-----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, BWg618T6HKGe5i+ZaPVTjprc6XLnXVWQEsild6tHHau2Vx/X5liEi+V43SHRP7kO qjeqy7Fa3GWt3lUNa1l1Qw== 0000912057-99-006100.txt : 19991117 0000912057-99-006100.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-006100 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARTEC GLOBAL COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001043310 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 521660985 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23087 FILM NUMBER: 99755292 BUSINESS ADDRESS: STREET 1: 10411 MOTOR CITY DR CITY: BETHESDA STATE: MD ZIP: 20817 BUSINESS PHONE: 3013658959 MAIL ADDRESS: STREET 1: 10411 MOTOR CITY DR STREET 2: SUITE 300 CITY: BETHESDA STATE: MD ZIP: 20817 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15d OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-23087 ------------------------ STARTEC GLOBAL COMMUNICATIONS CORPORATION 10411 MOTOR CITY DRIVE BETHESDA, MD 20817 (301) 365-8959 DELAWARE 52-2099559 - --------------------------------------------- --------------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date.
SHARES OUTSTANDING TITLE OF EACH CLASS: AS OF NOVEMBER 5, 1999 -------------------- ---------------------- Common Stock, Par Value 9,444,905 $0.01 Per Share
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- STARTEC GLOBAL COMMUNICATIONS CORPORATION FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 INDEX PART I. FINANCIAL INFORMATION (UNAUDITED) ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 1999 and 1998.................................................... 2 Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998.............................. 3 Condensed Consolidated Statements of Cash Flows for the nine months Ended September 30, 1999 and 1998........... 4 Notes to Condensed Consolidated Financial Statements...... 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 9 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................................ 17 PART II. OTHER INFORMATION AND SIGNATURE............................. 18
PART I. - FINANCIAL INFORMATION ITEM 1. - FINANCIAL STATEMENTS STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, -------------------- -------------------- 1999 1998 1999 1998 --------- -------- --------- -------- Net revenues........................................ $ 76,616 $ 47,448 $ 196,246 $110,800 Cost of services 66,545 41,952 173,927 96,436 --------- -------- --------- -------- Gross margin.................................... 10,071 5,496 22,319 14,364 General and administrative expenses................. 11,316 6,091 31,308 12,974 Selling and marketing expenses...................... 3,553 2,068 10,729 3,829 Depreciation and amortization....................... 2,062 619 5,301 1,327 --------- -------- --------- -------- Loss from operations................................ (6,860) (3,282) (25,019) (3,766) Interest expense.................................... (5,511) (5,130) (16,034) (7,707) Interest income..................................... 1,140 2,397 4,092 3,700 Equity in loss from affiliates...................... (41) -- (60) -- --------- -------- --------- -------- Loss before income taxes............................ (11,272) (6,015) (37,021) (7,773) Income tax provision................................ -- -- -- -- --------- -------- --------- -------- Net loss............................................ $ (11,272) $ (6,015) $ (37,021) $ (7,773) ========= ======== ========= ======== Basic and diluted loss per common share $ (1.19) $ (0.67) $ (3.98) $ (0.87) ========= ======== ========= ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents................................... $ 43,968 $ 81,456 Accounts receivable, net of allowance for doubtful accounts of $3,922 and $2,659, respectively........................ 53,238 40,370 Accounts receivable, related party.......................... 205 684 Other current assets........................................ 7,310 3,916 -------- -------- Total current assets.................................... 104,721 126,426 Property and equipment, net of accumulated depreciation and amortization of $8,198 and $3,493, respectively........... 80,286 43,525 Restricted cash and pledged securities...................... 35,486 44,336 Intangibles, net and other long-term assets................. 27,721 11,695 -------- -------- $248,214 $225,982 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............................................ $ 53,786 $ 36,273 Accrued expenses............................................ 13,644 6,845 Bank facility............................................... 15,662 -- Vendor financing............................................ 4,544 1,476 Capital lease obligations................................... 241 402 Note payable to individuals and other....................... 16 16 -------- -------- Total current liabilities............................... 87,893 45,012 Senior notes................................................ 158,163 158,022 Vendor financing, net of current portion.................... 18,657 7,409 Minority interest........................................... 222 -- Capital lease obligations, net of current portion........... 152 59 -------- -------- Total liabilities....................................... 265,087 210,502 -------- -------- STOCKHOLDERS' EQUITY (DEFICIT): Common stock, $0.01 par value; 40,000,000 and 20,000,000 shares authorized, 9,439,505 and 8,964,815 shares issued and outstanding, respectively............................. 135 90 Additional paid-in capital.................................. 44,551 39,632 Unearned compensation....................................... (254) (190) Accumulated deficit......................................... (61,073) (24,052) Accumulated translation adjustment.......................... (232) -- -------- -------- Total stockholders' equity(deficit)..................... (16,873) 15,480 -------- -------- $248,214 $225,982 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- 1999 1998 --------- -------- OPERATING ACTIVITIES: Net loss.................................................... $ (37,021) $ (7,773) Adjustments to net loss: Depreciation and amortization............................. 5,301 1,327 Amortization of deferred debt financing costs and debt discounts............................................... 584 625 Other non-cash adjustments................................ (153) 39 Changes in operating assets and liabilities, net of acquisition costs: Accounts receivable, net.................................. (11,260) (12,768) Accounts receivable, related party........................ 479 (333) Accounts payable.......................................... 20,034 12,224 Accrued expenses.......................................... 6,666 8,052 Other..................................................... (3,612) (1,845) --------- -------- Net cash used in operating activities................... (18,982) (452) --------- -------- INVESTING ACTIVITIES: Acquisitions, net of cash acquired.......................... (16,208) (150) Purchases of property and equipment......................... (40,619) (18,799) --------- -------- Net cash used in investing activities................... (56,827) (18,949) --------- -------- FINANCING ACTIVITIES: Proceeds from bank facility................................. 39,180 -- Proceeds from vendor financing.............................. 15,934 -- Proceeds from sale of pledged securities.................... 8,850 -- Proceeds from Senior Notes and Warrants Offering............ -- 160,000 Scheduled repayments of bank facility....................... (23,518) Scheduled repayments of vendor financing.................... (1,618) -- Repayments under capital lease obligations.................. (334) (277) Payment of debt financing costs............................. (276) (5,994) Investments in pledged securities........................... -- (52,417) Net proceeds from issuance of common shares................. 103 262 --------- -------- Net cash provided by financing activities............... 38,321 101,574 --------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (37,488) 82,173 CASH AND CASH EQUIVALENTS, beginning of the period.......... 81,456 26,114 --------- -------- CASH AND CASH EQUIVALENTS, end of the period................ $ 43,968 $108,287 ========= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid............................................... $ 10,657 $ 80 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Equipment acquired under capital lease...................... $ -- $ 84 Note payable to individual, converted to common stock....... -- 44 The Company acquired a 83% ownership interest in Phone Systems and Network, Inc. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired, including direct acquisition costs....................................... 14,928 -- Cash paid for assets...................................... (7,077) -- Liabilities assumed including minority interest........... 3,903 -- Stock issued in connection with acquisition............... 3,948 --
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL. The accompanying condensed consolidated financial statements of Startec Global Communications Corporation and subsidiaries (the "Company" or "Startec") have been prepared by the Company without audit. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly the financial position of the Company as of September 30, 1999 and December 31, 1998, and the results of operations for the three and nine months ended September 30, 1999 and 1998 and cash flows for the nine months ended September 30, 1999 and 1998. Interim results are not necessarily indicative of results that may be expected for the entire year. Certain prior period amounts have been reclassified to conform to current period presentation. The Company is subject to various risks in connection with the operation of its business. These risks include, but are not limited to, dependence on operating agreements with foreign partners, significant foreign and U.S.-based customers and suppliers, availability of transmission facilities, U.S. and foreign regulations, international economic and political instability, dependence on effective billing and information systems, customer attrition, and rapid technological change. Many of the Company's competitors are significantly larger and have substantially greater resources than the Company. If the Company's competitors were to devote significant additional resources to the provision of international long-distance services to the Company's target customer base, the Company's business, financial condition, and results of operations could be materially adversely affected. The Company has devoted substantial resources to the buildout of its network and the development and expansion of its marketing programs. As a result, the Company has experienced operating losses and negative cash flows from operations. These losses and negative operating cash flows are expected to continue for additional periods in the future. There can be no assurance that the Company's operations will become profitable or will produce positive cash flows. The Company's capital requirements for the continued buildout of its network and growth of its customer base are substantial. The Company intends to fund its operational and capital requirements until early 2001 using cash on hand and its available credit facilities. However, there can be no assurance that the Company will not need additional external financing sooner than currently anticipated, or that such financing would be available on terms management finds acceptable or at all. In the event that the Company is unable to obtain such additional financing, it will be required to limit or curtail its expansion plans. 2. REORGANIZATION. In 1998, the Company's board of directors and stockholders approved a reorganization pursuant to which the Company's corporate structure would be realigned to that of a publicly traded Delaware holding company ("Reorganization"). In March 1999, pursuant to the reorganization plan, all of the Company's assets were transferred into a Delaware subsidiary company ("New Parent"), with a subsequent transfer of those assets to multiple subsidiaries of the New Parent. The Company was then 5 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. REORGANIZATION. (CONTINUED) merged with and into the New Parent with the New Parent then assuming the Company's name. The merger did not impact the condensed consolidated financial statements of the Company. 3. EARNINGS (LOSS) PER SHARE. SFAS No. 128 requires dual presentation of basic and diluted earnings per share on the face of the statements of operations for all periods presented. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Weighted average common shares outstanding consist of the following for the three and nine months ending September 30, 1999 and 1998 (in thousands):
FOR THE THREE FOR THE NINE MONTHS MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Weighted average common shares outstanding-basic......................................... 9,422 8,964 9,319 8,939 Stock option and warrant equivalents........................ -- -- -- -- ----- ----- ----- ----- Weighted average common and Equivalent shares outstanding--diluted.................. 9,422 8,964 9,319 8,939 ===== ===== ===== =====
Options and warrants to purchase approximately 1,835,000 shares of common stock were excluded from the computation of diluted loss per share in 1999 because inclusion of these options would have an anti-dilutive effect on loss per share. 4. ACQUISITIONS AND INVESTMENTS. In July 1999, the Company acquired the fixed assets and customers of Worldwide Telecommunications Company Limited, Infinity Telecommunications Limited and Pacific Direct, Inc. (collectively "Worldwide Group") for approximately $200,000 in cash and $790,000 (54,482 shares) in Startec Common Stock. Worldwide Group provides voice and data services to businesses and individuals in the Hong Kong, China region. In June 1999, the Company acquired a 15% ownership interest in SigmaNet Network Corporation ("SigmaNet") for approximately $500,000. SigmaNet provides Internet services under the name of IAOL including internet access and a web portal for the Asian Indian community. In May 1999, the Company entered into an agreement to acquire up to a 49% fully diluted ownership interest in Dialnet Communications Limited ("Dialnet") for up to $1.6 million. Dialnet provides value added voice and data services in India. The agreement, which became effective July 1999 upon approval by the government of India, provides for an investment of $1 million payable in equal installments of $500,000 in July 1999 and March 2000 and a $600,000 convertible loan. The loan, convertible into common shares of Dialnet through July 2002, extends available credit of $300,000 6 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. ACQUISITIONS AND INVESTMENTS. (CONTINUED) immediately and an additional $300,000 in March 2000. Per the agreement, the remaining $500,000 investment and $300,000 loan are payable at the Company's option. As of September 30, 1999, the Company has an equity investment of $500,000 and $300,000 is outstanding under the convertible loan. In February 1999, the Company acquired a 64.6% ownership interest in Phone Systems and Network, Inc. of France ("PSN") for approximately $3.8 million in cash and 425,000 shares of the Company's Common Stock. The Company acquired an additional 18.4% ownership interest through a cash tender offer in the second quarter of 1999 for a total ownership interest of approximately 83%. Total consideration amounted to approximately $11 million, including acquisition costs. The Company recognized approximately $10.3 million in intangibles and other long term assets associated with the acquisition. PSN is a facilities based provider in France, with switches in both Paris and Switzerland with additional capacity on a switch located in the United Kingdom. PSN also provides services on a switchless reseller basis in Belgium. Common shares of PSN are traded on the Nouveau Marche Exchange in France. The purchase prices of PSN and the Worldwide Group were allocated to the net assets acquired based upon the estimated fair value of such assets, which resulted in an allocation to goodwill. The purchase price allocations have been completed on a preliminary basis and are subject to adjustment should new or additional facts about the businesses become known. The Company has accounted for the acquisitions using the purchase method. Accordingly, the results of operations of the acquired companies are included in the accompanying condensed consolidated statements of operations of the Company, as of the date of acquisition. In February 1999, the Company acquired a 20% equity ownership interest in BCH Holdings, Inc. ("BCH") with operations in Poland, for approximately $1.2 million. Concurrent with the acquisition, Startec received a $2.5 million note payable from BCH convertible at Startec's option into common shares equivalent to an additional 28% fully diluted ownership interest of BCH. BCH is a reseller of international voice and a licensed Internet service provider in Poland. The investment in BCH and the note payable from BCH are included in intangibles and other long-term assets in the accompanying condensed consolidated balance sheet. 5. OPERATING SEGMENTS AND SIGNIFICANT CUSTOMERS AND SUPPLIERS. The Company classifies its operations into one industry segment: long distance telecommunications services. The Company is currently evaluating segmentation of its business into global Internet services and regional long distance telecommunications services. Substantially all of the Company's revenues for each period presented were derived from calls originated within the United States and terminated outside the United States. A significant portion of the Company's net revenues is derived from a limited number of customers. For the nine month period ended September 30, 1999 and 1998, the Company's five largest carrier customers accounted for approximately 38 percent and 40 percent of net revenues, respectively. The Company's agreements and arrangements with its carrier customers generally may be terminated on short notice without penalty. A significant portion of the Company's cost of services is purchased from a limited number of suppliers. For the nine month period ended September 30, 1999 and 1998, the Company's five largest vendors accounted for approximately 22 percent and 37 percent of cost of sales, respectively. 7 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. VENDOR AND BANK FINANCING. In July 1999, the Company entered into a three year vendor financing facility for up to $5 million with IBM Credit Corp ("IBM Facility"). The IBM Facility may be used to finance the purchase of IBM hardware and software from IBM under a capital lease structure. The IBM Facility bears interest at a variable rate during the term of the lease. In June 1999, the Company entered into a three year Loan and Security Agreement with Congress Financial Corporation ("CFC Facility"), a subsidiary of First Union National Bank for up to $30 million. The CFC Facility, secured by trade accounts receivable may be used to finance equipment, undersea cables and the expansion of the Company's facilities. The CFC Facility bears interest at the prime rate effective on the date of borrowing. Principal and interest on the CFC Facility are repaid through collections from trade accounts receivable. There is an unused line fee equal to 1/4% per annum calculated upon the amount the maximum credit exceeds the average daily balance of borrowed amounts during the immediately preceding month payable monthly in arrears. In May 1999, the Company entered into a vendor financing facility for up to $20 million bearing interest at 8 1/2% with Ascend Credit Corporation ("Ascend Facility"). The Ascend Facility may be used to finance equipment purchased from Ascend under a capitalized lease structure. 7. COMPREHENSIVE INCOME. The total of net loss and all other non-owner changes in equity consists of the following for the three and nine months ending September 30, 1999 and 1998 (in thousands):
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, --------------------- ------------------- 1999 1998 1999 1998 --------- --------- -------- -------- Net loss............................................ (11,272) (6,015) (37,021) (7,773) Other comprehensive income: Currency translation................................ (19) -- (232) -- ------- ------- ------- ------- Comprehensive net loss.............................. (11,291) (6,015) (37,253) (7,773) ======= ======= ======= =======
8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the financial statements, related notes, and other detailed information included elsewhere in this Quarterly Report on Form 10-Q. This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements other than historical information or statements of current condition. Some forward-looking statements may be identified by the use of such terms as "believes," "anticipates," "intends," or "expects." These forward-looking statements relate to plans, objectives and expectations of the Company for future operations. In light of the risks and uncertainties inherent in all such projected operational matters, the inclusion of forward-looking statements in this report should not be regarded as a representation by 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 certain factors including, but not limited to, changes in market conditions, the international telecommunications industry dependence on operating agreements with foreign partners, significant foreign and U.S.-based customers and suppliers, availability of transmission facilities, U.S. and foreign regulations, international economic and political instability, entry into new and developing markets, dependence on effective billing and information systems, customer concentration and attrition, rapid technological change and the expansion of the global network. These factors should not be considered exhaustive; 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. OVERVIEW The Company is a rapidly growing, facilities based international long distance telecommunications service provider. The Company markets its services to select ethnic residential communities in North America, Europe, Asia and to leading international long distance carriers. The Company's quarterly revenues have increased from $47.4 million for the three months ended September 30, 1998 to $76.6 million for the three months ended September 30, 1999. The Company reported a net loss for the three months ended September 30, 1999 of $11.3 million, or $1.19 per diluted common share compared to a net loss of $6.0 million or $0.67 per diluted common share in the three months ended September 30, 1998. The number of the Company's residential customers increased from approximately 114,000 customers as of September 30, 1998 to approximately 256,000 customers as of September 30, 1999. The Company is expanding its service offerings to ethnic communities by deploying ATM/IP telephony in North America and Western Europe on its network facilitating the Company's continued expansion into ethnic emerging economies by providing long distance telecommunications services bundled with Internet access to its residential customers. The Company is also offering a web site virtual community consisting of in-language content and other value-added services, and plans to launch additional web site virtual communities over the next year ("eStart") and co-location and Web hosting facilities at its main international gateway sites. 9 RESULTS OF OPERATIONS The following table sets forth certain financial data as a percentage of net revenues for the periods indicated.
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, --------------------- ------------------- 1999 1998 1999 1998 --------- --------- -------- -------- Net revenues........................................... 100.0% 100.0% 100.0% 100.0% Cost of services....................................... 86.9 88.4 88.6 87.0 ------- ------- ------- ------ Gross margin......................................... 13.1 11.6 11.4 13.0 General and administrative expenses 14.8 12.8 16.0 11.7 Selling and marketing expenses......................... 4.6 4.4 5.5 3.5 Depreciation and amortization.......................... 2.7 1.3 2.7 1.2 ------- ------- ------- ------ Loss from operations................................... (9.0) (6.9) (12.8) (3.4) Interest expense....................................... (7.2) (10.8) (8.2) (7.0) Interest income........................................ 1.5 5.1 2.1 3.3 Equity in loss from affiliates......................... -- -- -- -- ------- ------- ------- ------ Loss before taxes...................................... (14.7) (12.6) (18.9) (7.1) Income tax provision................................... -- -- -- -- ------- ------- ------- ------ Net loss............................................... (14.7)% (12.6)% (18.9)% (7.1)% ======= ======= ======= ======
THREE AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED TO THREE AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 NET REVENUES. Net revenues for the three months ended September 30, 1999 increased $29.2 million, or 61.5%, to $76.6 million from $47.4 million for the three months ended September 30, 1998. Net revenues for the nine months ended September 30, 1999 increased $85.4 million, or 77.1%, to $196.2 million from $110.8 million over the same period in 1998. Net revenues are consolidated to include the effect of acquisitions for the periods presented. Residential revenue increased by $7.6 million or 53.1%, to $21.9 million for the three months ended September 30, 1999, from $14.3 million for the same period in 1998. Residential revenue increased $17.9 million or 46.5%, to $56.4 million for the year to date 1999. The increase in residential revenue was due to an increase in residential customers to approximately 256,000 at September 30, 1999 from approximately 114,000 at September 30, 1998 due to growth in new and existing ethnic markets. Carrier revenues for the three month period ended September 30, 1999 increased $21.6 million, or 65.4% to $54.7 million from $33.1 million for the three months ended September 30, 1998. For the nine month period ended September 30, 1999, carrier revenues increased $67.6 million or 93.5%, to $139.9 million. The increase in carrier revenues is due to the Company's strategy to optimize its capacity on its facilities, which has resulted in increased sales to new and existing carrier customers. Deployment of additional network infrastructure and the doubling of call center capacity attributed greatly to overall customer growth. GROSS MARGIN. Gross margin increased $4.6 million to $10.1 million for the three months ended September 30, 1999 from $5.5 million for the three months ended September 30, 1998. Gross margin for the nine months in 1999 increased $7.9 million to $22.3 million from $14.4 million in the nine months of 1998. Gross margin as a percentage of net revenues increased to 13.1% for the three months ended September 30, 1999 from 11.6% over the same period in 1998. Year to date, gross margin as a percentage of net revenues decreased to 11.4% from 13% year to date 1998. Gross margin was impacted by the continued implementation of the fifty operating agreements entered into in 1998 and 1999 partially offset by additional transport costs associated with bringing up the European facilities. Operating agreements initially carry traffic in only one direction, which resulted in higher termination 10 costs in the first half of 1999. Upon successful implementation, lower termination costs are normally realized. Typically, the Company will receive traffic from the signatories of these operating agreements two quarters after initial implementation. GENERAL AND ADMINISTRATIVE. General and administrative expenses for the three months ended September 30, 1999 increased 85.2% to $11.3 million from $6.1 million for the three months ended September 30, 1998. Year to date general and administrative expenses increased 140.8% to $31.3 million from $13 million over the same period in 1998. As a percentage of net revenues, general and administrative expenses for the three and nine months ended September 30, 1999 increased to 14.8% and 16% from 12.8% and 11.7% over the same period in 1998, respectively. The increase was primarily due to an increase in personnel to 721 at September 30, 1999 from 342 employees at September 30, 1998 as a result of the Company's continued worldwide development and expansion as well as pre- operating costs associated with startup operations in Europe and Asia and the Company's implementation of its ISP strategy. Substantial increases in general and administrative expense in Asia are the result of the Company's expanding infrastructure as well as the movement and expansion of much of the Company's customer care center operations offshore. The customer care center expanded from approximately 65 seats in May 1999 to 255 in September. SELLING AND MARKETING. Selling and marketing expenses for the three and nine months ended September 30, 1999 increased to $3.6 million and $10.7 million from approximately $2.1 and $3.8 million for the three and nine months ended September 30, 1998, respectively. As a percentage of net revenues, selling and marketing expenses for the three and nine months ended September 30, 1999 increased to 4.6% and 5.5% from 4.4% and 3.5% for the three and nine months ended September 30, 1998, respectively. The increase is primarily due to the Company's efforts to attract new customers and retain existing customers. Additionally, the Company has begun sales and marketing efforts related to both the operations in Europe and the implementation of the Company's ISP strategy. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the three and nine months ended September 30, 1999 increased to $2.1 million and $5.3 million from approximately $619,000 and $1.3 million for the three and nine months ended September 30, 1998, respectively, primarily due to increases in capital expenditures pursuant to the Company's strategy of expanding its network infrastructure. INTEREST EXPENSE. Interest expense for the three and nine month period ended September 30, 1999 increased to $5.5 million and $16.0 million from approximately $5.1 million and $7.7 million for the three and nine months ended September 30, 1998, respectively, as a result of an offering of Senior Notes and Warrants ("Senior Notes and Warrants Offering") consummated in May 1998, and several bank and vendor financing agreements entered into during 1999. INTEREST INCOME. Interest income for the three and nine month period ended September 30, 1999 decreased to $1.1 million from $2.4 million for the three months ended September 30, 1998, and increased to $4.1 million from $3.7 million for the nine months ended September 30, 1998. The increase is primarily due to the investment of the net proceeds from the Senior Notes and Warrants Offering consummated in May 1998 with the decrease primarily due to the investment of cash in the Company's network infrastructure. NET LOSS. Net loss for the three months ended September 30, 1999 was $11.3 million or $1.19 per diluted common share compared to a net loss of approximately $6.0 million or $0.67 per diluted common share for the three months ended September 30, 1998. Year to date net loss was $37.0 million or $3.98 per diluted common share compared to $7.8 million or $0.87 per diluted share over the same period in 1998. 11 LIQUIDITY AND CAPITAL RESOURCES The Company reported a decrease in cash and cash equivalents of $37.5 million during the nine months ended September 30, 1999. This decrease is primarily due to expanding capital and operating requirements, including the acquisition of a 83% ownership interest of Phone Systems and Network, Inc. ("PSN") of France in February, 1999, the acquisition of a 20% equity ownership interest in BCH Holding Company, Inc. in February, 1999, and a payment towards the purchase of Global GmbH of Germany. Cash used in operations increased $18.5 million to $19 million principally due to cash requirements for the expansion of operations partially offset by changes in operating accounts. As a result of completing the Senior Notes and Warrants Offering in 1998 and the Company's expansion, the Company expects that it will incur negative EBITDA and significant operating and net losses on an annual basis for the next several years, as it incurs additional costs associated with the development and expansion of its marketing programs and its entry into new markets, the introduction of new telecommunications and Internet services, and as a result of the interest expense associated with its financing activities. Approximately $52 million of the net proceeds of the Senior Notes was used to purchase certain pledged securities, which will assure holders of the Senior Notes that they will receive all scheduled cash interest payments through November 2001. The Company may be required to obtain additional financing in order to pay interest on the Senior Notes after November 2001 and to repay the Senior Notes at their maturity. Pledged securities totaled $35.3 million at September 30, 1999. During 1998, the Company advanced an aggregate of approximately $1.4 million to certain of its employees and officers. The secured loans bear interest at a rate of 7.87% per year, and are due and payable on December 31, 1999. The loans are included in other current assets in the accompanying condensed consolidated balance sheets. Cash used in investing activities was $56.8 million in the first nine months of 1999 compared to $18.9 million in the same period in 1998. Cash used in investing activities through the third quarter of 1999 includes capital expenditures of $40.6 million relating to the continued expansion of the Company's network including the completion of the installation of a new Nortel GSP international gateway switch and Internet Protocol gateway in Miami, Florida, the purchase of capacity on fiber optic cables, Indefeasible Rights of Usage ("IRUs"), various POP sites and IP gateways and the development of Internet related services. The Company capitalized approximately $5.0 million pursuant to the Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". Capital expenditures in the first nine months of 1999 included $5.9 million and $3 million for the Company's telecommunications infrastructure in Europe and Asia, respectively, and approximately $506,000 for the Company's eStart business infrastructure. The Company also acquired minority ownership interests in several unrelated strategic entities for approximately $750,000 in cash. In July 1999, the Company acquired the fixed assets and customers of Worldwide Telecommunications Company Limited, Infinity Telecommunications Limited and Pacific Direct, Inc. (collectively "Worldwide Group") for approximately $200,000 in cash and $790,000 (54,482 shares) in Startec Common Stock. Worldwide Group provides voice and data services to businesses and individuals in the Hong Kong, China region. In June 1999, the Company acquired a 15% ownership interest in SigmaNet Network Corporation ("SigmaNet") for approximately $500,000. SigmaNet provides Internet services under the name of IAOL including Internet access and a web portal for the Asian Indian community. In May 1999, the Company entered into an agreement to acquire up to a 49% fully diluted ownership interest in Dialnet Communications Limited ("Dialnet") for up to $1.6 million. Dialnet provides value added voice and data services in India. The agreement, which became effective July 1999 upon approval by the government of India, provides for an investment of $1 million payable in equal installments of $500,000 in July 1999 and March 2000 and a $600,000 convertible loan. The loan, 12 convertible into common shares of Dialnet in July 2002, extends available credit of $300,000 immediately and an additional $300,000 in March 2000. Per the agreement, the remaining $500,000 investment and $300,000 loan, are payable at the Company's option As of September 30, 1999, the Company has an equity investment of $500,000 and $300,000 is outstanding under the convertible loan. In February 1999, the Company acquired a 64.6% ownership interest in Phone Systems and Network, Inc. of France ("PSN") for approximately $3.8 million in cash and 425,000 shares of the Company's Common Stock. The Company acquired an additional 18.4% ownership interest through a cash tender offer for a total ownership interest of approximately 83%. Total consideration amounted to approximately $11 million, including acquisition costs. The Company recognized approximately $10.3 million in intangibles and other long term assets associated with the acquisition. PSN is a facilities based provider in France, with switches in both Paris and Switzerland with additional capacity on a switch located in the United Kingdom. PSN also provides services on a switchless reseller basis in Belgium. Common shares of PSN are traded on the Nouveau Marche Exchange in France. In February 1999, the Company acquired a 20% equity ownership interest in BCH Holding Company, Inc. ("BCH") with operations in Poland, for approximately $1.2 million. Concurrent with the acquisition, Startec received a $2.5 million note payable from BCH convertible at Startec's option into common shares equivalent to an additional 28% fully diluted ownership interest of BCH. BCH is a reseller of international voice and a licensed Internet service provider in Poland. The investment in BCH and the note payable from BCH are included in intangibles and other long-term assets in the accompanying condensed consolidated balance sheet. In December 1998, the Company acquired Global Communications GmbH of Germany ("Global") for $5.4 million. Global has a Class IV nationwide telecommunications license for Germany, an interconnection agreement with Deutsche Telekom and a Siemens EWSD switch located in Dusseldorf. In November 1998, the Company acquired PCI Communications, Inc. ("PCI") for approximately $2.6 million. PCI is a provider of voice and data services located in the Pacific Rim island of Guam. PCI has signatory status on the TPC-5, Guam-Philippines and China-U.S. cables. The acquisition accelerates the Company's network deployment in the Asia-Pacific region and will also allow Startec to access a U.S. based satellite line of sight that extends from Southeast Asia to Central Europe. The Company currently owns capacity on 13 undersea fiber optic cables, located in the Atlantic, Pacific and Indian Oceans and one fiber optic cable from New York to Los Angeles, through IRUs and through signatory ownership. Securing ownership interests in cable systems allows the Company to manage transmission capacity as well as transmission costs. Additionally, the Company has signed a total of 50 international operating agreements. Approximately 31 of these agreements have been implemented. International operating agreements increase the Company's flexibility for terminating international calls by providing it with multiple termination routes. Cash provided by financing activities was approximately $38.3 million for the first nine months of 1999 compared to approximately $101.6 million over the same period in 1998. Cash provided by financing activities primarily relates to draws against the bank facility and vendor financing agreements partially offset by the scheduled repayments of the bank facility, vendor financing and capital leases. In July 1999, the Company entered into a three year vendor financing facility for up to $5 million with IBM Credit Corp ("IBM Facility"). The IBM Facility may be used to finance the purchase of IBM hardware and software from IBM under a capital lease structure. The IBM Facility bears interest at a variable rate during the term of the lease. In June 1999, the Company entered into a three year Loan and Security Agreement with Congress Financial Corporation ("CFC Facility"), a subsidiary of First Union Bank for up to $30 million. The CFC Facility, secured by trade accounts receivable may be used to finance equipment, undersea cables and the expansion of the Company's facilities. The CFC Facility bears interest at the prime rate 13 effective on the date of borrowing. Principal and interest on the CFC Facility are repaid through collections from trade accounts receivable. There is an unused line fee equal to 1/4% per annum calculated upon the amount the maximum credit exceeds the average daily balance of borrowed amounts during the immediately preceding month payable monthly in arrears. As of September 30, 1999, approximately $16.6 million bearing interest at 7.5% was outstanding under the facility. In May 1999, the Company entered into a vendor financing facility for up to $20 million with Ascend Credit Corporation ("Ascend Facility"). The Ascend Facility may be used to finance equipment purchased from Ascend under a capital lease structure. As of September 30, 1999, approximately $2.6 million bearing interest at 8.5% was outstanding under the facility. In December 1998, Startec entered into a credit facility for up to $35 million with NTFC Capital Corporation ("NTFC Facility"), a financing arm of GE Capital. The line of credit is flexible and may be used to finance switches, associated telecommunications equipment, undersea fiber optic cables, and the expansion of facilities in the Company's targeted marketing areas. Each borrowing under the NTFC Facility bears interest at a fixed rate equal to the average yield to maturity of the five-year Treasury Note plus the Rate Adjustment (as defined in the agreement). Individual borrowings under the NTFC Facility are amortized over 60 months from the date of advance with a final maturity of all outstanding amounts of January 2004. As of September 30, 1999, approximately $20.6 million was outstanding and $12.7 million was available under the facility. Principal and interest payments of approximately $423,000 are due monthly in arrears. In May 1998, the Company issued $160 million of 12% Senior Notes yielding net proceeds of approximately $155 million, of which approximately $52.4 million was used to purchase securities which are pledged and restricted for use as the first six interest payments due on the Senior Notes. As part of the offering, the Company issued warrants to purchase 200,226 shares of common stock. The warrants are exercisable subsequent to November 1998 at an exercise price of $24.20 per share. The Company intends to apply approximately $102 million to fund capital expenditures through the end of the first quarter of 2000 to expand and develop the Company's network, including the purchase and installation of switches and related network equipment (including software and hardware upgrades for current equipment), the acquisition of fiber optic cable facilities, and investments in and the acquisition of satellite earth stations. The Senior Notes are unsecured and require semi-annual interest payments which began in November 1998. The implementation of the Company's strategic plan, including the development and expansion of its network facilities, expansion of its marketing programs, and funding of operating losses and working capital needs, will require significant investment. The Company expects that the net proceeds of the Senior Notes and Warrants Offering and the bank and vendor financing agreements together with cash on hand and cash flow from operations, will provide the Company with sufficient capital to fund currently planned capital expenditures and anticipated operating losses until early 2001. There can be no assurance that the Company will not need additional financing sooner than currently anticipated. The need for additional financing depends on a variety of factors, including the rate and extent of the Company's expansion and new markets, the cost of an investment in additional switching and transmission facilities and ownership rights in fiber optic cable, the incurrence of costs to support the introduction of additional or enhanced services, and increased sales and marketing expenses. In addition, the Company may need additional financing to fund unanticipated working capital needs or to take advantage of unanticipated business opportunities, including acquisitions, investments or strategic alliances. The amount of the Company's actual future capital requirements also will depend upon many factors that are not within the Company's control, including competitive conditions and regulatory or other government actions. In the event that the Company's plans or assumptions change or prove to be inaccurate or the Company's capital resources prove to be insufficient to fund the Company's growth and operations, then some or all of the Company's development and expansion plans could be delayed 14 or abandoned, or the Company may be required to seek additional financing or to sell assets, to the extent permitted by the terms of the Senior Notes. The Company may seek to raise such additional capital from public or private equity or debt sources. There can be no assurance that the Company will be able to obtain additional financing or, if obtained, that it will be able to do so on a timely basis or on terms favorable to the Company. If the Company is able to raise additional funds through the incurrence of debt, it would likely become subject to additional restrictive financial covenants. In the event that the Company is unable to obtain such additional capital or is unable to obtain such additional capital on acceptable terms, the Company may be required to reduce the scope of its expansion, which could adversely affect the Company's business, financial condition and results of operations, its ability to compete and its ability to meet its obligations under the Senior Notes. YEAR 2000 COMPLIANCE Many of the world's computer systems (including those in non-information technology equipment and systems) currently record years in a two-digit format. If not addressed, such computer systems will be unable to properly interpret dates beyond the year 1999, which could lead to business disruptions in the U.S. and internationally (the "Y2K" issue). A number of the Company's technology systems are affected by the Y2K issue. To ensure that the Company will be Y2K compliant before the new millennium, the Company formed a Y2K compliance team in the fourth quarter of 1997 and allocated corporate resources to determine the extent which the Y2K issue affected the Company and to formulate a Y2K compliance plan. Since then, the Company has been reviewing its embedded technology and infrastructure equipment, as well as non-embedded technology equipment to identify those that contain two-digit year codes, and is in the process of upgrading its infrastructure and corporate facilities to achieve Y2K compliance. In addition, the Company is actively working with its suppliers, vendors and customers to assess their compliance and remediation efforts and the Company's exposure to Y2K problems that may be caused by the failure of such suppliers, vendors and customers to become Y2K compliant in a timely manner. The Company is proceeding on a schedule which it believes will allow it to be Y2K compliant by the end of November 1999. The Company is focusing on three major areas of concern for the Y2K issue: embedded technology and infrastructure equipment, non-embedded technology equipment and third party suppliers compliance. The Y2K compliance team created a five stage process for becoming Y2K compliant. The five process stages are (1) compiling a complete inventory of all date sensitive technology equipment; (2) prioritizing systems affected based on revenues, strategic issues, and risk exposure; (3) performing modification of affected systems; (4) completing testing of modified systems; and (5) performing implementation of modified systems. The Company has completed the testing of modified systems and is in the final stages of performing implementation of modified systems. EMBEDDED TECHNOLOGY AND INFRASTRUCTURE EQUIPMENT. The embedded technology and infrastructure equipment area of concern consists primarily of switches, POPs, fiber optic cables and various platforms. Much of this equipment is purchased from third party vendors and has been certified by the vendor to be Y2K compliant. The certified pieces of equipment, such as many of the switches need only to be individually tested by the vendor and/or the Company to ensure compliance. Much of the infrastructure equipment contains both embedded and non-embedded technology requiring duplicative efforts. The Company believes that all U.S. based and most global embedded technology systems and infrastructure equipment are currently Y2K compliant. In addition, in order to protect against the acquisition of additional non-compliant products, the Company now requires suppliers to represent and warrant that products sold or licensed to the Company are Y2K compliant. However, there can be no assurance of the accuracy or completeness of any such representations made to the Company. 15 NON-EMBEDDED TECHNOLOGY EQUIPMENT. Non-embedded technology systems include predominately applications software and interfacing software. Much of this equipment has previously been upgraded to Y2K compliance through software upgrades and the purchase of new systems. Specific areas of concern for non-embedded technology include the software monitoring and managing the Company's call center and customer care database as well as network support. Expenditures regarding non-embedded technology are not expected to be material. The Company believes that all domestic non-embedded technology systems are currently Y2K compliant. The Company is in the process of prioritizing those global non-embedded technology systems that are not yet Y2K compliant and will undertake steps to achieve compliance prior to 2000; however, there can be no assurance that all global non-embedded technology systems will be Y2K compliant by that time. ACQUISITIONS. The Company is rapidly expanding through increased capital expenditures and acquisitions of companies. Upon acquisition, acquired companies become subject to the five step process of becoming Y2K compliant as discussed above. Time lines for dates of completion of the Company's Y2K compliance process are developed individually for each acquisition. Currently, all companies that have been acquired by the Company to date are on schedule to be Y2K compliant by December 1999, however, there can be no assurance that all acquired companies will be Y2K compliant by 2000. THIRD PARTY SUPPLIERS. The Company is currently communicating with its critical suppliers, vendors and customers about their plans and progress in addressing the Y2K issue. Detailed evaluations of the most critical third parties have been completed. The Company has also evaluated and prioritized the environments in which the Company operates. Many of the Company's residential and commercial markets include areas of emerging economies where the Y2K compliance issue does not appear to be a priority. In particular, the Company is aware that certain foreign carriers with which it has relationships have not yet been able to certify Y2K compliance and, although they are addressing the issue, there can be no assurance that these foreign carriers will be Y2K compliant by the end of December 1999. The Company plans to monitor progress made in these areas to mitigate any future exposure, however, the Company has limited, if any, control over the progress made by these third parties, and therefore, is unable to predict the potential effect on the Company's operations if the third parties in these foreign markets fail to adequately address the Y2K issue. These evaluations will be followed by the development of contingency plans, which commenced in the second quarter of 1999, with completion expected by the end of November 1999. RISK AND CONTINGENCY PLAN. There are many risks associated with the Y2K issue, including the possibility of a failure of the Company's routing and compression equipment, computer, and non-information technology systems. Such failures could have a material adverse effect upon the Company and may cause systems malfunctions, incorrect or incomplete transaction processing, the inability to reconcile accounting books and records, the inability of the Company to manage its business as well as potentially losing customers and increasing risk associated with litigation. In addition, even if the Company successfully becomes Y2K compliant, it can be materially and adversely affected by failures of third parties to become Y2K compliant. The failure of third parties with which the Company has financial or operational relationships such as LECs, carriers, cable suppliers, billing agents, satellite facilities, equipment suppliers, financial institutions, payroll contractors, regulatory agencies and utility companies, to become Y2K compliant in a timely manner could result in material adverse effects on the Company's results of operations. The Company is currently working diligently to become Y2K compliant by the end of November 1999. However, there can be no assurance that the Company will be successful in taking corrective action in a timely manner. The Company has started to develop contingency plans with regard to its key technology systems, although there can be no assurance that these contingency plans will successfully avoid a service disruption. The Company intends to document Y2K contingency plans as part of its Y2K risk mitigation efforts by the end of November 1999. 16 In addition to these efforts, Startec has joined with a number of other telecommunications providers to form a task force designed to give its members early warning of potential Y2K problems that may arise during the Y2K turnover across global time zones. During the turnover, carriers will log into a secure global database to report troubles and outages. This will assist task force members, including Startec, in identifying potential problems and allow them to take steps to redirect traffic, if necessary. COSTS. Total costs incurred up to September 30, 1999 specifically associated with becoming Y2K compliant have been approximately $550,000. No further material costs are expected to be incurred to become Y2K compliant. These costs will be included in the Y2K compliance costs once the specific Y2K components can be identified and allocated. Costs associated with the identification and testing of third party compliance will also be included once such costs can be identified. Readers are cautioned that certain of the statements made herein with respect to the Y2K issue are forward-looking statements. These statements, which include statements concerning the Company's expectations about future costs and timely completion of its Y2K modifications are subject to uncertainties that could cause actual results to differ materially from what has been discussed above. Factors that could influence the amount of future costs and the effective timing of remediation efforts include the success of the Company in identifying embedded technology and infrastructure equipment as well as non-embedded equipment that contain two-digit year codes, the nature and amount of programming and testing required to upgrade or replace each of the affected systems and equipment, the nature and amount of testing, verification, the rate and magnitude of related labor costs, and the success of the Company's suppliers, in addressing the Y2K issue. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk, including changes in interest rates, and to foreign currency exchange rate risks. The Company does not hold any financial instruments for trading purposes. The Company believes that its primary market risk exposure relates the effects that changes in interest rates have on its investments and those portions of its outstanding indebtedness that do not have fixed rates of interest. In this regard, changes in interest rates affect the interest earned on the Company's investments in cash equivalents, which consist primarily of demand deposits and money market accounts, and U.S. Government obligations which have been purchased by the Company and pledged to make certain interest payments on the Senior Notes. In addition, changes in interest rates impact the fair value of the Company's long-term debt obligations (including the Senior Notes). As of September 30, 1999, the fair value of the Senior Notes was approximately $129.6 million and the fair value of the securities pledged to make certain interest payments on the Senior Notes was approximately $36.5 million. Changes in interest rates also affect the Company's borrowings under its other financing facilities with NTFC, Ascend and Congress Financial Corporation. The NTFC Facility provides that each borrowing under the facility bears interest at a fixed rate equal to the average yield to maturity of the five-year Treasury Note plus an agreed-upon rate adjustment. The Ascend Facility provides that each borrowing under the facility bears interest at 8 1/2%. The CFC Facility provides that each borrowing under the CFC Facility bears interest at the prime rate effective on the date of borrowing. The Company's foreign operations to date have not been material, and therefore any foreign exchange rate fluctuations relating to the Company's results of foreign operations have also not been material. The Company has not entered into foreign currency exchange forward contracts or other derivative arrangements to manage risks associated with foreign exchange rate fluctuations. Foreign exchange rate fluctuations exposure may increase in the future as the size and scope of the Company's foreign operations increases. 17 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is from time to time the subject of, or involved in, legal proceedings. Management believes that any liability or loss resulting from such matters will not have a material adverse effect on the financial position or results of operations of the Company. ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS On August 21, 1999, the Board of Directors of the Company approved an amendment to the Company's Shareholder Rights Agreement dated as of March 26, 1998 (the "Rights Plan"). The amendment to the Rights Plan raised the threshold at which a person would be deemed to be an Acquiring Person (as defined in the Rights Plan) from 10% to 15% of the shares of Company common stock outstanding. The purpose of the amendment was to prevent the inadvertent triggering of the dilutive provisions of the Rights Plan in connection with the acquisition by Mr. Walt Anderson and Gold & Appel Transfer, S.A. of shares in excess of 10% of the Company's common stock then outstanding. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits: 4.12. First Supplemental Indenture dated as of 20 August 1999 by and between the Company and First Union National Bank, as Trustee. 10.54. Billing and Collection Services Agreement between BC Tel Corporation and Startec Global Communications Company (Canada) dated 23 July, 1999. 10.55. Procedures of the Interexchange Carrier Group Agreement between BC Tel Corporation and Startec Global Communications Company (Canada) dated 23 July, 1999. 27.1 Financial Data Schedule b. Reports on Form 8-K: On August 25, 1999, the Company filed a Form 8-K, pursuant to Item 5 of the Form. 18 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 15th day of November, 1999. STARTEC GLOBAL COMMUNICATIONS CORPORATION BY: /S/ PRABHAV V. MANIYAR ----------------------------------------- Prabhav V. Maniyar SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER, SECRETARY AND DIRECTOR (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
19 EX-4.12 2 EXHIBIT 4.12 Exhibit 4.12 SECOND SUPPLEMENTAL INDENTURE THIS SECOND SUPPLEMENTAL INDENTURE, dated as of August 20, 1999 (the "Second Supplemental Indenture") by and among Startec Global Communications Corporation, a Delaware corporation ("Startec"), and First Union National Bank, as Trustee under the Indenture (as defined below)(the "Trustee"). WHEREAS, Startec and the Trustee are parties to an Indenture dated as of May 21, 1998, as amended by the First Supplemental Indenture dated February 28, 1999 (the "Indenture"), pursuant to which Startec issued its 12% Senior Notes due 2008 and 12% Series A Senior Notes due 2008 (collectively the "Notes"); and WHEREAS, Section 901 of the Indenture provides, generally, that, without the consent of the Holders (as defined in the Indenture), Startec, when authorized by a Board Resolution (as defined in the Indenture), and the Trustee may enter into one or more indenture supplements to cure any ambiguity, to correct or supplement any provision in the Indenture which may be inconsistent with any other provision in the Indenture, or to make any other provisions with respect to matters or questions arising under the Indenture; and WHEREAS, the Indenture contains an incorrect cross-reference which creates both ambiguity and inconsistency in the Indenture as it currently exists; and WHEREAS, Startec's Board of Directors has passed a Board Resolution authorizing an indenture supplement to correct the cross-reference and thus clarify the ambiguity and resolve the inconsistency. NOW, THEREFORE, THIS SECOND SUPPLEMENTAL INDENTURE WITNESSETH: The parties hereto mutually agree as follows: SECTION 1-CORRECTION. This Indenture is hereby corrected by amending the definition of Permitted Liens as follows: In the sub-part (xxi) of the definition of Permitted Liens, the reference to "clause (iv) of paragraph (b) of Section 1011" is hereby changed to read "clause (iii) of paragraph (b) of Section 1011." SECTION 2-RATIFICATION OF INDENTURE. The Indenture, as supplemented hereby, is in all respects ratified and confirmed and the Indenture as so supplemented shall be read, taken and construed as one instrument. SECTION 3-COUNTERPARTS. This Second Supplemental Indenture may be executed in several counterparts, each of which shall be regarded as an original and all of which together shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental Indenture to be duly executed as of the day and year first above written. STARTEC: Startec Global Communication Corporation By: /s/ Ram Mukunda --------------- Name: Ram Mukunda Title: President and Chief Executive Officer TRUSTEE: First Union National Bank By: /s/ Patricia A. Welling ----------------------- Name: Patricia A. Welling Title: Vice President EX-10.54 3 EXHIBIT 10.54 EXHIBIT 10.54 BILLING AND COLLECTION SERVICES AGREEMENT This Agreement is made in duplicate this 23 day of July, 1999. BETWEEN: Startec Global Communications Company (Canada), a corporation duly incorporated under the laws of Nova Scotia, having an office at Suite 800 1959 Upper Water Street, Halifax, NS B3J 3NL (hereinafter referred to as "the Alternate Provider of Long Distance Service" or "the APLDS") AND: BC TEL, a corporation duly incorporated under the laws of Canada, having an office at 3777 Kingsway, Burnaby, B.C. V5H 3Z7 (hereinafter referred to as "BC TEL") Whereas BC TEL has agreed to provide billing and collection services for Eligible Calls to Customers who maintain accounts with BC TEL, as defined within; and Whereas the APLDS wishes to utilize BC TEL's billing and collection services; BC TEL and the APLDS in consideration of the mutual covenants and promises in this Agreement therefore agree as follows: Page 1 Revised 97 05 12 Article 1 DEFINITIONS 1. In this Agreement, these terms will be defined as follows: a) "Casual Calls" means calls placed on the APLDS's network using the 101XXXX dialing plan, placed by a caller who is not an APLDS subscriber. b) "Collect Calls" means collect calls placed on the APLDS's network which are billed to a Customer who is not an APLDS subscriber. c) "Third Party Calls" means calls placed on the APLDS's network which are billed to a third party telephone number, where such third party is not an APLDS subscriber. d) "900 Service Calls" means calls placed to an APLDS provided 900 number, where the caller is not an APLDS subscriber. e) "Customer" means an end user who purchases communications services from the APLDS and who maintains an account with BC TEL. f) "Bad Debt" means charges for Eligible Calls which have been legitimately billed to Customers, but are not paid by the Customers and which are not disputed by the Customers as described in BC TEL's billing and collection services procedures which are provided to the APLDS from time to time. Bad Debt specifically excludes charges incurred fraudulently. g) "GST" means applicable Goods and Services Tax. h) "PST" means applicable Provincial Sales Tax. i) "Chargeback" means an account receivable which is returned to the APLDS by BC TEL after it has been included on a Customer's invoice. j) "Eligible Calls" means message toll service calls placed on the APLDS's network as described in Article 2.1. k) "Recirculated" means held by the APLDS and periodically Page 2 Revised 97 05 12 investigated by the APLDS to determine whether the Customer is a subscriber to the APLDS's services. l) "Rebilled" means provided to BC TEL for inclusion on a Customer invoice subsequent to being previously included on a Customer invoice by BC TEL. Article 2 SCOPE OF THE AGREEMENT 2.1 Subject to Articles 2.2, 2.3 and 2.4, BC TEL will purchase from the APLDS and the APLDS will sell, assign, transfer and set over unto BC TEL all rights, title and interests in and to the accounts receivable for Eligible Calls accruing to the APLDS. Eligible Calls consist exclusively of: a) Casual Calls other than casual calls to Long Distance Directory Assistance (LDDA), b) Collect Calls, c) Third Party Calls, d) 900 Service Calls, provided that the 900 Service program associated with such calls meets the then current Program Content Guidelines specified in Schedule "C" to the Advantage 900 Accounts Receivable Management (ARM) Agreement approved from time to time by the Canadian Radio-television and Telecommunications Commission, and e) Calls placed over the APLDS's network using the '1+' dialing plan, that appear to be Casual Calls, provided that the calls have been Recirculated by the APLDS for at least 14 days. BC TEL will not purchase from the APLDS and the APLDS will not sell, assign, transfer and set over unto BC TEL the accounts receivable for any other types of calls. 2.2 BC TEL, at its sole discretion, will not purchase accounts receivable for the following types of charges, or if such accounts receivable are purchased, BC TEL may return them or charge them back to the APLDS and BC TEL shall be entitled to recover the full amount of all payments made by BC TEL to the APLDS for such accounts receivable, including taxes, and to retain any charges applied by BC TEL pursuant to Articles 6 and 7 hereof: Page 3 Revised 97 05 12 a) For which there are invalid entries in the fields of the associated call detail records provided by the APLDS, as defined by the technical specifications of the services which are provided to the APLDS from time to time by BC TEL, b) For which the associated call detail records do not pass edits for validity and consistency or the charge cannot otherwise be billed to a Customer, c) Associated with domestic and Canada-USA calls which are more than 60 days old when first received by BC TEL and Rebilled calls which are more than 120 days old when received by BC TEL, d) Associated with overseas calls which are more than 120 days old when first received by BC TEL and Rebilled overseas calls which are more than 180 days old when received by BC TEL, e) Associated with calls charged to accounts outside of BC TEL's operating territory, including accounts in independent company territories, f) Associated with calls charged to non-existent accounts, g) Associated with calls for which the charge has been duplicated, h) Associated with Third Party Calls or Collect Calls where the charges for such calls have not been validated by the APLDS by obtaining the concurrence of the billed party at the time each such call was made, i) Associated with calls where the Customer denies knowledge of the call, requests an adjustment due to dialing error, or any other conditions as described in the billing and collection services procedures which are provided to the APLDS from time to time by BC TEL, j) Associated with fraudulent or suspected fraudulent calls, and k) Associated with calls that are Rebilled more than once. 2.3 Notwithstanding anything herein, BC TEL will not purchase and the APLDS will not sell, assign, transfer or set over the accounts receivable for 900 Service Calls associated with programs that do not comply with the then current Program Content Guidelines as specified in Schedule "C" to the Advantage 900 Accounts Receivable Management (ARM) Agreement approved from time to time by the Canadian Radio-television and Telecommunications Commission. In the event that the APLDS provides accounts receivable for 900 Service Calls associated with programs that do not comply with the Program Content Guidelines, BC Page 4 Revised 97 05 12 TEL may return the accounts receivable to the APLDS and recover the full amount of the charge including taxes and retain any charges applied by BC TEL pursuant to Articles 6 and 7 hereof and, at its discretion, terminate the billing of charges for 900 Service Calls under this Agreement, subject to the procedures for termination specified in Article 12. 2.4 Title to the accounts receivable which BC TEL purchases and the APLDS sells, assigns, transfers or sets over pursuant to this Agreement will be deemed to have passed to BC TEL upon such account receivable's successful completion of all BC TEL pre-billing edits. 2.5 In the event an account receivable is charged back to the APLDS, title to such account receivable shall be deemed to have reverted to the APLDS upon the APLDS's receipt of the Chargeback record applicable to such account receivable. 2.6 The APLDS will record all necessary billing details, as defined by the technical specifications of the services which are provided to the APLDS from time to time by BC TEL, for all Eligible Calls by Customers, calculate the amounts owing including taxes, and forward a transmittal invoice to BC TEL. BC TEL will include the relevant charges in statements distributed to Customers responsible for the payment of the Eligible Calls. 2.7 The provision of billing and collection services to the APLDS does not preclude BC TEL from providing billing and collection services or any other service to any other parties, including any other alternative providers of long distance service. Article 3 RIGHTS AND RESPONSIBILITIES OF BC TEL 3.1 BC TEL will make available to the APLDS the following billing and collection services in accordance with the terms and conditions contained herein, any applicable provisions of BC TEL's Terms of Service and tariffs and the technical specifications of the services which are provided to the APLDS from time to time by BC TEL: a) Preparation and rendering of bills for charges associated with Eligible Calls by Customers and which charges have been purchased by BC TEL. Page 5 Revised 97 05 12 b) Collection of payments for charges relating to Eligible Calls made by Customers of the APLDS, including appropriate taxes which will be remitted by the APLDS to the appropriate governments as specified in Article 5. c) Answering of Customer questions regarding charges billed by BC TEL for Eligible Calls provided by the APLDS, excluding questions about the details of the APLDS's services, rates, rate structures and similar matters. d) Application of credits and adjustments to Customer accounts, in accordance with the billing and collection services procedures which are provided by BC TEL to the APLDS from time to time. 3.2 Customer billing records which do not pass edits for validity and consistency will be returned to the APLDS unprocessed and BC TEL will not purchase such accounts receivable from the APLDS. The edits for validity and consistency are described in the technical specifications of the services which are provided to the APLDS from time to time by BC TEL. 3.3 Accounts receivable for which BC TEL does not collect payment from the Customer may be returned to the APLDS as provided for in Article 2, except as provided for in Article 3.4. For these Chargebacks, BC TEL will return to the APLDS such call detail information as is provided for in the technical specifications of the services which are provided to the APLDS from time to time by BC TEL. For these Chargebacks, BC TEL will recover from the APLDS the full amount of all payments made by BC TEL to the APLDS for the accounts receivable, including taxes, and will retain any charges applied by BC TEL pursuant to Articles 6 and 7 hereof. 3.4 Accounts receivable which become Bad Debt will not be charged back to the APLDS, except as otherwise provided for in Articles 2.2, 2.3 and 3.2. 3.5 The parties hereto agree and the APLDS represents to BC TEL that BC TEL will have full power and authority, at any time, to notify any person who will be concerned with the assignment of the accounts Page 6 Revised 97 05 12 receivable or otherwise affected by it, of the fact that said assignment has been made. Furthermore, the APLDS, at BC TEL's request, will notify any person who will be concerned with the assignment of the accounts receivable or otherwise affected by it, of the fact that said assignment has been made. 3.6 The parties hereto agree and the APLDS represents to BC TEL that BC TEL will have full power and authority to register any and all financing statements and other similar documentation under any applicable legislation so as to protect and perfect its interest in the accounts receivable. The APLDS agrees to execute or obtain execution of all necessary consents required to give effect to this Article 3. 3.7 At any time during the continuance of this Agreement, BC TEL will have the right to sell, assign, transfer and set over the accounts receivable with all or any rights, title and interests therein to any person, firm or corporation, and the assignee thereof will acquire and possess all the powers, rights and interests granted under this Agreement and will be subject to any obligations of BC TEL hereunder. 3.8 For any call which is charged back to the APLDS pursuant to Article 2.2 i), 2.2 j) and 2.2 k) in accordance with the applicable tariffs, BC TEL shall provide to the APLDS the Customer's name, telephone number and billing address associated with such a call. 3.9 All information provided to the APLDS pursuant to this Agreement is provided in confidence for the exclusive use of the APLDS. The APLDS is responsible for protecting the confidentiality of this information and may not provide, disclose or resell this information to any third party, including, but without restricting the generality of the foregoing, any agents, affiliates, co-venturers, etc. 3.10 All information provided to the APLDS pursuant to this Agreement, including, but without restricting the generality of the foregoing, the name, telephone number and billing address of any Customer, may only be used for the purpose of billing Eligible Calls. Such information may be provided by the APLDS to a third party if this information is to be used for billing and collection purposes on behalf of the APLDS subject to the appropriate privacy safeguards. Without limiting the generality of the foregoing, the APLDS may not use any information provided pursuant to this Agreement for telemarketing purposes. For the purposes of this Agreement, telemarketing shall include, but not be Page 7 Revised 97 05 12 restricted to, the promotion by the APLDS or by any person or entity, of the APLDS or its services or products, or of a third party or its services or products, by any means. Notwithstanding the foregoing, the APLDS may disclose a Customer=s name and address to an agent whom it has retained in thecollection of the Eligible Calls of that Customer, provided the information is required for, and is to be used only for, that purpose and the APLDS has implemented appropriate safeguards to protect the privacy of Customers. Article 4 RIGHTS AND RESPONSIBILITIES OF THE APLDS 4.1 The APLDS will record all necessary billing details for all Eligible Calls by Customers including calculation of all amounts owing including taxes. The billing details will be provided to BC TEL in accordance with the technical specifications of the services which are provided to the APLDS from time to time by BC TEL. The APLDS is solely responsible for the accuracy of the billing details provided to BC TEL. 4.2 The APLDS will only submit to BC TEL accounts receivable for Eligible Calls, as described in Article 2. The APLDS agrees that for any other accounts receivable which are submitted to BC TEL, BC TEL may return or charge back the accounts receivable to the APLDS. In such event, BC TEL will recover the full amount of all payments made by BC TEL to the APLDS for the accounts receivable, including taxes, from the APLDS in accordance with Article 6 hereof and the APLDS will be required to pay to BC TEL charges as described in Article 7. 4.3 The APLDS is responsible for calculation and remittance of taxes, as described in Article 5. 4.4 The APLDS must provide for the use of Customers an inquiry telephone number and must be accessible at the inquiry telephone number to respond to Customer inquiries at no charge to any user of such service. The APLDS must speak directly to anyone who has contacted the APLDS via the inquiry telephone number within 24 hours of receipt of any such contact. Article 5 TAXATION 5.1 Both parties acknowledge that federal and provincial sales or other Page 8 Revised 97 05 12 consumption taxes, including GST and PST, may apply to the charges for calls provided by the APLDS. BC TEL will be responsible fordetermining GST and British Columbia PST applicable and which must be levied from a Customer. The APLDS will be responsible for determining all other taxes applicable to the provision of its services and which must be levied from a Customer. 5.2 BC TEL will calculate the applicable amounts of GST and British Columbia PST due on all charges. The APLDS will calculate and provide to BC TEL the applicable amounts of all other provinces' PST due on all charges forwarded to BC TEL for billing purposes. 5.3 BC TEL will bill and collect the applicable taxes on behalf of the APLDS, unless BC TEL identifies the Customer as tax exempt (for either, or both, of GST and PST). If a Customer is tax exempt, the appropriate tax, or taxes, will be removed, other taxes will be recalculated by BC TEL, if necessary, and the revised tax amounts will be billed. 5.4 BC TEL will report to the APLDS the amount of tax, or taxes, that have been billed. 5.5 BC TEL will be responsible for the remittance of British Columbia PST to the British Columbia government. The APLDS will be responsible for the remittance of all other taxes to the appropriate government authorities. 5.6 In any event, the APLDS will indemnify and hold BC TEL harmless for any outstanding taxes which may subsequently be claimed against BC TEL as purchaser of the accounts receivable arising from the APLDS's failure to promptly notify BC TEL of applicable taxes or to remit all applicable taxes. Article 6 PAYMENT FOR ACCOUNTS RECEIVABLE 6.1 BC TEL will pay to the APLDS an amount equal to the full value of each account receivable recorded less an accounts receivable management discount, as detailed in the applicable tariffs, to account for Bad Debt associated with the accounts receivable purchased from the APLDS, and less all associated charges specified in this Agreement to the APLDS including the full amount of each account receivable Page 9 Revised 97 05 12 returned or charged back to the APLDS. The resulting amount will be paid to the APLDS within forty-five (45) days of the last day of the calendar month for which the account receivable was recorded by BC TEL, or, in the event that full payment is not made by this time, interest will subsequently accrue on any outstanding balance at the rate specified in General Tariff CRTC 1005, Item 15 (2). 6.2 In the event that the accounts receivable management discount plus the associated charges to the APLDS plus the full amount of all accounts receivable returned and charged back to the APLDS exceeds the full value of the accounts receivable recorded during a calendar month, the APLDS will pay to BC TEL the difference forty-five (45) days from the last day of that month or thirty (30) days from the issuance by BC TEL of an accounting showing such difference for the month, whichever occurs later. 6.3 All monthly accounts will be deemed to have been accepted by the APLDS if no written objection will have been made thereto within one hundred and twenty (120) days from the date specified on such account. Any agreed adjustments arising from any such objection will be reflected in the next feasible monthly settlement payment. 6.4 In the event that the APLDS submits a written objection to BC TEL, BC TEL shall review the accounts in respect to which the objection shall have been made and shall render its decision regarding the objection to the APLDS within thirty (30) days. BC TEL's decision shall be final. 6.5 In the event that BC TEL experiences Chargebacks from Customers following the expiration or termination of this Agreement, the APLDS agrees to pay BC TEL the full amount of the accounts receivable charged back plus the associated charges forty-five (45) days from the last day of the month during which the Chargebacks occur. Article 7 RATES AND CHARGES 7.1 In consideration of BC TEL providing billing and collection services to the APLDS as described in this Agreement, BC TEL will charge the APLDS and the APLDS will pay rates and charges as detailed in the applicable tariffs. Page 10 Revised 97 05 12 Article 8 AUTHORIZATION 8.1 The APLDS expressly authorizes BC TEL to use the name of the APLDS for the purpose of identifying the APLDS on whose behalf the call is being billed in the collection of all accounts receivable. Article 9 ACCOUNTING TO THE APLDS 9.1 BC TEL will provide reports to the APLDS, including an accounting of the payment due to the APLDS for the accounts receivable purchased by BC TEL. The reports will be provided according to the technical specifications of the services which are provided to the APLDS from time to time by BC TEL. 9.2 Any report provided to the APLDS will be deemed to be correct unless the APLDS notifies BC TEL of any discrepancy therein, within sixty (60) days from the date the report is issued by BC TEL. 9.3 In the event that an error is made by BC TEL in the preparation of any report, BC TEL's liability will be limited to correcting the same and to modifying the report accordingly in the next issue of the same. 9.4 The reports described in this article will be the only documentation conclusive with respect to accounts receivable and call volumes. Article 10 LIMITATION OF LIABILITY 10.1 BC TEL's liability shall be subject to the provisions regarding liability in its Terms of Service. Without restricting the generality of the foregoing, BC TEL will not be responsible to the APLDS for direct, indirect, special, incidental or consequential damage or loss in connection with or arising out of the performance or non-performance of the terms of this Agreement howsoever caused, including, without limiting the foregoing, any business or economic loss, notwithstanding that BC TEL has been advised or is aware of the possibility thereof. 10.2 The provisions of this Article 10 will survive the expiration or Page 11 Revised 97 05 12 termination of this Agreement. Article 11 TERM 11.1 This Agreement will be deemed to come into force on the _____ day of _________,_____ and will be effective for an initial period of two years from this date and will continue afterwards for successive month-to-month periods under the same terms and conditions unless and until terminated by either party upon sixty (60) days prior written notice to the other party, or pursuant to the provisions of this Agreement concerning termination. Article 12 TERMINATION 12.1 Except as provided hereinafter, in the event that either party will be in breach of any of the terms of this Agreement, or, without restricting the generality of the foregoing, of any laws applicable thereto, regulations or BC TEL tariffs, the other party may, by notice to the party in default, require the remedy of said breach or the performance of the obligations hereunder. If the party so notified fails to remedy or perform within ten (10) days of the receipt of such notice, the other party may, without prejudice to all its rights and remedies in respect of breach of contract, subject to the terms of this Agreement, terminate this Agreement as specified in Article 12.7 below. 12.2 Where one party (the party in default) has received notification from the other party (the party not in default) pursuant to Article 12.1 of this Agreement and notwithstanding that the party in default has remedied such breach or has performed said obligation, in the event at any time thereafter that such party in default is found by the party not in default to have breached or to have failed to perform in respect of the same provision(s) of this Agreement under which notification was first provided pursuant to Article 12.1, the party not in default will have the right at its sole discretion to terminate this Agreement as specified in Article 12.7 below. 12.3 If, in BC TEL's reasonable judgment, the provision of billing and collection services under this Agreement gives rise to an unreasonable number of Customer complaints, BC TEL may terminate this Agreement upon thirty (30) days prior written notice to the APLDS. Page 12 Revised 97 05 12 12.4 In the event that the Chargebacks associated with the APLDS's accounts receivable are at a level of 15% or more of the total accounts receivable for two (2) consecutive months, or if the Bad Debt associated with the APLDS's accounts receivable is at a level of 10% or more of the total accounts receivable for two (2) consecutive months, BC TEL may, at its sole discretion, terminate this Agreement as specified in Article 12.7 below. 12.5 Subject to the terms of this Agreement, any termination of this Agreement for breach of any of its terms will be without prejudice to all rights and remedies available to the party terminating this Agreement in respect of such breach. 12.6 Notwithstanding Article 12.7 below, if one of the parties becomes insolvent or if insolvency or bankruptcy proceedings of any kind are initiated against a party, if a party is placed in receivership or if a party has to perform a transfer of property in favour of its creditors or its property is placed under sequestration or is subject to liquidation, the other party may, upon notice, immediately terminate this Agreement. 12.7 Prior to termination of this Agreement, the party terminating the Agreement shall provide the other party with ten (10) days prior written notice stating the reason for termination and the scheduled termination date. Additionally, at least twenty-four hours prior to termination, the party terminating the Agreement shall advise the other party that termination is imminent. 12.8 If this Agreement is terminated by the APLDS prior to the end of the contract term, a charge equal to the remaining balance of monthly subscription fees shall apply for the contract term. 12.9 Without restricting the generality of the foregoing, all provisions of this Agreement regarding amounts payable to BC TEL for services provided to the APLDS shall survive termination of this Agreement. Page 13 Revised 97 05 12 Article 13 NON-WAIVER 13.1 The failure of either party, at any time, to require performance by the other party of any provision, condition or covenant hereof will, in no way, affect its right thereafter to enforce the provision, condition or covenant, nor will the waiver by either party of any breach of any provision, condition or covenant hereof be taken or held binding upon the party, unless in writing, and the waiver will not be taken or held to be a waiver of any future breach of the same provision, condition or covenant. Article 14 ENTIRE AGREEMENT 14.1 This Agreement, together with all matters incorporated by reference, constitutes the entire Agreement between the parties with regard to matters dealt with under this Agreement and there are no other conditions or warranties, expressed, implied or statutory, applicable to the subject. Article 15 ASSIGNMENT 15.1 Except as provided herein, neither party will assign or transfer this Agreement, or any rights or privileges hereunder, in whole or in part, without the written prior approval of the other, provided however that nothing herein will prevent BC TEL from assigning or transferring this Agreement to a subsidiary or affiliate of BC TEL without the consent of the other party. 15.2 This Agreement will be binding upon the respective successors and permitted assigns of the parties hereto. Article 16 GOVERNING LAW 16.1 The terms of this Agreement will be governed by the law of the Province of British Columbia. Page 14 Revised 97 05 12 Article 17 REGULATORY APPROVAL 17.1 This Agreement, including the rates, terms and conditions specified herein and in the applicable tariffs, are subject to all applicable regulatory approvals. Such rates, terms and conditions may be modified from time to time in accordance with and subject to the approval of the Canadian Radio-television and Telecommunications Commission. Article 18 INTERPRETATION 18.1 The headings appearing in this Agreement have been inserted as a matter of convenience and for reference only and, in no way, define, limit or enlarge the scope or meaning of this Agreement or of any provisions hereof. 18.2 Whenever a word importing the singular number only is used in this Agreement, such word will include the plural and words importing either gender or firms or corporations will include the persons or other genders and firms or corporations where applicable. Any reference to the term of this Agreement will, unless the context otherwise requires, be deemed to include any renewals hereof. Article 19 SEVERABILITY 19.1 If any clause or clauses or part or parts of clauses in this Agreement be illegal or unenforceable, it or they will be considered separate and severable from the Agreement and the remaining provisions of the Agreement will remain in full force and effect and will be binding upon the parties hereto as though the said clauses or part or parts of clauses had never been included, provided, however, that in the event that the removal of such clause or clauses renders this Agreement ineffective in the assessment of BC TEL, BC TEL shall have the right to terminate this Agreement as specified in Article 12.7. Page 15 Revised 97 05 12 Article 20 NOTICES 20.1 Any notice or other communication hereunder will be in written form and will be sufficient if delivered personally, by facsimile or by pre-paid registered mail to the address of the APLDS as follows: - - - - - - and to BC TEL at the following address: Dan Delaloye Vice President International & Carrier Services 26th Floor Telus Tower 411 1st Street S.E. Calgary, Alberta T2G 4Y5 20.2 The date of receipt of such communication will be the first business day following the date sent, if delivered personally or by facsimile, or, if sent by pre-paid registered mail, will be deemed to be the fifth business day after the same will have been mailed, except in the event of a mail strike this latter presumption will not apply. 20.3 Either party may change its address for notice under Article 20 without obtaining consent from the other party, provided, however, that it notifies the other party in writing of its new address. Page 16 Revised 97 05 12 Article 21 FORCE MAJEURE 21.1 Neither party will be held liable for any delay or failure in performance of any part of this Agreement in the event of force majeure or for any cause beyond the reasonable control of the party concerned. In particular, and without limiting the above, the parties will be excused from the performance of their obligations under this Agreement where failure to comply with any of the terms or conditions of this Agreement will be caused by an act of God, strike, walk out, public enemy, war, civil commotion, riot, judicial or government order, other requirement of law, or any other cause of whatsoever nature or kind beyond the reasonable control of either party. Article 22 LANGUAGE 22.1 This Agreement has been prepared and drawn up in the English language at the express wish of the parties. Le present contrat a ete prepare et redige en anglais a la demande expresse des parties. Page 17 Revised 97 05 12 IN WITNESS WHEREOF the parties have executed this Agreement. This_________day of____________________,__________, in the city of______________ Province of___________________by the APLDS______________________________________ PLEASE INSERT NAME Witnessed by: ) ) Per Signature --------------- ) Name - --------------------------- --------------- (Signature of Witness) ) Title --------------- ) ) - --------------------------- (Name of Witness) ) ------------------------------ ) (PLEASE PRINT OR TYPE NAME ) AND TITLE OF PERSON WHO - --------------------------- (Address) ) ACTUALLY SIGNS) AND This_________day of____________________,__________, in the city of______________ Province of___________________by the BC TEL_____________________________________ PLEASE INSERT NAME Witnessed by: ) ) Per Signature --------------- ) Name - --------------------------- --------------- (Signature of Witness) ) Title --------------- ) ) - --------------------------- (Name of Witness) ) ------------------------------ ) (PLEASE PRINT OR TYPE NAME ) AND TITLE OF PERSON WHO - --------------------------- (Address) ) ACTUALLY SIGNS) Page 18 Revised 97 05 12 EX-10.55 4 EXHIBIT 10.55 EXHIBIT 10.55 AGREEMENT SPECIFYING THE PROCEDURES OF THE INTEREXCHANGE CARRIER GROUP BETWEEN: Startec Global Communications Company (Canada), a corporation duly incorporated under the laws of Nova Scotia, having an office at Suite 800 1959 Upper Water Street, Halifax, NS B3J 3NL (hereinafter referred to as "IX Customer") OF THE FIRST PART AND: BC TEL, a corporation duly incorporated under the laws of Canada, having an office at 3777 Kingsway, Burnaby, BC V5H 3Z7 (hereinafter referred to as "BC TEL" or "the Company") OF THE SECOND PART WHEREAS in Telecom Decision CRTC 92-12 (Decision 92-12) the Canadian Radio-television and Telecommunications Commission ("The Commission") directed BC TEL to establish an Interexchange Carrier Group (the "Carrier Services Group" or "CSG"); WHEREAS BC TEL has established a Carrier Services Group to comply with Decision 92-12 and to effectively meet IX Customer's requirements related to interconnection; and WHEREAS BC TEL has established procedures, including the establishment of the Carrier Services Group, to ensure that information provided by IX Customer to BC TEL in its capacity as a provider of a monopoly service is kept confidential; Now therefore in consideration of the premises and the mutual covenants hereinafter contained, the Company and IX Customer hereby agree as follows: /2 1. CARRIER SERVICES GROUP FUNCTIONS & PROCEDURES: a) The Carrier Services Group will coordinate the delivery by BC TEL and Associated Companies, (defined as in section 5(1), hereto) of facilities and services to IX Customer pursuant to the terms of Decision 92-12. b) The Carrier Services Group will be responsible for the performance of the following functions in relation to interconnection of the networks of IX Customer and BC TEL: 1) The coordination of the delivery of services and facilities to IX Customer. 2) The development and marketing of services provided by BC TEL to IX Customer. 3) Tracking of IX Customer's network access requirements, based upon forecasts provided by IX Customer. 4) The processing and tracking of network access service requests by IX Customer. 5) The operation of a network provisioning interface to IX Customer. 6) The reception and processing of presubscription orders from IX Customer. 7) Handling billing inquiries from, and account reconciliation for, IX Customer and providing those collection services BC TEL is obligated to provide pursuant to the terms of Decision 92-12; 8) The development and coordination of equal access arrangements. 9) The performance of contract administration. 10) The safeguarding of all Confidential Information provided to the Carrier Services Group by IX Customer. c) The specific obligations to be undertaken by the Carrier Services Group shall be set forth in the schedules described in section 2 below and the general nature of the functions described above shall not serve to expand those obligations. The Carrier Services Group will serve as IX Customer's first point of contact with BC TEL with respect to the activities and services specified in paragraph b), above. /3 2. CARRIER SERVICES GROUP PROCEDURES: The procedures of the Company's Carrier Services Group with respect to receipt and processing of orders from IX Customer, interexchange carrier billing, network planning in relation to services provided as a result of interconnection and are specified in the following schedules attached hereto, which schedules shall constitute an integral part of this Agreement: Schedule 1 Ordering procedures Schedule 2 Carrier billing Schedule 3 Network Planning Schedule 4 PIC information processing 3. DISCLOSURE OF CONFIDENTIAL INFORMATION: a) In order to enable BC TEL to provide services and facilities associated with interconnection, IX Customer will disclose to the Carrier Services Group Confidential Information, as further defined below. It is agreed between the parties that the Confidential Information provided by IX Customer, subject to Article 11 of BC TEL's Terms of Service, respectively, shall be used by BC TEL solely for the purpose of facilitating the provision of services and facilities associated with interconnection. For greater certainty, BC TEL will not provide the Confidential Information to personnel involved in the provision of services offered in competition with IX Customer, except in accordance with the provisions of this Agreement. b) BC TEL further agrees that all right, title and interest in the Confidential Information shall remain the exclusive property of IX Customer and that BC TEL shall not use or disclose Confidential Information except in accordance with the terms of this Agreement or, alternatively, with the prior written consent of IX Customer. 4. CONFIDENTIAL INFORMATION: 1) For the purposes of this Agreement, "Confidential Information" shall mean any data or oral or written information: (a) obtained from IX Customer either directly or indirectly through a BC TEL Associated Company or (b) developed by BC TEL or a BC TEL Associated Company exclusively for the benefit of IX Customer, relating to interconnection /4 which BC TEL receives or develops in its capacity as a provider of a monopoly service and that is not generally known outside IX Customer whether or not such information is identified as "Confidential" at the time of disclosure. Confidential Information may include but shall not be limited to information pertaining to IX Customer's: circuit orders, market forecasts, plans for the development of new services, network plans, new customers, and current or proposed business plans shall be deemed "Confidential Information" whether or not identified as "Confidential" at the time of disclosure. 2) No receiving party shall be liable for disclosure or use of Confidential Information upon the occurrence of one or more of the following events: (a) The Confidential Information enters the public domain other than through a breach of this Agreement. (b) The Commission orders public disclosure of the Confidential Information. (c) The Confidential Information is lawfully obtained by the receiving party from a third party or parties without a breach of this Agreement. (d) IX Customer has provided express written approval for the disclosure of the Confidential Information. (e) Information is independently developed by BC TEL. (f) The Confidential Information is required by Canadian law to be disclosed or released by the receiving party. 5. DISCLOSURE TO BC TEL ASSOCIATED COMPANIES: 1) It is understood by the parties hereto that the Carrier Services Group will utilize the staff and facilities of the following organizations and companies ("the BC TEL Associated Companies"). Nothing in this Agreement shall be deemed to prevent the Carrier Services Group from providing Confidential Information to the BC TEL Associated Companies subject to the procedures specified in section 7, hereto and on a "need to know" basis, in relation to the provision of services and facilities contemplated in this Agreement. /5 The BC TEL Associated Companies shall consist of the following: a) Stentor Resource Centre Inc. for the purpose of performing the following activities associated with the provision of interconnection services to IX Customer: engineering services, standards development, services development, policy, rating and tariff development. b) BC TEL Systems Solutions Inc. for the purpose of developing and implementing systems required to support the operations of BC TEL and other telephone companies with whom IX Customer may interconnect its network, subject to agreement between BC TEL and such other telephone companies. The activities of BC TEL Systems Solutions Inc. will include but not be limited to the development of the Carrier Access Management Systems (CAMS) and of the Primary Interexchange Carrier (PIC) System. BC TEL Systems Solutions Inc. may carry out revisions to other BC TEL systems required as a result of interconnection. BC TEL Systems Solutions Inc. will also develop associated methods and procedures. c) Stentor Canadian Network Management (SCNM) for the purpose of planning and coordinating the introduction of common services to IX Customer and the implementation of common methods and procedures between SCNM member telephone companies. d) Such other organizations and companies as the parties may agree to in writing from time to time. /6 2) BC TEL will not provide any Confidential Information to any BC TEL Associated Company unless any such BC TEL Associated Company has executed an acknowledgment in the form specified in Attachment 4 within 45 days following the effective date of this Agreement, confirming that it will protect the confidentiality of Confidential Information to the same extent that BC TEL protects Confidential Information under the terms of this Agreement. BC TEL will deliver a copy of each such executed acknowledgment to IX Customer. 6. DISCLOSURE TO STENTOR OWNERS: BC TEL will disclose Confidential Information to the Stentor Resource Centre Inc. owner companies (the "owners") only to the extent such information is required to be disclosed in order to provide services and facilities in relation to interconnection and only with the prior authorization of IX Customer. Where disclosure is made to an owner which has executed an Interexchange Carrier Group (ICG) Agreement with IX Customer, such disclosure of Confidential Information will be made by BC TEL subject to the undertaking that each such owner to whom the Confidential Information is disclosed will treat the Confidential Information in the same manner as it treats IX Customer Confidential Information disclosed to its own ICG pursuant to its ICG Agreement with IX Customer. In the event BC TEL is permitted by IX Customer to provide Confidential Information to an owner which has not entered into an ICG Agreement with IX Customer, BC TEL shall endeavor to obtain from such owner an executed acknowledgment in the form specified in Attachment 4 that such owner shall protect the Confidential Information to the same extent that BC TEL protects Confidential Information under the provisions of this Agreement. BC TEL will deliver a copy of each such executed acknowledgment as soon as BC TEL obtains same. 7A. PROCEDURES TO ENSURE CONFIDENTIALITY: BC TEL shall be responsible to ensure that the Confidential Information provided by IX Customer to the BC TEL Carrier Services Group is used by BC TEL and by such third parties to whom the Confidential Information may be provided pursuant to the terms of this Agreement solely for the purpose of providing to IX Customer services and facilities associated with interconnection. All Confidential Information provided to the Carrier Services Group will be communicated within the CSG and to those employees of BC TEL as well as the BC TEL Associated Companies on a "need to know" basis only and only to the extent such information is required for the provision of services and facilities associated with interconnection. BC TEL shall further ensure the protection of Confidential Information by implementing the following procedures: /7 a) With respect to all BC TEL employees within the Carrier Services Group who will be performing any of the functions required for the provision of services and facilities associated with interconnection, whether on a dedicated or non-dedicated basis, BC TEL shall review with each employee at the beginning of his/her assignment to such group and on an annual basis thereafter the information specified in Attachment 1. An acknowledgment form will be signed by the employee as well as the employee's immediate supervisor indicating that the document has been reviewed and understood and such signed acknowledgment forms will be retained by BC TEL. Provided that if BC TEL has made reasonable efforts to obtain an employee's signature but cannot, an acknowledgment form signed by such employee's supervisor confirming review shall be sufficient. b) All such dedicated groups will be located in office areas where access is controlled. c) The CAMS and PIC systems, used to provide facilities and services in relation to interconnection will, to an extent consistent with the efficient functioning of BC TEL's operations, be maintained and operated separately from BC TEL's other systems. Interfaces with these systems will be provided on an "as needed" basis only. Additionally, access to the CAMS and PIC systems will be restricted through the use of appropriate sign-on procedures. d) With respect to those BC TEL employees who are not part of the Carrier Services Group but who may be involved in the provision of services pursuant to this Agreement, BC TEL shall ensure that the BC TEL Corporate Code of Ethics, enclosed as Attachment 3 is periodically reviewed with each employee and each such employee's immediate supervisor shall certify that such review has been conducted. The type of employees contemplated in this section may include, but is not limited to those individuals performing functions such as network planning, the installation and maintenance of network facilities, the performance of economic and other studies, the management of regulatory activities and the delivery of legal services. e) Additionally, all physical media on which any Confidential Information resides, in the possession of any of the employees in a) and d), above, shall be kept in locked offices and/or in locked desks, cabinets or other storage areas at night, and on all BC TEL non-business days as well as during other prolonged periods when an employee is absent from his/her workstation. f) With respect to the employees specified in a) above, upon termination of employment or retirement, or upon leaving a position of employment in which the employee was provided access to Confidential Information, the employee's immediate supervisor will review with the employee Attachment 1 hereof and will ensure that the employee understands its content. /8 g) With respect to all employees of the BC TEL Associated Companies, who will be performing, on a dedicated or non-dedicated basis, any of the functions required for the provision of services and facilities associated with interconnection, BC TEL shall ensure that procedures are implemented which are materially consistent with and no less stringent than the procedures detailed in paragraphs a), b), c), d), e) and f) herein with respect to the protection of Confidential Information as soon as is reasonably possible upon the execution of this Agreement. h) With respect to all agents, contractors or subcontractors, to whom BC TEL discloses or intends to disclose Confidential Information, BC TEL shall obtain, as a condition to dealing with such agent, contractor or sub-contractor, written non-disclosure covenants materially similar to those specified in Attachment 2, hereto. 7B. BC TEL CONFIDENTIAL INFORMATION a) Any data or oral or written information disclosed by BC TEL or by a BC TEL associated company to IX Customer pursuant to the provisions of this Agreement or the Schedules described in paragraph 2, including, without limitation, information provided through any Joint Technical Committee or other similar committees established shall be deemed "BCT Confidential Information". BCT Confidential Information includes but shall not be limited to BC TEL switch locations, network architectural information (capacity network planning) and performance data. b) In order to enable IX Customer to interconnect with the facilities of BC TEL, BC TEL will be disclosing BCT Confidential Information to IX Customer. All BCT Confidential Information shall be used by IX Customer solely for the purpose of facilitating the obtaining of services and facilities of BC TEL associated with such interconnection. For greater certainty, IX Customer personnel receiving such information shall not provide the BCT Confidential Information to personnel involved in the provision of services offered in competition with IX Customer, except in accordance with the provisions of this paragraph 7A. c) Similarly, IX Customer shall not use or disclose BCT Confidential Information except in accordance with the terms of this Agreement or with the prior written consent of BC TEL. /9 d) IX Customer shall ensure that BCT Confidential Information provided by IX Customer is used by IX Customer and any third parties to whom the BCT Confidential Information may be provided pursuant to the terms of this Agreement solely for the purpose of IX Customer obtaining the services and facilities associated with interconnection. All BCT Confidential Information provided to IX Customer employees will be communicated by such employees to other IX Customer employees on a "need to know" basis only and only to the extent such information is required for the obtaining of services and facilities associated with interconnection pursuant to Decision 92-12. Further, IX Customer shall ensure the protection of such confidential information by following procedures similar in substance and at least as onerous as the procedures outlined in paragraphs 7(a) through to and including 7(h) applicable to BC TEL. In this regard all references to "Carrier Services Group" shall be deemed replaced with a reference to "IX Customer's employees to whom BCT Confidential Information is disclosed" and the corporate Code of Ethics of IX Customer shall contain provisions no less onerous than those of BC TEL contained in Attachment 3. e) All other provisions of the Agreement in order to give effect to the foregoing shall apply, mutatis mutandi, to IX Customer and BC TEL agrees that the limitations on liability set forth in paragraph 4(2) shall apply to the BCT Confidential Information referred to herein. 8. APPLICABLE APPROVALS: This Agreement and the schedules attached hereto shall be subject at all times to all applicable regulatory approvals. This Agreement shall be effective from the day of , 199 . 9. NOTICES: Subject to the provisions of specific schedules attached hereto, all notices or notifications to be given hereunder shall be in writing and shall be hand delivered or sent by registered mail or by facsimile with proof of receipt addressed as follows: to BC TEL: Dan Delaloye Vice-President International and Carrier Services 26th Floor TELUS Tower 411 - 1st Street S.E. Calgary Alberta T2G 4Y5 to IX Customer: -------------------------------- -------------------------------- -------------------------------- -------------------------------- /10 If hand delivered or sent by facsimile such notice or notification shall be deemed to have been received on the first working day following date sent. If sent by registered mail such notice or notification shall be deemed to have been received on the third working day following date sent. 10. MODIFICATIONS: No modification of any of the terms of this Agreement shall be valid unless in writing and signed by the parties. Any such modification shall be subject to all applicable regulatory filing requirements and approvals. 11. CHANGES TO PROCEDURES: Notwithstanding section 10 hereto, if either party to this Agreement proposes to make any changes to its operations, services or systems which will materially affect the procedures specified in the schedules identified in section 2, hereto, the party making such changes shall give the other party prior notification and shall coordinate such changes with the other party. In those instances in which such changes require modification of any of the schedules specified in section 2, the party making such changes shall consult the other party prior to making any such change and in the event such other party does not agree to the changes, the provisions of section 13 of this Agreement will apply. 12. FORCE MAJEURE: The parties' performance under this Agreement shall be excused by labour difficulties (such as work stoppages, studies, lockouts, slowdowns and similar labour disrupting events), government orders, civil commotions and other circumstances beyond the parties' reasonable control provided, however, that the party invoking such circumstances shall immediately notify the other party in writing, which notification shall specify the character of the circumstances beyond its control such party has invoked. Failure to provide timely notification shall deprive the party in question of the right to refer to any of the above circumstances as reason for relieving it of responsibility for failure to perform an obligation. 13. DISPUTES: Any dispute arising between the parties hereto and involving the operation or the interpretation of this Agreement shall be resolved through negotiations at the first instance between Carrier Services Group staff and IX Customer Telco Relations group staff designated for this purpose. In the event the dispute remains unresolved after a period of 5 business days except as described elsewhere in this Agreement from the date the dispute arose, then either party may file a complaint to the Commission. /11 14. INVALID, UNENFORCEABLE PROVISIONS: If any provision of this Agreement is declared invalid, illegal or unenforceable by a court or tribunal acting within its jurisdiction, the remainder of this Agreement shall remain fully enforceable and effective. 15. APPLICABLE LAW: This Agreement and its interpretation shall be subject to the laws of British Columbia and the laws of Canada applicable thereto. IN WITNESS WHEREOF the parties hereto have executed this Agreement by their duly authorized representatives, such execution effective on the date and year first written above. Signed this day of , 199 . IX CUSTOMER BC TEL - -------------------------- -------------------------- Willie Grieve - -------------------------- Vice-President - Regulatory Affairs /12 ATTACHMENT 1 PROTECTION OF IX CUSTOMER CONFIDENTIAL INFORMATION 1. As used herein, "Confidential Information" shall mean any data or oral or written information (a) obtained from IX Customer either directly or indirectly through a BC TEL Associated Company or (b) developed by BC TEL or a BC TEL Associated Company exclusively for the benefit of IX Customer relating to interconnection which BC TEL receives or develops in its capacity as a provider of a monopoly service and that is not generally known outside IX Customer whether or not such information is identified as "Confidential" by IX Customer at the time of disclosure. Confidential Information may include, but shall not be limited to information pertaining to IX Customer's: market forecasts, plans for development of new services, network plans, information relating to new customers and IX Customer's current or proposed business plans shall be deemed "Confidential Information" whether or not identified as "Confidential" at the time of disclosure. 2. BC TEL and each employee who is involved in providing IX Customer services related to interconnection (the Employee) acknowledge and agree that the relationship between BC TEL and its employees is one of mutual trust and reliance. 3. The Employee acknowledges that he/she has and may have access to Confidential Information, the disclosure of any of which to IX Customer's competitors (including Stentor Canadian Network Management member companies), customers, or the general public may be highly detrimental to the best interests of IX Customer and BC TEL. 4. The Employee acknowledges that the businesses of IX Customer and of BC TEL cannot be properly protected from adverse consequences of the actions of the Employee other than by the restrictions set forth in this document. 5. To this end the Employee agrees not to disclose any Confidential Information to anyone at any time, during the Employee's employment by BC TEL except on a "need to know" basis. The Employee also agrees not to disclose any Confidential Information to anyone after the employee's employment with BC TEL. /13 ATTACHMENT 2 THIRD PARTY NON-DISCLOSURE PROCEDURES 1) All contractual arrangements between BC TEL and potential agents or consultants in which Confidential Information is to be disclosed by BC TEL are to contain non-disclosure covenants materially similar to the following: NON-DISCLOSURE COVENANTS 1. DEFINITIONS For the purposes of this attachment, the following definitions shall apply: (a) "Confidential Information" shall mean any data or information, other than Trade Secrets, that is obtained from BC TEL or developed by the Consultant exclusively for the benefit of BC TEL and not generally known outside BC TEL where such information is identified as "confidential" at the time of disclosure provided that information pertaining to BC TEL's orders, market forecasts, plans for the development of new customers and current or proposed business plans shall be deemed "Confidential Information" whether or not identified as "Confidential" at the time of disclosure. (b) "Consultant" shall mean the Consultant with whom BC TEL intends to disclose Confidential Information. 2. DISCLOSURE During the course of the services provided by the Consultant to BC TEL, BC TEL may disclose to the Consultant Confidential Information, either directly, as by verbal or written communications (including the transmission of data by any means), or indirectly, as by permitting employees of the Consultant to observe various operations or processes conducted by BC TEL. These disclosures will be made upon the basis of the confidential relationship established between the company and upon the Consultant's agreement that, unless specifically authorized in writing by BC TEL, it will: (a) Use such Confidential Information solely for the purpose of providing to BC TEL the services contracted for /14 (b) Promptly return to BC TEL, upon its request, any and all tangible material concerning such Confidential Information, including all copies and notes, whether such material was made or compiled by the Consultant or furnished by BC TEL; and (c) Take reasonable precautions to protect from disclosure all Confidential Information disclosed to it by BC TEL. 3. EXCEPTIONS The foregoing restrictions shall not apply to any information which, but for this section, would be Confidential Information under this agreement: (a) information that enters the public domain other than through a breach of this agreement; (b) information that is disclosed in good faith to the Consultant by a third party having legitimate possession and the right to make such disclosure; (c) information that was in legitimate possession of the Consultant prior to disclosure hereunder; or (d) information that is independently developed by the Consultant or (e) information that is required by Canadian law to be released by the receiving party. Additionally, the aforesaid restrictions shall not apply to any Confidential Information after the expiration of a period of three years following the date of disclosure. /15 ATTACHMENT 3 [BC TEL CORPORATE CODE OF ETHICS TO BE ATTACHED] /16 ATTACHMENT 4 A C K N O W L E D G E M E N T EFFECTIVE: BETWEEN: BC TEL, a corporation duly incorporated under the laws of Canada, having an office at 3777 Kingsway, Burnaby, BC V5H 3Z7 ("BC TEL") AND: ------------------------- ------------------------- ------------------------- ------------------------- WHEREAS ("IX Customer") and BC TEL entered into an Agreement effective , 199enclosed as Attachment 1 ("the Agreement") whereby BC TEL undertook to protect the confidentiality of certain information confidential to IX Customer as further specified in the Agreement (the "IX Customer Confidential Information"). NOW THEREFORE, for and in consideration of the premises, of the mutual promises contained herein, and of other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: The parties hereto acknowledge that BC TEL may disclose to ___IX Customer Confidential Information. The parties hereto also acknowledge that ___has reviewed and understands the Agreement and ___will protect the confidentiality of the IX Customer Confidential Information to the same extent that BC TEL protects the confidentiality of the IX Customer Confidential Information under the provisions of the Agreement. BC TEL ------------------------------ By: By: ------------------------- ------------------------ Name: Name: ------------------------- ------------------------ Title: Title: ------------------------- ------------------------ EX-27 5 EXHIBIT 27
5 1,000 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1999 1 43,968 0 57,160 (3,922) 0 104,721 88,484 (8,198) 248,214 87,893 158,163 0 0 135 (17,008) 248,214 196,246 196,246 173,927 173,927 47,338 0 (16,034) (37,021) 0 (37,021) 0 0 0 (37,021) (3.98) (3.98)
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