1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending September 30, 1996
Commission File Number 33-26019-LA
Long Distance Direct Holdings, Inc.
(Exact name of small business issuer as specified in its charter)
Nevada 33-0323376
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification No.)
1 Blue Hill Plaza, Pearl River, NY 10965
-----------------------------------------
Issuer's telephone number: 914-620-0765
________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the issuer's common equity, as of September
30, 1996 is 5,108,836.
Transitional small business disclosure Format (check one):
Yes No X
--- ---
2
The registrant hereby amends Item 1 of its form 10QSB report for September 30,
1996 as follows:
Item 1.
- -------
LONG DISTANCE DIRECT HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
30-Sep
-----------
1996 December 31,
----------- ------------
ASSETS (unaudited) 1995
----------- ------------
CURRENT ASSETS
Cash $ 1,071,995 $ 207,666
Accounts receivable (net of allowance for
doubtful accounts of $287,501 and $163,149,respectively) 1,309,262 1,103,903
Other current assets 407,165 93,229
----------- -----------
Total Current Assets 2,788,422 1,404,798
----------- -----------
PROPERTY AND EQUIPMENT
Furniture and equipment 57,871 54,856
Computer equipment and software 237,293 196,764
Leasehold improvements 38,720 38,720
----------- -----------
333,884 290,340
Less: accumulated depreciation 177,071 129,203
----------- -----------
156,813 161,137
----------- -----------
OTHER ASSETS 35,180 61,790
OFFICER LOAN RECEIVABLE 19,259 --
----------- -----------
2,999,674 $ 1,627,725
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable - current 570,000 1,165,000
Accounts payable 2,412,777 2,370,081
Accrued expenses 294,922 577,576
Sales and excise taxes payable 466,956 703,143
Loans payable - officers 500,000 74,244
----------- -----------
Total Current Liabilities 4,244,655 4,890,044
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' DEFICIT
Common stock - par value $.001 per share;
authorized 30,000,000 shares; issued
and outstanding 5,108,836 shares 5,109 3,798
Additional paid in capital 5,163,867 1,429,434
Accumulated deficit (6,413,957) (4,665,551)
----------- -----------
Less: Subscriptions receivable 0 (30,000)
----------- -----------
Total Stockholders' Deficit (1,244,981) (3,262,319)
----------- -----------
$ 2,999,674 $ 1,627,725
=========== ===========
See notes to Consolidated Financial Statements
3
LONG DISTANCE DIRECT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS YEAR TO DATE THREE MONTHS YEAR TO DATE
ENDED 9/30/96 9/30/96 ENDED 9/30/95 9/30/95
------------- ------------ ------------- ------------
REVENUES $ 1,266,227 $ 4,229,729 $ 2,045,454 $ 6,931,987
CUSTOMER REBATES AND REFUNDS 12,101 19,690 122,854 342,396
----------- ----------- ----------- -----------
NET REVENUES 1,254,126 4,210,039 1,922,600 6,589,591
COST OF SERVICES 927,934 3,067,743 1,440,378 4,932,971
----------- ----------- ----------- -----------
Gross Profit 326,192 1,142,296 482,222 1,656,620
----------- ----------- ----------- -----------
OPERATING EXPENSES
Sales and marketing 132,190 448,363 87,433 570,686
General and administrative 478,660 1,855,774 695,110 1,997,929
----------- ----------- ----------- -----------
Total Operating Expenses 610,850 2,304,137 782,543 2,568,615
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (284,658) (1,161,841) (300,321) (911,995)
OTHER EXPENSES (INCOME)
Interest expense 523,956 589,295 86,047 247,506
Interest income (1,118) (2,730) (1,080) (4,018)
Initial public offering costs -- -- -- 377,585
----------- ----------- ----------- -----------
Total Other Expenses (Income) 522,838 586,565 84,967 621,073
----------- ----------- ----------- -----------
NET LOSS $ (807,496) $(1,748,406) $ (385,288) ($1,533,068)
=========== =========== =========== ===========
NET LOSS PER SHARE (.20) (.44) (.11) (.45)
4
LONG DISTANCE DIRECT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
---------------------------
30-Sep-96 30-Sep-95
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(1,748,406) $(1,533,068)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 47,868 41,234
Amortization of note discount 116,000
Imputed interest on personal guarantee
Financing expenses
Provision for doubtful accounts 180,864 252,583
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (329,711) 230,214
(Increase) decrease in other current assets (313,936) 181,982
(Increase) decrease in other assets 26,610 120,376
Increase in accounts payable 42,696 795,277
Increase (decrease) in accrued expenses (339,165) (17,053)
Increase (decrease) in sales and excise
taxes payable (236,187) 20,565
----------- ---------
Total Adjustments to Net Loss (920,961) 1,741,178
----------- ---------
Net Cash Used in Operating
Activities (2,669,367) 208,110
----------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES
Acquisition of property and equipment (43,545) (34,634)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (payment) of notes payable (595,000) (178,400)
Proceeds (payment) of related party loans 406,497 (57,812)
Proceeds from private placement 3,765,744
---------- ---------
Net Cash Provided by
Financing Activities 3,577,241 (236,212)
---------- ---------
NET INCREASE (DECREASE) IN CASH 864,329 (62,736)
---------- ---------
CASH -- Beginning of Period 207,666 52,015
CASH -- End of Period $1,071,995 $(10,721)
5
LONG DISTANCE DIRECT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments necessary to present fairly the Company's position as of
September 30, 1996 and December 31, 1995 and results of its operations and cash
flows for the nine-month periods ending September 30, 1996 and September 30,
1995.
The accounting policies followed by the Company are set forth in Note 2 to the
Company's financial statements in the Form 10-K/A Amendment Number 1 for the
period ending December 31, 1995.
6
The registrant hereby amends Item 2 of its Form 10QSB Report for
September 30, 1996 as follows:
Item 2
- ------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following discussion and analysis should be read in conjunction
with the Financial Statements and the notes thereto appearing herein. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in "Risk Factors" and elsewhere in this Prospectus.
GENERAL
The following discussion and analysis relates to the financial condition
and results of operations of the Company for the two years ended September 30,
1996. The Company has sustained losses for each of the two years due to the lack
of working capital to finance adequate levels of marketing expenditure,
insufficient revenues and other reasons. The Company effected a restructuring in
October, 1995 in order to be able to improve its liquidity and finance its
future expansion by subsequent offerings of shares of its Common Stock. Since
the restructuring, the Company has raised approximately $6.2 million in cash
(net of certain expenses) from the private sale of its Common Stock and has
converted approximately $1.7 million of its debt into equity.
Management expects to use the proceeds from these and future offerings,
if successful, to provide increased working capital. The Company has thus far
used independent sales representatives, sub-contracted telemarketers, and direct
mail to solicit customers. The Company now intends to establish its own in-house
telemarketing facility, has launched a limited televised marketing program to
increase its independent sales force, and plans to increase its direct mail
activity. The Company has also, in November, 1996, signed a mutually exclusive
agreement with Kaire International, a multi-level marketing company, to supply
telephone service to that company's registered associates and through those
associates to the public at large. In January, 1997, the Company signed a
mutually exclusive agreement with National Benefits Consultants, LLC ("NBC"), a
company in alliance with Deloitte & Touche LLP, under which NBC will market
the Company's telecommunications services to audit clients of Deloitte &
Touche LLP and other commercial entities.
RESULTS OF OPERATIONS
THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AS COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995
Gross revenues for the nine months ended September 30, 1996 were
$4,230,000 as compared to $6,931,987 for the nine months ended September 30,
1995. The Company attributes the decrease of 39% to the Company's inability to
finance adequate levels of marketing expenditure to offset customer attrition
and to the loss, in October 1995, of its largest customer, L.C. Wegard &
Company, which had generated gross revenue of approximately $150,000 per month,
as a result of such customer's bankruptcy.
7
The Company intends to increase expenditures on sub-contracted
telemarketing and direct mail activities as well as establish its own in-house
telemarketing facility.
The Company has launched a limited televised marketing program to
increase its independent sales force. In May, 1996, the Company, through its
wholly owned subsidiary, Long Distance Direct Marketing, Inc., entered into a
joint venture arrangement with Guthy-Renker Distribution, Inc., an infomercial
producer and promoter, to produce and market a thirty minute infomercial selling
the right to become an independent sales representative of the Company. Under
this contract, the Company is responsible for financing the cost of production
of the infomercial program, while Guthy-Renker is responsible for financing both
the cost of media and the costs of fulfilling the orders procured by the
infomercial. The film has been completed and test marketing has commenced in the
last quarter of 1996 with what the Company believes were encouraging results.
The Company commenced broadcast of the infomercial in January, 1997 with a view
to generating substantial numbers of additional independent sales
representatives. There can be no assurance, however, that such roll-out will be
successful or that representatives recruited by this method will generate
significant levels of telephone service for the Company.
In November, 1996, the Company signed a mutually exclusive agreement
with Kaire International, a multi-level marketing company, to supply telephone
service to that company's registered associates and through those associates to
the public at large. There can be no assurance, however, that Kaire will be
successful in selling LDDI's service to those associates or that the associates
themselves will be successful in selling such service to the public at large.
In January, 1997, the Company signed a mutually exclusive agreement
with National Benefits Consultants, LLC ("NBC"), a company in alliance with
Deloitte & Touche LLP, under which NBC will market the Company's
telecommunications services to audit clients of Deloitte & Touche LLP and other
commercial entities. There can be no assurance, however, that NBC will be
successful in selling LDDI's services pursuant to this agreement.
In the first quarter of 1996, Congress passed legislation allowing the
entry of long-distance carriers into the local market and local carriers into
the long distance market to foster greater competition within the telephone
industry. While this may lead to increased competition for the Company in the
long distance market from local carriers, management plans to enter into the
local market in order to increase its overall market share.
The Company also entered the residential market in 1996. Previously,
the Company sold exclusively to commercial customers. The Company has signed
an agreement with MCI which allows the "LECs" (Local Exchange Carriers) to bill
and collect on behalf of the Company. It is anticipated that the majority of
new business generated from the Company's televised marketing program will be
residential where customers prefer to receive both local and long distance
usage on one monthly bill. The Company believes that commercial customers are
more open to receiving separate bills for local and long distance service.
Management believes that the Company's systems are capable of
supporting the anticipated growth in the Company's revenues. The systems were
further upgraded in 1995 to provide quicker response times for customer service
and collections functions.
Gross profit was $1,142,000 and $1,656,620 for the nine months ended
September 30, 1996 and 1995, respectively. As a percentage of net sales, the
gross profit margins for the nine months ended September 30, 1996 and 1995 were
27% and 25%, respectively. The percentage increase is due to two factors:
extremely favorable pricing received by the Company under its 1996 contract with
MCI; and the loss of the Company's largest customer, L.C. Wegard and Company, in
October, 1995. Since the Company had granted promotional rebates to this
customer in 1995, the result was slimmer profit margins in 1995. The Company
recently re-negotiated its contract with AT&T.
For the period September 1994 through August, 1995, the Company
operated under an individually negotiated contract tariff with AT&T for outbound
long distance service. This contract had a three year term and required the
purchase of $1,200,000 per quarter of SDN (Software Defined Network) and DNS
(Distributed Network Service) usage. The Company received volume discounts based
on its level of
8
usage. The new contract signed on September 1, 1995 -- which superseded all
previous contracts with AT&T -- encompassed both outbound and inbound service
and was set at a fixed term of four years with a one-year extension. In February
1997, the Company signed a four-year negotiated contract tariff with AT&T
effective March 1, 1997 for the supply of inbound and outbound telephone
service. The new contract supersedes the contract dated September 1, 1995. The
Company's minimum quarterly purchase requirement remains constant at $1,200,000
in years one to three and increases to $1,475,000 in year four. Failure to
achieve the minimum will require payment of the shortfall by the Company. Under
the contract tariff, the Company is obligated to make payments equal to its
minimum purchase requirement for the outstanding term of the agreement if there
is an early termination thereof. The Company has received more favorable
pricing from AT&T on both domestic and international usage under the new
contract. In addition, AT&T has agreed to issue a credit waiving the
entire cumulative shortfall charged under the old contract (approximately $2.3
million as of September 30, 1996, none of which has been reflected in the
Company's financial statements included herein) within thirty days after the
Company discharges its past due obligation to AT&T of $200,000, which amount is
scheduled to be paid by June 1, 1997.
On March 1, 1996 the Company signed an individually negotiated
agreement with MCI under which the Company is authorized to resell various MCI
services, including outbound long-distance and local long distance, inbound
long-distance, calling cards, debit cards, teleconferencing and MCI enhanced
services. The agreement is subject to a twelve month ramp period followed by a
thirty month service period and supersedes a prior agreement signed August 1995
under which MCI was unable to provide service as a result of software problems
between MCI and the LECs.
During the first five months of the ramp period, the Company has no
minimum purchase obligations. During the sixth, seventh, and eighth months, the
Company is obliged to purchase $250,000 of services per month, during the ninth
and tenth month $500,000 per month, during the eleventh and twelfth month
$750,000 per month, and during the thirty month service period $1,000,000 per
month. In the event that the Company fails to meet its minimum purchase
requirements, it must pay MCI 15% of the difference between the amount used and
the respective minimum monthly requirement.
The agreement is subject to increases and decreases in the rate of
discount offered to the Company, depending on the proportion of "new business"
(currently non-MCI business) in the Company's total usage. During the first six
months of the agreement, either the Company or MCI may terminate the agreement
at will, with no penalty. In the event that no notice of termination is received
within six months, the agreement is to run for the full forty-two (42) month
term.
Prior to March 31, 1996, MCI had been unable to provision the Company's
customers. Subsequent to March 31, 1996, MCI commenced providing service and the
benefit of this was reflected in the Company's revenues beginning in the second
quarter. In consideration of its inability to provide service under the August,
1995 contract prior to December 31, 1995, MCI agreed to compensate the Company
in the form of a service credit in an amount not to exceed $1,000,000, to be
applied against its initial usage under the March, 1996 contract.
Sales and marketing expenses were $448,363 and $570,686 for the nine
months ended September 30 1996 and 1995 respectively. As a percentage of gross
sales, sales and marketing expenses were 10.6% and 8% for the nine months ended
September 30, 1996 and September 30, 1995, respectively. The percentage increase
is attributable partially to lower sales in 1996 and partially to one-time
adjustments made at September 30, 1995, as follows: The Company wrote off
amounts due one of its telemarketers of $109,816 after it ceased doing business
with this telemarketer . The Company also wrote off $75,000 of commission
payable to its independent sales agents who are no longer active. Management has
resumed its acquisition of accounts upon receipt of funding from its private
placements and plans to pursue marketing techniques more aggressively to
increase its customer database and revenues. The Company intends to establish
its own in-house telemarketing facility, has launched a televised marketing
program during 1996 to increase its independent sales force and has resumed
its direct mail activity.
General and administrative expenses were $1,855,774 and $1,997,929 for
the nine months ended September 30, 1996, and 1995, respectively. As a
percentage of gross sales, general and administrative expenses for the nine
months ended September 30, 1996 and 1995 were 44% and 29%, respectively. Total
general and administrative expenses were reduced by $108,000 at September 30,
1996, which represented a writeoff of amounts payable to two former partners of
the Company when litigation was settled in the third quarter. The principal
elements which contributed to the increase in general and administrative
expenses as a percentage of sales are mainly related to the Company's
expansion of its resources in anticipation of increased levels of sales and
expenditures incurred in connection with the Company's plan to reduce
significantly its levels of debt by December 31, 1996. The Company incurred
increased audit and legal fees due to heavier reporting requirements and
9
settlement of outstanding litigation, and increased costs in relation to
penalties and interest paid to taxing authorities in an attempt to clear old
outstanding tax liabilities. The percentage increase is also attributable to
lower sales levels in 1996.
Interest expense for the nine months ended September 30, 1996 and 1995
was $586,000 and $243,000, respectively. For the nine months ending September
30, 1995, interest expense related to accrued interest on indebtedness of the
Company in connection with a note incurred in relation to the purchase of the
partnership interest of two of the original limited partners in LDDLP, and
various financing agreements entered into in 1994 to finance the Company's
working capital requirements. The note payable related to the partnership buy
out was paid off in the third quarter of 1996 when litigation was settled. In
addition, a majority of the Company's outstanding loans were converted to
equity under the first private placement. In the third quarter of 1996, 150,000
shares were granted to a shareholder of the Company in turn for such
shareholder making a loan of $500,000 to the Company. Non-cash interest expense
in the amount of $495,000 was recorded as a result of this transaction. In
addition, this loan was converted to equity at September 30, 1996. In the last
quarter of 1996, another $850,000 in loans payable was converted to equity.
The Company incurred a net loss of $1,748,000 for the nine months ended
September 30, 1996 compared to a net loss of $1,533,068 for the nine months
ended September 30, 1995. For the nine months ending September 30, 1995, costs
of $377,585 were written off in connection with an initial public offering which
had been planned for the beginning of 1995 but which did not take place. These
amounts had been largely incurred during 1994 but not expensed during that year
and are non-operational in nature.
THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AS COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1995
Gross revenues for the three months ended September 30, 1996 were
$1,266,227 as compared to $2,045,454 for the three months ended September 30,
1995. The Company attributes the decrease of 38% to the Company's inability to
finance adequate levels of marketing expenditure to offset customer attrition
and to the loss, in October 1995, of its largest customer, L.C. Wegard &
Company, which had generated gross revenue of approximately $150,000 per month,
as a result of such customer's bankruptcy.
10
The Company intends to increase expenditures on sub-contracted
telemarketing and direct mail activities as well as establish its own in-house
telemarketing facility.
The Company has launched a limited televised marketing program to
increase its independent sales force. In May, 1996, the Company, through its
wholly owned subsidiary, Long Distance Direct Marketing, Inc., entered into a
joint venture arrangement with Guthy- Renker Distribution, Inc., an infomercial
producer and promoter, to produce and market a thirty minute infomercial selling
the right to become an independent sales representative of the Company. Under
this contract, the Company is responsible for financing the cost of production
of the infomercial program, while Guthy-Renker is responsible for financing both
the cost of media and the costs of fulfilling the orders procured by the
infomercial. The film has been completed and test marketing has commenced in the
last quarter of 1996 with what the Company believes were encouraging results.
The Company commenced broadcast of the infomercial in January, 1997 with a view
to generating substantial numbers of additional independent sales
representatives. There can be no assurance, however, that such roll-out will be
successful or that representatives recruited by this method will generate
significant levels of telephone service for the Company.
In November, 1996, the Company signed a mutually exclusive agreement
with Kaire International, a multi-level marketing company, to supply telephone
service to that company's registered associates and through those associates to
the public at large. There can be no assurance, however, that Kaire will be
successful in selling LDDI's service to those associates or that the associates
themselves will be successful in selling such service to the public at large.
In January, 1997, the Company signed a mutually exclusive agreement with
National Benefits Consultants, LLC ("NBC"), a company in alliance with Deloitte
& Touche LLP, under which NBC will market the Company's telecommunications
services to audit clients of Deloitte & Touche LLP and other commercial
entities. There can be no assurance, however, that NBC will be successful in
selling LDDI's services pursuant to this agreement.
In the first quarter of 1996, Congress passed legislation allowing the
entry of long-distance carriers into the local market and local carriers into
the long distance market to foster greater competition within the telephone
industry. While this may lead to increased competition for the Company in the
long distance market from local carriers, management plans to enter into the
local market in order to increase its overall market share.
The Company also entered the residential market in 1996. Previously,
the Company sold exclusively to commercial customers. The Company has signed
an agreement with MCI which allows the "LECs" (Local Exchange Carriers) to bill
and collect on behalf of the Company. It is anticipated that the majority of new
business generated from the Company's televised marketing program will be
residential where customers prefer to receive both local and long distance usage
on one monthly bill. The Company believes that commercial customers are more
open to receiving separate bills for local and long distance service.
Management believes that the Company's systems are capable of
supporting the anticipated growth in the Company's revenues. The systems were
further upgraded in 1995 to provide quicker response times for customer
service and collections functions.
Gross profit was $326,192 and $482,222 for the three months ended
September 30, 1996 and 1995, respectively. As a percentage of net sales, the
gross profit margins for the three months ended September 30, 1996 and 1995 were
26% and 25%, respectively. The percentage increase is due to two factors:
extremely favorable pricing received by the Company under its 1996 contract with
MCI; and the loss of the Company's largest customer, L.C. Wegard and Company, in
October, 1995. Since the Company had granted promotional rebates to this
customer in 1995, the result was slimmer profit margins in 1995. The
Company recently re-negotiated its contract with AT&T.
For the period September 1994 through August, 1995, the Company
operated under an individually negotiated contract tariff with AT&T for outbound
long distance service. This contract had a three year term and required the
purchase of $1,200,000 per quarter of SDN (Software Defined Network) and DNS
(Distributed Network Service) usage. The Company received volume discounts based
on its level of
11
usage. The new contract signed on September 1, 1995 -- which superseded all
previous contracts with AT&T -- encompassed both outbound and inbound service
and was set at a fixed term of four years with a one-year extension. In February
1997, the Company signed a four-year negotiated contract tariff with AT&T
effective March 1, 1997 for the supply of inbound and outbound telephone
service. The new contract supersedes the contract dated September 1, 1995. The
Company's minimum quarterly purchase requirement remains constant at $1,200,000
in years one to three and increases to $1,475,000 in year four. Failure to
achieve the minimum will require payment of the shortfall by the Company. Under
the contract tariff, the Company is obligated to make payments equal to its
minimum purchase requirement for the outstanding term of the agreement if there
is an early termination thereof. The Company has received more favorable
pricing from AT&T on both domestic and international usage under the new
contract. In addition, AT&T has agreed to issue a credit waiving the
entire cumulative shortfall charged under the old contract (approximately $2.3
million as of September 30, 1996, none of which has been reflected in the
Company's financial statements included herein) within thirty days after the
Company discharges its past due obligation to AT&T of $200,000, which amount is
scheduled to be paid by June 1, 1997.
On March 1, 1996 the Company signed an individually negotiated
agreement with MCI under which the Company is authorized to resell various MCI
services, including outbound long-distance and local long distance, inbound
long-distance, calling cards, debit cards, teleconferencing and MCI enhanced
services. The agreement is subject to a twelve month ramp period followed by a
thirty month service period and supersedes a prior agreement signed August 1995
under which MCI was unable to provide service as a result of software problems
between MCI and the LECs.
During the first five months of the ramp period, the Company has no
minimum purchase obligations. During the sixth, seventh, and eighth months, the
Company is obliged to purchase $250,000 of services per month, during the ninth
and tenth month $500,000 per month, during the eleventh and twelfth month
$750,000 per month, and during the thirty month service period $1,000,000 per
month. In the event that the Company fails to meet its minimum purchase
requirements, it must pay MCI 15% of the difference between the amount used and
the respective minimum monthly requirement.
The agreement is subject to increases and decreases in the rate of
discount offered to the Company, depending on the proportion of "new business"
(currently non-MCI business) in the Company's total usage. During the first six
months of the agreement, either the Company or MCI may terminate the agreement
at will, with no penalty. In the event that no notice of termination is received
within six months, the agreement is to run for the full forty-two (42) month
term.
Prior to March 31, 1996, MCI had been unable to provision the Company's
customers. Subsequent to March 31, 1996, MCI commenced providing service and the
benefit of this was reflected in the Company's revenues beginning in the second
quarter. In consideration of its inability to provide service under the August,
1995 contract prior to December 31, 1995, MCI agreed to compensate the Company
in the form of a service credit in an amount not to exceed $1,000,000, to be
applied against its initial usage under the March, 1996 contract.
Sales and marketing expenses were $132,190 and $87,433 for the three
months ended September 30 1996 and 1995 respectively. As a percentage of gross
sales, sales and marketing expenses were 10% and 4% for the three months ended
September 30, 1996 and September 30, 1995, respectively. The percentage increase
is attributable partially to lower sales in 1996 and partially to one-time
adjustments made at September 30, 1995, as follows: The Company wrote off
amounts due one of its telemarketers of $109,816 after it ceased doing business
with this telemarketer . The Company also wrote off $75,000 of commission
payable to its independent sales agents who are no longer active. Management has
resumed its acquisition of accounts upon receipt of funding from its private
placements and plans to pursue marketing techniques more aggressively to
increase its customer database and revenues. The Company intends to establish
its own in-house telemarketing facility, has launched a televised marketing
program during 1996 to increase its independent sales force and has resumed
its direct mail activity.
General and administrative expenses were $478,660 and $695,110 for
the three months ended September 30, 1996, and 1995, respectively. As a
percentage of gross sales, general and administrative expenses for the three
months ended September 30, 1996 and 1995 were 38% and 34%, respectively. Total
general and administrative expenses were reduced by $108,000 at September 30,
1996, which represented a writeoff of amounts payable to two former partners of
the Company when litigation was settled in the third quarter. The principal
elements which contributed to the increase as a percentage of gross sales in
general and administrative expenses are mainly related to the Company's
expansion of its resources in anticipation of increased levels of sales and
expenditures incurred in connection with the Company's plan to reduce
significantly its levels of debt by December 31, 1996. The Company incurred
increased audit and legal fees due to heavier reporting requirements and
12
settlement of outstanding litigation, and increased costs in relation to
penalties and interest paid to taxing authorities in an attempt to clear old
outstanding tax liabilities. The percentage increase is also attributable to
lower sales levels in 1996.
Interest expense for the three months ended September 30, 1996 and 1995
was $522,838 and $84,967, respectively. For the quarter ending September 30,
1995, interest expense related to accrued interest on indebtedness of the
Company in connection with a note incurred in relation to the purchase of the
partnership interest of two of the original limited partners in LDDLP, and
various financing agreements entered into in 1994 to finance the Company's
working capital requirements. The note payable related to the partnership buy
out was paid off in the third quarter of 1996 when litigation was settled. In
addition, a majority of the Company's outstanding loans were converted to
equity under the first private placement. In the third quarter of 1996, 150,000
shares were granted to a shareholder of the Company in turn for such
shareholder making a loan of $500,000 to the Company. Non-cash interest expense
in the amount of $495,000 was recorded as a result of this transaction. In
addition, this loan was converted to equity at September 30, 1996. In the last
quarter of 1996, another $850,000 in loans payable was converted to equity.
The Company incurred a net loss of $807,496 for the three months ended
September 30, 1996 compared to a net loss of $385,288 for the three months
ended September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had negative working capital of
$1,456,000 compared to negative working capital of $3,487,749 at September 30,
1995. The Company experienced cash constraints throughout 1995 as a result of
the abandonment of its plans to effect an initial public offering but effected
a restructuring in October, 1995 in order to be able to improve its liquidity
and finance its future expansion. The Company subsequently offered shares of
its common stock. As a part of the restructuring, a majority of the, Company's
loans which were outstanding at September 30, 1995 were converted to equity at
December 31, 1995 under the first private placement. Other loans were repaid in
1996. In the third quarter of 1996, litigation related to a buyout of two
former partners was settled, and, as a result, the corresponding indebtedness
was canceled. In addition, at October 31, 1996, another $850,000 will be
converted to equity.
As of fiscal year 1996, it is anticipated that the balance sheet will
be free of substantially all of the debt which it carried at September 30,
1995.
13
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: February 13, 1997 Long Distance Direct Holdings, Inc.
By:/s/ Steven Lampert
--------------------------
Steven Lampert, President
(Principal Executive Officer),
and Director
By:/s/ Michael Preston
--------------------------
Michael Preston, Chief
Financial Officer (Principal
Accounting Officer) and
Director