<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTER ENDED MARCH 31, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
COMMISSION FILE NO. 000-23087
------------------------
STARTEC GLOBAL COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 52-2099559
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10411 MOTOR CITY DRIVE
BETHESDA, MD 20817
(Address of principal executive offices) (Zip Code)
</TABLE>
(301) 365-8959
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. 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.
<TABLE>
<CAPTION>
SHARES OUTSTANDING
TITLE OF EACH CLASS: AS OF MAY 3, 2000
- -------------------- ------------------
<S> <C>
Common Stock, par value $0.01 per share 13,570,850
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. Financial Statements
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2000 and 1999.............. 3
Condensed Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999................................... 4
Condensed Consolidated Statements of Cash Flows for the
three months Ended March 31, 2000 and 1999.............. 5
Notes to Condensed Consolidated Financial Statements........ 6-10
Management's Discussion and Analysis of Financial Condition
ITEM 2. and Results of Operations............................... 11-16
Quantitative and Qualitative Disclosures about Market
ITEM 3. Risk.................................................... 16
PART II. OTHER INFORMATION AND SIGNATURE............................. 17
</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
ENDED MARCH 31,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Net revenues................................................ $ 77,376 $ 57,714
Cost of services............................................ 62,890 52,654
-------- --------
Gross margin.............................................. 14,486 5,060
General and administrative expenses......................... 15,401 9,817
Selling and marketing expenses.............................. 3,628 4,128
Depreciation and amortization............................... 2,574 1,375
-------- --------
Loss from operations........................................ (7,117) (10,260)
Interest expense............................................ (5,996) (5,199)
Interest income............................................. 950 1,734
Equity in loss from affiliates.............................. (13) (102)
-------- --------
Loss before income taxes.................................... (12,176) (13,827)
Income tax provision........................................ -- --
-------- --------
Net loss.................................................... $(12,176) $(13,827)
======== ========
Basic and diluted loss per common share..................... $ (1.05) $ (1.51)
======== ========
</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>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 30,049 $ 54,731
Accounts receivable, net of allowance for doubtful accounts
of $4,482 and $3,964, respectively........................ 69,750 65,182
Accounts receivable, related party.......................... 692 518
Other current assets........................................ 7,184 4,876
-------- --------
Total current assets.................................. 107,675 125,307
Property and equipment, net of accumulated depreciation and
amortization of $13,006 and $10,422, respectively......... 106,320 94,221
Restricted cash and pledged securities...................... 28,320 28,108
Intangibles, net............................................ 55,060 21,982
Other long-term assets...................................... 11,687 11,013
-------- --------
$309,062 $280,631
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 70,274 $ 68,095
Accrued expenses............................................ 19,232 9,186
Bank facilities............................................. 10,631 14,191
Vendor financing............................................ 7,366 5,253
Capital lease and other obligations......................... 96 132
-------- --------
Total current liabilities............................. 107,599 96,857
Senior notes................................................ 158,286 158,233
Vendor financing, net of current portion.................... 22,802 19,504
Capital lease and other obligations, net of current
portion................................................... 230 166
-------- --------
Total liabilities..................................... 288,917 274,760
-------- --------
Commitments and Contingencies...............................
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value; 40,000,000 shares authorized,
12,110,244 and 11,354,005 shares issued and outstanding,
respectively.............................................. 121 114
Additional paid-in capital.................................. 105,139 78,447
Unearned compensation....................................... (189) (255)
Accumulated deficit......................................... (84,463) (72,287)
Accumulated other comprehensive loss........................ (463) (148)
-------- --------
Total stockholders' equity............................ 20,145 5,871
-------- --------
$309,062 $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 THREE MONTHS
ENDED MARCH 31,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(12,176) $(13,827)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization............................. 2,574 1,375
Amortization of deferred debt financing costs and debt
discounts............................................... 213 178
Other non-cash adjustments................................ 66 28
Changes in operating assets and liabilities, net of
acquisition effects:
Accounts receivable, net.................................. (148) 3,045
Accounts receivable, related party........................ (174) 181
Accounts payable.......................................... (362) 8,433
Accrued expenses.......................................... 8,658 6,900
Other..................................................... (209) (3,584)
-------- --------
Net cash (used in) provided by operating activities..... (1,558) 2,729
-------- --------
INVESTING ACTIVITIES:
Acquisitions................................................ (9,629) (14,336)
Purchases of property and equipment......................... (11,256) (10,269)
-------- --------
Net cash used in investing activities................... (20,885) (24,605)
-------- --------
FINANCING ACTIVITIES:
Proceeds from vendor financing.............................. 6,447 324
Proceeds from bank facilities............................... 48,600 --
Payment of debt financing costs............................. (150) --
Repayments of bank facility................................. (55,524) --
Repayments of vendor financing.............................. (1,438) (357)
Repayments under capital lease obligations.................. (174) (96)
-------- --------
Net cash used in financing activities....................... (2,239) (129)
-------- --------
Decrease in Cash and Cash Equivalents....................... (24,682) (22,005)
Cash and Cash Equivalents, beginning of the period.......... 54,731 81,456
-------- --------
Cash and Cash Equivalents, end of the period................ $ 30,049 $ 59,451
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid............................................... $ 173 $ 221
</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 subsidiaries as of March 31,
2000, and the results of their operations and their cash flows for the three
months ended March 31, 2000 and March 31, 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, 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 attrition, and
rapid technological change. 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 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.
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 1998 and
1999. 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's capital requirements for the continued buildout of its network and
growth of its customer base are substantial. The Company intends to fund its
operational and capital requirements in 2000 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.
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 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
6
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. LOSS PER COMMON SHARE. (CONTINUED)
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 months ending March 31, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
ENDED MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Weighted average common shares outstanding-basic/diluted.... 11,615 9,144
Stock option and warrant equivalents........................ -- --
------ -----
Weighted average common and equivalent shares
outstanding-basic/ diluted................................ 11,615 9,144
====== =====
</TABLE>
Options and warrants to purchase approximately 2,480,000 and 1,380,000
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
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 $1.4 million in stock. The
shares were issued in the second quarter. 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 $3.6 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 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. The shares were issued in the second quarter. 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 $12.6 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 March 2000, the Company acquired DLC Enterprises Inc. ("DLC"), a New
York-based telecommunications company for approximately $500,000. 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 $800,000
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 March 2000, Startec acquired Global Villager Inc. for approximately
$800,000 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 vast range of content and services
on
7
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS. (CONTINUED)
its Web site for the Greater 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 $14.1 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.
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. The Company's
summarized, unaudited consolidated pro forma results of operations for the three
months ended March 31, 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 ENDED
-------------------------------
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
Net revenues..................................... $ 82,628 $ 62,352
Loss from operations............................. (6,968) (9,706)
Net loss......................................... (12,140) (13,400)
Loss per common share............................ (1.05) (1.47)
</TABLE>
4. BUSINESS SEGMENT DATA AND SIGNIFICANT CUSTOMERS AND SUPPLIERS.
The Company has transformed its financial reporting in the first quarter of
2000 to reflect the diversification of service line segments. The Company has
classified its operations from two industry segments to three segments,
long-distance telecommunications services, global ethnic Web communities
("eStart") and VoIP services. The long distance telecommunications service
segment is evaluated by management on a regional basis by continent.
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 is included in the consolidated Federal
income tax return of the Company and its subsidiaries and is 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 the Company's other segments based on the
total head count for the Company.
8
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS SEGMENT DATA AND SIGNIFICANT CUSTOMERS AND SUPPLIERS. (CONTINUED)
The following table presents revenues and other financial information on a
regional and segmented basis as of March 31, 2000 and for the three months ended
March 31, 2000 (in thousands);
<TABLE>
<CAPTION>
LONG DISTANCE
TELECOMMUNICATIONS
------------------------------
NORTH
AMERICA EUROPE ASIA ESTART VOIP CONSOLIDATED
-------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues.............................. $ 63,977 $ 5,394 $ 1,722 -- $ 6,283 $ 77,376
Gross margin.............................. 10,874 1,648 499 -- 1,465 14,486
Selling, marketing, general and
administrative expense.................. 8,339 5,696 2,225 $ 1,785 984 19,029
EBITDA.................................... 2,535 (4,048) (1,726) (1,785) 481 (4,543)
Depreciation and amortization expense..... 2,371 9 194 -- -- 2,574
Interest expense.......................... 5,996 -- -- -- -- 5,996
Interest income........................... 901 35 14 -- -- 950
Fixed Assets, gross....................... 85,964 8,595 11,613 7,900 5,254 119,326
Total assets.............................. 241,891 15,745 13,413 26,633 11,380 309,062
</TABLE>
In March 1999, the Company operated in only one business segment--long
distance telecommunications. Operations in Europe and Asia were not material for
the three months ended March 31, 1999.
A significant portion of the Company's net revenues is derived from a
limited number of customers. For the three month periods ended March 31, 2000
and 1999, the Company's five largest carrier customers accounted for
approximately 24% and 46% 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 three month periods ended March 31, 2000
and 1999, the Company's five largest suppliers accounted for approximately 27%
and 29% of cost of services, respectively.
5. COMPREHENSIVE LOSS.
The total of net loss and all other non-owner changes in equity consists of
the following for the three months ending March 31, 2000 and 1999 (in
thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
ENDED MARCH 31,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Net loss................................................ $(12,176) $(13,827)
Other comprehensive loss:
Foreign currency translation adjustment................. (315) --
-------- --------
Comprehensive loss...................................... $(12,491) $(13,827)
======== ========
</TABLE>
9
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. EQUITY FINANCING.
In May 2000, the Company issued 1,377,800 shares of unregistered common
stock for gross proceeds of approximately $16.5 million.
10
<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. 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 factors including, but not limited to,
changes in market conditions, 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 an integrated communications provider of voice, data and Internet
services. We market our services to select ethnic residential communities in
North America, Europe and Asia and to leading international long distance
carriers. Our quarterly revenues have increased from $57.7 million for the three
months ended March 31, 1999 to $77.4 million for the three months ended
March 31, 2000. We reported a net loss for the three months ended March 31, 2000
of $12.2 million, or $1.05 per common share compared to a net loss of
$13.8 million or $1.51 per common share for the three months ended March 31,
1999. The number of our residential customers increased from approximately
131,000 customers as of March 31, 1999 to approximately 442,000 customers as of
March 31, 2000. Of these customers, we provided a bundle of telecommunications
services and internet access to approximately 67,000 North American customers
(15.2% of our total residential customers) and provided telecommunications
services to approximately 115,000 European customers (26.1% of our total
residential customers).
We are expanding our service offerings to ethnic communities by deploying
ATM/IP telephony in North America, Western Europe, Latin America and the Pacific
Rim on our network facilitating our continued expansion into ethnic emerging
economies by providing long distance telecommunications services bundled with
Internet access to our residential customers. We are seeking to create a single
ethnically focused web community under the brand name eStart. Our community
features multiple ethnic virtual communities through a single gateway with
in-language content and other value added services. Through the first quarter,
we have launched four such communities. Our goal is to create a single online
destination for ethnic communities for telecommunications services, e-commerce
transactions, professional services, news and entertainment. We also plan to
offer co-location and Web hosting facilities at our main international gateway
sites.
11
<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
ENDED MARCH 31,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Net revenues............................................. 100.0% 100.0%
Cost of services......................................... 81.3 91.2
----- -----
Gross margin........................................... 18.7 8.8
General and administrative expenses...................... 19.9 16.9
Selling and marketing expenses........................... 4.7 7.1
Depreciation and amortization............................ 3.3 2.4
----- -----
Loss from operations..................................... (9.2) (17.6)
Interest expense......................................... (7.8) (9.0)
Interest income.......................................... 1.2 2.8
Equity in loss from affiliates........................... (0.0) (0.2)
----- -----
Loss before income taxes................................. (15.8) (24.0)
Income tax provision..................................... -- --
----- -----
Net loss................................................. (15.8)% (24.0)%
===== =====
</TABLE>
THREE MONTH PERIOD ENDED MARCH 31, 2000 COMPARED TO THREE MONTH PERIOD ENDED
MARCH 31, 1999
NET REVENUES. Net revenues for the three months ended March 31, 2000
increased $19.7 million, or 34.1%, to $77.4 million from $57.7 million for the
three months ended March 31, 1999. Net revenues are consolidated to include the
effect of acquisitions for the periods presented. We completed the launch of our
Voice over Internet Protocol ("VoIP") service in the second half of the first
quarter and generated VoIP revenue of $6.3 million. Residential revenue
increased by $8.6 million or 52.4%, to $25.0 million for the three months ended
March 31, 2000, from $16.4 million for the same period in 1999. The increase in
residential revenue was due to an increase in residential customers to
approximately 442,000 at March 31, 2000 from approximately 131,000 at March 31,
1999 due to growth in new and existing ethnic markets. Deployment of additional
network infrastructure and the doubling of call center capacity attributed
greatly to overall customer growth. Carrier revenues for the three-month period
ended March 31, 2000, increased $4.7 million, or 11.4% to $46.0 million from
$41.3 million for the three months ended March 31, 1999. The increase in carrier
revenues was due to the execution of our strategy to optimize our capacity on
our facilities, which has resulted in increased sales to new and existing
carrier customers.
GROSS MARGIN. Gross margin increased $9.4 million to $14.5 million for the
three months ended March 31, 2000 from $5.1 million for the three months ended
March 31, 1999. Gross margin as a percentage of net revenues increased to 18.7%
for the three months ended March 31, 2000 from 8.8% over the same period in
1999. Gross margin was impacted positively by our completion of the launch of
the VoIP service in the second half of the first quarter and by the increase of
the proportion of residential revenue to wholesale carrier revenue in comparison
to total net revenues. In addition, the start up costs associated with our
European expansion had previously reduced our gross margin. However, as our
customer count and traffic volumes have grown in Europe, this impact has been
lessened.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three months ended March 31, 2000 increased 58.8% to $15.4 million from
$9.7 million for the three months ended March 31, 1999. As a percentage of net
revenues, general and administrative expenses for the three months ended
March 31, 2000 increased to 19.9% from 16.9% over the same period in 1999. The
increase was primarily
12
<PAGE>
due to an increase in personnel to 895 at March 31, 2000, from 564 employees at
March 31, 1999 and additional business integration costs.
We also continue to incur costs associated with our growth including
pre-operating costs related to our start up operations in Europe and Asia, the
expansion of our network infrastructure, the implementation of our ISP strategy
and the expansion of our customer care operations offshore.
SELLING AND MARKETING. Selling and marketing expenses for the three months
ended March 31, 2000 decreased to $3.6 million from approximately $4.1 million
for the three months ended March 31, 1999, respectively. As a percentage of net
revenues, selling and marketing expenses for the three months ended March 31,
2000 decreased to 4.7% from 7.1% for the three months ended March 31, 1999,
respectively. 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.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for
the three months ended March 31, 2000 increased to $2.6 million from
approximately $1.4 million for the three months ended March 31, 1999,
respectively, primarily due to increases in capital expenditures pursuant to the
Company's strategy of expanding its network infrastructure.
INTEREST EXPENSE. Interest expense for the three-month period ended
March 31, 2000, increased to $6.0 million from approximately $5.2 million for
the three months ended March 31, 1999, respectively. This was a result of higher
balances we drew on from several bank and vendor financing agreements entered
into during 1999.
INTEREST INCOME. Interest income for the three-month period ended
March 31, 2000 decreased to $1.0 million from $1.6 million for the three months
ended March 31, 1999.
NET LOSS. Net loss for the three months ended March 31, 2000 was
$12.2 million or $1.05 per common share compared to a net loss of approximately
$13.8 million or $1.51 per common share for the same period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
We reported a decrease in cash and cash equivalents of approximately
$24.7 million during the three months ended March 31, 2000. Cash used in
operations increased $5.9 million to approximately $3.2 million principally due
to cash requirements for the expansion of operations partially offset by changes
in operating accounts.
We expect to incur negative EBITDA and significant operating losses and net
losses on an annual basis for the next several years, as we incur additional
costs associated with the development and expansion of our marketing programs,
our entry into new markets, the introduction of new telecommunications and
Internet services, and as a result of interest expense associated with our
financing activities. As of March 31, 2000, we have pledged securities of
approximately $28.3 million to cover all scheduled cash interest payments on the
Senior Notes through May 2001. 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, the Company advanced an aggregate of approximately
$1.4 million to certain of its 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 $898,000 was repaid in January 2000 and the
balance was refinanced through December 31, 2000.
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In the first quarter of 2000, we acquired several VoIP termination
facilities from various vendors for approximately $2.2 million in cash and
approximately $1.4 million in stock. The shares were issued in the second
quarter. We have integrated these facilities into our VoIP network and have
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 $3.6 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, 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. The shares were issued in
the second quarter. 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
$12.6 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, the Company acquired DLC Enterprises Inc.
("DLC"), a New York-based telecommunications company for approximately $500,000.
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 $800,000 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, Startec acquired Global Villager Inc. for
approximately $800,000 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 vast range of
content and services on its Web site for the Greater 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
$14.1 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.
Our business strategy contemplates aggregate capital expenditures (including
capital expenditures, working capital and other general corporate purposes) of
approximately $40 million through December 31, 2000 to be spent on our Internet
infrastructure. A substantial portion of these expenditures are funded by
existing vendor arrangements. We are also pursuing additional sources of
financing from the capital markets to raise between $22 and $49 million. 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.
We regularly review opportunities to further 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.
14
<PAGE>
EQUITY AND DEBT FINANCING
In May 2000, we issued 1,377,800 shares of unregistered common stock for
gross proceeds of approximately $16.5 million.
In July 1999, we entered into a three year vendor financing facility for up
to $5 million with IBM Credit Corp ("IBM Facility"). The IBM Facility may be
used to finance the purchase of IBM hardware and software from IBM under a
capital lease structure. The IBM Facility bears interest at a variable rate
during the term of the lease. As of March 31, 2000, approximately $1.3 million
was outstanding.
In June 1999, we entered into a three year Loan and Security Agreement with
Congress Financial Corporation ("CFC Facility"), a subsidiary of First Union
Bank for up to $30 million. The CFC Facility, secured by trade accounts
receivable may be used to finance equipment, undersea cables and the expansion
of the Company's facilities. The CFC Facility bears interest at the prime rate
effective on the date of borrowing. Principal and interest on the CFC Facility
are repaid through collections from trade accounts receivable. There is an
unused line fee equal to 1/4% per annum calculated upon the amount the maximum
credit exceeds the average daily balance of borrowed amounts during the
immediately preceding month payable monthly in arrears. As of March 31, 2000,
approximately $7.3 million bearing interest at 7.5% was outstanding under the
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 March 31, 2000, approximately $2.2 million bearing
interest at 8.5% was outstanding under the facility.
In December 1998, we entered into a credit facility for up to $35 million
with NTFC Capital Corporation ("NTFC Facility"), a financing arm of GE Capital.
The line of credit is flexible and may be used to finance switches, associated
telecommunications equipment, undersea fiber optic cables, and the expansion of
facilities in the Company's targeted marketing areas. Each borrowing under the
NTFC Facility bears interest at a fixed rate equal to the average yield to
maturity of the five-year Treasury Note plus the Rate Adjustment (as defined in
the agreement). Individual borrowings under the NTFC Facility are amortized over
60 months from the date of advance with a final maturity of all outstanding
amounts of January 2004. As of March 31, 2000, approximately $26.0 million was
outstanding bearing variable rates of interest and $5.2 million was available
under the facility. Principal and interest payments of approximately $695,000
are due monthly in arrears.
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,
the Company 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, 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
15
<PAGE>
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 may seek to raise such additional capital from public or private equity
or debt sources. There can be no assurance 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. We
believe that our available cash, cash from operations, and funds available under
our debt facilities will be sufficient to fund our operations and capital
expenditure requirements over at least the next twelve months.
CASH FLOWS
Our cash and cash equivalents decreased to approximately $30.0 million at
March 31, 2000, from approximately $54.7 million at December 31, 1999. Net cash
used in operating activities was approximately $1.6 million for the three months
ended March 31, 2000 compared to cash provided by operations of approximately
$2.7 million for the same period in 1999. The decrease in cash from operations
was primarily the result of net loss and increase in accounts receivable, whcih
was partially offset by an increase in accounts payable and accrued expenses.
Cash used in investing activities was $20.9 million in the first three
months of 2000 compared to $24.6 million in the same period in 1999. Cash used
in investing activities in the first quarter of 2000 includes capital
expenditures of $7.7 million relating to acquired IP termination facilities. The
Company capitalized approximately $1.2 million pursuant to the Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use".
Cash used in financing activities was approximately $2.2 million for the
first three months of 2000 compared to approximately $129,000 over the same
period in 1999. Cash used in financing activities primarily relates to scheduled
repayments of the bank facility, vendor financing and capital leases partially
offset by the draws against the bank facility and vendor financing agreements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including changes in interest rates,
and to foreign currency exchange rate risks. The Company does not hold any
financial instruments for trading purposes. The Company believes that its
primary market risk exposure relates the effects that changes in interest rates
have on its investments and those portions of its outstanding indebtedness that
do not have fixed rates of interest. In this regard, changes in interest rates
affect the interest earned on the Company's investments in cash equivalents,
which consist primarily of demand deposits and money market accounts, and U.S.
Government obligations which have been purchased by the Company and pledged to
make certain interest payments on the Senior Notes. In addition, changes in
interest rates impact the fair value of the Company's long-term debt obligations
(including the Senior Notes). As of March 31, 2000, the fair value of the Senior
Notes was approximately $131 million and the fair value of the securities
pledged to make certain interest payments on the Senior Notes was approximately
$27.8 million. Changes in interest rates also affect the Company's borrowings
under its other financing facilities with NTFC, IBM, Ascend and Congress
Financial Corporation. 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 Ascend
Facility provides that each borrowing under the facility bears interest at 8.5%.
The
16
<PAGE>
CFC Facility provides that each borrowing under the CFC Facility bears interest
at the prime rate effective on the date of borrowing. The IBM facility bears
interest at a variable rate during the term of the lease.
The foreign exchange rate fluctuations relating to the Company's results of
foreign operations have not been material. The Company has not entered into
foreign currency exchange forward contracts or other derivative arrangements to
manage risks associated with foreign exchange rate fluctuations. Foreign
exchange rate fluctuations exposure may increase in the future as the size and
scope of the Company's foreign operations increases.
17
<PAGE>
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
On May 11, 2000, we announced the sale of 1,377,800 shares of common stock
in an offering exempt from the registration provisions of the Securities Act of
1933, as amended (the "1933 Act"). These shares were issued in a private
placement pursuant to Section 4(2) of the 1933 Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
27.1 Financial Data Schedule
99.1 Press Release dated May 11, 2000
b. Reports on Form 8-K:
No reports on form 8-K were filed during the period ending March 31,
2000.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized on the
15(th) day of May, 2000.
<TABLE>
<S> <C> <C>
STARTEC GLOBAL COMMUNICATIONS CORPORATION
By: /s/ PRABHAV V. MANIYAR
-----------------------------------------
CHIEF FINANCIAL
OFFICER AND DIRECTOR
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
</TABLE>
19
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<PAGE>
[LETTERHEAD]
STARTEC RAISES OVER $16 MILLION IN PRIVATE
PLACEMENT OF COMMON STOCK
BETHESDA, MD - May 11, 2000: Startec Global Communications (Nasdaq: STGC), an
integrated communications provider of voice, data and Internet services to
the emerging economies, today announced that it has sold 1,377,800 shares of
its common stock in an offering exempt from the registration provisions of
the Securities Act of 1933, as amended (the "1933 Act"). These shares may not
be offered or sold in the United States absent registration or an applicable
exemption from the registration requirements of the 1933 Act.
The gross proceeds received by Startec from the sale of these shares are
approximately $16.5 million. The proceeds from the offering will be used to
fund the growth and integration of Startec's acquisitions. Startec is making
this disclosure pursuant to Rule 135c of the 1933 Act.
About Startec:
Startec Global Communications is an integrated communications provider of
voice, data and Internet services. Startec's Internet Protocol Network, with
extensive reach into the emerging economies, includes ten international
gateway switches located worldwide, 71 IP gateways, an ATM ring and ownership
interests in 15 undersea fiber optic cables. As a facilities based carrier,
Startec can provide a full suite of services on its network, including
bundled long distance and Internet access, Voice over IP and a constellation
of ethnic virtual communities. The Company's class of common stock is traded
on The Nasdaq National Market under the symbol "STGC."
For more information on Startec, please visit its Web site, www.startec.com.
To become a member of Startec's online ethnic communities, please visit
www.estart.com.
Other than historical information contained herein, certain statements in
this release are "forward-looking statements' within the meaning of the
Private Securities Litigation Reform Act of 1994. Forward-looking statements
in this release involve a number of risks and uncertainties including, but
not limited to, changes in market conditions, government regulation,
technology, the international communications industry, and the global
economy, availability of transmission facilities, management of rapid growth,
entry into new and developing markets, competition, customer concentration
and attrition, and the expansion of the global network. These risk factors
are discussed in further detail in the Company's SEC filings.
For more information, contact:
Jennifer Boyer
Startec Global Communications Corporation
Tel. (301) 767-1430
[email protected]
