-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FZ+exHa0FGyTA0LI0jWMj1jMehWqTElxWXXCkpQZWM9hWYqpy2ArSCdIOTQ/2XZp zLsLdh/4NnMvv0twDg1IEg== 0000950148-97-002042.txt : 19970814 0000950148-97-002042.hdr.sgml : 19970814 ACCESSION NUMBER: 0000950148-97-002042 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STAR TELECOMMUNICATIONS INC CENTRAL INDEX KEY: 0001026486 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 770362681 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22581 FILM NUMBER: 97657709 BUSINESS ADDRESS: STREET 1: 223 EAST DE LA GUERRA STREET STREET 2: STE 202 CITY: SANTA BARBARA STATE: CA ZIP: 93101 BUSINESS PHONE: 8058991962 MAIL ADDRESS: STREET 1: 223 EAST DE LA GUERRA STREET CITY: SANTA BARBARA STATE: CA ZIP: 93101 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED June 30,1997 COMMISSION FILE NUMBER 000-22581 STAR TELECOMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) Delaware 77-0362681 (State or Other Jurisdiction (IRS Employer of Incorporation or Organization) Identification Number) 223 East De La Guerra, Santa Barbara, California, 93101 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (805) 899-1962 None (Former name, former address and former fiscal year if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports 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 No X ----- ----- As of June 30,1997, the number of the registrant's Common Shares of $.001 par value outstanding was 15,798,254. 2 STAR TELECOMMUNICATIONS, INC. TABLE OF CONTENTS
PAGE ---- PART I - FINANCIAL INFORMATION: Item 1: Financial Statements Consolidated Balance Sheets As Of December 31, 1996 And June 30, 1997 3 Consolidated Statements Of Income For The Three And Six Month Periods Ended June 30, 1996 And 1997 5 Consolidated Statements Of Stockholders' Equity For The Years Ended December 31, 1994, 1995 And 1996 And For The Six Month Period Ended June 30, 1997 6 Consolidated Statements Of Cash Flows For The Six Month Periods Ended June 30, 1996 And 1997 7 Notes To Consolidated Financial Statements 9 Item 2: Management's Discussion And Analysis Of Financial Condition And Results Of Operations 11 PART II - OTHER INFORMATION 15
2 3 ITEM 1. FINANCIAL STATEMENTS STAR TELECOMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS ASSETS (In thousands)
December 31, June 30, ------------ -------- 1996 1997 -------- -------- (Unaudited) Current Assets: Cash and cash equivalents $ 1,719 $ 3,985 Marketable securities 1,630 16,970 Accounts receivable, net of allowance of $5,733 at December 31, 1996 and $6,318 at June 30, 1997 22,888 34,194 Receivable from related parties 115 -- Prepaid expenses and other assets 1,729 6,104 Prepaid taxes 677 1,228 -------- -------- Total current assets 28,758 62,481 -------- -------- Property and Equipment: Operating equipment 8,653 17,672 Leasehold improvements 4,214 4,346 Computer equipment 1,604 1,806 Furniture and fixtures 435 762 -------- -------- 14,906 24,586 Less-accumulated depreciation and amortization (1,201) (2,820) -------- -------- Total property and equipment, net 13,705 21,766 -------- -------- Investments 153 153 Deposits 5,630 3,826 Other 428 -- -------- -------- 6,211 3,979 -------- -------- ======== Total assets $ 48,674 $ 88,226 ======== ========
See accompanying notes to the consolidated financial statements. 3 4 STAR TELECOMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (In thousands, except for share data)
December 31, June 30, ------------ -------- 1996 1997 -------- -------- (Unaudited) Current Liabilities: Revolving line of credit $ 7,814 $ - Revolving lines of credit with stockholder 26 103 Current portion of long-term debt 267 807 Current portion of capital lease obligations 827 1,186 Accounts payable 6,260 5,580 Accrued network costs 19,494 28,766 Accrued expenses 1,621 2,623 -------- -------- Total current liabilities 36,309 39,065 -------- -------- Long-Term Liabilities: Long-term debt, net of current portion 466 3,445 Capital lease obligations, net of current portion 4,808 5,180 Deferred compensation 116 43 Deposits 88 75 -------- -------- Total long-term liabilities 5,478 8,743 -------- -------- Stockholders' Equity: Preferred Stock $.001 par value: Authorized - 1,367,050 shares Issued and outstanding - 1,367,047 shares at December 31, 1996 and 1 -- none at June 30, 1997 Common Stock $.001 par value: Authorized - 30,000,000 shares Issued and outstanding - 10,914,396 shares at December 31, 1996 and 15,798,254 at June 30, 1997 11 16 Additional paid-in capital 13,637 44,614 Deferred compensation (118) (78) Retained deficit (6,644) (4,134) -------- -------- Stockholders' equity 6,887 40,418 -------- -------- Total liabilities and stockholders' equity $ 48,674 $ 88,226 ======== ========
See accompanying notes to the consolidated financial statements. 4 5 STAR TELECOMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except for share data)
Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 1996 1997 1996 1997 --------- --------- --------- --------- (Unaudited) (Unaudited) Revenues $ 42,852 $ 82,707 $ 78,519 $ 153,715 Cost of services 38,754 73,483 71,040 137,221 --------- --------- --------- --------- Gross profit 4,098 9,224 7,479 16,494 Operating expenses: Selling, general and administrative expenses 2,573 6,034 4,376 10,564 Depreciation and amortization 156 897 264 1,619 --------- --------- --------- --------- 2,729 6,931 4,640 12,183 --------- --------- --------- --------- Income from operations 1,369 2,293 2,839 4,311 --------- --------- --------- --------- Other income (expense): Interest income 28 53 28 74 Interest expense (109) (410) (187) (779) Other (100) -- (100) 48 --------- --------- --------- --------- (181) (357) (259) (657) --------- --------- --------- --------- Income before provision for income taxes 1,188 1,936 2,580 3,654 --------- --------- --------- --------- Provision for income taxes 485 858 1,029 1,144 --------- --------- --------- --------- Net income $ 703 $ 1,078 $ 1,551 $ 2,510 ========= ========= ========= ========= Net income per share (Note 3) $ 0.06 $ 0.08 $ 0.14 $ 0.19 ========= ========= ========= ========= Weighted average number of common shares outstanding (Note 3) 11,497 13,617 11,204 13,202 ========= ========= ========= =========
See accompanying notes to the consolidated financial statements. 5 6 STAR TELECOMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1997 (IN THOUSANDS, EXCEPT FOR SHARE DATA)
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED RETAINED ------------------ ------------------ PAID-IN COMPEN- EARNINGS SHARES AMOUNT SHARES AMOUNT CAPITAL SATION (DEFICIT) TOTAL ---------- ------ ---------- ------ -------- ----- --------- -------- Balance, December 31, 1993 - $ - - $ - $ - $ - $ - $ - Issuance of common stock - - 8,100,810 8 2 - - 10 Net loss - - - - - - (122) (122) ---------- --- ---------- --- -------- ----- ------- -------- Balance, December 31, 1994 - - 8,100,810 8 2 - (122) (112) Issuance of common stock - - 899,190 1 102 - - 103 Conversion of debt to equity - - - - 990 - - 990 Net loss - - - - - - (568) (568) --- ---------- --- -------- ----- ------- -------- Balance, December 31, 1995 - - 9,000,000 9 1,094 - (690) 413 Effect of termination of the S-Corporation election - - - - (690) - 690 - Compensation expense relating to stock options - - - - 168 (118) - 50 Issuance of common stock - - 1,914,396 2 5,566 - - 5,568 Issuance of preferred stock 1,367,047 1 - - 7,499 - - 7,500 Net loss - - - - - - (6,644) (6,644) ---------- --- ---------- --- -------- ----- ------- -------- Balance, December 31, 1996 1,367,047 1 10,914,396 11 13,637 (118) (6,644) 6,887 Conversion of redeemable preferred stock to common stock (1,367,047) (1) 911,358 1 - - - - Initial public offering of common stock - - 3,950,000 4 35,546 - - 35,550 Costs associated with initial public offering of common stock - - - - (4,636) - - (4,636) Exercise of stock options - - 22,500 - 67 - - 67 Compensation expense relating to stock options - - - - - 40 - 40 Net income - - - - - - 2,510 2,510 ---------- --- ---------- --- -------- ----- ------- -------- Balance, June 30, 1997 (unaudited) - - 15,798,254 $16 $ 44,614 $ (78) $(4,134) $ 40,418 ========== === ========== === ======== ===== ======= ========
See accompanying notes to the consolidated financial statements. 6 7 STAR TELECOMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Six Months Ended June 30, ---------------------- 1996 1997 ------- -------- (Unaudited) Cash Flows From Operating Activities: Net income $ 1,551 $ 2,510 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 264 1,619 Compensation expense relating to stock options - 40 Provision for doubtful accounts 1,054 2,737 Deferred income taxes (500) - Deferred compensation 35 (73) Decrease (increase) in assets: Accounts receivable (6,785) (14,043) Receivable from related parties (87) 115 Prepaid expenses and other assets (480) (4,375) Prepaid taxes - (551) Deposits (644) 1,804 Increase (decrease) in liabilities: Accounts payable 8,051 (680) Accrued network costs 2,554 9,272 Accrued expenses 380 1,002 Taxes payable 319 - ------- -------- Net cash provided by (used in) operating activities 5,712 (623) ------- -------- Cash Flows From Investing Activities: Capital expenditures (2,316) (3,627) Purchases of investments, net (153) - Marketable securities, net - (15,340) Decrease in other long-term assets - 428 Increase (decrease) in other long-term liabilities 76 (13) ------- -------- Net cash used in investing activities: $(2,393) $(18,552) ------- --------
See accompanying notes to the consolidated financial statements. 7 8 STAR TELECOMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Six Months Ended June 30, ---------------------- 1996 1997 ------- -------- (Unaudited) Cash Flows From Financing Activities: Borrowings under lines of credit $ 2,130 $ 33,946 Repayments under lines of credit (330) (41,760) Borrowings under lines of credit with stockholder 17 500 Repayments under lines of credit with stockholder (926) (423) Repayments under long-term debt - (332) Payments under capital lease obligation (99) (1,471) Issuance of common stock 1,500 30,981 ------- -------- Net cash provided by financing activities 2,292 21,441 ------- -------- Increase in cash and cash equivalents 5,611 2,266 Cash and cash equivalents, beginning of period 164 1,719 ------- -------- Cash and cash equivalents, end of period $ 5,775 $ 3,985 ======= ========
See accompanying notes to the consolidated financial statements. 8 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) GENERAL The financial statements included herein are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities Exchange Commission ("SEC") regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments (of a normal and recurring nature) which are necessary to present fairly the financial position, results of operations and cash flows for the interim periods. These financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 1996, and the unaudited financial statements for the quarter ended March 31, 1997, each as set forth in the Registration Statement on Form S-1 of STAR Telecommunications, Inc. ("STAR" or the "Company") Registration No. 333-21325, which was declared effective by the SEC on June 12, 1997. The results for the three and six month periods ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. (2) BUSINESS AND PURPOSE Star is an international long distance service provider offering low cost switched voice services on a wholesale basis primarily to U. S.-based long distance carriers. Star provides international long distance service to over 275 foreign countries through a flexible network of resale arrangements with long distance providers, various foreign termination relationships, international gateway switches and leased and owned transmission facilities. (3) NET INCOME PER COMMON SHARE Net income per common share for the three and six month periods ended June 30, 1996 and 1997 is based on the weighted average number of common shares outstanding giving effect of the conversion of the preferred stock (Note 4). Per share information was computed pursuant to the rules of the SEC, which require that common shares issued by the Company during the twelve months immediately preceding the Company's initial public offering plus the number of shares issuable pursuant to the grant of options issued during the same period, be included in the calculation of the shares outstanding using the treasury stock method from the beginning of all periods presented. The following schedule summarizes the information used to compute weighted average number of common shares outstanding at June 30, 1996 and 1997 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 1996 1997 1996 1997 ------ ------ ------ ------ Weighted number of common shares outstanding 10,463 11,748 10,170 11,334 Effect of stock options 956 958 956 957 Conversion of preferred stock 78 911 78 911 ------ ------ ------ ------ Weighted average number of common shares used to compute net income per share 11,497 13,617 11,204 13,202 ====== ====== ====== ======
9 10 (4) SIGNIFICANT EVENTS In June 1997, the Company completed an initial public offering of 4,600,000 shares of common stock of which 3,950,000 were sold by the Company and 650,000 shares were sold by certain selling shareholders. The net proceeds to the Company (after deducting underwriting discounts and offering expenses) from the sale of the shares was approximately $30.9 million. The Company used $14.2 million of the net proceeds to repay indebtedness. The Company intends to use the remaining proceeds to finance the expansion of its international network facilities, to invest in direct termination arrangements, strategic alliances or acquisitions and for working capital and general corporate purposes. In connection with the initial public offering, all outstanding preferred shares were converted to common shares at a rate of three preferred shares to two common shares. (5) COMMITMENTS The Company is obligated under various service agreements with long distance carriers to pay minimum usage charges of approximately $22,919,000 for the six month period between July 1, 1997 and December 31, 1997, and $26,424,000 and $5,006,000 for the twelve months ending December 31, 1998 and 1999, respectively. The Company anticipates exceeding the minimum usage volume with these vendors. (6) STATEMENTS OF CASH FLOWS During the six month periods ended June 30, 1996 and 1997, cash paid for interest was $162,000 and $818,000, respectively. For the same periods, cash paid for income taxes amounted to $1,210,000 and $1,695,000, respectively. Non-cash investing and financing activities are as follows:
SIX MONTHS ENDED JUNE 30, --------------------------- 1996 1997 ---------- ---------- Equipment purchased through notes and capital leases $ 779,000 $6,053,000 ========== ==========
(7) SUBSEQUENT EVENTS On July 10, 1997 the Company began operating a Nortel DMS 100E international gateway switch in London, which will enable calls originated in the UK to be terminated on the Company's network. The Company expects that the switch will begin contributing to revenues in the third quarter of 1997. On August 7, 1997, the Company entered into a commitment with Sanwa Bank, California for a $25 million, 2 year revolving line of credit. The facility which has certain financial and non-financial covenants, will be secured by substantially all of the assets of the Company and will be used to support letters of credit and for working capital and general corporate purposes. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements other than historical information or statements of current condition. Some forward looking statements may be identified by use of such terms as "believes", "anticipates", "intends", or "expects". These forward-looking statements relate to the plans, objectives and expectations of the Company for future operations. In light of the risks and uncertainties inherent in all such projected operation matters, the inclusion of forward-looking statements in this report should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved or that any of the Company's operating expectations will be realized. The Company's revenues and results of operations are difficult to forecast and could differ materially from those projected in the forward-looking statements contained in this report as a result of numerous factors including among others, the following: (i) changes in international settlement rates; (ii) foreign currency fluctuations; (iii) termination of certain service agreements or inablility to enter into additional service agreements; (iv) inaccuracies in the Company's forecast of traffic growth; (v) changes in or developments under domestic or foreign laws, regulations, licensing requirements or telecommunications standards; (vi) foreign political or economic instability; (vii) changes in the availability of transmission facilities; (viii) loss of the services of key officers; (ix) loss of a customer which provides significant revenues to the Company; (x) highly competitive market conditions in the industry, (xi) concentration of credit risk. The foregoing review of the important factors should not be considered as exhaustive; the Company undertakes no obligation to release publicly the results of any future revisions it may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The following table sets forth income statement data as a percentage of revenues for the periods indicated.
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------------- ------------------- 1996 1997 1996 1997 ------ ------ ------ ------ Revenues 100.0% 100.0% 100.0% 100.0% Cost of services 90.4 88.8 90.5 89.3 ------ ------ ------ ------ Gross profit 9.6 11.2 9.5 10.7 Operating expenses: Selling, general & administrative 6.0 7.3 5.6 6.9 Depreciation & amortization 0.4 1.1 0.3 1.1 ------ ------ ------ ------ 6.4 8.4 5.9 8.0 ------ ------ ------ ------ Income from operations 3.2 2.8 3.6 2.7 ------ ------ ------ ------ Other income (expense): Interest income .00 0.0 0.0 0.1 Interest expense (0.3) (0.5) (0.2) (0.5) Other (0.2) 0.0 (0.1) 0.0 ------ ------ ------ ------ (0.5) (0.5) (0.3) (0.4) Income before provision for income taxes 2.7 2.3 3.3 2.3 ------ ------ ------ ------ Provision for income taxes 1.1 1.0 1.3 0.7 ====== ====== ====== ====== Net income 1.6% 1.3% 2.0% 1.6% ====== ====== ====== ======
11 12 Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996. Revenues: Revenues increased 93.0% to $82.7 million in the second quarter of 1997 from $42.9 million in the second quarter of 1996, with minutes of use increasing 81.3% to 188.7 million in the second quarter of 1997, as compared to 104.1 million minutes of use in the comparable quarter of the year prior. The increase in revenue resulted from an increase in new customers, increased usage by existing customers and a higher average customer rate per minute. The average customer rate per minute rose due to price increases in selected countries as well as terminating country mix of traffic patterns. Gross Margin: Gross profit increased to $9.2 million in the second quarter of 1997 from $4.1 million in the second quarter of 1996. Gross margin improved to 11.2% from 9.6% reflecting the negotiation of lower rates on routes with significant traffic as well as lower costs on direct termination arrangements in selected countries. Selling, General and Administrative: Selling, general and administrative expenses increased 134.5% to $6.0 million during the second quarter of 1997 from $2.6 million in the comparable quarter one year earlier, and increased as a percentage of revenue to 7.3% from 6.0% in the prior period. Selling, general and administrative expenses increased between periods as the Company continues to increase its employee base and incurs payroll, employee benefits, commissions and related expenses. Operating expenses associated with expanding transmission and switch facilities also increased in support of the Company's growing telecommunications network. Bad debt expense increased as a percentage of revenues to 2.0% from 1.5%. Depreciation: Depreciation increased to $897,000 in the second quarter of 1997 from $156,000 in the second quarter of 1996. Depreciation increased as a result of the Company's continued expansion of its transmission network, leasehold improvements associated with the Los Angeles, New York and London switching facilities and switch site buildout. Other Income (Expense): Other expense, net, increased to $357,000 in the second quarter of 1997 from $181,000 in the first quarter of 1996. This increase is primarily due to $410,000 in interest expense incurred under the bank line of credit, and various debt obligations. This increase was offset by $53,000 in interest income. Provision for Income Taxes: The Company's provision for income taxes increased to $858,000 in the second quarter of 1997 from $485,000 in the second quarter of 1996 reflecting the growth in pre-tax earnings. Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996. Revenues: Revenues increased 95.8% to $153.7 million in the first half of 1997 from $78.5 million in the first half of 1996. Minutes of use increased to 361.2 million in the first half of 1997 from 189.5 million in the first half of 1996. The increase was primarily the result of both increased sales to existing customers and to an increase in the number of wholesale carrier customers. Gross Margin: Gross profit increased to $16.5 million in the first half of 1997 from $7.5 million in the first half of 1996. Gross margin improved to 10.7% from 9.5% , reflecting the negotiation of lower rates on routes with significant traffic and the benefit of the Company's lower cost direct termination arrangements. Selling, General and Administrative: Selling, general and administrative expenses increased 141.4% to $10.6 million during the first half of 1997 from $4.4 million in the comparable period one year earlier, and increased as a percentage of revenue to 6.9% from 5.6% in the prior period. Selling, general and administrative expenses increased between periods as the Company continues to increase its employee base and incurs payroll, employee benefits, commissions and related expenses. Operating expenses associated 12 13 with expanding transmission and switch facilities also increased in support of the Company's growing telecommunications network. Bad debt expense increased as a percentage of revenues to 1.8% from 1.3%. Depreciation: Depreciation increased to $1.6 million in the first half of 1997 from $264,000 for the first half of 1996. Depreciation increased as a result of the Company's continued expansion of its transmission network and the switching facilities located in Los Angeles, New York and London. Other Income (Expense): Other expense, net, increased to $657,000 in the first half of 1997 from $259,000 in the first half of 1996. This increase is primarily due to $779,000 in interest expense incurred in 1997 under the bank line of credit, and various debt obligations. This increase was offset by $74,000 in interest income and $48,000 gain on the sale of short term investments and cash equivalents from funds raised in private placements of equity securities during 1996. Provision for Income Taxes: The Company's provision for income taxes increased to $1.1 million in the first half of 1997 from $1.0 million in the first half of 1996. The effective tax rate decreased to 31.3% in the first half of 1997 from 39.9% in the year prior reflecting the write-off of a customer accounts receivable. The Company fully reserved the net deferred tax asset of $2.5 million at June 30, 1997 as the Company has not yet had a full year of profitable operations. 13 14 LIQUIDITY AND CAPITAL RESOURCES On June 12, 1997, the Company completed an initial public offering of 4,600,000 of common stock of which 3,950,000 were sold by the Company and 650,000 shares were sold by certain selling shareholders. The net proceeds to the Company were approximately $30.9 million. Prior to the initial public offering, the Company funded its business primarily through funds advanced from an officer of the Company, bank debt and the private sale of equity. The Company generated $5.7 million in net cash from operating activities during the first six months of 1996 as a result of net income plus depreciation and amortization and the provision for doubtful accounts bolstered by increases in both accounts payable and accrued network costs. Offsetting cash generated by operations were increases in accounts receivable, prepaid expenses and other assets, deposits, and deferred income taxes. The Company's investing activities used cash of approximately $2.4 million during the first six months of 1996, primarily resulting from capital expenditures. The Company's financing activities provided cash of approximately $2.3 million primarily from borrowings under various lines of credit and the sale of common stock, offset by repayment under various lines of credit. The Company used net cash from operating activities of approximately $623,000 in the first six months of 1997, primarily as a result of an increase in accounts receivable, prepaid expenses and other assets and a decrease in accounts payable. The uses of cash from operating activities were offset by net income plus depreciation and amortization, and the provision for doubtful accounts, an increase in accrued network costs and accrued expenses and a decrease in deposits. The Company's investing activities used cash of approximately $18.6 million during the first six months of 1997, primarily resulting from capital expenditures and investing the net proceeds of the initial public offering in marketable securities. The Company's financing activities provided net cash of approximately $21.4 million which includes the net proceeds from the initial public offering of common stock of approximately $30.9 million, and borrowings under various lines of credit offset by repayments under various lines of credit. As of December 31, 1996 and June 30, 1997 the Company had cash and cash equivalents of approximately $1.7 million and $4.0 million, respectively, and a working capital deficit of approximately $7.6 million as of December 31, 1996 and working capital surplus of $23.4 million as of June 30, 1997. As of June 30, 1997 the Company had approximately $6.4 million outstanding for capital leases relating primarily to the Company's switching equipment. The Company used approximately $14.2 million of the net proceeds from the initial public offering to repay indebtedness. The Company anticipates making capital expenditures of approximately $40.0 million over the next 12 months to expand the Company's global network. The Company believes that the remaining proceeds from the initial public offering, cash generated from operations as well as funding under its bank line of credit to meet its capital requirements and, as appropriate, capital lease financing will be sufficient to satisfy the Company's liquidity needs over the next 12 months. 14 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On May 14, 1997, the Company was granted summary judgment on Communication Telesystems International's ("CTS") First Amended Complaint claim of $6.0 million for damages for an alleged breach of contract. As a result, on June 16, 1997 the Company has dismissed its related claim seeking $2.0 million in damages for an alleged breach of two contracts by CTS. ITEM 2. CHANGES IN SECURITIES Securities sold during the period which were not registered under the Securities Act include sales of 10,000 common shares at $3.00 per share on May 8, 1997, and 10,000 common shares at $3.00 per share on June 9, 1997 to two former members of the board of directors in conjunction with the exercise of options granted to them as board members. 15 16 SIGNATURES Pursuant to the requirements 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. STAR TELECOMMUNICATIONS, INC. Dated: August 13, 1997 By: /s/ Christopher E. Edgecomb ------------------------------------------ Christopher E. Edgecomb Chief Executive Officer and Director (Duly Authorized Officer) By: /s/ Kelly D. Enos ------------------------------------------ Kelly D. Enos Chief Financial Officer (Principal Financial & Accounting Officer) 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATEMENTS OF INCOME, CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, AND CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SCHEDULES 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 3,985 16,970 40,512 (6,318) 0 62,481 24,586 (2,820) 88,226 39,065 10,618 0 0 16 40,402 88,226 153,715 153,715 137,221 12,183 48 0 779 3,654 1,144 0 0 0 0 2,510 .19 .19
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