (the
"Preferred Stock") at a price of $175 per 1/1,000th share.
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 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 offer 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 Rights will expire on March 25, 2008.
Until a Right is exercised, the holder thereof will have no rights as a
stockholder of the Company, including without limitation, the right to vote or
to receive dividends. In addition, other than those provisions relating to the
principal economic terms of the Rights (other than an increase in the purchase
price), any of the provisions of the Plan may be amended by the Board of
Directors prior to the Distribution Date.
Upon the completion of the Reorganization, the Company's rights and
obligations under the Plan will continue.
LISTING
The Common Stock is quoted on the Nasdaq Stock Market under the symbol
"STGC."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company.
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DESCRIPTION OF WARRANTS
The Warrants were issued pursuant to the Warrant Agreement between the
Company and First Union National Bank, as Warrant Agent. The following summary
of certain provisions of the Warrants and the Warrant Agreement does not purport
to be complete and is qualified in its entirety by reference to the Warrants and
the Warrant Agreement, including the definitions therein of certain terms used
below. Capitalized terms used in this Description of Warrants and not otherwise
defined herein have the meanings ascribed to such terms in the Warrants and the
Warrant Agreement. A copy of the Warrant Agreement, including the form of the
Warrants, has been filed as an exhibit to the Warrant Registration Statement of
which this Prospectus forms a part.
GENERAL
Each Warrant, when exercised, will entitle the holder thereof to receive
1.25141 fully paid and non-assessable shares of Common Stock of the Company at
the Exercise Price of $24.20 per share. The Exercise Price and the number of
shares of Common Stock issuable upon exercise of a Warrant are both subject to
adjustment in certain circumstances described below. The Warrants will be
exercisable to purchase an aggregate of 200,226 shares of Common Stock.
The Warrants may be exercised at any time and from time to time on or after
November 15, 1998 and expire on May 15, 2008. Under the Warrant Agreement, the
Company is obligated to give notice of expiration not less than 90 nor more than
120 days prior to the Expiration Date to the registered holders of the then
outstanding Warrants. If the Company fails to give such notice, the Warrants
will nevertheless expire and become void on the Expiration Date. The Warrants
will not trade separately from the Notes until the Separation Date.
In order to exercise all or any of the Warrants, the holder thereof is
required to surrender to the Warrant Agent the related registered certificate
issued by the Company representing the Warrants (the "Warrant Certificate") with
the accompanying form of election to purchase properly completed and executed,
and to pay in full the Exercise Price for each share of Common Stock or other
securities issuable upon exercise of such Warrants. The exercise procedure for
Warrants held in book-entry form will be governed by the Depositary's standing
procedure for such exercise. The Exercise Price may be paid (i) in cash or by
certified or official bank check or by wire transfer to an account designated by
the Company for such purpose or (ii) without the payment of cash, by reducing
the number of shares of Common Stock that would be obtainable upon the exercise
of a Warrant and payment of the Exercise Price in cash so as to yield a number
of shares of Common Stock upon the exercise of such Warrant equal to the product
of (a) the number of shares of Common Stock for which such Warrant is
exercisable as of the date of exercise (if the Exercise Price were being paid in
cash) and (b) the Cashless Exercise Ratio (the "Cashless Exercise"). The
"Cashless Exercise Ratio" shall equal a fraction, the numerator of which is the
excess of the Current Market Value (as defined herein) per share of Common Stock
on the Exercise Date over the Exercise Price per share as of the Exercise Date
and the denominator of which is the Current Market Value per share of the Common
Stock on the Exercise Date. Upon surrender of a Warrant Certificate representing
more than one Warrant in connection with the holder's option to elect a Cashless
Exercise, the number of shares of Common Stock deliverable upon a Cashless
Exercise shall be equal to the number of shares of Common Stock issuable upon
the exercise of Warrants that the holder specifies are to be exercised pursuant
to a Cashless Exercise multiplied by the Cashless Exercise Ratio. All provisions
of the Warrant Agreement shall be applicable with respect to a surrender of a
Warrant Certificate pursuant to a Cashless Exercise for less than the full
number of Warrants represented thereby. Upon surrender of the Warrant
Certificate and payment of the Exercise Price, the Company will deliver or cause
to be delivered to or upon the written order of such holder, a stock certificate
representing 1.25141 shares of Common Stock of the Company for each Warrant
evidenced by such Warrant Certificate, subject to adjustment as described
herein. If less than all of the Warrants evidenced by a Warrant Certificate are
to be exercised, a new Warrant Certificate will be issued for the remaining
number of Warrants. No fractional shares of Common Stock will be issued upon
exercise of the Warrants. The Company will pay to the holder of the Warrant at
the time of exercise an amount in cash equal to the Current Market Value of any
such fractional share of Common Stock.
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The holders of unexercised Warrants are not entitled, by virtue of being
such holders, to receive dividends, to vote, to consent, to exercise any
preemptive rights or to receive notice as stockholders of the Company in respect
of any stockholders meeting for the election of directors of the Company or any
other purpose, or to exercise any other rights whatsoever as stockholders of the
Company.
No service charge will be made for registration of transfer or exchange
upon surrender of any Warrant Certificate at the office of the Warrant Agent
maintained for that purpose. The Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any registration or transfer or exchange of Warrant Certificates.
In the event a bankruptcy or reorganization is commenced by or against the
Company, a bankruptcy court may hold that unexercised Warrants are executory
contracts which may be subject to rejection by the Company with approval of the
bankruptcy court. As a result, holders of the Warrants may not, even if
sufficient funds are available, be entitled to receive any consideration or may
receive an amount less than they would be entitled to receive if they had
exercised their Warrants prior to the commencement of any such bankruptcy or
reorganization.
NOTWITHSTANDING THE FOREGOING, THE EXERCISE OF THE WARRANTS (AND THE
OWNERSHIP OF COMMON STOCK ISSUABLE UPON THE EXERCISE THEREOF) MAY BE LIMITED BY
THE COMPANY IN ORDER TO ENSURE COMPLIANCE WITH THE FCC'S RULES AND THE WARRANTS
WILL NOT BE EXERCISABLE BY ANY HOLDER IF SUCH EXERCISE WOULD CAUSE THE COMPANY
TO BE IN VIOLATION OF THE COMMUNICATIONS ACT OR THE FCC'S RULES, REGULATIONS OR
POLICIES. SEE "RISK FACTORS -- POTENTIAL ADVERSE EFFECTS OF REGULATION."
ADJUSTMENTS
The number of shares of Common Stock of the Company issuable upon the
exercise of the Warrants and the Exercise Price will be subject to adjustment in
certain circumstances, including:
(i) the payment by the Company of dividends and other distributions on
its Common Stock payable in Common Stock or other equity interests of the
Company;
(ii) subdivisions, combinations and certain reclassifications of the
Common Stock of the Company;
(iii) the issuance to all holders of Common Stock of rights, options
or warrants entitling them to subscribe for additional shares of Common
Stock, or of securities convertible into or exercisable or exchangeable for
additional shares of Common Stock at an offering price (or with an initial
conversion, exercise or exchange price plus such offering price) which is
less than the Current Market Value per share of Common Stock;
(iv) the distribution to all holders of Common Stock of any assets of
the Company (including cash), debt securities of the Company or any rights
or warrants to purchase any securities (excluding those rights and warrants
referred to in clause (iii) above and cash dividends and other cash
distributions from current or retained earnings);
(v) the issuance of shares of Common Stock for a consideration per
share which is less than the Current Market Value per share of Common
Stock; and
(vi) the issuance of securities convertible into or exercisable or
exchangeable for Common Stock for a conversion, exercise or exchange price
per share which is less than the Current Market Value per share of Common
Stock.
The events described in clauses (v) and (vi) above are subject to certain
exceptions described in the Warrant Agreement, including, without limitation,
certain bona fide public offerings and private placements and certain issuances
of Common Stock pursuant to employee stock incentive plans.
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No adjustment in the Exercise Price will be required unless and until such
adjustment would result, either by itself or with other adjustments not
previously made, in an increase or decrease of at least 1% in the Exercise Price
or the number of shares of Common Stock issuable upon exercise of Warrants
immediately prior to the making of such adjustment; provided, however, that any
adjustment that is not made as a result of this paragraph will be carried
forward and taken into account in any subsequent adjustment. In addition, the
Company may at any time reduce the Exercise Price (but not to an amount that is
less than the par value of the Common Stock) for any period of time (but not
less than 20 business days) as deemed appropriate by the Board of Directors of
the Company.
In case of certain consolidations or mergers of the Company, or the sale of
all or substantially all of the assets of the Company to another Person, each
Warrant will thereafter be exercisable for the right to receive the kind and
amount of shares of stock or other securities or property to which such holder
would have been entitled as a result of such consolidation, merger or sale had
the Warrants been exercised immediately prior thereto. However, if (i) the
Company consolidates, merges or sells all or substantially all of its assets to
another person and, in connection therewith, the consideration payable to the
holders of Common Stock in exchange for their shares is payable solely in cash
or (ii) there is a dissolution, liquidation or winding-up of the Company, then
the holders of the Warrants will be entitled to receive distributions on an
equal basis with the holders of Common Stock or other securities issuable upon
exercise of the Warrants, as if the Warrants had been exercised immediately
prior to such event, less the Exercise Price. Upon receipt of such payment, if
any, the Warrants will expire and the rights of holders thereof will cease. In
the case of any such consolidation, merger or sale of assets, the surviving or
acquiring person and, in the event of any dissolution, liquidation or winding-up
of the Company, the Company must deposit promptly with the Warrant Agent the
funds, if any, required to pay the holders of the Warrants. After such funds and
the surrendered Warrant Certificates are received, the Warrant Agent is required
to deliver a check in such amount as is appropriate (or, in the case of
consideration other than cash, such other consideration as is appropriate) to
such Persons as it may be directed in writing by the holders surrendering such
Warrants.
In the event of a taxable distribution to holders of Common Stock of the
Company which results in an adjustment to the number of shares of Common Stock
or other consideration for which a Warrant may be exercised, the holders of the
Warrants may, in certain circumstances, be deemed to have received a
distribution subject to United States federal income tax as a dividend. See
"Certain Federal Income Tax Considerations--Tax Treatment of the Warrants."
RESERVATION OF SHARES
The Company has authorized and will reserve for issuance such number of
shares of Common Stock as will be issuable upon the exercise of all outstanding
Warrants. Such shares of Common Stock, when issued and paid for in accordance
with the Warrant Agreement, will be duly and validly issued, fully paid and
nonassessable, free of preemptive rights and free from all taxes, liens, charges
and security interests.
PROVISION OF FINANCIAL STATEMENTS AND REPORTS
The Company will be required (a) to provide to each Holder, without cost to
such holder, copies of such annual and quarterly reports and documents that the
Company files with the Commission (to the extent such filings are accepted by
the Commission and whether or not the Company has a class of securities
registered under the Exchange Act) or that the Company would be required to file
were it subject to Section 13 or 15 of the Exchange Act, within 15 days after
the date of such filing or the date on which the Company would be required to
file such reports or documents and (b) if filing such reports and documents with
the Commission is not accepted by the Commission or is prohibited under the
Exchange Act, to supply at the Company's cost copies of such reports and
documents to any prospective holder promptly upon request.
AMENDMENT
Any amendment or supplement to the Warrant Agreement that has an adverse
effect on the interests of the holders of the Warrants will require the written
consent of the holders of a majority of the then outstanding Warrants (excluding
any Warrants held by the Company or any of its Affiliates).
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Notwithstanding the foregoing, the Company and the Warrant Agent, without the
consent of the holders of the Warrants, may, from time to time, amend or
supplement the Warrant Agreement for certain purposes, including to cure any
ambiguities, defects or inconsistencies or to make any change that does not
adversely affect the rights of any holder. The consent of each holder of the
Warrants affected will be required for any amendment pursuant to which the
Exercise Price would be increased or the number of shares of Common Stock
issuable upon exercise of the Warrants would be decreased (other than pursuant
to adjustments provided for in the Warrant Agreement) or the exercise period
with respect to the Warrants would be shortened.
REGISTRATION RIGHTS
The Warrant Agreement provides, for the benefit of the Holders of the
Warrants, that the Company will file with the Commission the Warrant
Registration Statement on an appropriate form under the Securities Act and will
use its reasonable best efforts to cause the Warrant Registration Statement to
be declared effective by the Commission not later than November 17, 1998. The
Warrant Agreement requires the Company, subject to certain limited exceptions,
to use its reasonable best efforts to keep the Warrant Registration Statement
continuously effective, supplemented and amended to ensure that it is available
for its intended use by the holders of the Transfer Restricted Warrant
Securities (as defined herein) entitled to this benefit and to ensure that the
Warrant Registration Statement conforms and continues to conform with the
requirements of the Securities Act and the policies, rules and regulations of
the Commission, as announced from time to time until the second anniversary of
the date on which the last Warrant exercised at a time when the Warrant
Registration Statement was not effective or when the use of the prospectus
contained therein was suspended or such shorter period ending when all the
Warrants and/or Warrant Shares have been sold pursuant to the Warrant
Registration Statement; provided, however, that during such period, the holders
may be prevented or restricted by the Company from effecting sales pursuant to
the Warrant Registration Statement under certain circumstances as more fully
described in the Warrant Agreement. A Holder of Warrants or Warrant Shares
acquired upon an exercise of Warrants at a time when the Warrant Registration
Statement is not effective or available for use generally will be required to be
named as a selling securityholder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions of the Securities Act in connection with such sales and will be bound
by the provisions of the Warrant Agreement applicable to such Holder (including
certain indemnification and contribution obligations).
If the Warrant Registration Statement (i) has not become effective on or
before November 17, 1998 or (ii) such registration statement becomes effective
but shall thereafter cease to be effective or fails to be usable for its
intended purpose without being succeeded within five business days by a
post-effective amendment to such Warrant Registration Statement that cures such
failure and that is itself immediately declared effective (each such event being
a "Warrant Registration Default"), the Company shall pay to the holders of
Warrants and/or Warrant Shares that in either case are Transfer Restricted
Warrant Securities an amount in cash in the amount of $1.00 per Warrant or
Warrant Share ("Warrant Liquidated Damages") for the first 90-day period (or
portion thereof) following such Warrant Registration Default, such amount to
increase by an additional $0.50 per Warrant or Warrant Share with respect to
each subsequent 90-day period (or portion thereof) until all Warrant
Registration Defaults have been cured, up to a maximum rate of Warrant
Liquidated Damages of $2.50 per Warrant or Warrant Share. All accrued and unpaid
Warrant Liquidated Damages shall be paid to the holders of record of the
Warrants or Warrant Shares entitled thereto on the last day of each calendar
quarter during which any such payment shall have become due.
The Warrant Agreement further provides that upon the occurrence of an
Exercise Event, the Holders of at least 25% of the Warrants will be entitled to
require the Company to use its reasonable best efforts to effect one
registration under the Securities Act in respect of an underwritten sale of
Warrant Shares (a "Demand Registration"), subject to certain limitations, unless
an exemption from the registration requirements of the Securities Act is then
available for the sale of such Warrant Shares. Upon a demand, the Company will
prepare, file and use its reasonable best efforts to cause to be effective
within 120 days of such demand a registration statement in respect of all
Warrant Shares that request to be included in such registration statement (a
"Demand Registration Statement"); provided
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that in lieu of filing such Demand Registration Statement, the Company may
purchase all of the Warrant Shares the Holders of which have requested their
inclusion in the Demand Registration Statement at their Current Market Value.
Warrants and/or Warrant Shares shall be defined as "Transfer Restricted
Warrant Securities," until the earlier to occur of (i) the date on which such
Warrants and/or Warrant Shares have been registered under the Securities Act and
disposed of in accordance with the Warrant Registration Statement or (ii) the
date on which such Warrant and/or Warrant Share is eligible for distribution to
the public pursuant to Rule 144 under the Securities Act.
"Current Market Value" per share of Common Stock or any other security at
any date is defined to mean (i) if the security is not of a class registered
under the Exchange Act, (a) the value of the security determined in good faith
by the Board and certified in a board resolution, based on the most recently
completed arm's length transaction between the Company and a Person other than
an Affiliate of the Company, the closing of which occurred on such date or
within the six-month period preceding such date, or (b) if no such transaction
shall have occurred on such date or within such six-month period, the value of
the security as determined by an Independent Financial Expert (as defined in the
Warrant Agreement); or (ii) if such security is of a class registered under the
Exchange Act, the average of the last reported sale price of the Common Stock
(or the equivalent in an over-the-counter market) for each Business Day (as
defined in the Warrant Agreement) during the period commencing 15 Business Days
before such date and ending one day prior to such date, or if the security is of
a class registered under the Exchange Act for less than 15 Business Days before
such date, the average of the daily closing bid prices (or such equivalent) for
all the Business Days before such date for which daily closing bid prices are
available (provided, however, that if the closing bid price is not determinable
for at least 10 Business Days in such period, then clause (i) above and not this
clause (ii) shall used to determine Current Market Value); provided, however,
that if the Warrant Shares requested to be included in a Demand Registration
Statement shall be underlying an unexercised Warrant, then Current Market Value
shall be calculated as aforesaid, but shall have deducted therefrom the exercise
price of the related Warrant.
"Exercise Event" is defined to mean, with respect to each Warrant as to
which such event is applicable, the earlier of: (i) a Change of Control (as
defined in the Indenture) and (ii) any date when the Company (A) consolidates or
merges into or with another Person (but only where the holders of Common Stock
receive consideration in exchange for all or part of such Common Stock other
than common stock of the surviving Person) or (B) sell all or substantially its
assets to another Person if the Common Stock (or other securities) thereafter
issuable upon exercise of the Warrants is not registered under the Exchange Act;
provided, that the events in (A) and (B) will not be deemed to have occurred if
the consideration for the Common Stock in either such transaction consists
solely of cash.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the principal U.S. federal income tax
consequences of the purchase, ownership and disposition of the Warrants. This
summary is based on the Internal Revenue Code of 1986, as amended (the "Code"),
final, temporary, and proposed Treasury regulations promulgated thereunder,
administrative pronouncements and rulings, and judicial decisions, changes to
any of which subsequent to the date hereof may affect the tax consequences
described herein, possibly with retroactive effect.
This summary discusses only Warrants held as capital assets within the
meaning of Code section 1221. It does not discuss all of the tax consequences
that may be relevant to a holder in light of the holder's particular
circumstances or to a holder subject to special rules, such as certain financial
institutions, banks, insurance companies, regulated investment companies,
dealers in securities or foreign currencies, tax exempt organizations, persons
holding Warrants as part of a straddle, hedging or conversion transaction, or
United States Holders whose functional currency (as defined in Code section 985)
is not the U.S. dollar. Persons considering purchasing the Warrants should
consult their own tax advisors concerning the application of United States
federal tax laws to their particular situations as well as any tax consequences
arising under the laws of any state, local or foreign taxing jurisdiction.
As used in this summary, the term "United States Holder" means the
beneficial owner of a Warrant that is, for United States federal income tax
purposes, (i) a citizen or resident of the United States (including certain
former citizens and former long-term residents); (ii) a corporation, partnership
or other entity created or organized in or under the laws of the United States
or of any political subdivision thereof; (iii) an estate the income of which is
subject to United States federal income taxation regardless of it source; or
(iv) a trust with respect to the administration of which a court within the
United States is able to exercise primary supervision and one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust. As used in this summary, the term "Non-United States Holder" means a
beneficial owner of a Warrant that is not a United States Holder.
ALLOCATION OF ISSUE PRICE
On the date of issuance of the Units, the issue price of each Unit was
allocated, as between the Note and the Warrant, $986.83 to each Note and $13.17
to each Warrant, based on the Company's best judgment of the relative fair
market values of each such component of the Units on the issue date. Holders who
purchased a Unit at original issue for its original issue price will use this
allocation to determine such holder's income tax basis in the Warrants and the
issue price of the Notes, as discussed below. The Company's allocation is not
binding on the Internal Revenue Service ("IRS"), which may challenge such
allocation. A holder of a Unit is bound by the Company's initial allocation
unless the holder discloses a different allocation on a statement attached to
the holder's timely filed federal income tax return for the holder's taxable
year that includes the acquisition date of the Unit.
TAX CONSEQUENCES TO UNITED STATES HOLDERS
A United States Holder of a Warrant will recognize gain or loss upon the
sale, redemption or other taxable disposition of a Warrant in an amount equal to
the difference between the amount of cash and fair market value of property
received and the holder's adjusted tax basis in the Warrant. An initial holder's
tax basis in a Warrant will be the portion of the issue price of a Unit
allocable to a Warrant, as described above, adjusted as described below. Such
gain or loss generally will be capital gain or loss if the gain or loss from a
taxable disposition of Common Stock received upon exercise of a Warrant would be
capital gain or loss, and will be long-term capital gain or loss if the holder
has held the Warrant for more than 18 months.
The exercise of a Warrant will not result in a taxable event to the holder
of a Warrant (except (i) with respect to the receipt of cash in lieu of a
fractional share of Common Stock or (ii) possibly, where a Cashless Exercise
occurs). The receipt of cash in lieu of a fractional share of Common Stock will
be taxable as if the fractional share had been issued and then redeemed for
cash. As a result, a holder would recognize gain or loss in an amount equal to
the difference between the amount of cash received
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for the fractional share and the United States Holder's tax basis (described
below) in the fractional share. It is unclear whether a Cashless Exercise of a
Warrant will result in the recognition of gain or loss to the holder.
Accordingly, holder should consult with their own tax advisors before exercising
the Warrants in such manner.
A United States Holder's federal income tax basis in the Common Stock
received upon exercise of a Warrant pursuant to the payment of the exercise
price (including any fractional share interest) will be equal to the sum of the
holder's federal income tax basis in the Warrant immediately prior to exercise
plus the amount of any cash paid upon exercise. The holder's holding period for
the Common Stock (including any fractional share interest) would begin on the
day after the date of exercise.
Upon the expiration of an unexercised Warrant, a holder will generally
recognize a capital loss equal to the adjusted tax basis of such Warrant. Such
loss generally will be long-term capital loss if the holder has held the Warrant
for more than 18 months.
An adjustment in the exercise price or conversion ratio with respect to the
Warrants made pursuant to the anti-dilution provisions of the Warrants may, in
certain circumstances, result in constructive distributions to the United States
Holders of the Warrants which could be taxable as dividends to the holders under
Code section 305. A holder's federal income tax basis in a Warrant would
generally be increased by the amount of any such dividend.
TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
Under present U.S. federal tax law, and subject to the discussion below
concerning backup withholding, a Non-United States Holder of a Warrant, or of
the Common Stock received upon exercise thereof, will not be subject to U.S.
federal income tax on gain realized on the sale, exchange or other disposition
of the Warrant or Common Stock, unless (i) such Non-United States Holder is an
individual who is present in the United States for 183 days or more in the
taxable year of disposition, and either (A) such individual has a "tax home" (as
defined in Code section 911(d)(3)) in the United States (unless such gain is
attributable to a fixed place of business in foreign country maintained by such
individual and has been subject to foreign tax of at least 10 percent) or (B)
the gain is attributable to an office or other fixed place of business
maintained by such individual in the United States or (ii) such gain is
effectively connected with the conduct by such Non-United States Holder of a
trade or business in the United States, and, if a tax treaty applies, the gain
is attributable to a U.S. permanent establishment maintained by the Non-United
States Holder or (iii) the Non-United States Holder is subject to special rules
applicable to certain former citizens or residents of the United States, or (iv)
the Company is or has been a "U.S. real property holding corporation" for
federal income tax purposes at any time during the five year period ending on
the date of disposition and the Holder at any time during such five-year period
held, actually or constructively, more than 5% of such Common Stock.
THE FEDERAL INCOME TAX SUMMARY SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR
SITUATION. HOLDERS OF NOTES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE PRECISE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF
ACQUIRING, OWNING AND DISPOSING OF THE NOTES.
83
<PAGE>
PLAN OF DISTRIBUTION
The Warrants and the Warrant Shares may be offered and sold from time to
time to purchasers directly by the Selling Holders or to or through
underwriters, broker-dealers or agents, who may receive compensation in the form
of underwriting discounts, concessions or commissions from the Selling Holders
or the purchasers of such securities for whom they may act as agents. The
Selling Holders and any underwriters, broker-dealers or agents that participate
in the distribution of Warrants or the Warrant Shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any profit on the
sale of the Warrants or the Warrant Shares and any discounts, commissions,
concessions or other compensation received by any such underwriter,
broker-dealer or agent may be deemed to be underwriting discounts and
commissions under the Securities Act.
The Warrants and the Warrant Shares may be sold from time to time by the
Selling Holders in one or more transactions at fixed prices, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at varying prices determined at the time of sale or at negotiated
prices. The sale of the Warrants and the Warrant Shares may be effected in
transactions (which may involve crosses or block transactions) (i) on any
national securities exchange or automated quotation service on which the
Warrants or the Warrant Shares may be listed or quoted at the time of sale, (ii)
in the over-the-counter market, (iii) in transactions otherwise than on such
exchanges or automated quotation services or in the over-the-counter market,
(iv) through the writing of options or (v) through a combination of such methods
of sale. In addition, any Warrants or Warrant Shares that qualify for sale
pursuant to Rule 144 under the Securities Act may be sold pursuant to such Rule
rather than pursuant to this Prospectus. At the time a particular offering of
the Warrants or the Warrant Shares is made, a supplement to this Prospectus (a
"Prospectus Supplement") will, to the extent required, be distributed which will
set forth the aggregate amount of Warrants or Warrant Shares being offered and
the terms of the offering, including the name or names of any underwriters,
broker-dealers or agents, any discounts, commissions and other terms
constituting compensation from the Selling Holders and any discounts,
commissions or concessions allowed or reallowed or paid to broker-dealers. Each
broker-dealer receiving the Warrants or Warrant Shares for its own account
pursuant to this Prospectus must acknowledge that it will deliver the Prospectus
and any Prospectus Supplement in connection with any sale of such Warrants or
Warrant Shares.
The Company's Common Stock is listed on the Nasdaq National Market under
the symbol "STGC." Application will be made to have the Warrant Shares approved
for quotation on the Nasdaq National Market. Prior to this offering, there has
been no public market for the Warrants and there can be no assurance that an
active public market for the Warrants will develop or that, if a such a market
develops, it will be maintained. The Company does not intend to apply for
quotation of the Warrants on the Nasdaq Stock Market or for listing of the
Warrants on any national securities exchange.
To comply with the securities laws of certain jurisdictions, to the extent
applicable, the Warrants and Warrant Shares will be offered or sold in such
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain jurisdictions the Warrants and Warrant Shares may not be
offered or sold unless they have been registered or qualified for sale in such
jurisdictions or an exemption from registration or qualification is available
and is complied with.
The Selling Holders will be subject to applicable provisions of the
Securities Exchange Act of 1934 and the rules and regulations promulgated
thereunder, which provisions may limit the timing of purchases and sales of any
of the Warrants or Warrant Shares by the Selling Holders. The foregoing may
affect the marketability of such securities.
Pursuant to the Warrant Agreement, certain expenses of the registration of
the Warrants and Warrant Shares will be paid by the Company, including, without
limitation, Commission filing fees, the fees and expenses of counsel and the
costs of compliance with state securities or "blue sky" laws; provided, however,
that the Selling Holders will pay all underwriting discounts, selling
commissions and transfer taxes, if any, applicable to any sales of the Warrants
and Warrant Shares. The Company has agreed to indemnify the Selling Holders
against certain civil liabilities, including certain liabilities under the
Securities Act, and the Selling Holders will be entitled to contribution in
connection with any
84
<PAGE>
registration of the Warrants and Warrant Shares and any sales pursuant thereto.
The Company will be indemnified by the Selling Holders severally against certain
civil liabilities, including certain liabilities under the Securities Act, and
will be entitled to contribution in connection with any registration of the
Warrants and Warrant Shares and any sales pursuant thereto.
LEGAL MATTERS
The validity of the securities offered hereby will be passed on for the
Company by Schnader Harrison Segal & Lewis LLP, Washington, D.C.
EXPERTS
The audited financial statements and schedule included in this Prospectus
and elsewhere in the Registration Statement 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 Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Warrants and Warrant Shares
being offered by this Prospectus. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions of which have been omitted pursuant to the
rules and regulations of the Commission. Statements made in this Prospectus as
to the contents of any contract, agreement or other document are not necessarily
complete. For further information with respect to the Company and the securities
offered hereby, reference is made to the Registration Statement, including the
exhibits thereto and the financial statements, notes and schedules filed as a
part thereof. With respect to each such contract, agreement or other document
filed or incorporated by reference as an exhibit to the Registration Statement,
reference is made to such exhibit for a more complete description of the matter
involved, and each such statement is qualified in its entirety by such
reference.
The Company has agreed to file with the Commission, to the extent
permitted, and distribute to holders of the Warrants and Warrant Shares,
reports, information and documents specified in Sections 13(a) and 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not
the Company is subject to such informational requirements of the Exchange Act.
The Company is subject to the informational and reporting requirements of
the Exchange Act and, in accordance therewith, files periodic reports, proxy and
information statements, and other information, with the Commission. Such
reports, proxy and information statements, and other information may be
inspected and copied at the public reference facilities of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
at the regional offices of the Commission located at Northwestern Atrium, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can be
obtained from the Commission at prescribed rates by writing to the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a Web
site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that are filed
electronically with the Commission. In addition, the Company's Common Stock is
quoted on the Nasdaq National Market, and reports proxy and information
statements and other information concerning the Company may also be inspected at
the offices of NASDAQ Operations, 1735 K Street, N.W., Washington, D.C. 20006.
85
<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.
ISP (International Settlements Policy): A policy that governs the
settlements between U.S. carriers and their foreign correspondents of the cost
of terminating each other's network.
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.
G-1
<PAGE>
ITU: The International Telecommunications Union.
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 United States
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 carrier's facilities.
MAOU (Minimum Assignable Ownership Units): Capacity on a telecommunications
systems, usually an undersea fiber optic cable, required on an ownership basis.
PBX (Public Branch Exchange): Switching equipment that allows connection
of private extension telephones to the PSTN or to a private line.
P.O.P. site (Point-of-Presence): An installaltion consisting of scaleable
interconnection, compression, and related telecommunications equipment that
aggregates traffic from a specific region and routes it to a switch. It is also
the area in which calls are terminated just before the calls are connected to
the local phone company's lines.
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 (Postal, Telephone and Telegraph Company): A foreign telecommunication
carrier that has been dominant in its home market and which may be wholly or
partially government-owned.
Private line: A dedicated telecommunications connection between end-user
locations.
Proportional return traffic: Under the terms of operating agreements,
foreign partners are required to deliver to the U.S.-based carriers traffic
flowing to the United States in the same proportion as the U.S.-based 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 United States 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.
SNO: A second network operator is a private carrier in a
recently-deregulated foreign nation in which the number of private carriers is
limited.
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 CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants ................................................. F-2
Consolidated Statements of Operations for the fiscal years ended December 31, 1995, 1996,
1997, and the six months ended June 30, 1997 and 1998 ................................... F-3
Consolidated Balance Sheets as of December 31, 1996, 1997, and as of June 30, 1998 ....... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the fiscal years
ended
December 31, 1995, 1996, 1997, and the six months ended June 30, 1998 ................... F-5
Consolidated Statements of Cash Flows for the fiscal years ended December 31, 1995, 1996,
1997, and the six months ended June 30, 1997 and 1998 ................................... F-6
Notes to Consolidated Financial Statements ............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Startec Global Communications Corporation:
We have audited the accompanying balance sheets of Startec Global
Communications Corporation (a Maryland corporation) as of December 31, 1996 and
1997, and the related statements of operations, changes in stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1997. 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, 1996 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 4, 1998
F-2
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------- -------------------------
1995 1996 1997 1997 1998
------------- ------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues ....................................... $ 10,508 $ 32,215 $ 85,857 $ 28,836 $ 63,353
Cost of services ................................... 9,129 29,881 75,783 25,250 54,485
--------- --------- --------- -------- --------
Gross margin ...................................... 1,379 2,334 10,074 3,586 8,868
General and administrative expenses ................ 2,170 3,996 6,288 2,461 6,852
Selling and marketing expenses ..................... 184 514 1,238 306 1,761
Depreciation and amortization ...................... 137 333 451 214 708
--------- --------- --------- -------- --------
Income (loss) from operations ..................... (1,112) (2,509) 2,097 605 (453)
Interest expense ................................... 116 337 762 252 2,577
Interest income .................................... 22 16 313 5 1,302
--------- --------- --------- -------- --------
Income (loss) before income tax provision ......... (1,206) (2,830) 1,648 358 (1,728)
Income tax provision ............................... -- -- 29 7 30
--------- --------- --------- -------- --------
Net income (loss) ................................. $ (1,206) $ (2,830) $ 1,619 $ 351 $ (1,758)
========= ========= ========= ======== ========
Basic earnings (loss) per share .................... $ (0.23) $ (0.52) $ 0.26 $ 0.06 $ (0.20)
========= ========= ========= ======== ========
Weighted average common shares outstanding --
basic ............................................. 5,317 5,403 6,136 5,403 8,926
========= ========= ========= ======== ========
Diluted earnings (loss) per share .................. $ (0.23) $ (0.52) $ 0.25 $ 0.06 $ (0.20)
========= ========= ========= ======== ========
Weighted average common and equivalent shares
outstanding -- diluted ............................ 5,317 5,403 6,423 5,589 8,926
========= ========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1996 1997 1998
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................................................... $ 148 $ 26,114 $120,121
Accounts receivable, net of allowance for doubtful accounts of approximately
$1,079, $2,353, and $2,982 respectively....................................... 5,334 16,980 23,293
Accounts receivable, related party ............................................. 78 377 778
Other current assets ........................................................... 211 1,743 1,974
-------- -------- --------
Total current assets ......................................................... 5,771 45,214 146,166
-------- -------- --------
PROPERTY AND EQUIPMENT:
Long distance communications equipment ......................................... 1,773 3,305 7,010
Computer and office equipment .................................................. 392 1,024 4,083
Less -- Accumulated depreciation and amortization .............................. (789) (1,240) (1,933)
-------- -------- --------
1,376 3,089 9,160
Construction in progress ....................................................... -- 2,095 1,087
-------- -------- --------
Total property and equipment, net ............................................ 1,376 5,184 10,247
-------- -------- --------
Deferred debt financing costs, net ............................................. -- 952 6,265
Restricted cash and pledged securities ......................................... 180 180 52,597
-------- -------- --------
Total assets ................................................................. $ 7,327 $ 51,530 $215,275
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ............................................................... $ 7,171 $ 15,420 $ 17,595
Accrued expenses ............................................................... 2,858 3,728 6,845
Short-term borrowings under receivables-based credit facility .................. 1,812 -- --
Capital lease obligations ...................................................... 226 331 381
Notes payable to related parties ............................................... 53 -- --
Notes payable to individuals and other ......................................... 650 -- --
-------- -------- --------
Total current liabilities .................................................... 12,770 19,479 24,821
-------- -------- --------
Capital lease obligations, net of current portion .............................. 546 417 266
Senior Notes ................................................................... -- -- 157,917
Notes payable to related parties, net of current portion ....................... 100 -- --
Notes payable to individuals and other, net of current portion ................. -- 44 --
-------- -------- --------
Total liabilities ............................................................ 13,416 19,940 183,004
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock; $1.00 par value; 100,000 shares authorized; no shares issued
and outstanding .............................................................. -- -- --
Voting common stock; $0.01 par value; 10,000,000 shares authorized at De-
cember 31, 1996; 20,000,000 shares authorized at December 31, 1997 and June
30, 1998; 5,380,824, 8,811,999, and 8,964,315 shares issued and out-
standing at December 31, 1996, 1997 and June 30, 1998, respectively .......... 54 88 90
Nonvoting common stock; $1.00 par value; 25,000 shares authorized and
22,526 shares issued and outstanding at December 31, 1996; no shares au-
thorized, issued and outstanding at December 31, 1997 and June 30, 1998. 22 -- --
Additional paid-in capital ..................................................... 932 35,528 35,832
Warrants ....................................................................... -- 1,693 3,800
Unearned compensation .......................................................... -- (241) (215)
Accumulated deficit ............................................................ (7,097) (5,478) (7,236)
-------- -------- --------
Total stockholders' equity (deficit) ......................................... (6,089) 31,590 32,271
-------- -------- --------
Total liabilities and stockholders' equity (deficit) ......................... $ 7,327 $ 51,530 $215,275
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-4
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997,
AND THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
VOTING NONVOTING
COMMON STOCK COMMON STOCK ADDITIONAL
----------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 .............................. 4,574 $ 46 22 $ 22 $ 190
Net loss ................................................. -- -- -- -- --
Issuance of common stock ................................. 807 8 -- -- 742
----- ---- -- ----- --------
Balance at December 31, 1995 .............................. 5,381 54 22 22 932
Net loss ................................................. -- -- -- -- --
----- ---- -- ----- --------
Balance at December 31, 1996 .............................. 5,381 54 22 22 932
Net income ............................................... -- -- -- -- --
Conversion of nonvoting common shares to voting
common shares ........................................... 17 -- (17) (17) 17
Purchase and retirement of nonvoting common shares........ -- -- (5) (5) (40)
Net proceeds from initial public offering ................ 3,278 33 -- -- 34,961
Exercise of stock options ................................ 136 1 -- -- 143
Unearned compensation pursuant to issuance of stock
options ................................................. -- -- -- -- 385
Amortization of unearned compensation .................... -- -- -- -- --
Warrants issued in connection with equity ($870) and
debt placement ($823) ................................... -- -- -- -- (870)
----- ---- ----- ------- --------
Balance at December 31, 1997 .............................. 8,812 88 -- -- 35,528
Net loss (unaudited) ..................................... -- -- -- -- --
Warrants issued in connection with senior notes offer-
ing (unaudited) ......................................... -- -- -- -- --
Amortization of unearned compensation (unaudited) ........ -- -- -- -- --
Conversion of note payable to common stock (unaudit-
ed) ..................................................... 24 -- -- -- 44
Exercise of stock options (unaudited) .................... 128 2 -- -- 260
----- ---- ----- ------- --------
Balance at June 30, 1998 (unaudited) ...................... 8,964 $ 90 -- $ -- $ 35,832
===== ==== ===== ======= ========
<CAPTION>
UNEARNED ACCUMULATED
WARRANTS COMPENSATION DEFICIT TOTAL
---------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 .............................. $ -- $ -- $ (3,061) $ (2,803)
Net loss ................................................. -- -- (1,206) (1,206)
Issuance of common stock ................................. -- -- -- 750
------- ------- --------- ---------
Balance at December 31, 1995 .............................. -- -- (4,267) (3,259)
Net loss ................................................. -- -- (2,830) (2,830)
------- ------- --------- ---------
Balance at December 31, 1996 .............................. -- -- (7,097) (6,089)
Net income ............................................... -- -- 1,619 1,619
Conversion of nonvoting common shares to voting
common shares ........................................... -- -- -- --
Purchase and retirement of nonvoting common shares........ -- -- -- (45)
Net proceeds from initial public offering ................ -- -- -- 34,994
Exercise of stock options ................................ -- -- -- 144
Unearned compensation pursuant to issuance of stock
options ................................................. -- (385) -- --
Amortization of unearned compensation .................... -- 144 -- 144
Warrants issued in connection with equity ($870) and
debt placement ($823) ................................... 1,693 -- -- 823
------- ------- --------- ---------
Balance at December 31, 1997 .............................. 1,693 (241) (5,478) 31,590
Net loss (unaudited) ..................................... -- -- (1,758) (1,758)
Warrants issued in connection with senior notes offer-
ing (unaudited) ......................................... 2,107 -- -- 2,107
Amortization of unearned compensation (unaudited) ........ -- 26 -- 26
Conversion of note payable to common stock (unaudit-
ed) ..................................................... -- -- -- 44
Exercise of stock options (unaudited) .................... -- -- -- 262
------- ------- --------- ---------
Balance at June 30, 1998 (unaudited) ...................... $ 3,800 $ (215) $ (7,236) $ 32,271
======= ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ -------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ............................................................ $ (1,206) $(2,830) $ 1,619
Adjustments to net income (loss):
Depreciation and amortization ............................................... 137 333 451
Compensation pursuant to stock options ...................................... -- -- 144
Amortization of deferred debt financing costs and debt discounts ............ -- -- 237
Changes in operating assets and liabilities:
Accounts receivable, net .................................................... (1,342) (3,113) (11,646)
Accounts receivable, related party .......................................... (46) 241 (299)
Other current assets ........................................................ (83) (80) (429)
Accounts payable ............................................................ 1,135 2,515 8,249
Accrued expenses ............................................................ 637 1,578 (45)
-------- ------- ----------
Net cash (used in) provided by operating activities ....................... (768) (1,356) (1,719)
-------- ------- ----------
INVESTING ACTIVITIES:
Purchases of property and equipment .......................................... (200) (520) (3,881)
-------- ------- ----------
Net cash used in investing activities ..................................... (200) (520) (3,881)
-------- ------- ----------
FINANCING ACTIVITIES:
Net borrowings (repayments) under receivables-based credit facility .......... 570 1,242 (1,812)
Proceeds from senior notes and warrants offering ............................. -- -- --
Investment in pledged securities ............................................. -- -- --
Repayments under capital lease obligations ................................... (96) (91) (402)
Repayments under notes payable to related parties ............................ -- (5) (153)
Borrowings under notes payable to individuals and other ...................... 50 475 --
Repayments under notes payable to individuals and other ...................... (35) (125) (650)
Deferred debt financing costs ................................................ -- -- (366)
Net proceeds from issuance of common stock ................................... 750 -- 34,994
Proceeds from exercises of stock options ..................................... -- -- --
Purchase and retirement of nonvoting common stock ............................ -- -- (45)
-------- --------- ----------
Net cash provided by financing activities ................................. 1,239 1,496 31,566
-------- --------- ----------
Net increase (decrease) in cash and cash equivalents ...................... 271 (380) 25,966
Cash and cash equivalents at the beginning of the period .................... 257 528 148
-------- --------- ----------
Cash and cash equivalents at the end of the period .......................... $ 528 $ 148 $ 26,114
======== ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ................................................................ $ 87 $ 296 $ 591
======== ========= ==========
Income taxes paid ............................................................ $ -- $ -- $ 19
======== ========= ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Deferred debt financing and offering costs not paid .......................... $ -- $ -- $ --
Equipment acquired under capital lease ....................................... $ 285 $ 524 $ 378
Accrued expenses converted to a note ......................................... $ -- $ -- $ 44
Note payable to individual, converted to common stock ........................ $ -- $ -- $ --
In 1997, the Company recorded $1,103 in "Other current assets", $959 in accrued
expenses and $144 in equity, related to options exercised through December 31,
1997. This amount was collected in January 1998 (Note 2)........
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1997 1998
----------- -------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ............................................................ $ 351 $ (1,758)
Adjustments to net income (loss):
Depreciation and amortization ............................................... 214 693
Compensation pursuant to stock options ...................................... 23 26
Amortization of deferred debt financing costs and debt discounts ............ -- 348
Changes in operating assets and liabilities:
Accounts receivable, net .................................................... (3,909) (6,313)
Accounts receivable, related party .......................................... (269) (401)
Other current assets ........................................................ (20) (231)
Accounts payable ............................................................ 4,032 2,175
Accrued expenses ............................................................ 92 3,117
--------- ---------
Net cash (used in) provided by operating activities ....................... 514 (2,344)
--------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment .......................................... (184) (5,672)
--------- ---------
Net cash used in investing activities ..................................... (184) (5,672)
--------- ---------
FINANCING ACTIVITIES:
Net borrowings (repayments) under receivables-based credit facility .......... 1,106 --
Proceeds from senior notes and warrants offering ............................. -- 160,000
Investment in pledged securities ............................................. -- (52,417)
Repayments under capital lease obligations ................................... (129) (185)
Repayments under notes payable to related parties ............................ -- --
Borrowings under notes payable to individuals and other ...................... 650 --
Repayments under notes payable to individuals and other ...................... -- --
Deferred debt financing costs ................................................ -- (5,637)
Net proceeds from issuance of common stock ................................... -- --
Proceeds from exercises of stock options ..................................... -- 262
Purchase and retirement of nonvoting common stock ............................ -- --
--------- ---------
Net cash provided by financing activities ................................. 1,627 102,023
--------- ---------
Net increase (decrease) in cash and cash equivalents ...................... 1,957 94,007
Cash and cash equivalents at the beginning of the period .................... 148 26,114
--------- ---------
Cash and cash equivalents at the end of the period .......................... $ 2,105 $ 120,121
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ................................................................ $ 269 $ 63
========= =========
Income taxes paid ............................................................ $ -- $ --
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Deferred debt financing and offering costs not paid .......................... $ 433 $ --
Equipment acquired under capital lease ....................................... $ 378 $ 84
Accrued expenses converted to a note ......................................... $ -- $ --
Note payable to individual, converted to common stock ........................ $ -- $ 44
In 1997, the Company recorded $1,103 in "Other current assets", $959 in accrued
expenses and $144 in equity, related to options exercised through December 31,
1997. This amount was collected in January 1998 (Note 2)........
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 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 United States-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.
REORGANIZATION
The Company's board of directors and stockholders have approved a
reorganization pursuant to which the Company's corporate structure will be
realigned to that of a publicly traded Delaware holding company. The
reorganization will consist of the transfer of substantially all of the
Company's assets into a newly incorporated Delaware subsidiary company ("New
Parent"), and the subsequent transfer of those assets to multiple subsidiaries
of the New Parent. After such transfer, the Company will be merged with and into
the New Parent. As of June 30, 1998, the New Parent and its subsidiaries had
been formed, but no transfer of assets had been made. The reorganization is
expected to be completed during the fourth quarter ended December 1998 and will
not have an impact on the consolidated financial statements of the Company.
INITIAL PUBLIC OFFERING
In October 1997, the Company completed an initial public offering of its
common stock (the "Initial Public Offering"). Together with the exercise of the
overallotment option in November 1997, the Offering placed 3,277,500 shares of
common stock at a price of $12.00 per share, yielding net proceeds (after
underwriting discounts, commissions, and other professional fees) to the Company
of approximately $35.0 million.
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 United
States-based customers and suppliers, availability of transmission facilities,
United States 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.
F-7
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
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 United States
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, 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:
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, 1998 and for the six months ended
June 30, 1997 and 1998, has been prepared by the Company, without audit, 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, 1998 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 $2.0 million, $1.1
million and $1.4 million, or 19 percent, 3 percent, and 2 percent of net
revenues in 1995, 1996, and 1997, respectively, and $994,000 and $706,000, or 3
percent and 1 percent of
F-8
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
net revenues in the six months ended June 30, 1997 and 1998, 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. The Company accrues disputed vendor
charges until such differences are resolved (see Notes 4 and 12).
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 others 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 in July 1997.
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 believes that no such impairment existed as of
December 31, 1996, 1997, and June 30, 1998.
The Company's estimates of anticipated gross revenues, the remaining
estimated lives of tangible 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.
OTHER CURRENT ASSETS
Included in other current assets as of December 31, 1997, is approximately
$1.1 million for amounts due from employees related to the exercise of stock
options in December 1997. No cash was advanced to these employees. Additionally,
none of these employees were executive officers of the Company. All amounts due
from employees for the payment of the exercise price and related payroll taxes
were collected in January 1998. During the second quarter of 1998, the Company
advanced an aggregate of
F-9
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
approximately $737,000 to certain of its employees and officers. The loans bear
interest at a rate of 7.87% per year, and are due and payable on December 31,
1998. The loans are included in other current assets in the accompanying
consolidated balance sheet.
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:
<TABLE>
<S> <C>
Long-distance communications equipment (including undersea
cable) .................................................. 7 to 20 years
Computer and office equipment ............................ 3 to 5 years
</TABLE>
Long-distance communications equipment includes assets financed under
capital lease obligations of approximately $1,287,000, $1,456,000, and
$1,540,000 as of December 31, 1996, 1997, and June 30, 1998, respectively.
Accumulated depreciation on these assets as of December 31, 1996, 1997, and June
30, 1998, was approximately $587,000, $672,000, and $838,000, 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
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 31 percent of gross accounts receivable as of
December 31, 1997 and June 30, 1998, respectively. Revenues from several
customers represented more than 10 percent of net revenues for the periods
presented (see Note 10). 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 7 percent and 5 percent of cost of services
in the year ended December 31, 1997 and the six months ended June 30, 1998,
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
expected amount to be realized.
EARNINGS (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board released
Statement No. 128, "Earnings Per Share." SFAS 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. Diluted
F-10
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
earnings per share is computed similarly to fully diluted earnins per share
under Accounting Principles Bulletin No. 15. 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 (loss) per share for all periods presented to be
consistent with SFAS No. 128 and SAB No. 98.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------- -------------------------
1995 1996 1997 1997 1998
------------ ------------ ----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Weighted average common shares outstanding - basic..... 5,317 5,403 6,136 5,403 8,926
Dilutive effect of stock options and warrants ......... -- -- 287 186 --
----- ----- ----- ----- -----
Weighted average common and equivalent shares out-
standing - diluted ................................... 5,317 5,403 6,423 5,589 8,926
===== ===== ===== ===== =====
Per Share Amounts:
Basic ................................................ $ (0.23) $ (0.52) $ 0.26 $ 0.06 $ (0.20)
========= ========= ======= ======= =======
Diluted .............................................. $ (0.23) $ (0.52) $ 0.25 $ 0.06 $ (0.20)
========= ========= ======= ======= =======
</TABLE>
DEBT DISCOUNT AND DEFERRED DEBT FINANCING COSTS
As more fully discussed in Note 5 and Note 7, respectively, in July, 1997,
the Company entered into a credit facility (the "Loan") with a bank (the
"Lender"), and in May 1998, the Company completed the placement of $160 million
12% senior notes. Debt discount represents amounts ascribed to the warrants
issued in connection with the Loan and the senior notes. Deferred debt financing
costs represent underwriting discounts and commissions, legal fees, and other
costs incurred in connection with the origination of the Loan and the placement
of the senior notes. These costs are being amortized over the term of the
obligations using the effective interest method. As of December 31, 1997, the
unamortized debt discount and deferred debt financing costs were approximately
$658,000 and $294,000, respectively. As of June 30, 1998, the unamortized debt
discount and deferred debt financing costs were approximately $2,577,000 and
$5,771,000, respectively.
ADVERTISING COSTS
In accordance with Statement of Position 93-7, "Reporting on Advertising
Costs," costs for advertising are expensed as incurred within the fiscal year.
Such costs are included in "Selling and marketing expenses" in the statements of
operations.
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."
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 did not have any components of "other comprehensive
income", net income is the same as "total comprehensive income" for all periods
presented.
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
F-11
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED
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.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1996 1997 1998
---------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Residential ............................. $ 3,840 $ 9,560 $ 13,100
Carrier ................................. 2,573 9,773 13,175
-------- -------- --------
6,413 19,333 26,275
Allowance for doubtful accounts ......... (1,079) (2,353) (2,982)
-------- -------- --------
$ 5,334 $ 16,980 $ 23,293
======== ======== ========
</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 $3,428,000 of residential receivables as of December 31, 1996
were pledged as security under the receivables-based credit facility agreement
discussed in Note 5. No receivables were pledged as of December 31, 1997 and
June 30, 1998, as the related facility was extinguished in July 1997.
4. ACCRUED EXPENSES:
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1996 1997 1998
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Disputed vendor charges .......................... $ 2,057 $ 2,124 $2,124
Accrued payroll and related taxes ................ 368 1,194 381
Accrued excise taxes and related charges ......... 182 -- --
Accrued interest ................................. 88 22 2,209
Universal Service Fund payable ................... -- -- 964
Other ............................................ 163 388 1,167
------- ------- ------
$ 2,858 $ 3,728 $6,845
======= ======= ======
</TABLE>
Disputed vendor charges 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 provided approximately $1,414,000 and $67,000 in the
years ended December 31, 1996 and 1997, respectively, related to disputed
minutes for which the Company has not recognized any corresponding revenue. No
amounts were provided during the six months ended June 30, 1998. 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 presumably be
paid in cash.
5. CREDIT FACILITY:
Prior to July 1, 1997, the Company had an advanced payment agreement with a
third party billing company, which allowed the Company to take advances against
70 percent of all records submitted for billing. Advances were secured by the
receivables involved. Approximately $1,812,000 was outstanding under this
receivables-based credit facility as of December 31, 1996, with a weighted
average interest rate on outstanding borrowings of 12.25 percent. In July 1997,
the Company paid the remaining amounts owed under this agreement using proceeds
from the Loan discussed below.
F-12
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
On July 1, 1997 the Company entered into a Loan with the 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 revenues to Loan
balance, interest coverage, and cash flow leverage, minimum residential
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. Beginning on July 1, 1998, should
the Lender determine and assert based on its reasonable assessment that a
material adverse change has occurred, all amounts outstanding would become due
and payable. The weighted average borrowings and interest rate under the Loan
during 1997 were approximately $2,015,000 and 10 percent, respectively. The
highest balance outstanding during 1997 was approximately $7,012,000. The
Company had no outstanding balance under the Loan as of December 31, 1997 and
June 30, 1998.
In connection with the Loan, the Company issued the Lender warrants to
purchase 539,800 shares of the Company's common stock, representing 10 percent
of the outstanding common stock on the date of issuance. Warrants with respect
to 269,900 of such shares, or 5 percent of the outstanding common stock at the
time the warrants were issued, vested fully on the date of the issuance. Vesting
of the remaining warrants was contingent on the occurrence of certain events,
and, since the Company completed the Initial Public Offering prior to December
31, 1997, no additional warrants will vest. The exercise price of the warrants
is $8.46 per share, and they expire on July 1, 2002. Upon completion of the
Initial Public Offering, the warrants ceased to be redeemable and, accordingly,
the fair value of approximately $823,000 ascribed to the warrants is classified
as a component of stockholders' equity as of December 31, 1997 and June 30,
1998. Proceeds from the Loan were used to pay down the receivables-based credit
facility (discussed above), to retire 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.
In the second quarter of 1998, the Company amended the Loan (the "Amended
Loan"). In particular, among other amendments, the Amended Loan provides that
certain key financial covenants shall apply only in the event that the Company
attempts to borrow amounts under the Amended Loan. As of June 30, 1998, as a
result of the senior notes offering, the Company is not in compliance with these
covenants and is therefore unable to borrow any amounts under the Amended Loan.
The Amended Loan also provides for the release of the Lender's security interest
in the Company's stock owned by the majority stockholder and another stockholder
previously pledged to secure the Company's obligations under the Loan.
6. STOCKHOLDERS' EQUITY (DEFICIT):
In July 1997, the Company exchanged 17,175 shares of its outstanding
nonvoting common stock for authorized voting common stock and purchased the
remaining 5,351 shares of outstanding nonvoting common stock from a former
officer and director of the Company for $45,269. In August 1997, the Company
increased its authorized shares of common stock to 20,000,000 and created a
preferred class of stock with 100,000 shares of $1.00 par value preferred stock
authorized for issuance.
F-13
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
STOCK OPTION PLANS
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. In 1998,
the Board of Directors and stockholders approved an increase in the shares
authorized for issuance under the Performance Plan to 18.5 percent of the common
shares outstanding. 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 December 31, 1997 and June 30, 1998, approximately 352,000 and 1,171,698
options, respectively, were available for grant under the Performance Plan.
Amended and Restated Stock Option Plan
The Company's Amended and Restated Stock Option Plan, reserves 270,000
shares of voting common stock to be issued to officers and key employees under
terms and conditions to be set by the Company's Board of Directors. Options
granted under this plan may be exercised only upon the occurrence of any of the
following events: (i) a sale of more than 50 percent of the issued and
outstanding shares of stock in one transaction, (ii) a dissolution or
liquidation of the Company, (iii) a merger or consolidation in which the Company
is not the surviving corporation, (iv) a filing by the Company of an effective
registration statement under the Securities Act of 1933, as amended, or (v) the
seventh anniversary of the date of full-time employment of the optionee. The
Company amended its stock option plan as of January 20, 1997 to provide that
options may be exercised on or after the seventh anniversary of the date of full
time employment. In conjunction with this amendment, all options outstanding
were cancelled , and certain options were reissued at their original exercise
prices. Pursuant to Accounting Principles Board Opinion No. 25 " Accounting for
Stock Issued to Employees" ("APB No. 25") and its related interpretations,
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. The Company recognized approximately $131,000 in
compensation expense for the year ended December 31, 1997 as the vesting of the
options accelerated upon completion of the Initial Public Offering.
A summary of the Company's aggregate stock option activity and related
information under the Performance Plan and the Amended and Restated Option Plan,
is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------------------- ------------------------
1995 1996 1997 1998
--------------------- ----------------------- ------------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ----------- ----------- ----------- ------------- ----------- ------------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning
of period ..................... 103,200 $ 0.30 143,200 $ 0.38 138,300 $ 0.38 531,666 $ 9.96
Granted ........................ 40,000 0.60 -- -- 668,366 8.14 136,000 17.97
Exercised ...................... -- -- -- -- (136,500) 1.05 (125,316) 1.85
Forfeited/Surrendered .......... -- -- (4,900) 0.36 (138,500) 0.38 (46,000) 10.00
------- ------- ------- ------- -------- ------- -------- --------
Options outstanding at end of
period ........................ 143,200 $ 0.38 138,300 $ 0.38 531,666 $ 9.96 496,350 $ 14.20
======= ======= ======= ======= ======== ======= ======== ========
Options exercisable at end of
period ........................ -- -- 133,266 $ 1.85 7,950 $ 1.85
======= ======= ======== ======= ======== ========
</TABLE>
F-14
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
Exercise prices for options outstanding as of June 30, 1998, are as follows
(unaudited):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ --------------------------------
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER OF OPTIONS CONTRACTUAL LIFE EXERCISE NUMBER OF OPTIONS EXERCISE
EXERCISE PRICES OUTSTANDING IN YEARS PRICE OUTSTANDING PRICE
- -------------------- ------------------- ------------------ ----------- ------------------- ----------
<S> <C> <C> <C> <C> <C>
$1.85 -- $1.85 7,950 8.55 $ 1.85 7,950 $ 1.85
$9.87 -- $10.00 191,900 9.27 10.00 -- --
$12.00 -- $12.00 7,500 9.13 12.00 -- --
$14.25 -- $15.00 62,000 9.93 14.27 -- --
$16.56 -- $16.56 160,000 9.44 16.56 -- --
$18.00 -- $26.75 67,000 9.72 22.22 --
- -------------------- ------- ---- -------- ----- -------
$1.85 -- $26.75 496,350 9.45 $ 14.20 7,950 $ 1.85
==================== ======= ==== ======== ===== =======
</TABLE>
The Company has elected to account for stock and stock rights in
accordance with APB No. 25. SFAS No. 123, "Accounting for Stock-Based
Compensation," 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.
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 during the years ended December 31, 1995, 1997 and the six
months ended June 30, 1998, 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, 6.2 and 6.2 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 stock
rights.
The weighted-average fair value of options granted during the years ended
December 31, 1995, 1997, and the six months ended June 30, 1998, was $0.34,
$4.32 and $9.22 per share, respectively. For purposes of pro forma disclosures,
the estimated fair value of 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
approximately $1,209,000 and $2,833,000, respectively, or $0.23 and $0.52 per
share (basic and diluted), respectively. Pro forma net income for 1997 would
have been approximately $1,600,000, or $0.26 per share (basic) and $0.25 per
share (diluted). Pro forma net loss for the six months ended June 30, 1998 would
have been approximately $2,146,000, or $0.24 per share (basic and diluted). The
provisions of SFAS No. 123 are not required to be applied to awards granted
prior to January 1, 1995. The impact of applying SFAS No. 123 may not
necessarily be indicative of future results.
In December 1997, under the Performance Plan, the Company granted to
several consultants options to acquire 30,000 shares of the Company's common
stock in lieu of payment of certain consulting services to be performed in the
future. Pursuant to SFAS No. 123, the Company will recognize compensation
expense for the fair value of these options granted to consultants, as
calculated using the Black-Scholes option pricing model, using the weighted
average assumptions described above. The fair value of these options is
approximately $254,000 and will be recognized ratably over estimated service
period.
F-15
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
COMMON STOCK WARRANTS
The Company issued to certain underwriters involved in the Initial Public
Offering, warrants to purchase up to 150,000 shares of common stock at an
exercise price of $13.20 per share. The warrants are exercisable for a period of
five years beginning October 1998. The holders of the warrants will have no
voting or other stockholder rights unless and until the warrants are exercised.
The fair value of these warrants was approximately $870,000, and is classified
in stockholders' equity.
See Note 5 and Note 7, respectively, for a discussion of the warrants
issued to the Lender in connection with the Loan and the warrants issued in
connection with the senior notes offering.
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
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.
7. NOTES PAYABLE:
SENIOR NOTES AND WARRANTS OFFERING
In May 1998, the Company completed the placement of $160 million 12% senior
notes due 2008 and warrants to purchase 200,226 shares of common stock at an
exercise price of $24.20 per share. This placement yielded net proceeds of
approximately $155 million, of which approximately $52 million was used to
purchase U.S. Government obligations which have been pledged to fund the first
six interest
F-16
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
payments due on the senior notes. The senior notes are recorded at a discount of
$2.1 million to their face amount to reflect the value attributed to warrants.
The senior notes are unsecured and require semi annual interest payments
beginning November 15, 1998. The senior notes and warrants have certain
registration rights.
NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1996 1997 1998
-------- ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to parties related to the primary stockholder and
president of the Company, bearing interest at rates ranging from
15 to 25 percent. .............................................. $ 153 $ -- $ --
Less Current Portion ............................................ (53) -- --
----- ---- ----
Long-term Portion ............................................... $ 100 $ -- $ --
===== ==== ====
</TABLE>
NOTES PAYABLE TO INDIVIDUALS AND OTHER
Notes payable to individuals and other consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1996 1997 1998
-------- ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to various parties, bearing interest at rates ranging
from 15 to 25 percent ............................................. $ 650 $ -- $ --
Note payable to individual, convertible into 24,000 shares of voting
common stock upon maturity in 1999 ................................ -- 44 --
------ ---- ----
650 44 --
Less Current Portion ............................................... (650) -- --
------ ---- ----
Long-term Portion .................................................. $ -- $ 44 $ --
====== ==== ====
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases office space, equipment and undersea fiber optic cable
under operating leases. Rent expense was approximately $94,000, $135,000 and
$313,000 for the years ended December 31, 1995, 1996 and 1997, respectively, and
$65,000 and $375,000 for the six months ended June 30, 1997 and 1998,
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 (in
thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- ---------------------------------------------- --------- ----------
<S> <C> <C>
1998 ......................................... $ 398 $ 615
1999 ......................................... 393 712
2000 ......................................... 53 733
2001 ......................................... -- 657
2002 ......................................... -- 537
------ -------
$ 844 $ 3,254
=======
Less - Amounts representing interest ......... (96)
Less - Current portion ....................... (331)
------
Long-term Portion ............................ $ 417
======
</TABLE>
F-17
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
LEASE WITH RELATED PARTY
The Company has entered into an agreement with an affiliate of a
stockholder 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
approximately $46,000 in accounts payable as of June 30, 1998, related to this
agreement. Unpaid amounts bear interest at the 180-day LIBOR rate, plus one
quarter percent. The amounts to be paid by the Company under this operating
lease are included in the future minimum commitments schedule above.
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.
RESTRICTED CASH AND PLEDGED SECURITIES
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. The Company was required to purchase U.S.
Government obligations which have been pledged to fund the first six interest
payments due on the senior notes (Note 7).
EMPLOYEE BENEFIT PLANS
Effective March 1998, the Company adopted a defined contribution plan under
section 401(k) of the Internal Revenue Code (the "Plan"). Employees are eligible
for the Plan after completing at least one year of service and attaining age 20.
The Plan allows for employee contributions up to 15% of their compensation.
LITIGATION
Certain claims have been asserted 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 consolidated financial
statements.
9. RELATED-PARTY TRANSACTIONS:
The Company has an agreement with an affiliate of a stockholder of the
Company that calls for the purchase and sale of long distance services. Revenues
generated from this affiliate amounted to approximately $1.0 million, $1.5
million and $1.9 million, or 10, 5 and 2 percent of total net revenues for the
years ended December 31, 1995, 1996, and 1997, respectively, and $1.2 million
and $1.0 million, or 4 percent and 2 percent of total net revenues for the six
months ended June 30, 1997 and 1998, respectively. The Company was in a net
accounts receivable position with this affiliate of approximately $14,000,
$377,000, and $778,000 as of December 31, 1996, 1997, and June 30, 1998,
respectively. Services provided by this affiliate and recognized in cost of
services amounted to approximately $134,000, $663,000 and $680,000 for the years
ended December 31, 1995, 1996 and 1997, respectively, and $495,000 and $256,000
for the six months ended June 30, 1997 and 1998, respectively.
The Company provided long-distance services to an affiliated entity owned
by the primary stockholder 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. No services were provided in 1997 and 1998. The affiliate
was unable to collect approximately $150,000 and $95,000 from its resi-
F-18
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
dential customers in the years ended December 31, 1995 and 1996, respectively.
Accounts receivable from this affiliated entity were approximately $64,000 as of
December 31, 1996. There were no amounts outstanding from this affiliate as of
December 31, 1997 and June 30, 1998.
The Company had notes payable to parties related to the primary stockholder
and president of the Company which were paid in full in July 1997 (see Note 7)
and a lease with an affiliate of a stockholder 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 (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- -----------------------
1995 1996 1997 1997 1998
---------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Asia/Pacific Rim ................. $ 6,970 $ 13,824 $ 42,039 $12,083 $29,676
Middle East/North Africa ......... 694 8,276 21,236 8,090 12,743
Sub-Saharan Africa ............... 35 1,136 6,394 2,371 4,329
Eastern Europe ................... 317 2,650 7,964 2,848 6,625
Western Europe ................... 1,647 1,783 1,913 904 1,307
North America .................... 494 3,718 3,398 1,559 2,874
Other ............................ 351 828 2,913 981 5,799
-------- -------- -------- ------- -------
$ 10,508 $ 32,215 $ 85,857 $28,836 $63,353
======== ======== ======== ======= =======
</TABLE>
SIGNIFICANT CUSTOMERS
A significant portion of the Company's net revenues is derived from a
limited number of customers. During the years ended December 31, 1996 and 1997,
the Company's five largest carrier customers accounted for approximately 40 and
47 percent, respectively, of the Company's total net revenues. In addition,
during the six months ended June 30, 1998, the Company's five largest carriers
accounted for approximately 33% of net revenues, with one carrier customer
accounting for approximately 19% 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 total net revenues (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
--------- --------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Videsh Sanchar Nigam Limited ("VSNL") $1,959 * * * *
WorldCom, Inc. ...................... * $7,383 $19,886 $7,694 $11,838
Frontier ............................ * * 12,420 * *
</TABLE>
* Revenue provided was less than 10 percent of total revenues for the year.
SIGNIFICANT SUPPLIERS
A significant portion of the Company's cost of services is purchased from a
limited number of suppliers. Including charges in dispute (see Note 4),
purchases from the five largest suppliers represented approximately 47 and 38
percent of cost of services in the year ended December 31, 1997 and the six
months ended June 30, 1998, respectively. The following suppliers provided 10
percent or more of the Company's total cost of services (in thousands):
F-19
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- ---------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
VSNL .............................. $7,155 $7,525 * $3,405 *
Cherry Communications ............. * 3,897 * * *
WorldCom, Inc. .................... * 3,972 $9,918 3,774 *
Pacific Gateway Exchange. ......... * * 8,893 * $5,993
Star Telecom ...................... * * * 1,348 *
</TABLE>
* Cost of services provided was less than 10 percent of total cost of
services for the year.
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 India.
11. INCOME TAXES:
The Company has net operating loss carryforwards ("NOLs") for Federal
income tax purposes of approximately $2,564,000 and $1,878,000 as of December
31, 1996 and 1997, respectively, which may be applied against future taxable
income and expire in years 2010 and 2011. The Company utilized a portion of
these NOLs to partially offset its taxable income for the year ended December
31, 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.
The tax effect of significant temporary differences, which comprise the
deferred tax assets and liabilities, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- -----------
DEFERRED TAX ASSETS:
<S> <C> <C>
Net operating loss carryforwards ......... $ 1,014 $ 725
Allowance for doubtful accounts .......... 336 909
Contested liabilities .................... 814 1,024
Cash to accrual adjustments .............. 778 460
Other .................................... 17 119
-------- --------
Total deferred tax assets ............... 2,959 3,237
Deferred tax liabilities:
Depreciation ............................. 66 204
Other .................................... -- 42
-------- --------
Total deferred tax liabilities .......... 66 246
-------- --------
Net deferred tax assets .................. 2,893 2,991
Valuation allowance ...................... (2,893) (2,991)
-------- --------
$ -- $ --
======== ========
</TABLE>
F-20
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
Pursuant to Section 448 of the Internal Revenue Code, the Company was
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 the years
ended December 31, 1995 and 1996. A provision for Federal alternative minimum
tax was recorded for the year ended December 31, 1997. The components of income
tax expense for the year ended December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31,
1997
------------------
<S> <C>
Current Provision
Federal ............................................. $ 171
Federal alternative minimum tax ..................... 29
State ............................................... 23
Deferred benefit
Federal ............................................. (86)
State ............................................... (12)
Benefit of net operating loss carryforwards ......... (194)
Increase in valuation allowance ....................... 98
------
$ 29
======
</TABLE>
The provision for income taxes results in an effective rate which differs
from the Federal statutory rate as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31,
1997
------------------
<S> <C>
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 ........................ 1.8
Benefit of net operating loss carryforwards ............ (38.6)
-----
Effective rate ......................................... 1.8%
=====
</TABLE>
F-21
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
12. QUARTERLY DATA (UNAUDITED):
The following quarterly financial data has been prepared from the financial
records of the Company without audit, and reflects all adjustments which, in the
opinion of management, were of a normal recurring nature (except as discussed in
notes (1), (2) and (3) below) and necessary for a fair presentation of the
results of operations for the interim periods presented. The operating results
for any quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTERS ENDED
(IN THOUSANDS)
----------------------------------------------------------------
1996 1997
-------------------------------------------------- -------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
----------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues (1) ..................... $ 4,722 $ 8,485 $ 7,652 $ 11,356 $ 12,372
Gross margin (2)(3)(1) ............... 255 563 889 627 1,607
Income (loss) from operations......... (444) (409) (740) (916) 256
Net income (loss) .................... $ (497) $ (465) $ (815) $ (1,053) $ 137
======== ======== ======== ========= =========
Basic earnings (loss) per share ...... $ (0.09) $ (0.09) $ (0.15) $ (0.19) $ 0.03
========= ========= ========= ========= =========
Weighted average common
shares outstanding - basic .......... 5,403 5,403 5,403 5,403 5,403
========= ========= ========= ========= =========
Diluted earnings (loss) per share $ (0.09) $ (0.09) $ (0.15) $ (0.19) $ 0.03
========= ========= ========= ========= =========
Weighted average common
shares and equivalent - di-
luted ............................... 5,403 5,403 5,403 5,403 5,474
========= ========= ========= ========= =========
<CAPTION>
QUARTERS ENDED
(IN THOUSANDS)
--------------------------------------------------------------------
1997 1998
----------------------------------------- --------------------------
JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net revenues (1) ..................... $ 16,464 $ 25,757 $ 31,264 $ 29,891 $ 33,462
Gross margin (2)(3)(1) ............... 1,979 3,089 3,399 4,236 4,632
Income (loss) from operations......... 349 738 754 713 (1,166)
Net income (loss) .................... $ 214 $ 413 $ 855 $ 899 $ (2,657)
========= ========= ========= ========= ========
Basic earnings (loss) per share ...... $ 0.04 $ 0.08 $ 0.10 $ 0.10 $ (0.30)
========= ========= ========= ========= ========
Weighted average common
shares outstanding - basic .......... 5,403 5,403 8,324 8,909 8,942
========= ========= ========= ========= ========
Diluted earnings (loss) per share $ 0.04 $ 0.07 $ 0.10 $ 0.10 $ (0.30)
========= ========= ========= ========= ========
Weighted average common
shares and equivalent - di-
luted ............................... 5,646 5,760 8,709 9,365 8,942
========= ========= ========= ========= ========
</TABLE>
- ----------
(1) During the second quarter of 1998, upon receipt of favorable collection
data, the Company reduced its allowance for doubtful accounts by
approximately $337,000.
(2) Vendor disputes and other disputed charges resolved in the fourth quarter
of 1997 resulted in net credits as estimated by management of approximately
$300,000, recognized as lower cost of services and general and
administrative expenses.
(3) During the first quarter of 1997, the Company's gross margin improved by
approximately $1.0 million over the fourth quarter of 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)
to a lesser extent, an increase in the percentage of residential traffic
originated on-net.
F-22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Startec Global Communications Corporation:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Startec Global Communications Corporation (a
Maryland corporation) included in this registration statement and have issued
our report thereon dated March 4, 1998. Our audits were 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 audits 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.,
March 4, 1998
S-1
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -------------------------------------------------- ----------- ---------- -------------- -------------- ----------
ADDITIONS
-------------------------
BALANCE CHARGED CHARGED TO
AT TO COSTS OTHER BALANCE
BEGINNING AND ACCOUNTS DEDUCTIONS AT END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBER(A) DESCRIBER(B) PERIOD
- -------------------------------------------------- ----------- ---------- -------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Reflected as reductions to the related assets:
Provisions for uncollectible accounts (deduc-
tions from trade accounts receivable)
Year ended December 31, 1995 ..................... $ 752 $ 150 $ 174 $ (619) $ 457
Year ended December 31, 1996 ..................... 457 783 464 (625) 1,079
Year ended December 31, 1997 ..................... 1,079 57 1,864 (647) 2,353
</TABLE>
- ----------
(a) Represents reduction of revenue for accrued credits on residential
business.
(b) Represents amounts written off as uncollectible.
S-2
<PAGE>
====================================== ======================================
NO DEALER, SALES REPRESENTATIVE
OR ANY OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR
TO MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH 160,000 WARRANTS
INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN TO PURCHASE
AUTHORIZED BY THE COMPANY OR THE
SELLING HOLDERS. THIS PROSPECTUS DOES COMMON STOCK
NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THOSE TO WHICH
IT RELATES NOR DOES IT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SUCH SECURITIES TO 200,226 SHARES
ANY PERSON IN ANY JURISDICTION IN
WHICH IT WOULD BE UNLAWFUL TO MAKE OF COMMON STOCK
SUCH AN OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE [STARTEC LOGO]
INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
----------------------
TABLE OF CONTENTS
PAGE
----
Note Regarding
Forward-Looking STARTEC GLOBAL
Statements .................. ii COMMUNICATIONS CORPORATION
Prospectus Summary ............ 1
Risk Factors .................. 9
Use of Proceeds ............... 23
Dividend Policy ............... 24
Price Range of Common Stock ... 24
Selected Financial and
Other Data .................. 25
Management's Discussion and
Analysis of Financial
Condition and Results of ------------------------------------
Operations .................. 26 PROSPECTUS
The International , 1998
Telecommunications
Industry..................... 36 ------------------------------------
Business ...................... 41
Management .................... 59
Principal Stockholders ........ 68
Certain Transactions .......... 70
Description of Capital Stock .. 71
Description of Warrants ....... 78
Certain United States
Federal Income Tax
Considerations .............. 83
Plan of Distribution .......... 85
Legal Matters ................. 86
Experts ....................... 86
Available Information ......... 86
Glossary of Terms ............. G-1
Index to Financial Statements . F-1
====================================== ======================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an estimate (except for the SEC registration
fees) 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.
SEC registration fees . ................................ $1,143
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 DIRECTORS AND OFFICERS
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
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
II-1
<PAGE>
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.
Upon completion of the Reorganization described in the Prospectus the
Delaware Charter will provide that the Company shall indemnify 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 the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise to the fullest extent permitted by the Delaware
General Corporation Law ("DGCL"), as the same may hereafter be amended, or as
otherwise permitted by law.
II-2
<PAGE>
Section 145 of the DGCL permits a corporation to indemnify its directors
and officers against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlements actually and reasonably incurred by them in
connection with any action, suit or proceeding brought by third parties, if such
directors or officers acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reason to believe
their conduct was unlawful. In a derivative action, i.e., one by or in the right
of the corporation, indemnification may be made only for expenses actually and
reasonably incurred by directors and officers in connection with the defense or
settlement of an action or suit, and only with respect to a matter as to which
they shall have acted in good faith and in a manner they reasonably believed to
be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made if such person shall have been adjudged liable to
the corporation, unless and only to the extent that the court in which the
action or suit was brought shall determine upon application that the defendant
officers or directors are fairly and reasonable entitled to indemnity for such
expenses despite such adjudication of liability.
As permitted by Section 102(b)(7) of the DGCL, the Delaware Charter
provides that no director of the Company will be liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Company; (2) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of the law; (3) under Section 174 of
the DGCL regarding improper dividends; or (4) for any transaction from which a
director derived an improper benefit.
The Company currently maintains, and intends to maintain in the future, at
its expense, a policy of insurance which insures its directors and officers,
subject to certain exclusions and deductions as are usual in such insurance
policies, against certain liabilities which may be incurred in such capacities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following sets forth information as of August 31, 1998, 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, Regulation D, Rule 144A or Rule 701 under 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.
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 "accredited" or "sophisticated"
investors and such persons represented to the Registrant that the shares were
purchased for investment purposes only and with no view toward distribution, or,
with respect to transactions pursuant to Rule 144A, that such investors met the
definition of "Qualified Institutional Buyer" under Rule 144A,
(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.
(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, during the period, the Registrant granted options
pursuant to its 1997 Performance Incentive Plan to 56 persons to purchase an
aggregate of up to 510,900 shares of Common Stock at exercise prices ranging
from $10.00 to $26.75 per share
(c) On July 1, 1997, the Registrant issued warrants to purchase up to
539,800 shares of its Common Stock to Signet Bank in connection with the
provision by Signet of a revolving credit facility.
(d) On July 29, 1997, the Registrant exchanged 17,175 shares of its
non-voting common stock held of record by Ram Mukunda for an equal number of
shares of its voting common stock.
(e) On September 11, 1997, the Registrant issued Atlantic-ACM a convertible
note which provided the holder with the option to acquire 3,000 shares of Common
Stock in lieu of payment in the principal amount of $30,000 owed by the
Registrant to Atlantic-ACM for certain consulting services.
II-3
<PAGE>
(f) On October 8, 1997, the Registrant issued warrants to purchase up to
150,000 shares of its Common Stock to Ferris, Baker Watts Incorporated and
Boenning & Scattergood, Inc., the underwriters of the Registrant's initial
public offering, as partial compensation for the services rendered by such
persons to the Registrant in connection therewith.
(g) On May 21, 1998, the Registrant issued 160,000 Units consisting of
$160,000,000 12% Senior Notes due 2008 and Warrants to purchase 200,226 shares
of Common Stock to Lehman Brothers Inc., Goldman, Sachs & Co. and ING Baring
(U.S.) Securities, Inc. in a private sale resulting in net proceeds to the
Registrant of approximately $155,000,000.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------
1.1++ -- Purchase Agreement, dated May 18, 1998, among the Company, Lehman
Brothers Inc., Goldman, Sachs & Co. and ING Barings (U.S.)
Securities, Inc. (the "Initial Purchasers").
3.1** -- Certificate of Incorporation of the Registrant.
3.2** -- Bylaws of the Registrant.
4.1 + -- Indenture, dated as of May 21, 1998, between the Registrant and
First Union National Bank.
4.2 + -- Form of 12% Series A Senior Notes due 2008.
4.3 + -- Registration Rights Agreement, dated as of May 21, 1998, among
the Registrant and the Initial Purchasers.
4.4 + -- Warrant Agreement, dated as of May 21, 1998 by and between the
Company and First Union National Bank, as Warrant Agent.
4.5 + -- Form of Warrant (included as Exhibit A to Exhibit 4.4)
4.6 + -- Collateral Pledge and Security Agreement, dated as of May 21,
1998, by and between the Company and First Union National Bank,
as Trustee.
5.1 * -- Opinion of Schnader Harrison Segal & Lewis, LLP.
10.1 ** -- Secured Revolving Line of Credit Facility Agreement dated as of
July 1, 1997 by and between Startec, Inc. and Signet Bank.
10.2 ** -- Lease by and between Vaswani Place Limited Partnership and
Startec, Inc. dated as of September 1, 1994, as amended.
10.3 ** -- Agreement by and between World Communications, Inc. and Startec,
Inc. dated as of April 25, 1990.
10.4 ** -- Co-Location and Facilities Management Services Agreement by and
between Extranet Telecommunications, Inc. and Startec, Inc. dated
as of August 28, 1997.
10.5 ** -- Employment Agreement dated as of July 1, 1997 by and between
Startec, Inc. and Ram Mukunda.
10.6 ** -- Employment Agreement dated as of July 1, 1997 by and between
Startec, Inc. and Prabhav V. Maniyar.
10.7 ** -- Amended and Restated Stock Option Plan.
10.8 ** -- 1997 Performance Incentive Plan.
10.9 ** -- Subscription Agreement by and among Blue Carol Enterprises,
Limited, Startec, Inc. and Ram Mukunda dated as of February 8,
1995.
10.10** -- Agreement for Management Participation by and among Blue Carol
Enterprises, Limited, Startec, Inc. and Ram Mukunda dated as of
February 8, 1995, as amended as of June 16, 1997.
10.11** -- Service Agreement by and between Companhia Santomensed De
Telecommunicacoes and Startec, Inc. as amended on February 8,
1995.
II-4
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------
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.
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 Services Agreement by and between Cherry Communications,
Inc. and Startec, Inc. dated as of June 7, 1995.
10.21 + -- Agreement by and between Northern Telecom Inc. and the Company,
dated as of Decem- ber 23, 1997.
10.22 + -- Indefeasible Right of Use Agreement by and between Teleglobe
Cantat-3, Inc. and the Company, dated as of September 15, 1997
(Canus 1 Cable System).
10.23 + -- Indefeasible Right of Use Agreement by and between Teleglobe
Cantat-3, Inc. and the Company, dated as of September 15, 1997
(Cantat 3 Cable System).
10.24++ -- Loan and Security Agreement by and between Prabhav V. Maniyar and
the Company, dated June 30, 1998.
10.25++ -- Lease by and between The Vaswani Place Corporation and the
Company, dated as of October 27, 1997.
10.26++ -- Indefeasible Right of Use Agreement by and between Cable &
Wireless Inc. and the Com- pany, dated June 9, 1998 (Gemini Cable
System).
10.27++ -- First Amendment to Lease by and between The Vaswani Place
Corporation and the Com- pany, dated May 11, 1998.
10.28++ -- International Facilities License, United Kingdom.
10.29 -- Columbus III Cable System Construction and Maintenance Agreement,
dated February 11, 1998.
21.1 -- Subsidiaries of Registrant.
23.1 -- Consent of Arthur Andersen LLP.
23.2* -- Consent of Schnader Harrison Segal & Lewis LLP (included in the
opinion filed as Exhibit 5.1).
24.1 -- Power of Attorney (included on signature page hereof).
27.1* -- Financial Data Schedule.
- ----------
* To be filed by amendment.
** Incorporated by reference from the Company's Registration Statement on Form
S-1 (SEC File No. 333-32753).
+ Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998.
++ Incorporated by reference from the Company's Registration Statement on Form
S-4 (SEC File No. 333-61779).
II-5
<PAGE>
(B) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules are included in Part II of the
Registration Statement: Schedule II Valuation and Qualifying Account
Schedules not listed above are omitted because they are not applicable, not
required, or the required information is included in the Financial Statements or
the Notes thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933, (ii) to reflect in the Prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 per cent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement, and (iii) to include any material
information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 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 Act and will be governed by the final adjudication of
such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, 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 Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, 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-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Bethesda, Maryland on September 28,
1998.
STARTEC GLOBAL COMMUNICATIONS CORPORATION
By:/s/ Ram Mukunda
------------------------------
Name: Ram Mukunda
Title: President, Chief Executive Officer
and Treasurer
POWER OF ATTORNEY
NOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Ram Mukunda and Prabhav V. Maniyar, and
each of them acting individually, as his attorneys-in-fact and agents, each with
full power of substitution and resubstitution, for him in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------- ------------------------------------- ------------------
<S> <C> <C>
/s/ Ram Mukunda President, Chief Executive Officer, September 28, 1998
- ------------------------- Treasurer and Director (Principal
Ram Mukunda Executive Officer)
/s/ Prabhav V. Maniyar Senior Vice President, Chief September 28, 1998
- ------------------------- Financial Officer, Secretary and
Prabhav V. Maniyar Director (Principal Financial and
Accounting Officer)
- ------------------------- Director September , 1998
Nazir G. Dossani
/s/ Richard K. Prins
- ------------------------- Director September 28, 1998
Richard K. Prins
/s/ Vijay Srinivas
- ------------------------- Director September 28, 1998
Vijay Srinivas
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------
1.1++ -- Purchase Agreement, dated May 18, 1998, among the Company, Lehman
Brothers Inc., Goldman, Sachs & Co. and ING Barings (U.S.)
Securities, Inc. (the "Initial Purchasers").
3.1** -- Certificate of Incorporation of the Registrant.
3.2** -- Bylaws of the Registrant.
4.1 + -- Indenture, dated as of May 21, 1998, between the Registrant and
First Union National Bank.
4.2 + -- Form of 12% Series A Senior Notes due 2008.
4.3 + -- Registration Rights Agreement, dated as of May 21, 1998, among
the Registrant and the Initial Purchasers.
4.4 + -- Warrant Agreement, dated as of May 21, 1998 by and between the
Company and First Union National Bank, as Warrant Agent.
4.5 + -- Form of Warrant (included as Exhibit A to Exhibit 4.4)
4.6 + -- Collateral Pledge and Security Agreement, dated as of May 21,
1998, by and between the Company and First Union National Bank,
as Trustee.
5.1 * -- Opinion of Schnader Harrison Segal & Lewis, LLP.
10.1 ** -- Secured Revolving Line of Credit Facility Agreement dated as of
July 1, 1997 by and between Startec, Inc. and Signet Bank.
10.2 ** -- Lease by and between Vaswani Place Limited Partnership and
Startec, Inc. dated as of September 1, 1994, as amended.
10.3 ** -- Agreement by and between World Communications, Inc. and Startec,
Inc. dated as of April 25, 1990.
10.4 ** -- Co-Location and Facilities Management Services Agreement by and
between Extranet Telecommunications, Inc. and Startec, Inc. dated
as of August 28, 1997.
10.5 ** -- Employment Agreement dated as of July 1, 1997 by and between
Startec, Inc. and Ram Mukunda.
10.6 ** -- Employment Agreement dated as of July 1, 1997 by and between
Startec, Inc. and Prabhav V. Maniyar.
10.7 ** -- Amended and Restated Stock Option Plan.
10.8 ** -- 1997 Performance Incentive Plan.
10.9 ** -- Subscription Agreement by and among Blue Carol Enterprises,
Limited, Startec, Inc. and Ram Mukunda dated as of February 8,
1995.
10.10** -- Agreement for Management Participation by and among Blue Carol
Enterprises, Limited, Startec, Inc. and Ram Mukunda dated as of
February 8, 1995, as amended as of June 16, 1997.
10.11** -- Service Agreement by and between Companhia Santomensed De
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 October 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.
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------
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 Services Agreement by and between Cherry Communications,
Inc. and Startec, Inc. dated as of June 7, 1995.
10.21 + -- Agreement by and between Northern Telecom Inc. and the Company,
dated as of Decem- ber 23, 1997.
10.22 + -- Indefeasible Right of Use Agreement by and between Teleglobe
Cantat-3, Inc. and the Company, dated as of September 15, 1997
(Canus 1 Cable System).
10.23 + -- Indefeasible Right of Use Agreement by and between Teleglobe
Cantat-3, Inc. and the Company, dated as of September 15, 1997
(Cantat 3 Cable System).
10.24++ -- Loan and Security Agreement by and between Prabhav V. Maniyar and
the Company, dated June 30, 1998.
10.25++ -- Lease by and between The Vaswani Place Corporation and the
Company, dated as of October 27, 1997.
10.26++ -- Indefeasible Right of Use Agreement by and between Cable &
Wireless Inc. and the Com- pany, dated June 9, 1998 (Gemini Cable
System).
10.27++ -- First Amendment to Lease by and between The Vaswani Place
Corporation and the Com- pany, dated May 11, 1998.
10.28++ -- International Facilities License, United Kingdom.
10.29 -- Columbus III Cable System Construction and Maintenance Agreement,
dated February 11, 1998.
21.1 -- Subsidiaries of Registrant.
23.1 -- Consent of Arthur Andersen LLP.
23.2* -- Consent of Schnader Harrison Segal & Lewis LLP (included in the
opinion filed as Exhibit 5.1).
24.1 -- Power of Attorney (included on signature page hereof).
27.1* -- Financial Data Schedule.
- ----------
* To be filed by amendment.
** Incorporated by reference from the Company's Registration Statement on Form
S-1 (SEC File No. 333-32753).
+ Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998.
++ Incorporated by reference from the Company's Registration Statement on Form
S-4 (SEC File No. 333-61779).
COLUMBUS III CABLE SYSTEM
CONSTRUCTION AND MAINTENANCE AGREEMENT
[COLUMBUS III LOGO]
<PAGE>
TABLE OF CONTENTS
PARAGRAPH PAGE
1. Definitions 2
2. Columbus III Segments and Subsegments 5
3. Provision and Ownership of Segments and Subsegments and 7
Additional Property
4. Supply of Segment S of Columbus III 7
5. Establishment of Columbus III General Committee 7
6. Procurement Group 9
7. Obligation to Provide Transiting and Other Facilities to Extendd 10
Columbus III Capacity
8. Obligation to Provide Inland System Connections 11
9. Definition of Capital Costs of Segment S of Columbus III 11
10. Allocation and Billing of Capital Costs of Segment S Columbus III 12
11. Acquisition and Transfer of Capacity 14
12. Assignment and Use of Capacity 16
13. Decrease or Increase of the Columbus III Design Capacity 18
14. Duties and Rights as to Operation and Maintenance of Columbus III 19
15. Allocation and Billing of the Operation and Maintenance Costs of 20
Segment S
16. Use of Segment D 21
Page i
<PAGE>
TABLE OF CONTENTS
17. Use of Segments A, B, and C 24
18. Keeping and Inspection of Books for Columbus III 26
19. Currency and Place of Payment 27
20. Duration of Agreement and Realization of Assets 27
21. Obtaining of Licences 29
22. Confidential Information 29
23. Privileges for Documents or Communications 30
24. Relationship and Liability of the Parties 30
25. Assignment of Rights and Obligations 31
26. Default 31
27. Settlement of claims by the Parties 32
28. Waiver 33
29. Severability 33
30. Force Majeure 33
31. Paragraph and Subparagraph Headings 34
32. Execution and Interpretation of this Agreement and Supplementary 32
Agreement
33. Settlement of Disputes 35
Page ii
<PAGE>
TABLE OF CONTENTS
34. Successors Bound 35
35. Entire Agreement 35
36. Interpretation 38
Additional Property
37. Testimonium 39
Page iii
<PAGE>
TABLE OF CONTENTS
Schedules
Schedule A Parties to the Agreement
Schedule B Voting Interests
Schedule C Ownership and Allocation of Capital Costs of Segment S
Schedule D Allocation of Operation and Maintenance Costs of Segment S
Schedule E Allocation of Capital Costs of the Cable Stations
Schedule F Allocation of Operation and Maintenance Costs of the Cable
Stations
Schedule G Assignment of Underwritten MIUs in Subsegment S4
Schedule H-0 Total Assignment of Jointly Owned MIUs (by Subsegment)
Schedule H-1 Assignment of Jointly Owned MIUs in Subsegment S1
Schedule H-2 Assignment of Jointly Owned MIUs in Subsegment S2
Schedule H-3 Assignment of Jointly Owned MIUs in Subsegment S3
Schedule H-4 Assignment of Jointly Owned MIUs in Subsegment S4
Schedule H-5 Assignment of Jointly Owned MIUs in Subsegment S5
Schedule H-6 Summary of Jointly Owned MIUs in the Path Mazara (Italy)
to Conil (Spain)
Schedule H-7 Summary of Jointly Owned MIUs in the Path Mazara (Italy)
to Lisboa (Portugal)
Schedule H-8 Summary of Jointly Owned MIUs in the Path Mazara (Italy)
to Hollywood (Florida, U.S.A.)
Schedule H-9 Summary of Jointly Owned MIUs in the Path Conil (Spain) to
Hollywood (Florida, U.S.A.)
Schedule H-10 Summary of Jointly Owned MIUs in the Path Lisboa (Portugal) to
Hollywood (Florida, U.S.A.)
Schedule I-1 Assignment of Wholly Owned MIUs (by Segment)
Schedule I-2 Summary of Wholly Owned MIUs in the Path Mazara (Italy) to
Conil (Spain)
Schedule I-3 Summary of Wholly Owned MIUs in the Path Mazara (Italy) to
Lisboa (Portugal)
Schedule I-4 Summary of Wholly Owned MIUs in the Path Mazara (Italy) to
Hollywood Florida, U.S.A.)
Page iv
<PAGE>
Schedule I-5 Summary of Wholly Owned MIUs in the Path Conil (Spain) to
Hollywood (Florida, U.S.A.)
Schedule I-6 Summary of Wholly Owned MIUs in the Path Lisboa (Portugal) to
Hollywood (Florida, U.S.A.)
Schedule J-1 Assignment of Wholly Owned MIUs Pool (by Subsegment)
Schedule J-2 Summary of Wholly Owned MIUs Pool in the Path Mazara (Italy )
to Conil (Spain)
Schedule J-3 Summary of Wholly Owned MIUs Pool in the Path Mazara (Italy) to
Lisboa (Portugal)
Schedule J-4 Summary of Wholly Owned MIUs Pool in the Path Mazara (Italy) to
Hollywood (Florida, U.S.A.)
Schedule J-5 Summary of Wholly Owned MIUs Pool in the Path Conil (Spain) to
Hollywood (Florida, U.S.A.)
Schedule J-6 Summary of Wholly Owned MIUs Pool in the Path Lisboa (Portugal)
to Hollywood (Florida, U.S.A)
Schedule K-1 Assignment of Notional Capacity (by Subsegment)
Schedule K-2 Summary of Notional Capacity in the Path Mazara (Italy) to
Conil (Spain)
Schedule K-3 Summary of Notional Capacity in the Path Mazara (Italy) to
Lisboa (Portugal)
Schedule K-4 Summary of Notional Capacity in the Path Mazara (Italy) to
Hollywood (Florida, U.S.A.)
Schedule K-5 Summary of Notional Capacity in the Path Conil (Spain) to
Hollywood (Florida, U.S.A.)
Schedule K-6 Summary of Notional Capacity in the Path Lisboa (Portugal) to
Hollywood (Florida, U.S.A.)
Schedule L-1 Assignment of Allocated Capacity (by Subsegment)
Schedule L-2 Summary of Allocated Capacity in the Path Mazara (Italy) to
Conil (Spain)
Schedule L-3 Summary of Allocated Capacity in the Path Mazara (Italy) to
Lisboa (Portugal)
Schedule L-4 Summary of Allocated Capacity in the Path Mazara(Italy) to
Hollywood (Florida, U.S.A.)
Schedule L-5 Summary of Allocated Capacity in the Path Conil (Spain) to
Hollywood (Florida, U.S.A.)
Schedule L-6 Summary of Allocated Capacity in the Path Lisboa (Portugal) to
Hollywood (Florida, U.S.A.)
Page v
<PAGE>
TABLE OF CONTENTS
Schedule M-0 Total Assignment of all Standard IRU Capacity sold (by
Subsegment)
Schedule M-1 Assignment of all Standard IRU Capacity sold in Subsegment S1
Schedule M-2 Assignment of all Standard IRU Capacity sold in Subsegment S2
Schedule M-3 Assignment of all Standard IRU Capacity sold in Subsegment S3
Schedule M-4 Assignment of all Standard IRU Capacity sold in Subsegment S4
Schedule M-5 Assignment of all Standard IRU Capacity sold in Subsegment S5
Schedule M-6 Summary of all Standard IRU Capacity sold in the Path Mazara
(Italy) to Conil (Spain)
Schedule M-7 Summary of all Standard IRU Capacity sold in the Path Mazara
(Italy) to Lisboa (Portugal)
Schedule M-8 Summary of all Standard IRU Capacity sold in the Path Mazara
(Italy) to Hollywood (Florida, U.S.A.)
Schedule M-9 Summary of all Standard IRU Capacity sold in the Path Conil
(Spain) to Hollywood (Florida, U.S.A.)
Schedule M-10 Summary of all Standard IRU Capacity sold in the Path Lisboa
(Portugal) to Hollywood (Florida, U.S.A.)
Schedule N Summary of Financial Credits
ANNEXES
Annex 1 Assignment, Routing and Restoration Subcommittee Terms of
Reference
Annex 2 Operation and Maintenance Subcommittee Terms of Reference
Annex 3 Financial and Administrative Subcommittee Terms of Reference
Annex 4 Central Billing Party Terms of Reference
Annex 5 Network Administrator Terms of Reference
Annex 6 Procurement Group Terms of Reference
EXHBITS
Exhibit 1 Columbus III Architecture
Exhibit 2 Columbus III Fiber Pairs Configuration
Exhibit 3 Columbus III Ring Configuration
Exhibit 4 Columbus III Capacity Definitions
Exhibit 5 Columbus III Bodies Structure
Page vi
<PAGE>
COLUMBUS III CABLE SYSTEM
CONSTRUCTION AND MAINTENANCE AGREEMENT
This Agreement is entered into as of this 11th day of February, 1998,
between and among the Parties signatory hereto (hereinafter collectively called
"Parties"), which Parties are identified in Schedule A attached hereto.
WITNESSETH:
WHEREAS, telecommunications services are being provided between and among
the European Continent on the East, and the North American Continent and its
territories on the West, by means of transatlantic submarine cables and
satellite facilities, and
WHEREAS, it is the intention of the Parties to provide and construct a
submarine cable system called the Columbus III cable system (hereinafter called
"Columbus III") which will be used to provide telecommunications services
between points in or reached via Italy, Spain, Portugal and Florida, U.S.A., and
points beyond, and to operate and maintain it jointly in the most cost effective
manner, and
WHEREAS, a Memorandum of Understanding was signed on the 3rd day of April
1997, and an Addendum No. 1 to the Memorandum of Understanding was signed on the
30th day of July 1997, and
WHEREAS, it is the intention of the Parties to acquire an investment share
corresponding to their capacity requirements for the use of Columbus III through
at least the year 2009, and
WHEREAS, the Parties invited other Telecommunications Entities to become
Parties to this Agreement, and
WHEREAS, the Parties now desire to define the terms and conditions upon
which Columbus III will be provided, constructed, maintained, and operated.
1
<PAGE>
NOW, THEREFORE, the Parties, in consideration of the mutual covenants
herein expressed, covenant and a-ree with each other as follows:
1. DEFINITIONS
The following, definitions shall apply throughout this Agreement:
(A) Basic System Module:
A Basic System Module of Columbus III shall consist of a 155 Mbps digital
line section with interfaces provided in accordance with all appropriate ITU-T
Recommendations.
(B) Bit Sequence Independence:
The property of a binary transmission channel, telecommunication circuit or
connection, that permits all sequences of binary signal elements to be conveyed
over it at its specified bit rate, without chan-c to the value of any si-nal
elements in accordance with all the appropriate ITU-T Recommendations.
(C) Branching Unit:
A Branching Unit (hereinafter called "BU") shall be a device composed of a
housing, and any associated equipment that is required as a junction point for
Columbus III in order to arrange for the fiber pairs in Segment S of Columbus
III to be separated between the System Interface locations,
(D) Cable Landing Point:
Cable Landing Point shall be the beach joint at the respective cable
landing locations or mean low water line if there is no beach joint.
(E) Capacity (as shown in Exhibit 4):
o Allocated Capacity: The capacity as shown in Schedule L, which
consists of the Notional Capacity, plus the Standard IRU
Capacity.
o Common Reserve Capacity: The capacity which is the difference
between the Design Capacity and the sum of the Allocated Capacity
plus the In-System Restoration Capacity.
o Design Capacity: The capacity which Segment S is technically able
to carry, and which will consist initially of 64 Basic System
Modules, The Design Capacity will consist of the Allocated
Capacity, plus the Common Reserve Capacity, plus the In-System
Restoration Capacity.
o In-System Restoration Capacity: The capacity which at a given
moment is reserved to provide in- System restoration. Such
capacity shall be limited to fifty percent (50%) of the Design
Capacity, unless otherwise decided by the General Committee.
2
<PAGE>
o Notional Capacity: The capacity as shown in Schedule K, which
consists of the Jointly Owned MIUs, plus the Wholly Owned MIUs,
plus the Underwritten MIUs, plus the Wholly Owned MIUs Pool:
- Underwritten MIUS: The capacity which MARCONI has acquired
in Subsegment S4 with the objective to subsidize such
Subsegment, as shown in Schedule G.
- Jointly Owned MTUS: The capacity acquired at the time of
execution of this Agreement, by one Party for joint use with
another Party, as shown in Schedule H.
- Wholly Owned MIUS: The capacity acquired at the time of
execution of this Agreement, by one Party for its wholly
use, or for jointly use with another Party or
Telecommunications Entity, as shown in Schedule I.
- Wholly Owned MIUs Pool: A pool composed by the aggregate per
Path of those Wholly Owned MIUs that a Party derides to make
available for such a Pool, as shown in Schedule J.
After the execution of this Agreement, the Notional Capacity may vary
as a result of acquisitions from the Underwritten MIUs or from the
Wholly Owned MIUs Pool, and/or movements of capacity to/from the
Wholly Owned MIUs Pool, and/or assignments of capacity to the Parties
after an expansion of the Notional Capacity, and/or assignments of
capacity to one Party as a result of a reassignment of Wholly Owned
MIUs by Path.
o Standard IRU Capacity: The capacity as shown in Schedule M, which
has been sold on a Standard IRU Agreement basis, from the Common
Reserve Capacity, and/or from the Underwritten MIUS, and/or from
the Wholly Owned MIUs Pool.
(F) Country:
The word "Country" shall mean a country, territory or place, as
appropriate.
(G) Dedicated Link:
The portion of Columbus III consisting of a dedicated and fully equipped
optical fiber pair between Lisboa and Ponta Delgada (Azores Islands, Portugal)
with the associated terminal equipment in Lisboa and Ponta Delgada, provided
through the Supply Contract(s), and to be sold to MARCONI.
(H) Designated Financial Credit:
That portion of a Party's Financial Credit that it dccidcs to be used for
future capacity acquisitions by such Party, and not included in the Financial
Credit Pool,s shown in Schedule N.
(I) Financial Credit:
The Credit as shown in Schedule N, obtained by a Party in return for its
respective level of investment, and by MARCONI also in return for acquisitions
by a
3
<PAGE>
third party from the Underwritten MIUs through a Standard IRU Agreement where
Financial Credit was used for payment. Financiai Credit may be used, for
acquisition by a Party of capacity coming from the Underwritten MIUs and/or from
the Common Reserve Capacity using its Designated Financial Credit, or for
receivin- funds derived from the sales of the Common Reserve Capacity through
the Financial Credit Pool.
(J) Financial Credit Pool:
A pool composed by the aggregate of those Financial Credit amounts that a
Party decides to make available for such a Pool, and not included in its
Designated Financial Credit, as shown in Schedule N.
(K) Landing Point Parties:
Landing Point Parties shall mean AT&T, MARCONI, TELECOM ITALIA and
TELEFONICA DE ESPARA.
(L) Minimum Investment Unit:
Minimum Investment Unit (hereinafter called "MIU") shall mean a capacity
designated as the minimum unit of investment in Columbus III mapped onto a VC-12
and allowing the use of a nominal 2 Mbps bearer and all associated overhead bits
for multiplexing in each direction per all the appropriate ITU T
Recommendations.
(M) Multiplex Equipment:
That equipment to be provided for bidirectional use between the MIU access
points and the corresponding System Interface equipment, which shall provide for
grooming of all payload within Columbus III according to all appropriate ITU-T
Recommendations.
(N) Path:
The connectivity in Columbus III between any two System Interfaces,
assuming a direct connection between these System Interfaces and independent of
the physical links used to connect such System Interfaces.
(0) Ready for Customer Service (RFCS) Date:
The date on which Columbus III will be available for customer service. The
RFCS Date is planned to be by September, 1999.
(P) Ready for Provisional Acceptance (RFPA) Date:
The date on which Columbus III is to be accepted from the Supplier(s). The
RFPA Date is planned to be by July, 1999.
(Q) Schedules:
Schedules shall be the initial schedules attached hereto and made a part
hereof and any written amendments thereto or any schedule substituted therefore
in accordance with the provisions of this Agreement.
(R) Standard IRU Agreement,
The standard agreement that provides terms and conditions for acquisition
of capacity on an Indefeasible Right of Use (hereinafter called "IRU") basis,
from the
4
<PAGE>
Wholly Owned MIUs Pool, and/or Underwritten MIUs, and/or Common Reserve
Capacity.
(S) Standard IRU Holder:
A Party or Telecommunications Entity that has acquired capacity in Columbus
III through a Standard IRU Agreement.
(T) System Interface:
The System Interface location shall be the digital input/output ports
(either optical or electrical) where the 155 Mbps digital line section connects
with other transmission facilities or equipment. The System Interface shall be
at the 155 Mbps level as defined by all the appropriate ITU-T Recommendations.
(U) Telecommunications Entity:
Any entity authorized under the laws of its respective Country, to acquire
and use facilities for the provision of telecommunications services.
2. COLUMBUS III SEGMENTS AND SUBSEGMENTS
(A) In accordance with this Agreement, Columbus III, shall be provided,
constructed, maintained, and operated among Cable Stations in Mazara del Vallo
(Italy), Conil (Spain), Lisboa (Portugal) and Hollywood (Florida, U.S.A.).
(B) For purposes of this Agreement, Columbus III shall be regarded as
consisting of Segments A, B, C, D and S.
(C) Segment S shall be the whole of the submarine cable and all associated'
equipment provided between and including the System Interfaces and all
associated interconnection equipment at the relevant Cable Stations. Segment S
shall be regarded as consisting of the following Subsegments comprising two
fiber optic pairs each:
(i) Subsegment SI: A submarine cable linking Segment A to BUl and
shall include 1/3 of BUl.
(ii) Subsegment S2: A submarine cable linking Segment B to BUl and
shall include 1/3 of BUI.
(iii)Subsegment S3: A submarine cable linking BUI to BU2 and shall
include 1/3 of BU I and 1/3 of BU2.
(iv) Subsegment S4: A submarine cable linking Segment C to BU2 and
shall include 1/3 of BU2.
(v) Subsegment SS: A submarine cable linking Segment D to BU2 and
shall include 1/3 of BU2.
(D) Segment S shall also include:
(i) all transmission equipment, power feeding equipment, maintenance
equipment and any special test equipment directly associated with
the submersible plant, and
5
<PAGE>
(ii) the transmission cable equipped with appropriate optical
amplifiers and branching units between the Cable Stations, and
(iii)the sea earth cable and electrode system and/or an appropriate
share thereof, associated with the terminal power feeding
equipment, and
(iv) the associated interconnection equipment, as required to meet the
internal connectivity of Columbus III, to be approved by the
General Committee.
(E) Segment A shall be an appropriate share of a Cable Station located in
Mazara del Vallo (Italy).
(F) Segment B shall be an appropriate share of a Cable Station located in
Conil (Spain).
(G) Segment C shall be an appropriate share of a Cable Station located in
Lisboa (Portugal).
(H) Segment D shall be an appropriate share of a Cable Station located in
Hollywood (Florida U.S.A.).
(I) Segments A, B, C and D (hereinafter also called "Cable Station(s)")
shall also include an appropriate share of land and buildings at the specified
locations for the cable landing and for the cable right of way and cable ducts
between the Cable Station and its respective Cable Landing Point, an appropriate
share of common services and equipment (other than services and equipment
associated solely with Columbus III), and the Multiplex Equipment at each of the
locations necessary to establish transmission rates bellow the nominal 155 Mbps
level associated solely with Columbus III, but which is not part of Segment S.
(J) Each Segment or Subsegment shall be regarded as including its related
spare and standby units and components including, but not limited to, repeaters,
branching units, cable lengths, and terminal equipment, or a proportionate share
thereof.
(K) As shown in Exhibits 1, 2 and 3, Columbus III shall be a trunk and
branch architecture configured in a collapsed ring including Segments A, B, C
and D, and Subsegments SI, S2, S3, S4 and S5.
(L) Columbus III shall provide the following Paths:
(i) Mazara del Vallo - Conil
(ii) Mazara del Vallo - Lisboa
(iii) Mazara del Vallo - Hollywood
(iv) Conit - Hollywood
(v) Lisboa - Hollywood
(M) Columbus III may include, subject to the approval of the General
Committee, a Dedicated Link between Lisboa (Portugal) and Ponta Delgada (Azores
Islands, Portugal) consisting of one fully equipped optical fiber pair with its
associated terminal equipment in the respective Cable Stations. In the case of
6
<PAGE>
inclusion of such Dedicated Link in Columbus III, the ownership of such
Dedicated Link will be transferred to MARCONI on terms and conditions to be
provided by an appropriate separate agreement to be signed by the Landing Point
Parties on behalf of the Parties.
3. PROVISION AND OWNERSHIP OF SEGMENTS AND SUBSEGMENTS AND ADDITIONAL
PROPERTY
(A) Segment A shall be provided and owned by TELECOM ITALIA.
(B) Segment B shall be provided and owned by TELEFONICA DE ESPA&A.
(C) Segment C shall be provided and owned by MARCONI.
(D) Segment D shall be provided and owned by AT&T.
(E) Each Party responsible for the provision of Segments A, B, C and D
shall be responsible for the land construction and rearrangements and/or
additions to the common plant at the Cable Station in its Country and other
activities not covered in the Supply Contract(s) for its respective Cable
Station.
(F) Segment S shall be provided in accordance with Paragraph 4 of this
Agreement and shall be owned by the Parties in common and undivided shares, in
the proportions set forth in Schedule C.
(G) In this Agreement, references to any Segment or Subsegment, however
expressed, shall be deemed to include, unless the content otherwise requires,
additional property incorporated therein by agreement of the Parties.
4. SUPPLY OF SEGMENT S OF COLUMBUS III
The supply of Segment S and of the associated Multiplex Equipment in each
of the Cable Stations, shall be through contract(s) (hereinafter called "Supply
Contract(s)") to be placed by a procurement group established pursuant to
Paragraph 6 (hereinafter called the "PG"), with Supplier(s) to be selected by
the PG, following the submission and evaluation of proposals from prospective
suppliers through an international call for bids. The placing of a Supply
Contract(s) by the PG shall be subject to prior authorization by the General
Committee.
5. ESTABLISHMENT OF COLUMBUS III GENERAL COMMITTEE
(A) For the purpose of directing the progress of the engineering,
provisioning, installation, bringing into service and continued operation and
maintenance of Columbus III, the Parties shall form a Columbus III General
Committee (hereinafter called the "General Committee"), consisting of one
representative from each of the Parties to this Agreement, which committee shall
make all decisions necessary on behalf of the Parties to effectuate the purposes
of this Agreement.
7
<PAGE>
(B) TELECOM ITALIA shall provide the General Coordinator. For the conduct
of its meetings, the General Committee shall elect a chairperson for each
meeting.
(C) The General Committee will meet on the call of the General Committee
Coordinator or whenever requested by at least two (2) Parties resenting at least
five percent (5%) of the total voting interests specified in Schedule B and
including at least one Landing Point Party. The General Committee Coordinator
shall give at least thirty (30) days advance notice of each meeting, together
with a copy of the draft agenda. In cases of emergency, such notice period may
be reduced where at least seventy-five percent (75%) of the total voting
interests specified in Schedule B is in agreement. Discussion documents for the
meeting should be made available to members fourteen (14) days before the
meeting, but the General Committee may agree to discuss papers distributed on
less than fourteen (14) days notice. Meetings of the General Committee shall be
considered convened if at least sixty-six percent (66%). of the total voting
interests specified in Schedule B is represented by the attending Parties
(hereinafter called "Quorum").
(D) All decisions made by the General Committee shall be subject, in the
first place, to consultation among the Parties which shall make every reasonable
effort to reach consensus with respect to matters to be decided. However, in the
event consensus cannot be reached, the decision will be carried on the basis of
a vote. Unless other-wise stated in this Agreement, the vote will be carried by
a majority (more than fifty percent (50%)) of the total voting interests
specified in Schedule B,including at least two Landing Point Parties.
(E) Two or more Parties may designate the same person to serve as their
representative at specific meetings of the General Committee and its
Subcommittees. Any Party not represented at a General Committee meeting, but
entitled to vote, may vote on any matter on the agenda of such meeting by either
appointing a proxy in writing, or giving notice in writing of such vote to the
General Committee Coordinator prior to the submission of such matters for vote
at such meeting. A member of the General Committee representing more than one
Party shall separately cast the vote to which each Party he represents is
entitled.
(F) Following the call for a General Committee meeting, if the General
Committee Coordinator has not received confirmation of attendance by the Parties
to ensure that a Quorum for a General Committee meeting will be achieved, or in
case that during the current meeting a majority (more than fifty percent (50%))
of the total voting interests specified in Schedule B has not been reached in a
vote, the General Committee Coordinator shall, within ten (10) days, send out
invitations to all Parties for another General Committee meeting indicating the
circumstances for re. scheduling the meeting with the same working agenda. In
such cases, no Quorum will be required, and any vote will be carried by a
majority (more than fifty percent (50%) of the voting interests cast, including
at least two Landing Point Parties.
(G) To aid the General Committee in the performance of its duties, the
following bodies shall be formed (as shown in Exhibit5):
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i) a capacity Assignment, Routing and Restoration Subcommittee
(hereinafter called"AR&R Subcommittee);
iii) an Operation and Maintenance Subcommittee (hereinafter called
"O&M Subcommittee");
iii) a Financial and Administrative Subcommittee hereinafter called
"F&A Subcommittee");
iv) a Central Billing Party (hereinafter called "CBP"),
v) a Network Administrator (hereinafter called "NA").
These bodies shall be responsible for their respective areas of interest
listed in Annexes 1, 2, 3, 4 and 5, and any other areas of interest designated
by the General Committee. The General Committee may also appoint other bodies to
address specific questions which may arise.
(H) Subcommittees shall meet at least once annually after the date of this
Agreement and more frequently if necessary, until two years following the
Columbus III RFCS Date, and thereafter as is determined by the General
Committee. Meetings of a Subcommittee may be called to consider specific
questions at the discretion of its chairperson or whenever requested by at least
two (2) Parties representing at least five percent (5%) of the total voting
interests specified in Schedule B and including at east one Landing, Point
Party.
(I) After final acceptance of Columbus III, the General Committee shall
determine whether any of its Subcommittees or any other body should remain
inexistence. In the event that the General Committee determines that any of its
Subcommittees or any other body should be dissolved, the General Committee may
have the right to determine, in accordance with Subparagraph S(D) through (F),
the manner in which the Subcommittee's or any body's responsibilities shall be
reassigned.
(J)All decisions made by the General Committee shall be binding on the
Parties. No decisions of the General Committee, its Subcommittees, the PG, the
CBP,the NA or any other body established by the General Committee shall override
any provisions of this Agreement or, in any way diminish the rights or prejudice
'the interests granted to any Party or Parties under this Agreement.
6. PROCUREMENT GROUP
(A) The PG shall be formed, consisting of representatives from AT&T,
MARCONI, TELECOM ITALIAand TELEFONICA DE ESPANA. Subject to Paragraph 4, the PG
shall act on behalf of the Parties to this Agreement in all procurement matters
and be solely responsible for all actions as may be required to contract on a
joint, but not several basis with the Supplier(s) to provide Segment S of
Columbus III.
(B) The responsibilities of the PG are contained in its Terms of Reference
listed in Annex 6.
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(C) In the event that any part of Segment S fails to meet the
specifications in the relevant Supply Contract(s) for its provision or is not
engineered, provided, installed and ready in sufficient time to permit Segment S
to be provisionally accepted on or before the planned RFPA Date, or, if a
Supplier(s) is otherwise in material breach of its Supply Contract(s), the PG
shall immediately notify the General Committee and take such action as may be
necessary to exercise the rights and remedies available under the terms and
conditions of the relevant Supply Contract(s). The PG shall also take any other
action directly against a Supplier(s) as may be necessary to exercise rights and
remedies avaialbe under the relevant Supply Contract(s). Such action by the PG
shall be subject to its Terms of Reference and to any direction deemed necessary
by the General Committee.
(D) Upon request, each of the Parties shall be entitled to receive a copy
of the Supply Contract(s), at the requesting Party's expense and pursuant to the
terms Paragraph 22 of this Agreement.
(E) The PG shall not be liable to any other Party for any loss or damage
sustained by reason of the Supplier(s)' failure to perform in accordance with
the terms and conditions of the Supply Contract(s), or as a result of Segment S
of Columbus III not being ready for provisional acceptance on or before the
planned RFPA Date, or if Columbus III does not perform in accordance with the
technical specifications and other requirements of the Supply Contract(s), or if
Columbus III is not placed into operation. The Parties to this Agreement
recognize that the PG does not guarantee or warrant:
i) the performance of the Supply Contract(s) by the Supplier(s), or
ii) the performance or reliability of Segment S of Columbus III, or
iii) that Columbus III will be placed into operation,
and the Parties hereby agree that nothing in this Agreement shall be construed
as such a warranty or guarantee.
7. OBLIGATION TO PROVIDE TRANSITING AND OTHER FACILITIES TO EXTEND COLUMBUS
III CAPACITY
(A) Except as provided hereinafter in this Subparagraph 7(A), each of the
Landing Point Parties shall use all reasonable efforts to furnish and maintain,
or cause to be furnished and maintained, in efficient working order, for the
other Parties and/or Standard IRU Holders not from that Landing Point Party's
Country, for the duration of this Agreement, such facilities in its respective
Country, as may be reasonably required for extending capacity in Columbus III
assigned to such Parties and/or Standard IRU Holders for the purpose of handling
communications transiting its respective Country. No Party shall be required
under this Agreement to furnish such facilities in its Country to other Parties
and/or Standard IRU Holders from its own Country. The Provision of the
facilities mentioned in this Subparagraph shall be the subject of separate
agreements acceptable to the affected Parties and Standard IRU Holders.
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(B) At the request of a specific Party, and under a separate agreement,
facilities and equipment shall be supplied by the Landing Point Parties within
the Cable Station to provide interconnection between PDH and SDH di-ital
submarine cable systems to meet the various requirements at the 155 Mbps, 140
Mbps, 45 Mbps, 34 Mbps and 2 Mbps ITU-T Recommendations interfaces.
(C) The digital facilities and/or digital multiplexing equipment provided
pursuant to Subparagraph 7(A) and (B) shall be suitable for extending capacity
in Columbus III and shall be furnished and maintained on terms and conditions
which shall be no less favorable than those granted to other Telecommunications
Entities for transmission facilities of similar type and quantity transiting the
location involved. Such terms and conditions shall not be inconsistent with
applicable governmental regulations in the location in which the facilities are
located.
(D) Upon request, AT&T will provide U.S.A. Parties to this Agreement
suitable space and will provide connection at the Hollywood Cable Station for
operation and control purposes relating to capacity assigned, or to be assigned,
to them in Columbus III. AT&T may provide such space in a building separate from
its Cable Station, but adjacent to the Cable Station. For these purposes, such
U.S.A. Parties shall have the right to provide their own personnel and equipment
in such space and shall reimburse AT&T for the reasonable jointly agreed costs
incurred in complying with this Subparagraph 7(D), including, but not limited
to, the costs of any building additions that may be reasonably required.
8. OBLIGATION TO PROVIDE INLAND SYSTEM CONNECTIONS
Each of the Parties to this Agreement, at its own expense, on or before the
RFPA Date, shall do, or cause to be done, all such acts and things as may be
necessary within its operating territory to provide suitable connection for its
jointly or wholly assigned capacity in Columbus III with its inland
communication systems in its operating territory. With respect to U.S.A.
Parties, their operating territories in the Continental U.S.A. shall be
considered separate and distinct from the operating territory in other U.S.A.
jurisdictions. Such U.S.A. Parties shall provide such connection within the
Continental U.S.A., dependent upon the location of the operating territory to be
served.
9. DEFINITION OF CAPITAL COSTS OF SEGMENT S OF COLUMBUS III
(A) Capital costs of Segment S, as used in this Agreement, refers to costs
incurred in engineering, providing, and constructing Segment S, or causing it to
be engineered, provided, and constructed, or in laying or causing to be laid
cables, repeaters, BUs and joint housings, or in installing or causing to be
installed cable system equipment, and shall include:
i) the costs incurred under the Columbus III MOU, and
ii) those costs payable to the Supplier(s) under the Supply
Contract(s), and
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iii) other costs incurred under the direction of the PG and those
capital costs directly incurred by the Landing Point Parties, the
CBP, the NA or any other Party authorized by the General
Committee which shall be fair and reasonable in amount and not
included in the Supply Contract(s). and which have been directly
and reasonably incurred for the purpose of, or to be properly
chargeable in respect of such engineering, provision,
construction, installation and laying of Segment S of Columbus
III. Such costs shall include but are not limited to, the costs
of engineering, design, materials, manufacturing, procurement and
inspection, installation, removal (with appropriate reduction for
salvage), cable ship and other ship costs, route surveys,
burying, testing associated with laying or installation, customs
duties, taxes (except income tax imposed upon the net income of a
Party), appropriate financial charges attributable to other
Parties' shares of costs incurred by the Landing Point Parties or
any other Party authorized by the General Committee, at the rate
at which such Party generally incurred such financial charges,
supervision, billing activities, overheads and insurance or a
reasonable allowance in lieu of insurance, if such Party elects
to carry a risk itself, being a risk against which insurance is
usual or recognized or would have been reasonable. Such costs
shall include costs reasonably incurred by the Parties in the
holding of the General Committee and Subcommittees meetings but
excluding attendance by the Parties representatives at such
meetings. Such costs shall also include costs incurred by the
Parties in holding the PG and its working groups meetings and the
attendance by the Parties representatives at such meetings, and
iv) any additional work or property incorporated subsequent to the
RFPA Date by agreement of the Parties, which agreement shall not
be unreasonably withheld.
(B) Any amounts received by, or credited to, a Party or the CBP as a
consequence of letters of Guarantee, liquidated damages, or other similar
amounts resulting from the failure of the Supplier(s) to fully perform any
provision of the Supply Contract(s), shall accrue to the benefit of all the
Parties in proportion to their Ownership as specified in Schedule C.
10. ALLOCATION AND BILLING OF CAPITAL COSTS OF SEGMENT S OF COLUMBUS III
(A) The capital costs of Segment S, as defined in Paragraph 9, shall be
allocated in the proportions set forth in Schedule C.
(B) The CBP shall receive bills from the Supplier(s) for the costs included
in the Supply Contract(s), which shall be verified by the PG. The NA, the PG and
its working groups, the Landing Point Parties and any other Party authorized by
the General Committee shall promptly render bills to the CBP for the cost of
items directly incurred by them in accordance with Paragraph 9 of this
Agreement. Such bills shall contain a reasonable detail to substantiate the
bills. The CBP shall
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promptly render bills for such amounts to each of the Parties in accordance with
Schedule C, not more frequently than once a month and only for bills exceeding
one hundred U.S. dollars (100 U.S. S). On the basis of such bills, each Party
shall pay to the CBP the amount owed within forty-five (45) days from the date
the bill was rendered by the CBP.
(C) In the case of bills containing costs billed on a preliminary billing
basis, promptly after the actual costs involved are determined, the CBP shall
make such appropriate adjustments and render any necessary bills or arrange for
any necessary credits, as appropriate.
(D) As soon as practicable after the RFPA Date, the CBP shall compute the
amount of each Party's share of the capital costs of Segment S in accordance
with Schedule C, shall make appropriate adjustments and shall render bills or
arrange for any necessary refunds by way of final settlement, in order that each
Party may bear its proper share of the capital costs of Segment S.
(E) For the purpose of this Agreement, financial charges shall be computed,
as applicable, at a rate equal to the lowest publicly announced prime rate or
minimum commercial lending rate or the appropriate Interbank Offer Rate, however
described, and as determined on the fifteenth (15th) day of each month during
which the said financial charges apply, for ninety (90) day loans in the
currencies of the United States of America, Portugal, Spain, and Italy of the
following, banks or bank association computed on a daily basis from the date the
said amount is incurred until the date payment is due.
(i) Bills rendered by AT&T:
Citibank, N.A., New York City, or
Chase Manhattan Bank N.A., New York City
(ii) Bills rendered by MARCONI:
Interbank Lisbon Offered Rate (LISBOR)
(iii)Bills rendered by TELEFONICA DE ESPA&A:
Madrid Interbank Offered Rate (MIBOR)
as published by Banco de Espana.
(iv) Bills rendered by TELECOM ITALIA:
The Prime Rate A.B.I. published by the "Sole 24 Ore" newspaper.
If the General Committee shall authorize Parties other than those Parties listed
above to render bills, it shall also specify the applicable rates.
(F) Bills not paid when due shall accrue extended payment charges from the
day following the date on which payment was due in accordance with Subparagraph
10(B), until paid. If the due date is not a business day in the Country of the
Party being invoiced, the due date shall be postponed to the next business day.
For purposes Of this Agreement, extended payment charges shall be computed at
two hundred percent (200%) of the rates as specified in Subparagraph 10(E), from
the day
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following the date on which payment was due until paid. For purposes of this
Agreement "paid" shall mean that the funds are available for immediate use,
except that any unavailability arising from restrictions on the payee's ability
to use the funds immediately not caused by the payer shall not in any way result
in financial charges to the payer thereunder, except as indicated in Paragraph
26.
(G) In the event that applicable law only allows the imposition of
financial charges and extended payment charges at a rate below that establihed
in accordance with this Paragraph 10, financial charges and extended payment
charges shall be at the highest rate permitted by the applicable law.
(H) Credits for refunds of appropriate financial charges and bills for
extended payment charges will not be rendered if the amount of charges involved
is less than one hundred U.S. dollars (100 U.S.$) or equivalent currency.
(I) A bill shall be deemed to have been accepted by a Party or Standard IRU
Holder to whom it is rendered if that Pary or Standard IRU Holder does not
present a written objection fifteen (15) days before the date when payment is
due. If such objection is made, the billing Party and the Party or Standard IRU
Holder concerned shall make every reasonable effort to settle promptly the
dispute concerning the bill in question. If the objection is sustained and the
billed Party or Standard IRU Holder has paid the disputed bill, the agreed upon
overpayment shall be refunded to the objecting Party or Standard IRU Holder by
the billing Party promptly together with any extended payment charges calculated
thereon at a rate determined in accordance with Subparagraph 10(F) of this
Agreement, from the date of payment of the bill to the date on which the refund
is transmitted to the objecting Party or Standard IRU Holder. If the objection
is not sustained and the billed Party or Standard IRU Holder shall pay such bill
promptly together with any extended payment charges calculated thereon at a rate
determined in accordance with Subparagraph 10(F) of this Agreement, from the day
following the date on which payment was due until paid. Nothing in this
Subparagraph 10(I) shall relieve a Party or Standard IRU Holder from paying
those parts of a bill that are not in dispute.
11. ACQUISITION AND TRANSFER OF CAPACITY
(A) Capacity in Columbus III shall be jointly or wholly acquired by Parties
or Telecommunications Entities in increments of MIUs in a Path, or in Subsegment
S4 for the Underwritten MIUs.
(B) Acquisition of capacity on an ownership basis is only at the time of
executive on of this Agreement. The MIU price of the capacity between System
Interfaces in a Path is the one resulting from the addition of the MIU cost of
each Subsegment, assuming connectivity through a direct link between the
involved System Interfaces, in accordance with Exhibit 1. The MIU cost in a
Subsegment is determined by dividing the capital cost of that Subsegment,
including all costs of associated equipment between the System Interfaces as
described in Subparagraphs 2(C) and (D), by the Notional Capacity of that
Subsegment at the time of execution of this Agreement.
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(C) After the execution of this Agreement:
i) any transfer of capacity from a Party shall be made on an other
than ownership basis as may be agreed between such Party and other
Party or a Telecommunications Entity, and
ii)any acquisition of capacity by a Party or Telecommunications Entity
shall be made on a Standard IRU Aareement basis from the Wholly Owned
MIUS Pool, or from the Common Reserve Capacity, or from the
Underwritten MIUS.
(D) Any transfer or acquisition of capacity after the execution of this
Agreement shall be made according to the following prioritization, through a
right of first refusal:
i) transfer from a Party of a half-interest in a Wholly Owned MIU to
a Party or Telecommunications Entity for joint use with the owner
of such Wholly Owned MIU;
ii) acquisition of a whole or two half-interests in a MIU on a per
Path basis from the Wholly Owned MIUs Pool;
iii) acquisition of a whole or two half-interests in a MIU on a per
Path basis from the Common Reserve Capacity.
(E) In the Paths Mazara del Vallo - Lisboa and/or Lisboa - Hollywood, the
acquisition from the Underwritten MIUs will have priority over the acquisition
from the Wholly Owned MIUs Pool as provided in Subparagraph I I(D)ii). In order
to ensure the full connectivity between the two System Interfaces in each such
Paths, the Underwritten MIUs shall be matched with capacity to be acquired from
the Common Reserve Capacity on a Subsegment basis.
(F) Notwithstanding Subparagraph II(D), transfer from a Party of a
half-interest in a Jointly Owned MIU to a Telecommunications Entity located in
the same Country and licensed after the execution of this Agreement shall have
first priority, by prior agreement of the owner of the corresponding
half-interest of such a MIU.
(G) The MIU price in the case of transfer of capacity from a Party provided
in Subparagraph 11(F) shall not be higher than the Standard IRU Capacity price
in force at the moment of such transfer.
(H) Acquisition of capacity by a Party using its Designated Financial
Credit shall only be from the Underwritten MIUs and/or from the Common Reserve
Capacity, and shall follow the prioritization according to Subparagraphs II (D)
and
(I) The MIU price in the case of acquisition of capacity by a Party using
its Designated Financial Credit shall correspond to the lowest price between the
MIU price as defined in Subparagraph II (B) and fixed at the RFCS Date, and the
Standard IRU Capacity price in force at the moment of such acquisition.
(J) The funds derived from the acquisition of a whole or two half-interests
in a MIU on a per Path basis from the Wholly Owned MIUs Pool as in Subparagraph
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11(D)ii) shall be distributed among the Parties according to their participation
in the Wholly Owned MIUs Pool on a per Path basis as specified in Schedule J.
(K) The funds derived from the acquisition of a whole or two-interests in a
MIU from the Common Reserve Capacity, on a per Path basis as in Subparagraph I I
(D)iii) or on a Subsegment basis as in Subparagraph I I (E), shall be
distributed first among the Parties according to their participation in the
Financial Credit Pool as specified in Schedule N. Following the exhaust of the
Financial Credit Pool, such funds shall be distributed among the Parties
according to their Ownership as specified in Schedule C.
(L) The funds derived from the acquisition of Underwritten MIUs as in
Subparagraph II (E), shall be distributed to MARCONI.
(M) For the acquisition of capacity by a Party or Telecommunications Entity
on a Standard IRU Agreement basis, the NA, together with an ad-hoc working group
if required, will develop the pricing criteria, the terms and conditions of a
Standard IRU Agreement, and the sales procedures for approval by the General
Committee. Following such approval, the NA shall'be authorized to execute such
Standard IRU Agreements with Parties or Telecommunications Entities on behalf of
the respective concerned Parties. The NA shall modify the relevant Schedules as
appropriate and provide such Schedules to the CBP for its accounting activities.
No provisions of the Standard IRU Agreement shall override the provisions of
this Agreement. The Standard IRU Capacity price may be reviewed from time to
time, if necessary by the General Committee. Where a Telecommunications Entity
requesting acquisition of capacity on a Standard IRU Agreement basis is not a
Party, such sale may be denied by the General Committee in the case such
Telecommunications Entity status has not been confirmed.
(N) A Party may include in or remove from the Wholly Owned MIUs Pool any
quantity of its Wholly Owned MIUS, twice a year at a specified date, or as
determined by the General Committee.
(0) A Party may move any amount of its Financial Credit, from the Financial
Credit Pool to its Designated Financial Credit, or from its Designated Financial
Credit to the Financial Credit Pool, twice a year at a specified date, or as
determined by the General Committee.
(P) No provisions of any agreement for the transfer of capacity on an other
than ownership basis shall override"the provisions of this Agreement.
12. ASSIGNMENT AND USE OF CAPACITY
(A) MIU(S) may be wholly or jointly used by Party(s), and/or
Telecommunications Entity(s).
(B) A Party may re quest to reassign one or more of its Wholly Owned MIUs
from one Path to different Path(s), twice a year at a specified date, or as
determined by the General Committee. Such reassignment shall be in a number of
Wholly Owned MIU(S) in the new chosen Path(s), which corresponds to the same
value of the Wholly
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Owned MIU(S) in the old Path. The number of Wholly owned MIU(S) in the new
chosen Path(s) is calculated by multiplying the number of Wholly Owned MIU(S) in
the old Path by the MIU price of the old Path as defined in Subparagraph 1 1 (B)
and fixed at the RFCS Date, and dividing that product by the MIU price of the
new Path(s) as defined in Subparagraph II (B) and fixed at the RFCS Date. Any
fraction of a Wholly Owned MIU in the new chosen Path(s) may be:
i) waived without any compensation, or
ii) completed to an exact number of the corresponding Wholly Owned
MIUs in the new chosen Path(s) at the requesting Party's charge.
In such a case the relevant funds shall be distributed among the
Parties according to their Ownership as specified in Schedule C.
Such additional fraction of Wholly Owned MIU shall be paid at a
Standard IRU Capacity price in force at the moment of such
acquisition. Any Wholly Owned MIU resulting from the combination
of a fractional interest of the reassigned capacity together with
a fractional interest on a Standard IRU Capacity basis, shall be
considered as Standard IRU Capacity.
It is not permitted to include in the Wholly Owned MIUs Pool any Wholly
Owned MIU which has been reassigned from its oriinal Path to a different Path.
The Party requesting to reassign one or more of its Wholly Owned MIUs from
one Path to different Path(s) shall also pay the costs regarding the use of the
Cable Stations in the new chosen Path(s) as provided in Paragraph 16 and/or 17
as appropriate, the operation and maintenance costs in the new chosen Path(s),
and any administrative costs that this reassignment of Wholly Owned MIUs may
involve. The NA shall modify the relevant Schedules as appropriate. The NA and
the AR&R Subcommittee will jointly define, as necessary, procedures to be
applied in case of reassignments of Wholly Owned MIUs by Path, for approval by
the General Committee.
(C) The General Committee may decide on an expansion of the Notional
Capacity. For such decision the agreement of the Parties holding interests in
the Wholly Owned MIUs Pool, and/or in the Financial Credit Pool, and/or
holdinUnderwritten MIUs is required. All the Parties shall obtain their
corresponding share of such expansion of the Notional Capacity according, to
Schedule B, to be assigned in Wholly Owned MIUs or by such method as the General
Committee may agree.
(D) MIUs shall be initially arranged so as to ensure complete fascicles of
MIUs in the smallest number of such fascicles possible, as the Parties or
Standard IRU Holders may desire. A MIU and fascicles of MIUs shall be capable of
supporting Bit Sequence Independence transmission rates of VC-4, VC-3 and VC-12
as per all appropriate ITU-T Recommendations.
(E) MIUs may be rearranged, if so requested by Parties or Standard IRU
Holders, so far as reasonably possible, to ensure complete fascicles of MIUS,
provided:
i) the agreement of the relevant Landing Point Parties is obtained;
and
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ii) the agreement of other Parties or Standard IPU Holders with
arranged MIUs that would be affected by the proposed
rearrangement is obtained; and
iii) all costs arising from the prop be paid by the Parties or
Standard IRLJ Holders requesting it.
Such agreement in (i) and (ii) shall not be unreasonably withheld.
(F) The communications capability of any MIU may be optimized by the
Parties or Standard IRU Holders to whom such MIUs are assigned by the use of
equipment which will more efficiently use the MIUS, provided that the use of
such equipment does not cause an interruption of, or interference to, the use of
any other MIUS, or prevent the use of similar equipment by other Parties or
Standard IRU Holders. Such equipment, if used, shall not constitute a part of
Columbus III.
(G) The NA and the AR&R Subcommittee will jointly define, as necessary,
procedures for the use of the In-System Restoration Capacity in order to provide
in system restoration, taking advantage of the collapsed ring configuration of
Columbus 111, for approval by the General Committee. However, in order to
satisfy expansions of the Notional Capacity and/or acquisitions of capacity on a
Standard IR'U Agreement basis from the Common Reserve Capacity, the General
Committee may decide to reduce the amount of the In-System Restoration Capacity.
(H) The NA and the AR&R Subcommittee will jointly define, as necessary,
procedures, terms and conditions for the temporary utilization of the Common
Reserve Capacity for purposes of restoration of other cable systems, for
approval by the General Committee. The General Committee shall accord priority
to expansions of the Notional Capacity, and acquisitions of capacity on a
Standard IRU Agreement basis from the Common Reserve Capacity, over restoration
of other cable systems.
(I) The NA and the AR&R Subcommittee will jointly define, as necessary,
procedures, terms and conditions for the temporary utilization of the Common
Reserve Capacity for purposes of the provision of temporary or occasional
services, for approval by the General Committee. The General Committee shall
accord priority to restoration of other cable systems, over the provision of
temporary or occasional services.
13. DECREASE OR INCREASE OF THE COLUMBUS III DESIGN CAPACITY
(A) Whenever only fifteen percent (15%) of half of the Desicin Capacity
remains as Common Reserve Capacity, distribution of such capacity will be
determined by the General Committee.
(B) In the event that the Design Capacity is less than the Allocated
Capacity specified in Schedule L, the capacity assigned to the Parties and
Standard IRLJ Holders shall be reduced in the proportions in which the capacity
in the relevant Subsegments was assigned to the Parties and Standard IRU Holders
immediately preceding such decrease in the Design Capacity. The assignment of
fractional
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interests in capacity of less than one MIU resulting from such reductions will
be determined by the General Committee.
(C) The General Committee may decide to increase the Design Capacity. For
such decision the agreement of the Parties holding interests in the Wholly Owned
MIUs Pool, and/or in the Financial Credit Pool, and/or holding Underwritten MIUs
is required. All the Parties shall share the costs associated with such increase
of the Design Capacity according to Schedule B. The increase of the Design
Capacity shall be followed by an expansion of the Notional Capacity, as the
General Committee may agree.
14. DUTIES AND RIGHTS AS TO OPERATION AND MAINTENANCE OF COLUMBUS III
(A) TELECOM ITALIA shall be responsible for the operation and maintenance
of Segment A, and for the operation and maintenance of that portion of Segment S
beginning at its respective Cable Landing Point and extending toward Segment A,
on behalf of the Parties and Standard IRU Holders.
(B) TELEFONICA DE ESPANA shall be responsible for the operation and
maintenance of Segment B, and for the operation and maintenance of that portion
of Segment S beginning at its respective Cable Landing Point and extending
toward Segment B, on behalf of the Parties and Standard IRU Holders.
(C) MARCONI shall be responsible for the operation and maintenance of
Segment C, and for the operation and maintenance of that portion of Segment S
beginning at its respective Cable Landing Point and extending toward Segment C,
on behalf of the Parties and Standard IRU Holders.
(D) AT&T shall be responsible for the operation and maintenance of Segment
D, and for the operation and maintenance of that portion of Segment S beginning
at its respective Cable Landing Point and extending toward Segment D, on behalf
of the Parties and Standard IRU Holders.
(E) AT&T, MARCONI, TELECOM ITALIA and TELEFONICA DE ESPAN'A (hereinafter
called, the "Maintenance Authorities") shall jointly be responsible for the
operation and maintenance of Segment S from the respective Cable Landing Points
and extending seawards, on behalf of the Parties and Standard IRU Holders. The
responsibilities for the operation and maintenance of Segment S shall be
identified and reviewed by the O&M Subcommittee for the General Committee
approval.
(F) The Maintenance Authorities shall use all reasonable efforts to
economically maintain Columbus III in efficient working order and with an
objective of achieving effective and timely repairs when necessary, and in a
manner consistent with applicable international submarine cable maintenance
practices. Any of the Maintenance Authorities shall have the right to deactivate
Columbus III, or any Segment or Subsegment thereof, in order to perform the
duties imposed upon them in this Paragraph 14. Prior to such deactivation,
coordination shall be made with all the Maintenance Authorities, and reasonable
notice shall be given to other Parties and Standard IRU Holders.
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(G) To the extent possible, sixty (60) days prior to initiating action, the
Maintenance Authority involved shall advise the other Parties and Standard IRU
Holders in writing of the timing, scope and costs of significant planned
maintenance operations, of significant changes to existing operations and
maintenance methods, and of contractual arrangements for cable ships that will
have a significant impact on the operation or maintenance of Columbus III.
Should one or more Parties representing at least five percent (5%) of the total
voting interests specified in Schedule B, including at least one Landing Point
Party, wish to review such an operation or change prior to its occurrence, the
Maintenance Authority involved shall be notified in writing within thirty (30)
days of such advice. Upon notification from the Maintenance Authority, the
General Committee Coordinator shall initiate action to convene an ad-hoc meeting
of the O&M Subcommittee for such review.
(H) Each Party concerned shall give necessary information relating to the
operation and maintenance of the equipment which that Party may have designed or
procured and which is used in Columbus III, to each Party by whom that
equipment, by reason of the provisions of this Paragraph 14, is to be operated
and maintained. Each Maintenance Authority shall provide and have prompt access
to all system maintenance information, necessary to the performance of its
duties, appropriate to those parts of Columbus III not covered by its authority.
All information given or to which access is offered herein shall be subject to
Paragraph 22.
(I) In no circumstances shall any Party or Standard IRU Holder be liable to
any of the other Parties or Standard IRU Holders for any loss, whether direct or
indirect, or damage sustained by reason of any delay in provision, failure in,
damage to or breakdown of the facilities constituting Columbus III or any
interruption of service, whatsoever, may have been the cause of such delay in
provisioning of service, failure, damage, breakdown, or interruption and for
however long it shall last.
(J) Each Party to this Agreement, at its own expense, shall have the right
to inspect from time to time the operation and maintenance of any portion of
Columbus III and to obtain copies of the maintenance records. For this purpose
the Maintenance Authorities shall retain records, as defined by the O&M
Subcommittee, including recorder charts, for a period of not less than five (5)
years from the date of the record. If these records are destroyed at the end of
this period, a summary of important events shall be retained for the life of
Columbus III.
(K) The Maintenance Authorities shall be entitled to negotiate agreements
in respect of the crossing of Segment S with other undersea plant. After the
agreement of the General Committee is obtained, the Maintenance Authorities may
sign such agreements on behalf of the Parties, and shall provide all Parties
with copies of such agreements on request.
15. ALLOCATION AND BILLING OF THE OPERATION AND MAINTENANCE COSTS OF
SEGMENT S
(A) The costs of operation and maintenance of Segment S shall be allocated
in the proportions specified in Schedule D.
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(B) The costs of operation and maintenance to which Subparagraph 15(A)
refers are the costs reasonably incurred in operating and maintaining the
facilities involved, including, but not limited to, the cost of attendance,
testing, adjustments, storage of plant and equipment, repairs (including repairs
at sea), cable ships, maintenance and repair devices that are or may hereafter
become available (including standby costs), re-burial and the replacement of
plant, tools and test equipment, customs duties, taxes (except income tax
imposed upon the income of a Party) paid in respect of such facilities,
appropriate financial charges attributable to other Parties' shares of costs
incurred by a Maintenance Authority at the rate at which the appropriate
Maintenance Authority generally incurred such financial charges, supervision,
overheads and costs and expenses reasonably incurred on account of claims made
by or against other persons in respect of such facilities or any part thereof
and damages or compensation payable by the Parties concerned on account of such
claims. Costs and expenses and damages or compensation payable to the Parties on
account of such claims shall be shared by them in the same proportions as they
share the costs of operation and maintenance of Segment S under Subparagraph
15(A).
(C) The General Committee may authorize the purchase and use of special
tools and test equipment for use on board cable ships which are required for the
maintenance and repair of Segment S. The related costs may include, but not be
limited to, the costs, or an appropriate share thereof, for the purchase,
storage and maintenance of this equipment. The General Committee will determine
the manner in which these costs will be billed to the Parties and Standard IRU
Holders.
(D) The Maintenance Authorities or the CBP, as appropriate, shall render
bills to the Parties and Standard IRU Holders not more frequently than quarterly
in accordance with procedures to be established by the General Committee for the
expenditures and/or compensations herein referred. From time to time the
Maintenance Authorities shall also furnish such further details of such bills as
the other Parties or Standard IRU Holders may reasonably require. On the basis
of such bills, each Party or Standard IRU Holder shall pay such amounts as may
be owed within forty-five (45) days from the date the bills are rendered.
(E) The billing process as specified in Paragraph 10 shall also be
applicable to all bills rendered pursuant to this Paragraph 15.
16. USE OF SEGMENT D
(A) The owner of Segment D, shall grant to the Parties and Standard IRU
Holders an Indefeasible Right of Use of Segment D including any addition thereto
(hereinafter called "Cable Station IRU"), for the purpose of using its capacity
in Columbus III in Hollywood (Florida, U.S.A.), and carrying on the related
activities in accordance with this Agreement, commencing on the RFPA Date, or
the date a Standard IRU Holder acquires such capacity, and continuing for the
duration of this Agreement.
(B) If a Cable Station becomes unavailable for any reason, the owner of
that Cable Station, in agreement with the Parties hereto, shall take all
necessary measures
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to ensure that another appropriate Cable Station will be available for Columbus
III for the duration of this Agreement on,terms and conditions similar to those
contained in this Agreement.
(C) For the Cable Station IRU involved, the portion of the capital costs,
and operation and maintenance costs of the Cable Station, including any
additions thereto, allocable to Columbus III shall be on the basis of use. Where
the use of a Cable Station or certain Cable Station equipment situated therein,
such as power supply or testing and maintenance equipment, is shared, by
agreement of the Parties, by Columbus III and other communications systems
terminating at that Cable Station, the capital costs, and operation and
maintenance costs of such shared Cable Station equipment (not solely
attributable to a particular cable system or systems) will be allocated among
the cable systems involved in the proportions in which each uses the shared
Cable Station equipment. For such purposes, use of a shared Cable Station or of
shared Cable Station equipment therein attributable to a particular system shall
be determined on the basis of the ratio of:
i) the installed costs of the Cable Station equipment (excluding
shared equipment) associated with the particular cable system to;
ii) the installed cost of the Cable Station equipment (excluding
shared equipment) associated with all systems, including Columbus
III, which makes use of the shared facility.
(D) Capital costs, as used in this Paragraph 16 with reference to the
provision of each Cable Station (including land, access roads, cable
right-of-way, ducts and buildings at such Cable Stations), or to causing them to
be provided and constructed, or to install or causing to be installed Cable
Station equipment, shall include all expenditures incurred which shall be fair
and reasonable in amount and either shall have been directly and reasonably
incurred for the purpose of, or shall be properly chargeable in respect of, such
provision, construction, and installation, including, but not limited to, the
purchase costs of land, building costs, amounts incurred for the respective
development, engineering, design, materials, manufacturing, procurement and
inspection, installation, removing (with appropriate reduction for salvage),
testing associated with installation, custom duties, taxes (except income tax
imposed upon the income of a Party), financial charges attributable to other
Parties, shares of costs, supervision, overheads and insurance or a reasonable
allowance in lieu thereof. Losses against which insurance was not provided, or
for which an allowance in lieu thereof was not taken, shall constitute capital
costs. Operation and maintenance costs as used in this Paragraph 16 with
reference to each of the Cable Stations shall include costs reasonably incurred
in maintaining and operating the facilities involved, including, but not limited
to, the cost of attendance, testing, adjustments, repairs and replacements,
customs duties, taxes (except income tax imposed upon the income of a Party)
paid in respect of such facilities, billing activities, administrative costs,
financial charges attributable to other Parties, shares of costs, and costs and
expenses reasonably incurred on account of claims made by or against other
persons in respect of such facilities or any part thereof and damages or
compensation payable by the Cable Station owner on account of such claims.
Costs, expenses, damages, or compensation payable to the Cable Station owner on
account of claims made against
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other persons shall be shared by the Parties and Standard IRU Holders acquiring
a Cable Station IRU in the same proportions as they share the operation and
maintenance costs of the aforementioned Cable Station.
(E) The capital costs, and operation and maintenance costs of the Cable
Station shall be borne only by the Parties and Standard IRU Holders accessing
Columbus III at such Cable Station, and shall be shared by them in the
proportions specified in Schedules E and F.
(F) The Cable Station owner shall determine the initial payment, or
subsequent payments associated with an increase or decrease of capacity, for the
net capital costs of the applicable Cable Station (i.e., capital cost less
accrued depreciation determined in accordance with the generally accepted
accounting practices of the Country of the Cable Station owner), which will be
due from the Parties and Standard IRU Holders to the parties of the other cable
systems and communications systems already terminating at the Cable Station,
that are entitled to a share of such payments at the time the Cable Station IRU
commences pursuant to Subparagraph 16(A) of this Agreement.
(G) Payments due by the Parties under Subparagraph 16(F) accordance with
the following settlement plan:
i) One hundred twenty (120) days before the planned RFCS Date, the
Cable Station owners shall each render a bill to the CBP, on an
actual or preliminary billing basis for the amount referred to in
Subparagraph 16(F).
ii) Sixty (60) days before the planned RFCS Date, the CBP shall
render bills to the Parties hereto, on an actual or preliminary
billing basis for their proportionate shares of the amount
referred to in Subparagraph 16(F).
iii) In the case of preliminary bills, appropriate adjustments will be
made as soon as practicable after the actual costs are
determined.
iv) The billed Party shall pay such bills to the CBP on or before the
date on which the Cable Station IRU is granted to the Parties
hereto, or the date that the respective Cable Station is
available for the landing and termination of Columbus III,
whichever is later.
v) Within sixty (60) days after receiving such payment, the CBP
shall pay the respective Cable Station owner.
(H) Parties and Standard IRU Holders shall be billed individually for and
shall pay its proportionate share of the operation and maintenance costs of the
Cable Station allocable to this Agreement, commencing at the time the Cable
Station IRU is granted to the Party or Standard IRU Holder, or the date that the
respective Cable Station is available for the landing and termination of
Columbus III, whichever is later.
(I) In the event of sale or other disposition of Segment D, or any part
thereof, such Cable Station owner shall share with the other Parties and
Standard IRU Holders
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any net proceeds, or costs, of such sale or disposition received, or expenses,
by the Cable Station owner in the proportions in which the Parties' and Standard
IRU Holders' interests in the subject to the sale or disposition are specified
in Schedule E at the time of the sale or disposition.
(J) In the event that a Cable Station owner elects, upon termination of
this Agreement, to retain the ownership of all or part of its Cable Station,
such Cable Station owner shall pay each of the other Parties and Standard IRU
Holders the net book cost of such Segment in the proportions in which the
Parties' and Standard IRU Holders' interests are specified in Schedule E at the
time this Agreement is terminated.
(K) Notwithstanding Subparagraph 16(A) of this Agreement, a Party or
Standard IRU Holder granted a Cable Station IRU in Segment D may, prior to the
commencement of that Cable Station IRU, elect to renounce its Cable Station IRU
and to instead have use of Segment D for the duration of this Agreement on such
terms and conditions as are agreed upon between that Party or Standard IRU
Holder and the owner of the respective Cable Station by separate agreement. In
such event the provisions of Subparagraphs 16(A) through (G) shall apply in
relation to such use except insofar as they may be modified by such separate
agreement. These separate agreements shall not confer on a Party or Standard IRU
Holder any financial or other benefit of substance to which the Party or
Standard IRU Holder would not otherwise be entitled under this Agreement.
(L) A Cable Station IRU can be transferred to any Telecommunications Entity
only by the Party holding such Cable Station IRU, solely for that capacity
acquired on an ownership basis.
(M) In the case of reassignment of Wholly Owned MIU(s) as provided in
Subparagraph 12(B), the requesting Party shall pay the additional costs (capital
costs for the Cable Station IRU, and operation and maintenance costs)
corresponding to the increased number of Wholly Owned MIU(s) using the Cable
Stations in the new chosen Path(s), without any reimbursement for the costs
already paid corresponding to the decreased number of Wholly Owned MIU(s) using
the Cable Stations in the previous Path.
17. USE OF SEGMENTS A, B AND C
(A) The respective owners of Segments A, B and C, shall grant to the
Parties and Standard IRU Holders a Right to Use of Segments A, B and C
respectively including any addition thereto (hereinafter called "Cable Station
Right to Use"), for the purpose of using its capacity in Columbus III in Lisboa
(Portugal), Conil (Spain) and Mazara del Vallo (Italy) respectively, and
carrying on the related activities in accordance with this Agreement, commencing
on the RFPA Date, or the date a Standard IRU Holder acquires such capacity, and
continuing for the duration of this Agreement.
(B) If a Cable Station becomes unavailable for any reason, the owner of
that Cable Station, in agreement with the Parties hereto, shall take all
necessary measures
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to ensure that another appropriate Cable Station will be available for Columbus
III for the duration of this Agreement on terms and conditions similar to those
contained in this Agreement.
(C) The capital costs, and operation and maintenance costs of the Cable
Stations shall be borne only by the Parties and Standard IRU Holders accessing
Columbus III at such Cable Station, and shall be shared by them in the
proportions specified in Schedules E and F.
(D) For the Cable Station Right to Use, the relevant Parties and Standard
IRU Holders shall pay a lump sum to the respective Cable Station owner to cover
an appropriate share of the capital costs reasonably incurred in providing such
Segment.
(E) In determining the capital costs of the Cable Station Right to Use, the
Landing Point Parties have taken into account the estimated cost of the
provision and construction of each of the Cable Stations, or causing them to be
provided and constructed, and installing or causing to be installed Cable
Station equipment, in accordance with the accounting practices of each Landing
Point Party. This includes all such expenditure reasonably incurred and includes
but is not limited to, the purchase costs of land, building costs, access road,
cable rights of way, amounts incurred for development, engineering, design,
materials, manufacturing, procurement and inspection, installation, removing
(with appropriate reduction for salvage), testing associated with installation,
customs duties, taxes (except income tax imposed upon the net income of a
Party), appropriate financial charges, supervision, overheads and insurance or a
reasonable allowance in lieu thereof, or losses against which insurance was not
provided, or for which an allowance in lieu thereof was not provided.
(F) In determining the operation and maintenance cost of the Cable Station
Right to Use, the Landing Point Parties have taken into account an estimate of
costs reasonably incurred in operating and maintaining the facilities involved,
including, but not limited to, the cost of attendance, testing, adjustments,
repairs and replacements, customs duties, taxes (except income tax as imposed
upon the net income of a Party) paid in respect of such facilities, billing
activities, administrative costs, appropriate financial charges, and costs and
expenses reasonably incurred on account of claims made by or against other
persons in respect of such facilities or any part thereof, and damages or
compensation payable by the Cable Station owner on account of such claims,
costs, expenses, damages, or compensation payable to or by the terminal station
owner on account of claims made against other persons.
(G) Payments due by the Parties under Subparagraph 17(E) shall be made in
accordance with the following settlement plan:
i) One hundred twenty (120) days before the planned RFCS Date, the
Cable Station owners shall each render a bill to the CBP, on an
actual or preliminary billing basis for the amount referred to in
Subparagraph 17(D).
ii) Sixty (60) days before the planned RFCS Date, the CBP shall
render bills to the Parties, on an actual or preliminary billing
basis for their proportionate shares of the amount referred to in
Subparagraph 17(D).
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iii) In the case of preliminary bills, appropriate adjustments will be
made as soon as practicable after the actual costs are
determined.
iv) The billed Party shall pay such bills to the CBP on or before the
date on which the Cable Station Right to Use is granted to the
Parties, or the date that the respective Cable Station is
available for the landing and termination of Columbus III,
whichever is later.
v) Within sixty (60) days after receiving such payment, the CBP
shall pay the respective Cable Station owner.
(H) Parties and Standard IRU Holders shall be billed individually for and
shall pay its proportionate share of the operation and maintenance costs of the
Cable Station allocable to this Agreement, commencing at the time the Cable
Station Right to Use is granted to the Party or Standard IRU Holder, or the date
that the respective Cable Station is available for the landing and termination
of Columbus III, whichever is later.
(I) Nothing contained in this Agreement shall be deemed to vest in any
Party or Standard IRU Holder, other than the owner of the respective Cable
Station, any salvage rights in that Cable Station, or in any Cable Station
substituted therefor.
(J) Notwithstanding Subparagraph 17(A) of this Agreement, a Party or
Standard IRU Holder granted a Cable Station Right to Use in Segments B, C or D
may, prior to the commencement of that Cable Station Right to Use, elect to
renounce its Cable Station Right to Use and to instead have use of Segments B, C
or D for the duration of this Agreement on such terms and conditions as are
agreed upon between that Party or Standard IRU Holder and the owner of the
respective Cable Station by separate agreements. In such event the provisions of
Subparagraphs 17(A) through (I) shall apply in relation to such use except
insofar as they may be modified by such separate agreements. These separate
agreements shall not confer on a Party or Standard IRU Holder any financial or
other benefit of substance to which the Party or Standard IRU Holder would not
otherwise be entitled under this Agreement.
(K) A Cable Station Right to Use can be transferred to any
Telecommunications Entity only by the Party holding such Cable Station Right to
Use, solely for that capacity acquired on an ownership basis.
(L) In the case of reassignment of Wholly Owned MIU(s) as provided in
Subparagraph 12(B), the requesting Party shall pay the additional costs (lump
sum for the Cable Station Right to Use, and operation and maintenance costs)
corresponding to the increased number of Wholly Owned MIU(s) using the Cable
Stations in the new chosen Path(s), without any reimbursement for the costs
already paid corresponding to the decreased number of Wholly Owned MIU(s) using
the Cable Stations in the previous Path.
18. KEEPING AND INSPECTION OF BOOKS FOR COLUMBUS III
(A) AT&T, MARCONI, TELECOM ITALIA and TELEFONICA DE ESPANA shall each keep
and maintain such books, records, vouchers, and accounts of all costs
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that are incurred in the planning, engineering, provision, and installation of
Segment S and not. included in the Supply Contract(s), as defined in Paragraph
9, which they incur directly for a period of five (5) years from the RFPA Date,
or the date the work is completed, whichever is later.
(B) The CBP shall keep and maintain such books, records, vouchers, and
accounts with respect to its billing of costs incurred by the Terminal Parties
and any other Party having incurred costs for implementation of Columbus III, as
authorized by the General Committee, and costs billable under the Supply
Contract(s), including any subcontracts, for a period of five (5) years from the
RFPA Date, or the date on which the work is completed, whichever is later.
(C) Any Party keeping and maintaining books, records, vouchers, and
accounts of costs pursuant to Subparagraphs 18(A) and (B) shall afford the
Parties the right to review or audit said books, records, vouchers, and accounts
of costs. In affording the right to review, any such Party shall be permitted to
recover, from the Party or Parties requesting the review, the reasonable costs
incurred in complying with the review or audit. The Party or Parties requesting
the review shall bear the entire cost of the review or audit. Such right shall
only be exercisable through the F&A Subcommittee in accordance with the F&A
Subcommittee's audit procedures.
(D) Any exercising of the right to review specified in this Paragraph 18
shall be effected by periodic audits, as requested by one or more Parties and as
directed by the F&A Subcommittee. AT&T, MARCONI, TELECOM ITALIA and TELEFONICA
DE ESPANA expressly agree to such audits.
(E) If requested by the General Committee, a final audit shall be
conducted. The costs of such audit shall be borne by the Parties in proportion
to Schedule B.
19.CURRENCY AND PLACE OF PAYMENT
All bills under this Agreement from one Party or the CBP to another Party
shall be rendered in U.S. dollars and shall be payable in U.S. dollars to the
payee's principal office, or other designated office. Each Party incurring costs
in other than U.S. dollars shall convert same to U.S. dollars in accordance with
the buying rate of the Central Bank in such Party's Country in effect at the
time the bill is rendered. The General Committee may vary these procedures at
its discretion.
20.DURATION OF AGREEMENT AND REALIZATION OF ASSETS
(A) This Agreement shall become effective on the day and year first above
written and shall continue in operation for at least twenty-five (25) years
after the RFPA Date (hereinafter called, the "Initial Period"), and can be
terminated thereafter by agreement of the Parties. Any Party may terminate its
participation in this Agreement by giving at least one year's notice in writing
to the other Parties expiring at the end of the Initial Period or at any time
thereafter. Upon the effective date of termination of participation of a Party,
the Schedules of this Agreement will be appropriately modified and the remaining
Parties to this Agreement shall assume
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capital, operation and maintenance interests of the Party terminating its
participation in proportion to their interests assigned immediately preceding
such effective date of termination, except for the continuing rights and
obligations of the terminating Party as specified in Subparagraphs 20(C), (D)
and (E) of this Agreement. No credit of capital costs will be made to a Party
that terminates its participation in accordance with this Subparagraph 20(A).
Termination of this Agreement or termination of the participation of any Party
therein shall not terminate Subparagraphs 20(C), (D) and (E) of this Agreement
or prejudice the operation or effect, or diminish any other right or obligation
of any Party hereto accrued or incurred prior to such termination.
(B) This Agreement may, however, be terminated at any time during the
Initial Period with the agreement in writing of all the Parties. If unanimous
agreement cannot be reached between all the Parties, this matter will be
referred to the General Committee for decision in accordance with Subparagraph
5(D), but in this case requiring a ninety percent (90%) majority of the total
voting interests specified in Schedule B.
(C) The interests of the Parties or of any Party in Columbus III which come
to an end by reason of the termination of this Agreement or the termination of
the participation of any Party therein shall be deemed to continue for as long
as is necessary for effectuating the purposes of Subparagraphs 20(D) and (E) of
this Agreement, and Columbus III shall accordingly thereafter be held as
respects such interests upon the appropriate trusts by the Parties who are the
owners thereof. Should the doctrine of trusts not be recognized under the laws
of the Country where the property to which such interests relate is located,
then the Party or Parties who are the owners thereof shall nevertheless be
expressly bound to comply with the provisions of Subparagraphs 20(D) and(E) of
this Agreement.
(D) Upon termination of this Agreement, the Parties shall use all
reasonable efforts to liquidate within one year such assets as included in
Segment S as may then exist by sale or other disposition between the Parties or
by sale to other entities or persons, but no sale or disposition shall be
effected except by agreement between or among the Parties to this Agreement who
have interests in the subject thereof at the time this Agreement is terminated.
In the event agreement cannot be reached, the decision will be made in
accordance with Subparagraph 5(D) of this Agreement. The net proceeds, or costs,
of every sale or other disposition shall be divided between or among the Parties
to this Agreement in proportion to the percentages shown on Schedule C
immediately prior to the first time any Party terminates its participation in
this Agreement, or this Agreement is terminated pursuant to Subparagraph 20(A),
whichever occurs first. The Parties shall execute such documents and take such
action as may be necessary to effectuate any sale or other disposition made
pursuant to this Paragraph 20.
(E) Unless the General Committee shall otherwise determine, a Party's
termination of its participation in this Agreement, or the termination of this
Agreement pursuant to Subparagraph 20(A), or a Party's default, shall not
relieve that Party or the Parties hereto from any liabilities arising on account
of claims made by third parties in respect of such facilities or any part
thereof and damages or compensation payable on account of such claims, or, any
amounts due related to the
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Party's pro-rata share of costs pursuant to this Agreement or obligations which
may arise in relation to Columbus III due to any law, order or regulation made
by any government or supranational legal authority pursuant to any international
convention, treaty or agreement. Any such liabilities or costs incurred or
benefits accruing in satisfying such obligations shall be divided among the
Parties hereto in the proportions of the voting interests specified in Schedule
B immediately prior to the first time any Party terminates its participation in
this Agreement or this Agreement is terminated, pursuant to Subparagraph 20(A),
whichever occurs first.
21. OBTAINING OF LICENSES
(A) The performance of this Agreement by the Parties is contingent upon the
obtaining and continuance of such governmental approvals, consents,
authorizations, licenses and permits as may be required or be deemed necessary
by the Parties and as may be satisfactory to them.
(B) Each Party in its respective Country shall be responsible for matters
relating to the obtaining and continuance of governmental approvals, consents,
authorizations, licenses and permits for the construction and utilization of
Columbus III and the Parties shall use all reasonable efforts to obtain and to
have continued in effect such approvals, consents, authorizations, licenses and
permits for the construction and utilization of Columbus III pursuant to the
terms and conditions of this Agreement.
(C) If any Party ceases to maintain the continuance of all governmental
approval, consents, licenses and permits for the utilization of its capacity in
Columbus III, then that Party, for the purposes of this Paragraph 21, will be
considered to no longer be a signatory to this Agreement, and this Party's
capacity will be treated as per Subparagraph 26(C).
22. CONFIDENTIAL INFORMATION
(A) Ownership of any technical information or data whether in written,
graphic or other tangible form (hereinafter called "Information") shall remain
with the Party providing the Information, or with the third party that has
provided the Information for disclosure only to the Parties to this Agreement.
(B) Parties warrant that they do not intend to, and will not knowingly,
without the prior written consent of the Supplier(s), disclose or transmit
directly or indirectly:
i) Information obtained by or through the Supplier(s), or
ii) any immediate product (including processes, materials and
services) produced directly by the use of the Information
obtained by or through the Supplier(s), or
iii) any commodity produced by such immediate product if the immediate
product of the Information obtained by or through the Supplier(s)
is a
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plant capable of producing a commodity or is a major component of
such plant.
(C) Information furnished by one Party to another shall be kept
confidential by the Party receiving it, and shall be used only for the purposes
of designing, constructing, operating and maintaining Columbus III, and may not
be used for any other purposes without the prior written consent of the Party
owning the Information.
(D) The provisions in Subparagraphs 22(A) through (C) will not apply to
information which:
i) was previously known to the receiving Party free of any
obligation to keep it confidential, or
ii) has come into the public domain other than by a breach of
confidentiality by the receiving Party, or
iii) is received from a third Party without similar restriction and
without breach of this Agreement; or
iv) is independently developed.
(E) Nothing in this Paragraph 22 shall prohibit the disclosure required
under any applicable law, rule or regulation or pursuant to the direction of any
Governmental Entity or Agency having competent jurisdiction over any Party or
pursuant to the rules of governance of a Party provided that the disclosing
Party uses all reasonable means to make such disclosure under a non-disclosure
or confidential agreement acceptable to the Parties and/or to the owner of the
Information.
23. PRIVILEGES FOR DOCUMENTS OR COMMUNICATIONS
Each Party hereto specifically reserves, and is granted by each of the
other Parties, in any action, arbitration or other proceeding between or among
the Parties or any of them in a Country other than that Party's own Country, the
right of privilege, in accordance with the laws of that Party's own Country,
with respect to any documents or communications which are material and pertinent
to the subject matter of the action, arbitration or proceeding as respects which
privilege could be claimed or asserted by that Party in accordance with those
laws, and such privilege, whatever may be its nature and whenever it be claimed
or asserted, shall be allowed to that Party as it would be allowed if the
action, arbitration or other proceeding had been brought in a court of, or
before an arbitrator in, the Party's own Country.
24. RELATIONSHIP AND LIABILITY OF THE PARTIES
(A) The relationship between or among the Parties shall not be that of
partners and nothing therein contained shall be deemed to constitute a
partnership between or among them, or to merge their assets or other liabilities
or undertakings. The common enterprises among the Parties shall be limited to
the express provisions of this Agreement. Except as otherwise provided herein,
the liability of the Parties shall be several and not joint or collective
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(B) Each Party agrees to indemnify each of the other Parties in respect of
all costs, expenses, damages and demands, arising out of or in connection with
any claim against, or liability of, the latter as an owner of Columbus III where
such claim is made by, or the liability is to, any third party not being a Party
hereto and arises out of or in connection with Columbus III. Subject to there
being no conflict of interest, each Party so indemnifying shall have the right,
at its sole cost and expense, to observe but not directly participate in any
discussions, meetings or conferences held prior to or during any settlement or
legal proceedings resulting from any such claim or liability.
(C) Under no circumstances shall any Party be liable to any other Party in
contract, tort, (including negligence or breach of statutory duty) or otherwise
for loss, whether direct or indirect, of profits, property, traffic, business or
anticipated savings, or for any indirect or consequential loss or damage in
connection with the operation of this Agreement howsoever caused. Such causes
shall include, but not be limited to:
i) any delay in the provision of Columbus III;
ii) any damage to, breakdown in or failure of Columbus III;
iii) any interruption of service,
whatever may be the reason for such loss, damage or delay and for however long
it shall continue.
25. ASSIGNMENT OF RIGHTS AND OBLIGATIONS
Except as otherwise provided in this Agreement, during the continuance of
this Agreement no Party shall without the consent, which consent shall not be
unreasonably withheld, of the other Parties sell, assign, transfer, or dispose
of its rights or obligations under this Agreement or of any interest in Columbus
III except to a present or future majority owned subsidiary or affiliate or to a
successor in connection with the sale or transfer of all or substantially all of
the business of such Party or to an entity, under the common control, directly
or indirectly of its parent corporation, or to a statutory assignee, or to a
corporation controlling, or under the same control as, such Party, in which case
written notice shall be given in a timely manner by the Party making said sale,
assignment, transfer or disposition.
26. DEFAULT
(A) Except as provided in Subparagraph 26(B), if any Party or Standard IRU
Holder fails to make any payment required by this Agreement on the date when it
is due and such default continues for a period of at least two (2) months after
the date when payment is due, the CBP or the billing Party shall notify the
billed Party or Standard IRU Holder in writing of its intent to notify the
General Committee of the status of the matter and to request the reclamation of
capacity. If full payment is not received from the billed Party or Standard IRU
Holder within three (3) months of such notification, the CBP or the billing
Party may notify the General Committee of
31
<PAGE>
the status of the matter and request that the General Committee reclaim the
capacity in Columbus III assigned to the defaulting Party or Standard IRU
Holder.
(B) For bills not paid for a period of at least two (2) months after the
time for the submission of a written objection and related to costs due and
included in the Supply Contract(s), the CBP or the billing Party may at the
direction of the F&A SC, redistribute this bill among the remaining Parties on a
pro-rata share basis in accordance with the procedures specified in Paragraph
10. Any subsequent payment, including accrued interest, by the defaulting Party
shall be distributed among the remaining Parties. At the time of default, the
CBP or the billing Party shall notify the General Committee which shall decide
upon any appropriate action.
(C) The General Committee shall have the option of reclaiming the capacity
assigned to a Party or Standard IRU Holder that is in default of this Agreement,
if such default has existed for the period as specified in Subparagraph 26(A).
The General Committee shall consider any extenuating circumstances not within
the specific control of the defaulting Party or Standard IRU Holder and the
interest of any Party or Standard IRU Holder that has jointly assigned capacity
with the defaulting Party or Standard IRU Holder, in determining whether or not
to reclaim the capacity assigned to such defaulting Party or Standard IRU
Holder. If the General Committee reclaims any capacity in Columbus III assigned
to such defaulting Party or Standard IRU Holder pursuant to this Agreement,
reclaimed capacity of the defaulting Party or Standard IRU Holder and its
matching corresponding capacity shall be reassigned by the General Committee to
the remaining Parties hereto on terms mutually acceptable to such remaining
Parties; and the remaining Parties shall not be obligated to make any payments
to the defaulting Party or Standard IRU Holder for the reclaimed capacity. The
rights or obligations under this Agreement of a defaulting Party or Standard IRU
Holder shall terminate as of the time the General Committee reclaims all of the
capacity previously assigned to the defaulting Party or Standard IRU Holder. The
matching capacity shall also be reclaimed and the Parties and Standard IRU
Holders affected will be reimbursed with the income derived by the sale of the
defaulted capacity. This Agreement shall be appropriately amended to reflect the
default of a Party or Standard IRU Holder and the reassignment of the interest
herein of such defaulting Party or Standard IRU Holder to succeeding Parties.
(D) The CBP and the F&A Subcommittee will jointly define as necessary,
procedures, terms and conditions to be applied in case of default by any Party
or Standard IRU Holder, for approval by the General Committee.
27. SETTLEMENT OF CLAIMS BY THE PARTIES
(A) If any Party is obliged by a final judgment of a competent tribunal, or
under a settlement approved by all the Parties, to discharge any claim,
including all costs and expenses associated therewith, resulting from the
implementation of this Agreement, the Party which has discharged the claim shall
be entitled to receive from the other Parties and Standard IRU Holders
reimbursement in the proportions set out in Schedule D.
32
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(B) If a claim is brought against a Party, it shall, as a condition of
reimbursement under Subparagraph 27(A), give written notice thereof to the other
Parties as soon as practicable and shall not admit liability nor settle, adjust,
or compromise the claim without their consent.
(C) Each Maintenance Authority shall be authorized to pursue claims in its
own name, on behalf of the Parties, in the event of any damage or loss to
Columbus III. Each Maintenance Authority shall have authority to file
appropriate lawsuits or other proceedings, to settle or compromise any claims
and to execute releases and settlement agreements on behalf of the Parties as
necessary to effect a settlement or compromise. Appropriate notification from
the Maintenance Authority shall be provided to the General Committee in
consideration of such action. In addition, the concurrence of the General
Committee shall be obtained prior to settling or compromising any claim on
behalf of the Parties. Any money received by the claimant Party as a result of
an award by a competent tribunal or under a settlement approved by all the
Parties shall be shared among all the Parties and Standard IRU Holders in the
proportions set out in Schedule D.
(D) Notwithstanding the above, where a claim is brought against AT&T,
MARCONI, TELECOM ITALIA or TELEFONICA DE ESPANA in respect of a sacrificed
anchor and/or loss of, or damage to, fishing gear, that Party may settle such a
claim if for an amount no greater than twenty five thousand U.S. dollars (25,000
U.S. $) or its equivalent in other currencies or such an amount as agreed by the
Parties from time to time, and obtain reimbursement under Subparagraph 27(A).
28. WAIVER
Silence, lateness to invoke, or the waiver by any Party of a breach of, or
a default under, any of the provisions of this Agreement, or the failure of any
Party, on one or more occasions, to enforce any of the provisions of this
Agreement or to exercise any right or privilege thereunder shall not thereafter
be construed as a waiver of any subsequent breach or default of a similar
nature, or as a waiver of any such provision, right, or privilege thereunder.
29. SEVERABILITY
If any of the provisions of the Agreement shall be invalid or
unenforceable, such invalidity or unenforceability shall not invalidate or
render unenforceable the entire Agreement, but rather the entire Agreement shall
be construed as if not containing the particular invalid or unenforceable
provision or provisions, and the rights and obligations of the Parties shall be
construed and enforced accordingly.
30. FORCE MAJEURE
If the performance of this Agreement, or of any obligation hereunder (other
than payment obligation) is prevented, restricted or interfered with by reason
of, including but not limited to:
33
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i) acts of God, such as earthquakes, fires or floods;
ii) war, revolution, civil commotion, acts of public enemies,
blockade or embargo;
iii) acts of a Government in its sovereign capacity;
iv) labor difficulties, including, without limitation, strikes,
slowdowns, picketing or boycotts; or
v) any circumstances, foreseeable or unforeseeable, beyond the
reasonable control and without the fault or negligence of the
Party affected.
The Party affected, upon giving written notice to the other Party as soon
as possible after either learning of such event or after the date when such
Party should have known of such event, shall be excused from such performance on
a day-to-day basis to the extent of such prevention, restriction, or
interference (and the other Party shall likewise be excused from performance of
its obligations on a day-to-day basis to the extent such Party's obligations are
related to the performance so prevented, restricted or interfered with);
provided, however, that the Party so affected shall use its best efforts to
avoid or remove such causes of non-performance and both Parties shall proceed
whenever such causes are removed or cease.
31. PARAGRAPH AND SUBPARAGRAPH HEADINGS
The headings of the Paragraphs and Subparagraphs do not form part of this
Agreement and shall not have any effect on the interpretation thereof.
32. EXECUTION AND INTERPRETATION OF THIS AGREEMENT AND SUPPLEMENTARY
AGREEMENTS
(A) This Agreement shall be executed by the Parties, or by certain Parties
designated by the General Committee on behalf of all the Parties herein, in one
counterpart in the English language. The General Committee Coordinator shall be
the custodian of such counterpart. The Parties shall be provided a copy of this
Agreement and any amendments thereof, of any Supplementary Agreements and of
revised Schedules. A notarized copy of this Agreement and any amendments
thereof, and of any Supplementary Agreement shall be provided to a Party upon
request, and at the requesting Party's expense.
(B) This Agreement and any of its provisions may be altered or added to
only by another agreement in writing and signed by a duly authorized person on
behalf of each Party to this Agreement. This provision shall not apply to any
Schedule modified in accordance with any other provision of this Agreement and
any Schedule so modified shall be deemed to be a part of this Agreement in
substitution for the immediately preceding version of that Schedule. The NA
shall be responsible for issuing such modified Schedule(s).
34
<PAGE>
(C) The General Committee Coordinator shall cancel from this Agreement any
Party that has not executed such Agreement on or before the 12th day of April,
1998. The NA shall remove such Parties from the Schedules accordingly.
(D) Notwithstanding Paragraph 11, new Parties, or increases of ownership by
the existing Parties, will be permitted until April 12, 1998.
33.SETTLEMENT OF DISPUTES
(A) If a dispute should arise under this Agreement between or among the
Parties, they shall make every reasonable effort to resolve such dispute.
However, in the event that they are unable to resolve such dispute the matter
shall be referred to the General Committee which shall either resolve the matter
or determine the method by which the matter should be resolved (including
arbitration, if appropriate). This procedure shall be the sole and exclusive
remedy for any dispute which may arise under this Agreement between or among the
Parties. The performance of this Agreement by the Parties shall continue during
the resolution of any dispute. Any decision regarding this Subparagraph shall be
taken by the General Committee on the basis of a majority of eighty percent
(80%) of the total voting interests specified in Schedule B.
(B) If any difference shall arise between or among the Parties or any of
them respecting the interpretation or effect of this Agreement or any part or
provision thereof or their rights and obligations thereunder, and by reason
thereof, there shall arise the need to decide the question by what municipal or
national law this Agreement or such part or provision thereof is governed, the
following facts shall be excluded from consideration, namely, that this
Agreement was made in a particular Country and that it may appear by reason of
its form, style, language or otherwise to have been drawn preponderantly with
reference to a particular system of municipal or national law; the intention of
the Parties being that such facts shall be regarded by the Parties and in all
courts and tribunals wherever situated as irrelevant to the question aforesaid
and to the decision, thereof.
34. SUCCESSORS BOUND
This Agreement shall be binding on the Parties, their successors, and
permitted assigns.
35.ENTIRE AGREEMENT
This Agreement supersedes all prior oral or written understandings between
the Parties and constitutes the entire agreement between the Parties with
respect to the subject matter of this Agreement. This Agreement includes the
following documents which are attached hereto and incorporated herein by
reference:
35
<PAGE>
Schedule A Parties to the Agreement
Schedule B Voting Interests
Schedule C Ownership and Allocation of Capital Costs of Segment S
Schedule D Allocation of Operation and Maintenance Costs of Segment S
Schedule E Allocation of Capital Costs of the Cable Stations
Schedule F Allocation of Operation and Maintenance Costs of the Cable
Stations
Schedule G Assignment of Underwritten MIUs in Subsegment S4
Schedule H-0 Total Assignment of Jointly Owned MIUs (by Subsegment)
Schedule H-I Assignment of Jointly Owned MIUs in Subsegment S 1
Schedule H-2 Assignment of Jointly Owned MIUs in Subsegment S2
Schedule H-3 Assignment of Jointly Owned MIUs in Subsegment S3
Schedule H-4 Assignment of Jointly Owned MIUs in Subsegment S4
Schedule H-5 Assignment of Jointly Owned MIUs in Subsegment S5
Schedule H-6 Summary of Jointly Owned MIUs in the Path Mazara (Italy) to
Conil (Spain)
Schedule H-7 Summary of Jointly Owned MIUs in the Path Mazara (Italy) to
Lisboa (Portugal)
Schedule H-8 Summary of Jointly Owned MIUs in the Path Mazara (Italy) to
Hollywood (Florida, U.S.A.)
Schedule H-9 Summary of Jointly Owned MIUs in the Path Conil (Spain) to
Hollywood (Florida, U.S.A.)
Schedule H-10 Summary of Jointly Owned MIUs in the Path Lisboa (Portugal) to
Hollywood (Florida, U.S.A.)
Schedule I-1 Assignment of Wholly Owned MIUs (by Subsegment)
Schedule I-2 Summary of Wholly Owned MIUs in the Path Mazara (Italy) to
Conil (Spain)
Schedule I-3 Summary of Wholly Owned MIUs in the Path Mazara (Italy) to
Lisboa (Portugal)
Schedule I-4 Summary of Wholly Owned MIUs in the Path Mazara (Italy) to
Hollywood (Florida, U.S.A.)
Schedule I-5 Summary of Wholly Owned MIUs in the Path Conil (Spain) to
Hollywood (Florida, U.S.A.)
Schedule I-6 Summary of Wholly Owned MIUs in the Path Lisboa (Portugal) to
Hollywood (Florida, U.S.A.)
36
<PAGE>
Schedule J-1 Assignment of Wholly Owned MIUs Pool (by Subsegment)
Schedule J-2 Summary of Wholly Owned MIUs Pool in the Path Mazara (Italy) to
Conil (Spain)
Schedule J-3 Summary of Wholly Owned MIUs Pool in the Path Mazara (Italy) to
Lisboa (Portugal)
Schedule J-4 Summary of Wholly Owned MIUs Pool in the Path Mazara (Italy) to
Hollywood (Florida, U.S.A.)
Schedule J-5 Summary of Wholly Owned MIUs Pool in the Path Conil (Spain) to
Hollywood (Florida, U.S.A.)
Schedule J-6 Summary of Wholly Owned MIUs Pool in the Path Lisboa (Portugal)
to Hollywood (Florida, U.S.A.)
Schedule K-1 Assignment of Notional Capacity (by Subsegment)
Schedule K-2 Summary of Notional Capacity in the Path Mazara (Italy) to
Conil (Spain)
Schedule K-3 Summary of Notional Capacity in the Path Mazara (Italy) to
Lisboa (Portugal)
Schedule K-4 Summary of Notional Capacity in the Path Mazara (Italy) to
Hollywood (Florida, U.S.A.)
Schedule K-5 Summary of Notional Capacity in the Path Conil (Spain) to
Hollywood (Florida, U.S.A.)
Schedule K-6 Summary of Notional Capacity in the Path Lisboa (Portugal) to
Hollywood (Florida, U.S.A.)
Schedule L-1 Assignment of Allocated Capacity (by Subsegment)
Schedule L-2 Summary of Allocated Capacity in the Path Mazara (Italy) to
Conil (Spain)
Schedule L-3 Summary of Allocated Capacity in the Path Mazara (Italy) to
Lisboa (Portugal)
Schedule L-4 Summary of Allocated Capacity in the Path Mazara (Italy) to
Hollywood (Florida, U.S.A.)
Schedule L-5 Summary of Allocated Capacity in the Path Conil (Spain) to
Hollywood (Florida, U.S.A.)
Schedule L-6 Summary of Allocated Capacity in the Path Lisboa (Portugal) to
Hollywood (Florida, U.S.A.)
Schedule M-0 Total Assignment of all Standard IRU Capacity sold (by
Subsegment)
Schedule M-1 Assignment of all Standard IRU Capacity sold in Subsegment S1
Schedule M-2 Assignment of all Standard IRU Capacity sold in Subsegment S2
Schedule M-3 Assignment of all Standard IRU Capacity sold in Subsegment S3
Schedule M-4 Assignment of all Standard IRU Capacity sold in Subsegment S4
Schedule M-5 Assignment of all Standard IRU Capacity sold in Subsegment S5
Schedule M-6 Summary of all Standard IRU Capacity sold in the Path Mazara
(Italy) to Conil (Spain)
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Schedule M-7 Summary of all Standard IRU Capacity sold in the Path Mazara
(Italy) to Lisboa (Portugal)
Schedule M-8 Summary of all Standard IRU Capacity sold in the Path Mazara
(Italy) to Hollywood (Florida, U.S.A.)
Schedule M-9 Summary of all Standard IRU Capacity sold in the Path Conil
(Spain) to Hollywood (Florida, U.S.A.)
Schedule M-10 Summary of all Standard IRU Capacity sold in the Path Lisboa
(Portusal) to Hollywood (Florida, U.S.A.)
Schedule N Summary of Financial Credits
Annex 1 Assignment, Routing and Restoration Subcommittee Terms of
Reference
Annex 2 Operation and Maintenance Subcommittee Terms of Reference
Annex 3 Financial and Administrative Subcommittee Terms of Reference
Annex 4 Central Billing Party Terms of Reference
Annex 5 Network Administrator Terms of Reference
Annex 6 Procurement Group Terms of Reference
Exhibit 1 Columbus III Architecture
Exhibit 2 Columbus III Fiber Pairs Configuration
Exhibit 3 Columbus III Ring Configuration
Exhibit 4 Columbus III Capacity Definitions
Exhibit 5 Columbus III Bodies Structure
36. INTERPRETATION
Where the sense requires, words denoting the singular only shall also
include the plural and vice versa. References to persons shall include firms and
companies and vice versa. Reference to the male shall include the female.
<PAGE>
37. TESTIMONIUM
IN WITNESS WHEREOF, the Parties have severally subscribed these presents or
cause them to be subscribed in their names and on their behalf by their
respective officers thereunto duly authorized.
Signed on behalf of ALESTRA, S. DE R.L. DE C.V
/s/
- --------------------------------
a person authorised to act in that behalf.
Signed on behalf of ANTELECOM, N.V.
/s/
- ------------------------------
a person authorised to act in that behalf.
Signed on behalf of AT&T CORP.
/s/
- ------------------------------
a person authorised to act in that behalf.
Signed on behalf of BAHAMAS TELECOMMUNICATIONS COMPANY
/s/
- ------------------------------
a person authorised to act in that behalf.
39
<PAGE>
Signed on behalf of BARAK I.T.C.
/s/
- -------------------------------
a person authorised to act in that behalf.
Signed on behalf of BELL SOUTH CHILE S.A.
/s/
- --------------------------------
a person authorised to act in that behalf.
Signed on behalf of BULGARIAN TELECOMMUNICATIONS COMPANY LTD.
/s/
- --------------------------------
a person authorised to act in that behalf.
Signed on behalf of CABLE & WIRELESS PANAMA, S.A.
/s/
- --------------------------------
a person authorised to act in that behalf.
Signed on behalf of COMPANHIA PORTUGUESA RADIO MARCONI S.A.
/s/
- --------------------------------
a person authorised to act in that behalf.
40
<PAGE>
Signed on behalf of COMPANIA ANONIMA NACIONAL TELEFONOS DE VENEZUELA
/s/
- -----------------------------
a person authorised to act in that behalf.
Signed on behalf of CYPRUS TELECOMMUNICATIONS AUTHORITY
/s/
- -----------------------------
a person authorised to act in that behalf.
Signed on behalf of EMPRESA BRASILEIRA DE TELECOMUNICACOES S.A.
/s/
- -------------------------------
a person authorised to act in that behalf.
Signed on behalf of EMPRESA NACIONAL DE TELECOMUNICACIONES DE COLOMBIA
/s/
- -------------------------------
a person authorised to act in that behalf.
Signed on behalf of GOLDEN LINES INTERNATIONAL COMMUNICATIONS SERVICES LTD.
/s/
- --------------------------------
a person authorised to act in that behalf.
41
<PAGE>
Signed on behalf of IDB WORLDCOM SERVICES INC.
- ---------------------------------
a person authorised to act in that behalf.
Signed on behalf of lNSTITUTO COSTARRICENSE DE ELECTRICIDAD
/s/
- ----------------------------------
a person authorised to act in that behalf.
Signed on behalf of MCI INTERNATIONAL INC.
/s/
- -----------------------------
a person authorised to act in that behalf.
Signed on behalf of PACIFIC GATEWAY EXCHANGE (BERMUDA) LIMITED
/s/
- -------------------------------
a person authorised to act in that behalf.
Signed on behalf of PT INDOSAT (PERSERO) TBK.
/s/
- -------------------------------
a person authorised to act in that behalf.
42
<PAGE>
Signed on behalf of SERVEI DE TELECOMUNICACIONS D'ANDORRA
/s/
- -----------------------------
a person authorised to act in that behalf.
Signed on behalf of SOCIETE NATIONALE DES TELECOMMUNICATIONS DU SENEGAL
/s/
- -----------------------------
a person authorised to act in that behalf.
Signed on behalf of STARTEC GLOBAL COMMUNICATION CORPORATION
/s/
- --------------------------------
a person authorised to act in that behalf.
Signed on behalf of SWISSCOM AG
/s/
- --------------------------------
a person authorised to act in that behalf.
Signed on behalf of TELECOM ITALIA, S.p.A.
/s/
- ---------------------------------
a person authorised to act in that behalf.
43
<PAGE>
Signed on behalf of TELECOMJNICACIONES INTERNACIONALES DE
ARGENTINA, TELINTAR S.A.
/s/
- --------------------------------
a person authorised to act in that behalf.
Signed on behalf of TELEFONICA DE ESPANA, S.A.
/s/
- --------------------------------
a person authorised to act in that behalf.
Signed on behalf of TELEFONICA DEL PERU
/s/
- --------------------------------------
a person authorised to act in that behalf.
Signed on behalf of TELEFONOS DE MEXICO, S.A. DE C.V.
/s/
- --------------------------------
a person authorised to act in that behalf.
Signed on behalf of TELEFONICA LARGA DISTANCIA DE PUERTO RICO, INC.
/s/
- --------------------------------
a person authorised to act in that behalf.
44
<PAGE>
Signed on behalf of TELEGLOBE USA, INC.
/s/
- --------------------------------
a person authorised to act in that behalf.
Signed on behalf of TELEPUERTO SAN ISIDRO, S.A.
/s/
- --------------------------------
a person authorised to act in that behalf.
Signed on behalf of TELESUR
/s/
- --------------------------------
a person authorised to act in that behalf.
Signed on behalf of TELKOM SA LIMITED
/s/
- --------------------------------
a person authorised to act in that behalf.
Signed on behalf of THE ST. THOMAS AND SAN JUAN TELEPHONE COMPANY INC.
/s/
- ---------------------------------
a person authorised to act in that behalf.
45
<PAGE>
Signed on behalf of TRANSOCEANIC COMMUNICATIONS INCORPORATED
/s/
- -----------------------------
a person authorised to act in that behalf.
Signed on behalf of TURK TELEKOMUNIKASYON A.S.
/s/
- -----------------------------
a person authorised to act in that behalf.
Signed on behalf of UKRANIAN STATE ENTERPRISE OF INTERNATIONAL AND LONG-
DISTANCE TELECOMMUNICATIONS & TV UKRTEC
/s/
- -------------------------------
a person authorised to act in that behalf.
46
<PAGE>
SCHEDULE A
PARTIES TO THE AGREEMENT
ALESTRA, S. DE R.L. DE C.V., a corporation organized and existing under the laws
of Mexico and having its principal office at Av. Paseo de las Palmas # 275, Piso
8, Col. Lomas de Chapultepee, 11000 Mexico, D.F. MEXICO, (herein called
"ALESTRA", which expression shall include its successors and assigns).
ANTELECOM, N.V., having an office at Schouwburgwveg 22, Curacao, Netherlands
Antilles (herein called "ANTELECOM", which expression shall include its
successors).
AT&T CORP., a corporation organized and existing under the laws of the State of
New York and having its principal office at 340 Mount Kemble Avenue, Morristown,
New Jersey 07960, USA (herein called "AT&T", which expression shall include its
successors).
BAHAMAS TELECOMMUNICATIONS CORPORATION, a Corporation established and existing
by virtue under the Bahamas Telecommunications Corporation Act of 1996 and
having its principal place of business at John F. Kennedy and Dolphin Drives,
P.O. Box N-3048, Nassau, Bahamas (herein called "BATELCO", which expression
shall include its successors).
BARAK I.T.C., a corporation organized and existing under the laws of Israel and
having its principal office at 15 Hamelacha St., Industrial Park Cible, Rosh
Ha'ayin, 48091 Israel, herein called "BARAK", which expression shall include its
successors and assigns.
BELL SOUTH CHILE S.A., a company organized under the laws of Chile and having
its principal office at Av. E1 Bosque Sur 130, Piso 14, Las Condes, Santiago,
Chile (herein called "BELL SOUTH-CHILE", which expression shall include its
successors).
BULGARIAN TELECOMMUNICATIONS COMPANY LTD., a company existing under the laws of
Bulgaria whose registered office is at 1606 Sofia 8, Totleben Boulevard (herein
called "BTC BULGARIA", which expression shall include its successors).
CABLE & WIRELESS PANAMA, S.A., an entity organized and existing under the laws
of the Republic of Panama and having its office at Apartado 9A-659, Panama 9A,
Republic of Panama (herein called "C&W PANAMA", which expression shall include
its successors).
COMPANHIA PORTUGUESA RADIO MARCONI S.A., a corporation organized and existing
under the laws of Portugal and having its principal office at Av. Alvaro Pais
No. 2, 1600 Lisboa, Portugal (herein called "MARCONI", which expression shall
include its successors).
COMPANIA ANONIMA NACIONAL TELEFONOS DE VENEZUELA, a company organized under the
laws of Venezuela and having its principal office at Av. Libertador, Edif.
Administrativo, Caracas, Venezuela (herein called "CANTV", which expression
shall include its successors).
1
<PAGE>
CYPRUS TELECOMMUNICATIONS AUTHORITY, a corporate body established by law. having
its main office at Telecommunications Street, PO Box 4929, CY-1396 Nicosia,
Cyprus (herein called "CYTA", which expression shall include its successors).
EMPRESA BRASILEIRA DE TELECOMUNICACOES S.A. Avenida Presidente Vargas - 1012,
Rio de Janeiro, 20179-900, Brazil (herein called "EMBRATEL", which expression
shall include its successors).
EMPRESA NACIONAL DE TELECOMUNICACIONES DE COLOMBIA, an entity having its
principal office at CaIle 23 N 13-49, Santa Fe de Bogota, Colombia (herein
called "TELECOM COLOMBIA", which expression shall include its successors).
GOLDEN LINES INTERNATIONAL COMMUNICATIONS SERVICES LTD., a company organized and
existing under the laws of Israel and having its principal office at 25 Hasivim
St., Kiryat Matalon, Petach Tikvah, 49170 Israel (herein called "GOLDEN LINES",
which expression shall include its successors).
IDB WORLDCOM SERVICES INC., a corporation organized and existing under the laws
of the State of Delaware, United States of America and having an office at 380
Madison Avenue, New York, New York 10017, USA (hereinafter called "WORLDCOM" or
"WCOM", which expression shall include its successors).
INSTITUTO COSTARRICENSE DE ELECTRICDAD, a government owned decentralized
institution, having its Telecomunications Operations Office at San Pedro de
Montes de Oca, PO Box 10032, San Jose 1000, Costa Pica (herein called "ICE",
which expression shall include its successors).
MCI INTERNATIONAL INC., a corporation organized and existing under the laws of
the State of Delaware and having its principal office at 2 International Drive,
Rye Brook, New York, USA (herein called "MCII", which expression shall include
its successors).
PACIFIC GATEWAY EXCHANGE (BERMUDA) LIMITED whose expression shall include its
successors, whose registered office is at Conyers Dill Pearman, Clarendon House,
2 Church Street, Hamilton HMII, Bermuda and whose mailing address is at 533
Airport Blvd., Suite 505, Burlingame, CA 94010, USA (herein called "PGE").
PT INDOSAT (PERSERO) Tbk., registered as a company for international
telecommunications of the Republic of Indonesia and existing under the laws of
Indonesia and having its principal office at Jalan Medan Merdeka Barat No. 21,
Jakarta 10110, Indonesia, hereinafter called "INDOSAT", which expression shall
include its successors.
SERVEl DE TELECOMUNICACIONS D'ANDORRA, a company organized under the laws of
Andorra and having its pricipal office at Av. Meritxell 112, Andorra la Vella,
Andorra (herein called "STA", which expression shall include its successors).
2
<PAGE>
SOCIIETE NATIONALE DES TELECOMMUNICATIONS DU SENEGAL, 6, Rue Wagane Diouf,
Dakar, Senegal (herein called "SONATEL", which expression shall include its
successors).
STARTEC GLOBAL COMMUNICATION CORPORATION, a corporation organized and existing
under the laws of the State of Maryland, USA and having its head office at 10411
Motor City Drive, Bethesda, MD 20817, USA (herein called "STGC", which
expression shall include its successors and assigns).
SWISSCOM AG, a company existing under the laws of Switzerland, having its
principal offices at Viktoriastrasse 21, CH-3050 Berne / Switzerland (herein
called "SWISSCOM", which expression shall include its successors).
TELECOM ITALIA, S.p.A., a corporation organized under the laws of Italy and
having its principal office at Via Dan Dalmazzo 15-10122 Torino, Italy (herein
called "TI", which expression shall include its successors).
TELECOMUNICACIONES INTERNACIONALES DE ARGENTINA, TELINTAR S.A., 25 de Mayo 457,
7 Piso, 1002 Capital Federal, Argentina (herein called "TELINTAR", which
expression shall include its successors).
TELEFONICA DE ESPANA, S.A., a corporation organized and existing under the laws
of Spain and having its principal office at Gran Via 28, Madrid, Spain (herein
called "TLFN", which expression shall include its successors).
TELEFONICA DEL PERU, a corporation organized and existing under the laws of Peru
and having its principal office at Av. Arequipa N 1155, Lima 1, Peru (herein
called "TLFN-PERU", which expression shall include its successors).
TELEFONOS DE MEXICO, S.A. DE C.V., a corporation duly organized and existing
under the laws of Mexico and having an office at Parque Via 198, M6xico D.F.,
Mexico (herein called "TELMEX", which expression shall include its successors).
TELEFONICA LARGA DISTANCIA DE PUERTO RICO, INC., Metro Office Park, Building No.
8, Second Floor, Guaynabo, Puerto Rico 00968 (herein called "TLDI", which
expression shall include its successors).
TELEGLOBE USA, INC., a corporation organized and existing under the laws of the
state of Delaware, and having its principal office at 1751 Pinnacle Drive,
Mclean, Virginia (hereinafter called "TELEGLOBE", which expression shall include
its successors) for the use of its wholly owned or otherwise affiliated,
authorized international carriers.
TELEPUERTO SAN ISIDRO, S.A., a corporation organized and existing under the laws
of the Dominican Republic and having its principal office at Lope de Vega,
Avenida 95, Santo Domingo, Dominican Republic (herein called "TRICOM", which
expression shall include its successors).
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TELESUR, a company organized under the laws of Suriname and having an office at
Heiligenweg No. 40, P.O. Box 1839, Paramaribo, Suriname, (herein called
"TELESUR" which expression shall include its successors).
TELKOM SA LIMITED, a public company with limited liability, registered under the
laws of the Republic of South Africa with registration number 91/05476/06 and
having its registered office at 152 Proes Street, Pretoria, Republic of South
Africa, herein referred to as "TELKOM SA", which expression shall include its
successors.
THE ST. THOMAS AND SAN JUAN TELEPHONE COMPANY INC., an entity organized and
existing under the laws of the U.S. Virgin Islands and having its principal
office at No. 2 Beltjen Place, St. Thomas, U.S.V.I. 00803-1915, St. Thomas, U.S.
Virgin Islands (herein called "TRESCOM", which expression shall include its
successors).
TRANSOCEANIC COMMUNICATIONS INCORPORATED, a wholly owned subsidiary of AT&T, a
corporation organized and existing under the laws of the State of Delaware, and
having an office at 340 Mt. Kemble Avenue, Morristown, New Jersey 07960, USA
(herein called "TOCI", which expression shall include its successors).
TURK TELEKOMUNIKASYON A.S., a corporation organized and existing under the laws
of Turkey, having its main office at Turgut Ozal Bulvari, 06103
Aydinlikevler-Ankara, Turkey (herein called "TURK TELEKOM", which expression
shall include its successors).
UCRAINIAN PUBLIC COMPANY OF INTERNATIONAL AND LONG-DISTANCE TELECOMMUNICA-TIONS
UKRTEC, having its main office at Solomenskaya 3, 252110 Kiev, Ukraine (herein
called "UKRTEC", which expression shall include its successors).
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ANNEX 1
COLUMBUS III CABLE SYSTEM
ASSIGNMENT, ROUTING AND RESTORATION SUBCOMMITTEE
TERMS OF REFERENCE
a) The responsibilities of the Assignment, Routing and Restoration
Subcommittee (hereinafter called "AR&R Subcommittee") shall include the
following:
i. Jointly develop with the NA, for approval by the General Committee, a
routing plan for the assignment of capacity.
ii. Jointly define with the NA, for approval by the General Committee:
a. Procedures for reassignments of Wholly Owned MIUs by Path.
b. Procedures for the use of the In-System Restoration Capacity.
c. Procedures, terms and conditions for the restoration of other
cable systems.
d. Procedures, terms and conditions for the provision of temporary
or occasional services.
iii. Study and recommend extension arrangements.
iv. Recommend the digital interworking arrangements including
multiplexing, digital circuit multiplication, conversion equipment,
digital cross connect equipment, synchronization plans, performance
monitoring equipment, test procedures, alarms, etc.
v. Study and recommend performance criteria for equipment and systems
referenced in iv) above.
vi. Monitor the development and timely provision of compatible interface
equipment arrangements.
vii. Oversee the establishment of a central record for capacity assignment
and utilization, to be managed by the NA.
viii.Determine pre-service test points, types of tests, test parameters,
test duration, and test limits on digital facilities operating on
Columbus III at bit rates below and including 155.52 Mbps if extended
into a terrestrial network.
ix. Plan and schedule the pre-service tests including tests on the cable
sections and end to end tests for those primary rate blocks that will
carry initial service.
x. Coordinate activities during the pre-service testing program,
including the exchange of necessary technical, contact and
coordination information among the Columbus III users prior to the
start of the testing program.
xi. Develop and recommend to the General Committee a restoration plan
including technical and commercial conditions and principles to be
followed in the restoration plans for Columbus III capacity.
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xii. Monitor the deployment of other international digital transmission
systems in the area and recommend technical principles to be followed
in using Columbus III as a restoration medium for such other
transmission systems.
xiii.Determine and act on any required transmission testing of Columbus
III restoration configurations.
xiv. Study and insure the integration of Columbus III with the existing PDH
systems.
xv. Evaluate long-term technical performance of the digital facilities
routed through Columbus III.
xvi. To review expenditures to date against budget and forecast cost to
completion as they relate to the functions of this Subcommittee.
xvii.To review project variations and proposed project changes as they
relate to the functions of this Subcommittee.
b) The AR&R Subcommittee shall direct the NA and shall work in liaison with
the other Subcommittees, the CBP and the PG as appropriate.
c) The AR&R Subcommittee shall report on a regular basis or as requested by
the General Committee.
d) All Parties shall have the right to be represented in this Subcommittee.
e) The AR&R Subcommittee shall carry out any other responsibilities as the
General Committee may direct
f) MCII shall provide the Chairperson of the AR&R Subcommittee.
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ANNEX 2
COLUMBUS III CABLE SYSTEM
OPERATION AND MAINTENANCE SUBCOMMITTEE
TERMS OF REFERENCE
a) The responsibilities of the Operation and Maintenance Subcommittee
(hereinafter called "O&M Subcommittee ") shall include the following:
i. Review the Operation and Maintenance Document to be used for Columbus
III as proposed by the Maintenance Authorities which will include the
review and preparation of testing, operating and maintenance methods
for the efficient operation of Columbus III, prior to submission to
the General Committee for approval.
ii. Review the Maintenance Authorities' recommendation regarding the
inclusion of Columbus III in a Cable Maintenance Agreement and review
the relevant agreement to be signed by the Maintenance Authorities,
after the General Committee approval.
iii. Make recommendations to the PG on the provision of maintenance
equipment and spares other than that, if any, not being provided under
the Supply Contract.
iv. Review any recommendation made by the PG for pooling equipment with
other cable systems.
v. Study other matters and provide assistance as required to resolve
problems affecting maintenance of Columbus III as may be identified by
the Maintenance Authorities and/or the PG.
vi. Liaise as required with the Maintenance Authorities for other cable
systems concerning the preparation of plans and procedures for the
provision, disposition, maintenance and replacement of any jointly
owned equipment or spares which may be agreed to be provided by the
owners of cable systems involved.
vii. Review the Operation and Maintenance budget developed by the
Maintenance Authorities, for approval by the General Committee and
provide this budgetary information to the F&A Subcommittee.
b) In the performance of the above responsibilities, the O&M Subcommittee
shall work in liaison with the other Subcommittees and the PG as
appropriate.
c) The O&M Subcommittee shall report on a regular basis or as requested by the
General Committee.
d) All Parties shall have the right to be represented in this Subcommittee.
e) The O&M Subcommittee shall carry out any other responsibilities as the
General Committee may direct.
f) TELEFONICA DE ESPANA shall provide the chairperson of the O&M Subcommittee.
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ANNEX 3
COLUMBUS III CABLE SYSTEM
FINANCIAL AND ADMINISTRATIVE SUBCOMMITTEE
TERMS OF REFERENCE
a) The responsibilities of the Financial and Administrative Subcommittee
(hereinafter called "F&A Subcommittee") shall include the following:
i. Jointly develop with the CBP, detailed billing, specific time
intervals for all associated functions, financial and accounting
procedures based on the terms and conditions of this Agreement, for
approval by the General Committee, including but not limited to:
a. Payments between the Parties and the Supplier concerning the
construction of Columbus III.
b. Payments among the Parties and among the Standard IRU Holders.
c. Payments resulting from adjustments of Schedules.
d. Currency exchange costs.
e. Circumstances of default.
ii. Jointly develop with the NA, the administrative procedures for the
transfer of capacity among the different types of Capacity, and for
the use of the Financial Credits, for approval by the General
Committee.
iii. Investigate and develop detailed procedures for reclamation of taxes
by the Parties, if appropriate.
iv. Develop any other billing, financial and accounting procedures as
necessary, for approval by the General Committee.
v. Prepare a budget for approval by the General Committee showing:
a. Fixed costs by major cost elements.
b. Costs incurred by all budgetary cost elements.
c. Division of costs among Segments and Subsegments, where
applicable.
d. Semi-annual cash flows per calendar year.
e. Billing amounts by calendar quarter.
vi. Monitor the following items by comparison with the budget:
a. Expenditures to date.
b. Expenditures outstanding.
c. Variations and reasons therefore.
vii. Establish audit procedures as appropriate, in accordance with this
Agreement and the Supply Contract.
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viii.The F&A Subcommittee, if instructed by the General Committee, shall
carry out, or cause to be carried out, a detailed investigation of
project expenditures, including the conducting of an audit, in
accordance with the terms of this Agreement.
ix. Assist the General Committee as necessary in the interpretation of the
financial terms of this Agreement.
x. Advise the General Committee on any budgetary implications of proposed
engineering variations to the project.
b) The F&A Subcommittee shall direct the CBP, and shall maintain liaison with
the PG, the NA, and as necessary with any other Subcommittees.
c) The F&A Subcommittee shall report on a regular basis or as requested to the
General Committee.
d) All Parties shall have the right to be represented in this Subcommittee.
e) The F&A Subcommittee shall carry out any other responsibilities as the
General Committee may direct.
f) MARCONI shall provide the chairperson of the F&A Subcommittee.
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ANNEX4
COLUMBUS III CABLE SYSTEM
CENTRAL BILLING PARTY
TERMS OF REFERENCE
a) The responsibilities of the Central Billing Party (hereinafter called
"CBP") shall include the following:
i. Provide a centralized billing function to the Parties in order to:
a. Render bills to and receive payment from the Parties and make
payments to the Supplier and Parties as appropriate.
b. Provide for direct billing to and receive payments from Standard
IRU Holders as appropriate.
c. Render bills to and receive payments from the Parties and
Standard IRU Holders regarding operation and maintenance and
restoration costs as appropriate.
d. Minimize cross billing among the Parties.
e. Minimize the number of financial transactions.
f. Minimize the billing, payment and costs associated with such
financial transactions and multiple currencies.
ii. Jointly develop with the F&A Subcommittee, detailed billing, specific
time intervals for all associated functions, financial and accounting
procedures based on the terms and conditions of this Agreement, for
approval by the General Committee including but not limited to:
a. Payments between the Parties and the Supplier concerning the
construction of Columbus III.
b. Payments among the Parties and among the Standard IRU Holders.
c. Payments resulting from adjustments of Schedules.
d. Currency exchange costs.
e. Circumstances of default.
iii. Monitor the amount of each Party's share of costs of Segment S and
make any necessary refunds in order that adjustments, as soon as
practicable, and render any necessary bills and under the terms and
conditionsay bear its proper share of the costs as provided of this
Agreement.
iv. Report to the General Committee any default in payment by any of the
Parties or Standard IRU Holders as provided in this Agreement.
v. Maintain records of all its billing activities for a period of five
(5) years.
vi. Provide a point of contact for explanations regarding bills.
vii. Keep all the documentation on which the bills are rendered.
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b) The CBP shall assist, as necessary, the F&A Subcommittee in carrying out
its tasks assigned by the General Committee.
c) The CBP shall report at least once every three months or as requested, to
the General Committee through the F&A Subcommittee.
d) AT&T shall be the CBP and provide the central billing functions as outlined
herein.
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ANNEX 5
COLUMBUS III CABLE SYSTEM
NETWORK ADMINISTRATOR
TERMS OF REFERENCE
a) The responsibilities of the Network Administrator (hereinafter called "NA")
shall include the following:
i. Jointly develop with the AR&R Subcommittee, for approval by the
General Committee a routing plan for the assignment of capacity.
ii. Jointly define with the AR&R Subcommittee, for approval by the General
Committee:
a. Procedures for reassignments of Wholly Owned MIUs by Path.
b. Procedures for the use of the In-System Restoration Capacity.
c. Procedures, terms and conditions for the restoration of other
cable systems.
d. Procedures, terms and conditions for the provision of temporary
or occasional services.
iii. Arrange, monitor, record and maintain the following:
a. Capacity assignments and utilization.
b. In-system restoration.
c. Restoration of other cable systems.
d. Temporary or occasional services.
iv. Register, monitor and review capacity allocation in each Path in order
to identify and avoid excess activation and bottlenecks in Columbus
III.
v. Update and distribute the Schedules of this Agreement to the Parties.
vi. Coordinate and administer the arrangement for the capacity used for
the provision of restoration of other cable systems.
vii. Coordinate and administer the arrangement for the capacity used for
the provision of temporary or occasional services.
viii.Provide support to the AR&R Subcommittee in developing the
restoration plan for Columbus III.
ix. Provide support to the AR&R Subcommittee in identifying capacity
requirements for restoration of other cables via Columbus III.
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x. Work with the Landing Point Parties to monitor the availability of
inland extensions and cable access facilities and transit facilities
necessary to meet service and restoration requirements.
xi. Develop together with an ad-hoc working group if required, the pricing
criteria, terms and conditions of a Standard IRU Agreement and sales
procedures for approval by the General Committee.
xii. Verify the availability of capacity in the Paths prior to execution of
Standard IRU Agreements, of other cable systems restoration
agreements, or of temporary or occasional services agreements.
xiii.Execute Standard IRU Agreements, restoration of other cable systems
agreements, or temporary or occasional services agreements on behalf
of the Parties and in accordance with this Agreement.
xiv. Upon receipt of a matching request from two corresponding Parties
and/or Standard IRU Holders, coordinate the implementation of the
COLUMBUS III capacity by the Landing Point Parties; administer the
provision of a cable assignment of capacity owned or acquired through
a Standard IRU Agreement, and manage all such requests associated with
capacity, for activation or deactivation within 5 (five) business
days, or as otherwise directed by the General Committee.
xv. Jointly develop with the F&A Subcommittee, the administrative
procedures for the transfer of capacity among the different types of
Capacity, and the use of the Financial Credits, for approval by the
General Committee.
b) The NA shall work as appropriate in the performance of the above
responsibilities in liaison with the Subcommittees and the Landing Point
Parties.
c) The NA shall assist, as necessary, the AR&R Subcommittee in carrying out
its tasks assigned by the General Committee.
d) The NA shall report at least once every three months or as requested, to
the General Committee through the AR&R Subcommittee.
e) AT&T shall be the NA and shall provide the network administrator functions
as outlined herein.
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ANNEX 6
COLUMBUS III CABLE SYSTEM
PROCUREMENT GROUP
TERMS OF REFERENCE
a) The responsibilities of the Procurement Group (hereinafter called "PG")
shall include the following:
i. The PG will pursue the activities previously undertaken by the IPG
under the Memorandum Of Understanding.
ii. Develop procedures and documentation for:
a) The solicitation of proposals from Supplier(s) and any testing or
evaluation services.
b) The analysis and comparison of Suppliers' proposals.
c) The selection of the Supplier(s).
d) The negotiation with the Supplier(s).
iii. Execute the Supply Contract(s) with the Supplier(s) on behalf of the
Parties following the approval of the General Committee.
iv. Designate representatives to examine test and inspect equipment,
material, supplies and installation activities.
v. Coordinate and control development and construction of Segment S of
Columbus III, oversee the provision of Segments A, B, C and D, and
review work reports for all Segments.
vi. Be responsible for the interpretation of all provisions of the Supply
Contract(s). The General Committee shall be finally responsible for
the interpretation of the provisions concerning damages, warranty and
extensions of time.
vii. Review the Supply Contract(s) expenditures to date against budget and
forecast to completion.
viii.Review and negotiate variations, amendments and proposed project
changes to the Supply Contract(s). Approve such variations, amendments
and changes provided that the overall cumulative value of the changes
to the Supply Contract(s) does not increase the value of the Supply
Contract(s) by more than one percent (1%) of its initial value.
Changes exceeding this cumulative value will be referred to the
General Committee for approval. All project changes shall be reported
to the General Committee.
ix. Develop the specifications for increasing the Design Capacity, if so
required by the General Committee.
x. Provide to the F&A Subcommittee and the General Committee, as
appropriate, timely information regarding the costs of the project and
the cost and description of any project changes. Develop procedures in
consultation with the F&A Subcommittee to allocate capital costs to
the appropriate Columbus III Segments.
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xi. Oversee overall Columbus III integration and operating compatibility
of Segment S and review all contractual matters pertaining to such
integration.
xii. Coordinate and administer testing procedures and results related to
acceptance tests and warranty provisions to evaluate compliance with
technical specifications as provided for in the Supply Contract(s).
xiii.Make recommendations to the General Committee regarding the issuance
of certificates of acceptance. After authorization by General
Committee, issue appropriate certificates of acceptance, under the
Supply Contract(s).
xiv. Approve invoices rendered by the Supplier(s), in accordance with the
terms of the Supply Contract(s), and by the Terminal Parties, in
accordance with the budget approved by the General Committee.
xv. Purchase all the necessary Multiplex Equipment, maintenance equipment
and spares on the recommendation of the AR&R and O&M Subcommittees
with all the relevant information forwarded to the General Committee.
xvi. Maintain books, records, vouchers and accounts of all costs that are
incurred under the Supply Contract(s).
xvii.Ensure the compatibility of the provision of the Supply Contract(s)
with the terms and the conditions of this Agreement.
b) The PG shall work as appropriate in the performance of the above
responsibilities in liaison with the Subcommittees.
c) To aid the PG in the performance of its duties some working groups may be
established as deemed necessary.
d) The PG shall report to the General Committee at least once every three
months during the construction period, or as may be requested.
e) The PG shall carry out any other responsibilities as the General Committee
may direct.
f) The Chairperson of the PG shall rotate among the PG Parties.
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EXHIBIT 1
COLUMBUS III CABLE SYSTEM
Columbus III Architecture
[GRAPHIC OMITTED]
<PAGE>
EXHIBIT 2
COLUMBUS III CABLE SYSTEM
Columbus III Fiber Pairs Configuration
[GRAPHIC OMITTED]
<PAGE>
EXHIBIT 3
COLUMBUS III CABLE SYSTEM
Columbus III Ring Configuration
[GRAPHIC OMITTED]
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EXHIBIT 4
COLUMBUS III CABLE SYSTEM
Columbus III Capacity Definitions
[GRAPHIC OMITTED]
Note: Schedule N is a Summary of Financial Credits (U.S. $)
<PAGE>
EXHIBIT 5
COLUMBUS III CABLE SYSTEM
Columbus III Bodies Structure
[GRAPHIC OMITTED]
EXHIBIT 21.1
SUBSIDIARIES
Startec Global Holding Corporation, a Delaware Corporation
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 24, 1998
