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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 333-56989
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LONG DISTANCE INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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 [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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FORWARD LOOKING STATEMENTS
Certain statements contained in or incorporated by reference in this Form 10-K
constitute "forward looking statements" made in reliance on the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. As such,
they involve risks and uncertainties that could cause actual results to differ
materially from those set forth in such forward looking statements. The
Company's forward looking statements are based on assumptions about, or include
statements concerning, many important factors, including without limitation
changes in customer usage and customer preferences. The Company's ability to
effectively implement its strategies, including its expansion, network
development and advanced information system strategies; competitive trends and
consolidation within the telecommunications industry; the effect of economic
changes in other countries in which LDI does business; and other factors
described herein. While the Company believes that its assumptions are
reasonable, it cautions that it is impossible to predict the impact of certain
factors which could cause actual results to differ materially from expected
results.
PART I
ITEM 1. BUSINESS
THE COMPANY
Long Distance International Inc. ("LDI" or the "Company") is a rapidly growing
multinational telecommunications company, which provides international
telecommunications services from the United States, Austria, France, Germany,
Italy, Norway, Spain, Sweden, Switzerland and the United Kingdom, 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.
NETnet International AB ("NETnet"), the Company's recently acquired subsidiary,
offers domestic long distance service, international long distance service and
fixed to mobile service in Austria, France, Germany, Norway, Sweden and
Switzerland. 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 sales, agent sales, direct
response marketing and telemarketing.
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. During 1998, LDI initiated the design and
buildout of a European telecommunications network. Thereafter, on October 9,
1998, LDI acquired the outstanding shares of NETnet in consideration for 37.5%
of LDI's Common Stock on a fully diluted basis. NETnet commenced operations in
August 1995 in Sweden and expanded into its other European markets in 1996 and
1997.
Revenues have grown from $2.6 million in 1995 to $82.4 million in 1998. The
Company had net losses of $4.0 million, $11.3 million and $84.8 million for the
fiscal years ended 1996, 1997 and 1998 respectively. The Company recorded an
asset impairment and restructuring charge of approximately $4.0 million in the
fourth quarter of 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview -- Restructuring of Operations."
LDI will require substantial capital, significantly in excess of historical
levels, to implement its business strategy and planned capital expenditures and
to fund LDI's operating losses beyond 1999. During 1999 LDI intends to seek to
raise at least $40 million in capital, in the form of debt or equity or a
combination thereof, from public or private sources to fund the Company's
capital needs. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
LDI'S NETWORK
The Company's United States network consists of six carrier grade DSC
Communications Corporation ("DSC") DEX600 switches ("DEX Switches") in Chicago,
Illinois; Fort Lauderdale, Florida; Fresno, California; New York, New York;
Raleigh, North Carolina; and Tulsa, Oklahoma, and interconnection agreements
with local exchange carriers ("LECs") in 33 states and Washington, D.C. The
Company's United States network enables it to originate long distance calls in
all states except Alaska and Hawaii, reaching areas covering more than 75% of
the total metropolitan United States population, allowing the Company to offer
its services in and around 44 of the top 50 metropolitan 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 has an STM-1 linking Asynchronous Transfer Mode ("ATM") service
on the United-States-United Kingdom link. The
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Company also has negotiated interconnection agreements with public
telecommunications operators ("PTOs") in Austria, Denmark, France, the
Netherlands, Norway, Sweden and the United Kingdom.
LDI has significantly expanded its United States and European networks and has
switches in the markets listed below:
MARKET NETWORK ELEMENT
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UNITED STATES
Chicago ............................ DEX Switch
Fort Lauderdale .................... DEX Switch
Fresno ............................. DEX Switch
New York ........................... DEX Switch/International Gateway
Raleigh ............................ DEX Switch
Tulsa .............................. DEX Switch
EUROPE
Copenhagen ......................... 2 Ericsson ANS Translocal 2
Mini-Switches
("ANS Translocal 2")
Frankfurt .......................... ANS Translocal 2
London ............................. DEX Switch/International Gateway
Madrid ............................. ANS Translocal 2
Milan .............................. ANS Translocal 2
Oslo ............................... ANS Translocal 2
Paris .............................. ANS Translocal 2
Stockholm .......................... 2 ANS Translocal 2s
Vienna.............................. ANS Translocal 2
Zurich.............................. 2 ANS Translocal 2s
By June 30, 1999, the Company expects to sign an interconnection agreement with
the PTO in Switzerland and to have renegotiated its interconnection agreement
with the PTO in Germany. The Company has also commenced negotiations with the
PTO in Spain for interconnection. LDI intends to add additional IRUs and leased
lines as demand warrants.
SERVICES
The Company offers telecommunications services in markets that originate over
50% of the world's international telecommunications traffic. The size of each
market (based on 1996 data) in which the Company currently offers services is
set forth below:
<TABLE>
<CAPTION>
1996 VOLUME PERCENTAGE
OF OUTGOING OF 1996 OUTGOING
COUNTRY MINUTES (1) INTERNATIONAL TRAFFIC (1)
- ------- ------------- -------------------------
(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 ...................................... 2,184 3.0
Switzerland ................................ 1,936 2.8
Spain ...................................... 1,189 1.7
Sweden ..................................... 1,026 1.5
Austria .................................... 960 1.4
Norway ..................................... 444 0.6
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39,354 56.1
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</TABLE>
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(1) All data taken from Telegeography 1997/1998 which is published by
Telegeography, Inc.
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 or
closed user groups. 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.
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
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switch or POP and is interconnected to the Public Switched Telephone Network
("PSTN"). LDI currently offers equal access in 33 states in the United States
and Washington, D.C. and expects by June 30, 1999 to offer equal access service
in additional states. If regulatory conditions allow and interconnection is
available, LDI expects to offer equal access in Germany and Norway by year end
1999.
EASY ACCESS. Easy access enables a long distance customer to access LDI's
network from the customer's home or office by dialing LDI's 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 Austria, Germany, Norway, Sweden, Switzerland and the United
Kingdom and expects to offer easy access in France by June 30, 1999. 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 access code on long distance calls. The access code may
be four or more digits. For example, in the United Kingdom, the access code is
"1xxx," in France it is "16xx" and in Germany it has recently changed to
"0100xx".
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 customer can access LDI's network even if LDI has
not been selected as the customer's presubscribed long distance carrier.
Customers 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 33 states in the United States and Washington, D.C. and expects to
offer such in additional states and, if regulatory conditions allow and
interconnection is available, in Germany by year end 1999.
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 .
CALLING CARD SERVICES
LDI offers calling card services as an additional service for its presubscribed
long distance customers in the United States. LDI's calling cards allow
customers to avoid using higher cost hotel or pay telephones when travelling 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.
PREPAID SERVICES
LDI's prepaid card service is a prepaid version of its calling card. Customers
purchase cards with a PIN code and a credit balance that 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 service has similar value-added features to
its postpaid card service and offers competitive rates to international
destinations. LDI's prepaid cards are available in the United Kingdom and France
and are distributed through agents and retailers.
TOLL-FREE SERVICES
LDI provides domestic toll-free service to customers in the United States,
Switzerland and the United Kingdom (e.g. "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 sells capacity to carrier
customers.
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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. LDI attempts to
minimize these risks by entering into agreements with these customers and by
obtaining deposits. 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 acquired a British reseller of cellular communications services in May 1998.
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.
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. 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'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, Sprint, MCI WorldCom, Inc. 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 Worldcom's
Telecom*USA brand and AT&T's Lucky Dog brand. In western Europe, LDI's
competitors include (i) PTOs, (ii) alliances such as AT&T's alliance with
British Telecom and Sprint's alliance with Deutsche Telekom and France Telecom,
known as "Global One," (iii) companies offering international telecommunications
services, such as Esprit Telecom ("Esprit"), 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.
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. Many of the Company's larger competitors have lower
incremental transmission costs than the Company because of, among other things,
greater use of owned transmission capacity, more favorable interconnection rates
and volume discounts on transmission. 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.
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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.
FCC restrictions 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.
Also, changes in FCC rules relating to charges for access to local exchange
telephone networks may disproportionately disadvantage smaller long distance
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 (which is not certain),
access charges for AT&T and other large interexchange carriers would decrease
and access charges for small interexchange carriers would increase
disproportionately.
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. 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 European Union ("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 require adoption by the Council of the European Communities. Certain EU
member states were granted a derogation from liberalizing their
telecommunication markets on January 1, 1998. Luxembourg was granted a six month
derogation. Spain liberalized on December 1, 1998 pursuant to a derogation
entitling it to delay liberalization to such date. Ireland and Portugal were
granted a derogation until January 1, 2000, although Ireland liberalized on
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. Some EU
member states have inconsistently and, in some instances, unclearly implemented
EU telecommunications directives, which could 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.
SALES AND MARKETING
The Company markets its services to SME and residential customers with
significant long distance calling needs and recently commenced marketing to
carrier customers. LDI relies on a combination of direct sales, agent sales,
direct response marketing, outbound telemarketing and affinity programs in
marketing its services to its customers. Residential customers are solicited
through direct mail and telemarketing and SME customers through direct and agent
sales. Wholesale services will be marketed to carriers by LDI's in-house direct
sales force.
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LDI'S TARGET MARKETS
SME. The Company targets small and medium-sized businesses that originate in
excess of $500 in international usage 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.
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.
DISTRIBUTION CHANNELS
DIRECT SALES. The Company markets its services to certain SMEs by means of
direct sales by a sales staff. In Sweden, Norway, Austria, Switzerland, the
United Kingdom, the United States and France, the Company employs a direct sales
force. In several of these countries, indirect sales through agents are also
pursued. The Company often deploys direct sales people to specialize in specific
customer niches or industry sectors. In some cases the direct sales efforts is
augmented by telemarketing and direct mail. The Company will market its
wholesale services exclusively through direct sales and has retained one sales
person in the United States and one person in the United Kingdom for wholesale
sales.
INDIRECT SALES. The Company markets its services to certain SME accounts by
means of indirect sales through generally nonexclusive arrangements with agents
to sell services under the LDI or NETnet brand names. 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
typically pays an agent between 6% and 15% of ongoing collected revenues. Agents
are recruited and managed by Company-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.
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
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.
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.
PRICING POLICY
SME. In Europe, the Company generally prices 10% to 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 SMEs.
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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 carrier's rates and routings to all destinations
on a day-by-day basis.
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.
EMPLOYEES
The following table summarizes the number of full time employees of the Company
as of February 28, 1999 by region and classification:
NORTH
CLASSIFICATION AMERICA EUROPE TOTAL
- -------------- ------- ------ -----
Management & Administrative 41 89 130
Sales & Marketing 22 99 121
Customer Service & Support 15 60 75
Technical 81 111 192
-- --- ---
Total 159 359 518
=== === ===
The Company believes its relations with its employees are good. None of the
Company's employees are represented by a collective bargaining agreement and the
Company has never experienced a work stoppage.
ITEM 2 - PROPERTIES
The Company currently leases its corporate headquarters of approximately 38,000
square feet, which is located in Ft. Lauderdale, Florida. The lease provides for
annual rent of approximately $368,000 in the first year with annual increases
and expires in January 2008. The Company leases approximately 10,000 square feet
in London for its European headquarters and London site switch. 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,
Vienna, Austria, Copenhagen, Denmark, Paris, France, Frankfurt, Hamburg and
Munich, Germany, Florence and Milan, Italy, Oslo, Norway, Madrid, Spain,
Stockholm, Sweden and Zurich, Switzerland. Certain communications equipment,
which includes network switches and transmission lines, are leased through
operating and capital leases.
Management believes that the Company's present administrative and sales office
is adequate for its anticipated operations and that similar space can readily be
obtained as needed. The Company believes the current leased facilities to house
the communications equipment are adequate, however, as the Company's network of
switches grows, the Company expects to lease additional facilities to house new
equipment.
ITEM 3 - LEGAL PROCEEDINGS
The Company is, from time to time, a party to litigation that arises in the
ordinary conduct of its business operations or otherwise. The Company believes
the outcome of pending legal proceedings to which the Company is a party will
not have a material adverse effect on the Company's business financial
conditions, results of operations or cash flows.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is currently no established public trading market for the Company's common
stock. Issued and outstanding shares of the Company's common stock are held by
approximately 117 shareholders of record.
CERTAIN SALES OF EQUITY SECURITIES
On April 13, 1998, the Company consummated an offering (the "High Yield
Offering" or the "Offering") of 225,000 units, each unit consisting of one
12.25% Senior Note due 2008 and one Warrant to purchase 15.0874 shares of common
stock
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of the Company, for a purchase price of $1,000 per unit. The High Yield Offering
resulted in gross proceeds to the Company of $225 million and the issuance by
the Company of warrants to purchase a total of 3,394,655 shares of LDI common
stock. Each such warrant entitles the holder thereof to purchase LDI common
stock at an exercise price of $.01 per share at any time after April 13, 1999
and prior to the tenth anniversary of its date of issue. Morgan Stanley & Co.
Incorporated and SBC Warburg Dillon Read Inc. served as placement agents for the
High Yield Offering.
On April 21, 1998, LDI acquired Newgate Communications Limited ("Newgate"), a
United Kingdom company providing cellular communication services to United
Kingdom customers, for approximately $1.7 million in cash, and approximately
214,000 shares of Common Stock.
On September 4, 1998, the Company issued to the holders of the Company's Series
B Preferred Stock warrants to purchase 1,010,101 shares of Common Stock at an
exercise price of $.001 per share. These warrants were issued in consideration
of such holders' consent to amending 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 were not to attain at least $100 million in gross revenues or were
to have a loss before interest, taxes, depreciation and amortization in excess
of $10 million for the fiscal year ended December 31, 1998.
On October 9, 1998, the Company acquired the outstanding shares of NETnet in
consideration for 37.5% of LDI's common stock on a fully-diluted basis, or
approximately 33,592,970 shares of LDI common stock, subject to adjustment as
provided in the acquisition agreement.
Under its Articles of Incorporation, the Company was required to pay to holders
of shares of its Series A Convertible Preferred Stock all dividends accrued on
such preferred shares from their respective dates of issue through December 31,
1998. In satisfaction of such accrued dividends (approximately $227,000) the
Company paid such dividends as of such date in the form of 63,997 shares of LDI
common stock.
During the year ended December 31, 1998, the Company issued a total of 1,597,921
shares of its common stock as a result of the exercise of warrants to purchase
such common stock that the Company had issued in private placements in 1995 and
1996. Exercise prices for such warrants ranged from $.75 to $1.25 per share of
common stock. LDI realized gross proceeds in an aggregate of $1,772,891 from the
exercise of such warrants at various times during the year ended December 31,
1998.
During the year ended December 31, 1998, the Company granted a total of
3,217,000 options to purchase LDI common stock to employees and certain
consultants of the Company in consideration for their services to the Company.
Options were granted with exercise prices ranging from $2.10 per share in
January, 1998 to $4.00 per share in December 1998.
Each issuance of securities described above was made in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, or Regulation D, Regulation S or Rule 144A promulgated thereunder, for
transactions by an issuer not involving any public offering. The recipients of
securities in each such transaction (other than employee stock option grants)
represented their intention to acquire the securities for investment only and
not with a view to or for distribution in connection with such transactions. All
recipients had adequate access to information about the Company through their
relationship to the Company or through information about the Company made
available to them.
DIVIDEND POLICY
The Company has not paid or declared any cash dividends on its common stock to
date. The payment of dividends, if any in the future, is within the discretion
of the Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition. Dividends are currently restricted by an
indenture (the "Indenture") entered into in connection with the High Yield
Offering, the terms of the Company's preferred stock, and may be restricted by
other credit arrangements entered into in the future by the Company. It is the
present intention of the Board of Directors to retain all earnings, if any, for
use in the Company's operations and accordingly, the Board of Directors does not
expect to declare or pay any dividends in the foreseeable future.
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth the periods indicated selected consolidated
financial data for the Company. The consolidated balance sheet data and
consolidated statement of operations data as of and for the years ended December
31, 1994, 1995, 1996, 1997 and 1998 have been derived from the Company's
Consolidated Financial Statements.
8
<PAGE> 10
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ------------ ------------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net $5 $2,593 $14,362 $40,116 $82,438
Costs of telecommunications services 6 1,932 8,361 22,720 64,317
Selling, general and administrative expenses 219 2,299 9,887 28,066 73,483
Asset impairment and restructuring costs -- -- -- -- 3,969
Depreciation and amortization 7 30 121 440 8,748
---------- ------------ ------------- ------------- -----------
Operating loss (227) (1,668) (4,007) (11,110) (68,079)
Minority interest -- -- 179 (132) --
Interest expense, net 7 15 (193) (92) (16,721)
---------- ------------ ------------- ------------- -----------
Net loss (220) (1,653) (4,021) (11,334) (84,799)
Preferred dividends and preferred stock and
Warrant redemption accretion -- (18) (74) (902) (5,624)
---------- ------------ ------------- ------------- -----------
Net loss applicable to common shareholders $(220) $(1,671) $(4,095) $(12,236) $(90,423)
========== ============ ============= ============= ===========
Net loss per share applicable to common
shareholders
-- basic and dilutive(1) $(0.03) $(0.10) $(0.21) $(0.51) $(2.74)
Weighted average shares outstanding 6,521 16,667 19,837 23,953 33,000
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ------------- ------------- ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $606 $545 $255 $12,173 $52,064
Total assets 845 1,667 3,894 27,807 344,082
Short term debt -- -- -- 551 18,552
Long term debt, net of current portion -- -- -- 2,600 222,109
Series A Redeemable Convertible Preferred Stock -- 1,185 1,291 1,365 1,200
Series B Redeemable Preferred Stock -- -- -- 12,350 14,276
Redeemable Warrants -- -- -- -- 11,567
Common shareholders' equity (capital deficiency) 616 1,132 (1,368) (239) 7,724
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ------------ ------------- -------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE, PER MINUTE AND RATIO
INFORMATION)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Capital expenditures $171 $189 $325 $7,094 $40,138
EBITDA(2) (220) (1,638) (3,886) (10,670) (59,331)
Revenue per minute 0.34 0.34 0.24 0.23 0.24
Billable minutes of use 16 7,541 58,706 175,248 350,176
Ratio of earnings to fixed charges(3) (31.43) (42.50) (14.00) (16.36) (2.34)
Net cash provided by (used in):
Operating activities (90) (1,852) (2,774) (7,134) (72,487)
Investing activities (171) (189) (353) (4,339) (94,637)
Financing activities 867 (1,980) 2,836 23,392 207,831
REGIONAL DATA:
Revenues
United States $5 $2,544 $14,021 $34,459 $42,279
Europe -- 49 341 5,657 40,159
Billable minutes of use
United States 16 7,461 57,765 159,602 234,529
Europe -- 80 941 15,646 115,647
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 11
(1) 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.
(2) 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.
(3) 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, 1994, 1995, 1996, 1997 and 1998 the
Company's earnings before fixed charges were insufficient to cover its
fixed charges by $0.2 million, $1.7 million, $4.0 million, $11.3
million and $84.8 million, respectively.
ITEM 7 - 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 ANNUAL REPORT. THE FOLLOWING DISCUSSION INCLUDES CERTAIN
FORWARD-LOOKING STATEMENTS.
OVERVIEW
RESTRUCTURING OF OPERATIONS
In December 1998, the Company began implementing a worldwide plan to reduce
selling, general and administrative costs. In connection with this plan, the
Company recorded asset impairment and restructuring charges of approximately
$4.0 million in the fourth quarter of 1998. As part of this plan, the Company
reduced its work force, wrote-off equipment, terminated certain agency
agreements, closed facilities and recorded other costs. Primarily all activities
and future cash outlays relating to such restructuring are expected to be
complete by the second quarter of 1999.
The restructuring activities primarily relate to the following:
THE ELIMINATION OF JOB RESPONSIBILITIES WORLDWIDE. Employees were terminated in
almost all countries in which the Company operates and almost all departments of
the Company including sales, marketing, finance and other administrative areas.
Related charges include severance and other wage related expenses. A total of 88
employees were terminated as a result of this plan.
EQUIPMENT WRITE-OFFS. In conjunction with the Company's decision to exit a line
of business, the Company had equipment for which there was no alternative use.
These charges relate to the write-off of the net book value of the equipment
because of little opportunity for resale.
TERMINATION OF AGENCY CONTRACTS. In conjunction with the Company's decision to
exit certain markets, it terminated certain contracts with third party agents.
The Company has included provisions for penalties and other costs for early
termination of these relationships.
CLOSURE OF FACILITIES AND RELATED COSTS. The Company made decisions to terminate
operations in certain markets and reduce excess facilities space. Included in
the restructuring charge are costs for lease termination penalties and future
lease payments on non-cancelable leases associated with these facilities.
The Company expects to remove approximately $2.8 million from its cost structure
in 1999.
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, 1996, 1997 and 1998.
10
<PAGE> 12
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
-------- -------- --------
(I N T H O U S A N D S)
REVENUES, NET
United States ............... $ 14,021 $ 34,459 $ 42,279
Europe ...................... 341 5,657 40,159
-------- -------- --------
Total ....................... $ 14,362 $ 40,116 $ 82,438
-------- -------- --------
BILLABLE MINUTES
United States ............... 57,765 159,602 234,529
Europe ...................... 941 15,646 115,647
-------- -------- --------
Total ....................... 58,706 175,248 350,176
-------- -------- --------
- --------------------------------------------------------------------------------
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 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.
Prior to the fourth quarter of 1998, a significant portion of the Company's
revenues came from its dial-around calling customers. For the year ended
December 31, 1998, approximately $18 million in revenues (44% of its United
States revenue and 22% of its consolidated revenues) came from dial-around
customers solicited through direct response marketing. During the second half of
1998, the Company experienced a declining response rate to its direct marketing.
As a result, the Company has discontinued its direct response advertising
campaigns. The Company expects revenues from dial-around services 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. In particular, the Company initiated an independent agent
program during 1998, and expects to expand this program substantially in 1999.
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.
With the acquisition of NETnet and through development of certain European
markets, LDI expects to derive a significantly larger portion of its revenues
from Europe in the future. In Europe, LDI markets its services primarily to SME
accounts, and to a lesser extent also to residential accounts with relatively
high international usage. LDI acquires its SME customers through a combination
of direct sales and sales by independent agents. Often these sales efforts are
supported by telemarketing. To attract residential accounts, LDI has used direct
response advertising, telemarketing and independent agents.
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 and circuits. Prior to December 1998, the majority of the Company's costs
of telecommunication 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 completes 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 another carrier's network
and substantially all calls carried by LDI must be terminated using another
carrier's facilities. By June 30, 1999, the Company expects the majority of its
calls in the United States will be originated and terminated using its
facilities. Origination and termination charges on calls generally are paid by
LDI, with the exception of Europe, where the subscriber often pays local access.
In areas with easy access, the Company pays the origination charges. LDI expects
that the unit cost of telecommunications services will decline as the Company
routes more calls through the Company's switches, IRUs and leased circuits. See
"Business - LDI's 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 expenses. LDI has historically sold its services primarily
through direct response advertising. Selling expenses have consisted of the cost
of preparing and sending color inserts
11
<PAGE> 13
through the mail or local newspapers. Due to the declining response rate to the
Company's direct response advertising, the Company discontinued this type of
advertising in the fourth quarter of 1998. During 1997, LDI commenced selling
services through 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 revenue as the Company expands its wholesale services and its
agent programs.
General and administrative expenses primarily relate to salaries, professional
and consultant fees and other organizational expenses associated with entering
new markets. During 1998, LDI significantly increased the size of its management
team at existing locations, and established new offices in Europe, all of which
resulted in an increase in general and administrative expenses. As the Company's
revenues increase at these new locations and offices, general and administrative
expenses are expected to decrease as a percentage of revenues. The Company does
not expect to expand its geographic locations in 1999.
DEPRECIATION AND AMORTIZATION
The Company has historically experienced low depreciation and amortization
expense because it acted primarily as a switchless reseller until 1998; however,
as the Company expands its network, it expects its depreciation and amortization
expense to increase significantly.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
REVENUES, NET. Total revenues, net, increased 105%, to $82.4 million for the
year ended December 31, 1998 from $40.1 million for the year ended December 31,
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"), NETnet and Newgate (acquired within the past year), and the
Company's carrier division, increased at a greater rate than for the Company's
United States operations. Total billable minutes of use increased by 100% to
350.2 million minutes for the year ended December 31, 1998 from 175.2 million
minutes for the year ended December 31, 1997. Average revenue per minute
increased to $0.24 in 1998 from $0.23 in 1997. Average revenue per minute
increased because of a greater percentage of European revenues and billable
minutes in the mix which was partially offset by competition in the United
States and Europe. As noted below, the average revenue per minute in Europe is
higher than in the United States.
In the United States, revenues for the year ended December 31, 1998 increased by
23% to $42.3 million from $34.4 million for the year ended December 31, 1997.
Billable minutes increased by 47% to 234.5 million minutes for the year ended
December 31, 1998, as compared with 159.6 million minutes for the year ended
December 31, 1997. Offsetting the growth in billable minutes was a decline in
average revenue per minute, which fell to $0.18 for the year 1998 as compared
with $0.22 for the year 1997 due to increased competition. Commencement of an
agent program, an increase in direct response advertising and an independent
telemarketing service were responsible for the increase in revenues. The Company
also increased the number of inserts mailed by 81%, with 207.4 million direct
mail inserts in the year 1998, compared with 114.4 million direct mail inserts
in year 1997. During the second half of 1998, the Company experienced a
declining response rate to its direct mail marketing program. As a result, the
Company is amending its product offering and discontinued direct response
advertising. The Company expects a decreasing percentage of its revenues to be
derived from dial-around service in the future as it expands services to equal
access and carrier customers.
In Europe, revenues increased to $40.2 million for the year ended December 31,
1998, as compared with $5.7 million for the year ended December 31, 1997.
Billable minutes increased from approximately 15.6 million in the year 1997 to
115.6 million in the year 1998. The increase was due primarily to the inclusion
of the results of Speedial, Newgate and NETnet and increased activity of the
Company's European carrier division. Speedial contributed approximately 13% of
European revenues while Newgate contributed approximately 16% and NETnet
contributed approximately 31% of European revenues during the year ended
December 31, 1998. The Company's European carrier division which commenced
operations in the third quarter of 1998, had revenues of $9.6 million. In
addition, the Company expanded its advertising and marketing programs to its
customer base. Average revenue per minute decreased from $0.36 to $0.35
primarily due to increased competition.
COST OF TELECOMMUNICATIONS SERVICES. Cost of telecommunications services
increased by 183% to $64.3 million for the year ended December 31, 1998, as
compared with $22.7 million for the year ended December 31, 1997. Average costs
per minute increased from $0.13 in 1997 to $0.18 for 1998. This increase
primarily reflects a change in the mix of billable minutes with proportionately
more billable minutes from the Company's European operations, including its
carrier operations, in 1998 than in 1997. Average cost of telecommunications
services is higher in Europe than in the United States. The Company's gross
margin was negatively impacted during the second and third quarters by the
upgrade of the billing system which prevented the billing of all calls in the
United States for which the Company was charged
12
<PAGE> 14
by its carriers, by increased competition in both the United States and Europe
and by a decline in dial-around revenues which have relatively high gross
margins. Costs of telecommunications services for the Company's carrier
operators generally have a lower gross margin but are used to fill excess
capacity on the network and give the Company a lower per minute rate on leased
lines. As a percentage of revenues, the cost of telecommunications services
increased from 57% in 1997 to 78% in 1998. The gross margin declined from 43% in
1997 to 22% in 1998. The change in gross margin reflects the higher average cost
per minute 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 migrates its telecommunications traffic to the networks.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 162% to $73.5 million for the year ended
December 31, 1998, as compared with $28.1 million for the year ended December
31, 1997. The increases resulted primarily from increased sales and marketing
expenses for the direct mail and independent telemarketing service. In the
United States, the Company mailed significantly more direct mail inserts during
1998, increasing the number of direct mail inserts by 81% from 114.4 million in
1997 to 207.4 million in 1998. In addition, the expansion of the Company's
marketing channels in the United States and Europe resulted in increased
salaries, professional and consulting costs. Expenses relating to billing costs
and bad debt write-offs were higher in 1998 than in 1997 due to increased
revenue from dial-around customers. Expenses from dial-around customers have
proven to be higher than from other customers. As a result the Company has
decreased its efforts in this area.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to $8.8
million for the year ended December 31, 1998, from $440,000 for the year ended
December 31, 1997. The increase was due to significantly more fixed assets,
primarily network equipment and office equipment as the Company completed the
buildout of its network and amortization of goodwill resulting from the
acquisition of NETnet and Newgate.
LOSS FROM OPERATIONS. Loss from operations increased from $11.1 million for the
year ended December 31, 1997, to $68.1 million for the year ended December 31,
1998. The aforementioned factors caused this increase.
NET LOSS. Net loss increased from $11.3 million for the year ended December 31,
1997 to $84.8 million for the year ended December 31, 1998. This increase was
due to increased losses from operations together with increased interest expense
resulting from the issuance of the Senior Notes and Warrants completed in April
1998.
In December 1998, the Company began implementing a worldwide plan to reduce
selling, general and administrative costs. In connection with this plan, the
Company recorded asset impairment and restructuring charges of approximately
$4.0 million in the fourth quarter of 1998. As part of this plan, the Company
reduced its work force, wrote-off equipment, terminated certain agency
agreements, closed facilities and recorded other costs. Primarily all activities
and future cash outlays are expected to be complete by the second quarter of
1999.
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 199% to 175.2 million billable minutes
in 1997 from 58.7 million billable minutes in 1996. Growth in billable minutes
was offset by declines in prices, as the average rate per minute declined to
$0.23 in 1997 from $0.24 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 57.8 million
billable minutes in 1996 to 159.6 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 $0.22 in 1997 from $0.24 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
0.9 million billable minutes in 1996 to approximately 15.6 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 $0.36 in 1996 and 1997.
13
<PAGE> 15
COST OF TELECOMMUNICATIONS SERVICES. Cost 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 $0.14 in 1996 to $0.13 in 1997,
reflecting volume discounts and generally lower transmission costs available in
the market. Somewhat offsetting this lower cost was a 10% increase in
transmission rates paid to Esprit, a significant wholesale supplier to the
Company of telecommunication capacity, commencing November 1, 1997. As a
percentage of revenues, cost 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
organizational 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 significant
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had cash and cash equivalents of $52.1
million excluding restricted cash and certificates of deposit. On April 13,
1998, the Company consummated an Offering of 225,000 units, each unit consisting
of one 12.25% Senior Note (the "Notes" or "Senior Notes") due 2008 and one
Warrant to purchase a total of 3,394,655 shares of Common Stock for $225
million. Approximately $75.5 million of the Offering proceeds ($64.2 million as
of December 31, 1998) was used to purchase US government securities, which will
be sufficient upon receipt of scheduled interest and principal of such
securities to fund the first six scheduled interest payments on the Notes.
Capital expenditures during 1998 totaled approximately $40.1 million, including
$18.6 million for property and equipment acquired pursuant to capital leases and
installment loans. Capital expenditures 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. Since October 1998, the Company has made capital infusions into
NETnet aggregating approximately $29.4 million to fund NETnet's operations. In
addition, the Company expects to continue to incur operating losses until 2000
as it develops its operations in Europe and expands its marketing initiatives in
the United States.
With the inclusion of the operating results of NETnet, the net proceeds from the
Offering are not currently expected to be sufficient to fund LDI's operating
losses and planned capital expenditures beyond 1999. EBITDA losses and planned
capital expenditures are projected to total $44 million and $22 million,
respectively, in the next twelve months. Actual capital expenditures and cash
requirements may vary significantly from LDI's estimates depending upon numerous
factors including sales levels, competitive pressures and regulatory actions. In
January 1999, the Board of Directors authorized the Company to pursue additional
financing of $40 million. The Company will attempt to obtain this financing in
1999 in the form of debt or equity or a combination thereof, from public or
private sources, to fund the Company's capital needs. 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. If LDI is unable to obtain additional capital during 1999, LDI likely
will be required to significantly reduce the scope of its expansion, and
possibly to abandon certain markets in which it currently operates. Although
providing a short term reduction in cash flow use, any such reduction or
abandonment could have a long-term material adverse effect upon LDI's business,
financial condition and results of operations and its ability to pay principal
and interest on the Notes. If LDI continues to be unable to obtain additional
capital after 1999, LDI may be required to review all strategic alternatives.
Net cash used in operating activities was $2.8 million, $7.1 million and $72.5
million in 1996, 1997 and 1998, respectively. 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. Net cash used in operating activities
14
<PAGE> 16
in 1998 consisted of a net loss of $84.8 million and an increase in working
capital of $8.9 million. This was partially offset by noncash charges of $21.2
million.
Net cash used in investing activities was $0.4 million, $4.3 million and $94.6
million in 1996, 1997 and 1998, respectively. Cash used in investing activities
in 1997 was comprised of $3.2 million for capital expenditures and $1.0 million
for the acquisition of Speedial. Cash used in 1998 consisted primarily of an
increase in restricted cash of $66.2 million. The restricted cash of $67.0
million on the balance sheet consist of a portfolio of securities pledged as
security for payment on the first six scheduled interest payments due on the
Senior Notes. In addition, the Company paid cash for capital expenditures of
$21.5 million (see above discussion of capital expenditures).
Net cash provided by financing was $2.8 million, $23.4 million and $207.8
million in 1996, 1997 and 1998, respectively. Cash provided by financing
activities in 1997 consisted primarily of the issuance of preferred stock,
common stock and warrants. Cash provided by financing activities in 1998 was
comprised primarily of the proceeds from the Senior Note Offering in April 1998.
This was partially offset by payments on the capital lease obligations and
installment loans, and by repayments on loans.
FOREIGN CURRENCY EXPOSURE AND EUROPEAN MONETARY UNION
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 1996, 1997 and 1998, approximately 1%, 9% and 49%, 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 December 31, 1998, the Company had no open foreign
currency positions.
On January 1, 1999 eleven of the existing members of the EU joined the European
Monetary Union. This will lead, among many other things, to fundamental changes
in the way participating EU states implement their monetary policies and manage
local currency exchange rates. Ultimately, there will be a single currency
within certain countries of the EU, known as the Euro and one organization, the
European Central Bank, responsible for setting European monetary policy. While
some believe that the change will bring a higher level of competition within
Europe and a greater sense of economic stability within the region, there is no
certainty that the Company's activity in this region will necessarily realize
any benefits as a result of such changes. The Company has reviewed the impact
the Euro will have on its business and whether this will give rise to a need for
significant changes in its commercial operations or treasury management
functions. While it is uncertain whether or not there will be any immediate
direct benefits from the planned conversion, the Company believes it is properly
prepared to accommodate any changes deemed necessary after January 1, 1999
without any significant changes to its current commercial operations, treasury
management and management information systems.
NEW ACCOUNTING PRONOUNCEMENTS
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.
The Company has adopted 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 has not had
a material effect on the Company's financial statements and disclosures.
IMPACT OF YEAR 2000
"Year 2000 Readiness" 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 Readiness 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 "Readiness Initiative Project"). The Readiness 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.
15
<PAGE> 17
Inability to reach substantial Year 2000 Readiness 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 Readiness 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 ready as they are implemented. As part of the Readiness
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 ready. 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 ready and the Company's
accounting software provider has certified to the Company that such software is
Year 2000 ready.
LDI intends to have all Year 2000 Readiness conversion and testing issues for
its most critical business systems used in domestic operations completed by the
end of the second quarter of 1999. Inter-system testing and deployment issues
are expected to be completed by mid-1999. The status of Year 2000 Readiness
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 Readiness Initiative Project, LDI is reviewing its
other business contingency plans to ensure they adequately address Year 2000
Readiness 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, though 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 its information technology
infrastructure.
Some of the costs associated with LDI's Readiness Initiative Project were
incurred in 1997 and 1998 and the remainder will be incurred during 1999. LDI
estimates the costs will be approximately $2.0 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 ready 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
Readiness Initiative Project that would adversely affect the Year 2000 Readiness
of LDI. Furthermore, the Year 2000 Readiness 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.
16
<PAGE> 18
SEASONALITY
The Company believes its business is not subject to significant seasonality
based on historical trends.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This requirement is not currently applicable to LDI.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------- -------------------
<S> <C>
Report of Independent Certified Public Accountants F-1
- ----------------------------------------------------------------------------------------------- -------------------
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-2
- ----------------------------------------------------------------------------------------------- -------------------
Consolidated Statements of Operations for the Years ended December 31, 1996, 1997 and 1998 F-3
- ----------------------------------------------------------------------------------------------- -------------------
Consolidated Statements of Common Shareholders' Equity (Capital Deficiency) for
the Years ended December 31, 1996, 1997 and 1998 F-4
- ----------------------------------------------------------------------------------------------- -------------------
Consolidated Statements of Cash Flows for the Years ended December 31, 1996, 1997 and 1998 F-5
- ----------------------------------------------------------------------------------------------- -------------------
Notes to the Consolidated Financial Statements F-7
- ----------------------------------------------------------------------------------------------- -------------------
</TABLE>
17
<PAGE> 19
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, 1997 and
1998, 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, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). 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, 1997 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, 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
March 10, 1999
F-1
<PAGE> 20
LONG DISTANCE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1998
------------- -------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 12,172,779 $ 52,064,072
Certificates of deposit -- 2,907,895
Restricted cash and investments 104,970 30,410,363
Accounts receivable, net of allowance for doubtful accounts
of $956,000 in 1997 and $6,330,000 in 1998 5,981,978 24,920,284
Other current assets 458,363 5,467,328
------------- -------------
Total current assets 18,718,090 115,769,942
Restricted cash and investments -- 36,600,856
Property and equipment, net 7,514,008 58,819,212
Goodwill, net of accumulated amortization of $26,000 in 1997
and $3,223,000 in 1998 450,087 129,705,238
Other assets 1,124,938 3,186,290
------------- -------------
Total assets $ 27,807,123 $ 344,081,538
============= =============
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY):
Current liabilities:
Accounts payable $ 5,572,458 $ 20,865,078
Accrued telecommunication costs 3,341,975 18,366,669
Accrued restructuring costs -- 3,014,752
Other accrued liabilities 2,266,348 12,924,149
Accrued acquisition contingency -- 7,508,029
Senior Note interest payable -- 5,976,563
Notes payable -- 4,950,000
Current portion of capital lease obligations 500,113 10,760,795
Current portion of installment loans 50,717 2,840,776
------------- -------------
Total current liabilities 11,731,611 87,206,811
Installment loans 148,836 3,907,910
Capital lease obligations 2,450,781 12,337,528
Senior Notes payable -- 205,863,147
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 $1,228,278 at December 31, 1997 and 1998,
respectively 1,364,607 1,199,278
Redeemable convertible, preferred stock, Series B, cumulative
$.001 par value - 5,000,000 shares authorized and 2,500,000
shares issued and outstanding - liquidation value $25,000,000 12,350,478 14,275,864
Redeemable warrants, 3,394,665 authorized, issued and
outstanding at December 31, 1998 -- 11,566,939
Common shareholders' equity (capital deficiency):
Common stock, $.001 par value - 100,000,000 shares authorized,
24,754,354 and 57,703,371 shares issued and outstanding at
December 31, 1997 and 1998, respectively 24,754 57,703
Additional paid-in capital 16,995,486 110,540,448
Other comprehensive loss -- (815,465)
Accumulated deficit (17,259,430) (102,058,625)
------------- -------------
Total common shareholders' equity (capital deficiency) (239,190) 7,724,061
------------- -------------
Total liabilities and common shareholders' equity (capital deficiency) $ 27,807,123 $ 344,081,538
============= =============
</TABLE>
See accompanying notes. F-2
<PAGE> 21
LONG DISTANCE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Retail, net $ 14,361,835 $ 40,115,910 $ 72,394,892
Wholesale, net -- -- 10,043,579
------------ ------------ ------------
Total revenues 14,361,835 40,115,910 82,438,471
Costs of telecommunications services 8,361,323 22,719,511 64,316,624
------------ ------------ ------------
Gross margin 6,000,512 17,396,399 18,121,847
Selling, general and administrative expenses 9,886,808 28,065,918 73,483,039
Asset impairment and restructuring costs -- -- 3,969,740
Depreciation and amortization 121,356 440,116 8,747,629
------------ ------------ ------------
Operating loss (4,007,652) (11,109,635) (68,078,561)
Other expense (income):
Interest expense 211,713 522,641 23,810,615
Interest income (19,063) (430,656) (7,089,981)
Minority interest (179,259) 132,384 --
------------ ------------ ------------
(13,391) (224,369) (16,720,634)
------------ ------------ ------------
Net loss (4,021,043) (11,334,004) (84,799,195)
Preferred stock dividends and preferred stock
and warrant redemption accretion (73,695) (901,876) (5,623,915)
------------ ------------ ------------
Net loss applicable to common shareholders $ (4,094,738) $(12,235,880) $(90,423,110)
============ ============ ============
Net loss per share applicable to common
shareholders - basic and dilutive $ (0.21) $ (0.51) $ (2.74)
============ ============ ============
Weighted average shares outstanding 19,836,912 23,953,434 32,999,731
============ ============ ============
</TABLE>
See accompanying notes. F-3
<PAGE> 22
LONG DISTANCE INTERNATIONAL INC. & AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL OTHER
----------------------- PAID-IN COMPREHENSIVE
SHARES AMOUNT CAPITAL LOSS
------------ --------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 17,198,332 $ 17,198 $ 2,132,764 $ --
Stock subscriptions received -- -- -- --
Issuance of common stock,
net of issuance costs
of $628,800 3,043,171 3,043 1,194,062 --
Issuance of common stock
on conversion of bridge loan 2,140,668 2,141 1,282,258 --
Accrued dividend on Series
A preferred stock -- -- (73,695) --
Net loss -- -- -- --
------------ --------- ------------- -------------
Balance at December 31, 1996 22,382,171 22,382 4,535,389 --
Issuance of common stock
from exercise of warrants,
net of issuance costs
of $45,740 1,615,233 1,615 1,283,619 --
Issuance of common stock
for advertising costs 606,950 607 615,454 --
Issuance of common stock
to investment advisor 150,000 150 89,850 --
Issuance of Series B warrants,
net of issuance costs
of $1,092,244 -- -- 11,313,050 --
Issuance of warrants for line
of credit -- -- 60,000 --
Accrued dividend on Series
A preferred stock -- -- (73,695) --
Accretion to redemption value
of Series B preferred stock -- -- (828,181) --
Net loss -- -- -- --
------------ --------- ------------- -------------
Balance at December 31, 1997 24,754,354 24,754 16,995,486 --
Other comprehensive loss -- -- -- (815,465)
Issuance of common stock for
acquisition of NETnet 31,073,497 31,073 92,567,948 --
Issuance of common stock
from exercise of warrants,
net of issuance costs
of $59,507 1,597,921 1,598 1,711,786 --
Issuance of common stock
for acquisition of Newgate 213,602 214 854,194 --
Accrued dividend on Series
A preferred stock -- -- (73,695) --
Issuance of common stock
in payment of Series A
preferred stock dividends 63,997 64 239,026 --
Accretion to redemption value
of Series B preferred stock -- -- (1,925,388) --
Accretion on warrants -- -- (38,909) --
Stock options issued for
professional services -- -- 210,000 --
Net loss -- -- -- --
------------ --------- ------------- -------------
Balance at December 31, 1998 57,703,371 $ 57,703 $ 110,540,448 $ (815,465)
============ ========= ============= =============
<CAPTION>
TOTAL COMMON
SHAREHOLDERS'
EQUITY
ACCUMULATED SUBSCRIPTIONS (CAPITAL
DEFICIT RECEIVABLE DEFICIENCY)
------------- ------------- -------------
<S> <C> <C> <C>
Balance at January 1, 1996 $ (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 -- -- 1,197,105
Issuance of common stock
on conversion of bridge loan -- -- 1,284,399
Accrued dividend on Series
A preferred stock -- -- (73,695)
Net loss (4,021,043) -- (4,021,043)
------------- ------------- -------------
Balance at December 31, 1996 (5,925,426) -- (1,367,655)
Issuance of common stock
from exercise of warrants,
net of issuance costs
of $45,740 -- -- 1,285,234
Issuance of common stock
for advertising costs -- -- 616,061
Issuance of common stock
to investment advisor -- -- 90,000
Issuance of Series B warrants,
net of issuance costs
of $1,092,244 -- -- 11,313,050
Issuance of warrants for line
of credit -- -- 60,000
Accrued dividend on Series
A preferred stock -- -- (73,695)
Accretion to redemption value
of Series B preferred stock -- -- (828,181)
Net loss (11,334,004) -- (11,334,004)
------------- ------------- -------------
Balance at December 31, 1997 (17,259,430) -- (239,190)
Other comprehensive loss -- -- (815,465)
Issuance of common stock for
acquisition of NETnet -- -- 92,599,021
Issuance of common stock
from exercise of warrants,
net of issuance costs
of $59,507 -- -- 1,713,384
Issuance of common stock
for acquisition of Newgate -- -- 854,408
Accrued dividend on Series
A preferred stock -- -- (73,695)
Issuance of common stock
in payment of Series A
preferred stock dividends -- -- 239,090
Accretion to redemption value
of Series B preferred stock -- -- (1,925,388)
Accretion on warrants -- -- (38,909)
Stock options issued for
professional services -- -- 210,000
Net loss (84,799,195) -- (84,799,195)
------------- ------------- -------------
Balance at December 31, 1998 $(102,058,625) -- $ 7,724,061
============= ============= =============
</TABLE>
See accompanying notes. F-4
<PAGE> 23
LONG DISTANCE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (4,021,043) $ (11,334,004) $ (84,799,195)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 121,356 440,116 8,747,629
Minority partner's equity in losses (income) of subsidiary (179,259) 132,384 --
Common stock and options issued for professional services -- 217,467 210,000
Provision for bad debts 651,741 2,580,125 6,626,996
Asset impairment and restructuring charges -- -- 3,969,740
Loss on disposal of fixed assets -- -- 755,000
Amortization of discount on Senior Notes -- -- 857,886
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable (2,491,407) (6,118,967) (20,409,893)
Other current assets (215,627) (224,745) (1,003,173)
Other assets (99,547) (447,318) (2,031,352)
Accounts payable 1,631,653 4,144,805 (1,601,861)
Accrued telecommunication costs 1,060,805 1,985,173 3,656,694
Accrued restructuring costs -- -- (403,248)
Senior Note interest payable -- -- 5,976,563
Other accrued liabilities 767,705 1,490,490 6,961,212
------------- ------------- -------------
Net cash used in operating activities (2,773,623) (7,134,474) (72,487,002)
INVESTING ACTIVITIES:
Increase in restricted cash and investments (28,000) (76,970) (66,186,249)
Purchase of certificates of deposit -- -- (2,907,895)
Acquisitions of NETnet and Newgate, net of cash acquired
of $1,122,000 -- (1,047,605) (2,427,161)
Purchases of property and equipment (324,586) (3,214,869) (21,528,121)
Purchase of minority interest in subsidiaries -- -- (1,587,714)
------------- ------------- -------------
Net cash used in investing activities (352,586) (4,339,444) (94,637,140)
FINANCING ACTIVITIES:
Proceeds from issuance of Senior Notes and redeemable warrants, net
of offering costs -- -- 216,533,291
Proceeds from issuance of common stock and exercise of warrants,
net of offering costs 1,472,268 1,285,234 1,713,448
Proceeds from issuance of preferred stock and warrants, net of
offering costs 32,500 22,835,348 --
Proceeds from line of credit -- 1,480,000 --
Repayment of line of credit -- (1,480,000) (1,831,000)
Principal payments on capital lease obligations -- (598,166) (4,891,854)
Principal payments on installment loans -- (130,447) (2,443,867)
Repayment of loans -- -- (1,249,118)
Proceeds from contributions by minority partner 46,875 -- --
Proceeds from bridge financing 1,284,399 -- --
------------- ------------- -------------
Net cash provided by financing activities 2,836,042 23,391,969 207,830,900
------------- ------------- -------------
Effect of exchange rate changes -- -- (815,465)
Increase (decrease) in cash and cash equivalents (290,167) 11,918,051 39,891,293
Cash at beginning of year 544,895 254,728 12,172,779
------------- ------------- -------------
Cash and cash equivalents at end of year $ 254,728 $ 12,172,779 $ 52,064,072
============= ============= =============
</TABLE>
Continued F-5
<PAGE> 24
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued in repayment of bridge loan $ 1,284,399 $ -- $ --
============ ============ ============
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 $ 10,610,283
============ ============ ============
Property and equipment purchased under installment loans $ -- $ 330,000 $ 8,000,000
============ ============ ============
Accrued dividends on Series A preferred stock net of repayment
through issuance of common stock in 1998 $ 73,695 $ 73,695 $ (165,331)
============ ============ ============
Accretion on Series B preferred stock and redeemable warrants $ -- $ 828,181 $ 1,925,388
============ ============ ============
Warrants issued in connection with the line of credit $ -- $ 60,000 $ --
============ ============ ============
Accrual for acquisition contingency $ -- $ -- $ 7,508,029
============ ============ ============
Common stock issued for acquisitions $ -- $ -- $ 93,453,429
============ ============ ============
Issuance of notes payable for accounts payable $ -- $ -- $ 4,950,000
============ ============ ============
</TABLE>
See accompanying notes. F-6
<PAGE> 25
1. ORGANIZATION AND LIQUIDITY
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 telecommunications services
including calling card, dial-around, easy access, prepaid and postpaid
calling card, fixed to mobile and toll free services.
LIQUIDITY
During 1998, the Company has expanded its network infrastructure and
acquired additional operating subsidiaries. These events have primarily
been funded with proceeds from the Senior Note Offering (see Note 7).
The Company plans to obtain additional financing in 1999 to continue
its expansion plans. If the Company is unable to obtain additional
financing, it will likely be required to reduce the scope of its
expansion and possibly abandon operations in certain markets in which
it currently operates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and it's subsidiaries:
* Dynamic Telecom International Inc (DTI) - 100%
* NETnet International AB - 100%
* NETnet AB, Sweden - 100%
* NETnet AS, Norway - 100%
* NETnet AG, Switzerland - 100%
* NETnet Italy Spa, Italy - 100%
* NETnet NETcenter AB, Sweden - 100%
* LDI Ltd - 100%
* Long Distance International (U.K.) Ltd. (formerly Speedial
International) - 100%
* Televersa NETnet Telekommunikationssysteme GmbH, Germany -
100%
* NETnet Telekommunikations GmbH, Austria - 85%
* Newgate Communications Ltd. - 100%
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 life 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 which are
amortized over the lesser of the terms of the agreements or the useful
life of the IRU.
Depreciation and amortization of property and equipment is computed
using the following estimated useful lives:
Furniture and fixtures 3 years
Dialers and equipment 3 - 5 years
Switches and infrastructure 5 years
Computer equipment. 3 years
Leasehold improvements 2 - 15 years
F-7
<PAGE> 26
Replacements and betterments, renewals and repairs that extend the life
of the asset are capitalized; other repairs and maintenance are
expensed as incurred. The cost and accumulated depreciation applicable
to assets sold or retired are removed from the accounts and the gain or
loss on disposition is recognized in the Consolidated Statement of
Operations.
REVENUES
The Company records revenue for the telecommunications traffic along
its or other carriers networks and for connection charges related to
adding new customers.
The Company records revenues for its telecommunications traffic at the
time a telephone call is completed and registered based upon minutes of
traffic processed or by contracted fee arrangements. The connection fee
is recognized as revenue when the customer is connected to the
Company's services.
COST OF TELECOMMUNICATION SERVICES
Cost of services represents direct charges from vendors that the
Company incurs to deliver service to its customers. These include
leasing costs for the dedicated phone lines that form the Company's
network, and rate-per-minute charges from other carriers that transmit
international traffic on behalf of the Company. Cost of services are
recorded at the time the call is completed or during the period the
leases benefit.
Cost of services also includes network cost which consist of access,
transport and termination costs.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and stated amounts of
revenue and expense during the reporting period. Actual results could
differ from these estimates.
STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which 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.
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.
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 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 (see Notes
12 and 13).
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 asset may be impaired. The Company, based on
current circumstances, does not believe that any long-lived assets are
impaired at December 31, 1998.
F-8
<PAGE> 27
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 two to twenty 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 adjusted to fair value.
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 purchased the outstanding minority interest for
approximately $390,000. The Company generally allocated 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. The Company has also
funded the losses for the minority partner in Austria and absorbed 100%
of the cumulative unfunded net losses through December 31, 1998.
MARKETING AND ADVERTISING EXPENSE
The Company expenses marketing and advertising costs as incurred. The
Company incurred advertising expenses of approximately $4,400,000,
$9,200,000 and $14,300,000 during the years ended December 31, 1996,
1997 and 1998, respectively. Advertising expenses consist primarily of
direct mail programs and television advertising.
STARTUP AND ORGANIZATIONAL COSTS
Startup and organizational costs expended by the Company in
establishing operations at its subsidiaries are expensed as incurred.
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 AND INVESTMENTS
Restricted cash on the accompanying Consolidated Balance Sheets consist
of (i) a portfolio of U.S. Treasury Notes pledged as security for
payment on the first six scheduled interest payments due on the Senior
Notes, (ii) certificates of deposit that are collateral for the
Company's performance under a telecommunications services agreement and
(iii) certain letters of credit pledged as security for equipment
financing. Long term restricted cash consists of amounts held for
scheduled interest payments on the Senior Notes subsequent to December
31, 1999.
The U.S. Treasury Notes restricted for scheduled interest payments on
the Senior Notes are classified as held to maturity and are recorded at
amortized cost.
Regulations of certain countries in which the Company operates require
that a portion of cash be restricted for governmental obligations that
are owed but have not yet been paid. Such amounts include value-added
taxes collected and employer and employee obligations for national
social benefit programs.
CONCENTRATION OF CREDIT RISK
In the normal course of business, the Company extends unsecured credit
to its customers. Management has provided a reserve for amounts which
may eventually become uncollectible.
F-9
<PAGE> 28
A majority of the Company's transmission and switching facilities are
provided by several telecommunications carriers. Under the terms of the
supplier agreements, the Company purchases long-distance service at
fixed monthly lease rates or 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 could have a
negative effect on the Company's operating results.
The Company has an agreement with a national service bureau to
coordinate billing and collection services from a majority of the
Company's U.S. customers through local exchange carriers (LECs). At
December 31, 1997 and 1998, approximately 60% and 30% of the Company's
accounts receivable were due from LEC's respectively.
REGULATIONS
The Company is subject to regulation by the Federal Communications
Commission and by various state public service and public utility
commissions. The Company is also subject to regulations by various
agencies in Europe.
FOREIGN CURRENCY TRANSLATION
In accordance with SFAS No. 52, assets and liabilities denominated in
foreign currencies are translated into US dollars at the rate of
exchange in effect at the balance sheet date, while revenue and
expenses are translated at the weighted-average rates prevailing during
the respective years. Components of shareholders' equity (capital
deficiency) are translated at historical rates. Gains and losses
resulting from translating assets and liabilities at various exchange
rates are reported as a part of other comprehensive loss in the
statement of shareholders' equity (capital deficiency). Net transaction
gains or losses relate primarily to leased-line costs and are included
as a component of cost of services on the Consolidated Statements of
Operations. Transaction gains or losses included in the Consolidated
Statements of Operations are not material.
RECLASSIFICATION
Certain amounts in prior year's financial statements have been
reclassified to conform with the current year's presentation.
RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, REPORTING COMPREHENSIVE INCOME. This statement
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.
This statement is effective for fiscal years beginning after December
15, 1997. The adoption of SFAS No. 130 did not have a material effect
on the Company's consolidated financial statements.
In June 1997, FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. This statement requires that
public business enterprises report certain information about operating
segments in complete sets of financial statements of the enterprise and
in condensed financial statements of interim periods issued to
shareholders. It also requires that public business enterprises report
certain information about their products and services, the geographic
areas in which they operate, and their major customers. This statement
is effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS No. 131 has no impact on the Company's Consolidated
Financial Statements.
F-10
<PAGE> 29
3. ACQUISITIONS
In October 1998, the Company entered into an acquisition agreement to
exchange 100% of the outstanding stock of NETnet International AB
("NETnet") for 33,592,970 shares of the Company's Common Stock, which
represents approximately 37.5% of the Company's common stock. NETnet is
a provider of international long distance, domestic long distance and
fixed mobile services to small and medium sized business customers.
NETnet operates in Sweden, Norway, Germany, Switzerland, Austria,
Italy, and France. The acquisition is being accounted for under the
purchase method and accordingly NETnet's results have been included in
the Company's Consolidated Financial Statements since October 1998. The
exchange transaction, including acquisition costs, was valued at
$101,840,000 as determined by the Company's Board of Directors. The
excess of the purchase price over the fair value of the net liabilities
acquired (see Note 6) was approximately $127,470,735 and is being
amortized on a straight line basis over 20 years.
The Company is currently in dispute with the seller of NETnet regarding
the accuracy of the seller's representations. Accordingly, 2,519,473
shares that are contingently returnable to the Company have been
classified as an accrued liability at December 31, 1998, and are not
included in loss per share calculations for the year ended December 31,
1998.
In April 1998, the Company acquired all of the outstanding common stock
of Newgate Communications Limited, ("Newgate"), a U.K. company
providing cellular communication services to UK customers. The
acquisition is being accounted for under the purchase method and
accordingly, Newgate results have been included in the Company's
Consolidated Financial Statements since April 21, 1998. The purchase
price was approximately $2,554,000 consisting of $1,700,000 cash and
the issuance of 214,000 shares of the Company's common stock with an
estimated value of $4.00 per share. The excess of purchase price over
the fair value of net liabilities acquired was approximately $3,700,000
and is being amortized on a straight-line basis over three years.
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
Company's Consolidated 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 purchases occurred
on January 1, 1997. The unaudited pro forma results for the years ended
December 31, 1997 and 1998 are not necessarily indicative of what
actually would have occurred if the acquisitions had been in effect for
the entire periods presented. In addition, they are not intended to be
a projection of future results.
1997 1998
------------- -------------
Revenues, net $ 72,221,830 $ 114,105,858
Net loss per share
(basic and dilutive) $ (0.80) $ (2.21)
Net loss applicable to
common shareholders $ (44,017,267) $(125,766,434)
In December 1998, the Company acquired the 2.8% minority interest in
NETnet Germany for cash consideration of approximately $1,200,000, with
the entire amount of the purchase price being recorded as goodwill.
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 ceased
the financing of the majority of its U.S. Receivables in August 1998.
At December 31, 1997, the outstanding balance of such receivables for
which the Company was contingently liable was approximately $3,646,000.
During the years ended December 31, 1997 and 1998, the Company
F-11
<PAGE> 30
received proceeds of approximately $26,513,000 and $19,527,000,
respectively, pursuant to these agreements and incurred approximately
$425,000 and $355,000, respectively, in interest charges upon the sale
of such accounts. Interest paid to the purchaser of such receivables
was approximately $109,000 and $381,000 for the years ended December
31, 1997 and 1998, respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------
1997 1998
--------------------------------------
<S> <C> <C>
Furniture and fixtures $ 167,490 $ 1,450,928
Dialers and equipment 1,254,931 11,440,299
Switches and infrastructure 4,525,775 40,608,194
Computer equipment 1,964,538 7,507,663
Leasehold improvements 120,374 4,088,467
--------------------------------------
8,033,108 65,095,551
Less accumulated depreciation (519,100) (6,276,339)
--------------------------------------
Property and equipment, net $ 7,514,008 $ 58,819,212
======================================
</TABLE>
Depreciation expense was $111,335, $409,645 and $5,602,552 during the
years ended December 31, 1996, 1997 and 1998, respectively.
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.
Included in property and equipment at December 31, 1997 and 1998, is
equipment under capital leases and installment loans of $5,164,000 and
$26,488,000, net of accumulated amortizations of $58,000 and
$2,868,000, respectively.
6. NOTES PAYABLE
In January 1999, the Company entered into an agreement to repay a
portion of accounts payable owed to a carrier by NETnet and assumed by
the Company through its acquisition (see Note 3). The principal amount
is approximately $4.1 million. Interest on the balance accrues monthly
at 12 1/2% on a compounded basis. Interest began accruing in September
1998, but monthly interest payments are not required until January
1999. The entire principal balance is due in September 1999.
In November 1998, the Company entered into a repayment agreement to
repay a portion of accounts payable owed to a carrier by NETnet and
assumed by the Company through its acquisition. The principal amount is
approximately $800,000 and will be repaid in nine equal installments
beginning in November 1998. The unpaid balance will be subject to an
interest rate of 1.5% per month.
7. INSTALLMENT LOANS, LONG-TERM DEBT AND SENIOR NOTES PAYABLE
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% 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% per annum through 2001.
In May 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 $2.25 million plus 12% per annum through 2001.
These IRU payment obligations have been included in installment loans.
Future annual principal payments on installment loans are as follows:
F-12
<PAGE> 31
Year ended December 31:
1999 $ 2,850,120
2000 2,438,584
2001 1,372,583
2002 46,434
2003 32,378
Thereafter 8,587
--------------------
Total 6,748,686
Current maturities (2,840,776)
--------------------
Long term maturities $ 3,907,910
====================
Interest paid on installment loans during the year ended December 31,
1998 was approximately $458,000.
On April 13, 1998, the Company completed an offering of 12 1/4% Senior
Notes with detachable common stock purchase warrants (see Note 12) for
$225,000,000. The Senior Notes are unsecured and were recorded at
approximately $204,000,000, net of a discount and offering costs of
approximately $21,000,000. The Senior Notes are redeemable at the
Company's option beginning April 13, 2003 at the redemption amount, as
defined, plus accrued and unpaid interest.
The terms of the senior note agreement restrict, among other things,
the Company's ability to declare or pay any distribution on its capital
stock, enter into new commitments or borrowings over specified amounts
and dispose of assets outside the ordinary course of business. In
addition, upon a change in control, as defined, the Company must
mandatorily redeem the Senior Notes at 101% of the stated principal
amount, plus accrued and unpaid interest. The Senior Notes mature on
April 15, 2008.
Approximately $75,500,000 of the net proceeds of the senior note
offering were placed in an interest bearing escrow account to fund the
semiannual interest payments through April 15, 2001. At December 31,
1998, restricted cash on the accompanying balance sheet includes
approximately $64,200,000 designated to fund these interest
obligations. Cash paid for interest on the Senior Notes was
approximately $13,935,000 in 1998. 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 matured in January 1999 and
was not renewed. Pursuant to the agreement, the Company paid interest
monthly to the bank at 8.25% per annum and paid a fee monthly to the
unrelated party at a rate equal to 2% per annum. Under the Agreement,
in 1997 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 and 1998. Interest paid
on amounts outstanding on the Line during the years ended December 31,
1997 and 1998 was approximately $8,000 and $0, respectively.
LEASES
The Company leases its premises under noncancelable operating leases
expiring at various dates through 2023. Rental expense was
approximately $167,000, $391,000 and $2,047,000 for the years ended
December 31, 1996, 1997 and 1998, 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, 1998 was approximately $1,558,000.
As of December 31, 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:
F-13
<PAGE> 32
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------------- ------------------
<S> <C> <C>
Year ended December 31:
1999 $ 12,950,031 $ 2,341,542
2000 5,580,473 1,986,882
2001 3,946,702 1,767,852
2002 3,687,198 1,270,292
2003 1,047,789 1,137,305
Thereafter -- 10,196,240
------------------- -----------------
Total minimum lease payments 27,212,193 $ 18,700,113
=================
Less amounts representing interest (12% to 20%) (4,113,870)
-------------------
Present value of obligations under capital leases 23,098,323
Less current maturities (10,760,795)
-------------------
Long-term obligations under capital leases $ 12,337,528
===================
</TABLE>
9. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------
1997 1998
------------------------------------
<S> <C> <C>
Payroll, commission and benefits $ 182,835 $ 2,507,603
Local exchange carrier chargeback reserve 1,438,721 867,952
Professional and consulting fees 332,049 1,258,517
Equipment purchases -- 3,438,532
Other 312,743 4,851,545
------------------------------------
Total other accrued liabilities $ 2,266,348 $ 12,924,149
====================================
</TABLE>
10. COMMITMENTS
At December 31, 1997 and 1998, the Company is contingently liable under
certain letters of credit provided to telecommunications carriers to
ensure payment of telecommunications costs incurred by the Company.
The Company has entered into an agreement to purchase future IRU's
totaling $16,000,000. Included in other non-current assets at December
31, 1998 is a $1,600,000 deposit pursuant to this agreement.
11. 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.
The United States and foreign components of loss from continuing
operations before income taxes are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------------------------------------------------------
<S> <C> <C> <C>
United States $ (3,304,008) $ (7,589,057) $ (50,803,096)
Foreign (717,035) (3,744,947) (33,996,099)
---------------------------------------------------------
$ (4,021,043) $ (11,334,004) $ (84,799,195)
=========================================================
</TABLE>
Significant components of the Company's net deferred income taxes are
as follows:
F-14
<PAGE> 33
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------
1997 1998
--------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 480,000 $ 2,139,000
Accrued expenses 45,000 1,119,000
Net operating loss carryforwards 5,800,000 31,923,000
--------------------------------------
6,325,000 35,181,000
Valuation allowance (6,245,000) (34,384,000)
--------------------------------------
Total deferred tax assets 80,000 797,000
Deferred tax liabilities:
Property and equipment (80,000) (797,000)
Total deferred tax liabilities (80,000) (797,000)
======================================
Total net deferred tax $ -- $ --
======================================
</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 valuation
allowance of $6,245,000 and $34,384,000 at December 31, 1997 and 1998,
respectively, 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, 1997 and 1998 was
$4,306,000 and $28,139,000 respectively.
The Company has incurred net operating losses since inception. At
December 31, 1998, the Company had approximately $65,228,000 and
$24,307,000 in operating loss carryforwards for U.S. and foreign income
tax purposes, respectively, that expire in various amounts from 2009
through 2018 for U.S. income and carry forward indefinitely for foreign
income tax purposes. 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 U.S. net operating loss carryforwards. At this point
in time, the Company has not completed a change in ownership study and
the exact amounts of any such limitations are not known.
The federal statutory tax rate reconciled to the effective rate is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------
1996 1997 1998
------------------------------------------------------
<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 0.92 0.65 1.75
Change in valuation allowance 36.51 37.99 33.43
Other 0.20 (1.01) 2.45
------------------------------------------------------
0.00% 0.00% 0.00%
======================================================
</TABLE>
12. 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), non-qualified stock
options (NSO), stock appreciation rights (SAR) or stock depreciation
rights. The term of the options (limited to 10 years), vesting schedule
and exercise price are at the discretion of the Board of Directors. At
December 31, 1998, there were 4,542,500 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 the
F-15
<PAGE> 34
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, 1998, there were 2,150,000 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 or
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 has 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 6.5% and 5.5% for 1997 and 1998,
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 and $85,210,000 for the years ended
December 31, 1997 and 1998, respectively. The pro forma effect for the
year ended December 31, 1996 was not material.
No options were exercised during the years ended December 31, 1996,
1997 and 1998. A summary of the Company's stock option activity and
related information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------
1996 1997 1998
--------------------------------------------------
<S> <C> <C> <C>
Options outstanding at January 1 646,500 1,229,500 3,935,000
Issued 583,000 2,705,500 3,217,500
Forfeited -- -- (460,000)
--------------------------------------------------
Options outstanding at December 31 1,229,500 3,935,000 6,692,500
==================================================
Exercisable at December 31 762,800 3,024,000 3,708,256
==================================================
OPTIONS WITH EXERCISE PRICES EQUAL TO OR
LESS THAN $1.25 PER SHARE:
Number of options at December 31 1,229,500 3,762,000 3,567,000
==================================================
Weighted average contractual life
remaining (in years) 6.0 6.2 5.2
==================================================
Range in exercise prices $0.05-$0.60 $0.05-$1.25 $0.05-$1.25
==================================================
Weighted average exercise price of
currently exercisable options $ 0.20 $ 0.94 $ 0.93
==================================================
Weighted average exercise price of
outstanding options $ 0.34 $ 0.93 $ 0.94
==================================================
OPTIONS WITH EXERCISE PRICES GREATER
THAN $1.25 PER SHARE:
Number of options at December 31 -- 173,000 3,125,500
==================================================
Weighted average contractual life
remaining (in years) -- 8.4 8.4
==================================================
Range in exercise prices $ -- $2.00-$2.10 $2.10-$4.25
==================================================
Weighted average exercise price of
currently exercisable options $ -- $ 2.10 $ 2.35
==================================================
Weighted average exercise price of
outstanding options $ -- $ 2.06 $ 3.61
==================================================
</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 during the years ended December 31, 1997 and
1998.
F-16
<PAGE> 35
The Company's recently acquired subsidiary maintains defined
contribution plans for certain employees based on the subsidiary in
which the employee is employed. For each plan, the Company contributes
to an independent insurance company or other qualified financial
institution an amount equal to either a percentage of the employee's
salary or a fixed amount, as specified by each plan. These
contributions are in the employee's name, and the employee is entitled
to receive the contributed principal and any earnings the principal has
earned. The participants all become 100% vested upon entering the plan.
Certain plans also allow the participants to contribute to the plan.
The Company records expense for these costs when incurred. The Company
incurred approximately $0, $0 and $150,000 for the years ended 1996,
1997 and 1998, respectively.
The Company is also required to pay into the local government social
security system in each country in which the Company has employees. The
Company records expense for these social security obligations when
incurred.
13. 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
accrue at a fixed annual rate of $0.03 per share and are payable at
December 31, 1998, and at each December 31 thereafter. Shares of Series
A Preferred are convertible into shares of common stock at any time at
a conversion price equal to $0.50 per share subject to adjustment, and
holders of such shares are entitled to the number of votes equal to the
number of shares of common stock into which such shares are
convertible. In the event of any liquidation, dissolution or winding up
of the Company, the holders of the Series A preferred shall be entitled
to receive an amount equal to $0.50 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 $0.50 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 Series A preferred
participation in dividends declared on common shares in excess of
certain defined levels.
Dividends on Series A Preferred Stock were cumulative through December
31, 1998 at which time the Company had the option of paying the
dividends in cash or shares of the Company's common stock. Subsequent
to December 31, 1998, accrued dividends will be currently payable. On
December 8, 1998, the Board of Directors authorized the payment of
accrued and unpaid dividends as of December 31, 1998 to shareholders of
record on that date. Accordingly, on December 31, 1998 the Company
issued 63,997 shares of common stock in payment of the dividends. The
shares issued were included in the Company's computation of weighted
average common shares outstanding and had an immaterial effect on loss
per share.
SERIES B PREFERRED STOCK
On July 28, 1997, the Company executed an agreement with a group of
investors under common control (the "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 $0.001 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 $0.001 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 7).
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.
F-17
<PAGE> 36
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
shares of the Company's common stock at an exercise price of $0.001 per
share. 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. For the year ended December 31, 1997, the
accretion to redemption value was recorded assuming a redemption value
of $10 per share.
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.
COMMON STOCK
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.
During the year ended December 31, 1998, the Company issued 31,073,497
shares of its common stock, in connection with the acquisition of
NETnet and 213,602 shares in connection with the acquisition of Newgate
(see Note 3). In addition, the Company issued 1,597,921 shares related
to the exercise of warrants and 63,997 shares related to the payment of
Series A preferred stock dividends. The proceeds from the exercise of
warrants was approximately $1,713,384.
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 for
proceeds of $487,500. On March 4, 1998, warrants were exercised by the
holder to purchase 650,000 shares of common stock for proceeds of
$650,000.
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 expired 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.
F-18
<PAGE> 37
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 7), the Company issued warrants to purchase up to 1,000,000 shares
of common stock at an exercise price of $0.75 per share. 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.
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.
In connection with the offering of Senior Notes (see Note 7), the
Company issued redeemable warrants to purchase 3,394,665 shares of
common stock at an exercise price of $0.01 per share. The warrants were
recorded at their fair value of approximately $11,528,000, net of
issuance costs of $487,000 and are being accreted to their redemption
through April 2008. The warrants are exercisable at any time beginning
April 13, 1999 and for a period of ten years. Upon the sale of assets
or merger of the Company, as defined, for consideration other than
exchange traded securities or cash, the Company will be obligated to
redeem the warrants.
A summary of the Company's warrants is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------
1996 1997 1998
----------------------------------------------------
<S> <C> <C> <C>
Warrants outstanding at January 1 2,000,000 4,585,785 14,472,098
Issued 3,285,785 12,078,143 5,027,865
Exercised -- (1,605,248) (1,587,599)
Forfeited (700,000) (586,582) (200,364)
----------------------------------------------------
Warrants outstanding and exercisable at
December 31 4,585,785 14,472,098 17,712,000
====================================================
Range in exercise prices $0.60-$1.25 $0.001-$1.25 $0.001-$1.25
====================================================
</TABLE>
As of December 31, 1998, common shares reserved for issuance are as
follows:
Series A Preferred 2,456,556
Series B Preferred 2,500,000
Employee stock options 6,692,500
Warrants 17,712,000
-------------------
Total 29,361,056
==================
The warrants issued by the Company contain customary anti-dilution
adjustments for issuances of stock, stock splits, combinations and
certain other events.
14. 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, 1997 and 1998, revenue
from these shareholders was approximately $524,000 and $700,000,
respectively. During 1997, the Company issued shares of common stock to
their primary advertising printer (see Note 12). During 1997 and 1998,
the Company paid $324,000 and $1,384,000, respectively, to a network
consulting company. In January 1998, the owner of the consulting
company became a member of the Company's Board of Directors.
F-19
<PAGE> 38
15. 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's operating
segments are based on the geographical areas in which the Company
provides services.
Revenue is based on the location of the entity providing services.
Operating loss represents net revenues less operating costs and
expenses, and does not include interest expense/income and other
expense/income. Identifiable assets by geographic area are those
tangible and intangible assets used in the Company's operation of each
geographic area. The unallocated portion represents corporate overhead
expenses not specifically identifiable to a segment, and the IRU's,
which are used concurrently by the United States and European segments.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------
1996 1997 1998
----------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
United States
Retail $ 14,020,394 $ 34,459,013 $ 41,822,296
Wholesale -- -- 456,715
Europe
Retail 341,441 5,656,897 30,572,596
Wholesale -- -- 9,586,864
----------------------------------------------------------
CONSOLIDATED REVENUE $ 14,361,835 $ 40,115,910 $ 82,438,471
==========================================================
OPERATING LOSS:
United States $ (2,807,894) $ (6,616,952) $ (34,534,398)
Europe (896,294) (3,599,522) (32,955,830)
Unallocated (303,464) (893,161) (588,333)
----------------------------------------------------------
TOTAL OPERATING LOSS $ (4,007,652) $ (11,109,635) $ (68,078,561)
==========================================================
DEPRECIATION AND AMORTIZATION:
United States $ 103,294 $ 244,328 $ 1,809,576
Europe 18,062 195,788 6,349,720
Unallocated -- -- 588,333
----------------------------------------------------------
TOTAL DEPRECIATION AND AMORTIZATION $ 121,356 $ 440,116 $ 8,747,629
==========================================================
ASSETS:
United States $ 3,344,835 $ 20,988,691 $ 146,117,177
Europe 505,717 5,832,279 190,222,694
Unallocated 43,158 986,153 7,741,667
----------------------------------------------------------
TOTAL ASSETS $ 3,893,710 $ 27,807,123 $ 344,081,538
==========================================================
CAPITAL EXPENDITURES:
United States $ 131,289 $ 3,381,215 $ 17,656,376
Europe 193,297 3,382,714 14,482,028
Unallocated -- 330,000 8,000,000
----------------------------------------------------------
TOTAL CAPITAL EXPENDITURES $ 324,586 $ 7,093,929 $ 40,138,404
==========================================================
LONG-LIVED ASSETS:
United States $ 704,830 $ 3,612,872 $ 21,404,258
Europe 179,798 4,490,008 162,564,815
Unallocated 43,158 986,153 7,741,667
----------------------------------------------------------
TOTAL LONG-LIVED ASSETS $ 927,786 $ 9,089,033 $ 191,710,740
==========================================================
</TABLE>
F-20
<PAGE> 39
16. 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, 1998
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.
The senior notes were issued in April 1998. The fair value of of the
senior notes at December 31, 1998 approximate their carrying value
based on nominal changes in the market rate of interest since their
issuance.
17. ASSET IMPAIRMENT AND RESTRUCTURING COSTS
In December 1998, the Company began implementing 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 is estimated to be $3,250,000.
Primarily all activities and future cash outlays are expected to be
completed by the second quarter of 1999.
Primary charges are summarized as follows:
THE ELIMINATION OF JOB RESPONSIBILITIES WORLDWIDE. Employees were
terminated in almost all countries in which the Company operates
and almost all departments of the Company including sales,
marketing, finance and other administrative areas. Related charges
include severance and other wage related expenses. A total of 88
employees were terminated as a result of this plan.
EQUIPMENT WRITE-OFFS. In conjunction with the Company's decision
to exit a line of business, the Company had equipment for which
there was no alternative use. These charges relate to the
impairment write-off of the net book value of the equipment
because of little opportunity for resale.
TERMINATION OF AGENCY CONTRACTS. In conjunction with the Company's
decision to exit certain markets, it terminated certain contracts
with third party agents. The Company has included provisions for
penalties and other costs for early termination of these
relationships.
CLOSURE OF FACILITIES AND RELATED COSTS. The Company made
decisions to terminate operations in certain markets and reduce
excess facilities space. Included in the restructuring charge are
costs for lease termination penalties or future lease payments on
noncancelable leases associated with these facilities.
Details of the asset impairment and restructuring charges are as
follows:
Involuntary employee terminations $ 2,451,000
Equipment writeoffs 551,000
Termination of agency agreements 512,000
Closure of facilities and related costs 237,000
Other costs 218,000
------------------
Total charges $ 3,969,000
==================
18. SUBSEQUENT EVENTS
In January 1999, the Company entered into a two year employment
agreement with its Chief Executive Officer. The employment agreement
provides for annual base salary of $280,000. Additionally, pursuant to
the employment agreement, the Chief Executive Officer was awarded stock
options to purchase 3,000,000 shares of common stock at an exercise
price of $3.55 per share.
In January 1999, the Company entered into a three year employment
agreement with its Executive Vice President of Operations. The
employment agreement provides for an annual base salary of $160,000.
F-21
<PAGE> 40
Additionally, pursuant to the employment agreement, the Executive Vice
President was awarded stock options to purchase 275,000 shares of
common stock at an exercise price of $4.00 per share.
The Board of Directors has authorized the Company to pursue additional
financing of $40 million, which may involve the issuance of mezzanine
equity.
19. UNAUDITED QUARTERLY FINANCIAL INFORMATION
(Dollars in 000's except per share data)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
1998 1998 1998 1998
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 15,244 $ 15,416 $ 17,525 $ 34,254
Gross Margin 4,839 4,150 3,765 5,368
Operating loss (7,354) (10,901) (14,243) (35,581)
Net loss applicable to common (11,608) (16,413) (19,250) (43,152)
shareholders
Net Loss per share applicable
to common shareholders
(basic and dilutive) $ (0.47) $ (0.64) $ (0.73) $ (0.79)
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
1997 1997 1997 1997
------------------------------------------------------------------------
Revenues $ 8,770 $ 9,959 $ 8,905 $ 12,482
Gross Margin 4,145 4,993 3,848 4,410
Operating loss (1,393) (1,287) (1,507) (6,923)
Net loss applicable to common (1,510) (1,484) (1,813) (7,429)
shareholders
Net loss per share applicable
to common shareholders
(basic and dilutive) $ (0.06) $ (0.06) $ (0.08) $ (0.30)
</TABLE>
F-22
<PAGE> 41
Financial Statements Schedules
II - Valuation and qualifying accounts for each of the three years in the period
ended December 31, 1998.
All other schedules are omitted because they are not applicable.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND 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
David Glassman 47 Vice Chairman of the Board
David Hess 37 Chief Executive Officer
James Rose 43 Chief Operating Officer and Executive Vice President of Operations
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
Mats Herdenfeldt 52 Senior Vice President
Barry Brooks 42 Non-Voting Director
Lawrence Mestel 36 Director
Olaf N. Krohg 36 Director
Jan Carlzon 57 Director
Per L. Saxegaard 40 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 of
LDI since its inception, acted as Co-Chief Executive Officer of LDI from its
inception until December 1998, and acted as its European Managing Director from
March 1998 to May 1998. 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 also
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, has been a Director of LDI since its
inception, has been Vice Chairman of the Board since December 1998, and acted as
President and Co-Chief Executive Officer of LDI from its inception until
December 1998. 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.
DAVID HESS became Chief Executive Officer in January 1999. From October 1997 to
December 1998, Mr. Hess served as President of TotalTel USA Communications Inc.
("TotalTel"), a switch based telecommunications provider. From May 1995 to
October 1997, Mr. Hess served as Senior Vice President and Vice President of
TotalTel International and Carrier Services, Inc., an operating subsidiary of
TotalTel. From 1993 to 1995, Mr. Hess served as Director of Eastern Regional
18
<PAGE> 42
Carrier Sales for West Coast Telecommunications, Inc. From 1991 to 1993, Mr.
Hess was a National Account Manager for Sprint Carrier Services and from 1989 to
1991, Mr. Hess was a Strategic Account Manager for United Telephone Systems.
From 1986 to 1989, Mr. Hess was employed by MCI in various sales and sales
management positions.
JAMES ROSE became Executive Vice President of Operations in January 1999. From
May 1998 to December 1998, Mr. Rose served as Vice President of Operations of
TotalTel. From December 1994 to April 1998, Mr. Rose served as Director of
Operations and Engineering, as well as Director of Budgets, Planning and
Implementation of IXC Communications. From March 1994 to December 1994, Mr. Rose
served as Manager of Traffic Engineering and Network Optimization of West Coast
Telecommunications, Inc. From 1982 to 1992, Mr. Rose held various engineering
and managerial positions at MCI.
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 service 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.
MATS HERDENFELDT has been Vice President of LDI since November 1998. From
January 1998, Mr. Herdenfeldt served as Chief Operating Officer of NETnet and
was appointed Chief Executive Officer of NETnet in September 1998. Before
joining NETnet, Mr. Herdenfeldt served in senior executive positions for Data
General in Scandinavia and the U.S. for more than 10 years. Prior to his
employment with Data General, Mr. Herdenfeldt held various managerial positions
with Ericsson and Honeywell in Sweden.
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, corporate counsel to Island Trading Co. ("Island"), a
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.
JAN CARLZON has been a Director of LDI since December 1998. Mr. Carlzon
co-founded NETnet in 1994 and serves as Chairman of its former parent company,
NETnet International S.A. From April 1995 until December 1997, Mr. Carlzon was
Chairman and Chief Executive Officer of Transpool AB, a Nordic travel operator.
Mr. Carlzon was President and Chief Executive Officer of the Scandinavian
Airlines Group, a consortium of 50% privately owned national airlines of
19
<PAGE> 43
Denmark, Norway and Sweden, from 1981 to 1993. From 1978 to 1980, Mr. Carlzon
was President of Linejeflyg, the Swedish domestic airline. Mr. Carlzon is also a
member of the Board of Directors of CellICD AB, Multi Q International AB, Boxman
AB, Intentia AB, Servisair Plc, Antula Healthcare AB and Merkantildata A.S.
PER L. SAXEGAARD has been a Director of LDI since December 1998. Mr. Saxegaard
founded HQ Norden, an investment bank, in 1994 and since then has served as its
Managing Partner. Mr. Saxegaard has been a Partner in charge of corporate
finance of Orkla Finans, an investment bank, since 1990 and from 1988 to 1990
held various other positions at Orkla Finans. Prior to 1988, Mr. Saxegaard held
various positions within the Business Development Department of Orkla ASA, an
industrial and investment conglomerate.
ITEM 11 - EXECUTIVE 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.
The following table discloses compensation for fiscal year 1998 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 1998 exceeds
$100,000 (the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL SECURITIES
FISCAL COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) OPTIONS # COMPENSATION(1)
- --------------------------- --------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
Clifford Friedland 1998 $195,915 1,000,000 $5,000
Chairman of the Board and Co-Chief
Executive Officer(2)
David Glassman 1998 $178,718 1,000,000 $5,000
President Co-Chief Executive Officer(3)
Richard Blume 1998 $115,462 250,000 $2,000
Chief Operating Officer and Executive Vice
President(4)
Elizabeth Tuttle 1998 $ 94,231 350,000 --
Chief Financial Officer
</TABLE>
- -------------------
(1) Represents a vehicle allowance provided to the executive.
(2) Mr. Friedland ceased to act as Co-Chief Executive Officer in December 1998.
Mr. Friedland remains Chairman of the Board, a non-executive position, and
is a consultant to LDI.
(3) Mr. Glassman ceased to act as President and Co-Chief Executive Officer in
December 1998. Mr. Glassman was appointed Vice Chairman of the Board, a
non-executive position, and is a consultant to LDI.
(4) Mr. Blume commenced service as Chief Operating Officer and Executive Vice
President on March 6, 1998. Mr. Blume ceased his position as Chief
Operating Officer of LDI in January,1999.
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 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF % OF SHARES VALUE AT ASSUMED
SECURITIES SUBJECT TO ANNUAL RATE 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 -- -- -- -- -- --
David Glassman -- -- -- -- -- --
Richard Blume 250,000 8.7% $3.00 (2) $1,645,928 $2,523,237
Elizabeth Tuttle 350,000 12.2% (3) (2) $1,714,626 $2,663,480
</TABLE>
20
<PAGE> 44
- --------------
(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) The Company granted Ms. Tuttle, on the dates shown, options to purchase the
following number of shares of Common Stock at the indicated prices: 120,000
shares on January 1, 1998 at $2.10 per share; 80,000 shares on March 1,
1998 at $3.00 per share; and 150,000 shares on December 8, 1998 at $4.00
per share.
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
more than one year, in the event of a change in 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 the
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 December 31, 1998, options to purchase 2,150,000 shares of Common Stock
were outstanding under the Stock Incentive Plan, 2,000,000 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 towards 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, Option 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
21
<PAGE> 45
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.
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 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 December 31, 1998, options to purchase 4,542,500 shares of Common Stock
were outstanding under the Stock Option Plan, 1,708,256 of which were
exercisable as of such date.
EMPLOYMENT AGREEMENTS
In January 1999, LDI entered into a two-year employment agreement with David
Hess as Chief Executive Officer. The employment agreement provides that as of
January 1999, Mr. Hess will receive an annual base salary of $280,000. In
addition, Mr. Hess will be entitled to receive an incentive bonus opportunity of
up to $300,000 for 1999 in the event Mr. Hess achieves certain mutually agreed
upon performance targets (including the completion of financing transactions in
1999 in excess of $50,000,000) and an incentive bonus opportunity of up to
$300,000 for 2000 in the event Mr. Hess achieves certain performance targets the
amount of which and criteria of which will be determined by the Compensation
Committee and Board of Directors of LDI. Pursuant to his employment agreement
Mr. Hess was awarded stock options to purchase 3,000,000 shares of Common Stock
at an exercise price of $3.55 per share, pending LDI's creation of a new stock
option plan for employees of the Company. All such options have seven year terms
and vest in equal segments over three years for so long as Mr. Hess is an
employee of the Company. If the employment agreement is terminated as a result
of Mr. Hess' death, his estate or beneficiaries will be entitled to his base
salary through the end of the month in which death occurs and annual incentive
bonus award for the year in which his death occurs, based on the original target
award for such year. LDI may terminate the employment if Mr. Hess becomes
physically or mentally incapacitated on a long-term basis. In such case, Mr.
Hess will be entitled to long-term disability benefits then in effect for senior
executives of LDI, his base salary through the end of the month in which
long-term disability benefits commence and the annual incentive award for the
year in which the termination occurs, based on the original target award for
such year. The Company may terminate Mr. Hess for "cause", as defined in the
employment agreement, provided that Mr. Hess will not be terminated for "cause"
unless LDI gives Mr. Hess notice of his conduct with an opportunity to cure for
a period of 10 days and hearing before the Board of Directors. If terminated for
"cause" or if he voluntarily terminates his employment agreement, Mr. Hess shall
be entitled to his base salary through the date of termination and all options
shall be terminated provided that the voluntary termination will be effective 30
days after Mr. Hess gives notice of such termination to LDI. If Mr. Hess is
terminated by LDI without "cause" or if he is constructively terminated, as
defined in the employment agreement, he shall be entitled to his base salary for
a period of 12 months following his termination (which at Mr. Hess' option the
present value of such amount may be paid to him in one lump sum), a pro rata
annual incentive award for the year in which termination occurs, based on his
original target award, an annual incentive award for a period of 12 months
following the date of termination, based on his original target award for such
year (in each case which may be paid similar to the base salary), all
outstanding vested options and all employee benefits until the earlier of 12
months following the date of termination or such time as Mr. Hess receives
equivalent benefits under the plans of a subsequent employer. Additionally,
should the employment agreement be terminated after a "change of control" of
LDI, as defined in the employment agreement, without "cause" or if he has been
constructively terminated, Mr. Hess shall be entitled to the same benefits as if
there had not been a "change in control". Mr. Hess is subject to a
confidentiality provision, a one year non-compete and a one year
non-solicitation provision of employees of LDI.
In December 1998, LDI entered into an agreement with Clifford Friedland pursuant
to which Mr. Friedland became sole Chief Executive Officer of LDI, agreed
voluntarily to relinquish his position as Chief Executive Officer upon the
appointment of a successor, agreed to remain Chairman of the Board, and agreed
to provide consulting services to the Company until December 31, 2001. The
agreement provides that Mr. Friedland will receive annual compensation of
$160,000. In addition, if Mr. Friedland is terminated for "cause", as defined in
the agreement, then he is entitled to receive termination pay equal to his
compensation, and all benefits provided for in the agreement, for a period of 60
days from the time notice of termination is given. If Mr. Friedland, is
terminated because of his death or disability, then Company is obligated to pay
Mr. Friedland, his heirs, administrators or estate, twice the amount of all
compensation that
22
<PAGE> 46
would have been payable through the end of his term. If there is a "change of
control" of LDI, as defined in the agreement, then his services terminate and he
is entitled to receive the amount of compensation that would have been payable
through the end of the term. If Mr. Friedland is terminated by the Company
without "cause" or Mr. Friedland terminates his services for "good reason", as
defined in the agreement, then the Company is obligated to pay Mr. Friedland an
amount equal to the compensation that would have been payable to him through the
end of the term.
In December 1998, LDI entered into an agreement with David Glassman pursuant to
which Mr. Glassman relinquished his position as President and Co-Chief Executive
Officer, agreed to serve as Vice Chairman of the Board, and agreed to provide
consulting services to the Company until December 31, 2001. The agreement
provides that Mr. Glassman will receive annual compensation of $160,000. In
addition, if Mr. Glassman is terminated for "cause", as defined in the
agreement, then he is entitled to receive termination pay equal to his
compensation, and all benefits provided for in the agreement, for a period of 60
days from the time notice of termination is given. If Mr. Glassman, is
terminated 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
compensation that would have been payable through the end of his term. If there
is a "change of control" of LDI, as defined in the agreement, then his services
terminate and he is entitled to receive the amount of compensation that would
have been payable through the end of the term. If Mr. Glassman is terminated by
the Company without "cause" or Mr. Glassman terminates his services for "good
reason", as defined in the agreement, then the Company is obligated to pay Mr.
Glassman an amount equal to the compensation that would have been payable to him
through the end of the term.
In January 1999, LDI entered into an employment agreement with James Rose,
pursuant to which Mr. Rose will serve as Executive Vice President of Operations
of LDI. The employment agreement provides that Mr. Rose will receive an annual
salary of $160,000, and it expires in January 2002. Mr. Rose will also receive
stock options to purchase 275,000 shares of Common Stock at an exercise price of
$4.00 per share, subject to the approval of the Board of Directors of the
Company. Such options will have seven years term and will vest in equal segments
over the term of the employment agreement. The Company may terminate the
employment agreement if Mr. Rose 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. Rose shall be entitled to his base salary through the date on
which such termination takes effect. If Mr. Rose is terminated "without cause",
as defined in the employment agreement, he will be entitled to receive his base
salary and bonus until three months from the date of such termination if it
occurs during the first year of the employment term, or until six months from
the date of such termination if it occurs after the first year of the employment
term. Mr. Rose 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 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 the 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.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding the beneficial ownership of
LDI as of December 31, 1998, after giving effect to the shares of Common Stock
issuable in connection with the NETnet acquisition and options grants to
executive officers who commenced employment with LDI in 1999, 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.
23
<PAGE> 47
<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 9.4%
David Glassman(3) 6,250,000 9.8
David Hess(4) -- --
James Rose(5) -- --
Elizabeth Tuttle(6) 59,997 *
Barry Brooks(7) 82,500 *
Lawrence Mestel(8) 225,000 *
Olaf N. Krohg(9) -- --
Jan Carlzon -- --
Per Saxegaard -- --
Advent International Corporation(10)
101 Federal Street
Boston, MA 02110 12,089,240 16.2
Island Trading Co.(11)
4 Columbus Circle
5th Floor
New York, NY 10019 3,422,350 5.5
Karl Stockman AB(12)
Regementsgatan 21 A
S-653 40 Karlstad
Sweden 5,610,066 9.0
All Directors and Executive Officers as a Group
(13 persons) (13) 14,319,472 21.9
</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 December 31, 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., 4150 SW 28th Way, Fort Lauderdale, Florida 33312.
(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 62,619,400 shares, comprised of 60,162,844 shares of Common Stock
and 2,456,556 shares of Series A Preferred Stock outstanding as of
December 31, 1998, after giving effect to the shares of Common Stock
issuable in connection with the NETnet acquisition.
(3) Includes options to purchase 1,000,000 shares of Common Stock under the
Stock Incentive Plan, which are currently exercisable.
(4) Excludes options to purchase 3,000,000 shares of Common Stock granted
under a new stock option plan to be adopted by the Company which are
not currently exercisable, subject to adoption of such plan.
(5) Excludes options to purchase 275,000 shares of Common Stock under the
Stock Incentive Plan (subject to approval of the Board of Directors of
the Company) which are not currently exercisable.
(6) Includes options to purchase 59,997 shares of Common Stock under the
Stock Incentive Plan, which are currently exercisable. Excludes options
to purchase 140,003 shares of Common Stock under the Stock Option Plan
and 150,000 shares of Common Stock under the Stock Incentive Plan which
are not currently exercisable.
(7) Includes options to purchase 7,500 shares of Common Stock under the
Stock Incentive Plan which are currently exercisable.
(8) Excludes securities held by Island, an affiliate of Mr. Mestel, as to
which Mr. Mestel disclaims beneficial ownership.
24
<PAGE> 48
(9) Excludes the ADV Warrants to purchase 11,089,240 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 issued to the Advent Entities, as to which Mr. Krohg
disclaims beneficial ownership.
(10) Includes the ADV Warrants to purchase 11,089,240 shares of Common Stock
held by the Advent Entities, which are currently exercisable, see
"Description of the Capital Stock - Warrants", and warrants to purchase
an additional 1,000,000 shares of Common Stock that the Company issued
to the Advent Entities.
(11) Excludes securities held by Mr. Mestel, an affiliate of Island, over
which Island disclaims beneficial ownership.
(12) Includes 5,610,066 shares of Common Stock to which Karl Stockman AB is
entitled in connection with the NETnet acquisition, subject to
adjustment as provided in the acquisition agreements.
(13) Includes options to purchase an aggregate of 2,699,472 shares of Common
Stock under the Stock Incentive Plan and Stock Option Plan which are
currently exercisable. Excludes options to purchase 602,528 shares of
Common Stock under the Stock Option Plan and the Stock Incentive Plan
which are not currently exercisable and excludes options to purchase
3,000,000 shares of Common Stock granted under a new stock option plan
to be adopted by the Company which are not currently exercisable and
options to purchase 275,000 shares of Common Stock under the Stock
Incentive Plan (subject to approval of the Board of Directors of the
Company) which are not currently exercisable.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
LDI is party to a shareholders' agreement among Clifford Friedland and David
Glassman, directors of LDI and beneficial owners of 9% and 10%, respectively, of
the Common Stock after giving effect to the shares of stock issuable in
connection with the NETnet acquisition, 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
of 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
as the ADV Warrants, other than with respect to anti-dilution protection. See
"Description of the Capital Stock - Warrants". These warrants were issued in
consideration of the Advent Entities' consent to amending 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, and depreciation and
amortization in excess of $10 million for the fiscal year ended December 31,
1998. Olaf N. Krohg, 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 5.5% of the Common Stock after giving effect to the shares of
stock issuable in connection with the NETnet acquisition, on a basis no more
favorable to Island than LDI charges to other of its customers for like
services. LDI received approximately $105,100, $137,500 and $91,000 in 1996,
1997 and 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.
TNMG, a telecommunications consulting firm, has rendered consulting services to
the Company in the past and has been assisting the Company in upgrading its
billing and customer care information systems in the United States and Europe.
Richard Nespola, a director of the Company during 1998, 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 and $1,384,000 in 1997
and 1998, respectively, in consideration of such services.
25
<PAGE> 49
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report
(1) Financial Statements.
See "Item 8. Financial Statements and Supplemental Data" for Financial
Statements included with this Annual Report in Form 10-K.
(2) Financial Statements Schedules
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits listed in the Exhibit Index, including compensatory plans or
arrangements listed below:
Employment agreement between LDI and Clifford Friedland dated July 1,
1995.
Employment agreement between LDI and David Glassman dated July 1, 1995.
Employment agreement between LDI and Elizabeth Tuttle dated February 1,
1998.
Employment agreement between LDI and David Hess dated January 5, 1999.
Employment agreement between LDI and James Rose dated January 11, 1999.
Consulting agreement between LDI and Clifford Friedland dated December
8, 1998.
Consulting agreement between LDI and David Glassman dated December 8,
1998.
(b) No report on Form 8-K was filed during the fourth quarter of the
period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 on 15(d) 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/ David Hess
-----------------------------
David Hess
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated below, on this 25th day of March,
1999.
<TABLE>
<CAPTION>
SIGNATURES TITLE
- ---------- -----
<S> <C>
/s/ CLIFFORD FRIEDLAND Chairman of the Board
- -----------------------------------------
Clifford Friedland
/s/ DAVID GLASSMAN Vice Chairman of the Board
- -----------------------------------------
David Glassman
/s/ DAVID HESS Chief Executive Officer (Principal executive officer)
- -----------------------------------------
David Hess
/s/ ELIZABETH TUTTLE Chief Financial Officer (Principal financial officer and
- ----------------------------------------- principal accounting officer)
Elizabeth Tuttle
</TABLE>
26
<PAGE> 50
/s/ LAWRENCE MESTEL Director
- -----------------------------------------
Lawrence Mestel
/s/ OLAF N. KROHG Director
- -----------------------------------------
Olaf N. Krohg
/s/ JAN CARLZON Director
- -----------------------------------------
Jan Carlzon
/s/ PER SAXEGAARD Director
- -----------------------------------------
Per Saxegaard
27
<PAGE> 51
EXHIBIT INDEX
<TABLE>
<CAPTION>
INCORPORATED
BY REFERENCE EXHIBIT
TO(1) NUMBER EXHIBIT DESCRIPTION
- --------------------- -------------- -----------------------------------------------------------
<S> <C> <C>
Exhibit 1.1 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").
Exhibit 2.1 2.1 Acquisition Agreement, dated October 9, 1998, for NETnet
acquisition.
Exhibit 3.1 3.1 Amended and Restated Articles of Incorporation of Long
Distance International Inc., as amended.
Exhibit 3.2 3.2 Bylaws of Long Distance International Inc.
Exhibit 4.1 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 the
Company.
Exhibit 4.2 4.2 Notes Registration Rights Agreement, dated April 7, 1998,
between Long Distance International Inc. and the Placement
Agents.
Exhibit 4.3 4.3 Form of Senior Note (contained in Indenture filed as Exhibit
4.1).
Exhibit 4.4 4.4 Form of Exchange Note (contained in Indenture filed as
Exhibit 4.1).
Exhibit 4.5 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.
Exhibit 4.6 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.
Exhibit 10.1 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).
Exhibit 10.2 10.2 Warrant Registration Rights Agreement, dated as of April 13,
1998, between Long Distance International Inc. and The Bank
of New York.
Exhibit 10.3 10.3 Stock Purchase Agreement with certain Advent Entities, dated
July 28, 1997.
Exhibit 10.4 10.4 Shareholders Agreement with certain shareholders and certain
Advent Entities, dated July 28, 1997.
Exhibit 10.5 10.5 Registration Rights Agreement with certain Advent Entities,
dated July 28, 1997.
Exhibit 10.6 10.6 Preemptive Rights Agreement with certain shareholders and
certain Advent Entities, dated July 28, 1997.
Exhibit 10.7 10.7 Employment agreement between LDI and Clifford Friedland
dated July 1, 1995.
Exhibit 10.8 10.8 Employment agreement between LDI and David Glassman dated
July 1, 1995.
Exhibit 10.10 10.9 Employment agreement between LDI and Elizabeth Tuttle dated
February 1, 1998.
Exhibit 10.12 10.10 Employment agreement between LDI and David Hess dated
January 5, 1999.
Exhibit 10.13 10.11 Employment agreement between LDI and James Rose dated
January 11, 1999.
</TABLE>
28
<PAGE> 52
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit 10.14 10.12 Consulting agreement between LDI and Clifford Friedland
dated December 8, 1998.
Exhibit 10.15 10.13 Consulting agreement between LDI and David Glassman dated
December 8, 1998.
Exhibit 10.15 10.14 September 1994 Shareholders' Agreement.
Exhibit 10.17 10.15 July 22, 1994 Shareholders' Agreement.
* 12.1 Statement regarding Computation of Ratio of Earnings to
Fixed Charges.
Exhibit 21.1 21.1 Subsidiaries of Long Distance International Inc.
* 27.1 Financial Data Schedule for the year ended December 31,
1998.
</TABLE>
- ----------------
* Filed Herewith
(1) Registrant's Registration Statement on Form S-4 (Regis. No. 333-56989)
29
<PAGE> 53
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, 1998
Deducted from asset accounts
Allowance for doubtful accounts $ 956,000 $ 6,627,000 $ 1,253,000 $ 6,330,000
Valuation allowance 6,245,000 28,139,000 -- 34,384,000
----------- ----------- ----------- -----------
$ 7,201,000 $34,766,000 $ 1,253,000 $40,714,000
=========== =========== =========== ===========
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 $ 411,000 $ 371,000
Valuation allowance 707,000 1,232,000 -- 1,939,000
----------- ----------- ----------- -----------
$ 837,000 $ 1,884,000 $ 411,000 $ 2,310,000
=========== =========== =========== ===========
</TABLE>
S-1
<PAGE> 1
EXHIBIT 12.1
LONG DISTANCE INTERNATIONAL INC.
RATIO OF EARNINGS TO FIXED CHARGES
(in thousands, except ratio amounts)
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
----------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Fixed Charges:
Interest $ -- $ 18 $ 212 $ 523 $ 23,811
Amortization of debt expense and debt discounts -- -- -- -- 858
Interest component of rent 7 20 56 130 682
--------- --------- -------- --------- ---------
Total fixed charges $ 7 $ 38 $ 268 $ 653 $ 25,351
========= ========= ======== ========= =========
Net Loss $ (220) $ (1,653) $ (4,021) $ (11,334) $ (84,799)
Add (deduct) Fixed charges -- 38 268 653 25,351
--------- --------- -------- --------- ---------
Adjusted earnings $ (220) $ (1,615) $ (3,753) $ (10,681) $ (59,448)
========= ========= ======== ========= =========
Ratio of earnings to fixed charges (31.43) (42.50) (14.00) (16.36) (2.34)
========= ========= ======== ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 52,064,072
<SECURITIES> 2,907,895
<RECEIVABLES> 31,250,284
<ALLOWANCES> 6,330,000
<INVENTORY> 0
<CURRENT-ASSETS> 115,769,942
<PP&E> 65,095,551
<DEPRECIATION> 6,276,339
<TOTAL-ASSETS> 344,081,538
<CURRENT-LIABILITIES> 87,206,811
<BONDS> 205,863,147
15,475,142
0
<COMMON> 57,703
<OTHER-SE> 7,666,358
<TOTAL-LIABILITY-AND-EQUITY> 344,081,538
<SALES> 82,438,471
<TOTAL-REVENUES> 82,438,471
<CGS> 64,316,624
<TOTAL-COSTS> 64,316,624
<OTHER-EXPENSES> 8,747,629
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,810,615
<INCOME-PRETAX> (84,799,195)
<INCOME-TAX> 0
<INCOME-CONTINUING> (84,799,195)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (84,799,195)
<EPS-PRIMARY> (2.74)
<EPS-DILUTED> (2.74)
</TABLE>
