Filed Pursuant to Rule 424B4
Registration No.333-61779
PROSPECTUS
[GRAPHIC STARTEC GLOBAL COMMUNICATIONS CORPORATION LOGO]
OFFER TO EXCHANGE 12% SERIES A SENIOR NOTES DUE 2008
FOR ANY AND ALL 12% SENIOR NOTES DUE 2008
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON NOVEMBER 12, 1998, UNLESS EXTENDED
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Startec Global Communications Corporation ("Startec Global" or the
"Company") is offering, upon the terms and conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together constitute
the "Exchange Offer"), to exchange up to $160,000,000 aggregate principal amount
of its 12% Series A Senior Notes due 2008 (the "Exchange Notes") for up to
$160,000,000 aggregate principal amount of its 12% Senior Notes due 2008 (the
"Old Notes", and together with the Exchange Notes, the "Notes"). The Old Notes
are one component of Units (the "Units") issued by the Company on May 21, 1998
(the "Old Notes Offering"), each such Unit consisting of (i) $1,000 principal
amount of its Old Notes and (ii) a warrant (the "Warrant") to purchase 1.25141
shares (the "Warrant Shares") at an exercise price of $24.20 per share of its
Common Stock, par value $0.01 per share (the "Common Stock"). The Notes and the
Warrants will not be separately transferable until the Separation Date (as
defined herein) and the Warrants are not exercisable until November 15, 1998. As
of the date of this Prospectus, there was $160,000,000 aggregate principal
amount of Old Notes outstanding. The terms of the Exchange Notes are identical
in all material respects to those of the Old Notes, except that (i) the Exchange
Notes have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), and, therefore, will not bear legends restricting their
transfer and (ii) the holders of the Exchange Notes will not be entitled to
certain rights under the Registration Rights Agreement (as defined herein),
including the terms providing for an increase in the interest rate on the Old
Notes under certain circumstances relating to the timing of the Exchange Offer,
all of which rights will terminate when the Exchange Offer is consummated. See
"The Exchange Offer--Purposes and Effects of the Exchange Offer."
Based on an interpretation by the Securities and Exchange Commission (the
"Commission") set forth in no-action letters issued to third parties, the
Company believes that the Exchange Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by a holder thereof (other than (i) a broker-dealer who purchases
such Exchange Notes directly from the Company to resell pursuant to Rule 144A
under the Securities Act or any other available exemption under the Securities
Act or (ii) a person that is an affiliate (as defined in Rule 405 under the
Securities Act) of the Company), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the holder
is acquiring the Exchange Notes in the ordinary course of its business and is
not participating, and has no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. Eligible holders wishing
to accept the Exchange Offer must represent to the Company that such conditions
have been met. Each broker-dealer that receives the Exchange Notes for its own
account in exchange for the Old Notes, where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The Letter of Transmittal states that by
so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of Exchange Notes
received in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activity or other trading activities.
The Company has agreed that, for a period of 180 days after the Expiration Date
(as defined herein), it will make this Prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution."
Interest on the Exchange Notes will be payable semi-annually in arrears on
May 15 and November 15 of each year, commencing November 15, 1998. Holders of
the Exchange Notes will receive interest from the date of initial issuance of
the Exchange Notes, plus an amount equal to the accrued interest on the Old
Notes from the later of (i) the most recent date to which interest has been paid
thereon or (ii) the date of issuance of the Old Notes, to the date of exchange
thereof. The Notes will be redeemable at the option of the Company, in whole or
in part, at any time on or after May 15, 2003, at the redemption prices set
forth herein, plus accrued and unpaid interest and Liquidated Damages (as
defined herein), if any, to the date of redemption. In addition, at any time
prior to May 15, 2001, the Company may redeem from time to time up to 35.0% of
the originally issued aggregate principal amount of the Notes at the redemption
price set forth herein, plus accrued and unpaid interest and Liquidated Damages,
if any, to the date of redemption with the Net Cash Proceeds (as defined) of one
or more Public Equity Offerings (as defined); provided, however, that at least
65.0% of the originally issued aggregate principal amount of the Notes remains
outstanding after any such redemption. In the event of a Change of Control (as
defined herein), each holder of the Notes will have the right to require the
Company to purchase all or any part 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 Exchange Notes will be unsecured obligations of the Company, will rank
senior in right of payment to any existing and future obligations of the Company
expressly subordinated in right of payment to the Exchange Notes and will rank
pari passu in right of payment with all other existing and future unsecured and
unsubordinated obligations of the Company. As of June 30, 1998, after giving pro
forma effect to the Reorganization (as defined herein), the Company and its
consolidated subsidiaries would have had approximately $158.6 million of
Indebtedness (as defined herein). Following the Reorganization, the Company will
be a holding company that will conduct its business through its subsidiaries,
and therefore all then existing and future Indebtedness and other liabilities
and commitments of the Company's subsidiaries, including trade payables, will be
effectively senior to the Exchange Notes. As of June 30, 1998, after giving pro
forma effect to the Reorganization, the Company's consolidated subsidiaries had
aggregate liabilities of approximately $25.1 million, including approximately
$647,000 of Indebtedness. The Company's subsidiaries will not be guarantors of
the Exchange Notes. The Company used approximately $52.4 million of the proceeds
of the Old Notes Offering to purchase a portfolio of Pledged Securities (as
defined in the Indenture) consisting of U.S. Government Obligations (as defined
in the Indenture), which are pledged as security and restricted for the first
six scheduled interest payments on the Notes.
The Exchange Offer is not conditioned on any minimum aggregate principal
amount of Old Notes being tendered for exchange. The Company will accept for
exchange any and all validly tendered Old Notes not withdrawn prior to 5:00
p.m., New York City time, on November 12, 1998, unless extended by the Company
(the "Expiration Date"). The Company may, in its sole discretion, extend the
Exchange Offer indefinitely, subject to the Company's obligation to pay
Liquidated Damages if the Exchange Offer is not consummated by November 17,
1998. Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date. The Exchange Offer is subject to certain customary conditions. See "The
Exchange Offer--Conditions to Exchange Offer." The Company will not receive any
proceeds from the Exchange Offer.
The Exchange Notes are new securities for which there currently is no
market. The Company does not intend to apply for listing of the Exchange Notes
on any securities exchange or for quotation through the Nasdaq National Market
("Nasdaq"). Although the Initial Purchasers (as defined) have informed the
Company that they currently intend to make a market in the Exchange Notes, they
are not obligated to do so and any such market-making may be discontinued at any
time without notice. In addition, such market-making activity may be limited
during the pendency of the Exchange Offer or the effectiveness of a shelf
registration statement in lieu thereof. Accordingly, there can be no assurance
as to the development or liquidity of any market for the Exchange Notes.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
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FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH THE EXCHANGE OFFER AND AN INVESTMENT IN THE EXCHANGE NOTES, SEE "RISK
FACTORS" BEGINNING ON PAGE 15.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
October 14, 1998
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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 15 of this
Prospectus.
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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 early 1999. 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
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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 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 20 major U.S. metropolitan markets. 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
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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 ("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. 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 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.
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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.
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, following completion of the Exchange Offer.
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 as the
obligor under the Old Notes and the Exchange Notes. It is expected that
Subsidiary Holdings' only assets will be its equity interests in its
subsidiaries.
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OLD NOTES OFFERING
On May 21, 1998, the Company issued $160,000,000 aggregate principal amount
of Old Notes pursuant to an Indenture (as defined), as one component of Units
issued by the Company on that date, each such Unit consisting of (i) $1,000
principal amount of Old Notes and (ii) a Warrant to purchase 1.25141 Warrant
Shares. Interest on the Old Notes is payable semiannually in arrears on May 15
and November 15 of each year, commencing on November 15, 1998.
The Old 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 Old Notes has the right to
require the Company to purchase all or any of such holder's Old 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 Old
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 Old 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 Old 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.
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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.
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THE EXCHANGE OFFER
For additional information concerning the Notes, as well as the definitions
of certain capitalized terms used below, see "Description of Notes."
The Exchange Offer..... The Company is offering to exchange up to
$160,000,000 aggregate principal amount of Exchange
Notes for up to $160,000,000 aggregate principal
amount of Old Notes that are properly tendered and
accepted. The Company will issue Exchange Notes on or
promptly after the Expiration Date. The terms of the
Exchange Notes are substantially identical in all
respects to the terms of the Old Notes for which they
may be exchanged pursuant to the Exchange Offer,
except that (i) the Exchange Notes are freely
transferable by holders thereof (other than as
provided herein), and are not subject to any covenant
restricting transfer absent registration under the
Securities Act and (ii) the holders of the Exchange
Notes will not be entitled to certain rights under a
registration rights agreement (the "Registration
Rights Agreement") that the Company executed and
delivered to the Initial Purchasers for the benefit
of the holders of the Old Notes. The Registration
Rights Agreement provides such holders certain
exchange and registration rights, and includes terms
providing for an increase in the interest rate on the
Old Notes under certain circumstances relating to the
timing of the Exchange Offer, all of which rights
will terminate when the Exchange Offer is
consummated. See "The Exchange Offer." The Exchange
Offer is not conditioned upon any minimum aggregate
principal amount of Old Notes being tendered for
exchange.
Based on an interpretation by the Commission set
forth in no-action letters issued to third parties,
the Company believes that the Exchange Notes issued
pursuant to the Exchange Offer in exchange for Old
Notes may be offered for resale, resold and otherwise
transferred by a holder thereof (other than (i) a
broker-dealer who purchases such Exchange Notes
directly from the Company to resell pursuant to Rule
144A under the Securities Act or any other available
exemption under the Securities Act or (ii) a person
that is an affiliate (as defined in Rule 405 under
the Securities Act) of the Company), without
compliance with the registration and prospectus
delivery provisions of the Securities Act, provided
that the holder is acquiring the Exchange Notes in
the ordinary course of its business and is not
participating, and has no arrangement or
understanding with any person to participate, in the
distribution of the Exchange Notes. Each
broker-dealer that receives the Exchange Notes for
its own account in exchange for the Old Notes, where
such Old Notes were acquired by such broker-dealer as
a result of market-making activities or other trading
activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such
Exchange Notes. The Company has agreed that, for a
period of 180 days after the Expiration Date, it will
make this Prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan
of Distribution."
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Registration Rights..... On May 21, 1998 (the "Closing Date"), the Old Notes
were issued by the Company to Lehman Brothers Inc.,
Goldman, Sachs & Co. and ING Baring (U.S.)
Securities, Inc. (collectively, the "Initial
Purchasers") in transactions exempt from the
registration requirements of the Securities Act
pursuant to a purchase agreement (the "Purchase
Agreement"), dated as of May 18, 1998, by and among
the Company and the Initial Purchasers. The Initial
Purchasers subsequently sold the Old Notes (a) to
qualified institutional buyers in reliance on Rule
144A under the Securities Act and (b) outside the
U.S. to certain persons in reliance on Regulation S
under the Securities Act. Pursuant to the
Registration Rights Agreement, the Company is
obligated to (i) file a registration statement
relating to the Exchange Offer (the "Exchange Offer
Registration Statement") with the Commission with
respect to the Exchange Offer on or prior to 90 days
after the Closing Date, (ii) use its reasonable best
efforts to cause the Exchange Offer Registration
Statement to be declared effective by the Commission
within 150 days after the Closing Date, (iii) file
all necessary amendments to the Exchange Offer
Registration Statement and make other necessary
filings pursuant to state securities laws to permit
consummation of the Exchange Offer and (iv) use its
reasonable best efforts to cause the Exchange Offer
to be consummated on or prior to 30 days after the
date on which the Exchange Offer Registration
Statement is declared effective by the Commission. In
the event that applicable law or Commission policy do
not permit the Company to effect the Exchange Offer,
the Exchange Offer is not consummated by November 17,
1998, or certain holders of the Old Notes notify the
Company they are not permitted to participate in, or
would not receive freely tradable Exchange Notes
pursuant to, the Exchange Offer, the Company will use
its reasonable best efforts to cause to be declared
effective a registration statement (the "Shelf
Registration Statement") with respect to resale of
the Old Notes on or prior to the 150th day after such
obligation arises and to keep the Shelf Registration
Statement continuously effective until up to two
years after the date on which the Old Notes were
sold. If the Company fails to satisfy these
registration obligations, it will be required to pay
Liquidated Damages (as defined) to the holders of the
Old Notes under certain circumstances. The holders of
the Exchange Notes are not entitled to any exchange
or registration rights with respect to the Exchange
Notes, except as described herein. Holders of Old
Notes do not have any appraisal or dissenters' rights
under the Indenture in connection with the Exchange
Offer. See "The Exchange Offer -- Purposes and
Effects of the Exchange Offer."
Expiration Date.......... The Exchange Offer will expire at 5:00 p.m., New York
City time, on November 12, 1998, unless the Exchange
Offer is extended, in which case the term "Expiration
Date" means the date and time to which the Exchange
Offer is so extended.
7
<PAGE>
Conditions to the Exchange
Offer................... The Exchange Offer is subject to certain customary
conditions, one or more of which may be waived by the
Company, in its sole discretion. See "The Exchange
Offer -- Conditions to Exchange Offer." The Company
reserves the right to terminate or amend the Exchange
Offer at any time prior to the Expiration Date upon
the occurrence of any such conditions.
Procedures for Tendering
Old Notes................ Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with the Old
Notes and any other required documentation to the
exchange agent (the "Exchange Agent") at the address
set forth herein. Old Notes may be physically
delivered, but physical delivery is not required if a
confirmation of a book-entry transfer of such Old
Notes to the Exchange Agent's account at the
Depository Trust Company ("DTC" or the "Depository")
is delivered in a timely fashion. By executing the
Letter of Transmittal, each holder will represent to
the Company, among other things, that (i) the
Exchange Notes acquired pursuant to the Exchange
Offer by the holder and any beneficial owners of Old
Notes are being acquired in the ordinary course of
business of the person receiving such Exchange Notes,
(ii) neither the holder nor such beneficial owner is
engaged in, intends to engage in or has an
arrangement or understanding with any person to
participate in the distribution of such Exchange
Notes and (iii) neither the holder nor such
beneficial owner is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company. Each
broker-dealer that receives Exchange Notes for its
own account in exchange for Old Notes, where such Old
Notes were acquired by such broker or dealer as a
result of market-making activities or other trading
activities (other than Old Notes acquired directly
from the Company), may participate in the Exchange
Offer but may be deemed an "underwriter" under the
Securities Act and, therefore, must acknowledge in
the Letter of Transmittal that it will deliver a
prospectus in connection with any resale of such
Exchange Notes. The Letter of Transmittal states
that, by so acknowledging and by delivering a
prospectus, a broker or dealer will not be deemed to
admit that it is an "underwriter" within the meaning
of the Securities Act. See "The Exchange Offer --
Procedures for Tendering" and "Plan of Distribution."
Interest on the Exchange
Notes................... The Exchange Notes will bear interest at the rate of
12% per annum, payable semiannually in arrears on May
15 and November 15 of each year, commencing on
November 15, 1998. Holders of the Exchange Notes will
receive interest from the date of initial issuance of
the Exchange Notes, plus an amount equal to the
accrued interest on the Old Notes from the later of
(i) the most recent date to which interest has been
paid thereon and (ii) the
8
<PAGE>
date of issuance of the Old Notes, to the date of
exchange thereof.
Special Procedures for
Beneficial Owners....... Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered holder promptly
and instruct such registered holder to tender on such
beneficial owner's behalf. If such beneficial owner
wishes to tender on such owner's own behalf, such
owner must, prior to completing and executing the
Letter of Transmittal and delivering his Old Notes,
either make appropriate arrangements to register
ownership of the Old Notes in such owner's name or
obtain a properly completed bond power from the
registered holder. The transfer of registered
ownership may take considerable time and may not be
completed prior to the Expiration Date. See "The
Exchange Offer -- Procedures for Tendering."
Guaranteed Delivery Proce-
dures .................. Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes, the
Letter of Transmittal or any other documents required
by the Letter of Transmittal to the Exchange Agent
prior to the Expiration Date must tender their Old
Notes according to the guaranteed delivery procedures
set forth in "The Exchange Offer -- Guaranteed
Delivery Procedures."
Acceptance of the Old Notes
and Delivery of the Ex-
change Notes............ Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, the Company will
accept for exchange any and all Old Notes which are
properly tendered in the Exchange Offer prior to the
Expiration Date. The Exchange Notes issued pursuant
to the Exchange Offer will be delivered as soon as
practicable after acceptance of the Old Notes.
Withdrawal Rights........ Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date. See "The Exchange Offer --
Withdrawal of Tenders."
U.S. Federal Income Tax
Considerations ......... The exchange of the Old Notes for the Exchange Notes
pursuant to the Exchange Offer will not constitute a
material modification of the terms of the Old Notes
or the Exchange Notes and, thus, such exchange will
not constitute an exchange for U.S. federal income
tax purposes. Accordingly, such exchange will have no
U.S. federal income tax consequences to the holders
of the Old Notes or the Exchange Notes, regardless of
whether such holders participate in the Exchange
Offer. See "Certain United States Federal Income Tax
Considerations."
Use of the Proceeds...... There will be no proceeds to the Company from the
exchange of Exchange Notes for Old Notes pursuant to
the Exchange Offer. See "Use of Proceeds."
9
<PAGE>
Effect on Holders of Old
Notes................... As a result of making this Exchange Offer, and upon
acceptance for exchange of all validly tendered Old
Notes pursuant to the terms of this Exchange Offer,
the Company will have fulfilled a covenant contained
in the terms of the Old Notes and the Registration
Rights Agreement and, accordingly, a holder of the
Old Notes will have no further registration or other
rights under the Registration Rights Agreement,
except under certain limited circumstances. Holders
of the Old Notes who do not tender their Old Notes in
the Exchange Offer will continue to hold such Old
Notes and will be entitled to all the rights and
subject to the limitations applicable thereto under
the Indenture. All untendered, and tendered, but
unaccepted, Old Notes will continue to be subject to
the restrictions on transfer provided for in the Old
Notes and the Indenture. To the extent that Old Notes
are tendered and accepted in the Exchange Offer, the
trading market, if any, for the Old Notes not so
tendered could be adversely affected. See "Risk
Factors -- Consequences of Failure to Exchange."
Exchange Agent.......... First Union National Bank is serving as Exchange
Agent in connection with the Exchange Offer. The
address and telephone number of the Exchange Agent
are set forth in "The Exchange Offer -- Exchange
Agent."
Fees and Expenses...... All fees and expenses incident to the Company's
completion of the Exchange Offer and the fullfillment
of its obligations under the Registration Rights
Agreement will be borne by the Company.
THE EXCHANGE NOTES
The Exchange Offer applies to $160,000,000 aggregate principal amount of
Old Notes. The terms of the Exchange Notes are identical in all material
respects to the Old Notes, except that the Exchange Notes have been registered
under the Securities Act and, therefore, will not bear legends restricting their
transfer, and the holders of the Exchange Notes will not be entitled to certain
rights under the Registration Rights Agreement, including the terms providing
for an increase in the interest rate on the Old Notes under certain
circumstances relating to the timing of the Exchange Offer, all of which rights
will terminate when the Exchange Offer is consummated. The Exchange Notes will
evidence the same debt as the Old Notes and will be entitled to the benefits of
the Indenture, under which both the Old Notes were, and the Exchange Notes will
be, issued. See "Description of Notes."
Issue.................... $160,000,000 aggregate principal amount of 12% Series
A Senior Notes due 2008.
Maturity Date............ May 15, 2008.
Interest Payment Dates.. May 15 and November 15, commencing on November 15,
1998.
Ranking.................. The Exchange Notes will be unsecured (except as
described herein) obligations of the Company, will
rank senior in right of payment to any existing and
future obligations of the Company expressly
subordinated in right of payment to the Exchange
Notes and pari passu in right of payment with all
other existing
10
<PAGE>
and future unsecured and unsubordinated obligations
of the Company, including trade payables. As of June
30, 1998, the Company had approximately $158.6
million of Indebtedness. Following the Reorganization
(as defined herein), since the Company will be a
holding company that will conduct its business
through its subsidiaries, all then existing and
future Indebtedness and other liabilities and
commitments of the Company's subsidiaries, including
trade payables, will be effectively senior to the
Exchange Notes. The Company's subsidiaries will not
be guarantors of the Exchange Notes, except in
certain circumstances. The Indenture limits, but does
not prohibit, the incurrence of certain additional
Indebtedness by the Company and its Restricted
Subsidiaries (as defined in the Indenture), and does
not limit the amount of Indebtedness Incurred (as
defined herein) to finance the cost of
Telecommunications Assets (as defined herein). As of
June 30, 1998, after giving pro forma effect to the
Reorganization, the Company's consolidated
subsidiaries would have had aggregate liabilities of
approximately $25.1 million, including approximately
$647,000 of Indebtedness.
Security................. Pursuant to the Indenture, the Company purchased and
pledged to the Trustee, as security for the benefit
of the holders of the Notes, the Pledged Securities
in an amount sufficient upon receipt of scheduled
interest and/or principal payments of such securities
to provide for the payment in full of the first six
scheduled interest payments due on the Notes. The
Company used approximately $52.4 million of the net
proceeds of the Old Notes Offering to acquire the
Pledged Securities. Under the Pledge Agreement,
assuming that the Company makes the first six
scheduled interest payments on the Notes in a timely
manner, any remaining Pledged Securities will be
released to the Company from the Pledge Account and
the Notes will be unsecured. See "Description of
Notes -- Security."
Optional Redemption...... The Exchange Notes generally will not be redeemable
at the option of the Company prior to May 15, 2003.
Thereafter, the Exchange Notes will be redeemable, in
whole or in part, at the option of the Company, at
the redemption prices set forth herein, plus accrued
and unpaid interest and Liquidated Damages, if any,
to the date of redemption. Notwithstanding the
foregoing, prior to May 15, 2001, the Company may
redeem, from time to time, up to 35.0% of the
originally issued aggregate principal amount of
Exchange Notes at a redemption price equal to 112% of
the aggregate principal amount thereof plus accrued
and unpaid interest and Liquidated Damages, if any,
to the date of redemption with the Net Cash Proceeds
of one or more Public Equity Offerings; provided,
however, that at least 65.0% of the originally issued
aggregate principal amount of the Exchange Notes
remains outstanding immediately after such
redemption; and provided further that notice of such
redemption shall be given within 60 days of the
closing of any such Public Equity Offering. See
"Description of Notes -- Optional Redemption."
11
<PAGE>
Absence of Public Trading
Market for the Exchange
Notes .................. There is no public market for the Exchange Notes. The
Company does not intend to apply for listing of the
Exchange Notes on any national securities exchange or
for quotation of the Exchange Notes through Nasdaq,
although the Old Notes are eligible for trading in
the Private Offerings, Resales and Trading through
Automated Linkages ("PORTAL") Market. Although the
Initial Purchasers have informed the Company that
they currently intend to make a market in the
Exchange Notes, they are not obligated to do so and
any such market-making may be discontinued at any
time without notice. In addition, such market-making
activity may be limited during the pendency of the
Exchange Offer or the effectiveness of a Shelf
Registration Statement (as defined herein) in lieu
thereof. Accordingly, there can be no assurance as to
the development or liquidity of any market for the
Exchange Notes.
Change of Control...... In the event of a Change of Control, each holder of
the Exchange Notes will have the right to require the
Company to purchase all or any part of such holder's
Exchange 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 thereon, if any, to the date of purchase.
Because the Company will be a holding company
following completion of the Reorganization, there can
be no assurance that the Company will have sufficient
funds on hand or through its subsidiaries or
otherwise to satisfy its repurchase obligations with
respect to Exchange Notes tendered upon a Change of
Control. See "Description of Notes -- Repurchase of
Notes upon a Change of Control."
Covenants................ The Indenture contains certain covenants that, among
other things, limit the ability of the Company and
its Restricted Subsidiaries to incur additional
Indebtedness, pay dividends or make other
distributions, repurchase Capital Stock (as defined
in the Indenture) or subordinated Indebtedness or
make certain other Restricted Payments, create
certain liens or restrictions on distributions from
subsidiaries enter into certain transactions with
shareholders and affiliates, sell assets, issue or
sell Capital Stock of the Company's Restricted
Subsidiaries or enter into certain mergers and
consolidations. The Indenture does not limit the
amount of Indebtedness that may be incurred to
finance the cost of Telecommunications Assets. See
"Description of Notes -- Covenants."
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes in exchange for the Old Notes pursuant to the Exchange Offer. In
consideration for issuing the Exchange Notes as contemplated herein, the Company
will receive, in exchange, Old Notes in like principal amount. The Old Notes
surrendered in exchange for the Exchange Notes will be retired and cancelled and
cannot be reissued. Accordingly, issuance of the Exchange Notes will not result
in any change in the Indebtedness of the Company. The net proceeds to the
Company from the
12
<PAGE>
Old 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.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH THE EXCHANGE OFFER AND AN INVESTMENT IN THE EXCHANGE NOTES, SEE
"RISK FACTORS" BEGINNING ON PAGE 15 OF THIS PROSPECTUS.
13
<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
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)
======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(1) ..................................... $ (975) $ (2,176) $ 2,548 $ 819 $ 255
Capital expenditures .......................... 200 520 3,881 184 5,672
Ratio of earnings to fixed charges(2) ......... -- -- 3.12x 2.37x --
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.
(2) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" are defined as income (loss) before income tax provision plus
fixed charges. Fixed charges consist of interest expense, amortization of
deferred debt financing costs and the estimated interest portion of rental
payments on operating leases. Earnings were inadequate to cover fixed
charges for the fiscal years ended December 31, 1995, 1996 and the six
months ended June 30, 1998 by approximately $1.2 million, $2.8 million, and
$1.7 million, respectively.
14
<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 Exchange Notes.
SUBSTANTIAL INDEBTEDNESS; LIQUIDITY
The Company has substantial indebtedness as a result of the Old Notes
Offering. As of June 30, 1998, the Company had total assets of approximately
$215.3 million, total Indebtedness of approximately $158.6 million (including
approximately $647,000 of Indebtedness, excluding the Old Notes) and
stockholders' equity of approximately $32.3 million. For the fiscal year ended
December 31, 1997, after giving pro forma effect to the Old Notes Offering and
the application of the net proceeds therefrom as if the Old 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. 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 Old Notes Offering,"
"Selected Financial and Other Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Description of Notes" 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 holders of the Notes, 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 TO REPAY
NOTES
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 obligation, contingent or
otherwise, to pay amounts due with respect to the Notes or to make funds
15
<PAGE>
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 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 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 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, including its obligations under the
Notes. 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
Old Notes Offering" and "Selected Financial and Other Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING; DISCRETION IN USE OF
PROCEEDS OF THE OLD 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
16
<PAGE>
capital needs, will require significant investment. The Company expects that the
net proceeds of the Old 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 Old
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 of the Old Notes Offering" 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 Old 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- 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
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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 receivable;
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
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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.
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
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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.
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
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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 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
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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 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.
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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 customers, 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."
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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."
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
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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 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
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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.
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
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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; RESTRICTIONS ON TRANSFERABILITY
The Exchange Notes are new securities for which there is currently no
market. The Company does not intend to apply for listing of the Exchange Notes
on any national securities exchange or for quotation of the Exchange Notes
through Nasdaq. Future trading prices of the Exchange Notes will depend on many
factors, including, among other things, prevailing interest rates, the Company's
operating results and the market for similar securities. The Initial Purchasers
have advised the Company that they currently intend to make a market in the
Exchange Notes. The Initial Purchasers, however, are not obligated to do so, and
any market making may be discontinued at any time without notice. In addition,
such market-making activities may be limited during the pendency of the Exchange
Offer and during the effectiveness of any Registration Statement.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes have not been registered under the Securities Act and are
subject to substantial restrictions on transfer. Old Notes that are not tendered
in exchange for Exchange Notes or are tendered but not accepted will, following
consummation of the Exchange Offer, continue to be subject to
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the existing restrictions upon transfer thereof. The Company does not currently
anticipate that it will register the Old Notes under the Securities Act. To the
extent that Old Notes are tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted Old Notes could be
adversely affected. In addition, although the Old Notes have been designated for
trading in the Private Offerings, Resale and Trading through Automatic Linkages
("PORTAL") Market, to the extent that Old Notes are tendered and accepted in
connection with the Exchange Offer, any trading market for Old Notes that remain
outstanding after the Exchange Offer could be adversely affected.
FAILURE TO COMPLY WITH EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for the Old Notes pursuant to
the Exchange Offer will be made only after timely receipt by the Exchange Agent
of such Old Notes, a properly completed and duly executed Letter of Transmittal
and all other required documents. Therefore, holders of the Old Notes desiring
to tender such Old Notes in exchange for Exchange Notes should allow sufficient
time to ensure timely delivery. The Company is under no duty to give
notification of defects or irregularities with respect to tenders of Old Notes
for exchange. Holders of Old Notes who do not exchange their Old Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Old Notes as set forth in the legend thereon.
See "The Exchange Offer."
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THE EXCHANGE OFFER
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER
Pursuant to the Registration Rights Agreement, the Company is obligated to
file with the Commission, subject to the provisions described below, the
Exchange Offer Registration Statement on an appropriate form permitting the
Exchange Notes to be offered in exchange for the Transfer Restricted Securities
(as defined below) and to permit resales of Exchange Notes held by
broker-dealers as contemplated by the Registration Rights Agreement. The
Registration Rights Agreement provides that, unless the Exchange Offer would not
be permitted by applicable law or Commission policy, the Company will (i) file
the Exchange Offer Registration Statement with the Commission on or prior to 90
days after the Closing Date, (ii) use its reasonable best efforts to cause the
Exchange Offer Registration Statement to be declared effective by the Commission
within 150 days after the Closing Date, (iii) (A) file all pre-effective
amendments to such Exchange Offer Registration Statement as may be necessary in
order to cause such Exchange Offer Registration Statement to become effective,
(B) file, if applicable, a post-effective amendment to such Exchange Offer
Registration Statement pursuant to Rule 430A under the Securities Act and (C)
cause all necessary filings in connection with the registration and
qualifications of the Exchange Notes to be made under the blue sky laws of such
jurisdictions as are necessary to permit consummation of the Exchange Offer and
(iv) use its reasonable best efforts to cause the Exchange Offer to be
consummated on or prior to 30 days after the date on which the Exchange Offer
Registration Statement is declared effective by the Commission.
For purposes of the foregoing, "Transfer Restricted Securities" means each
Old Note until the earliest to occur of (i) the date on which such Old Note has
been properly tendered for exchange (and accepted by the Company) by a person
other than a broker-dealer for Exchange Notes pursuant to the Exchange Offer,
(ii) following the exchange by a broker-dealer in the Exchange Offer of such Old
Note for one or more Exchange Notes, the date on which such Exchange Notes are
sold to a purchaser who receives from such broker-dealer on or prior to the date
of such sale a copy of this Prospectus, (iii) the date on which such Old Note
has been effectively registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement or (iv) the date on which such
Note is eligible for distribution to the public pursuant to Rule 144 under the
Securities Act.
Under existing Commission interpretations, the Exchange Notes would, in
general, be freely transferable after the Exchange Offer without further
registration under the Securities Act; provided, however, that, in the case of
broker-dealers participating in the Exchange Offer, a prospectus meeting the
requirements of the Securities Act must be delivered by such broker-dealers in
connection with resales of the Exchange Notes. The Company has agreed, for a
period of 180 days after consummation of the Exchange Offer, to make available a
prospectus meeting the requirements of the Securities Act to any such
broker-dealer for use in connection with any resale of any Exchange Notes
acquired in the Exchange Offer. A broker-dealer that delivers such a prospectus
to purchasers in connection with such resales will be subject to certain of the
civil liability provisions under the Securities Act and will be bound by the
provisions of the Registration Rights Agreement (including certain
indemnification rights and obligations).
Holders of Old Notes that desire to exchange such Old Notes for Exchange
Notes pursuant to the Exchange Offer will be required to make certain
representations, including representations that (i) any Exchange Notes to be
received by it will be acquired in the ordinary course of its business, (ii) it
is not engaged in, nor does it intend to engage in, nor does it have an
arrangement or understanding with any person to participate in the distribution
(within the meaning of the Securities Act) of the Exchange Notes and (iii) it is
not an "affiliate," as defined in Rule 405 of the Securities Act, of the
Company, or if it is an affiliate, it will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
Exchange Notes. If the holder is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Old Notes that were acquired as a
result of market-making activities or other trading activities, it will be
required to acknowledge that it will deliver a prospectus in connection with any
resale of such Exchange Notes.
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The Company has agreed to pay all expenses incident to the Exchange Offer
and will indemnify the Initial Purchasers against certain liabilities, including
liabilities under the Securities Act.
If (i) the Company is not permitted to consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or Commission
policy, (ii) any holder of Transfer Restricted Securities that is a "qualified
institutional buyer" (as defined in Rule 144A under the Securities Act) notifies
the Company at least 20 business days prior to the consummation of the Exchange
Offer that (a) applicable law or Commission policy prohibits the Company from
participating in the Exchange Offer, (b) such holder may not resell the Exchange
Notes acquired by it in the Exchange Offer to the public without delivering a
prospectus and this Prospectus is not appropriate or available for such resales
by such holder or (c) such holder is a broker-dealer and holds Notes acquired
directly from the Company or an affiliate of the Company, (iii) the Exchange
Offer is not for any other reason consummated by November 17, 1998 or (iv) the
Exchange Offer has been completed and in the opinion of counsel for the Initial
Purchasers, a registration statement must be filed and a prospectus must be
delivered by the Initial Purchasers in connection with any offering or sale of
Transfer Restricted Securities, the Company will use its reasonable best efforts
to: (A) file a Shelf Registration Statement within 60 days of the earliest to
occur of (i) through (iv) above and (B) cause the Shelf Registration Statement
to be declared effective by the Commission on or prior to the 150th day after
such obligation arises. The Company shall use its reasonable best efforts to
keep such Shelf Registration Statement continuously effective, supplemented and
amended to ensure that it is available for resales of Old Notes by the holders
of Transfer Restricted Securities entitled to this benefit and to ensure that
such Shelf Registration Statement conforms and continues to conform with the
requirements of the Registration Rights Agreement, the Securities Act and the
policies, rules and regulations of the Commission, as announced from time to
time, until the second anniversary of the Closing Date; provided, however, that
during such two-year period the holders may be prevented or restricted by the
Company from effecting sales pursuant to the Shelf Registration Statement as
more fully described in the Registration Rights Agreement. A holder of Old Notes
that sells its Old Notes pursuant to the Shelf Registration Statement generally
will be required to be named as a selling security holder in the related
prospectus and to deliver a prospectus to purchasers, will be subject to certain
of the civil liability provisions under the Securities Act in connection with
such sales and will be bound by the provisions of the Registration Rights
Agreement that are applicable to such holder (including certain indemnification
and contribution obligations).
If (i) the Company fails to file with the Commission any of the
registration statements required by the Registration Rights Agreement on or
before the date specified therein for such filing, (ii) any of such registration
statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness in the Registration Rights Agreement (the
"Effectiveness Target Date"), (iii) the Exchange Offer has not been consummated
within 30 days after the Effectiveness Target Date with respect to the Exchange
Offer Registration Statement or (iv) any Registration Statement required by the
Registration Rights Agreement is filed and declared effective but thereafter
ceases 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
registration statement that cures such failure and that is itself immediately
declared effective (each such event referred to in clauses (i) through (iv)
above, a "Registration Default"), additional cash interest ("Liquidated
Damages") shall accrue to each holder of the Old Notes commencing upon the
occurrence of such Registration Default in an amount equal to .50% per annum of
the principal amount of Old Notes held by such holder. The amount of Liquidated
Damages will increase by an additional .50% per annum of the principal amount of
Old Notes with respect to each subsequent 90-day period (or portion thereof)
until all Registration Defaults have been cured, up to a maximum rate of
Liquidated Damages of 1.50% per annum of the principal amount of Old Notes. All
accrued Liquidated Damages will be paid to holders by the Company in the same
manner as interest is paid pursuant to the Indenture. Following the cure of all
Registration Defaults relating to any particular Transfer Restricted Securities,
the accrual of Liquidated Damages with respect to such Transfer Restricted
Securities will cease.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified by
reference to, all the provisions of the Registration
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Rights Agreement, a copy of which has been filed with the Commission as an
exhibit to the Exchange Offer Registration Statement of which this Prospectus is
a part.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company shall accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue up to $160,000,000 aggregate
principal amount of Exchange Notes in exchange for up to $160,000,000 aggregate
principal amount of outstanding Old Notes accepted in the Exchange Offer.
Holders may tender some or all of their Old Notes pursuant to the Exchange
Offer. However, Old Notes may be tendered only in integral multiples of $1,000.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
The form and terms of the Exchange Notes will be identical in all material
respect to the form and terms of the Old Notes, except that (i) the Exchange
Notes will have been registered under the Securities Act and therefore will not
bear legends restricting the transfer thereof and (ii) the holders of the
Exchange Notes will not be entitled to certain rights under the Registration
Rights Agreement, including the terms providing for an increase in the interest
rate on the Old Notes under certain circumstances relating to the timing of the
Exchange Offer, all of which rights will terminate when the Exchange Offer is
consummated. The Exchange Notes will evidence the same debt as the Old Notes and
will be entitled to the benefits of the Indenture under which the Old Notes
were, and the Exchange Notes will be, issued, such that all outstanding Notes
will be treated as a single class of debt securities under the Indenture.
As of the date of this Prospectus, $160,000,000 aggregate principal amount
of the Old Notes was outstanding. Holders of Old Notes do not have any appraisal
or dissenters' rights under the Indenture in connection with the Exchange Offer.
The Company intends to conduct the Exchange Offer in accordance with the
provisions of the Registration Rights Agreement and the applicable requirements
of the Securities Act, the Exchange Act and the rules and regulations of the
Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the Exchange Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, such unaccepted Old Notes will be returned, without expense, to the
tendering holder thereof as promptly as practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commission or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company shall pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS AND AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
November 12 , 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company shall notify the
Exchange Agent of any extension by oral (promptly confirmed in writing) or
written notice and shall make a public announcement thereof, prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
expiration date of the Exchange Offer. Without limiting the manner in which the
Company may choose to make a public announcement of any delay, extension,
amendment or termination of the Exchange Offer, the Company shall have no
obligation to publish, advertise or otherwise communicate any such public
announcement, other than by making a timely release to an appropriate news
agency.
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The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any
conditions set forth below under "-- Conditions to Exchange Offer" shall not
have been satisfied, to terminate the Exchange Offer by giving oral or written
notice of such delay, extension or termination to the Exchange Agent or (iv) to
amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof to the registered holders. If the
Exchange Offer is amended in a manner determined by the Company to constitute a
material change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders of Old
Notes, and the Company will extend the Exchange Offer for a period of five to
ten business days, depending upon the significance of the amendment and the
manner of disclosure to such registered holders, if the Exchange Offer would
otherwise expire during such five to ten business day period. The rights
reserved by the Company in this paragraph are in addition to the Company's
rights set forth below under the caption "-- Conditions to Exchange Offer."
If the Company extends the period of time during which the Exchange Offer
is open, or if it is delayed in accepting for exchange of, or in issuing and
exchanging the Exchange Notes for, any Old Notes, or is unable to accept for
exchange of, or issue Exchange Notes for, any Old Notes pursuant to the Exchange
Offer for any reason, then, without prejudice to the Company's rights under the
Exchange Offer, the Exchange Agent may, on behalf of the Company, retain all Old
Notes tendered, and such Old Notes may not be withdrawn except as otherwise
provided below in "-- Withdrawal of Tenders." The adoption by the Company of the
right to delay acceptance for exchange of, or the issuance and the exchange of
the Exchange Notes, for any Old Notes is subject to applicable law, including
Rule 14e-1(c) under the Exchange Act, which requires that the Company pay the
consideration offered or return the Old Notes deposited by or on behalf of the
holders thereof promptly after the termination or withdrawal of the Exchange
Offer.
PROCEDURES FOR TENDERING
Only a registered holder of Old Notes may tender such Old Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign
and date the Letter of Transmittal, or facsimile thereof, have the signature
thereon guaranteed if required by the Letter of Transmittal and mail or
otherwise deliver such Letter of Transmittal or such facsimile to the Exchange
Agent at the address set forth below under "-- Exchange Agent" for receipt prior
to the Expiration Date. In addition, either (i) certificates for such Old Notes
must be received by the Exchange Agent along with the Letter of Transmittal, or
(ii) a timely confirmation of a book-entry transfer of such Old Notes, if such
procedure is available, into the Exchange Agent's account at DTC pursuant to the
procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date, or (iii) the holders must comply
with the guaranteed delivery procedures described below under "-- Guaranteed
Delivery Procedures."
Any financial institution that is a participant in the Depository's
Book-Entry Transfer facility system may make book-entry delivery of the Old
Notes by causing the Depository to transfer such Old Notes into the Exchange
Agent's account in accordance with the Depository's procedure for such transfer.
Although delivery of Old Notes may be effected through book-entry transfer into
the Exchange Agent's account at the Depository, the Letter of Transmittal (or
facsimile thereof), with any required signature guarantees and any other
required documents, must, in any case, be transmitted to and received and
confirmed by the Exchange Agent at its addresses set forth under "-- Exchange
Agent" below prior to 5:00 p.m., New York City time, on the Expiration Date.
DELIVERY OF DOCUMENTS TO THE DEPOSITORY IN ACCORDANCE WITH ITS PROCEDURES DOES
NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a holder which is not withdrawn prior to the Expiration Date
will constitute a binding agreement between such holder and the Company in
accordance with the terms and subject to the conditions set forth herein and in
the Letter of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOM-
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MENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED.
IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY
INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF
TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST
THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES
TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner of the Old Notes whose Old Notes are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender should contact the registered holder promptly and instruct
such registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering such
owner's Old Notes either make appropriate arrangements to register ownership of
the Old Notes in such owner's name (to the extent permitted by the Indenture) or
obtain a properly completed assignment from the registered holder. The transfer
of registered ownership may take considerable time.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes (which term includes any participants in DTC
whose name appears on a security position listing as the owner of the Old Notes)
or if delivery of the Old Notes is to be made to a person other than the
registered holder, such Exchange Notes must be endorsed or accompanied by a
properly completed bond power, in either case signed by such registered holder
as such registered holder's name appears on such Old Notes with the signature on
the Old Notes or the bond power guaranteed by an Eligible Institution (as
defined below).
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "-- Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution unless the Old Notes tendered pursuant thereto are
tendered (i) by a registered holder who has not completed the box entitled
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantee must be made by a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States, or another "Eligible Guarantor Institution"
within the meaning of Rule 17Ad-15 under the Exchange Act (any of the foregoing
an "Eligible Institution").
If the Letter of Transmittal or any Old Notes or assignments are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Exchange Agent and the Depository have confirmed that any financial
institution that is a participant in the Depository's system may utilize the
Depository's Automated Tender Offer Program to tender Old Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes, the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) shall be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Although the Company intends to
request the Exchange Agent to notify holders of defects or irregularities with
respect to
33
<PAGE>
tenders of Old Notes, neither the Company, the Exchange Agent nor any other
person shall incur any liability for failure to give such notification. Tenders
of Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived.
While the Company has no present plan to acquire any Old Notes which are
not tendered in the Exchange Offer or to file a registration statement to permit
resales of any Old Notes which are not tendered pursuant to the Exchange Offer,
the Company reserves the right in its sole discretion to purchase or make offers
for any Old Notes that remain outstanding subsequent to the Expiration Date or,
as set forth below under "-- Conditions to Exchange Offer," to terminate the
Exchange Offer and, to the extent permitted by applicable law, purchase Old
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchase or offers could differ from the terms of the Exchange
Offer.
By tendering, each holder will represent to the Company that, among other
things, (i) the Exchange Notes to be acquired by the holder of the Old Notes in
connection with the Exchange Offer are being acquired by the holder in the
ordinary course of business of the holder, (ii) the holder has no arrangement or
understanding with any person to participate in the distribution of Exchange
Notes, (iii) the holder acknowledges and agrees that any person who is a
broker-dealer registered under the Exchange Act or is participating in the
Exchange Offer for the purpose of distributing the Exchange Notes must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with a secondary resale transaction of the Exchange Notes acquired
by such person and cannot rely on the position of the staff of the Commission
set forth in certain no-action letters, (iv) the holder understands that a
secondary resale transaction described in clause (iii) above and any resales of
Exchange Notes obtained by such holder in exchange for Old Notes acquired by
such holder directly from the Company should be covered by an effective
registration statement containing the selling security holder information
required by Item 507 or Item 508, as applicable, of Regulation S-K of the
Commission, and (v) the holder is not an "affiliate," as defined in Rule 405 of
the Securities Act, of the Company. If the holder is a broker-dealer that will
receive Exchange Notes for its own account in exchange for Old Notes that were
acquired as a result of market-making activities or other trading activities,
the holder is required to acknowledge in the Letter of Transmittal that it will
deliver a prospectus in connection with any resale of such Exchange Notes;
however, by so acknowledging and by delivering a prospectus, the holder will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. See "Plan of Distribution."
RETURN OF OLD NOTES
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned
without expense to the tendering holder thereof (or, in the case of Old Notes
tendered by book-entry transfer into the Exchange Agent's account at the
Depository pursuant to the book-entry transfer procedures described below, such
Old Notes will be credited to an account maintained with the Depository) as
promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Depository for purposes of the Exchange Offer within two
business days after the date of this Prospectus, and any financial institution
that is a participant in the Depository's system may make book-entry delivery of
Old Notes by causing the Depository to transfer such Old Notes into the Exchange
Agent's account at the Depository in accordance with the Depository's procedures
for transfer. However, although delivery of Old Notes may be effected through
book-entry transfer at the Depository, the Letter of Transmittal or facsimile
thereof, with any required signature guarantees and any other required
documents, must, in any case, be transmitted to and received by the Exchange
Agent at the address set forth below under "-- Exchange Agent" on or prior to
the Expiration Date or pursuant to the guaranteed delivery procedures described
below.
34
<PAGE>
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes (or complete
the procedures for book-entry transfer), the Letters of Transmittal or any other
required documents to the Exchange Agent prior to the Expiration Date, may
effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery substantially in the form provided by the Company (by facsimile
transmission, mail or hand delivery) setting forth the name and address of the
holder, the certificate number(s) of such Old Notes (if available) and the
principal amount of Old Notes tendered, stating that the tender is being made
thereby and guaranteeing that, within three New York Stock Exchange trading days
after the Expiration Date, the Letter of Transmittal (or a facsimile thereof)
together with the certificate(s) representing the Old Notes in proper form (or
transfer for a confirmation of a book-entry transfer into the Exchange Agent's
account at the Depository of Old Notes delivered electronically), and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) such properly executed Letter of Transmittal (or facsimile thereof), as
well as the certificate(s) representing all tendered Old Notes in proper form
for transfer (or a confirmation of a book-entry transfer into the Exchange
Agent's account at the Depository of Old Notes delivered electronically), and
all other documents required by the Letter of Transmittal are received by the
Exchange Agent within three New York Stock Exchange trading days after the
Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to the holders who wish to tender their Old Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to the Expiration Date. To withdraw a tender of Old Notes in
the Exchange Offer, a written or facsimile transmission notice of withdrawal
must be received by the Exchange Agent at its address set forth herein prior to
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Old Notes to be withdrawn (the "Depositor"),
(ii) identify the Old Notes to be withdrawn (including the certificate number or
numbers (if applicable) and principal amount of such Old Notes), and (iii) be
signed by the holder in the same manner as the original signature on the Letter
of Transmittal by which such Old Notes were tendered (including any required
signature guarantees). All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company in
its sole discretion, whose determination shall be final and binding on all
parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no Exchange Notes will be issued
with respect thereto unless the Old Notes so withdrawn are validly retendered.
Properly withdrawn Old Notes may be retendered by following one of the
procedures described above under "-- Procedures for Tendering" at any time prior
to the Expiration Date.
CONDITIONS TO EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any Old
Notes not theretofore accepted for exchange, and may terminate or amend the
Exchange Offer as provided herein before the acceptance of such Old Notes, if
any of the following conditions exist:
(a) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the Exchange Offer which, in
the reasonable judgment of the Company, might impair the ability of the Company
to proceed with the Exchange Offer or have a material adverse effect on the
contemplated benefits of the Exchange Offer to the Company or there shall have
occurred any material adverse development in any existing action or proceeding
with respect to the Company or any of its Subsidiaries; or
35
<PAGE>
(b) there shall have been any material change, or development involving a
prospective change, in the business or financial affairs of the Company or any
of its Subsidiaries which, in the reasonable judgment of the Company, could
reasonably be expected to materially impair the ability of the Company to
proceed with the Exchange Offer or materially impair the contemplated benefits
of the Exchange Offer to the Company; or
(c) there shall have been proposed, adopted or enacted any law, statute,
rule or regulation which, in the judgment of the Company, could reasonably be
expected to materially impair the ability of the Company to proceed with the
Exchange Offer or materially impair the contemplated benefits of the Exchange
Offer to the Company; or
(d) any governmental approval which the Company shall, in its reasonable
discretion, deem necessary for the consummation of the Exchange Offer as
contemplated hereby shall have not been obtained.
If the Company determines in its reasonable discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Old Notes
and return all tendered Old Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of holders to withdraw such Old
Notes (see "-- Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn. If such waiver constitutes a material
change to the Exchange Offer, the Company will promptly disclose such waiver by
means of a prospectus supplement that will be distributed to the registered
holders of the Old Notes, and the Company will extend the Exchange Offer for a
period of five to ten business days, depending upon the significance of the
waiver and the manner of disclosure to the registered holders, if the Exchange
Offer would otherwise expire during such five to ten business day period.
Holders may have certain rights and remedies against the Company under the
Registration Rights Agreement should the Company fail to consummate the Exchange
Offer, notwithstanding a failure of the conditions stated above. See
"Description of Notes." Such conditions are not intended to modify those rights
or remedies in any respect.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to such
condition or may be waived by the Company in whole or in part at any time and
from time to time in the Company's reasonable discretion. The failure by the
Company at any time to exercise the foregoing rights shall not be deemed a
waiver of any such right and each such right shall be deemed an ongoing right
which may be asserted at any time and from time to time.
TERMINATION OF REGISTRATION RIGHTS
All rights under the Registration Rights Agreement (including registration
rights) of holders of the Old Notes eligible to participate in this Exchange
Offer will terminate upon consummation of the Exchange Offer except with respect
to the Company's continuing obligations (i) to indemnify the holders (including
any broker-dealers) and certain parties related to the holders against certain
liabilities (including liabilities under the Securities Act), (ii) to provide,
upon the request of any holder of any transfer-restricted Old Notes, certain
information in order to permit resales of such Old Notes pursuant to Rule 144A,
(iii) to use its best efforts to keep the Exchange Offer Registration Statement
effective and to amend and supplement this Prospectus in order to permit this
Prospectus to be lawfully delivered by all persons subject to the prospectus
delivery requirements of the Securities Act for such period of time as is
necessary to comply with applicable law in connection with any resale of the
Exchange Notes; provided, however, that such period shall not exceed 180 days
after the Exchange Offer has been consummated. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted pursuant to the
foregoing provisions, the Company has been informed that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
EXCHANGE AGENT
First Union National Bank has been appointed as Exchange Agent for the
Exchange Offer. All questions and requests for assistance as well as
correspondence in connection with the Exchange Offer and the Letter of
Transmittal should be addressed to the Exchange Agent, as follows:
36
<PAGE>
FIRST UNION NATIONAL BANK
First Union Customer Information Center
Corporate Trust Operations -- NC1153
1525 West W.T. Harris Blvd. 3C3
Charlotte, N.C. 28288-1153
Telephone: 704-590-7408
Fax: 704-590-7628
Attention: Michael Klotz
Requests for additional copies of this Prospectus, the Letter of
Transmittal or the Notice of Guaranteed Delivery should be directed to the
Exchange Agent.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telecopy, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager or other soliciting agent
in connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptance of the Exchange Offer. The Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$375,000. Such expenses include fees and expenses of the Exchange Agent and
Trustee, accounting and legal fees and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder of Old Notes.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the Old
Notes as reflected in the Company's accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized. The expenses of the Exchange Offer will be amortized over the term
of the Notes.
37
<PAGE>
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the Exchange Notes offered in the
Exchange Offer. In consideration for issuing the Exchange Notes as contemplated
in this Prospectus, the Company will receive, in exchange, Old Notes in like
principal amount at maturity, the form and terms of the Exchange Notes are the
same as the form and terms of the Old Notes except that (i) the exchange will
have been registered under the Securities Act, and, therefore, the Exchange
Notes will not bear legends restricting the transfer thereof and (ii) holders of
the Exchange Notes will not be entitled to certain rights of holders of the Old
Notes under the Registration Rights Agreement, which rights will terminate upon
the consummation of the Exchange Offer. The Old Notes surrendered in exchange
for Old Notes will be retired and cancelled and cannot be reissued. Accordingly,
issuance of the Exchange Notes will not result in any increase in the
indebtedness of the Company.
The net proceeds of the Old 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 Old
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, in early 1999, 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. 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 Old 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 Old 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
38
<PAGE>
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.
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
======== ====== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(1) ..................................... $ (1,525) $ (843) $ (975) $ (2,176) $ 2,548
Capital expenditures .......................... 45 44 200 520 3,881
Ratio of earnings to fixed charges(2) ......... -- -- -- -- 3.12x
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
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)
======== ========
OTHER FINANCIAL DATA:
EBITDA(1) ..................................... $ 819 $ 255
Capital expenditures .......................... 184 5,672
Ratio of earnings to fixed charges(2) ......... 2.37x --
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.
(2) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" are defined as income (loss) before income tax provision plus
fixed charges. Fixed charges consist of interest expense, amortization of
deferred debt financing costs and the estimated interest portion of rental
payments on operating leases. Earnings were inadequate to cover fixed
charges for the fiscal years ended December 31, 1993, 1994, 1995, 1996 and
the six months ended June 30, 1998 by approximately $1.7 million, $1.0
million, $1.2 million, $2.8 million, and $1.7 million, respectively.
39
<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.
40
<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
41
<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
42
<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.
43
<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.
44
<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.
45
<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
below), 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 Old
Notes Offering and the Reorganization. As of the date hereof, as a result of the
Indebtedness incurred in connection with the Old 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 Old 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 Old 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
46
<PAGE>
in cash 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 Old Notes Offering.
After the Exchange Offer, 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 Old
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, in early 1999, 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 Old 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.
47
<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
Old 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 Old 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 Old 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 request-
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ing 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, 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.
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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."
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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-
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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, Sprint
and MCI 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.
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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 in early 1999. 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 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 20 major U.S. metropolitan markets. 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 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 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.
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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 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.
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[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
approximately 160 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
approximately 20 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, 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:
<TABLE>
<CAPTION>
COUNTRY CARRIER CARRIER STATUS
- ------- ------- --------------
<S> <C> <C>
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
</TABLE>
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 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 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 two 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 recently entered into agreements with long distance service
providers that would have allowed the RBOCs to provide, indirectly, in-region
long distance services. Both of the proposals were challenged before the FCC,
which ruled that the agreements violate the 1996 Act because the RBOCs have not
satisfied the 14-point checklist for non-discriminatory competitive access to
their local networks. Both of these challenges are now pending before the FCC.
The FCC's ruling has been appealed before the United States Court of Appeals for
the District of Columbia. 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 this appeal or its 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
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RBOCs and other local exchange carriers also have been seeking greater pricing
flexibility and reduction 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. The Company cannot predict the outcome of this proceeding or
its possible impact on the Company.
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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 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 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
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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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<PAGE>
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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<PAGE>
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
79
<PAGE>
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.
80
<PAGE>
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) Includes options to purchase 5,000 shares of Common Stock.
(6) Includes 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 warrants 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 $100 on
October 9, 1997 in the Common Stock and in each of the indices and, in each
case, assumes reinvestment of all dividends. The Company has not paid any
dividends on the Common Stock and does not intend to do so in the foreseeable
future. The performance graph is not necessarily indicative of future
performance.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
MONTHLY CUMULATIVE TOTAL VALUES($)*
------------------------------------------------------------------------
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 44 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 Old Notes Offering, including the
Warrant Registration Statement and the Demand 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
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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 OTHER INDEBTEDNESS
The Signet Facility provides for maximum borrowings of up to the lesser of
$15 million or 85% of eligible accounts receivable, as defined, until maturity
of the Signet Facility on December 31, 1999. The proceeds of the Signet Facility
may be used for working capital and general corporate purposes. As of the date
hereof, there are no amounts outstanding under the Signet Facility.
Interest. Borrowings under the Signet Facility bear interest, at the
Company's option, at the prime rate, plus 2%, or the adjusted LIBOR, plus 4%.
Security. The Signet Facility is secured by substantially all of the
Company's assets, and, prior to the First Amendment to Credit Facility (the
"Amended Credit Facility") described below, a pledge of all of the Company's
stock owned by Ram Mukunda and Vijay and Usha Srinivas.
Covenants. The Signet Facility contains certain financial and non-financial
covenants, including, but not limited to (i) ratios of monthly net revenue to
loan balance, (ii) interest coverage requirements, (iii) cash flow leverage
requirements, (iv) limitations on capital expenditures, incurrence of additional
indebtedness and the issuance of additional equity securities, (iv) restrictions
on transfers of assets, mergers and acquisitions and (v) restrictions on the
payment of dividends.
Events of Default. The Signet Facility contains events of default customary
for similar facilities. If any event of default occurs and is continuing beyond
any applicable grace period, First Union (defined below) may accelerate the due
date with respect to the entire indebtedness of the Company under the Signet
Facility and may also immediately enforce and realize upon any collateral
security granted to the lender thereunder.
The Company and First Union National Bank ("First Union"), as the successor
to Signet Bank, recently executed the Amended Credit Facility, which provided
for certain changes to the Signet Facility in connection with the Old Notes
Offering and the Reorganization. Pursuant to the Amended Credit Facility, among
other changes, First Union consented to the Old Notes Offering and the
Reorganization and waived compliance with certain affirmative and negative
covenants in connection therewith that may be in conflict with the terms of the
Old Notes Offering. In particular, among other amendments, the Amended Credit
Facility provides that certain key financial covenants shall apply only in the
event that the Company attempts to borrow amounts under the Amended Credit
Facility. As of the date hereof, as a result of the Indebtedness incurred in
connection with the Old Notes Offering, the Company is not in compliance with
these covenants and is therefore unable to borrow any amounts under the Amended
Credit Facility. The Amended Credit Facility also provided for the release of
First Union's security interest in the Company's stock owned by Mr. Mukunda and
Mr. and Mrs. Srinivas previously pledged to secure the Company's obligations
under the Signet Facility.
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DESCRIPTION OF UNITS
Each Unit consists of $1,000 principal amount of Notes and a Warrant to
purchase 1.25141 Warrant Shares. The issue price of a Unit was allocated, as
between the Note and the Warrant, $986.83 to the Note and $13.17 to the Warrant.
The Notes and the Warrants are not be separately transferable until the earliest
to occur of (i) November 15, 1998, (ii) an Exercise Event, (iii) the date the
Exchange Offer Registration Statement or Shelf Registration Statement is
declared effective by the Commission and (iv) such other date as Lehman
Brothers, Inc. shall determine (the "Separation Date").
DESCRIPTION OF NOTES
The Old Notes were, and the Exchange Notes will be, issued pursuant to an
Indenture, dated as of May 21, 1998 (the "Indenture"), between the Company and
First Union National Bank, as trustee thereunder (the "Trustee"). Upon issuance
of the Exchange Notes or the effectiveness of a Shelf Registration Statement,
the Indenture will be subject to and governed by the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). The following summary of certain
provisions of the Notes, the Indenture, the Registration Rights Agreement and
the Pledge Agreement does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Notes, the
Indenture, the Registration Rights Agreement and the Pledge Agreement, including
the definitions of certain terms therein and those terms made a part thereof by
the Trust Indenture Act. Whenever particular sections or defined terms of the
Indenture not otherwise defined herein are referred to, such sections or defined
terms are incorporated herein by reference. Copies of the Indenture, the
Registration Rights Agreement and the Pledge Agreement have been filed with the
Commission as exhibits to the Exchange Offer Registration Statement of which
this Prospectus is a part. For purposes of this "Description of Notes," the term
"the Company" refers to Startec Global and not any of its Subsidiaries. The
definitions of certain other terms used in the following summary are set forth
below under "-- Certain Definitions."
GENERAL
The Old Notes are, and the Exchange Notes will be, senior obligations of
the Company, limited to $160.0 million aggregate principal amount, and will
mature on May 15, 2008. The Notes bear interest at the rate of 12% per annum,
payable semiannually in arrears on May 15 and November 15 of each year,
commencing November 15, 1998 to the Person in whose name the Note (or any
predecessor Note) is registered at the close of business on the preceding May 1
or November 1, as the case may be. Interest will be computed on the basis of a
360-day year of twelve 30-day months.
Principal of, premium, if any, interest and Liquidated Damages, if any, on
the Notes will be payable, and the Notes may be exchanged or transferred, at the
office or agency of the Company (which initially will be the corporate trust
operations office of the Trustee in New York City; or, at the option of the
Company, payment of interest may be made by check mailed to the address of the
holders as such address appears in the Register; provided that all payments with
respect to Global Notes and Certificated Notes (as such terms are defined below
under the caption "Book-Entry, Delivery and Form") the holders of which have
given wire transfer instructions to the Company will be required to be made by
wire transfer of immediately available funds to the accounts specified by the
holders thereof. (Section 307)
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and any integral multiple thereof.
See "Book-Entry, Delivery and Form." No service charge will be made for any
registration of transfer or exchange of Notes, but the Company may require
payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith. (Section 305)
OPTIONAL REDEMPTION
Except as otherwise provided, the Notes are not redeemable at the option of
the Company prior to May 15, 2003. At any time on or after that date, the Notes
may be redeemed at the Company's option, in whole or in part, at any time or
from time to time, upon not less than 30 nor more than 60 days' prior
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notice mailed by first class mail to each holder's last address as it appears in
the Register, at the following Redemption Prices (expressed in percentages of
principal amount thereof), plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the Redemption Date (subject to the right of holders
of record on the relevant Regular Record Date to receive interest due on an
Interest Payment Date that is on or prior to the Redemption Date), if redeemed
during the 12-month period commencing on May 15 of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2003 ........................... 106.0%
2004 ........................... 104.0%
2005 ........................... 102.0%
2006 (and thereafter) .......... 100.0%
</TABLE>
Notwithstanding the foregoing, prior to May 15, 2001, the Company may, on
any one or more occasions, redeem up to 35.0% of the originally issued aggregate
principal amount of Notes at a redemption price of 112.0% of the aggregate
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the Redemption Date, with the Net Cash Proceeds of
one or more Public Equity Offerings; provided, that at least 65.0% of the
originally issued principal amount of the Notes remains outstanding immediately
after the occurrence of such redemption; and provided further that notice of
such redemptions shall be given within 60 days of the closing of any such Public
Equity Offering. (Section 1101)
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed or, if the Notes are not listed on a national securities exchange, on a
pro rata basis, by lot or by such other method as the Trustee in its sole
discretion shall deem to be fair and appropriate; provided that no Note of
$1,000 or less in principal amount at maturity shall be redeemed in part. If any
Note is to be redeemed in part only, the notice of redemption relating to such
Note shall state the portion of the principal amount thereof to be redeemed. A
new Note in principal amount equal to the unredeemed portion thereof will be
issued in the name of the holder thereof upon cancellation of the original Note.
SECURITY
The Indenture requires the Company to purchase and pledge to the Trustee,
as security for the benefit of the holders of the Notes, the Pledged Securities
in such amount as will be sufficient upon receipt of scheduled interest and/or
principal payments of such securities, in the opinion of a nationally recognized
firm of independent public accountants selected by the Company, to provide for
payment in full of the first six scheduled interest payments due on the Notes.
The Company used approximately $52.4 million of the net proceeds of the Old
Notes Offering to acquire the Pledged Securities. The Pledged Securities were
pledged by the Company to the Trustee for the benefit of the holders of the
Notes pursuant to the Pledge Agreement and are held by the Trustee in the Pledge
Account pending disposition pursuant to the Pledge Agreement. Pursuant to the
Pledge Agreement, immediately prior to one of the first six scheduled interest
payment dates with respect to the Notes, the Company may either (a) deposit with
the Trustee from funds otherwise available to the Company cash sufficient to pay
the interest scheduled to be paid on such date or (b) direct the Trustee to
release from the Pledge Account proceeds sufficient to pay interest then due. In
the event that the Company exercises the option under clause (a) above, the
Company may thereafter direct the Trustee to release to the Company proceeds or
Pledged Securities from the Pledge Account in like amount. A failure by the
Company to pay interest on the Notes in a timely manner through the first six
scheduled interest payment dates will constitute an immediate Event of Default
under the Indenture.
Interest earned on the Pledged Securities is added to the Pledge Account.
In the event that the funds or Pledged Securities held in the Pledge Account
exceed the amount sufficient, in the opinion of a nationally recognized firm of
independent public accountants selected by the Company, to provide for payment
in full of the first six scheduled interest payments due on the Notes (or, in
the event an interest
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payment or payments have been made, an amount sufficient to provide for payment
in full of any interest payments remaining, up to and including the sixth
scheduled interest payment) the Trustee will be permitted to release to the
Company, at the Company's request, any such excess amount.
The Notes are secured by a first priority security interest in the Pledged
Securities and in the Pledge Account and, accordingly, the Pledged Securities
and the Pledge Account also secure repayment of the principal amount (and
Liquidated Damages, if any) of the Notes to the extent of such security.
Under the Pledge Agreement, assuming that the Company makes the first six
scheduled interest payments on the Notes in a timely manner, any remaining
Pledged Securities will be released from the Pledge Account and the Notes
therefore will be unsecured.
RANKING
The Old Notes are, and the Exchange Notes will be, unsecured obligations of
the Company (except as described above) and 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 pari passu in right of payment with all other
existing and future unsecured and unsubordinated obligations of the Company,
including trade payables. As of June 30, 1998, after giving pro forma effect to
the Reorganization, the Company and its consolidated Subsidiaries would have had
approximately $158.6 million of Indebtedness. Because the Company is a holding
company that conducts its business through its subsidiaries, all existing and
future Indebtedness and other liabilities and commitments of the Company's
subsidiaries, including trade payables, will be effectively senior to the Notes.
The Indenture limits, but does not prohibit, the incurrence of certain
additional Indebtedness by the Company and its Restricted Subsidiaries and does
not limit the amount of Indebtedness Incurred to finance the cost of
Telecommunications Assets. The Company anticipates that it and its Subsidiaries
will Incur substantial additional Indebtedness in the future. As of June 30,
1998, after giving pro forma effect to the Reorganization, the Company's
consolidated subsidiaries had aggregate liabilities of approximately $25.1
million, including approximately $647,000 of Indebtedness.
COVENANTS
Limitation on Indebtedness and Preferred Stock of Subsidiaries.
(a) Subject to paragraph (b) below, the Company will not, and will not
permit any of its Restricted Subsidiaries to, Incur any Indebtedness or, in
the case of Restricted Subsidiaries, issue or have outstanding Preferred
Stock (other than Acquired Preferred Stock); provided, however, that the
Company may Incur Indebtedness if, immediately thereafter, the ratio of (i)
the aggregate principal amount (or accreted value, as the case may be) of
Indebtedness of the Company and its Restricted Subsidiaries on a
consolidated basis outstanding as of the Transaction Date to (ii) the Pro
Forma Consolidated Cash Flow for the preceding two full fiscal quarters
multiplied by two, determined on a pro forma basis as if any such
Indebtedness had been Incurred and the proceeds thereof had been applied at
the beginning of such two fiscal quarters, would be greater than zero and
less than 5.0 to 1.
(b) The foregoing limitations of paragraph (a) of this covenant will not
apply to any of the following Indebtedness ("Permitted Indebtedness"), each
of which will be given independent effect:
(i) Indebtedness of the Company evidenced by the Notes;
(ii) Indebtedness of the Company or any Restricted Subsidiary
outstanding on the Issue Date;
(iii) Indebtedness of the Company or any Restricted Subsidiary under
one or more Credit Facilities, in an aggregate principal amount at any
one time outstanding not to exceed the greater of (x) $50.0 million and
(y) 85.0% of Eligible Accounts Receivable;
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(iv) Indebtedness of the Company or any Restricted Subsidiary Incurred
to finance the cost (including the cost of design, development,
construction, acquisition, licensing, installation or integration) of
Telecommunications Assets;
(v) Indebtedness of a Restricted Subsidiary owed to and held by the
Company or another Restricted Subsidiary, except that (A) any transfer of
such Indebtedness by the Company or a Restricted Subsidiary (other than
to the Company or another Restricted Subsidiary) and (B) the sale,
transfer or other disposition by the Company or any Restricted Subsidiary
of Capital Stock of a Restricted Subsidiary which is owed Indebtedness by
another Restricted Subsidiary shall, in each case, be an incurrence of
Indebtedness by such Restricted Subsidiary, subject to the other
provisions of the Indenture;
(vi) Indebtedness of the Company owed to and held by a Restricted
Subsidiary which is unsecured and subordinated in right to the payment
and performance to the obligations of the Company under the Indenture and
the Notes, except that (A) any transfer of such Indebtedness by a
Restricted Subsidiary (other than to another Restricted Subsidiary) and
(B) the sale, transfer or other disposition by the Company or any
Restricted Subsidiary of Capital Stock of a Restricted Subsidiary which
is owed Indebtedness by the Company shall, in each case, be an incurrence
of Indebtedness by the Company, subject to other provisions of the
Indenture;
(vii) Indebtedness of the Company or a Restricted Subsidiary issued in
exchange for, or the net proceeds of which are used to refinance (whether
by amendment, renewal, extension or refunding), then outstanding
Indebtedness of the Company or a Restricted Subsidiary, other than
Indebtedness Incurred under clauses (iii), (v), (vi), (viii), (ix), (xi)
and (xii) of this paragraph, and any refinancings thereof in an amount
not to exceed the amount so refinanced or refunded (plus premiums,
accrued interest, and reasonable fees and expenses); provided that such
new Indebtedness shall only be permitted under this clause (vii) if: (A)
in case the Notes are refinanced in part or the Indebtedness to be
refinanced is pari passu with the Notes, such new Indebtedness, by its
terms or by the terms of any agreement or instrument pursuant to which
such new Indebtedness is issued or remains outstanding, is expressly made
pari passu with, or subordinate in right of payment to, the remaining
Notes, (B) in case the Indebtedness to be refinanced is subordinated in
right of payment to the Notes, such new Indebtedness, by its terms or by
the terms of any agreement or instrument pursuant to which such new
Indebtedness is issued or remains outstanding, is expressly made
subordinate in right of payment to the Notes at least to the extent that
the Indebtedness to be refinanced is subordinated to the Notes and (C)
such new Indebtedness, determined as of the date of Incurrence of such
new Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be refinanced or refunded, and the Average Life of such
new Indebtedness is at least equal to the remaining Average Life of the
Indebtedness to be refinanced or refunded; and provided further that in
no event may Indebtedness of the Company be refinanced by means of any
Indebtedness of any Restricted Subsidiary pursuant to this clause (vii);
(viii) Indebtedness of (x) the Company not to exceed, at any one time
outstanding, 2.00 times the Net Cash Proceeds from the issuance and sale,
other than to a Subsidiary, of Common Stock (other than Redeemable Stock)
of the Company (less the amount of such proceeds used to make Restricted
Payments as provided in clause (iii) or (iv) of the second paragraph of
the "Limitation on Restricted Payments" covenant) and (y) the Company not
to exceed, at one time outstanding, the fair market value of any
Telecommunications Assets acquired by the Company in exchange for Common
Stock of the Company issued after the Issue Date; provided, however, that
in determining the fair market value of any such Telecommunications
Assets so acquired, if the estimated fair market value of such
Telecommunications Assets exceeds (A) $2.0 million (as estimated in good
faith by the Board of Directors), then the fair market value of such
Telecommunications Assets will be determined by a majority of the Board
of Directors of the Company, which determination will be evidenced by a
resolution thereof, and (B) $10.0 million (as estimated in good faith by
the Board of Directors), then the Company will deliver the Trustee a
written appraisal as to the fair market value of such Tele-
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communications Assets prepared by a nationally recognized investment
banking or public accounting firm (or, if no such investment banking or
public accounting firm is qualified to prepare such an appraisal, by a
nationally recognized appraisal firm); and provided further that, except
with respect to Acquired Indebtedness, such Indebtedness does not mature
prior to the Stated Maturity of the Notes and the Average Life of such
Indebtedness is longer than that of the Notes;
(ix) Indebtedness of the Company or any Restricted Subsidiary (A) in
respect of performance, surety or appeal bonds or letters of credit
supporting trade payables, in each case provided in the ordinary course
of business, (B) under Currency Agreements and Interest Rate Agreements
covering Indebtedness of the Company; provided that such agreements do
not increase the Indebtedness of the obligor outstanding at any time
other than as a result of fluctuations in foreign currency exchange rates
or interest rates or by reason of fees, indemnities and compensation
payable thereunder, and (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or
from Guarantees or letters of credit, surety bonds or performance bonds
securing any obligations of the Company or any of its Restricted
Subsidiaries pursuant to such agreements, in any case Incurred in
connection with the disposition of any business, assets or Restricted
Subsidiary of the Company (other than Guarantees of Indebtedness Incurred
by any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition), in
a principal amount not to exceed the gross proceeds actually received by
the Company or any Restricted Subsidiary in connection with such
disposition;
(x) Indebtedness of the Company, to the extent that the net proceeds
thereof are promptly (A) used to repurchase Notes tendered in a Change of
Control offer or (B) deposited to defease all of the Notes as described
below under "Defeasance and Covenant Defeasance of Indenture";
(xi) Indebtedness of a Restricted Subsidiary represented by a
Guarantee of the Notes permitted by and made in accordance with the
"Limitation on Issuances of Guarantees of Indebtedness by Restricted
Subsidiaries" covenant; and
(xii) Indebtedness of the Company or any Restricted Subsidiary in
addition to that permitted to be incurred pursuant to clauses (i) through
(xi) above in an aggregate principal amount not in excess of $10.0
million (or, to the extent not denominated in United States dollars, the
United States Dollar Equivalent thereof) at any one time outstanding.
(c) For purposes of determining any particular amount of Indebtedness
under this "Limitation on Indebtedness and Preferred Stock of Subsidiaries"
covenant, Guarantees, Liens or obligations with respect to letters of credit
and other credit enhancements supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included; provided,
however, that the foregoing shall not in any way be deemed to limit the
provision of "Limitation on Issuances of Guarantees of Indebtedness by
Restricted Subsidiaries." For purposes of determining compliance with this
"Limitation on Indebtedness" covenant, in the event that an item of
Indebtedness meets the criteria of more than one of the types of Indebtedness
described in the above clauses, the Company, in its sole discretion may, at
the time of such Incurrence, (i) classify such item of Indebtedness under and
comply with either of paragraph (a) or (b) of this covenant (or any of such
definitions), as applicable, (ii) classify and divide such item of
Indebtedness into more than one of such paragraphs (or definitions), as
applicable, and (iii) elect to comply with such paragraphs (or definitions),
as applicable in any order.
Limitation on Restricted Payments.
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) (A) declare or pay any dividend or make any
distribution in respect of the Company's Capital Stock to the holders thereof
(other than stock splits, dividends or distributions payable solely in shares of
Capital Stock (other than Redeemable Stock) of the Company or in options,
warrants or other rights to acquire
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such shares of Capital Stock) or (B) declare or pay any dividend or make any
distribution in respect of the Capital Stock of any Restricted Subsidiary to any
Person other than dividends and distributions payable to the Company or any
Restricted Subsidiary or to all holders of Capital Stock of such Restricted
Subsidiary on a pro rata basis; (ii) purchase, redeem, retire or otherwise
acquire for value any shares of Capital Stock of the Company (including options,
warrants or other rights to acquire such shares of Capital Stock) held by any
Person or any shares of Capital Stock of any Restricted Subsidiary (including
options, warrants and other rights to acquire such shares of Capital Stock) held
by any Affiliate of the Company (other than a wholly owned Restricted
Subsidiary) or any holder (or any Affiliate thereof) of 5.0% or more of the
Company's Capital Stock; (iii) make any voluntary or optional principal payment,
or voluntary or optional redemption, repurchase, defeasance, or other
acquisition or retirement for value, of Indebtedness of the Company that is
subordinated in right of payment to the Notes; or (iv) make any Investment,
other than a Permitted Investment, in any Person (such payments or any other
actions described in clauses (i) through (iv) being collectively "Restricted
Payments") if, at the time of, and after giving effect to, the proposed
Restricted Payment:
(A) a Default or Event of Default shall have occurred and be continuing;
(B) the Company could not Incur at least $1.00 of Indebtedness under
paragraph (a) of the "Limitation on Indebtedness and Preferred Stock
of Subsidiaries" covenant; and
(C) the aggregate amount of all Restricted Payments declared or made from
and after the Closing Date would exceed the sum of:
(1) Cumulative Consolidated Cash Flow minus 200% of Cumulative
Consolidated Fixed Charges;
(2) 100% of the aggregate Net Cash Proceeds from the issue or sale to
a Person, which is not a Subsidiary of the Company, of Capital Stock of
the Company (other than Redeemable Stock) or of debt securities of the
Company which have been converted into or exchanged for such Capital
Stock (except to the extent such Net Cash Proceeds are used to Incur new
Indebtedness outstanding pursuant to clause (viii) of paragraph (b) of
the "Limitation on Indebtedness and Preferred Stock of Subsidiaries"
covenant); and
(3) to the extent any Permitted Investment that was made after the
Closing Date is sold for cash or otherwise liquidated or repaid for cash,
the lesser of (i) the cash return of capital with respect to such
Permitted Investment (less the cost of disposition, if any) and (ii) the
initial amount of such Permitted Investment.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Notes
including a premium, if any, and accrued and unpaid interest and Liquidated
Damages, if any, with the net proceeds of, or in exchange for, Indebtedness
Incurred under clause (viii) of paragraph (b) of the "Limitation on Indebtedness
and Preferred Stock of Subsidiaries" covenant; (iii) the repurchase, redemption
or other acquisition of Capital Stock of the Company in exchange for, or out of
the Net Cash Proceeds of a substantially concurrent (A) capital contribution to
the Company or (B) issuance and sale of shares of Capital Stock (other than
Redeemable Stock) of the Company (except to the extent such proceeds are used to
incur new Indebtedness outstanding pursuant to clause (viii) of paragraph (b) of
the "Limitation on Indebtedness and Preferred Stock of Subsidiaries" covenant);
(iv) the acquisition of Indebtedness of the Company which is subordinated in
right of payment to the Notes in exchange for, or out of the proceeds of, a
substantially concurrent (A) capital contribution to the Company or (B) issuance
and sale of, shares of the Capital Stock of the Company (other than Redeemable
Stock) (except to the extent such proceeds are used to incur new Indebtedness
outstanding pursuant to clause (viii) of paragraph (b) of the "Limitation on
Indebtedness and Preferred Stock of Subsidiaries" covenant); (v) payments or
distributions to dissenting stockholders in accordance with applicable law,
pursuant to or in connection with a consolidation, merger or transfer of assets
that complies with the provisions of the Indenture
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applicable to mergers, consolidations and transfers of all or substantially all
of the property and assets of the Company; (vi) other Restricted Payments not to
exceed $2.0 million; and (vii) investments in any Telecommunications Assets
acquired in exchange for Capital Stock of the Company (other than Redeemable
Stock) issued after the Issue Date or with the Net Cash Proceeds from the
concurrent issuance and sale of Capital Stock of the Company (other than
Redeemable Stock); provided that, except in the case of clause (i), no Default
or Event of Default shall have occurred and be continuing or occur as a
consequence of the actions or payments set forth therein. (Section 1012)
Each Restricted Payment permitted pursuant to the immediately preceding
paragraph (other than the Restricted Payment referred to in clause (ii) thereof)
and the Net Cash Proceeds from any capital contributions to the Company or
issuance of Capital Stock referred to in clauses (iii), (iv) and (vii) of the
immediately preceding paragraph, shall be included in calculating whether the
conditions of clause (C) of the first paragraph of this "Limitation on
Restricted Payments" covenant have been met with respect to any subsequent
Restricted Payments. In the event the proceeds of an issuance of Capital Stock
of the Company are used for the redemption, repurchase or other acquisition of
the Notes, then the Net Cash Proceeds of such issuance shall be included in
clause (C) of the first paragraph of this "Limitation on Restricted Payments"
covenant only to the extent such proceeds are not used for such redemption,
repurchase or other acquisition of the Notes.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries.
So long as any of the Notes are outstanding, the Company will not, and will
not permit any Restricted Subsidiary to, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction of any kind
on the ability of any Restricted Subsidiary to (i) pay dividends or make any
other distributions on any Capital Stock of such Restricted Subsidiary owned by
the Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed
to the Company or any other Restricted Subsidiary (iii) make loans or advances
to the Company or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Indenture or any other
agreements or instruments in effect on the Closing Date, and any extensions,
refinancings, renewals or replacements of such agreements; provided that the
encumbrances and restrictions in any such extensions, refinancings, renewals or
replacements are no less favorable in any material respect to the holders than
those encumbrances or restrictions that are then in effect and that are being
extended, refinanced, renewed or replaced; (ii) contained in the terms of any
Indebtedness or any agreement pursuant to which such Indebtedness was issued
(or, in the case of Acquired Preferred Stock, terms of such Acquired Preferred
Stock) if the encumbrance or restriction applies only in the event of a default
with respect to a financial covenant contained in such Indebtedness or agreement
(or, in the case of Acquired Preferred Stock, upon the default in the payment of
dividends upon such Acquired Preferred Stock) and such encumbrance or
restriction is not materially more disadvantageous to the holders of the Notes
than is customary in comparable financings (as determined by the Company) and
the Company determines that any such encumbrance or restriction will not
materially affect the Company's ability to make principal or interest payments
on the Notes; (iii) existing under or by reason of applicable law; (iv) existing
with respect to any Person or the property or assets of such Person acquired by
the Company or any Restricted Subsidiary, existing at the time of such
acquisition and not incurred in contemplation thereof, which encumbrances or
restrictions are not applicable to any Person or the property or assets of any
Person other than such Person or the property or assets of such Person so
acquired; (v) in the case of clause (iv) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant, (A) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is, or is subject to, a
lease, purchase mortgage obligation, license, conveyance or contract or similar
property or asset, (B) existing by virtue of any transfer of, agreement to
transfer, option or right with respect to, or Lien on, any property or assets of
the Company or any Restricted Subsidiary not otherwise prohibited by the
Indenture or (C) arising or agreed to in the ordinary course of business, not
relating to any Indebtedness, and that do not, individually or in the aggregate,
detract from the value of property or assets of the Company or any Restricted
Subsidiary in any manner material to the Company or any Restricted Sub-
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sidiary; or (vi) with respect to a Restricted Subsidiary and imposed pursuant to
an agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock of, or property and assets of, such
Restricted Subsidiary. Nothing contained in this "Limitation on Dividend and
Other Payment Restrictions Affecting Restricted Subsidiaries" covenant shall
prevent the Company or any Restricted Subsidiary from (1) creating, incurring,
assuming or suffering to exist any Liens otherwise permitted in the "Limitation
on Liens" covenant or (2) restricting the sale or other disposition of property
or assets of the Company or any of its Restricted Subsidiaries that secure
Indebtedness of the Company or any of its Restricted Subsidiaries. (Section
1013)
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries.
The Company will not, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue, transfer, convey, sell, lease or otherwise
dispose of any shares of Capital Stock (including options, warrants or other
rights to purchase shares of such Capital Stock) of such or any other Restricted
Subsidiary (other than to the Company or a wholly owned Restricted Subsidiary or
in respect of any director's qualifying shares or sales of shares of Capital
Stock to foreign nationals mandated by applicable law) to any Person unless (A)
the Net Cash Proceeds from such issuance, transfer, conveyance, sale, lease or
other disposition are applied in accordance with the provisions of the
"Limitation on Asset Sales" covenant, (B) immediately after giving effect to
such issuance, transfer, conveyance, sale, lease or other disposition, such
Restricted Subsidiary would no longer constitute a Restricted Subsidiary and (C)
any Investment in such Person remaining after giving effect to such issuance,
transfer, conveyance, sale, lease or other disposition would have been permitted
to be made under the "Limitation on Restricted Payments" covenant if made on the
date of such issuance, transfer, conveyance, sale, lease or other disposition
(valued as provided in the definition of "Investment"); provided, however, that
notwithstanding the foregoing, the Company may, and may permit its Restricted
Subsidiaries to, issue, transfer, convey, sell or otherwise dispose of Capital
Stock, (other than Redeemable Stock) (including options, warrants or other
rights to purchase shares of such Capital Stock) of such or any other Restricted
Cable Subsidiary so long as (x) immediately after such transaction, the Company
and/or its Restricted Subsidiaries continue to beneficially own at least a
majority of the Voting Stock of such Restricted Cable Subsidiary and (y) the Net
Cash Proceeds from such transaction are applied in accordance with the
provisions of the "Limitation on Assets Sales" covenant. For purposes of the
foregoing, a "Restricted Cable Subsidiary" shall mean any Restricted Subsidiary
of the Company organized after the Closing Date for the purpose of designing,
developing, constructing, acquiring, licensing, owning and/or operating fiber
optic cable or similar transmission systems used in the telecommunications
business. (Section 1014)
Limitation on Transactions with Stockholders and Affiliates.
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 10.0% or more of any class of Capital Stock of the Company or any
Restricted Subsidiary or with any Affiliate of the Company or any Restricted
Subsidiary, unless (i) such transaction or series of transactions is on terms no
less favorable to the Company or such Restricted Subsidiary than those terms
that could be obtained in a comparable arm's-length transaction with a Person
that is not such a holder or an Affiliate, (ii) if such transaction or series of
transactions involves aggregate consideration in excess of $2.0 million, then
such transaction or series of transactions is approved by a majority of the
Board of Directors of the Company (including a majority of the disinterested
members thereof, if any) and is evidenced by a resolution thereof and (iii) if
such transaction or series of transactions involves aggregate consideration in
excess of $10.0 million, then the Company or such Restricted Subsidiary will
deliver to the Trustee a written opinion as to the fairness to the Company or
such Restricted Subsidiary of such transaction from a financial point of view
from a nationally recognized investment banking firm (or, if an investment
banking firm is generally not qualified to give such an opinion, by a nationally
recognized appraisal firm or accounting firm).
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The foregoing limitation does not limit, and will not apply to (i) any
transaction between the Company and any of its Restricted Subsidiaries or among
Restricted Subsidiaries; (ii) the payment or reimbursement of reasonable and
customary regular fees and expenses to directors of the Company who are not
employees of the Company; (iii) any Restricted Payments not prohibited by the
"Limitation on Restricted Payments" covenant; (iv) loans and advances to
officers or employees of the Company and its Subsidiaries not exceeding at any
one time outstanding $1.5 million in the aggregate; (v) employment and similar
agreements entered into between the Company or any of its Restricted
Subsidiaries with their respective employees in the ordinary course of business;
and (vi) operating and similar agreements entered into in the ordinary course of
the Company's business. (Section 1015)
Limitation on Liens.
Under the terms of the Indenture, the Company will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, create, incur, assume or
suffer to exist any Lien (other than Permitted Liens) on any of its assets or
properties of any character (including, without limitation, licenses and
trademarks), or any shares of Capital Stock or Indebtedness of any Restricted
Subsidiary, whether owned at the date of the Indenture or thereafter acquired,
or any income, profits or proceeds therefrom, or assign or otherwise convey any
right to receive income thereof, without making effective provision for all of
the Notes and all other amounts ranking pari passu with the Notes to be directly
secured equally and ratably with the obligation or liability secured by such
Lien, or, if such obligation or liability is subordinated to the Notes and other
amounts ranking pari passu with the Notes, without making provision for the
Notes and such other amounts to be directly secured prior to the obligation or
liability secured by such Lien. (Section 1016)
Limitation on Sale-Leaseback Transactions.
The Company will not, and will not permit any of its Restricted
Subsidiaries to, enter into any Sale- Leaseback Transaction with respect to any
property of the Company or any of its Restricted Subsidiaries. Notwithstanding
the foregoing, the Company may enter into Sale-Leaseback Transactions; provided,
however, that (a) the Attributable Value of such Sale-Leaseback Transaction
shall be deemed to be Indebtedness of the Company and (b) after giving pro forma
effect to any such Sale-Leaseback Transaction and the foregoing clause (a), the
Company would be able to incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to paragraph (a) set forth in the covenant
described under "-- Limitation on Indebtedness and Preferred Stock of
Subsidiaries."
Limitation on Asset Sales.
The Company will not, and will not permit any Restricted Subsidiary to,
make any Asset Sale, unless (i) the Company or the Restricted Subsidiary, as the
case may be, receives consideration at the time of such Asset Sale at least
equal to the fair market value of the assets sold or disposed of as determined
by the good faith judgment of the Board of Directors evidenced by a Board
Resolution and (ii) at least 75.0% of the consideration received for such Asset
Sale consists of cash or cash equivalents or the assumption of unsubordinated
Indebtedness.
The Company shall, or shall cause the relevant Restricted Subsidiary to,
within 360 days after the date of receipt of the Net Cash Proceeds from an
Asset Sale, (i) (A) apply an amount equal to such Net Cash Proceeds to
permanently repay unsubordinated Indebtedness of the Company or Indebtedness of
any Restricted Subsidiary, in each case, owing to a Person other than the
Company or any of its Restricted Subsidiaries or (B) invest an equal amount, or
the amount not so applied pursuant to clause (A), in property or assets of a
nature or type or that are used in a business (or in a Person having property
and assets of a nature or type, or engaged in a business) similar or related to
the nature or type of the property and assets of, or the business of, the
Company and its Restricted Subsidiaries existing on the date of such investment
(as determined in good faith by the Board of Directors, whose determination
shall be conclusive and evidenced by a Board Resolution) and (ii) apply (no
later than the end of the 360-day period referred to above) such excess Net
Cash Proceeds (to the extent not applied pursuant to clause (i)) as provided in
the following paragraphs of this "Limitation on Asset Sales" covenant. The
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amount of such Net Cash Proceeds required to be applied (or to be committed to
be applied) during such 360-day period referred to above in the preceding
sentence and not applied as so required by the end of such period shall
constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Excess Proceeds Offer (as defined
herein) totals at least $10.0 million, the Company must, not later than the 30th
Business Day thereafter, make an offer (an "Excess Proceeds Offer") to purchase
from the holders on a pro rata basis an aggregate principal amount of Notes
equal to the Excess Proceeds on such date, at a purchase price equal to 100.0%
of the principal amount of the Notes, plus, in each case, accrued and unpaid
interest and Liquidated Damages, if any, to the date of purchase (the "Excess
Proceeds Payment").
The Company shall commence an Excess Proceeds Offer by mailing a notice to
the Trustee and each holder stating: (i) that the Excess Proceeds Offer is being
made pursuant to this "Limitation on Asset Sales" covenant and that all Notes
validly tendered will be accepted for payment on a pro rata basis; (ii) the
purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Excess Proceeds Payment Date"); (iii) that any Note not tendered will
continue to accrue interest pursuant to its terms; (iv) that, unless the Company
defaults in the payment of the Excess Proceeds Payment, any Note accepted for
payment pursuant to the Excess Proceeds Offer shall cease to accrue interest and
Liquidated Damages, if any, on and after the Excess Proceeds Payment Date; (v)
that holders electing to have a Note purchased pursuant to the Excess Proceeds
Offer will be required to surrender the Note, together with the form entitled
"Option of the Holder to Elect Purchase" on the reverse side of the Note
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the Business Day immediately preceding the Excess
Proceeds Payment Date; (vi) that holders will be entitled to withdraw their
election if the Paying Agent receives, not later than the close of business on
the third Business Day immediately preceding the Excess Proceeds Payment Date, a
telegram, facsimile transmission or letter setting forth the name of such
holder, the principal amount of Notes delivered for purchase and a statement
that such holder is withdrawing his election to have such Notes purchased; and
(vii) that holders whose Notes are being purchased only in part will be issued
new Notes equal in principal amount to the unpurchased portion of the Notes
surrendered; provided that each Note purchased and each new Note issued shall be
in a principal amount of $1,000 or integral multiples thereof.
On the Excess Proceeds Payment Date, the Company shall (i) accept for
payment on a pro rata basis Notes or portions thereof tendered pursuant to the
Excess Proceeds Offer; (ii) deposit with the Paying Agent money sufficient to
pay the purchase price of all Notes or portions thereof so accepted; and (iii)
deliver, or cause to be delivered, to the Trustee all Notes or portions thereof
so accepted together with an Officers' Certificate specifying the Notes or
portions thereof accepted for payment by the Company. The Paying Agent shall
promptly mail to the holders of Notes so accepted payment in an amount equal to
the purchase price, and the Trustee shall promptly authenticate and mail to such
holders a new Note equal in principal amount to any unpurchased portion of the
Note surrendered; provided that each Note purchased and each new Note issued
shall be in a principal amount of $1,000 or integral multiples thereof. To the
extent that the aggregate principal amount of Notes tendered is less than the
Excess Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes. The Company will publicly announce the results of the Excess
Proceeds Offer as soon as practicable after the Excess Proceeds Payment Date.
For purposes of this "Limitation on Asset Sales" covenant, the Trustee shall act
as the Paying Agent.
The Company will comply with Rule 14e-1 under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and any other rules and regulations
thereunder to the extent such rules and regulations are applicable, in the event
that such Excess Proceeds are received by the Company under this "Limitation on
Asset Sales" covenant and the Company is required to repurchase Notes as
described above. (Section 1017)
Limitation on Issuances of Guarantees of Indebtedness by Restricted
Subsidiaries.
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee, assume or in any other manner become liable with
respect to any Indebtedness of the Company, other
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than Indebtedness under Credit Facilities incurred under clause (iii) of
paragraph (b) in the "Limitation on Indebtedness and Preferred Stock of
Subsidiaries" covenant, unless (i) such Restricted Subsidiary simultaneously
executes and delivers a supplemental indenture to the Indenture providing for a
Guarantee of the Notes on terms substantially similar to the guarantee of such
Indebtedness, except that if such Indebtedness is by its express terms
subordinated in right of payment to the Notes, any such assumption, Guarantee or
other liability of such Restricted Subsidiary with respect to such Indebtedness
shall be subordinated in right of payment to such Restricted Subsidiary's
assumption, Guarantee or other liability with respect to the Notes substantially
to the same extent as such Indebtedness is subordinated to the Notes and (ii)
such Restricted Subsidiary waives, and will not in any manner whatsoever claim
or take the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against the Company or any other Restricted
Subsidiary as a result of any payment by such Restricted Subsidiary under its
Guarantee.
Notwithstanding the foregoing, any Guarantee by a Restricted Subsidiary may
provide by its terms that it will be automatically and unconditionally released
and discharged upon (i) any sale, exchange or transfer, to any Person not an
Affiliate of the Company, of all of the Company's and each Restricted
Subsidiary's Capital Stock in, or all or substantially all of the assets of,
such Restricted Subsidiary (which sale, exchange or transfer is not prohibited
by the Indenture) or (ii) the release or discharge of the guarantee which
resulted in the creation of such Guarantee, except a discharge or release by or
as a result of payment under such Guarantee. (Section 1018)
Business of the Company; Restriction on Transfers of Existing Business.
The Company will not, and will not permit any Restricted Subsidiary to, be
principally engaged in any business or activity other than a Permitted Business.
In addition, the Company and any Restricted Subsidiary will not be permitted to,
directly or indirectly, transfer to any Unrestricted Subsidiary (i) any of the
material licenses, agreements or instruments, permits or authorizations used in
the Permitted Business of the Company and any Restricted Subsidiary on the
Closing Date or (ii) any material portion of the "property and equipment" (as
such term is used in the Company's consolidated financial statements) of the
Company or any Significant Subsidiary used in the licensed service areas of the
Company and any Restricted Subsidiary as such exists on the Closing Date.
(Section 1019)
Limitation on Investments in Unrestricted Subsidiaries.
The Company will not make, and will not permit any of its Restricted
Subsidiaries to make, any Investments in Unrestricted Subsidiaries if, at the
time thereof, the aggregate amount of such Investments, together with any other
Restricted Payments made after the Closing Date, would exceed the amount of
Restricted Payments then permitted to be made pursuant to the "Limitation on
Restricted Payments" covenant. Any Investments in Unrestricted Subsidiaries
permitted to be made pursuant to this covenant (i) will be treated as the making
of a Restricted Payment in calculating the amount of Restricted Payments made by
the Company or a Subsidiary and (ii) may be made in cash or property (if made in
property, the Fair Market Value thereof as determined by the Board of Directors
of the Company (whose determination shall be conclusive and evidenced by a Board
Resolution) shall be deemed to be the amount of such Investment for the purpose
of clause (i)). (Section 1020)
Provision of Financial Statements and Reports.
The Company will file on a timely basis 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, the annual reports,
quarterly reports and other documents that the Company would be required to file
if it were subject to Section 13 or 15 of the Exchange Act. All such annual
reports shall include the geographic segment financial information required to
be disclosed by the Company under Item 101(d) of Regulation S-K under the
Securities Act. The Company will also be required (a) to file with the Trustee,
and provide to each holder, without cost to such holder, copies of such reports
and documents within 15 days after the date on which the Company files such
reports and documents with the Commission or the date on which the Company would
be required to file such reports and docu-
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ments if the Company were so required 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.
(Section 1009)
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder will have the right
to require the Company to repurchase all or any part of its Notes at a purchase
price in cash pursuant to the offer described below (the "Change of Control
Offer") equal to 101.0% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, to the date of purchase (subject to the
right of holders of record to receive interest on the relevant Interest Payment
Date) (the "Change of Control Payment").
Within 30 days of the Change of Control, the Company will mail a notice to
the Trustee and each holder stating, among other things: (i) that a Change of
Control has occurred, that the Change of Control Offer is being made pursuant to
this "Repurchase of Notes upon a Change of Control" covenant and that all Notes
validly tendered will be accepted for payment; (ii) the circumstances and
relevant facts regarding such Change of Control; (iii) the purchase price and
the date of purchase (which shall be a Business Day no earlier than 30 days nor
later than 60 days from the date such notice is mailed) (the "Change of Control
Payment Date"); (iv) that any Note not tendered will continue to accrue interest
pursuant to its terms; (v) that, unless the Company defaults in the payment of
the Change of Control Payment, any Note accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest and Liquidated Damages,
if any, on and after the Change of Control Payment Date; (vi) that holders
electing to have any Note or portion thereof purchased pursuant to the Change of
Control Offer will be required to surrender such Note, together with the form
entitled "Option of the Holder to Elect Purchase" on the reverse side of such
Note completed, to the Paying Agent at the address specified in the notice prior
to the close of business on the Business Day immediately preceding the Change of
Control Payment Date; (vii) that holders will be entitled to withdraw their
election if the Paying Agent receives, not later than the close of business on
the third Business Day immediately preceding the Change of Control Payment Date,
a telegram, facsimile transmission or letter setting forth the name of such
holder, the principal amount of Notes delivered for purchase and a statement
that such holder is withdrawing his election to have such Notes purchased; and
(viii) that holders whose Notes are being purchased only in part will be issued
new Notes equal in principal amount to the unpurchased portion of the Notes
surrendered; provided that each Note purchased and each new Note issued shall be
in a principal amount of $1,000 or integral multiples thereof.
On the Change of Control Payment Date, the Company shall: (i) accept for
payment Notes or portions thereof tendered pursuant to the Change of Control
Offer; (ii) deposit with the Paying Agent money sufficient to pay the purchase
price of all Notes or portions thereof so accepted; and (iii) deliver, or cause
to be delivered, to the Trustee, all Notes or portions thereof so accepted
together with an Officer's Certificate specifying the Notes or portions thereof
accepted for payment by the Company. The Paying Agent shall promptly mail, to
the holders of Notes so accepted, payment in an amount equal to the purchase
price, and the Trustee shall promptly authenticate and mail to such holders a
new Note equal in principal amount to any unpurchased portion of the Notes
surrendered; provided that each Note purchased and each new Note issued shall be
in a principal amount of $1,000 or integral multiples thereof. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date. For purposes of this
"Repurchase of Notes upon a Change of Control" covenant, the Trustee shall act
as Paying Agent.
The Company shall not be required to make a Change of Control Offer upon a
Change of Control if a third party makes a Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements
applicable to a Change of Control Offer made by the Company and purchases all
Notes validly tendered and not withdrawn under such Change of Control Offer.
The Company will comply with Rule 14e-1 under the Exchange Act and any
other rules and regulations thereunder to the extent such rules and regulations
are applicable in the event that a Change of
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Control occurs and the Company is required to repurchase the Notes under this
"Repurchase of Notes upon a Change of Control" covenant. (Section 1010)
If the Company is unable to repay all of its Indebtedness that would
prohibit repurchase of the Notes or is unable to obtain the consents of the
holders of Indebtedness, if any, of the Company outstanding at the time of a
Change of Control whose consent would be so required to permit the repurchase of
Notes, then the Company will have breached such covenant. This breach will
constitute an Event of Default under the Indenture if it continues for a period
of 30 consecutive days after written notice is given to the Company by the
Trustee or the holders of at least 25.0% in aggregate principal amount of the
Notes then outstanding. In addition, the failure by the Company to repurchase
Notes at the conclusion of the Change of Control Offer will constitute an Event
of Default without any waiting period or notice requirements.
There can be no assurances that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities or Indebtedness of the Company which might
be outstanding at the time). The above covenant requiring the Company to
repurchase the Notes will, unless the consents referred to above are obtained,
require the Company to repay all indebtedness then outstanding which by its
terms would prohibit such Note repurchase, either prior to or concurrently with
such Note repurchase.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its assets
(as an entirety or substantially an entirety in one transaction or a series of
related transactions) to, any Person or permit any Person to merge with or into
the Company, and the Company will not permit any of its Restricted Subsidiaries
to enter into any such transaction or series of transactions if such transaction
or series of transactions, in the aggregate, would result in the sale,
assignment, conveyance, transfer, lease or other disposition of all or
substantially all of the assets of the Company or the Company and its Restricted
Subsidiaries, taken as a whole, to any other Person or Persons, unless: (i)
either the Company will be the continuing Person, or the Person (if other than
the Company) formed by such consolidation or into which the Company is merged or
that acquired or leased such assets of the Company will be a corporation
organized and validly existing under the laws of the United States of America or
any jurisdiction thereof and shall expressly assume, by a supplemental
indenture, executed and delivered to the Trustee, all of the obligations of the
Company with respect to the Notes and under the Indenture; (ii) immediately
after giving effect to such transaction on a pro forma basis, no Default or
Event of Default shall have occurred and be continuing; (iii) immediately after
giving effect to such transaction on a pro forma basis, the Company, or any
Person becoming the successor obligor of the Notes, shall have a Consolidated
Net Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction; (iv) immediately after giving effect to
such transaction on a pro forma basis, the Company, or any Person becoming the
successor obligor of the Notes, as the case may be, could Incur at least $1.00
of Indebtedness under paragraph (a) of the "Limitation on Indebtedness and
Issuance of Preferred Stock of Subsidiaries" covenant; and (v) the Company
delivers to the Trustee an Officers' Certificate (attaching the arithmetic
computations to demonstrate compliance with clauses (iii) and (iv)) and an
Opinion of Counsel, in each case stating that such consolidation, merger or
transfer and such supplemental indenture complies with this provision and that
all conditions precedent provided for herein relating to such transaction have
been complied with; provided, however, that clauses (iii) and (iv) above do not
apply if, in the good faith determination of the Board of Directors of the
Company, whose determination shall be evidenced by a Board Resolution, the
principal purpose of such transaction is to change the state of incorporation of
the Company; provided further that any such transaction shall not have as one of
its purposes the evasion of the foregoing limitations; and provided further that
clauses (ii), (iv) and (v) above shall not apply to the Reorganization. (Section
801)
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EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the
Indenture: (a) default in the payment of interest or Liquidated Damages, if any,
on the Notes when due and payable as to any Interest Payment Date falling on or
prior to May 15, 2001; (b) default in the payment of interest or Liquidated
Damages, if any, on the Notes when due and payable as to any Interest Payment
Date following May 15, 2001, and any such failure continues for a period of 30
days; (c) default in the payment of principal of (or premium, if any, on) any
Note when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise; (d) default in the payment of principal or interest or
Liquidated Damages, if any, on Notes required to be purchased pursuant to an
Excess Proceeds Offer as described under "Limitation on Asset Sales" or pursuant
to a Change of Control Offer as described under "Repurchase of Notes upon a
Change of Control"; (e) failure to perform or comply with the provisions
described under "Consolidation, Merger and Sale of Assets"; (f) default in the
performance of or breach of any other covenant or agreement of the Company set
forth in the Indenture or under the Notes and such default or breach continues
for a period of 30 consecutive days after written notice by the Trustee or the
holders of 25.0% or more in aggregate principal amount of the Notes then
outstanding; (g) there occurs with respect to any issue or issues of
Indebtedness of the Company or any Restricted Subsidiary having an outstanding
principal amount of $5.0 million or more in the aggregate for all such issues of
all such Persons, whether such Indebtedness now exists or shall hereafter be
created, (I) an event of default that has caused the holder thereof to declare
such Indebtedness to be due and payable prior to its Stated Maturity and such
Indebtedness has not been discharged in full or such acceleration has not been
rescinded or annulled by the expiration of any applicable grace period and/or
(II) the failure to make a principal payment at the final (but not any interim)
fixed maturity date thereon and such defaulted payment shall not have been made,
waived or extended by the expiration of any applicable grace period; (h) any
final judgment or order (not covered by insurance) for the payment of money in
excess of $5.0 million in the aggregate for all such final judgments or orders
against all such Persons (treating any deductibles, self-insurance or retention
as not so covered) shall be rendered against the Company or any Restricted
Subsidiary and shall not be paid or discharged, and there shall be any period of
30 consecutive days following entry of the final judgment or order that causes
the aggregate amount for all such final judgments or orders outstanding and not
paid or discharged against all such Persons to exceed $5.0 million during which
a stay of enforcement of such final judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect; (i) a court having jurisdiction in
the premises enters a decree or order for (A) relief in respect of the Company
or any of its Significant Subsidiaries in an involuntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any of its Significant
Subsidiaries or for all or substantially all of the property and assets of the
Company or any of its Significant Subsidiaries or (C) the winding up or
liquidation of the affairs of the Company or any of its Significant Subsidiaries
and, in each case, such decree or order shall remain unstayed and in effect for
a period of 30 consecutive days; (j) the Company or any of its Significant
Subsidiaries (A) commences a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or consents to the
entry of an order for relief in an involuntary case under any such law, (B)
consents to the appointment of or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the Company or
any of its Significant Subsidiaries or for all or substantially all of the
property and assets of the Company or any of its Significant Subsidiaries or (C)
effects any general assignment for the benefit of creditors; or (k) the Company
asserts in writing that the Pledge Agreement ceases to be in full force and
effect before payment in full of the obligations thereunder. (Section 501)
If an Event of Default (other than an Event of Default specified in clause
(i) or (j) above) occurs and is continuing under the Indenture, the Trustee or
the holders of at least 25% in aggregate principal amount of the Notes then
outstanding, by written notice to the Company (and to the Trustee if such notice
is given by the holders), may, and the Trustee at the request of such holders
shall, declare the principal of, premium, if any, accrued and unpaid interest
and Liquidated Damages, if any, on the Notes to be immediately due and payable.
Upon a declaration of acceleration, such principal of, premium, if any, accrued
interest and Liquidated Damages, if any, shall become immediately due and
payable. In the
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event of a declaration of acceleration because an Event of Default set forth in
clause (g) above has occurred and is continuing, such declaration of
acceleration shall be automatically rescinded and annulled if the default
triggering such Event of Default pursuant to clause (g) shall be remedied or
cured by the Company and/or the relevant Significant Subsidiaries or waived by
the holders of the relevant Indebtedness within 60 days after the declaration of
acceleration with respect thereto. If an Event of Default specified in clause
(i) or (j) above occurs, the principal of, premium, if any, accrued interest and
Liquidated Damages, if any, on the Notes then outstanding shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holder. The holders of at least a majority in
aggregate principal amount of the outstanding Notes, by written notice to the
Company and to the Trustee, may waive all past defaults and rescind and annul a
declaration of acceleration and its consequences if (i) all existing Events of
Default, other than the nonpayment of the principal of, premium, if any, accrued
and unpaid interest and Liquidated Damages, if any, on the Notes that have
become due solely by such declaration of acceleration, have been cured or waived
(subject to certain limitations) and (ii) the rescission, in the opinion of
counsel, would not conflict with any judgment or decree of a court of competent
jurisdiction. For information as to the waiver of defaults, see "-- Modification
and Waiver." (Section 502)
The holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from holders of Notes. No holder
may pursue any remedy with respect to the Indenture or the Notes unless: (i) the
holder gives the Trustee written notice of a continuing Event of Default; (ii)
the holders of at least 25% in aggregate principal amount of then outstanding
Notes make a written request to the Trustee to pursue the remedy; (iii) such
holder or holders offer the Trustee indemnity satisfactory to the Trustee
against any costs, liability or expense; (iv) the Trustee does not comply with
the request within 60 days after receipt of the request and the offer of
indemnity; and (v) during such 60-day period, the holders of a majority in
aggregate principal amount of then outstanding Notes do not give the Trustee a
direction that is inconsistent with the request. However, such limitations do
not apply to the right of any holder of a Note to receive payment of the
principal of, premium, if any, accrued interest or Liquidated Damages, if any,
on, such Note or to bring suit for the enforcement of any such payment, on or
after the due date expressed in the Notes, which right shall not be impaired or
affected without the consent of the holder. (Sections 507 and 508)
The Indenture will require certain officers of the Company to certify, on
or before a date not more than 120 days after the end of each fiscal year, that
a review has been conducted of the activities of the Company and the Company's
performance under the Indenture and that the Company has fulfilled all
obligations thereunder or, if there has been a default in the fulfillment of any
such obligation, specifying each such default and the nature and status thereof.
The Company will also be obligated to notify the Trustee of any default or
defaults in the performance of any covenants or agreements under the Indenture.
For these purposes, such compliance shall be determined without regard to any
grace period or notice requirement under the Indenture. (Section 1008)
DEFEASANCE AND COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company upon the Notes discharged with respect to the
outstanding Notes ("defeasance"). Such defeasance means that the Company will be
deemed to have paid and discharged the entire Indebtedness represented by the
outstanding Notes and to have satisfied all its other obligations under such
Notes and the Indenture insofar as such Notes are concerned except for (i) the
rights of holders of outstanding Notes to receive payments (solely from monies
deposited in trust) in respect of the principal of, premium, if any, accrued
interest and Liquidated Damages, if any, on such Notes when such payments are
due, (ii) the Company's obligations to issue temporary Notes, register the
transfer or exchange of any Notes, replace mutilated, destroyed, lost or stolen
Notes, maintain an office or agency for payments in respect of the Notes and
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segregate and hold such payments in trust, (iii) the rights, powers, trusts,
duties and immunities of the Trustee and (iv) the defeasance provisions of the
Indenture. In addition, the Company may, at its option and at any time, elect to
have the obligations of the Company released with respect to certain covenants
and other provisions set forth in the Indenture, and any omission to comply with
such obligations will not constitute a Default or an Event of Default with
respect to the Notes ("covenant defeasance"). (Sections 1301, 1302 and 1303)
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit or cause to be deposited with the Trustee, as
trust funds in trust, specifically pledged as security for, and dedicated solely
to, the benefit of the holders of the Notes, cash in United States dollars, U.S.
Government Obligations (as defined in the Indenture), or a combination thereof,
in such amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay and discharge the principal of,
premium, if any, and accrued interest and Liquidated Damages, if any, on the
outstanding Notes on the Stated Maturity (or upon redemption, if applicable) of
such principal, premium, if any, or installment of interest and Liquidated
Damages, if any; (ii) no Default or Event of Default with respect to the Notes
will have occurred and be continuing on the date of such deposit or, insofar as
an event of bankruptcy under clause (i) or (j) of "Events of Default" above is
concerned, at any time during the period ending on the 123rd day after the date
of such deposit; (iii) such defeasance or covenant defeasance will not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company is a party or by
which it is bound; (iv) in the case of defeasance, the Company shall have
delivered to the Trustee an Opinion of Counsel stating that the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling, or since May 15, 1998, there has been a change in applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion shall confirm that, the holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if such
defeasance had not occurred; (v) in the case of covenant defeasance, the Company
shall have delivered to the Trustee an Opinion of Counsel to the effect that the
holders of the Notes outstanding will not recognize income, gain or loss for
federal income tax purposes as a result of such covenant defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such covenant defeasance had not
occurred; and (vi) the Company shall have delivered to the Trustee an Officer's
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for relating to either the defeasance or the covenant
defeasance, as the case may be, have been complied with. (Section 1304)
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when, (ii) either (A) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or repaid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held by the Company and thereafter repaid to the Company or
discharged from such trust) have been delivered to the Trustee for cancellation
or (B) all Notes not theretofore delivered to the Trustee for cancellation
(except lost, stolen or destroyed Notes which have been replaced or paid) (i)
have become due and payable, or (ii) will become due and payable at their Stated
Maturity within one year, or (iii) are to be called for redemption within one
year under arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the Company and
the Company, in the case of (i), (ii) or (iii) above, has irrevocably deposited
or caused to be deposited with the Trustee funds in an amount sufficient to pay
and discharge the entire Indebtedness on the Notes not theretofore delivered to
the Trustee for cancellation, for principal of, premium, if any, accrued
interest and Liquidated Damages, if any, on the Notes to the date of deposit (in
the case of Notes which have become due and payable) or to the Stated Maturities
or Redemption Date, as the case may be, together with irrevocable instructions
from the Company directing the Trustee to apply such funds to the payment
thereof at maturity or redemption, as
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the case may be; (ii) the Company had paid all other sums payable under the
Indenture by the Company; and (iii) the Company has delivered to the Trustee an
officers' certificate and an opinion of counsel stating that all conditions
precedent under the Indenture relating to the satisfaction and discharge of the
Indenture have been complied with.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that no
such modification or amendment may, without the consent of each holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (ii) reduce the principal amount of, or premium, if
any, or interest on any Note or extend the time for payment of interest on, or
alter the redemption provisions of, any Note, (iii) change the place or currency
of payment of principal of, or premium, if any, or interest on any Note, (iv)
impair the right of any holder of the Notes to receive payment of, principal of
and interest on such holder's Notes on or after the due dates therefor or to
institute suit for the enforcement of any payment on or after the Stated
Maturity (or, in the case of a redemption, on or after the Redemption Date) of
any Note, (v) reduce the above-stated percentage of outstanding Notes the
consent of whose holders is necessary to modify, amend, waive, supplement or
consent to take any action under the Indenture or the Notes, (vi) waive a
default in the payment of principal of, premium, if any, or accrued and unpaid
interest or Liquidated Damages, if any, on the Notes, (vii) reduce or change the
rate or time for payment of interest on the Notes, (viii) reduce or change the
rate or time for payment of Liquidated Damages, if any, (ix) modify any
provisions of any Guarantees in a manner adverse to the holders or (x) reduce
the percentage or aggregate principal amount of outstanding Notes the consent of
whose holders is necessary for waiver of compliance with certain provisions of
the Indenture or for waiver of certain defaults.
GOVERNING LAW AND SUBMISSION TO JURISDICTION
The Notes and the Indenture are governed and construed in accordance with
the laws of the State of New York. The Company will submit to the jurisdiction
of the U.S. federal and New York state courts located in the Borough of
Manhattan, City and State of New York for purposes of all legal actions and
proceedings instituted in connection with the Notes and the Indenture.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; provided, however, if the Trustee acquires any conflicting
interest, it must eliminate such conflict as soon as practicable, but in any
event within 90 days.
The holders of a majority in aggregate principal amount of the outstanding
Notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any holder of Notes, unless such holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other capitalized
term used herein for which no definition is provided.
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"Acquired Indebtedness" or "Acquired Preferred Stock" is defined to mean
Indebtedness or Preferred Stock, as the case may be, of a Person existing at the
time such Person becomes a Restricted Subsidiary or Indebtedness assumed in
connection with an Asset Acquisition by the Company or a Restricted Subsidiary
and not incurred in connection with, or in anticipation of, such Person becoming
a Restricted Subsidiary or such Asset Acquisition; provided that Indebtedness or
Preferred Stock, as the case may be, of such Person which is redeemed, defeased,
retired or otherwise repaid in full at the time of or immediately upon the
consummation of the transactions by which such Person becomes a Restricted
Subsidiary or such Asset Acquisition shall not be considered as Indebtedness or
Preferred Stock.
"Affiliate" is defined to mean, as applied to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, is defined to mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" is defined to mean (i) an investment by the Company or
any of its Restricted Subsidiaries in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or shall be merged
into or consolidated with the Company or any of its Restricted Subsidiaries or
(ii) an acquisition by the Company or any of its Restricted Subsidiaries of the
property and assets of any Person (other than the Company or any of its
Restricted Subsidiaries) that constitute substantially all of a division or line
of business of such Person.
"Asset Disposition" is defined to mean the sale or other disposition by the
Company or any of its Restricted Subsidiaries (other than to the Company or
another Restricted Subsidiary of the Company) of (i) all or substantially all of
the Capital Stock of any Restricted Subsidiary of the Company or (ii) all or
substantially all of the assets that constitute a division or line of business
of the Company or any of its Restricted Subsidiaries.
"Asset Sale" is defined to mean any sale, transfer or other disposition
(including by way of merger, consolidation or Sale-Leaseback Transactions) in
one transaction or a series of related transactions by the Company or any of its
Restricted Subsidiaries to any Person (other than the Company or any of its
Restricted Subsidiaries) of (i) all or any of the Capital Stock of any
Restricted Subsidiary (other than in respect of any director's qualifying shares
or investments by foreign nationals mandated by applicable law), (ii) all or
substantially all of the property and assets of an operating unit or business of
the Company or any of its Restricted Subsidiaries or (iii) any other property
and assets of the Company or any of its Restricted Subsidiaries outside the
ordinary course of business of the Company or such Restricted Subsidiary and, in
each case, that is not governed by the provisions of the Indenture applicable to
mergers, consolidations and sales of assets of the Company and which, in the
case of any of clause (i), (ii) or (iii) above, whether in one transaction or a
series of related transactions, (a) have a fair market value in excess of $1.0
million or (b) are for net proceeds in excess of $1.0 million; provided that
sales or other dispositions of inventory, receivables and other current assets
in the ordinary course of business shall not be included within the meaning of
"Asset Sale."
"Attributable Value" is defined to mean, as to any particular lease under
which any Person is at the time liable other than a Capitalized Lease
Obligation, and at any date as of which the amount thereof is to be determined,
the total net amount of rent required to be paid by such person under such lease
during the remaining term thereof (whether or not such lease is terminable at
the option of the lessee prior to the end of such term), including any period
for which such lease has been, or may, at the option of the lessor, be extended,
discounted from the last date of such term to the date of determination at a
rate per annum equal to the discount rate which would be applicable to a
Capitalized Lease Obligation with like term in accordance with GAAP. The net
amount of rent required to be paid under any lease for any such period shall be
the aggregate amount of rent payable by the lessee with respect to such period
after excluding amounts required to be paid on account of insurance, taxes,
assessments, utility, operating and labor costs and similar charges.
"Attributable Value" means, as to a Capitalized Lease Obligation under which any
Person is at the time liable and at any date as of which the amount thereof is
to be determined, the capitalized amount thereof that would appear on the face
of a balance sheet of such Person in accordance with GAAP.
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"Average Life" is defined to mean, with respect to any Indebtedness, as at
any date of determination, the quotient obtained by dividing (i) the sum of the
products of (a) the number of years from such date to the date or dates of each
successive scheduled principal payment (including, without limitation, any
sinking fund requirements) of such Indebtedness and (b) the amount of each such
principal payment by (ii) the sum of all such principal payments.
"Board of Directors" is defined to mean the board of directors of the
Company or its equivalent, including managers or members of a limited liability
company, general partners of a partnership, limited partnership or limited
liability partnership or trustees of a business trust, or any duly authorized
committee thereof.
"Capital Stock" is defined to mean, with respect to any Person, any and all
shares, interests, participations, rights in or other equivalents (however
designated, whether voting or non-voting) in equity of such Person, whether now
outstanding or issued after the date of the Indenture, including, without
limitation, all Common Stock and Preferred Stock.
"Capitalized Lease Obligation" is defined to mean any obligation under a
lease of (or other agreement conveying the right to use) any property (whether
real, personal or mixed) that is required to be classified and accounted for as
a capital lease obligation under GAAP, and, for the purpose of the Indenture,
the amount of such obligation at any date shall be the capitalized amount
thereof at such date, determined in accordance with GAAP.
"Change of Control" is defined to mean such time as (i) a "person" or
"group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act)
becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) of more than 50.0% of the total voting power of the then
outstanding Voting Stock of the Company, or after the consummation of the
Reorganization, Subsidiary Holdings; (ii) individuals who at the beginning of
any period of two consecutive calendar years constituted the Board of Directors
(together with any directors who are members of the Board of Directors on the
date hereof and any new directors whose election by the Board of Directors or
whose nomination for election by the Company's stockholders was approved by a
vote of at least two-thirds of the members of the Board of Directors then still
in office who either were members of the Board of Directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the members of such
Board of Directors then in office; (iii) the sale, lease, transfer, conveyance
or other disposition (other than by way of merger or consolidation), in one or a
series of related transactions, of all or substantially all of the assets of the
Company and its Subsidiaries, taken as a whole, to any such "person" or "group"
(other than to the Company or a Restricted Subsidiary); (iv) the merger or
consolidation of the Company with or into another corporation or the merger of
another corporation with or into the Company in one or a series of related
transactions with the effect that, immediately after such transaction, any such
"person" or "group" of persons or entities shall have become the beneficial
owner of securities of the surviving corporation of such merger or consolidation
representing a majority of the total voting power of the then outstanding Voting
Stock of the surviving corporation; or (v) the adoption of a plan relating to
the liquidation or dissolution of the Company; provided, however, that the
consummation of the Reorganization shall not constitute or be deemed to
constitute a "Change of Control."
"Closing Date" is defined to mean the date on which the Notes are
originally issued under the Indenture.
"Common Stock" is defined to mean, with respect to any Person, any and all
shares, interests, participations, rights in or other equivalents (however
designated, whether voting or non-voting) of such Person's common stock, whether
now outstanding or issued after the date of the Indenture, including, without
limitation, all series and classes of such common stock.
"Consolidated Cash Flow" is defined to mean, for any period, the sum of the
amounts for such period of (i) Consolidated Net Income, (ii) Consolidated
Interest Expense, (iii) income taxes, to the extent such amount was deducted in
calculating Consolidated Net Income (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or losses or
sales of
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assets), (iv) depreciation expense, to the extent such amount was deducted in
calculating Consolidated Net Income, (v) amortization expense, to the extent
such amount was deducted in calculating Consolidated Net Income, and (vi) all
other non-cash items reducing Consolidated Net Income (excluding any non-cash
charge to the extent that it represents an accrual of or reserve for cash
charges in any future period), less all non-cash items increasing Consolidated
Net Income, all as determined on a consolidated basis for the Company and its
Restricted Subsidiaries in conformity with GAAP.
"Consolidated Fixed Charges" is defined to mean, for any period,
Consolidated Interest Expense plus dividends declared and payable on Preferred
Stock.
"Consolidated Interest Expense" is defined to mean, for any period, the
aggregate amount of interest in respect of Indebtedness (including capitalized
interest, amortization of original issue discount on any Indebtedness and the
interest portion of any deferred payment obligation, calculated in accordance
with the effective interest method of accounting; all commissions, discounts and
other fees and charges owed with respect to letters of credit and bankers'
acceptance financing; the net costs associated with Interest Rate Agreements;
and interest on Indebtedness that is Guaranteed or secured by the Company or any
of its Restricted Subsidiaries) and all but the principal component of rentals
in respect of Capitalized Lease Obligations paid, accrued or scheduled to be
paid or to be accrued by the Company and its Restricted Subsidiaries during such
period.
"Consolidated Net Income" means, with respect to any Person, for any
period, the consolidated net income (or loss) of such Person and its Restricted
Subsidiaries for such period as determined in accordance with GAAP, adjusted, to
the extent included in calculating such net income, by excluding, without
duplication, (i) all extraordinary gains or losses, (ii) net income (or loss) of
any Person combined in such Person or one of its Restricted Subsidiaries on a
"pooling of interests" basis attributable to any period prior to the date of
combination, (iii) gains or losses (on an after-tax basis) in respect of any
Asset Sales by such Person or one of its Restricted Subsidiaries, (iv) the net
income of any Restricted Subsidiary of such Person to the extent that the
declaration of dividends or similar distributions by that Restricted Subsidiary
of that income is not at the time permitted, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulations applicable to that
Restricted Subsidiary or its stockholders, (v) any gain or loss realized as a
result of the cumulative effect of a change in accounting principles, (vi) any
amount paid or accrued as dividends on Preferred Stock of the Company or
Preferred Stock of any Restricted Subsidiary owned by Persons other than the
Company and any of its Restricted Subsidiaries, (vii) restructuring charges,
(viii) charges relating to the write-off of acquired in-process research and
development expenses and other intangible assets of a Person in connection with
the application of the purchase method of accounting and (ix) the net income (or
loss) of any Person (other than net income (or loss) attributable to a
Restricted Subsidiary) in which any Person (other than the Company or any of its
Restricted Subsidiaries) has a joint interest, except to the extent of the
amount of dividends or other distributions actually paid to the Company or any
of its Restricted Subsidiaries by such other Person during such period.
"Consolidated Net Worth" is defined to mean, at any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of the Company and its Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation), less any amounts attributable to Redeemable Stock or any equity
security convertible into or exchangeable for Indebtedness, the cost of treasury
stock and the principal amount of any promissory notes receivable from the sale
of the Capital Stock of the Company or any of its Subsidiaries, each item to be
determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
"Credit Facilities" is defined to mean one or more debt facilities or
commercial paper facilities with banks or other institutional lenders providing
for revolving credit loans, term loans, receivables financing or securitizations
(including through the sale of receivables to such lenders or to special purpose
entities formed to borrow from such lenders against such receivables) or letters
of credit, in each case, as amended, restated, modified, renewed, refunded,
replaced or refinanced in whole or in part from time to time.
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"Cumulative Consolidated Cash Flow" is defined to mean, for the period
beginning on the Closing Date through and including the end of the last fiscal
quarter (taken as one accounting period) preceding the date of any proposed
Restricted Payment, Consolidated Cash Flow of the Company and its Restricted
Subsidiaries for such period determined on a consolidated basis in accordance
with GAAP.
"Cumulative Consolidated Fixed Charges" are defined to mean the
Consolidated Fixed Charges of the Company and its Restricted Subsidiaries for
the period beginning on the Closing Date through and including the end of the
last fiscal quarter (taken as one accounting period) preceding the date of any
proposed Restricted Payment, determined on a consolidated basis in accordance
with GAAP.
"Cumulative Consolidated Interest Expense" is defined to mean, for the
period beginning on the Closing Date through and including the end of the last
fiscal quarter (taken as one accounting period) preceding the date of any
proposed Restricted Payment, Consolidated Interest Expense of the Company and
its Restricted Subsidiaries for such period determined on a consolidated basis
in accordance with GAAP.
"Currency Agreement" is defined to mean any foreign exchange contract,
currency swap agreement and any other arrangement and agreement designed to
provide protection against fluctuations in currency (or currency unit) values.
"Default" is defined to mean any event that is, or after notice or passage
of time or both would be, an Event of Default.
"Eligible Accounts Receivable" is defined to mean the accounts receivable
(net of any reserves and allowances for doubtful accounts in accordance with
GAAP) of any Person arising in the ordinary course of business that are not more
than 90 days past their due date, as shown on the most recent consolidated
balance sheet of such Person filed with the Commission, all in accordance with
GAAP.
"Eligible Institution" is defined to mean a commercial banking institution
that has combined capital and surplus of not less than $500.0 million or its
equivalent in foreign currency, and has outstanding debt with a rating of "A-3"
or higher according to Moody's Investors Service, Inc., or "A-" or higher
according to Standard & Poor's Ratings Services (or such similar equivalent
rating by at least one "nationally recognized statistical rating organization"
(as defined in Rule 436 under the Securities Act) at the time as of which any
investment or rollover therein is made.
"Event of Default" has the meaning set forth under "Events of Default"
herein.
"Fair Market Value" is defined to mean, with respect to any asset or
property, the sale value that would be obtained in an arm's length transaction
between an informed and willing seller under no compulsion to sell and an
informed and willing buyer under no compulsion to buy.
"GAAP" is defined to mean generally accepted accounting principles in the
United States as in effect from time to time, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession of the United States.
"Guarantee" is defined to mean any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness or other
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such other Person (whether
arising by virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided that the term "Guarantee" shall
not include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
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"Incur" or "Incurrence" is defined to mean, with respect to any
Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become
liable for or with respect to, or become responsible for, the payment of,
contingently or otherwise, such Indebtedness, including an Incurrence of
Indebtedness by reason of the acquisition of more than 50.0% of the Capital
Stock of any Person; provided that neither the accrual of interest nor the
accretion of original issue discount shall be considered an Incurrence of
Indebtedness.
"Indebtedness" is defined to mean, with respect to any Person at any date
of determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto), (iv) except with respect to
Trade Payables, all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, which purchase price is due more than
six months after the date of placing such property in service or taking delivery
and title thereto or the completion of such services, (v) all obligations of
such Person as lessee under Capitalized Lease Obligations and the Attributable
Value under any Sale-Leaseback Transaction of such Person, (vi) all Indebtedness
of other Persons secured by a Lien on any asset of such Person, whether or not
such Indebtedness is assumed by such Person; provided that the amount of such
Indebtedness shall be the lesser of (A) the fair market value of such asset at
such date of determination or (B) the amount of such Indebtedness, (vii) all
Indebtedness of other Persons Guaranteed by such Person to the extent such
Indebtedness is Guaranteed by such Person, (viii) the maximum fixed redemption
or repurchase price of Redeemable Stock of the Company or Preferred Stock of any
Restricted Subsidiary at the time of determination and (ix) to the extent not
otherwise included in this definition, obligations under Currency Agreements and
Interest Rate Agreements. The amount of Indebtedness of any Person at any date
shall be the outstanding balance at such date of all unconditional obligations
as described above and, with respect to contingent obligations, the maximum
liability upon the occurrence of the contingency giving rise to the obligation;
provided (x) that the amount outstanding at any time of any Indebtedness issued
with original issue discount is the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with GAAP and (y) that
Indebtedness shall not include any liability for federal, state, local, foreign
or other taxes.
"Interest Rate Agreement" is defined to mean interest rate swap agreements,
interest rate cap agreements, interest rate insurance, and other arrangements
and agreements designed to provide protection against fluctuations in interest
rates.
"Interest Rate Protection Obligations" is defined to mean the obligations
of any Person pursuant to any Interest Rate Agreements.
"Investment" in any Person is defined to mean any direct or indirect
advance, loan or other extension of credit (including, without limitation, by
way of Guarantee or similar arrangement; but excluding advances to customers in
the ordinary course of business that are, in conformity with GAAP, recorded as
accounts receivable on the balance sheet of the Company or its Restricted
Subsidiaries) or capital contribution to (by means of any transfer of cash or
other property to others or any payment for property or services for the account
or use of others), or any purchase or acquisition of Capital Stock, bonds,
notes, debentures or other similar instruments issued by, such Person. For
purposes of the definition of "Unrestricted Subsidiary," the "Limitation on
Restricted Payments" covenant and the "Limitation on Issuance and Sale of
Capital Stock of Restricted Subsidiaries" covenant described above, (i)
"Investment" shall include (a) the fair market value of the assets (net of
liabilities) of any Restricted Subsidiary of the Company at the time that such
Restricted Subsidiary of the Company is designated an Unrestricted Subsidiary
and shall exclude the fair market value of the assets (net of liabilities) of
any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary of the Company and (b) the fair market value,
in the case of a sale of Capital Stock in accordance with the "Limitation on the
Issuance and Sale of Capital Stock of Restricted Subsidiaries" covenant such
that a Person no longer constitutes a Restricted Subsidiary, of the remaining
assets (net of liabilities) of such Person after such sale, and shall exclude
the fair market value of the assets (net of liabilities) of any Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated a
Restricted Subsid-
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iary of the Company and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined by the Board of Directors in good faith.
"Lien" is defined to mean any mortgage, charge, pledge, security interest,
encumbrance, lien (statutory or other), hypothecation, assignment for security
or other encumbrance upon or with respect to any property of any kind
(including, without limitation, any conditional sale or other title retention
agreement or lease in the nature thereof, any sale with recourse against the
seller or any Affiliate of the seller, or any agreement to give any security
interest).
"Marketable Securities" is defined to mean: (i) U.S. Government Obligations
which have a remaining weighted average life to maturity of not more than one
year from the date of Investment therein; (ii) any time deposit account, money
market deposit and certificate of deposit maturing not more than 180 days after
the date of acquisition issued by, or time deposit of, an Eligible Institution;
(iii) certificates of deposit, Eurodollar time deposits and bankers' acceptances
with maturity of 90 days or less and overnight bank deposits of any financial
institution that is organized under the laws of the United States of America or
any state hereof, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $300.0 million (or, to the extent
non-United States dollar-denominated, the United States Dollar Equivalent of
such amount) and has outstanding debt which is rated "A" (or such similar
equivalent ratings or higher by at least one "nationally recognized statistical
rating organization" (as defined in Rule 436 under the Securities Act); (iv)
commercial paper maturing not more than 180 days after the date of acquisition
issued by a corporation (other than an Affiliate of the Company) with a rating,
at the time as of which any investment therein is made, of "P-1" or higher
according to Moody's Investors Service, Inc., or "A-1" or higher according to
Standard & Poor's Ratings Services (or such similar equivalent rating by at
least one "nationally recognized statistical rating organization" (as defined in
Rule 436 under the Securities Act)); (v) auction rate preferred securities whose
rates are reset based on market levels for a par security not more than 90 days
after the date of acquisition with a rating, at the time as of which any
investment therein is made, of "A-3" or higher according to Moody's Investors
Service, Inc., or "A-" or higher according to Standard & Poor's Ratings Services
(or such similar equivalent rating by at least one "nationally recognized
statistical rating organization" (as defined in Rule 436 under the Securities
Act)) and issued by a corporation that is not an Affiliate of the Company; (vi)
any banker's acceptance or money market deposit accounts issued or offered by an
Eligible Institution; (vii) repurchase obligations with a term of not more than
seven days for U.S. Government Obligations entered into with an Eligible
Institution; and (viii) any fund investing exclusively in investments of the
types described in clauses (i) through (vii) above.
"Net Cash Proceeds" is defined to mean (a) with respect to any Asset Sale,
the proceeds of such Asset Sale in the form of cash or cash equivalents,
including payments in respect of deferred payment obligations (to the extent
corresponding to the principal, but not interest, component thereof) when
received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any Restricted
Subsidiary of the Company) and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of: (i) brokerage
commissions, finders' fees and other fees and expenses (including fees and
expenses of counsel, accountants and investment bankers and other advisors)
related to such Asset Sale, (ii) provisions for all taxes payable as a result of
such Asset Sale without regard to the consolidated results of operations of the
Company and its Restricted Subsidiaries, taken as a whole (after taking into
account any available offsetting tax credits or deductions and any tax sharing
arrangements), (iii) payments made to repay Indebtedness or any other obligation
outstanding at the time of such Asset Sale that either (A) is secured by a Lien
on the property or assets sold or (B) is required to be paid as a result of such
sale and (iv) appropriate amounts to be provided by the Company or any
Restricted Subsidiary of the Company as a reserve against any contingent
liabilities associated with such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale, all as determined in conformity with GAAP, and
(b) with respect to any issuance or sale of Capital Stock, the proceeds of such
issuance or sale in the form of cash or cash equivalents, including payments in
respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof)
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when received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any Restricted
Subsidiary of the Company) and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of attorneys' fees,
finders' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Permitted Business" is defined to mean any business involving voice, data
and other telecommunications services.
"Permitted Investment" is defined to mean (i) an Investment in a Restricted
Subsidiary or a Person which will, upon the making of such Investment, become a
Restricted Subsidiary or be merged or consolidated with or into or transfer or
convey all or substantially all its assets to, the Company or a Restricted
Subsidiary; (ii) any Investment in Marketable Securities or Pledged Securities;
(iii) payroll, travel and similar advances to cover matters that are expected at
the time of such advances ultimately to be treated as expenses in accordance
with GAAP; (iv) loans or advances to officers and employees that do not in the
aggregate exceed $1.5 million at any time outstanding; (v) stock, obligations or
securities received in satisfaction of judgments; (vi) Investments in any Person
received as consideration for Asset Sales to the extent permitted under the
"Limitation on Asset Sales" covenant; (vii) Investments in any Person at any one
time outstanding (measured on the date each such Investment was made without
giving effect to subsequent changes in value) in an aggregate amount not to
exceed the greater of (A) $35.0 million or (B) 15.0% of the Company's total
consolidated assets; (viii) Investments in deposits with respect to leases or
utilities provided to third parties in the ordinary course of business; (ix)
Investments in Currency Agreements and Interest Rate Agreements on commercially
reasonable terms entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business in connection with the operation
of the business of the Company or its Restricted Subsidiaries; provided that
such agreements do not increase the Indebtedness of the obligor outstanding at
any time other than as a result of fluctuations in foreign currency exchange
rates or interest rates or by reason of fees, indemnities and compensation
payable thereunder; (x) repurchases or redemptions by the Company of Capital
Stock from officers and other employees of the Company or any of its
Subsidiaries or their authorized representatives upon the death, disability or
termination of employment of such individuals, in an aggregate amount not
exceeding $1.0 million in any calendar year and $3.0 million from the date of
the Indenture; and (xi) Investments in evidences of Indebtedness, securities or
other property received from another Person by the Company or any of its
Restricted Subsidiaries in connection with any bankruptcy proceeding or by
reason of a composition or readjustment of debt or a reorganization of such
Person or as a result of foreclosure, perfection or enforcement of any Lien in
exchange for evidences of Indebtedness, securities or other property of such
Person held by the Company or any of its Subsidiaries, or for other liabilities
or obligations of such Person to the Company or any of its Subsidiaries that
were created, in accordance with the terms of the Indenture.
"Permitted Liens" is defined to mean (i) Liens for taxes, assessments,
governmental charges or claims that are being contested in good faith by
appropriate legal proceedings promptly instituted and diligently conducted and
for which a reserve or other appropriate provision, if any, as shall be required
in conformity with GAAP shall have been made; (ii) statutory Liens of landlords
and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or
other similar Liens arising in the ordinary course of business and with respect
to amounts not yet delinquent or being contested in good faith by appropriate
legal proceedings promptly instituted and diligently conducted and for which a
reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made; (iii) Liens incurred or deposits made
in the ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of social security; (iv) Liens incurred
or deposits made to secure the performance of tenders, bids, leases, statutory
or regulatory obligations, bankers' acceptances, surety and appeal bonds,
government or other contracts, performance and return-of-money bonds and other
obligations of a similar nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (v) easements,
rights-of-way, municipal and zoning ordinances and similar charges,
encumbrances, title defects or other irregularities that do not materially
interfere with the ordinary course of business of the Company or any of its
Restricted Subsidiaries; (vi)
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Liens (including extensions and renewals thereof) upon real or personal property
purchased or leased after the Closing Date; provided that (a) such Lien is
created solely for the purpose of securing Indebtedness Incurred in compliance
with the "Limitation on Indebtedness and Preferred Stock of Subsidiaries"
covenant (1) to finance the cost (including the cost of design, development,
construction, acquisition, installation or integration) of the item of property
or assets subject thereto and such Lien is created prior to, at the time of or
within six months after the later of the acquisition, the completion of
construction or the commencement of full operation of such property or (2) to
refinance any Indebtedness previously so secured, (b) the principal amount of
the Indebtedness secured by such Lien does not exceed 100% of such cost and (c)
any such Lien shall not extend to or cover any property or assets other than
such item of property or assets and any improvements on such item; (vii) leases
or subleases granted to others that do not materially interfere with the
ordinary course of business of the Company and its Restricted Subsidiaries,
taken as a whole; (viii) Liens encumbering property or assets under construction
arising from progress or partial payments by a customer of the Company or its
Restricted Subsidiaries relating to such property or assets; (ix) any interest
or title of a lessor in the property subject to any Capitalized Lease Obligation
or operating lease; (x) Liens arising from filing Uniform Commercial Code
financing statements regarding leases; (xi) Liens on property of, or on shares
of stock or Indebtedness of, any corporation existing at the time such
corporation becomes, or becomes a part of, any Restricted Subsidiary; provided
that such Liens do not extend to or cover any property or assets of the Company
or any Restricted Subsidiary other than the property or assets acquired and were
not created in contemplation of such transaction; (xii) Liens in favor of the
Company or any Restricted Subsidiary; (xiii) Liens arising from the rendering of
a final judgment or order against the Company or any Restricted Subsidiary of
the Company that does not give rise to an Event of Default; (xiv) Liens securing
reimbursement obligations with respect to letters of credit that encumber
documents and other property relating to such letters of credit and the products
and proceeds thereof; (xv) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payment of customs duties in connection
with the importation of goods; (xvi) Liens encumbering customary initial
deposits and margin deposits and other Liens that are either within the general
parameters customary in the industry or incurred in the ordinary course of
business, in each case, securing Indebtedness under Interest Rate Agreements and
Currency Agreements; (xvii) Liens arising out of conditional sale, title
retention, consignment or similar arrangements for the sale of goods entered
into by the Company or any of its Restricted Subsidiaries in the ordinary course
of business in accordance with the past practices of the Company and its
Restricted Subsidiaries prior to the Closing Date; (xviii) Liens existing on the
Closing Date or securing the Notes or any Guarantee of the Notes; (xix) Liens
granted after the Closing Date on any assets or Capital Stock of the Company or
its Restricted Subsidiaries created in favor of the holders; (xx) Liens securing
Indebtedness which is incurred to refinance secured Indebtedness which is
permitted to be Incurred under clause (viii) of paragraph (b) of the "Limitation
on Indebtedness and Preferred Stock of Subsidiaries" covenant; provided that
such Liens do not extend to or cover any property or assets of the Company or
any Restricted Subsidiary other than the property or assets securing the
Indebtedness being refinanced; and (xxi) Liens securing Indebtedness under
Credit Facilities incurred in compliance with clause (iv) of paragraph (b) of
the "Limitation on Indebtedness and Preferred Stock of Subsidiaries" covenant.
"Pledge Account" is defined to mean an account established with the Trustee
pursuant to the terms of the Pledge Agreement for the deposit of the Pledged
Securities purchased by the Company with a portion of the net proceeds from the
Offering.
"Pledge Agreement" is defined to mean the Collateral Pledge and Security
Agreement, dated as of the date of the Indenture, from the Company to the
Trustee, governing the Pledge Account and the disbursement of funds therefrom.
"Pledged Securities" is defined to mean the securities purchased by the
Company with a portion of the net proceeds from the Offering, which shall
consist of U.S. Government Obligations, to be deposited in the Pledge Account.
The Pledged Securities may be held in book-entry form through First Union
National Bank acting as securities intermediary.
"Preferred Stock" is defined to mean, with respect to any Person, any and
all shares, interests, participations, rights or other equivalents (however
designated, whether voting or non-voting) of such
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Person's preferred or preference stock, whether now outstanding or issued after
the date of the Indenture, including, without limitation, all series and classes
of such preferred or preference stock.
"Pro Forma Consolidated Cash Flow" is defined to mean, for any period, the
Consolidated Cash Flow of the Company for such period calculated on a pro forma
basis to give effect to any Asset Disposition or Asset Acquisition not in the
ordinary course of business (including acquisitions of other Persons by merger,
consolidation or purchase of Capital Stock) during such period as if such Asset
Disposition or Asset Acquisition had taken place on the first day of such
period, including any related financing transactions and also giving pro forma
effect to any other Indebtedness repaid or discharged during such period other
than with respect to working capital borrowings.
"Public Equity Offering" is defined to mean an underwritten primary public
offering of Common Stock of the Company pursuant to an effective registration
statement under the Securities Act.
"Redeemable Stock" is defined to mean any class or series of Capital Stock
of any Person that by its terms (or by the terms of any security into which it
is exchangeable) or otherwise is (i) required to be redeemed on or prior to the
date that is 123 days after the date of the Stated Maturity of the Notes, (ii)
redeemable at the option of the holder of such class or series of Capital Stock
at any time on or prior to the date that is 123 days after the date of the
Stated Maturity of the Notes or (iii) convertible into or exchangeable for
Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a
scheduled maturity on or prior to the date that is 123 days after the date of
the Stated Maturity of the Notes; provided that any Capital Stock that would not
constitute Redeemable Stock but for provisions thereof giving holders thereof
the right to require such Person to repurchase or redeem such Capital Stock upon
the occurrence of an "asset sale" or "change of control" occurring on or prior
to the date that is 123 days after the date of the Stated Maturity of the Notes
shall not constitute Redeemable Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are no more favorable to the holders
of such Capital Stock than the provisions contained in "Limitation on Asset
Sales" and "Repurchase of Notes upon a Change of Control" covenants described
above and such Capital Stock specifically provides that such Person will not
repurchase or redeem any such stock pursuant to such provisions on or prior to
the date that is 123 days after the date of the Company's repurchase of such
Notes as are required to be repurchased pursuant to the "Limitation on Asset
Sales" and "Repurchase of Notes upon a Change of Control" covenants described
above.
"Registration Rights Agreement" is defined to mean the Registration Rights
Agreement, dated as of the date of the Indenture, by and among the Initial
Purchasers and the Company, concerning the registration and exchange of the
Notes.
"Restricted Subsidiary" is defined to mean any Subsidiary of the Company
other than an Unrestricted Subsidiary.
"Sale-Leaseback Transaction" of any person is defined to mean an
arrangement with any lender, investor or other Person ("Investor") or to which
such Investor is a party providing for the lease by such Person of any property
or asset of such Person which has been or is being sold or transferred by such
Person after the acquisition thereof or the completion of construction or
commencement of operation thereof to such Investor or to any Person to whom
funds have been or are to be advanced by such Investor on the security of such
property or asset. The stated maturity of such arrangement shall be the date of
the last payment of rent or any other amount due under such arrangement prior to
the first date on which such arrangements may be terminated by the lessee
without payment of a penalty.
"Significant Subsidiary" is defined to mean a Restricted Subsidiary that is
a "significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under
the Securities Act and the Exchange Act.
"Stated Maturity" is defined to mean, (i) with respect to any debt
security, the date specified in such debt security as the fixed date on which
the final installment of principal of such debt security is due and payable and
(ii) with respect to any scheduled installment of principal of or interest on
any debt security, the date specified in such debt security as the fixed date on
which such installment is due and payable.
"Subsidiary" is defined to mean, with respect to any Person, any
corporation, association or other business entity of which more than 50.0% of
the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
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"Telecommunications Assets" is defined to mean, with respect to any Person,
equipment and other properties or assets (whether tangible or intangible) used
in the telecommunications business, including, without limitation, rights with
respect to IRUs, MAOUs or minimum investment units (or similar interests) in
fiber optic cable and international or domestic telecommunications switches or
other transmission facilities, including monitoring and related administrative
support facilities (or Common Stock of a Person that becomes a Restricted
Subsidiary, the assets of which consist primarily of any such Telecommunications
Assets), in each case purchased, or acquired through a Capitalized Lease
Obligation, by the Company or a Restricted Subsidiary after the Closing Date.
"Trade Payables" is defined to mean any accounts payable or any other
indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by the Company or any of its Restricted Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods and
services.
"Transaction Date" is defined to mean, with respect to the Incurrence of
any Indebtedness by the Company or any of its Restricted Subsidiaries, the date
such Indebtedness is to be Incurred and with respect to any Restricted Payment,
the date such Restricted Payment is to be made.
"United States Dollar Equivalent" is defined to mean, with respect to any
monetary amount in a currency other than the United States dollar, at any time
for the determination thereof, the amount of United States dollars obtained by
converting such foreign currency involved in such computation into United States
dollars at the spot rate for the purchase of United States dollars with the
applicable foreign currency as quoted by Reuters at approximately 11:00 a.m.
(New York City time) on the date not more than two business days prior to such
determination. For purposes of determining whether any Indebtedness can be
incurred (including Permitted Indebtedness), any Investment can be made and any
transaction described in the "Limitation on Transactions with Stockholders and
Affiliates" covenant can be undertaken (a "Tested Transaction"), the United
States Dollar Equivalent of such Indebtedness, Investment or transaction
described in the "Limitation on Transactions with Stockholders and Affiliates"
covenant will be determined on the date incurred, made or undertaken and no
subsequent change in the United States Dollar Equivalent shall cause such Tested
Transaction to have been incurred, made or undertaken in violation of the
Indenture.
"Unrestricted Subsidiary" is defined to mean (i) any Subsidiary of the
Company that at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate
any Restricted Subsidiary of the Company (including any newly acquired or newly
formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property
of, the Company or any Restricted Subsidiary; provided that (A) the Subsidiary
to be so designated has total assets of $1,000 or less or (B) if such Subsidiary
has assets greater than $1,000, that such designation would be permitted under
the "Limitation on Restricted Payments" covenant described above, and such
Subsidiary is not liable, directly or indirectly, with respect to any
Indebtedness other than Unrestricted Subsidiary Indebtedness. The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary of the Company; provided that immediately after giving effect to such
designation (x) the Company could Incur $1.00 of additional Indebtedness under
the first paragraph of the "Limitation on Indebtedness and Preferred Stock of
Subsidiaries" covenant described above and (y) no Default or Event of Default
shall have occurred and be continuing. Any such designation by the Board of
Directors shall be evidenced to the Trustee by promptly filing with the Trustee
a copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"Unrestricted Subsidiary Indebtedness" is defined to mean any Indebtedness
of any Unrestricted Subsidiary (i) as to which neither the Company nor any
Restricted Subsidiary is directly or indirectly liable (by virtue of the Company
or any such Restricted Subsidiary being the primary obliger on, guarantor of, or
otherwise liable in any respect to, such Indebtedness) and (ii) which, upon the
occurrence of a default with respect thereto, does not result in, or permit any
holder of any Indebtedness of the
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Company or any Restricted Subsidiary to declare, a default of such Indebtedness
of the Company or any Restricted Subsidiary or cause the payment thereof to be
accelerated or payable prior to its Stated Maturity.
"U.S. Government Obligations" is defined to mean securities that are (x)
direct obligations of the United States for the timely payment of which its full
faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
the timely payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States, which, in either case, are not callable
or redeemable at the option of the issuer thereof, and shall also include a
depository receipt issued by a "bank" (as defined in Section 3(a)(2) of the
Securities Act), as custodian with respect to any such U.S. Government
Obligation or a specific payment of principal of or interest on any such U.S.
Government Obligation held by such custodian for the account of the holder of
such depository receipt, provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the U.S. Government Obligation or the specific payment of principal
of or interest on the U.S. Government Obligation evidenced by such depository
receipt.
"Voting Stock" is defined to mean with respect to any Person, Capital Stock
of any class or kind ordinarily having the power to vote for the election of
directors, managers or other voting members of the governing body of such
Person.
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BOOK-ENTRY, DELIVERY AND FORM
Exchange Notes issued in exchange for the Old Notes currently represented
by one or more fully registered global notes ("Old Global Notes") will be
represented by one or more fully registered global notes (collectively, the
"Exchange Global Notes"). The Old Global Notes were deposited on the date of the
closing of the sale of the Old Notes, and the Exchange Global Notes will be
deposited on the date of the closing of the Exchange Offer, with, or on behalf
of, The Depository Trust company ("DTC") and registered in the name of DTC or a
nominee of DTC. "Global Notes" means the Old Global Notes or the Exchange Global
Notes, as the case may be.
Exchange Notes held by holders who elect to take physical delivery of their
certificates instead of holding their interest through the Exchange Global Notes
and which are thus ineligible to trade through DTC (collectively referred to
herein as the "Non-Global Purchasers") will be issued, in registered form,
without interest coupons ("Certificated Exchange Notes"). Upon a transfer of
such Certificated Exchange Notes initially issued to a Non-Global Purchaser,
such Certificated Exchange Notes will, unless the transferee requests otherwise
or the Exchange Global Notes have previously been exchanged in whole for such
Certificated Exchange Notes, be exchanged for an interest in the applicable
Exchange Global Notes. As described below under "--Certificated Exchange Notes,"
owners of beneficial interests in an Exchange Global Note may receive physical
delivery of Certificated Exchange Notes only in the limited circumstances
described therein.
THE EXCHANGE GLOBAL NOTES. The Company expects that, pursuant to procedures
established by DTC, (i) upon deposit of the Exchange Global Notes, DTC or its
custodian will credit, on its internal system, the corresponding principal
amount of Exchange Global Notes to the respective accounts of persons who have
accounts with such depositary and (ii) ownership of the Exchange Global Notes
will be shown on, and the transfer of ownership thereof will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants). Such accounts initially will be designated by
or on behalf of the Initial Purchasers and ownership of beneficial interests in
the Exchange Global Notes will be limited to persons who have accounts with DTC
("participants") or persons who hold interests through participants. Qualified
institutional buyers may hold their interests in the Exchange Global Notes
directly through the DTC if they are participants in such system, or indirectly
through organizations which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee will be considered the sole owner or holder of the
Exchange Global Notes represented by the applicable Exchange Global Notes for
all purposes under the Indenture. No beneficial owner of an interest in the
Exchange Global Notes will be able to transfer such interest except in
accordance with DTC's applicable procedures in addition to those provided for
under the Indenture with respect to the Notes.
Payments of the principal of, premium (if any) and interest on, the
Exchange Global Notes will be made to DTC or its nominee, as the case may be, as
the registered owner thereof. None of the Company, the Trustee or any paying
agent will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in the
Exchange Global Notes or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
the principal of, premium (if any) and interest on, the Exchange Global Notes,
will credit participants' accounts with payments in amounts proportionate to
their respective beneficial interests in the principal amount of such Exchange
Global Note, as shown on the records of DTC or its nominee. The Company also
expects that payments by participants to owners of beneficial interests in any
such Exchange Global Notes held through such participants will be governed by
standing instructions and customary practice, as is now the case with securities
held for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
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Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a Certificated Note for any reason,
including to sell Notes to persons in states which require physical delivery of
such securities or to pledge such securities, such holder must transfer its
interest in the applicable Exchange Global Note in accordance with the normal
procedures of DTC and the procedures set forth in the Indenture.
DTC has advised the Company that DTC will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interests in the applicable Exchange Global Note is credited and
only in respect of such portion of Notes, the aggregate principal amount of
Notes as to which such participant or participants has or have given such
direction. However, if there is an Event of Default under the Indenture, DTC
will exchange the applicable Exchange Global Note for Certificated Notes, which
it will distribute to its participants and which, if representing interests in
the applicable Exchange Global Note, will be legended as set forth in the
Indenture.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Exchange Global Note among participants of DTC, it
is under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
CERTIFICATED EXCHANGE NOTES. If (i) the Company notifies the Trustee in
writing that the DTC is no longer willing or able to act as a depository and the
Company does not appoint a qualified successor within 90 days or (ii) the
Company, at its option, notifies the Trustee in writing that it elects to cause
the issuance of Exchange Notes in definitive form under the Indenture, then,
upon surrender by the relevant registered owner of its Exchange Global Note,
Certificated Exchange Notes in such form will be issued to each person that such
registered owner and the DTC identify as the beneficial owner of the related
Notes. In addition, subject to certain conditions, any person having a
beneficial interest in the Exchange Global Note may, upon request to the
Trustee, exchange such beneficial interest for Exchange Notes in the form of
Certificated Exchange Notes. Upon any such issuance, the Trustee is required to
register such Certificated Exchange Notes in the name of, and cause the same to
be delivered to, such person or persons (or the nominee of any thereof) in fully
registered form.
Neither the Company nor Trustee shall be liable for any delay by the
related registered owner or the DTC in identifying the beneficial owners of the
related Exchange Notes and each such person may conclusively rely on, and shall
be protected in relying on, instructions from such registered owner or of the
DTC for all purposes (including with respect to the registration and delivery,
and the principal amount of the Exchange Notes to be issued).
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the principal U.S. federal income tax
consequences to beneficial owners arising from the exchange of Old Notes for
Exchange Notes. 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. In
addition, the recently enacted Taxpayer Relief Act of 1997 could affect an
investment in Notes in that, among other things, it reduces the rate of federal
income tax imposed on capital gains of individual taxpayers for capital assets
held more than eighteen months (and reduces such rate even further for capital
assets acquired after the year 2000 and held more than five years).
This summary discusses only Notes 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
Holders subject to special rules, such as certain financial institutions, banks,
insurance companies, tax-exempt organizations, U.S. Holders subject to the
alternative minimum tax, regulated investment companies, dealers in securities
or foreign currencies, persons holding Notes as part of a straddle or hedging
transaction, or U.S. Holders whose functional currency (as defined in Code
section 985) is not the U.S. dollar. Persons considering purchasing Notes should
consult their own tax advisors concerning the application of U.S. 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 "U.S. Holder" means the beneficial owner
of a Note that is, for U.S. federal income tax purposes, (i) a citizen or
resident of the U.S. (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 U.S. or of any political subdivision
thereof; (iii) an estate the income of which is subject to U.S. federal income
taxation regardless of its source; or (iv) a trust with respect to the
administration of which a court within the U.S. is able to exercise primary
supervision and one or more U.S. persons have the authority to control all
substantial decisions of the trust. As used in this summary, the term "Non-U.S.
Holder" means a beneficial owner of a Note that is not a U.S. Holder.
EXCHANGE OF NOTES
The exchange of the Old Notes for the Exchange Notes pursuant to the
Exchange Offer will not constitute a material modification of the terms of the
Old Notes or the Exchange Notes and, thus, such exchange will not constitute an
exchange for U.S. federal income tax purposes. Accordingly, such exchange will
have no U.S. federal income tax consequences to the holders of the Old Notes or
the Exchange Notes, regardless of whether such holders participate in the
Exchange Offer. Consequently, each holder will continue to be required to
include interest on the Exchange Notes, or the Old Notes, if not exchanged, in
its gross income in accordance with its method of accounting for U.S. federal
income tax purposes and will have the same tax basis and holding period in the
Exchange Notes as in the Old Notes. The Company intends to treat the Exchange
Offer for U.S. federal income tax purposes in accordance with the position
described in this paragraph.
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.
122
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Old Notes, where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale.
The Company will not receive any proceeds from any sale of Old Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Notes, or a combination of such methods
of resale, at market prices prevailing at the time of resale, at prices related
to such prevailing market prices or negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commission or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such person may be deemed to be underwriting compensations under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer other than commissions or concessions of any
brokers or dealers and will indemnify the holders of the Old Notes (including
any broker- dealers) against certain liabilities, including liabilities under
the Securities Act.
CERTAIN LEGAL MATTERS
The validity of the Exchange Notes offered hereby have been 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.
123
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (the "Exchange Offer
Registration Statement") under the Securities Act with respect to the Exchange
Notes being offered by this Prospectus. This Prospectus does not contain all the
information set forth in the Exchange Offer 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 Exchange Notes offered hereby, reference is made to the Exchange Offer
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 Exchange Offer 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 Exchange Notes, reports, information
and documents specified in Sections 13(a) and 15(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), so long as the Exchange Notes are
outstanding, 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.
124
<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 installation 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>
<TABLE>
<S> <C>
===================================================================================================================================
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON
HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS IN CONNECTION WITH THE EXCHANGE
OFFER OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, $160,000,000
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE EXCHANGE NOTES OFFERED HEREBY
NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR A [GRAPHIC OMITTED)
SOLICITATION OF AN OFFER TO BUY, ANY OF THE EXCHANGE
NOTES TO ANY PERSON IN ANY JURISDICTION IN WHICH IT
WOULD BE UNLAWFUL TO MAKE 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
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------ STARTEC GLOBAL
TABLE OF CONTENTS COMMUNICATIONS CORPORATION
PAGE OFFER TO EXCHANGE
---- 12% SERIES A
Note Regarding Forward-Looking Statements ........... ii SENIOR NOTES DUE 2008
Prospectus Summary .................................. 1 FOR ANY AND ALL
Risk Factors ........................................ 15 12% SENIOR NOTES DUE 2008
The Exchange Offer .................................. 29
Use of Proceeds ..................................... 38
Selected Financial and Other Data ................... 39
Management's Discussion and Analysis of Financial
Condition and Results of Operations .............. 40
The International Telecommunications Industry ....... 50
Business ............................................ 55 --------------------
Management .......................................... 72 PROSPECTUS
Principal Stockholders .............................. 81 October 14, 1998
Certain Transactions ................................ 83 --------------------
Description of Capital Stock ........................ 84
Description of Other Indebtedness ................... 91
Description of Units ................................ 92 ALL TENDERED OLD NOTES, EXECUTED LETTERS OF
Description of Notes ................................ 92 TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE
Book-Entry, Delivery and Form ....................... 120 DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND
Certain United States Federal Income Tax REQUESTS FOR ASSISTANCE AND REQUESTS FOR ADDITIONAL
Considerations ................................... 122 COPIES OF THE PROSPECTUS, THE LETTER OF TRANSMITTAL
Plan of Distribution ................................ 123 AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED
Certain Legal Matters ............................... 123 TO THE EXCHANGE AGENT AS FOLLOWS:
Experts ............................................. 123
Available Information ............................... 124 FIRST UNION CUSTOMER INFORMATION CENTER
Glossary of Terms ................................... G-1 CORPORATE TRUST OPERATIONS -- NC 1153
Index to Financial Statements ....................... F-1 1525 WEST W.T. HARRIS BOULEVARD 3C3
Schedules............................................ S-1 CHARLOTTE, N.C. 28288-1153
FACSIMILE:
(704) 590-7628
TELEPHONE:
(704) 590-7408
====================================================================================================================================
</TABLE>
