<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 000-23087
-----------------------------
STARTEC GLOBAL COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
10411 MOTOR CITY DRIVE
BETHESDA, MD
(Address of principal executive offices)
20817
(Zip Code)
(301) 365-8959
(Registrant's telephone number, including area code)
52-2099559
(I.R.S. Employer
Identification No.)
-------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[x] No[ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Title of Each Class:
--------------------
Common Stock, par value $0.01 per share
Shares Outstanding
as of November 9, 2000
----------------------
14,731,969
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION
FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
ITEM 1. Financial Statements
Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 2000 and 1999............................... 3
Condensed Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999...................................................... 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999...................................... 5
Notes to Condensed Consolidated Financial Statements..................... 6-14
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 15-23
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk............... 24
PART II. OTHER INFORMATION AND SIGNATURE.......................................... 25-26
</TABLE>
2
<PAGE>
PART I.-FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues .......................................... $ 83,198 $ 76,616 $ 249,740 $ 196,246
Cost of services ...................................... 64,807 66,545 200,060 173,927
-------------------------------------------------
Gross margin ........................................ 18,391 10,071 49,680 22,319
General and administrative expenses ................... 16,150 11,316 49,780 31,308
Selling and marketing expenses ........................ 5,124 3,553 12,146 10,729
Depreciation and amortization ......................... 4,656 2,062 11,037 5,301
-------------------------------------------------
Loss from operations .................................. (7,539) (6,860) (23,283) (25,019)
Interest expense ...................................... (7,537) (5,511) (19,841) (16,034)
Interest income ....................................... 767 1,140 2,296 4,092
Equity in loss from affiliates ........................ (818) (41) (1,197) (60)
-------------------------------------------------
Loss before extraordinary item ........................ (15,127) (11,272) (42,025) (37,021)
Extraordinary item-loss on early extinguishment of debt - - (902) -
-------------------------------------------------
Net loss .............................................. $(15,127) $(11,272) $ (42,927) $ (37,021)
=================================================
Basic and diluted loss per common share:
Loss before extraordinary item ........................ $ (1.05) $ (1.19) $ (3.19) $ (3.98)
Extraordinary item-loss on early extinguishment of debt - - (0.07) -
-------------------------------------------------
Basic and diluted loss per common share ............... $ (1.05) $ (1.19) $ (3.26) $ (3.98)
=================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 22,151 $ 54,731
Accounts receivable, net of allowance for doubtful accounts of $7,435 and
$3,964, respectively .................................................... 66,419 65,182
Accounts receivable, related party ........................................ 602 518
Other current assets ...................................................... 9,879 4,876
--------- ---------
Total current assets ................................................ 99,051 125,307
Property and equipment, net of accumulated depreciation and amortization of
$19,589 and $10,422, respectively ....................................... 121,179 94,221
Intangibles, net .......................................................... 51,218 21,982
Restricted cash and pledged securities .................................... 19,299 28,108
Investments ............................................................... 37,507 4,729
Other long-term assets .................................................... 8,812 6,284
--------- ---------
Total assets ........................................................ $ 337,066 $ 280,631
========= =========
CURRENT LIABILITIES:
Accounts payable .......................................................... $ 71,166 $ 68,095
Accrued expenses .......................................................... 20,067 9,186
Credit facilities ......................................................... 12,255 14,191
Vendor financing .......................................................... 6,511 5,253
Capital lease and other obligations ....................................... - 132
--------- ---------
Total current liabilities ........................................... 109,999 96,857
Senior notes .............................................................. 158,391 158,233
Credit facilities, net of current portion ................................. 18,906 -
Vendor financing, net of current portion .................................. 39,224 19,504
Capital lease and other obligations, net of current portion ............... 649 166
--------- ---------
Total liabilities .................................................... 327,169 274,760
--------- ---------
Commitments and Contingencies
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value; 40,000,000 shares authorized, 14,354,509 and
11,354,005 shares issued and outstanding, respectively .................. 144 114
Additional paid-in capital ................................................ 126,071 78,447
Unearned compensation ..................................................... (147) (255)
Accumulated deficit ....................................................... (115,214) (72,287)
Accumulated other comprehensive loss ...................................... (957) (148)
--------- ---------
Total stockholders' equity ........................................... 9,897 5,871
--------- ---------
Total liabilities and stockholders' equity ........................... $ 337,066 $ 280,631
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2000 1999
---------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ............................................................... $ (42,927) $(37,021)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ........................................ 11,037 5,301
Amortization of deferred debt financing costs and debt
discounts ............................................................ 729 584
Other non-cash adjustments ........................................... (1,001) (153)
Changes in operating assets and liabilities, net of acquisition effects:
Accounts receivable, net ............................................. (20,580) (11,260)
Accounts receivable, related party ................................... (84) 479
Accounts payable ..................................................... 530 20,034
Accrued expenses ..................................................... 9,493 6,666
Other ................................................................ (5,064) (3,612)
--------- --------
Net cash used in operating activities ......................... (47,867) (18,982)
--------- --------
INVESTING ACTIVITIES:
Acquisitions ........................................................... (10,274) (16,208)
Purchases of property and equipment .................................... (33,694) (40,619)
Sale of property and equipment ......................................... 424 -
--------- --------
Net cash used in investing activities ......................... (43,544) (56,827)
--------- --------
FINANCING ACTIVITIES:
Proceeds from vendor financing ......................................... 40,464 15,934
Proceeds from credit facilities ........................................ 105,257 39,180
Proceeds from sale of pledged securities ............................... 9,600 8,850
Proceeds from private placement ........................................ 15,240 -
Proceeds from exercise of warrants/options ............................. 752 103
Payment of debt financing costs ........................................ (1,920) (276)
Repayments of credit facilities ........................................ (104,776) (23,518)
Repayments of vendor financing ......................................... (5,507) (1,618)
Repayments under capital lease obligations ............................. (279) (334)
--------- --------
Net cash provided by financing activities ..................... 58,831 38,321
--------- --------
Decrease in cash and cash equivalents .................................. (32,580) (37,488)
Cash and cash equivalents, beginning of the period ..................... 54,731 81,456
--------- --------
Cash and cash equivalents, end of the period ........................... $ 22,151 $ 43,968
========= ========
Supplemental disclosure of cash flow information:
Interest paid........................................................... $ 13,782 $ 10,657
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying condensed consolidated financial statements of Startec
Global Communications Corporation and subsidiaries (the "Company" or "Startec")
have been prepared by the Company without audit. Certain information and
footnote disclosures normally included in financial statements presented in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to present
fairly the financial position of the Company and its subsidiaries as of
September 30, 2000, and the results of their operations and their cash flows for
the three and nine months ended September 30, 2000 and September 30, 1999.
Interim results are not necessarily indicative of results that may be expected
for future periods or for the entire year. Certain prior period amounts have
been reclassified to conform to current period presentation.
The Company is subject to various risks in connection with the operation
of its business. These risks include, but are not limited to, changes in
market conditions, availability of financing, dependence on the growth of the
Internet and the quality of its infrastructure, dependence on operating
agreements with foreign partners, difficulties in successfully integrating and
managing the operations, technology and personnel of acquired entities, cost
of acquisitions, reliance on third parties to provide it with technology,
communications infrastructure and content, interoperability problems among
hardware produced by different vendors, significant foreign and U.S.-based
customers and suppliers, availability of transmission facilities, U.S. and
foreign regulations, international economic and political instability,
dependence on effective billing and information systems, customer attrition,
rapid technological change and difficulties in attracting and retaining
personnel. Many of the Company's competitors are significantly larger and
have substantially greater resources than the Company. If the Company's
competitors were to devote significant additional resources to the provision
of internet and communications products and services to the Company's target
customer base, the Company's business, financial condition, and results of
operations could be materially adversely affected.
The Company has devoted substantial resources to the buildout of its
network, deployment of its Internet initiatives, and the expansion of its
marketing programs and strategic acquisitions. As a result, the Company
experienced operating losses and negative cash flows from operations in 1999 and
during the first nine months of 2000. These losses and negative operating cash
flows are expected to continue for additional periods in the future. There can
be no assurance that the Company's operations will become profitable or will
produce positive cash flows. The Company intends to fund its operational and
capital requirements using cash on hand, its available credit facilities, and
with equity or debt financing. There can be no assurance that such new financing
will be available on terms management finds acceptable or at all. In the event
that the Company is unable to obtain such additional financing, it will be
required to substantially limit or curtail its expansion plans, network
buildout, marketing programs, and foreign operations or the Company may resort
to selling assets to the extent permitted by its debt facilities. Even with such
reductions, management believes that new financing will be required by no later
than the end of 2001 to meet operating needs and the November 2001 interest
payment on the Company's senior notes. The Company has been advised by its
independent public accountants that if the Company has not raised sufficient
capital to meet its projected obligations for 2001 or alternatively completed
restructuring of its indebtedness prior to the completion of their audit of the
Company's financial statements for the year ending December 31, 2000, their
auditors' report on those financial statements will be modified to reflect these
contingencies.
6
<PAGE>
2. LOSS PER COMMON SHARE
Statement of Financial Accounting Standards No. 128 "Earnings Per Common
Share" requires dual presentation of basic and diluted earnings per common share
on the face of the statements of operations for all periods presented. Basic
earnings per common 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. Weighted average
common shares outstanding consist of the following for the three and nine months
ended September 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------
2000 1999 2000 1999
----------------------------------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding-basic............... 14,345 9,422 13,153 9,319
Stock option and warrant equivalents........................... - - - -
----------------------------------------
Weighted average common and equivalent shares
outstanding-basic/diluted.................................... 14,345 9,422 13,153 9,319
========================================
</TABLE>
Options and warrants to purchase an aggregate of approximately 2,846,000
and 1,835,000 shares of common stock were excluded from the computation of
diluted loss per common share in 2000 and 1999, respectively, because
inclusion of these options and warrants would have an anti-dilutive effect on
loss per common share.
3. ACQUISITIONS
In the first quarter of 2000, the Company acquired several Voice over
Internet Protocol ("VoIP") termination facilities from various vendors for
approximately $2.2 million in cash and approximately $1.9 million in common
stock. The purchase price was allocated to the net assets acquired based upon
the estimated fair value of such assets, which resulted in an allocation of
approximately $4.1 million to goodwill.
In March 2000, the Company acquired Vancouver Telephone Company ("VTC"),
for approximately $1.1 million in cash and 520,463 shares of common stock valued
at approximately $12.3 million. VTC provides domestic and international long
distance services in Canada. VTC markets its telephone services to ethnic
communities in Canada, including Taiwanese, Chinese, Romanian and Serbian
communities. The purchase price was allocated to the net assets acquired based
upon the estimated fair value of such assets, which resulted in an allocation of
approximately $13.6 million to goodwill. If certain financial criteria are met
by January 31, 2001, the Company is subject to a contingent payment of
approximately $4.0 million payable with the Company's common stock.
In March 2000, the Company acquired DLC Enterprises Inc. ("DLC"), a New
York-based telecommunications company for approximately $0.5 milion. DLC offers
dial-1, debit card and ISP services. DLC provides Startec with a management and
sales force, proprietary billing and customer provisioning software and small
business revenue. The acquisition of DLC facilitates the introduction of
commercial services for ethnic and mid-sized business customers. The purchase
price was allocated to the net assets acquired based upon the estimated fair
value of such assets, which resulted in an allocation of approximately $1.1
million to goodwill. If certain financial criteria are met by April 30, 2001,
the Company is subject to a contingent payment of approximately $5.6 million
payable in cash of approximately $0.5 million and $5.1 million in the form of
either cash or the Company's common stock.
7
<PAGE>
3. ACQUISITIONS (CONTINUED)
In March 2000, Startec acquired Global Villager Inc. for approximately $0.8
million in cash and 503,872 shares of the Company's common stock valued at
approximately $13.2 million. Global Villager owns a leading bilingual
Chinese/English Web community, DragonSurf.com, which provides a range of content
and services on its Web site for the Chinese community. The purchase price was
allocated to the net assets acquired based upon the estimated fair value of such
assets, which resulted in an allocation of approximately $13.8 million to
goodwill.
The Company has accounted for all of the referenced acquisitions using the
purchase method. Accordingly, the results of operations of the acquired
companies are included in the accompanying consolidated statements of the
Company as of the date of their respective acquisition. Purchase price
allocations have been completed on a preliminary basis and are subject to
adjustment should new or additional facts about the business become known. The
Company's summarized, unaudited consolidated pro forma results of operations for
the three and nine months ended September 30, 2000 and 1999, as if the above
acquisitions occurred on January 1, 1999 are as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------------------------
2000 1999 2000 1999
--------------------------------------------
<S> <C> <C> <C> <C>
Net revenues...................................... $ 83,198 $80,394 $253,073 $206,988
Loss from operations.............................. (7,539) (6,608) (23,061) (24,124)
Net loss before extraordinary item................ (15,127) (11,022) (41,894) (36,188)
Extraordinary item................................ - - (902) -
Net loss after extraordinary item................. (15,127) (11,022) (42,796) (36,188)
Basic and diluted loss per common share:
Loss before extraordinary item................. $ (1.05) $ (1.11) $ (3.06) $ (3.68)
Extraordinary item - loss on early
extinguishments of debt......................... - - (0.07) -
Basic and diluted loss per common share........ $ (1.05) $ (1.11) $ (3.13) $ (3.68)
</TABLE>
4. INVESTMENTS
In September 2000, the Company sold certain of its VoIP termination
facilities, valued at approximately $4.3 million, and converted certain of
its accounts receivable, valued at approximately $24.5 million, in exchange
for 40% of the issued and outstanding common stock of Sunrise World
Communications, Inc. ("Sunrise"). Sunrise provides internet communications
services between the United States and the emerging economies of the world.
The accounts receivable consisted of trade receivables, prepaids, and certain
other deposits. As of September 30, 2000, the Company's investment value in
Sunrise is approximately $28.8 million.
In May 1999, the Company entered into an agreement to acquire up to 49%
fully diluted ownership in Dialnet Communications Limited ("Dialnet") for up
to $1.6 million. Dialnet provides value added voice and data services in
India. Pursuant to the agreement, which became effective July 1999 upon
approval by the government of India, the Company made a total investment of
$1.0 million, and also extended $600,000 in credit to Dialnet. Through July
2002, the Company can require that the face amount of the debt outstanding to
Dialnet be converted into common stock of Dialnet. As of September 30, 2000,
the Company had an equity investment of $1.3 million in Dialnet, and $0.6
million outstanding under the loan.
8
<PAGE>
4. INVESTMENTS (CONTINUED)
In February 1999, the Company acquired a 20% equity ownership interest
in BCH Holding Company, Inc. ("BCH"), which has operations in Poland, for
approximately $1.2 million. BCH is a reseller of international voice and a
licensed Internet service provider in Poland. Concurrent with the
acquisition, Startec received a $2.5 million note receivable from BCH
convertible at Startec's option into common stock of BCH equivalent to an
additional 28% fully diluted ownership interest of BCH. Startec also extended
credit for up to $0.5 million to BCH in the second quarter of 2000. As of
September 30, 2000 BCH had borrowed all $0.5 million. The investment in BCH and
the note receivable from BCH are included in other long-term assets in the
accompanying consolidated balance sheets.
5. BUSINESS SEGMENT DATA
The Company changed the composition of its reportable segments in the third
quarter of. Previously, the Company had classified its operations into two
industry segments, traditional telecommunications services and Internet Protocol
("IP") services. The traditional telecommunications service segment was
evaluated by management on a regional basis. The IP services segment was
evaluated by management on a product basis. In the third quarter of 2000, the
Company stopped evaluating services by product, and began evaluating all
services by region. In addition, the Company views traffic terminating on its IP
network as IP revenue. The IP revenue represents wholesale VoIP and residential
and business traffic. All other traffic is considered to be circuit switched
revenue. Restatement of prior period segment amounts is impractical and in
accordance with the Financial Accounting Standards Board Statement on Financial
Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION ("SFAS 131"), the Company will present segment information
for the third quarter of 2000, the period in which the change occurred, under
the old method and under the new method.
The Company evaluates the performance of its segments based primarily on
Earnings Before Interest Taxes Depreciation and Amortization ("EBITDA"). The
Company's interest income and expense are included in the consolidated Federal
income tax return of the Company and its subsidiaries and are allocated based
upon the relative contribution to the Company's consolidated general and
administrative expense.
The majority of the Company's selling, general, and administrative cost is
incurred by the North American operations. However, selling, general, and
administrative cost is allocated to all segments based on the total head count
for the Company.
The following table presents segment revenues and other financial
information based on product, which was the old method, as of September 30,
2000 and for the three and nine months ended September 30, 2000 (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2000
TELECOMMUNICATIONS IP TOTAL
---------------------------------- --------------------
NORTH
AMERICA EUROPE ASIA ESTART VOIP CONSOLIDATED
------- ------ ---- ------ ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues..................................... $ 31,086 $ 5,368 $ 1,435 $ 22,537 $ 22,772 $ 83,198
Gross margin..................................... 1,556 487 447 7,493 8,408 18,391
Selling, marketing, general and administrative
expense........................................ 11,488 5,737 3,295 256 498 21,274
EBITDA........................................... (9,932) (5,250) (2,848) 7,237 7,910 (2,883)
Depreciation and amortization expense............ 3,894 115 240 228 179 4,656
Interest expense................................. 7,473 64 - - - 7,537
Interest income.................................. 742 11 14 - - 767
Fixed assets, gross.............................. 89,639 21,844 13,722 9,784 5,779 140,768
Total assets..................................... $250,907 $ 34,468 $15,443 $ 27,745 $ 8,503 $ 337,066
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000
TELECOMMUNICATIONS IP TOTAL
-------------------------------- --------------------
NORTH
AMERICA EUROPE ASIA ESTART VOIP CONSOLIDATED
------- ------ ---- ------ ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues..................................... $ 116,517 $ 16,887 $ 4,928 $ 64,742 $ 46,666 $ 249,740
Gross margin..................................... 10,484 2,569 1,591 20,542 14,494 49,680
Selling, marketing, general and administrative
expense........................................ 25,888 15,420 8,133 6,277 6,208 61,926
EBITDA........................................... (15,404) (12,851) (6,542) 14,265 8,286 (12,246)
Depreciation and amortization expense............ 8,888 351 725 593 480 11,037
Interest expense................................. 19,790 50 1 - - 19,841
Interest income.................................. 2,208 50 38 - - 2,296
Fixed assets, gross.............................. 89,639 21,844 13,722 9,784 5,779 140,768
Total assets..................................... $ 250,907 $ 34,468 $ 15,443 $ 27,745 $ 8,503 $ 337,066
</TABLE>
10
<PAGE>
5. BUSINESS SEGMENT DATA (CONTINUED)
The following table presents segment revenues and other financial
information based on region, which is the new method, as of September 30,
2000 and for the three and nine months ended September 30, 2000 (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2000
--------------------------------------------
NORTH TOTAL
AMERICA EUROPE ASIA CONSOLIDATED
------- ------ ---- ------------
<S> <C> <C> <C> <C>
Net revenues:
IP........................... $ 45,309 $ 5,368 $ 1,435 $ 52,112
Circuit switched ............ 31,086 - - 31,086
Total net revenues........ 76,395 5,368 1,435 83,198
Gross margin:
IP........................... 15,901 487 447 16,835
Circuit switched ............ 1,556 - - 1,556
Total gross margin........ 17,457 487 447 18,391
Selling, marketing, general and
administrative expense........ 12,242 5,737 3,295 21,274
EBITDA.......................... 5,215 (5,250) (2,848) (2,883)
Depreciation and amortization
expense....................... 4,301 115 240 4,656
Interest expense................ 7,473 64 - 7,537
Interest income................. 742 11 14 767
Fixed assets, gross............. 105,203 21,843 13,722 140,768
Total assets.................... $287,155 $34,468 $15,443 $ 337,066
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000
--------------------------------------------
NORTH TOTAL
AMERICA EUROPE ASIA CONSOLIDATED
------- ------ ---- ------------
<S> <C> <C> <C> <C>
Net revenues:
IP........................... $ 70,310 $ 5,368 $ 1,435 $ 77,113
Circuit switched ............ 157,615 11,519 3,493 172,627
Total net revenues........ 227,925 16,887 4,928 249,740
Gross margin:
IP........................... 24,761 487 447 25,695
Circuit switched ............ 20,759 2,081 1,145 23,985
Total gross margin........ 45,520 2,568 1,592 49,680
Selling, marketing, general and
administrative expense........ 38,373 15,420 8,133 61,926
EBITDA.......................... 7,147 (12,852) (6,541) (12,246)
Depreciation and amortization
expense....................... 9,961 351 725 11,037
Interest expense................ 19,790 50 1 19,841
Interest income................. 2,208 50 38 2,296
Fixed assets, gross............. 105,203 21,843 13,722 140,768
Total assets.................... $287,155 $34,468 $15,443 $ 337,066
</TABLE>
In September 1999, the Company operated in only one business segment-long
distance telecommunications. Operations in Europe and Asia were not material for
the three and nine months ended September 30, 1999.
11
<PAGE>
6. SIGNIFICANT CUSTOMERS AND SUPPLIERS
A significant portion of the Company's net revenues is derived from a
limited number of customers. For the nine-month periods ended September 30, 2000
and 1999, the Company's five largest carrier customers accounted for
approximately 20% and 38% of net revenues, respectively. The Company's
agreements and arrangements with its carrier customers generally may be
terminated by either party on short notice without penalty.
A significant portion of the Company's cost of services is purchased from a
limited number of suppliers. For the nine-month periods ended September 30, 2000
and 1999, the Company's five largest suppliers accounted for approximately 17%
and 22% of cost of services, respectively.
7. VENDOR AND CREDIT FACILITIES
In June 2000, the Company entered into a five-year term loan with a
principal balance of $50 million with NTFC Capital Corporation, a financing arm
of GE Capital ("NTFC Facility"). This loan represents an increase of $15 million
over the original $35 million facility entered into in December 1998 with NTFC.
Advances under the original $35 million mature on January 31, 2004 and advances
under the $15 million increase mature on May 31, 2005. The NTFC Facility may be
used to finance the continued expansion of Startec's Internet initiatives and
transport business, additional development of Wireless Applications Protocol,
applications of its Internet portals, expansion of VoIP services, acquisitions
and working capital for general corporate purposes. The outstanding borrowings
on the NTFC Facility carry interest rates ranging from 8.91% to 10.65%, with a
weighted average interest rate of 9.9%. Principal and interest payments are due
monthly. Under the terms of the NTFC Facility, the Company is subject to certain
financial and operational covenants, including but not limited to minimum
EBITDA, restrictions on the Company's ability to pay dividends and level of
indebtedness. As of September 30, 2000, approximately $46.8 million was
outstanding under the NTFC Facility. The NTFC Facility is secured by a pledge of
all shares of Startec Global Operating Company ("Operating Company") owned by
the Company, and by a first priority security interest in all of the Operating
Company's assets.
In June 2000, the Company entered into a $20 million unsecured facility
from Allied Capital Corporation ("Allied Facility") with a balloon payment due
at maturity in 2005. The Allied Facility may be used for general corporate
purposes, including, without limitation, the purchase of telecommunications
assets. The Allied Facility bears interest at the fixed rate of 15% per annum
and is payable semi-annually, in arrears, at the fixed rate of 10% per annum. In
connection with entering into the Allied Facility, the Company issued a stock
purchase warrant to Allied pursuant to which, at any time and from time to time
until June 30, 2005, Allied is entitled at its sole option to purchase an
aggregate of 125,000 shares of common stock at an exercise price of $11.21 per
share, subject to certain antidilution adjustments. Under the terms of the
Allied Facility, the Company is subject to certain financial and operational
covenants, including but not limited to restrictions on the Company's ability to
pay dividends and level of indebtedness. As of September 30, 2000, $20 million
was outstanding under the facility. After July 1, 2002, the Company can prepay
all or part of this loan without penalty.
In July 1999, the Company entered into a three-year vendor financing
facility for up to $5 million with IBM Credit Corporation ("IBM Facility"). The
IBM Facility may be used to finance the purchase of IBM hardware and software
from IBM under a capital lease structure. Borrowings under the IBM Facility bear
interest at a fixed rate equal to the average yield to maturity of the five-year
Treasury Note plus a rate adjustment which varies by the type of equipment
purchased. The outstanding borrowings on the IBM Facility carry interest rates
ranging from 9.5% to 15.4% with a weighted average interest rate of 11.7%. As of
September 30, 2000, approximately $ 1.3 million was outstanding under the IBM
Facility.
In May 1999, the Company entered into a vendor financing facility for up to
$20 million with Ascend Credit Corporation ("Ascend Facility"). The Ascend
Facility may be used to finance equipment
12
<PAGE>
purchased from Ascend under a capital lease structure. As of September 30, 2000,
approximately $1.9 million bearing interest at 8.5% was outstanding under the
facility.
13
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7. VENDOR AND CREDIT FACILITIES (CONTINUED)
In May 2000, the Company entered into a credit facility for up to $7.5
million from Coast Business Credit Corporation ("Coast Facility") due in
Novemer 2002. The Coast Facility may be used to satisfy various operating
liabilities. The interest rate on the Coast facility is the Prime Rate plus
3.5%, with a floor of 9%. As of September 30, 2000, approximately $6.7
million was outstanding under the Coast Facility.
In June 2000, the Company repaid and terminated a three-year Loan and
Security Agreement with Congress Financial Corporation ("CFC Facility") two
years ahead of the original term. Extraordinary losses of approximately $902,000
incurred with this extinguishment consisted of a one-time payment to Congress
Financial Corporation and unamortized deferred financing costs.
8. COMPREHENSIVE LOSS
The total of net loss and all other non-owner changes in equity consists of
the following for the three and nine months ending September 30, 2000 and 1999
(in thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------------------------
2000 1999 2000 1999
------------------------------------------------
<S> <C> <C> <C> <C>
Net loss..................................... $(15,127) $(11,272) $(42,927) $(37,021)
Other comprehensive loss:
Foreign currency translation adjustment...... (21) (19) (809) (232)
------------------------------------------------
Comprehensive loss........................... $(15,148) $(11,291) $(43,736) $(37,253)
================================================
</TABLE>
9. SUBSEQUENT EVENTS
In November 2000, Startec entered into an agreement to acquire Capsule
Communications, Inc. ("Capsule"), formerly known as US Wats, Inc. Under the
terms of the merger, subject to certain price adjustments, Startec will issue
approximately 2.7 million shares of common stock to shareholders of Capsule. In
addition, Startec will issue an aggregate of $3 million in 5-year, unsecured
promissory notes to two Capsule shareholders owning approximately 74% of the
issued and outstanding shares of Capsule. The merger agreement, which is
expected to be formally consummated in the first quarter of 2001, is subject to
the conditions set forth in the merger agreement and requires, among other
things, the approval of Startec and Capsule shareholders as well as receipt of
regulatory approvals. The approval of the merger by Capsule's stockholders is
assured because the two Capsule shareholders beneficially owning in the
aggregate approximately 74% of Capsule's outstanding common stock have executed
voting agreements committing them to vote all of their shares in favor of the
merger. Capsule is a switch-based interexchange carrier providing long distance
telephone communications services primarily to small and medium-size business
customers as well as residents. Capsule also provides inbound-800 long distance
services, as well as other telecommunications services. Capsule uses its own
switches and facilities to originate, transport and terminate calls for
customers generally located in the Mid-Atlantic region and California (on-net
areas). For calls originating or terminating outside Capsule's own network
(off-net area), the Company utilizes the services provided by other long
distance companies. The acquisition is subject to shareholder and regulatory
approval.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of the financial condition and
results of operations should be read in conjunction with the financial
statements, related notes, and other detailed information included elsewhere
in this Quarterly Report on Form 10-Q. This report contains certain
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are statements
other than historical information or statements of current condition. Some
forward-looking statements may be identified by the use of such terms as
"believes," "anticipates," "intends," or "expects." These forward-looking
statements relate to our plans, objectives and expectations for future
operations and growth. Other forward-looking statements in this Quarterly
Report on Form 10-Q include statements regarding synergies and growth
expected as a result of our in-progress and future acquisitions, expected
growth in earnings, revenue and gross margin, our expectation regarding our
ability to consummate future acquisitions and the necessity for and expected
availability of additional financing. In light of the risks and uncertainties
inherent in all such projected operational matters, the inclusion of
forward-looking statements in this report should not be regarded as a
representation by us or any other person that our objectives or plans will be
achieved or that any of our operating expectations will be realized. Our
revenues and results of operations are difficult to forecast and could differ
materially from those projected in the forward-looking statements contained
in this report as a result of certain risks and uncertainties including, but
not limited to, our ability to integrate and manage acquired companies,
assets and personnel, changes in market conditions, the volatile and
competitive environment for Internet telephony, the availability of
transmission facilities, management of our rapid growth, entry into new and
developing markets, competition, the international telecommunications
industry, dependence on operating agreements with foreign partners, reliance
on third parties to provide us with technology, infrastructure and content,
significant foreign and U.S.-based customers and suppliers, availability of
transmission facilities, U.S. and foreign regulations, international economic
and political instability, dependence on effective billing and information
systems, customer concentration and attrition, rapid technological change,
and the expansion of the global network. These factors should not be
considered exhaustive; we undertake no obligation to release publicly the
results of any future revisions we may make to forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
OVERVIEW
We are a leading provider of advanced communications and Internet
services to residential and business customers transacting with the world's
emerging economies. Our quarterly revenues have increased from $76.6 million
for the three months ended September 30, 1999 to $83.2 million for the three
months ended September 30, 2000. We reported a net loss for the three months
ended September 30, 2000 of $15.1 million, or $1.05 per common share compared
to a net loss of $11.3 million or $1.19 per common share for the three months
ended September 30, 1999. The number of our residential customers increased
from approximately 256,000 customers as of September 30, 1999 to
approximately 645,000 customers as of September 30, 2000. Of these customers,
we provided a bundle of telecommunications services and Internet access to
approximately 130,000 North American customers.
We continue to deploy our Internet Protocol (IP) network, expand our
ethnic customer base and we are beginning to penetrate the business segment.
We anticipate future growth from providing a comprehensive product suite of
IP communication services. These services are expected to include Phone to
Phone, PC to PC, PC to Phone and IP Virtual Private Network (VPN) services.
We continue to pursue acquisitions that will increase our customer base and
our revenue. In addition, we are migrating from circuit-switched to IP-based
technology and we will leverage our existing assets to focus on IP services.
15
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
net revenues for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues ...................... 100.0% 100.0% 100.0% 100.0%
Cost of services .................. 77.9 86.9 80.1 88.6
----------------------------------------------
Gross margin .................... 22.1 13.1 19.9 11.4
General and administrative expenses 19.4 14.8 19.9 16.0
Selling and marketing expenses .... 6.2 4.6 4.9 5.5
Depreciation and amortization ..... 5.6 2.7 4.4 2.7
----------------------------------------------
Loss from operations .............. (9.1) (9.0) (9.3) (12.8)
Interest expense .................. (9.1) (7.2) (7.9) (8.2)
Interest income ................... 0.9 1.5 0.9 2.1
Equity in loss from affiliates .... (1.0) - (0.5) -
Loss before extraordinary item .... (18.3) (14.7) (16.8) (18.9)
Extraordinary item-loss on early
extinguishment of debt .......... - - (0.4) -
----------------------------------------------
Net loss .......................... (18.3)% (14.7)% (17.2)% (18.9)%
==============================================
</TABLE>
THREE AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000 COMPARED TO THREE AND NINE
MONTH PERIOD ENDED SEPTEMBER 30, 1999
NET REVENUES. Net revenues for the three months ended September 30, 2000
increased $6.6 million, or 8.6%, to $83.2 million from $76.6 million for the
three months ended September 30, 1999. Net revenues for the nine months ended
September 30, 2000 increased $53.5 million, or 27.3%, to $249.7 million from
$196.2 million over the same period in 1999. Net revenues include the effect of
acquisitions from their respective acquisition dates.
Net revenues generated by our North American segment increased $3.3
million, or 4.5%, to $76.4 million for the three months ended September 30,
2000, from $73.1 million for the same period in 1999, and increased $40.0
million, or 21.3%, to $227.9 million for the nine months ended September 30,
2000, from $187.9 million for the same period in 1999. Revenue from our IP
network in North America was $45.3 million for the three months ended September
30, 2000 and $70.3 million for the nine months ended September 30, 2000. The
North American IP segment was not operational in either of the corresponding
periods of 1999. Revenue from our North American circuit switched network
decreased $42.0 million or 57.5%, to $31.1 million for the three months ended
September 30, 2000, from $73.1 million for the same period in 1999. Revenue from
our North American circuit switched network decreased $30.3 million or 16.1%, to
$157.6 million for the nine months ended September 30, 2000, from $187.9 million
for the same period in 1999. The decrease in the amount of circuit switched
revenues was due to the reduction in the amount of wholesale circuit switched
traffic on our network. In addition, we were able to fully migrate our
residential traffic onto our IP network in the third quarter of 2000.
Net revenues generated by our European segment increased $3.4 million, or
170.0%, to $5.4 million for the three months ended September 30, 2000, from $2.0
million for the same period in 1999, and increased $12.1 million, or 252.1%, to
$16.9 million for the nine months ended September 30, 2000, from $4.8 million
for the same period in 1999. Revenue from our IP network in Europe was $5.4
million for the three and nine months ended September 30, 2000. The European IP
segment was not operational in either of the corresponding periods of 1999. As a
result of the complete migration toward the IP network in Europe, we did not
generate any revenue from our circuit switched network for the three months
ended
16
<PAGE>
September 30, 2000, a decrease from $2.0 million for the same period in 1999.
Revenue from our circuit switched network in Europe increased $6.7 million or
139.6%, to $11.5 million for the nine months ended September 30, 2000, from
$4.8 million for the same period in 1999. The overall increase in net
revenues are due to our continued penetration into the European market during
fiscal year 2000. We were able to migrate all of our European traffic onto
our IP network in the third quarter of 2000.
Net revenues generated by our Asian segment decreased $ 0.1 million, or
6.7%, to $1.4 million for the three months ended September 30, 2000, from $1.5
million for the same period in 1999, and increased $1.3 million, or 36.1%, to
$4.9 million for the nine months ended September 30, 2000, from $3.6 million for
the same period in 1999. Revenue from our IP network in Asia was $1.4 million
for the three and nine months ended September 30, 2000. The Asian IP segment was
not operational in either of the corresponding periods of 1999. As a result of
the complete migration toward the IP network in Asia, we did not generate any
revenue from our circuit switched network for the three months ended September
30, 2000, a decrease from $1.5 million for the same period in 1999. Revenue from
our circuit switched network in Asia decreased $0.1 million or 2.8%, to $3.5
million for the nine months ended September 30, 2000, from $3.6 million for the
same period in 1999.
GROSS MARGIN. Gross margin increased $8.3 million, or 82.2%, to $18.4 million
for the three months ended September 30, 2000 from $10.1 million for the three
months ended September 30, 1999. Gross margin for the nine months ended
September 30, 2000 increased $27.4 million, or 122.9%, to $49.7 million from
$22.3 million for the same period in 1999. Gross margin as a percentage of net
revenues increased to 22.1% for the three months ended September 30, 2000 from
13.1% for the three months ended September 30, 1999, and increased to 19.9% for
the nine months ended September 30, 2000 from 11.4% for the same period in 1999.
The majority of this increase can be attributed to the higher gross margins we
experienced from operations in our IP segment.
Gross margin for our North American segment increased $8.0 million, or
84.2%, to $17.5 million for the three months ended September 30, 2000, from $9.5
million for the same period in 1999, and increased $24.6 million, or 117.7%, to
$45.5 million for the nine months ended September 30, 2000, from $20.9 million
for the same period in 1999. Gross margins for our North American segment's IP
revenues were 35.1% of net revenues or $15.9 million for the three months ended
September 30, 2000, and 35.2% of net revenues or $24.8 million for the nine
months ended September 30, 2000. The North American IP segment was not
operational in either of the corresponding periods of 1999. North American
circuit switched gross margins were 5.0% of net revenues, or $1.6 million for
the three months ended September 30, 2000, as compared to 12.9% of net revenues
and $9.5 million for the corresponding period in 1999. North American circuit
switched gross margins were 13.2% of net revenues or $20.8 million for the nine
months ended September 30, 2000, as compared to 11.1% and $20.9 million for the
corresponding period in 1999.
Gross margin for our European segment increased $0.6 million, to $0.5
million for the three months ended September 30, 2000, from a negative $0.1
for the same period in 1999, and increased $3.1 million, to $2.6 million for
the nine months ended September 30, 2000, from a negative $0.5 million for
the same period in 1999. Gross margins for our European IP revenues were $0.5
million, or 9.3% of net revenues for the three months ended September 30,
2000, and $0.5 million, or 9.3% of net revenues for the nine months ended
September 30, 2000. The European IP segment was not operational in either of
the corresponding periods of 1999. The European traffic was completely
migrated from the circuit switched network in the second quarter of 2000. As
such, no revenues were generated on the European circuit switched network.
European circuit switched gross margins were 18.1% of net revenues, or $2.1
million for the nine months ended September 30, 2000, as compared to a
negative 9.6% of net revenues and negative $0.5 million for the corresponding
period in 1999.
Gross margin for our Asian segment decreased $0.4 million, or 50.0%, to
$0.4 million for the three months ended September 30, 2000, from $0.8 million
for the same period in 1999, and decreased $0.2 million, or 11.1%, to $1.6
million for the nine months ended September 30, 2000, from $1.8 million for the
same period in 1999. Gross margins for our Asian segment's IP revenues were
31.1% of net revenues for
17
<PAGE>
the three months ended September 30, 2000, and 31.1% of net revenues for the
nine months ended September 30, 2000. The Asian IP segment was not operational
in either of the corresponding periods of 1999. The Asian traffic was completely
migrated from the circuit switched network in the second quarter of 2000. As
such, no revenues were generated on the Asian circuit switched network. Asian
circuit switched gross margins were 32.8% of net revenues, or $1.1 million for
the nine months ended September 30, 2000, as compared to 51.6% of net revenues
and negative $1.8 million for the corresponding period in 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the three
months ended September 30, 2000 increased $4.9 million, or 43.4% to $16.2
million from $11.3 million for the three months ended September 30, 1999.
General and administrative expenses increased $18.5 million, or 59.1% to $49.8
million for the nine months ended September 30, 2000 from $31.3 million over the
same period in 1999.
General and administrative expenses as a percentage of net revenues
increased to 19.4% for the three months ended September 30, 2000 from 13.1% for
the same period in 1999, and increased to 19.9% for the nine months ended
September 30, 2000 from 11.4% for the same period in 1999. The increase was
primarily due to business integration costs generated by our acquisitions in the
first quarter of 2000.
General and administrative expenses for our North American segment remained
constant at $8.0 million for the three months ended September 30, 2000 and 1999,
and increased $7.1 million, or 31.4%, to $29.7 million for the nine months ended
September 30, 2000, from $22.6 million for the same period in 1999.
General and administrative expenses for our European segment increased $2.8
million, or 133.3%, to $4.9 million for the three months ended September 30,
2000, from $2.1 million for the same period in 1999, and increased $5.8 million,
or 90.6%, to $12.2 million for the nine months ended September 30, 2000, from
$6.4 million for the same period in 1999.
General and administrative expenses for our Asian segment decreased $0.5
million, or 41.7%, to $3.2 million for the three months ended September 30,
2000, from $1.2 million for the same period in 1999, and increased $3.1 million,
or 134.8%, to $7.9 million for the nine months ended September 30, 2000, from
$2.3 million for the same period in 1999.
SELLING AND MARKETING. Selling and marketing expenses for the three months ended
September 30, 2000 increased $1.5 million, or 41.7% to $5.1 million from $3.6
million for the three months ended September 30, 1999. Selling and marketing
expenses increased $1.4 million, or 13.1% to $12.1 million for the nine months
ended September 30, 2000 from $10.7 million for the nine months ended September
30, 1999.
Selling and administrative expenses as a percentage of net revenues
increased to 6.2% for the three months ended September 30, 2000 from 4.6% for
the same period in 1999, but decreased to 4.9% for the nine months ended
September 30, 2000 from 5.5% for the same period in 1999. The decrease is
primarily due to our efforts to convert our existing dial around customer base
to a bundled customer base rather than pursuing new customers through increased
external marketing efforts.
Selling and marketing for our North American segment increased $1.1
million, or 35.4%, to $4.2 million for the three months ended September 30,
2000, from $3.1 million for the same period in 1999, but decreased $0.9 million,
or 9.4%, to $8.7 million for the nine months ended September 30, 2000 from $9.6
million for the same period in 1999. Selling and marketing expenses as a
percentage of net revenues increased to 5.5% for the three months ended
September 30, 2000 from 4.2% for the same period in 1999, and decreased to 3.8%
for the nine months ended September 30, 2000 from 5.1% for the same period in
1999. The decrease is primarily due to our efforts to convert our existing dial
around customer base to a bundled customer base rather than pursuing new
customers through increased external marketing efforts. The costs from our
outbound service representatives who performed this function are recorded in
general and administrative expenses.
18
<PAGE>
Selling and marketing for our European segment increased $0.5 million, or
125.0%, to $0.9 million for the three months ended September 30, 2000, from $0.4
million for the same period in 1999, and increased $2.1 million, or 190.9%, to
$3.2 million for the nine months ended September 30, 2000 from $1.1 million for
the same period in 1999. Selling and marketing expenses as a percentage of net
revenues decreased to 16.6% for the three months ended September 30, 2000 from
20.0% for the same period in 1999, and decreased to 18.9% for the nine months
ended September 30, 2000 from 22.9% for the same period in 1999. The decrease is
primarily due to the efforts to convert our dial around customer base for
bundled customer acquisitions rather than pursuing new customers through
increased marketing efforts. The costs from our outbound service representatives
who performed this function are recorded in general and administrative expenses.
Selling and marketing for our Asian segment increased $10,000, or 21.7%, to
$56,000 for the three months ended September 30, 2000, from $46,000 for the same
period in 1999, and increased $126,000, or 165.8%, to $202,000 for the nine
months ended September 30, 2000 from $76,000 for the same period in 1999.
Selling and marketing expenses as a percentage of net revenues increased to 4.0%
for the three months ended September 30, 2000 from 3.1% for the same period in
1999, and increased to 4.1% for the nine months ended September 30, 2000 from
2.1% for the same period in 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$2.6 million, or 123.8%, to $4.7 million for the three months ended September
30, 2000 from $2.1 million for the same period in 1999. Depreciation and
amortization expense increased $5.7 million, or 107.5%, to $11.0 million for the
nine months ended September 30, 2000 from $5.3 million for the same period in
1999. This was primarily due to increases in capital expenditures pursuant to
our strategy of expanding our network infrastructure and amortization of
goodwill.
INTEREST EXPENSE. Interest expense increased $2.0 million, or 36.4%, to $7.5
million for the three months ended September 30, 2000 from $5.5 million for the
same period in 1999. Interest expense increased $3.8 million, or 23.8%, to $19.8
million for the nine months ended September 30, 2000 from $16.0 million for the
same period in 1999. This was a result of higher balances drawn from several
bank and vendor financing agreements entered into during 1999 and 2000.
INTEREST INCOME. Interest income decreased $0.3 million, or 27.3%, to $0.8
million for the three months ended September 30, 2000 from $1.1 million for the
same period in 1999. Interest income decreased $1.8 million, or 43.9%, to $2.3
million for the nine months ended September 30, 2000 from $4.1 million for the
same period in 1999. This is primarily due to a decrease in the amount of
pledged securities on our balance sheet, reflecting the interest payments made
on the Senior Notes.
NET LOSS. Net loss for the three months ended September 30, 2000 was $15.1
million or $1.05 per common share compared to a net loss of approximately $11.3
million or $1.19 per common share for the same period in 1999. Nine-month net
loss before extraordinary item was $42.0 million or $3.19 per common share
compared to $37.0 million or $3.98 per common share over the same period in
1999. Net loss for the three months ended September 30, 2000 was $15.1 million
or $1.05 per common share and net loss for the nine months ended September 30,
2000 was $42.9 million or $3.26 per common share, after the extraordinary item.
We incurred a loss of $0.9 million in connection with the early repayment and
termination of our Loan and Security Agreement with Congress Financial
Corporation ("CFC") during the second quarter. This amount consisted of a
one-time payment to CFC and unamortized deferred financing costs.
LIQUIDITY AND CAPITAL RESOURCES
We reported a decrease in cash and cash equivalents of approximately $32.6
million during the nine months ended September 30, 2000. Cash used in operating
activities for the nine months ended September 30, 2000 increased $28.9 million,
or 152.1% to $47.9 million from $19.0 million for the same period in 1999
principally due to cash requirements for the expansion of operations partially
offset by changes in operating accounts and the integration of acquisitions.
We expect to incur net losses on a quarterly basis for the next several
quarters, as we incur additional costs associated with the strengthening of
our network infrastructure, the development and expansion of our marketing
programs, our entry into new markets,
19
<PAGE>
the pursuit of our acquisition strategy, the expansion of existing and
introduction of new telecommunications and Internet services, the expansion of
our global IP network and as a result of interest expense associated with our
financing activities. As of September 30, 2000, we have pledged securities of
approximately $19.3 million to cover all scheduled cash interest payments on the
Senior Notes through May 2001. The Company is scheduled to pay a semiannual
interest payment of approximately $9.6 million in November 2000. We may be
required to obtain additional financing in order to pay interest on the Senior
Notes after May 2001 and to repay the Senior Notes at their maturity.
During 1998, we advanced an aggregate of approximately $1.4 million to
certain of our employees and officers. The secured loans bear interest at a rate
of 7.87% per year, and were originally due and payable on December 31, 1999.
Approximately $0.9 million was repaid in January 2000, and the balance was
extended through December 31, 2000.
In September 2000, we sold certain of our VoIP termination facilities,
valued at approximately $4.3 million, and converted certain of our accounts
receivable, valued at approximately $24.5 million, in exchange for 40% of the
issued and outstanding common stock of Sunrise World Communications, Inc.
("Sunrise"). Sunrise provides internet communications services between the
United States and the emerging economies of the world. The accounts
receivable consisted of trade receivables, prepaids, and deposits. As of
September 30, 2000, our investment value in Sunrise is approximately $28.8
million.
In the first quarter of 2000, we acquired several VoIP termination
facilities from various vendors for approximately $2.2 million in cash and
approximately $1.9 million in common stock. We issued the shares in the second
and third quarters of 2000. We have integrated these facilities into our VoIP
network and launched VoIP services as a new line of business in the first
quarter of 2000. The purchase price was allocated to the net assets acquired
based upon the estimated fair value of such assets, which resulted in an
allocation of approximately $4.1 million to goodwill. Purchase price allocations
have been completed on a preliminary basis and are subject to adjustment should
new or additional facts about the business become known.
In the first quarter of 2000, we acquired Vancouver Telephone Company
("VTC") for approximately $1.1 million in cash and 520,463 shares of common
stock valued at approximately $12.3 million. We issued the shares in the second
quarter of 2000. VTC provides domestic and international long distance services
in Canada. VTC markets its telephone services to ethnic communities in Canada,
including Taiwanese, Chinese, Romanian and Serbian communities. The purchase
price was allocated to the net assets acquired based upon the estimated fair
value of such assets, which resulted in an allocation of approximately $13.6
million to goodwill. Purchase price allocations have been completed on a
preliminary basis and are subject to adjustment should new or additional facts
about the business become known.
In the first quarter of 2000, we acquired DLC Enterprises Inc. ("DLC"),
a New York-based telecommunications company for approximately $0.5 million.
DLC offers voice and data services. DLC provides us with a management and
sales force, proprietary billing and customer service software and small
business customers. The acquisition of DLC facilitates the introduction of
commercial services for ethnic small and mid-sized business customers. The
purchase price was allocated to the net assets acquired based upon the
estimated fair value of such assets, which resulted in an allocation of
approximately $1.1 million to goodwill. Purchase price allocations have been
completed on a preliminary basis and are subject to adjustment should new or
additional facts about the business become known.
In the first quarter of 2000, we acquired Global Villager Inc. for
approximately $0.8 million in cash and 503,872 shares of common stock valued
at approximately $13.2 million. Global Villager owns a leading bilingual
Chinese/English Web community, DragonSurf.com, which provides a range of
content and services on its Web site for the Chinese community. The purchase
price was allocated to the net assets acquired based upon the estimated fair
value of such assets, which resulted in an allocation of approximately $13.8
million to goodwill. Purchase price allocations have been completed on a
preliminary basis and are subject to adjustment should new or additional
facts about the business become known.
In November 2000, we entered into an agreement to acquire Capsule
Communications, Inc. ("Capsule"), formerly known as US WATS, Inc. Under the
terms of the merger, subject to certain price adjustments, we will issue
approximately 2.7 million shares of common stock to shareholders of Capsule.
In addition, we will issue an aggregate of $3 million in 5-year, unsecured
promissory notes to two Capsule shareholders owning approximately 74% of the
issued and outstanding shares of Capsule. The merger agreement, which we
anticipate will be formally consummated in the first quarter of 2001, is
subject to the conditions set forth in the merger agreement and requires,
among other things, the approval of our shareholders and Capsule shareholders
as well as the receipt of regulatory approvals. The approval of the merger by
Capsule's stockholders is assured because the two Capsule shareholders
beneficially owning in the aggregate approximately 74% of Capsule's
outstanding common stock have executed voting agreements committing them to
vote all of their shares in favor of the merger.
Our business strategy contemplates aggregate capital expenditures
(including capital expenditures, working capital and other general corporate
purposes) of approximately $35 million through December 31, 2000 to be spent
on our Internet infrastructure. A substantial portion of these expenditures
has been incurred as of September 30, 2000, and has been funded by existing
vendor arrangements. We are also pursuing additional sources of financing
from the capital markets. We intend to use any additional sources of
financing to fund our acquisition activities. These activities include, but
are not limited to, integration expenses, Internet infrastructure and other
post acquisition-related expenditures.
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We regularly review opportunities to implement our business strategy
through strategic alliances with, investment in, or acquisitions of businesses
that we believe are complementary to our current and planned operations. Our
ability to consummate strategic alliances and acquisitions, and to make
investments that may be of strategic significance, may require us to obtain
additional debt and/or equity financing. There can be no assurance that we will
be successful in arranging such financing on terms we consider acceptable or at
all.
Although we intend to implement the capital spending plan described above,
it is possible that unanticipated business opportunities may arise which we may
conclude are more favorable to our long-term prospects than those contemplated
by the current capital spending plan.
EQUITY AND DEBT FINANCING
In June 2000, we repaid and terminated a three-year Loan and Security
Agreement with Congress Financial Corporation ("CFC Facility") two years ahead
of the original term. We incurred extraordinary losses of approximately $0.9
million with this extinguishment consisting of a one-time payment to Congress
Financial Corporation and unamortized deferred financing costs.
In June 2000, we entered into a five-year term loan with a principal
balance of $50 million with NTFC Capital Corporation, a financing arm of GE
Capital ("NTFC Facility"). This loan represents an increase of $15 million
over the original $35 million facility entered into in December 1998 with
NTFC. The NTFC Facility may be used to finance the continued expansion of our
Internet initiatives and transport business, additional development of
Wireless Applications Protocol, applications of its Internet portals,
expansion of VoIP services, acquisitions and working capital for general
corporate purposes. The outstanding borrowings on the NTFC Facility carry
interest rates ranging from 8.91% to 9.90%, with a weighted average interest
rate of 9.9%. Under the terms of the NTFC Facility, we are subject to certain
financial and operational covenants, including but not limited to minimum
EBITDA, restrictions on our ability to pay dividends and level of
indebtedness. As of September 30, 2000, approximately $46.8 million was
outstanding under the NTFC Facility. The NTFC Facility is secured by a pledge
of all shares of Startec Global Operating Company ("Operating Company") owned
by the Company, and by a first priority security interest in all of the
Operating Company's assets.
In June 2000, we entered into a $20 million unsecured facility from Allied
Capital ("Allied Facility") with a balloon payment due at maturity in 2005. The
Allied Facility may be used for general corporate purposes, including the
purchase of telecommunications assets, without limitations. The Allied Facility
bears interest at the fixed rate of 15% per annum and is payable semi-annually,
in arrears, at the fixed rate of 10% per annum. Under the terms of the Allied
Facility, we are subject to certain financial and operational covenants,
including but not limited to restrictions on our ability to pay dividends and
level of indebtedness. As of September 30, 2000, $20 million was outstanding
under the facility. After July 1, 2002, the Company can prepay all or part of
this loan without penalty. In connection with entering into the Allied Facility,
we issued a stock purchase warrant to Allied pursuant to which, at any time and
from time to time until June 30, 2005, Allied is entitled at its sole option to
purchase an aggregate of 125,000 shares of our common stock at an exercise price
of $11.21 per share subject to certain antidilution adjustments.
In May 2000, we entered into vendor financing facility for up to $7.5
million from Coast Business Credit Corporation ("Coast Facility") due in Novemer
2002. The Coast Facility may be used to satisfy various operating liabilities.
The interest rate on the Coast facility is the Prime Rate plus 3.5%, with a
floor of 9%. As of September 30, 2000, approximately $6.7 million was
outstanding under the Coast Facility.
In July 1999, we entered into a three-year vendor financing facility for up
to $5 million with IBM Credit Corporation ("IBM Facility"). The IBM Facility may
be used to finance the purchase of IBM hardware and software from IBM under a
capital lease structure. Borrowings under the IBM Facility bear interest at a
fixed rate equal to the average yield to maturity of the five-year Treasury Note
plus a rate adjustment which varies by the type of equipment purchased. The
outstanding borrowings on the IBM Facility carry interest
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rates ranging from 9.5% to 15.4% with a weighted average interest rate of 11.7%.
As of September 30, 2000, approximately $1.3 million was outstanding under the
IBM Facility.
In May 1999, we entered into a vendor financing facility for up to $20
million with Ascend Credit Corporation ("Ascend Facility"). The Ascend Facility
may be used to finance equipment purchased from Ascend under a capital lease
structure. As of September 30, 2000, approximately $1.9 million bearing interest
at 8.5% was outstanding under the facility.
In May 1998, we issued $160 million of 12% Senior Notes yielding net
proceeds of approximately $155 million, of which approximately $52.4 million was
used to purchase securities which are pledged and restricted for use as the
first six interest payments due on the Senior Notes. As part of the offering, we
issued warrants to purchase 200,226 shares of common stock. The warrants are
exercisable subsequent to November 1998 at an exercise price of $24.20 per
share. The Senior Notes are unsecured and require semi-annual interest payments,
which began in November 1998.
The implementation of our strategic plans, including the development and
expansion of our network facilities, expansion of our marketing programs,
expansion of our global IP network, pursuit of our acquisition strategy,
acquisition of additional commercial customers, our evolution to marketing of
network and enterprise services, and funding of operating losses and working
capital needs, will require significant investment. There can be no assurance
that we 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 our expansion 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, we 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 our actual future capital requirements also will
depend upon many factors that are not within our control, including
competitive conditions and regulatory or other government actions. In the
event that our plans or assumptions change or prove to be inaccurate or our
capital resources prove to be insufficient to fund our growth and operations,
then some or all of our development and expansion plans could be delayed or
abandoned, or we may be required to seek additional financing or to sell
assets, to the extent permitted by the terms of the Senior Notes.
We need to raise such additional capital from public or private equity
or debt sources. We cannot assure you that we will be able to obtain additional
financing or, if obtained, that it will be able to do so on a timely basis or on
favorable terms. If we are able to raise additional funds through the incurrence
of debt, it would likely become subject to additional restrictive financial
covenants. In the event that we are unable to obtain such additional capital or
are unable to obtain such additional capital on acceptable terms, we may be
required to reduce the scope of our expansion, which could adversely affect our
business, financial condition and results of operations, our ability to compete
and our ability to meet our obligations under the Senior Notes.
CASH FLOWS
Our cash and cash equivalents decreased $32.5 million, or 59.4%, to
$22.2 million at September 30, 2000, from $54.7 million at December 31, 1999.
Net cash used in operating activities increased $28.9 million, or 152.1%, to
$47.9 million for the nine months ended September 30, 2000 compared to
approximately $19.0 million for the same period in 1999. The increase in cash
used in operations was primarily the result of an increase of net loss and
accounts receivable, which was partially offset by an increase in accounts
payable and accrued expenses.
Cash used in investing activities was $43.5 million in the first nine
months of 2000 compared to $56.8 million in the same period in 1999. We
capitalized approximately $3.7 million pursuant to the Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use."
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Cash provided by financing activities was approximately $58.8
million for the first nine months of 2000 compared to approximately $38.3
million over the same period in 1999. Cash provided by financing activities
primarily relates to proceeds from draws on the bank facility and vendor
financing as well as proceeds from the private placement of our common stock
partially offset by repayments of the credit facility and vendor financing.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, including changes in interest rates, and
to foreign currency exchange rate risks. We do not hold any financial
instruments for trading purposes. We believe that our primary market risk
exposure relates the effects that changes in interest rates have on our
investments and those portions of our outstanding indebtedness that do not
have fixed rates of interest. In this regard, changes in interest rates
affect the interest earned on our investments in cash equivalents, which
consist primarily of demand deposits and money market accounts, and U.S.
Government obligations which we have purchased and pledged to make certain
interest payments on the Senior Notes. In addition, changes in interest rates
impact the fair value of our long-term debt obligations (including the Senior
Notes). As of September 30, 2000, the fair value of the Senior Notes was
approximately $120.0 million and the fair value of the securities pledged to
make certain interest payments on the Senior Notes was approximately $19.3
million. Changes in interest rates also affect our borrowings under our other
financing facilities with NTFC, Allied, IBM and Ascend. The NTFC Facility
provides that each borrowing under the facility bears interest at a fixed
rate equal to the average yield to maturity of the five-year Treasury Note
plus an agreed-upon rate adjustment. The Allied facility bears interest at
the fixed rate of 15% per annum and is payable semi-annually, in arrears, at
the fixed rate of 10% per annum. The Ascend Facility provides that each
borrowing under the facility bears interest at 8.5%. The IBM facility bears
interest at a variable rate during the term of the lease.
The foreign exchange rate fluctuations relating to our results of
foreign operations have not been material. We have not entered into foreign
currency exchange forward contracts or other derivative arrangements to
manage risks associated with foreign exchange rate fluctuations. Foreign
exchange rate fluctuation exposure may increase in the future as the size and
scope of our foreign operations increases.
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PART II.-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time we are involved in litigation incidental to the conduct
of our business. We are not currently a party to any lawsuit or proceeding
which, in the opinion of management, is likely to have a material adverse effect
on the business, financial condition or results of operations.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
2.2* Agreement and Plan of Reorganization dated November 2, 2000 by and among
Startec Global Communications Corporation, Stars Acquisition Corp., Capsule
Communications, Inc., Gold & Appel Transfer, S.A. and Foundation for the
International Non-Governmental Development of Space
4.13** First Amendment dated as of August 21, 1999 to Shareholder Rights
Agreement dated as of March 26, 1998, between Startec Global Communications
Corporation and Continental Stock Transfer & Trust Company.
4.14* Second Amendment dated November 8, 2000 to Shareholder Rights Agreement
dated as of March 26, 1998, between Startec Global Communications Corporation
and Continental Stock Transfer & Trust Company.
10.61* Voting Agreement dated November 2, 2000 by and between Startec Global
Communications Corporation, Stars Acquisition Corp. and Gold & Appel Transfer,
S.A.
10.62* Voting Agreement dated November 2, 2000 by and between Startec Global
Communications Corporation, Stars Acquisition Corp. and Foundation for the
International Non-Governmental Development of Space.
27.1 Financial Data Schedule
--------------------------------------------------------------------------------
*Incorporated by reference from Exhibits 2.2, 99.1, 99.2, 99.3 and 99.4 to the
Company's Current Report on Form 8-K (SEC File No. 000-23087) filed on November
13, 2000.
** Incorporated by reference from Exhibit 99.1 to the Company's Current
Report on Form 8-K (SEC File No. 000-23087) filed on August 25, 1999.
No reports on Form 8-K were filed during the period ending September 30,
2000.
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized on the 14th day of
November, 2000.
STARTEC GLOBAL COMMUNICATIONS CORPORATION
By: /s/ PRABHAV V. MANIYAR
---------------------------------------------------------
CHIEF FINANCIAL
OFFICER AND DIRECTOR
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
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