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 March 31, 1998
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
May 31, 1998 is 9,350,924.
Transitional small business disclosure Format (check one):
Yes No X
--- ---
2
LONG DISTANCE DIRECT HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
31-Mar
1998 December 31,
ASSETS (unaudited) 1997
- ------ ----------- ----
CURRENT ASSETS
Cash (294,380) 50,447
Accounts receivable (net of allowance for
doubtful accounts of $1,739,105 and $1,205,230 respectively) 4,555,981 1,725,556
Other current assets 223,653 220,050
------------------------------------------------
Total Current Assets 4,485,254 1,996,053
------------------------------------------------
PROPERTY AND EQUIPMENT
Furniture and equipment 210,726 208,819
Computer equipment and software 543,747 516,579
Leasehold improvements 127,335 127,335
------------------------------------------------
881,808 852,733
Less: accumulated depreciation 356,112 312,495
------------------------------------------------
525,696 540,238
------------------------------------------------
Other Assets 136,084 100,213
Officers' Loans 563,598 563,598
Prepaid marketing costs 265,744 262,744
5,976,376 3,462,846
================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable 280,000 -
Notes payable - related party 509,929 309,929
Accounts payable 3,238,224 4,138,448
Accrued expenses 308,737 273,356
Sales and excise taxes payable 933,839 418,944
Officer's loan payable 38,748 -
------------------------------------------------
Total Current Liabilities 5,309,477 5,140,677
------------------------------------------------
Long Term Liabilities 3,351,173
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common stock - par value $.001 per share;
authorized 30,000,000 shares; issued
and outstanding 9,117,000 shares 9,117 8,967
Additional paid in capital 10,922,121 10,924,848
Accumulated deficit (13,615,512) (12,611,646)
------------------------------------------------
Total Stockholders' Equity (2,684,274) (1,677,831)
------------------------------------------------
5,976,376 3,462,846
================================================
See notes to Consolidated Financial Statements
3
LONG DISTANCE DIRECT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED 3/31/98 ENDED 3/31/97
------------- -------------
REVENUES $ 4,454,735 $ 2,097,202
CUSTOMER REBATES AND REFUNDS 19,929 1,204
----------- -----------
NET REVENUES 4,434,806 2,095,998
COST OF SERVICES 3,614,107 1,542,722
----------- -----------
Gross Profit 820,699 553,276
----------- -----------
OPERATING EXPENSES
Sales and marketing 92,236 71,819
General and administrative 1,721,052 926,803
----------- -----------
Total Operating Expenses 1,813,288 998,622
----------- -----------
LOSS FROM OPERATIONS (992,589) (445,346)
OTHER EXPENSES (INCOME)
Interest expense 5,303 1,164
Interest income --
State income tax 5,974
----------- -----------
Total Other Expenses (Income) 11,277 1,164
NET LOSS $(1,003,866) $ (446,510)
=========== ===========
NET LOSS PER SHARE (.11) (0.09)
4
LONG DISTANCE DIRECT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
31-Mar-98 31-Mar-97
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($1,003,866) ($446,510)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 43,617 31,187
Amortization of note discount
Imputed interest on personal guarantee
Financing expenses
Provision for doubtful accounts 533,875 58,311
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (3,364,300) (1,410,088)
(Increase) decrease in other current assets (3,603) 84,509
(Increase) decrease in other assets (123) (77,378)
Increase in accounts payable (900,224) 988,297
Increase (decrease) in accrued expenses 35,381 (152,187)
Increase (decrease) in sales and excise taxes payable 514,895 (5,919)
Increase (decrease) in long term liabilities 3,351,173 --
---------- -----------
Total Adjustments to Net Loss 210,691 (483,268)
--------------------------------------------------
Net Cash Used in Operating Activities (793,175) (929,778)
--------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Acquisition of property and equipment (29,075) (110,639)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (payment) of notes payable 280,000 --
Proceeds (payment) of related party loans 200,000 123,990
Proceeds from private placement (2,577) 1,627,449
--------------------------------------------------
Net Cash Provided by Financing Activities 477,423 1,751,439
--------------------------------------------------
NET INCREASE (DECREASE) IN CASH (344,827) 711,022
--------------------------------------------------
CASH - Beginning of Period 50,447 962,471
CASH - End of Period ($294,380) $1,673,493
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
March 31, 1998 and December 31, 1997 and results of its operations and cash
flows for the three month periods ending March 31, 1998 and March 31, 1997.
The accounting policies followed by the Company are set forth in Note 2 to the
Company's financial statements in the Form 10KSB for the period ending
December 31, 1997.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Financial Statements and the notes thereto appearing herein. This
report 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 this discussion and analysis and elsewhere in this
report. Factors that could cause actual results to differ are: the Company's
ability to obtain sufficient funds to finance near term and long term working
capital needs; the Company's ability to satisfy its past due and future
obligations to MCI in order to maintain the right to resell MCI services; the
Company's ability to satisfy its past due obligations to AT&T; the Company's
ability to sell at profitable rates; the Company's ability to collect its
outstanding receivables; the Company's ability to manage a rapid increase in its
customer database; competition in the long distance telecommunications industry;
ability of the Company's marketing strategies to develop sufficient levels of
revenue to sustain growth; customer attrition; federal and state regulation of
the telecommunications industry; the Company's ability to manage its information
systems for rapid growth; and retention of key personnel.
GENERAL
LDDI is a non-facilities-based, or "switchless," reseller of outbound
and inbound long-distance telephone, teleconferencing, cellular long distance
and calling card services to small and medium-sized commercial customers and
residential subscribers. All of the services sold by the Company in 1997 were
provided by MCI Telecommunications Corporation("MCI") and AT&T Corporation
("AT&T"). In April, 1998, the Company requested that AT&T terminate its contract
and AT&T has agreed to release the Company from its current contractual
obligations and to waive all shortfall penalties and termination liabilities
upon discharge of the Company's outstanding liability to AT&T of approximately
$500,000 at December 31, 1997.
In 1997, the Company did not meet its minimum purchase requirements
under its contract with MCI. The Company believes that it was prevented from
meeting its minimum purchase obligation in part because up to 20,000 new
customers acquired by the Company since January 1, 1997 and processed through
MCI were confirmed to LDDI's service but, due to software problems at MCI, were
not, in practice, activated onto the Company's network. From an operational
point of view, MCI has assured the Company that its software difficulties have
been rectified and that all current and future accounts sent to MCI for
provisioning to the Company's network will be processed correctly.
In June of 1998, MCI and the Company reached an agreement under which
the Company will forgo the benefit of its unbilled revenue from the new
customers MCI failed to activate onto the Company's network (approximately
$560,000 of unbilled revenue was recorded in the first quarter of 1997) in
return for, (i) the waiver by MCI of the entire amount of the Company's
liability for underutilization charges of approximately $736,000 and $929,000 as
of December 31, 1997 and May 31, 1998, respectively, under its existing minimum
purchase obligations, (ii) a material reduction in the Company's minimum
purchase obligations for the first nine months of the new agreement, (iii)
certain performance credits under the new minimum purchase obligations, (iv)
reductions in prices charged to the Company by MCI for telephone services which
the Company could not otherwise expect to achieve without an increase in its
minimum
7
2
purchase obligations and (v) the issuance by the Company of a three-year
promissory note in the amount of $4,200,000 to MCI, which is guaranteed by two
of the Company's officers and principal shareholders. The note bears interest
at 9.5% and requires semi-monthly payments of principal and interest. Should
the Company default on the note, MCI has the right to demand payment of the
entire principal due and any accrued interest. There can be no assurance that
the the Company will be able to make timely payments on its promissory note to
MCI or otherwise fulfill its obligations to MCI.
MCI has a contractual right to terminate the Company's service should
the Company default on its obligations under the new contract. IF MCI exercised
this right, it would result in a loss of telephone service to the Company's
customer base and would materially adversely affect the Company's ability to
continue its operations. The Company is currently sending payments to MCI in
accordance with the new contract. Although the Company has signed a new
agreement and promissory note, there can be no assurance that MCI will not
terminate service for default under the new contract and seek to enforce its
lien on LDDI's receivables and other assets.
The Company is in the process of seeking alternate carriers to
supplement its arrangement with MCI.
In April, 1998, the Company requested that AT&T terminate its contract
and AT&T has agreed to release the Company from its current contractual
obligations and to waive all penalties for failure to meet minimum purchase
requirements (approximately $2,600,000 for 1997) and termination liabilities
upon discharge of the Company's outstanding liability to AT&T for telephone
services (approximately $500,000 at December 31, 1997). The Company has promised
to pay the $500,000 liability to AT&T in twelve equal payments pursuant to a
non-interest bearing promissory note that is to be personally guaranteed by two
of the Company's officers. There can be no assurance that the Company will be
able to make timely payments on its proposed promissory note to AT&T. Should the
Company fail to make timely payments on its promissory note to AT&T or otherwise
be in default under its arrangement with AT&T, the Company may also be liable
for the entire amount of all shortfall penalties proposed to be waived by AT&T.
The Company has agreed with AT&T that any customers which the Company has not
migrated off the AT&T network by April, 1998, could be transferred by AT&T to
its own network. As of June, 1998 the Company still had approximately 1,700
customers on the AT&T network.Since the Company has failed to migrate these
customers, their service will be interrupted or AT&T will transfer such
customers to its own network.
Both MCI and AT&T hold liens on the LDDI's receivables and assets in
lieu of security deposits.
The Company markets its services utilizing various channels of
distribution. Historically, the Company has marketed its services through three
methods typically employed by sellers and resellers of telephone services: field
sales, outbound telemarketing, and direct mail. Beginning in the fourth quarter
of 1996, the Company began to change its strategy by adding other marketing
techniques. In particular, the Company entered into a number of agreements with
third parties under certain of which those parties will be primarily
responsible, both financially and operationally, for marketing the Company's
telecommunications services to their members or customers. The Company
test-marketed a televised marketing program in conjunction with Guthy-Renker
Distribution, Inc. ("GRD"), which it rolled out in January, 1997, to increase
its independent sales force. Although this program generated $2,500,000 in usage
8
3
revenue in 1997 and $693,000 for the first quarter of 1998, it did not generate
the level of revenue anticipated by management principally because of the MCI
software problems described above. The Company revised its agreement with GRD
under which GRD produced and financed a second infomercial with a different
format. This GRD-produced infomercial generated disappointing results. The
revised agreement allows the Company to produce and finance its own infomercial
if the GRD-produced infomercial fails to generate positive results. As a
result, the Company financed and produced a third infomercial - the format of
which is similar to that of the first infomercial - which first aired in May of
1998. There can be no assurance that this new Company-produced infomercial will
generate results similar to those of the first infomercial. In addition, there
can be no assurance that the Company will have sufficient capital to promote
the new Company-produced infomercial.
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. The Company's arrangement with NBC generated approximately $285,000 in
billed telephone service for the first quarter of 1998.
In 1998, the Company entered into marketing agreements with Popular
Club Plan ("PCP"), a subsidiary of J. Crew Group, Inc., New Media
Telecommunications, Inc. ("NMTI") and various network marketing companies,
direct response marketers and affinity groups pursuant to which these entities
will market the Company's services to their respective customers or members in
consideration for commissions based upon revenues generated by these marketing
programs. To date, revenue generated by these marketing programs has been
minimal. These marketing programs represent the key element in the Company's
strategy to achieve growth in revenue and customer base, but there can be no
assurance that such growth will be achieved.
In June, 1998, the Company signed two agreements with IDT which will
enable the Company to provide to its customers both dial-up and Dedicated
Internet access.
Since, in 1997, the Company did not realize the level of revenue
anticipated from its marketing arrangements, the Company has taken steps to
reduce its operating costs by reducing its personnel and other costs.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AS COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 1997.
Gross revenues for the three months ended March 31, 1998 were
$4,455,000 as compared to $2,097,000 for the three months ended March 31, 1997.
The increase in sales is attributable to revenue generated by the Company's new
televised marketing program,its agreement with National Benefits Consultants,
LLC ("NBC") and its other marketing strategies. The Company's televised
marketing program generated $693,000 or 16% of total revenue in billed telephone
service. The Company's arrangement with NBC generated $285,000 or 6% of total
revenue in billed telephone service. In addition, $1.4 million or 31% of revenue
was generated in the first quarter of 1998 through membership fees charged to
the Company's customers in relation to a psychic marketing program conducted in
conjunction with one of its marketing partners.
Gross revenues for the period ended March 31, 1997 included unbilled
revenue of approximately $.5 million in respect of certain new customers which
were acquired by LDDI since January 1, 1997 and processed through MCI and which
formed a large portion of the customers who were generated
9
4
from the Company's televised marketing program. The accounts in question were
confirmed to LDDI's service but, due to software problems at MCI, the Company
had not received the benefit of these billings at March 31, 1997. MCI and the
Company have reached an agreement under which the Company has forgone the
benefit of such unbilled revenue in return for various accommodations described
above.
The Company estimates that, when the nine month ramp period has expired
under the new contract with MCI described above, in order to meet its new
minimum purchase obligations, the Company must bill its customers approximately
$17,000,000 (annually) at the current gross profit margin level of 30%. Under
the new contract with MCI, the sales levels needed to meet the Company's
obligations to MCI would be $900,000 during the first quarter following the
inception date of the new contract; $1,300,000 during the second quarter;
$2,100,000 during the third quarter; and $4,250,000 quarterly thereafter.
In May, 1996, the Company, through its wholly owned subsidiary, Long
Distance Direct Marketing, Inc. ("LDDM"), entered into an arrangement with
Guthy-Renker Distribution ("GRD"), 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 the contract with GRD,
the Company was responsible for financing any loss incurred from the sale of
sales agent kits sold pursuant to the infomercial. In the twelve months ended
December 31, 1997, the Company recorded losses from the sale of sales agent kits
amounting to $400,000.
In October, 1997, the Company entered into a new five-year agreement
with Guthy- Renker Corporation ("GRC"), the parent company of GRD. Under the new
agreement with GRC, a second infomercial with a different format was produced
and financed by GRC. This infomercial generated disappointing results. The new
agreement with GRC allows the Company to produce and finance its own infomercial
if the GRD-produced infomercial fails to generate positive results. As a result,
the Company financed and produced a third infomercial - the format of which is
similar to that of the first infomercial - which first aired in May of 1998.
There can be no assurance that this Company-produced infomercial will generate
results similar to those of the first infomercial, nor can there be any
assurance that the Company will have sufficient capital to promote and support
it.
In 1998, the Company entered into marketing agreements with Popular
Club Plan ("PCP"), a subsidiary of J. Crew Group, Inc., New Media
Telecommunications, Inc. ("NMTI") and various network marketing companies,
direct response marketers and affinity groups pursuant to which these entities
will market the Company's services to their respective customers or members in
consideration for commissions based upon revenues generated by these marketing
programs.
Gross profit was $821,000 and $553,000 for the three months ended March
31, 1998 and 1997, respectively. As a percentage of gross sales, the gross
profit margins for the three months ended March 31, 1998 and 1997 were
18% and 26%, respectively. This decrease is attributable to lower profit
margins related to two of the Company's marketing arrangements. Revenue
generated from the arrangement with NBC yields a lower price per minute in
comparison to the Company's other sources of revenue. In addition, profit
margins generated from psychic membership fees charged to customers are lower
than those generated from long distance revenue.
10
5
Sales and marketing expenses were $92,000 and $72,000 for the three
months ended March 31, 1998 and 1997, respectively. As a percentage of gross
sales, sales and marketing expenses decreased from 3% for the three months ended
March 31, 1997 to 2% for the three months ended March 31, 1998. The percentage
decrease is attributable to two factors: limited expenditure on account
acquisition from outbound telemarketing firms due to concentration on other
marketing strategies in 1998, in particular to the relationships with third
parties who are responsible for marketing the Company's services; and increased
sales levels in 1998.
General and administrative expenses were $1,721,000 and $927,000 for
the three months ended March 31, 1998, and 1997, respectively. As a percentage
of gross sales, general and administrative expenses for the three months ended
March 31, 1998 and 1997 were 39% and 44%, respectively. Factors which
contributed to the increase in general and administrative expenses are mainly
related to the Company's expansion of its resources in anticipation of increased
levels of sales, including payroll and related administrative costs. Additional
billing costs were incurred in 1998 to meet the needs of the Company's new
marketing strategies. In the first quarter of 1998, the Company increased its
provision for bad debt based upon 1997 experience with uncollectable
receivables.
The Company incurred a net loss of $1,004,000 for the three months
ended March 31, 1998 compared to a net loss of $447,000 for the three months
ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has sustained operating losses for each year of
its existence due to a lack of working capital to finance adequate levels
of marketing expenditure, insufficient revenues and other reasons. Since its
inception, the Company has financed its operational losses through debt and
equity placements and will need to continue to do so until revenues reach such
levels that enough working capital is generated from its operations. There can
be no assurance that the Company will realize this level of revenue.
The Company's expected expanded sales and marketing efforts could
result in significantly higher operating losses in the future. The Company's
trend of incurring operating losses is likely to continue until its revenues
reach certain levels materially higher than any achieved to date. There can be
no assurance that the Company will not continue to experience operating losses
in the future or that the Company's revenues will reach such levels.
Until the Company's revenues reach certain levels materially higher
than any achieved to date, as to which there can be no assurance, the Company
will be required to raise substantial additional amounts of capital from the
sale of its securities or through debt financing arrangements to finance its
operations. There can be no assurance that additional financing will be
available on acceptable terms, if at all.
The Company is in the process of raising debt financing in a private
offering that has not been registered under the Securities Act of 1933 in order
to meet short term capital requirements. The Company is seeking to raise up to
$1,500,000 from a limited group of selected accredited investors and has raised
approximately $1,000,000 since the private offering commenced in February, 1998.
The proceeds of the debt financing to date have been used to fund the Company's
11
6
marketing ventures and for working capital purposes. There can be no assurance
that the Company will be able to raise any debt financing in excess of the
$1,000,000 received to date, or that any other financing will be available on
acceptable terms or at all.
12
SIGNATURES
In accordance with the requirements 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: July 7, 1998 Long Distance Direct Holdings, Inc.
By:/s/ Steven Lampert
--------------------------
Steven Lampert, President
(Principal Executive Officer)
By:/s/ Michael Preston
--------------------------
Michael Preston, Chief
Financial Officer (Principal
Accounting Officer)