-----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, TDclB54DDxOOuClk2er2jk6qlro8I9tsnYoDXNFQn9DQcnGh1hIVzkvQgB03W73a 7VvLF6L0sx43RnCSKlwD1A== 0001047469-99-001434.txt : 19990120 0001047469-99-001434.hdr.sgml : 19990120 ACCESSION NUMBER: 0001047469-99-001434 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19990119 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/A SEC ACT: SEC FILE NUMBER: 000-22581 FILM NUMBER: 99507834 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/A 1 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A AMENDMENT NO. 1 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 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 January 13, 1999, the number of the registrant's Common Shares of $.001 par value outstanding was 42,246,521. The undersigned Registrant hereby amends the following items of its Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, as set forth below: 2 ITEM 1. FINANCIAL STATEMENTS STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except for share data)
December 31, June 30, 1997 1998 ------------ ---------- (Unaudited) Current Assets: Cash and cash equivalents $ 1,903 $ 9,161 Short-term investments 18,631 114,421 Accounts receivable, net 46,675 66,119 Receivable from related parties -- 5,076 Other current assets 10,696 19,818 ---------- ---------- Total current assets 77,905 214,595 ---------- ---------- Property and equipment, net 35,959 101,287 Other assets 6,452 2,045 ---------- ---------- Total assets $ 120,316 $ 317,927 ========== ========== Current Liabilities: Revolving lines of credit with stockholder $ 138 $ 73 Current portion of long-term obligations 3,259 7,319 Accounts payable and other accrued expenses 22,345 35,309 Accrued network cost 38,403 47,942 ---------- ---------- Total current liabilities 64,145 90,643 ---------- ---------- Long-Term Liabilities: Long-term obligations, net of current portion 12,107 26,528 Other long-term liabilities 863 1,247 ---------- ---------- Total long-term liabilities 12,970 27,775 ---------- ---------- Stockholders' Equity: Common Stock $.001 par value: Authorized - 50,000,000 shares 35 42 Additional paid-in capital 41,662 192,823 Deferred compensation (30) -- Retained earnings 1,534 6,644 ---------- ---------- Total stockholders' equity 43,201 199,509 ---------- ---------- Total liabilities and stockholders' equity $ 120,316 $ 317,927 ========== ==========
See accompanying notes to the condensed consolidated financial statements. 3 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, --------------------------- --------------------------- 1997 1998 1997 1998 ---------- ---------- ---------- ---------- (Unaudited) (Unaudited) Revenue $ 95,250 $ 131,929 $ 180,077 $ 261,198 ---------- ---------- ---------- ---------- Operating expenses: Cost of services 82,886 112,877 156,612 224,470 Selling, general and administrative expenses 8,500 11,371 16,220 22,931 Depreciation and amortization 993 2,737 1,813 4,616 Merger expense -- -- -- 314 ---------- ---------- ---------- ---------- 92,379 126,985 174,645 252,331 ---------- ---------- ---------- ---------- Income from operations 2,871 4,944 5,432 8,867 ---------- ---------- ---------- ---------- Other income (expense): Interest income 53 1,389 74 1,672 Interest expense (438) (722) (836) (1,340) Other (756) (97) (705) (258) ---------- ---------- ---------- ---------- (1,141) 570 (1,467) 74 ---------- ---------- ---------- ---------- Income before provision for income taxes 1,730 5,514 3,965 8,941 Provision for income taxes 810 2,296 1,151 3,831 ---------- ---------- ---------- ---------- Net income $ 920 $ 3,218 $ 2,814 $ 5,110 ========== ========== ========== ========== Income before provision for income taxes 1,730 3,965 Pro forma income taxes 693 1,581 ---------- ---------- Pro forma net income $ 1,037 $ 2,384 ========== ========== Basic income per share $ 0.03 $ 0.08 $ 0.10 $ 0.14 ========== ========== ========== ========== Diluted income per share $ 0.03 $ 0.08 $ 0.10 $ 0.13 ========== ========== ========== ========== Pro forma basic income per share $ 0.04 $ 0.09 ========== ========== Pro forma diluted income per share $ 0.03 $ 0.08 ========== ==========
See accompanying notes to the condensed consolidated financial statements. 4 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Six Months Ended June 30, --------------------------- 1997 1998 ---------- ---------- (Unaudited) Cash Flows From Operating Activities: Net income $ 2,814 $ 5,110 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,813 4,616 Loss on disposal of equipment 42 -- Compensation expense relating to stock options 40 30 Provision for doubtful accounts 2,737 1,067 Deferred income taxes -- (2,234) Deferred compensation (73) 52 Decrease (increase) in assets: Accounts receivable (9,560) (20,511) Receivable from related parties 100 (5,076) Other assets (3,090) 2,485 Increase (decrease) in liabilities: Accounts payable and other accrued expenses (3,020) 12,964 Accrued network cost 9,272 9,539 Other liabilities 65 682 ---------- ---------- Net cash provided by operating activities 1,140 8,724 ---------- ---------- Cash Flows From Investing Activities: Capital expenditures (3,746) (48,340) Short-term investments, net (15,314) (95,790) Proceeds from the sale of assets 18 -- ---------- ---------- Net cash used in investing activities (19,042) (144,130) ---------- ----------
See accompanying notes to the condensed consolidated financial statements. 5 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Six Months Ended June 30, --------------------------- 1997 1998 ---------- ---------- (Unaudited) Cash Flows From Financing Activities: Repayments under lines of credit (7,814) -- Repayments under lines of credit with stockholder 77 (65) Payments under long-term debt and capital lease obligations (1,987) (3,473) Stockholder distributions for LDS (595) -- Issuance of common stock 30,981 144,743 Other financing activities 426 (11) Stock options exercised -- 1,470 ---------- ---------- Net cash used in financing activities 21,088 142,664 ---------- ---------- Increase (decrease) in cash and cash equivalents 3,186 7,258 Cash and cash equivalents, beginning of period 1,845 1,903 ---------- ---------- Cash and cash equivalents, end of period $ 5,031 $ 9,161 ========== ==========
See accompanying notes to the condensed consolidated financial statements. 6 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 STAR Telecommunications, Inc. ("STAR" or the "Company") Annual Report on Form 10-K. The results for the three and six month periods ended June 30, 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 a 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. (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 subsidiaries, LD Services, Inc. ("LDS") and Arvilla Telecommunications, Inc. ("CEO"). (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. The following schedule summarizes the information used to compute net income per common share for the three and six months ended June 30, 1997 and 1998 (in thousands): 7
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ------------------ ------------------ 1997 1998 1997 1998 ------ ------ ------ ------ Weighted number of common shares used to compute basic earnings per share 28,153 39,627 27,304 37,640 Weighted average common share equivalents 1,625 1,994 1,596 2,009 ------ ------ ------ ------ Weighted average number of common share and share equivalents used to compute diluted earnings per share 29,778 41,621 28,900 39,649 ====== ====== ====== ======
(4) PRO FORMA INCOME TAXES The results of operations and provision for income taxes for the three and six months ended June 30, 1997 reflect 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 equity 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 three and six month periods ended June 30, 1997 and 1998, comprehensive income equaled net income. (6) SIGNIFICANT EVENTS 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. In June 1998, the Company signed a definitive agreement to acquire PT-1 Communications, Inc. ("PT-1"). 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. In June 1998, the Company signed a 20 year, $70 million dollar agreement with Qwest Communications International Inc. ("Qwest") to purchase the long-term rights to use capacity over Qwest's domestic network. 8 (7) STATEMENTS OF CASH FLOWS During the six month periods ended June 30, 1997 and 1998, cash paid for interest was $876,000 and $1,253,000 respectively. For the same periods, cash paid for income taxes amounted to $1,752,000 and $1,576,000 respectively. Non-cash investing and financing activities are as follows (in thousands):
SIX MONTHS ENDED JUNE 30, ------------------------ 1997 1998 --------- --------- Equipment purchased through notes and capital leases $ 6,053 $ 21,604 Tax benefits related to stock options -- 4,966 --------- --------- $ 6,053 $ 26,570 ========= =========
(8) SEGMENT INFORMATION At June 30, 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 three months and six months ended June 30, 1997 and 1998 are as follows (in thousands):
THREE MONTHS ENDED, JUNE 30, 1997 WHOLESALE COMMERCIAL TOTAL Revenue from external customers $88,790 $ 6,460 $95,250 Interest income 53 0 53 Interest expense 437 1 438 Depreciation and amortization 989 4 993 Segment profit (loss) 1,341 (421) 920 Segment assets 93,834 5,032 98,866
THREE MONTHS ENDED, JUNE 30, 1998 WHOLESALE COMMERCIAL TOTAL Revenue from external customers $124,022 $ 7,907 $131,929 Interest income 1,382 7 1,389 Interest expense 721 1 722 Depreciation and amortization 2,714 23 2,737 Segment profit (loss) 3,505 (287) 3,218 Segment assets 309,061 8,866 317,927
9
SIX MONTHS ENDED, JUNE 30, 1997 WHOLESALE COMMERCIAL TOTAL Revenue from external customers $165,244 $ 14,833 $180,077 Interest income 74 0 74 Interest expense 834 2 836 Depreciation and amortization 1,803 10 1,813 Segment profit 2,760 54 2,814 Segment assets 93,834 5,032 98,866
SIX MONTHS ENDED, JUNE 30, 1998 WHOLESALE COMMERCIAL TOTAL Revenue from external customers $255,215 $ 5,983 $261,198 Interest income 1,663 9 1,672 Interest expense 1,339 1 1,340 Depreciation and amortization 4,590 26 4,616 Segment profit (loss) 5,482 (372) 5,110 Segment assets 309,061 8,866 317,927
(9) NEW PRONOUNCEMENTS In June 1998, the AICPA issued statement of Financial Accounting Standards No. 133 "Accounting For Derivative Instruments and Hedging Activities." The Company has not yet analyzed the impact of this new standard. The Company will adopt the standard in January of 2000. (10) SUBSEQUENT EVENTS On July 1, 1998, the Company's stockholders voted to amend and restate the certificate of incorporation to increase the number of shares of the Company's authorized common stock from 50 million shares to 100 million shares. 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 SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------------- -------------------- 1997 1998 1997 1998 ------ ------ ------ ------ Revenues 100.0% 100.0% 100.0% 100.0% ------ ------ ------ ------ Operating expenses: Cost of services 87.0 85.6 87.0 86.0 Selling, general and administrative 8.9 8.6 9.0 8.8 Depreciation and amortization 1.0 2.1 1.0 1.8 Merger Expense -- -- -- 0.1 ------ ------ ------ ------ 97.0 96.3 97.0 96.7 ------ ------ ------ ------ Income from operations 3.0 3.7 3.0 3.3 ------ ------ ------ ------ Other income (expense): Interest income 0.1 1.1 -- 0.6 Interest expense (0.5) (0.5) (0.5) (0.5) Other (0.8) (0.1) (0.4) (0.1) ------ ------ ------ ------ (1.2) 0.5 (0.9) -- Income before provision for income taxes 1.8 4.2 2.1 3.3 ------ ------ ------ ------ Provision for income taxes 0.9 1.7 0.6 1.4 ------ ------ ------ ------ Net income 1.0% 2.5% 1.5% 1.9% ====== ====== ====== ======
11 Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997. Revenues: Revenues increased 38.5% to $131.9 million in the second quarter of 1998 from $95.3 million in the second quarter of 1997. Wholesale revenues increased 39.7% to $124.0 million from $88.8 million in the prior year quarter. Wholesale minutes of use increased 67.9% to 348.5 million in the second quarter of 1998, as compared to 207.6 million minutes of use in the comparable quarter of the year prior. This increase reflects growth in the number of wholesale customers to 146 at the quarter ended June 30, 1998, up from 112 in the quarter ended June 30, 1997, as well as an increase in usage by existing customers. The average wholesale rate per minute of use declined to $0.34 for the current quarter as compared to $0.43 for the quarter ended June 30, 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 increased 22.4% to $7.9 million in the second quarter of 1998 from $6.5 million in the second quarter of 1997 reflecting the success of new international rate plans for targeting ethnic markets for Latin America and the Pacific Rim. Commercial rate per minute decreased to $0.24 for the second quarter of 1998 compared to $0.25 in the second quarter of 1997 as a result of competitive pricing. Cost of Services (exclusive of depreciation and amortization): On a consolidated basis cost of services (exclusive of depreciation and amortization) increased 36.2% to $112.9 million in the second quarter of 1998 from $82.9 million in the second quarter of 1997. Consolidated cost of services (exclusive of depreciation and amortization) as a percentage of consolidated revenues, decreased to 85.6% in the second quarter of 1998 compared to 87.0% in the same period of 1997. Wholesale cost of services (exclusive of depreciation and amortization) decreased to $107.4 million in 1998 from $78.9 million for 1997. Wholesale cost of services (exclusive of depreciation and amortization) as a percentage of wholesale revenues decreased to 86.6% in the quarter from 88.9% in the prior year quarter. The Company currently routes to 40 countries on its network, up from 31 countries in the quarter ended March 31, 1998. Commercial cost of services (exclusive of depreciation and amortization) increased slightly to $5.5 million in the second quarter of 1998 from $4.0 million in the second quarter of 1997. Commercial cost of services (exclusive of depreciation and amortization) as a percentage of commercial revenues for the second quarter of 1998 increased to 69.6% from 61.5% in the prior year quarter as a result of increased competition causing lower rates and one time charges related to moving LDS and CEO customer bases onto STAR's network. Selling, General and Administrative: For the second quarter of 1998, selling, general and administrative expenses increased 33.8% to $11.4 million, from $8.5 million in the second quarter of 1997. Wholesale selling, general and administrative expenses increased to $8.7 million in the second quarter of 1998 from $6.3 million in the second quarter of 1997, and decreased slightly as a percentage of wholesale revenues to 6.9% from 7.1% 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 $2.7 million in the second quarter of 1998 from $2.2 million in the second quarter of 1997. Commercial selling, general and administrative expenses increased as a percentage of commercial revenues to 34.4% from 33.5%, respectively, as LDS increased its telemarketing sales force to focus on new target markets. 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 $2.7 million for the second quarter of 1998 from $993,000 for the second quarter of 1997, and increased as a percentage of revenues to 2.1% 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 continue to increase as a percentage of revenues as the Company continues to expand its global telecommunications network. Other Income (Expense): The Company reported other income of $570,000 in the second quarter of 1998 as compared to other expense of $1.1 million in the second quarter of 1997. Interest income earned on short-term investments increased to $1.4 million in the second quarter of 1998 from $53,000 in the second quarter of 1997 reflecting interest earned on cash generated by the Company's secondary equity offering in May. Interest expense increased 12 to $722,000 in the second quarter of 1998 from $438,000 in the second quarter of 1997 reflecting additional capital leases on new switches. Also included in other expense in the second quarter of 1998 is $97,000 of foreign currency losses related primarily to the balance in the inter-company account between STAR and its foreign subsidiaries. In the second quarter of 1997 other expense included $756,000 consisting primarily of a legal settlement at LDS. Provision for Income Taxes: The Company's provision for income taxes increased to $2.3 million in the second quarter of 1998 from $810,000 in the second quarter of 1997 primarily due to the increase in profitability of the Company. Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997. Revenues: Revenues increased 45.0% to $261.2 million in the first half of 1998 up from $180.1 in the first half of 1997. Minutes of use increased to 720 million in the first half of 1998 from 448 million in the first half of 1997. The increase was primarily the result of both increased sales to existing wholesale customers and to an increase in the number of wholesale carrier customers. Cost of Services (exclusive of depreciation and amortization): Cost of services (exclusive of depreciation and amortization) increased 43.3% to $224.5 million during the six months ended June 30, 1998, up from $156.6 million for the comparable period of 1997, but decreased as a percentage of revenues to 86.0% from 87.0%, respectively. The decrease in cost of services (exclusive of depreciation and amortization) relative to revenues reflects the increasing amount of traffic terminated over STAR's owned network. Management believes that countries will continue to be added to STAR's global network thereby contributing to an overall decline in cost per minute. Selling, General and Administrative: Selling, general and administrative expenses increased 41.4% to $22.9 million during the first half of 1998 from $16.2 million in the comparable period one year earlier, and decreased slightly as a percentage of revenue to 8.8% from 9.0% in the prior period. Depreciation: Depreciation increased to $4.6 million in the first half of 1998 from $1.8 million for the first half of 1997. Depreciation increased as a result of the Company's continued expansion of its global transmission network. Other Income (Expense): Other income, net increased to $74,000 in the first half of 1998 from a net expense of $1.5 million in the first half of 1997. The swing results from interest income earned on the proceeds from the secondary offering of $1.7 million offset by interest expense incurred on capital leases of $1.3 million. Provision for Income Taxes: The Company's provision for income taxes increased to $3.8 million in the first half of 1998 from $1.2 million in the first half of 1997. The effective tax rate increased to 42.8% in the first half of 1998 from 29.0% in the first half of 1997 reflecting the write-off of a customer accounts receivable in the first quarter of 1997. Year 2000 Compliance: A significant percentage of the software that runs most of the computers in the United States relies on two-digit date codes to perform a number of computation and decision making functions. Commencing on January 1, 2000, these computer programs may fail from an inability to interpret date codes properly, misreading "00" for the year 1900 instead of the year 2000. STAR has initiated a comprehensive program to identify, evaluate and address issues associated with the ability of its information technology and non-information technology systems to properly recognize the Year 2000 in order to avoid interruption of the operation of these systems and a material adverse effect on STAR's operations as a result of the century change. Each of the information technology software programs that STAR currently uses has either been certified by its respective vendor as Year 2000 compliant or will be replaced with software that is so certified prior to January 1, 1999. STAR intends to conduct comprehensive tests of all of its software programs for Year 2000 compliance as part of its Year 2000 readiness program. An integral part of STAR's non-information technology systems, its telecommunications switches, is not currently Year 2000 compliant. The respective vendors of STAR's twelve switches are in the process of upgrading the switches and have informed STAR that the switches will be compliant on or before February 28, 1999. STAR does not believe that its other non-information technology systems will be affected by the Year 2000, but will not know definitively until STAR tests and evaluates such equipment during January 1999. STAR's computer systems interface with the computers and technology of many different telecommunications companies, including those of foreign companies, on a daily basis. STAR considers the Year 2000 readiness of its foreign customers and vendors of particular importance given the general concern that the computer systems abroad may not be as prepared as those in domestic operations to handle the century change. As part of its Year 2000 compliance program, STAR intends to contact its significant vendors and customers to ascertain whether the systems used by such third parties are Year 2000 compliant. STAR plans to have all Year 2000 compliance initial testing and any necessary conversions completed by July 1999. Historically, STAR has not incurred any costs to date to reprogram, replace and test its information and non-information technology systems for Year 2000 compliance. The costs associated with STAR's Year 2000 compliance efforts will be incurred during 1998 and 1999. STAR estimates the costs of the efforts will be between $70,000 and $150,000 over the life of the project; though such expenditures may increase materially following testing of non-information technology systems and evaluation of the Year 2000 compliance status of integral third party vendors and customers. Costs incurred in connection with STAR's Year 2000 compliance efforts will be expensed as incurred. STAR currently anticipates that its information technology and non-information technology systems will be Year 2000 compliant before January 1, 2000, though no assurances can be given that STAR's compliance testing will not detect unanticipated Year 2000 compliance problems. Furthermore, STAR does not yet know the Year 2000 compliance status of integral third parties and is therefore currently unable to assess the likelihood or the risk to STAR of third party system failures. However, a system failure by any of STAR's significant customers or vendors could have a material adverse effect on STAR's operations. The Company believes that the most reasonably likely worst case scenario resulting from the century change will be its inability to route telephone traffic at current rates to desired locations for an indeterminable period of time. Such worst case scenario could have a material adverse affect on STAR's results of operations and liquidity. STAR intends to develop contingency plans to handle a Year 2000 system failure experienced by its information and non-information technology systems and to handle any necessary interactions with the computers and technology of any integral non-complying third party. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1998, STAR had cash and cash equivalents of $9.2 million, short-term investments of $114.4 million (as a result of the Company's secondary equity offering) and a working capital surplus of $124.0 million. As of June 30, 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 137.5 basis points and expires on July 1, 1999. 13 However, available borrowings under the line of credit is reduced by outstanding letters of credit in the amount of $4.2 million. STAR generated net cash from operating activities of $8.7 million for the six months ended June 30, 1998, primarily from net income plus depreciation and amortization, as well as increases in accounts payable, accrued expenses and accrued network costs offset by increases in accounts receivable. The Company's investing activities used cash of $144.1 million during the six months ended June 30, 1998, primarily from capital expenditures and the purchase of short-term investments. 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 shares of Common Stock were approximately $144.7 million. The Company's financing activities generated cash of approximately $142.7 million primarily from proceeds raised in the secondary stock offering as well as stock options exercised, offset by payments under capital lease obligations. While the termination of the LDS customer base in California will result in a loss of commercial revenues from that state during 1998, management does not believe that the loss of such revenues will have a material impact on STAR's liquidity in the future. 14 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: January 15, 1999 By: /s/ Kelly D. Enos ------------------------------------------- Kelly D. Enos Chief Financial Officer (Principal Financial & Accounting Officer) 15 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STAR TELECOMMUNICATIONS, INC. FORM 10-Q/A AMENDMENT NO 1. FOR THE QTR ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 9,161 114,421 66,119 0 0 214,595 101,287 0 317,927 90,643 33,847 0 0 42 199,467 317,927 0 261,198 0 252,331 258 0 1,340 8,941 3,831 0 0 0 0 5,110 0.14 0.13
-----END PRIVACY-ENHANCED MESSAGE-----