<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- -------------------------------------------------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE THREE MONTHS ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 333-56989
-----------------------
Long Distance International Inc.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------------------
FLORIDA 65-0423006
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
4150 SW 28TH WAY, FT. LAUDERDALE, FL 33312
(Address of principal executive office) (Zip Code)
-----------------------------
(954) 327-7500
(Registrant's telephone number, including area code)
-----------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Number of shares of common stock outstanding at May 10, 1999: 57,703,371
1
<PAGE> 2
LONG DISTANCE INTERNATIONAL INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Operations (unaudited)
For the three months ended March 31, 1999 and
March 31, 1998 4
Consolidated Statements of Cash Flows (unaudited)
For the three months ended March 31, 1999 and
March 31, 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LONG DISTANCE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
---------------------------------
1998 1999
------------- -------------
ASSETS: (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 52,064,072 $ 24,701,098
Certificates of deposit 2,907,895 2,907,895
Restricted cash and investments 30,410,363 28,988,406
Accounts receivable, net of allowance for doubtful accounts of
$6,330,000 at December 31, 1998 and $7,523,000 at March 31, 1999 24,920,284 24,427,246
Other current assets 5,467,328 5,664,504
------------- -------------
Total current assets 115,769,942 86,689,149
Restricted cash and investments 36,600,856 39,502,209
Property and equipment, net 58,819,212 59,404,332
Goodwill, net of accumulated amortization of $3,223,000 at
December 31, 1998 and $5,157,000 at March 31, 1999 129,705,238 127,978,311
Other assets 3,186,290 3,503,787
============= =============
Total assets $ 344,081,538 $ 317,077,788
============= =============
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY):
Current liabilities:
Accounts payable $ 20,865,078 $ 20,547,514
Accrued telecommunication costs 18,366,669 17,175,165
Accrued restructuring costs 3,014,752 1,775,277
Other accrued liabilities 12,924,149 13,285,037
Accrued acquisition contingency 7,508,029 7,508,029
Senior Note interest payable 5,976,563 13,126,563
Notes payable 4,950,000 4,800,000
Current portion of capital lease obligations 10,760,795 8,471,176
Current portion of installment loans 2,840,776 2,303,161
------------- -------------
Total current liabilities 87,206,811 88,991,922
Installment loans 3,907,910 3,349,034
Capital lease obligations 12,337,528 13,501,885
Senior Notes payable 205,863,147 205,952,369
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
$1,228,278 and $1,448,881 at December 31, 1998 and
March 31, 1999, respectively 1,199,278 1,217,702
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 of $25,000,000 14,275,864 14,756,371
Redeemable warrants, 3,394,665 authorized, issued and
outstanding at December 31, 1998 and March 31, 1999 11,566,939 11,555,022
Common shareholders' equity (capital deficiency):
Common stock, $.001 par value - 100,000,000 shares authorized,
57,703,371 shares issued and outstanding at
December 31, 1998 and March 31, 1999 57,703 57,703
Additional paid-in capital 110,540,448 110,026,628
Other comprehensive loss (815,465) (601,740)
Accumulated deficit (102,058,625) (131,729,108)
------------- -------------
Total common shareholders' equity (capital deficiency) 7,724,061 (22,246,517)
------------- -------------
Total liabilities and common shareholders' equity (capital deficiency) $ 344,081,538 $ 317,077,788
============= =============
</TABLE>
See accompanying notes. 3
<PAGE> 4
LONG DISTANCE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Revenues:
Retail, net $ 15,243,787 $ 25,249,875
Wholesale, net -- 12,684,000
------------ ------------
Total revenues 15,243,787 37,933,875
Costs of telecommunications services 10,404,807 34,529,630
------------ ------------
Gross margin 4,838,980 3,404,245
Selling, general and administrative expenses 11,829,290 18,907,051
Depreciation and amortization 364,249 6,259,173
------------ ------------
Operating loss (7,354,559) (21,761,979)
Other expense (income):
Interest expense 273,372 8,921,082
Interest income (107,944) (1,012,578)
------------ ------------
165,428 7,908,504
------------ ------------
Net loss (7,519,987) (29,670,483)
Preferred stock dividends and preferred stock
and warrant redemption accretion (4,088,147) (513,774)
============ ============
Net loss applicable to common shareholders $(11,608,134) $(30,184,257)
============ ============
Net loss per share applicable to common
shareholders - basic and dilutive $ (0.47) $ (0.52)
============ ============
Weighted average shares outstanding 24,839,443 57,703,371
============ ============
</TABLE>
See accompanying notes. 4
<PAGE> 5
LONG DISTANCE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------
1998 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (7,519,987) $(29,670,483)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 364,249 6,259,173
Provision for bad debts 1,107,259 613,921
Amortization of discount on Senior Notes -- 300,427
Amortization of bond offering costs -- 263,047
Changes in operating assets and liabilities:
Accounts receivable (4,075,402) (120,883)
Other current assets (327,129) (197,176)
Other assets (534,861) (317,497)
Accounts payable 3,944,418 (317,564)
Accrued telecommunication costs (758,837) (1,191,504)
Accrued restructuring costs -- (1,239,475)
Senior Note interest payable -- 7,150,000
Other accrued liabilities 1,384,620 360,888
------------ ------------
Net cash used in operating activities (6,415,670) (18,107,126)
INVESTING ACTIVITIES:
Increase in restricted cash and investments (792,334) (1,479,396)
Purchases of property and equipment (903,941) (2,637,881)
Purchase of minority interest in subsidiaries (387,714) --
Acquisition costs associated with purchase of NETnet -- (375,000)
------------ ------------
Net cash used in investing activities (2,083,989) (4,492,277)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock and exercise of warrants,
net of offering costs 755,455 --
Principal payments on capital lease obligations (438,749) (3,565,833)
Principal payments on installment loans (12,403) (1,077,651)
Payments on notes payable -- (150,000)
Bond offering costs -- (501,011)
Dividends paid on Series A preferred stock -- (46)
------------ ------------
Net cash provided by (used in) financing activities 304,303 (5,294,541)
------------ ------------
Effect of exchange rate changes 20,141 530,970
------------ ------------
Decrease in cash and cash equivalents (8,175,215) (27,362,974)
Cash and cash equivalents at beginning of period 12,172,779 52,064,072
============ ============
Cash and cash equivalents at end of period $ 3,997,564 $ 24,701,098
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired under capital leases $ 1,141,016 $ 2,440,571
============ ============
Property and equipment purchased under installment loans $ -- $ 18,840
============ ============
Accrued dividends on Series A preferred stock $ 18,425 $ 18,424
============ ============
Accretion on Series B preferred stock and redeemable warrants $ 483,864 $ 495,349
============ ============
</TABLE>
See accompanying notes. 5
<PAGE> 6
LONG DISTANCE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements for the interim periods
are unaudited and do not include all information and footnotes necessary
for the presentation of financial position, results of operations and cash
flows in conformity with generally accepted accounting principles.
In the opinion of the management of Long Distance International Inc., (the
"Company") all adjustments necessary for a fair presentation of the results
of the interim periods have been included. All adjustments were of a normal
and recurring nature. The December 31, 1998 balance sheet was derived from
the audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. The results of
operations for the three months ended March 31, 1999 are not necessarily
indicative of the results for the full fiscal year ending December 31,
1999.
The information included in these unaudited condensed consolidated
financial statements should be read in conjunction with management's
discussion and analysis of financial condition and results of operations
and the consolidated financial statements and accompanying notes included
in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
2. LOSS PER SHARE
The Company computes loss per share pursuant to Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share. Weighted average
shares outstanding does not include any contingently issuable shares. The
dilutive effect of options, warrants and Series A convertible preferred
stock have not been considered as their effect would be antidilutive for
all periods presented.
3. COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. Comprehensive income is
defined as the change in equity arising from non-owner sources. It includes
net loss as well as foreign currency items, minimum pension liability
adjustments, and unrealized gains and losses on certain investments in debt
and equity securities. The only such item applicable to the Company is
foreign currency translations adjustment which did not have a material
effect on the Company's consolidated financial statements.
Comprehensive loss for the three months ended March 31, 1999 was
$29,456,758 as compared to $7,499,846 in the same period in the prior year.
4. SEGMENT ANALYSIS
The Company operates in one industry segment, the telecommunications
services industry, which includes international and domestic telephony as
well as fixed-line to mobile services. The Company has two reportable
operating segments based on the geographical areas in which the Company
provides services. The reportable segments are the United States and
Europe. Operating loss represents net revenues less operating costs and
expenses, and does not include interest expense/income and other
expense/income. The unallocated portion represents depreciation expense for
the Company's IRU's, which are used concurrently by the United States and
European segments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
1998 1999
------------ ------------
<S> <C> <C>
REVENUE:
United States
Retail $ 12,115,582 $ 5,675,875
Wholesale -- --
Europe
Retail 3,128,205 19,574,000
Wholesale -- 12,684,000
------------ ------------
CONSOLIDATED REVENUE $ 15,243,787 $ 37,933,875
============ ============
OPERATING LOSS:
United States $ (5,060,364) $ (8,153,893)
Europe (2,294,195) (13,208,086)
Unallocated -- (400,000)
------------ ------------
TOTAL OPERATING LOSS $ (7,354,559) $(21,761,979)
============ ============
</TABLE>
6
<PAGE> 7
5. ASSET IMPAIRMENT AND RESTRUCTURING COSTS
In December 1998, the Company implemented a worldwide plan to reduce selling,
general and administrative costs and increase efficiencies. In connection with
this program, the Company recorded charges of approximately $4.0 million in the
fourth quarter of 1998. The cash outlay related to these charges in the first
three months of 1999 was approximately $1.2 million. Primarily all activities
and future cash outlays are expected to be completed by the second quarter of
1999. Details of the change in the restructuring accrual between December 31,
1998 and March 31, 1999 are outlined below.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 PAYMENTS MARCH 31, 1999
----------------- ---------- --------------
<S> <C> <C> <C>
Involuntary employee terminations $2,411,170 $ 820,411 $1,590,759
Closure of facilities and related costs 239,582 155,064 84,518
Other costs 364,000 264,000 100,000
---------- ---------- ----------
$3,014,752 $1,239,475 $1,775,277
========== ========== ==========
</TABLE>
6. CONTINGENCY
Viatel, Inc. ("Viatel"), a Trans-Atlantic cable provider, has claimed that the
Company is obligated to pay $14,875,000 under certain letter agreements which
Viatel claims obligated LDI to purchase certain cable capacity as part of an IRU
agreement that was never consummated. The Company believes that it has no
obligation to pay Viatel under those purported agreements and that its
liability, in any event would be limited to the $1,625,000 which the Company
placed in escrow during 1998. The Company intends to vigorously defend against
Viatel's claim but is unable to predict the ultimate outcome of this matter and
the amount of loss, if any.
7
<PAGE> 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998
Revenues, Net. Total revenues, net increased 149%, to $37.9 million for the
three months ended March 31, 1999 from $15.2 million for the three months ended
March 31, 1998. The increase in revenue is due to the growth in the Company's
European operations, which include the results of NETnet International AB
("NETnet") and Newgate Communications Limited ("Newgate"). NETnet was acquired
in October 1998 while Newgate was acquired in April 1998. Total billable minutes
of use increased by 110% to 146.8 million minutes for the three months ended
March 31, 1999 from 69.8 million minutes for the three months ended March 31,
1998. Average revenue per minute increased to $0.26 in the first three months of
1999 from $0.22 in the first three months of 1998. Average revenue per minute
increased primarily because of a greater percentage of European revenues and
billable minutes in the mix. As noted below, the average revenue per minute in
Europe is higher than in the United States.
In the United States, revenues for the three months ended March 31, 1999
decreased by 53% to $5.7 million from $12.1 million for the three months ended
March 31, 1998. Billable minutes decreased by 32% to 40.9 million minutes for
the three months ended March 31, 1999, as compared with 59.8 million minutes for
the three months ended March 31, 1998. The decrease in revenue and billable
minutes is primarily due to a decrease in dial-around revenue as the Company has
discontinued direct response advertising. In addition to the decrease in revenue
and billable minutes, there was a decline in average revenue per minute, which
fell to $0.14 for the first three months of 1999 as compared with $0.20 for the
first three months of 1998 due to increased competition.
In Europe, revenues increased to $32.2 million for the three months ended March
31, 1999, as compared with $3.1 million for the three months ended March 31,
1998. Billable minutes increased from 10.0 million for the three months ended
March 31, 1998 to 105.9 million for the three months ended March 31, 1999. The
increase was due primarily to the inclusion of the results of Newgate and NETnet
and increased activity of the Company's European wholesale division. Newgate
contributed approximately 7% and NETnet contributed approximately 43% of
European revenues during the three months ended March 31, 1999. The Company's
European wholesale division, which commenced operations in the third quarter of
1998, contributed revenues of $12.7 million. Average revenue per minute
decreased from $0.31 to $0.30 primarily due to a change in the traffic mix and
to a lesser extent, from competition.
Cost of Telecommunications Services. Cost of telecommunications services
increased by 232% to $34.5 million for the three months ended March 31, 1999, as
compared with $10.4 million for the three months ended March 31, 1998. Average
costs per minute increased from $0.15 for the three months ended March 31, 1998
to $0.24 for the three months ended March 31, 1999. 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 wholesale
operations, in the first three months of 1999 than in the first three months of
1998. The average cost of telecommunications services is higher in Europe than
in the United States. The Company's gross margin declined from 32% for the three
months ended March 31, 1998 to 9% for the three months ended March 31, 1999. The
decline in the gross margin percentage is primarily due to a greater percentage
of revenue from the Company's wholesale division and from operational delays in
migrating traffic onto the US network. The Company's wholesale division
generally has a lower gross margin but is used to fill excess capacity on the
network and give the Company a lower per minute rate on leased lines. The
Company believes it will continue to experience pressure on its gross margin
until it completes the migration of its telecommunications traffic to its
network.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") increased by 60% to $18.9 million for the three
months ended March 31, 1999, as compared with $11.8 million for the three months
ended March 31, 1998. The increases resulted primarily from additional expenses
in Europe as a result of the acquisitions of NETnet and Newgate in 1998. SG&A as
a percent of revenue decreased to 50% for the three months ended March 31, 1999
from 78% for the same period in the prior year, and from 90% in the fourth
quarter of 1998. The fourth quarter of 1998 included the results of NETnet and
Newgate. The decrease is primarily due to the significant growth of our European
revenue along with a concerted effort to reduce expenses in Europe subsequent to
the acquisition of NETnet.
Depreciation and Amortization. Depreciation and amortization increased to $6.3
million for the three months ended March 31, 1999, from $0.4 million for the
three months ended March 31, 1998. The increase was due to significantly more
fixed assets, primarily network equipment and office equipment as the Company
completed the buildout of its network in the United States, and the increase in
fixed assets in Europe due to the acquisitions. In addition, goodwill
amortization increased significantly due to the acquisitions.
Loss from Operations. Loss from operations increased from $7.4 million for the
three months ended March 31, 1998, to $21.8 million for the three months ended
March 31, 1999. The aforementioned factors caused this increase.
Net Loss. Net loss increased from $7.5 million for the three months ended March
31, 1998 to $29.7 million for the three months ended March 31, 1999. 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.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had cash and cash equivalents of $24.7 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 ($64.6 million as of March
31, 1999) 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 the first three months of 1999 totaled approximately
$5.1 million, including $2.5 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 expenditures related to its
new corporate headquarters in the United States. 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 1999. 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 approximately $40 million. The Company is currently seeking to
obtain this financing in the second quarter of 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 will likely 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 is
unable to obtain additional capital after 1999, LDI will be required to review
all strategic alternatives.
Viatel, Inc. ("Viatel"), a Trans-Atlantic cable provider, has claimed that the
Company is obligated to pay $14,875,000 under certain letter agreements which
Viatel claims obligated LDI to purchase certain cable capacity as part of an IRU
agreement that was never consummated. The Company believes that it has no
obligation to pay Viatel under those purported agreements and that its
liability, in any event would be limited to the $1,625,000 which the Company
placed in escrow during 1998. The Company intends to vigorously defend against
Viatel's claim but is unable to predict the ultimate outcome of this matter and
the amount of loss, if any.
Net cash used in operating activities was $18.1 million for the three months
ended March 31, 1999 as compared to $6.4 million for the three months ended
March 31, 1998. The Company's net cash used in operating activities in the first
three months of 1999 was primarily composed of a net loss of $29.7 million
offset by $11.6 million of non-cash charges and changes in working capital. Net
cash used in operating activities in the first three months of 1998 consisted of
a net loss of $7.5 million offset by $1.1 million of non-cash charges and
changes in working capital.
Net cash used in investing activities was $4.5 million for the three months
ended March 31, 1999 as compared with $2.1 million for the three months ended
March 31, 1998. Cash used in investing activities in the first three months of
1999 was comprised primarily of $2.6 million for capital expenditures and a $1.5
million increase in restricted cash and investments. Cash used in the first
three months of 1998 consisted primarily of $0.9 million for capital
expenditures and a $0.8 million increase in restricted cash and investments.
Net cash used in financing was $5.3 million for the three months ended March 31,
1999 as compared to net cash provided by financing of $0.3 million for the three
months ended March 31, 1998. Cash used in financing activities in the first
three months of 1999 consisted primarily of payments on capital lease
obligations and installment loans of approximately $4.1 million. Cash provided
by financing activities in the first three months of 1998 was comprised
primarily of proceeds from the issuance of common stock and warrants. This was
partially offset by $0.5 million in payments on capital lease obligations and
installment 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.
Interest expense on the Notes will be paid in United States dollars. For the
three months ended March 31, 1999 and March 31, 1998, approximately 85% and 21%,
respectively, of LDI's revenues were billed in currencies other than the United
States dollar. As LDI expands its operations in Europe, a higher percentage of
revenues is expected to be billed in foreign currencies. 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
March 31, 1999, the Company had no open foreign currency positions.
On January 1, 1999 eleven of the existing members of the European Union ("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
9
<PAGE> 10
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.
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.
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 be, by January 1, 2000,
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 providers have 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 case 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 it's information technology
infrastructure.
Some of the costs associated with LDI's Readiness Initiative Project were
incurred in the first three months of 1998 and 1999 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.
10
<PAGE> 11
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.
SEASONALITY
The Company believes its business is not subject to significant seasonality
based on historical trends.
FORWARD LOOKING STATEMENTS
Certain statements contained in this Form 10-Q 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.
11
<PAGE> 12
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
None
12
<PAGE> 13
LONG DISTANCE INTERNATIONAL INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the
undersigned, thereunto duly authorized.
LONG DISTANCE INTERNATIONAL INC.
By: /s/ Elizabeth Tuttle
-------------------------------
Elizabeth Tuttle
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: May 10, 1999
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 24,701,098
<SECURITIES> 2,907,895
<RECEIVABLES> 31,950,246
<ALLOWANCES> 7,523,000
<INVENTORY> 0
<CURRENT-ASSETS> 86,689,149
<PP&E> 75,088,780
<DEPRECIATION> 15,684,448
<TOTAL-ASSETS> 317,077,788
<CURRENT-LIABILITIES> 88,991,922
<BONDS> 205,952,369
15,974,073
0
<COMMON> 57,703
<OTHER-SE> (22,304,220)
<TOTAL-LIABILITY-AND-EQUITY> 317,077,788
<SALES> 37,933,875
<TOTAL-REVENUES> 37,933,875
<CGS> 34,529,630
<TOTAL-COSTS> 34,529,630
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 613,921
<INTEREST-EXPENSE> 8,921,082
<INCOME-PRETAX> (29,670,483)
<INCOME-TAX> 0
<INCOME-CONTINUING> (29,670,483)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,670,483)
<EPS-PRIMARY> (0.52)
<EPS-DILUTED> (0.52)
</TABLE>
