<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- -------------------------------------------------------------------------------
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 333-56989
-----------------------
LONG DISTANCE INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
-----------------------
FLORIDA 65-0423006
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
4150 SW 28TH WAY, FT. LAUDERDALE, FL 33312
(Address of principal executive office) (Zip Code)
-----------------------------
(954) 327-7500
(Registrant's telephone number, including area code)
-----------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Number of shares of common stock outstanding at November 10, 1999: 57,703,371
1
<PAGE> 2
LONG DISTANCE INTERNATIONAL INC.
INDEX TO FORM 10-Q/A
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1999 (unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations (unaudited)
For the three and nine months ended September 30, 1999
and September 30, 1998 4
Condensed Consolidated Statements of Cash Flows (unaudited)
For the nine months ended September 30, 1999 and
September 30, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LONG DISTANCE INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------- -------------
(Unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 52,064,072 $ 4,405,230
Certificates of deposit 2,907,895 --
Restricted cash and investments 30,410,363 54,032,614
Accounts receivable, net of allowance for doubtful accounts
of $4,210,000 at December 31, 1998 and $3,260,000 at
September 30, 1999 16,749,980 15,125,022
Other current assets 5,435,820 7,278,131
------------- -------------
Total current assets 107,568,130 80,840,997
Net assets of discontinued operations 27,625,441 4,793,837
Restricted cash and investments 36,600,856 --
Property and equipment, net 38,258,615 31,655,372
Goodwill, net of accumulated amortization of $3,223,000 at
December 31, 1998 and $9,409,000 at September 30, 1999 129,705,821 125,025,049
Other assets 2,855,565 3,150,270
------------- -------------
Total assets $ 342,614,428 $ 245,465,525
============= =============
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY):
Current liabilities:
Accounts payable $ 20,865,078 $ 27,073,758
Accrued telecommunication costs 18,243,307 10,134,563
Accrued restructuring costs 3,014,752 778,199
Other accrued liabilities 11,580,401 11,525,367
Accrued acquisition contingency 7,508,029 7,508,029
Senior Note interest payable 5,976,563 12,626,563
Notes payable 4,950,000 13,456,579
Current portion of capital lease obligations 10,760,795 11,664,531
Current portion of installment loans 2,840,776 5,278,389
------------- -------------
Total current liabilities 85,739,701 100,045,978
Installment loans 3,907,910 --
Capital lease obligations 12,337,528 5,204,000
Senior Notes payable 205,863,147 207,002,521
Commitments and Contingencies
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 $1,228,278 at December 31, 1998 and September 30, 1999 1,199,278 1,254,550
Redeemable preferred stock, Series B, cumulative $.001 par value -
5,000,000 shares authorized and 2,500,000 shares issued
and outstanding - liquidation value of $25,000,000 14,275,864 15,717,386
Redeemable warrants, 3,394,665 authorized, issued and
outstanding at December 31, 1998 and September 30, 1999 11,566,939 11,580,372
Redeemable warrants, 12,543,714 authorized, issued
and outstanding at September 30, 1999 -- 783,092
Common shareholders' equity (capital deficiency):
Common stock, $.001 par value - 250,000,000 shares
authorized, 57,703,371 shares issued and outstanding at
December 31, 1998 and September 30, 1999 57,703 57,703
Additional paid-in capital 110,540,448 109,003,040
Accumulated other comprehensive loss (815,465) (280,586)
Accumulated deficit (102,058,625) (204,902,531)
------------- -------------
Total common shareholders' equity (capital deficiency) 7,724,061 (96,122,374)
------------- -------------
Total liabilities and common shareholders' equity
(capital deficiency) $ 342,614,428 $ 245,465,525
============= =============
</TABLE>
See accompanying notes.
3
<PAGE> 4
LONG DISTANCE INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- ---------------------------------
1998 1999 1998 1999
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues:
Retail, net $ 7,692,742 $ 21,577,000 $ 14,878,798 $ 61,743,000
Wholesale, net -- 9,288,732 -- 33,947,732
------------ ------------ ------------ -------------
Total revenues 7,692,742 30,865,732 14,878,798 95,690,732
Costs of telecommunications services 6,577,352 25,080,558 13,020,946 80,799,568
------------ ------------ ------------ -------------
Gross margin 1,115,390 5,785,174 1,857,852 14,891,164
Selling, general and administrative expenses 6,503,326 13,193,263 15,253,564 41,923,770
Depreciation and amortization 1,247,858 5,276,684 2,248,294 15,607,241
------------ ------------ ------------ -------------
Operating loss (6,635,794) (12,684,773) (15,644,006) (42,639,847)
Other expense (income):
Interest expense 7,738,513 8,373,456 14,540,357 24,643,442
Interest income (3,537,577) (258,002) (5,271,995) (2,139,183)
------------ ------------ ------------ -------------
4,200,936 8,115,454 9,268,362 22,504,259
Loss from continuing operations (10,836,730) (20,800,227) (24,912,368) (65,144,106)
Discontinued operations:
Loss from discontinued operations (7,905,112) (1,986,741) (17,246,196) (20,286,324)
Loss on disposal of discontinued operations -- (3,111,715) -- (17,413,476)
------------ ------------ ------------ -------------
Net loss (18,741,842) (25,898,683) (42,158,564) (102,843,906)
Preferred stock dividends and preferred stock
and warrant redemption accretion (508,010) (511,810) (5,112,217) (1,537,362)
------------ ------------ ------------ -------------
Net loss applicable to common shareholders $(19,249,852) $(26,410,493) $(47,270,781) $(104,381,268)
============ ============ ============ =============
EARNINGS PER SHARE APPLICABLE TO COMMON
SHAREHOLDERS - BASIC AND DILUTIVE:
Loss from continuing operations: $ (0.43) $ (0.37) $ (1.17) $ (1.16)
Loss from discontinued operations (0.30) (0.09) (0.67) (0.65)
------------ ------------ ------------ -------------
Net loss per share $ (0.73) $ (0.46) $ (1.84) $ (1.81)
============ ============ ============ =============
Weighted average shares outstanding 26,393,749 57,703,371 25,721,077 57,703,371
============ ============ ============ =============
</TABLE>
See accompanying notes.
4
<PAGE> 5
LONG DISTANCE INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------
1998 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (42,158,564) $(102,843,906)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,248,294 15,607,241
Provision for bad debts 351,851 456,000
Amortization of discount on Senior Notes and Notes payable 557,459 901,281
Amortization of bond offering costs -- 872,671
Loss on phase-out of discontinued operations -- 2,149,896
Provision for writedown of assets -- 16,955,493
Changes in operating assets and liabilities:
Accounts receivable (2,003,808) 1,168,958
Other current assets (1,219,301) (1,842,310)
Other assets (2,977,893) (294,705)
Accounts payable 2,501,003 6,208,680
Accrued telecommunication costs (732,548) (8,108,744)
Accrued restructuring costs -- (2,236,555)
Senior Note interest payable 12,785,938 6,650,000
Other accrued liabilities (1,406,446) (309,032)
Discontinued operations - changes in assets and
liabilites (8,575,852) 3,726,215
------------- -------------
Net cash used in operating activities (40,629,867) (60,938,817)
INVESTING ACTIVITIES:
(Increase) decrease in restricted cash and investments (82,114,456) 12,978,605
Redemption of certificates of deposit -- 2,907,895
Purchases of property and equipment (3,159,574) (434,336)
Disposal of property and equipment -- 57,000
Purchase of minority interest in subsidiaries (387,714) --
Acquisition costs associated with purchase of Newgate (1,397,684) --
Acquisition costs associated with purchase of NETnet -- (1,407,352)
------------- -------------
Net cash (used in) provided by investing activities (87,059,428) 14,101,812
FINANCING ACTIVITIES:
Proceeds from issuance of Senior Notes and redeemable warrants,
net of offering costs 216,508,954 --
Proceeds from issuance of common stock and exercise of warrants,
net of offering costs 1,683,510 --
Proceeds from issuance of Notes payable and warrants -- 10,000,000
Payments on Notes payable -- (864,000)
Bond offering costs -- (508,042)
Principal payments on capital lease obligations (1,276,779) (8,762,377)
Principal payments on installment loans (1,956,621) (1,222,297)
------------- -------------
Net cash provided by (used in) financing activities 214,959,064 (1,356,716)
Effect of exchange rate changes 122,086 534,879
------------- -------------
Increase (decrease) in cash and cash equivalents 87,391,855 (47,658,842)
Cash and cash equivalents at beginning of period 12,172,779 52,064,072
------------- -------------
Cash and cash equivalents at end of period $ 99,564,634 $ 4,405,230
============= =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired under capital leases $ 3,143,383 $ 2,532,539
============= =============
Property and equipment purchased under installment loans $ 8,000,000 $ --
============= =============
Accrued dividends on Series A preferred stock $ 55,273 $ 55,273
============= =============
Accretion on Series B preferred stock and redeemable warrants $ 1,471,086 $ 1,482,089
============= =============
</TABLE>
See accompanying notes.
5
<PAGE> 6
LONG DISTANCE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements for the
interim periods are unaudited and do not include all the information and
footnotes necessary for the presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles.
In the opinion of the management of Long Distance International Inc. (the
"Company"), all adjustments necessary for a fair presentation of the
results of the interim periods have been included. All adjustments were of
a normal and recurring nature. The December 31, 1998 balance sheet was
derived from the audited financial statements, but does not include all
the disclosures required by generally accepted accounting principles. The
results of operations for the three and nine month periods ended September
30, 1999 are not necessarily indicative of the results to be expected for
the full year ending December 31, 1999.
The accompanying financial statements have been prepared on a going concern
basis, which contemplated the realization of assets and satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Company has incurred losses of $102,843,906 and $42,158,564
for the nine months ended September 30, 1999 and 1998 respectively, and has
a working capital deficit of $19,204,981 at September 30, 1999. These
factors, among others, raise substantial doubt the Company's ability to
continue as a going concern for a reasonable period of time. (See Note 8 -
Liquidity)
The financial statements do not include any adjustments relating to the
recoverability and classification of assets and liabilities that might be
necessary should the Company be unable to continue as a going concern other
than those discussed in Note 7 - Discontinued Operations.
The Company is in default on many of its capital and operating leases in
the United States. The Company has not made a principal payment on a note
payable when due (See Note 8 - Liquidity). In addition, many of the
Company's other liabilities in the United States have not been paid within
their stated terms. Subsequent to September 30, 1999, LDI Acquisition Sub
Inc., a consolidated subsidiary of the Company ("LDI Acquisition")
obtained a $2 million loan from a third party under the Loan Agreement
(See Note 9 - Loan Agreement). On October 15, 1999, the Company made the
scheduled semi-annual interest payment on the 12 1/4% Senior Notes due
2008 (the "Notes"). In addition, on October 15, 1999, the holders of the
Notes (the "Senior Noteholders") directed the Indenture Trustee to hold
the interest payment and to not deliver it to the Noteholders. On November
5, 1999, the Senior Noteholders directed the Indenture Trustee to advance
up to $8 million of the interest payment to LDI Acquisition on the terms
and conditions of the Loan Agreement. The Company understands that the
Indenture Trustee continues to hold the remainder of the interest payment.
The Company's continuation as a going concern is dependent upon obtaining
additional funding through debt or equity financing or through the sale of
the Company.
The information included in these unaudited condensed consolidated
financial statements should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
and the consolidated financial statements and accompanying notes included
in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
6
<PAGE> 7
2. LOSS PER SHARE
The Company computes loss per share pursuant to Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share. Weighted average
shares outstanding does not include any contingently issuable 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.
3. COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. Comprehensive income is
defined as the change in equity arising from non-owner sources. It
includes net loss as well as foreign currency items, minimum pension
liability adjustments, and unrealized gains and losses on certain
investments in debt and equity securities. Other than net loss, the only
such item applicable to the Company is foreign currency translations
adjustment which did not have a material effect on the Company's
consolidated financial statements. Comprehensive loss for the three months
ended September 30, 1999 was $25,635,390 as compared to $18,654,832 in the
same period in the prior year. Comprehensive loss for the nine months
ended September 30, 1999 was $102,309,027 as compared to $42,036,478 in
the same period in the prior year.
4. SEGMENT ANALYSIS
The Company operates in one industry segment, the telecommunications
services industry, which includes international and domestic telephony as
well as fixed-line to mobile services. The Company has reportable
operating segments based on the geographical areas in which the Company
provides services as well as the type of customer it sells to. Operating
loss represents net revenues less operating costs and expenses, and does
not include interest expense/income and other expense/income. All
inter-company transactions have been eliminated. Other, as shown below,
includes the Company's operations in Spain, Italy, France and the U.S.
headquarters. The Company also supports headquarters operations in Sweden
and the United Kingdom. The costs associated with those headquarters are
included in the amounts below related to those respective countries.
7
<PAGE> 8
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
--------------------------- ----------------------------
1998 1999 1998 1999
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
United Kingdom $ 4,147,265 $ 7,707,000 $ 9,910,840 $ 20,038,000
Germany -- 4,688,000 -- 14,457,000
Sweden -- 2,763,000 -- 8,857,000
Norway -- 1,111,000 -- 3,275,000
Switzerland -- 1,598,000 -- 4,943,000
Austria -- 2,089,000 -- 5,858,000
Other 1,030,760 2,978,732 2,453,241 5,674,732
European - Wholesale 2,514,717 7,931,000 2,514,717 32,588,000
----------- ------------ ------------ ------------
Consolidated revenue: $ 7,692,742 $ 30,865,732 $ 14,878,798 $ 95,690,732
=========== ============ ============ ============
Operating income (loss):
United Kingdom $(2,725,956) $ (1,722,000) $ (6,815,174) $ (6,506,000)
Germany -- (20,000) -- (238,000)
Sweden -- (4,136,000) -- (13,252,000)
Norway -- (487,000) -- (1,516,000)
Switzerland -- (423,000) -- (1,252,000)
Austria -- (82,000) -- (689,000)
Other (3,909,838) (5,707,773) (8,828,832) (18,705,847)
European - Wholesale -- (107,000) -- (481,000)
----------- ------------ ------------ ------------
Total operating loss: $(6,635,794) $(12,684,773) $(15,644,006) $(42,639,847)
=========== ============ ============ ============
</TABLE>
5. ASSET IMPAIRMENT AND RESTRUCTURING COSTS
In December 1998, the Company implemented a worldwide plan to reduce selling,
general and administrative costs and increase efficiencies. In connection with
this program, the Company recorded charges of approximately $4.0 million in the
fourth quarter of 1998. The cash outlay related to these charges in the first
nine months of 1999 was approximately $1.9 million. Details of the change in
the restructuring accrual between December 31, 1998 and September 30, 1999 are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 PAYMENTS REDUCTION SEPTEMBER 30, 1999
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Involuntary employee terminations $ 2,411,170 $ (1,411,134) $ (355,005) $ 645,031
Closure of facilities and related costs 239,582 (206,417) -- 33,165
Other costs 364,000 (263,997) -- 100,003
----------- ------------ ---------- ---------
$ 3,014,752 $ (1,881,548) $ (355,005) $ 778,199
=========== ============= =========== =========
</TABLE>
Pursuant to the restructuring, the Company recorded $1.1 million in employment
contract obligations to executives. The Company has settled certain of these
obligations for lesser amounts and has recorded a reduction of $355,005 in the
reserve related to these settlements in the second quarter of 1999. The
remaining employment contract obligations are expected to be paid over the next
nine months.
8
<PAGE> 9
6. CONTINGENCIES
Viatel, Inc. ("Viatel"), a Trans-Atlantic cable provider, has claimed that the
Company is obligated to pay $14,875,000 under certain letter agreements which
Viatel claims obligated the Company to purchase certain cable capacity as part
of an IRU agreement that was never consummated. The Company believes that it
has no obligation to pay Viatel under those purported agreements and that its
liability, in any event, would be limited to the $1,625,000 which the Company
placed in escrow during 1998. This amount is included in other assets in the
Company's Balance Sheet as of September 30, 1999. The Company intends to
vigorously defend against Viatel's claim but is unable to predict the ultimate
outcome of this matter and the amount of loss, if any.
In connection with the October 1998 acquisition of NETnet International A. B.
("NETnet"), 2,519,473 shares of the purchase price are contingently returnable
to the Company in connection with the accuracy of the seller's representations
and have been classified as an accrued liability of $7,508,029 at December 31,
1998 and September 30, 1999. These shares have not been included in the number
of shares used in the loss-per-share calculation for the nine months ended
September 30, 1999.
From time to time, the Company is a party to litigation arising in the normal
course of business. The Company is not currently engaged in any legal
proceedings that are expected to have a material adverse effect on the Company.
7. DISCONTINUED OPERATIONS
Following continued weakness in the United States operations, on May 18, 1999
the Company's Board of Directors agreed to a plan to discontinue the Company's
U.S. retail operations. Accordingly, the operating results of the discontinued
retail operations, including provisions for estimated losses during the
phase-out period, have been segregated from continuing operations and reported
as a separate line item on the statement of operations. Due to the subjective
nature of estimating future operating losses and incremental costs of disposal,
it is reasonably possible that these estimates may change in the future. Future
changes in estimates will be included in the statement of operations in the
period determined. The Company recorded an expense in the second quarter of
1999 in the amount of approximately $14.3 million to provide for the estimated
loss on disposition of the related assets and liabilities of the U.S. retail
operations and other expenses related to the closing of these operations and
approximately $3.1 million in the third quarter to provide for the estimated
loss in disposition of additional assets. Amounts recorded include
approximately $4.3 million for estimated operating losses during the phase-out
period subsequent to September 30, 1999 and approximately $450,000 for rent
under operating leases until the Company estimates it can sublease certain of
its facilities. In the third quarter, the Company recorded an additional $1.9
million for estimated operating losses during the phase-out period. Included in
the net assets of the discontinued operations at September 30, 1999 is $6.9
million for property and equipment relating to the Company's U.S. network which
is net of a write-down of $17.0 million to reserve for the expected loss on the
sale of the property and equipment. The Company is liable for capital lease
obligations and installment loans on this equipment. Accordingly, the lease
obligations of $9.6 million and installment loans of $5.2 million have not been
included in the net assets of the discontinued operation. As the Company is not
current on the payment of these leases, they are classified as current
obligations at September 30, 1999. (See Note 8 - Liquidity).
The consolidated financial statements and related footnotes of the Company have
been restated to report separately the net assets and operating results of the
U.S. retail operations as discontinued operations for all periods presented.
Net assets of the U.S. discontinued operations, which are presented as net
amounts in the Company's consolidated balance sheets at September 30, 1999 and
December 31, 1998, are as follows:
9
<PAGE> 10
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ ------------
<S> <C> <C>
Accopunts receivable $ 8,170,303 $ 955,570
Property and equipment 20,560,597 6,922,314
Other assets 361,651 16,466
------------ ------------
Total assets 29,092,551 7,894,350
Reserve for loss on disposition -- (2,149,896)
Other liabilities (1,467,110) (950,617)
------------ ------------
Total liabilities (1,467,110) (3,100,513)
Net assets of discontinued operations $ 27,625,441 $ 4,793,837
============ ============
</TABLE>
The results of discontinued operations for the nine months ended
September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1998 1999
------------ ------------
<S> <C> <C>
Net revenues $ 33,305,541 $ 11,537,468
Cost of telecommunications services 22,419,596 15,620,524
------------ ------------
Gross profit (loss) 10,885,945 (4,083,056)
Selling, general and administrative expenses (28,132,141) (14,339,294)
Estimated operating losses during the
phase-out period of discontinued operations -- (1,863,974)
------------ ------------
Loss from discontinued operations $(17,246,196) $(20,286,324)
============ ============
Loss on disposal of discontinued operations $ -- $(17,413,476)
============ ============
</TABLE>
8. LIQUIDITY
In January 1999, the Board of Directors authorized the Company to pursue
additional financing of approximately $40 million and subsequently retained
Morgan Stanley & Co. Incorporated ("Morgan Stanley") as its financial advisor.
Without prior notice at the end of June 1999, Morgan Stanley advised the
Company that it was abandoning its efforts to raise capital on behalf of the
Company and unilaterally terminating its engagement as financial advisor to the
Company. In connection with Morgan Stanley's termination of its engagement,
Morgan Stanley has advised the Company it is a holder of a significant portion
of the Notes. The Company has expressly reserved all rights, remedies, claims
and causes of action that it has or may have against Morgan Stanley in
connection with Morgan Stanley's engagement as financial advisor to the Company
and the terms and conditions of the termination of such engagement.
The Company's cash and cash equivalents at September 30, 1999, are not
sufficient to fund the operations of the Company through the end of 1999.
Through September 30, 1999, the Company was successful in raising an additional
$10 million of financing (see Note 9) of an original $40 million of financing
which was sought. During the second quarter of 1999, when it became apparent
that the Company would not be successful in obtaining all of the debt or equity
financing it was seeking, the Company began to consider all alternatives
available to it to raise additional liquidity and/or realize value on its
assets and operations. These options include the potential sale of the company
or a substantial amount of its assets or debt or equity financing.
As of September 30, 1999, the Company had not made certain payments to lessors,
lenders and vendors. The Company leases certain computer and telecommunications
10
<PAGE> 11
equipment under non-cancelable capital leases with maturities of three to five
years. The Company has not made payments under these leases in the United
States for several months. These leases generally contain acceleration
provisions which allow the lease to become due in full as a result of
non-payment. Several of these lessors have notified the Company of defaults and
acceleration of the leases. Accordingly, the Company has reclassified all of
these U.S. leases as current in its Balance Sheet at September 30, 1999. The
Company did not make a scheduled principal payment of approximately $4 million
on a note payable to one of its European carriers which came due on September
30, 1999. The Company is negotiating with the carrier to restructure this debt.
(See "Liquidity and Capital Resources")
If the Company is unable to obtain additional debt or equity financing, to
successfully implement a strategic alliance or arrange a sale of the Company,
or substantially all of the Company's assets in the near future, together with
the financing necessary to consummate such a sale, it will have to file a
petition under the Federal Bankruptcy Code.
The consolidated Financial Statements do not include any adjustments to reflect
the possible future effects of the aforementioned on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from this uncertainty (See Note 1 - Basis of Presentation).
9. LOAN AGREEMENT
On July 20, 1999, LDI Acquisition borrowed $10,000,000 (the "Loan"), from
Frederick A. DeLuca ("DeLuca"), an existing stockholder of the Company,
pursuant to a term loan agreement (the "Loan Agreement"), among the Company,
LDI Acquisition, DeLuca, the lenders from time to time signatory thereto (the
"Other Lenders") and DeLuca, as collateral agent (in such capacity, the
"Collateral Agent"). The Loan has a one year term, expiring on July 20, 2000
(the "Initial Term"), and is extendable for up to an additional four months at
the option of the Company (the "Extended Term"). The principal amount of the
loan is payable at maturity. Interest is payable monthly and the loan bears
interest of 12-1/4% per annum during the Initial Term and 24-1/2% per annum
during the Extended Term. The loan is subject to a prepayment penalty if
prepaid prior to January 2000 and to substantial late charges if monthly
interest payments are not paid on a timely basis. The Loan Agreement has been
structured to allow for additional term loans (up to an aggregate principal
amount (together with the Loan) of $40,000,000) from the Other Lenders in
minimum term loan advances of $100,000. Any such future loans shall be made
subject to the terms of the Loan Agreement. The Company and LDI Acquisition
have agreed that the proceeds of any term loan advances which, together with
the Loan, exceed $32,500,000 would be used to repay the indebtedness of its
consolidated subsidiary NETnet to certain Scandinavian banks who currently have
a lien on the stock of NETnet.
The loan is secured by all the common stock of LDI Acquisition, pursuant to a
pledge agreement by the Company in favor of the Collateral Agent for the
ratable benefit of himself and the Other Lenders, and by all the capital stock
of the subsidiaries of LDI Acquisition to the extent possible, pursuant to a
pledge agreement by LDI Acquisition in favor of the Collateral Agent, for the
ratable benefit of himself and the Other Lenders. The subsidiaries of LDI
Acquisition represent all the non-U.S. based operations of the Company.
As additional consideration for, and as an inducement to DeLuca and the Other
Lenders to make loans under the agreement, the Company has agreed to issue to
the lenders a (i) Class A Common Stock Warrants (the "A Warrants") to purchase
up to 30% of the Company's common stock on a fully diluted basis as of the date
immediately preceding the closing of the Loan (the "Fully Diluted Shares") and
(ii) Class B Warrants (the "B Warrants"; together with the A Warrants, the
"Warrants") to purchase up to 20% of the Fully Diluted Shares (in each case,
assuming a full funding under the Loan Agreement of $40,000,000). The B
Warrants will become void in the event the term loan to which such Warrant
relates is paid on or prior to four months after such loan is made. To date,
Warrants have only been issued to DeLuca to purchase up to an aggregate of
12.5% of the Fully Diluted Shares (or 7.5% of the Fully Diluted Shares if the B
Warrants become void). Each Warrant is exercisable for a term of five years
from its exercise date (as hereinafter defined) and the exercise price for each
share of the Company's Common Stock exercisable under a Warrant is $.001 per
share. No Warrant is exercisable (assuming the B Warrant has not been voided)
until the earliest of:
(a) the sixteenth month anniversary date of the issuance of a
Warrant;
(b) the date the Company consummates an initial public offering
of shares of Common Stock pursuant to an effective
registration statement under the Securities Act of 1933;
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(c) the date the Company consummates a sale of all or a
substantial portion of the business of the Company and its
consolidated subsidiaries taken as a whole, whether by way of
merger, acquisition, sale of assets or sale of capital stock;
(d) the date a bankruptcy petition is filed by or against the
Company, LDI Acquisition or a material operating subsidiary
of LDI Acquisition;
(e) the effective date of a waiver under the Indenture, dated as
of April 13, 1998 (the "Indenture"), pursuant to which the
Company's 12 1/4% Senior Notes due 2008 (the "Notes") were
issued, the effect of which waiver would be to waive the
requirement that the Company repurchase the Notes pursuant to
Section 4.12 of the Indenture because of a Change of Control
(as defined in the Indenture);
(f) the date on which the exercise of all A Warrants and all B
Warrants would not result in a Change of Control; and
(g) the date on which a Change of Control under the Indenture
occurs for a reason other than an exercise of any of the A
Warrants or B Warrants and a waiver with respect thereto
described in clause (e) above is not obtained; and
(h) the date on which Cliff Friedland and David Glassman cease to
be directors of the Company (other than by reason of their
death or disability) or beneficially own in the aggregate
less than 5,000,000 shares of Common Stock of the Company.
Additionally, as further consideration for the Loan, DeLuca (or his designee)
was given the right to a seat on the Company's Board of Directors. The Company
failed to make the scheduled monthly interest payments under the Loan Agreement
in September and October. However, the Company has received a forbearance from
the lenders under the Loan Agreement with respect to such missed interest
payments until the earlier to occur of November 30, 1999, or the filing of a
petition or complaint against the Company pursuant to Chapter 11 of Title 11 of
the United States Code (the "Bankruptcy Code") or any similar law.
As determined by the Company's Board of Directors, the value of the Warrants
was determined to be approximately $783,000, which resulted in a discount and
effective interest rate of 21% on the Loan. The discount is being amortized
over the initial term of the Loan.
10. EQUITY
On July 13, 1999, the Board of Directors of the Company approved Articles of
Amendment to the Second Restated Articles of Incorporation whereby the number
of common shares authorized was increased to 250,000,000, and the number of
shares of both classes of Preferred, which may be issued in either Series, was
increased by an additional 20,000,000 shares as designated by the Board of
Directors.
11. SUBSEQUENT EVENTS
On October 19, 1999, LDI Acquisition obtained a $2 million loan from a third
party, World Access, Inc. ("World Access"), an international long distance
provider and proprietary network equipment supplier. The loan was made under
the Loan Agreement (See Note 9 - Loan Agreement). In connection with the loan,
World Access entered into discussions with the Company regarding a potential
business transaction.
On October 15, 1999, the Company made the scheduled semi-annual interest
payment on the Notes in the amount of $13.8 million. In addition, on October
15, 1999, the Senior Noteholders directed the Indenture Trustee to hold the
interest payment and not to deliver it to the Senior Noteholders.
In the months of September and October, LDI Acquisition did not make scheduled
interest payments under the Loan Agreement. LDI Acquisition has received a
forbearance from the lenders under the Loan Agreement with respect to such
missed interest payments until the earlier to occur of November 30, 1999, or a
filing by or against the Company pursuant to Chapter 11 of the Bankruptcy Code
or a similar law.
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On November 5, 1999, the Senior Noteholders directed the Indenture Trustee to
advance to LDI Acquisition up to $8 million of the interest payment pursuant to
the terms and conditions of the Loan Agreement. The Company understands that
the Indenture Trustee continues to hold the remainder of the interest payment.
The $8 million in advances is subject to certain budget compliance and advance
request notification. Approximately $6.3 million was drawn on November 5, 1999.
Advances are being made under the Loan Agreement (See Note 9 - Loan Agreement).
No advances may be made after the earlier to occur of a termination by the
Senior Noteholders or November 30, 1999.
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LONG DISTANCE INTERNATIONAL INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the
undersigned, thereunto duly authorized.
LONG DISTANCE INTERNATIONAL INC.
By: /s/ Elizabeth A. Tuttle
----------------------------------------
Elizabeth A. Tuttle
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: November 16, 1999
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