<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1998
REGISTRATION NO. 333-56989
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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LONG DISTANCE INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
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4813
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
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65-0423006
(I.R.S. EMPLOYER IDENTIFICATION NO.)
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888 SOUTH ANDREWS AVENUE
SUITE 205
FORT LAUDERDALE, FLORIDA 33316
(954) 522-3300
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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CLIFFORD FRIEDLAND
LONG DISTANCE INTERNATIONAL INC.
888 SOUTH ANDREWS AVENUE
SUITE 205
FORT LAUDERDALE, FLORIDA 33316
(954) 522-3300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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COPIES TO:
DAVID S. SCHAEFER, ESQ.
LOEB & LOEB LLP
345 PARK AVENUE
NEW YORK, NEW YORK 10154-0037
(212) 407-4000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
PROSPECTUS (SUBJECT TO COMPLETION)
DATED NOVEMBER 12, 1998
LONG DISTANCE INTERNATIONAL INC.
$225,000,000 OFFER TO EXCHANGE ALL OUTSTANDING
12 1/4% SENIOR NOTES DUE 2008
FOR
12 1/4% SENIOR NOTES DUE 2008
OF
LONG DISTANCE INTERNATIONAL INC.
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INTEREST PAYABLE APRIL 15 AND OCTOBER 15
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THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED.
LONG DISTANCE INTERNATIONAL INC. (THE "COMPANY") HEREBY OFFERS, UPON THE TERMS
AND SUBJECT TO THE CONDITIONS SET FORTH IN THIS PROSPECTUS (AS THE SAME MAY BE
AMENDED OR SUPPLEMENTED FROM TIME TO TIME) AND IN THE ACCOMPANYING LETTER OF
TRANSMITTAL (THE "LETTER OF TRANSMITTAL") (WHICH TOGETHER CONSTITUTE THE
"EXCHANGE OFFER"), TO EXCHANGE $1,000 PRINCIPAL AMOUNT OF ITS 12 1/4% SENIOR
NOTES DUE 2008 (THE "EXCHANGE NOTES") WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), FOR EACH $1,000
PRINCIPAL AMOUNT OF ITS OUTSTANDING UNREGISTERED 12 1/4% SENIOR NOTES DUE 2008,
OF WHICH $225,000,000 IN AGGREGATE PRINCIPAL AMOUNT IS OUTSTANDING AS OF THE
DATE HEREOF (THE "SENIOR NOTES" AND, TOGETHER WITH THE EXCHANGE NOTES, THE
"NOTES").
THE FORM AND TERMS OF THE EXCHANGE NOTES WILL BE IDENTICAL IN ALL MATERIAL
RESPECTS TO THE FORM AND TERMS OF THE SENIOR NOTES, EXCEPT THAT THE EXCHANGE
NOTES WILL HAVE BEEN REGISTERED UNDER THE SECURITIES ACT AND THEREFORE WILL NOT
BE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER APPLICABLE TO THE SENIOR NOTES.
THE EXCHANGE OFFER IS BEING MADE PURSUANT TO THE NOTES REGISTRATION RIGHTS
AGREEMENT DATED APRIL 7, 1998 (THE "REGISTRATION RIGHTS AGREEMENT") BETWEEN
MORGAN STANLEY & CO. INCORPORATED AND SBC WARBURG DILLON READ INC.
(COLLECTIVELY, THE "PLACEMENT AGENTS") AND THE COMPANY. THE EXCHANGE NOTES WILL
EVIDENCE THE SAME INDEBTEDNESS AS THE SENIOR NOTES (WHICH THEY WILL REPLACE) AND
WILL BE ISSUED PURSUANT TO, AND ENTITLED TO THE BENEFITS OF, AN INDENTURE DATED
AS OF APRIL 13, 1998 BETWEEN THE COMPANY AND THE BANK OF NEW YORK, AS TRUSTEE
(THE "TRUSTEE"), GOVERNING THE SENIOR NOTES AND THE EXCHANGE NOTES (THE
"INDENTURE").
THE EXCHANGE NOTES ARE CONSIDERED TO BE ISSUED AT ORIGINAL ISSUE DISCOUNT. SEE
"UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS." THE INDENTURE REQUIRES THE
COMPANY TO REPURCHASE THE NOTES UPON A CHANGE OF CONTROL. THERE CAN BE NO
ASSURANCE THAT THE COMPANY WOULD HAVE OR HAVE ACCESS TO ADEQUATE FUNDS TO
REPURCHASE THE NOTES IN THE EVENT OF A CHANGE OF CONTROL. THE INDENTURE DOES NOT
REQUIRE THE COMPANY TO REPURCHASE THE NOTES OR AFFORD OTHER PROTECTION IN THE
EVENT OF A HIGHLY LEVERAGED TRANSACTION THAT DOES NOT RESULT IN A CHANGE OF
CONTROL.
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SEE "RISK FACTORS" COMMENCING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES. THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS , 1998
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 6
Risk Factors................................................ 17
The Exchange Offer.......................................... 34
Use of Proceeds............................................. 40
Dividend Policy............................................. 41
Capitalization.............................................. 42
Selected Consolidated Financial Data........................ 43
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 45
Business.................................................... 55
Management.................................................. 78
Certain Transactions........................................ 85
Principal Shareholders...................................... 86
Description of the Exchange Notes........................... 88
Description of the Capital Stock............................ 116
United States Federal Income Tax Considerations............. 122
Plan of Distribution........................................ 128
Legal Matters............................................... 130
Experts..................................................... 130
Additional Information...................................... 130
Index to Consolidated Financial Statements.................. F-1
</TABLE>
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The Notes will mature on April 15, 2008. Interest on the Notes will accrue
at a rate of 12 1/4% per annum and will be payable semiannually on April 15 and
October 15 of each year. See "Description of the Exchange Notes." The Notes will
be redeemable at the option of the Company, in whole or in part, at any time on
or after April 15, 2003, at the redemption prices set forth herein, plus accrued
and unpaid interest if any thereon. In addition, at any time prior to April 15,
2001, the Company may redeem up to 35% of the aggregate principal amount of the
Notes from the proceeds of one or more Public Equity Offerings (as defined
herein) at the redemption price set forth herein; provided that after any such
redemption at least $146.2 million aggregate principal amount of the Senior
Notes and the Exchange Notes remains outstanding. See "Description of the
Exchange Notes -- Certain Definitions."
The Exchange Notes will be general unsecured obligations of the Company,
ranking pari passu in right of payment with the Senior Notes and all other
existing and future unsecured unsubordinated indebtedness of the Company and
senior in right of payment to all subordinated indebtedness of the Company. The
Company does not have any present plans to enter into any future indebtedness to
which the Notes would be senior. The Notes will be effectively subordinated,
however, to all secured indebtedness of the Company and to all existing and
future liabilities of the Company's subsidiaries. As of June 30, 1998, after
giving effect to the Offering (as defined herein), the Company had $213.5
million of long-term indebtedness outstanding (including approximately $11.4
million of secured indebtedness of which approximately $2.2 million related to
the Company's subsidiaries).
The Senior Notes, together with warrants (the "Warrants") to purchase
common stock, par value $.001 per share of the Company (the "Common Stock"),
were originally issued and sold on April 13, 1998 in a transaction not
registered under the Securities Act (the "Offering"). Accordingly, the Senior
Notes may not be offered for resale, resold or otherwise transferred unless so
registered or unless an applicable exemption from the registration requirements
of the Securities Act is available. Based on interpretations by the staff of the
Securities and Exchange Commission (the "Commission"), as set forth in no-action
letters issued to third parties unrelated to the Company, the Company believes
that the Exchange Notes issued pursuant to the Exchange Offer may be offered for
resale, resold or otherwise transferred by a holder thereof (other than any
holder that is (i) a broker-dealer that acquired Senior Notes as a result of
market-making activities or other trading activities or (ii) an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration or prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such holder's business and such holder has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such Exchange Notes. Any holder who tenders
Senior Notes in the Exchange Offer with the intention to participate, or for the
purpose of participating, in a distribution of the Exchange Notes or who is an
affiliate of the Company may not rely upon such interpretations by the staff of
the Commission and, in the absence of an exemption therefrom, must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. Failure to comply with such
requirements in such instance may result in such holder incurring liabilities
under the Securities Act for which the holder is not indemnified by the Company.
The staff of the Commission has not considered the Exchange Offer in the context
of a no-action letter, and there can be no assurance that the staff of the
Commission would make a similar determination with respect to the Exchange Offer
as in such other circumstances.
By tendering Senior Notes in exchange for Exchange Notes, each holder will
represent to the Company, among other things, that: (i) any Exchange Notes to be
received by such holder will be acquired in the ordinary course of such holder's
business; (ii) such holder has no arrangement or understanding with any person
to participate in a distribution (within the meaning of the Securities Act) of
the Exchange Notes; and (iii) such holder is not an "affiliate" of the Company
(within the meaning of Rule 405 under the Securities Act), or if such holder is
an affiliate, that such holder will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Senior Notes, where such Senior Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that by so
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acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Senior Notes where such Senior Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period not to exceed 180 days
after the Expiration Date (as defined herein), it will furnish additional copies
of this Prospectus, as amended or supplemented, to any broker-dealer that
reasonably requests such documents for use in connection with any such resale.
See "Plan of Distribution."
The Company does not intend to apply for listing of the Exchange Notes for
trading on any securities exchange or for inclusion of the Exchange Notes in any
automated quotation system. The Senior Notes, however, have been designated for
trading in the Private Offerings, Resales and Trading through Automatic Linkages
("PORTAL") Market of the National Association of Securities Dealers, Inc. Any
Senior Notes not tendered and accepted in the Exchange Offer will remain
outstanding. To the extent that Senior Notes are not tendered and accepted in
the Exchange Offer, a holder's ability to sell such Senior Notes could be
adversely affected. Following consummation of the Exchange Offer, the holders of
Senior Notes will continue to be subject to the existing restrictions on
transfer thereof and the Company will have no further obligation to such holders
to provide for the registration under the Securities Act of the Senior Notes.
See "Description of the Exchange Notes -- Exchange Offer; Registration Rights."
No assurance can be given as to the liquidity of either the Senior Notes or the
Exchange Notes.
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF SENIOR NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
SENIOR NOTES PURSUANT TO THE EXCHANGE OFFER.
Senior Notes may be tendered for exchange prior to 5:00 p.m., New York City
time, on , 1998 (such time on such date being hereinafter called the
"Expiration Date"), unless the Exchange Offer is extended by the Company (in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended). Tenders of Senior Notes may be withdrawn
at any time prior to the Expiration Date. The Exchange Offer is not conditioned
upon any minimum aggregate principal amount of Senior Notes being tendered for
exchange. Senior Notes may be tendered only in integral multiples of aggregate
principal amount of $1,000. The Company has agreed to pay all expenses of the
Exchange Offer. This Prospectus, together with the Letter of Transmittal, is
being sent to all registered holders of Senior Notes as of , 1998.
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. No underwriter is being used in connection with
the Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus. As
used herein, the terms "Company" and "LDI" refer to Long Distance International
Inc. and its subsidiaries, unless the context otherwise requires. Statements
contained in this Prospectus regarding LDI's expectations with respect to future
operations and other matters, which can be identified by use of forward-looking
terminology, such as "may," "will," "expect," "anticipate," "estimate" or
"continue" or the negative thereof or variations thereon or comparable
terminology, are forward-looking statements. See "Risk Factors" for cautionary
statements identifying important factors with respect to such forward-looking
statements, including important risks and uncertainties that could cause actual
results to differ materially from results referred to in the forward-looking
statements. Industry data used throughout this Prospectus was obtained from
industry publications and has not been independently verified by LDI.
THE COMPANY
LDI is a rapidly growing multinational telecommunications company, which
provides international telecommunications services from the United States, the
United Kingdom, France, Italy and Spain to over 200 countries. LDI offers
domestic long distance calling, postpaid calling card services, prepaid services
and toll-free services in the United States and the United Kingdom. In France,
Italy and Spain, the Company primarily provides international telecommunications
services and prepaid calling card services. The Company markets primarily to
residential and small and medium-sized business enterprise ("SME") customers
with significant long distance calling needs and recently commenced marketing to
carrier customers. The Company markets its services through direct response
marketing, agent sales, telemarketing and direct sales.
LDI commenced operations in 1995 as a switchless reseller of international
and domestic long distance services in the United States and, during 1996,
expanded into the western European market. LDI recently initiated the design and
buildout of a European telecommunications network. By interconnecting its United
States and European networks, LDI seeks to expand its western European presence
and intends to leverage its existing United States operations with the objective
of lowering the cost, improving the quality and broadening the scope of services
offered to its customers across two continents. Revenues have grown from $2.6
million in 1995 to $40.1 million in 1997, 85.9% of which was derived from
services offered in the United States, consisting primarily of dial-around
services to residential and small business customers. The Company had net losses
of $1.7 million, $4.0 million, $11.3 million and $23.4 million for the fiscal
years ended 1995, 1996 and 1997 and the six months ended June 30, 1998,
respectively.
LDI'S NETWORK
The Company's United States network consists of one carrier grade DSC
Communications Corporation ("DSC") DEX600 switch ("DEX Switch") in Fort
Lauderdale, Florida, switch partitions in New York City, New York; Birmingham,
Alabama; Charlotte, North Carolina; Denver, Colorado; and Los Angeles and
Oakland, California, and interconnection agreements with local exchange carriers
("LECs") in 27 states. LDI also leases on a per minute basis switching and
network capacity in Davenport, Iowa; Las Vegas, Nevada; Chattanooga, Tennessee;
and Washington, D.C. The Company's network enables it to originate long distance
calls in areas covering more than 50% of the total metropolitan United States
population, allowing the Company to offer its services in and around 31 of the
top 50 metropolitan statistical areas in the United States.
The Company's international facilities consist of an international gateway
attached to a DEX Switch in London, which is connected to the Company's United
States network via an indefeasible right of use ("IRU") on the international
trans-Atlantic fiber optic cable CANTAT 3. The Company's London switch is
connected to various international facilities-based carriers in western Europe.
In addition, the Company has purchased IRUs on the Atlantic Crossing 1 fiber
optic cable and the UK-Germany 6 fiber optic cable (which is under construction
and is expected to be operational during 1999). The Company also has negotiated
interconnection agreements with public telecommunications operators ("PTOs") in
the United Kingdom, Denmark, The Netherlands and Sweden.
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In 1998, LDI intends to significantly expand its United States and European
networks, and by year end expects to have switches in the markets listed below:
<TABLE>
<CAPTION>
EXPECTED COMMERCIAL
MARKET NETWORK ELEMENT OPERATION DATE
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<S> <C> <C>
United States
Fort Lauderdale.................... DEX Switch Installed
New York City...................... DEX Switch/International Gateway Installed
Fresno............................. DEX Switch(1) Installed
Tulsa.............................. DEX Switch Installed
Chicago............................ DEX Switch(2) Installed
Raleigh............................ DEX Switch(3) Installed
Europe(4)
London............................. DEX Switch/International Gateway Installed
Milan.............................. ANS Switch Installed
Madrid............................. ANS Switch Installed
Frankfurt.......................... Ericsson ANS Translocal 2 mini-switch 4Q'98
("ANS Switch")
Ericsson AXE10 Switch 1Q'99
("AXE10 Switch")/International
Gateway(5)
Paris.............................. ANS Switch 4Q'98
AXE10 Switch/International Gateway(5) 1Q'99
Lyons.............................. ANS Switch 4Q'98
Copenhagen......................... ANS Switch (5) 4Q'98
Amsterdam.......................... ANS Switch (5) 4Q'98
</TABLE>
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(1) Replaces switch partition and leased switch capacity in Las Vegas, Nevada;
and Oakland and Los Angeles, California.
(2) Replaces leased switch capacity in Davenport, Iowa.
(3) Replaces switch partition and leased switch capacity in Chattanooga,
Tennessee; Charlotte, North Carolina; and Washington, D.C.
(4) LDI also plans to install points of presence ("POPs") in at least ten
European cities by December 31, 1998.
(5) AXE10 Switches replace ANS Switches which will be redeployed in Copenhagen
and Amsterdam, respectively.
By the end of 1998, LDI expects that its United States network will enable
it to originate services in all states except Alaska, reaching areas covering
more than 80% of the total metropolitan United States population. In Europe, LDI
is negotiating to purchase an IRU on the FLAG fiber optic cable (between the
United Kingdom, Spain and Italy), subject to obtaining backhaul from local
telecommunications companies in Italy and Spain, and has entered into a letter
of intent to purchase an IRU on the planned CIRCE fiber optic ring (between
London, Paris, Brussels, Rotterdam and Amsterdam). The Company expects to sign
interconnection agreements in 1998 with the PTOs in Germany, France, Italy,
Switzerland, Norway, and Austria and add additional IRUs and leased lines as
demand warrants.
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THE INTERNATIONAL TELECOMMUNICATIONS MARKET
The international long distance public switched telecommunications market,
consisting of telephone calls between countries, generated an estimated $61
billion in revenue and 70 billion minutes of use in 1996 and is recognized as
one of the fastest growing segments of the long distance telecommunications
industry. The market for these services is highly concentrated in more developed
countries, with approximately 40% and 27% of 1996 worldwide international long
distance traffic originating in Europe and the United States, respectively. The
Company has significantly less than a 1% share of this market. According to
Analysys Ltd., a market research firm, international long distance minutes are
projected to grow by approximately 18% per annum from approximately 90 billion
in 1997 to approximately 170 billion minutes in 2001. This growth is expected to
be spurred by (i) the continued deregulation of telecommunications markets
throughout the world, (ii) increased capacity, improved quality and lower
operating costs attributable to technological improvements, (iii) the expansion
of telecommunications infrastructure and (iv) the globalization of the world's
economies and free trade. International settlement rates (the rates paid to
other carriers to terminate an international call) have declined over the past
five years and, in connection with a recent United States Federal Communications
Commission (the "FCC") initiative to balance the United States settlement
deficit, the Company expects such rates to continue to decline. The costs for
leased transmission capacity have also declined and are expected by the Company
to continue to decline. Furthermore, the trend towards liberalization is
expected to further reduce carriers' costs of originating and terminating calls
by allowing carriers in some jurisdictions to interconnect with the domestic
public switched telephone network ("PSTN").
The European international long distance market is the largest in the
world, with approximately 28 billion minutes of use or 40% of international
calling volume originating in Europe in 1996. The continental European PTOs have
historically had monopolies on providing telephone services to and from their
respective countries. As a result, the costs of international telephone calls
from most countries in continental Europe have been higher than comparable calls
originated from the United States or the United Kingdom. Until recently,
customers in many continental European markets had not been able to obtain from
their PTOs value-added features such as itemized billing, speed dial, redial and
voice mail. On January 1, 1998, most countries in the European Union ("EU")
liberalized the provision of telecommunications services, which the Company
believes will, together with technological advancements, lead to
telecommunications market developments similar to those which have occurred in
the United States and the United Kingdom.
STRATEGY
LDI's objective is to create a cost-competitive, facilities-based
multinational telecommunications network which provides high quality
international and domestic long distance services to residential, SME and
carrier customers. The key elements of the Company's strategy are:
- Establish Operations in Attractive European Markets. Capitalize on
large, recently liberalized European markets and establish an early
presence in less liberalized or less competitive markets.
- Expand Existing Operations. Extend the coverage of current product
offerings, both geographically and through new marketing channels, and
expand the range of products offered.
- Design, Develop and Implement a Cost-Competitive, Multinational
Network. Reduce the cost and increase control of services offered, where
feasible, by owning facilities and investing incrementally, as traffic
volumes justify ownership. Pursue the wholesale market to maximize
network utilization by selling excess capacity to other carriers.
- Employ Focused and Cost-Effective Sales and Marketing Channels; Establish
a Global Brand. Target specific groups of frequent international
long-distance callers, using established, variable-cost, low-overhead
marketing channels and programs and develop stronger brand awareness.
- Pursue Strategic Alliances and Acquisitions. Extend network reach by
swapping traffic with facilities-based telecommunications carriers.
Through business acquisitions, enter new markets, continue to expand its
customer base and acquire local management expertise, facilities and
distribution channels.
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- Deploy Technologically Advanced Information Systems to Facilitate Billing
and Customer Support Functions. Deploy flexible, scalable information
systems to meet growing customer care, billing, and management
information requirements.
LDI believes that its key competitive strengths are its growing network,
its sales and marketing experience in targeting customer segments with
significant long distance calling needs, its relatively early entry into large
liberalized markets in western Europe, and its experienced senior management
team, which has built and developed successful telecommunications businesses.
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THE EXCHANGE OFFER
The Exchange Offer......... Up to $225.0 million aggregate principal amount of
Exchange Notes are being offered in exchange for a
like aggregate principal amount of Senior Notes.
Senior Notes may be tendered for exchange in whole
or in part in integral multiples of $1,000
principal amount. The Company is making the
Exchange Offer in order to satisfy its obligations
under the Registration Rights Agreement relating to
the Senior Notes. For a description of the
procedures for tendering Senior Notes, see "The
Exchange Offer -- Procedures for Tendering Senior
Notes."
Expiration Date............ 5:00 p.m., New York City time, on ,
1998 unless the Exchange Offer is extended by the
Company (in which case the term "Expiration Date"
shall mean the latest date and time to which the
Exchange Offer is extended). See "The Exchange
Offer -- Expiration Date; Extensions; Amendments."
Conditions to the
Exchange Offer........... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Senior Notes
being tendered or any other condition, other than
that the Exchange Offer does not violate applicable
law or any applicable interpretation of the staff
of the Commission. See "The Exchange
Offer -- Conditions to the Exchange Offer."
Withdrawal Rights.......... Tenders of Senior Notes may be withdrawn at any
time prior to the Expiration Date by delivering a
written notice of such withdrawal to the Exchange
Agent (as defined herein) in conformity with
certain procedures as set forth below under "The
Exchange Offer -- Withdrawal Rights."
Procedures for Tendering
Senior Notes............. Tendering holders of Senior Notes must complete and
sign a Letter of Transmittal in accordance with the
instructions contained therein and forward the same
by mail, facsimile transmission or hand delivery,
together with any other required documents, to the
Exchange Agent, either with the Senior Notes to be
tendered or in compliance with the specified
procedures for guaranteed delivery of Senior Notes.
Certain brokers, dealers, commercial banks, trust
companies and other nominees may also effect
tenders by book-entry transfer. Holders of Senior
Notes registered in the name of a broker, dealer,
commercial bank, trust company or other nominee are
urged to contact such person promptly if they wish
to tender Senior Notes pursuant to the Exchange
Offer. See "The Exchange Offer -- Procedures for
Tendering Senior Notes."
Letters of Transmittal and certificates
representing Senior Notes should not be sent to the
Company. Such documents should only be sent to the
Exchange Agent. Questions regarding how to tender
and requests for information should be directed to
the Exchange Agent. See "The Exchange
Offer -- Exchange Agent."
Resales of Exchange
Notes...................... Based on interpretations by the staff of the
Commission, as set forth in no-action letters
issued to third parties, the Company believes that
a holder of Senior Notes (other than any holder
that is (i) a broker-dealer that acquired Senior
Notes as a result of market-making activities or
other trading activities, or (ii) an "affiliate" of
the Company within the meaning of Rule 405 under
the Securities Act) who exchange its Senior Notes
for Exchange Notes pursuant to the Exchange Offer
may offer for resale, resell and otherwise transfer
such Exchange Notes without
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<PAGE> 11
compliance with the registration and prospectus
delivery provisions of the Securities Act, provided
that such Exchange Notes are acquired in the
ordinary course of such holder's business and such
holder has no arrangement or understanding with any
person to participate in a distribution (within the
meaning of the Securities Act) of such Exchange
Notes. Any holder who tenders Senior Notes in the
Exchange Offer with the intention to participate,
or for the purpose of participating, in a
distribution of the Exchange Notes or who is an
affiliate of the Company may not rely upon such
interpretations by the staff of the Commission and,
in the absence of an exemption therefrom, must
comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any secondary resale transaction.
Failure to comply with such requirements in such
instance may result in such holder incurring
liabilities under the Securities Act for which the
holder is not indemnified by the Company. The staff
of the Commission has not considered the Exchange
Offer in the context of a no-action letter, and
there can be no assurance that the staff of the
Commission would make a similar determination with
respect to the Exchange Offer. Each broker-dealer
that receives Exchange Notes for its own account in
exchange for Senior Notes, where such Senior Notes
were acquired by such broker-dealer as a result of
market-making activities or other trading
activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such
Exchange Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. The Company has
agreed that, for a period not to exceed 180 days
after the Expiration Date, it will furnish
additional copies of this Prospectus, as amended or
supplemented, to any broker-dealer that reasonably
requests such documents for use in connection with
any such resale. See "Plan of Distribution."
Exchange Agent............. The exchange agent with respect to the Exchange
Offer is The Bank of New York (the "Exchange
Agent"). The address, telephone number and
facsimile number of the Exchange Agent are set
forth in "The Exchange Offer -- Exchange Agent" and
in the Letter of Transmittal.
Use of Proceeds............ The Company will not receive any cash proceeds from
the issuance of the Exchange Notes offered hereby.
See "Use of Proceeds."
United States Federal
Income Tax
Considerations........... In the opinion of Loeb & Loeb LLP, counsel to the
Company, the exchange of the Senior Notes for the
Exchange Notes will not be a taxable exchange for
federal income tax purposes, and holders of Senior
Notes will not recognize any taxable gain or loss
or any interest income as a result of such
exchange. See "United States Federal Income Tax
Considerations."
THE EXCHANGE NOTES
Securities Offered......... $225.0 million aggregate principal amount of
12 1/4% Senior Notes due 2008. The terms of the
Exchange Notes will be identical in all material
respects to the terms of the Senior Notes, except
that the Exchange Notes will have been registered
under the Securities Act and therefore will not be
subject to certain restrictions on transfer
applicable to the
11
<PAGE> 12
Senior Notes. The Exchange Notes will evidence the
same debt as the Senior Notes and will be issued
pursuant to and entitled to the benefits of the
Indenture.
Maturity................... April 15, 2008.
Interest................... Interest on the Notes is payable semiannually in
cash on April 15 and October 15 of each year,
commencing October 15, 1998. For a discussion of
the United States Federal income tax treatment of
the Notes under the original issue discount rules,
see "United States Federal Income Tax
Considerations."
Optional Redemption........ On or after April 15, 2003, the Notes will be
redeemable, at the option of LDI, in whole or in
part, at any time or from time to time, at the
redemption prices set forth herein, plus accrued
and unpaid interest, if any, to the date of
redemption. In addition, prior to April 15, 2001,
up to 35% of the aggregate principal amount of the
Notes may be redeemed with the proceeds of Public
Equity Offerings (as such term is defined under the
caption "Description of the Exchange
Notes -- Certain Definitions") at the redemption
price set forth herein; provided that at least
$146.2 million aggregate principal amount of Notes
remains outstanding after each such redemption. See
"Description of the Exchange Notes -- Optional
Redemption."
Security................... The Company has used approximately $75.5 million of
the net proceeds of the Offering to acquire a
portfolio of securities (the "Pledged Securities"),
consisting of U.S. government securities, that has
been pledged as security for the payment in full of
the first six scheduled interest payments due on
the Notes. Scheduled interest and principal
payments on the Pledged Securities will be used by
LDI to make the first six scheduled interest
payments on the Notes. See "Description of the
Exchange Notes -- Security." The Pledged Securities
are being held by the Trustee under the Pledge
Agreement (as defined herein) pending disbursement.
Change of Control.......... Upon a Change of Control (as such term is defined
"Description of the Exchange Notes -- Certain
Definitions"), LDI is required to make an offer to
purchase the Notes at a purchase price equal to
101% of the aggregate principal amount thereof,
plus accrued interest, if any. There can be no
assurance that the Company would have or have
access to adequate funds to repurchase the Notes in
the event of a change of control. See "Description
of the Exchange Notes -- Repurchase of Notes upon a
Change of Control." In addition, upon the
occurrence of certain transactions, the Company
will be required to offer to repurchase the
Warrants issued together with the Senior Notes. See
"Description of the Capital Stock -- Warrants." If
a transaction requiring the Company to offer to
repurchase the Warrants occurred, which transaction
also qualified as a Change of Control, such could
have a material adverse effect on the Company's
financial ability to repurchase the Notes.
Ranking.................... The Notes will be unsecured (except as described
above under "-- Security") unsubordinated
indebtedness of LDI, will rank pari passu in right
of payment with all existing and future
unsubordinated indebtedness of LDI, junior in right
of payment to all secured indebtedness of LDI and
will be senior in right of payment to all existing
and future subordinated indebtedness of LDI. At
June 30, 1998, after giving effect to the Offering,
the Company had $213.5 million of long-term
indebtedness outstanding (including approximately
$11.4 million of
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<PAGE> 13
secured indebtedness of which approximately $2.2
million related to the Company's subsidiaries).
Certain Covenants.......... The Indenture contains certain covenants, which,
among other things and subject to certain
exceptions, restrict the ability of LDI and its
Restricted Subsidiaries (as defined under the
caption "Description of the Exchange
Notes -- Certain Definitions") to incur additional
indebtedness, make restricted payments, issue
guarantees, enter into transactions with
shareholders and affiliates, create liens, issue or
sell capital stock of Restricted Subsidiaries,
engage in sale-leaseback transactions, sell assets
or to consolidate, merge or sell all or
substantially all of its assets. See "Description
of the Exchange Notes -- Covenants."
Original Issue Discount.... The Exchange Notes should be treated as a
continuation of the Senior Notes for federal income
tax purposes. The Senior Notes were issued with
original issue discount. For federal income tax
purposes, holders of the Notes will be required to
include the amount of original issue discount in
income in advance of receipt of cash to which the
income is attributable. See "United States Federal
Income Tax Considerations."
RISK FACTORS
Potential participants in the Exchange Offer should consider carefully
certain factors relating to the Company, its business and an investment in the
Exchange Notes before tendering their Senior Notes for Exchange Notes,
including, but not limited to, risks relating to the Company's limited operating
history, ability to implement its expansion plans, historical and expected
future losses and negative cash flow, high leverage and restrictions based on
covenants contained in the Indenture, substantial capital requirements and
original issue discount of the Notes. See "Risk Factors" commencing on page 17.
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<PAGE> 14
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data (except for certain data
under Other Data and Regional Data) for the years ended December 31, 1995, 1996
and 1997 and as of December 31, 1997 were derived from the audited consolidated
financial statements of LDI which, together with the notes thereto, are included
elsewhere in this Prospectus. The consolidated financial data for the years
ended December 31, 1993 and 1994 and the six months ended June 30, 1997 and 1998
were derived from the Company's unaudited consolidated financial statements. The
Company's unaudited consolidated financial statements for the years ended
December 31, 1993 and 1994 are not included herein. In management's opinion, the
unaudited consolidated financial statements reflect all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
financial position and results of operations for such periods. The information
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of LDI (the "Consolidated Financial Statements") and the
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ --------------------
1993 1994 1995 1996 1997 1997 1998
----- ------ -------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE, PER MINUTE AND RATIO INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net...................... $ -- $ 5 $ 2,593 $14,362 $ 40,116 $18,729 $ 30,660
Costs of telecommunications
services......................... -- 6 1,932 8,361 22,720 9,592 21,671
Selling, general and administrative
expenses......................... 32 219 2,299 9,887 28,066 11,706 26,127
Depreciation and amortization...... -- 7 30 121 440 110 1,118
---- ----- ------- ------- -------- ------- --------
Operating loss..................... (32) (227) (1,668) (4,007) (11,110) (2,679) (18,256)
Minority interest(1)............... -- -- -- 179 (132) -- --
Interest expense, net.............. -- 7 15 (193) (92) (278) (5,161)
---- ----- ------- ------- -------- ------- --------
Net loss........................... (32) (220) (1,653) (4,021) (11,334) (2,957) (23,417)
Preferred dividends and preferred
stock and warrant redemption
accretion........................ -- -- (18) (74) (902) (37) (4,604)
---- ----- ------- ------- -------- ------- --------
Net loss applicable to common
shareholders..................... $(32) $(220) $(1,671) $(4,095) $(12,236) $(2,994) $(28,021)
==== ===== ======= ======= ======== ======= ========
Net loss per share applicable to
common shareholders -- basic and
dilutive(2)...................... $ -- $(.03) $ (.10) $ (.21) $ (.51) $ (0.13) $ (1.10)
Weighted average shares
outstanding...................... -- 6,521 16,667 19,837 23,953 23,574 25,379
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1998
ACTUAL
(IN THOUSANDS)
---------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 129,435
Restricted cash............................................. 77,647
Total assets................................................ 246,049
Short term debt............................................. 2,925
Long term debt, net of current portion...................... 213,539
Series A Redeemable Convertible Preferred Stock............. 1,401
Series B Redeemable Preferred Stock......................... 13,315
Warrants, redeemable(6)..................................... 11,546
Common shareholders' capital deficiency..................... (22,344)
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
----- ------- -------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE, PER MINUTE AND RATIO INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Capital expenditures............... $ 1 $ 171 $ 189 $ 325 $ 7,094 $ 1,250 $ 16,506
EBITDA(3).......................... (32) (220) (1,638) (3,886) (10,670) (2,570) (17,138)
Pro forma interest expense,
net(4)........................... -- -- -- -- 30,328 15,164 8,391
Revenue per minute................. -- .34 .34 .24 .23 .23 .22
Billable minutes of use............ -- 16 7,541 58,706 175,248 82,553 139,329
Ratio of earnings to fixed
charges(5)....................... N/A (31.43) (42.50) (14.00) (16.36) (13.50) (2.34)
Net Cash provided by (used in):
Operating activities............. 1 (90) (1,852) (2,774) (7,134) 92 (12,939)
Investing activities............. (1) (171) (189) (353) (4,339) (318) (85,150)
Financing activities............. -- 867 1,980 2,836 23,392 1,052 215,352
REGIONAL DATA:
Revenues
United States.................... $ -- $ 5 $ 2,544 $14,021 $ 34,459 $17,572 $ 23,474
Europe........................... -- -- 49 341 5,657 1,157 7,186
Billable minutes of use
United States.................... -- 16 7,461 57,765 159,602 79,665 118,486
Europe........................... -- -- 80 941 15,646 2,888 20,843
</TABLE>
- ---------------
(1) In January 1996, the Company contributed $150,000 in respect of an 80%
equity interest in Long Distance International Ltd. ("LDI Ltd."), a United
Kingdom operating subsidiary. In January 1998, the Company purchased the
outstanding 20% minority interest for approximately $380,000. During 1997,
the minority shareholder did not fund its share of LDI Ltd.'s losses and, as
a result, during 1997 the Company absorbed LDI Ltd.'s cumulative unfunded
net losses.
(2) The Company's loss per share amounts for all periods presented are computed
in accordance with SFAS No. 128 "Earnings Per Share," which was effective
for periods ending after December 15, 1997. Loss applicable to common
shareholders has been reduced by preferred dividends and preferred stock and
warrant redemption accretion.
(3) EBITDA represents net loss before interest, income tax expense (benefit),
minority interest and depreciation and amortization. LDI has included
information concerning EBITDA herein because such information is commonly
used in the telecommunications industry as one measure of an issuer's
operating performance and ability to service debt. EBITDA is not determined
in accordance with generally accepted accounting principles, is not
indicative of cash provided by operating activities, is not necessarily
comparable to similarly titled measures of other companies, should not be
used as a measure of operating income and cash flows from operations as
determined under generally accepted accounting principles and should not be
considered in isolation or as an alternative to measures of performance
determined in accordance with generally accepted accounting principles.
(4) Gives effect to the Offering as if it occurred as of the beginning of the
period presented and includes amortization of financing costs and original
issue discount of approximately $8.9 million and $12.0 million,
respectively, over the term of the Notes. For purposes of calculating pro
forma interest expense,
15
<PAGE> 16
$204.6 million of the net proceeds from the Offering have been allocated to
the Notes and $11.5 million of the net proceeds from the Offering have been
allocated to the Warrants.
(5) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of net losses before fixed charges. Fixed charges consist of
interest on debt and the interest component of rent expense. For the years
ended December 31, 1995, 1996 and 1997 and the six months ended June 30,
1997 and 1998 the Company's earnings before fixed charges were insufficient
to cover its fixed charges by $1.7 million, $4.0 million, $11.3 million,
$3.0 million and $23.4 million, respectively.
(6) Upon the occurrence of certain transactions, the Company will be required to
offer to repurchase the Warrants. See "Description of Capital
Stock -- Warrants."
16
<PAGE> 17
RISK FACTORS
An investment in the Exchange Notes involves a significant degree of risk.
In determining whether to tender their Senior Notes for Exchange Notes,
potential investors should consider carefully all of the information set forth
in this Prospectus and, in particular, the following factors. This Prospectus
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in
such forward-looking statements.
LIMITED OPERATING HISTORY
LDI was formed in 1993, but conducted only limited operations prior to
year-end 1995, and, therefore, has a limited operating history upon which
potential investors may base an evaluation of its performance. LDI has provided
services principally in the United States and western Europe (principally in the
United Kingdom). See "Business -- Services."
LDI intends to significantly expand its operations in its current markets
and to enter into a number of markets where it currently does not have
operations. In many of its future markets, LDI also plans to offer services that
have been provided in the past to a large extent only by PTOs. Furthermore, in
certain of such markets, LDI also intends to utilize access and transmission
methods with respect to which it has limited operating experience. LDI's
prospects must, therefore, be considered in light of the risks, expenses,
problems and delays inherent in substantially expanding a business and in
establishing a new business in additional markets in an evolving industry. See
"-- Implementation of Expansion Plans," "-- Need for Local Connectivity,"
"-- Dependence on Third Party Sales Organizations," "-- Competition," "-- Risks
Associated with Rapid Growth," "-- Risks Associated with Rapidly Changing
Industry," "-- Significant Price Declines," "-- Dependence on Effective
Information Systems and Billing and Collection Agreements," "-- Dependence On
Key Personnel," "-- Dependence on Suppliers" and "Business -- Services."
IMPLEMENTATION OF EXPANSION PLANS
LDI currently operates principally as a switchless reseller. LDI's
successful implementation of its strategy will depend, in part, upon LDI's
ability to successfully effect the transition from a reseller to a
facilities-based provider of telecommunications services. This transition will
require the continued expansion and development of its network in the United
States and western Europe, as well as the related back-office capacity,
including billing systems, expansion of the Company's telemarketing operations
and the hiring and retention of management and highly productive internal sales
personnel and independent sales agents. Execution of LDI's expansion plans is
subject to a variety of risks, including, but not limited to, operating and
technical problems, regulatory uncertainties and competition.
As LDI expands its network, it will incur significant fixed costs, relating
principally to acquisition of switching equipment, IRUs and leased lines and
network management systems. As part of its expansion strategy, LDI has
purchased, and intends to purchase additional, IRUs on fiber optic cable systems
that are currently under construction or the construction of which is planned.
In October 1997, the Company entered into a purchase agreement for an IRU on a
sub-marine telecommunications cable for which it will pay an aggregate of $5
million plus 12% interest per annum through 2001. In January 1998, the Company
entered into a purchase agreement for an IRU on a land-based telecommunications
cable for which it will pay an aggregate of $750,000 plus 12% interest per annum
through 2001. In May 1998, the Company entered into a purchase agreement for an
IRU on a land-based telecommunications cable for which it will pay an aggregate
of $2.25 million plus 12% interest per annum through 2001. LDI has entered into
a letter of intent, and placed a deposit of $1.6 million pursuant to an escrow
agreement, to purchase five STM-1s from Viatel on CIRCE, the planned fiber optic
ring between London, Paris, Brussels, Rotterdam and Amsterdam, which is expected
to be operational by the second quarter of 1999. There can be no assurance that
such fiber optic systems will be completed on a timely basis or at all. In the
event such systems are not completed, the Company may be required to obtain
transmission capacity through more expensive means. The development and
expansion of LDI's network has entailed and will continue to entail considerable
costs in advance of anticipated revenues and may cause substantial fluctuations
in LDI's operating results. There can be no assurance that LDI will be able to
expand its network as planned or that LDI will generate traffic volumes
sufficient to enjoy significant economies of scale, which LDI believes are
critical to the overall success of its strategy. Failure by LDI to implement its
expansion plans could have a material adverse effect upon LDI's business,
financial condition and results of operations and its ability to pay principal
of and interest on the Notes.
17
<PAGE> 18
HISTORICAL AND FUTURE LOSSES AND NEGATIVE CASH FLOW
LDI's current aggregate net losses as of June 30, 1998 were $40.7 million.
LDI had negative EBITDA of $1.6 million, $3.9 million and $10.7 million and a
net loss of $1.7 million, $4.0 million and $11.3 million for the years ended
December 31, 1995, 1996 and 1997, respectively, and a negative EBITDA of $2.6
million and $17.1 million and a net loss of $3.0 million and $23.4 million for
the six months ended June 30, 1997 and 1998, respectively. On a pro forma basis,
assuming the Offering had been consummated on January 1, 1998, LDI would have
had a net loss of $26.9 million for the six months ended June 30, 1998.
Furthermore, LDI expects to incur increasing negative EBITDA, increasing
negative cash flow from operations, increasing operating losses and increasing
net losses for at least the next several years as it expands its network. After
giving effect to the Offering, the Company's earnings before fixed charges were
insufficient to cover its fixed charges by $23.4 million for the six months
ended June 30, 1998. The Company's EBITDA less capital expenditures were $(1.8
million), $(4.2 million) and $(13.9 million) for the years ended December 31,
1995, 1996 and 1997, respectively and $(2.9 million) and $(23.0 million) for the
six months ended June 30, 1997 and 1998, respectively. There can be no
assurances that LDI will ever operate at profitable levels or have positive
EBITDA. See "Capitalization," "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The ability of LDI to meet its debt service obligations will depend upon
its future performance, which, in turn, is subject to LDI's successful
implementation of its strategy, as well as to financial, competitive, business,
regulatory, technical and other factors beyond LDI's control. If LDI is unable
to generate cash flow from operations that is sufficient to meet its working
capital and debt service requirements, it may be required to refinance all or a
portion of its indebtedness. There can be no assurance that any such refinancing
would be possible on terms that would be acceptable to LDI, if at all. If such
refinancing were not possible or if additional financing were not available, LDI
could be forced to default on its obligations with respect to the Notes.
HIGH LEVERAGE; RESTRICTIVE COVENANTS
At June 30, 1998, after giving effect to the Offering, LDI had total
consolidated long-term indebtedness of approximately $213.5 million, net of
current portion, (including approximately $11.4 million of secured indebtedness
of which approximately $2.2 million related to the Company's subsidiaries),
redeemable preferred stock and warrants of $26.3 million and a common
shareholders' capital deficiency of approximately $22.3 million. LDI anticipates
that it will incur additional indebtedness, primarily in connection with
equipment financings. Although the Indenture limits the incurrence of additional
indebtedness by the Company and its subsidiaries, the Indenture permits the
Company and its subsidiaries to incur an unlimited amount of indebtedness to
finance the cost of equipment, inventory and other assets. See "Description of
the Exchange Notes -- Covenants." The level of LDI's indebtedness could have
important consequences to holders of the Notes, including the following: (i) the
debt service requirements of other indebtedness could make it more difficult for
LDI to make payments on the Notes; (ii) the ability of LDI to obtain any
necessary financing in the future for working capital, capital expenditures,
debt service requirements or other purposes may be limited; (iii) a substantial
portion of LDI's future cash flow from operations, if any, may be dedicated to
the payment of principal and interest on its indebtedness and other obligations;
(iv) flexibility in planning for, or reacting to changes in, LDI's business may
be limited; (v) LDI will be more highly leveraged than certain of its
competitors, which may place it at a competitive disadvantage; and (vi) LDI's
high degree of indebtedness could make it more vulnerable in the event of a
downturn in its business. LDI's high level of indebtedness could have a material
adverse effect upon its business, financial condition and results of operations
and its ability to pay principal of and interest on the Notes. See "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The Indenture contains certain restrictive covenants that limit, among
other things, the ability of LDI to incur indebtedness, make prepayments of
subordinated indebtedness, pay dividends, make investments, engage in
transactions with shareholders and affiliates, issue capital stock of Restricted
Subsidiaries, create liens, sell assets and engage in mergers and
consolidations. See "Description of the Exchange Notes -- Covenants." A failure
to comply with the covenants and restrictions in the Indenture or agreements
relating to any subsequent financing could result in an event of default under
such agreements which could permit the
18
<PAGE> 19
acceleration of the related debt and the acceleration of debt under other debt
agreements that contain cross-acceleration or cross-default provisions, and
would have an adverse effect on the Company. In addition, the terms of LDI's
Series A Redeemable Convertible Preferred Stock (the "Series A Preferred Stock")
and Series B Redeemable Preferred Stock (the "Series B Preferred Stock") place
restrictions on the ability of LDI to engage in certain transactions and the
terms of the Series B Preferred Stock also restrict LDI's ability to incur
indebtedness. These restrictions could limit the ability of LDI to effect
financings or engage in other corporate activities.
SUBSTANTIAL CAPITAL REQUIREMENTS
LDI will require substantial capital expenditures significantly in excess
of historical levels to implement its business strategy. Such expenditures are
estimated to be approximately $45.0 million over the next 12 month period. The
net proceeds from the Offering are expected to be sufficient to fund LDI's
planned capital expenditures and operating losses, which the Company expects
will be approximately $18.0 million over the next 12 month period, until LDI
begins to generate positive cash flow (which is not expected to occur prior to
the year 2000). Actual capital expenditures and cash requirements may vary
significantly from LDI's estimates depending on a number of factors, including
the pace, extent and cost of network expansion, sales levels, competitive
pressures and regulatory actions. If LDI's plans or assumptions change, its
assumptions prove to be inaccurate, it experiences unanticipated costs or
competitive pressures, it consummates acquisitions or the net proceeds from the
Offering otherwise prove to be insufficient, LDI may be required to seek
additional capital (or seek additional capital sooner than expected). LDI may
seek to raise additional equity or debt capital from public or private sources.
There can be no assurance that LDI will be able to raise such capital on
satisfactory terms or at all. Furthermore, the restrictive covenants contained
in the Indenture and the terms of LDI's Series B Preferred Stock limit LDI's
ability to incur additional indebtedness. If LDI raises additional funds through
the incurrence of indebtedness, LDI may become subject to additional or more
restrictive covenants. In the event that LDI is unable to obtain such additional
capital or is unable to obtain such additional capital on acceptable terms, LDI
may be required to reduce the scope of its expansion, which could have a
material adverse effect upon LDI's business, financial condition and results of
operations and its ability to pay principal of and interest on the Notes.
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
The Exchange Notes should be treated as a continuation of the Senior Notes
for federal income tax purposes. The Senior Notes were treated as having been
issued at a discount for United States federal income tax purposes. Prospective
investors should consult their tax advisors about the application of federal
income tax law, as well as any applicable state, local or foreign tax laws. This
Prospectus contains no information regarding taxation other than under certain
laws of the United States.
If a bankruptcy case is commenced by or against LDI under the United States
Bankruptcy Code after the issuance of the Exchange Notes, the claim of a holder
of Exchange Notes with respect to the principal amount thereof would likely be
limited to an amount equal to the sum of (i) the initial offering price and (ii)
that portion of the original issue discount that is not deemed to constitute
"unmatured interest" for purposes of the United States Bankruptcy Code. Any
original issue discount that was not accrued as of any bankruptcy filing would
constitute "unmatured interest".
YEAR 2000 COMPLIANCE
"Year 2000 Compliance," which affects many corporations, concerns the
inability of information systems, primarily computer software programs, to
properly recognize and process date sensitive information relating to the Year
2000 and beyond. Inability to reach substantial Year 2000 Compliance in LDI's
systems and integral third party systems could result in interruption or failure
of LDI's ability to provide telecommunications services, interruption or failure
of LDI's customer billing processes, operating and other information technology
systems and/or failure of certain date sensitive equipment. Such interruptions
or failures could result in claims by customers and/or loss of revenue due to
service interruption and/or delays in LDI's ability to bill its customers in an
accurate and timely manner. Additionally, increased expenses associated with
litigation and/or stabilization of operations following such interruptions or
failure or execution of Year 2000 contingency plans could, and most probably
would, result in significant revenue and cost issues. LDI currently
19
<PAGE> 20
anticipates the mission critical systems it controls in its domestic and
international operations to be fully Year 2000 compliant by January 1, 2000.
However, no assurance can be given that unforeseen circumstances will not arise
which would adversely affect the Year 2000 Compliance of LDI. Furthermore, the
Year 2000 Compliance of LDI's integral third party networks is not yet fully
known. As a result, LDI is unable to determine the impact that any third party
systems interruptions or failures would have on LDI's business, results of
operations or financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Impact of Year 2000."
COMPETITION; COMPETITIVE PRICING
The provision of telecommunications services is extremely competitive and
will become increasingly so as the regulatory barriers to entry into
telecommunications markets are reduced or eliminated. LDI believes that the
non-United States and non-United Kingdom markets into which LDI intends to
expand its operations will experience increased competition and will begin to
resemble the competitive landscape in the United States and the United Kingdom,
in part as a result of regulatory initiatives. However, it appears that western
European telecommunications markets may experience price competition more
rapidly and more extensively than was experienced when deregulation occurred in
the United States and the United Kingdom.
Competition for customers is primarily on the basis of price and, to a
lesser extent, on the type and quality of services offered and customer service.
LDI has no control over the prices set by its competitors or the type or quality
of their services. LDI has a large number of competitors which may use their
substantial financial resources to cause severe price competition in the markets
in which LDI operates, which would require LDI to reduce its prices in order to
remain competitive. For example, Sprint Corporation ("Sprint") recently
announced a program offering $.10 per minute rates on certain calls to the
United Kingdom and free United States domestic long distance calls on Fridays
and MCI Communications Corporation ("MCI") has reduced the prices of certain of
its domestic off-peak calls significantly. LDI has focused on users that make
such calls. In the United Kingdom, British Telecom reduced its retail prices
pursuant to the requirements of the Office of Telecommunications ("Oftel"), the
United Kingdom telecommunications regulatory authority. In western Europe,
France Telecom and Deutsche Telekom have recently taken steps to substantially
reduce prices in an effort to protect their market share and deter competitors,
such as the Company. France Telecom has obtained approval to reduce retail
prices on domestic and international long distance services by an average of 9%
during each of 1997 and 1998 and 4.5% during each of 1999 and 2000. Deutsche
Telekom has announced that, subject to regulatory approval, it intends to reduce
retail prices on domestic and international long distance service by up to 40%.
Neither France Telecom nor Deutsche Telekom has reduced wholesale prices to the
same extent as retail prices. In the United States, the FCC, the United States
telecommunications regulatory authority, adopted rules which are designed to
bring downward pressure on international telephone rates. The FCC is requiring
United States international facilities-based carriers to negotiate lower
settlement rates with correspondent foreign carriers that deliver calls in
foreign jurisdictions. The FCC expects such lower settlement rates to become
effective on a transitional basis, commencing January 1, 1999 for major
countries, with lower settlement rates to become effective for substantially all
countries by January 1, 2003. Any resulting savings to the United States
facilities-based carriers might be passed along to their customers in the form
of reduced rates for international calls. Corresponding price reductions by LDI
could reduce LDI's revenues and margins, which could have a material adverse
effect on LDI's business, financial condition and results of operations and its
ability to pay interest on and principal of the Notes. The Company has
experienced, and expects to continue to experience, declining revenue per
billable minute in all of its markets, in part as a result of increasing
worldwide competition within the telecommunications industry. LDI also
experiences customer attrition, or "churn," as a result of the highly
competitive nature of its markets and expects current levels of churn to
continue or increase. See "-- Response Rates; Customer Attrition; Impact of
Increased Postal and Paper Costs."
LDI's success will depend upon its ability to compete with a variety of
other telecommunications providers in each of its markets. In the United States,
LDI's competitors include AT&T, MCI, Sprint, WorldCom, Inc. ("WorldCom") and
numerous other carriers for domestic and international long distance calls. In
addition, LDI faces competition from lesser known entities, including VarTec
Telecom Inc. and Excel, and lesser known brands of well known competitors such
as MCI's Telecom*USA brand. Congress has
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substantially amended the Communications Act of 1934 (the "Communications Act")
by enacting the Telecommunications Act of 1996 (the "1996 Act"), making the
regional Bell operating companies (the "RBOCs") eligible, subject to FCC
approval, to offer domestic long distance and international telecommunications
services in their "in region" service areas, where they control essential
facilities such as local lines connecting to the premises of customers. The use
of these facilities at reasonable and non-discriminatory rates, and on
reasonable and nondiscriminatory conditions, is necessary to enable new market
entrants, including long distance carriers, to compete effectively with the
RBOCs and other carriers. The RBOCs have the incentive to overcharge for the use
of their essential facilities for the dual purposes of discouraging competition
from new local market entrants and cross-subsidizing their proposed new long
distance services. The RBOCs also may offer domestic long distance and
international services outside of their service areas or "out-of-region
services." The United States District Court for the Northern District of Texas
recently ruled that the "in region" provisions of the 1996 Act restricting the
RBOCs entry into long distance market were unconstitutional. That decision has
been stayed pending reconsideration and is being appealed to the United States
Fifth Circuit Court of Appeals. In addition, the FCC permits foreign
telecommunications entities to enter the United States international
telecommunications market, including dominant foreign entities whose home
markets are conducive to competition. The FCC also has substantially reduced the
regulatory constraints on AT&T, LDI's largest competitor, by declaring AT&T to
be "non-dominant," first in the domestic long distance market and more recently
in the international market, thus, granting AT&T more pricing and service
flexibility and permitting it to compete more effectively with smaller
inter-exchange carriers such as LDI.
In western Europe, LDI's competitors include (i) PTOs, (ii) alliances such
as AT&T's alliance with Unisource (itself a joint venture among Telecom
Netherlands, Telia AB and Swiss Telecom PTT), and Sprint's alliance with
Deutsche Telekom and France Telecom, known as "Global One," (iii) companies
offering international telecommunications services, such as Esprit Telecom,
Econophone, Inc., Primus, Viatel Global Communications ("Viatel") and RSL
Communications, Ltd., (iv) new entrants into the European telecommunications
industry which are partially owned by large European industrial or utilities
companies such as Arcor Mannesmann in Germany, Omnitel in Italy and Energis in
the United Kingdom, and (v) other companies with business plans similar in
varying degrees to LDI's. Because all of the Company's targeted European markets
(other than the United Kingdom) have only recently liberalized or are still in
the process of liberalizing the provision of telephone services, customers in
these markets are not accustomed to obtaining services from competitors to PTOs
and may be reluctant to use new providers, such as the Company. PTOs also
generally have certain competitive advantages over the Company and other
providers due to their control of local connectivity, their extensive ownership
of facilities, their ability to delay or prevent equal access to lines and the
reluctance of some regulators to adopt policies and grant regulatory approvals
that would result in increased competition for the local PTO. For example, in
France, only six carriers plus France Telecom are currently able to provide long
distance service using a single digit prefix. The Company is not one of those
carriers.
The World Trade Organization (the "WTO") recently concluded an agreement,
known as the WTO Basic Telecommunications Service Agreement (the "WTO
Agreement"), which opens the telecommunications markets of the signatory
countries to foreign carriers on varying dates beginning February 5, 1998. The
WTO Agreement is subject to legislative ratification in many of the 70 signatory
countries. Pursuant to the WTO Agreement, United States companies would have
foreign market access for local, long distance and international services,
either on a facilities basis or through resale of existing network capacity.
United States companies also would be permitted to acquire, establish or hold a
significant stake in telecommunications companies around the world. Conversely,
foreign companies would be permitted to enter the domestic United States
telecommunications market and acquire ownership interests in United States
service providers. Although the WTO Agreement may open additional markets to LDI
or broaden the permissible services that LDI can provide in certain markets, the
WTO Agreement also may subject LDI to greater competitive pressures in its
markets, with the risk of losing customers to other carriers and reductions in
LDI's rates.
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In addition, there are pending major consolidations in the
telecommunications industry which could result in even more powerful competitors
to LDI. For example, the proposed acquisition of MCI by WorldCom, the proposed
merger of AT&T and TCI and the acquisition of Teleport Communications Group by
AT&T would create powerful competitors for LDI.
LDI also may experience competition in one or more of its markets from
competitors utilizing new or alternative technologies and/or transmission
methods, including cable television companies, wireless telephone companies,
satellite owners and resellers, Internet service providers, electric and other
utilities, railways, microwave carriers and large end users that have private
networks. Existing telecommunications companies, including AT&T, are
implementing plans to offer voice telecommunications services over the Internet
at substantially reduced prices.
Many of LDI's competitors are significantly larger, have substantially
greater financial, technical and marketing resources and larger networks than
LDI, control transmission lines and have long-standing relationships with LDI's
target customers. If any of LDI's competitors were to devote additional
attention to the provision of international and/or domestic long distance voice
telecommunication services to LDI's target customer base, there could be a
material adverse effect upon LDI's business, financial condition and results of
operations and its ability to pay principal of and interest on the Notes. Many
of the Company's larger competitors have lower incremental transmission costs
than the Company due to, among other things, greater use of owned transmission
capacity, more favorable interconnection rates and volume discounts on
transmission. Furthermore, in certain European countries (including France and
Italy) telecommunications companies that make substantial investments in network
infrastructure will receive a substantial discount on interconnection rates. The
Company does not expect to qualify for such a discount initially, if at all. In
addition, certain of the Company's competitors offer customers an integrated
full service telecommunications package consisting of local and long distance
voice, data and Internet transmission. The Company does not offer all of these
services and does not presently plan to do so, which could have a material
adverse effect on the Company's ability to compete, its business, financial
condition and results of operations and its ability to pay principal of and
interest on the Notes.
Each of the markets in which LDI offers or intends to offer its services
will present unique competitive factors. There can be no assurance that LDI will
be able to effectively compete in any given market and the success of LDI's
strategy in any one market is not necessarily indicative of its ability to
succeed in any other market. See "Business -- Competition."
RESPONSE RATES; CUSTOMER ATTRITION; IMPACT OF INCREASED POSTAGE AND PAPER COSTS
To date, a significant portion of the Company's revenues have come from its
dial-around customers. Dial-around service enables a United States long distance
customer to access LDI's network from the customer's home or office by dialing a
"10xxx" prefix and then the number the customer is calling. The FCC recently
expanded carrier identification codes from "10xxx" to a "1010xxx" format. There
can be no assurance that the change in format will not have a material adverse
effect on the Company's dial-around business. For the year ended December 31,
1997, approximately $27 million of revenues (79% of its United States revenues
and 68% of it consolidated revenues) came from dial-around services. The Company
primarily markets its dial-around services through direct mail marketing
campaigns and telemarketing and expects to increase the use of these and other
marketing methods in the United States as it continues to expand its United
States network. As a result, the Company's business and results of operations
will continue to be significantly affected by the customer attrition rate and
the response rate of its direct marketing initiatives. The number of new
customers who utilize the Company's service in the near term period after a
marketing campaign defines the campaign's overall response rate. Customer
attrition represents the number of customers who utilize the Company's service
after a campaign who fail to continue to use the Company's service.
The Company believes that a high level of customer attrition is inherent to
the dial-around long distance industry. Attrition is attributable to a number of
factors, including initiatives of existing and new competitors as they engage
in, among other things, national advertising campaigns, telemarketing programs
and the issuance of cash and other forms of customer "win-back" incentives and
other customer acquisition programs prevalent in the residential long distance
market as well as the termination of service for non-payment. The
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Company typically experiences higher customer attrition in the first few months
following a marketing campaign as a significant number of customers sample the
Company's dial-around service. While remailings and additional marketing efforts
in its existing markets are important components of the Company's growth
strategy, the Company may eventually reach a point in its existing markets where
it determines that its direct mail marketing strategy is no longer a
cost-effective method to acquire customers. There can be no assurance that the
Company's attrition rate will not increase or that its response rate will not
decrease. An increase in attrition rate or a decrease in response rate could
have a material adverse effect upon the Company's business and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Because the Company has used, and expects to continue to use, direct mail
marketing to advertise its dial-around and certain other of its services,
postage and paper costs have been, and will continue to be, significant expenses
in the operation of the Company's business. There can be no assurance that the
Company will be able to pass on any significant postage and paper cost price
increases to its customers. Additionally, strikes or other service interruptions
associated with the production or delivery of the Company's direct mail could
adversely affect the Company's ability to market its services on a timely basis.
Any increases in postage or paper costs or substantial service interruptions
with the production or delivery of the Company's direct mail could have an
adverse effect on the Company's operating results.
MIGRATION OF DIAL-AROUND CALLERS TO PRESUBSCRIBED SERVICES
A key element of the Company's strategy for continued growth is the
migration of its United States dial-around calling customers to its
presubscribed ("1+") long distance services. Since the Company began operating,
in the United States it has focused primarily on providing international
dial-around calling long distance services to residential customers, and its
marketing efforts have primarily relied on direct mail marketing and a
telemarketing system. The Company typically experiences declining customer
utilization in the first few months following a marketing campaign after a
significant number of customers sample the Company's dial-around service. The
Company believes that a high level of customer attrition is inherent to the
dial-around long distance industry and therefore, in order to maintain long-term
customer relationships, the Company's strategy includes migrating its
dial-around calling customers in the United States to its presubscribed
services. No assurance can be given that the Company will be successful in
migrating a significant number of its dial-around customers to its presubscribed
long distance service. The failure to migrate customers would have a material
adverse effect on the Company's growth strategy, its business, financial
condition and results of operations.
DEPENDENCE ON THIRD PARTY SALES ORGANIZATIONS
LDI intends to continue to sell its services through indirect channels of
distribution, including independent sales agents and resellers. Approximately
11% of the Company's revenues for the year ended December 31, 1997 was derived
from these channels. A key element of the Company's growth strategy will be the
continued expansion into the SME market primarily using third party sales
organizations. The ability of the Company to successfully compete in the SME
market in the United States will depend on its ability to attract and retain
effective third party sales organizations. Although LDI believes that it offers
its independent sales agents and resellers sufficient incentives to market and
sell its services, LDI does not have direct control over such persons and there
can be no assurance that they will perform in a satisfactory manner. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Sales and Marketing."
LDI believes that its relationships with its current independent sales
agents and resellers are good. However, there can be no assurance that LDI will
not in the future experience material disputes with any such person or that LDI
and/or any such person will not decide to terminate their business relationship.
In addition, regulations pertaining to commercial agents introduced by the EU
have given sales agents far greater protection than before, resulting in the
potential for increased termination payments in the event of a dispute. Such
disputes or terminations could adversely affect the number of customers obtained
and/or retained by LDI, which could have a material adverse effect upon LDI's
business, financial condition and results of operations and its ability to pay
principal of and interest on the Notes.
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In addition, in the United States both federal and state officials are
tightening the rules governing the telemarketing of telecommunications services
and the requirements imposed on carriers acquiring customers in that manner.
Customer complaints of unauthorized conversion or "slamming" are widespread in
the long distance industry. LDI is subject to a risk of federal or state
enforcement actions with respect to these activities. Provisions in the
Company's agreements with its third party sales organizations mandate compliance
by such parties with applicable state and federal regulations. However, because
these third party sales organizations are independent marketing companies, LDI
does not have direct control over such persons and there can be no assurance
that they will perform in a satisfactory manner.
RISKS ASSOCIATED WITH RAPIDLY CHANGING INDUSTRY
The international telecommunications industry is changing rapidly due to,
among other things, regulatory liberalization, upon which much of LDI's planned
expansion into western Europe is predicated, privatization of PTOs, the
expansion of telecommunications infrastructure and the globalization of the
world's economies. The telecommunications industry also is in a period of rapid
technological evolution, marked by the introduction of new product and service
offerings and increased satellite and fiber optic cable transmission capacity
for services similar to those provided by LDI, including utilization of the
Internet for voice and data communications. Recently Lucent Technologies Inc.
announced that it has developed a system that would significantly increase the
transmission capacity of certain fiber optic systems. See "-- Competition."
There can be no assurance that one or more of the foregoing factors will
not vary unpredictably, which could have a material adverse effect on LDI, its
ability to pay principal of and interest on the Notes and the value of the
Warrants and the Warrant Shares. There also can be no assurance, even if such
factors turn out as anticipated by LDI, that LDI will be able to implement its
strategy or that its strategy will be successful in the rapidly evolving
telecommunications market. In addition, there can be no assurance that LDI will
be able to compete effectively or adjust its contemplated plan of development to
meet changing market conditions. Furthermore, LDI is unable to predict which of
the many possible future service offerings will be important to establish and
maintain a competitive position or what expenditures will be required to develop
and provide such services. LDI's success will depend, in part, on its ability to
anticipate and adapt to rapid technological changes occurring in the
telecommunications industry and on its ability to offer, on a timely basis,
services that satisfy evolving industry standards. The failure by LDI to respond
to new technologies on a timely basis, penetrate new markets in a timely manner
in response to changing market conditions or customer requirements or achieve a
significant degree of market acceptance of new or enhanced services could have a
material adverse effect upon LDI's business, financial condition and results of
operations and its ability to pay principal of and interest on the Notes.
SIGNIFICANT PRICE DECLINES
Prices for international long distance calls historically have been
determined by international settlement rates. Because these rates historically
have been negotiated between national telephone monopolies, they have been
artificially high and have allowed carriers to enjoy artificially high gross
margins on international calls. However, many industry observers believe that,
given the negligible marginal cost to a facilities-based carrier of carrying an
international call and given the emergence of competition in many countries
(particularly in western Europe, where LDI currently intends to expand), the
international settlement rate system is in the process of breaking down. In
addition, EC Directive 97/33/EC, which became effective on January 1, 1998,
requires EU operators with significant market power to impose charges for call
termination for cross border traffic that are cost-based and non-discriminatory,
which will have an effect on settlement rates with countries and territories
outside the EU. This has begun to be reflected in international rates,
particularly the rates charged for calls between countries where competition
exists. For example, Sprint recently reduced its rates on certain calls between
the United States and the United Kingdom to $.10 per minute. This represents a
steep decline from rates charged for such calls as recently as several years ago
and LDI expects rates on international calls, particularly between the United
States and the United Kingdom, to continue to decline significantly.
Furthermore, the FCC has adopted rules, designed to bring downward pressure on
international telephone rates, that require United States international
facilities-based carriers to negotiate lower settlement rates with their
correspondent foreign carriers. Historically, LDI's transmission costs have
fallen at a faster
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rate than its retail prices, resulting in higher gross margins. However, in the
future, LDI could experience a substantial reduction in its gross margins on
international calls as retail prices are reduced, which, absent a substantial
increase in billable minutes of traffic carried or charges for additional
services, would have a material adverse effect upon LDI's business, financial
condition and results of operations and its ability to pay principal of and
interest on the Notes.
RISKS ASSOCIATED WITH RAPID GROWTH
LDI has experienced rapid growth. LDI's revenues were $2.6 million for
1995, and increased to $14.4 million for 1996, and $40.1 million for 1997. LDI's
strategy contemplates continued growth primarily through further expansion of
its existing operations and the establishment of new operations. LDI's ability
to manage its anticipated future growth will depend on its ability to evaluate
new markets, secure, retain and motivate independent sales agents and its
internal sales forces, monitor operations, control costs, maintain effective
quality controls, provide customer service, obtain satisfactory and
cost-effective lease rights from, and interconnection with, competitors that own
transmission lines (in many cases, intra-national transmission lines may be
available only from PTOs), and significantly expand its internal management,
technical, accounting and customer billing systems. LDI's rapid growth has
placed, and its planned future growth will continue to place, a significant and
increasing strain on its financial, management and operational resources. There
can be no assurance that LDI's financial, management and operational systems and
infrastructure will be adequate to maintain and effectively monitor future
growth or that LDI will be able to successfully attract, train and manage
additional employees and/or independent sales agents. The failure to continue to
upgrade LDI's financial, management and operational control systems and
infrastructure or the occurrence of unexpected expansion difficulties could have
a material adverse effect upon LDI's business, financial condition and results
of operations and its ability to pay principal of and interest on the Notes. See
"-- Dependence on Effective Information Systems and Billing and Collection
Agreements" and "-- Dependence on Key Personnel."
ACQUISITION RELATED RISKS
The Company may, as part of its expansion strategy, acquire other
businesses that will complement its existing business. Management is unable to
predict whether or when any prospective acquisitions will occur or the
likelihood of a material transaction being completed on favorable terms and
conditions. The Company's ability to finance acquisitions may be constrained by,
among other things, its high degree of leverage following the Offering. Such
transactions commonly involve certain risks, including, among others: the
difficulty of assimilating the acquired operations and personnel; the potential
disruption of the Company's ongoing business and diversion of resources and
management time; the possible inability of management to maintain uniform
standards, controls, procedures and policies; the risks of entering markets in
which the Company has little or no direct prior experience; and the potential
impairment of relationships with employees or customers as a result of changes
in management. There can be no assurance that any acquisition will be made, that
the Company will be able to obtain additional financing needed to finance such
acquisitions and, if any acquisitions are so made, that the acquired business
will be successfully integrated into the Company's operations or that the
acquired business will perform as expected. The Company has no definitive
agreement with respect to any acquisition, although from time to time it has
discussions with other companies and assesses opportunities on an ongoing basis.
See "Business -- Strategy."
The Company may also enter into joint venture transactions. These
transactions present many of the same risks involved in acquisitions and may
also involve the risk that other joint venture partners may have economic,
business or legal interests or objectives that are inconsistent with those of
the Company. Joint venture partners may also be unable to meet their economic or
other obligations, thereby forcing the Company to fulfill these obligations.
DEVALUATION AND CURRENCY RISKS
A portion of LDI's revenues and expenses are denominated in non-United
States currencies. Furthermore, LDI's business strategy contemplates that,
although an increasing portion of its revenues and expenses will be denominated
in non-United States currencies, a disproportionate portion of LDI's expenses,
including interest and principal on the Notes, will be denominated in dollars.
LDI has not hedged against
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foreign currency exchange transaction risks. Because of LDI's constantly
changing currency exposure and the fact that all foreign currencies do not
fluctuate in the same manner against the dollar, LDI cannot quantify the effect
of exchange rate fluctuations on its future financial condition or results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview."
REGULATORY RESTRICTIONS
National and local laws and regulations governing the provision of
telecommunications services differ significantly among the countries in which
LDI currently operates and intends to operate. The interpretation and
enforcement of such laws and regulations varies and could limit LDI's ability to
provide certain telecommunications services in certain markets. There can be no
assurance that future regulatory, judicial and legislative changes will not have
a material adverse effect on LDI, that domestic or international regulators or
third parties will not raise material issues with regard to LDI's compliance or
noncompliance with applicable laws and regulations or that other regulatory
activities will not have a material adverse effect on LDI. See
"Business -- Regulation."
In the United States, LDI's authority to engage in the resale of
international private lines to provide international telephone service is
pursuant to an authorization (the "Section 214 Private Line Authorization")
granted under Section 214 of the Communications Act. Certain rules of the FCC
restrict LDI from (i) transmitting calls routed over leased lines between New
York and London onward over a leased line to western Europe (other than to a
country which the FCC deems to provide equivalent resale opportunities to those
provided under United States laws, which, in Europe, includes only Sweden and
The Netherlands) or (ii) transmitting calls from western European countries
(other than those deemed to provide equivalent resale opportunities) over leased
lines to London and then onward over a leased line between London and New York.
FCC restrictions thus may materially limit the optimal and most profitable use
of LDI's leased lines between New York and London and result in increased
transmission costs on certain calls, which LDI may not be able to pass on to its
customers.
In the United States, the FCC and relevant state public service commissions
("PSCs") have the authority to regulate interstate and intrastate telephone
rates, respectively, ownership of transmission facilities and the terms and
conditions under which certain of LDI's services are provided. Federal and state
regulations and regulatory trends have had, and in the future are likely to
have, both positive and negative effects on LDI and its ability to compete. The
recent trend in both federal and state regulation of telecommunications service
providers has been in the direction of reduced regulation. There can be no
assurance that changes in current or future federal or state regulations or
future judicial changes would not have a material adverse effect on LDI. See
"Business -- Regulation."
In order to provide their services, inter-exchange carriers, including LDI,
must generally purchase "access" from LECs to originate calls from and terminate
calls in the local exchange telephone networks. In the United States, access
charges generally are regulated by the FCC and the relevant state PSCs. Under
the terms of the AT&T divestiture decree, a court order entered in 1982 which,
among other things, required AT&T to divest its 22 Bell operating companies from
its long distance division (the "AT&T Divestiture Decree"), the RBOCs were
required to price the "local transport" portion of such access charges on an
"equal price per unit of traffic" basis. The FCC has adopted, subject to
reconsideration, a change in the access charge structure, which reduces per
minute access charges, but applies additional per line charges for business
users. This change in access charge structure may disproportionately
disadvantage smaller carriers such as LDI. Under alternative access charge rate
structures proposed to the FCC, LECs would be permitted to allow volume
discounts in the pricing of access charges. If these rate structures are
adopted, access charges for AT&T and other large inter-exchange carriers would
decrease and access charges for small inter-exchange carriers would increase.
While the outcome of these proceedings is uncertain, should the FCC adopt
permanent access charge rules along the lines of the proposed structures, LDI
would be at a cost disadvantage with regard to access charges in comparison to
AT&T and other large inter-exchange carrier competitors. The FCC also has,
subject to reconsideration, announced that it will impose charges on
inter-exchange carriers, including LDI, to support subsidies for
telecommunications services for schools, libraries, rural health care centers
and low income persons. LDI expects to pass these charges on to its customers,
provided, however, if
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LDI were unable to pass on these charges, such could have a material adverse
effect on LDI's business, financial condition and results of operations and its
ability to pay principal of and interest on the Notes.
The FCC requires long distance carriers to pay access charges to payphone
providers for calls made from payphones to toll-free numbers or "1010xxx"
numbers administered by long distance carriers. Prior to October 7, 1997, this
obligation applied only to long distance carriers with toll revenues of $100
million or more per annum. As of October 7, 1997, all long distance carriers,
irrespective of their annual toll revenues, must pay to each payphone operator
$.284 for each access or toll-free call made from the operator's payphones
unless the payphone operator and the long distance carrier agree upon a
different rate of compensation. LDI's card-based services in the United States
are accessed by customers through a toll-free number, often from payphones. LDI
has marketed its services at a discount to prices charged by larger carriers
which recently have begun charging this $.284 access charge. There can be no
assurance that LDI will be able to fully pass this cost on to its customers or
that doing so will not result in a loss of customers. Furthermore, larger
carriers are likely to be able to negotiate lower payphone access charges than
LDI, which could result in such carriers offering lower pricing on services in
the United States accessed from payphones than that offered by LDI.
In addition to regulation by the FCC, the majority of the states require
the Company to register or apply for certification prior to initiating
intrastate interexchange telecommunications service. To date, the Company is
certified to provide intrastate interexchange telecommunications services in 49
states and the District of Columbia. The laws of certain states, including the
rules, regulations and policies of certain state regulatory authorities, require
entities such as the Company to obtain prior approval or to file ratifications
of certain securities issuances, including, in certain cases, the Offering. The
Company has filed notifications with state regulatory authorities and is seeking
approval of the Offering, where required. While many of such authorities have
granted approval, no assurances can be given that the Company will receive such
approvals from all of the states in which it is certified. State issued
certificates of authority to provide intrastate interexchange telecommunications
services can generally be conditioned, modified, canceled, terminated or revoked
by state regulatory authorities for failure to comply with state law and/or the
rules, regulations and policies of the state regulatory authorities. Fines and
other penalties also may be imposed for such violations.
A substantial portion of LDI's expansion strategy is based upon the
expected regulatory liberalization of certain EU markets that commenced on
January 1, 1998. In response to such liberalization, LDI has been and is
continuing to establish operations and making capital expenditures in certain EU
countries. Although liberalization is a legal obligation required by EU
directives, certain of the more detailed EU regulatory framework to apply in the
liberalized environment after January 1, 1998, including further directives,
still requires adoption by the Council of the European Communities. Certain EU
member states have been granted a derogation from liberalizing their
telecommunication markets on January 1, 1998. Luxembourg has been granted a six
month derogation. Ireland and Portugal have been granted a derogation until
January 1, 2000, although Ireland has indicated that it will liberalize on
January 1, 1999. Spain has been granted a derogation entitling it to delay
liberalization until December 1, 1998. Greece has been granted a derogation
entitling it to delay full liberalization until January 1, 2001. There can be no
assurance that each EU member state will proceed with the expected
liberalization on schedule, if at all, that the trend towards liberalization
will not be stopped or reversed or that any steps taken by EU member states
toward liberalization will actually result in an open or competitive
telecommunications market. Accordingly, LDI faces the risk that it will
establish operations and make capital expenditures in a given country in
anticipation of regulatory liberalization which does not subsequently occur, is
delayed or does not result in the market environment anticipated by LDI.
The national governments of EU member states must pass legislation to
liberalize the markets within their countries to give effect to EU directives.
This applies not only to the liberalization requirements set out in EU
directives that already have been adopted, but also requirements to be contained
in those directives which still remain to be adopted by the Council of the
European Communities. LDI's provision of services in Europe may be materially
adversely affected if any EU member state imposes greater restrictions on non-EU
international services than on international services within the EU, although EU
members have signed the WTO Agreement which allows access to their markets by
other signatories. Some EU member states have inconsistently and, in some
instances, unclearly implemented EU telecommunications directives, which could
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limit, constrain or otherwise adversely affect LDI's ability to provide certain
services. Furthermore, national governments may not necessarily pass legislation
enacting an EU directive in the form required, if at all, or may pass such
legislation only after a significant delay. In November 1997, the European
Commission commenced proceedings against seven EU member states, including
Belgium, Denmark, Germany, Greece, Italy, Luxembourg and Portugal for failure to
implement certain EU telecommunications directives fully. Even if a national
legislature enacts appropriate regulations within the time frame established by
the EU, there may be significant resistance to the implementation of such
legislation from PTOs, regulators, trade unions and other sources. For example,
in the United Kingdom, Mercury Communications, now Cable & Wireless
Communications ("Mercury"), resorted to legal action against the Post Office
Engineering Union because the union refused to connect customers to Mercury's
switches. In France, the telecommunications union has stated its objection to
the current move towards liberalization. In Germany, competitors of Deutsche
Telekom have had to resort to court proceedings to attempt to obtain unbundled
access to the local loop and the interconnection prices set by the relevant
ministry have been challenged. In addition, in both France and Germany, the
interconnection prices currently in effect would make it difficult for
competitors such as the Company to generate positive gross margins in those
countries without substantial infrastructure investment. For instance in France,
infrastructure licensees are entitled to lower rates for interconnection with
France Telecom, currently about 20% lower than voice licensees. In Italy, the
government has, in the past, failed to adopt requisite legislation liberalizing
its telecommunications markets on a timely basis. These and other potential
obstacles to liberalization could have a material adverse effect on LDI's
operations by preventing LDI from expanding its operations as currently
intended, as well as a material adverse effect on LDI's business, financial
condition and results of operations and its ability to pay principal of and
interest on the Notes.
If LDI's interpretation of applicable laws and regulations proves
incorrect, it could lose, or be unable to obtain, regulatory approvals necessary
to provide certain of its services or to use certain of its transmission
methods. LDI also could have substantial monetary fines and penalties imposed
against it. There can be no assurance that LDI has accurately interpreted or
will accurately interpret applicable laws and regulations in particular
jurisdictions, or that regulators or third parties will not raise material
issues with regard to LDI's compliance with applicable laws or regulations.
If LDI is unable to provide the services it is presently providing or
intends to provide or to use its existing or contemplated access or transmission
methods due to its inability to receive or retain formal or informal approvals
for such services or access or transmission methods, or for any other reason
related to regulatory compliance or the lack thereof, LDI's business, financial
condition and results of operations and its ability to pay principal of and
interest on the Notes would be materially and adversely affected. See
"Business -- Regulation."
INABILITY TO PREDICT TRAFFIC VOLUME
The Company may purchase IRUs or enter into long-term agreements for leased
capacity in anticipation of traffic volumes which do not reach expected levels
and therefore, be obligated to pay for transmission capacity without adequate
corresponding revenues. In addition, in the event the Company leases capacity
with minimum volume commitments and such minimum volumes are not obtained, the
Company may be required to pay under-utilization charges. Conversely, the
Company may underestimate its need for capacity and, therefore, be required to
obtain transmission capacity through more expensive means. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." If
the Company is unable to accurately project its needs for capacity in the
future, such inability may have a material adverse effect on the Company's
business, financial condition and results of operations and its ability to pay
principal of and interest on the Notes.
NEED FOR LOCAL CONNECTIVITY
To originate and terminate calls, LDI requires "local connectivity," which
is the right to use the PSTN. Although LDI has been successful to date in
obtaining local connectivity in each of its existing network cities in the
United States, there can be no assurance that LDI will be able to maintain local
connectivity, obtain
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additional local connectivity in such cities to the extent necessary or
desirable, or obtain local connectivity in additional cities, in each case
either on acceptable terms or at all. In the United States, LDI obtains local
connectivity from LECs, which also are competitors of LDI. Furthermore, in the
United States, access and termination costs charged by LECs to long distance
providers constitute a significant portion of the total cost of domestic long
distance calls. LDI is interconnected with British Telecom in the United Kingdom
and at present obtains its local connectivity in other European countries from
other reseller carriers. LDI is negotiating interconnection agreements with the
PTOs in such other western European countries for local connectivity. There can
be no assurance that any of the foregoing competitors will make local
connectivity available to LDI at commercially reasonable rates or on a timely
basis. For instance, in France, voice license interconnect tariffs are currently
only available in respect of those transit zones in which carriers such as LDI
install and connect a POP to France Telecom by means of three 2Mb circuits. The
Company has entered into interconnection agreements with the PTOs in the United
Kingdom, Denmark, The Netherlands and Sweden. The Company expects to enter into
interconnection agreements with the PTOs in France, Italy, Germany, Norway,
Switzerland and Austria in 1998. There can be no assurances that the Company
will be able to negotiate interconnection agreements with such PTOs on favorable
terms or at all, or that LDI will be able to implement interconnection in any
country where it enters into interconnection agreements. The failure to obtain
local connectivity on commercially acceptable terms could have a material
adverse effect upon LDI's business, financial condition and results of
operations and its ability to pay principal of and interest on the Notes.
DEPENDENCE ON LEASED LINES AND CARRIERS
LDI will not own most of the telecommunications transmission lines that it
uses. The telephone calls made by LDI's customers will be connected, at least in
part, through transmission lines that LDI will lease. Many of the lessors of
such lines are competitors of LDI. In many countries, the only provider of
transmission facilities is the PTO. Accordingly, prior to full liberalization,
there may be only one source of intra-national transmission lines in these
countries, and LDI may be required to lease transmission capacity at
artificially high rates from a provider that occupies a monopoly or near
monopoly position on the portion of a call transmitted in that provider's
country. Such rates may be too high to allow LDI to generate gross profit on
international calls routed to an LDI switch or node by means of such
intra-national lines. In addition, PTOs will not necessarily be required by law
to allow LDI to lease transmission lines. Even where applicable law requires
PTOs to lease transmission lines to LDI, delays may nevertheless be encountered
with respect to the commencement of operations, and extensive delays may occur
with respect to the negotiation of leases and interconnection agreements. In
addition, disputes may occur with respect to pricing terms and billing.
LDI will be vulnerable to changes in its lease arrangements, such as price
increases and service cancellations, where LDI leases capacity for
point-to-point circuits on a monthly or longer-term fixed cost basis. The
negotiation of lease agreements will involve estimates regarding future supply
and demand for transmission capacity as well as estimates of the calling
patterns and traffic levels of LDI's existing and future customers. LDI's
success will depend, in part, on its ability to obtain and utilize leased
capacity on a cost-effective basis. Depending upon the rate, LDI could suffer
competitive disadvantages if it entered or enters into leases with inappropriate
durations or leases based on per minute charges for high volume routes (or
leases with fixed monthly rates for low volume routes), or if it fails to meet
any minimum volume requirements thereunder. LDI also will be vulnerable to
service interruptions and poor transmission quality from leased lines. The
deterioration or termination of LDI's relationships with one or more of its
carrier vendors could have a material adverse effect upon LDI's business,
financial condition and results of operations and its ability to pay principal
of and interest on the Notes.
The Company intends to provide transmission capacity to carriers and
believes that the revenue it will earn from its carrier customers will represent
a significant portion of its future revenues. Carrier customers are price
sensitive and therefore any increase by LDI in the price of its carrier customer
services relative to its competitors or any relative decrease in the price of
such services offered by such competitors would impact adversely on the
Company's carrier customer base and on its business, financial condition and
results of operations. In addition, certain of the Company's carrier customers
may be unprofitable or only marginally profitable, resulting in a risk of
delinquency or non-payment.
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DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS AND BILLING AND COLLECTION
AGREEMENTS
To complete its billing, LDI must record and process large amounts of data
quickly and accurately. LDI is in the process of upgrading existing in-house
billing and customer information systems in the United States and is installing
a new billing and rating platform in Europe. LDI believes that the successful
implementation and integration of these enhanced and new information systems is
important to its continued growth and its ability to monitor costs, bill
customers and achieve operating efficiencies, but there can be no assurance that
LDI will not encounter delays or cost-overruns or suffer adverse consequences in
implementing such systems. In addition, as LDI's information systems suppliers
revise and upgrade their hardware, software and equipment technology, there can
be no assurance that LDI will not encounter difficulties in integrating such new
technology into its business or that the new systems will be appropriate for
LDI's business. The failure of the Company's systems to meet its needs would
have a material adverse effect on the Company's business, financial condition
and results of operations and its ability to pay principal of and interest on
the Notes. See "Business -- Information Technology." The Company bills
substantially all of its United States customers, including all of its
dial-around customers, through LEC billing and collection agreements, pursuant
to which the Company's charges are placed on the customers' monthly local
telephone bills. In addition, the Company benefits from the LECs' extensive
collections infrastructure. The Company believes that LEC billing and collection
is the most effective mechanism for billing and collecting charges from most of
its United States customers, and the loss of agreements covering a significant
number of customers could have a material adverse effect on the Company's
business, results of operations and financial condition.
DEPENDENCE ON KEY PERSONNEL
The success of LDI is dependent, in large part, upon its senior management.
The loss of services of any of the members of LDI's senior management team,
particularly Clifford Friedland, the Chairman, Co-Chief Executive Officer and
European Managing Director, or David Glassman, the President and Co-Chief
Executive Officer, could have a material adverse effect on LDI, its business,
financial condition and results of operations and its ability to pay principal
of and interest on the Notes. Mr. Glassman and Mr. Friedland are parties to
employment agreements with LDI, both with terms that expire on June 30, 1999.
Such agreements automatically renew for successive one-year periods unless
notice of termination is given. See "Management -- Executive
Compensation -- Employment Agreements." LDI maintains "key person" life
insurance policies on the lives of each of Messrs. Glassman and Friedland that
provide for payment of $1 million to LDI in the event of death or long-term
disability.
LDI's success also will depend on its ability to attract, retain and
motivate additional qualified management, marketing, technical, sales and other
personnel who are in high demand and are often subject to competing employment
opportunities, including qualified independent sales agents. LDI recently hired
a chief financial officer and various technical and marketing employees and will
be required to hire additional management, as well as marketing, technical,
sales and other personnel as LDI effectuates its expansion strategy. In
addition, LDI is in the process of assembling a European management team and
establishing arrangements with sales agents and resellers in Europe to support
the expansion of its network into western Europe. There can be no assurance that
LDI will be successful in attracting, retaining or motivating such personnel.
The loss of the services of key personnel or the inability to attract additional
qualified personnel, could have a material adverse effect upon LDI's business,
financial condition and results of operations and its ability to pay principal
of and interest on the Notes. See "-- Dependence on Third Party Sales
Organizations."
DEPENDENCE ON SUPPLIERS
LDI leases or intends to lease a significant portion of its switch
equipment from DSC and Ericsson AB. Any inability of LDI to lease such switches
on a timely basis or at competitive prices, or any failure by LDI to
successfully integrate such switches into its network, could result in delays,
operational problems or increased expenses. If LDI were required to obtain
switch equipment from other suppliers, such would adversely impact LDI's
strategy to configure its sites as identically as practicable in order to reduce
its personnel and training requirements. A majority of the Company's
transmission capacity and switching facilities are provided by Worldcom, Telco
Communications Group and DSC. Under the terms of the supplier agreements, the
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Company purchases long distance service at certain per-minute rates, which vary
based on the time, distance and type of call. Although management believes that
alternative carriers could be found in a timely manner, disruption of service
for more than a brief period of time or any other of the foregoing could have a
material adverse effect upon LDI's business, financial conditions and results of
operations and its ability to pay principal of and interest on the Notes. See
"Business -- The LDI Network."
PRINCIPAL SHAREHOLDERS; CONFLICTS OF INTEREST
Clifford Friedland, the Chairman, Co-Chief Executive Officer and European
Managing Director of LDI, and David Glassman, the President and Co-Chief
Executive Officer of LDI, own, in the aggregate, approximately 41% of the
outstanding shares of Common Stock prior to the Offering (giving effect to the
options under LDI's 1997 Stock Incentive Plan (the "Incentive Plan"), held by
Mr. Friedland and Mr. Glassman which are currently exercisable). Such
shareholders will continue to have significant influence over the election of
members of LDI's Board of Directors, other than the two directors who may be
elected by the holders of the Series B Preferred Stock, the outcome of matters
submitted to a vote of the holders of Common Stock and generally will be able to
direct the affairs of LDI. Pursuant to the shareholders' agreements among the
Company and certain of its shareholders dated July 22, 1994 and September 1994
(the "1994 Shareholders' Agreements"), each shareholder party to the 1994
Shareholders' Agreements is required to vote all of its shares of stock and take
all such other actions as may be necessary to elect and maintain each of Messrs.
Friedland and Glassman as members of the Board of Directors of the Company so
long as he owns at least 5% of the issued and outstanding capital stock of the
Company. In addition, certain entities affiliated with Advent International
Corporation (the "Advent Entities"), own Series B Preferred Stock and warrants
to purchase Common Stock (collectively, with warrants issued to certain other
persons in connection with the sale of securities to the Advent Entities, the
"ADV Warrants"). The ADV Warrants entitle the Advent Entities to purchase
10,994,051 shares of Common Stock. The Company has agreed to issue additional
warrants to the Advent Entities to purchase 1,000,000 shares of Common Stock in
consideration of their consent to amend certain terms of the Series B Preferred
Stock. See "Certain Transactions." The approval of the holders of a majority of
the shares of Series B Preferred Stock is required for LDI to take certain
actions, including the sale of certain of LDI's assets, a merger, consolidation,
recapitalization or liquidation of LDI, the declaration or payment of certain
dividends or the acquisition or redemption of any class of capital stock. In
addition, the holders of the Series B Preferred Stock are entitled to elect two
directors to the Company's Board of Directors. See "Description of the Capital
Stock -- Preferred Stock -- Series B Preferred Stock."
Certain decisions concerning the operations or financial structure of the
Company may present conflicts of interest between the holders of the Company's
capital stock and the holders of the Notes. For example, if the Company
encounters financial difficulties or is unable to pay its debts as they mature,
the interest of these investors may conflict with those of the holders of the
Notes. In addition, the holders of the Company's capital stock may have an
interest in pursuing acquisitions, divestitures, financings or other
transactions that, in their judgment, could enhance their equity investment in
the Company even though such transactions might involve increased risk to the
holders of the Notes. See "Principal Shareholders."
ANTI-TAKEOVER EFFECTS
The Florida Business Corporation Act, as amended (the "Florida Act"),
prohibits certain Florida corporations from engaging in a broad range of
business combinations or extraordinary transactions with shareholders which own
10% or more of the corporation's voting securities unless certain shareholder or
disinterested director consents have been obtained. This provision of the
Florida Act will be applicable to LDI at such time as it has more than a
specified number of shareholders. The Florida Act also contains a provision
which could prohibit the voting of shares in certain Florida corporations which
are acquired in an acquisition that immediately thereafter entitles the
acquiring party to vote more than one-fifth of the corporation's voting power in
the election of directors. The Company is subject to this provision of the
Florida Act. In addition, upon a change of control of LDI, LDI is required to
redeem the Series A Preferred Stock and holders of the Series B Preferred Stock
may require LDI to redeem its Series B Preferred Stock. Any of the foregoing, as
well as the concentrated ownership of LDI, could have the effect of delaying or
precluding transactions involving a change of control of LDI, including
transactions in which shareholders might otherwise receive a
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substantial premium for their shares over then current market prices. See
"Description of the Capital Stock -- Anti-Takeover Provisions of Florida Law"
and "Principal Shareholders."
LACK OF PUBLIC MARKETS
The Senior Notes have been designated for trading by qualified buyers in
the PORTAL Market. The Senior Notes have not been registered under the
Securities Act, however, and will continue to be subject to restrictions on
transferability to the extent that they are not exchanged for Exchange Notes.
Furthermore, the Exchange Offer will not be conditioned upon any minimum or
maximum aggregate principal amount of Senior Notes being tendered for exchange.
No assurance can be given as to the liquidity of the trading market of the
Senior Notes following the Exchange Offer.
Although the Exchange Notes will generally be permitted to be resold or
otherwise transferred by the holders thereof (other than any holder that is (i)
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act or (ii) a broker-dealer that acquired Senior Notes as a result of
market-making activities or other trading activities) without compliance with
the registration requirements under the Securities Act, the Exchange Notes will
constitute a new issue of securities for which there is currently no established
trading market. If a trading market does not develop or is not maintained,
holders of the Exchange Notes may experience difficulty in reselling the
Exchange Notes or may be unable to sell them at all. If a market for the
Exchange Notes develops, any such market may cease at any time. If a public
trading market develops for the Exchange Notes, future trading prices of the
Exchange Notes will depend on many factors, including, among other things,
prevailing interest rates, the market for similar securities, the financial
conditions and results of operations of the Company and other factors beyond the
control of the Company, including general economic conditions. The Company does
not intend to list the Exchange Notes on any national securities exchange or to
seek approval for quotation through any automated quotation system. The Company
has been advised by the Placement Agents that following completion of the
Exchange Offer, the Placement Agents intend to make a market in the Exchange
Notes. However, the Placement Agents are not obligated to do so and any
market-making activities with respect to the Exchange Notes may be discontinued
at any time without notice. Accordingly, no assurance can be given that an
active public or other market will develop for the Exchange Notes or as to the
liquidity of or the trading market for the Exchange Notes.
Notwithstanding the registration of the Exchange Notes in the Exchange
Offer, holders who are "affiliates" of the Company (within the meaning of Rule
405 under the Securities Act) may publicly offer for sale or resell the Exchange
Notes only in compliance with the provisions of Rule 144 under the Securities
Act or any other available exemptions under the Securities Act.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Senior Notes, where such Senior Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
CONSEQUENCES OF A FAILURE TO EXCHANGE SENIOR NOTES
The Senior Notes have not been registered under the Securities Act or any
state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case in
compliance with certain other conditions and restrictions. Senior Notes that
remain outstanding after consummation of the Exchange Offer will continue to
bear a legend reflecting such restrictions on transfer. In addition, upon
consummation of the Exchange Offer, holders of Senior Notes that remain
outstanding will not be entitled to any rights to have such Senior Notes
registered under the Securities Act. The Company does not intend to register
under the Securities Act any Senior Notes that remain outstanding after
consummation of the Exchange Offer. See "The Exchange Offer." To the extent that
Senior Notes are not tendered and accepted in the Exchange Offer, a holder's
ability to sell such Senior Notes could be adversely affected.
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EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for Senior Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Exchange Agent of
(i) such Senior Notes or a book-entry confirmation of a book-entry transfer of
the Senior Notes into the Exchange Agent's account at The Depository Trust
Company ("DTC"); (ii) the Letter of Transmittal (or a facsimile thereof),
properly completed and duly executed, with any required signature guarantees;
and (iii) any other documents required by the Letter of Transmittal. Holders of
the Senior Notes desiring to tender such Senior Notes in exchange for Exchange
Notes should allow sufficient time to ensure timely delivery. The Company and
the Exchange Agent are under no duty to give notification of defects or
irregularities with respect to the tenders of Senior Notes for exchange. See
"The Exchange Offer."
SHARES ELIGIBLE FOR FUTURE SALE
LDI has 100,000,000 shares of Common Stock, 2,600,000 shares of Series A
Preferred Stock and 5,000,000 shares of Series B Preferred Stock authorized. As
of June 30, 1998, there were 26,316,755 shares of Common Stock outstanding,
2,456,556 shares of Series A Preferred Stock outstanding and 2,500,000 shares of
Series B Preferred Stock outstanding, all of which are restricted securities
under Rule 144 under the Securities Act and may not be sold other than pursuant
to an effective registration statement under the Securities Act or pursuant to
an exemption from such registration requirements. In connection with the
Offering, the Company issued 225,000 Warrants to purchase an aggregate of
3,394,655 shares of Common Stock (representing approximately 6.5% of the
outstanding Common Stock on a fully-diluted basis as of the closing date of the
Offering). The holders of the Warrants will be entitled to "piggy-back"
registration rights for the shares of Common Stock purchasable upon exercise of
the Warrants in connection with any public offering of Common Stock (subject to
certain exceptions). See "Description of the Warrants." As of June 30, 1998,
options and warrants to purchase an additional 18,800,958 shares of Common Stock
were outstanding. The Company has granted certain registration rights with
respect to substantially all of the outstanding shares of Common Stock. In
addition, the Company has granted certain registration rights with respect to
the shares of Common Stock issuable upon exercise of the ADV Warrants. See
"Description of the Capital Stock -- Registration Rights." Following an initial
public offering of the Common Stock, sales of a substantial number of shares of
Common Stock in the public market under Rule 144 or otherwise, or the perception
that such sales could occur, could adversely affect the market price of the
Common Stock. See "Description of the Capital Stock."
RISKS REGARDING FORWARD LOOKING STATEMENTS
This Prospectus contains "forward-looking statements" (as such term is
defined in Commission rules), which generally can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussion of strategy that involves risks and
uncertainties. Management wishes to caution the reader that these
forward-looking statements, such as the Company's plans and strategies, its
anticipation of increases in long distance call traffic and of revenues from
designated markets, and statements regarding the development of the Company's
business, the markets for the Company's services and products, the Company's
anticipated capital expenditures, possible changes in regulatory requirements
and other statements contained herein regarding matters that are not historical
facts, are only predictions and estimates regarding future events and
circumstances. Cautionary statements are disclosed in this Prospectus,
including, without limitation, in connection with the forward-looking statements
included in this Prospectus and under "Risk Factors." No assurance can be given
that the future results will be achieved; actual events or results may differ
materially as a result of risks facing the Company. Such risks include, but are
not limited to, the Company's ability to successfully implement its expansion
plans and market its services to current and new customers; access markets;
identify, finance and complete suitable acquisitions; obtain IRUs and leased
transmission capacity and any required governmental authorizations and licenses,
all in a timely manner, at reasonable costs and on satisfactory terms and
conditions, as well as regulatory, legislative and judicial developments that
could cause actual results to differ materially from the future results
indicated, expressed or implied, in such forward-looking statements. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. The Company undertakes no obligations to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
In connection with the sale of the Senior Notes, the Company entered into
the Registration Rights Agreement with the Placement Agents, pursuant to which
the Company agreed to file and to use its best efforts to cause to become
effective with the Commission a registration statement with respect to the
exchange of the Senior Notes for Exchange Notes having terms identical in all
material respects to the terms of the Senior Notes. A copy of the Registration
Rights Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part (the "Registration Statement"). The Exchange
Offer is being made to satisfy the contractual obligations of the Company under
the Registration Rights Agreement. All Senior Notes validly tendered will be
accepted for exchange.
By tendering Senior Notes in exchange for Exchange Notes, each holder will
represent to the Company that: (i) any Exchange Notes to be received by such
holder will be acquired in the ordinary course of such holder's business; (ii)
such holder has no arrangement or understanding with any person to participate
in a distribution (within the meaning of the Securities Act) of the Exchange
Notes; (iii) such holder is not an "affiliate" of the Company (within the
meaning of Rule 405 under the Securities Act), or if such holder is an
affiliate, that such holder will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable; (iv) such
holder has full power and authority to tender, exchange, sell, assign and
transfer the tendered Senior Notes; (v) the Company will acquire good,
marketable and unencumbered title to the tendered Senior Notes, free and clear
of all liens, restrictions, charges and encumbrances; and (vi) the Senior Notes
tendered for exchange are not subject to any adverse claims or proxies. Each
tendering holder also will warrant and agree that such holder will, upon
request, execute and deliver any additional documents deemed by the Company or
the Exchange Agent to be necessary or desirable to complete the exchange, sale,
assignment, and transfer of the Senior Notes tendered pursuant to the Exchange
Offer. Each broker-dealer that receives Exchange Notes for its own account in
exchange for Senior Notes, where such Senior Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
The Exchange Offer is not being made to, nor will the Company accept
tenders for exchange from, holders of Senior Notes in any jurisdiction in which
the Exchange Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect to
the Exchange Offer means any person in whose name the Senior Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder, or any participant in
DTC whose name appears on a security position listing as a holder of Senior
Notes (which, for purposes of the Exchange Offer, include beneficial interests
in the Senior Notes held by direct or indirect participants in DTC and Senior
Notes held in definitive form).
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange $1,000 principal amount of Exchange Notes for each $1,000 principal
amount of Senior Notes properly tendered prior to the Expiration Date and not
properly withdrawn in accordance with the procedures described below. Holders
may tender their Senior Notes in whole or in part in integral multiples of
$1,000 principal amount.
The form and terms of the Exchange Notes will be the same as the form and
terms of the Senior Notes, except that the Exchange Notes will have been
registered under the Securities Act and therefore will not be subject to certain
restrictions on transfer applicable to the Senior Notes. The Exchange Notes will
evidence the same indebtedness as the Senior Notes (which they will replace) and
will be issued pursuant to, and entitled to the benefits of, the Indenture.
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The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Senior Notes being tendered for exchange. The Company reserves the
right in its sole discretion to purchase or make offers for any Senior Notes
that remain outstanding after the Expiration Date or, as set forth under
"-- Conditions to the Exchange Offer," to terminate the Exchange Offer and, to
the extent permitted by applicable law, purchase Senior Notes in the open
market, in privately negotiated transactions or otherwise. The terms of any such
purchases or offers could differ from the terms of the Exchange Offer. As of the
date of this Prospectus, $225.0 million aggregate principal amount of Senior
Notes is outstanding.
Holders of Senior Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer. Senior Notes that are not tendered, or are
tendered but not accepted, in connection with the Exchange Offer will remain
outstanding and will continue to accrue interest in accordance with their terms.
Following consummation of the Exchange Offer, the holders of Senior Notes will
continue to be subject to the existing restrictions on transfer thereof and will
not retain any rights under the Registration Rights Agreement. The Company does
not intend to register under the Securities Act any Senior Notes that remain
outstanding after consummation of the Exchange Offer. See "Risk
Factors -- Consequences of a Failure to Exchange Senior Notes."
If any tendered Senior Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Senior Notes will be returned,
without expense, to the tendering holder thereof promptly after the Expiration
Date.
Holders who tender Senior Notes in connection with the Exchange Offer will
not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of Senior Notes in connection with the Exchange Offer. The Company will
pay all charges and expenses, other than certain applicable taxes described
below, in connection with the Exchange Offer. See "-- Fees and Expenses."
THE BOARD OF DIRECTORS OF THE COMPANY MAKES NO RECOMMENDATION TO HOLDERS OF
SENIOR NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY
PORTION OF THEIR SENIOR NOTES PURSUANT TO THE EXCHANGE OFFER. IN ADDITION, NO
ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. EACH HOLDER OF SENIOR
NOTES MUST MAKE ITS OWN DECISION WHETHER TO TENDER PURSUANT TO THE EXCHANGE
OFFER AND, IF IT DECIDES TO DO SO, AS TO THE AGGREGATE AMOUNT OF SENIOR NOTES TO
TENDER, AFTER READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND
CONSULTING WITH ITS ADVISERS, IF ANY, BASED ON THEIR FINANCIAL POSITION AND
REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS, AMENDMENTS
The term "Expiration Date" means 5:00 p.m., New York City time, on
, 1998 unless the Exchange Offer is extended by the Company (in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended).
If the Exchange Offer is amended in a manner determined by the Company to
constitute a material change, or if the Company waives a material condition of
the Exchange Offer, the Company will promptly disclose such amendment by means
of a prospectus supplement that will be distributed to the registered holders of
the Senior Notes, and the Company will extend the Exchange Offer to the extent
required by Rule 14e-1 under the Exchange Act.
Any such extension or amendment will be followed promptly by oral or
written notice thereof to the Exchange Agent (any such oral notice to be
promptly confirmed in writing) and by making a public announcement thereof, and
such announcement in the case of an extension will be made no later than 9:00
a.m., New York City time, on the next business day after the previously
scheduled Expiration Date. Without limiting the manner in which the Company may
choose to make any public announcement, and subject to applicable laws, the
Company shall have no obligation to publish, advertise or otherwise communicate
any such public announcement other than by issuing a release to an appropriate
news agency.
35
<PAGE> 36
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will exchange, and will issue to the Exchange Agent, Exchange Notes for
Senior Notes validly tendered and not withdrawn (pursuant to the withdrawal
rights described under "-- Withdrawal Rights") promptly after the Expiration
Date.
In all cases, delivery of Exchange Notes in exchange for Senior Notes
tendered and accepted for exchange pursuant to the Exchange Offer will be made
only after timely receipt by the Exchange Agent of (i) Senior Notes or a
book-entry confirmation of a book-entry transfer of Senior Notes into the
Exchange Agent's account at DTC; (ii) the Letter of Transmittal (or facsimile
thereof), properly completed and duly executed, with any required signature
guarantees; and (iii) any other documents required by the Letter of Transmittal.
Accordingly, the delivery of Exchange Notes might not be made to all tendering
holders at the same time, and will depend upon when Senior Notes, book-entry
confirmations with respect to Senior Notes and other required documents are
received by the Exchange Agent.
The term "book-entry confirmation" means a timely confirmation of a
book-entry transfer of Senior Notes into the Exchange Agent's account at DTC.
Subject to the terms and conditions of the Exchange Offer, the Company will
be deemed to have accepted for exchange, and thereby exchanged, Senior Notes
validly tendered and not withdrawn as, if and when the Company gives oral or
written notice to the Exchange Agent (any such oral notice to be promptly
confirmed in writing) of the Company's acceptance of such Senior Notes for
exchange pursuant to the Exchange Offer. The Company's acceptance for exchange
of Senior Notes tendered pursuant to any of the procedures described above will
constitute a binding agreement between the tendering holder and the Company upon
the terms and subject to the conditions of the Exchange Offer. The Exchange
Agent will act as agent for the Company for the purpose of receiving tenders of
Senior Notes, Letters of Transmittal and related documents, and as agent for
tendering holders for the purpose of receiving Senior Notes, Letters of
Transmittal and related documents and transmitting Exchange Notes to holders who
validly tendered Senior Notes. Such exchange will be made promptly after the
Expiration Date. If for any reason whatsoever the acceptance for exchange or the
exchange of any Senior Notes tendered pursuant to the Exchange Offer is delayed
(whether before or after the Company's acceptance for exchange of Senior Notes),
or the Company extends the Exchange Offer or is unable to accept for exchange or
exchange Senior Notes tendered pursuant to the Exchange Offer, then, without
prejudice to the Company's rights set forth herein, the Exchange Agent may,
nevertheless, on behalf of the Company and subject to Rule 14e-1(c) under the
Exchange Act, retain tendered Senior Notes and such Senior Notes may not be
withdrawn except to the extent tendering holders are entitled to withdrawal
rights as described under "-- Withdrawal Rights."
PROCEDURES FOR TENDERING SENIOR NOTES
Valid Tender. Except as set forth below, in order for Senior Notes to be
validly tendered pursuant to the Exchange Offer, either (i) (a) a properly
completed and duly executed Letter of Transmittal (or facsimile thereof), with
any required signature guarantees and any other required documents, must be
received by the Exchange Agent at the address set forth under "-- Exchange
Agent" prior to the Expiration Date and (b) tendered Senior Notes must be
received by the Exchange Agent, or (ii) such Senior Notes must be tendered
pursuant to the procedures for book-entry transfer set forth below and a
book-entry confirmation must be received by the Exchange Agent, in each case
prior to the Expiration Date, or (iii) the guaranteed delivery procedures set
forth below must be complied with.
If less than all of the Senior Notes held by a holder are tendered by such
holder, such holder should fill in the amount of Senior Notes being tendered in
the appropriate box on the Letter of Transmittal. The entire amount of Senior
Notes delivered to the Exchange Agent will be deemed to have been tendered
unless otherwise indicated.
If any Letter of Transmittal, endorsement, bond power, power of attorney,
or any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact,
36
<PAGE> 37
officer of a corporation or other person acting in a fiduciary or representative
capacity, such person should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company, in its sole discretion, of such
person's authority to so act must be submitted.
Any beneficial owner of Senior Notes that are held by or registered in the
name of a broker, dealer, commercial bank, trust company or other nominee or
custodian is urged to contact such entity promptly if such beneficial holder
wishes to participate in the Exchange Offer.
THE METHOD OF DELIVERY OF SENIOR NOTES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER,
AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE
AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY AND PROPER INSURANCE SHOULD BE OBTAINED. NO
LETTER OF TRANSMITTAL OR SENIOR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THESE TRANSACTIONS FOR SUCH HOLDERS.
Book-Entry Transfer. The Company understands that the Exchange Agent will
make a request promptly after the date of this Prospectus to establish an
account with respect to the Senior Notes at DTC for the purpose of facilitating
the Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in DTC's system may make book-entry delivery
of Senior Notes by causing DTC to transfer such Senior Notes into the Exchange
Agent's account with respect to the Senior Notes in accordance with DTC's
Automated Tender Offer Program ("ATOP") procedures for such book-entry
transfers. Although delivery of the Senior Notes may be effected through
book-entry transfer into the Exchange Agent's account at DTC, the exchange for
Senior Notes so tendered will only be made after timely confirmation (a
"Book-Entry Confirmation") of such book-entry transfer of the Senior Notes into
the Exchange Agent's account, and timely receipt by the Exchange Agent of a
Book-Entry Confirmation with a message transmitted by DTC and received by the
Exchange Agent and forming part of the Book-Entry Confirmation, which states
that DTC has received express acknowledgment from a participant tendering Senior
Notes that such participant has received and agrees to be bound by the terms of
the Letter of Transmittal, and that such agreement may be enforced against such
participant.
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
Signature Guarantees. Certificates for Senior Notes need not be endorsed
and signature guarantees on a Letter of Transmittal or a notice of withdrawal,
as the case may be, are unnecessary unless (a) a certificate for Senior Notes is
registered in a name other than that of the person surrendering the certificate
or (b) a registered holder completes the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" in the Letter of Transmittal.
In the case of (a) or (b) above, such certificates for Senior Notes must be duly
endorsed or accompanied by a properly executed bond power, with the endorsement
or signature on the bond power and on the Letter of Transmittal or the notice of
withdrawal, as the case may be, guaranteed by a firm or other entity identified
in Rule 17Ad-15 under the Exchange Act as an "eligible guarantor institution,"
including (as such terms are defined therein) (i) a bank; (ii) a broker, dealer,
municipal securities broker or dealer or government securities broker or dealer;
(iii) a credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings association that is a
participant in a Securities Transfer Association (each an "Eligible
Institution"), unless surrendered on behalf of such Eligible Institution. See
Instructions 2 and 5 to the Letter of Transmittal.
Guaranteed Delivery. If a holder desires to tender Senior Notes pursuant
to the Exchange Offer and the certificates for such Senior Notes are not
immediately available or time will not permit all required documents to reach
the Exchange Agent before the Expiration Date, or the procedures for book-entry
transfer cannot be
37
<PAGE> 38
completed on a timely basis, such Senior Notes may nevertheless be tendered,
provided that all of the following guaranteed delivery procedures are complied
with:
(i) such tenders are made by or through an Eligible Institution;
(ii) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form accompanying the Letter of
Transmittal, setting forth the name and address of the holder of Senior
Notes and the amount of Senior Notes tendered, stating that the tender is
being made thereby and guaranteeing that within three New York Stock
Exchange trading days after the date of execution of the Notice of
Guaranteed Delivery, the certificates for all physically tendered Senior
Notes, in proper form for transfer, or a book-entry confirmation, as the
case may be, and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent. The
Notice of Guaranteed Delivery may be delivered by hand, or transmitted by
facsimile or mail to the Exchange Agent and must include a guarantee by an
Eligible Institution in the form set forth in the Notice of Guaranteed
Delivery; and
(iii) the certificates (or book-entry confirmation) representing all
tendered Senior Notes, in proper form for transfer, together with a
properly completed and duly executed Letter of Transmittal, with any
required signature guarantees and any other documents required by the
Letter of Transmittal, are received by the Exchange Agent within three New
York Stock Exchange trading days after the date of execution of the Notice
of Guaranteed Delivery.
Determination of Validity. All questions as to the form of documents,
validity, eligibility (including time of receipt) and acceptance for exchange of
any tendered Senior Notes will be determined by the Company, in its sole
discretion, which determination shall be final and binding on all parties. The
Company reserves the absolute right, in its sole and absolute discretion, to
reject any and all tenders determined by it not to be in proper form or the
acceptance for exchange of which may, in the view of counsel to the Company, be
unlawful. The Company also reserves the right, in its reasonable discretion and
subject to applicable law, to waive any of the conditions of the Exchange Offer
as set forth under "-- Conditions to the Exchange Offer" or any defect or
irregularity in any tender of Senior Notes of any particular holder whether or
not similar defects or irregularities are waived in the case of other holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including the Letter of Transmittal and the instructions thereto) will be
final and binding on all parties. No tender of Senior Notes will be deemed to
have been validly made until all defects or irregularities with respect to such
tender have been cured or waived. Neither the Company, any affiliates or assigns
of the Company, the Exchange Agent or any other person shall be under any duty
to give any notification of any defects or irregularities in tenders or incur
any liability for failure to give any such notification.
RESALES OF EXCHANGE NOTES
Based on interpretations by the staff of the Commission, as set forth in
no-action letters issued to third parties unrelated to the Company, the Company
believes that a holder of Senior Notes (other than any holder that is (i) a
broker-dealer that acquired Senior Notes as a result of market-making activities
or other trading activities or (ii) an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act), who exchanges such holder's
Senior Notes for Exchange Notes pursuant to the Exchange Offer may offer for
resale, resell and otherwise transfer such Exchange Notes without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of such
holder's business and such holder has no arrangement or understanding with any
person to participate in a distribution (within the meaning of the Securities
Act) of such Exchange Notes. Any holder who tenders Senior Notes in the Exchange
Offer with the intention to participate, or for the purpose of participating, in
a distribution of the Exchange Notes or who is an affiliate of the Company may
not rely upon such interpretations by the staff of the Commission and, in the
absence of an exemption therefrom, must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
secondary resale transaction. Failure to comply with such requirements in such
instance may result in
38
<PAGE> 39
such holder incurring liabilities under the Securities Act for which the holder
is not indemnified by the Company. The staff of the Commission has not
considered the Exchange Offer in the context of a no-action letter, and there
can be no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer. Each broker-dealer that
receives Exchange Notes for its own account in exchange for Senior Notes, where
such Senior Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. The Company has agreed
that, for a period not to exceed 180 days after the Expiration Date, it will
furnish additional copies of this Prospectus, as amended or supplemented, to any
broker-dealer that reasonably requests such documents for use in connection with
any such resale. See "Plan of Distribution."
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of Senior Notes may be
withdrawn at any time prior to the Expiration Date.
In order for a withdrawal to be effective, a written, telegraphic or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at its address set forth under "-- Exchange Agent" prior to
the Expiration Date. Any such notice of withdrawal must specify the name of the
person who tendered the Senior Notes to be withdrawn, the aggregate principal
amount of Senior Notes to be withdrawn, and (if certificates for such Senior
Notes have been tendered) the name of the registered holder of the Senior Notes
as set forth on the Senior Notes, if different from that of the person who
tendered such Senior Notes. If certificates for Senior Notes have been delivered
or otherwise identified to the Exchange Agent, the notice of withdrawal must
specify the certificate number on the particular Senior Notes to be withdrawn
and the signature on the notice of withdrawal must be guaranteed by an Eligible
Institution, except in the case of Senior Notes tendered for the account of an
Eligible Institution. If Senior Notes have been tendered pursuant to the
procedures for book-entry transfer set forth in "-- Procedures for Tendering
Senior Notes," the notice of withdrawal must specify the name and number of the
account at DTC to be credited with the withdrawal of Senior Notes and must
otherwise comply with the procedures of DTC. Withdrawals of tenders of Senior
Notes may not be rescinded. Senior Notes properly withdrawn will not be deemed
validly tendered for purposes of the Exchange Offer, but may be retendered at
any subsequent time prior to the Expiration Date by following any of the
procedures described above under "-- Procedures for Tendering Senior Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, which determination shall be final and binding on all parties.
Neither the Company, any affiliates of the Company, the Exchange Agent or any
other person shall be under any duty to give any notification of any defects or
irregularities in any notice of withdrawal or incur any liability for failure to
give any such notification. Any Senior Notes which have been tendered but which
are withdrawn will be returned to the holder thereof promptly after withdrawal.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest, which will be payable in cash, at a
rate of 12 1/4% per annum on each April 15 and October 15, the first such
payment to be made on October 15, 1998.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer or any extension
of the Exchange Offer, the Company may terminate the Exchange Offer if the
Exchange Offer violates applicable law or any applicable interpretation of the
staff of the Commission.
39
<PAGE> 40
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests of or Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
BY REGISTERED OR CERTIFIED MAIL, BY OVERNIGHT COURIER OR BY HAND:
The Bank of New York
101 Barclay Street
Floor 7 East
New York, New York 10286
Attention: Reorganization Area
or
BY FACSIMILE:
The Bank of New York
Attention: Reorganization Area
Facsimile Number (212) 815-6339
In addition, Letters of Transmittal and any other required documentation
should be sent to the Exchange Agent at the address set forth above, except
where facsimile transmission is specifically authorized (e.g., withdrawals and
Notices of Guaranteed Delivery). DELIVERY OF THE LETTER OF TRANSMITTAL TO AN
ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA FACSIMILE OTHER THAN
AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail. Additional solicitation may be
made personally or by telephone or other means by officers, directors or
employees of the Company.
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the Exchange Offer. The Company has
agreed to pay the Exchange Agent reasonable and customary fees for its services
and will reimburse it for its reasonable out-of-pocket expenses in connection
therewith. The Company will also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of this Prospectus and related documents to the beneficial
owners of Senior Notes, and in handling or tendering for their customers.
Holders who tender their Senior Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that if Exchange Notes
are to be delivered to, or are to be issued in the name of, any person other
than the registered holder of the Senior Notes tendered, or if a transfer tax is
imposed for any reason other than the exchange of Senior Notes in connection
with the Exchange Offer, then the amount of any such transfer tax (whether
imposed on the registered holder or any other persons) will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any proceeds from the issuance of the Exchange Notes offered hereby. In
consideration for issuing the Exchange Notes as contemplated in this Prospectus,
the Company will receive, in exchange, an equal number of Senior Notes in like
principal amount. The form and
40
<PAGE> 41
terms of the Exchange Notes will be identical in all material respects to the
form and terms of the Senior Notes, except as otherwise described under "The
Exchange Offer -- Terms of the Exchange Offer."
The net proceeds to the Company from the sale of the Senior Notes were
approximately $216.1 million, after deducting the estimated discount and
commissions and other expenses payable by the Company. Approximately $75.5
million of the net proceeds were used to purchase the Pledged Securities, the
scheduled interest and principal payments of which will be used to make the
first six scheduled interest payments on the Notes.
The Company has also used a portion of the net proceeds and plans to
continue to use the net proceeds (i) to expand the Company's network
infrastructure, including the acquisition of telecommunications equipment and
IRUs and other interests in fiber optic cables, (ii) to develop, acquire and
integrate network management, billing and customer care information systems,
(iii) to expand its sales and marketing programs and (iv) for working capital
and other general corporate purposes. The actual allocation of funds among these
uses will depend on future developments in or affecting the Company's business,
the competitive climate in which it operates and the emergence of future
opportunities. Total estimated capital expenditures for 1998 and 1999 are
approximately $47.0 million and $32.0 million, respectively. In addition, as
part of its business strategy, the Company will continue to evaluate potential
acquisitions, joint ventures and strategic alliances and a portion of the net
proceeds may be used to fund such investments. Although LDI is evaluating
certain potential investment opportunities, it does not have any present
commitments or agreements with respect to any such investment, acquisition or
strategic alliance. Prior to the application of the net proceeds from the
Offering as described above, such funds will be invested in short-term,
investment grade securities.
DIVIDEND POLICY
The Company intends to retain future earnings to finance its growth and
development and therefore does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. The declaration and payment in the
future of any cash dividends will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the earnings, capital
requirements and financial position of the Company, existing and future
covenants and general economic conditions. The holders of Series A Preferred
Stock are entitled to receive cumulative cash dividends at the annual rate of
$.03 per share of Series A Preferred Stock, subject to certain restrictions and
limitations. The holders of Series B Preferred Stock are entitled to receive
cash dividends at the annual rate of $1.20 per share of Series B Preferred
Stock, if and when declared by the Company Board of Directors certain
restrictions and limitations. Unless dividends are paid on both the Series A
Preferred Stock and the Series B Preferred Stock, no dividend is payable on the
Common Stock. The Company's ability to pay dividends on its capital stock
(including the Series A and Series B Preferred Stock) is limited by the terms of
the Indenture. See "Descriptions of the Exchange Notes -- Covenants" and
"Description of the Capital Stock -- Preferred Stock."
41
<PAGE> 42
CAPITALIZATION
The following table sets forth the cash and cash equivalents and
capitalization of LDI at June 30, 1998 after giving effect to the Offering. This
information should be read in conjunction with "Use of Proceeds," "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------
ACTUAL
--------------
(IN THOUSANDS)
<S> <C>
Cash and cash equivalents................................... $ 129,435
=========
Restricted cash............................................. $ 77,647
=========
Current portion of long-term debt and capital lease
obligations............................................... $ 2,925
=========
Long-term debt and capital lease obligations, net of current
portion:
Capital lease obligations................................. $ 3,692
Installment loans......................................... 4,738
Senior Notes(1)........................................... 205,109
---------
Total long-term debt and capital lease obligations, net
of current portion.................................... 213,539
Series A Redeemable Preferred Stock:
2,600,000 shares authorized; 2,456,556 shares issued and
outstanding; liquidation value of $1,430,546........... 1,401
Series B Redeemable Preferred Stock:
5,000,000 shares authorized; 2,500,000 shares issued and
outstanding; liquidation value of $25,000,000.......... 13,315
Redeemable Warrants, 3,394,655 authorized, issued and
outstanding............................................... 11,546
Common shareholders' capital deficiency:
Common stock, $.001 par value, 100,000,000 shares
authorized, 26,316,755 shares issued and outstanding... 26
Additional paid-in capital................................ 18,270
Accumulated deficit....................................... (40,676)
Accumulated other comprehensive income.................... 35
---------
Total common shareholders' capital deficiency.......... (22,345)
---------
Total capitalization.............................. $ 217,456
=========
</TABLE>
- ---------------
(1) Of the $216.1 million net proceeds from the Offering, $204.6 million has
been allocated to the Notes and $11.5 million has been allocated to the
issuance of the Warrants as determined by the Company's Board of Directors,
based on an independent valuation.
42
<PAGE> 43
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data (except for certain data
under Other Data and data under Regional Data) for the years ended December 31,
1995, 1996 and 1997 and as of December 31, 1996 and 1997 were derived from the
audited consolidated financial statements of LDI which, together with the notes
thereto and the related report of Ernst & Young LLP, independent public
accountants, are included elsewhere in this Prospectus. The consolidated
financial data as of December 31, 1993 and 1994 and for the years ended December
31, 1993 and 1994 and the six months ended June 30, 1997 and 1998 were derived
from the Company's unaudited consolidated financial statements. The Company's
unaudited consolidated financial statements for the years ended December 31,
1993 and 1994 are not included herein. In management's opinion, the unaudited
consolidated financial statements reflect all adjustments (consisting of only
normal recurring adjustments) necessary for a fair presentation of the Company's
financial position and results of operations for such periods. The information
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE, PER MINUTE AND RATIO INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net...................... $ -- $ 5 $ 2,593 $ 14,362 $ 40,116 $18,729 $ 30,660
Costs of telecommunications
services......................... -- 6 1,932 8,361 22,720 9,592 21,671
Selling, general and administrative
expenses......................... 32 219 2,299 9,887 28,066 11,706 26,127
Depreciation and amortization...... -- 7 30 121 440 110 1,118
---- -------- ------- -------- -------- ------- --------
Operating loss..................... (32) (227) (1,668) (4,007) (11,110) (2,679) (18,256)
Minority interest(1)............... -- -- -- 179 (132) -- --
Interest expense, net.............. -- 7 15 (193) (92) (278) (5,161)
---- -------- ------- -------- -------- ------- --------
Net loss........................... (32) (220) (1,653) (4,021) (11,334) (2,957) (23,417)
Preferred dividends and preferred
stock and warrant redemption
accretion........................ -- -- (18) (74) (902) (37) (4,604)
---- -------- ------- -------- -------- ------- --------
Net loss applicable to common
shareholders..................... $(32) $ (220) $(1,671) $ (4,095) $(12,236) $(2,994) $(28,021)
==== ======== ======= ======== ======== ======= ========
Net loss per share applicable to
common shareholders -- basic and
dilutive(2)...................... $ -- $ (.03) $ (.10) $ (.21) $ (.51) $ (0.13) $ (1.10)
Weighted average shares
outstanding...................... -- 6,521 16,667 19,837 23,953 23,574 25,379
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ -- $606 $ 545 $ 255 $12,173 $129,435
Total assets........................... -- 845 1,667 3,894 27,807 246,049
Short term debt........................ -- -- -- -- 551 2,925
Long term debt, net of current
portion.............................. -- -- -- -- 2,600 213,539
Series A Redeemable Convertible
Preferred Stock...................... -- -- 1,185 1,291 1,365 1,401
Series B Redeemable Preferred Stock.... -- -- -- -- 12,350 13,315
Redeemable Warrants.................... -- -- -- -- -- 11,546
Common shareholders' capital
deficiency........................... (32) 616 1,132 (1,368) (239) (22,344)
</TABLE>
43
<PAGE> 44
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE, PER MINUTE AND RATIO INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Capital expenditures......... $ 1 $ 171 $ 189 $ 325 $ 7,094 $ 1,250 $ 16,506
EBITDA(3).................... (32) (220) (1,638) (3,886) (10,670) (2,570) (17,138)
Revenue per minute........... -- .34 .34 .24 .23 .23 .22
Billable minutes of use...... -- 16 7,541 58,706 175,248 82,553 139,329
Ratio of earnings to fixed
charges(4)................. -- (31.43) (42.50) (14.00) (16.36) (13.50) (2.34)
Net Cash Provided by
(Used in):
Operating activities....... 1 (90) (1,852) (2,774) (7,134) 92 (12,939)
Investing activities....... (1) (171) (189) (353) (4,339) (318) (85,150)
Financing activities....... -- 867 1,980 2,836 23,392 1,052 215,352
REGIONAL DATA:
Revenues
United States.............. $ -- $ 5 $ 2,544 $ 14,021 $ 34,459 $17,572 $ 23,474
Europe..................... -- -- 49 341 5,657 1,157 7,186
Billable minutes of use
United States.............. -- 16 7,461 57,765 159,602 79,665 118,486
Europe..................... -- -- 80 941 15,646 2,888 20,843
</TABLE>
- ---------------
(1) In January 1996, the Company contributed $150,000 in respect of an 80%
equity interest in LDI Ltd. In January 1998, the Company purchased the
outstanding 20% minority interest for approximately $380,000. During 1997,
the minority shareholder did not fund its share of LDI Ltd.'s losses and, as
a result, during 1997 the Company absorbed LDI Ltd.'s cumulative unfunded
net losses.
(2) The Company's loss per share amounts for all periods presented are computed
in accordance with SFAS No. 128 "Earnings Per Share", which was effective
for periods ending after December 15, 1997. Loss applicable to common
shareholders has been reduced by preferred dividends and redemption
accretion.
(3) EBITDA represents net loss before interest, income tax expenses (benefit),
minority interest and depreciation and amortization. LDI has included
information concerning EBITDA herein because such information is commonly
used in the telecommunications industry as one measure of an issuer's
operating performance and ability to service debt. EBITDA is not determined
in accordance with generally accepted accounting principles, is not
indicative of cash provided by operating activities, is not necessarily
comparable to similarly titled measures of other companies, should not be
used as a measure of operating income and cash flows from operations as
determined under generally accepted accounting principles and should not be
considered in isolation or as an alternative to measures of performance
determined in accordance with generally accepted accounting principles.
(4) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of net losses before fixed charges. Fixed charges consist of
interest on debt and the interest component of rent expense. For the years
ended December 31, 1995, 1996 and 1997 and the six months ended June 30,
1997 and 1998 the Company's earnings before fixed charges were insufficient
to cover its fixed charges by $1.7 million, $4.0 million, $11.3 million,
$3.0 million and $23.4 million, respectively.
44
<PAGE> 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements, the notes thereto and the other financial
data included elsewhere in this Prospectus. The following discussion includes
certain forward-looking statements. For a discussion of important factors,
including, but not limited to, the continued development of LDI's business,
actions of regulatory authorities and competitors, price declines and other
factors that could cause actual results to differ materially from the
forward-looking statements, see "Risk Factors."
OVERVIEW
GENERAL
LDI is a rapidly growing multinational telecommunications company, which
provides international telecommunications services from the United States, the
United Kingdom, France, Italy and Spain to over 200 countries. LDI offers
domestic long distance calling, postpaid calling card services, prepaid services
and toll-free services in the United States and the United Kingdom. In France,
Italy and Spain, the Company primarily provides international telecommunications
services and prepaid calling card services. The Company markets primarily to
residential and SME customers with significant long distance calling needs and
recently commenced marketing to carrier customers. The Company markets its
services through direct response marketing, agent sales, telemarketing and
direct sales.
LDI commenced operations in 1995 as a switchless reseller of international
and domestic long distance services in the United States and, during 1996,
expanded into the western European market. LDI recently initiated the design and
buildout of a European telecommunications network. By interconnecting its United
States and European networks, LDI seeks to expand its western European presence
and intends to leverage its existing United States operations with the objective
of lowering the cost, improving the quality and broadening the scope of services
offered to its customers across two continents.
REVENUES
The Company derives its revenues principally from the provision of long
distance voice telecommunications services. Revenues are derived from the
numbers of minutes of use (or fractions thereof) billed by the Company
("billable minutes") and are recorded upon completion of calls. The following
table shows the total revenue and billable minutes attributable to LDI's United
States and European operations for the years ended December 31, 1995, 1996 and
1997 and the six months ended June 30, 1997 and 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- -------------------
1995 1996 1997 1997 1998
------ ------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUES, NET
United States......................... $2,544 $14,021 $ 34,459 $17,572 $ 23,474
Europe................................ 49 341 5,657 1,157 7,186
------ ------- -------- ------- --------
Total....................... $2,593 $14,362 $ 40,116 $18,729 $ 30,660
====== ======= ======== ======= ========
BILLABLE MINUTES
United States......................... 7,461 57,765 159,602 79,665 118,486
Europe................................ 80 941 15,646 2,888 20,843
------ ------- -------- ------- --------
Total....................... 7,541 58,706 175,248 82,553 139,329
====== ======= ======== ======= ========
</TABLE>
LDI maintains local market pricing structures and generally prices its
services to customers at a discount to the dominant service providers in each
area. LDI has experienced and continues to experience declining average revenue
per minute as a result of competition, although due to technological innovation
and significant available transmission capacity, transmission costs in the
telecommunications industry have historically
45
<PAGE> 46
declined at a more rapid rate than prices. There can be no assurance that this
trend will continue. The Company believes that, as prices decline, calling
volume of its customers will increase and offset, at least in part, the effect
on revenues of price declines.
To date, a significant portion of the Company's revenues have come from its
dial-around calling customers. For the year ended December 31, 1997,
approximately $27 million of revenues (79% of its United States revenues and 68%
of its consolidated revenues) came from dial-around services. The Company
primarily markets its dial-around services through direct mail marketing
campaigns and telemarketing and expects to increase the use of these marketing
methods in the United States as it continues to expand its United States
network. Revenue from dial-around service is higher gross margin than revenue
from equal access service. The Company typically experiences declining customer
utilization in the first few months following a marketing campaign after a
significant number of customers sample the Company's dial-around service. See
"Risk Factors -- Response Rates; Customer Attrition; Impact of Increased Postage
and Paper Costs." Therefore, the Company continues to engage in direct mail
marketing campaigns and telemarketing to maintain and increase its dial-around
customer base. In addition, the Company expects to engage in other forms of
direct response marketing, including television and other media advertising. The
Company expects revenues from dial-around services to increase generally but to
decline as a percentage of overall revenues as the Company expands its other
services.
LDI expects that an increasing portion of its United States revenue will be
derived from services to equal access customers, due to planned increased
marketing activities. The Company recently commenced marketing services to
carriers and expects that an increasing portion of its United States revenues
will also be derived from sales to carrier customers. Revenue from carrier
customers generally produces lower gross margins than revenues from equal access
or dial-around services and carrier customers are generally more price
sensitive; however, associated selling, general and administrative expenses are
also generally lower. As LDI builds its European telecommunications network, it
expects to derive a greater portion of its revenues from European SME and
residential customers acquired primarily through agent sales and direct response
marketing.
COSTS OF TELECOMMUNICATIONS SERVICES
The Company's costs of telecommunications services is composed of costs
associated with gaining local access, the transport and termination of calls and
the amortization of installation expenses associated with the network trunk
groups. The majority of the Company's cost of telecommunications services have
been variable, including local access charges and transmission capacity leased
on a per-minute of use basis. LDI expects that an increasing amount of its total
operating costs will be fixed in the future, as the Company expands its network
of owned switches, IRUs and leased circuits. The depreciation expense with
respect to the Company's switches, ancillary equipment and IRUs is not accounted
for in cost of services. Currently all calls carried by LDI are originated on
its own or other carrier's network and substantially all calls carried by LDI
must be terminated using another carrier's facilities. Origination and
termination charges on calls generally are paid by LDI, with the exception of
Europe, where local access is often paid by the subscriber. As LDI's minutes of
traffic carried have grown, LDI has obtained better pricing on switched
transmission capacity. The marginal cost of services has also decreased,
independent of volume discounts, due to technological innovation and substantial
third-party transmission capacity. LDI expects that the unit cost of
telecommunications services will decline as the Company expands its network and
more calls are routed through the Company's switches, IRUs and leased circuits.
See "Business -- The LDI Network."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses are composed of marketing and
selling expenses, billing and bad debt expenses, customer service expenses and
general overhead. LDI has historically sold its services primarily through
direct response advertising. Selling expenses have consisted of the cost of
preparing and sending color inserts through the mail or local newspapers. Due to
the decreased customer utilization in the Company's dial-around services
following a marketing campaign, the Company must continue to engage in direct
marketing campaigns and telemarketing to maintain and to continue to increase
its dial-around customer base. The Company expects to significantly increase its
direct response marketing as it expands into new markets and remails in existing
markets. During 1997, LDI commenced selling services through
46
<PAGE> 47
independent sales channels, and the costs associated therewith are included in
selling expenses. In Europe, LDI markets its services through a combination of
direct and agent sales to the commercial market and through print advertising
and in-house telemarketing to residential customers. The Company believes its
selling expenses are primarily variable and will decline as a percentage of
sales as the Company expands its wholesale services and its agent programs.
Billing service expense consists of payments made to the LECs under billing
and collection agreements which enable the Company to include its charges on its
customers' monthly telephone bills from the LECs and take advantage of the LECs'
extensive collections infrastructure. Billing service expense also includes
service fees due to a LEC clearing house which provides billing support and
receivables financing. The Company had ceased the majority of its accounts
receivable financing as of August 1998. Provisions for bad debts are withheld by
the LECs as part of the regular billing cycle. Periodically, at least once a
year, the actual bad debt experience is reconciled with the reserve and payment
is made by either the LEC or the Company.
General and administrative expenses primarily relate to salaries,
professional and consultant fees and licensing and other organizational expenses
associated with entering new markets. During 1997, LDI significantly increased
the size of its management team at existing locations, and established new
offices in France, Italy and Spain, all of which resulted in an increase in
general and administrative expenses. LDI expects to continue to establish new
offices in the future and expects to continue to incur increasing general and
administrative expenses in advance of anticipated related revenues. As a result,
LDI expects that its general and administrative expenses will increase as a
percentage of revenues as it builds its customer base.
DEPRECIATION AND AMORTIZATION
The Company has historically experienced low depreciation and amortization
expense because it has acted primarily as a switchless reseller; however, as the
Company expands its network, it expects its depreciation and amortization
expense to increase significantly.
RESULTS OF OPERATIONS
The following table represents certain data concerning LDI's results of
operations for the years ended December 31, 1995, 1996 and 1997 and the six
months ended June 30, 1997 and 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- -------------------
1995 1996 1997 1997 1998
------ ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues, net.............................. $2,593 $14,362 $40,116 $ 18,729 $ 30,660
Costs of telecommunications services....... 1,932 8,361 22,720 9,592 21,671
Selling, general and administrative
expenses................................. 2,299 9,887 28,066 11,706 26,127
Depreciation and amortization.............. 30 121 440 110 1,118
Net loss................................... (1,653) (4,021) (11,334) (2,957) (23,417)
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
1997
Revenues, Net. Total revenues, net increased 64%, to $30.7 million for the
six months ended June 30, 1998 from $18.7 million for the six months ended June
30, 1997. Revenues increased in both the United States and Europe, resulting
from growth in billable minutes. Revenues and billable minutes for the Company's
European operations, which include the results of Speedial International UK
("Speedial") and Newgate Communications Limited ("Newgate") (acquired within the
past year), increased at a greater rate than for the Company's United States
operations. Total billable minutes of use increased by 69%, to 139.3 million
minutes for the six months ended June 30, 1998 from 82.6 million minutes for the
six months ended June 30, 1997. Growth in billable minutes was offset by a
decline in average revenue per minute, with revenue per minute averaging $.22
for the six months ended June 30, 1998, compared with $.23 for the six months
ended June 30, 1997. This decline in average revenue per minute was due to
competition in Europe
47
<PAGE> 48
and the United States, partially offset by an increase in the proportion of
European revenues and billable minutes in the mix. As noted below, the average
revenue per minute in Europe is higher than in the United States.
In the United States, revenues for the six months ended June 30, 1998
increased by 34%, to $23.5 million from $17.6 million for the six months ended
June 30, 1997. Billable minutes increased by 49% to 118.5 million minutes for
the six months ended June 30, 1998, as compared with 79.7 million minutes for
the six months ended June 30, 1997. Offsetting the growth in billable minutes
was a decline in average revenue per minute which fell to $.20 for the first
half of 1998 as compared with $.22 for the first half of 1997. Growth in equal
acess ("1+") service was responsible for the increase in revenues. During the
first six months of 1998, the Company used a number of new sales channels
including an independent telemarketing service and an agent program to stimulate
revenues in the "1+" market. The Company increased the number of inserts mailed
by 91%, with 126.2 million direct mail inserts in the first half of 1998, as
compared with 66.1 million direct mail inserts in the first half of 1997. The
Company experienced a declining response rate to its direct mail marketing
program. As a result, the Company is amending its product offering and direct
response advertising. In addition, the Company is expanding its services to
equal access and carrier customers. The Company expects a decreasing percentage
of its revenues to be derived from dial-around service in the future.
In Europe, revenues increased to $7.1 million for six months ended June 30,
1998, as compared with $1.1 million for the six months ended June 30, 1997.
Billable minutes increased from approximately 2.9 million in the first half of
1997 to 20.8 million in the first half of 1998. The increase was due primarily
to the inclusion of the results of Speedial and Newgate. Speedial contributed
approximately 26% of revenues and Newgate contributed approximately 23% of
revenues during the six months ended June 30, 1998. In addition, the Company
expanded its marketing programs to its customer base. Average revenue per minute
declined from $.40 to $.34 primarily due to increased competition somewhat
offset by the inclusion of Newgate's billable minutes in the mix.
Cost of Telecommunications Services. Costs of telecommunications services
increased by 126% to $21.7 million for the six months ended June 30, 1998, as
compared with $9.6 million for the six months ended June 30, 1997. Average cost
per minute increased from $.12 in the first half of 1997 to $.16 for the first
half of 1998. This increase primarily reflects a change in the mix of billable
minutes with proportionately more billable minutes from the Company's European
operations in the first half of 1998 than in the first half of 1997. The
Company's average cost of telecommunications services is higher in Europe than
in the United States and its gross margin is substantially lower in Europe than
in the United States. The Company's gross margin was negatively impacted during
the second quarter by the upgrade of the billing system which prevented the
billing of all calls in the United States for which the Company was charged by
its carriers. As a percentage of revenues, the cost of telecommunications
services increased from 51% in the first half of 1997 to 71% in the first half
of 1998. The gross margin declined from 49% in the first half of 1997 to 29% in
the first half of 1998. The change in gross margin reflects the aforementioned
decline in revenue per minute coupled with higher average cost per minute and
failure to bill all calls as described above. The Company believes it will
continue to experience pressure on its gross margin until it completes the
expansion of its switch network and the upgrade of its billing systems.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 123% to $26.1 million for the first half of
1998, as compared with $11.7 million for the first half of 1997. The increases
resulted primarily from increased sales and marketing expenses for the direct
mail and independent telemarketing service as well as increased salaries,
professional and consulting costs. In the United States, the Company mailed
significantly more direct mail inserts during the first six months of 1998,
increasing the number of direct mail inserts by 91% from 66.1 million in the
first six months of 1997 to 126.2 million in the first six months of 1998.
Depreciation and Amortization. Depreciation and amortization increased to
$1.1 million for the six months ended June 30, 1998, from $110,000 for the six
months ended June 30, 1997. The increase was due to significantly more fixed
assets, primarily network equipment and office equipment.
48
<PAGE> 49
Loss from Operations. Loss from operations increased from $2.7 million for
the six months ended June 30, 1997, to $18.3 million in the six months ended
June 30, 1998. The aforementioned factors caused this increase.
Net Loss. Net loss increased from $3.0 million in the six months ended
June 30, 1997 to $23.4 million for the six months ended June 30, 1998. This
increase was due to increased losses from operations together with increased
interest expense resulting from the Offering.
1997 COMPARED TO 1996
Revenues, Net. Total revenues for 1997 increased by 179%, to $40.1 million
from $14.4 million in 1996. This increase reflected growth in both the United
States and Europe. Billable minutes increased by 197% to 175 million billable
minutes in 1997 from 59 million billable minutes in 1996. Growth in billable
minutes was offset by declines in prices, as the average rate per minute
declined to $.23 in 1997 from $.24 in 1996.
In the United States, revenues in 1997 increased 146%, to $34.4 million in
1997 from $14.0 million in 1996. Billable minutes increased by 176% from 58
million billable minutes in 1996 to 160 million billable minutes in 1997. Growth
in both dial-around and "1+" services principally contributed to the increase,
which growth resulted primarily from increased sales and marketing activity. The
Company accelerated its direct mail marketing program targeted to dial-around
customers, mailing 114.4 million inserts in 1997, compared with 43.9 million
inserts in 1996. LDI also commenced using an independent sales channel,
addressing the "1+" market and broadening the distribution channels for its
products. Offsetting the growth in billable minutes was a decline in revenue per
minute which fell to $.22 in 1997 from $.24 in 1996. United States revenues
represented 98% and 86% of total revenues in 1996 and 1997, respectively.
In Europe, revenues increased to $5.7 million in 1997 from $341,000 in
1996. This was due primarily to an increase in billable minutes, from
approximately 1 million billable minutes in 1996 to approximately 16 million
billable minutes in 1997. The Company accelerated its marketing programs in
Europe, increasing both its direct marketing channels and its agent sales
network. In addition, the Company acquired Speedial in September 1997. Speedial
contributed approximately 19% of LDI's total European revenues in 1997. Average
revenue per minute remained stable at $.36 in 1996 and 1997.
Costs of Telecommunications Services. Costs of telecommunications services
increased by 170%, to $22.7 million in 1997 from $8.4 million in 1996, due to
the increase in billable minutes, offset in part by a decline in average cost
per minute. Average cost per minute declined from $.14 in 1996 to $.13 in 1997,
reflecting volume discounts and generally lower transmission costs available in
the market. Somewhat offsetting this lower cost was the 10% increase in
transmission rates paid to Esprit, commencing November 1, 1997. As a percentage
of revenues, costs of telecommunications services declined from 58% in 1996 to
57% in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $28.1 million in 1997 from $9.9 million in
1996, primarily as a result of increased direct mail campaigns in the United
States and salaries, professional consulting fees and licensing and other
organization expenses relating to the establishment of new offices in France,
Italy and Spain. The selling, general and administrative expenses in 1997
reflect a significant increase in infrastructure spending, particularly the cost
of entry into several new markets, including France and Spain, and a
significantly expanded presence in the United Kingdom. This cost increase was
offset by a decrease in the per unit cost of the direct mail inserts. In the
United States the Company mailed significantly more inserts in 1997; inserts
mailed increased by 160%, as described above. The number of employees based in
the United States at year-end increased from 60 in 1996 to 171 in 1997. As a
percentage of revenues, selling, general and administrative expenses increased
to 70% in 1997 from 69% in 1996.
Depreciation and Amortization. Depreciation and amortization increased to
$440,000 in 1997 from $121,000 in 1996. This increase was due to the general
increase in fixed assets, primarily office equipment, over the period. During
the fourth quarter of 1997, the Company also acquired switching equipment for
its London, New York and Fort Lauderdale sites.
49
<PAGE> 50
Net Loss. Net loss increased from $4.0 million in 1996 to $11.3 million in
1997, primarily as a result of the above factors.
1996 COMPARED TO 1995
Revenues, Net. Total revenues for 1996 increased by 454% to $14.4 million
from $2.6 million in 1995. This increase was primarily due to growth in billable
minutes from dial-around customers and reflected the progress of the
implementation of the Company's United States business plan from the start-up of
the direct mail marketing program in December 1995. Direct response insert
mailings increased from 1.0 million inserts in 1995 to 43.9 million inserts in
1996. Billable minutes increased approximately 638% from 8 million billable
minutes in 1995 to 59 million billable minutes in 1996. Growth in billable
minutes was offset somewhat by an approximate 29% decline in prices reflecting
price declines in the industry generally, as average revenue per minute declined
from $.34 in 1995 to $.24 in 1996. United States revenues represented 98% of
total revenues in each of 1996 and 1995.
Costs of Telecommunications Services. Costs of telecommunications services
increased by 342% to $8.4 million in 1996 from $1.9 million in 1995 due to the
increase in billable minutes offset in part by a decline in average cost per
minute. Cost of telecommunications services per minute declined by 44% from $.26
in 1995 to $.14 in 1996, reflecting economies of scale in buying transmission
capacity and lower transmission costs available in the market. As a percentage
of revenues, costs of telecommunications services declined from 75% in 1995 to
58% in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $9.9 million in 1996 from $2.3 million in
1995. The increase in selling, general and administrative expenses reflects the
costs of mailing significantly more inserts, mentioned above. Also included in
the increase in selling, general and administrative expenses are the costs to
build the Company's infrastructure, including additions to the management team,
improvements in management information systems and "back office" operations, and
costs for licensing. The number of employees at year-end increased from 18 in
1995 to 60 in 1996. As a percentage of revenues, selling, general and
administrative expenses declined from 89% in 1995 to 69% in 1996.
Depreciation and Amortization. Depreciation and amortization increased to
$121,000 in 1996 from $30,000 in 1995, reflecting the general increase in fixed
assets, primarily office equipment over the period.
Net Loss. Net loss increased from $1.7 million in 1995 to $4.0 million in
1996 primarily as a result of the above factors.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred net losses and negative cash flows from operating
activities from inception through June 30, 1998. These losses and negative cash
flows result primarily from start-up costs, marketing expenses and capital
expenditures required for construction and deployment of the Company's network.
The Company expects to incur increasing losses and negative cash flows as it
continues to buildout and expand its network. Historically, funds necessary to
finance the Company's activities have been provided from sales of preferred
stock, Common Stock, and warrants. In addition, to provide short-term liquidity,
the Company sold receivables due from LECs, subject to full recourse provisions,
to the Company's billing provider during 1995, 1996, 1997 and the first two
quarters of 1998. During August 1998, the Company ceased selling the majority of
its receivables. At June 30, 1998, LDI had approximately $129.4 million in cash
and cash equivalents, excluding restricted cash related to collaterized letters
of credit and a portion of the proceeds of the Offering used to purchase the
Pledged Securities, the scheduled interest and principal payments on which will
be used to make the first six scheduled interest payments.
50
<PAGE> 51
SIX MONTHS ENDED JUNE 30, 1998
Net cash used in operating activities totaled approximately $12.9 million,
with $23.4 million used to fund net losses offset by non-cash expenses of $9.3
million and a decrease in operating assets and liabilities of $1.2 million.
Net cash used in investing activities totaled $85.1 million principally
consisting of $77.5 million for the aforementioned escrow account and other
restricted cash and $5.8 million for network and office equipment. In addition,
LDI acquired Newgate, a United Kingdom company providing cellular communication
services to United Kingdom customers on April 21, 1998, for approximately $1.7
million in cash, and approximately 214,000 shares of Common Stock. On January
22, 1998, LDI repurchased the 20% interest in LDI Ltd. which had formerly been
owned by Esprit Telecom UK for L231,250 (or approximately $388,000) including
interest.
Net cash provided by financing activities during the six months ended June
30, 1998, totaled $215.3 million. This total included the Offering which
provided $216.4 million. In addition, the exercise of outstanding warrants into
Common Stock provided $1.4 million of cash. These cash sources were offset by
payments under installment loans and capital leases of $2.5 million.
The Company believes that with its working capital, its cash flows from
operations, proceeds of the Offering and its increased financing under capital
lease obligations to fund capital expenditures, it will have adequate resources
to meet its anticipated operating requirements for the next several years,
however, there can be no assurance that this will be the case.
YEARS ENDED 1995, 1996 AND 1997
Net cash used in operating activities was $1.9 million, $2.8 million and
$7.1 million in 1995, 1996 and 1997, respectively. Net cash used in investing
activities was $189,000 in 1995 and $353,000 in 1996. The Company financed these
activities principally through the periodic sale of preferred stock, Common
Stock and warrants totaling $2.0 million in 1995 and $1.5 million in 1996.
During 1996, LDI obtained $1.2 million in bridge financing which was repaid
later that year by the issuance of approximately 2.1 million shares of Common
Stock. The Company's net cash used in operating activities in 1997 was primarily
composed of a net loss of $11.3 million offset by $4.2 million of non-cash
charges and changes in working capital. Cash used for investing activities
totaled $4.3 million in 1997, which was composed of $3.2 million for capital
expenditures and $1.0 million for the acquisition of Speedial. The capital
expenditures primarily consisted of network equipment purchases such as switches
for Fort Lauderdale, New York and London and other network related items,
computers and general office equipment. Cash provided by financing activities
totaled $23.4 million for 1997, net of approximately $600,000 of payments on
capital lease obligations and approximately $130,000 of principal payments on
installment loans.
On July 28, 1997, the Advent Entities purchased 2,400,000 shares of Series
B Preferred Stock and 9,908,367 ADV Warrants for $24.0 million. In addition, the
Company sold 7,000 shares of Series B Preferred Stock and 28,898 ADV Warrants to
certain employees and investment bankers involved in the transaction for
$70,000. In August 1997, the Advent Entities purchased 75,000 shares of Series B
Preferred Stock and 309,636 ADV Warrants for $750,000. In addition, the Company
sold 18,000 shares of Series B Preferred Stock and 74,313 ADV Warrants to an
investment banker involved in the transaction for $180,000. Total proceeds to
the Company were $22.8 million, net of offering costs. Approximately $330,000 of
the proceeds were used to repay a line of credit which had been previously
borrowed in 1997. In addition, LDI issued $600,000 of Common Stock pursuant to
an agreement with a vendor whereby the vendor accepted Common Stock in lieu of
payment of invoices for printing services related to the direct mail program.
On January 22, 1998, LDI purchased Esprit's 20% interest in LDI Ltd. for
L231,250 (or approximately $380,000). The Company also repaid a loan of
approximately L108,000 (or approximately $177,000) including interest and posted
a letter of credit with a major United Kingdom bank to secure payment for
transmission services provided by Esprit. In addition, on April 21, 1998, LDI
made a tender offer for all of the outstanding shares of stock of Newgate, a
reseller of wireless services in the United Kingdom, for aggregate consideration
of approximately $1.7 million in cash and approximately 214,000 shares of Common
Stock.
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OTHER
On April 13, 1998, LDI consummated the Offering. In connection with the
Offering, LDI issued $225.0 million in aggregate principal amount of Senior
Notes and Warrants to purchase in the aggregate 3,394,655 shares of Common
Stock. Approximately $75.5 million of the Offering proceeds was used to purchase
the Pledged Securities, which will be sufficient upon receipt of scheduled
interest and principal payment of such securities to fund the first six
scheduled interest payments on the Notes. The net proceeds of the Offering have
been, and are expected to continue to be, used as set forth under "Use of
Proceeds."
LDI expects capital expenditures during 1998 to total approximately $47.0
million, of which $16.5 million was expended in the first six months of the
year. Capital expenditures for the first six months of 1998, relate primarily to
equipment required to build the Company's telecommunications network in the
United States and Europe as well as to upgrade its billing and MIS platforms in
Europe and the United States. In addition, the Company expects to continue to
incur operating losses as it develops its operations in Europe and expands its
marketing initiatives in the United States.
LDI intends to fund its capital expenditures and operating losses for the
foreseeable future with the proceeds of the Offering. To the extent the Company
considers appropriate, LDI will also utilize vendor and other equipment
financing. LDI expects to continue to make significant capital expenditures as
it continues to expand its geographic scope and to increase its network
capabilities and network infrastructure. Actual capital expenditures and cash
requirements will depend upon numerous factors, including the nature of future
expansion, economic conditions, competition, regulatory developments and the
ability to incur debt and make capital expenditures under the Indenture relating
to the Notes.
The net proceeds from the Offering are expected to fund LDI's planned
expansion and operating losses over the next two years. The ability of LDI to
generate positive cash flow, which is not expected to occur prior to the year
2000, and to meet its working capital requirements and debt service requirements
will be subject to LDI's successful implementation of its operating strategy, as
well as to financial, competitive, business, regulatory and other factors beyond
LDI's control. If LDI is unable to generate cash flow from operations that is
sufficient to meet its working capital and debt service requirements, it may be
required to refinance all or a portion of its indebtedness or raise additional
capital. Additionally, if LDI's plans or assumptions change, its assumptions
prove to be inaccurate, it experiences unanticipated costs or competitive
pressures, it consummates acquisitions or the net proceeds from the Offering
prove to be insufficient, LDI may be required to refinance a portion of its
indebtedness or seek additional capital. LDI may seek to raise additional equity
or debt capital from public or private sources. The Company has financed certain
of its network equipment using vendor financing and expects that it may continue
to do so in the future. There can be no assurance that LDI will be able to raise
such capital on satisfactory terms or at all. There can be no assurance that any
such refinancing would be possible on terms that would be acceptable to LDI or
that any additional financing could be obtained. See "Risk Factors -- Historical
and Future Losses and Negative Cash Flow."
FOREIGN CURRENCY EXPOSURE
LDI is exposed to fluctuations in foreign currencies relative to the United
States dollar because LDI generally bills in local currency, while transmission
and other costs are paid in a mix of United States dollars and local currency,
and interest expense on the Notes will be in United States dollars. For the
years ended 1995, 1996, and 1997, approximately 0%, 1%, and 9%, respectively of
LDI's revenues were billed in currencies other than the United States dollar. As
LDI expands its operations, a higher percentage of revenues is expected to be
billed in foreign currencies. The relative contribution of the Company's
European operations will fluctuate based upon the relative value of the United
States dollar versus the currencies in the countries in which the Company
operates. LDI periodically evaluates the use of foreign exchange contracts to
hedge foreign currency exposure and to control risks relating to foreign
currency fluctuations. LDI does not use derivative financial instruments for
speculative purposes. As of June 30, 1998, the Company had no open foreign
currency positions.
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NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted SFAS No. 128, "Earnings Per Share." This statement
establishes standards for computing and presenting earnings per share ("EPS").
For entities with complex capital structures, the statement requires the dual
presentation of basic EPS and diluted EPS on the face of the statement of
operations. Under this new standard, basic EPS is computed based on weighted
average shares outstanding and excludes any potential dilution. Diluted EPS
reflects potential dilution from the exercise or conversion of securities into
common stock or from other contracts to issue common stock and is similar to the
currently-required fully-diluted EPS.
The Company has adopted SFAS Statement No. 130, "Comprehensive Income:
Financial Statement Presentation" which requires that all items that are
required to be recognized under the accounting standards as components of
comprehensive income be reported in a financial statement that is displayed as
prominently as other financial statements. The adoption of Statement No. 130 has
not had a material effect on the Company's financial statements.
During 1998, the Company is required to adopt SFAS Statement No. 131,
"Disclosure About Segments of an Enterprise and Related Information" which
requires a company to disclose segment profit or loss and segment assets. The
adoption of Statement No. 131 is not expected to have a material effect on the
Company's financial statements and disclosures.
IMPACT OF YEAR 2000
"Year 2000 Compliance," which affects many corporations, concerns the
inability of information systems, primarily computer software programs, to
properly recognize and process date sensitive information relating to the Year
2000 and beyond. The Company has initiated a company-wide program to identify
and address issues associated with the ability of its date sensitive
information, telephony and business systems, as well as certain other pertinent
equipment, to properly recognize Year 2000 Compliance issues in order to avoid
interruption of the operation of these systems or equipment as a result of the
century change on January 1, 2000 (the "Compliance Initiative Project"). The
Compliance Initiative Project is also designed to assess the impact on LDI of
the readiness of third party business entities with which LDI is engaged in
business or for which LDI provides services.
Inability to reach substantial Year 2000 Compliance in LDI's systems and
integral third party systems could result in interruption or failure of LDI's
ability to provide telecommunications services, interruption or failure of LDI's
customer billing processes, operating and other information technology systems
and/or failure of certain date sensitive equipment. Such interruptions or
failures could result in claims by customers and/or loss of revenue due to
service interruption and/or delays in LDI's ability to bill its customers in an
accurate and timely manner. Additionally, increased expenses associated with
litigation and/or stabilization of operations following such interruptions or
failures or execution of Year 2000 contingency plans could, and most probably
would, result in significant revenue and cost issues.
The Compliance Initiative Project is being conducted by a management team
that is coordinating all efforts. The management team is utilizing resources
consisting of internal staff, external resources, third party network providers,
and external business vendors. The Company intends to identify and make any
necessary changes. Ongoing systems and applications upgrades are being tested
and made Year 2000 compliant as they are implemented. As part of the Compliance
Initiative Project, the Company has been communicating directly with, or
reviewing disclosures made by, incumbent LECs, carriers, switch providers,
information systems vendors and other third parties that may impact LDI's
readiness for the Year 2000. Such persons have represented, in these
communications or disclosures, that the information systems of such persons, to
the extent they would have an impact on LDI, are or will by January 1, 2000 be
Year 2000 compliant. In addition, the LEC clearing house which provides billing
support to the Company has certified to the Company that its systems, to the
extent they would have an impact on LDI, are Year 2000 compliant and the
Company's accounting software provider has certified to the Company that such
software is Year 2000 compliant.
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LDI intends to have all Year 2000 Compliance conversion and testing issues
for its most critical business systems used in domestic operations completed by
the end of 1998. Inter-system testing and deployment issues are expected to be
completed by mid-1999. The status of Year 2000 Compliance efforts for LDI's
international operations is less advanced than for its domestic operations,
however, Year 2000 conversion, testing, and deployment for international systems
is expected to be completed by mid-1999.
LDI has developed several contingency plans for conducting its business
operations in the event of crisis, including system outages or natural
disasters. As a part of the Compliance Initiative Project, LDI is reviewing its
other business contingency plans to ensure they adequately address Year 2000
Compliance issues that may also arise. LDI's operational systems, such as
billing and accounting, are also being addressed in this endeavor.
LDI's Year 2000 contingency efforts cover all aspects of the Company's
business objectives. The two most important criteria are the Company's ability
to carry telecommunications traffic and to bill for such traffic.
LDI's telecommunications switches are configured to operate in stand alone
mode, parallel mode, and/or re-route mode. In the instance of outages, the
Company's network traffic is re-routed using switch software. LDI's network
switches employ self-healing architecture capable of automatic re-routing should
the need arise. In the cases of natural disasters, the Company's switches
operate in a fully redundant, full parallel mode. This mode allows LDI's traffic
to be either re-routed or run in a parallel state. LDI believes the necessary
geographic disparity between switches also provides another level of contingent
security.
LDI's information technology, through different in objective, employs
similar architectural standards. LDI's data network is also a self-healing,
fully redundant network capable of re-routing data information to and from
various LDI locations. The existence of parallel servers in disparate locations
enables LDI to maintain full operational status of LDI's information technology
infrastructure.
Some of the costs associated with LDI's Compliance Initiative Project were
incurred in 1997 and the first half of 1998 and the remainder will be incurred
during the second half of 1998 and 1999. LDI estimates the costs will be
approximately $1.5 million over the life of, and adherence to, the project. LDI
intends to continually reassess the estimated costs and status of its Year 2000
remediation efforts.
LDI currently anticipates the mission critical systems it controls in its
domestic and international operations to be fully Year 2000 compliant by January
1, 2000. However, no assurance can be given that unforeseen circumstances will
not arise during the performance of the testing and deployment phases of LDI's
Compliance Initiative Project which would adversely affect the Year 2000
Compliance of LDI. Furthermore, the Year 2000 Compliance of LDI's integral third
party networks is not yet fully known. As a result, LDI is unable to determine
the impact that any third party systems interruptions or failures would have on
LDI's business, results of operations or financial condition.
INFLATION
The Company does not expect inflation to have any significant impact on its
business, financial condition or results of operations.
SEASONALITY
The Company believes its business is not subject to significant seasonality
based on historical trends.
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BUSINESS
LDI is a rapidly growing multinational telecommunications company, which
provides international telecommunications services from the United States, the
United Kingdom, France, Italy and Spain to over 200 countries. LDI offers
domestic long distance calling, postpaid calling card services, prepaid services
and toll-free services in the United States and the United Kingdom. In France,
Italy and Spain, the Company primarily provides international telecommunications
services and prepaid calling card services. The Company markets primarily to
residential and SME customers with significant long distance calling needs and
recently commenced marketing to carrier customers. The Company markets its
services through direct response marketing, agent sales, telemarketing and
direct sales.
LDI commenced operations in 1995 as a switchless reseller of international
and domestic long distance services in the United States and, during 1996,
expanded into the western European market. LDI recently initiated the design and
buildout of a European telecommunications network. By interconnecting United
States and European networks, LDI seeks to expand its western European presence
and intends to leverage its existing United States operations with the objective
of lowering the cost, improving the quality and broadening the scope of services
offered to its customers across two continents. Revenues have grown from $2.6
million in 1995 to $40.1 million in 1997, 85.9% of which was derived from
services offered in the United States, consisting primarily of dial-around
services to residential and small business customers. The Company had net losses
of $1.7 million, $4.0 million and $11.3 million and $23.4 million for the fiscal
years ended 1995, 1996 and 1997 and the six months ended June 30, 1998.
LDI is a Florida corporation. Its principal executive offices are located
at 888 South Andrews Avenue, Suite 205, Fort Lauderdale, Florida 33316. Its
telephone number is (954) 522-3300.
INDUSTRY OVERVIEW
LONG DISTANCE TRANSMISSION
A long distance telephone call consists of three parts: origination,
transport and termination. Generally, a national long distance call originates
on a local exchange network or a leased line and is transported to the network
of a long distance carrier. The call is then carried along the long distance
network to another local exchange network where the call is terminated. An
international long distance call is similar to a national long distance call,
but typically involves at least two traditional long distance carriers: the
first carrier transports the call from the country of origination and the second
carrier terminates the call in the country of termination. The two companies may
be operating companies within a group or under common ownership.
International long distance calls are transported by land-based or undersea
cable, by microwave or via satellites. A carrier can obtain circuits on cable
systems either through ownership or leases. Ownership in cables and control of
the network infrastructure is generally acquired through IRUs, minimum
investment units ("MIUs"), managed bandwidth or through the purchase of dark
fiber optic cables and purchase of associated electronics. The fundamental
difference between an IRU holder and an owner of an MIU is that the IRU holder
is not entitled to participate in management decisions relating to the cable
systems.
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The following diagram illustrates the pattern of a typical international
long distance call:
INTERNATIONAL LONG DISTANCE CALL CHART
CLASSIFICATION OF SERVICE PROVIDERS
International long distance carriers generally can be categorized according
to ownership and use of transmission facilities and switches. Although no
carrier utilizes exclusively owned facilities for the transmission of all of its
international long distance traffic, carriers vary from being primarily
facilities-based (i.e., they own and operate their own land based or undersea
cable and switches) to those that are purely resellers of another carrier's
transmission network. Generally, the first-tier long distance companies (e.g.,
AT&T, MCI, Sprint and WorldCom in the United States and British Telecom and
Mercury in the United Kingdom) are transmission facilities-based carriers that
own and operate a large domestic fiber-based network. In addition, a number of
such large United States telecommunications service providers and European PTOs
have formed alliances to compete in offering seamless services to large
customers globally (e.g., Global One, Concert and WorldPartners). Second-tier
long distance companies (e.g., Excel and TelSave Holdings Inc. in the United
States; RSL Communications and Viatel in the United Kingdom) own switching
facilities but generally own far less cable or transmission facilities than
first-tier carriers. The third-tier of the market consists of long distance
companies that are generally switchless resellers that rely on the transmission
facilities of other carriers. See "-- Regulation" and "-- Competition."
INTERNATIONAL TELECOMMUNICATIONS MARKET
The international long distance public switched telecommunications market,
consisting of telephone calls between countries, generated an estimated $61
billion in revenue and 70 billion minutes of use in 1996 and is recognized as
one of the fastest growing segments of the long distance telecommunications
industry. The market for these services is highly concentrated in more developed
countries, with approximately 40% and 27% of 1996 worldwide international long
distance traffic originating in Europe and the United States,
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respectively. The Company has significantly less than a 1% share of this market.
According to Analysys Ltd., international long distance minutes are projected to
grow by approximately 18% per annum from approximately 90 billion in 1997 to
approximately 170 billion minutes in 2001. This growth is expected to be spurred
by (i) the continued deregulation of telecommunications markets throughout the
world, (ii) increased capacity, improved quality and lower operating costs
attributable to technological improvements, (iii) the expansion of
telecommunications infrastructure and (iv) the globalization of the world's
economies and free trade. International settlement rates (the rates paid to
other carriers to terminate an international call) have declined over the past
five years and, in connection with a recent FCC initiative to balance the United
States settlement deficit, the Company expects such rates to continue to
decline. The costs for leased transmission capacity have also declined and are
expected by the Company to continue to decline. Furthermore, the trend towards
liberalization is expected to further reduce carriers' costs of originating and
terminating calls by allowing carriers in some jurisdictions to interconnect
with the domestic PSTN.
PROJECTED GROWTH OF INTERNATIONAL LONG DISTANCE VOICE TRAFFIC
Compound Annual Growth Rate 18%*
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Latin America........................ 2.9 3.4 4.0 4.6 5.3 6.2
Eastern Europe....................... 3.4 4.1 4.8 5.7 6.8 8.1
African/Mediterranean................ 4.9 5.7 6.6 7.6 8.9 10.4
Asia/Pacific......................... 12.0 16.0 19.2 23.1 27.8 33.7
North America........................ 25.8 30.0 35.3 41.7 49.2 58.3
Western Europe....................... 28.6 32.8 36.8 41.5 46.9 53.1
---- ---- ----- ----- ----- -----
Total................................ 77.6 92.0 106.7 124.2 144.9 169.8
</TABLE>
- ---------------
Source: Analysys Ltd.
* Prices have declined and are expected to continue to decline. Accordingly,
growth in revenues is expected to be substantially less than growth in
minutes. See "Risk Factors -- Risks Associated with Rapidly Changing Industry"
and "-- Regulation."
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UNITED STATES LONG DISTANCE MARKET
According to estimates by the FCC, United States-originated international
long distance telephone traffic has grown from approximately 7 billion minutes
in 1989 to approximately 19 billion minutes in 1996, a compound annual growth
rate of approximately 15%. The growth of the United States-originated
international long distance market was initially attributable to regulatory
liberalization and the decrease in prices that accompanied the onset of
competition. Regulatory liberalization and the resulting competition also have
led to improvements in service offerings and customer service.
The profitability of the United States originated international long
distance market is in large part driven by the difference between billed
revenues and settlement rates (i.e., the rates paid to other carriers to
terminate an international call), although an increasing proportion of traffic
is terminated other than through the international settlement process. Increased
competition arising from regulatory liberalization and pressure arising from
increased global trade have brought about reductions in settlement rates and
end-user prices, reducing termination costs for United States based carriers.
Based on FCC data for the period 1989 through 1996, per minute settlement
payments by United States based carriers to foreign PTOs fell 39%, whereas per
minute international billed revenues fell only 27%. As a result, gross profit
margin for outbound international calls increased. LDI believes that
transmission costs will decline to more closely reflect the underlying cost of
facilities rather than historic settlement rates. See "Risk
Factors -- Significant Price Declines."
Although LDI focuses on the international telecommunications market, it
also provides domestic long distance services to many of its customers and, as
part of its strategy, will seek to increase its United States domestic long
distance business. Although the United States domestic long distance market is
much larger than the United States-originated international long distance
market, the profit per minute of use for international traffic has generally
been higher than for domestic traffic.
UNITED KINGDOM LONG DISTANCE MARKET
Since 1991, the United Kingdom government has sought to encourage increased
competition in telecommunications services, including international
telecommunications services. As a consequence of these actions, the United
Kingdom now has a dynamic telecommunications market, with over 200
telecommunications operators individually licensed to operate in the United
Kingdom market. The price of international calls made from the United Kingdom
has decreased significantly since 1991 due to increased competition after the
award of ISR licenses and the downward pressure exerted on British Telecom's
prices by Oftel.
The interconnection regime in the United Kingdom provides operators with
the ability to obtain cost based, non-discriminatory charges for interconnection
services. Oftel regulates the interconnection rates charged by British Telecom
to other individually licensed operators. Oftel also has the power to intervene
and determine charges and other terms if an operator believes that it is not
being offered fair pricing. Oftel has stated that the category of companies that
qualify for interconnection services consist of those network operators that are
making a significant contribution to infrastructure competition by installing
transmission capacity or any international simple resale operator making a
significant contribution to competition in the international market. A recent EU
Interconnection Directive provides that PTOs with significant market power (over
25%) are obliged to interconnect with individually licensed operators on
transparent, objective and non-discriminatory cost-based terms.
On December 19, 1996, the United Kingdom government opened to competition
the provision of international facilities-based services, which until then only
British Telecom and Mercury had been authorized to provide. LDI was awarded an
ISR license in March 1995, which allows LDI to lease international transmission
lines from other carriers while utilizing the public local network to originate
and terminate calls at each end, and an international facilities based license
(an "IFL") on December 19, 1996 which enables LDI to provide international
services over and run its own international facilities. See "-- The LDI
Network."
The United Kingdom is the favored hub for international traffic originating
in continental Europe due to the availability of relatively inexpensive
transmission capacity to and from the United Kingdom. This
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preference is expected to continue as rates for international services are
further reduced as a result of additional competition.
EUROPEAN INTERNATIONAL LONG DISTANCE MARKET
The European international long distance market is the largest in the
world, generating approximately 28 billion minutes, over 40% of total
international calling volume in 1996 according to Telegeography, Inc., a market
research firm. The European PTOs generally have had monopolies on providing
telephone services from their respective countries, making the price of
international telephone calls from continental Europe much higher than
comparable calls initiated from the United States or the United Kingdom.
Furthermore, customers in many European markets have generally not been able to
obtain value-added features that are readily available in the United States,
such as itemized billing, touch tone dialing, voicemail and other enhanced
services. Regulatory liberalization, together with significant advances in
technology that have decreased the cost of providing services and allowed the
provision of sophisticated value-added features, is facilitating competition
with European PTOs by emerging telecommunications service providers.
LDI believes that the regulatory liberalization currently underway in many
countries in continental Europe could lead to market developments similar to
those that occurred in the United States and the United Kingdom upon regulatory
liberalization of long distance telecommunications services in those countries.
Regulatory liberalization in the United States and the United Kingdom has
resulted in an increase in call traffic and the emergence of multiple new
telecommunications services providers of varying sizes. In addition, significant
reductions in prices, as well as improvements in both the breadth and quality of
services offered and the level of overall responsiveness to customers, have
occurred. Although pricing has become competitive in both the United States and
the United Kingdom, marginal costs have declined significantly. There can be no
assurance, however, that the continental European experience will mirror those
in the United States or the United Kingdom or that competitive and other factors
will not adversely impact profitability of companies in the industry. See "Risk
Factors -- Competition."
STRATEGY
The Company's objective is to create a cost-competitive, facilities-based,
multinational telecommunications network which provides high quality
international and domestic long distance services to residential, SME and
carrier customers. The key elements of the Company's strategy are:
ESTABLISH OPERATIONS IN ATTRACTIVE EUROPEAN MARKETS
LDI plans to establish operations in markets with high international
calling volume which recently liberalized their telecommunications markets or
are in the process of regulatory liberalization. In 1997, the Company
established operations in France, Italy and Spain and, in 1998, expects to
establish operations in Germany and Sweden. The Company believes there is a
significant advantage to being an early entrant in such markets because there is
often a significant divergence between the cost of domestic and international
calls in markets that have not commenced, or are just commencing,
liberalization. In addition, LDI intends to concentrate on smaller regional
markets where there is often less competition. Particularly in smaller markets,
prior to installing facilities, LDI will generally establish a presence by
reselling traffic on other carriers' networks. In countries where
interconnection with the PTO is currently not available, LDI may provide dial-in
services to establish an early market presence prior to further liberalization
of the market.
EXPAND EXISTING OPERATIONS
In the United States, LDI plans to complete its expansion of operations to
all states except Alaska during the second half of 1998. Further, it plans to
expand its marketing channels by commencing a master agent program and to target
its sales efforts at certain selected market segments. In the United Kingdom,
LDI plans to expand its agent program and prepaid calling card business. In
Spain and Italy, LDI plans to increase its agent program.
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LDI intends to further penetrate the domestic and international long
distance telecommunications markets in the United States and United Kingdom by
offering a broader range of value-added services at competitive prices. LDI is
one of two companies selected by British Telecom to resell, on a trial basis,
local loop services to residential and small business customers. Further, LDI
recently acquired a British reseller of cellular communications services by
making a tender offer which expired on May 15, 1998. This acquisition provides
the Company with an expanded product range and the opportunity to further
penetrate the United Kingdom market by cross-selling its services to subscribers
of this company. Where appropriate, LDI also intends to resell minutes of
traffic capacity to other telecommunications providers.
DESIGN, DEVELOP AND IMPLEMENT A COST-COMPETITIVE, MULTINATIONAL NETWORK
By designing, developing and implementing a multinational network, LDI
believes that it will be able to reduce the cost and expand the scope of
services offered in its targeted markets. As the cost of owning and operating
the network upon completion of its buildout will be relatively fixed, the
marginal cost of additional minutes of traffic will decline. LDI intends to
install only carrier grade switches with enhanced service platforms, which will
allow it to offer a broad range of services such as calling card and prepaid
services. The Company plans to have each switch connected to at least two other
switches to ensure network quality and full redundancy, and to enhance least
cost routing.
The Company will seek to manage the investment of capital within its
network on an incremental basis in order to maximize the efficiency of its
capital expenditures program. In general, the Company transmits traffic by
leasing capacity on a variable cost per minute basis until it believes that a
direct investment in facilities or a fixed cost lease arrangement between
countries or on a particular route is warranted. When the cost of owning
facilities is justified relative to leasing facilities or reselling other
carriers' networks, the Company plans to invest in facilities and thereby
expects to increase its gross margins and lower its overall transmission costs.
See "Risk Factors -- Limited Operating History," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "-- The LDI
Network." The Company believes that ownership of its network will allow it to
lower its unit cost, broaden the range of its available services, and better
control fraud.
The Company intends to pursue the wholesale market in order to maximize
utilization of its network by selling or trading excess capacity to other
carriers.
EMPLOY FOCUSED AND COST-EFFECTIVE SALES AND MARKETING CHANNELS; ESTABLISH A
GLOBAL BRAND
The Company is focusing on providing telecommunications services to
residential and SME customers, who are frequent users of international long
distance telecommunications but are typically underserved by larger
telecommunications companies. In 1997, approximately 35% of LDI's United States
long distance revenues was from international calls made by United States
customers compared with approximately 10% for the United States market and
approximately 47% of LDI's United Kingdom long distance minutes and 78% of
revenue was from international calls made by United Kingdom customers. LDI
primarily uses direct response and agent telemarketing programs to attract
customers onto its network. Many of its programs are carefully designed to
attract new customers from certain market segments, such as the ethnic and
expatriate communities and internationally focused industry sectors. To market
its services more effectively to both residential and business customers, the
Company is building a network of agents who will sell LDI's products and
services in each market in which it provides services. The Company intends to
minimize the fixed overhead cost of its sales and marketing channels. Through
its sales and marketing and public relations activities, LDI seeks to develop
stronger brand awareness and to establish a global brand. See "-- Sales and
Marketing."
PURSUE STRATEGIC ALLIANCES AND ACQUISITIONS
The Company has used and expects to continue using strategic alliances and
acquisitions to expand its business. LDI may make an acquisition, enter into a
joint venture or form a strategic alliance with another carrier to swap traffic
and interconnect its network thereby enhancing the efficiency of its network and
the
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network of its strategic partner. The Company continuously reviews potential
acquisitions which it believes will expand or enhance its current operations by
providing the Company with the opportunity to enter additional strategic markets
or to strengthen its operations in an existing market. In particular, LDI seeks
to acquire businesses with an established customer base, compatible operations,
telecommunications licenses, or experienced management. For example, LDI
recently acquired the assets of Speedial, a prepaid residential service provider
in the United Kingdom, and made a tender offer to acquire Newgate, a reseller of
wireless services in the United Kingdom. These acquisitions allowed the Company
to expand its product range, to enter the ethnic residential market sector in
the United Kingdom and to acquire a new direct marketing channel.
DEPLOY TECHNOLOGICALLY ADVANCED INFORMATION SYSTEMS TO FACILITATE BILLING
AND CUSTOMER SUPPORT FUNCTIONS
The Company believes that advanced effective and flexible billing and
customer care information systems are vital to support its anticipated growth.
In the United States, LDI plans to upgrade its information systems, as well as
to purchase off-the-shelf platforms to be customized to suit the Company's
needs. The Company has retained a management information systems consultant (see
"Certain Transactions") to assist it in selecting a cost-effective system
designed to have the following key features:
- flexibility with respect to billing for various telecommunications
services and billing formats;
- ability to support LEC, direct and wholesale/carrier billing;
- scalability for increases in number of customers and calling volume; and
- ability to support detailed management information with respect to
customer care and business performance.
The Company has commenced upgrading its information systems in the United
States. In Europe, the Company has purchased an Oracle-based billing and rating
engine that supports billing in local currencies and currently expects such
system to be operational in November 1998. This platform is being used by other
telecommunications providers in Europe.
SERVICES
By the end of 1998, the Company anticipates that it will offer
telecommunications services in markets that originate over 50% of the world's
international telecommunications traffic. The size of each market in which the
Company currently offers or intends to offer services during 1998 is set forth
below:
<TABLE>
<CAPTION>
1996 VOLUME PERCENTAGE
OF OUTGOING OF 1996 OUTGOING
COUNTRY MINUTES(1) INTERNATIONAL TRAFFIC
------- ------------- ---------------------
(IN MILLIONS)
<S> <C> <C>
United States............................................... 18,830 26.9%
Germany..................................................... 5,100 7.3
United Kingdom.............................................. 4,569 6.5
France...................................................... 3,116 4.4
Italy....................................................... 2,124 3.0
Spain....................................................... 1,189 1.7
Sweden...................................................... 1,026 1.5
------ ----
Total............................................. 35,954 51.3%
====== ====
</TABLE>
- ---------------
(1) All data were taken from Telegeography 1997/1998, which is published by
Telegeography, Inc.
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The following tables summarize LDI's service offerings by principal
geographic and target market as of June 30, 1998 and as projected by December
31, 1998:
<TABLE>
<CAPTION>
SERVICES
-----------------------------------------------------------------
DIAL-AROUND EQUAL ACCESS POSTPAID WHOLESALE
TARGET MARKETS "1010XXX" "1+" CALLING CARD TOLL-FREE SERVICES
-------------- ----------- ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
United States
Residential............ -- -- -- --
SME.................... -- -- -- --
Carrier................ --
</TABLE>
<TABLE>
<CAPTION>
PREPAID
POSTPAID RESIDENTIAL
EASY ACCESS CLOSED USER CALLING OR PREPAID WHOLESALE
"1XXX"(1) GROUP(2) CALLBACK(2) LOCAL(3) CARD CALLING CARD TOLL-FREE SERVICES
-------------- ----------- ----------- -------- -------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United Kingdom
Residential............ L L -- --
SME.................... -- L -- --
Carrier................ L
Italy
Residential............
SME.................... L -- -- L
Carrier................
France
Residential............ L L --
SME.................... L -- -- -- L
Carrier................ L
Spain
Residential............
SME.................... -- -- -- --
Carrier................
Sweden
Residential............
SME.................... L --
Carrier................
Germany
Residential............ L L L
SME.................... L -- --
Carrier................ L
</TABLE>
Key: -- Available June 30, 1998
L Expected to be available by December 31, 1998
- ---------------
(1) Subject to obtaining interconnection with the local PTO. See "-- The LDI
Network -- Interconnection Agreements."
(2) The Company anticipates that these services will be upgraded to "1xxx"
service in France and Italy before December 31, 1998.
(3) Pursuant to trial program with British Telecom. See "-- Local Services."
INTERNATIONAL AND DOMESTIC LONG DISTANCE SERVICES
LDI's international and domestic long distance services can be accessed
from the customer's billing location using equal access, easy access,
dial-around, closed user groups or callback access. LDI's international and
domestic long distance service generally enables customers to call to any long
distance destination within the country and to over 200 countries worldwide.
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<PAGE> 63
Equal Access. In jurisdictions allowing equal access, a customer that
selects LDI as the customer's long distance carrier can make long distance calls
on LDI's network without dialing any special access number or code (e.g., in the
United States, equal access customers simply dial "1" plus the number being
called). LDI can offer equal access where LDI has a switch or POP and is
interconnected to the PSTN. LDI currently offers equal access in 27 states of
the United States and expects by year-end 1998 to offer equal access service in
additional states and, if regulatory conditions allow and interconnection is
available, in Germany.
Easy Access. "1xxx" or easy access enables a long distance customer to
access LDI's network from the customer's home or office by dialing LDI's four
digit access code for the applicable country and then the number the customer is
calling. The customer does not need to dial a further personal identification
number ("PIN") or code. This access method is available to customers with an LDI
account who are connected to the PSTN by means of a digital exchange. LDI can
offer easy access where LDI has a switch or POP if regulatory conditions allow
for such (but do not permit equal access) and interconnection is available. LDI
currently offers easy access in the United Kingdom and expects to offer easy
access in Sweden, France, Germany and Italy by year-end 1998. Depending on a
customer's spending volume, LDI may install call routing equipment (i.e.,
auto-dialers) or reprogram the customer's private automatic branch exchange to
automatically dial the "1xxx" code on long distance calls. In certain countries,
the access code may be more than four digits.
Dial-Around. LDI's dial-around service enables a United States long
distance customer to access LDI's network from the customer's home or office by
dialing a "1010xxx" prefix ("1010799" for LDI in the United States) and then the
number the customer is calling. The FCC recently expanded carrier identification
codes from "10xxx" to a "1010xxx" format. There can be no assurance that the
change in format will not have a material adverse effect on the Company's
dial-around business. The customer can access LDI's network even if LDI has not
been selected as the customer's presubscribed long distance carrier. The
customer can thereby "dial around" their presubscribed long distance carrier to
take advantage of LDI's long distance rates. LDI currently offers dial-around
services in 27 states of the United States and expects to offer such in
additional states and, if regulatory conditions allow and interconnection is
available, in Germany by year-end 1998.
Closed User Group. LDI offers international long distance service in
certain western European markets where it does not have a carrier-to-carrier
interconnection with the PTO by providing a local telephone number that enables
a long distance customer to access LDI's network from the customer's home or
office. Upon accessing LDI's network through such local call, the customer dials
the number the customer is calling. In most countries, customers must prefix
this number with a PIN authorization code. This access method can be available
wherever LDI has a switch or POP or an agreement with a carrier that has such.
LDI may offer this service to establish its presence in a new market prior to
full interconnection with the local PTO. LDI currently offers closed user group
services in Italy, France and Spain but intends to transition to easy access
("1xxx") service in Italy and France by year-end 1998.
Callback. Callback access enables a long distance customer to access LDI's
network from markets where LDI does not have in-country facilities or a resale
agreement. The customer accesses LDI's network from the customer's home or
office by dialing a long distance telephone number. The customer will receive a
"call back" from such number and can then use such telephone line to dial the
number the customer is calling. LDI may offer this service to establish a
presence in a new market prior to full inter-connection with the local PTO. LDI
currently offers callback services in Italy but intends to transition to easy
access service there by year-end 1998.
LOCAL SERVICES
Local telecommunications service is service within a customer's local
calling area. The Company is currently one of two companies participating in a
trial of a new program with British Telecom to offer local service in London
which commenced on March 1, 1998. Under this program called "Calls and Access,"
LDI markets local services by reselling the British Telecom line rentals and
local calls, with certain of British Telecom's value-added services, to
residential and small business customers billed under the LDI brand name.
British Telecom passes on the call records to LDI for billing; the customers
then receive only one bill from
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<PAGE> 64
LDI. This allows LDI to offer postpaid long distance services to residential and
small business customers in the United Kingdom using either LDI's network or by
reselling British Telecom's network under the LDI brand name. The Company does
not currently plan to provide local services in any other of its markets.
CALLING CARD SERVICES
LDI offers calling card services as an additional service for its
presubscribed long distance customers in the United States and United Kingdom.
LDI's calling cards allow customers to avoid using higher cost hotel or pay
telephones when travelling in the country of issue and in over 40 countries.
LDI's calling card service is accessed from a country by dialing an
international freephone number for that country followed by the caller's account
number and PIN. LDI has been allocated a group of universal international
freephone numbers ("UIFNs"). One of these will be used for the calling card so
that the same toll-free number will be available to access the LDI network from
16 European countries. In Europe, LDI's calling cards provide value-added
services such as voice mail and message delivery. Calling cards are billed on a
postpaid basis.
PREPAID SERVICES
Calling Card. LDI's prepaid card service is a prepaid version of its
calling card. Customers purchase cards with a PIN code and a credit balance
which allows them to access the service via a toll-free number until the credit
balance has been used up or the PIN expires. LDI's prepaid card has similar
value-added features to its postpaid card and offers competitive rates to
international destinations. LDI's prepaid card is available in the United
Kingdom and France and is distributed through agents and retailers.
Residential. LDI also offers a prepaid residential service in the United
Kingdom. This service is accessed by dialing a toll-free access number or "1xxx"
code. The customer then receives a second dialtone and dials the destination
number. No PIN code is required when calling from a home number that is
presubscribed to LDI's service and is connected to the PSTN by means of a
digital exchange.
TOLL-FREE SERVICES
LDI provides domestic toll-free service to customers in the United States
and the United Kingdom (i.e., "800" or "888" service in the United States and
"0800" in the United Kingdom). This service is targeted at customers who have a
substantial number of incoming domestic long distance calls. Customers of LDI's
toll-free service are assigned a toll-free number. Calls to the toll-free number
are routed to the LDI network. From there, the call is transmitted to the
customer's location in the same manner as other calls routed through the LDI
network.
WHOLESALE SERVICES
In both the United States and in Europe, LDI anticipates that it will sell
capacity to carrier customers.
Carrier services are sold at substantially lower margins than LDI's other
services. However, because carrier customers purchase transmission capacity in
bulk, these services will allow LDI to increase the amount of transmission
capacity that it purchases, enabling it to obtain volume discounts on
transmission capacity from its vendors and, therefore, realize lower unit costs.
In addition, the sale of transmission capacity on LDI's IRUs and leased lines
will allow LDI to generate additional revenues on transmission lines operating
at less than full capacity without incurring significant marginal costs. Carrier
customers frequently change vendors based on small differences in price and
certain carrier customers could subject LDI to credit risks.
By maintaining a constantly updated database of carriers, rates and
routings, LDI believes it will be able to compete effectively in this market.
WIRELESS SERVICES
LDI recently acquired a British reseller of cellular communications
services through a tender offer. This acquisition also provides the Company with
an expanded product range and the opportunity to further penetrate the United
Kingdom market by cross-selling its services to subscribers of this company.
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<PAGE> 65
SALES AND MARKETING
The Company markets its services to residential and SME customers with
significant long distance calling needs and recently commenced marketing to
carrier customers. LDI will rely on a combination of direct response marketing,
indirect sales, outbound telemarketing, direct sales and affinity programs in
marketing its services to its customers. Residential customers will be solicited
through direct mail and telemarketing and SME customers through direct and agent
sales. In each metropolitan area in Europe, LDI will hire a dealer manager to
manage relationships with local agents. Wholesale services will be marketed to
carriers by LDI's in-house direct sales force.
LDI'S TARGET MARKETS
Residential. LDI's services are marketed primarily to residential
customers with significant international calling needs such as expatriate and
ethnic communities. The Company believes that approximately 60% of the 100
million households in the United States have not enrolled in a discount long
distance calling program. In the United States, the Company has targeted the
Asian and Hispanic communities. In Europe, the Company targets and plans to
target the various large ethnic communities, such as the Indian, Pakistani,
Caribbean and African communities in the United Kingdom and the Turkish and
eastern European communities in Germany.
SME. The Company targets small and medium-sized businesses that originate
in excess of $500 in international telephone calls per month. The Company
believes that this market segment offers significant opportunities because it
has traditionally been underserved by the major global telecommunications
carriers and the PTOs, which offer their lowest rates and best services
primarily to higher volume multinational business customers.
Carrier. The Company recently began offering international termination and
transit traffic services to other carriers, including resellers, on a wholesale
basis. The Company anticipates that significant levels of traffic volume
generated by such carrier customers will enable the Company to obtain volume
discounts on transmission capacity from its vendors. The Company believes that
revenues from its carrier customers will represent a significant portion of the
Company's overall revenues in the future. See "Risk Factors -- Inability to
Predict Traffic Volume" and "-- Services -- Wholesale Services."
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<PAGE> 66
DISTRIBUTION CHANNELS
The following table summarizes LDI's current and planned distribution
channels as of June 30, 1998 and as projected by December 31, 1998:
<TABLE>
<CAPTION>
DISTRIBUTION CHANNELS
-----------------------------------------------------------------------------------
DIRECT RESPONSE
TARGET MARKETS MARKETING INDIRECT SALES TELEMARKETING DIRECT SALES AFFINITY PROGRAMS
-------------- --------------- -------------- ------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
United States
Residential...................... K K K
SME.............................. K L K L K
Carrier.......................... K
United Kingdom
Residential...................... K L L
SME.............................. K K K K
Carrier.......................... L
Italy
Residential......................
SME.............................. K
Carrier..........................
France
Residential...................... L L L L
SME.............................. K K K L
Carrier.......................... L
Spain
Residential......................
SME.............................. K
Carrier..........................
Sweden
Residential......................
SME.............................. L
Carrier..........................
Germany
Residential...................... L L L L
SME.............................. L L L
Carrier.......................... L
</TABLE>
Key: K Available June 30, 1998
L Expected to be available by December 31, 1998
Direct Response Marketing. The Company markets its services to the
residential market and, to a lesser extent, to the SME market through direct
response marketing. Direct response marketing includes direct mailings,
newspaper advertisements, inserts in newspapers, television and radio
commercials and advertising in various other media. In the United States, direct
response marketing programs generate dial-around revenue as well as in-bound
calls to the Company's telemarketing center. In 1997, LDI mailed 114.4 million
direct mail inserts compared to 43.9 million inserts in 1996.
The Company plans to enhance the targeting of its direct response marketing
through market analysis utilizing LDI's residential database and external data.
Such market analysis uses advanced socio-demographic profiling of customers
based on geographic area, customer lifestyle, usage patterns and other
information. The Company anticipates that this socio-demographic profiling will
also be used in Europe for residential marketing.
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<PAGE> 67
Indirect Sales. The Company primarily markets its services to the SME
market by means of indirect sales through generally nonexclusive arrangements
with agents to sell services under the LDI brand name. This channel is also used
to sell to residential markets and to sell prepaid cards through retail
channels. Agents generally sign a letter of authority with the Company which
allows the agents to sell the Company's services; however, the Company is
entitled to reject any sales order or contract introduced by an agent. LDI's
dealer managers currently have relationships with 260 master agents and the
Company intends to significantly expand its agent program. LDI typically pays an
agent between 6% and 15% of ongoing collected revenues. Agents are recruited and
managed by LDI-employed dealer managers. LDI anticipates that its incentive
programs, training programs and back office and marketing support for dealers
and agents will be a competitive strength in recruiting and managing agents.
Telemarketing. The Company has established in-house call centers in the
United States and the United Kingdom to engage in telemarketing. The Company
generates call lists of lapsed or low spending customers and potential new
customers from both billing and external data. The Company also uses the
telemarketing call center to set appointments between prospective SME customers
and LDI salespersons or agents. In the United States, the Company also uses the
services of independent telemarketing sales organizations.
Direct Sales. The Company markets its services to the larger SMEs by means
of direct sales by a small sales staff. In the United Kingdom, the Company
employs six direct sales people. In Paris, the Company employs two direct sales
people. The Company deploys direct sales people to specialize in specific
customer niches or industry sectors. The Company will market its wholesale
services exclusively through direct sales and has retained one sales person in
the United States.
Affinity Programs. The Company also participates in various affinity
programs to market its services. Affinity programs are programs whereby two or
more companies market their respective products or services by promoting a
co-branded product or service to the affinity group members. For example, a
company with a strong brand or customer base will pass on LDI benefits (e.g.,
free or discounted calls) to its customers as a method for marketing both LDI's
and such company's respective products or services.
Retail. The Company intends to use retail outlets to distribute its
prepaid card and prepaid wireless products to end-users. Relationships with
retail outlets will be managed either by LDI agents or, in some instances,
relationships with chains will be managed directly by LDI.
OTHER MARKETING CONSIDERATIONS
Customer Care. The Company will continue to use proactive customer care
teams to manage existing residential and SME customers' accounts in order to
retain customers and to sell additional services. The Company anticipates that
it will continue to utilize this sales channel in local offices in new markets.
Billing. LDI regards its billing as an important feature of its service
offerings because it provides information and customized billing formats that
may not be available from other carriers. The Company plans to upgrade its
billing systems in 1998 to provide additional flexibility, capacity and
scalability for growth. See "-- Information Technology." For all directly billed
postpaid products, customers receive an LDI bill in addition to a bill from
their local telephone company for local lines and services, other than with
respect to the "Calls and Access" program with British Telecom. See "-- Local
Services." In the United States, all dial-around customers and most
presubscribed customers receive their LDI long distance bill on their LEC bill
through a billing arrangement between LDI and the LEC or LEC clearing house.
Carrier customers will be directly billed by the Company.
Competitive Advantages. The Company believes that its competitive
advantages against dominant incumbent carriers will be its pricing, its flexible
and innovative marketing and packaging and its customer care; against larger
facilities-based independent carriers, the Company believes its principal
competitive advantages will be its focus on smaller businesses and residential
customers, its lower overhead and its early participation in underserved
markets; against smaller entrants, the Company believes its broad range of
products, its enhanced billing formats and its multinational facilities-based
network will be its principal competitive advantages. The Company believes that
the dominant incumbents (i.e., PTOs in Europe) will initially be its biggest
competitors.
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<PAGE> 68
Brand Development. The Company will continue to coordinate its marketing
activities, including monitoring the performance of its sales channels to
increase brand awareness. The Company markets its telecommunications services
under its "LDI" brand name as well as several additional brand names. LDI also
markets its services through other carriers licensed for such purpose on a
nonbranded basis. LDI uses the brand name "Speedial" for marketing its prepaid
services to ethnic residential customers in the United Kingdom and the brand
name "Dynamic Telecom International" for its closed user group services in
southern Europe. The Company utilizes public relations services to promote its
brands.
PRICING POLICY
Residential. The Company monitors the retail prices of other carriers and
prices its long distance services to residential customers accordingly. Programs
offered to residential customers from time to time include special promotional
rates for limited periods, special offers, as well as prepaid programs with
incentives to prepay larger amounts. In both the United States and Europe, the
Company's marketing materials generally contain price comparisons against the
dominant incumbent carriers only.
SME. In Europe, the Company generally prices at least 15% below the
incumbent carriers. LDI also offers a "price promise" in some markets whereby
LDI agrees to match or beat rates offered by certain approved competitors. In
addition to price, however, the Company emphasizes non-price differentiators
such as product range, customer service quality and channel effectiveness in
marketing and selling to SMEs.
Carrier. The Company intends to price its wholesale services based on a
margin over underlying variable cost. The wholesale division will maintain an
automated "rate vault" database of other carriers' rates and routings to all
destinations on a day-by-day basis.
THE LDI NETWORK
NETWORK ECONOMICS
By designing, developing and implementing a multinational network and
migrating from a switchless resale or hybrid resale environment to a
facilities-based environment, LDI believes that it will be able to reduce the
cost and expand the scope of its services offered in its targeted markets. As
the cost of owning and operating the network upon completion of its buildout
will be relatively fixed, the unit cost of additional minutes of traffic will
decline. At or above certain volume levels, the fixed cost of capital investment
in network infrastructure (even when amortized over only five years) will be
lower than the variable per minute settlement rate or rates in the international
wholesale market. As the Company's cost structure becomes facilities-based, the
Company expects that the majority of its transmission cost will be for
interconnection with the PSTN.
CURRENT NETWORK
In the United States, LDI owns and operates a DEX Switch located in Fort
Lauderdale, Florida and currently leases switch partitions in New York City, New
York; Birmingham, Alabama; Charlotte, North Carolina; Denver, Colorado; and Los
Angeles and Oakland, California. The partition leases are on a flat-fee
month-to-month basis. LDI also leases on a per minute basis switching and
network capacity in Davenport, Iowa; Las Vegas, Nevada; Chattanooga, Tennessee;
and Washington, D.C. In other markets in which LDI operates, it acts as a
switchless reseller, buying minutes of traffic capacity from other providers.
Typically, the service provider posts the Company's billing records on an
electronic bulletin board on a daily basis for retrieval by LDI.
In western Europe, LDI owns and operates a DEX Switch with an international
gateway in London, which is connected to the Company's United States network and
various international facilities-based carriers in Europe. LDI operates mostly
as a switchless reseller in Europe, except with respect to the United Kingdom
residential market. Accordingly, in Europe, LDI purchases minutes of traffic
from other facilities-based carriers.
In the United States, the Company's switching facilities are interconnected
through leased long distance transmission lines. Outside the United States, LDI
uses a combination of leased facilities and acquired IRUs on international fiber
facilities.
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NETWORK UPGRADE AND EXPANSION
By the end of 1998, LDI plans to install switches in New York City, New
York; Chicago, Illinois; Fresno, California; Raleigh, North Carolina; and Tulsa,
Oklahoma, which switches will replace the Company's switch partition and leased
switch capacity in Las Vegas, Nevada; Oakland and Los Angeles, California;
Davenport, Iowa; Chattanooga, Tennessee; Charlotte, North Carolina; and
Washington, D.C. LDI will continue to lease switch partitions in Birmingham,
Alabama and Denver, Colorado and will commence leasing an additional switch
partition in Seattle, Washington. The Company intends to connect each switch to
at least two other switches by DS-3 (45 Mb) leased lines, and connections to
local telephone service will be through DS-1 (1.54 Mb) leased lines. The New
York switch will also act as an international gateway between the Company's
network in the United States and Europe, when it is placed in service in the
third quarter of 1998. The Fort Lauderdale and Fresno switches will also be
upgraded to act as international gateways between South America and the Pacific
Rim, respectively, when traffic justifies.
In Europe, LDI plans to have installed main hub switches in Paris and
Frankfurt by year-end 1998. In addition, the Company intends to add remote
switches in secondary markets including Amsterdam, The Netherlands; Copenhagen,
Denmark; Lyons, France; Madrid, Spain; and Milan, Italy, during the course of
1998.
The following table sets forth the switches the Company's plans to have
installed by year-end 1998:
<TABLE>
<CAPTION>
EXPECTED COMMERCIAL
MARKET NETWORK ELEMENT OPERATION DATE
------ --------------- -------------------
<S> <C> <C>
United States
Fort Lauderdale............. DEX Switch Installed
New York City............... DEX Switch/International Gateway Installed
Fresno...................... DEX Switch(1) Installed
Tulsa....................... DEX Switch Installed
Chicago..................... DEX Switch(2) Installed
Raleigh..................... DEX Switch(3) Installed
Europe(4)
London...................... DEX Switch/International Gateway Installed
Milan....................... ANS Switch Installed
Madrid...................... ANS Switch Installed
Frankfurt................... ANS Switch 4Q'98
AXE10 Switch/International 1Q'99
Gateway(5)
Paris....................... ANS Switch 4Q'98
AXE10 Switch/International 1Q'99
Gateway(5)
Lyons....................... ANS Switch 4Q'98
Copenhagen.................. ANS Switch(5) 4Q'98
Amsterdam................... ANS Switch(5) 4Q'98
</TABLE>
- ---------------
(1) Replaces switch partition and leased switch capacity in Las Vegas, Nevada;
and Oakland and Los Angeles, California.
(2) Replaces leased switch capacity in Davenport, Iowa.
(3) Replaces switch partition and leased switch capacity in Chattanooga,
Tennessee; Charlotte, North Carolina; and Washington, D.C.
(4) LDI also plans to install POPs in at least ten European cities in Europe by
December 31, 1998.
(5) AXE10 Switches replace ANS Switches which will be redeployed in Copenhagen
and Amsterdam, respectively.
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<PAGE> 70
To interconnect its European switching installations, LDI plans to use a
combination of leased lines and purchased fiber optic facilities. The Company
owns or has committed to buy the following fiber optic transmission facilities:
- CANTAT 3 -- United States to United Kingdom (one E-1)
- CANTAT 3 -- United Kingdom to Denmark (one E-1)
- Atlantic Crossing 1 -- New York to London (one STM-1)
- UK - Germany 6 -- United Kingdom to Germany (four E-1s) (currently under
construction)
In addition, LDI has entered into a letter of intent, and placed a deposit
of $1.6 million pursuant to an escrow agreement, to purchase five STM-1s from
Viatel on CIRCE, the planned fiber optic ring between London, Paris, Brussels,
Rotterdam and Amsterdam, which is expected to be operational by the second
quarter of 1999. LDI is also negotiating to purchase an IRU on the FLAG fiber
optic cable between the United Kingdom, Spain and Italy, subject to obtaining
local backhaul from local telecommunications companies in Italy and Spain.
The Company is continuing to explore opportunities for acquiring facilities
in Europe and Asia, in furtherance of its strategy to develop a cost-competitive
multinational network.
NETWORK INFRASTRUCTURE
LDI's network construction policies require that all site configurations be
as identical to each other as possible, so that all of LDI's site technicians
may be able to readily service any site and to reduce training costs. In
furtherance thereof, LDI intends to minimize the number of vendors from whom it
purchases equipment. Each site must have an electric generator; access to at
least two fiber optic cable carriers; 24 hours a day, seven days a week building
security; automatic fire protection systems; and secure 24 hour parking for two
to three personnel.
In the United States and Europe each owned switch site will be connected to
at least two other switches, and all primary switches will be connected to each
other, thereby providing redundancy and increasing the reliability of the
network.
LDI uses or plans to use carrier grade DSC and Ericsson AB switches,
Newbridge Network, Inc. bandwidth management systems, Coherent echo cancelers,
and Tadiran digital cross-connect systems.
LDI intends to employ remote monitoring, maintenance, and management to
reduce service costs and response times. The entire system will be managed with
SS-7 "out-of-band" signaling, which, among other things, will enable rapid call
set-up and real time system monitoring and remediation. All traffic on LDI's
network will be analyzed real-time by an automated fraud management system to be
located in LDI's network management center in Fort Lauderdale. A mirror (fully
redundant) network management center is planned to be located in London, during
the first quarter of 1999.
INTERCONNECTION AGREEMENTS
The Company currently has interconnection agreements with all the RBOCs and
other major LECs in the United States as well as the PTOs in the United Kingdom,
Sweden, The Netherlands and Denmark. During 1998, the Company intends to enter
into interconnection agreements with the PTOs in France, Germany, Italy, Norway,
Switzerland and Austria.
INFORMATION TECHNOLOGY
CURRENT BILLING PLATFORM
In the United States, the Company bills substantially all of its customers,
including all of its dial-around customers, through LEC billing and collection
agreements. LDI downloads call records daily from its carriers. The Company's
data systems track and rate the call records. The information is transmitted to
a billing service bureau, which transmits the data to the appropriate LEC. The
LEC then includes LDI's charges in its customers' bills and performs collection.
LDI invoices a limited number of large SME customers directly on a monthly
basis. In Europe, LDI relies on in-house PC-based billing systems. LDI collects
data from carriers, rates the call records and bills its carrier customers
directly.
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BILLING PLATFORM UPGRADE
The Company believes that advanced, effective and flexible billing and
customer care information systems are vital to support its anticipated growth.
In the United States, LDI has commenced upgrading existing systems, plans
to purchase certain new platforms and plans to outsource certain segments of its
billing where justified. The Company buys off-the-shelf software, which is
customized to suit the Company's needs. The Company retains management
information systems consultants (see "Certain Transactions") to assist it in
selecting and implementing a cost-effective system designed to have the
following key features:
- flexibility with respect to billing for various services and billing
formats;
- ability to support LEC, direct and wholesale/carrier billing;
- scalability for increases in number of customers and calling volume; and
- ability to support detailed management information with respect to
customer care and business performance.
In Europe, the Company has purchased an Oracle-based billing and rating
engine that supports billing in local currencies (GENEVA), from Generic
Technology in Cambridge, England. The Company expects the GENEVA system to be
operational in November 1998. The software will handle retail business and
residential billing, as well as wholesale requirements. The GENEVA software is
currently being used by other European telecommunications providers.
LDI employs its own programming staff to meet ongoing country and product
development/marketing requirements. Outsourcing is used for non-recurring
programming in Oracle and Helpdesk applications. LDI anticipates that the
processing of monthly billing will be outsourced to third parties. The Company
believes that this will lead to reductions in headcount, mailing systems and
postal costs.
COMPETITION
The provision of telecommunications services is extremely competitive and
will become increasingly so as the regulatory barriers to entry into
telecommunications markets are reduced or eliminated. LDI believes that the
non-United States and non-United Kingdom markets into which LDI intends to
expand its operations will experience increased competition and will begin to
resemble the competitive landscape in the United States, in part as a result of
regulatory initiatives. However, it appears that continental European
telecommunications markets may experience price competition more rapidly and
more extensively than was experienced when deregulation occurred in the United
States and the United Kingdom.
Competition for customers is primarily on the basis of price and, to a
lesser extent, on the type and quality of services offered and customer service.
LDI has a large number of competitors which may use their substantial financial
resources to cause severe price competition in the markets in which LDI
operates, which would require LDI to reduce its prices in order to remain
competitive. Many of the Company's larger competitors have lower incremental
transmission costs than the Company due to, among other things, greater use of
owned transmission capacity, more favorable interconnection rates and volume
discounts on transmission. Furthermore, in certain European countries (including
France and Italy), telecommunications companies that make substantial
investments in network infrastructure will receive a substantial discount on
interconnection rates. The Company does not expect to qualify for such a
discount in the foreseeable future. In addition, certain of the Company's
competitors offer customers an integrated full service telecommunications
package consisting of local and long distance voice, data and Internet
transmission. The Company does not offer all of these services and does not
presently plan to do so, which could have a material adverse effect on the
Company's ability to compete.
In the United Kingdom, British Telecom reduced its retail prices pursuant
to the requirements of Oftel. In continental Europe, France Telecom and Deutsche
Telekom have recently taken steps to substantially reduce prices in an effort to
protect their market share and deter competitors, such as the Company. France
Telecom has obtained approval to reduce retail prices on domestic and
international long distance services by an average of 9% during each of 1997 and
1998 and 4.5% during each of 1999 and 2000. Deutsche Telekom has announced that,
subject to regulatory approval, it intends to reduce retail prices on domestic
and
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international long distance service by up to 40%. In the United States, the FCC
adopted rules which are designed to bring downward pressure on international
telephone rates. The FCC is requiring United States international
facilities-based carriers to negotiate lower settlement rates with correspondent
foreign carriers that deliver calls in foreign jurisdictions. The FCC expects
such lower settlement rates to become effective on a transitional basis,
commencing January 1, 1999 for major countries, with lower settlement rates to
become effective for substantially all countries by January 1, 2003.
Corresponding price reductions by LDI could reduce LDI's revenues and margins,
which could have a material adverse effect on LDI's business. The Company has
experienced, and expects to continue to experience, declining revenue per
billable minute in all of its markets, in part as a result of increasing
worldwide competition within the telecommunications industry. LDI also
experiences customer attrition, or "churn," as a result of the highly
competitive nature of its markets and expects current levels of churn to
continue or increase.
LDI's success will depend upon its ability to compete with a variety of
other telecommunications providers in each of its markets. In the United States,
the long distance business is dominated by AT&T, MCI, Sprint and WorldCom and
includes numerous other carriers for domestic and international long distance
calls. Congress has substantially amended the Communications Act by enacting the
1996 Act, making RBOCs eligible, subject to FCC approval, to offer domestic long
distance and international telecommunications services in their "in region"
service areas, where they control essential facilities such as local lines
connecting to the premises of customers. The FCC also has substantially reduced
the regulatory constraints on AT&T, LDI's largest competitor, by declaring AT&T
to be "non-dominant," first in the domestic long distance market and more
recently in the international market, thus, granting AT&T more pricing and
service flexibility and permitting it to compete more effectively with smaller
inter-exchange carriers such as LDI.
In Europe, LDI's competitors include (i) PTOs, (ii) alliances such as
AT&T's alliance with Unisource (itself a joint venture among Telecom
Netherlands, Telia AB and Swiss Telecom PTT), and Sprint's alliance with
Deutsche Telekom and France Telecom, known as "Global One," (iii) companies
offering international telecommunications services, such as Esprit, Econophone,
Inc., Primus, Viatel and RSL Communications, Ltd., (iv) new entrants into the
European telecommunications industry which are partially owned by large European
industrial or utilities companies such as Arcor Mannesmann in Germany, Omnitel
in Italy and Energis in the United Kingdom, and (v) other companies with
business plans similar in varying degrees to LDI's.
Because all of the Company's targeted European markets (other than the
United Kingdom) have only recently liberalized or are still in the process of
liberalizing the provision of telephone services, customers in these markets are
not accustomed to obtaining services from competitors to PTOs and may be
reluctant to use new providers, such as the Company. PTOs also generally have
certain competitive advantages over the Company and other providers due to their
control of local connectivity, their extensive ownership of facilities, their
ability to delay or prevent equal access to lines and the reluctance of some
regulators to adopt policies and grant regulatory approvals that would result in
increased competition for the local PTO. PTOs are able to threaten and implement
disconnection if an invoice is unpaid, while LDI cannot threaten or arrange for
disconnection of a customer where LDI is not the local service provider.
The WTO recently concluded an agreement, known as the WTO Agreement, which
opens the telecommunications markets of the signatory countries to foreign
carriers on varying dates beginning February 5, 1998. The WTO Agreement is
subject to legislative ratification in many of the 70 signatory countries.
Although the WTO Agreement may open additional markets to LDI or broaden the
permissible services that LDI can provide in certain markets, the WTO Agreement
also may subject LDI to greater competitive pressures in its markets, with the
risk of losing customers to other carriers and reductions in LDI's rates. See
"-- Regulation -- World Trade Organization Initiatives."
LDI also may experience competition in one or more of its markets from
competitors utilizing new or alternative technologies and/or transmission
methods, including cable television companies, wireless telephone companies,
satellite owners and resellers, Internet service providers, electric and other
utilities, railways, microwave carriers and large end users that have private
networks. Existing telecommunications
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companies, including AT&T, are implementing plans to offer voice
telecommunications services over the Internet at substantially reduced prices.
Each of the markets in which LDI offers or intends to offer its services
will present unique competitive factors. There can be no assurance that LDI will
be able to effectively compete in any given market and the success of LDI's
strategy in any one market is not necessarily indicative of its ability to
succeed in any other market. See "Risk Factors -- Competition."
REGULATION
A summary discussion of the regulatory frameworks in certain geographic
regions in which LDI operates or has targeted for penetration is set forth
below. This discussion is intended to provide a general outline of the more
relevant regulations and current regulatory posture of the various jurisdictions
and is not intended as a comprehensive discussion of such regulations or
regulatory posture. There can be no assurance that future regulatory, judicial
or legislative changes will not have a material adverse effect on LDI, that
domestic or international regulators or third parties will not raise material
issues with regard to LDI's compliance or noncompliance with applicable laws and
regulations or that other regulatory activities will not have a material adverse
effect on LDI. See "Risk Factors -- Regulatory Restrictions."
UNITED STATES
LDI's United States operations are subject to extensive federal and state
regulation. Federal laws and FCC regulations apply to interstate
telecommunications (including international telecommunications that originate or
terminate in the United States), while particular state regulatory authorities
have jurisdiction over telecommunications originating and terminating within the
state.
Federal. The FCC currently regulates LDI as a non-dominant carrier with
respect to both its international and domestic long distance services. In the
domestic, as distinguished from the international sector, the FCC abstains from
closely regulating the services and charges of non-dominant carriers.
Nevertheless, the FCC acts upon complaints against such carriers for failure to
comply with statutory obligations or with the FCC's rules, regulations and
policies. The FCC also has the power to impose more stringent regulatory
requirements on LDI and to change its regulatory classification. In the current
regulatory atmosphere, LDI believes that the FCC is unlikely to do so with
respect to LDI's international or domestic service offerings.
FCC policy and rules authorize (without the need to obtain specific service
authorizations) a non-dominant carrier to provide domestic interstate
telecommunications services, and generally to resell international private
leased lines connected to the PSTN in Canada, Sweden, the United Kingdom,
Australia, The Netherlands or New Zealand. In the international sector, specific
FCC authorizations, which LDI has acquired, are required for the resale of
switched and private line services of United States facilities-based carriers,
and to provide telecommunications services, both switched and private line, as a
facilities-based carrier by acquiring circuits on various undersea cables or
leasing satellite facilities. The FCC reserves the right to condition, modify or
revoke such domestic and international authority for violations of the
Communications Act or the FCC's regulations, rules or policies promulgated
thereunder. Although LDI believes the probability to be remote, a rescission by
the FCC of LDI's domestic or international authority or a refusal by the FCC to
grant additional international authority would have a material adverse effect on
LDI.
LDI, as a non-dominant carrier, is required to file with the FCC domestic
and international tariffs containing charges and related practices, regulations
and classifications. The FCC presumes the tariffs of non-dominant carriers to be
lawful. The FCC could, however, investigate LDI's tariffs, upon its own motion
or upon complaint by a member of the public. As a result of any such
investigation, the FCC could order LDI to revise its tariffs, or the FCC could
prescribe revised tariffs.
LDI holds global facilities-based authorization under Section 214 of the
Communications Act for international resale carriers which permits LDI to
provide services or use facilities between the United States and all other
countries and authorization under Section 214 for resale of private lines
connected to the PSTN between the United States and the United Kingdom. LDI
holds all necessary Section 214 authorizations for conducting its present
business but may need additional authority in the future. LDI is authorized to
resell
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international private lines to Canada, Sweden, the United Kingdom, Australia,
The Netherlands and New Zealand, for the provision of voice and data services.
The FCC recently expanded carrier identification codes from "10xxx" to a
"1010xxx" format. There can be no assurance that the change in format will not
have a material adverse effect on the Company's dial-around business.
The FCC also has proposed rules (which may or may not be adopted in their
proposed form) which are designed to bring downward pressure on international
telephone rates. The FCC is proposing to require United States international
facilities-based carriers to pay lower settlement rates to their correspondent
foreign carriers. Any resulting savings to the United States facilities-based
carriers might be passed along to their customers in the form of reduced rates
for international calls.
The FCC requires long distance carriers to pay access charges to payphone
providers for calls made from payphones to toll-free numbers administered by
long distance carriers. As of October 7, 1997, all long distance carriers,
irrespective of their annual toll revenues, must pay to each payphone operator
$.284 for each access or toll-free call made from the operator's payphones
unless the payphone operator and the long distance carrier agree upon a
different rate of compensation. There can be no assurance that LDI will be able
to fully pass this cost on to its customers or that doing so will not result in
a loss of customers.
State. The intrastate long distance operations of LDI are subject to
various state laws and regulations. In addition, the majority of the states
require the Company to register or apply for certification prior to initiating
intrastate interexchange telecommunications service. Most states also require
LDI to file and maintain detailed tariffs listing their rates for intrastate
service. To date, the Company is certified to provide intrastate interexchange
telecommunications services in 49 states and the District of Columbia. The laws
of certain states, including the rules, regulations and policies of certain
state regulatory authorities, require entities such as the Company to obtain
prior approval or to file ratifications of certain securities issuances,
including, in certain cases, the Offering. The Company has filed notifications
with state regulatory authorities and is seeking approval of the Offering, where
required. While many of such authorities have granted approval, no assurances
can be given that the Company will receive such approvals from all of the states
in which it is certified. State issued certificates of authority to provide
intrastate interexchange telecommunications services can generally be
conditioned, modified, canceled, terminated or revoked by state regulatory
authorities for failure to comply with state law and/or the rules, regulations
and policies of the state regulatory authorities. Fines and other penalties also
may be imposed for such violations.
UNITED KINGDOM
The telecommunications services provided by LDI in the United Kingdom are
regulated by Oftel, an independent regulatory body. Since the break-up of the
United Kingdom telecommunications duopoly consisting of British Telecom and
Mercury in 1991, it has been the stated goal of Oftel to create a competitive
marketplace from which detailed regulation could eventually be withdrawn.
In 1991, a "multi-operator" policy was established to introduce increased
competition in the market for telecommunication services and infrastructure.
Under the multi-operator policy, the United Kingdom Department of Trade and
Industry (the "DTI") will recommend the grant of a license to operate a
telecommunications network to any applicant that the DTI believes has a
reasonable business plan and where there are no other overriding considerations
not to grant such license. All public telecommunications operators and
international simple resellers operate under individual licenses granted by the
Secretary of State for Trade and Industry pursuant to the Telecommunications Act
1984. Most telecommunications systems with compatible equipment that are
authorized to be run under an individual license granted under the
Telecommunications Act 1984 are permitted to interconnect to British Telecom's
network, although the United Kingdom government has indicated that entitlement
to interconnection with British Telecom's network may depend on types of
services provided by an operator rather than compatibility of equipment in the
future. Under the terms of British Telecom's license, it is required to allow
any such licensed operator to interconnect its system to British Telecom's
system, unless it is not reasonably practicable to do so (e.g., due
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to incompatible equipment). Oftel has stated that the categories of companies
that qualify for interconnection services consist of those network operators
that are making significant contributions to infrastructure competition by
installing transmission capacity or international simple resale operators making
significant contributions to competition in their respective international
market.
Since 1992, the United Kingdom government has permitted competition in the
provision of "any to any" international services over leased lines where calls
originate and terminate on the PSTN. LDI, through its subsidiary, LDI Ltd.,
holds an ISR license in the United Kingdom. An ISR license entitles LDI to
resell international message, telephone and private line services. Provided that
Oftel is satisfied that the licensee is making a significant contribution to
competition in the market for international telephony services, the ISR license
also enables the licensee to interconnect with, and lease capacity at wholesale
rates from, British Telecom, Mercury and other public telecommunications
operators. LDI Ltd. has an interconnection agreement with British Telecom in the
United Kingdom and implementation was completed in May 1998. As of January 1,
1998, ISR was replaced by ISVR (international simple voice resale) which license
permits operators who lease international private leased circuits to conduct all
activities previously permitted by an ISR license. LDI Ltd. was granted an ISVR
as of December 31, 1997.
In the United Kingdom, there was until recently a duopoly on ownership of
international cable and satellite facilities vested with British Telecom and
Mercury. All other operators were required to buy leased capacity from British
Telecom or Mercury, rather than acquiring IRUs on existing cable routes. This
constraint was removed in December 1996 when the United Kingdom government began
to issue IFLs. An IFL authorizes its holder to provide international
telecommunication services over and run its own international infrastructure and
systems. There is no limit on the number of these licenses that may be issued.
LDI was awarded an IFL on December 19, 1996. The provision of international
services by means of the IFL to countries not signatories to the WTO Agreement
is subject to proportionate return and parallel accounting conditions. Those
conditions exist in all IFL licenses; however, they are not applied to WTO
signatory countries. In addition, United Kingdom regulations specify that equal
access be available in the United Kingdom by January 1, 2000, although there can
be no assurance that equal access will actually be implemented by such date.
EUROPEAN UNION
Most EU member states (except for countries such as the United Kingdom,
Sweden and Finland, which are already substantially liberalized) are in the
initial stages of regulatory liberalization. Regulatory liberalization in these
countries may occur either because the EU member state decides to open its own
market (e.g., the United Kingdom, Sweden and Finland) or because it is required
to do so by one or more regulations or directives issued by the institutions of
the European Communities. National governments must pass legislation within
their countries to give effect to EU directives. See "Risk Factors -- Regulatory
Restrictions."
In 1990, the European Commission issued a Directive on Competition in the
Markets for Telecommunications Services (the "Services Directive") requiring
each EU member state to abolish its existing monopolies in the provision of all
telecommunications services other than voice telephony to the public. The
Services Directive did not require the liberalization of telecommunications
infrastructure, nor did it apply to telex, mobile telephony, paging or satellite
services. The effect of the Services Directive was to direct EU member states to
permit the competitive provision of all services other than voice telephony to
the public, including value-added services and voice services within closed user
groups. However, as a consequence of inconsistent local implementation of the
Services Directive through the adoption of national legislation, there are
differing interpretations as to the definition of voice telephony, which can be
reserved to the PTOs in those countries which have a derogation from the
implementation of the Services Directive, and permitted value-added and closed
user group services, which can be provided by competitors. The European
Commission generally has taken a narrow view of the definition of voice
telephony, declaring that voice services may not be reserved to the PTOs if (i)
dedicated customer access is used to provide the service, (ii) the service
confers new value-added benefits on users (such as alternative billing methods)
or (iii) calling is limited by a service provider to a group having legal,
economic or professional ties, namely a closed user group.
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In March 1996, the Services Directive was amended by the adoption of the
Full Competition Directive, which required all EU member states, with the
exception of Greece, Ireland, Luxembourg, Portugal and Spain, (i) to allow those
operators which already have licenses to operate telecommunications
infrastructure for specific purposes (such as utility companies or railroad
companies authorized to operate telecommunications networks only for their own
purposes) to supply liberalized services over such "alternative infrastructure"
by July 1, 1996 and (ii) to fully liberalize the supply of all
telecommunications services and the provision of telecommunications
infrastructure by January 1, 1998. The Full Competition Directive encourages EU
member states to accelerate liberalization of voice telephony. Luxembourg has
been granted six months derogation. Ireland and Portugal have been granted a
derogation until January 1, 2000, although Ireland has indicated that it will
liberalize on January 1, 1999. Spain has been granted a derogation entitling it
to delay liberalization until December 1, 1998. Greece has been granted a
derogation entitling it to delay full liberalization until January 1, 2001. Some
EU member states, such as the United Kingdom, Sweden, Finland, The Netherlands
and Denmark, implemented liberalization in advance of the January 1, 1998 EU
deadline.
The Full Competition Directive provides for the abolishment, as of January
1, 1998, of all special or exclusive rights that restrict the provision of
telecommunications services by companies established in the EU without regard to
the destination or origin of the communications involved. However, neither that
directive nor the original Services Directive prevent EU member states from
maintaining restrictions on companies which are not established in the EU in
order to ensure that EU companies are afforded comparable and effective
treatment in third countries. Thus, the United Kingdom has in the past limited
certain international services on routes to countries that do not have open
markets comparable to the United Kingdom's liberalized market. However, in 1994,
the United Kingdom ruled that the United States (in addition to certain other
countries) provides an equivalent open market and since that date has had no
restrictions (subject to operators obtaining the necessary license) on services
provided over leased lines between the United States and the United Kingdom.
During the second half of 1996, the United Kingdom liberalized all international
facilities-based services and international simple resale services between the
United Kingdom and other countries subject to certain conditions. The ability of
EU member states to in the future enact restrictions in respect of companies
which are not established in the EU is expected to be limited to the extent that
the WTO Agreement becomes effective within the EU. See "-- World Trade
Organization Initiatives."
The recently adopted Interconnect Directive requires PTOs and operators
with significant market power (over 25%) to interconnect on non-discriminatory,
transparent, objective cost-based terms with individually licensed operators in
the EU. Operators such as LDI that are entitled to benefit from such
interconnection rights may also be required to provide interconnection, although
not on a cost basis unless the operator has significant market power.
In addition to the abolition of special and exclusive rights, the Council
of the European Communities has stated that it intends to adopt more detailed
regulatory measures in order to harmonize the rules applying in the liberalized
environment which commenced on January 1, 1998. In this respect, a directive
relating to licensing in general and a decision relating to the licensing of
satellite PCS services already have been adopted. However, additional directives
are expected to be adopted by the Council of the European Communities, although
their final content and timing of implementation cannot be predicted at this
time.
Each EU member state in which LDI currently conducts its business has a
different regulatory regime and such differences are expected to continue. The
requirements for LDI to obtain necessary approvals vary considerably from
country to country and are expected to continue to vary. LDI Ltd., and/or its
French and Danish subsidiaries have operator authority in Denmark, The
Netherlands, Finland, Sweden, Germany and France. Applications have been filed
or are in the process of being filed in Italy, Belgium, Switzerland, Norway and
Austria. LDI Ltd. and/or its French and Danish subsidiaries have been granted a
closed user group license in Spain and have filed an application for a closed
user group license in Portugal. In addition, LDI Ltd. has interconnection
agreements with the PTOs in Denmark, The Netherlands and Sweden. Implementation
of these agreements is expected to be completed by the end of 1998.
The Company anticipates that equal access will be available in all western
European countries excluding Spain, Portugal, Ireland and Greece by 2001.
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WORLD TRADE ORGANIZATION INITIATIVES
The WTO recently concluded the WTO Agreement, which opens the
telecommunications markets of the signatory countries to entry by foreign
carriers on varying dates beginning February 5, 1998. The WTO Agreement is
subject to legislative ratification in many of the 70 signatory countries.
Pursuant to the WTO Agreement, United States companies would have foreign market
access for local, long distance and international services, either on a
facilities basis or through resale of existing network capacity. United States
companies also would be permitted to acquire, establish or hold a significant
stake in foreign telecommunications companies. Conversely, foreign companies
would be permitted to enter the domestic United States telecommunications
markets and acquire ownership interests in United States service providers.
Although the WTO Agreement might open additional markets to LDI or broaden the
permissible services that LDI now provides in certain markets, the WTO Agreement
also might subject LDI to greater competitive pressures in its existing markets,
with the risk of customer diversions to competitive carriers and reductions in
LDI's rates.
EMPLOYEES
As of June 30, 1998, LDI had 274 full-time employees worldwide. Of this
total, 159 were based in the United States, 100 in the United Kingdom, 10 in
France, 2 in Italy, 2 in Spain and 1 in Germany. LDI's United States employees
are based principally in its offices in Fort Lauderdale, Florida. In the United
Kingdom, LDI's employees are based principally in its offices in London.
LDI's employees are not represented by a labor union or a collective
bargaining agreement. LDI considers its employee relations to be good.
LITIGATION
LDI is from time to time a party to litigation that arises in the ordinary
course of its business operations or otherwise. LDI is not presently a party to
any litigation that it believes would have a material adverse effect on its
business or operations.
PROPERTIES
The Company leases approximately 8,300 square feet for its executive
offices in Fort Lauderdale, Florida, pursuant to leases which expire January 31,
1999 and for which the Company pays monthly rent of approximately $12,000. LDI
plans to relocate its executive offices to approximately 38,000 square feet in
Fort Lauderdale, Florida and, in connection therewith, has entered into a lease,
to commence upon completion of buildout of the space (currently expected to be
in the fourth quarter of 1998). The lease provides for annual rent of
approximately $368,000 in the first year with annual increases and expires in
January 2008. In addition, LDI has entered into leases with respect to
approximately 13,000 square feet of space in Fort Lauderdale, Florida to serve
as the Company's world wide network management center which provide for a
monthly rent of approximately $13,000 and expire with respect to approximately
4,500 square feet on July 31, 2000 and approximately 8,500 square feet on
October 5, 2001. The Company leases approximately 10,000 square feet in London
for its European headquarters and London switch site. The lease provides for
monthly rent of approximately $12,600 and expires in 2022. The Company also
rents spaces for its smaller sales and marketing offices and its switches in
California, Florida, Illinois, New York, North Carolina, Oklahoma, Paris,
France, Hamburg, Germany, Florence, Italy and Madrid, Spain. The Company
believes that suitable additional space will be available to it at commercially
reasonable rates in all the locations in which it operates or plans to operate.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER SENIOR MANAGEMENT
The following table sets forth certain information with respect to the
directors, executive officers and other senior management of LDI.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Clifford Friedland................... 47 Chairman of the Board, Co-Chief Executive Officer and
European Managing Director
David Glassman....................... 47 President, Co-Chief Executive Officer and Director
Richard Blume........................ 51 Chief Operating Officer and Executive Vice President
John Castellano...................... 45 President of Dynamic Telecom International Inc.
Elizabeth Tuttle..................... 42 Chief Financial Officer
Ian Adam............................. 52 European Managing Director
Robert Van Dyke...................... 52 Senior Vice President of Network Engineering and
Operations
Albert Clark......................... 57 Senior Vice President of Information Technologies
Barry Brooks......................... 42 Non-Voting Director
Lawrence Mestel...................... 36 Director
Olaf N. Krohg........................ 36 Director
Richard Nespola...................... 54 Director
</TABLE>
Directors of LDI each serve for a term of one year or until their
successors are elected. Holders of the Series B Preferred Stock are entitled to
elect two directors and have elected Mr. Krohg as one of such directors. Seruus
Capital Partners LLC ("Seruus"), a consultant to the Company, and First Equity
Capital Securities, Inc. ("FECS"), placement agent for the Company's 1996
private placement, each have the right to require the Company to use its best
efforts to cause a nominee of Seruus or FECS, as the case may be, to be elected
as a non-voting director upon its request. To date, neither Seruus nor FECS has
made such a request.
Clifford Friedland co-founded LDI in May 1993, has been Chairman of the
Board and Co-Chief Executive Officer of LDI since its inception and acting
European Managing Director since March 16, 1998. Mr. Friedland relocated to
London in June 1998 where he is responsible for developing and expanding LDI's
European operations. Prior to forming the Company, Mr. Friedland co-founded
Action Pay-Per-View ("Action PPV"), a 24 hour a day national cable television
programmer that transmitted programming via satellite to over 5 million homes in
the United States. Mr. Friedland served as a Director of Action PPV from 1989 to
1993. Mr. Friedland also co-founded Long Distance America ("LDA"), a long
distance telecommunications reseller, in 1984 and served as its Chairman and a
Director until 1989. Mr. Friedland also co-founded United Satellite
Communications, Inc. ("United Satellite"), a direct to home satellite service
(i.e., DBS or direct broadcast satellite), and served as a Vice President and
Director of United Satellite from 1980 to 1984. In 1981, Mr. Friedland
co-founded United States Satellite Systems, Inc. ("US Satellite"), a Ku-band
satellite system company. Mr. Friedland also co-founded POP Network Inc. ("POP
Network"), a satellite delivered music video channel, and served as its Chairman
from 1978 to 1980.
David Glassman co-founded LDI in May 1993 and has been President, Co-Chief
Executive Officer and a Director of LDI since its inception. From 1989 to 1993,
Mr. Glassman served as consultant to Action PPV. Mr. Glassman co-founded LDA in
1984 and served as its President and a Director until 1989. In 1980, Mr.
Glassman co-founded United Satellite. Mr. Glassman co-founded POP Network and
served as its President from 1978 to 1980.
Richard Blume has been Chief Operating Officer and Executive Vice President
of LDI since March 16, 1998 and has served as President of LDI Wireless, a
division of LDI, since April 1997. From September 1994 to March 1997, Mr. Blume
served as President of Digitable Communications, a communications satellite
transponder brokerage company. Mr. Blume co-founded Action PPV and served as its
President and Chief Operating Officer from 1987 to 1994. From 1984 to 1987, Mr.
Blume was President of his own telecommunications consulting firm. Mr. Blume
co-founded United Satellite and served as its Executive Vice President and a
Director from 1980 to 1984. Mr. Blume co-founded POP Network and served as its
Vice President from 1978 to 1980.
John Castellano has been President of Dynamic Telecom International Inc.
("Dynamic Telecom"), a wholly-owned subsidiary of LDI, since LDI's acquisition
of Dynamic Telecom in May 1993. Mr. Castellano
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also served as President of Dynamic Telecom prior to the LDI acquisition (at
which time Dynamic Telecom was operating under the name International Telecom
Services).
Elizabeth Tuttle has been Chief Financial Officer of LDI since January
1998. From July 1991 to December 1997, Ms. Tuttle served in various capacities
at ITT Corporation, including as its Senior Vice President and Treasurer from
December 1995 to December 1997. From January 1990 to July 1991, Ms. Tuttle was a
Director of Investment Banking of Salomon Brothers Inc ("Salomon Brothers") and
from May 1986 to December 1989 she served as a Vice President of Investment
Banking of Salomon Brothers.
Ian Adam is a consultant to the Company and has served as European Managing
Director of LDI since May 1998. From 1994 to January 1998, Mr. Adam served as
General Manager, Business Development in Paris, France for British Telecom and
from 1991 to 1994, Mr. Adam served as British Telecom's General Manager, Country
Operations, Paris, France. From 1985 to 1991, Mr. Adam served in various
marketing capacities at Wang Laboratories Inc., a computer services company.
From 1979 to 1985, Mr. Adam served in various marketing capacities at General
Electric Information Services Co., a computer services company.
Robert Van Dyke has been Senior Vice President of Network Engineering and
Operations of LDI since July 1998. From March 1995 to June 1998, Mr. Van Dyke
was Vice President of Network Design and Implementation for Intermedia
Communications Inc., an integrated provider of voice, Internet and frame relay
services. From March 1970 to March 1995, Mr. Van Dyke served in various
capacities at GTE/CONTEL, an incumbent LEC.
Albert Clark has been Senior Vice President of Information Technologies of
LDI since June 1998. From June 1997 to June 1998, Mr. Clark was Vice President
of Information Technology for Oasis, a provider of information technology
services for the airline industry. From August 1996 to June 1997, Mr. Clark was
Vice President of Information Technologies for American TelNet, a provider of
800 and 900 pay-per-call services. From August 1993 to May 1996, Mr. Clark
served as Vice President of Information Systems at AmeriQuest Technologies, a
national computer distributor. Prior thereto, Mr. Clark served as an information
technology consultant to various corporations, including CONRAIL, Southeast
Telephone and Communications, National Telephone, City Gas Company of Florida
and Commodore Cruise, and Metro Dade County and the State of Florida.
Barry Brooks has been a Non-Voting Director of LDI since 1995. Mr. Brooks
is a partner, and Chairman of the New York office, of the law firm of Paul,
Hastings, Janofsky & Walker, LLP, New York, New York, corporate counsel to
Island Trading Co. ("Island"), an entertainment holding company, and a principal
shareholder of the Company. See "Principal Shareholders."
Lawrence Mestel has been a Director of LDI since 1995. Since December 1997,
Mr. Mestel has been the Chief Operating Officer of Island and Island Life, an
entertainment and hospitality company. From 1994 to December 1997, Mr. Mestel
served as Chief Operating Officer for Island Entertainment Group, an
entertainment holding company composed of Island Records, Island Pictures,
Island Music Publishing and Island. From 1990 to 1993, Mr. Mestel served as
Chief Financial Officer to Island Records. See "Principal Shareholders."
Olaf N. Krohg has been a Director of LDI since July 1997. Since 1995 Mr.
Krohg has been a Partner of Advent International Corporation, a principal
shareholder of the Company, and is one of the two directors who may be elected
by the holders of Series B Preferred Stock. See "Principal Shareholders." From
1992 to 1994 Mr. Krohg was an investment manager for Advent International plc.
Richard Nespola has been a Director of LDI since December 1997. Mr. Nespola
founded and has been the President and Chief Executive Officer of The Network
Management Group, Inc. ("TNMG"), a global telecommunications consulting firm,
since 1990. Prior to founding TNMG, Mr. Nespola held senior positions with MCI,
Sprint, and Telesphere Communications.
DIRECTOR COMPENSATION
Directors, excluding directors who are also employees of the Company and
non-voting directors, are entitled to receive $10,000 per year as compensation
for their services as director. Mr. Nespola has waived his right to receive such
compensation.
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<PAGE> 80
EXECUTIVE COMPENSATION
The following table discloses compensation for fiscal year 1997 received by
the Company's Co-Chief Executive Officers and the Company's other most highly
compensated executive officers whose total salary and bonus for 1997 exceeded
$100,000 (the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) OPTIONS (#) COMPENSATION($)
--------------------------- ----------- ------------------- ------------ ---------------
<S> <C> <C> <C> <C>
Clifford Friedland....................... 1997 127,000 1,000,000 23,000(1)
Chairman of the Board and Co-Chief
Executive Officer
David Glassman........................... 1997 127,000 1,000,000 11,000(2)
President and Co-Chief Executive
Officer
Richard Blume............................ 1997(4) 75,000 250,000 --
Chief Operating Officer and Executive
Vice President(3)
John Castellano.......................... 1997 71,961 -- --
President of Dynamic Telecom
Elizabeth Tuttle......................... 1997(5) -- -- --
Chief Financial Officer
</TABLE>
- ---------------
(1) Represents rent paid on apartment used by the Company which is owned by a
corporation owned by Mr. Friedland.
(2) Represents reimbursement of expenses incurred by Mr. Glassman.
(3) Mr. Blume commenced service as Chief Operating Officer and Executive Vice
President on March 16, 1998. Mr. Blume has served as President of LDI
Wireless since April 1997.
(4) Mr. Blume commenced employment with the Company in April 1997.
(5) Ms. Tuttle commenced employment with the Company in January 1998.
The following table sets forth information regarding individual grants of
stock options to purchase Common Stock made by the Company to the named
executive officers pursuant to the Company's stock option plans during 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF % OF SHARES VALUE AT ASSUMED
SECURITIES SUBJECT TO ANNUAL RATES OF
UNDERLYING OPTIONS STOCK PRICE APPRECIATION
OPTIONS GRANTED TO FOR OPTION TERM(1)
GRANTED EMPLOYEES IN EXERCISE PRICE EXPIRATION -------------------------
EXECUTIVE OFFICER (# OF SHARES) FISCAL YEAR ($ PER SHARE) DATE 5% ($) 10% ($)
----------------- ------------- ------------ ---------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Clifford Friedland........... 1,000,000 36% $1.25 6/30/02 $1,600,000 $2,040,000
David Glassman............... 1,000,000 36 $1.25 6/30/02 1,600,000 2,040,000
Richard Blume................ 250,000 9 $1.25 (2) 535,000 914,625
John Castellano.............. -- -- -- -- -- --
Elizabeth Tuttle(3).......... -- -- -- -- -- --
</TABLE>
- ---------------
(1) The potential realizable value at assumed annual rates of 5% and 10% stock
price appreciation for option term were determined by taking the product of
(a) the difference between (i) the product of the per-share market price at
the time of the grant and the sum of one plus the adjusted stock price
appreciation rate (the assumed rate of appreciation compounded annually over
the term of the option) and (ii) the per-share exercise price of the option
and (b) the number of securities underlying the grant at fiscal year-end.
The per-share market price was determined by the Company's Board of
Directors and is equivalent to per-share prices paid for purchases of Common
Stock (or Common Stock equivalents) by unaffiliated third parties within a
reasonable time of grant of the options.
(2) Options vest over a period of approximately three years and expire with
respect to the underlying shares of Common Stock seven years from each
applicable vesting date.
(3) Ms. Tuttle commenced employment with the Company in January 1998.
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<PAGE> 81
1997 STOCK INCENTIVE PLAN
The Board of Directors and the shareholders of the Company have adopted and
approved the 1997 stock incentive plan (the "Stock Incentive Plan"). The Stock
Incentive Plan allows the Company to grant incentive stock options ("ISOs") as
defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), nonqualified stock options ("NSOs"), stock appreciation rights ("SARs")
performance shares and restricted stock (collectively the "Awards"). All of the
Company's executive officers are eligible participants in the Stock Incentive
Plan. The purpose of the Stock Incentive Plan is to advance the interests of the
Company by enhancing its ability to attract, retain and offer an incentive to
key executive officers who are crucial to the future growth and success of the
Company and its subsidiaries. The total number of shares authorized for grant of
Awards under the Stock Incentive Plan is 4,000,000, subject to adjustment in
certain circumstances. The Stock Incentive Plan is administered by the Board of
Directors, which has the authority to, among other things, make Awards. The
Board of Directors has authorized management to include in options previously or
to be granted under the Stock Incentive Plan, a provision that allows for the
accelerated vesting of options in full for employees employed by the Company for
one year or longer or in part pursuant to a formula for employees employed by
the Company for less than one year, in the event of a change of control of the
Company.
The Stock Incentive Plan contains certain limitations applicable only to
ISOs granted thereunder. The price of the shares subject to each ISO shall not
be less than the fair market value of such shares at the time such ISO is
granted. In addition, if an ISO is granted to any individual who, at the time of
such option, owns more than 10% of the total combined voting power of all
classes of capital stock of the Company, subsidiaries and affiliates, the
exercise price per share subject to such ISO shall not be less than 110% of the
fair market value per share at the time of the grant, and the term of the ISO
cannot exceed five years. The exercise price payable by the optionee at the time
of exercise is payable in cash, by check and, in certain instances, by the
delivery of an assignment of shares valued at their fair market value, a
promissory note with terms determined by the Board of Directors, an irrevocable
undertaking by a broker to deliver funds sufficient to pay the exercise price,
or irrevocable instructions to a broker to deliver cash or a check sufficient to
pay the exercise price, or any combination of the foregoing.
As of June 30, 1998, options to purchase 2,000,000 shares of Common Stock
were outstanding under the Stock Incentive Plan, all of which were exercisable
as of such date.
1994 STOCK OPTION PLAN
The Board of Directors and the shareholders of the Company have adopted and
approved the 1994 Employee Stock Option Plan (the "Stock Option Plan"). The
Stock Option Plan allows the Company to grant ISOs, NSOs, SARs and stock
depreciation rights ("SDRs" and collectively, the "Options"). The Stock Option
Plan further provides for the grant of Options, other than ISOs, to officers,
members of the Board of Directors, independent contractors and consultants,
whether or not employees of the Company. The purpose of the Stock Option Plan is
to provide the employees, directors, independent contractors and consultants of
the Company with an added incentive to continue their services to the Company
and to induce them to exert their maximum efforts toward the Company's success.
Options granted under the Stock Option Plan may not be exercisable for terms in
excess of ten years from the date of the grant. In addition, no options may be
granted under the Stock Option Plan later than ten years after the Stock Option
Plan's effective date. The total number of shares with respect to which Options
may be granted under the Stock Option Plan is 5,000,000, subject to adjustment
in certain circumstances. If any Option granted under the Stock Option Plan
expires or terminates for any reason without having been exercised or shall
cease for any reason to be exercisable, the unpurchased shares subject thereto
shall again be available for grant under the Stock Option Plan.
The Stock Option Plan is administered by the Board of Directors of the
Company which may determine, in its discretion, among other things, the
individuals to whom, and the time or times at which, Options shall be granted,
the terms of such Options (whether ISO, NSO and/or SAR or SDR in tandem with a
NSO) and the number of shares to be subject to each Option. The Board of
Directors has authorized management to include in options previously or to be
granted under the Stock Option Plan, a provision that allows for the accelerated
vesting of such options in full for employees employed by the Company for one
year or longer or in part pursuant to a formula for employees employed by the
Company for less than one year, in the event of a change of control of the
Company.
81
<PAGE> 82
The Stock Option Plan contains certain limitations applicable only to ISOs
granted thereunder. The price of the shares subject to each ISO shall not be
less than the fair market value of such shares at the time such ISO is granted.
In addition, if an ISO is granted to any individual who, immediately before the
ISO is to be granted, owns (directly or through attrition) more than 10% of the
total combined voting power of all classes of capital stock of the Company or a
subsidiary or parent of the Company, the exercise price per share subject to
such ISO shall not be less than 110% of the fair market value per share at the
time such ISO is granted and the term of the option cannot exceed five years.
The exercise price payable by the optionee at the time of exercise is payable in
cash, by check and, in certain instances, by the delivery of an assignment of
shares having a value equal to the exercise price or by the delivery of an
interest-bearing promissory note having an original principal balance equal to
the exercise price and an interest rate not below the rate which would result in
imputed interest under the Code, or any combination of the foregoing. The
exercise price may also be paid in full by a broker-dealer to whom the optionee
has submitted an exercise notice consisting of a fully endorsed Option, or
through any other medium of payment so authorized.
As of June 30, 1998, options to purchase 3,257,000 shares of Common Stock
were outstanding under the Stock Option Plan, 1,297,636 of which were
exercisable as of such date.
401(k) PLAN
In January 1997, the Company adopted the Long Distance International Inc.
401(k) Employee Savings Plan with an effective date of January 1, 1997. The plan
is available to all employees who were employed on January 1, 1997, and any
employee who has completed six months of service and has attained the age of 21.
An employee may contribute, on a pretax basis, up to 15% of the employee's total
annual wages. Employee contributions are fully vested and non-forfeitable. The
Company may, in its discretion, make voluntary matching contributions. As of
June 30, 1998, no such matching contributions had been made.
EMPLOYMENT AGREEMENTS
On July 1, 1995, LDI entered into a three-year employment agreement with
Clifford Friedland as Chairman and Co-Chief Executive Officer, which agreement
automatically renews for successive one-year periods unless either Mr. Friedland
or the Company gives written notice of termination at least 120 days before the
end of such one-year renewal term. The employment agreement provides that as of
June 1997, Mr. Friedland will receive an annual salary of $150,000. In addition,
if Mr. Friedland is terminated for "cause," as defined in the employment
agreement, then he is entitled to receive severance pay equal to his base salary
and other compensation, and all benefits provided for in the employment
agreement for a period of 60 days from the time notice of termination is given.
If Mr. Friedland is terminated for "good reason," as defined in the employment
agreement, or because of his death or disability, then the Company is obligated
to pay Mr. Friedland, his heirs, administrators or estate, twice the amount of
all base salary that would have been payable through the end of the term during
which such termination occurs. Additionally, should Mr. Friedland terminate the
employment agreement because of a "change of control" of LDI, as defined in the
employment agreement, then he is entitled to receive either (A) two and
nine-tenths times his base salary payable within 30 days of receipt of his
notice of termination if a majority of the Company's Board of Directors opposed
the change of control, or (B) two and one-half times such base salary within 30
days of receipt of his notice of termination if a majority of the Board of
Directors voted in favor of the change of control; provided that such severance
pay does not apply to a change in control for which Mr. Friedland, either as a
director or shareholder of LDI, votes in favor. If Mr. Friedland is terminated
by the Company without cause and without good reason or otherwise in breach of
the employment agreement, then the Company is obligated to pay Mr. Friedland an
amount equal to ten times the compensation that would have been payable to him
through the end of the term of the employment agreement.
On July 1, 1995, LDI entered into a three-year employment agreement with
David Glassman as President and Co-Chief Executive Officer, which agreement
automatically renews for successive one-year periods unless either Mr. Glassman
or the Company gives the other written notice of termination at least 120 days
before the end of such one-year renewal term. The employment agreement provides
that as of June 1997, Mr. Glassman will receive an annual salary of $150,000. In
addition, if Mr. Glassman is terminated for
82
<PAGE> 83
"cause," as defined in the employment agreement, then he is entitled to receive
severance pay equal to his base salary and other compensation, and all benefits
provided for in the employment agreement for a period of 60 days from the time
notice of termination is given. If Mr. Glassman is terminated for "good reason,"
as defined in the employment agreement, or because of his death or disability,
then the Company is obligated to pay Mr. Glassman, his heirs, administrators or
estate, twice the amount of all base salary that would have been payable through
the end of the term during which such termination occurs. Additionally, should
Mr. Glassman terminate the employment agreement because of a "change of control"
of LDI, as defined in the employment agreement, then he is entitled to receive
either (A) two and nine-tenths times his current base salary payable within 30
days of receipt of his notice of termination if a majority of the Company's
Board of Directors opposed the change of control, or (B) two and one-half times
such base salary within 30 days of receipt of his notice of termination if a
majority of the Board of Directors voted in favor of the change of control;
provided that such severance pay does not apply to a change in control for which
Mr. Glassman, either as a director or shareholder of LDI, votes in favor. If Mr.
Glassman is terminated by the Company without cause and without good reason or
otherwise in breach of the employment agreement, then the Company is obligated
to pay Mr. Glassman an amount equal to ten times the compensation that would
have been payable to him through the end of the term of the employment
agreement.
On April 1, 1998, LDI entered into a three-year employment agreement with
Richard Blume as Chief Operating Officer and Executive Vice President of the
Company and as President of LDI Wireless Division. The employment agreement
provides that Mr. Blume will receive an annual base salary of $120,000 as of May
1, 1998, which will be adjusted on the first and second anniversary of the
commencement date of the employment agreement by an amount equal to the annual
increase, if any, in the Consumer Price Index for the New York City metropolitan
area. If Mr. Blume is employed as President of LDI Wireless Division or as an
officer of the Company who has primary responsibility for and oversight of LDI
Wireless on March 31, 2000, then he is entitled to receive a bonus payable in
shares of Common Stock in an amount equal to the quotient of (A) the product of
(i) five percent, multiplied by (ii) the net income of LDI Wireless Division
during the twelfth quarter of the employment period, multiplied by (iii) four,
divided by (B) the then current market price of the Common Stock. Pursuant to
his employment agreement, Mr. Blume received stock options to purchase 250,000
shares of Common Stock at an exercise price of $3.00 per share. All such options
have seven year terms and vest over the term of the employment agreement. The
Company may terminate the employment agreement if Mr. Blume becomes physically
or mentally incapacitated or otherwise unable fully to discharge his duties
under his employment agreement, is convicted of a felony or breaches a material
term of the employment agreement and Mr. Blume shall be entitled to his base
salary through the date on which the termination takes effect. If Mr. Blume is
terminated "without cause," as defined in the employment agreement, he will be
entitled to severance pay equal to his base salary until March 30, 2001 and his
stock options will continue to vest. Mr. Blume is subject to a confidentiality
provision, a six-month non-compete provision and a two-year non-solicitation of
employees of LDI provision.
On July 1, 1997, LDI entered into a three-year employment agreement with
John Castellano as President of Dynamic Telecom, a wholly-owned subsidiary of
LDI. The employment agreement provides that Mr. Castellano will receive an
annual base salary of $90,000, which will be adjusted on the first and second
anniversary of the commencement date of the employment agreement by an amount
equal to the annual increase, if any, in the Consumer Price Index for the Miami,
Florida metropolitan area. The Company may terminate the employment agreement if
Mr. Castellano becomes physically or mentally incapacitated or otherwise unable
fully to discharge his duties under his employment agreement, is convicted of a
felony or breaches a material term of the employment agreement and Mr.
Castellano shall be entitled to his base salary through the date on which the
termination takes effect. If Mr. Castellano is terminated "without cause," as
defined in the employment agreement, he is entitled to receive $22,500 in
severance pay. Mr. Castellano is subject to a confidentiality provision, a
six-month non-compete provision, and a two-year non-solicitation of employees of
LDI provision.
LDI entered into an employment agreement with Elizabeth Tuttle as Chief
Financial Officer of LDI which expires in January 2001. The employment agreement
provides that Ms. Tuttle will receive an annual salary of $100,000. Ms. Tuttle
also received stock options to purchase 120,000 shares of Common Stock at an
83
<PAGE> 84
exercise price of $2.10 per share. Such options vest over the term of the
employment agreement. The Company may terminate the employment agreement if Ms.
Tuttle becomes physically or mentally incapacitated or otherwise unable fully to
discharge her duties under her employment agreement, is convicted of a felony or
breaches a material term of the employment agreement and Ms. Tuttle shall be
entitled to her base salary through the date on which such termination takes
effect. If Ms. Tuttle is terminated "without cause," as defined in the
employment agreement, she is entitled to receive $25,000 in severance pay and
her stock options will continue to vest for a three-month period from the date
of termination. Ms. Tuttle is subject to a confidentiality provision, a
six-month non-compete provision, and a two-year non-solicitation of employees of
LDI provision.
84
<PAGE> 85
CERTAIN TRANSACTIONS
LDI is party to a shareholders' agreement among Clifford Friedland and
David Glassman, Co-Chief Executive Officers and directors of LDI and beneficial
owners of 20% and 21%, respectively, of the Common Stock, and the Advent
Entities, beneficial owners of substantially all of the issued and outstanding
Series B Preferred Stock and the ADV Warrants, pursuant to which, if (i) either
of Messrs. Friedland or Glassman intends to sell his shares of Common Stock, as
a condition to such sale, the Advent Entities shall be entitled to participate
proportionately in such sale (thereby reducing the number of shares to be sold
by Mr. Friedland or Mr. Glassman), or (ii) holders of 51% or more of the voting
power of LDI, excluding the Advent Entities, approve the sale of LDI, and the
Advent Entities also approve such sale, then each party to the shareholders'
agreement will take all action necessary to consummate such sale.
In connection with the purchase by the Advent Entities of Series B
Preferred Stock and the ADV Warrants, the Company granted the Advent Entities
certain preemptive and registration rights. See "Description of the Capital
Stock -- Preemptive Rights" and "-- Registration Rights." On March 20, 1998, the
Company agreed to issue to the Advent Entities warrants to purchase an
additional 1,000,000 shares of Common Stock on substantially the same terms and
conditions, other than with respect to anti-dilution protection, as the ADV
Warrants. See "Description of the Capital Stock -- Warrants." These warrants are
issuable in consideration of the Advent Entities' consent to amendment of the
terms of the Series B Preferred Stock to, among other things, eliminate
adjustment to the redemption price of the Series B Preferred Stock from $10 to
$15 per share, or from $25 million to $37.5 million in the aggregate, plus any
accrued, but unpaid dividends, in the event the Company does not attain at least
$100 million in gross revenues or has a loss before interest, taxes,
depreciation and amortization in excess of $10 million for the fiscal year ended
December 31, 1998. Olaf N. Khrog, a director of the Company, is a partner of
Advent International Corporation.
LDI provides telecommunications services to a hotel owned by Island, which
beneficially owns 11.8% of the Common Stock, on a basis no more favorable to
Island than LDI charges to other of its customers for like services. LDI
received approximately $19,600, $105,100, $137,500, and $59,000 in 1995, 1996,
1997, and during the first two quarters of 1998, respectively, in consideration
for such services. Lawrence Mestel, a director of the Company, is the Chief
Operating Officer of Island. Barry Brooks, a non-voting director of the Company,
is corporate counsel to Island.
LDI provides telecommunications services to a corporation majority owned by
Frederick DeLuca, beneficial owner of 5.6% of the Common Stock, on a basis no
more favorable to such corporation than LDI charges to other of its customers
for like services. LDI received approximately $77,600, $131,100, $387,000, and
$290,000 in 1995, 1996, 1997, and during the first two quarters of 1998,
respectively, in consideration for such services. The Company leases certain
equipment and machinery pursuant to a five-year capital lease agreement with Mr.
DeLuca. The lease payment of approximately $101,000 was prepaid at the inception
of the lease in September 1995 by the issuance of Common Stock. The Company may
purchase the equipment at the end of the lease term for nominal consideration.
TNMG, a telecommunications consulting firm, has rendered consulting
services to the Company in the past and currently has been retained by the
Company to assist it in upgrading its billing and customer care information
systems in the United States and Europe. See "Business -- Information
Technology." Richard Nespola, a Director of the Company, is the President, Chief
Executive Officer and a shareholder of TNMG. Pursuant to a letter agreement
between LDI and TNMG, TNMG will charge LDI for its services on the basis of time
and materials devoted to the project. LDI may terminate or suspend the project
at any time. The Company believes that the terms of its arrangements with TNMG
are no less favorable to the Company than those that would be available from an
unaffiliated third party. LDI paid approximately $324,000 in 1997 and $1,012,000
during the first two quarters of 1998, respectively, in consideration for such
services.
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<PAGE> 86
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of LDI as of June 30, 1998 by (i) each person known by LDI to own
beneficially more than 5% of the outstanding stock of each class of voting
securities of LDI, (ii) each of LDI's Directors, (iii) each of the named
executive officers and (iv) the directors and executive officers as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
------------------------------------
NUMBER OF SHARES PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER OF COMMON STOCK(2) COMMON STOCK(2)
------------------------------------ ------------------ ---------------
<S> <C> <C>
Clifford Friedland (3)...................................... 5,950,000 20%
David Glassman (3).......................................... 6,250,000 21
Richard Blume (4)........................................... 415,825 1.4
John Castellano (5)......................................... 1,244,500 4.3
Elizabeth Tuttle (6)........................................ 20,000 *
Barry Brooks (7)............................................ 82,500 *
Lawrence Mestel (8)......................................... 225,000 *
Olaf N. Krohg (9)........................................... -- --
Richard Nespola............................................. -- --
Advent International Corporation (10)
101 Federal Street
Boston, MA 02110.......................................... 10,994,051 27.7
Island Trading Co. (11)
4 Columbus Circle
5th Floor
New York, NY 10019........................................ 3,386,112 11.8
Frederick DeLuca (12)
3000 N.E. 30th Place
Suite 207
Fort Lauderdale, FL 33306................................. 1,600,000 5.6
All Directors and Executive Officers as a Group (9 persons)
(13)...................................................... 14,187,825 45.3
</TABLE>
- ---------------
*Less than 1%.
(1) Except where otherwise indicated, LDI believes that all persons listed in
the table, based on information provided by such persons, have sole voting
and dispositive power over the securities beneficially owned by them,
subject to community property laws, where applicable. For purposes of this
table, a person is deemed to be the "beneficial owner" of any shares that
are "currently exercisable" i.e., with respect to which such person has the
right to acquire within 60 days from the date of June 30, 1998. For purposes
of computing the percentage of outstanding shares held by each person named
above, any security that is currently exercisable is deemed to be
outstanding, but is not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person. Except where
otherwise indicated, the address of each person listed in the table is c/o
Long Distance International, Inc., 888 South Andrews Avenue, Suite 205, Fort
Lauderdale, Florida 33316.
(2) The number of shares beneficially owned includes both shares of Common Stock
and shares of Series A Preferred Stock held by such persons (the Series A
Preferred Stock is convertible into Common Stock at a conversion rate of
one-to-one). The percentage of ownership is based upon 28,773,311 shares,
comprised of 26,316,755 shares and 2,456,556 shares of Common Stock and
Series A Preferred Stock, respectively, outstanding as of June 30, 1998. See
"Description of the Capital Stock -- Preferred Stock -- Series A Preferred
Stock -- Conversion."
(3) Includes options to purchase 1,000,000 shares of Common Stock under the
Stock Incentive Plan which are currently exercisable.
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<PAGE> 87
(4) Includes options to purchase 95,825 shares of Common Stock which are
currently exercisable. Excludes options to purchase 404,175 shares of
Common Stock under the Stock Option Plan which are not currently
exercisable.
(5) Includes options to purchase 444,500 shares of Common Stock under the Stock
Option Plan which are currently exercisable.
(6) Includes options to purchase 20,000 shares of Common Stock under the Stock
Option Plan which are currently exercisable. Excludes options to purchase
180,000 shares of Common Stock under the Stock Option Plan which are not
currently exercisable.
(7) Includes options to purchase 7,500 shares of Common Stock under the Stock
Option Plan which are currently exercisable.
(8) Excludes securities held by Island, an affiliate of Mr. Mestel, as to which
Mr. Mestel disclaims beneficial ownership.
(9) Excludes the ADV Warrants to purchase 10,994,051 shares of Common Stock
which are currently exercisable held on behalf of certain investment funds
affiliated with Advent International Corporation, an affiliate of Mr.
Krohg, and warrants to purchase 1,000,000 shares of Common Stock that the
Company has agreed to issue to the Advent Entities, as to which Mr. Krohg
disclaims beneficial ownership.
(10) Includes the ADV Warrants to purchase 10,994,051 shares of Common Stock
which are currently exercisable held on behalf of certain investment funds
affiliated with Advent International Corporation. See "Description of the
Capital Stock -- Warrants." Excludes warrants to purchase 1,000,000 shares
of Common Stock that the Company has agreed to issue to the Advent
Entities. See "Certain Transactions."
(11) Excludes securities held by Mr. Mestel, an affiliate of Island, over which
Island disclaims beneficial ownership.
(12) Includes shares of Common Stock issued to a trust for the benefit of Mr.
DeLuca.
(13) Includes options to purchase an aggregate of 2,567,825 shares of Common
Stock under the Stock Incentive Plan and Stock Option Plan which are
currently exercisable. Excludes options to purchase 584,175 shares of
Common Stock under the Stock Option Plan which are not currently
exercisable.
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DESCRIPTION OF THE EXCHANGE NOTES
The Senior Notes were, and the Exchange Notes are to be, issued under an
Indenture, dated as of April 13, 1998 (the "Indenture"), between the Company, as
issuer, and The Bank of New York, as Trustee. A copy of the Indenture is filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part. The following summary of the material provisions of the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Indenture, including the definitions of
certain terms therein and those terms made a part thereof by reference to the
Trust Indenture Act of 1939, as amended. Whenever particular defined terms of
the Indenture not otherwise defined herein are referred to, such defined terms
are incorporated herein by reference. For definitions of certain capitalized
terms used in the following summary, see "-- Certain Definitions."
GENERAL
The terms of the Exchange Notes will be identical in all material respects
to the Senior Notes, except that the Exchange Notes will have been registered
under the Securities Act and therefore will not be subject to certain
restrictions on transfer applicable to the Senior Notes.
The Notes will be unsecured (except to the extent described under
"-- Security" below) unsubordinated obligations of the Company, initially
limited to $225.0 million aggregate principal amount, and will mature on April
15, 2008. Each Note will bear interest at the rate shown on the front cover of
this Prospectus from the Closing Date or from the most recent Interest Payment
Date to which interest has been paid or provided for, payable semiannually (to
Holders of record at the close of business on the April 1 or October 1
immediately preceding the Interest Payment Date) on April 15 and October 15 of
each year, commencing October 15, 1998. See "-- Registration Rights" for a
description of the circumstances under which the interest rate on the Notes may
be increased by .5% per annum until the consummation of a registered exchange
offer or the effectiveness of a shelf registration statement. Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, the City of New York (which initially will
be the principal corporate trust office of the Trustee at 101 Barclay Street,
Floor 21 West, New York, New York 10286); provided that, at the option of the
Company, payment of interest may be made by check mailed to the Holders at their
addresses as they appear in the Security Register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and any integral multiple thereof.
See "Description of the Units -- Book-Entry; Delivery and Form." No service
charge will be made for any registration of transfer or exchange of Notes, but
the Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
The Company may, subject to the covenants described below under "Covenants"
and applicable law, issue additional Notes under the Indenture. The Notes
offered hereby and any additional Notes subsequently issued would be treated as
a single class for all purposes under the Indenture.
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or in part,
at any time or from time to time, on or after April 15, 2003 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holder's last address as it appears in the Security
Register, at the following Redemption Prices (expressed in percentages of
principal amount), plus accrued and unpaid interest, if any, to the Redemption
Date (subject to the right of Holders of record on the relevant Regular Record
Date that is
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on or prior to the Redemption Date to receive interest due on an Interest
Payment Date), if redeemed during the 12-month period commencing April 15 of the
years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2003............................................ 106.125%
2004............................................ 104.083%
2005............................................ 102.042%
2006 and thereafter............................. 100.000%
</TABLE>
In addition, at any time prior to April 15, 2001, the Company may redeem up
to 35% of the aggregate principal amount of the Notes originally issued with the
proceeds of one or more Public Equity Offerings following which a Public Market
occurs, at any time as a whole, or from time to time in part, at a Redemption
Price (expressed as a percentage of principal amount) of 112.250%; provided that
(1) at least $146,250,000 aggregate principal amount of Notes remains
outstanding after each such redemption and (2) notice of any such redemption is
mailed within 60 days after the related Public Equity Offering.
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed or, if the Notes are not listed on a national securities exchange, on a
pro rata basis, by lot or by such other method as the Trustee in its sole
discretion shall deem to be fair and appropriate; provided that no Note of
$1,000 in principal amount or less shall be redeemed in part. If any Note is to
be redeemed in part only, the notice of redemption relating to such Note shall
state the portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note.
SECURITY
In accordance with the Indenture, the Company has purchased and pledged to
the Trustee as security for the benefit of the holders of the Notes the Pledged
Securities in such amount as will be sufficient upon receipt of scheduled
interest and principal payment of such securities to provide for payment in full
of the first six scheduled interest payments due on the Notes. The Company used
approximately $75.5 million of the net proceeds of the Offering to acquire the
Pledged Securities.
The Pledged Securities have been pledged by the Company to the Trustee for
the benefit of the holders of the Notes pursuant to the Pledge Agreement and
will be held by the Trustee in the Pledge Account. Pursuant to the Pledge
Agreement, immediately prior to an Interest Payment Date, the Company may either
deposit with the Trustee from funds otherwise available to the Company cash
sufficient to pay the interest scheduled to be paid on such date or the Company
may direct the Trustee to release from the Pledge Account proceeds sufficient to
pay interest then due on the Notes. In the event the Company exercises the
former option, the Company may direct the Trustee to release a like amount of
proceeds from the Pledge Account. A failure to pay interest on the Notes in a
timely manner through the first six scheduled interest payment dates will
constitute an immediate Event of Default under the Indenture, with no grace or
cure period. The Pledged Securities and Pledge Account will also secure the
repayment of the principal amount and premium on the Notes.
Under the Pledge Agreement, once the Company makes the first six scheduled
interest payments on the Notes, all of the remaining Pledged Securities, if any,
will be released from the Pledge Account and thereafter the Notes will be
unsecured.
REGISTRATION RIGHTS
The Company entered into the Registration Rights Agreement with the
Placement Agents, for the benefit of the Holders, pursuant to which the Company
has agreed to file the Registration Statement of which this Prospectus forms a
part with the Commission. The Registration Rights Agreement provides that the
Company will use its best efforts, at its cost, to file and cause to become
effective the Registration Statement
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with respect to the Exchange Offer. Upon the effectiveness of the Registration
Statement, the Company will offer the Exchange Notes in return for surrender of
the Senior Notes. The Company has agreed to keep the Exchange Offer open for not
less than 20 business days after the date notice of the Exchange Offer is mailed
to Holders. For each Senior Note surrendered to the Company under the Exchange
Offer, the Holder will receive an Exchange Note of equal principal amount.
Interest on each Exchange Note shall accrue from the last Interest Payment Date
on which interest was paid on the Senior Notes so surrendered or, if no interest
has been paid on such Senior Notes, the Closing Date. Under existing Commission
interpretations, the Exchange Notes would be freely transferable by holders
other than affiliates of the Company after the Exchange Offer without further
registration under the Securities Act if the holder of the Exchange Notes
represents that it is acquiring the Exchange Notes in the ordinary course of its
business, that it has no arrangement or understanding with any person to
participate in the distribution of the Exchange Notes and that it is not an
affiliate of the Company, as such terms are interpreted by the Commission;
provided that broker-dealers ("Participating Broker-Dealers") receiving Exchange
Notes in the Exchange Offer will have a prospectus delivery requirement with
respect to resales of such Exchange Notes. The Commission has taken the position
that Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to Exchange Notes with this Prospectus under certain
circumstances. Under the Registration Rights Agreement, the Company is required
to allow Participating Broker-Dealers and other persons, if any, with similar
prospectus delivery requirements to use this Prospectus in connection with the
resale of such Exchange Notes.
A holder of Senior Notes who wishes to exchange such Senior Notes for
Exchange Notes in the Exchange Offer will be required to represent that, among
other things, any Exchange Notes to be received by it will be acquired in the
ordinary course of its business and that at the time of the commencement of the
Exchange Offer it has no arrangement or understanding with any person to
participate in a distribution (within the meaning of the Securities Act) of the
Exchange Notes and that it is not an "affiliate" of the Company, as defined in
Rule 405 of the Securities Act, or if it is an affiliate, that it will comply
with the registration and prospectus delivery requirements of the Securities Act
to the extent applicable.
The Company has filed the Registration Statement (of which this Prospectus
is a part) and by delivery of this Prospectus, the Letter of Transmittal, etc.
has commenced the Exchange Offer pursuant to the Registration Rights Agreement.
In the event that applicable interpretations of the staff of the Securities
and Exchange Commission do not permit the Company to effect the Exchange Offer,
or under certain other circumstances, the Company shall, at its cost, use its
best efforts to cause to become effective a shelf registration statement (the
"Shelf Registration Statement") with respect to resales of the Notes and to keep
such registration statement effective until the expiration of the time period
referred to in Rule 144(k) under the Securities Act after the Closing Date, or
such shorter period that will terminate when all Senior Notes covered by the
Shelf Registration Statement have been sold pursuant to the Shelf Registration
Statement. The Company shall, in the event of such a shelf registration, provide
to each Holder copies of the prospectus, notify each Holder when the Shelf
Registration Statement for the Notes has become effective and take certain other
actions as are required to permit resales of the Notes. A Holder that sells its
Senior Notes pursuant to the Shelf Registration Statement generally will be
required to be named as a selling security holder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the Registration Rights Agreement that are
applicable to such a Holder (including certain indemnification obligations).
In the event that the Exchange Offer is not consummated and a Shelf
Registration Statement is not declared effective on or prior to the date that is
six months after the Closing Date the interest rate on the Notes shall be
increased by .5% per annum until the Exchange Offer is consummated or the Shelf
Registration Statement is declared effective.
The Company is entitled to close the Exchange Offer 20 business days after
the commencement thereof, provided that it has accepted all Senior Notes
theretofore validly surrendered in accordance with the terms of the Exchange
Offer. Senior Notes not tendered in the Exchange Offer shall be subject to all
of the terms and conditions specified in the Indenture and to the transfer
restrictions described in "Transfer Restrictions."
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This summary of certain provisions of the Registration Rights Agreement
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is filed as an exhibit to the Registration Statement
of which this Prospectus forms a part.
RANKING
The indebtedness evidenced by the Notes will rank pari passu in right of
payment with all existing and future unsubordinated indebtedness of the Company
and senior in right of payment to all existing and future subordinated
indebtedness of the Company. As of June 30, 1998, after giving effect to the
Offering, LDI had $213.5 million of long-term indebtedness outstanding.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other capitalized
terms used herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or is merged into or consolidated
with a Restricted Subsidiary or assumed in connection with an Asset Acquisition
by a Restricted Subsidiary, whether or not Incurred in connection with, or in
anticipation of, such Person becoming a Restricted Subsidiary or such Asset
Acquisition; provided that Indebtedness of such Person which is redeemed,
defeased, retired or otherwise repaid at the time of or immediately upon
consummation of the transactions by which such Person becomes a Restricted
Subsidiary or such Asset Acquisition shall not be Acquired Indebtedness.
"Adjusted Consolidated Net Income" means, for any period the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income (or loss) of any Person that is not a Restricted Subsidiary,
except (x) with respect to net income, to the extent of the amount of dividends
or other distributions actually paid to the Company or any of its Restricted
Subsidiaries by such Person during such period and (y) with respect to net
losses, to the extent of the amount of Investments made by the Company or any of
its Restricted Subsidiaries in such Person during such period; (ii) solely for
the purposes of calculating the amount of Restricted Payments that may be made
pursuant to clause (C) of the first paragraph of the "Limitation on Restricted
Payments" covenant described below (and in such case, except to the extent
includable pursuant to clause (i) above), the net income (or loss) of any Person
accrued prior to the date it becomes a Restricted Subsidiary or is merged into
or consolidated with the Company or any of its Restricted Subsidiaries or all or
substantially all of the property and assets of such Person are acquired by the
Company or any of its Restricted Subsidiaries; (iii) the net income of any
Restricted Subsidiary to the extent that the declaration or payment of dividends
or similar distributions by such Restricted Subsidiary of such net income is not
at the time permitted by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Restricted Subsidiary; (iv) any gains or losses
(on an after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the "Limitation on Restricted Payments"
covenant described below, any amount paid or accrued as dividends on Preferred
Stock of the Company or any Restricted Subsidiary owned by Persons other than
the Company and any of its Restricted Subsidiaries; (vi) all extraordinary gains
and extraordinary losses; and (vii) any compensation expense paid or payable
solely with Capital Stock (other than Disqualified Stock) of the Company or any
options, warrants or other rights to acquire Capital Stock (other than
Disqualified Stock) of the Company.
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the
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extent resulting from write-ups of capital assets (excluding write-ups in
connection with accounting for acquisitions in conformity with GAAP), after
deducting therefrom (i) all current liabilities of the Company and its
Restricted Subsidiaries (excluding intercompany items) and (ii) all goodwill,
trade names, trademarks, patents, unamortized debt discount and expense and
other like intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP and filed with the Commission or provided to
the Trustee pursuant to the "Commission Reports and Reports to Holders"
covenant.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries; provided that such Person's
primary business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such investment or (ii)
an acquisition by the Company or any of its Restricted Subsidiaries of the
property and assets of any Person other than the Company or any of its
Restricted Subsidiaries that constitute substantially all of a division or line
of business of such Person; provided that the property and assets acquired are
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of the Company or any of its
Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transaction but excluding any
Lien granted in compliance with the "Limitation on Liens" covenant) in one
transaction or a series of related transactions by the Company or any of its
Restricted Subsidiaries to any Person other than the Company or any of its
Restricted Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets (other than the Capital Stock of, or
other Investment in, an Unrestricted Subsidiary) of the Company or any of its
Restricted Subsidiaries outside the ordinary course of business of the Company
or such Restricted Subsidiary and, in each case, that is not (A) a Restricted
Payment permitted under the "Limitation on Restricted Payments" covenant, (B) a
Permitted Investment under clause (vii) or (viii) of the definition thereof or
(C) governed by the provisions of the Indenture applicable to mergers,
consolidations and sales of all or substantially all of the assets of the
Company; provided that "Asset Sale" shall not include (a) sales or other
dispositions of inventory, receivables and other current assets, (b) sales or
other dispositions of assets or the issuance of any Capital Stock of any
Restricted Subsidiary or Permitted Joint Venture for consideration at least
equal to the fair market value of the assets sold or disposed of, provided that
the consideration received would constitute property or assets of the kind
described in clause (B) of the "Limitation on Asset Sales" covenant, including
consideration that consists of technology, licenses or expertise useful in the
business of the Company and its Restricted Subsidiaries, (c) sales or other
dispositions of obsolete or outdated equipment; provided that each such sale or
other disposition or series of such sales or such other dispositions shall not
involve assets that are material to the business of the Company and its
Restricted Subsidiaries, taken as a whole, and (d) sales or other dispositions
during any 12-month period of assets with an aggregate fair market value not in
excess of $1 million.
"Attributable Indebtedness" means when used in connection with a
sale-leaseback transaction referred to in the "Limitation on Sale-Leaseback
Transactions" covenant described below, at any date of determination,
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the product of (i) the net proceeds from such sale-leaseback transaction and
(ii) a fraction, the numerator of which is the number of full years of the term
of the lease relating to the property involved in such sale-leaseback
transaction (without regard to any options to renew or extend such term)
remaining at the date of the making of such computation and the denominator of
which is the number of full years of the term of such lease (without regard to
any options to renew or extend such term) measured from the first day of such
term.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as (i) (a) prior to the occurrence of a
Public Market, a "person" or "group" (within the meaning of Section 13(d) or
14(d)(2) under the Exchange Act) becomes the ultimate "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of Voting Stock representing a
greater percentage of the total voting power of the Voting Stock of the Company,
on a fully diluted basis, than is held by the Existing Stockholders and their
Affiliates on such date and (b) after the occurrence of a Public Market, a
"person" or "group" (within the meaning of Section 13(d) or 14(d)(2) under the
Exchange Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act) of more than 35% of the total voting power of the Voting
Stock of the Company on a fully diluted basis and such ownership represents a
greater percentage of the total voting power of the Voting Stock of the Company,
on a fully diluted basis, than is held by the Existing Stockholders and their
Affiliates on such date; or (ii) individuals who on the Closing Date constitute
the Board of Directors (together with any new directors whose election by the
Board of Directors or whose nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds of the members of the
Board of Directors then in office who either were members of the Board of
Directors on the Closing Date or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
members of the Board of Directors then in office.
"Closing Date" means the date on which the Notes are originally issued
under the Indenture.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non voting) of such Person's equity, other than Preferred Stock of
such Person, whether outstanding on the Closing Date or issued thereafter,
including, without limitation all series and classes of such common stock.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest
Expense, (ii) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary gains or losses or sales of assets),
(iii) depreciation expense, (iv) amortization expense, and (v) all other
non-cash items reducing Adjusted Consolidated Net Income (other than items that
will require cash payments and for which an accrual or reserve is, or is
required by GAAP to be, made), less all non-cash items increasing Adjusted
Consolidated Net Income, all as determined on a consolidated basis for the
Company and its Restricted Subsidiaries in conformity with GAAP; provided that,
if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary,
Consolidated EBITDA shall be reduced (to the extent not otherwise reduced in
accordance with GAAP) by an amount equal to (A) the amount of the
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Adjusted Consolidated Net Income attributable to such Restricted Subsidiary
multiplied by (B) the percentage ownership interest in the income of such
Restricted Subsidiary not owned on the last day of such period by the Company or
any of its Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and the interest component of Capitalized Lease
Obligations paid, accrued or scheduled to be paid or to be accrued by the
Company and its Restricted Subsidiaries during such period; excluding, however:
(i) any amount of such interest of any Restricted Subsidiary if the net income
of such Restricted Subsidiary is excluded in the calculation of Adjusted
Consolidated Net Income pursuant to clause (iii) of the definition thereof (but
only in the same proportion as the net income of such Restricted Subsidiary is
excluded from the calculation of Adjusted Consolidated Net Income pursuant to
clause (iii) of the definition thereof) and (ii) any premiums, fees and expenses
(and any amortization thereof) payable in connection with the offering of the
Notes, all as determined on a consolidated basis (without taking into account
Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of the Company have been filed
with the Commission or provided to the Trustee pursuant to the "Commission
Reports and Reports to Holders" covenant described below, or, with respect to
quarters for which no reports are required to be filed, for which such financial
statements are then available, as determined by the Company (such four fiscal
quarter period being the "Four Quarter Period"); provided that (A) pro forma
effect shall be given to any Indebtedness to be Incurred or repaid on the
Transaction Date; (B) pro forma effect shall be given to Asset Dispositions and
Asset Acquisitions (including giving pro forma effect to the application of
proceeds of any Asset Disposition) that occur during the period beginning on the
first day of such Four Quarter Period and ending on the Transaction Date (the
"Reference Period"), as if they had occurred and such proceeds had been applied
on the first day of such Reference Period; and (C) pro forma effect shall be
given to asset dispositions and asset acquisitions (including giving pro forma
effect to the application of proceeds of any asset disposition) that have been
made by any Person that has become a Restricted Subsidiary or has been merged
with or into, or consolidated with, the Company or any Restricted Subsidiary
during such Reference Period and that would have constituted Asset Dispositions
or Asset Acquisitions had such transactions occurred when such Person was a
Restricted Subsidiary as if such asset dispositions or asset acquisitions were
Asset Dispositions or Asset Acquisitions that occurred on the first day of such
Reference Period; provided that to the extent that clause (B) or (C) of this
sentence requires that pro forma effect be given to an Asset Acquisition or
Asset Disposition, such pro forma calculation shall be based upon the four full
fiscal quarters immediately preceding the Transaction Date of the Person, or
division or line of business of the Person, that is acquired or disposed for
which financial information is available.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity (plus, to the extent not otherwise included, Preferred Stock of the
Company) as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
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"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in "Limitation on Asset Sales" and
"Repurchase of Notes upon a Change of Control" covenants described below and
such Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to the
"Limitation on Asset Sales" and "Repurchase of Notes upon a Change of Control"
covenants described below.
"Existing Stockholders" means Clifford Friedland and David Glassman.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution; provided that for purposes of clause (viii) of
the second paragraph of the "Limitation on Indebtedness" covenant, (x) the fair
market value of any security registered under the Exchange Act shall be the
average of the closing prices, regular way, of such security for the 20
consecutive trading days immediately preceding the sale of Capital Stock and (y)
in the event the aggregate fair market value of any other property (other than
cash or cash equivalents) received by the Company exceeds $10 million, the fair
market value of such property shall be determined by a nationally recognized
investment banking firm and set forth in their written opinion which shall be
delivered to the Trustee.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession; provided, however, that all reports and other financial
information provided by the Company to the Holders of the Notes or the Trustee
shall be prepared in accordance with GAAP as in effect on the date of such
report or other financial information. All ratios and computations contained or
referred to in the Indenture shall be computed in conformity with GAAP applied
on a consistent basis, except that calculations made for purposes of determining
compliance with the terms of the covenants and with other provisions of the
Indenture shall be made without giving effect to (i) the amortization or
write-off of any expenses incurred in connection with the offering of the Notes
and (ii) except as otherwise provided, the amortization of any amounts required
or permitted by Accounting Principles Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered
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into for purposes of assuring in any other manner the obligee of such
Indebtedness of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided that the term "Guarantee" shall
not include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Acquired Indebtedness; provided that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto), but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (i) or (ii) above or (v), (vi)
or (vii) below) entered into in the ordinary course of business of such Person
to the extent such letters of credit are not drawn upon or, if drawn upon, to
the extent such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of placing such property in service or taking delivery and title thereto or
the completion of such services, except Trade Payables, (v) all Capitalized
Lease Obligations of such Person, (vi) all Indebtedness of other Persons secured
by a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; provided that the amount of such Indebtedness shall be
the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness, (vii) all Indebtedness of
other Persons Guaranteed by such Person to the extent such Indebtedness is
Guaranteed by such Person and (viii) to the extent not otherwise included in
this definition, obligations under Currency Agreements and Interest Rate
Agreements. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation, provided (A)
that the amount outstanding at any time of any Indebtedness issued with original
issue discount is the face amount of such Indebtedness less the remaining
unamortized portion of the original issue discount of such Indebtedness at the
time of its issuance as determined in conformity with GAAP, (B) that money
borrowed and set aside at the time of the Incurrence of any Indebtedness in
order to prefund the payment of the interest on such Indebtedness shall not be
deemed to be "Indebtedness" so long as such money is held to secure the payment
of such interest and (C) that "Indebtedness" shall not include any liability for
federal, state, local or other taxes.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers or suppliers in the
ordinary course of business that are, in conformity with GAAP, recorded as
accounts receivable, prepaid expenses or deposits on the balance sheet of the
Company or its Restricted Subsidiaries) or capital contribution to (by means of
any transfer of cash or other property), or any payment for property or services
for the account or use of, or any purchase or acquisition of Capital Stock,
bonds, notes, debentures or other similar instruments issued by, such Person and
shall include (i) the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary and (ii) the fair market value of the Capital Stock (or any other
Investment), held by the Company or any of its Restricted Subsidiaries, of (or
in) any Person that has ceased to be a Restricted Subsidiary, including, without
limitation, by reason of any transaction permitted by clause (iii) of the
"Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries" covenant; provided that the fair market value of the Investment
remaining in any person that has ceased to be
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a Restricted Subsidiary shall not exceed the aggregate amount of Investments
previously made in such person valued at the time such Investments were made
less the net reduction in such Investments. For purposes of the definition of
"Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant
described below, (i) "Investment" shall include the fair market value of the
assets (net of liabilities (other than liabilities to the Company or any of its
Restricted Subsidiaries)) of any Restricted Subsidiary at the time that such
Restricted Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair
market value of the assets (net of liabilities (other than liabilities to the
Company or any of its Restricted Subsidiaries)) of any Unrestricted Subsidiary
at the time that such Unrestricted Subsidiary is designated a Restricted
Subsidiary shall be considered a reduction in outstanding Investments and (iii)
any property transferred to or from an Unrestricted Subsidiary shall be valued
at its fair market value at the time of such transfer.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, (iii) any relocation expenses and severance or
shut-down costs incurred as a result of such Asset Sale, (iv) payments made to
repay Indebtedness or any other obligation outstanding at the time of such Asset
Sale that either (A) is secured by a Lien on the property or assets sold or (B)
is required to be paid as a result of such sale and (v) reserves against
adjustments in the sale price of the asset or assets subject to such Asset Sale
and reserves against any liabilities associated with such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as determined
in conformity with GAAP and (b) with respect to any issuance or sale of Capital
Stock, the proceeds of such issuance or sale in the form of cash or cash
equivalents, including payments in respect of deferred payment obligations (to
the extent corresponding to the principal, but not interest, component thereof)
when received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any Restricted
Subsidiary) and proceeds from the conversion of other property received when
converted to cash or cash equivalents, net of attorney's fees, accountants'
fees, underwriters' or placement agents' fees, discounts or commissions and
brokerage, consultant and other fees incurred in connection with such issuance
or sale and net of taxes paid or payable as a result thereof.
"Offer to Purchase" means an offer to purchase Notes by the Company from
the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that all
Notes validly tendered will be accepted for payment on a pro rata basis; (ii)
the purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Payment Date"); (iii) that any Note not tendered will continue to accrue
interest pursuant to its terms; (iv) that, unless the Company defaults in the
payment of the purchase price, any Note accepted for payment pursuant to the
Offer to Purchase shall cease to accrue interest on and after the Payment Date;
(v) that Holders electing to have a Note purchased pursuant to the Offer to
Purchase will be required to surrender the Note, together with the form entitled
"Option of the Holder to Elect Purchase" on the reverse side of the Note
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the Business Day immediately preceding the Payment
Date; (vi) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a facsimile transmission or
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letter setting forth the name of such Holder, the principal amount of Notes
delivered for purchase and a statement that such Holder is withdrawing his
election to have such Notes purchased; and (vii) that Holders whose Notes are
being purchased only in part will be issued new Notes equal in principal amount
to the unpurchased portion of the Notes surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
integral multiples thereof. On the Payment Date, the Company shall (i) accept
for payment on a pro rata basis Notes or portions thereof tendered pursuant to
an Offer to Purchase; (ii) deposit with the Paying Agent money sufficient to pay
the purchase price of all Notes or portions thereof so accepted; and (iii)
deliver, or cause to be delivered, to the Trustee all Notes or portions thereof
so accepted together with an Officers' Certificate specifying the Notes or
portions thereof accepted for payment by the Company. The Paying Agent shall
promptly mail to the Holders of Notes so accepted payment in an amount equal to
the purchase price, and the Trustee shall promptly authenticate and mail to such
Holders a new Note equal in principal amount to any unpurchased portion of the
Note surrendered; provided that each Note purchased and each new Note issued
shall be in a principal amount of $1,000 or integral multiples thereof. The
Company will publicly announce the results of an Offer to Purchase as soon as
practicable after the Payment Date. The Trustee shall act as the Paying Agent
for an Offer to Purchase. The Company will comply with Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable, in the event that the Company
is required to repurchase Notes pursuant to an Offer to Purchase.
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into, or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; provided that such Person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash
Investments; (iii) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP and reasonable advances to sales representatives; (iv)
Investments received in satisfaction of judgments, bankruptcy, insolvency,
workouts or similar arrangements; (v) loans or advances to employees of the
Company or any Restricted Subsidiary evidenced by unsubordinated promissory
notes that do not in the aggregate exceed at any one time outstanding $3
million; (vi) Interest Rate Agreements and Currency Agreements designed solely
to protect the Company or its Restricted Subsidiaries against fluctuations in
interest rates or foreign currency exchange rates; (vii) Investments in debt
securities or other evidences of Indebtedness (A) that are issued by companies
engaged in the telecommunications business and (B) for which no public market
exists; provided that when each Investment pursuant to this clause (vii) is
made, the aggregate amount of Investments outstanding under this clause (vii)
does not exceed the greater of (I) $2 million and (II) 1% of Consolidated EBITDA
(if positive) for the then most recent four fiscal quarters for which financial
statements of the Company have been filed with the Commission; (viii) Strategic
Investments not to exceed $15 million at any one time outstanding; and (ix)
Investments in Permitted Joint Ventures not to exceed $15 million at any one
time outstanding.
"Permitted Joint Venture" means any Person (other than a Restricted
Subsidiary) whose primary business is related, ancillary or complementary to the
businesses of the Company and its Restricted Subsidiaries at the time of
determination.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made, (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids,
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leases, statutory or regulatory obligations, bankers' acceptances, surety and
appeal bonds, government contracts, performance and return-of-money bonds and
other obligations of a similar nature incurred in the ordinary course of
business (exclusive of obligations for the payment of borrowed money); (v)
easements, rights-of-way, municipal and zoning ordinances and similar charges,
encumbrances, title defects or other irregularities that do not materially
interfere with the ordinary course of business of the Company or any of its
Restricted Subsidiaries; (vi) Liens (including extensions and renewals thereof)
upon real or personal property (including leases on an indefeasible right to use
basis) acquired after the Closing Date; provided that (a) such Lien is created
solely for the purpose of securing Indebtedness Incurred, in accordance with the
"Limitation on Indebtedness" covenant described below, to finance the cost
(including the cost of design, development, acquisition, improvement,
construction, installation or integration) of the item of property or assets
subject thereto and such Lien is created prior to, at the time of or within six
months after the later of the acquisition, the completion of construction or the
commencement of full operation of such property, (b) the principal amount of the
Indebtedness secured by such Lien does not exceed 100% of such cost and (c) any
such Lien shall not extend to or cover any property or assets other than such
item of property or assets and any improvements on such item; (vii) leases or
subleases granted to others that do not materially interfere with the ordinary
course of business of the Company and its Restricted Subsidiaries, taken as a
whole; (viii) Liens encumbering property or assets under construction arising
from progress or partial payments by a customer of the Company or its Restricted
Subsidiaries relating to such property or assets; (ix) any interest or title of
a lessor in the property subject to any Capitalized Lease or operating lease;
(x) Liens arising from filing Uniform Commercial Code financing statements
regarding leases; (xi) Liens on property of, or on shares of Capital Stock or
Indebtedness of, any Person existing at the time such Person becomes, or becomes
a part of, any Restricted Subsidiary; provided that such Liens do not extend to
or cover any property or assets of the Company or any Restricted Subsidiary
other than the property, assets, Capital Stock or Indebtedness of the Person so
acquired; (xii) Liens in favor of the Company or any Restricted Subsidiary;
(xiii) Liens arising from the rendering of a final judgment or order against the
Company or any Restricted Subsidiary of the Company that does not give rise to
an Event of Default; (xiv) Liens securing reimbursement obligations with respect
to letters of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof; (xv) Liens in favor of
customs and revenue authorities arising as a matter of law to secure payment of
customs duties in connection with the importation of goods; (xvi) Liens
encumbering customary initial deposits and margin deposits, and other Liens that
are within the general parameters customary in the industry and incurred in the
ordinary course of business, in each case, securing Indebtedness under Interest
Rate Agreements and Currency Agreements and forward contracts, options, future
contracts, futures options or similar agreements or arrangements designed solely
to protect the Company or any of its Restricted Subsidiaries from fluctuations
in interest rates, currencies or the price of commodities; (xvii) Liens arising
out of conditional sale, title retention, consignment or similar arrangements
for the sale of goods entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business in accordance with the past
practices of the Company and its Restricted Subsidiaries prior to the Closing
Date; (xviii) Liens on or sales of receivables and (xix) Liens that secure
Indebtedness (or letters of credit entered into in the ordinary course of
business) with an aggregate principal amount not in excess of $5 million at any
time outstanding.
"Pledge Account" means an account established with the Trustee pursuant to
the terms of the Pledge Agreement for the deposit of the Pledged Securities to
be purchased by the Company with the net proceeds from the sale of the Notes.
"Pledge Agreement" means the Collateral Pledge and Security Agreement,
dated as of the Closing Date, made by the Company in favor of the Trustee,
governing the disbursement of funds from the Pledge Account, as such agreement
may be amended, restated, supplemented or otherwise modified from time to time.
"Pledged Securities" means the U.S. government securities to be purchased
by the Company and held in the Pledge Account in accordance with the Pledge
Agreement.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's preferred or preference
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equity, whether now outstanding or issued after the Closing Date, including,
without limitation, all series and classes of such preferred stock or preference
stock.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity Offering
has been consummated and (ii) at least 15% of the total issued and outstanding
Common Stock of the Company has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
"Released Indebtedness" means, with respect to any Asset Sale, Indebtedness
(i) which is owed by the Company or any Restricted Subsidiary (the "Obligors")
prior to such Asset Sale, (ii) which is assumed by the purchaser or any
affiliate thereof in connection with such Asset Sale and (iii) with respect to
which the Obligors receive written, unconditional, valid and enforceable
releases from each creditor, no later than the closing date of such Asset Sale.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Services, a division of The McGraw
Hill Companies, and its successors.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Strategic Investments" means (A) Investments that the Board of Directors
has determined in good faith will enable the Company or any of its Restricted
Subsidiaries to obtain additional business that it might not be able to obtain
without making such Investment and (B) Investments in entities the principal
function of which is to perform research and development with respect to
products and services that may be used or useful in the telecommunications
business; provided that the Company or one of its Restricted Subsidiaries are
entitled or otherwise reasonably expected to obtain rights to such products or
services as a result of such Investment.
"Strategic Subordinated Indebtedness" means Indebtedness of the Company
Incurred to finance the acquisition of a Person engaged in a business that is
related, ancillary or complementary to the business conducted by the Company or
any of its Restricted Subsidiaries, which Indebtedness by its terms, or by the
terms of any agreement or instrument pursuant to which such Indebtedness is
Incurred, (i) is expressly made subordinate in right of payment to the Notes and
(ii) provides that no payment of principal, premium or interest on, or any other
payment with respect to, such Indebtedness may be made prior to the payment in
full of all of the Company's obligations under the Notes; provided that such
Indebtedness may provide for and be repaid at any time from the proceeds of a
capital contribution or the sale of Capital Stock (other than Disqualified
Stock) of the Company after the Incurrence of such Indebtedness.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of
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America or any agency thereof, (ii) bankers' acceptances, time deposit accounts,
certificates of deposit and money market deposits maturing within one year of
the date of acquisition thereof issued by a bank or trust company which is
organized under the laws of the United States of America, any state thereof or
any foreign country recognized by the United States, and which bank or trust
company has capital, surplus and undivided profits aggregating in excess of $50
million (or the foreign currency equivalent thereof) and has outstanding debt
which is rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule 436
under the Securities Act) or any money-market fund sponsored by a registered
broker dealer or mutual fund distributor, (iii) repurchase obligations with a
term of not more than 30 days for underlying securities of the types described
in clause (i) above entered into with a bank meeting the qualifications
described in clause (ii) above, (iv) commercial paper, maturing not more than
one year after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's or "A-1"
(or higher) according to S&P, (v) securities with maturities of nine months or
less from the date of acquisition issued or fully and unconditionally guaranteed
by any state, commonwealth or territory of the United States of America, or by
any political subdivision or taxing authority thereof, and rated at least "A" by
S&P or Moody's, (vi) direct obligations of the British, Belgian, Dutch, French,
German or Swiss governments or obligations fully and unconditionally guaranteed
by any of such governments and (vii) certificates of deposit, bank promissory
notes and bankers' acceptances denominated in the currency of any country of the
European Union maturing not more than 365 days after the acquisition thereof and
issued or guaranteed by any one of the 20 largest banks (based on assets as of
the immediately preceding December 31) organized under the laws of any country
in the European Union; provided such bank is not under intervention,
receivership or any similar arrangement at the time of acquisition of such
certificates of deposit, bank promissory notes or bankers' acceptances; provided
that the aggregate principal amount of all obligations and Indebtedness included
in clauses (vi) and (vii) above shall not exceed at any one time outstanding $10
million.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; provided that (A) any Guarantee by the Company or any
Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the
Company or such Restricted Subsidiary (or both, if applicable) at the time of
such designation; (B) either (I) the Subsidiary to be so designated has total
assets of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the "Limitation on Restricted
Payments" covenant described below and (C) if applicable, the Incurrence of
Indebtedness and the Investment referred to in clause (A) of this proviso would
be permitted under the "Limitation on Indebtedness" and "Limitation on
Restricted Payments" covenants described below. The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that immediately after giving effect to such designation (x) all Liens and
Indebtedness of such Unrestricted Subsidiary outstanding immediately after such
designation would, if Incurred at such time, have been permitted to be Incurred
(and shall be deemed to have been Incurred) for all purposes of the Indenture
and (y) no Default or Event of Default shall have occurred and be continuing.
Any such designation by the Board of Directors shall be evidenced to the Trustee
by promptly filing with the Trustee a
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copy of the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
COVENANTS
The Indenture contains, among others, the following covenants.
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on the Closing Date); provided that the Company and any Restricted
Subsidiary may Incur Indebtedness if, after giving effect to the Incurrence of
such Indebtedness and the receipt and application of the proceeds therefrom, the
Consolidated Leverage Ratio would be greater than zero and (i) less than 5 to 1,
for Indebtedness Incurred by the Company, or (ii) less than 2 to 1, for
Indebtedness Incurred by any Restricted Subsidiary.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness outstanding at any time in an aggregate principal amount not to
exceed $100 million, less any amount of Indebtedness permanently repaid as
provided under the "Limitation on Asset Sales" covenant described below; (ii)
Indebtedness owed (A) to the Company evidenced by a promissory note or (B) to
any of its Restricted Subsidiaries; provided that any event which results in any
such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any
subsequent transfer of such Indebtedness (other than to the Company or another
Restricted Subsidiary) shall be deemed, in each case, to constitute an
Incurrence of such Indebtedness not permitted by this clause (ii); (iii)
Indebtedness issued in exchange for, or the net proceeds of which are used to
renew, extend, defease, refinance or refund, then outstanding Indebtedness,
other than Indebtedness Incurred under clause (i), (ii), (iv), (vi), (viii) or
(xii) of this paragraph, and any refinancings thereof in an amount not to exceed
the amount so renewed, extended, defeased, refinanced or refunded (plus
premiums, accrued interest, fees and expenses); provided that Indebtedness the
proceeds of which are used to renew, extend, defease, refinance or refund the
Notes in part or Indebtedness that is pari passu with, or subordinated in right
of payment to, the Notes shall only be permitted under this clause (iii) if (A)
in case the Notes are refinanced in part or the Indebtedness to be refinanced is
pari passu with the Notes, such new Indebtedness, by its terms or by the terms
of any agreement or instrument pursuant to which such new Indebtedness is
outstanding, is expressly made pari passu with, or subordinate in right of
payment to, the remaining Notes, (B) in case the Indebtedness to be refinanced
is subordinated in right of payment to the Notes, such new Indebtedness, by its
terms or by the terms of any agreement or instrument pursuant to which such new
Indebtedness is issued or remains outstanding, is expressly made subordinate in
right of payment to the Notes at least to the extent that the Indebtedness to be
refinanced is subordinated to the Notes; and (C) such new Indebtedness,
determined as of the date of Incurrence of such new Indebtedness, does not
mature prior to the Stated Maturity of the Indebtedness to be renewed, extended,
defeased, refinanced or refunded, and the Average Life of such new Indebtedness
is at least equal to the remaining Average Life of the Indebtedness to be
renewed, extended, defeased, refinanced or refunded; and provided further that
in no event may Indebtedness of the Company be refinanced by means of any
Indebtedness of any Restricted Subsidiary pursuant to this clause (iii); (iv)
Indebtedness (A) in respect of performance, surety or appeal bonds provided in
the ordinary course of business, (B) under Currency Agreements and Interest Rate
Agreements; provided that such agreements (a) are designed solely to protect the
Company or its Restricted Subsidiaries against fluctuations in foreign currency
exchange rates
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or interest rates and (b) do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder and (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
Guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of its Restricted Subsidiaries pursuant to
such agreements, in any case Incurred in connection with the disposition of any
business, assets or Restricted Subsidiary of the Company (other than Guarantees
of Indebtedness Incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary of the Company for the purpose of
financing such acquisition), in a principal amount not to exceed the gross
proceeds actually received by the Company or any Restricted Subsidiary in
connection with such disposition; (v) Indebtedness of the Company, to the extent
the net proceeds thereof are promptly (A) used to purchase Notes tendered in an
Offer to Purchase made as a result of a Change in Control or (B) deposited to
defease the Notes as described below under "Defeasance"; (vi) Guarantees of the
Notes and Guarantees of Indebtedness of the Company by any Restricted Subsidiary
provided the Guarantee of such Indebtedness is permitted by and made in
accordance with the "Limitation on Issuance of Guarantees by Restricted
Subsidiaries" covenant described below; (vii) Indebtedness (including
Guarantees) Incurred to finance the cost (including the cost of design,
development, acquisition, construction, installation, improvement,
transportation or integration) to acquire equipment, inventory or other tangible
assets (including leases on an indefeasible right to use basis) used or useful
in the telecommunications business of the Company and its Restricted
Subsidiaries (including acquisitions by way of Capitalized Lease and
acquisitions of the Capital Stock of a Person that becomes a Restricted
Subsidiary to the extent of the fair market value of the equipment, inventory or
network assets so acquired) by the Company or a Restricted Subsidiary after the
Closing Date; (viii) Indebtedness of the Company not to exceed, at any one time
outstanding, two times the sum of (A) the Net Cash Proceeds received by the
Company after the Closing Date from the issuance and sale of its Capital Stock
(other than Disqualified Stock) to a Person that is not a Subsidiary of the
Company, to the extent (I) such Net Cash Proceeds have not been used pursuant to
clause (C)(2) of the first paragraph or clause (iii), (iv), (vii) or (ix) of the
second paragraph of the "Limitation on Restricted Payments" covenant described
below to make a Restricted Payment and (II) if such Net Cash Proceeds are used
to consummate a transaction pursuant to which the Company Incurs Acquired
Indebtedness, the amount of such Net Cash Proceeds exceeds one-half of the
amount of Acquired Indebtedness so Incurred and (B) 80% of the fair market value
of property (other than cash and cash equivalents) received by the Company after
the Closing Date from the sale of its Capital Stock (other than Disqualified
Stock) to a Person that is not a Subsidiary of the Company, to the extent (I)
such sale of Capital Stock has not been used pursuant to clause (iii), (iv) or
(x) of the second paragraph of the "Limitation on Restricted Payments" covenant
described below to make a Restricted Payment and (II) if such Capital Stock is
used to consummate a transaction pursuant to which the Company Incurs Acquired
Indebtedness, 80% of the fair market value of the property received exceeds
one-half of the amount of Acquired Indebtedness so Incurred; provided in each
case that such Indebtedness does not mature prior to the Stated Maturity of the
Notes and has an Average Life longer than the Notes; (ix) Acquired Indebtedness;
(x) Strategic Subordinated Indebtedness; (xi) subordinated Indebtedness of the
Company (in addition to Indebtedness permitted under clauses (i) through (x)
above and clause (xii) below) in an aggregate principal amount outstanding at
any time not to exceed $100 million, less any amount of such Indebtedness
permanently repaid as provided under the "Limitation on Asset Sales" covenant
described below; and (xii) Indebtedness of the Company and any Restricted
Subsidiary; provided that at the time of the Incurrence of any Indebtedness
under this clause (xii) the amount of Indebtedness under this clause (xii) does
not exceed in aggregate 80% of the accounts receivable (net of accounts more
than 60 days past due and reserves and allowances for doubtful accounts,
determined in accordance with GAAP) of the Company and its Restricted
Subsidiaries on a consolidated basis as set forth on the balance sheet of the
Company most recently filed with the Commission or provided to the Trustee
pursuant to the "Commission Reports and Reports to Holders" covenant.
(b) Notwithstanding any other provision of this "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that the Company or a
Restricted Subsidiary may incur pursuant to this "Limitation on Indebtedness"
covenant shall not be deemed to be exceeded, with respect to any outstanding
Indebtedness, due solely to the result of fluctuations in the exchange rates of
currencies.
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(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens, letters of
credit or other obligations supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included and (2) any Liens
granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, the Company, in its sole discretion, shall classify, and from time to
time may reclassify, such item of Indebtedness and only be required to include
the amount and type of such Indebtedness in one of such clauses.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on or with respect to its Capital Stock (other than (x) dividends or
distributions payable solely in shares of its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to acquire shares of
such Capital Stock and (y) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders) held by Persons other
than the Company or any of its Restricted Subsidiaries, (ii) purchase, redeem,
retire or otherwise acquire for value any shares of Capital Stock of (x) the
Company or an Unrestricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Person other than
the Company or any Wholly Owned Restricted Subsidiary or (y) a Restricted
Subsidiary (including options, warrants or other rights to acquire such shares
of Capital Stock) held by any Affiliate of the Company (other than a Wholly
Owned Restricted Subsidiary) or any holder (or any Affiliate of such holder) of
5% or more of the Capital Stock of the Company, (iii) make any voluntary or
optional principal payment, or voluntary or optional redemption, repurchase,
defeasance, or other acquisition or retirement for value, of Indebtedness of the
Company that is subordinated in right of payment to the Notes (other than the
purchase, repurchase or the acquisition of Indebtedness in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in any case due within one year of the date of acquisition) or (iv) make any
Investment, other than a Permitted Investment, in any Person (such payments or
any other actions described in clauses (i) through (iv) being collectively
"Restricted Payments") if, at the time of, and after giving effect to, the
proposed Restricted Payment: (A) a Default or Event of Default shall have
occurred and be continuing, (B) the Company could not Incur at least $1.00 of
Indebtedness under the first paragraph of the "Limitation on Indebtedness"
covenant or (C) the aggregate amount of all Restricted Payments (the amount, if
other than in cash, to be determined in good faith by the Board of Directors,
whose determination shall be conclusive and evidenced by a Board Resolution)
made after the Closing Date shall exceed the sum of (1) 50% of the aggregate
amount of the Adjusted Consolidated Net Income (or, if the Adjusted Consolidated
Net Income is a loss, minus 100% of the amount of such loss) accrued on a
cumulative basis during the period (taken as one accounting period) beginning on
the first day of the fiscal quarter immediately following the Closing Date and
ending on the last day of the last fiscal quarter preceding the Transaction Date
for which reports have been filed pursuant to the "Commission Reports and
Reports to Holders" covenant plus (2)(A) the aggregate Net Cash Proceeds
received by the Company after the Closing Date from the issuance and sale
permitted by the Indenture of its Capital Stock (other than Disqualified Stock)
to a Person who is not a Subsidiary of the Company, or from the issuance to a
Person who is not a Subsidiary of the Company of any options, warrants or other
rights to acquire Capital Stock of the Company (in each case, exclusive of any
convertible Indebtedness, Disqualified Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are required to be
redeemed, prior to the Stated Maturity of the Notes) and (B) the aggregate Net
Cash Proceeds received after the Closing Date by the Company from the issuance
or sale (other than to a Subsidiary of the Company) of debt securities or shares
of Disqualified Stock that have been converted into or exchanged for Common
Stock (other than Disqualified Stock) of the Company, together with the
aggregate cash received by the Company at the time of such conversion or
exchange, in each case except to the extent such Net Cash Proceeds are used to
Incur Indebtedness pursuant to clause (viii) of the second paragraph of the
"Limitation on Indebtedness" covenant plus (3) an amount equal to the net
reduction in Investments (other than reductions in Permitted Investments) in any
Person resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of assets, in each case to
the Company or any Restricted Subsidiary or from the Net Cash Proceeds from the
sale of any such Investment
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(except, in each case, to the extent any such payment or proceeds are included
in the calculation of Adjusted Consolidated Net Income), or from redesignations
of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as
provided in the definition of "Investments"), not to exceed, in each case, the
amount of Investments previously made by the Company or any Restricted
Subsidiary in such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Notes
including premium, if any, and accrued and unpaid interest, with the proceeds
of, or in exchange for, Indebtedness Incurred under clause (iii) of the second
paragraph of part (a) of the "Limitation on Indebtedness" covenant; (iii) the
repurchase, redemption or other acquisition of Capital Stock of the Company (or
options, warrants or other rights to acquire such Capital Stock) or an
Unrestricted Subsidiary in exchange for, or out of the proceeds of a
substantially concurrent offering of, shares of Capital Stock (other than
Disqualified Stock) of the Company (or options, warrants or other rights to
acquire such Capital Stock); (iv) the making of any principal payment or the
repurchase, redemption, retirement, defeasance or other acquisition for value of
Indebtedness of the Company which is subordinated in right of payment to the
Notes in exchange for, or out of the proceeds of, a substantially concurrent
offering of, shares of the Capital Stock of the Company (other than Disqualified
Stock); (v) payments or distributions, to dissenting stockholders pursuant to
applicable law, pursuant to or in connection with a consolidation, merger or
transfer of assets that complies with the provisions of the Indenture applicable
to mergers, consolidations and transfers of all or substantially all of the
property and assets of the Company; (vi) the purchase, redemption, acquisition,
cancellation or other retirement for value of shares of Capital Stock of the
Company to the extent necessary, in the good faith judgment of the Board of
Directors of the Company, to prevent the loss or secure the renewal or
reinstatement of any license or franchise held by the Company or any Restricted
Subsidiary for any governmental agency; (vii) the declaration or payment of
dividends on the Common Stock of the Company following a Public Equity Offering
of such Common Stock, of up to 6% per annum of the Net Cash Proceeds received by
the Company in all Public Equity Offerings; (viii) prior to the occurrence of a
Public Market, the purchase, redemption, retirement or other acquisition for
value of Capital Stock of the Company, or options to purchase such shares, held
by directors, employees or former directors or employees of the Company or any
Restricted Subsidiary (or their estates or beneficiaries under their estates)
upon death, disability, retirement, termination of employment or pursuant to the
terms of any agreement under which such shares of Capital Stock or options were
issued; provided that the aggregate consideration paid for such purchase,
redemption, acquisition, cancellation or other retirement of such shares of
Capital Stock or options after the Closing Date does not exceed $500,000 in any
calendar year, or $2 million in the aggregate after the Closing Date; (ix)
Investments in any Person the primary business of which is related, ancillary or
complementary to the business of the Company and its Restricted Subsidiaries on
the date of such Investments; provided that the aggregate amount of Investments
made pursuant to this clause (ix) does not exceed the sum of (a) $20 million and
(b) the amount of Net Cash Proceeds received by the Company after the Closing
Date from the sale of its Capital Stock (other than Disqualified Stock) to a
Person who is not a Subsidiary of the Company, except to the extent such Net
Cash Proceeds are used to Incur Indebtedness pursuant to clause (viii) under the
"Limitation on Indebtedness" covenant or to make Restricted Payments pursuant to
clause (C)(2) of the first paragraph, or clause (iii) or (iv) of this paragraph,
of this "Limitation on Restricted Payments" covenant, plus (c) the net reduction
in Investments made pursuant to this clause (ix) resulting from distributions on
or repayments of such Investments or from the Net Cash Proceeds from the sale of
any such Investment (except in each case to the extent any such payment or
proceeds is included in the calculation of Adjusted Consolidated Net Income) or
from such Person becoming a Restricted Subsidiary (valued in each case as
provided in the definition of "Investments"), provided that the net reduction in
any Investment shall not exceed the amount of such Investment; (x) Investments
acquired in exchange for Capital Stock (other than Disqualified Stock) of the
Company; (xi) repurchases of Warrants pursuant to a Repurchase Offer; or (xii)
other Restricted Payments in an aggregate amount not to exceed $2 million;
provided that, except in the case of clauses (i) and (iii), no Default or Event
of Default shall have occurred and be continuing or occur as a consequence of
the actions or payments set forth therein.
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Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof, an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (iii) or (iv) thereof and an Investment referred to in clause (x)
thereof) and the Net Cash Proceeds from any issuance of Capital Stock referred
to in clauses (iii), (iv) and (ix) thereof shall be included in calculating
whether the conditions of clause (C) of the first paragraph of this "Limitation
on Restricted Payments" covenant have been met with respect to any subsequent
Restricted Payments. In the event the proceeds of an issuance of Capital Stock
of the Company are used for the redemption, repurchase or other acquisition of
the Notes, or Indebtedness that is pari passu with the Notes, then the Net Cash
Proceeds of such issuance shall be included in clause (C) of the first paragraph
of this "Limitation on Restricted Payments" covenant only to the extent such
proceeds are not used for such redemption, repurchase or other acquisition of
Indebtedness.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary, (iii) make loans or advances to
the Company or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Indenture or any other
agreements in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements; provided that the encumbrances and
restrictions in any such extensions, refinancings, renewals or replacements are
no less favorable in any material respect to the Holders than those encumbrances
or restrictions that are then in effect and that are being extended, refinanced,
renewed or replaced; (ii) existing under or by reason of applicable law; (iii)
existing with respect to any Person or the property or assets of such Person
acquired by the Company or any Restricted Subsidiary, existing at the time of
such acquisition and not incurred in contemplation thereof, which encumbrances
or restrictions are not applicable to any Person or the property or assets of
any Person other than such Person or the property or assets of such Person so
acquired, and any extensions, refinancings, renewals or replacements of the
agreement containing such encumbrance or restriction; provided that the
encumbrances and restrictions in any such extensions, refinancings, renewals or
replacements are no less favorable in any material respect to the Holders than
those encumbrances or restrictions that are then in effect and that are being
extended, refinanced, renewed or replaced; (iv) in the case of clause (iv) of
the first paragraph of this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant, (A) that restrict in a
customary manner the subletting, assignment or transfer of any property or asset
that is a lease, license, conveyance or contract or similar property or asset,
(B) existing by virtue of any transfer of, agreement to transfer, option or
right with respect to, or Lien on, any property or assets of the Company, or any
Restricted Subsidiary not otherwise prohibited by the Indenture or (C) arising
or agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate, detract from
the value of property or assets of the Company or any Restricted Subsidiary in
any manner material to the Company or any Restricted Subsidiary; (v) with
respect to a Restricted Subsidiary and imposed pursuant to an agreement that has
been entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or property and assets of, such Restricted Subsidiary; (vi)
contained in the terms of any Indebtedness or any agreement pursuant to which
such Indebtedness was issued if (A) the encumbrance or restriction applies only
in the event of a payment default or a default with respect to a financial
covenant contained in such Indebtedness or agreement, (B) the encumbrance or
restriction is not materially more disadvantageous to the Holders of the Notes
than is customary in comparable financings (as determined by the Company) and
(C) the Company determines that any such encumbrance or restriction will not
materially affect the Company's ability to make principal or interest payments
on the Notes; and (vii) provisions contained in agreements or instruments which
prohibit the payment of dividends or the making of other distributions with
respect to any particular class of Capital Stock of a Person other than on a pro
rata basis.
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Nothing contained in this "Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries" covenant shall prevent the Company or any
Restricted Subsidiary from (1) creating, incurring, assuming or suffering to
exist any Liens otherwise permitted in the "Limitation on Liens" covenant or (2)
restricting the sale or other disposition of property or assets of the Company
or any of its Restricted Subsidiaries that secure Indebtedness of the Company or
any of its Restricted Subsidiaries.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary, provided any Investment in such
Person remaining after giving effect to such issuance or sale would have been
permitted to be made under the "Limitation on Restricted Payments" covenant, if
made on the date of such issuance or sale; (iv) issuances or sales of Common
Stock of a Restricted Subsidiary, provided that the Company or such Restricted
Subsidiary applies the Net Cash Proceeds, if any, of any such sale in accordance
with clause (A) or (B) of the "Limitation on Asset Sales" covenant and (v)
issuances and sales of up to 6% of the Common Stock of each Restricted
Subsidiary in connection with employee benefit plans or arrangements.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is pari passu
with or subordinate in right of payment to the Notes ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the Notes by such Restricted Subsidiary
and (ii) such Restricted Subsidiary waives and will not in any manner whatsoever
claim or take the benefit or advantage of, any rights of reimbursement,
indemnity or subrogation or any other rights against the Company or any other
Restricted Subsidiary as a result of any payment by such Restricted Subsidiary
under its Subsidiary Guarantee; provided that this paragraph shall not be
applicable to any Guarantee of any Restricted Subsidiary that existed at the
time such Person became a Restricted Subsidiary and was not Incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary. If the Guaranteed Indebtedness is (A) pari passu with the Notes,
then the Guarantee of such Guaranteed Indebtedness shall be pari passu with, or
subordinated to, the Subsidiary Guarantee or (B) subordinated to the Notes, then
the Guarantee of such Guaranteed Indebtedness shall be subordinated to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
LIMITATION ON TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable to the Company or such Restricted Subsidiary
than could be obtained, at the time of such transaction or, if such transaction
is pursuant to a
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written agreement, at the time of the execution of the agreement providing
therefor, in a comparable arm's-length transaction with a Person that is not
such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view, (ii) any transaction
solely between the Company and any of its Wholly Owned Restricted Subsidiaries
or solely between Wholly Owned Restricted Subsidiaries, (iii) the payment of
reasonable and customary regular fees to directors of the Company who are not
employees of the Company, (iv) any payments or other transactions pursuant to
any tax-sharing agreement between the Company and any other Person with which
the Company files a consolidated tax return or with which the Company is part of
a consolidated group for tax purposes, (v) any Restricted Payments not
prohibited by the "Limitation on Restricted Payments" covenant, (vi) employment
agreements with, and loans and advances to, officers and employees of the
Company and its Restricted Subsidiaries, in each case in the ordinary course of
business or (vii) customary indemnification arrangements in favor of directors
and officers of the Company and its Restricted Subsidiaries. Notwithstanding the
foregoing, any transaction or series of related transactions covered by the
first paragraph of this "Limitation on Transactions with Shareholders and
Affiliates" covenant and not covered by clauses (ii) through (vii) of this
paragraph, the aggregate amount of which exceeds $3 million in value, must be
approved or determined to be fair in the manner provided for in clause (i)(A) or
(B) above.
LIMITATION ON LIENS
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character (including, without limitation, licenses), or any
shares of Capital Stock or Indebtedness of any Restricted Subsidiary, without
making effective provision for all of the Notes and all other amounts due under
the Indenture to be directly secured equally and ratably with (or, if the
obligation or liability to be secured by such Lien is subordinated in right of
payment to the Notes, prior to) the obligation or liability secured by such Lien
unless, after giving effect thereto, the aggregate amount of any Indebtedness so
secured, plus the Attributable Indebtedness for all sale-leaseback transactions
permitted under the "Limitation on Sale-Leaseback Transactions" covenant, does
not exceed 10% of Adjusted Consolidated Net Tangible Assets.
The foregoing limitation does not apply to (i) Liens existing on the
Closing Date; (ii) Liens granted after the Closing Date on any assets or Capital
Stock of the Company or its Restricted Subsidiaries created in favor of the
Holders; (iii) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to the Company or a Wholly Owned
Restricted Subsidiary to secure Indebtedness owing to the Company or such other
Restricted Subsidiary; (iv) Liens securing Indebtedness which is Incurred to
refinance secured Indebtedness which is permitted to be Incurred under clause
(iii) of the second paragraph of the "Limitation on Indebtedness" covenant;
provided that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets securing
the Indebtedness being refinanced; (v) Liens on the Capital Stock of, or any
property or assets of, a Restricted Subsidiary securing Indebtedness of such
Restricted Subsidiary permitted under the "Limitation on Indebtedness" covenant;
or (vi) Permitted Liens.
In the event that the Lien the existence of which gives rise to a Lien
securing the Notes pursuant to the provisions of this covenant ceases to exist,
the Lien securing the Notes required by the first paragraph of this covenant
shall automatically be released and the Trustee shall execute appropriate
documentation.
LIMITATION ON SALE-LEASEBACK TRANSACTIONS
The Company will not, and will not permit any Restricted Subsidiary to
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Company or such
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Restricted Subsidiary, as the case may be, intends to use for substantially the
same purpose or purposes as the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company and
any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within twelve
months after the sale or transfer of any assets or properties is completed,
applies an amount not less than the net proceeds received from such sale in
accordance with clause (A) or (B) of the first paragraph of the "Limitation on
Asset Sales" covenant described below.
LIMITATION ON ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale unless (i) the consideration received by the Company
or such Restricted Subsidiary (including any Released Indebtedness) is at least
equal to the fair market value of the assets sold or disposed of and (ii) at
least 75% of the consideration received (including any Released Indebtedness)
consists of (1) cash, Temporary Cash Investments or Released Indebtedness and
(2) Indebtedness of any Person which is either repaid in cash or sold for cash
within 90 days of such Asset Sale (for purposes of calculating the amount of
such Indebtedness, such Indebtedness shall be valued at its principal amount, if
it matures within 180 days of the consummation of such Asset Sale, or its fair
market value, in all other cases), provided, however, that this clause (ii)
shall not apply to any long-term assignments in capacity in a telecommunications
network. In the event and to the extent that the Net Cash Proceeds received by
the Company or any of its Restricted Subsidiaries from one or more Asset Sales
occurring on or after the Closing Date in any period of 12 consecutive months
exceed 10% of Adjusted Consolidated Net Tangible Assets (determined as of the
date closest to the commencement of such 12-month period for which a
consolidated balance sheet of the Company and its Subsidiaries has been filed
with the Commission or provided to the Trustee pursuant to the "Commission
Reports and Reports to Holders" covenant), then the Company shall or shall cause
the relevant Restricted Subsidiary to (i) within twelve months after the date
Net Cash Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible
Assets (A) apply an amount equal to such excess Net Cash Proceeds to permanently
repay unsubordinated Indebtedness of the Company or any Restricted Subsidiary
providing a Subsidiary Guarantee pursuant to the "Limitation on Issuances of
Guarantees by Restricted Subsidiaries" covenant described above or Indebtedness
of any other Restricted Subsidiary, in each case owing to a Person other than
the Company or any of its Restricted Subsidiaries or (B) invest an equal amount,
or the amount not so applied pursuant to clause (A) (or enter into a definitive
agreement committing to so invest within twelve months after the date of such
agreement), in property or assets (other than current assets) of a nature or
type or that are used in a business (or in a company having property and assets
of a nature or type, or engaged in a business) similar or related to the nature
or type of the property and assets of, or the business of, the Company and its
Restricted Subsidiaries existing on the date of such investment (as determined
in good faith by the Board of Directors, whose determination shall be conclusive
and evidenced by a Board Resolution) and (ii) apply (no later than the end of
the twelve-month period referred to in clause (i)) such excess Net Cash Proceeds
(to the extent not applied pursuant to clause (i)) as provided in the following
paragraph of this "Limitation on Asset Sales" covenant. The amount of such
excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such twelve-month period as set forth in clause (i) of the
preceding sentence and not applied as so required by the end of such period
shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $5 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of Notes on the relevant Payment Date equal to the
Excess Proceeds on such date, at a purchase price equal to 100% of the principal
amount of the Notes, plus accrued interest (if any) to the Payment Date. Upon
the consummation of an Offer to Purchase pursuant to this covenant, the amount
of Excess Proceeds shall be
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deemed to be equal to zero, plus the amount of any Excess Proceeds not
theretofore subject to an Offer to Purchase.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to 101% of the principal amount thereof, plus accrued
interest (if any) to the Payment Date.
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Company which might be outstanding
at the time). The above covenant requiring the Company to repurchase the Notes
will, unless consents are obtained, require the Company to repay all
indebtedness then outstanding which by its terms would prohibit such Note
repurchase, either prior to or concurrently with such Note repurchase.
COMMISSION REPORTS AND REPORTS TO HOLDERS
At all times from and after the earlier of (i) the date of the commencement
of an Exchange Offer or the effectiveness of a Shelf Registration Statement (the
"Registration") and (ii) the date that is six months after the Closing Date, in
either case, whether or not the Company is then required to file reports with
the Commission, the Company shall file with the Commission all such reports and
other information as it would be required to file with the Commission by Section
13(a) or 15(d) under the Securities Exchange Act of 1934 if it were subject
thereto. The Company shall supply the Trustee and each Holder or shall supply to
the Trustee for forwarding to each such Holder, without cost to such Holder,
copies of such reports and other information. In addition, at all times prior to
the earlier of the date of the Registration and the date that is six months
after the Closing Date, the Company shall, at its cost, deliver to each Holder
of the Notes quarterly and annual reports substantially equivalent to those
which would be required by the Exchange Act. In addition, at all times prior to
the Registration, upon the request of any Holder or any prospective purchaser of
the Notes designated by a Holder, the Company shall supply to such Holder or
such prospective purchaser the information required under Rule 144A under the
Securities Act.
EVENTS OF DEFAULT
The following events are defined as "Events of Default" in the Indenture:
(a) default in the payment of principal of (or premium, if any, on) any Note
when the same becomes due and payable at maturity, upon acceleration, redemption
or otherwise; (b) default in the payment of interest on any Note when the same
becomes due and payable, and such default continues for a period of 30 days;
provided that a failure to make any of the first six scheduled interest payments
on the Notes on the applicable Interest Payment Date will constitute an Event of
Default with no grace or cure period; (c) default in the performance or breach
of the provisions of the Indenture applicable to mergers, consolidations and
transfers of all or substantially all of the assets of the Company or the
failure to make or consummate an Offer to Purchase in accordance with the
"Limitation on Asset Sales" or "Repurchase of Notes upon a Change of Control"
covenant; (d) the Company defaults in the performance of or breaches any other
covenant or agreement of the Company in the Indenture or under the Notes (other
than a default specified in clause (a), (b) or (c) above) and such default or
breach continues for a period of 30 consecutive days after written notice by the
Trustee or the Holders of 25% or more in aggregate principal amount of the
Notes; (e) there occurs with respect to any issue or issues of Indebtedness of
the Company or any Significant Subsidiary having an outstanding principal amount
of $5 million or more in the aggregate for all such issues of all such Persons,
whether such Indebtedness now exists or shall hereafter be created, (I) an event
of default that has caused the holder thereof to declare such Indebtedness to be
due and payable prior to its Stated Maturity and such Indebtedness has not been
discharged in full or such acceleration has not been rescinded or annulled
within 30 days of such acceleration and/or (II) the failure to make a principal
payment at the final (but not any interim) fixed maturity and such defaulted
payment shall not have been made, waived or extended within 30 days of such
payment default; (f) any final judgment or order (not covered by insurance) for
the payment of money in excess of $5 million in
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the aggregate for all such final judgments or orders against all such Persons
(treating any deductibles, self-insurance or retention as not so covered) shall
be rendered against the Company or any Significant Subsidiary and shall not be
paid or discharged, and there shall be any period of 30 consecutive days
following entry of the final judgment or order that causes the aggregate amount
for all such final judgments or orders outstanding and not paid or discharged
against all such Persons to exceed $5 million during which a stay of enforcement
of such final judgment or order, by reason of a pending appeal or otherwise,
shall not be in effect; (g) a court having jurisdiction in the premises enters a
decree or order for (A) relief in respect of the Company or any Significant
Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect, (B) appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
the Company or any Significant Subsidiary or for all or substantially all of the
property and assets of the Company or any Significant Subsidiary or (C) the
winding up or liquidation of the affairs of the Company or any Significant
Subsidiary and, in each case, such decree or order shall remain unstayed and in
effect for a period of 30 consecutive days; (h) the Company or any Significant
Subsidiary (A) commences a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or consents to the
entry of an order for relief in an involuntary case under any such law, (B)
consents to the appointment of or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the Company,
or any Significant Subsidiary or for all or substantially all of the property
and assets of the Company or any Significant Subsidiary or (C) effects any
general assignment for the benefit of creditors; or (i) the Pledge Agreement
shall cease to be in full force and effect or enforceable in accordance with its
terms, other than in accordance with its terms.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the outstanding Notes, by written notice to the
Company (and to the Trustee if such notice is given by the Holders), may, and
the Trustee at the request of such Holders shall, declare the principal amount
of, premium, if any, and accrued interest, if any, on the Notes to be
immediately due and payable. Upon a declaration of acceleration, such principal
amount, premium, if any, and accrued interest, if any, shall be immediately due
and payable. In the event of a declaration of acceleration because an Event of
Default set forth in clause (e) above has occurred and is continuing, such
declaration of acceleration shall be automatically rescinded and annulled if the
event of default triggering such Event of Default pursuant to clause (e) shall
be remedied or cured by the Company or the relevant Significant Subsidiary or
waived by the holders of the relevant Indebtedness within 60 days after the
declaration of acceleration with respect thereto. If an Event of Default
specified in clause (g) or (h) above occurs with respect to the Company, the
principal amount of, premium, if any, and accrued interest, if any, on the Notes
then outstanding shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any Holder.
The Holders of at least a majority in principal amount of the outstanding Notes,
by written notice to the Company and to the Trustee, may waive all past defaults
and rescind and annul a declaration of acceleration and its consequences if (i)
all existing Events of Default, other than the nonpayment of the principal
amount of, premium, if any, and interest on the Notes that have become due
solely by such declaration of acceleration, have been cured or waived and (ii)
the rescission would not conflict with any judgment or decree of a court of
competent jurisdiction. For information as to the waiver of defaults, see
"-- Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless: (i)
the Holder gives the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of outstanding
Notes make a written request to the Trustee to pursue the remedy; (iii) such
Holder or Holders offer the Trustee indemnity satisfactory to the Trustee
against any costs, liability or expense; (iv) the Trustee does not comply with
the request within 60
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days after receipt of the request and the offer of indemnity; and (v) during
such 60-day period, the Holders of a majority in aggregate principal amount of
the outstanding Notes do not give the Trustee a direction that is inconsistent
with the request. However, such limitations do not apply to the right of any
Holder of a Note to receive payment of the principal of, premium, if any, or
interest on, such Note or to bring suit for the enforcement of any such payment,
on or after the due date expressed in the Notes, which right shall not be
impaired or affected without the consent of the Holder.
The Indenture will require certain officers of the Company to certify, on
or before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and its Restricted
Subsidiaries and the Company's and its Restricted Subsidiaries' performance
under the Indenture and that the Company has fulfilled all obligations
thereunder, or, if there has been default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. The
Company will also be obligated to notify the Trustee of any default or defaults
in the performance of any covenants or agreements under the Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to any Person or permit any Person to merge with
or into the Company unless: (i) the Company shall be the continuing Person, or
the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or that acquired or leased such property and assets
of the Company shall be a corporation organized and validly existing under the
laws of the United States of America or any jurisdiction thereof and shall
expressly assume, by a supplemental indenture, executed and delivered to the
Trustee, all of the obligations of the Company on all of the Notes and under the
Indenture; (ii) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing; (iii) immediately
after giving effect to such transaction on a pro forma basis, the Company or any
Person becoming the successor obligor of the Notes shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company,
immediately prior to such transaction; (iv) immediately after giving effect to
such transaction on a pro forma basis the Company, or any Person becoming the
successor obligor on the Notes, as the case may be, could Incur at least $1.00
of Indebtedness under the first paragraph of the "Limitation on Indebtedness"
covenant; provided that this clause (iv) shall not apply to (x) a consolidation,
merger or sale of all (but not less than all) of the assets of the Company if
all Liens and Indebtedness of the Company or any Person becoming the successor
obligor of the Notes, as the case may be, and its Restricted Subsidiaries
outstanding immediately after such transaction would, if Incurred at such time,
have been permitted to be Incurred (and all such Liens and Indebtedness, other
than Liens and Indebtedness of the Company and its Restricted Subsidiaries
outstanding immediately prior to the transaction, shall be deemed to have been
Incurred) for all purposes of the Indenture or (y) a consolidation, merger or
sale of all or substantially all of the assets of the Company if immediately
after giving effect to such transaction on a pro forma basis, the Company or any
Person becoming the successor obligor on the Notes shall have a Consolidated
Leverage Ratio equal to or less than the Consolidated Leverage Ratio of the
Company immediately prior to such transaction; and (v) the Company delivers to
the Trustee an Officers' Certificate (attaching the arithmetic computations to
demonstrate compliance with clauses (iii) and (iv) above) and Opinion of
Counsel, in each case stating that such consolidation, merger or transfer and
such supplemental indenture complies with this provision and that all conditions
precedent provided for herein relating to such transaction have been complied
with; provided, however, that clauses (iii) and (iv) above do not apply if, in
the good faith determination of the Board of Directors of the Company, whose
determination shall be evidenced by a Board Resolution, the principal purpose of
such transaction is to change the state of incorporation of the Company and any
such transaction shall not have as one of its purposes the evasion of the
foregoing limitations.
DEFEASANCE
Defeasance and Discharge. The Indenture provides that the Company will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to the
Notes
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(except for, among other matters, certain obligations to register the transfer
or exchange of the Notes, to replace stolen, lost or mutilated Notes, to
maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Company has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance with
the terms of the Indenture and the Notes, (B) the Company has delivered to the
Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
the Company's exercise of its option under this "Defeasance" provision and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit, defeasance and
discharge had not occurred, which Opinion of Counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service to the same
effect unless there has been a change in applicable federal income tax law after
the Closing Date such that a ruling is no longer required or (y) a ruling
directed to the Trustee received from the Internal Revenue Service to the same
effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel
to the effect that the creation of the defeasance trust does not violate the
Investment Company Act of 1940 and after the passage of 123 days following the
deposit, the trust fund will not be subject to the effect of Section 547 of the
United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor
Law, (C) immediately after giving effect to such deposit on a pro forma basis,
no Event of Default, or event that after the giving of notice or lapse of time
or both would become an Event of Default, shall have occurred and be continuing
on the date of such deposit or during the period ending on the 123rd day after
the date of such deposit, and such deposit shall not result in a breach or
violation of, or constitute a default under, any other agreement or instrument
to which the Company or any of its Subsidiaries is a party or by which the
Company, or any of its Subsidiaries is bound, and (D) if at such time the Notes
are listed on a national securities exchange, the Company has delivered to the
Trustee an Opinion of Counsel to the effect that the Notes will not be delisted
as a result of such deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further provides that the provisions of the Indenture will no longer
be in effect with respect to clauses (iii) and (iv) under "Consolidation, Merger
and Sale of Assets" and all the covenants described herein under "Covenants,"
clauses (c) and (d) under "Events of Default" with respect to such clauses (iii)
and (iv) under "Consolidation, Merger and Sale of Assets" and such covenants and
clauses (e) and (f) under "Events of Default" shall be deemed not to be Events
of Default, upon, among other things, the deposit with the Trustee, in trust, of
money and/or U.S. Government Obligations that through the payment of interest
and principal in respect thereof in accordance with their terms will provide
money in an amount sufficient to pay the principal of, premium, if any, and
accrued interest on the Notes on the Stated Maturity of such payments in
accordance with the terms of the Indenture and the Notes, the satisfaction of
the provisions described in clauses (B)(ii), (C) and (D) of the preceding
paragraph and the delivery by the Company to the Trustee of an Opinion of
Counsel to the effect that, among other things, the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such deposit
and defeasance of certain covenants and Events of Default and will be subject to
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred.
Defeasance and Certain Other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, the Company will
remain liable for such payments.
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MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that no
such modification or amendment may, without the consent of each Holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (ii) reduce the principal amount of, or premium, if
any, or interest on, any Note, (iii) change the place or currency of payment of
principal of, or premium, if any, or interest on, any Note, (iv) impair the
right to institute suit for the enforcement of any payment on or after the
Stated Maturity (or, in the case of a redemption, on or after the Redemption
Date) of any Note, (v) reduce the above-stated percentage of outstanding Notes
the consent of whose Holders is necessary to modify or amend the Indenture, (vi)
waive a default in the payment of principal of, premium, if any, or interest on
the Notes or (vii) reduce the percentage or aggregate principal amount of
outstanding Notes the consent of whose Holders is necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the Exchange Notes will initially be
represented by one or more permanent global Notes in definitive, fully
registered form (each a "Global Note") and will be deposited with the Trustee as
custodian for, and registered in the name of, a nominee of DTC. Except in the
limited circumstances described below under "Certificated Notes," owners of
beneficial interests in a Global Note will not be entitled to receive physical
delivery of Certificated Notes (as defined below).
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Exchange Notes represented by such Global Note for
all purposes under the Indenture and the Exchange Notes. No beneficial owner of
an interest in a Global Note will be able to transfer that interest except in
accordance with DTC's applicable procedures, in addition to those provided for
under the Indenture.
Payments of the principal of, and interest on, a Global Note will be made
to DTC or its nominee, as the case may be, as the registered owner thereof. None
of the Company, the Trustee, or any Paying Agent will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in a Global Note or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records of
DTC or its nominee. The Company also expects that payments by participants to
owners of beneficial interests in such Global Note held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in the names of nominees for such customers. Such payments will be the
responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
The Company expects that DTC will take any action permitted to be taken by
a holder of Exchange Notes (including the presentation of Exchange Notes for
exchange as described below) only at the direction of one or more participants
to whose account the DTC interests in a Global Note is credited and only in
respect of such portion of the aggregate principal amount of Exchange Notes as
to which such participant or participants has or have given such direction.
However, if there is an Event of Default under the Exchange
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Notes, DTC will exchange the applicable Global Note for Certificated Exchange
Notes, which it will distribute to its participants.
The Company understands that DTC is a limited-purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of certificates
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in the Global Notes among participants of DTC,
it is under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
CERTIFICATED NOTES
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Notes and a successor depositary is not appointed by the Company
within 90 days, the Company will issue Certificated Notes in exchange for the
Global Notes. Holders of an interest in a Global Note may receive a Certificated
Note in accordance with DTC's rules and procedures in addition to those provided
for under the Indenture.
NO PERSONAL LIABILITY OF INCORPORATORS, SHAREHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture or in any of
the Notes or because of the creation of any Indebtedness represented thereby,
shall be had against any incorporator, stockholder, officer, director, employee
or controlling person of the Company or of any successor Person thereof. Each
Holder, by accepting the Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default,
the Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise of the rights and powers vested in it under the Indenture as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that, if it acquires any
conflicting interest, it must eliminate such conflict or resign.
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DESCRIPTION OF THE CAPITAL STOCK
LDI's authorized capital stock consists of 100,000,000 shares of Common
Stock, and 7,600,000 shares of preferred stock, of which 2,600,000 shares have
been designated Series A Preferred Stock and 5,000,000 have been designated
Series B Preferred Stock. As of June 30, 1998, 26,316,755, 2,456,556 and
2,500,000 shares of Common Stock, Series A Preferred Stock and Series B
Preferred Stock, respectively, were issued and outstanding.
COMMON STOCK
The holders of Common Stock generally vote as a class with the holders of
Series A Preferred Stock and each share of Common Stock is entitled to one vote
for each share held on all matters submitted to a vote of shareholders. Holders
of the Common Stock are entitled to receive ratably such dividends, if any, as
may be declared by the Board of Directors out of funds legally available
therefor subject to the rights of holders of the Series A Preferred Stock and
the Series B Preferred Stock. See "Dividend Policy" and "--Preferred Stock."
Upon the liquidation, dissolution or winding up of LDI, the holders of Common
Stock are entitled to receive ratably the net assets of LDI available after the
payment of all debts and other liabilities and all preferential amounts to which
the holders of the Series A Preferred Stock and the Series B Preferred Stock are
entitled. The holders of Common Stock have no subscription, redemption or
conversion rights. The rights, preferences and privileges of holders of Common
Stock are subject to, and are adversely affected by, the rights of the holders
of shares of the Series A Preferred Stock and the Series B Preferred Stock (and
will be subject to, and may be adversely affected by, the rights of the holders
of any other series of preferred stock which LDI may designate and issue in the
future).
WARRANTS
In 1996, LDI completed a private placement of units consisting of Common
Stock, Series A Warrants, Series B Warrants and Series C Warrants. The Series A
Warrants and the Series B Warrants have expired. The Series C Warrants are each
exercisable for one share of Common Stock at an exercise price of $1.25 and
expire at 24 months from their date of issue. As of June 30, 1998, 235,000
Series C Warrants were outstanding. Dealers participating in the private
placement were issued warrants exercisable for an aggregate of 462,566 shares of
Common Stock at an exercise price of $.60 per share, which expire five years
from their date of issue. In addition, warrants exercisable for a maximum of
231,291 shares of Common Stock (the actual number determinable in accordance
with a formula set forth in the warrants) were issued to such dealers. Such
warrants become exercisable at various times based on a formula set forth in the
warrants, have exercise prices of $.75, $1.00 or $1.25, and expire 12, 18 or 24
months from the date of exercise of warrants placed by such dealers.
In 1997, warrants to purchase 1,000,000 shares of Common Stock at an
exercise price of $.75 per share, which expire in January and February 2002,
were granted to Seruus in connection with a consulting agreement between Seruus
and the Company and Seruus's providing a credit enhancement to a creditor of the
Company in order to induce such creditor to provide loans to the Company.
Also in 1997, in connection with the stock purchase agreement between the
Advent Entities, certain employees and investment bankers involved in the
transaction (the "Other ADV Warrantholders") and the Company dated July 28, 1997
(the "Advent Purchase Agreement"), the Advent Entities and the Other ADV
Warrantholders were issued the ADV Warrants which are currently exercisable to
purchase an aggregate of 11,105,101 shares of Common Stock at an exercise price
of $.001 per share at any time after July 28, 1997. In addition, the Company
issued warrants to the placement agents in connection with such transaction to
purchase an aggregate of 500,000 shares of Common Stock at an exercise price of
$2.00 per share, which expire on July 28, 2002. On March 20, 1998, the Company
agreed to issue additional warrants to the Advent Entities and the Other ADV
Warrantholders to purchase 1,010,101 shares of Common Stock at an exercise price
of $.001 per share at any time after their issuance. The warrants are issuable
to the Advent Entities and the Other ADV Warrantholders in consideration of
their consent to amend the terms of the Series B Preferred Stock. See "Certain
Transactions."
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In connection with the Offering, the Company issued 225,000 Warrants to
purchase an aggregate of 3,394,655 shares of Common Stock (representing
approximately 6.5% of the outstanding Common Stock on a fully-diluted basis as
of the closing date of the Offering). The Warrants were issued pursuant to the
Warrant Agreement between LDI and The Bank of New York (the "Warrant Agent"). A
copy of the Warrant Agreement is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. Each Warrant is evidenced by a
Warrant Certificate which entitles the holder thereof to purchase 15.0874 shares
of Common Stock of LDI at a price (the "Exercise Price") of $.01 per share,
subject to adjustment as provided in the Warrant Agreement. The Warrants may be
exercised at any time beginning one year after their date of issue and prior to
the close of business on the tenth anniversary thereof. Warrants that are not
exercised by such date will expire. The Warrants will become separately
transferable from the Senior Notes on the earliest to occur of (i) the date that
is six months following their date of issue, (ii) the commencement of the
Exchange Offer and (iii) the effective date of a shelf registration statement
with respect to the Notes. See "Description of the Exchange
Notes -- Registration Rights." Upon the occurrence of a merger, or a sale of
substantially all of its assets, with a person that does not have a class of
equity securities registered under the Exchange Act or a wholly owned subsidiary
of such a person in connection with which the consideration to shareholders of
LDI is not all cash, LDI or its successor by merger will be required, upon the
expiration of the time periods set forth in the Warrant Agreement, to offer to
repurchase the Warrants for cash.
All of the warrants issued by the Company contain customary anti-dilution
adjustments for certain issuances of stock, stock splits, combinations,
dividends, distributions, reclassification, exchanges, substitution,
reorganizations, mergers, consolidations, and sales of assets, except that the
ADV Warrants also provide for adjustment upon the exercise of all issued and
outstanding options and warrants as of July 28, 1997 and options issued or
issuable under the Stock Incentive Plan and the Stock Option Plan.
PREFERRED STOCK
SERIES A PREFERRED STOCK
Ranking. The Series A Preferred Stock is senior to the Common Stock of
LDI, whether such Common Stock is outstanding as of the date of issuance of the
Series A Preferred Stock or thereafter issued, as to distributions upon
liquidation, dissolution or the winding up of LDI. Without the consent of the
holders of a majority of the Series A Preferred Stock, LDI may not issue
additional shares of Series A Preferred Stock or any other equity security
senior to or on a parity with the Series A Preferred Stock, including senior
equity securities convertible into or exchangeable for, or issued with warrants
for, capital stock of the Company,
Voting Rights. The holders of Series A Preferred Stock are entitled to the
number of votes equal to the number of shares of Common Stock into which the
shares of Series A Preferred Stock are convertible. With respect to any matters
presented to the shareholders for their action or consideration, except for
matters relating to certain issuances and redemptions of capital stock and
amendments or modification of certain terms of the Series A Preferred Stock (as
to which matters the consent of holders of a majority of the Series A Preferred
Stock must be obtained) or as otherwise required by law, the holders of the
Series A Preferred Stock and Common Stock shall vote together as a single class.
Dividends. The holders of Series A Preferred Stock are entitled to receive
cumulative dividends, payable at the option of the Company in either cash or
Common Stock, at the annual rate of $.03 per share. The holders of Series A
Preferred Stock are entitled to receive an additional dividend per share of
Common Stock into which it is convertible equal to the amount by which any
dividend on the Common Stock exceeds $.03 per share. On December 31, 1998, all
accrued and unpaid dividends must be paid, and thereafter, all accrued and
unpaid dividends shall be paid on each December 31 of each year; provided,
however, that all accrued and unpaid dividends shall become payable immediately
in the event of the occurrence of a Specified Event (as defined herein) and
shall thereafter be paid on each December 31 of each year. A "Specified Event"
includes the closing of an offering and sale of Common Stock or other equity
securities for the account of the Company with gross proceeds in excess of
$7,500,000. Notwithstanding the foregoing and subject to certain conditions,
dividends on the Series A Preferred Stock shall cease to accrue and the payment
of all
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previously accrued and unpaid dividends shall be waived if the Common Stock is
quoted on Nasdaq or listed on a national securities exchange and has an average
trading price equal to or in excess of $2.00 per share.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the holders of Series A
Preferred Stock are entitled to receive, prior to the holders of Common Stock,
but subject to the right of holders of Series B Preferred Stock to receive
certain payments, an amount equal to $.50 per share plus any accrued, but
unpaid, dividends on the Series A Preferred Stock.
Conversion. The holders of Series A Preferred Stock may convert all or any
portion of their shares of Series A Preferred Stock into Common Stock of LDI at
any time. LDI may convert all of the shares of Series A Preferred Stock into
Common Stock upon (i) the closing of an underwritten public offering of Common
Stock with aggregate gross proceeds of at least $7,500,000 and a per share
public offering price of at least $2.00 or (ii) the election of a majority of
the Series A Preferred Stock to so convert their shares of Series A Preferred
Stock. Each share of Series A Preferred Stock is convertible into one share of
Common Stock, subject to adjustment for certain future share issuances and other
dilutive events.
Redemption. In the event of (i) any consolidation or merger of LDI, or any
other corporate reorganization or transaction or series of related transactions
by the Company (other than an initial public offering) immediately after which
the persons and entities (exclusive of the surviving or transferee entity or any
affiliate thereof) who were the beneficial owners of the outstanding voting
power of the Company immediately prior to such transaction or transactions are
not the beneficial owners, directly or indirectly, of more than 50% of the total
voting power of the Company or the surviving or transferee entity, or (ii) a
sale or other disposition of all or substantially all of the assets of the
Company, the holders of a majority of the Series A Preferred Stock may require
LDI to redeem all of the Series A Preferred Stock at an amount per share equal
to $.50 plus any accrued, but unpaid, dividends on the Series A Preferred Stock;
provided, however, that the Company shall have no authority or obligation to
redeem any shares of Series A Preferred Stock in the event that there remain
outstanding any shares of Series B Preferred Stock.
The holders of the Series A Preferred Stock have agreed not to exercise
such redemption right unless permitted under the Indenture and to subordinate
any claims to the claims of the holders of the Notes.
SERIES B PREFERRED STOCK
Ranking. The Series B Preferred Stock is senior to all other capital stock
of LDI, whether such capital stock is outstanding as of the date of issuance of
the Series B Preferred Stock or thereafter issued, as to distributions upon
liquidation, dissolution or the winding up of LDI.
Voting Rights. Other than certain consent rights and the right to elect
certain members of LDI's Board of Directors, and except as otherwise provided by
applicable law, holders of the Series B Preferred Stock have no voting rights.
Board Representation. The holders of Series B Preferred Stock have the
right to vote as a separate class to elect two directors to LDI's Board of
Directors. Additionally, in the event the Company fails to redeem the Series B
Preferred Stock at any time that the Company is required to do so pursuant to
the terms of the Series B Preferred Stock, the holders of Series B Preferred
Stock are entitled to elect two additional directors to LDI's Board of
Directors.
Dividends. The holders of Series B Preferred Stock are entitled to receive
when and as declared by the Board of Directors, non-cumulative cash dividends at
an annual rate of $1.20 per share commencing on the earlier of July 28, 2002 and
the date upon which the Company closes an underwritten public offering of its
Common Stock.
Liquidation. Upon the liquidation, distribution of assets, dissolution or
winding up of LDI, holders of Series B Preferred Stock are entitled to receive,
prior to the holders of Series A Preferred Stock and Common Stock, an amount
equal to $10 per share, plus any declared, but unpaid, dividends on the Series B
Preferred Stock.
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Redemption. Provided that an Exchange Event (as defined below) has not
occurred, the holders of a majority of the Series B Preferred Stock may require
the Company to redeem the Series B Preferred Stock at any time following the
earlier of (i) July 28, 2004, which may be extended as provided below and (ii) a
Redemption Event. A Redemption Event is defined as the occurrence of (i) a sale
or other disposition of all or substantially all of the assets of the Company,
(ii) any consolidation or merger of LDI, or any other corporate reorganization
or transaction or series of related transactions by the Company (other than an
initial public offering) immediately after which the persons and entities
(exclusive of the surviving or transferee entity or any affiliate thereof) who
were the beneficial owners of the outstanding voting power of the Company
immediately prior to such transaction or transactions are not the beneficial
owners, directly or indirectly, of more than 50% of the total voting power of
the Company or the surviving or transferee entity, (iii) the completion of both
of (a) an initial public offering and (b) issuance of high yield debt (i.e.,
debt securities rated Baa 3 or lower by Moody's Investor Service Inc. or BBB- or
lower by Standard & Poor's Corporation or the Notes) ("High Yield Debt") by the
Company, (iv) holders of 50% of the Common Stock, other than the Advent
Entities, Clifford Friedland and David Glassman, dispose of their shares of
Common Stock, or (v) the date when both Clifford Friedland and David Glassman
have terminated their employment with the Company without good reason. The
redemption price of the Series B Preferred Stock will be $10 per share plus all
accrued and unpaid dividends thereon (the "Series B Redemption Price").
If the Company issues High Yield Debt prior to the earliest of (i) an
initial public offering, (ii) a Redemption Event and (iii) July 28, 2002, then
the Company may extend the redemption date of the Series B Preferred Stock to a
date no later than the day immediately following the maturity date of the High
Yield Debt. The Company has extended the redemption date to the day after the
maturity of the Notes.
Upon the occurrence of an Exchange Event, and provided that a Redemption
Event (that is not also an Exchange Event) has not occurred, the Company shall
redeem the Series B Preferred Stock at a redemption price of $.001 per share. An
Exchange Event is defined as the earlier to occur of (i) a Redemption Event that
generates a value of at least $98 million for the warrants initially issued to
the Advent Entities and (ii) the date that the closing price per share of the
Common Stock, as listed on a public stock exchange, equals or exceeds a price
for each of 20 consecutive trading days that, when multiplied by the number of
shares of Common Stock for which the warrants initially issued to the Advent
Entities are exercisable, exceeds $98 million. See "-- Warrants."
In addition, the Company may redeem all, but not less than all, of the
outstanding Series B Preferred Stock at any time at the Series B Redemption
Price.
The holders of the Series B Preferred Stock have agreed not to exercise
such redemption right unless permitted under the Indenture and to subordinate
any claims to the claims of the holders of the Notes.
Limitation on Indebtedness. So long as any shares of Series B Preferred
Stock remain outstanding, LDI and its subsidiaries are not permitted, without
the vote or written consent of the holders of a majority of the Series B
Preferred Stock, to incur third party debt, whether or not secured, including
without limitation off-balance sheet financing, capital leases and operating
leases, but specifically excluding accounts receivable financing, if as a result
thereof, the aggregate outstanding principal balance of all third party debt
owed by LDI, not including trade credit extended to the Company in the normal
course of business, would exceed $30,000,000.
Other Matters Requiring the Consent of the Holders of Series B Preferred
Stock. So long as any shares of Series B Preferred Stock remain outstanding,
LDI is not permitted, without the vote or written consent of the holders of a
majority of the Series B Preferred Stock, to (among other things and subject to
certain exceptions) (i) issue Common Stock for less than certain threshold
amounts unless the aggregate number of such shares sold is less than 10% of all
outstanding shares of Common Stock, (ii) amend or otherwise modify the Articles
of Incorporation in any manner which materially adversely affects the rights of
the holders of Series B Preferred Stock, (iii) issue additional shares of Series
B Preferred Stock or any other equity security senior to or on a parity with the
Series B Preferred Stock, including senior equity securities convertible into or
exchangeable for, or issued with warrants for, capital stock of the Company,
(iv) spend in excess of the annual budget approved by the Board of Directors,
(v) consummate certain changes of control of the Company,
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(vi) purchase or redeem, or declare dividends or other distributions on, capital
stock of the Company or (vii) effect a fundamental change in the business of
LDI.
PREEMPTIVE RIGHTS
Pursuant to the 1994 Shareholders' Agreements, certain holders of the
Common Stock and the Series A Preferred Stock have preemptive rights. If the
Company issues or sells any voting stock, or any warrants, options or rights
convertible into or exchangeable for, or that carry any rights to subscribe for
or acquire, voting stock of the Company, which would adversely affect the
proportionate or relative voting or dividend rights of any such holder of Common
Stock or Series A Preferred Stock, then the Company is required to offer such
holders an opportunity to subscribe for and acquire shares in the proposed
issuance to maintain such holder's proportionate and relative voting and
dividend rights. The preemptive rights do not apply to (i) treasury shares, (ii)
shares of capital stock or warrants, options, securities or rights convertible
into shares of capital stock issued to employees, directors, officers,
consultants or independent contractors of the Company, or (iii) capital stock or
warrants, options, securities or rights convertible into shares of capital stock
issued in connection with the effectuation of a merger, consolidation or other
business combination.
In connection with the Advent Purchase Agreement, the Company, Mr.
Friedland and Mr. Glassman entered into a preemptive rights agreement with the
Advent Entities (the "Advent Preemptive Rights Agreement"). If the Company
issues or sells any rights, options or warrants to purchase any Common Stock or
securities of any type that are, or may become, convertible into Common Stock,
then the other parties to the agreement have a right to purchase their pro rata
share of such securities. These preemptive rights will not apply in the case of
(i) securities issued in connection with the acquisition by LDI of another
business entity or business segment of such an entity if after the acquisition,
LDI will own more than 50% of the voting power of such business entity or
business segment, (ii) securities issued to employees, consultants, officers or
directors of LDI pursuant to any stock option plan, (iii) securities issued in
connection with any stock split, stock dividend, recapitalization or other
reorganization of LDI, (iv) securities issued upon the exchange, exercise or
conversion of any security that is the subject of the Advent Preemptive Rights
Agreement, (v) securities sold in an initial public offering, (vi) treasury
shares, (vii) any right, option or warrant to acquire any security convertible
into or exchangeable for the securities described in any of subsections (i)
through (vi) of this sentence, and (viii) any Common Stock, or any rights,
options, warrants or shares convertible into or exchangeable for Common Stock,
which the Company was required to issue before July 28, 1997. The Advent
Preemptive Rights Agreement terminates upon the consummation of an underwritten
public offering of Common Stock by the Company.
REGISTRATION RIGHTS
Holders of substantially all of the issued and outstanding shares of Common
Stock, the warrants to purchase Common Stock issued in connection with the
private placement consummated by the Company in 1996 and the holders of the
Series A Preferred Stock (with respect to the shares of Common Stock into which
the Series A Preferred Stock is convertible) are entitled to certain piggy-back
registration rights pursuant to the 1994 Shareholders' Agreements. The 1994
Shareholders' Agreements provide for registration rights any time the Company
proposes to register any of its Common Stock under the Securities Act in
connection with the public offering of such securities solely for cash. In
addition, such securityholders are entitled to certain demand registration
rights under the terms of the respective purchase agreements pursuant to which
such securities were acquired. In connection with the Advent Purchase Agreement,
the Company entered into the Advent Registration Rights Agreement pursuant to
which, the Advent Entities have certain rights in respect of the registration of
the shares of Common Stock underlying the ADV Warrants held by the Advent
Entities and the additional warrants to purchase 1,000,000 shares of Common
Stock that the Company has agreed to issue to the Advent Entities (collectively,
the "Advent Common Shares") including demand registration rights, subsequent to
the first to occur of a qualified public offering of Common Stock or July 28,
2002 with respect to all or any part of not less than 25% of the Advent Common
Shares. No more than two demand registrations may be requested by the Advent
Entities. The Advent Entities also have piggy-back registration rights. The
Advent Registration Rights Agreement terminates upon the earlier to occur of
such date as the Advent Entities cease to own any Advent Common Shares and July
28, 2009. See "Certain Transactions."
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The holders of the Warrants will be entitled to "piggy-back" registration
rights for the shares of Common Stock purchasable upon exercise of the Warrants
in connection with any public offering of Common Stock (subject to certain
exceptions).
SHAREHOLDER AGREEMENTS
Pursuant to the 1994 Shareholders' Agreements, each shareholder party to
the 1994 Shareholders' Agreements is required to vote all of its shares of stock
and take all such other actions as may be necessary to elect and maintain
Messrs. Friedland and Glassman as members of the Board of Directors of the
Company; provided however, that the right of each of Messrs. Friedland and
Glassman to be a member of the Board of Directors and the obligations of the
shareholders party to the Shareholders' Agreements to vote to elect either as
director shall terminate as to Messrs. Friedland or Glassman when such director
owns less than 5% of the issued and outstanding capital stock of the Company.
Additionally, the 1994 Shareholders' Agreements places certain restrictions on
the transfer of stock by the shareholders party to the 1994 Shareholders'
Agreements, including a requirement that the Company and the shareholders party
to the 1994 Shareholders' Agreements first be given a right of first refusal
before any transfer is made.
INDEMNIFICATION AND LIMITATIONS ON DIRECTORS' LIABILITY
The Florida Act authorizes Florida corporations to indemnify any person who
is or was a party to any proceeding (other than an action by or on behalf of the
corporation), by reason of the fact that he or she is or was a director,
officer, employee, or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation or other entity, against liability incurred in connection with such
proceeding, including any appeal thereof, if he or she acted in good faith and
in a manner he or she reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
In the case of an action by or on behalf of a corporation, indemnification may
not be made if the person seeking indemnification is held liable, unless the
court in which such action was brought determines such person is fairly and
reasonably entitled to indemnification. The indemnification authorized under
Florida law is not exclusive and is in addition to any other rights granted to
officers and directors under the articles of incorporation or bylaws of the
corporation or any agreement between officers and directors and the corporation.
The Company's Articles of Incorporation provide for indemnification to the
maximum extent permitted by Florida law.
Under the Florida Act, a director is not personally liable for monetary
damages to a corporation or any other person for acts or omissions in his or her
capacity as a director except in certain limited circumstances such as certain
violations of criminal law and transactions in which the director derived an
improper personal benefit. As a result, shareholders may be unable to recover
monetary damages against directors for actions taken by them which constitute
negligence or gross negligence or which are in violation of their fiduciary
duties, although injunctive or other equitable relief may be available.
The foregoing provisions of the Florida Act and the Company's Articles of
Incorporation could have the effect of preventing or delaying a person from
acquiring or seeking to acquire a substantial equity interest in, or control of,
the Company.
ANTI-TAKEOVER PROVISIONS OF FLORIDA LAW
Several anti-takeover provisions under Florida law apply to corporations
organized under Florida law unless the corporation has elected to opt out of
such provisions in its articles of incorporation or (depending on the provision
in questions) its bylaws. The Company has not elected to opt out of these
provisions. The Florida Act contains a provision that prohibits the voting of
shares in certain Florida corporations which are acquired in a "control share
acquisition" unless the board of directors approves the control share
acquisition or the holders of a majority of the corporation's voting shares
(exclusive of shares held by officers of the corporation, inside directors or
the acquiring party) approve the granting of voting rights as to the shares
acquired in the control share acquisition. A control share acquisition is
defined as an acquisition that immediately thereafter
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entitles the acquiring party to vote in the election of directors with respect
to one-fifth or more of such voting power. This statutory voting restriction is
not applicable in certain circumstances set forth in the Florida Act. The
Company is subject to this statutory provision.
The Florida Act contains an "affiliated transaction" provision that
prohibits certain Florida corporations from engaging in a broad range of
business combinations or other corporate transactions with an "interested
shareholder" unless (i) the transaction is approved by the holders of two-thirds
of the corporation's voting shares other than those owned by the interested
shareholder, (ii) the transaction is approved by a majority of disinterested
directors, (iii) the interested shareholder owns 90% of the corporation's
outstanding voting shares or has owned at least 80% of the corporation's
outstanding voting shares for at least five years, or (iv) certain conditions
with respect to the consideration to be paid in the affiliated transaction and
certain additional conditions set forth in the Florida Act are met. An
interested shareholder is defined as a person who, together with affiliates and
associates, beneficially owns more than 10% of a corporation's outstanding
voting shares. The Company is not currently subject to this statutory provision
but will become subject thereto at such time as the Company has more than 300
shareholders.
These provisions could have the effect of delaying, deferring or preventing
a change of control of the Company. See "Risk Factors -- Anti-Takeover Effects."
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following sets forth the opinion of Loeb & Loeb LLP, counsel to the
Company, as to the material United States federal income tax consequences of an
investment associated with the exchange of the Senior Notes for the Exchange
Notes and with the ownership and disposition of the Notes. The opinion of Loeb &
Loeb LLP will be filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. This discussion is based on current provisions of the
United States Internal Revenue Code of 1986, as amended (the "Code"), applicable
final, temporary and proposed Treasury Regulations ("Treasury Regulations"),
judicial authority, and current administrative rulings and pronouncements of the
Internal Revenue Service (the "Service") and upon the facts concerning the
Company as of the date hereof. There can be no assurance that the Service will
not take a contrary view, and no ruling from the Service has been or will be
sought by the Company. Legislative, judicial, or administrative changes or
interpretations may be forthcoming that could alter or modify the statements and
conclusions set forth herein. Any such changes or interpretations may or may not
be retroactive and could affect the tax consequences to holders.
This discussion does not purport to deal with all aspects of taxation that
may be relevant to particular holders of the Notes in light of their personal
investment or tax circumstances, or to certain types of investors (including
individual retirement accounts and other tax deferred accounts, insurance
companies, financial institutions, broker-dealers or tax-exempt organizations)
subject to special treatment under the United States federal income tax laws.
This discussion does not deal with special tax situations, such as the holding
of the Notes as part of a straddle with other investments, or situations in
which the functional currency of a holder is not the United States dollar. In
addition, this discussion deals only with Notes held by initial purchasers that
hold such Notes as capital assets within the meaning of Section 1221 of the
Code. Except as otherwise described herein, this discussion applies only to a
person who is a holder who purchased Senior Notes pursuant to the Offering at
the "issue price" (as defined below).
For purposes of this discussion, the term "U.S. Holder" means a citizen or
resident of the United States, a corporation, limited liability company,
partnership or other entity created or organized in the United States or under
the law of the United States or any state thereof (including the District of
Columbia), an estate the income of which is includible in gross income for
United States federal income tax purposes regardless of its source, or a trust
if a court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust (or, under certain
circumstances, a trust the income of which is includible in gross income for
United States federal income tax purposes regardless of its source). The term
also includes certain former citizens of the United States. The term "Non-U.S.
Holder" means any person other than a U.S. Holder.
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THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. THE TAX TREATMENT
MAY VARY DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT
THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF
EXCHANGING THE SENIOR NOTES FOR THE EXCHANGE NOTES AND HOLDING AND DISPOSING OF
THE NOTES INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
TAX LAWS.
THE EXCHANGE
The exchange of Senior Notes for Exchange Notes will not be treated as an
exchange for federal income tax purposes because the Exchange Notes will not
differ materially in kind or extent from the Senior Notes and because the
exchange will occur by operation of the original terms of the Senior Notes. As a
result, U.S. Holders who exchange their Senior Notes for Exchange Notes will not
recognize any income, gain or loss for federal income tax purposes. A U.S.
Holder will have the same adjusted issue price, adjusted basis and holding
period in the Exchange Notes immediately after the exchange as it had in the
Senior Notes immediately before the exchange.
ALLOCATION OF PURCHASE PRICE BETWEEN NOTES AND WARRANTS
For United States federal income tax purposes, the Senior Notes were
originally issued and sold as part of a Unit comprised of one Senior Note and
one Warrant to purchase 15.0874 shares of Common Stock. The issue price of a
Unit for United States federal income tax purposes was the first price at which
a substantial amount of Units were sold to the public (excluding sales to bond
houses, brokers or similar persons acting as underwriters, placement agents or
wholesalers). The issue price of a Unit was allocated between the Notes and the
Warrants based on the Company's best judgment of the relative fair market values
of each such component of the Unit on the issue date. The Company allocated
$946.44 to each Note and $53.56 to each Warrant which allocation will continue
with respect to the Exchange Notes and Warrants in the hands of the original
holders and their transferees. Thus subsequent holders who acquire Exchange
Notes will still be required to report OID. See "-- Market Discount, Acquisition
Premium." Pursuant to Treasury Regulations issued under provisions of the Code
relating to original issue discount (the "OID Regulations"), each holder will be
bound by such allocation for United States federal income tax purposes unless
such holder discloses on a statement attached to its tax return for the taxable
year that includes the acquisition date of such Unit that its allocation differs
from that of the Company. No assurance can be given that the Service will accept
the Company's allocation. If the Company's allocation were successfully
challenged by the Service, the issue price, original issue discount accrual on
the Note and gain or loss on the sale or disposition of a Note or Warrant would
be different from that resulting under the allocation determined by the Company.
THE NOTES
Under applicable authorities, the Notes should be treated as indebtedness
for United States federal income tax purposes. In the unlikely event the Notes
are treated as equity, the amount of any actual or constructive distributions on
any such Note would first be taxable to the holder as dividend income to the
extent of the issuer's current and accumulated earnings and profits, and next
would be treated as a return of capital to the extent of the holder's tax basis
in the Note, with any remaining amount treated as gain from the sale of a Note.
Further, payments on the Notes treated as equity to Non-U.S. Holders would not
be eligible for the portfolio interest exception from United States withholding
tax, and dividends thereon would be subject to United States withholding tax at
a flat rate of 30% (or lower applicable treaty rate) and gain from their sale or
other taxable disposition might also be subject to United States tax. See
"-- Non-U.S. Holders." In addition, in the event of equity treatment, the
Company would not be entitled to deduct interest on the Notes for United States
federal income tax purposes. The remainder of this discussion assumes that the
Notes will constitute indebtedness of the Company for such tax purposes.
TAXATION OF STATED INTEREST
Stated interest paid or accrued on the Notes will be taxable to a U.S.
Holder as ordinary interest income in accordance with such U.S. Holder's method
of accounting for U.S. federal income tax purposes.
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The interest rate on the Notes will be increased if the Company fails to
either consummate the Exchange Offer or cause resales of the Notes to be
registered under the Securities Act prior to applicable deadlines. See
"Description of the Notes -- Exchange Offer, Registration Rights." According to
the OID Regulations, the possibility of a change in the interest rate will not
affect the yield of the Notes (and accordingly, will not affect the inclusion of
interest in income) if, based on all the facts and circumstances as of the issue
date, the possibility that such a change will occur is remote. The Company does
not intend to treat the possibility of a change in the interest rate as
affecting the yield to maturity of any Note. If, however, the interest rate were
increased because of such a failure, a U.S. Holder would be required to include
in gross income any increased amount of interest over the remaining term of the
Notes, possibly in advance of the receipt of cash relating thereto.
ORIGINAL ISSUE DISCOUNT
General. As a result of the allocation of a portion of the issue price of
the Units to the Warrants, the Notes will be treated as issued with OID, and
each U.S. Holder will be required to include in income (regardless of whether
such U.S. Holder is a cash or accrual basis taxpayer) in each taxable year, in
advance of the receipt of corresponding cash payments on such Notes, that
portion of the OID, computed on a constant yield basis, attributable to each day
during such year on which the U.S. Holder held the Notes. See "-- Taxation of
Original Issue Discount."
The amount of OID with respect to each Note will be equal to the excess of
(i) its "stated redemption price at maturity" over (ii) its issue price. Under
the OID Regulations, the "stated redemption price at maturity" of each Note will
include all payments to be made in respect thereof, including any stated
interest payments, other than "qualified stated interest." Payments of qualified
stated interest are payments of interest which are unconditionally payable in
cash or property (other than debt instruments of the issuer) at least annually
at a qualifying rate, including a single fixed rate. The "issue price" of a Note
is determined in the manner described under "--Allocation of Purchase Price
Between Notes and Warrants."
Taxation of Original Issue Discount. A U.S. Holder of a debt instrument
issued with OID is required to include in gross income for United States federal
income tax purposes an amount equal to the sum of the "daily portions" of such
OID for all days during the taxable year on which the holder holds the debt
instrument. The daily portions of OID required to be included in a holder's
gross income in a taxable year will be determined upon a constant-yield basis by
allocating to each day during the taxable year on which the holder holds the
debt instrument a pro-rata portion of the OID on such debt instrument which is
attributable to the "accrual period" in which such day is included. Accrual
periods with respect to a Note may be of any length and may vary in length over
the term of the Note as long as (i) no accrual period is longer than one year
and (ii) each scheduled payment of interest or principal on the Note occurs on
either the final or first day of an accrual period. The amount of the OID
attributable to each "accrual period" will be the product of the "adjusted issue
price" at the beginning of such accrual period and the "yield to maturity" of
the debt instrument (stated in a manner appropriately taking into account the
length of the accrual period). The "yield to maturity" is the discount rate
that, when used in computing the present value of all payments to be made under
the Notes, produces an amount equal to the issue price of the Notes. The
"adjusted issue price" of a debt instrument at the beginning of an accrual
period is defined generally as the issue price of the debt instrument plus the
aggregate amount of OID that accrued in all prior accrual periods, less any cash
payments on the debt instrument (except for payments of "qualified stated
interest," as defined above). Accordingly, a U.S. Holder of a Note will be
required to include OID in gross income for United States federal income tax
purposes in advance of the receipt of cash in respect of such income. The amount
of OID allocable to an initial short accrual period may be computed using any
reasonable method if all other accrual periods, other than a final short accrual
period, are of equal length. The amount of OID allocable to the final accrual
period at maturity of the Note is the difference between (x) the amount payable
at the maturity of the Note, and (y) the Note's adjusted issue price as of the
beginning of the final accrual period.
Effect of Mandatory and Optional Redemptions on OID. In the event of a
Change of Control, the Company will be required to offer to redeem all of the
Notes at redemption prices specified elsewhere herein. In the event that the
Company receives net proceeds from one or more Equity Offerings, the Company
may,
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at any time prior to April 15, 2001, use all or a portion of such net proceeds
to redeem the Notes in amounts and at redemption prices specified elsewhere
herein. Under the OID Regulations, computation of yield and maturity of the
Notes is not affected by such redemption rights and obligations if, based on all
the facts and circumstances as of the issue date, the potential occurrence of
such contingencies is remote. The Company has determined that, based on all of
the facts and circumstances that are expected to exist as of the issue date, the
possibility that a Change of Control or an optional redemption by the Company
will occur is remote and, as a result, the stated payment schedule of the Notes
must not be adjusted for such contingencies.
The Company may redeem the Notes, in whole or in part, at any time on or
after April 15, 2003, at redemption prices specified elsewhere herein, plus
accrued and unpaid interest to the date of redemption. The OID Regulations
contain rules for determining the "maturity date" and the stated redemption
price at maturity of an instrument that may be redeemed prior to its stated
maturity date at the option of the issuer. Under the OID Regulations, solely for
purposes of the accrual of OID, it is assumed that the issuer will exercise any
option to redeem a debt instrument if such exercise will lower the
yield-to-maturity of the debt instrument. The Company anticipates that it will
not be presumed to redeem the Notes prior to their stated maturity under the
foregoing rules because the exercise of such option would not lower the
yield-to-maturity of the Notes.
MARKET DISCOUNT, ACQUISITION PREMIUM
If a U.S. Holder acquires a Note for an amount that is less than its
revised issue price (generally, adjusted issue price at the time of
acquisition), the amount of the difference will be treated as "market discount,"
unless such difference is less than a specified de minimis amount. Under the
market discount rules of the Code, a U.S. Holder will be required to treat any
principal payment on, or any gain on the sale, exchange, retirement or other
disposition (including a gift) of, a Note as ordinary income to the extent of
any accrued market discount that has not previously been included in income.
Market discount generally accrues on a straight-line basis over the remaining
term of the Note, unless the U.S. Holder elects to accrue market discount on a
constant interest method. A U.S. Holder may not be allowed to deduct immediately
all or a portion of the interest expense on any indebtedness incurred or
continued to purchase or to carry such Note.
A U.S. Holder may elect to include market discount in income currently as
it accrues (either on a straight-line basis or, if the U.S. Holder so elects, on
a constant-yield basis), in which case the interest deferral rule set forth in
the preceding paragraph will not apply. Such an election will apply to all bonds
acquired by the U.S. Holder on or after the first day of the first taxable year
to which such election applies and may be revoked only with the consent of the
Service.
A U.S. Holder that acquires a Note for an amount that is greater than the
adjusted issue price of such Note but equal to or less than the sum of all
amounts payable on such Note after the purchase date will be considered to have
purchased such Note at an "acquisition premium." Under the acquisition premium
rules of the Code and the OID Regulations, the daily portion of OID which such
holder must include in its gross income with respect to such Note for any
taxable year will be reduced by an amount equal to the OID multiplied by a
fraction, the numerator of which is the amount of such acquisition premium and
the denominator of which is the OID remaining from the date the Note was
purchased to its maturity date.
SALE OR OTHER DISPOSITION
In general, upon the sale, exchange or redemption of a Note, a U.S. Holder
will recognize taxable gain or loss equal to the difference between (i) the
amount of cash proceeds and the fair market value of any property received on
the sale, exchange or redemption (not including any amount attributable to
accrued but unpaid interest) and (ii) the U.S. Holder's adjusted tax basis in
the Note. A U.S. Holder's adjusted tax basis in a Note generally will be equal
to the portion of the Unit purchase price allocable to such Note, increased by
the amount of any market discount or OID previously taken into income by the
U.S. Holder and reduced by the amount of any payments made on such Note (other
than payments of "qualified stated interest," as defined above) that are
received by the U.S. Holder.
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Subject to the discussion of market discount above, gain or loss realized
on the sale, exchange or redemption of a Note will be capital gain or loss.
Capital gain recognized by individual U.S. Holders generally will be subject to
a maximum federal income tax rate of (i) 39.6% if the U.S. Holder held the Note
for not more than one year, (ii) 28% if the U.S. Holder held the Note for more
than one year but not more than eighteen months, and (iii) 20% if the U.S.
Holder held the Note for more than eighteen months. The distinction between
capital gain or loss and ordinary income or loss is also relevant for purposes
of, among other things, limitations with respect to the deductibility of capital
losses.
An exchange of Notes pursuant to the Exchange Offer and the associated
redemption of the Notes by the Company in exchange for the Exchange Notes should
not be considered a taxable event.
NON-U.S. HOLDERS
In general, subject to the discussion below concerning backup withholding:
(a) payments of principal or interest (including OID) on the Notes by
the Company or any paying agent to a beneficial owner of a Note that is a
Non-U.S. Holder will not be subject to United States withholding tax,
provided that, in the case of interest or accrued OID, (i) such Non-U.S.
Holder does not own, actually or constructively, 10% or more of the total
combined voting power of all classes of stock of the Company entitled to
vote, within the meaning of Section 871(h)(3) of the Code, (ii) such
Non-U.S. Holder is not a "controlled foreign corporation" (within the
meaning of the Code) that is related, directly or indirectly, to the
Company through stock ownership, (iii) such Non-U.S. Holder is not a bank
receiving interest described in Section 881(c)(3)(A) of the Code, and (iv)
the certification requirements under Section 871(h) or Section 881(c) of
the Code and Treasury Regulations thereunder (summarized below) are
satisfied;
(b) A Non-U.S. Holder of a Note will not be subject to United States
income tax on gains realized on the sale, exchange or other disposition of
such Note, unless (i) such Non-U.S. Holder is an individual who is present
in the United States for 183 days or more in the taxable year of sale,
exchange or other disposition, and certain other conditions are met, (ii)
such gain is effectively connected with the conduct by the Non-U.S. Holder
of a trade or business in the United States and, if certain tax treaties
apply, is attributable to a United States permanent establishment
maintained by the Non-U.S. Holder, or (iii) the Non-U.S. Holder is subject
to Code provisions applicable to certain United States expatriates; and
(c) a Note held by an individual who is not a citizen or resident of
the United States at the time of his death will not be subject to United
States estate tax as a result of such individual's death, provided that, at
the time of such individual's death, the individual does not own, actually
or constructively, 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote and payments with respect
to such Note would not have been effectively connected with the conduct by
such individual of a trade or business in the United States.
To satisfy the certification requirements referred to in (a)(iv) above,
Sections 871(h) and 881(c) of the Code and currently effective Treasury
Regulations thereunder require that either (i) the beneficial owner of a Note
must certify, under penalties of perjury, to the Company or its paying agent, as
the case may be, that such owner is a Non-U.S. Holder and must provide such
owner's name and address, and United States taxpayer identification number
("TIN"), if any, or (ii) a securities clearing organization, bank or other
financial institution that holds customers securities in the ordinary course of
its trade or business (a "Financial Institution") and holds the Note on behalf
of the beneficial owner thereof must certify, under penalties of perjury, to the
Company or its paying agent, as the case may be, that such certificate has been
received from the beneficial owner and must furnish the payor with a copy
thereof. A certificate described in this paragraph is effective only with
respect to payments of interest made to the certifying Non-U.S. Holder after
delivery of the certificate in the calendar year of its delivery and the two
immediately succeeding calendar years. Under temporary Treasury Regulations,
such requirement will be fulfilled if the beneficial owner of a Note certifies
on IRS Form W-8, under penalties of perjury, that it is a Non-U.S. Holder and
provides its name and address, and any Financial Institution holding the Note on
behalf of the beneficial owner files a statement with the
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withholding agent to the effect that it has received such a statement from the
beneficial owner (and furnishes the withholding agent with a copy thereof).
Treasury Regulations released on October 6, 1997 (the "New Regulations")
and effective for payments made after December 31, 1999, subject to certain
transition rules, provide alternative methods for satisfying the certification
requirements described above. The New Regulations require, in the case of Notes
held by a foreign partnership, that (i) the certification be provided by the
partners rather than by the foreign partnership and (ii) the partnership provide
certain information, including a United States taxpayer identification number. A
look-through rule would apply in the case of tiered partnerships.
If a Non-U.S. Holder of a Note is engaged in a trade or business in the
United States and if interest (including OID) on the Note, or gain realized on
the sale, exchange or other disposition of the Note, is effectively connected
with the conduct of such trade or business and, if certain tax treaties apply,
is attributable to a United States permanent establishment maintained by the
Non-U.S. Holder in the United States, the Non-U.S. Holder, although exempt from
United States withholding tax (provided that the certification requirements
discussed in the next sentence are met), will generally be subject to regular
United States income tax on such interest or gain in the same manner as if it
were a U.S. Holder. In lieu of the certificate described above, such a Non-U.S.
Holder will be required, under currently effective Treasury Regulations, to
provide the Company with a properly executed IRS Form 4224 in order to claim an
exemption from withholding tax. In addition, if such Non-U.S. Holder is a
foreign corporation, it may be subject to a branch profits tax equal to 30% (or
such lower rate provided by an applicable treaty) of its effectively connected
earnings and profits for the taxable year, subject to certain adjustments. For
purposes of the branch profits tax, interest (including OID) on a Note and any
gain recognized on the sale, exchange or other disposition of a Note will be
included in the earnings and profits of such Non-U.S. Holder if such interest or
gain is effectively connected with the conduct by a Non-U.S. Holder of a trade
or business in the United States. The New Regulations alter certain of the
withholding reporting and certification requirements described above, effective
for payments made after December 31, 1999, subject to certain transition rules.
In general, for payments made after December 31, 1999, a Non-U.S. Holder with
effectively connected income must provide to the Company, either directly or
through an intermediary, a valid IRS Form W-8 to claim an exemption from
withholding.
In the unlikely event the Notes were treated as equity, the periodic
distributions received by a Non-U.S. Holder on the Notes would not qualify for
the portfolio interest exemption from United States federal income tax and would
instead be treated as dividends as described above.
Non-U.S. Holders should consult with their tax advisors regarding United
States and foreign tax consequences with respect to the Notes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding of United States federal income tax at a rate of 31% may
apply to payments made in respect of a Note to a holder that is not an "exempt
recipient" and that fails to provide certain identifying information (such as
the holder's TIN) in the manner required. Generally, individuals are not exempt
recipients, whereas corporations and certain other entities are exempt
recipients. Payments made in respect of a Note must be reported to the Service,
unless the holder is an exempt recipient or otherwise establishes an exemption.
In the case of payments of interest on a Note to a Non-U.S. Holder,
Treasury Regulations provide that backup withholding and information reporting
will not apply to payments with respect to which either requisite certification
has been received or an exemption has otherwise been established (provided that
neither the Company nor a paying agent has actual knowledge that the holder is a
U.S. Holder or that the conditions of any other exemption are not in fact
satisfied).
Payments of the proceeds of the sale of a Note to or through a foreign
office of a broker that is a United States person, a "controlled foreign
corporation" (within the meaning of the Code), or a foreign person, 50% or more
of whose gross income from all sources for the three-year period ending with the
close of its taxable
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year preceding the payment was effectively connected with the conduct of a trade
or business within the United States, or (pursuant to the New Regulations, for
payments made after December 31, 1999) a foreign partnership with certain United
States connections, are currently subject to certain information reporting
requirements, unless the payee is an exempt recipient or such broker has
evidence in its records that the payee is a Non-U.S. Holder and has no actual
knowledge that such evidence is false and certain other conditions are met.
Temporary Treasury Regulations indicate that such payments are not currently
subject to backup withholding. Under current Treasury Regulations, payments of
the proceeds of a sale of a Note to or through the United States office of a
broker will be subject to information reporting and backup withholding unless
the payee certifies under penalties of perjury as to his or her status as a
Non-U.S. Holder and satisfies certain other qualifications (and no agent or
broker who is responsible for receiving or reviewing such statement has actual
knowledge that it is incorrect) and provides his or her name and address or the
payee otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules from a payment to a
holder of a Note generally will be allowed as a refund or credit against such
holder's United States federal income tax, provided that the required
information is timely furnished to the Service.
In general, the New Regulations do not significantly alter the current
substantive withholding and information reporting requirements but unify current
certification procedures and forms and clarify reliance standards. Under the New
Regulations, special rules apply which permit the shifting of primary
responsibility for withholding to certain financial intermediaries acting on
behalf of beneficial owners. A holder of a Note should consult with its tax
advisor regarding the application of the backup withholding rules to its
particular situation, the availability of an exemption therefrom, the procedure
for obtaining such an exemption, if available, and the impact of the New
Regulations on payments made with respect to Notes after December 31, 1999.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF UNITED STATES FEDERAL
INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF NOTES IN LIGHT OF
ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. PROSPECTIVE HOLDERS
SHOULD CONSULT THEIR OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM
OF THE EXCHANGE OF SENIOR NOTES FOR EXCHANGE NOTES AND THE OWNERSHIP AND
DISPOSITION OF NOTES, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES
OR OTHER TAX LAWS.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Senior Notes where such Senior Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period not to exceed 180 days after the Expiration Date, it will
furnish additional copies of this Prospectus, as amended or supplemented, to any
broker-dealer that reasonably requests such documents for use in connection with
any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of
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such Exchange Notes may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit of any such resale of Exchange Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The Exchange Notes will constitute a new issue of securities with no
established trading market. The Company does not intend to list the Exchange
Notes on any national securities exchange or to seek approval for quotation
through any automated quotation system. The Company has been advised by the
Placement Agents that following completion of the Exchange Offer, the Placement
Agents intend to make a market in the Exchange Notes. However, the Placement
Agents are not obligated to do so and any market-marking activities with respect
to the Exchange Notes may be discontinued at any time without notice.
Accordingly, no assurance can be given that an active public or other market
will develop for the Exchange Notes or as to the liquidity of or the trading
market for the Exchange Notes. If a trading market does not develop or is not
maintained, holders of the Exchange Notes may experience difficulty in reselling
the Exchange Notes or may be unable to sell them at all. If a market for the
Exchange Notes develops, any such market may cease at any time. If a public
trading market develops for the Exchange Notes, future trading prices of the
Exchange Notes will depend on many factors, including, among other things,
prevailing interest rates, the market for similar securities, the financial
conditions and results of operations of the Company and other factors beyond the
control of the Company, including general economic conditions. Notwithstanding
the registration of the Exchange Notes in the Exchange Offer, holders who are
"affiliates" of the Company (within the meaning of Rule 405 under the Securities
Act) may publicly offer for sale or resell the Exchange Notes only in compliance
with the provisions of Rule 144 under the Securities Act or any other available
exemptions under the Securities Act.
The Company has agreed to pay all expenses incident to the Exchange Offer
other than commissions or concessions of any brokers or dealers, and will
indemnify the holders of the Senior Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act.
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LEGAL MATTERS
Certain legal matters in connection with the Exchange Notes offered hereby
will be passed upon for the Company by Loeb & Loeb LLP, New York, New York
10154-0037.
EXPERTS
The consolidated financial statements of Long Distance International Inc.
and subsidiaries at December 31, 1997 and 1996, and for each of the three years
in the period ended December 31, 1997, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
certified public accountants, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is not currently subject to the informational reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Upon effectiveness of the Registration Statement of which this Prospectus
forms a part, the Company will become subject to the informational requirements
of the Exchange Act. In addition, the Indenture provides that, regardless of
whether the Company is then required to file reports with the Commission, the
Company shall file with the Commission all such reports and other information as
would be required to be filed with the Commission if the Company were subject to
the reporting requirements of the Exchange Act. The Company will supply, or
cause the Trustee to supply, to each holder of Exchange Notes, without cost,
copies of such reports or other information.
The Company has filed the Registration Statement of which this Prospectus
forms a part under the Securities Act with respect to the Exchange Offer. As
permitted by the rules and regulations of the Commission, this Prospectus does
not contain all the information set forth in the Registration Statement. For
further information about the Company and the Exchange Offer, reference is made
to the Registration Statement and to the financial statements, exhibits and
schedules filed therewith. The statements contained in this Prospectus about the
contents of any contract or other document referred to are not necessarily
complete, and in each instance, reference is made to a copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. Copies of each such
document may be obtained from the Commission at the public reference section at
the Commission's principal office, 450 5th Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and at the Commission's Regional Offices located at the
Northwestern Atrium Center, Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661-2511, and 7 World Trade Center, 13th Floor, New York, New York
10048 upon payment of the charges prescribed by the Commission or, in the case
of certain such documents, by accessing the Commission's World Wide Web site at
http://www.sec.gov.
The Company is required by the terms of the Indenture to furnish the
Trustee with annual reports containing consolidated financial statements audited
by its independent public accountants and with quarterly reports containing
unaudited condensed consolidated financial statements for each of the first
three quarters of each fiscal year.
130
<PAGE> 131
(This page intentionally left blank)
<PAGE> 132
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets at December 31, 1996 and 1997... F-3
Consolidated Statements of Operations for years ended
December 31, 1995, 1996 and 1997.......................... F-4
Consolidated Statements of Common Shareholders' Equity
(Capital Deficiency) for years ended December 31, 1995,
1996 and 1997............................................. F-5
Consolidated Statements of Cash Flows for years ended
December 31, 1995, 1996 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Consolidated Balance Sheets at December 31, 1997 and June
30, 1998 (unaudited)...................................... F-20
Consolidated Statements of Operations for six months ended
June 30, 1997 and 1998 (unaudited)........................ F-21
Consolidated Statements of Cash Flows for six months ended
June 30, 1997 and 1998 (unaudited)........................ F-22
Notes to Consolidated Financial Statements (unaudited)...... F-24
</TABLE>
F-1
<PAGE> 133
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Long Distance International Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Long
Distance International Inc. and subsidiaries (the Company) as of December 31,
1996 and 1997, and the related consolidated statements of operations, common
shareholders' equity (capital deficiency) and cash flows for each of the three
years in the period ended December 31, 1997. Our audit also included the
financial statement schedule listed in the Index at Item 21(b). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Long Distance International Inc. and subsidiaries at December 31, 1996 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
West Palm Beach, Florida
February 17, 1998, except for
Note 16, as to which the date is March 20, 1998
F-2
<PAGE> 134
LONG DISTANCE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1996 1997
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 254,728 $ 12,172,779
Restricted cash........................................... 28,000 104,970
Accounts receivable, net of allowance for doubtful
accounts of $371,000 in 1996 and $956,000 in 1997...... 2,443,136 5,981,978
Other current assets...................................... 240,060 458,363
---------- ------------
Total current assets........................................ 2,965,924 18,718,090
Property and equipment, net................................. 542,216 7,514,008
Goodwill, net of accumulated amortization of $3,690 in 1996
and $26,428 in 1997....................................... 19,301 450,087
Other assets, net........................................... 366,269 1,124,938
---------- ------------
Total assets................................................ $3,893,710 $ 27,807,123
========== ============
LIABILITIES AND COMMON SHAREHOLDERS' CAPITAL DEFICIENCY
Current liabilities:
Accounts payable.......................................... $1,734,941 $ 5,572,458
Accrued telecommunication costs........................... 1,356,802 3,341,975
Other accrued liabilities................................. 878,712 2,266,348
Current portion of capital lease obligations.............. -- 500,113
Current portion of installment loans...................... -- 50,717
---------- ------------
Total current liabilities................................... 3,970,455 11,731,611
Installment loans........................................... -- 148,836
Capital lease obligations................................... -- 2,450,781
Commitments
Redeemable convertible, preferred stock, Series A,
cumulative $.001 par value -- 2,600,000 shares authorized
and 2,456,556 shares issued and outstanding -- liquidation
value of $1,324,410 and $1,393,608 in 1996 and 1997,
respectively.............................................. 1,290,910 1,364,607
Redeemable preferred stock, Series B, $.001 par
value -- 5,000,000 shares authorized, 2,500,000 shares
issued and outstanding -- liquidation value of
$25,000,000............................................... -- 12,350,478
Common shareholders' capital deficiency:
Common stock, $.001 par value -- 100,000,000 shares
authorized, 22,382,171 and 24,754,354 shares issued and
outstanding in 1996 and 1997, respectively............. 22,382 24,754
Additional paid-in capital................................ 4,535,389 16,995,486
Accumulated deficit....................................... (5,925,426) (17,259,430)
---------- ------------
Total common shareholders' capital deficiency............... (1,367,655) (239,190)
---------- ------------
Total liabilities and common shareholders' capital
deficiency................................................ $3,893,710 $ 27,807,123
========== ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 135
LONG DISTANCE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Revenues, net...................................... $ 2,592,633 $14,361,835 $ 40,115,910
Costs of telecommunications services............... 1,931,504 8,361,323 22,719,511
----------- ----------- ------------
Gross margin....................................... 661,129 6,000,512 17,396,399
Selling, general and administrative expenses....... 2,299,452 9,886,808 28,065,918
Depreciation and amortization...................... 30,231 121,356 440,116
----------- ----------- ------------
Operating loss..................................... (1,668,554) (4,007,652) (11,109,635)
Other expense (income):
Minority interest................................ -- (179,259) 132,384
Interest income.................................. (33,363) (19,063) (430,656)
Interest expense................................. 17,681 211,713 522,641
----------- ----------- ------------
(15,682) 13,391 (224,369)
----------- ----------- ------------
Net loss........................................... (1,652,872) (4,021,043) (11,334,004)
Preferred dividends and redemption accretion....... (17,937) (73,695) (901,876)
----------- ----------- ------------
Net loss applicable to common shareholders......... $(1,670,809) $(4,094,738) $(12,235,880)
=========== =========== ============
Net loss per share applicable to common
shareholders -- basic and dilutive............... $ (0.10) $ (0.21) $ (0.51)
=========== =========== ============
Weighted average shares outstanding................ 16,667,092 19,836,912 23,953,434
=========== =========== ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 136
LONG DISTANCE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
TOTAL COMMON
SHAREHOLDERS'
COMMON STOCK ADDITIONAL EQUITY
-------------------- PAID-IN ACCUMULATED SUBSCRIPTIONS (CAPITAL
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE DEFICIENCY)
---------- ------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995..... 14,339,000 $14,339 $ 1,043,861 $ (251,511) $(102,500) $ 704,189
Stock subscriptions
received................... -- -- -- -- 102,500 102,500
Issuance of common stock, net
of issuance costs of
$47,000.................... 2,520,761 2,520 983,679 -- (280,000) 706,199
Issuance of common stock for
subsidiary................. 50,000 50 22,450 -- -- 22,500
Issuance of common stock for
equipment.................. 288,571 289 100,711 -- -- 101,000
Accrued dividends on
preferred stock............ -- -- (17,937) -- -- (17,937)
Net loss..................... -- -- -- (1,652,872) -- (1,652,872)
---------- ------- ----------- ------------ --------- -----------
Balance at December 31, 1995... 17,198,332 17,198 2,132,764 (1,904,383) (280,000) (34,421)
Stock subscriptions
received................... -- -- -- -- 280,000 280,000
Issuance of common stock, net
of issuance costs of
$628,800................... 3,043,171 3,043 1,194,062 -- -- 1,197,105
Issuance of common stock on
conversion of bridge
loan....................... 2,140,668 2,141 1,282,258 -- -- 1,284,399
Accrued dividends on Series A
preferred stock............ -- -- (73,695) -- -- --
Net loss..................... -- -- -- (4,021,043) (4,021,043)
---------- ------- ----------- ------------ --------- -----------
Balance at December 31, 1996... 22,382,171 22,382 4,535,389 (5,925,426) -- (1,367,655)
Issuance of common stock from
exercise of warrants, net
of issuance costs of
$45,740.................... 1,615,233 1,615 1,283,619 -- -- 1,285,234
Issuance of common stock for
advertising costs.......... 606,950 607 615,454 -- -- 616,061
Issuance of common stock to
investment advisor......... 150,000 150 89,850 -- -- 90,000
Issuance of Series B
warrants, net of issuance
costs of $1,092,244........ -- -- 11,313,050 -- -- 11,313,050
Issuance of warrants for line
of credit.................. -- -- 60,000 -- -- 60,000
Accrued dividends on Series A
preferred stock............ -- -- (73,695) -- -- (73,695)
Accretion to redemption value
of Series B preferred
stock...................... -- -- (828,181) -- -- (828,181)
Net loss..................... -- -- -- (11,334,004) -- (11,334,004)
---------- ------- ----------- ------------ --------- -----------
Balance at December 31, 1997... 24,754,354 $24,754 $16,995,486 $(17,259,430) $ -- $ (239,190)
========== ======= =========== ============ ========= ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 137
LONG DISTANCE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(1,652,872) $(4,021,043) $(11,334,004)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 30,231 121,356 440,116
Minority partner's equity in losses (income) of
subsidiary.............................................. -- (179,259) 132,384
Common stock issued for advertising services.............. -- -- 217,467
Provision for bad debts................................... 60,000 651,741 2,580,125
Changes in operating assets and liabilities, net of
effects of acquisition of Speedial International:
Accounts receivable..................................... (665,324) (2,491,407) (6,118,967)
Other current assets.................................... (14,489) (215,627) (224,745)
Other assets............................................ (84,851) (99,547) (447,318)
Accounts payable........................................ 44,338 1,631,653 4,144,805
Accrued telecommunication costs......................... 295,998 1,060,805 1,985,173
Other accrued liabilities............................... 134,942 767,705 1,490,490
----------- ----------- ------------
Net cash used in operating activities....................... (1,852,027) (2,773,623) (7,134,474)
INVESTING ACTIVITIES:
Increase in restricted cash................................. -- (28,000) (76,970)
Acquisition of Speedial International....................... -- -- (1,047,605)
Purchases of property and equipment......................... (189,228) (324,586) (3,214,869)
----------- ----------- ------------
Net cash used in investing activities....................... (189,228) (352,586) (4,339,444)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock and exercise of
warrants, net of offering costs........................... 813,292 1,472,268 1,285,234
Proceeds from issuance of preferred stock and warrants, net
of offering costs......................................... 1,166,778 32,500 22,835,348
Proceeds from line of credit................................ -- -- 1,480,000
Repayment of line of credit................................. -- -- (1,480,000)
Principal payments on capital lease obligations............. -- -- (598,166)
Principal payments on installment loans..................... -- -- (130,447)
Proceeds from contributions by minority partner............. -- 46,875 --
Proceeds from bridge financing.............................. -- 1,284,399 --
----------- ----------- ------------
Net cash provided by financing activities................... 1,980,070 2,836,042 23,391,969
----------- ----------- ------------
Increase (decrease) in cash and cash equivalents............ (61,185) (290,167) 11,918,051
Cash at beginning of year................................... 606,080 544,895 254,728
----------- ----------- ------------
Cash and cash equivalents at end of year.................... $ 544,895 $ 254,728 $ 12,172,779
=========== =========== ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Common stock issued in repayment of bridge loan............. $ -- $ 1,284,399 $ --
=========== =========== ============
Common stock issued for subscriptions receivable............ $ 280,000 $ -- $ --
=========== =========== ============
Common stock issued for equipment........................... $ 101,000 $ -- $ --
=========== =========== ============
Common stock issued for acquisition......................... $ 22,500 $ -- $ --
=========== =========== ============
Common stock issued for accrued advertising costs........... $ -- $ -- $ 398,595
=========== =========== ============
Common stock issued to investment advisor................... $ -- $ -- $ 90,000
=========== =========== ============
Property and equipment acquired under capital leases........ $ -- $ -- $ 3,549,060
=========== =========== ============
Property and equipment purchased under installment loans.... $ -- $ -- $ 330,000
=========== =========== ============
Accrued dividends on Series A preferred stock............... $ 17,937 $ 73,695 $ 73,695
=========== =========== ============
Accretion on Series B preferred stock....................... $ -- $ -- $ 828,181
=========== =========== ============
Warrants issued in connection with the line of credit....... $ -- $ -- $ 60,000
=========== =========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 138
LONG DISTANCE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Long Distance International Inc. (the Company) was incorporated in the
State of Florida in May 1993. The Company is a provider of domestic and
international long distance services to residential and small and medium
business customers primarily in the United States and Europe. The Company offers
a full range of telecommunication services including calling card, dial-around,
easy access, prepaid and postpaid calling card, and toll free services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiary, Dynamic Telecom International Inc. (DTI) and its
majority-owned subsidiaries, LDI, Ltd. and Long Distance International (U.K.)
Ltd. (formerly Speedial Incorporated). All significant intercompany balances and
transactions have been eliminated in consolidation.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives (from two to seven
years) of the related assets. Property and equipment under capital leases is
recorded at the present value of the future minimum lease payments and amortized
over the lesser of the related lease term or useful life of the related assets.
Included in property and equipment are indefeasible rights of use (IRU) on
certain international telecommunications networks. The IRUs are amortized over
an estimated five year life.
REVENUES AND COSTS OF TELECOMMUNICATION SERVICES
Revenues from telecommunications services, including prepaid phone cards,
are recognized when the services are provided and costs of telecommunications
services are recognized as incurred. Costs of telecommunications services
primarily represent transmission and switching costs charged by carriers and
access charges assessed by local telephone operating companies which permit the
Company's customers to originate and terminate long distance calls.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions. Actual results could differ from these estimates.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, defines a fair value method of accounting for issuance
of stock options and other equity investments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period.
Pursuant to SFAS No. 123, companies are encouraged, but not required, to
adopt the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions under
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, but are required to disclose in a note to the financial statements
pro forma net income amounts as if the Company had applied the new method of
accounting. Additionally, SFAS No. 123 requires increased disclosure for
stock-based compensation for stock-based arrangements.
F-7
<PAGE> 139
LONG DISTANCE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company accounts for stock-based compensation under APB No. 25, under
which the Company's employee and director stock option plans qualify as
noncompensatory plans. Consequently, no compensation expense is recognized (see
Note 11).
LOSS PER SHARE
The Company computes loss per share pursuant to SFAS No. 128, Earnings Per
Share. Weighted average shares outstanding do not include any contingently
issued shares. The dilutive effect of options, warrants and Series A convertible
preferred stock have not been considered as their effect would be antidilutive
for all periods presented. See Notes 11 and 12.
LONG-LIVED ASSETS
The Company accounts for long-lived assets pursuant to SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, which requires impairment losses to be recorded on long-lived
assets used in operations when events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Management reviews
long-lived assets and the related intangible assets for impairment whenever
events or changes in circumstances indicate the assets may be impaired. The
Company, based on current circumstances, does not believe that any long-lived
assets are impaired at December 31, 1997.
GOODWILL
Goodwill represents the excess of the consideration paid over the fair
value of assets acquired from acquisitions and is amortized on a straight-line
basis over five to ten years. The carrying value of goodwill will be reviewed if
the facts and circumstances suggest that it may be impaired. If this review
indicates that goodwill will not be recoverable, as determined based on the
undiscounted cash flows of the entity acquired over the remaining amortization
period, the Company's carrying value of the goodwill will be reduced by the
estimated shortfall of cash flows.
During October 1997, the Company acquired the assets of Speedial
International, a United Kingdom (U.K.) company. Amounts paid in excess of the
fair value of assets acquired were $452,000 which is being amortized on a
straight line basis over ten years.
CUSTOMER LISTS
Included in other assets at December 31, 1997 is a customer list in the
amount of approximately $434,000. As determined by management, the customer list
is being amortized over two years, which is the expected period to be benefited
from the customers acquired. At December 31, 1997, accumulated amortization was
$55,000.
MINORITY INTEREST
In January 1996, the Company contributed $150,000 to establish an 80%
ownership interest in LDI, Ltd., a newly formed U.K. company that provides
telecommunications services to U.K. customers. In January 1998, the Company
repurchased the outstanding minority interest for approximately $380,000.
The Company generally allocates to the minority shareholder of LDI, Ltd.
its share of any profits or losses. During 1997, the minority interest
shareholder did not fund its share of the losses and, as a result, the Company
absorbed 100% of the cumulative unfunded net losses through December 31, 1997.
F-8
<PAGE> 140
LONG DISTANCE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING EXPENSE
The Company expenses advertising costs as incurred. The Company incurred
advertising expenses of approximately $178,000, $4,400,000 and $9,200,000,
during the years ended December 31, 1995, 1996 and 1997, respectively.
Advertising expenses consist primarily of direct mail programs.
STATEMENT OF CASH FLOWS
The Company considers all highly liquid investments with an initial
maturity of less than three months to be cash equivalents. Management believes
the use of credit quality financial institutions minimizes the risk of loss
associated with cash and cash equivalents.
RESTRICTED CASH
Restricted cash on the accompanying consolidated balance sheets consist of
certificates of deposit that are collateral for the Company's performance under
a telecommunications services agreement and certain letters of credit.
CONCENTRATION OF CREDIT RISK
The Company has an agreement with a national service bureau to coordinate
billing and collection services from a majority of the Company's customers
through local exchange carriers (LECs). At December 31, 1996 and 1997,
approximately 88% and 60% of the Company's accounts receivable were due from
LEC's, respectively.
A majority of the Company's transmission and switching facilities are
provided by three telecommunications carriers. Under the terms of the supplier
agreements, the Company purchases long distance service at certain per-minute
rates, which vary based on the time, distance and type of call. Although
management believes that alternative carriers could be found in a timely manner,
disruption of these services for more than a brief period of time would have a
negative effect on the Company's operating results.
REGULATION
The Company is subject to regulation by the Federal Communications
Commission and by various state public service and public utility commissions.
FOREIGN CURRENCY TRANSLATION
For the Company's foreign operations, where the functional currency is
other than the U.S. dollar, balance sheet amounts are generally translated using
the exchange rate in effect at the balance sheet date. Statement of operations
amounts are translated at the average exchange rate for the period. At December
31, 1996 and 1997, the gains and losses resulting from the changes in exchange
rates from period to period were not material.
RECLASSIFICATION
Certain amounts in prior year's financial statements have been reclassified
to conform with the current year's presentation.
3. ACQUISITION
In October 1997, the Company acquired the net assets of Speedial
International, a U.K. Company that previously provided prepaid long distance
services to U.K. customers. The acquisition is being accounted for under the
purchase method and accordingly, the results of operations of Speedial
International have been included in the financial statements since October 1997.
The purchase price was approximately $1,040,000. The excess of the purchase
price over fair value of the net assets acquired was approximately $450,000 and
is being amortized on a straight line basis over 10 years. The following
unaudited pro forma consolidated financial information shows the results of
operations assuming the above purchase occurred on January 1,
F-9
<PAGE> 141
LONG DISTANCE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996. The unaudited pro forma results for the years ended December 31, 1996 and
1997 are not necessarily indicative of what actually would have occurred if the
acquisition had been in effect for the entire period presented. In addition,
they are not intended to be a projection of future results.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
---------------------------
1996 1997
---- ----
<S> <C> <C>
Net sales............................................... $14,867,435 $ 44,917,830
=========== ============
Net loss................................................ $(4,131,230) $(12,235,850)
=========== ============
Net loss per share...................................... ($.21) ($.55)
=========== ============
</TABLE>
4. ACCOUNTS RECEIVABLE FINANCING
The Company accounts for its accounts receivable financing pursuant to SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", which provides accounting and reporting
standards for sales, securitizations and servicing of receivables and other
financial assets. The adoption of SFAS No. 125, which was effective for all
transactions occurring after December 31, 1996, did not have a material effect
on the Company.
The Company's U.S. and U.K. factoring agreements qualify for sales
treatment under SFAS No. 125. Under the U.S. agreements, primarily all customer
accounts receivable are assigned to a billing and collection service, who in
turn sells its ownership in the receivables to a commercial paper conduit. Under
the U.K. agreement, primarily all customer accounts receivable are assigned to a
financial institution. The financial institutions advance 80% and 70% of the
customer accounts in the U.S. and U.K., respectively, in anticipation of
customer collections, to the Company at the prime rate plus 2% in the U.S. and
the Bank of Scotland rate plus 2.5% in the U.K. Advances received are net of
interest amounts accrued on prior advances for which customer payment has not
been processed.
At December 31, 1996 and 1997, the outstanding balance of such receivables
for which the Company was contingently liable was approximately $2,275,000 and
$3,646,000, respectively. During the years ended December 31, 1996 and 1997, the
Company received proceeds of approximately $10,757,000 and $26,513,000,
respectively, pursuant to these agreements and incurred approximately $154,000
and $425,000, respectively, in interest charges upon the sale of such accounts.
Interest paid to the purchaser of such receivables was approximately $395,000
and $109,000 for the years ended December 31, 1996 and 1997, respectively.
Included in accrued liabilities at December 31, 1997 is an accrual for service
fees and for contingently liable amounts of approximately $521,000 and $778,000,
respectively, principally related to trade receivables sold.
5. PROPERTY AND EQUIPMENT
A summary of property and equipment, both owned and pursuant to capital
lease obligations, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1996 1997
-------- ----------
<S> <C> <C>
Furniture and fixtures............................... $ 51,948 $ 167,490
Machinery and equipment.............................. 275,960 1,254,931
Network equipment.................................... -- 4,525,775
Computer equipment................................... 334,198 1,964,538
Leasehold improvements............................... 19,947 120,374
-------- ----------
682,053 8,033,108
Less accumulated depreciation........................ (139,837) (519,100)
-------- ----------
$542,216 $7,514,008
======== ==========
</TABLE>
F-10
<PAGE> 142
LONG DISTANCE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in machinery and equipment is approximately $101,000 for equipment
under a five-year capital lease agreement with a major shareholder. The lease
payments were prepaid at the inception of the lease in September 1995 by the
issuance of common stock with an estimated fair value of $101,000. At the end of
the lease term, the Company may purchase the equipment for a nominal amount.
6. LONG-TERM DEBT
Installment loans at December 31, 1997 consist of the following:
<TABLE>
<S> <C>
Installment loan, collateralized by equipment, interest at
Libor + 3% per annum, payable in quarterly installments of
$1,105 through 2001....................................... $ 17,680
Installment loan, collateralized by equipment, interest at
Libor + 5.5% per annum, payable in quarterly installments
of $11,298 through 2001................................... 181,873
--------
199,553
Less current maturities..................................... (50,717)
--------
Long-term debt.............................................. $148,836
========
</TABLE>
Future annual principal payments on installment loans are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31:
-----------------------
<S> <C>
1998.............................................. $ 50,717
1999.............................................. 49,612
2000.............................................. 49,612
2001.............................................. 49,612
--------
$199,553
========
</TABLE>
Interest paid on installment loans during the year ended December 31, 1997
was approximately $21,000.
On January 31, 1997, the Company entered into an agreement (the Agreement)
with an unrelated party under which the Company was provided access to a
$1,800,000 line of credit (the Line) with a bank. The Line matures in January
1999 and is guaranteed by the unrelated party. Pursuant to the Agreement, the
Company will pay interest monthly to the bank at 8.25% per annum and will pay a
fee monthly to the unrelated party at a rate equal to 2% per annum. Under the
Agreement, the Company issued to the unrelated party warrants to purchase
1,000,000 shares of common stock at an exercise price of $0.75 per share. The
warrants expire January 31, 2003. There were no amounts outstanding under the
Line at December 31, 1997. During the year ended December 31, 1997, the Company
paid nominal fees to the unrelated party associated with amounts borrowed under
the Line which are included in interest expense in the accompanying consolidated
statement of operations. Interest paid on amounts outstanding on the Line during
the year ended December 31, 1997 was approximately $8,000.
In March 1996, the Company obtained $1,200,000 in bridge financing in the
form of an unsecured note payable. In September 1996, the Company repaid the
outstanding principal and accrued interest with the issuance of common stock
(see Note 12).
7. LEASES
The Company leases its premises under noncancelable operating leases
expiring at various dates through 2000. Rental expense was approximately
$61,000, $166,834 and $391,215 for the years ended December 31, 1995, 1996 and
1997, respectively. In addition, the Company leases certain computer and
telecommunications equipment under noncancelable capital leases. Interest paid
on capital leases during the year ended December 31, 1997 was approximately
$50,000.
F-11
<PAGE> 143
LONG DISTANCE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997, the scheduled future minimum lease payments
required under capital and operating leases that have initial or remaining
noncancelable lease terms in excess of one year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDED DECEMBER 31: LEASES LEASES
----------------------- ---------- ----------
<S> <C> <C>
1998.............................................. $ 831,048 $ 328,439
1999.............................................. 831,048 234,720
2000.............................................. 796,447 212,640
2001.............................................. 724,896 154,872
2002.............................................. 692,634 145,920
Thereafter........................................ -- 1,490,564
---------- ----------
Total minimum lease payments........................ 3,876,073 $2,567,155
==========
Less amounts representing interest (12% to 20%)..... (925,179)
----------
Present value of obligations under capital leases... 2,950,894
Less current maturities............................. (500,113)
----------
Long-term obligations under capital leases.......... $2,450,781
==========
</TABLE>
8. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1996 1997
---- ----
<S> <C> <C>
Accrued payroll, commission and benefits............... $ 40,209 $ 182,835
Local exchange carrier chargeback reserve.............. 254,408 1,438,721
Accrued printing....................................... 488,595 312,743
Accrued professional consulting........................ 95,500 332,049
-------- ----------
Total other accrued liabilities.......................... $878,712 $2,266,348
======== ==========
</TABLE>
9. COMMITMENTS
In October 1997, the Company entered into a purchase agreement for an IRU
on a sub-marine telecommunications cable. The Company will pay an aggregate of
$5 million plus 12% interest per annum payable through 2001. Included in fixed
assets as of December 31, 1997 is a $500,000 initial payment under this
agreement. In accordance with the agreement, the initial payment is refundable
only in the event that the capacity is not available at the October 1998
effective date, as defined. Upon completion of the cable, the IRU will be
capitalized and classified as a fixed asset and amortized over the estimated
useful life of the IRU.
In January 1998, the Company entered into a purchase agreement for an IRU
on a land-based telecommunication cable. The Company will pay an aggregate of
$750,000 plus 12% interest per annum payable through 2001. Upon completion of
the cable, the IRU will be capitalized and classified as a fixed asset and
amortized over the estimated useful life of the IRU.
F-12
<PAGE> 144
LONG DISTANCE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future annual principal and interest required under these agreements are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31:
-----------------------
<S> <C>
1998........................................... $1,727,864
1999........................................... 1,714,610
2000........................................... 1,818,360
2001........................................... 906,993
----------
Total payments................................... $6,167,827
==========
</TABLE>
At December 31, 1996 and 1997, the Company is contingently liable under
certain letters of credit provided to telecommunications carriers to ensure
payment of telecommunications costs incurred by the Company.
10. INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, Accounting for
Income Taxes. Deferred income tax assets and liabilities are determined based
upon differences between financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Significant components
of the Company's net deferred income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1996 1997
----------- -------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts....................... $ 317,000 $ 480,000
Accrued expenses...................................... -- 45,000
Net operating loss carryforwards...................... 1,641,000 5,800,000
----------- -------------
1,958,000 6,325,000
Valuation allowance..................................... (1,939,000) (6,245,000)
----------- -------------
Total deferred tax assets............................... 19,000 80,000
Deferred tax liabilities:
Fixed assets.......................................... (19,000) (80,000)
----------- -------------
Total deferred tax liabilities.......................... (19,000) (80,000)
----------- -------------
Total net deferred taxes................................ $ -- $ --
=========== =============
</TABLE>
SFAS No. 109 requires a valuation allowance to reduce the deferred tax
assets reported if, based on the weight of the evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Management has determined that a $6,245,000 valuation allowance at December 31,
1997 is necessary to reduce the deferred tax assets to the amount that will more
likely than not be realized. The change in the valuation allowance for the years
ended December 31, 1996 and 1997 was $1,232,000 and $4,306,000, respectively.
The Company has incurred net operating losses since inception. At December
31, 1997, the Company had approximately $12,000,000 and $4,000,000 in operating
loss carryforwards for U.S. and foreign income tax purposes, respectively, that
expire in various amounts from 2008 through 2012. The Company may have had a
change of ownership as defined by the Internal Revenue Code Section 382. As a
result, a substantial annual limitation may be imposed upon the future
utilization of its net operating loss carryforwards. At this point in time, the
Company has not completed a change in ownership study and the exact amount of
any such limitations are not known.
F-13
<PAGE> 145
LONG DISTANCE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The federal statutory tax rate reconciled to the effective rate is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Federal statutory rate (benefit)....................... (34.00)% (34.00)% (34.00)%
State tax rate, net of federal benefit................. (3.63) (3.63) (3.63)
Nondeductible items.................................... 1.20 0.92 0.65
Change in valuation allowance.......................... 36.43 36.51 37.99
Other.................................................. 0.00 0.20 (1.01)
------ ------ ------
0.00% 0.00% 0.00%
====== ====== ======
</TABLE>
11. EMPLOYEE BENEFITS
STOCK OPTIONS
During 1994, the Board of Directors approved the 1994 Employee Stock Option
Plan (the 1994 Plan) covering substantially all full time employees of the
Company. The 1994 Plan is administered by the Board of Directors who have
authority to grant up to 5,000,000 awards of any combination of incentive stock
options (ISO), nonqualified stock options (NSO), stock appreciation rights (SAR)
or stock depreciation rights. The term of the options (limited to ten years),
vesting schedule and exercise price are at the discretion of the Board of
Directors. At December 31, 1997, there were 1,977,500 shares awarded under the
1994 Plan.
In July 1997, the Board of Directors approved the 1997 Stock Incentive Plan
(the 1997 Plan) covering the Company's executive officers, as defined. The 1997
Plan is administered by the Board of Directors who have authority to grant up to
4,000,000 awards of any combination of ISO's, NSO's, SAR's or restricted stock.
The term of the options, vesting schedule and exercise price are at the
discretion of the Board of Directors. At December 31, 1997, there were 2,000,000
shares awarded under the 1997 Plan.
The Company has granted options to certain employees and employee-directors
which are issuable at the discretion of the Company's Board of Directors and
generally vest ratably over a two to four year period. Remaining option terms
range from one to five years. As determined by the Company's Board of Directors,
the exercise price of all options exceeded the fair market value of the
underlying common stock at the grant date. Therefore, no compensation expense
was recognized.
Pro forma information regarding net loss is required by SFAS No. 123 and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that statement. The fair value of
outstanding options was estimated at the date of grant using the minimum value
method with the following assumptions: risk-free interest rate of 5.5% and 6.5%
for 1996 and 1997, respectively; no expected dividends; and weighted average
expected life of the options from three to five years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effect of
applying the fair value method prescribed by SFAS No. 123 to the Company's
options results in pro forma net loss applicable to common shareholders of
$13,051,000 for the year ended December 31, 1997. The pro forma effect for the
years ended December 31, 1996 and 1995 was not material.
F-14
<PAGE> 146
LONG DISTANCE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No options were exercised, expired or forfeited during the years ended
December 31, 1996 and 1997. A summary of the Company's stock option activity and
related information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Options outstanding at January 1............ 619,000 646,500 1,229,500
Issued.................................... 27,500 583,000 2,748,000
----------- ----------- -----------
Options outstanding December 31............. 646,500 1,229,500 3,977,500
=========== =========== ===========
Exercisable at December 31.................. 300,000 654,000 3,015,500
=========== =========== ===========
Options with exercise prices equal to or
less than $1.25 per share:
Number of options at December 31.......... 646,500 1,229,500 3,754,500
=========== =========== ===========
Weighted average contractual life
remaining (in years)................... 4 3.0 3.6
=========== =========== ===========
Range in exercise prices.................. $0.05-$0.45 $0.05-$0.60 $0.05-$1.25
=========== =========== ===========
Weighted average exercise price of
currently exercisable options.......... $0.06 $0.11 $0.94
=========== =========== ===========
Weighted average exercise price of
outstanding options.................... $0.07 $0.12 $0.93
=========== =========== ===========
Options with exercise prices greater than
$1.25 per share:
Number of options at December 31.......... -- -- 223,000
=========== =========== ===========
Weighted average contractual life
remaining (in years)................... -- -- 4.8
=========== =========== ===========
Range in exercise prices.................. $-- $-- $2.00-$2.10
=========== =========== ===========
Weighted average exercise price of
currently exercisable options.......... $-- $-- $2.10
=========== =========== ===========
Weighted average exercise price of
outstanding options.................... $-- $-- $2.07
=========== =========== ===========
</TABLE>
EMPLOYEE SAVINGS PLAN
On January 1, 1997, the Company adopted a 401(k) savings plan (the Plan)
pursuant to which all employees that have completed six months of active service
or were employed on the date of adoption are eligible. The Plan provides for
matching contributions from the Company at the discretion of the Company's Board
of Directors. No matching contributions were made for the year ended December
31, 1997.
12. CAPITAL STOCK
SERIES A PREFERRED STOCK
The Company has outstanding 2,456,556 shares of its Series A Cumulative
Convertible Preferred Stock (Series A Preferred). Cumulative dividends are
payable at a fixed annual rate of $.03 per share ($96,132 and $165,330 accrued
at December 31, 1996 and 1997, respectively). Each share of Series A Preferred
has voting rights equal to common stock and are convertible into shares of
common stock at any time at a conversion price equal to $.50 per share. In the
event of any liquidation, dissolution or winding up of the Company, the
F-15
<PAGE> 147
LONG DISTANCE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
holders of the Series A Preferred shall be entitled to receive an amount equal
to $.50 per share plus all cumulative accrued and unpaid dividends. In addition,
if a change in control of the Company occurs, as defined, the holders of the
outstanding Series A Preferred can require the Company to redeem the shares for
$.50 per share plus all cumulative accrued and unpaid dividends. The terms of
the Series A Preferred restrict the Company's ability to pay dividends on common
stock and grant the holders of the Series A Preferred participation in dividends
declared on common shares in excess of certain defined levels.
SERIES B PREFERRED STOCK
On July 28, 1997, the Company executed an agreement with a group of
investors under common control (Investor Group) wherein the Investor Group
agreed to provide a maximum of $25,000,000 for up to 2,500,000 shares of Series
B Preferred Stock, par value $.001 per share (Series B Preferred) plus
detachable stock warrants (Series B Warrants) to purchase up to 10,321,215
shares of the Company's common stock at an exercise price of $.001 per warrant.
On July 28, 1997, the Investor Group purchased 2,400,000 shares of Series B
Preferred and 9,908,367 Series B Warrants for $24,000,000. In addition, the
Company sold 7,000 shares of Series B Preferred and 28,898 Series B Warrants to
certain employees and investment bankers involved in the transaction for
$70,000.
In August 1997, the Investor Group purchased 75,000 shares of Series B
Preferred and 309,636 Series B Warrants for $750,000. In addition, the Company
sold 18,000 shares of Series B Preferred and 74,313 Series B Warrants to an
investment banker involved in the transaction for $180,000.
Total proceeds to the Company were $22,832,847, net of offering costs. A
portion of the net proceeds were used to pay the $330,000 outstanding balance
under the Line (see Note 6).
Dividends on the Series B Preferred are payable at a fixed annual rate of
$1.20 per share if and when declared by the Board of Directors. The holders of
the Series B Preferred have the right to elect two members to the Board of
Directors. The Series B Preferred and its accrued and unpaid dividends are
redeemable at the option of the Company any time or at the option of the holder
at anytime after the seventh anniversary of their issuance. In the event of any
liquidation, dissolution or winding up of the Company, the holders of
outstanding Series B Preferred shall be entitled to receive an amount equal to
$10 per share plus all declared and unpaid dividends, or $15 per share plus all
declared and unpaid dividends in the event that the Company experiences an
operating shortfall in 1998, as defined. For the year ended December 31, 1997,
the accretion to redemption value was recorded assuming a redemption value of
$10 per share. The Company, based upon its results during 1998, will change the
recorded redemption value assuming a redemption value of $15 per share if it
becomes apparent that a 1998 operating shortfall will be experienced.
As determined by the Company's Board of Directors, the Series B Preferred
was recorded at $11,522,298 which represents the estimated fair value at the
date of issuance, net of issuance costs of $1,092,244, and the Series B Warrants
were recorded at $11,313,049, which represents the estimated fair value at the
date of issuance, net of issuance costs of $1,072,409. The Series B Preferred
will accrete up to the ultimate redemption value through periodic charges to
retained earnings, or in the case of an accumulated deficit, additional paid-in
capital. For the year ended December 31, 1997, the Company recorded accretion of
$828,181.
The terms of the Series A Preferred and Series B Preferred restrict, among
other things, the Company's ability to authorize or issue equity securities,
enter into new commitments or borrowings over specified amounts or make certain
expenditures over specified amounts not provided for in the Company's financial
operating budget.
F-16
<PAGE> 148
LONG DISTANCE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMON STOCK
In March 1996, the Company obtained $1,200,000 in bridge financing in the
form of an unsecured note payable (the Note) from an investment banker. Interest
on the Note was payable at maturity at 8%. The Company incurred $60,000 in
financing costs related to the bridge loan which is included in interest expense
in the 1996 statement of operations. In September 1996, the Note and all accrued
and unpaid interest thereon aggregating $1,285,000 was converted into 2,140,668
shares of the Company's common stock based upon the estimated fair value of the
common stock as determined by the Company's Board of Directors.
During the year ended December 31, 1996, the Company issued 3,043,171
shares of its common stock in a private placement. Proceeds were approximately
$1,197,000, net of issuance costs of approximately $628,800.
During the year ended December 31, 1997, the Company issued 1,615,233
shares of its common stock from the exercise of warrants. Proceeds were
approximately $1,285,234, net of issuance costs of approximately $45,740.
During 1996, the Company entered into an agreement with its primary
advertising printer whereby the printer may receive shares of the Company's
common stock in payment for printing services. The agreement provided the option
to receive cash or common stock for each invoice, limited to 20% of the amount
of each invoice. Included in accrued expenses at December 31, 1996 was
approximately $399,000 payable to the printer for which the printer elected to
receive common stock in lieu of cash. During the year ended December 31, 1997,
the Company issued 305,264 shares of common stock in settlement of amounts
accrued at December 31, 1996. During the year ended December 31, 1997, invoice
amounts for printing services incurred in 1997 totaling $217,000 were settled
with the issuance of 301,686 shares of common stock. The agreement expired in
1997.
During 1996, the Company entered into an agreement with an investment
advisor whereby the advisor would receive shares of the Company's common stock
in payment for consulting services. Included in accrued expenses at December 31,
1996 was $90,000 payable to the advisor. In January 1997, the Company issued
150,000 shares of common stock in settlement of the amounts accrued at December
31, 1996.
WARRANTS
During 1995, a representative of a major shareholder was appointed to the
Company's Board of Directors and the Company issued warrants to the shareholder
to purchase up to 2,000,000 shares of common stock at exercise prices ranging
from $0.60 to $1.00. The warrants expire at various dates through March 1998. On
March 31, 1997, warrants were exercised by the holder to purchase 650,000 shares
of common stock. The Company received proceeds of $487,500.
During 1996, the Company issued common stock with detachable warrants to
purchase up to 2,591,919 shares of common stock at exercise prices ranging from
$0.75 to $1.25. The warrants expire at various dates through December 1998.
Using the minimum value options pricing model, the Company determined that the
fair value of the warrants was not material.
In connection with the issuance of the Series B Preferred, described above,
the Company issued 10,321,215 Series B Warrants.
In January 1997, and in connection with the issuance of the Line (see Note
6), the Company issued warrants to purchase up to 1,000,000 shares of common
stock at an exercise price of $0.75 per warrant. The Company determined that the
fair value of the warrants was $60,000. Accordingly, the Company recorded the
value as deferred financing costs and is amortizing the amount to interest
expense over the term of the Line.
F-17
<PAGE> 149
LONG DISTANCE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 1997, and in connection with the issuance of the Series B Preferred
and associated warrants described above, the Company issued warrants to purchase
up to 500,000 shares of common stock at an exercise price of $2.00 per warrant.
The warrants were issued to an investment advisor for assistance with this
transaction. The Company determined that the fair value of the warrants was not
material.
A summary of the Company's warrants is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1995 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
Warrants outstanding at January 1....... -- 2,000,000 4,591,919
Issued................................ 2,000,000 2,591,919 11,822,583
Exercised............................. -- -- (1,615,233)
Forfeited............................. -- -- (527,719)
------------- ------------- --------------
Warrants outstanding and exercisable at
December 31........................... 2,000,000 4,591,919 14,271,550
============= ============= ==============
Range in exercise prices................ $0.60 - $1.00 $0.60 - $1.25 $0.001 - $1.25
============= ============= ==============
</TABLE>
As of December 31, 1997, common shares reserved for issuance are as
follows:
<TABLE>
<S> <C>
Series A Preferred.......................................... 2,456,556
Series B Preferred.......................................... 2,500,000
Employee stock options...................................... 3,977,500
Warrants.................................................... 14,271,550
----------
Total....................................................... 23,205,606
==========
</TABLE>
13. RELATED PARTY TRANSACTIONS
The Company provides telecommunication services to certain major
shareholders. In the opinion of management, rates charged to these shareholders
are comparable to rates charged to similar commercial customers. During the
years ended December 31, 1996 and 1997, revenue from these shareholders was
approximately $254,788 and $523,920, respectively.
During 1997, the Company issued shares of common stock to their primary
advertising printer (see Note 12).
During 1997, the Company paid $324,000 to a network consulting company. In
December 1997, the owner of the consulting company accepted an offer to become a
member of the Company's Board of Directors.
14. GEOGRAPHIC DATA
The Company is engaged in one major line of business which involves
providing long distance service to residential and small and medium business
customers. The Company's services are provided primarily in the United States
and Western Europe (beginning in 1995). Substantially all European results are
derived from services provided in the U.K.
The Company's results have been partially dependent on operations located
in Europe. These operations are subject to the risks that are inherent in
operating in such locations, including government regulations and currency
fluctuations.
Revenues by geographic area consist only of services provided to customers,
as reported in the accompanying consolidated statements of operations. Operating
loss by geographic area represents net revenues less applicable costs and
expenses related to those revenues. Unallocated expenses are primarily comprised
of general and administrative expenses of a corporate nature. Identifiable
assets by geographic area represent those assets used in the operation of each
geographic area. Corporate assets consist of an allocation of property and
equipment.
F-18
<PAGE> 150
LONG DISTANCE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents selected financial information pertaining to
the Company's geographic operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1995 1996 1997
----------- ----------- ------------
(U.S. DOLLARS)
<S> <C> <C> <C>
Revenues, net:
United States............................ $ 2,544,055 $14,020,394 $ 34,459,013
Europe................................... 48,578 341,441 5,656,897
----------- ----------- ------------
Consolidated revenues, net................. $ 2,592,633 $14,361,835 $ 40,115,910
=========== =========== ============
Operating (loss) income:
United States............................ $(1,700,355) $(2,834,356) $ (6,656,064)
Europe................................... 31,801 (869,832) (3,560,410)
Unallocated expenses..................... -- (303,464) (893,161)
----------- ----------- ------------
Consolidated operating loss................ $(1,668,554) $(4,007,652) $(11,109,635)
=========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1996 1997
----------- -----------
(U.S. DOLLARS)
<S> <C> <C>
Identifiable assets:
United States........................................... $ 3,344,835 $21,264,427
Europe.................................................. 505,717 5,886,543
Corporate............................................... 43,158 656,153
----------- -----------
Consolidated identifiable assets.......................... $ 1,666,585 $ 3,893,710
=========== ===========
</TABLE>
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, restricted cash, accounts receivable,
accounts payable and accrued expenses on the accompanying consolidated balance
sheets approximate fair value due to the short maturity of these items.
Installment loans bear interest at Libor plus 3.0% and Libor plus 5.5%. The
carrying amounts reported in the accompanying December 31, 1997 consolidated
balance sheet approximate fair value because the interest rates are tied to a
quoted variable rate.
Series A Preferred provides for cumulative dividends at a rate of 3% per
annum. Series B Preferred does not provide for cumulative dividends. The
carrying value of the Series A and Series B Preferred approximates its fair
value since it is carried at original fair value plus accretion.
16. SUBSEQUENT EVENT
On March 20, 1998, the Company agreed to issue to the holders of Series B
Preferred Stock (Series B Holders) warrants to purchase an additional 1,010,101
shares of Common Stock. These warrants are issuable in consideration of the
Series B Holders' consent to amend the terms of the Series B Preferred Stock to,
among other things, eliminate the provisions of the Series B Preferred Stock
that provided for potential redemption at $15 per share. The warrants provide
for the purchase of one share of the Company's common stock at an exercise price
of $0.001. The warrants have no expiration date. The warrants were accounted for
as a dividend to the Series B Holders based upon the estimated fair value of
$3.55 per warrant as determined by the Company's Board of Directors.
17. SUBSEQUENT EVENT (UNAUDITED)
On April 1, 1998, as amended, the Company entered into a non-binding letter
of intent to purchase a U.K. company that provides cellular communications
services to U.K. customers. The proposed purchase is approximately $2.3 million
of which 50% will be paid in cash and 50% will be paid through the issuance of
the Company's common stock.
F-19
<PAGE> 151
LONG DISTANCE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 12,172,779 $129,435,022
Restricted cash........................................... 104,970 77,647,103
Accounts receivable, net of allowance for doubtful
accounts of $956,000 at December 31, 1997 and
$2,218,000 at June 30, 1998............................ 5,981,978 8,169,155
Other current assets...................................... 458,363 1,801,512
------------ ------------
Total current assets........................................ 18,718,090 217,052,792
Property and equipment, net................................. 7,514,008 23,335,625
Goodwill, net of accumulated amortization of $26,000 at
December 31, 1997 and $225,000 at June 30, 1998........... 450,087 3,633,388
Other assets, net........................................... 1,124,938 2,026,928
------------ ------------
Total assets................................................ $ 27,807,123 $246,048,733
============ ============
LIABILITIES AND COMMON SHAREHOLDERS' CAPITAL DEFICIENCY:
Current liabilities:
Accounts payable.......................................... $ 5,572,458 $ 11,578,162
Accrued telecommunication costs........................... 3,341,975 2,809,177
Other accrued liabilities................................. 2,266,348 5,384,579
Bond interest payable..................................... -- 5,895,313
Current portion of capital lease obligations.............. 500,113 946,355
Current portion of installment loans...................... 50,717 1,978,317
------------ ------------
Total current liabilities................................... 11,731,611 28,591,903
Installment loans........................................... 148,836 4,738,030
Capital lease obligations................................... 2,450,781 3,691,659
Bonds payable............................................... -- 205,109,148
Commitments
Redeemable convertible, preferred stock, Series A,
cumulative $.001 par value -- 2,600,000 shares authorized
and 2,456,556 shares issued and outstanding -- liquidation
value of $1,393,608 and $1,430,546 at December 31, 1997
and June 30, 1998, respectively........................... 1,364,607 1,401,456
Redeemable preferred stock, Series B, $.001 par
value -- 5,000,000 shares authorized, 2,500,000 shares
issued and outstanding -- liquidation value of
$25,000,000............................................... 12,350,478 13,314,849
Redeemable warrants, 3,394,655 authorized, issued and
outstanding............................................... -- 11,546,076
Common shareholders' capital deficiency:
Common stock, $.001 par value -- 100,000,000 shares
authorized, 24,754,354 and 26,316,755 shares issued and
outstanding at December 31, 1997 and June 30, 1998,
respectively........................................... 24,754 26,317
Additional paid-in capital................................ 16,995,486 18,270,369
Accumulated deficit....................................... (17,259,430) (40,676,150)
Accumulated other comprehensive income.................... -- 35,076
------------ ------------
Capital deficiency.......................................... (239,190) (22,344,388)
------------ ------------
Total liabilities and common shareholders' capital
deficiency................................................ $ 27,807,123 $246,048,733
============ ============
</TABLE>
See accompanying notes.
F-20
<PAGE> 152
LONG DISTANCE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1997 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
Revenues, net............................................... $18,729,449 $ 30,659,751
Costs of telecommunications services........................ 9,591,795 21,671,233
----------- ------------
Gross margin................................................ 9,137,654 8,988,518
Selling, general and administrative expenses................ 11,706,973 26,126,861
Depreciation and amortization............................... 110,125 1,117,511
----------- ------------
Operating loss.............................................. (2,679,444) (18,255,854)
Other expense (income):
Interest income........................................... (3,525) (1,731,813)
Interest expense.......................................... 281,438 6,892,679
----------- ------------
277,913 5,160,866
----------- ------------
Net loss.................................................... (2,957,357) (23,416,720)
Preferred dividends and preferred stock and warrant
redemption accretion...................................... (36,848) (4,604,207)
----------- ------------
Net loss applicable to common shareholders.................. $(2,994,205) $(28,020,927)
=========== ============
Net loss per share applicable to common shareholders --
basic and dilutive........................................ $ (0.13) $ (1.10)
=========== ============
Weighted average shares outstanding......................... 23,573,651 25,379,167
=========== ============
</TABLE>
See accompanying notes.
F-21
<PAGE> 153
LONG DISTANCE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1997 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(2,957,357) $(23,416,720)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 110,125 1,116,272
Minority partner's equity in losses of subsidiary......... 132,384 --
Foreign currency translation adjustment................... -- 35,076
Provision for bad debts................................... 1,167,079 2,017,339
Common stock issued for advertising services.............. 217,465 --
Noncash interest expense.................................. -- 246,947
Changes in operating assets and liabilities, net of
acquisition:
Accounts receivable.................................... (1,031,214) (3,754,373)
Other current assets................................... 119,242 (895,462)
Other assets........................................... (94,003) (1,030,827)
Accounts payable....................................... 1,292,755 4,558,223
Accrued telecommunication costs........................ 1,122,819 (532,798)
Other accrued liabilities.............................. 12,362 2,821,264
Bond interest payable.................................. -- 5,895,313
----------- ------------
Net cash provided by (used in) operating activities......... 91,657 (12,939,746)
INVESTING ACTIVITIES:
(Increase) decrease in restricted cash...................... 222 (77,542,133)
Purchases of property and equipment......................... (318,381) (5,822,038)
Purchase of minority interest in subsidiary................. -- (387,714)
Acquisition, net of cash acquired........................... -- (1,397,684)
----------- ------------
Net cash used in investing activities....................... (318,159) (85,149,569)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of offering
costs..................................................... 664,011 1,440,385
Proceeds from issuance of bonds and warrants, net of
offering costs............................................ -- 216,391,149
Principal payments on capital lease obligations............. (12,050) (996,771)
Principal payments on installment loans..................... -- (1,483,205)
Net increase to short term borrowing........................ 400,000 --
----------- ------------
Net cash provided by financing activities................... 1,051,961 215,351,558
----------- ------------
Increase in cash and cash equivalents....................... 825,459 117,262,243
Cash and cash equivalents at beginning of period............ 254,728 12,172,779
----------- ------------
Cash and cash equivalents at end of period.................. $ 1,080,187 $129,435,022
=========== ============
</TABLE>
F-22
<PAGE> 154
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1997 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
=========== ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Property and equipment acquired under capital leases........ $ 696,024 $ 2,683,890
=========== ============
Property and equipment purchased under installment loans.... $ 236,762 $ 8,000,000
=========== ============
Accrued dividends on Series A preferred stock............... $ 36,850 $ 36,849
=========== ============
Accretion on Series B preferred stock....................... $ -- $ 964,371
=========== ============
Common stock issued for accrued advertising................. $ 398,597 $ --
=========== ============
Common stock issued to investment advisor................... $ 90,000 $ --
=========== ============
Warrants issued in connection with line of credit........... $ 60,000 $ --
=========== ============
Accretion on warrants....................................... $ -- $ 17,128
=========== ============
</TABLE>
On April 21, 1998, the Company purchased Newgate. In connection with the
acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired............................... $4,199,700
Cash paid................................................... 1,600,844
Issuance of common stock.................................... 1,744,448
----------
Liabilities assumed......................................... $ 854,408
==========
</TABLE>
See accompanying notes.
F-23
<PAGE> 155
LONG DISTANCE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements for the six-month
periods ended June 30, 1997 and 1998 and as of June 30, 1998 have been prepared
in accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, any adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the unaudited information shown have been included. The results of operations
for such interim periods are not necessarily indicative of the results expected
for the full year ending December 31, 1998.
2. DEBT OFFERING
On April 13, 1998, the Company consummated an offering of 225,000 units,
each unit consisting of one 12.25% Senior Note (the "Notes") due 2008 and one
warrant (the "Warrants") to purchase common stock for $225 million.
Approximately $75.5 million of the proceeds was placed in an escrow account and
pledged as security for the first six scheduled interest payments on the Notes.
The net proceeds to the Company were approximately $141 million. Approximately
$11.5 million was allocated to the Warrants, net of offering costs. The Warrants
accrete to their redemption value. Each warrant entitles the holder thereof to
purchase 15.0874 shares of the Company's common stock at an exercise price of
$.01 per share. The Warrants may be exercised during the period from one year
after issuance to ten years after issuance.
3. ACCOUNTS RECEIVABLE FINANCING
The Company accounts for its accounts receivable financing pursuant to SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", which provides accounting and reporting
standards for sales, securitizations and servicing of receivables and other
financial assets. The adoption of SFAS No. 125, which was effective for all
transactions occurring after December 31, 1996, did not have a material effect
on the Company.
The Company's U.S. agreements qualify for sales treatment under SFAS No.
125. Under the U.S. agreements, primarily all customer accounts receivable are
assigned to a billing and collection service, who in turn sells its ownership in
the receivables to a commercial paper conduit. The financial institutions
advance 80% of the customer accounts in the U.S. in anticipation of customer
collections, to the Company at the prime rate plus 2% in the U.S.
At December 31, 1997 and the six months ended June 30, 1998, the
outstanding balance of such receivables for which the Company is contingently
liable was approximately $3,646,000 and $5,207,000, respectively. During the
year ended December 31, 1997 and the six months ended June 30, 1998, the Company
received proceeds of approximately $26,513,000 and $17,221,000, respectively,
pursuant to these agreements and incurred approximately $425,000 and $225,000,
respectively, in interest charges upon the sale of such accounts. Interest paid
to the purchaser of such receivables was approximately $109,000 and $219,000 for
the year ended December 31, 1997 and the six months ended June 30, 1998,
respectively. Included in accrued liabilities at June 30, 1998 is an accrual for
service fees and for contingently liable amounts of approximately $1,169,307,
principally related to trade receivables sold.
F-24
<PAGE> 156
LONG DISTANCE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
4. PROPERTY AND EQUIPMENT
A summary of property and equipment, both owned and pursuant to capital
lease obligations, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
<S> <C> <C>
Furniture and fixtures............................ $ 167,490 $ 393,580
Machinery and equipment........................... 1,254,931 1,587,006
Network equipment................................. 4,525,775 17,636,591
Computer equipment................................ 1,964,538 4,065,571
Leasehold improvements............................ 120,374 875,993
---------- -----------
8,033,108 24,558,741
Less accumulated depreciation..................... (519,100) (1,223,116)
---------- -----------
$7,514,008 $23,335,625
========== ===========
</TABLE>
During the period ended June 30, 1998, the Company acquired three IRUs (See
Note 6) and additional switching equipment which are included in network
equipment at June 30, 1998.
5. LEASES
The Company leases its premises under noncancelable operating leases
expiring at various dates through 2000. Rental expense was approximately
$391,000 and $401,000 for the year ended December 31, 1997 and the six months
ended June 30, 1998, respectively. In addition, the Company leases certain
computer and telecommunications equipment under noncancelable capital leases.
Interest paid on capital leases during the six months ended June 30, 1998 was
approximately $190,142.
As of June 30, 1998, the scheduled future minimum lease payments required
under capital and operating leases that have initial or remaining noncancelable
lease terms in excess of one year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- ----------
<S> <C> <C>
First Quarter Ended June 30:
Remaining 1998........................................... $ 744,714 $ 358,732
1999..................................................... 1,548,182 626,931
2000..................................................... 1,488,303 630,232
2001..................................................... 1,164,681 581,883
2002..................................................... 1,016,762 436,838
Thereafter............................................... 116,802 4,299,132
----------- ----------
Total minimum lease payments............................... $ 6,079,444 $6,933,748
==========
Less amounts representing interest (12% to 20%)............ (1,441,430)
-----------
Present value of obligations under capital leases.......... $ 4,638,014
Less current maturities.................................... (946,355)
-----------
Long-term obligations under capital leases................. $ 3,691,659
===========
</TABLE>
6. INSTALLMENT LOANS
In October 1997, the Company entered into an installment purchase agreement
for an IRU on a sub-marine telecommunications cable for which it will pay an
aggregate of $5 million plus 12% interest per annum through 2001. In January
1998, the Company entered into an installment purchase agreement for an IRU on a
land-based telecommunications cable for which it will pay an aggregate of
$750,000 plus 12% interest per annum through 2001. In May 1998, the Company
entered into an installment purchase agreement for an IRU
F-25
<PAGE> 157
LONG DISTANCE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
on a land-based telecommunications cable for which it will pay an aggregate of
$2.25 million plus 12% interest per annum through 2001. As of June 30, 1998,
future annual principal payments on installment loans are as follows:
<TABLE>
<S> <C>
1999........................................................ $3,056,437
2000........................................................ 2,352,587
2001........................................................ 1,307,323
----------
Total............................................. $6,716,347
==========
</TABLE>
7. INCOME TAXES
For the six months ended June 30, 1997 and 1998, the benefit for income
taxes was computed using an estimated annual effective tax rate of 37% for both
periods. The Company recorded a 100% valuation allowance against net deferred
tax assets.
8. CAPITAL
On March 20, 1998, the Company agreed to issue to the holders of Series B
Preferred Stock (Series B Holders) warrants to purchase an additional 1,010,101
shares of Common Stock. These warrants are issuable in consideration of the
Series B Holders' consent to amend the terms of the Series B Preferred Stock to,
among other things, eliminate adjustment to the redemption price of the Series B
Preferred Stock from $10 to $15 per share, or from $25 million to $37.5 million
in the aggregate, plus any accrued, but unpaid dividends, in the event the
Company does not attain at least $100 million in gross revenues or has a loss
before interest, taxes, depreciation and amortization in excess of $10 million
for the fiscal year ended December 31, 1998. The warrants provide for the
purchase of one share of the Company's common stock at an exercise price of
$.001. The warrants have no expiration date. The warrants were accounted for as
a dividend to the Series B Holders based upon an estimated fair value of $3.55
per warrant which was based upon an independent valuation performed as of April
1998 to value similar warrants.
9. ACQUISITIONS
On April 21, 1998, the Company acquired all of the outstanding stock of
Newgate, a UK company providing cellular communication services to UK customers.
Total consideration paid was approximately $1,700,000 cash and 214,000 shares of
the Company's common stock. This acquisition has been accounted for under the
purchase method and accordingly, the results of operations of Newgate have been
included in the consolidated financial statements since April 21, 1998. The
total cost of acquisition was allocated to the tangible assets acquired and
liabilities assumed based on their respective fair values. The excess of the
purchase price over the fair value of net assets acquired of approximately
$3,400,000 is being amortized on a straightline basis over three years.
Accumulated amortization at June 30, 1998 was approximately $189,000.
The following unaudited pro forma consolidated financial information shows
the results of operations assuming the above purchase occurred on January 1,
1997. The unaudited pro forma results for the year ended December 31, 1997 and
the six months ended June 30, 1998 are not necessarily indicative of what
actually would have occurred if the acquisition had been in effect for the
entire period presented. In addition, they are not intended to be a projection
of future results.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
<S> <C> <C>
Net sales..................................... $ 49,185,910 $ 34,810,138
============ ============
Net loss...................................... $(12,135,004) $(23,687,728)
============ ============
Net loss per share............................ $(.54) $(1.11)
============ ============
</TABLE>
F-26
<PAGE> 158
LONG DISTANCE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
10. RELATED PARTY TRANSACTION
During the six months ended June 30, 1998, the Company paid approximately
$986,000 to TNMG, a telecommunications consulting firm for assistance in
upgrading its billing and customer care information systems in the United States
and Europe. In December 1997, the owner of the consulting firm became a member
of the Company's Board of Directors.
11. SUBSEQUENT EVENT
LDI has entered into a letter of intent, and placed a deposit of $1.6
million pursuant to an escrow agreement, to purchase five STM-1s from Viatel on
CIRCE, the planned fiber optic ring between London, Paris, Brussels, Rotterdam
and Amsterdam, which is expected to be operational by the second quarter of
1999.
On October 9, 1998, the Company entered into an agreement to exchange 100%
of the outstanding stock of Netnet International AB ("Netnet") for approximately
37.5% of the outstanding stock of the Company. After the acquisition, Netnet
will be a wholly-owned subsidiary of the Company. The transaction is intended to
be accounted for as a pooling of interests. Netnet is a provider of
international long distance, domestic long distance and fixed to mobile services
to small and medium sized business customers. Netnet operates in Sweden, Norway,
Germany, Switzerland, Austria, Italy, Greece and France.
F-27
<PAGE> 159
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Florida Business Corporation Act, as amended, authorizes Florida
corporations to indemnify any person who is or was a party to any proceeding
(other than an action by or on behalf of the corporation), by reason of the fact
that he or she is or was a director, officer, employee, or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation or other entity,
against liability incurred in connection with such proceeding, including any
appeal thereof, if he or she acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. In the case of an
action by or on behalf of a corporation, indemnification may not be made if the
person seeking indemnification is held liable, unless the court in which such
action was brought determines such person is fairly and reasonably entitled to
indemnification. The indemnification authorized under Florida law is not
exclusive and is in addition to any other rights granted to officers and
directors under the articles of incorporation or bylaws of the corporation or
any agreement between officers and directors and the corporation. The Company's
Articles of Incorporation provide for indemnification to the maximum extent
permitted by Florida law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
1.1 Purchase Agreement, dated April 7, 1998, between Long
Distance International Inc. and Morgan Stanley & Co.
Incorporated and SBC Warburg Dillon Read Inc. (the
"Placement Agents").*
3.1 Amended and Restated Articles of Incorporation of Long
Distance International Inc., as amended.*
3.2 Bylaws of Long Distance International Inc.*
4.1 Indenture dated as of April 13, 1998 between Long Distance
International Inc. and The Bank of New York, as Trustee,
relating to the 12 1/4% Senior Notes Due 2008 of Long
Distance International Inc.*
4.2 Notes Registration Rights Agreement, dated April 7, 1998,
between Long Distance International Inc. and the Placement
Agents.*
4.3 Form of Senior Note (contained in Indenture filed as Exhibit
4.1).*
4.4 Form of Exchange Note (contained in Indenture filed as
Exhibit 4.1).*
4.5 Collateral Pledge and Security Agreement, dated as of April
13, 1998, between Long Distance International Inc. and The
Bank of New York, as Trustee.*
4.6 Notification and Control Agreement, dated as of April 13,
1998, between Long Distance International Inc. and The Bank
of New York, as Trustee and Bank.*
5.1 Form of Opinion of Loeb & Loeb LLP.
5.2 Form of Opinion of Greene, Donnelley & Schermer.
8.1 Form of Tax Opinion of Loeb & Loeb LLP.
10.1 Warrant Agreement, dated as of April 13, 1998, between Long
Distance International Inc. and The Bank of New York
(including form of Warrant Certificate).*
10.2 Warrant Registration Rights Agreement, dated as of April 13,
1998, between Long Distance International Inc. and The Bank
of New York.*
10.3 Stock Purchase Agreement with certain Advent Entities, dated
July 28, 1997.*
10.4 Shareholders Agreement with certain shareholders and certain
Advent Entities, dated July 28, 1997.*
10.5 Registration Rights Agreement with certain Advent Entities,
dated July 28, 1997.*
10.6 Preemptive Rights Agreement with certain shareholders and
certain Advent Entities, dated July 28, 1997.*
</TABLE>
II-1
<PAGE> 160
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
10.7 Employment agreement between LDI and Clifford Friedland
dated July 1, 1995.*
10.8 Employment agreement between LDI and David Glassman dated
July 1, 1995.*
10.9 Employment agreement between LDI and Richard Blume dated
April 1, 1998.*
10.10 Employment agreement between LDI and Elizabeth Tuttle dated
February 1, 1998.*
10.11 Employment agreement between LDI and John Castellano dated
July 1, 1997.*
10.12 September 1994 Shareholders' Agreement.*
10.13 July 22, 1994 Shareholders' Agreement.*
12.1 Statement regarding Computation of Ratio of Earnings to
Fixed Charges.*
21.1 Subsidiaries of Long Distance International Inc.*
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Loeb & Loeb LLP (included in Exhibits 5.1 and
8.1).**
23.3 Consent of Greene, Donnelley & Schermer (included in Exhibit
5.2).**
23.4 Consent of Analysys Ltd.
24.1 Power of attorney (included on signature page).*
25.1 Statement on Form T-1 of Eligibility of Trustee.*
27.1 Financial Data Schedule for the years ended December 31,
1997.*
27.2 Financial Data Schedule for the three month period ended
March 31, 1998.*
27.3 Financial Data Schedule for the six month period ended June
30, 1998.*
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Letter to Brokers, et al.*
99.4 Form of Letter to Clients.*
</TABLE>
- ------------------------
* Previously filed.
** To be filed by amendment.
(b) Financial Statement Schedules
The following financial statement schedule is filed herewith:
Schedule II -- Valuation and Qualifying Accounts*
* Previously filed.
Schedules not listed above have been omitted because they are inapplicable
or the information required to be set forth therein is provided in the Combined
Financial Statements of the Company or notes thereto.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii)To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
II-2
<PAGE> 161
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this Registration Statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
II-3
<PAGE> 162
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECURITIES ACT, THE COMPANY HAS DULY CAUSED
THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF FORT LAUDERDALE, FLORIDA, ON THIS 12TH
DAY OF NOVEMBER, 1998.
LONG DISTANCE INTERNATIONAL INC.
By /s/ CLIFFORD FRIEDLAND
------------------------------------
Clifford Friedland
Chairman and Co-Chief Executive
Officer
Pursuant to the requirements of Securities Act, this Registration Statement
has been signed below by the following persons, in the capacities indicated
below, on this 12th day of November, 1998
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ CLIFFORD FRIEDLAND Chairman of the Board and Co-Chief Executive Officer
- ----------------------------------------------------- (Principal executive officer)
Clifford Friedland
/s/ DAVID GLASSMAN President, Co-Chief Executive Officer and Director
- -----------------------------------------------------
David Glassman
/s/ ELIZABETH TUTTLE Chief Financial Officer (Principal financial officer
- ----------------------------------------------------- and principal accounting officer)
Elizabeth Tuttle
* Non-Voting Director
- -----------------------------------------------------
Barry Brooks
* Director
- -----------------------------------------------------
Lawrence Mestel
* Director
- -----------------------------------------------------
Olaf N. Krohg
* Director
- -----------------------------------------------------
Richard Nespola
* Executed pursuant to power of attorney.
/s/ ELIZABETH TUTTLE
- -----------------------------------------------------
Elizabeth Tuttle
Attorney-in-fact
</TABLE>
II-4
<PAGE> 163
LONG DISTANCE INTERNATIONAL INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997 Deducted
from asset accounts
Allowance for doubtful accounts..... $ 371,000 $2,580,000 $ 1,995,000 $ 956,000
Valuation allowance................. 1,939,000 4,306,000 -- 6,245,000
---------- ---------- ----------- ----------
$2,310,000 $6,886,000 $ 1,995,000 $7,201,000
Year ended December 31, 1996
Deducted from asset accounts
Allowance for doubtful accounts..... $ 130,000 $ 652,000 $ 409,000 $ 371,000
Valuation allowance................. 707,000 1,232,000 -- 1,939,000
---------- ---------- ----------- ----------
$ 837,000 $1,884,000 $ 409,000 $2,310,000
Year ended December 31, 1995
Deducted from asset accounts
Allowance for doubtful accounts..... $ 70,000 $ 60,000 $ -- $ 130,000
Valuation allowance................. 707,000 -- -- 707,000
---------- ---------- ----------- ----------
$ 777,000 $ 60,000 $ -- $ 837,000
</TABLE>
S-1
<PAGE> 164
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S> <C>
1.1 Purchase Agreement, dated April 7, 1998, between Long
Distance International Inc. and Morgan Stanley & Co.
Incorporated and SBC Warburg Dillon Read Inc. (the
"Placement Agents").* ......................................
3.1 Amended and Restated Articles of Incorporation of Long
Distance International Inc., as amended.* ..................
3.2 Bylaws of Long Distance International Inc.* ................
4.1 Indenture dated as of April 13, 1998 between Long Distance
International Inc. and The Bank of New York, as Trustee,
relating to the 12 1/4% Senior Notes Due 2008 of Long
Distance International Inc.* ...............................
4.2 Notes Registration Rights Agreement, dated April 7, 1998,
between Long Distance International Inc. and the Placement
Agents.* ...................................................
4.3 Form of Senior Note (contained in Indenture filed as Exhibit
4.1).* .....................................................
4.4 Form of Exchange Note (contained in Indenture filed as
Exhibit 4.1).* .............................................
4.5 Collateral Pledge and Security Agreement, dated as of April
13, 1998, between Long Distance International Inc. and The
Bank of New York, as Trustee.* .............................
4.6 Notification and Control Agreement, dated as of April 13,
1998, between Long Distance International Inc. and The Bank
of New York, as Trustee and Bank.* .........................
5.1 Form of Opinion of Loeb & Loeb LLP..........................
5.2 Form of Opinion of Greene, Donnelly & Schermer..............
8.1 Form of Tax Opinion of Loeb & Loeb LLP......................
10.1 Warrant Agreement, dated as of April 13, 1998, between Long
Distance International Inc. and The Bank of New York
(including form of Warrant Certificate).* ..................
10.2 Warrant Registration Rights Agreement, dated as of April 13,
1998, between Long Distance International Inc. and The Bank
of New York.* ..............................................
10.3 Stock Purchase Agreement with certain Advent Entities, dated
July 28, 1997.* ............................................
10.4 Shareholders Agreement with certain shareholders and certain
Advent Entities, dated July 28, 1997.* .....................
10.5 Registration Rights Agreement with certain Advent Entities,
dated July 28, 1997.* ......................................
10.6 Preemptive Rights Agreement with certain shareholders and
certain Advent Entities, dated July 28, 1997.* .............
10.7 Employment agreement between LDI and Clifford Friedland
dated July 1, 1995.* .......................................
10.8 Employment agreement between LDI and David Glassman dated
July 1, 1995.* .............................................
10.9 Employment agreement between LDI and Richard Blume dated
April 1, 1998.* ............................................
10.10 Employment agreement between LDI and Elizabeth Tuttle dated
February 1, 1998.* .........................................
10.11 Employment agreement between LDI and John Castellano dated
July 1, 1997.* .............................................
10.12 September 1994 Shareholders' Agreement.* ...................
10.13 July 22, 1994 Shareholders' Agreement.* ....................
12.1 Statement regarding Computation of Ratio of Earnings to
Fixed Charges. .............................................
21.1 Subsidiaries of Long Distance International Inc.* ..........
23.1 Consent of Ernst & Young LLP. ..............................
</TABLE>
<PAGE> 1
EXHIBIT 5.1
[LETTERHEAD OF LOEB & LOEB LLP]
November __, 1998
Long Distance International Inc.
288 South Andrews Avenue, Suite 205
Fort Lauderdale, FL 33316
Ladies and Gentlemen:
This firm has acted as special counsel to Long Distance
International Inc., a Florida corporation (the "Company"), in connection with
its Registration Statement on Form S-4, as amended (File No. 333-56989) (the
"Registration Statement"), filed with the Securities and Exchange Commission
relating to the proposed offering of up to $225,000,000 in aggregate principal
amount of 12 1/4% Senior Notes Due 2008 (the "Exchange Notes") in exchange for
up to $225,000,000 in aggregate principal amount of the Company's outstanding
12 1/4% Senior Notes Due 2008 (the "Senior Notes"). This opinion letter is
furnished to you at your request to enable you to fulfill the requirements of
Item 601(b)(5) of Regulation S-K, 17 C.F.R. Section 229.601(b)(5), in connection
with the Registration Statement.
For purposes of this opinion letter, we have examined copies
of the following documents:
1. An executed copy of the Registration Statement.
2. An executed copy of the Indenture dated as of
April 13, 1998 (the "Indenture") by and between the Company and The Bank of New
York, as Trustee, including the forms of Senior Notes issued and the Exchange
Notes to be issued pursuant thereto, as filed as Exhibit 4.1 to the Registration
Statement.
3. The Amended and Restated Articles of Incorporation
of the Company, as amended, as certified by the Secretary of Florida on [date],
1998 and as certified by the Secretary of the Company on the date hereof as
being complete, accurate and in effect.
<PAGE> 2
Long Distance International Inc.
November ___, 1998
Page 2
4. The By-laws of the Company as certified by the
Secretary of the Company on the date hereof as being complete, accurate and in
effect.
5. Resolutions of the Board of Directors of the
Company and the Special Pricing Committee of the Board of Directors of the
Company adopted by unanimous written consent on March 20, 1998 and April 7,
1998, respectively, as certified by the Secretary of the Company on the date
hereof as being complete, accurate and in effect, relating to the issuance and
sale of the Exchange Notes and arrangements in connection therewith.
In our examination of the aforesaid documents, we have assumed
the genuineness of all signatures, the legal capacity of all natural persons,
the accuracy and completeness of all documents submitted to us, the authenticity
of all original documents, and the conformity to authentic original documents of
all documents submitted to us as copies (including telecopies). This opinion
letter is given, and all statements herein are made, in the context of the
foregoing.
This opinion letter is based as to matters of law solely on
applicable provisions of the Florida Business Corporation Act, as amended, and
the contract law of the State of New York (but not including any statutes,
ordinances, administrative decisions, rules or regulations of any political
subdivision of the State of New York). We express no opinion herein as to any
other laws, statutes, ordinances, rules or regulations not specifically referred
to above. As to all matters of Florida law relevant to the opinions expressed
herein, we have, with your permission, relied solely on an opinion of Greene,
Donnelley & Schermer.
Based upon, subject to and limited by the foregoing, we are of
the opinion that the Exchange Notes have been duly authorized on behalf of the
Company and that, (i) following the effectiveness of the Registration Statement
and receipt by the Company of the Senior Notes in exchange for the Exchange
Notes as specified in the resolutions of the Board of Directors referred to
above, and (ii) assuming due execution, authentication, issuance and delivery of
the Exchange Notes as provided in the Indenture, the Exchange Notes will
constitute valid and binding obligations of the Company entitled to the benefits
of the Indenture and enforceable in accordance with their terms, except as may
be limited by bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights and as may be limited by the exercise of judicial
discretion and the application of principles of equity including, without
limitation, requirements of good faith, fair dealing, conscionability and
materiality (regardless of whether the Exchange Notes are considered in a
proceeding in equity or at law).
<PAGE> 3
Long Distance International Inc.
November ___, 1998
Page 3
We assume no obligation to advise you of any changes in the
foregoing subsequent to the delivery of this opinion letter. This opinion letter
should not be quoted in whole or in part or otherwise referred to, nor filed
with or furnished to any governmental agency or other person or entity, without
the prior written consent of this firm.
We hereby consent to the filing of this opinion letter as
Exhibit 5.1 to the Registration Statement and to the reference to this firm
under the caption "Legal Matters" in the prospectus constituting a part of the
Registration Statement. In giving this consent, we do not thereby admit that we
are an "expert" within the meaning of the Securities Act of 1933, as amended.
Very truly yours,
<PAGE> 1
Exhibit 5.2
GREENE, DONNELLY & SCHERMER
ATTORNEYS AT LAW
1301 6th AVENUE WEST, SUITE 400
BRADENTON, FLORIDA 34205
ROBERT F. GREENE* TELEPHONE: (941) 747-3025 TAMPA OFFICE:
J. B. DONNELLY FACSIMILE: (941) 747-6937
KATHY W. SCHERMER
ROBERT C. SCHERMER 102 W. Whiting Street, Ste. 201
VERONICA E. DONNELLY Tampa, Florida 33602
EILEEN F. GRANAHAN Telephone: (813) 272-1480
CHRISTOPHER R. HAUGHEE Facsimile: (813) 273-0149
Of Counsel
*Board Certified Real Estate Lawyer DAVID J. TIPTON
November ___, 1998
Long Distance International Inc.
288 South Andrews Avenue, Suite 205
Fort Lauderdale, FL 33316
Loeb & Loeb LLP
345 Park Avenue
New York, New York 10154
Ladies and Gentlemen:
This firm has acted as special Florida counsel to Long Distance
International Inc., a Florida corporation (the "Company"), in connection with
its Registration Statement on Form S-4, as amended (File No. 333-56989) (the
"Registration Statement"), filed with the Securities and Exchange Commission
relating to the proposed offering of up to $225,000,000 in aggregate principal
amount of 12-1/4% Senior Notes Due 2008 (the "Exchange Notes") in exchange for
up to $225,000,000 in aggregate principal amount of the Company's outstanding
12-1/4% Senior Notes Due 2008 (the "Senior Notes"). This opinion letter is
furnished to your principal opining counsel, Loeb & Loeb LLP, ("POC") for
reliance as to matters of Florida law relevant to the opinions expressed by the
POC and to you at your request to enable you to fulfill the requirements of Item
601(b)(5) of Regulation S-K, 17 C.F.R. Section 229.601(b)(5), in connection with
the Registration Statement.
For purposes of this opinion letter, we have examined copies of the
following documents:
1. An executed copy of the Registration Statement.
2. An executed copy of the Indenture dated as of April 13, 1998 (the
"Indenture") by and between the Company and The Bank of New York, as Trustee,
including the forms of Senior Notes issued and the Exchange Notes to be issued
pursuant thereto, as filed as Exhibit 4.1 to the Registration Statement.
<PAGE> 2
Long Distance International, Inc.
November , 1998
Page 2
3. The Amended and Restated Articles of Incorporation of the Company,
as amended, as certified by the Florida Secretary of State on [date] , 1998, and
as certified by the Secretary of the Company on the date hereof as being
complete, accurate and in effect.
4. The By-Laws of the Company as certified by the Secretary of the
Company on the date hereof as being complete, accurate and in effect.
5. Resolutions of the Board of Directors of the Company and the Special
Pricing Committee of the Board of Directors of the Company adopted by unanimous
written consent on March 20, 1998, and April 7, 1998, respectively, as certified
by the Secretary of the Company on the date hereof as being complete, accurate
and in effect, relating to the issuance and sale of the Exchange Notes and
arrangements in connection therewith.
In our examination of the aforesaid documents, we have assumed the
genuineness of all signatures, the legal capacity of all natural persons, the
accuracy and completeness of all documents submitted to us, the authenticity of
all original documents, and the conformity to authentic original documents of
all documents submitted to us as copies (including telecopies). This opinion
letter is given, and all statements herein are made, in the context of the
foregoing.
Based upon, subject to and limited by the foregoing, we are of the
opinion that the Exchange Notes have been duly authorized on behalf of the
Company and that, (i) following the effectiveness of the Registration Statement
and receipt by the Company of the Senior Notes in exchange for the Exchange
Notes as specified in the resolutions of the Board of Directors referred to
above, and (ii) assuming due execution, authentication, issuance and delivery of
the Exchange Notes as provided in the Indenture, the Exchange Notes will
constitute valid and binding obligations of the Company entitled to the benefits
of the Indenture and enforceable in accordance with their terms, except as may
be limited by bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights and as may be limited by the exercise of judicial
discretion and the application of principles of equity including, without
limitation, requirements of good faith, fair dealing, conscionability and
materiality (regardless of whether the Exchange Notes are considered in a
proceeding in equity or at law).
For the purposes of the opinion above, we have, with your permission,
assumed that the parties' choice of New York law to govern the Exchange Notes
and the Indenture will be respected and that the Exchange Notes and the
Indenture are valid, binding and enforceable under New York law.
In rendering this opinion we have acted as a local specialist counsel
on matters of Florida law excluding securities matters. With your permission, we
have relied on the opinion of the POC as to all matters that do not address
Florida law.
<PAGE> 3
Long Distance International, Inc.
November , 1998
Page 3
While certain members of this firm are admitted to practice in certain
jurisdictions other than Florida, in rendering the foregoing opinion we have not
examined the laws of any jurisdiction other than the State of Florida.
Accordingly, the opinion we express herein is limited to matters involving
Florida law.
We assume no obligation to advise you of any changes in the foregoing
subsequent to the delivery of this opinion letter. This opinion letter should
not be quoted in whole or in part or otherwise referred to, nor filed with or
furnished to any governmental agency or other person or entity, without the
prior written consent of this firm.
We hereby consent to the filing of this opinion letter as Exhibit 5.2
to the Registration Statement and to the reference to this firm under the
caption "Legal Matters" in the prospectus constituting a part of the
Registration Statement. In giving this consent, we do not thereby admit that we
are an "expert" within the meaning of the Securities Act of 1933, as amended.
Sincerely,
<PAGE> 1
EXHIBIT 8.1
[LETTERHEAD OF LOEB & LOEB LLP]
November , 1998
Long Distance International Inc.
888 South Andrews Avenue
Fort Lauderdale, Florida 33316
Ladies and Gentlemen:
This firm has acted as special counsel to Long Distance
International Inc., a Florida corporation (the "Company"), in connection with
its Registration Statement on Form S-4, as amended (File No. 333-56989) (the
"Registration Statement"), filed with the Securities and Exchange Commission
relating to the proposed offering (the "Exchange Offer") of up to $225,000,000
in aggregate principal amount of 12 1/4% Senior Notes Due October 15, 2008 (the
"Exchange Notes") in exchange for up to $225,000,000 in aggregate principal
amount of the Company's outstanding 12 1/4% Senior Notes Due October 15, 2008
(the "Senior Notes"). This opinion letter is furnished to you at your request to
enable you to fulfill the requirements of Item 601(b)(8) of Regulation S-K, 17
C.F.R. Section 229.601(b)(8), in connection with the Registration Statement.
Capitalized terms used in this letter and not otherwise defined herein shall
have the meaning set forth in the prospectus ("Prospectus") included as part of
the Registration Statement.
This opinion letter is based as to matters of law solely on the
Internal Revenue Code of 1986, as amended, its legislative history, judicial
authority, current administrative rulings and practice, and existing and
proposed Treasury Regulations, all as in effect and existing on the date hereof
(collectively, "federal tax laws"). These provisions and interpretations are
subject to changes, which may or may not be retroactive in effect, that might
result in material modifications of our opinion. We express no opinion herein as
to any other laws, statutes, regulations, or ordinances.
<PAGE> 2
In rendering the following opinion, we have examined: (i) an
executed copy of the Registration Statement; (ii) the forms of the Senior Notes
and the Exchange Notes; and (iii) an executed copy of the Indenture.
In our review, we have assumed that all of the representations
and statements set forth in such documents are true and correct, and all of the
obligations imposed by any such documents on the parties thereto have been and
will continue to be performed or satisfied in accordance with their terms. We
also have assumed the genuineness of all signatures, the proper execution of all
documents, the accuracy and completeness of all documents submitted to us, the
authenticity of all original documents, and the conformity to authentic original
documents of all documents submitted to us as copies (including telecopies).
This opinion letter is given, and all statements herein are made, in the context
of the foregoing.
For purposes of rendering our opinion, we have not made an
independent investigation of the facts set forth in any of the above-referenced
documents, including the Prospectus. We have consequently relied upon
representations and information presented in such documents.
Based upon, and subject to, the foregoing, we are of the
opinion that:
(1) The exchange of the Senior Notes for the Exchange
Notes pursuant to the Exchange Offer will not be treated as a taxable exchange
for federal income tax purposes because the Exchange Notes will not differ
materially in kind or extent from the Senior Notes and because the exchange will
occur by operation of the original terms of the Senior Notes.
(2) The opinion of this firm contained in the
Registration Statement under the caption "United States Federal Income Tax
Considerations" is confirmed as of the date hereof.
We assume no obligation to advise you of any changes in the
foregoing subsequent to the delivery of this opinion letter. This opinion letter
should not be quoted in whole or in part or otherwise referred to, nor filed
with or furnished to any governmental agency or other person or entity, without
the prior written consent of this firm.
2
<PAGE> 3
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference to us under the caption
"United States Federal Income Tax Considerations" in the Prospectus. In giving
such consent, we do not admit that we are in the category of person whose
consent is required under Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
3
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 17, 1998, except for Note 16 as to which the
date is March 20, 1998, with respect to the consolidated financial statements
and schedule of Long Distance International Inc. included in Amendment No. 2 to
the Registration Statement (Form S-4 No. 333-56989) and related Prospectus of
Long Distance International Inc. for the registration of 225,000 of its 12 1/4%
Senior Notes.
/s/ Ernst & Young LLP
West Palm Beach, Florida
November 10, 1998
<PAGE> 1
Exhibit 23.4
THE BOARD OF DIRECTORS OF
LONG DISTANCE INTERNATIONAL INC.
Analysys Ltd. hereby consents to being named in the Long Distance
International Inc. Registration Statement on Form S-4 as the source of
information included in the chart entitled "Projected Growth of International
Long Distance Voice Traffic."
Cambridge, United Kingdom
October 28, 1998
ANALYSYS LTD.
By: /s/ Nick Cray
-------------------------------
Name: Nick Cray
Title: Chief Operating Officer
