-----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, UNlT/MxzrORds9hVMJYYPxufdw43Cdz02GXaPF4uzhnbS8vsNeNv81CttqbHJMBv p/NIXl9Zqrq9MUDXf2lZYA== 0000950148-98-001312.txt : 19980518 0000950148-98-001312.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950148-98-001312 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD 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: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22581 FILM NUMBER: 98622004 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 MARCH 31, 1998 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 [X] No [ ] As of March 31, 1998, the number of the registrant's Common Shares of $.001 par value outstanding was 35,798,210. 2 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES TABLE OF CONTENTS
PAGE ---- PART I - FINANCIAL INFORMATION: Item 1: Financial Statements Condensed Consolidated Balance Sheets As Of December 31, 1997 And March 31, 1998 3 Condensed Consolidated Statements Of Income For The Three Month Periods Ended March 31, 1997 And 1998 4 Condensed Consolidated Statements Of Cash Flows For The Three Month Periods Ended March 31, 1997 And 1998 5 Notes To Condensed Consolidated Financial Statements 7 Item 2: Management's Discussion And Analysis Of Financial Condition And Results Of Operations 11 PART II - OTHER INFORMATION 14
2 3 ITEM 1. FINANCIAL STATEMENTS STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)
December 31, March 31, 1997 1998 --------- --------- (Unaudited) Current Assets: Cash and cash equivalents $ 1,903 $ 5,285 Short-term investments 18,631 2,978 Accounts receivable, net 46,675 51,024 Receivable from related parties -- 303 Other current assets 10,695 16,057 --------- --------- Total current assets 77,904 75,647 --------- --------- Property and equipment, net 35,959 67,814 Other assets 6,453 851 --------- --------- Total assets $ 120,316 $ 144,312 ========= ========= Current Liabilities: Revolving lines of credit with stockholder $ 138 $ 82 Current portion of long-term obligations 2,975 6,314 Accounts payable and other accrued expenses 22,344 23,242 Accrued network cost 38,403 37,667 --------- --------- Total current liabilities 63,860 67,305 --------- --------- Long-Term Liabilities: Long-term obligations, net of current portion 12,391 25,902 Other long-term liabilities 863 378 --------- --------- Total long-term liabilities 13,254 26,280 --------- --------- Stockholders' Equity: Common Stock $.001 par value: Authorized - 50,000,000 shares 35 36 Additional paid-in capital 45,697 51,308 Deferred compensation (30) (10) Retained deficit (2,500) (607) --------- --------- Total stockholders' equity 43,202 50,727 --------- --------- Total liabilities and stockholders' equity $ 120,316 $ 144,312 ========= =========
See accompanying notes to the condensed consolidated financial statements. 3 4 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
Three Months Ended March 31, -------------------------- 1997 1998 --------- --------- (Unaudited) Revenue $ 84,827 $ 129,269 Cost of services 73,726 111,593 --------- --------- Gross profit 11,101 17,676 Operating expenses Selling, general and administrative expenses 7,720 11,561 Depreciation and amortization 820 1,879 Merger expense -- 314 --------- --------- 8,540 13,754 --------- --------- Income from operations 2,561 3,922 --------- --------- Other income (expense): Interest income 21 283 Interest expense (398) (618) Other 51 (160) --------- --------- (326) (495) --------- --------- Income before provision for income taxes 2,235 3,427 Provision for income taxes 341 1,534 --------- --------- Net income $ 1,894 $ 1,893 ========= ========= Income before provision for income taxes 2,235 Pro forma income taxes 888 --------- Pro forma net income $ 1,347 ========= Basic income per share $ 0.05 ========= Diluted income per share $ 0.05 ========= Pro forma basic income per share $ 0.05 ========= Pro forma diluted income per share $ 0.05 =========
See accompanying notes to the condensed consolidated financial statements. 4 5 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Three Months Ended March 31, ------------------------ 1997 1998 -------- -------- (Unaudited) Cash Flows From Operating Activities: Net income $ 1,894 $ 1,893 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 820 1,879 Loss on disposal of equipment 42 -- Compensation expense relating to stock options 20 20 Provision for doubtful accounts 1,128 1,017 Deferred income taxes -- (1,411) Deferred compensation (81) 50 Decrease (increase) in assets: Accounts receivable (6,315) (5,366) Receivable from related parties (14) (303) Other assets (207) 6,294 Increase (decrease) in liabilities: Accounts payable and accrued expenses 9,169 898 Accrued network cost (3,599) (736) Other liabilities 287 (535) -------- -------- Net cash provided by operating activities 3,144 3,700 -------- -------- Cash Flows From Investing Activities: Capital expenditures (2,324) (15,636) Investments (93) -- Short-term investments, net 1,656 15,653 Proceeds from the sale of assets 18 -- -------- -------- Net cash provided (used) by investing activities $ (743) $ 17 ======== ========
See accompanying notes to the condensed consolidated financial statements. 5 6 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Three Months Ended March 31, ---------------------- 1997 1998 ------- ------- (Unaudited) Cash Flows From Financing Activities: Repayments under lines of credit (2,472) -- Repayments under lines of credit with stockholder (26) (56) Payments under long-term debt (101) (187) Payments under capital lease obligations (67) (1,061) Other financing activities (467) -- Stock options exercised -- 969 ------- ------- Net cash used in financing activities (3,133) (335) ------- ------- Increase (decrease) in cash and cash equivalents (732) 3,382 Cash and cash equivalents, beginning of period 1,844 1,903 ------- ------- Cash and cash equivalents, end of period $ 1,112 $ 5,285 ======= =======
See accompanying notes to the condensed consolidated financial statements. 6 7 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (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 management's opinion, the financial statements reflect all adjustments (of a normal and recurring nature) which are necessary to present fairly the financial position, results of operations, stockholders' equity 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, 1997, as set forth in the Registration Statement on Form S-1 of STAR Telecommunications, Inc. ("STAR" or the "Company") Registration No. 333-48559, as amended, which was filed with the SEC on March 24, 1998. The results for the three month period ended March 31, 1998, are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. In March 1998, the company consummated a merger with T-One Corp. ("T-One"). The merger constituted a tax-free reorganization and has been accounted for as pooling of interests under Accounting Principles Board Opinion No. 16. Accordingly, all prior period consolidated financial statements presented have been restated to include the results of operations, financial position, and cash flows of T-One. On March 31, 1998, the Company effected a 2.05 for 1 stock split in the nature of a stock dividend with payment to the holders of the shares of common stock outstanding on February 20, 1998. The stock split has been retroactively reflected in the condensed consolidated financial statements for all periods presented. (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. In addition, STAR provides domestic commercial long-distance services through its subsidiary, LD Services, Inc. ("LDS"). (3) NET INCOME PER COMMON SHARE In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". The statement replaces primary EPS with basic EPS, which is computed by dividing reported earnings available to common stockholders by weighted average shares outstanding. The provision requires the calculation of diluted EPS. The Company adopted this statement in 1997. 7 8 The following schedule summarizes the information used to compute net income per common share for the three months ended March 31, 1997 and 1998 (in thousands):
THREE MONTHS ENDED MARCH 31, ------------------- 1997 1998 ------ ------ Weighted number of common shares used to compute basic earnings per share 24,577 35,629 Weighted common share equivalents 3,917 2,085 ------ ------ Weighted number of common share and share equivalents used to compute diluted earnings per share 28,494 37,714 ====== ======
(4) PRO FORMA INCOME TAXES The results of operations and provision for income taxes for the three months ended March 31, 1997 reflects LDS' status as an S-Corporation prior to the merger with STAR. The pro-forma income taxes, pro-forma net income, and pro-forma earnings per share information reflected in the condensed consolidated statements of income assumes that both STAR and LDS were taxed as C-Corporations for all periods presented. (5) COMPREHENSIVE INCOME On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". For year end financial statements SFAS 130 requires that comprehensive income, which is the total of net income and all other non-owner changes in equity, be displayed in a financial statement with the same prominence as other consolidated financial statements. In addition, the standard encourages companies to display the components of other comprehensive income below the total for net income. During the quarters ended March 31, 1997 and 1998, comprehensive income equaled net income. (6) SIGNIFICANT EVENTS In March 1998, the Company acquired T-One, an international wholesale long distance telecommunications provider based in New York, in a transaction that was accounted for as a pooling of interests. The Company issued 1,353,000 shares of its common stock to T-One's shareholders in exchange for all outstanding T-One shares. The accompanying consolidated financial statements are restated to include the financial position and result of operations of T-One for all periods presented. Net sales and historical net income (loss) of the combining companies for the three months ended March 31, 1997 and 1998, are as follows (in thousands): 8 9
THREE MONTHS ENDED MARCH 31, --------------------------- 1997 1998 --------- --------- Net Sales: STAR $ 79,382 $ 117,899 T-One 5,528 11,788 Elimination (83) (418) Total $ 84,827 $ 129,269 Net Income (Loss): STAR $ 1,907 $ 1,981 T-One (13) (88) Total $ 1,894 $ 1,893 --------- ---------
In November 1997, the Company signed a merger agreement with United Digital Network, Inc. ("UDN"). The company intends to account for the transaction as a pooling of interests. On February 3, 1998, the Company announced a 2.05 for 1 stock split in the nature of a stock dividend. The Company effected the stock split on March 31, 1998, which has been retroactively reflected in the accompanying consolidated financial statements for all periods presented. (7) STATEMENTS OF CASH FLOWS During the three month periods ended March 31, 1997 and 1998, cash paid for interest was $357,000 and $585,000, respectively. For the same periods, cash paid for income taxes amounted to $212,000 and $1,575,000, respectively. Non-cash investing and financing activities are as follows (in thousands):
THREE MONTHS ENDED MARCH 31, ---------------------- 1997 1998 ------- ------- Equipment purchased through notes and capital leases $ 913 $18,098 Tax benefits related to stock options -- 4,643 ------- ------- $ 913 $22,741 ======= =======
(8) SUBSEQUENT EVENTS On May 4, 1998, the Company completed a public offering of 6,000,000 shares of Common Stock of which 5,685,000 shares were sold by the Company and 315,000 shares were sold by a selling stockholder. The net proceeds to the Company (after deducting underwriting discounts and offering expenses) from the sale of such shares of Common Stock were approximately $145 million. 9 10 (9) SEGMENT INFORMATION At March 31, 1998, Star has two business segments, wholesale long distance and commercial long distance telecommunications. The wholesale segment provides long distance services to U.S. and foreign based telecommunications companies and the commercial segment provides commercial long distance services to small retailers throughout the United States. Both segments are accounted for in accordance with Generally Accepted Accounting Principles or "GAAP". Reportable segment information for the periods ended March 31, 1997 and 1998 are as follows:
MARCH 31, 1997 WHOLESALE COMMERCIAL TOTAL Revenue from external customers $ 76,454 $ 8,373 $ 84,827 Interest income 21 -- 21 Interest expense 397 1 398 Depreciation and amortization 814 6 820 Segment profit 1,419 475 1,894 Segment assets 63,546 5,181 68,727
MARCH 31, 1998 WHOLESALE COMMERCIAL TOTAL Revenue from external customers $ 121,193 $ 8,076 $ 129,269 Interest income 281 2 283 Interest expense 618 -- 618 Depreciation and amortization 1,876 3 1,879 Segment profit (loss) 1,978 (85) 1,893 Segment assets 137,678 6,634 144,312
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 customer rates per minute; (ii) foreign currency fluctuations; (iii) termination of certain service agreements or inability 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; and (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 ENDED MARCH 31, ---------------------- 1997 1998 ------ ------ Revenues 100.0% 100.0% Cost of services 86.9 86.3 ------ ------ Gross profit 13.1 13.7 Operating expenses: Selling, general and administrative 9.1 8.9 Depreciation and amortization 1.0 1.5 Merger Expense -- 0.2 ------ ------ 10.1 10.6 ------ ------ Income from operations 3.0 3.0 Other income (expense): Interest income -- 0.2 Interest expense (0.5) (0.5) Other 0.1 (0.1) ------ ------ Income before provision for income taxes 2.6 2.7 Provision for income taxes 0.4 1.2 ------ ------ Net income 2.2% 1.5% ====== ======
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997. Revenues: Revenues increased 52.4% to $129.3 million in the first quarter of 1998 from $84.8 million in the first quarter of 1997. Wholesale revenues increased to $121.2 million (including $11.4 million of revenue from T-One) from $76.5 million (including $5.4 million of revenue from T-One). Wholesale 11 12 minutes of use increased 73.2% to 324.4 million in the first quarter of 1998, as compared to 187.3 million minutes of use in the comparable quarter of the year prior. This increase reflects growth in the number of wholesale customers from 100 in March of 1997 to 131 at the end of March 1998, as well as an increase in usage by existing customers. The average rate per minute of use declined to $0.37 for the current quarter as compared to $0.40 for the quarter ended March 31, 1997 reflecting the change in country mix to include a larger proportion of lower rate per minute countries as well as lower prices on competitive routes. Commercial revenues decreased to $8.1 million in the first quarter of 1998 from $8.4 million in the first quarter of 1997 reflecting the termination of the LDS customer base in California due to the 1997 settlements entered into by LDS with each of the California PUC and the District Attorney of Monterey, California. Gross Profit: On a consolidated basis gross profit increased 59.2% to $17.7 million in the first quarter of 1998 from $11.1 million in the first quarter of 1997. Wholesale gross profit increased to $14.3 million in 1998 from $7.6 million for 1997 and wholesale gross margin increased to 11.8% from 9.9%, respectively. Wholesale gross profit expanded during the first quarter of 1998 as traffic was increasingly routed over the Company's proprietary international network. Without the inclusion of T-One in the Company's wholesale results the gross margin would have been 12.5% and 10.2% for the quarters ending March 31, 1998 and 1997, respectively. Selling, General and Administrative: For the first quarter of 1998, selling, general and administrative expenses increased 49.8% to $11.6 million, from $7.7 million in the first quarter of 1997. Wholesale selling, general and administrative expenses increased to $8.1 million in the first quarter of 1998 from $4.7 million in the first quarter of 1997, and increased as a percentage of wholesale revenues to 6.7% from 6.1% over the comparable periods. Total expenses increased year to year in absolute dollars as STAR expanded its proprietary international network and employee base. Commercial selling, general and administrative expenses increased to $3.5 million in the first quarter of 1998 from $3.0 million in the first quarter of 1997 and increased as a percentage of commercial revenues to 42.4% from 36.3%, respectively, as LD Services increased its telemarketing sales force to focus on new ethnic marketing programs. The Company expects selling, general and administrative expenses to expand in absolute dollars and as a percentage of revenues throughout fiscal year 1998, as the Company expands its network and employee base and in connection with the Company's development of the commercial market. Depreciation: Depreciation increased to $1.9 million for the first quarter of 1998 from $820,000 for the first quarter of 1997, and increased as a percentage of revenues to 1.5% from 1.0% in the prior period. Depreciation increased as a result of STAR's continuing expansion of its proprietary international network which includes purchases of switches, undersea cable and leasehold improvements associated with switch sites. STAR expects depreciation expense to increase as the Company continues to expand its global telecommunications network. Other Income (Expense): Other expense, net, increased to $495,000 in the first quarter of 1998 from $326,000 in the first quarter of 1997. This increase is primarily due to interest expense of $618,000 incurred under various capital leases and bank lines of credit. Interest income earned on short-term investments increased to $283,000 in the first quarter of 1998 from $21,000 in the first quarter of 1997 reflecting interest earned on cash generated by operations. Also included in other expense is $171,000 in foreign currency losses related to the intercompany account between STAR and its German subsidiary. Provision for Income Taxes: The provision for income taxes increased to $1.5 million in the first quarter of 1998 from $341,000 in the first quarter of 1997 ($888,000 pro forma), primarily due to the increase in profitability of the Company. 12 13 LIQUIDITY AND CAPITAL RESOURCES As of March 31, 1998, STAR had cash and cash equivalents of approximately $5.3 million, short-term investments of $3.0 million and a working capital surplus of $8.3 million. As of March 31, 1998, STAR had no funds outstanding on its $25 million revolving line of credit, which bears interest at a rate of the bank's cost of funds plus 175 basis points and expires on July 1, 1999. However, the line of credit is reduced by outstanding letters of credit in the amount of $4.7 million. STAR generated net cash from operating activities of $3.7 million in the first quarter of 1997, primarily from net income plus depreciation and amortization and other assets offset by increases in receivables. The Company's investing activities provided cash of approximately $17,000 during the first quarter of 1998 primarily from the sale of marketable securities offset by investments made in additional undersea cables and switching equipment. The Company's financing activities used cash of approximately $335,000 during the first quarter of 1998 primarily from repayments under capital lease agreements offset by the exercise of employee stock options. On May 4, 1998, the Company completed a secondary offering of 6,000,000 shares of Common Stock of which 5,685,000 shares were sold by the Company and 315,000 shares were sold by a selling stockholder. The net proceeds to the Company (after deducting underwriting discounts and offering expenses) from the sale of such shares of Common Stock were approximately $145 million. 13 14 PART II. OTHER INFORMATION None 14 15 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: May 12, 1998 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) 15 EX-27 2 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEETS, THE CONDENSED CONSOLIDATED STATEMENTS OF INCOME, CONDENSED CONDOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SCHEDULES. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 5,285 2,978 57,025 6,001 0 75,647 76,262 8,448 144,312 67,305 32,216 0 0 36 50,691 144,312 129,269 129,269 111,593 13,754 160 0 618 3,427 1,534 0 0 0 0 1,893 .05 .05
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