<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 17, 1996.
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------
LONG DISTANCE DIRECT HOLDINGS, INC.
(Name of Small Business Issuer in its Charter)
Nevada
(State of Incorporation)
SIC No. 4825
(Primary Standard Industrial Classification Code No.)
33-0323376
(IRS Employer I.D. No.)
1 BLUE HILL PLAZA
PEARL RIVER, NEW YORK 10965
(914) 620-0765
(Address and Telephone Number of Principal Executive Office
and Principal Place of Business)
---------------
Steven Lampert Copy to:
President Caldwell R. Campbell, Esq.
Long Distance Direct Holdings, Inc. Day, Campbell & McGill
1 Blue Hill Plaza 3070 Bristol Street, Suite 650
Pearl River, New York 10965 Costa Mesa, California 92626
(914) 620-0765 (714) 429-2900
(Name, Address, and Telephone Number
of Agent for Service)
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: /X/
<PAGE> 2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Class
of Proposed Maximum Proposed Maximum
Securities Being Amount to Offering Price Aggregate Offering Amount of
Registered be Registered Per Unit(1) Price(1) Registration Fee
<S> <C> <C> <C> <C>
Common Stock 2,796,703 $3.75 $10,487,637 $3,178
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee under Rule 457 based upon the average of the bid and
asked prices for the Common Stock on December 13, 1996, as reported by
the OTC Bulletin Board.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 3
LONG DISTANCE DIRECT HOLDINGS, INC.
CROSS REFERENCE SHEET
Between Items of Form SB-2 and Prospectus
<TABLE>
<CAPTION>
Registration Statement Item and Heading Prospectus Caption
<S> <C>
1. Forepart of the Registration Statement and Outside Front Cover Page
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front and Outside BackCover Pages
of Prospectus
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Not Applicable
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Selling Stockholders
8. Plan of Distribution Cover Page; Plan of Distribution
9. Legal Proceedings Business
10. Directors, Executive Officers, Promoters Management
and Control Persons
11. Security Ownership of Certain Beneficial Principal Stockholders
Owners and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel Legal Matters; Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities Management
15. Organization Within Last 5 Years Not Applicable
16. Description of Business Business
17. Management's Discussion and Analysis or Management's Discussion and Analysis of
Plan of Operations Financial Condition and Results of Operations
18. Description of Property Business
19. Certain Relationships and Related Certain Transactions
Transactions
20. Market Price for Common Equity and Market Price for Common Stock and
Related Stockholder Matters Related Stockholder Matters
</TABLE>
iii
<PAGE> 4
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure Not Applicable
iv
<PAGE> 5
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PROSPECTUS
PRELIMINARY PROSPECTUS DATED
DECEMBER 17, 1996
SUBJECT TO COMPLETION,
LONG DISTANCE DIRECT HOLDINGS, INC.
2,796,703 SHARES
OF
COMMON STOCK
($.001 PAR VALUE)
The shares of Common Stock of Long Distance Direct Holdings, Inc. (the
"Company") offered hereby (the "Shares") will be sold from time to time by the
stockholders described herein (the "Selling Stockholders") in transactions in
the national over-the-counter market or otherwise at prices prevailing at the
time of sale. The Company will not receive any of the proceeds from the sale of
the Shares. The expenses incurred in registering the Shares, estimated to be
$50,000, will be paid by the Company.
The Shares offered hereby have been or upon the exercise of outstanding
options and warrants will be acquired by the Selling Stockholders from the
Company in private transactions and are or will be "restricted securities" under
the Securities Act of 1933, as amended (the "Act"), prior to their sale
hereunder. This Prospectus has been prepared for the purpose of registering the
Shares under the Act to allow for future re sales by the Selling Stockholders to
the public without restriction. To the knowledge of the Company, the Selling
Stockholders have made no arrangement with any brokerage firm for the sale of
the Shares. The Selling Stockholders may be deemed to be "underwriters" within
the meaning of the Act. Any commissions received by a broker or dealer in
connection with resales of the Shares may be deemed to be underwriting
commissions or discounts under the Act. See "Plan of Distribution."
Brokers or dealers effecting transactions in the Shares should confirm
the registration of the Shares under the securities laws of the states in which
such transactions occur or the existence of an exemption from such registration,
or should cause such registration to occur in connection with any offer or sale
of the Shares.
The Common Stock of the Company is traded in the over-the-counter
market and quoted on the National Association of Securities Dealers Electronic
Bulletin Board ("OTC Bulletin Board") under the symbol "LDDI". The bid and asked
prices for the Common Stock on December 13, 1996, as reported by the OTC
Bulletin Board were $2.50 and $5.00 per share, respectively. To date, the volume
of trading in the Common Stock has been limited and, therefore, the market
prices for the Common Stock may not accurately reflect the value of the Company.
THE COMMON STOCK OFFERED HEREBY IS HIGHLY SPECULATIVE AND INVOLVES A
HIGH DEGREE OF RISK. SEE "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is _________________ , 1996.
<PAGE> 6
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
and Exchange Act of 1934 (the "1934 Act") and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the Commission's regional offices at Seven
World Trade Center, 13th Floor, New York, New York 10048 and Northwest Atrium
Building, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
The Company intends to distribute to its stockholders annual reports
containing audited financial statements with a report thereon by independent
certified public accountants after the end of each fiscal year. In addition, the
Company will furnish to its stockholders quarterly reports for the first three
quarters of each fiscal year containing unaudited financial and other
information after the end of each fiscal quarter, upon written request to the
secretary of the Company.
The Company has filed with the Commission a registration statement on Form
SB-2 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Act. This Prospectus does not contain all
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement.
No person is authorized to give any information or make any representations
other than those contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the registered shares
to which it relates or an offer to sell or a solicitation of an offer to buy
such securities in any circumstances in which such offer or solicitation is
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.......................................................................................... 3
Risk Factors................................................................................................ 5
The Company................................................................................................. 5
Market For Common Stock and Related Stockholder Matters..................................................... 9
Selected Financial Data..................................................................................... 10
Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 11
Business.................................................................................................... 18
Management.................................................................................................. 28
Principal Stockholders...................................................................................... 30
Certain Transactions........................................................................................ 31
Selling Stockholders........................................................................................ 34
Plan of Distribution........................................................................................ 34
Description of Capital Stock................................................................................ 35
Legal Matters............................................................................................... 36
Experts..................................................................................................... 36
Further Information......................................................................................... 36
Index to Financial Statements............................................................................... F-1
</TABLE>
2
<PAGE> 7
SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Memorandum.
THE COMPANY
The Company, which was formerly known as Golden Ark, Inc., was inactive
until October 6, 1995, when it acquired all of the outstanding stock of Long
Distance Direct, Inc. ("LDDI") and LDDI became a wholly owned subsidiary of the
Company. LDDI is a New York corporation which was formed in 1991 for the purpose
of acting as the general partner of Long Distance Direct L.P. ("LDDLP" or the
"Partnership"), a New York limited partnership formed at the same time for the
purpose of carrying on the business of a non-facilities-based reseller of
long-distance telephone service. In September 1995, LDDI acquired all of the
partnership interests of LDDLP in exchange for securities of LDDI common stock.
After its acquisition of LDDI, Golden Ark, Inc. changed its name to Long
Distance Direct Holdings, Inc. ("LDD Holdings"). In May, 1996, LDD Holdings
formed Long Distance Direct Marketing, Inc., a New York corporation ("LDDM"), as
a wholly owned subsidiary for the purpose of producing and marketing a televised
infomercial designed to recruit additional independent sales representatives.
References herein to the Company, to LDDI or to LDDM shall mean LDD Holdings,
LDDI and LDDM collectively unless the context otherwise requires. The financial
statements included elsewhere herein relate to the business which was known as
LDDLP prior to the acquisition of LDDLP by LDDI and the subsequent acquisition
of LDDI by LDD Holdings.
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. All of the
services sold by the Company are currently provided by AT&T or MCI. Management
believes that AT&T or MCI's long-distance service remains the preferred option
of the majority of telephone users. According to a 1995 FCC report, AT&T and MCI
accounted for approximately 56% and 17% respectively of total domestic long
distance revenue for calendar year 1994. The Company signs up customers and
provisions them onto the network of AT&T or MCI, which provide the actual
transmission service. The Company has agreements with AT&T and MCI to purchase a
minimum level of long distance telephone service at discounted bulk rates which
are lower than rates LDDI's customers are able to obtain for themselves due to
insufficient call volume. The Company does not own or lease any telephone
equipment or participate in the call completion process. Provision of the
service to the customer requires no equipment installation or modification on
the customer's premises; all action to provide the service takes place within
the local and inter-exchange carriers. The customer retains its existing
telephone numbers and incurs no expense in making the decision to switch to the
services of the Company.
The Company currently markets its services through three methods typically
employed by sellers and resellers of telephone services: field sales, outbound
marketing and direct mail. As of the date hereof, approximately 29% of the
Company's billings are derived from field sales using a system of self-employed
independent sales representatives, who are contractually restricted from
performing such services for competitors of LDDI, approximately 64% are derived
from outbound telemarketing using a number of outside telemarketing agencies
specialized in the sale of telephone services on a non-exclusive basis, and the
remaining 7% are derived from direct mail programs. The Company has also
test-marketed a televised marketing program during the fourth quarter of 1996,
which it intends to roll out in the first quarter of 1997, to increase its
independent sales force. The Company intends to establish its own in-house
telemarketing facility. 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. See "Business."
The Company's offices are located at One Blue Hill Plaza, Pearl River, New
York 10965. The Company's telephone number is (914) 620- 0675.
3
<PAGE> 8
THE SELLING STOCKHOLDER OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock outstanding on November 30, 1996(1)............................... 6,597,949
common Stock Offered by Selling Stockholders(2)................................ 2,796,703
Risk Factors............................ This Offering involves a high degree of risk.
See "Risk Factors."
OTC Bulletin Board Symbol............... LDDI
</TABLE>
- ----------
(1) Excluding 2,045,000 shares issuable upon exercise of outstanding options and
828,088 shares issuable upon exercise of outstanding warrants.
(2) Includes 45,000 shares issuable upon the exercise of options and 828,088
shares issuable upon the exercise of warrants held by the Selling Stockholders.
SUMMARY FINANCIAL INFORMATION
The statement of operations data for the years ended December 31, 1994 and
1995 and the balance sheet data as of December 31, 1995 has been derived from
financial statements of the Company which have been audited by Adelman, Katz and
Mond, L.L.P., independent auditors, and included herein. The report of Adelman,
Katz and Mond, L.L.P. on such financial statements notes that the Company's
negative working capital and accumulated deficit raise substantial doubt about
the Company's ability to continue as a going concern and that the financial
statements were prepared on the assumption that the Company will continue as a
going concern and do not include any adjustments that might result from the
Company's inability to continue as a going concern. The unaudited statement of
operations data for the nine months ended September 30, 1996 and the unaudited
balance sheet data as of September 30, 1996 has been derived from unaudited
financial information prepared on the same basis as the audited financial
statements. In the opinion of management, such unaudited financial information
includes all adjustments, consisting of normal recurring adjustments, necessary
to present fairly the information presented.
<TABLE>
<CAPTION>
Year Ended NINE MONTHS ENDED
December 31 SEPTEMBER 30
---------------------------------- -----------------------
1993 1994 1995 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues, Net.............. $ 5,340 $9,083 $7,986 $ 6,590 $ 4,710
Operating Expenses......... 1,916 3,877 3,219 2,569 2,304
Operating Loss............. (267) (1,052) (1,096) (912) (662)
Net Loss................... (972) (1,221) (1,875) (1,533) (1,248)
</TABLE>
4
<PAGE> 9
<TABLE>
<CAPTION>
As Of AS OF
December 31 SEPTEMBER 30
--------------------- ------------
1994 1995 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance Sheet Data:
Working Capital (deficit) $(2,281) $(3,485) $ (956)
Total Assets 2,852 1,627 3,500
Total Liabilities 5,027 4,890 4,245
Shareholder's Equity (deficiency) (2,175) (3,262) (745)
</TABLE>
RISK FACTORS
The securities offered hereby are speculative and involve a high degree of
risk. Each prospective investor should carefully consider the following risk
factors, as well as other information set forth in this Memorandum, before
deciding to purchase the Shares.
LIMITED OPERATING HISTORY
The Company commenced its long-distance telephone service operations in
November 1991 and, accordingly, has a limited operating history. The Company's
prospects must be considered in light of the risks, expenses, and difficulties
frequently encountered by a small business in a highly competitive industry. The
Company's operating expenses are expected to increase significantly as a result
of the Company's proposed expansion of its marketing and sales efforts, if
successful, and its contractual minimum long-distance service purchase
commitments to AT&T Corporation ("AT&T") and MCI Telecommunications Corporation
("MCI"). Since the Company has a limited operating history, there can be no
assurance that its operations will be profitable or that it will ever generate
sufficient revenues to meet its expenses and support its anticipated activities.
See "Business" and "Financial Statements."
HISTORY OF OPERATING LOSSES AND RISK OF FUTURE LOSSES; ACCUMULATED DEFICITS;
VIABILITY AS GOING CONCERN
The Company has never made a profit since inception in November, 1991. The
Company has sustained operating losses of $1,052,236 and $1,096,125 for the
fiscal years ended December 31, 1994, and 1995, respectively. As of December 31,
1995, the Company had an accumulated deficit of $4,665,551. The Company's future
prospects will depend in large part on the success of its expanded sales and
marketing efforts. There can be no assurances that the Company will not
experience operating losses in the future. In this respect, the report by the
Company's independent certified public accountants on the Company's financial
statements for the year ended December 31, 1995 notes that the Company's
negative working capital and accumulated deficit raise substantial doubt about
the Company's ability to continue as a going concern and that the financial
statements were prepared on the assumption that the Company will continue as a
going concern and do not include any adjustments that might result from the
Company's inability to continue as a going concern. For the first nine months of
fiscal year 1996, the Company sustained an operating loss of $661,841, and as of
September 30, 1996 the Company had an accumulated deficit of $5,913,957 and a
total stockholder deficit of $744,982. See "Business" and "Financial
Statements."
DEPENDENCE ON TELECOMMUNICATIONS SERVICE PROVIDERS
AT&T and MCI are currently the sole providers of the long-distance
telecommunications services that the Company resells to its customers. The
future business prospects of the Company are particularly dependent on the
continuous and reliable use of AT&T and MCI's networks. Changes in tariffs,
regulations, or policies by AT&T and MCI may adversely affect the Company's
ability to continue to offer long-distance service on what it considers to be
commercially reasonable or profitable terms. See "Business."
5
<PAGE> 10
POTENTIAL ADVERSE EFFECTS OF RATE CHANGES
The Company bills its customers for the various long-distance
telecommunications services used by such customers. The total billing to each
customer is generally less than the telephone charges for the same long-distance
service that the customer would pay to a primary seller of such services, such
as AT&T or MCI. LDD 'S ability to undersell such primary seller arises as a
result of the volume discount offered to LDDI in accordance with the terms of
its contracts with AT&T and MCI. The Company believes its lower customer bills
is one of the most important factors in its ability to attract and retain
customers. Therefore, narrowing of the differential between the rates charged to
the Company's customers and the cost of the bulk-rate long-distance
telecommunications services purchased by the Company for resale to such
customers would have a significant adverse effect on the Company. To the extent
this differential decreases, the savings the Company is able to obtain for its
customers would decrease and the Company would lose customers and face increased
difficulty in attracting new customers, and the Company's operating results
would also be adversely affected. See "Business."
COMPETITION
The Company markets long-distance telecommunications services utilizing the
AT&T and MCI networks to small and medium-size commercial customers and
residential subscribers at tariffed rates which are below the rates generally
available to such customers from other carriers. Many other companies are
engaged in a similar business to that of the Company and compete directly with
the Company for the same customers. There is no pivotal product distinction
between the services offered by the Company and the services offered by other
long-distance service providers. The same or similar volume discount pricing
schedules available to the Company from AT&T and MCI are also available from
AT&T, MCI and other telecommunications services providers to current and
potential competitors of the Company. There are no substantial barriers to the
entry of additional competitors into the market. In addition to direct
competition from other resellers, the Company competes with the sales
organizations of large telecommunications concerns such as Sprint Corporation
("Sprint") as well as AT&T and MCI themselves, any of which at any particular
time may offer prices lower than those offered by the Company, and all of which
have far greater financial, marketing and other resources than the Company. See
"Business -- Competition."
FAILURE TO MEET AT&T AND MCI MINIMUM PURCHASE REQUIREMENTS; CONTINGENT
LIABILITIES
The Company has entered into contract tariffs with AT&T and MCI for both
outbound and inbound long distance service. See "Business -- Arrangement with
AT&T" and "Business -- Arrangements with MCI." In July 1995, the Company signed
a five-year negotiated contract tariff with AT&T, effective September 1, 1995,
for the supply of inbound and outbound telephone service with volume discounts
which obligated the Company for a minimum quarterly purchase requirement of
$1,500,000. Also included within the contract tariff is a requirement that a
specified minimum proportion of each quarter's usage relate to "new business"
(i.e., currently non-AT&T business). The contract provides that 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 requirements for the outstanding term of the agreement if there
is an early termination of the plan. The Company is currently negotiating a new
contract tariff with AT&T under which new pricing and new minimum purchase
requirements are to be established. AT&T has written to the Company indicating
that in consideration of the Company entering into a new contract, the entire
cumulative shortfall charged under the existing contract (approximately $2.3
million as of September 30, 1996, none of which has been reflected in the
Company's financial statements included herein) will be waived. There can be no
assurance that such new contract will be entered into, or, if entered into, that
all or substantially all of the shortfall will be waived. In February, 1996, the
Company signed a four-year negotiated contract with MCI for the supply of
inbound and outbound telephone service with MCI with volume discounts in return
for minimum annual purchase requirements rising to $3,000,000 per quarter after
the first (12) twelve months of service under the contract. Failure to achieve
the minimum will require shortfall payments by the Company. At the present and
proposed combined level of its commitments to AT&T and MCI, and at its current
selling margins, the Company will need to achieve annualized net sales of
telephone service, once the ramp-up period under the MCI contract has been
completed in July 1997, of approximately $25 million in order to satisfy such
commitments. There can be no assurance that the Company will be able to achieve
this level of sales.
CONTROL BY OFFICERS AND DIRECTORS
6
<PAGE> 11
The Company's executive officers and directors beneficially own or control
in the aggregate 4,054,344 shares of Common Stock (including 1,684,000 shares
issuable upon the exercise of options held by the Company's executive officers
and directors) or approximately 49.1% of the outstanding shares of the Company's
Common Stock. See "Principal Shareholders." The votes represented by the shares
beneficially owned or controlled by the Company's executive officers and
directors could, if they were cast together, strongly influence the election of
a majority of the Company's directors and the outcome of most corporate actions
requiring shareholder approval.
Investors who purchase the Shares may be subject to certain risks due to the
concentrated ownership of the Common Stock of the Company. Such risks include
the fact that the shares beneficially owned or controlled by the Company's
executive officers and directors could, if they were cast together, delay, defer
or prevent a change in control of the Company, such as an unsolicited takeover,
which change in control might be beneficial to the shareholders.
GOVERNMENTAL REGULATION
The Company's activities are regulated by the public utility commissions of
the various states in which the Company operates. Also, decisions by the Federal
Communications Commission ("FCC") with respect to the permissible business
activities or pricing practices may have an adverse impact on the Company's
operations. The Company could be subject to complaints seeking damages and other
relief filed by parties claiming to be harmed by the Company's failure to file
tariffs. Moreover, any significant change in regulations by state governmental
agencies could significantly increase the Company's costs or otherwise have an
adverse effect on the Company's activities and on its expansion efforts. The FCC
has recently taken or is currently considering action on various proposals,
including proposals relating to interstate access transport services, public
filing of rates, proprietary calling cards and billed party preference.
Additionally, legislation has recently been enacted in Congress further
liberalizing the telecommunications industry, specifically by permitting the
Bell Operating Companies (BOCs) to provide service in the long-distance market
and allowing the long distance carriers such as AT&T, MCI and the Company into
the local markets. Although safeguards have been inserted into the legislation
to ensure fair competition, there can be no assurance that the entry of the BOCs
into the long-distance market will not have a material adverse effect on the
Company's business. See "Business -- Regulation."
DEPENDENCE ON KEY PERSONNEL
The success of the Company will be largely dependent on the efforts of
certain key personnel of the Company, including Steven L. Lampert, its Chairman,
Chief Executive Officer and President, and Michael D. Preston, its Chief
Financial Officer and Vice President-Finance. The Company has not entered into
written or formal employment agreements with Messrs. Lampert and Preston. The
loss of the services of either of these individuals would have a material
adverse effect on the Company. The Company has key-man life insurance policies
in the amount of $1,000,000 for each of Messrs. Lampert and Preston. The success
of the Company will also depend, in part, upon its ability in the future to
attract and retain additional qualified operating, marketing and financial
personnel. See "Business" and "Management."
RELIANCE ON INDEPENDENT SALES AGENTS
The Company markets its services through independent sales representatives
and independent telemarketing organizations, who are paid a commission by the
Company based on volume of sales generated, and by the Company's direct mail
program. The independent telemarketing organizations presently account for
approximately 64% of the Company's long-distance sales volume. Should the
services of one or more of these independent telemarketers be interrupted or
become unavailable to the Company, and in the event that the Company is unable
to promptly replace such marketing efforts, the financial results of the Company
could be adversely affected. See "Business -- Marketing and Sales."
TECHNOLOGICAL CHANGE AND NEW SERVICES
The telecommunications industry has been characterized by steady
technological change, frequent new service introductions and evolving industry
standards. The impact of such changes in service and standards on the Company
has been limited due to its selling g only AT&T long-distance services until
April, 1996. The Company believes that its future
7
<PAGE> 12
success will depend in part on its ability to anticipate such changes and to
offer on a timely basis market responsive services that meet these evolving
industry standards, especially if at some future time the Company should cease
selling AT&T service. There can be no assurance that the Company will have
sufficient resources to introduce new services that would satisfy an expanded
range of customer needs.
CUSTOMER ATTRITION
The Company believes that a high level of customer attrition is common in
the direct dial, long-distance industry. Although the level of attrition
experienced by the Company lies within the range anticipated in its budgets, the
Company does not have a long history of operations and accordingly, the level of
customer attrition experienced to date may not be indicative of future attrition
levels. In addition, there can be no assurance that any steps taken by the
Company to counter increased customer attrition will be successful.
AUTHORIZATION OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of
10,000,000 shares of "blank check" preferred stock with such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without stockholder
approval (but subject to applicable government regulatory restrictions), to
issue preferred stock with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of the
holders of the Company's Common Stock. In the event of issuance, the preferred
stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company.
Although the Company has no present intention to issue any shares of its
preferred stock, there can be no assurance that the Company will not do so in
the future. See "Description of Securities."
SHARES ELIGIBLE FOR FUTURE SALE
Of the 6,597,949 shares of the Company's Common Stock
outstanding on November 30, 1996, approximately 587,382 are freely tradeable
and approximately are "restricted securities," as that term is defined under
Rule 144 promulgated under the Securities Act ("Rule 144").
Approximately ___________ of the restricted securities will be eligible for
resale under Rule 144 in October, 1997 and the remaining ____________
restricted securities will be eligible for resale under Rule 144 in
approximately ___________, 1998. The "restricted securities" may be sold only
pursuant to registration under the Securities Act, or pursuant to an
exemption from the registration requirements of the Securities
Act including that arising under Rule 144. Generally, under Rule 144, each
person having held restricted securities for a period of two years may, every
three months, sell in ordinary brokerage transactions an amount of shares which
does not exceed the greater of one percent (1%) of the Company's then
outstanding shares of Common Stock, or the average weekly volume of trading of
such shares of Common Stock as reported during the preceding four calendar
weeks. A person who has not been an affiliate of the Company for at least the
three months immediately preceding the sale and who has beneficially owned
shares of the Common Stock for at least three years is entitled to sell such
shares under Rule 144(k) without regard to any of the limitations described
above. A proposed amendment to Rule 144 would shorten the two year holding
period to one year and the three year holding period to two years. Actual sales,
or the prospect of sales by the present stockholders of the Company or by future
holders of restricted securities under Rule 144, or otherwise, may, in the
future, have a depressive effect upon the price of the Company's shares of
Common Stock in any market that may develop therefor. See "Principal
Stockholders."
LIMITED PUBLIC MARKET FOR SECURITIES OF THE COMPANY
Although the Company's Common Stock is currently traded on the National
Association of Securities Dealers ("NASD") Electronic Bulletin Board, there was
no trading activity prior to December, 1995, and since such date there has been
only an extremely limited and sporadic trading market for the Common Stock.
Although the Company has filed an application for inclusion of the Company's
Common Stock in the NASDAQ Small Cap Market, there can be no assurance that
NASDAQ will admit the Company's Common Stock for trading on its Small Cap
Market. See "Market for Common Stock and Related Stockholder Matters."
8
<PAGE> 13
NASDAQ LISTING REQUIREMENTS; RISK OF LOW-PRICED SECURITIES
The criteria for the inclusion of securities on the NASDAQ Small Cap Market
require total assets and net worth of $4,000,000 and $2,000,000, respectively.
The Company believe that it currently satisfies such criteria and has applied
for inclusion of the Company's Common Stock in the NASDAQ Small Cap Market. If
the application is not approved, trading, if any, will be conducted in the
over-the-counter market in the so-called "pink sheets" or the NASD Electronic
Bulletin Board. An investor could find it more difficult to dispose of, or to
obtain accurate quotations as to the price of, the Company's securities if they
are traded in the over-the-counter market.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure, relating to the market for penny stocks, in connection
with trades in any stock defined as a penny stock. Regulations of the Securities
and Exchange Commission (the "Commission") generally define a penny stock to be
any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. Such exceptions include any equity security
listed on NASDAQ and any equity security issued by an issuer that has (i) net
tangible assets of at least $2,000,000, if such issuer has been in continuous
operation for three years, or (ii) net tangible assets of $5,000,000, if such
issuer has been in continuous operation for less than three years, or (iii)
average annual revenue of at least $6,000,000 for the last three years. Unless
an exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith.
In addition, if the Company's securities are not quoted on NASDAQ, or the
Company does not meet the exceptions described in the previous paragraph,
trading in the Common Stock would be covered by Rule 15g-9 promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act") for non-NASDAQ and non-
exchange listed securities. Under such rule, broker/dealers who recommend such
securities to persons other than established customers and accredited investors
must make a special written suitability determination regarding the purchaser
and receive the purchaser's written agreement to a transaction prior to sale.
NO DIVIDENDS
The Company has never paid any cash or other dividends on its Common Stock.
The Company anticipates that in the foreseeable future earnings, if any, will be
retained for use in the business or for other corporate purposes, and it is not
anticipated that cash or any other dividends in respect of the Common Stock will
be paid in the foreseeable future. See "Dividend Policy."
RELATED PARTY TRANSACTIONS AND POSSIBLE CONFLICTS OF INTEREST
Until November, 1996, the Board of Directors consisted of Steven Lampert and
Michael Preston, both of whom are executive officers and principal shareholders
of the Company. Thus, there has in the past existed the potential for conflicts
of interest in transactions between the Company and such individuals or entities
in which such individuals have an interest. The Company has attempted to ensure
that any such transactions were entered into on terms that were no less
favorable than could have been obtained in transactions with unrelated third
parties. In November, 1996, three additional individuals, none of whom is an
officer or employee of the Company, were elected to the Board of Directors.
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded in the over-the-counter market on
the OTC Bulletin Board under the symbol LDDI since December 13, 1995. There was
no active trading market for the Company's Common Stock for more than two years
prior to December 13, 1995. Since December 13, 1995, trading activity with
respect to the Company's Common Stock has been extremely limited and sporadic.
The following table reflects the high and low bid prices of the Company's
Common Stock as reported by the OTC Bulletin Board from December 13, 1995 to
December 13,1996. Such prices are inter-dealer quotations without retail
mark-ups, mark-downs or commissions, and may not represent actual transactions.
9
<PAGE> 14
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1995
Fourth Quarter (December 13 to December 31). $ 3.00 $ 3.00
1996
First Quarter............................ $ 3.00 $ 3.00
Second Quarter........................... $ 6.00 $ 3.00
Third Quarter............................ $ 6.00 $ 4.50
Fourth Quarter (through December 13)..... $ 5.00 $ 2.00
------ ------
</TABLE>
As of December 13, 1996, there were approximately 87 shareholders of
record of the Company's Common Stock. On December 13, 1996, the closing bid
price for the Company's Common Stock was $2.50.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock and
anticipates that, for the foreseeable future, no cash dividends will be paid on
its Common Stock. Payment of future cash dividends will be determined by the
Company's Board of Directors based upon conditions then existing, including the
Company's financial condition, capital requirements, cash flow, profitability,
business outlook and other factors. In addition, the Company's future credit
arrangements may restrict the payment of dividends.
SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1993,
1994 and 1995 and the balance sheet data for the year 1995 has been derived
from financial statements of the Company which have been audited by Adelman,
Katz and Mond, LLP, independent auditors, and included herein. The report of
Adelman, Katz and Mond, LLP, on such financial statements notes that the
Company's negative working capital and accumulated deficit raise substantial
doubt about the Company's ability to continue as a going concern and that the
financial statements were prepared on the assumption that the Company will
continue as a going concern and do not include any adjustments that might
result from the Company's inability to continue as a going concern. The
unaudited statement of operations data for the nine months ended September 30,
1996 and the unaudited balance sheet data as of September 30, 1996 has been
derived from unaudited financial information prepared on the same basis as the
audited financial statements. In the opinion of management, such unaudited
financial information includes all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the information presented.
<TABLE>
<CAPTION>
Year Ended NINE MONTHS ENDED
December 31 SEPTEMBER 30
------------------------------------ --------------------------
1993 1994 1995 1995 1996
-------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, gross $ 5,499 $ 9,528 $ 8,364 $ 6,932 $ 4,730
Customer rebates and refunds 159 445 377 342 20
------- ------- ------- ------- -------
Revenues, net 5,340 9,083 7,986 6,590 4,710
Cost of services 3,691 6,258 5,863 4,933 3,068
Gross Profit 1,649 2,825 2,123 1,657 1,642
Operating Expenses
Sales and marketing 472 1,323 519 571 448
General and administrative 1,444 2,554 2,700 1,998 1,856
------- ------- ------- ------- -------
1,916 3,877 3,219 2,569 2,304
Loss from operations before interest and
tax 262 1,052 1,096 912 662
</TABLE>
10
<PAGE> 15
<TABLE>
<CAPTION>
Year Ended NINE MONTHS ENDED
December 31 SEPTEMBER 30
------------------------------- ------------------
1993 1994 1995 1995 1996
------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest expense 96 169 371 243 586
1994 IPO costs written off 609 -- 407 378 --
------ ------ ------ ------ ------
Net Loss (972) (1,221) (1,874) (1,553) (1,248)
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31 SEPTEMBER 30
------------------- ------------
1994 1995 1996
---------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital (deficit) $(2,281) $(3,485) $ (956)
Total Assets 2,852 1,627 3,500
Total Liabilities 5,027 4,890 4,245
Shareholder's Equity (deficiency) (2,175) (3,262) (745)
</TABLE>
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. 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 has and will use the proceeds from these and future offerings, if
successful, to improve the financial condition of the Company and provide
increased working capital. Marketing activities will be pursued more
aggressively to increase the Company's customer base. 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 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. The Company believes that the proceeds of the current and
anticipated future offerings, if successful, together with cash flow generated
from operations, will be sufficient to meet its anticipated working capital
needs for the foreseeable future.
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 $4,729,729
as compared to $6,931,987 for the nine months ended September 30, 1995. The
decrease of 32% is attributable 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,
11
<PAGE> 16
L.C. Wegard & Company, which had generated gross revenue of approximately
$150,000 per month, as a result of such customer's bankruptcy. The Company has
taken steps to increase its revenues as discussed above.
During the last quarter of 1996, the Company anticipates taking steps to
increase its customer base and, consequently, its revenues and market share as
follows:
Management has begun to resume the active pursuit of new customers utilizing
the proceeds of its private placements, and will continue to do so in order to
increase its revenues. 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 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., one of the leading infomercial
producers and promoters in the United States, 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
encouraging results. If these results are sustained, the Company anticipates
that nationwide screening will begin prior to the end of 1996 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. LDDI understands that Kaire is one of the fastest growing
multi-level marketing companies in the United States with an associate base of
over 370,000 individuals. 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 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 has also entered the residential market in 1996. Previously, the
Company has 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. 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 the customer service and
collections functions.
Gross profit was $1,642,296 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
35% 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. Presently, the
Company is in the process of re-negotiating its contract with AT&T and AT&T has
indicated its willingness to grant the Company more favorable pricing.
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
12
<PAGE> 17
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 usage. The new contract signed on September 1, 1995 -- which supersedes all
previous contracts with AT&T -- encompasses both outbound and inbound service
and is set at a fixed term of four years with a one-year extension. The Company
continues to have a minimum SDN and DNS purchase requirement of $1,200,000 per
quarter for 16 quarters or 20 quarters if the Company extends its contract. The
Company is currently negotiating a new contract tariff with AT&T under which new
pricing and new minimum purchase requirements are to be established. AT&T has
written to the Company indicating that in consideration of the Company entering
into a new contract, the entire cumulative shortfall charged under the existing
contract (approximately $2.3 million as of September 30, 1996, none of which has
been reflected in the Company's financial statements included herein) will be
waived. There can be no assurance that such new contract will be entered into,
or, if entered into, that all or substantially all of the shortfall will be
waived.
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 9% 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 39% 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 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
13
<PAGE> 18
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 $589,295 and $247,506 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 $1,248,406 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.
Although the Company's 1996 sales were lower when compared to the 1995
levels, its loss in 1996 was lower since the Company sacrificed 5% of its
revenues at September 30, 1995 to grant promotional rebates to its largest
customer, L.C. Wegard and Company. Since the Company lost this customer in
October, 1995, it granted less than 1% in customer rebates in 1996 which
enhanced its profit margins.
THE TWELVE MONTHS ENDED DECEMBER 31, 1995 AS COMPARED TO THE TWELVE MONTHS ENDED
DECEMBER 31, 1994
Gross revenues for the twelve months ended December 31, 1995 were $8,363,949
as compared to $9,527,497 for the twelve months ended December 31, 1994. The
decrease of 12% is attributable partially to the Company's inability to finance
adequate levels of marketing expenditure to offset customer attrition and
partially to the inability of MCI to provide service under its contract with the
Company during 1995. In addition, in October 1995, the Company lost 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.
The Company anticipates taking steps to increase its customer base and,
consequently, its revenues and market share as follows:
Management plans to resume the active pursuit of new customers in 1996 upon
receipt of the proceeds of its current and future private placements, if
successful, and thus increase its revenues. 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 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 contract with
Guthy-Renker Distribution, Inc., one of the leading infomercial producers and
promoters in the United States, 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 encouraging results. If these results
are sustained, the Company anticipates that nationwide screening will begin
prior to the end of 1996. There can be no assurance 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. LDDI understands that Kaire is one of the fastest growing
multi level marketing companies in the United
14
<PAGE> 19
States with an associate base of over 370,000 individuals. 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 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 has also commenced its entry into the residential market in 1996
through its contract with MCI. Previously, the Company has sold exclusively to
commercial customers. In addition, it may expand its agreement with MCI to
include direct billing services and "LEC" billing whereby the "LEC's" (Local
Exchange Carriers) will bill and collect on behalf of the Company.
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 the customer service and
collections functions.
Gross profit was $2,123,737 and $2,824,813 for the twelve months ended
December, 1995 and 1994, respectively. The gross profit margins for the twelve
months ended December 31, 1995 and 1994 were 25.4% and 29.6%, respectively. The
dollar and percentage decreases are partially attributable to the decrease in
revenues explained above -- discounts granted to the Company are based upon
volume -- and partially to difficulties experienced in obtaining fully accurate
call record information from AT&T to rebill its customers.
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 usage. The new contract signed on September 1, 1995 which supersedes all
previous contracts with AT&T -- encompasses both outbound and inbound service
and is set at a fixed term of four years with a one-year extension. The Company
continues to have a minimum SDN and DNS purchase requirement of $1,200,000 per
quarter for 16 quarters or 20 quarters if the Company extends its contract. The
Company is currently negotiating a new contract with AT&T and expects to receive
more favorable terms and pricing.
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 longdistance,
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 (Local Exchange Companies).
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.
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. No provision for this
credit has been included in the Company's financial statements through December,
1995.
15
<PAGE> 20
Sales and marketing expenses were $519,411 and $1,322,546 for the twelve
months ended December 31, 1995 and 1994 respectively. As a percentage of gross
sales, sales and marketing expenses fell from 13.9 % for the twelve months ended
December 31, 1994 to 6.2 % for the twelve months ended December 31, 1995. Both
the dollar and percentage decrease are attributable to cash constraints
experienced by the Company during 1995. The expenditure for the year ended 1994
also included a non-recurring charge of $176,000 in respect of the writeoff of
an amount receivable from an outside telemarketing agency that was unable to
meet its obligations to the Company. Also contributing to the reduction in sales
and marketing expense is the increased efficiency of the Company's management in
controlling new account acquisition costs and monitoring the performance of
accounts acquired through outbound telemarketing firms. Management plans to
resume its acquisition of accounts upon receipt of funding from its current and
future private placements, if successful. The Company intends to establish its
own in-house telemarketing facility and to increase its direct mail activity. In
addition, the Company has launched a televised marketing program in the third
quarter of 1996 to increase its independent sales force and has 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.
General and administrative expenses were $2,700,451 and $2,554,503 for the
twelve months ended December 31, 1995, and 1994 respectively. As a percentage of
gross sales, general and administrative expenses for the twelve months ended
December 31, 1995 and 1994 were 32.3 % and 26.8% respectively. The principal
elements which contributed to the increase in general and administrative
expenses were costs relating to attempts during the year to raise capital for
the Company and increased costs relating to the maintenance and upgrading of the
Company's internal systems in anticipation of increased levels of sales
activity.
For the period ending December 31, 1995, costs of $407,572 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.
Interest expense for the twelve months ended December 31, 1995 and 1994
relates to accrued interest on indebtedness of the Company in connection with a
note incurred in connection with 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 Company incurred a net loss of $1,874,923 for the year ended December
1995 compared to a net loss of $1,220,717 for the year ended December 1994. The
larger net loss in 1995 is partially attributable to the one-time writeoff of
$407,000 of initial public offering costs which were non-operational in nature.
THE TWELVE MONTHS ENDED DECEMBER 31, 1994 AS COMPARED TO THE TWELVE MONTHS ENDED
DECEMBER 31, 1993
Gross revenues for the twelve months ended December 31, 1994 were $9,527,497
as compared to $5,499,035 for the twelve months ended December 31, 1993. The
increase of 73% is attributable to the introduction by the Company in January of
1994 of sub-contracted telemarketing agencies as an additional means to market
its services. Until the beginning of 1994, over 95% of the Company's billings
were derived from sales made by independent sales representatives.
Gross profit was $2,824,813 and $1,649,674 for the twelve months ended
December, 1994 and 1993, respectively. The gross profit margins for the twelve
months ended December 31, 1994 and 1993 were 29.6% and 30%, respectively. The
dollar increase is related to the increase in revenues as a result of the
introduction of the use of sub-contracted telemarketers in 1994. The decrease in
the profit margin percentage is attributable to the granting by the Company of
promotional credits in 1994 to its largest customer, L.C. Wegard and Company.
These credits were also issued in 1993 but were only granted for the period June
through December thus enhancing the Company's profit margin in 1993.
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 usage. The new contract signed on September 1, 1995 which supersedes all
previous contracts with AT&T -- encompasses both outbound and inbound service
and is set at a fixed term of four years with a one-year extension. The Company
continues to have a minimum SDN and DNS purchase requirement of $1,200,000
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<PAGE> 21
per quarter for 16 quarters or 20 quarters if the Company extends its contract.
The Company is currently negotiating a new contract with AT&T and expects to
receive more favorable terms and pricing.
Sales and marketing expenses were $1,322,546 and $472,473 for the twelve
months ended December 31, 1994 and 1993 respectively. As a percentage of gross
sales, sales and marketing expenses increased from 8.6 % for the twelve months
ended December 31, 1993 to 13.9 % for the twelve months ended December 31, 1994.
Both the dollar and percentage increase is attributable to the introduction by
the Company in 1994 of sub-contracted telemarketing agencies as an additional
means to market its services. The expenditure for the year ended 1994 also
included a non-recurring charge of $176,000 in respect of the writeoff of an
amount receivable from an outside telemarketing agency that was unable to meet
its obligations to the Company.
General and administrative expenses were $2,554,503 and $1,444,151 for the
twelve months ended December 31, 1994, and 1993 respectively. As a percentage of
gross sales, general and administrative expenses for the twelve months ended
December 31, 1994 and 1993 were 26.8 % and 26.2% respectively. The dollar
increase is partially attributable to increased costs relating to the
maintenance and upgrading of the Company's internal systems and partially to
higher personnel and office costs in relation to increased levels of sales
activity in 1994.
For the period ending December 31, 1993, costs of $609,074 were incurred in
relation to the buy out of two former partners of LDDLP of which $500,000 was
for a covenant not to compete, rent and other services and the remaining
$109,074 was for legal fees in connection with the buyout.
Interest expense for the twelve months ended December 31, 1994 relates to
accrued interest on indebtedness of the Company in connection with a note
incurred in connection with 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. Interest
expense in 1993 was incurred as a result of a factoring agreement which was
terminated on September 30, 1993.
The Company incurred a net loss of $1,220,717 for the year ended December
1994 compared to a net loss of $972,364 for the year ended December 1993.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had negative working capital of $3,485,246
compared to negative working capital of $2,180,641 at December 31, 1994. The
Company experienced cash constraints throughout 1995 as a result of the
abandonment of its plans to effect an initial public offering. The Company has
not experienced the growth in revenues and profits that it had anticipated at
the beginning of 1995 and has thus taken steps to improve its liquidity through
private placements of its common stock in the last quarter of 1995 and
throughout 1996. Due to cash constraints in the first three quarters of 1995,
management has been unable to undertake an active pursuit of new accounts from
outbound telemarketing firms or from direct mail, as a result of which revenues
progressively declined through customer attrition.
At September 30, 1996, the Company had negative working capital of $956,234
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
cleared. In addition, at October 31, 1996, another $850,000 will be converted to
equity.
At year end 1996, it is anticipated that the balance sheet will be free of
most of the debt which it carried at September 30, 1995. With the proceeds of
the last private placement, management has resumed its aggressive marketing
activities and plans to increase revenues, streamline operating costs, and bring
the Company into a profitable position in 1997, although no assurance can be
given that it will be successful in implementing these plans.
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<PAGE> 22
BUSINESS
Long Distance Direct Holdings, Inc., which was formerly known as Golden Ark
Inc., was inactive until October 6, 1995, when it acquired all of the
outstanding stock of Long Distance Direct, Inc. ("LDDI") and LDDI became a
wholly owned subsidiary of the Company. LDDI is a New York corporation which was
formed in 1991 for the purpose of acting as the general partner of Long Distance
Direct L.P. ("LDDLP" or the "Partnership"), a New York limited partnership
formed at the same time for the purpose of carrying on the business of a
non-facilities-based reseller of long-distance telephone service. In October
1995, LDDI acquired all of the partnership interests of LDDLP in exchange for
shares of LDDI common stock. After its acquisition of LDDI, Golden Ark, Inc.
changed its name to Long Distance Direct Holdings, Inc. ("LDD Holdings").
References herein to the Company or to LDDI shall mean LDD Holdings and LDDI
collectively unless the context otherwise requires. The financial statements
included elsewhere herein relate to the business which was known as LDDLP prior
to the acquisition of LDDLP by LDDI and the subsequent acquisition of LDDI by
LDD Holdings.
The Company's offices are located at One Blue Hill Plaza, Pearl River, New
York 10965. The Company's telephone number is 914-620-0765.
GENERAL
Long Distance Direct Holdings, Inc. 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 customers. All of the services
sold by the Company are currently provided either by AT&T or by MCI. Management
believes that AT&T and MCI's long-distance service remains the preferred option
of the majority of telephone users. According to a 1995 FCC report, AT&T and MCI
accounted for approximately 56% and 17% respectively of total domestic
long-distance revenue for calendar year 1994. The Company signs up customers and
connects or provisions them onto the network of AT&T or MCI, which provide the
actual transmission service. The Company has agreements with AT&T and MCI to
purchase a minimum annual level of long distance telephone service at discounted
bulk rates which are lower than rates LDDI's customers, with modest call volume,
would be able to obtain for themselves. The Company does not own or lease any
telephone equipment or participate in the call completion process. Provision of
the service to the customer requires no equipment installation or modification
on the customer's premises; all action to provide the service takes place within
the local and inter-exchange carriers. The customer retains his existing
telephone numbers and incurs no expense in making the decision to switch to the
services of the Company.
MARKETING AND SALES
The Company obtains customer orders through three separate methods typically
employed by sellers and resellers of telephone services: field sales,
telemarketing, and direct mail. Until the beginning of 1994, over 95% of the
Company's billings related to field sales, with the balance coming from
customers who had responded to the Company's direct mail programs. In January
1994, however, the Company commenced a program of outbound telemarketing, and in
June 1994 it increased the volume of its direct mail activity. Currently,
approximately 29% of the Company's billings are derived from field sales using a
system of self-employed independent sales representatives, who are contractually
restricted from performing such services for competitors of LDDI, approximately
64% are derived from telemarketing using a number of outside telemarketing
agencies specialized in the sale of telephone services on a non-exclusive basis,
and the remainder are derived from direct mail programs. The Company intends to
increase its direct mail marketing efforts and to establish its own in-house
telemarketing capability. The Company has also test marketed a televised
marketing program during the fourth quarter of 1996 to attract additional
participants to its independent sales force and intends to roll out such program
in the first quarter of 1997. There can be no assurance, however, that such roll
out will be successful or that independent sales agents recruited thereby will
significantly increase the level of the Company's billings.
The Company's field sales force is based on a system of independent sales
representatives, all of whom are self-employed. All sales representatives are
compensated on a commission-only basis. Commissions are payable to
representatives based on actual monies collected by LDDI which can be attributed
to specific customers. LDDI's current active sales force numbers about 20
individuals. Management is considering a number of new methods of recruiting
field sales representatives including the televised marketing programs referred
to above. LDDI has prepared a comprehensive manual for use by sales
representatives as a training tool for reference on the job.
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<PAGE> 23
LDDI also generates sales through direct mail programs, backed up by a small
in-house telemarketing department. Until June 1994, this activity comprised
exclusively the sending of direct mail packages to small businesses, inviting
them to telephone LDDI's own 800-number, and incorporating a special discount
offer, with conversions of inquiries being carried out by an inbound
telemarketing team. In June 1994, the Company commenced another direct mail
approach requiring customers to complete and send in a written sales order, with
follow-up information being obtained by the Company's in-house telemarketing
department. The results of the various programs that have been carried out to
date have generated sufficient response to lead management to seek to expand the
Company's direct mail activity.
In January, 1994, in order to market its services to small business users,
the Company contracted with a telemarketing company specializing in the
solicitation of orders for long-distance telephone services on behalf of
resellers. The first billings attributable to customers introduced by this
company were generated in February 1994. Since such date, the Company contracted
with a number of additional telemarketing agencies, similarly specialized in the
sale of telephone services, to market its services. The telemarketing agencies
are compensated principally by the payment of an up front fee based on
successfully provisioned orders and average per customer billing levels.
Payments on account are made on delivery of a validated order to the Company
with ongoing reconciliation and adjustment in light of results achieved. The
Company now intends to supplement the efforts of the outside agencies by
establishing an in-house outbound telemarketing department.
In November, 1996, the Company signed a mutually exclusive agreement with
Kaire International, a multi-level marketing company, to sell telephone service
to that company's 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.
TELEVISED MARKETING PROGRAM
Historically, the Company has obtained customer orders through three
separate methods typically employed by sellers and resellers of telephone
services: field sales, telemarketing and direct mail. At the outset, the Company
employed the field sales method exclusively. Although this method was
successful, and generated sales characterized by lower bad debt and customer
attrition levels than, for example, telemarketing or direct mail, it had as
principal drawbacks the facts that (i) the recruitment of independent sales
representatives proved a time-consuming and expensive procedure and (ii) the
Company, in common with other resellers of telephone services, experienced a
high level of turnover amongst its representatives.
In order to procure the advantages of sales generated by independent
representatives without the drawback of high turnover of personnel, the Company
conceived the idea of recruiting independent representatives in large numbers
through paid television programming, and to mitigate the cost of recruitment by
requiring the new representatives to pay a modest sum to purchase the right to
become independent sales representatives of the Company. The method chosen to
achieve this objective was the infomercial, a paid television program used
extensively by the direct marketing industry.
To this end, the Company, through its wholly-owned subsidiary, Long Distance
Direct Marketing Inc, entered into a contract in May, 1996, with Guthy-Renker
Distribution Inc., one of the leading infomercial producers and promoters in the
United States, 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 net profit, if any, generated by the infomercial, comprising the
revenues from the sale of "sales packages" to members of the public, less the
costs of production, media and fulfillment, is to be split evenly between
Guthy-Renker and the Company. All billings of telephone service generated for
the Company by representatives recruited through the infomercial are to accrue
to the sole benefit of the Company, subject to the payment to Guthy-Renker of a
commission of 2% on cash collected from such billings, net of taxes.
Test marketing of the infomercial took place in late September and October,
1996 and achieved a level of success such that the Company and Guthy-Renker have
decided to roll out the program in the first quarter of 1997. There can be no
assurance that the roll-out will also be successful, nor can there be any
assurance that representatives recruited by this method will generate
significant levels of billings of telephone service for the Company.
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<PAGE> 24
MULTI-LEVEL MARKETING
In November, 1996, the Company signed an 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. LDDI
understands that Kaire, which is recognized as the leading anti-oxidant product
company, and which has taken the decision to expand its anti-oxidant, health and
body Kaire lines to include telecommunications, is one of the fastest growing
multi-level marketing companies in the United States with a registered associate
base of over 370,000 individuals.
The agreement with Kaire, which is mutually exclusive and which in its
initial period runs to December 31, 1997, provides that LDDI will supply a full
range of telecommunications services on the AT&T and MCI networks which will be
co-extensive with the services offered by AT&T and MCI. In addition to providing
telephone service, LDDI will work with Kaire to develop suitable marketing
materials as well as to provide training for all Kaire associates. LDDI will
make available all training aids for Kaire at a mutually agreeable price.
There can be no assurance that Kaire will be successful in selling LDDI's
service to its associates or that those associates themselves will be successful
in selling such service to the public at large.
SERVICES PROVIDED
AT&T
The Company currently resells to its customers AT&T outbound and inbound
long-distance telephone service, including teleconferencing, cellular
long-distance and calling card services. Outbound service had, until September
1994, been provided exclusively under the Company's Software Design Network
("SDN") agreement with AT&T, but with the signing of a new contract tariff with
AT&T, effective September 7, 1994, now superseded by a new contract tariff with
AT&T, effective September 1, 1995, such service is now also provided on
Distributed Network Service ("DNS"). The Company's pricing to its customers for
the two services is identical, but DNS can be provisioned considerably faster
than SDN. Inbound service is now provided under the same contract tariff,
effective September 1, 1995, as the outbound service. The Company is currently
negotiating a new contract tariff with AT&T to include better pricing and to
supersede the existing contract. There can be no assurance, however, that such
negotiations will be successful.
Customers may also request a calling card. This allows use of the telephone
system either through off network dialing using an 800-number access or through
the traditional "zero plus" access method. The calling cards have been designed
to the Company's own specifications and are issued subject to the condition that
liability for usage thereunder remains that of the end-user unless and until
loss is reported to LDDI. In turn, LDDI has an on-line connection with AT&T's
Network Remote Access Monitoring System. Once LDDI has reported a loss or theft
to AT&T, LDDI has no further liability for usage on the lost or stolen card. The
Company is able to set and vary thresholds and usage parameters that have been
designed by AT&T to facilitate early detection of calling card theft or abuse.
MCI
Since March, 1996 and pursuant to contracts signed in August, 1995 and
March, 1996, the Company has also commenced the resale of MCI outbound and
inbound long-distance telephone service, including teleconferencing, cellular
long-distance, calling card and debit card services. Under the calling card
arrangements, customers may access the Company's network either through an
800-number or through "zero Plus" dialing. In the case of calling cards under
the MCI contract, MCI retains full liability for fraudulent use. Provisioning of
customers onto the MCI network is done directly by the Company in conjunction
with the Local Exchange Carriers.
Whereas, under its arrangements with AT&T, the Company is permitted to sell
only to commercial customers, the MCI contract permits resale to both the
commercial and the residential markets. Furthermore, the pricing of the MCI
contract makes residential sale a realistic and financially attractive
proposition. Finally, the Company is able in respect of the resale of MCI
service to offer its customers the alternative of billing through their Local
Exchange Carrier. This is believed to be important in relation to the
residential market, which is considered to be less willing than the commercial
market to receive separate monthly long distance bills.
Neither the outbound service nor the inbound service provided on the AT&T or
MCI networks requires any equipment installation or modification on the
customer's premises; all action to provide the service takes place within the
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<PAGE> 25
local and inter-exchange carriers. The customer retains his existing telephone
numbers and incurs no expense in making the decision to switch to the Company's
service. The Company provides its customers with services at a price which
management believes, because of the average customer's calling volume, would
generally be unavailable to such customers.
The Company's administrative and accounting systems are structured to
address the two principal areas of activity in the Company's business and their
financial and operational interface: the sales division and the customer account
base. With three separate sources of new orders, and a customer base that more
than doubled in 1994, management believes that the continued development and
structural integrity of the business depends on fundamentally sound
administrative and operating systems.
In recognition of this, the Company's management from the outset established
a computerized database under the direction of an outside computer consultant.
This database records and tracks all new sales representatives, together with
their reporting hierarchies, to enable monthly commission statements to be
driven from data supplied electronically from AT&T and MCI, and to respond to
all personnel questions. Additionally, the database records and implements all
activity from the outside telemarketing agencies, from order entry through
submission of orders to AT&T or the Local Exchange Carriers (in the case of MCI
services) to production of the data needed to effect monthly accounting
reconciliations with those agencies. The database tracks and implements order
entry and analyzes the performance of the various direct mail programs. It also
records all customers, together with their sales representative or other
introductory source attribution, and allows both direct electronic interface
with the Company's external billing agency for billing and collection purposes
and for internal interrogation for customer service purposes.
To support this function, LDDI has established computer-based operating
procedures that track each new customer through its provisioning sequence with
AT&T and the Local Exchange Carriers (where MCI service is concerned), enabling
LDDI to respond systematically and promptly to the reports generated by AT&T and
the Local Exchange Carriers on provisioning progress. In addition, LDDI operates
a customer service function as well as a dedicated credit control function.
Insofar as the Company is marketing services that are available from a wide
range of alternative suppliers, the high level of customer service that it can
offer is an area in which management believes the Company can outperform its
competitors. In this regard, as evidence of its responsive administrative
systems, the Company has a policy of calling its customers on a rotating basis
to establish the level of their satisfaction with the Company's service and to
identify and attend to any additional needs that they might have.
Through March, 1996, the Company's billing was performed on its behalf by
American College and University Systems ("ACUS"), a strategic business unit of
AT&T that provides resellers with a customized long-distance billing service
known as the "AT&T Bill Manager Service." The Company established its own
tariffed pricing elements and used the ACUS service to bill end-users at its
designated tariffed rates.
From monthly billing tapes and feeds supplied directly by AT&T, ACUS
produced and delivered invoices to all end-users in the Company's name, and
end-users remit payments directly to the Company through a "lock box" set up by
the Company. By using the services of ACUS, the Company was able to avoid the
labor-intensive administration of performing the billing function itself during
a period of strong account growth while retaining control over its pricing,
billing and collection policies. The Company negotiated a release without
penalty from its contract with ACUS, capable of implementation at any time after
July 1995, in order to be able to use the services of a billing company that was
both less expensive and better interfaced with the Company's computer systems.
To that effect, the Company entered into an agreement with Digital
Communications of America Inc. ("DCA") under which DCA provides billing services
to the Company in respect of both AT&T and MCI service. The first DCA bills were
generated in April, 1996. The Company has also signed an agreement with MCI
which allows the Local Exchange Carrier to bill and collect on behalf of the
Company. The Company may also in the future consider employing its own billing
personnel if and when it believes that the financial benefits of so doing will
outweigh the practical difficulties involved.
The Company's overall operational strategy is based on management's belief
that the sales function is highly dependent upon the strongest possible
administrative support. The lack of such support would result in a failure to
motivate and retain sales people or respond to the needs of the outside
telemarketing agencies, customer dissatisfaction, and the loss of revenues
through inefficiencies and inattention. Management believes that the Company's
attention to this area of its operations distinguishes it from much of its
competition.
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<PAGE> 26
ARRANGEMENTS WITH PROVIDERS
AT&T
The company commenced operations under Part II of AT&T's SDN tariff, a
generic tariff relating to outbound long-distance service only, and available to
both end-users and resellers satisfying AT&T's requirements both for usage
commitment and cash deposit for security purposes. Under this tariff, AT&T's
customers, which included the Company, receive a discount from published tariff
rates in return for the commitment and deposit referred to above. In December,
1992, the Company entered into a new five-year agreement with AT&T under Part VI
of the SDN tariff pursuant to which it increased its annual usage commitment in
return for the higher discounts available thereunder.
Effective September 7, 1994, the Company entered into an individually
negotiated contract tariff with AT&T for outbound long-distance service. This
contract tariff, which superseded the Company's arrangements under Part VI of
the SDN tariff, was the subject of an individual filing by AT&T with the FCC,
and had a three year term. Under this contract tariff AT&T agreed to supply the
Company, and the Company acquired the right to resell, both SDN and DNS service.
Effective September 1, 1995, the Company entered into a new
individually-negotiated contract for a fixed term of four years with a one year
extension at the Company's option. This tariff, which supersedes all the
Company's other arrangements with AT&T embraces both outbound and inbound
long-distance service. Under the contract tariff, the Company has accepted a
minimum purchase requirement under which it is obligated to pay such minimum
regardless of whether its usage reaches such levels. The minimum purchase
requirement is a constant amount throughout the duration of the contract tariff.
The minimum quarterly purchase requirement in respect of outbound service, SDN
and DNS combined, for each of the sixteen quarters of the contract tariff, and
for the four subsequent quarters if the Company elects to exercise its extension
option, is $1,200,000 per quarter. Also included within the contract tariff is a
requirement that a specified minimum proportion of each quarter's usage relate
to "new business", i.e. currently non AT&T business.
Until October 1992, the Company offered only outbound service to its
customers: in that month the Company started to offer its customers AT&T inbound
800-number service through a third-party intermediary provider. However, in
November 1993, the Company ended its arrangement with the third-party provider
and contracted directly with AT&T under CSTP II, a generic tariff, to enable it
to resell inbound 800-number service. In April 1994, the Company signed a
three-year individually-negotiated contract tariff with AT&T, effective May 1,
1994, for the supply of 800-number inbound telephone service with volume
discounts in excess of those available under CSTP II, in return for a minimum
annual purchase requirement of $1,200,000. AT&T has advised the Company that
this contract tariff was the first individually-negotiated contract tariff ever
signed for inbound 800 service.
Effective September 1, 1995, this contract tariff was superseded by the new
individually-negotiated contract tariff described above in relation to the
Company's outbound service. Under this tariff, which embraces both outbound and
inbound long-distance service, the Company continues to have a minimum annual
purchase requirement of $1,200,000 for inbound usage. Also included in the
contract tariff is a requirement that a specified minimum proportion of each
quarter's usage relate to "new business" as in respect of the outbound usage.
The Company is currently negotiating a new contract tariff with AT&T under
which new pricing and new minimum purchase requirements are to be established.
AT&T has written to the Company indicating that in consideration of the Company
entering into a new contract, the entire cumulative shortfall charged under the
existing contract (approximately $2.3 million as of September 30, 1996, none of
which has been reflected in the Company's financial statements included herein)
will be waived. There can be no assurance that such new contract will be entered
into, or, if entered into, that all or substantially all of the shortfall will
be waived.
MCI
On August 4, 1995, 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. This
agreement was subject to an eight (8) month ramp period followed by a thirty-six
(36) month service period. In March, 1996, the Company signed another
individually negotiated contract with MCI which superseded the contract of
August, 1995. This contract, which requires
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<PAGE> 27
higher minimum purchase levels than the prior agreements but affords better
prices, is subject to a twelve (12) month ramp period followed by a thirty (30)
month service period.
During the first five (5) 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 fifteen percent (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.
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 $1,000,000 to be applied
against its initial usage under the March, 1996 contract.
RECENT DEVELOPMENTS
On September 24, 1996, AT&T introduced a single-rate calling plan for
domestic residential long-distance calls, under which it would charge a flat
rate of fifteen cents ($.15) per minute. The Company's current business involves
almost exclusively the resale of AT&T and MCI telephone service to commercial
customers. The AT&T introduction has no direct effect on the Company's current
commercial business or any expansion of its service to commercial customers, and
based on industry experience the Company does not believe that AT&T's
introduction of a new residential plan suggests an imminent introduction of a
similar commercial plan.
The Company has recently entered the residential market through the resale
of MCI telephone service to residential customers. Since the Company neither
resells nor has any plans or arrangements to resell AT&T service to residential
customers, it considers the potential impact upon the Company of the AT&T
introduction to be limited to the pricing environment in which the Company
markets residential telephone service.
The AT&T single-rate calling plan is described by AT&T as designed to
simplify long distance pricing and ease consumer confusion. It is not described
by AT&T as a rate reduction and, based on its knowledge of AT&T's existing rate
plans, the Company does not consider the new AT&T plan to embody a rate
reduction. The Company believes that it is offering and will be able to continue
to offer residential telephone service at prices significantly lower than AT&T's
proposed flat rate and that the introduction of AT&T's single rate calling plan
will not have any material adverse affect on the business of the Company or on
the Company's marketing plans for residential service.
No assurances, however, can be given that either the Company will remain
able to offer residential telephone service at prices significantly lower than
AT&T and certain of the Company's other major competitors or that AT&T or such
other major competitors will not introduce new commercial telephone service
plans.
CUSTOMERS
At September 30, 1996, the Company had over 10,000 active billing customers.
Customers generated by field sales activity are predominately based on the
Eastern seaboard; those generated either by telemarketing or by direct mail have
no particular geographic bias. Through December 31, 1995, the Company's customer
base was exclusively commercial and contained no residential element. It covers
almost every generic field of business activity in the United States. In the
second quarter of 1996, the Company began marketing to residential customers. No
single current customer represented more than 3% of billings for the year ended
December 31, 1995 or for the nine months ended September 30, 1996.
23
<PAGE> 28
COMPETITION
The long-distance telecommunications market is highly competitive. The
Company does not believe it is a significant factor in the industry. The
principal competitive factors affecting the Company's market share are pricing,
customer service and value-added services such as customized billing,
teleconferencing, calling cards and prepaid calling cards. The Company's ability
to compete effectively will depend upon its continued ability to maintain high
quality, market-driven services at prices generally equal to or below those
charged by its competitors. The long-distance carriers which sell in competition
with the Company include MCI, Sprint, and AT&T itself. Resellers which sell in
competition with the Company include Long Distance Discount Services, LCI
International, Inc., U.S.Tel Inc., Excel Communications, Protel Communications
Corp., Equalnet, Midcom, Tel-Save and Pacific Coin. Of the resellers, some are
switchless and some have their own switches and leased lines: some sell services
of both AT&T and other long-distance carriers. Among the resellers, management
believes that LDDI is one of only a few to market AT&T long distance services
under a direct contractual relationship with AT&T. Management has also been
informed that the Company is one of only a limited number of resellers to be
granted a resale contract by MCI.
Price competition in the long-distance telecommunications industry has
increased in recent years due to the entry of many companies into the market.
Management's policy for gaining and retaining customers is based on four
principal components: first, marketing only premier quality long-distance
services, such as those provided by AT&T and MCI; second, offering rates for
telephone usage that are at least comparable with, and in many cases less
expensive than, those generally available to its target market; third,
developing and maintaining responsive information systems that enable customer
service to be carried out on a timely and efficient basis; and fourth, staff
training programs that teach personnel how to handle customer concerns both
efficiently and courteously.
INDUSTRY BACKGROUND
On January 1, 1984, AT&T's divestiture of the Bell System went into effect.
As a result of the decree ordering such divestiture by AT&T (the "AT&T
Divestiture Decree"), AT&T was forced to divest its 22 Bell Operating Companies
("BOCs"), which were reorganized under seven Regional Bell Operating Companies
("RBOCs"), such as Pacific Telesis and US West, Inc. The RBOCs own and are
responsible for operations of the BOCs in each of their regions. The BOCs, as
well as other independent companies which provide local telephone service, are
characterized as local exchange carriers. The local exchange carriers are
responsible for providing dial tone, local lines and billing for local service
as well as local access for long-distance traffic.
As an additional part of the AT&T Divestiture Decree, the United States was
divided into approximately 200 Local Access and Transport Areas ("LATAs"). AT&T
was given the right to compete for inter-LATA long-distance business, but was
prohibited from providing intra-LATA long-distance and local service. The BOCs
and other local exchange carriers were permitted to compete for intra-LATA
long-distance and local service, but were prohibited from entering the
inter-LATA long-distance market in which the Company competes, although
legislation has since been enacted permitting the BOCs and other local exchange
carriers to compete in the long-distance market and allowing AT&T and other
inter-exchange carriers to compete in the local markets.
The AT&T Divestiture Decree also required the local exchange carriers to
provide all inter-exchange carriers with access to local telephone exchange
facilities that are "equal in type, quality and price" to that provided to AT&T.
In addition, the local exchange carriers were required to conduct a subscription
process allowing consumers to select their long distance carrier. This
development, know as "equal access," enabled consumers to complete calls using
their selected long-distance carrier by simply dialing "1" plus the area code
and number. Prior to equal access, consumers using an inter-exchange carrier
other than AT&T had to dial a local number, then an access code, then the area
code and number of the call destination to complete a call. With equal access,
all inter-LATA traffic is carried by the local exchange carriers. The AT&T
Divestiture Decree and the implementation of equal access constitute the
fundamental regulatory developments that allow inter-exchange carriers other
than AT&T to enter and compete in the long-distance telecommunications market.
Since the AT&T Divestiture Decree, the long-distance industry has
experienced rapid technological development. One significant technological
change was the advent of digital transmission technology, which represented an
improvement over analog technology. Because the BOCs and many local exchange
carriers converted rapidly to digital switches, digital technology was necessary
for inter-exchange carriers to connect to the local exchange carriers for equal
access.
24
<PAGE> 29
Accompanying the movement toward digital switching was the rapid
development and implementation of fiber optic circuitry, which also requires
digital technology. While AT&T had once been the only source of high quality
transmission facilities, several other companies, including MCI and Sprint,
entered the business of building transmission facilities, using primarily fiber
optic circuits.
Following the AT&T Divestiture Decree, and the birth of competing
long-distance carriers, the inter-exchange carriers developed the concept of the
virtual private network ("VPN") in order to shift traffic onto the public
network from large, private networks transmitting on dedicated facilities. VPNs
are aimed at large organizations that have many locations and that spend at
least $50,000 per month on long-distance calling. The Software Defined Network
("SDN") is AT&T's most sophisticated form of VPN, utilizing its latest fiber
optic facilities and offering significant technical and administrative benefits
to major long-distance users.
In the late 1980's resellers perceived an opportunity to package, aggregate
and market AT&T's premier service at rates lower than small businesses could
expect to obtain directly from any other carrier, with billing carried out
directly by AT&T. The Company believes that this event created the switchless
reseller industry.
Between October 1989 and March 1990 many companies entered the market of SDN
resale, recruiting field sales forces to market to small and medium-sized
businesses. Whereas AT&T is generally believed to have found itself involved
unintentionally in resale at the outset, in 1992 it introduced Distributed
Network Service ("DNS") specifically as a resale product. In 1994, MCI also
decided to make its network available to resellers such as the Company.
Following negotiations which commenced in February, 1995 the company signed an
agreement effective September 1, 1995 to resell MCI's services. That agreement
was superseded by an upgraded contract in March, 1996. Provision of MCI service
by the Company commenced in March, 1996.
Resellers are classified into two categories, facilities-based and
non-facilities based. A facilities-based carrier utilizes lines owned by third
parties but operates its own switching equipment and usually bills its own
customers directly. A non-facilities-based carrier does not own or lease any
telephone equipment or participate in any portion of the call completion
process. For billing purposes it receives magnetic tapes of its customers'
long-distance usage from its service provider and uses this information as a
basis for billing. Facilities-based carriers have both an investment in the
network needed to complete the call process and a geographic concentration,
whereas non-facilities-based carriers have neither such investment nor any
geographic constraint.
As a result of the changes brought about by the AT&T Divestiture Decree,
secondary inter-exchange carriers, including the Company, generally provide
long-distance telephone services at a significantly lower cost than the
comparable services offered directly by AT&T, MCI and Sprint. The Company's
success will depend on its continuing ability to provide comparable services at
prices equal to or lower than its competitors in the future.
REGULATION
Although in the past the FCC had extensively regulated interstate
communications, the trend during the 1980's was toward lessened regulation.
Non-dominant inter-exchange carriers such as the Company were not required by
the FCC to maintain a certificate of public convenience and necessity or to file
tariffs with the FCC other than with respect to international calls and except
for informational tariffs, which were required to be filed with respect to
operator services. Over this period of time, the FCC had retained general
regulatory jurisdiction over the sale of interstate telecommunications services
by inter-exchange carriers, including the requirement that calls be charged on a
nondiscriminatory, just and reasonable basis.
Tariffs. On November 13, 1992, the United States Court of Appeals for the
District of Columbia Circuit (the "Court of Appeals") ruled that the FCC lacks
authority to waive the requirement that non dominant inter-exchange carriers
file tariffs. The Court of Appeals reversed the FCC's "forbearance policy,"
which had excused inter-exchange carriers from tariff filing requirements. The
FCC had also begun a new proceeding to promulgate rules for non-dominant
inter-exchange carriers' tariff filings in a streamlined manner so as to give
substantial flexibility to the Company and similarly situated competitors. The
FCC has enacted certain rules and is expected to enact others regarding tariff
filing requirements for non dominant carriers. The FCC has issued a statement
publicly announcing its intention not to enforce the strict tariff format and
content rules against non dominant inter-exchange carriers in the interim. In
July 1993, a Federal District Court (the
25
<PAGE> 30
"District Court") granted AT&T's request for a preliminary injunction
against MCI for failure to file customer-specific tariffs. MCI had relied upon
its earlier streamlined tariff filing, which set forth ranges of rates.
As a consequence of the Court of Appeals decision and the District Court's
ruling, the Company could be subject to complaints seeking damages, assessment
of monetary forfeitures and/or injunctive relief filed by any party claiming to
be injured by the Company's failure to file tariffs. The Court of Appeals
decision suggests that reliance upon the forbearance policy may not excuse past
failure to file tariffs, because the Court ruled that the forbearance policy
itself was unlawful. The Court of Appeals does not, however, require the FCC to
assess forfeitures or damages or take any other specific enforcement action
against those carriers who relied upon its policy, although it does direct the
FCC to give further consideration to the issue of damages in a private suit
between AT&T and MCI. In February 1993, AT&T filed lawsuits in Federal court
against MCI, Sprint and Williams Telecommunications Group, Inc. ("WilTel") for
alleged failure to file proper tariffs and seeking lost profits on a denied loss
of sales of $1 billion. WilTel responded by filing a Federal court complaint
against AT&T for illegal pricing activity, and similar complaints filed by MCI
and Sprint have been pending at the FCC for several years. Moreover, the
implications for other long-distance carriers of the District Court's
preliminary injunction against MCI may be substantial unless and until the FCC
acts. There is a possibility that the aftermath of the ultimate consequences of
the Court's ruling may affect the Company's pricing practices. AT&T has also
indicated that it may institute similar suits against other inter-exchange
carriers. MCI has filed a motion for reconsideration of the Court's preliminary
injunction and has also filed a petition for declaratory ruling with the FCC to
declare that it and other inter-exchange carriers cannot be held liable for good
faith reliance on the FCC's now reversed forbearance policy. At this time, the
Company cannot predict the likelihood of the filing of complaints against it or
potential liability, if any.
Potential Increased Competition. In 1984, pursuant to the AT&T Divestiture
Decree, AT&T divested its 22 wholly owned BOCs. In 1987, as part of the
triennial review of the AT&T Divestiture Decree, the U.S. District Court for the
District of Columbia denied the BOCs petition to enter, among other things, the
inter-LATA long-distance telecommunications business. The District Court's
ruling was appealed to the Court of Appeals, which, in 1990, affirmed the
District Court's decision to retain the inter-LATA prohibition for the BOCs.
Recent legislation passed in Congress now permits the BOCs to provide inter-LATA
service, subject to the provisions outlined in Recent Legislation below. As
indicated below, the Company and all other providers of inter-LATA service may
now expect to face substantial additional competition. This legislation follows
the relaxing by the FCC of its regulatory requirement applicable to foreign
controlled inter-exchange carriers such that these firms and others that may
enter the market in the future will have greater flexibility to compete in
international routes.
Regulation of AT&T. Currently, the Company and the inter-exchange carriers
with which it competes are subject to less regulation and have greater pricing
flexibility than AT&T. However, the difference in the level of regulation
between AT&T and its competitors has recently been narrowed. The general trend
of the FCC is to treat AT&T interexchange business service as competitive and
lessen FCC reviews of the rates AT&T charges for many of its business services.
In addition, the FCC has adopted "further streamlined" regulation for many of
AT&T's domestic business services, which effectively removes various controls
under existing regulations governing AT&T's pricing flexibility. The FCC also
allows AT&T to bundle individualized packages of integrated services to
specific, high-volume customers at negotiated prices. The Court of Appeals
recently held that these so-called Tariff 12 offerings are lawful under the
Federal Communications Act. The new rules allowing the further streamlining of
AT&T's regulation are the subject of judicial appeals pending before the Court
of Appeals. The outcome of these appellate proceedings is at this time
uncertain. Management of the Company does not believe that the implementation by
the FCC of the further streamlined rules would have a material adverse effect on
its business or operations. However, should the FCC affirm further streamlined
regulation with respect to a number of AT&T's domestic business services, AT&T
can be expected to offer and price its business services more aggressively,
which in turn, may affect the Company's pricing policies and gross margins.
Recent Legislation. Under the Telecommunications Act of 1996, which became
law on February 8, 1996, many restrictions were abolished that acted as entry
barriers in telecommunications markets. Of greatest significance to the Company,
this legislation eliminates the restrictions imposed by the AT&T consent decree
on the provision by the BOCs of long distance services. However, the entry of a
BOC into the long-distance market will only be permitted if it has satisfied the
FCC and the Justice department that it has satisfactorily opened its local
exchange market to competitors such as the Company. The process of entry by the
BOCs into the long distance market will take not less than two years to
complete. Although the Company intends to take advantage of the recent
legislation by seeking to resell local telephone service, there
26
<PAGE> 31
can be no assurance that it will be successful in so doing or that the entry of
the BOCs into the long distance market will not damage the Company's business
and financial position.
State Regulation. The Company's intrastate long-distance telecommunications
operations are subject to various state laws and regulations, including, in many
jurisdictions, certification requirements. Generally, the Company must obtain
and maintain certificates of public convenience and necessity from regulatory
authorities in most states in which it offers intrastate long distance services.
Some state regulatory authorities also require carriers to file tariffs which
set forth their rates and conditions of service. The Company has obtained
certificates, and filed tariffs, to provide service in a majority of the states
where it conducts business. Some states prohibit inter-exchange carriers from
providing intrastate service (calls both originating and terminating in the same
state) or restrict or condition the offering of intrastate or intra-LATA
long-distance service by the Company and other inter-exchange carriers. Those
states that do permit the offering of intrastate or intra-LATA service by
inter-exchange carriers generally require that end users desiring to access
these services dial special access codes which put the Company at a disadvantage
vis-a-vis local exchange carrier intrastate and intra-LATA toll service, which
generally requires no similar access code. The Company historically has not
experienced significant problems in its dealings with state regulatory
authorities. Changes in regulatory requirements, however, could result in
changes in the manner in which the company conducts its operation. The Company
may also incur the expense of legal fees and related costs in order to comply
with such changes in regulatory requirements. The Company plans to obtain the
required certification in each state to provide local service.
EMPLOYEES
At September 30, 1996, the Company had 27 employees, including the directors
and executive officers, of whom 23 are full time and 4 are part-time. Of these
27 employees, 7 are responsible for order entry and customer service, 14 are
responsible for accounting and credit control, 3 are responsible for marketing
support, and 3 are responsible for general management and administration. If the
Company is successful in its proposed marketing programs, management envisages
that there will be a need for a substantial increase in the number of its
employees.
In addition to its employees, the Company has a total of approximately 175
self-employed independent sales representatives who are either currently active
on the Company's behalf or who have introduced customers to the Company which
are still using the Company's network.
PROPERTIES
The Company operates out of an 8,200 square foot office at Blue Hill Plaza,
Pearl River, NY, a modern office facility. The space currently occupied by the
Company is leased under a lease expiring in March, 1998 with annual rent of
$148,000. The Company is currently renegotiating the terms of this lease as a
result of a change in ownership of the property. It is anticipated that the new
lease will provide additional space to accommodate the Company's planned
expansion as well as for reconstruction of the existing office space.
LEGAL PROCEEDINGS
The State of New York Department of Taxation and Finance has filed two
separate warrants against the Company evidencing judgment liens for uncontested
tax liabilities. One such warrant evidences an amount, including penalty and
interest, of $10,449.21. The other warrant evidences an amount, including
penalties and interest, of $5,238.61. The Company negotiated the payment of
these liabilities with the Department with monthly payments being made over a 24
month period ending July 1997, until which time the judgment liens will remain
in effect.
On September 19, 1996, the Company, Steven Lampert, Michael Preston, LDDI
and LDDLP entered into an agreement (the "Settlement Agreement") with Michael G.
Miller, Jeffrey L. Schwartz and JAMI Marketing Services, Inc. (the "Sellers"),
to settle pending litigation (the "Litigation") related to a Buy Out Agreement
among the parties dated April 6, 1993. In accordance with the terms of the
Settlement Agreement, the Company paid Sellers $500,000 in settlement of the
Litigation and as full satisfaction of all remaining obligations under the Buy
Out Agreement; the parties signed and delivered mutual general releases; and the
Litigation was dismissed with prejudice. See "Certain Transactions -- Buy Out
Agreement."
27
<PAGE> 32
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth the names, ages and titles of the persons who are
the directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME Age Position
- ------------------------------------------------------------------
<S> <C> <C>
Steven L. Lampert 47 President Chief Executive Officer and
Chairman of the Board
Michael D. Preston 50 Chief Financial Officer and Vice
President -- Finance and Director
Clair Alpert 53 Vice President -- Administration
Lori Colin 38 Controller
Andrea Grossman 32 Vice President -- Marketing
Rowland W. Day II 41 Director
Julian Levy 32 Director
Conrad J. Morris 64 Director
</TABLE>
Mr. Lampert is a founder of the Company and has been the Chief Executive
Officer since January 1994. He has served as President of the Company since it
commenced operations in December 1991. Prior to founding the Company, Mr.
Lampert served as President of Comtec, Inc., a New York-based telecommunications
corporation, from November 1985 through November 1991. Prior to 1985, Mr.
Lampert served as director of telecommunications for NBC and for Corning Labs
(formerly Metpath). Mr. Lampert has served as a director of the Company since
December 1991.
Mr. Preston is a founder of the Company and has been the Vice President --
Finance and Chief Financial Officer of the Company since January 1994. Prior to
this period, Mr. Preston was retained as a consultant to the Company commencing
in December 1991. Mr. Preston has served as a director of the Company since
December 1991, and served as a director of the following other companies, with
the date of such service in parentheses: Sterling Publishing Group PLC, a
publicly-held U.K business publishing company (1977 to September, 1995; and
served as Deputy Chairman from 1990 to September 1994); Broad Street Group PLC,
a publicly-held U.K public relations and marketing services firm (June 1977 to
March 1991); Frank Usher Holdings PLC, a publicly-held U.K clothing manufacturer
(1989 to 1990); Cadiz Land Corporation (1983 to 1987). Mr. Preston is a United
Kingdom Chartered Accountant.
Clair Alpert has been the Vice President -- Administration of the Company
since October 1993. Ms. Alpert served as Controller of the Company from April
1992 to October 1993. Prior to joining the Company, Ms. Alpert served as the
Director of Administration and Accounting for Gross & Alpert, C.P.A., a New
York-based accounting firm, from January 1987 to March 1992.
Lori Colin has been the Controller of the Company since October 1993. Prior
to joining the Company, Ms. Colin was a Senior Accountant at Chase Manhattan
Leasing Co. from 1991 to 1993, and prior to that was an Assistant Manager --
Accounting at Concord Leasing in Connecticut from 1985 to 1990.
Andrea Grossman has been the Vice-President Marketing of the Company since
May 1993. Ms. Grossman served as the Director of Marketing of the Company from
October 1992 to May 1993. Prior to joining the Company, Ms. Grossman was the
Database Marketing Director of JAMI Marketing Services, Inc., a New York-based
direct marketing firm, from October 1990 to October 1992. From June 1990 to
October 1990, Ms. Grossman was a Consultant with The Rostmark Group, a marketing
consultancy in New Jersey, and from January 1987 to June 1990, she was the
General Manager of Webvelope Corp., a New York printing company.
Rowland Day is a partner in the law firm of Day, Campbell & McGill, the
Company's corporate counsel. He was appointed a director of the Company in
November, 1996.
Julian Levy is a representative of Capital Growth International, an
investment banking firm that acted as placement agent for the Company in its
most recent offering of securities. He is a United Kingdom Chartered Accountant
and was appointed a director of the Company in November, 1996.
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<PAGE> 33
Conrad Morris is a United Kingdom businessman with executive investments and
management experience in both the United Kingdom and the United States. His
family firm, Business Systems Consultants Limited, is a significant investor in
the Company. He was appointed a director of the Company in November, 1996.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information regarding
compensation paid by the Company for services rendered during the fiscal years
ended December 31, 1993, 1994 and 1995, respectively, to the Company's Chief
Executive Officer and Chief Financial Officer during such period. No other
executive officer of the Company holding office in fiscal 1995 received total
annual salary and bonus exceeding $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG- TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION SECURITIES
NAME AND YEAR --------------------------------------- UNDERLYING
PRINCIPAL ENDING OTHER ANNUAL OPTIONS/
POSITION DECEMBER 31, SALARY BONUS COMPENSATION SARS(#)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993 $ 125,000 -- $ 9,769(1) 0
STEVEN LAMPERT, 1994 $ 250,000 -- $ 7,911(1) 0
PRESIDENT 1995 $ 150,000 -- $10,689(1) 250,000(2)
1993 $ 100,000 -- $ 2,581(1) 0
MICHAEL PRESTON, 1994 $ 100,000 -- $ 5,196(1) 0
CHIEF FINANCIAL OFFICER 1995 $ 125,000 -- $ 7,122(1) 250,000(3)
</TABLE>
- ----------
(1) INCLUDES AN ALLOWANCE FOR AUTOMOBILE EXPENSES.
(2) OPTIONS TO PURCHASE 250,000 SHARES AT A PRICE OF $.001 PER SHARE WERE
GRANTED TO MR. LAMPERT UNDER THE COMPANY'S 1995 STOCK OPTION PLAN.
(3) OPTIONS TO PURCHASE 250,000 SHARES AT A PRICE OF $.001 PER SHARE WERE
GRANTED TO MR. PRESTON UNDER THE COMPANY'S 1995 STOCK OPTION PLAN.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------------------
PERCENT OF
TOTAL OPTIONS EXERCISE
NUMBER OF SECURITIES GRANTED TO OR BASE
UNDERLYING EMPLOYEES PRICE EXPIRATION
NAME OPTIONS GRANTED IN 1995 ($/SH.) DATE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Steven Lampert 250,000 25% $ .0011 10/11/2000
MICHAEL PRESTON 250,000 25% $ .0011 10/11/2000
</TABLE>
- ----------
NO EXECUTIVE OFFICER NAMED IN THE SUMMARY COMPENSATION TABLE ABOVE EXERCISED
STOCK OPTIONS DURING THE FISCAL YEAR ENDED DECEMBER 31, 1995.
THE FOLLOWING TABLE SETS FORTH FOR EACH PERSON THE FISCAL YEAR-END VALUE OF
UNEXERCISED OPTIONS:
AGGREGATED OPTION EXERCISES IN
FISCAL YEAR ENDED DECEMBER 31, 1995 AND OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
SHARES NUMBER OF UNEXERCISED IN THE MONEY OPTIONS
ACQUIRED ON VALUE OPTIONS AT 12/31/95 AT 12/31/95(1)
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Steven Lampert 0 -- 250,000 0 $1,625,000 0
MICHAEL PRESTON 0 -- 250,000 0 $1,625,000 0
</TABLE>
29
<PAGE> 34
(1) The value of the Company's Common Stock for purposes of the calculation was
based upon the average of the bid and asked prices for the Common Stock on May
31, 1996 as reported by the OTC Bulletin Board, minus the exercise price.
STOCK OPTION PLAN
The Company has adopted a stock option plan (the "Stock Option Plan") for
its officers, directors, employees and consultants and has reserved a total of
2,000,000 shares of Common Stock to be issued upon exercise of options granted
under the Stock Option Plan. As of November 30, 1996, options to purchase
1,000,000 shares at an exercise price of approximately $.001 per share and
options to purchase 1,000,000 shares at an exercise price of $3.00 per share had
been granted, none of which have been exercised.
The Stock Option Plan will be administered by the Board of Directors (the
"Board"). Subject to the provisions of the Stock Option Plan, the Board will
have sole discretionary authority to interpret the Stock Option Plan and to
determine the type of awards to grant, when, if and to whom awards are granted,
the number of shares covered by each award and the terms and conditions of the
award.
Options granted under the Stock Option Plan may be "incentive stock options"
("ISOs"), within the meaning of Section 422 of the U.S. Internal Revenue Code,
as amended (the "Code"), or non-qualified stock options ("NQSOs"). The exercise
price of the options will be determined by the Board when the options are
granted, subject to a minimum price in the case of ISOs equal to the fair market
value (as defined in the Stock Option Plan) of the Common Shares on the date of
grant and a minimum price in the case of NQSOs of the par value of the Common
Stock. In the discretion of the Board, the option exercise price may be paid in
cash or in Common Shares or other property having a fair market value on the
date of exercise equal to the option exercise price.
DIRECTOR COMPENSATION
Directors who are officers or employees of the Company receive no additional
compensation for service as members of the Board of Directors or committees
thereof. Directors who are not officers or employees of the Company will receive
such compensation for their services as the Board of Directors may from time to
time determine. It is anticipated that non-employee directors will receive a fee
of $500 per meeting plus expenses of attending the meeting.
EMPLOYMENT CONTRACTS
The Company has not entered into any written or formal contract with any of
the above-named executive officers.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of November 30, 1996 by (i) each
person known by the Company to be the beneficial owner of more than five percent
of the Common Stock, (ii) each director of the Company, and (iii) all executive
officers and directors of the Company as a group. See "Management."
<TABLE>
<CAPTION>
Name and Address Number of Shares Percent of
of Beneficial Owner Beneficially Owned Class
- -------------------------------------------------------------------------------------
<S> <C> <C>
Steven L. Lampert............................. 1,687,065(1) 23.4%
8 Lady Godiva Way
New City, N.Y. 10956
Michael D. Preston............................ 1,694,020(2) 23.5%
8 Oak Hill Park Mews
London NW3 7LH
England
</TABLE>
30
<PAGE> 35
<TABLE>
<CAPTION> Name and Address Number of Shares
Percent of of Beneficial Owner Beneficially Owned
Class
- -------------------------------------------------------------------------------------
<S> <C> <C>
Rowland W. Day II............................. 453,259(3) 6.6%
3070 Bristol Street, Suite 650
Costa Mesa, CA 92626
Julian Levy................................... 50,000(4) less than 1%
Conrad Morris................................. -- --
Business Systems Consultants, Ltd............. 1,334,798(5) 20.2%
P.O. Box 222
31-33 Le Portlet
St. Peter Port
Gurnsey GYI 4J6
Channel Islands
__________ _____
All directors and officers.................... 4,054,344(6) 49.1%
as a group (8 persons)
</TABLE>
(1) Includes 600,000 shares issuable upon the exercise of outstanding options.
(2) Includes 600,000 shares issuable upon the exercise of outstanding options.
(3) Includes 264,000 shares issuable upon the exercise of outstanding options.
(4) Includes 50,000 shares issuable upon the exercise of outstanding options.
(5) Business Systems Consultants, Ltd (BSC) is an investment company
registered in Libera. BSC is beneficially owned by two adult daughters
of Conrad Morris, a director of the Company. Mr. Morris acts as an advisor
too but has no beneficial interest in BSC.
(6) Includes 1,684,000 shares issuable upon exercise of outstanding options.
CERTAIN TRANSACTIONS
PARTNERSHIP TRANSACTION
Pursuant to the Restructuring, on October 5, 1995, LDDI issued shares of its
Common Stock to the limited partners of LDDLP in exchange for their respective
partnership interests in LDDLP in a transaction exempt from the registration
requirements of the Securities Act. On October 6, 1995 LDD Holdings acquired all
of the outstanding shares of Common Stock of LDDI in exchange for 3,000,000
Shares of the Company's Common Stock.
BANK OF NEW YORK LOAN
Pursuant to the terms of a Bridge Loan and Security Agreement (the "Loan
Agreement") dated August 25, 1994 between Wingmead Securities Ltd. ("Wingmead")
and Michael Preston, a Director and Chief Financial Officer of the Company, as
lenders, and LDDLP, Wingmead and Preston each agreed to make one loan to the
Partnership in the original aggregate principal amount of $250,000. The Wingmead
loan (the "Wingmead Loan") was made on August 25, 1994, and the Preston loan
(the "Preston Loan") was made on October 27, 1994. The Wingmead Loan is
evidenced by a secured promissory note (the "Wingmead Note"), and bears interest
at a rate per annum equal to the Prime Rate plus 2.0%. As collateral security
for the payment of such amounts, LDDLP granted to Wingmead a first floating lien
on all of its assets. In addition, pursuant to the terms of a Guaranty dated
August 25, 1994 between Wingmead and Michael D. Preston, a Director and Chief
Financial Officer of the Company, Preston personally guaranteed the payment,
when due, of all amounts owed under the terms of the Loan Agreement, and as
security for such guaranty, entered into a pledge agreement with Wingmead dated
August 25, 1994 whereby he pledged 466,382 ordinary shares of Sterling
Publishing Group PLC beneficially owned by him and the proceeds of any sale
thereof to secure his obligations under his guaranty. The Preston Loan was
non-interest bearing and was repaid, together with the Wingmead Loan, out of the
proceeds of a loan from The Bank of New York (see following paragraph).
On October 28, 1994, the Company borrowed $500,000 from The Bank of New York
("BONY") pursuant to a General Loan and Security Agreement (the "BONY Note"),
which bears interest at a rate per annum equal to the Prime Rate
31
<PAGE> 36
plus .5%. Principal and interest on the BONY Note is due on April 12, 1995. The
proceeds from the BONY Note were used to pay in full the principal amount
outstanding under the Wingmead Note and the Preston Loan. There was no cost or
other effect to the Company for such prepayment. The accrued interest on the
Wingmead Note has been paid to date and the Company has issued 22,000 shares of
its common stock to Wingmead.
As collateral security for the payment of the BONY Note, the Company granted
BONY a security interest in a $500,000 certificate of deposit issued by BONY to
Wingmead which had been hypothecated to the Company by Wingmead. In addition,
pursuant to the terms of a Guaranty dated October 28, 1994 between BONY and
Steven Lampert, the Chief Executive Officer and Director of the Company and Mr.
Preston, the Chief Financial Officer and a Director of the Company, each of
Messrs. Lampert and Preston personally guaranteed the payments, when due, of all
amounts owing by the Company to BONY, which obligation is represented by the
BONY Notes.
The repayment date of the BONY Note was extended until September 30, 1995 by
an agreement entered into in April, 1995 on terms substantially identical to
those of the original agreement dated October 28, 1994 and was subsequently
extended to November 8, 1996, at which time it was paid in full. In February,
1995 Wingmead entered into an agreement with the Company under which it agreed
to subscribe for 166,667 shares of the Company's Common Stock at $3.00 per share
on July 31, 1996 or on the repayment by the Company of the BONY Note. On
November 18, 1996, Wingmead purchased 166,667 shares of the Company's Common
Stock for $500,000 cash.
BRIDGE LOANS
Series A Loans. Pursuant to a series of loans made on September 30, 1994,
the Company borrowed an aggregate principal amount of $177,500 from a group of
seven lenders (the "Series A Loans"). Each loan bears interest at a rate per
annum equal to the Prime Rate plus 2%, was due and payable on June 30, 1995, and
was evidenced by a secured promissory note dated as of September 30, 1994.
Pursuant to a Subordination Agreement entered into by and among LDDI, each
holder of the Series A Loans and Wingmead, each of the holders of the Series A
Loans agreed that their right to payment and security interest in the property
of LDDI would be subordinate to all indebtedness owed by LDDI to Wingmead.
The Series A Loan notes provided that any loans outstanding at the time that
the Company concludes an initial public offering or similar transaction may at
the holder's option be converted into shares of the Company's Common Stock at
the Offering price together with a premium of 25% over the face value of the
loan. Loans aggregating $30,000 plus accrued interest were repaid during 1995.
Holders of the balance of the Notes, aggregating $147,500, elected to convert
the amounts due to them, plus premium, into shares of the Company's Common Stock
at a price of $3.00 per share prior to December 31, 1995.
Second Wingmead Loan. Pursuant to an agreement dated December 6, 1994, the
Company borrowed from Wingmead the sum of $200,000 (the "Second Wingmead Loan")
repayable either within ten days following an initial public offering of the
Company's stock, or, if no such offering occurred within 90 days following the
date of the agreement, in six equal installments commencing on the 120th day
following the date of the agreement. The loan, which was secured by the Loan
Agreement dated August 25, 1994 between the Company, Wingmead and Michael
Preston, and was personally guaranteed by Michael Preston and Steven Lampert
bore interest at the rate of 20% per annum, and, in consideration for making the
loan, the Company agreed to issue to Wingmead 20,000 shares of the Company's
Common Stock, such shares to be unregistered but to have piggy-back registration
rights in the event of a public offering of the Company's Common Stock within
twenty-four months of the date of the agreement.
In August, 1996 Michael Preston paid Wingmead a total of $229,329.86,
representing $110,000 of the Second Wingmead loan together with accrued interest
and certain fees due to Wingmead, in consideration of Wingmead's granting to Mr.
Preston the benefit of Wingmead's interest in all such amounts owing by the
Company. Wingmead had previously converted the balance of the principal due into
30,000 shares of the Company's Common Stock at the price of $3.00 per share,
prior to December 31, 1995. On November 18, 1996, the Company repaid Mr. Preston
the full amount paid by him to Wingmead for the debt owed to Wingmead by the
Company.
Business Systems Consultants Loan. On October 30, 1993, Business Systems
Consultants Limited advanced the sum of $100,000 to the Company as an
interest-free, five-year unsecured and subordinated loan, repayable at the
obligee's
32
<PAGE> 37
request after three years. Business Systems Consultants converted this
loan into shares of the Company's Common Stock at the price of $3.00 per share
prior to December 31, 1995.
SHAREHOLDER LOANS
The Company entered into an agreement with Business Systems Consultants,
Ltd. ("BSC") in March, 1996, pursuant to which BSC agreed to loan $500,000 to
the Company. The agreement provided that BSC may convert all (but not less than
all ) of the loan into shares of the Company's Common Stock at a price of $3.30
per share at any time prior to the earlier of December 31, 1996 or the date on
which the Company's Common Stock is listed for trading on NASDAQ. As
consideration for the loan, the Company agreed to issue 150,000 shares of Common
Stock to BSC and to pay BSC a fee equal to 1.5% of the first $50 million of
revenues and 1% of revenues in excess of $50 million received by the Company
from the customer billings generated by sales representatives recruited via the
infomercial produced by Guthy-Renker during the first two years any revenue is
received from such infomercial. In August, 1996, BSC elected to convert the
entire amount of the loan to equity.
The Company entered into agreements with Business Systems Consultants, Ltd.
("BSC") and Michael Preston on August 1, 1996, pursuant to which BSC and Mr.
Preston agreed to loan $350,000 and $150,000, respectively, to the Company. The
loans bear interest at the rate of 12% per annum and are repayable within 60
days after receipt of the loan proceeds. The agreements provide that the loans
may be converted into shares of the Company's Common Stock at a price of $2.50
per share. As additional consideration for the loans, the Company agreed to
issue to BSC and Mr. Preston, for each seven day period during which the loans
are outstanding, 1,250 shares of Common Stock and 535 shares of Common Stock,
respectively, but not less than 5,000 shares and 2,140 shares, respectively. In
addition, if the loans are not repaid prior to September 30, 1996, BSC and Mr.
Preston have the option, exercisable at any time within 12 months after such
repayment date, to purchase, at a price of $2.50 per share, 140,000 shares and
60,000 shares, respectively. In November, 1996 BSC elected to convert the full
amount of its loan into shares of the Company's Common Stock at a price of $2.50
per share.
BUY OUT AGREEMENT
Pursuant to the terms of an agreement (the "Buy Out Agreement") dated April
6, 1993 by and among Steven L. Lampert ("Lampert"), Michael D. Preston
("Preston" and collectively with Lampert, the "Buyers"), Michael Miller
("Miller"), Jeffrey Schwartz ("Schwartz" and collectively with Miller, the
"Sellers"), LDDLP, LDDI and several inactive entities (collectively with LDDLP
and LDDI, the "Entities"), the Buyers, who are officers and directors of the
Company, purchased in equal proportions all of the interests of the Sellers in
the Entities (the "Buy Out"). At the closing of the Buy Out, the Buyers paid the
Sellers an aggregate of $500,000.
In connection with the Buy Out, LDDLP obligated itself under the Buy Out
Agreement (i) to pay the Sellers an aggregate of $250,000 for their covenants
not to compete with the business of LDDLP, (ii) to pay JAMI Marketing Services,
Inc. ("JAMI"), an affiliate of the Sellers, $303,333.34, with respect to and in
cancellation of an office facilities and equipment agreement and in
consideration of services rendered, and (iii) to pay to the Sellers an aggregate
of $80,000 with respect to their capital and current accounts with LDDLP
(collectively, the "LDDLP Obligations").
In addition, the Sellers were entitled to receive Contingent Event Payments
of up to an aggregate of $750,000 upon the occurrence of (a) the sale by either
of the Buyers of all or a majority of his interests in any Entity, (b) the sale
by any Entity of all or substantially all of its assets, or (c) the distribution
(excluding compensation payments to Lampert or Preston in amounts not exceeding
$187,500 and $150,000, respectively, per year) by any Entity of cash or property
to either of the Buyers (collectively the "Contingent Events"). The Buyers were
responsible for Contingent Event Payments, except in the case of an asset sale
by an Entity, in which case the Entity was responsible to the Sellers but the
Buyers were obligated to reimburse the Entity to the extent the net proceeds of
such sale were distributed to the Buyers.
A dispute arose with respect to the Buy Out Agreement and in February, 1996,
LDDLP and the Buyers filed a lawsuit against the Sellers seeking compensatory
and punitive damages. The Sellers subsequently filed a separate lawsuit against
LDDLP and the Buyers to exercise their rights to receive payment under the Buy
Out Agreement and to exercise their remedies under the security agreement with
respect thereto.
33
<PAGE> 38
On September 19, 1996, the Company, the Buyers, LDDI and LDDLP entered into
an agreement (the "Settlement Agreement") with the Sellers and JAMI to settle
the pending litigation (the "Litigation"). In accordance with the terms of the
Settlement Agreement, the Company paid Sellers $500,000 in settlement of the
Litigation and as full satisfaction of all remaining obligations under the Buy
Out Agreement, including the Contingent Event Payments; the parties signed and
delivered mutual general releases; and the Litigation was dismissed with
prejudice.
SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock by the Selling Stockholders
as of November 30, 1996, and as adjusted to reflect the sale of the Shares.
<TABLE>
<CAPTION>
Shares
Maximum Number Beneficially Owned
Number of Shares of Shares to be After Offering(2)
Beneficially Owned Sold Pursuant to ------------------
NAME Prior to Offering(1) this Prospectus(1) Number Percent
---- -------------------- ------------------ ------ -------
<S> <C> <C> <C> <C>
A/S Caco 5,000 5,000 0 --
Christopher Adam 45,000 20,000 25,000 *
Aeron Marine 5,000 5,000 0 --
Alberdale Partners
Limited 6,060 6,060 0 --
Les Alps 60,606 60,606 0 --
Arkan Investments
Ltd. 45,000 15,000 30,000 *
AS Kapitalutvikling 5,000 5,000 0 --
Banca del Gottardo 250,000 250,000 0 --
Bocap AS 50,000 50,000 0 --
Erling Borg 5,000 5,000 0 --
Harvey Brice 10,000 10,000 0 --
Business Systems
Consolidated Ltd. 6,400 6,400 0 --
Business Systems
Consultants Ltd. 1,334,798 200,000 1,134,798 17.2%
Caisse Centrale 80,000 80,000 0 --
Cameo Trust 20,000 20,000 0 --
Capital Growth
International 314,160 314,160 0 --
Capital Management 310,000 310,000 0 --
Cook & Cie 30,000 30,000 0 --
Continental Capital 75,000 75,000 0 --
Cowen/S. Hollander 22,500 22,500 0 --
Edgeport Nominees 63,480 63,480 0 --
Effectenbank Stroeve 30,000 30,000 0 --
Gems Opportunity Fund 90,909 90,909 0 --
Helix Investments 30,000 30,000 0 --
Steven Heydt 3,944 3,944 0 --
Albert Holland 3,944 3,944 0 --
Intergalactic Growth 30,000 30,000 0 --
Kismet 60,606 60,606 0 --
Michael Levi 10,000 10,000 0 --
Magmar Bryhn 3,125 3,125 0 --
Manhattan West 150,000 150,000 0 --
M.I. Wernstedt 5,000 5,000 0 --
Morgan Steel 30,000 30,000 0 --
Sid Paterson 5,000 5,000 0 --
Peter Barrington Kirk 10,000 10,000 0 --
Walter Prime 5,000 5,000 0 --
Republic Natl. Bank
(France) 5,000 5,000 0 --
Republic Natl. Bank
(Luxembourg) 20,000 20,000 0 --
Rahn & Rodman 10,000 10,000 0 --
Claude Rodrigue 35,000 15,000 20,000 *
Rosebud Capital 215,818 215,818 0 --
Saracen Intl. Inc. 5,000 5,000 0 --
Thomas Scichili 39,500 39,500 0 --
Earl Shannon 30,151 30,151 0 --
Skips AS Cahopus 10,000 10,000 0 --
C.V. Spelke 5,000 5,000 0 --
Stratford Partnership 30,000 30,000 0 --
Vital Miijo AS 10,000 10,000 0 --
Wingmead Securities
Ltd. 238,667 20,000 218,667 3.3%
Winthrop Trust 273,000 273,000 0 --
Wise and Shepard 12,500 12,500 0 --
Elie Wizman 15,000 15,000 0 --
Raphael Wizman 15,000 15,000 0 --
Day Campbell &
McGill 45,000 45,000 0 --
</TABLE>
* Less than 1%
34
<PAGE> 39
(1) Includes, with respect to the following persons, the following number
of Shares which may be acquired through the increase of Stock Options
or Warrants: Alberdale Partners Limited (6,060); Les Alps (30,303);
Banca del Gottardo (30,000); Bocap AS (25,000); Business Systems
Consolidated Ltd. (6,400); Cameo Trust (10,000); Capital Growth
International (314,160); Capital Management Gems Opportunity Fund
(30,303); Intergalactic Fund (15,000); Kismet (30,303); Michael Levi
(5,000); Morgan Steel (15,000); Peter Barrington Kirk (5,000);
Republic Natl. (Lux) (10,000); Rosebud Capital (90,909); Thomas
Scichili (39,500); Stratford Partnership (15,000); Vital Miijo AS
(5,000); Day Campbell & McGill (45,000).
(2) Gives effect to the exercise of all of the Options and Warrants for
which the underlying Shares of Common Stock are being offered hereby
and the sale of all of the Shares of Common Stock being offered by the
Selling Stockholder.
PLAN OF DISTRIBUTION
The Shares will be offered and sold by the Selling Stockholders for their
own accounts. The Company will not receive any of the proceeds from the sale of
the Shares pursuant to this Prospectus. The Company has agreed to bear the
expenses of the registration of the Shares, including legal and accounting fees
and such expenses are estimated to be $50,000.
The Selling Stockholders may offer and sell the Shares from time to time in
transactions in the over-the-counter market or in negotiated transactions, at
market prices prevailing at the time of sale or at negotiated prices. The
Selling Stockholders have advised the Company that they have not entered into
any agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their Shares, nor is there an underwriter
or coordinating broker acting in connection with the proposed sale of Shares by
the Selling Stockholders. Sales may be made directly or to or through
broker-dealers who may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders or the purchasers of
Shares for whom such broker-dealers may act as agent or to whom they may sell a
principal, or both (which compensation as to a particular broker-dealer may be
in excess of customary commissions).
The Selling Stockholders and any broker-dealers acting in connection with
the sale of the Shares hereunder may
35
<PAGE> 40
be deemed to be "underwriters" within the meaning of Section 2(11) of the Act,
and any commissions received by them and any profit realized by them on the
resale of Shares as principals may be deemed underwriting compensation under the
Act.
The Company has informed the Selling Stockholders that the anti-manipulative
Rules 10b-6 and 10b-7 under the Securities Exchange Act of 1934, as amended, may
apply to their sales in the market and has furnished each Selling Stockholder
with a copy of these Rules and has informed them of the need for delivery of
copies of this Prospectus.
Selling Stockholders may also use Rule 144 under the Act to sell the Shares
if they meet the criteria and conform to the requirements of such Rule.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company's Articles of Incorporation authorizes the issuance of
30,000,000 shares of Common Stock, $.001 par value, of which 6,601,933 shares
were outstanding as of November 30, 1996.
Holders of shares of Common Stock are entitled to one vote for each share on
all matters to be voted on by the shareholders. Holders of shares are not
entitled to cumulate their votes in the election of directors. Holders of shares
of Common Stock are entitled to share ratably in dividends, if any, as may be
declared, from time to time by the Board of Directors in its discretion, from
funds legally available therefor. In the event of a liquidation, dissolution or
winding up of the Company, the holders of shares of Common Stock are entitled to
share pro rata all assets remaining after payment in full of all liabilities.
Holders of Common Stock have no preemptive or other subscription rights, and
there are no conversion rights or redemption or sinking fund provisions with
respect to such shares.
PREFERRED STOCK
The Company's Articles of Incorporation authorizes the issuance of
10,000,000 shares of preferred stock, $0.001 par value. The Company's Articles
of Incorporation provide that the rights, preferences, and privileges of the
preferred stock shall be determined by the Board of Directors. The Board of
Directors has not taken any action to determine the rights, preferences or
privileges of the preferred stock nor has any preferred stock been issued. There
are no present plans to issue any shares of preferred stock.
OPTIONS
As of November 30, 1996, options to purchase 1,000,000 shares of Common
Stock at an exercise price of $.001 per share and options to purchase 1,000,000
shares at an exercise price of $3.00 per share had been granted under the
Company's 1995 Stock Option Plan, none of which have been exercised. See
"Management-Stock Option Plan." In addition, there were options outstanding to
purchase 45,000 shares of Common Stock at an exercise price of $3.00 per share.
WARRANTS
As of November 30, 1996, there were warrants outstanding to purchase, at any
time prior to March 31, 1999, 25,500 shares of Common Stock at an exercise price
of $3.00 per share, warrants outstanding to purchase, at any time prior to
August 31, 1999, 26,460 shares of Common Stock at an exercise price of $3.30 per
share, warrants outstanding to purchase, at a price of $4.00 per share, up to
401,362 shares of Common Stock at any time prior to November 18, 1998, and
warrants outstanding to purchase, at a price of $3.30 per share, up to 314,160
shares of Common Stock at any time prior to November 18, 1998.
The Company has agreed to issue to certain holders of 890,470 shares of
Common Stock, stock purchase warrants entitling such holders to purchase 1,666
shares of the Company's Common Stock for each 5,000 shares held by them if a
registration statement covering the resale of such securities which the Company
is required to file is not declared effective by each of certain specified dates
commencing on April 5, 1997.
36
<PAGE> 41
REGISTRAR AND TRANSFER AGENT
The Registrar and Transfer Agent for the Company's Common Stock is American
Securities Transfer, Inc., 938 Quail Street, Suite 101, Lakewood, Colorado
80215-5513.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for the
Company by Day, Campbell & McGill, 3070 Bristol Street, Suite 650, Costa Mesa,
California 92626. As of the date of this Prospectus, members of the firm owned a
total of 330,434 shares of the Company's Common Stock and held options to
purchase an additional 460,000 shares of the Company's Common Stock.
EXPERTS
The financial statements of the Company for the fiscal years ended December
31, 1994 and 1995 included in this Memorandum have been audited by Adelman, Katz
& Mond, LLP, independent certified public accountants, to the extent and for
the period set forth in its report included herein, and have been so included in
reliance upon the report (which notes that the Company's negative working
capital and accumulated deficit raise substantial doubt about the Company's
ability to continue as a going concern and that the financial statements were
prepared on the assumption that the Company will continue as a going concern and
do not include any adjustments that might result from the Company's inability to
continue as a going concern) of such firm given upon its authority as experts in
accounting and auditing.
FURTHER INFORMATION
The Company has filed with the Securities and Exchange Commission
("Commission"), a Registration Statement on Form SB-2 with respect to the
securities which are offered by this Prospectus. This Prospectus omits certain
information which is contained in the Registration Statement as permitted by the
Rules and Regulations of the Commission. For further information, reference is
made to the Registration Statement including the exhibits filed therewith, which
may be examined without charge at the Washington, D.C. offices of the Commission
and copies of all or any part thereof may be obtained upon payment of the
Commission's charge for copying. The statement contained in this Prospectus as
to the contents of any contract or other document identified as exhibits in this
Prospectus are not necessarily complete, and in each instance, reference is made
to the copy of such contract or document filed as an exhibit to the Registration
Statement, each statement being qualified in any and all respects by such
reference.
36
<PAGE> 42
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report of Adelman Katz and Mond, L.L.P F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-3
Consolidated Statements of Operations for the Years ended December 31, 1995,
1994 and 1993 F-4
Consolidated Statements of Stockholders' Deficit for the years ended December 31,
1995, 1994 and 1993 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995,
1994 and 1993 F-6
Notes to Consolidated Financial Statements for the years ended December 31,
1995, 1994 and 1993 F-7
Consolidated Financial Statements as of September 30, 1996 (unaudited)
and September 1995 (unaudited)
Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995
(unaudited) F-18
Consolidated Statements of Operations for the Nine Months ended September 30,
1996 (unaudited) and September 30, 1995 (unaudited) F-19
Consolidated Statements of Cash Flows for the Nine Months ended September 30,
1996 (unaudited) and September 30, 1995 (unaudited) F-20
Notes to Consolidated Financial Statements for the Nine Months ended
September 30, 1996 (unaudited) and September 30, 1995 (unaudited) F-21
</TABLE>
F-1
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Long Distance Direct Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Long Distance
Direct Holdings, Inc. as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the years ended December 31, 1995, 1994 and 1993. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Long
Distance Direct Holdings, Inc. as of December 31, 1995 and 1994, and the
consolidated result of its operations and its cash flows for the years ended
December 31, 1995, 1994 and 1993, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has experienced significant
recurring losses from operations and has an accumulated deficit, both of which
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
New York, N.Y. /s/ Adelman, Katz & Mond, LLP
September 20, 1996, except for Note 4
which is dated September 27, 1996
F-2
<PAGE> 44
LONG DISTANCE DIRECT HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
1995 1994
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 207,666 $52,015
Accounts receivable (net of allowance for doubtful accounts) (Note 2) 1,103,903 1,954,576
Other current assets 93,229 345,947
---------- ----------
Total Current Assets 1,404,798 2,352,538
---------- ----------
PROPERTY AND EQUIPMENT
Furniture and equipment 54,856 50,792
Computer equipment and software 196,764 161,922
Leasehold improvements 38,720 38,719
---------- ----------
290,340 251,433
Less: accumulated depreciation 129,203 74,623
---------- ----------
161,137 176,810
OTHER ASSETS 61,790 322,617
---------- ----------
$1,627,725 $2,851,965
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable - current (Note 6) $1,165,000 $1,076,071
Accounts payable 2,370,081 2,146,683
Accrued expenses 577,576 449,432
Sales and excise taxes payable (Note 5) 703,143 743,673
Loans payable - shareholders (Note 11) 74,244 217,320
---------- ----------
Total Current Liabilities 4,890,044 4,633,179
LONG-TERM LIABILITIES
Deferred network charges -0- 78,657
Long term debt, less current portion (Note 6) -0- 315,629
---------- -----------
Total Liabilities 4,890,044 5,027,465
---------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 5)
STOCKHOLDERS' DEFICIT
Common stock - par value $.001 per share;
authorized 30,000,000 shares 3,798 3,400
Additional paid in capital 1,429,434 611,728
Accumulated deficit (4,665,551) (2,790,628)
---------- -----------
(3,232,319) (2,175,500)
Less: Subscriptions receivable (30,000) -0-
---------- -----------
Total Stockholders' Deficit (3,262,319) (2,175,500)
---------- -----------
$1,627,725 $2,851,965
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 45
LONG DISTANCE DIRECT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
REVENUES $ 8,363,949 $ 9,527,497 $ 5,499,035
CUSTOMER REBATES AND REFUNDS 377,547 444,998 158,621
----------- ----------- -----------
NET REVENUES 7,986,402 9,082,499 5,340,414
COST OF SERVICES 5,862,665 6,257,686 3,690,740
----------- ----------- -----------
Gross Profit 2,123,737 2,824,813 1,649,674
----------- ----------- -----------
OPERATING EXPENSES
Sales and marketing 519,411 1,322,546 472,473
General and administrative 2,700,451 2,554,503 1,444,151
----------- ----------- -----------
Total Operating Expenses 3,219,862 3,877,049 1,916,624
----------- ----------- -----------
LOSS FROM OPERATIONS (1,096,125) (1,052,236) (266,950)
----------- ----------- -----------
OTHER EXPENSES (INCOME)
Interest expense 375,820 173,996 98,396
Interest income (4,594) (5,515) (2,056)
Partnership buy-out and other costs -0- -0- 609,074
Failed IPO costs 407,572 -0- -0-
----------- ----------- -----------
Total Other Expenses (Income) 778,798 168,481 705,414
----------- ----------- -----------
NET LOSS ($1,874,923) ($1,220,717) ($ 972,364)
=========== =========== ===========
NET LOSS PER SHARE (.55) (.36) (.30)
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 46
LONG DISTANCE DIRECT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
Common Stock Additional Paid Accumulated
Shares Amount in Capital Deficit
------ ------ --------------- -----------
<S> <C> <C> <C> <C>
Balance - December 31, 1992 3,165,730 $ 3,166 $ 181,962 ($ 582,547)
Par value assigned to deemed issuance of
shares of common stock for capital
contributions 192,270 192 259,808 --
Value assigned to shares of common stock
issuable in connection with borrowing 42,000 42 169,958 --
Dividends (15,000)
Net loss - December 31, 1993 -- -- -- (972,364)
---------- ------ --------- -----------
Balance - December 31, 1993 3,400,000 3,400 611,728 (1,569,911)
Net loss - December 31, 1994 -- -- -- (1,220,717)
----------- ------- --------- -----------
Balance - December 31, 1994 3,400,000 3,400 611,728 (2,790,628)
Accrual of expenses, payable in stock,
in connection with reverse acquisition -- -- (69,000) --
Par value assigned to shares of common
stock issued in private placement, net
of expenses of $306,397 397,835 398 886,706 --
Net loss - December 31, 1995 -- -- -- (1,874,923)
--------- ------ ---------- -----------
Balance - December 31, 1995 3,797,835 $3,798 $1,429,434 ($4,665,551)
========= ====== ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 47
LONG DISTANCE DIRECT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($1,874,923) ($1,220,717) ($972,364)
----------- ----------- ---------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 54,580 45,905 30,581
Amortization of note discount 116,000 52,000 -0-
Imputed interest on personal guarantee -0- 2,000 -0-
Financing expenses 49,793 -0- -0-
Provision for doubtful accounts 310,953 325,634 109,952
Buy-out of partnership interests -0- -0- 500,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 539,720 (1,388,937) (383,331)
(Increase) decrease in other current assets 252,718 (282,718) (6,864)
(Increase) decrease in other assets 260,827 (302,013) (7,599)
Increase (decrease) in accounts payable 223,398 1,174,456 (37,484)
Increase (decrease) in accrued expenses (74,946) 304,874 183,667
Increase (decrease) in sales and excise taxes payable (40,530) 282,030 438,676
---------- ----------- ---------
Total Adjustments to Net Loss 1,692,513 213,231 827,598
---------- ----------- ---------
Net Cash Used in Operating Activities (182,410) (1,007,486) (144,766)
---------- ----------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES
Acquisition of property and equipment (38,907) (72,284) (124,212)
---------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (payment) of notes payable (155,000) 935,298 (106,277)
Proceeds (payment) of related party loans (112,076) 106,602 100,000
Proceeds from private placement 776,209 -0- -0-
Capital contributions -0- -0- 260,000
Dividends paid -0- -0- (15,000)
Payment of private placement costs (132,165) -0- -0-
Net proceeds of former partners' buy-out note payable -0- -0- 61,400
---------- ----------- ---------
Net Cash Provided by Financing Activities 376,968 1,041,900 300,123
---------- ----------- ---------
NET INCREASE (DECREASE) IN CASH 155,651 (37,870) 31,145
CASH - Beginning of year 52,015 89,885 58,740
---------- ----------- ---------
CASH - End of year $207,666 $52,015 $89,885
========== =========== =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 48
LONG DISTANCE DIRECT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
1. ORGANIZATION AND BUSINESS
The consolidated financial statements consist of the accounts of Long
Distance Direct Holdings, Inc. ("LDDH") and its wholly owned subsidiary,
Long Distance Direct, Inc. ("LDDI"), referred to collectively as the
("Company"). All significant intercompany balances and transactions have
been eliminated in consolidation.
LDDH, which was formerly known as Golden Ark, Inc. was inactive until
October 6, 1995, when it acquired all of the outstanding stock of LDDI in
exchange for 3,000,000 shares of LDDH and LDDI became a wholly owned
subsidiary of LDDH. LDDI is a New York corporation which was formed in
1991 for the purpose of acting as the general partner of Long Distance
Direct L.P. ("LDDLP"), a New York limited partnership formed at the same
time for the purpose of carrying on the business of a non-facilities based
re-seller of long-distance telephone services. On October 5, 1995, LDDI
acquired all of the partnership interests of LDDLP in exchange for
3,218,821 shares of common stock of LDDI. This transaction was accounted
for as a change in form of organization. Prior to its acquisition of LDDI,
Golden Ark, Inc. effected a 1 for 1.4700477 forward split of its common
stock. After its acquisition of LDDI, Golden Ark, Inc. changed its name to
Long Distance Direct Holdings, Inc.
For accounting purposes, the acquisition of the common stock of LDDI has
been treated as a recapitalization of LDDI with LDDI as the acquirer
(reverse acquisition). Stockholders' equity and earnings per share data
has been restated to give retroactive recognition to the recapitalization.
The consolidated financial statements include the combined activities of
LDDI and LDDLP for the years ended December 31, 1993 and 1994 and for the
period from January 1, 1995 through October 5, 1995. Therefore no
pro-forma data has been presented.
The Company is a non-facilities based re-seller of outbound and inbound
long-distance telephone, teleconferencing, cellular long-distance and
calling card services to small and medium sized commercial customers. All
of the services sold by the Company during the period were provided by
AT&T. Although the Company had contracted with MCI in August 1995 to
purchase telephone service for resale, MCI was unable to provide service
prior to December 31, 1995. The Company signs up customers and provisions
them onto the network of AT&T, which provides the actual transmission of
service. The Company does not own or lease any telephone equipment or
participate in the call completion process.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Allowance for Doubtful Accounts
The allowance for doubtful accounts has been provided for based upon
management estimates. At December 31, 1995 and 1994, the allowance for
doubtful accounts was $163,149 and $455,567, respectively.
F-7
<PAGE> 49
LONG DISTANCE DIRECT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1995 AND 1994
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenues, Collections and Cost Recognition
Revenues are recognized from long-distance service usage by the Company's
customers. During the period, the Company operated under a billing service
agreement with an affiliate of AT&T. Under the agreement, AT&T's affiliate
provided billing services on behalf of the Company. Since December 31,
1995 the Company has contracted with another billing company to provide
billing services. The Company's customers make payments directly to the
Company through a lock-box account. This lock-box account is controlled by
the Company and maintained at a financial institution acceptable to AT&T.
Costs are recognized based on monthly network usage billings received from
AT&T.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets, liabilities, income
and expenses and disclosures of contingencies. Future events could alter
such estimates in the near term.
Property and Equipment
Property and equipment are stated at cost. Depreciation of furniture and
computer equipment is provided using the straight-line method for
financial reporting purposes based on their estimated useful lives.
Depreciation of leasehold improvements is provided using the straight-line
method for financial reporting purposes based on their estimated useful
lives or the life of the lease, whichever is shorter.
Initial Public Offering Costs
The Company incurred costs of approximately $407,000 in connection with an
initial public offering which was not successfully completed in 1995. As a
result, all such costs were charged to expense in 1995.
Private Placement Issuance Costs
The Company incurred costs of approximately $306,000 in connection with a
private placement of its own common stock. The Company received
subscriptions in excess of the minimum shares required in the offering and
the offering became effective. As a result, the costs incurred have been
deducted from the proceeds received in the offering by a charge to
additional paid in capital.
Deferred Telemarketing Costs
Telemarketing fees paid when a customer order is submitted to the Company
are deferred. These costs are amortized on a straight-line basis over six
months beginning in the month that customer revenue is generated.
F-8
<PAGE> 50
LONG DISTANCE DIRECT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1995 AND 1994
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Deferred Network Credit
The Company received a cash payment in 1994 as a non-refundable sign-on
bonus for the AT&T service agreement. The amount of the payment was
amortized on a straight-line basis over the life of the agreement.
Weighted Average of Common Shares
Earnings per share are based on the weighted average number of shares
outstanding (3,416,577 in 1995, 3,400,000 in 1994 and 3,282,865 in 1993).
The assumed exercise of stock options is anti-dilutive and therefore is
not considered a common stock equivalent.
AT&T Usage Credits
The Company receives credits from its supplier, AT&T, based upon volume
usage to date. Amounts are recorded in the period in which the Company has
earned the credits.
3. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. The Company has sustained
losses since inception and as a result has experienced deficiencies in
cash flows from operations and has a stockholders' deficit of $3,262,319
at December 31, 1995.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts and
classification of liabilities that might be necessary should the Company
be unable to continue in existence.
Management is taking the following steps to revise its operating results
and financial position, which it believes will be sufficient to provide
the Company with the ability to continue in existence:
- Renegotiation of current rates under AT&T agreement.
- Contract with MCI allowing residential as well as
commercial resale.
- Increased sales volume through telemarketing efforts.
- Closing of private placement in early 1996 and planned
completion of another private placement in the fall of
1996.
- Televised marketing program to recruit additional
independent sales representatives.
F-9
<PAGE> 51
LONG DISTANCE DIRECT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1995 AND 1994
4. PRIVATE PLACEMENT
In December 1995, the Company completed a private placement of 397,835
shares of common stock at a price of $3.00 per share. Prior to December
31, 1995, the Company issued 273,043 shares for cash (net of certain
expenses) of $806,211 and 124,792 shares for conversion of certain debt,
related interest and expenses in the amount of $374,376. Subsequent to
December 31, 1995, the Company issued 42,000 shares for $126,000. The
proceeds of the offering were utilized for expansion of marketing
activities, working capital and general corporate purposes. The offering
closed in February 1996.
In April 1996, the Company commenced a private placement for shares of its
common stock. The offering called for a minimum of 100,000 shares and a
maximum of 750,000 shares to be issued at a price of $3.30 per share. The
Company sold 505,518 shares totaling $1,668,209.
In August 1996, the Company commenced a private placement for shares of
its common stock. The offering called for a minimum of 30 units and a
maximum of 250 units to be issued at a price of $16,500 per unit. Each
unit consisted of 5,000 shares of the Company's common stock and warrants
entitling the holder to purchase at any time within two (2) years of
issuance, up to 5,000 shares of common stock at an exercise price of $4.00
per share, with each of the initial 91 units to be sold. The Company sold
80.3027 units totalling $1,324,995.
In September 1996, the Company amended the August 1996 private placement.
The amended offering called for a maximum of 250 units, with each unit
containing 5,000 shares of the Company's common stock. In the discretion
of the Company's placement agent, the number of units in the offering may
be increased by up to 50 units. Concurrently, with this offering, the
Company expects to offer to accredited investors, as defined in Regulation
D promulgated under the Securities Act, up to 144 units, each also
consisting of 5,000 shares of common stock and also at a price of $16,500
per unit.
An officer, director and principal shareholder of the Company has a 25%
interest in an investment firm which may receive fees in connection with
the sale of the units offered hereby.
5. COMMITMENTS AND CONTINGENT LIABILITIES
Contract Tariffs with AT&T-Minimum Commitments
Effective September 1, 1995, the Company entered into an individually
negotiated contract for a fixed term of four years with a one year
extension at the Company's option. The agreement is not renewable upon
termination of the five year term. Under the agreement, the Company will
be able to resell both inbound and outbound long-distance service. The
agreement calls for minimum purchase commitments of $2,400,000 on a
semi-annual basis and $4,800,000 on an annual basis. The agreement also
requires minimum purchases with respect to new business usage of $240,000
on a semi-annual basis and $480,000 on an annual basis. Failure to meet
the minimum purchase requirements will result in payment of any shortfall
by the Company.
F-10
<PAGE> 52
LONG DISTANCE DIRECT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1995 AND 1994
5. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
Contract Tariffs with AT&T-Minimum Commitments (continued)
As a result of information arising from the change of the billing company
after December 31, 1995, the Company has notified AT&T that it may have
been significantly over-billed by AT&T since September 1992. At this time,
however, no estimate can be made as to the time or the amount, if any, of
any recovery by the Company. Accordingly, no provision for recovery has
been reflected in the accompanying financial statements.
Carrier Agreement with MCI-Minimum Commitments
Effective August 4, 1995, the Company entered into an individually
negotiated agreement with MCI under which the Company is authorized to
resell various MCI services, including outbound and inbound long-distance
calls. This agreement was superseded by an individually negotiated
contract which was signed in 1996. The new agreement is for a forty-two
(42) month term and is cancelable without liability by either party during
the first six (6) months of the agreement. The agreement is subject to a
twelve (12) month ramp period followed by a thirty (30) month service
period. The usage requirements escalate from no minimum usage during the
first five (5) months to $750,000 in the twelfth month. The minimum usage
for the service periods is $1,000,000 per month. Failure to meet the
minimum purchase requirements will result in payment by the Company of 15%
of the difference between the actual usage and minimum monthly
requirements.
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 1996 contract. These
financial statements do not include a provision for this credit.
Joint Venture Agreement
In May 1996, the Company, through its wholly owned subsidiary, entered
into a joint venture agreement with a leading television production
company to launch a marketing program based on broadcast media. Under this
agreement, the Company is obligated to expend approximately $400,000
during 1996 in respect to production and origination costs, with all media
expenditures being borne by its joint venture partner.
Installment Obligation - New York State Taxes
The State of New York Department of Taxation & Finance has filed two
separate warrants against the Company evidencing judgment liens for
uncontested tax liabilities. The Company has negotiated a payment plan
with the State of New York. The Company is making the required payments
under the plan and the warrants will be released when all required
payments have been made.
F-11
<PAGE> 53
LONG DISTANCE DIRECT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1995 AND 1994
5. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
Installment Obligation - Federal Excise Taxes
During 1993, 1994 and the first quarter of 1995, the Company did not remit
payments for Federal excise taxes which were due to the Internal Revenue
Service. The Company entered into an installment agreement with the
Internal Revenue Service for the payment of such taxes. The agreement
required monthly payments of $34,000 until the total liability, including
taxes and interest had been satisfied. Penalties were waived by the
Internal Revenue Service. The Internal Revenue Service has filed a tax
lien in connection with this obligation, which will be released upon the
satisfaction of all amounts due under the agreement. As of September 1996,
the Company has made all of its payments under the payment plan.
Leases
The Company conducts its operations in leased facilities under a
noncancellable operating lease expiring in 1998. The Company also leases
automobiles and equipment under noncancellable operating leases expiring
in 1999. The minimum rental commitments under operating leases are as
follows:
<TABLE>
<S> <C>
Year ending December 31,
1996 $230,113
1997 214,262
1998 62,949
1999 3,706
--------
Total Minimum Payments Required $511,030
========
</TABLE>
Legal Proceedings - Partnership Buy-Out
A dispute arose with respect to the Partnership Buy-Out Agreement (Note 6)
and in February 1996, LDDLP and certain officers of the Company filed a
lawsuit against the former selling partners seeking compensatory and
punitive damages. The sellers subsequently filed a separate lawsuit
against LDDLP and the officers to exercise their rights to receive payment
under the Buy-Out Agreement and to exercise their remedies under a
security agreement with respect thereto.
On September 20, 1996, the parties entered into an agreement to settle the
pending litigation. In accordance with the terms of the settlement, the
Company paid the sellers $500,000 in settlement of the litigation and as
full satisfaction of all remaining obligations under the Buy-Out
Agreement. The parties signed and delivered mutual general releases and
the litigation was dismissed with prejudice.
F-12
<PAGE> 54
LONG DISTANCE DIRECT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1995 AND 1994
5. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
Shareholder Loans
In March 1996, the Company entered into an agreement with a shareholder of
the Company, pursuant to which the shareholder agreed to loan $500,000 to
the Company. The agreement provided that the shareholder may convert all
(but not less than all) of the loan into shares of the Company's common
stock at a price of $3.30 per share at any time prior to the earlier of
December 31, 1996 or the date on which the Company's common stock is
listed for trading on NASDAQ. As consideration for the loan, the Company
agreed to issue 150,000 shares of common stock to the shareholder and to
pay the shareholder a fee equal to 1.5% of the first $50 million of
revenues and 1% of revenues in excess of $50 million received by the
Company from the customer billings generated by sales representatives
recruited via the infomercial during the first two (2) years any revenue
is received from such infomercial. In September 1996, the shareholder
elected to convert the entire amount of the loan to equity.
The Company entered into agreements with two (2) shareholders on August 1,
1996, pursuant to which the shareholders agreed to loan $350,000 and
$150,000, respectively, to the Company. The loans bear interest at the
rate of 12% per annum and are repayable within 60 days after receipt of
the loan proceeds. The agreements provide that the loans may be converted
into shares of the Company's common stock at a price of $2.50 per share.
As additional consideration for the loans, the Company agreed to issue to
the shareholders, for each seven (7) day period during which the loans are
outstanding, 1,250 shares of common stock and 535 shares of common stock,
respectively, but not less than 5,000 shares and 2,140 shares,
respectively. In addition, if the loans are not repaid prior to September
30, 1996, the shareholders have the option exercisable at any time within
twelve (12) months after such repayment date, to purchase, at a price of
$2.50 per share, 140,000 shares and 60,000 shares, respectively.
F-13
<PAGE> 55
LONG DISTANCE DIRECT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1995 AND 1994
6. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
1995 1994
---- ----
<S> <C> <C>
Note payable to Bank of New York (a) $ 500,000 $ 456,000
Notes payable to two former partners, issued in
connection with Partnership buy-out (b) 555,000 530,200
Note payable, bearing interest at 20%, payable
in six (6) equal monthly installments (c) 110,000 128,000
Series A Loans Payable, bearing interest at prime
plus 2%, payable in full on June 30, 1995 (d) - 177,500
Notes payable, bearing interest at 20%, payable in
full on March 31, 1995 (e) - 100,000
----------- ----------
1,165,000 1,391,700
Less: current portion 1,165,000 1,076,071
----------- -----------
$ -0- $ 315,629
=========== ===========
</TABLE>
(a) Note Payable - Bank
On October 28, 1994, the Company borrowed $500,000 from the Bank of
New York, pursuant to a General Loan Security Agreement, with
interest payable monthly at a rate equal to the prime rate plus
one-half (1/2) percent. Principal is due and payable on July 31,
1996. The loan is secured by a $500,000 certificate of deposit which
was issued by the bank to a shareholder of the Company. The
shareholder has entered into an agreement with the Company under
which it agreed to subscribe to 166,667 shares of the Company's
common stock at $3.00 per share on July 31, 1996 or upon repayment
by the Company of the bank note, if earlier. The Company is
negotiating an extension of the bank loan and the subscription
agreement. The loan is personally guaranteed by two officers of the
Company. The amount outstanding at December 31, 1994 is shown net of
$44,000 of loan discounts.
(b) Notes Payable - Partnership Buy-Out Agreement
On April 6, 1993, certain officers and LDDI, (the "buyers") entered
into a buy-out agreement to purchase the interests of two (2)
partners in LDDLP (the "sellers"). The agreement provided for the
following:
- Note payable to the sellers for their capital and loan account
balances in the aggregate amount of $80,000. These notes were due
in full on May 31, 1995.
F-14
<PAGE> 56
LONG DISTANCE DIRECT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1995 AND 1994
6. NOTES PAYABLE (continued)
(b) Notes Payable - Partnership Buy-Out Agreement
(continued)
- Note payable in the amount of $500,000, payable as
follows: $300 to each of the sellers weekly; remaining
amounts outstanding are due upon the occurrence, if
any, of the following events: (a) the sale directly or
indirectly by the buyers of all or a majority of their
interests, or (b) the sale directly or indirectly of
all or substantially all of the assets, to the extent
that the proceeds from the sale exceed $2,000,000 or
(c) payments or distributions in any month, as salary
or bonuses to the buyers exceeding $18,750 in the
aggregate. The agreement also calls for payments in
the event that earnings exceed specified levels. After
payment of the notes, the contingent event payments are
limited to $750,000 and are reduced by the salary and
earnings cap payments described above.
The notes were non-interest bearing until the second anniversary of
the agreement, at which time, if they were not paid in full,
interest will be charged retroactively to April 6, 1993, at prime
plus 2% per annum.
As more fully described in Note 5, all of the Company's obligations
under these notes were satisfied in September 1996.
(c) Note Payable - Other
Pursuant to a loan made on December 6, 1994, the Company borrowed an
aggregate principal amount of $200,000 from one lender. The note is
evidenced by a promissory note, is payable in six (6) equal monthly
installments starting April 6, 1995, and bears interest at a rate of
20% per annum. The notes are personally guaranteed by certain
officers of the Company. Prior to December 31, 1995 the lender
converted $90,000 of principal into shares of the Company's common
stock at a price of $3.00 per share. The amount outstanding at
December 31, 1994 is shown net of $72,000 of loan discounts.
In August 1996, an officer and shareholder of the Company paid the
lender $229,330, representing the unpaid principal of $110,000, and
accrued interest and fees of $119,330, in consideration of the
lender granting the shareholder the benefit of the lender's interest
in all such amounts owed by the Company.
(d) Series A Loans
Pursuant to a series of loans made on September 30, 1994,
the Company borrowed an aggregate principal amount of $177,500 from
a group of seven (7) lenders ("Series A Loans"). Each loan is
evidenced by a promissory note dated as of September 30, 1994 and
was due on June 30, 1995, which bears interest at a rate per annum
equal to the prime rate plus 2%. Loans aggregating $30,000, plus
accrued interest were repaid during 1995. Holders of the balance of
the notes aggregating $147,500, elected to convert the amount
due to them, plus premium, into shares of the Company's common
stock at a price of $3.00 per share prior to December 31, 1995.
F-15
<PAGE> 57
LONG DISTANCE DIRECT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1995 AND 1994
6. NOTES PAYABLE (continued)
(e) Notes Payable - Other
Pursuant to loans made on December 9, 1994, the Company borrowed an
aggregate principal amount of $100,000 from two (2) lenders. Each
note bears interest at a rate of 20% per annum. These loans were
repaid during 1995.
7. STOCK OPTION PLAN
During 1995, the Company adopted the 1995 Stock Option Plan (the "Stock
Option Plan"), pursuant to which key employees of the Company who have
been selected as participants are eligible to receive awards of options to
purchase common shares.
The Stock Option Plan will be administered by the Compensation Committee
of the Board (the "Committee"). Subject to the provisions of the Stock
Option Plan, the Committee has sole discretionary authority to interpret
the Stock Option Plan and to determine the type of awards to grant, when,
if and to whom awards are granted, the number of shares covered by each
award and the terms and conditions of the award.
Options granted under the Stock Option Plan may be Incentive Stock Options
("ISOs"), within the meaning of Section 422 of the U.S. Internal Revenue
Code, as amended (the "Code"), or non-qualified stock options ("NQSOs").
The exercise price of the options will be determined by the Committee when
the options are granted, subject to a minimum price in the case of ISOs of
the fair market value (as defined in the Stock Option Plan) of the common
shares on the date of grant and a minimum price in the case of NQSOs of
the par value of the common shares. In the discretion of the Committee,
the option exercise price may be paid in cash or in common shares or other
property having fair market value on the date of exercise equal to the
option exercise price, or by delivering to the Company an amount of sale
or loan proceeds sufficient to pay the exercise price.
In October 1995, the Company granted 1,000,000 options to purchase
1,000,000 shares of the Company's common stock at a price of $.001 per
share. No options were exercised during 1995. There was no quoted market
price for the Company's stock on the date of the grant of the options.
Therefore, no compensation expense has been charged to operations in 1995.
8. INCOME TAXES
For the period from January 1, 1993 through October 5, 1995, LDDLP
operated as a limited partnership for Federal and State income tax
purposes. Accordingly, all of the partners were required to report their
share of the Company's loss on their respective Federal and State income
tax returns.
At December 31, 1995, the Company had net operating loss carryforwards for
financial and U.S. Federal income tax purposes of approximately
$4,000,000, which are available to offset future taxable income and begin
to expire in the year 2007.
F-16
<PAGE> 58
LONG DISTANCE DIRECT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1995 AND 1994
8. INCOME TAXES (continued)
Deferred taxes have not been recorded as the temporary differences, which
consist primarily of differences related to the method of recognizing bad
debts and depreciation, are not considered material by management.
9. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------ -------
<S> <C> <C> <C>
Cash paid during the year for interest $ 55,151 $3,719 $98,396
Private placement costs accrued 174,232 -0- -0-
Conversion of debt to equity 337,500 -0- -0-
</TABLE>
10. MAJOR CUSTOMER
The Company had a sales agreement with their one major customer during the
year. Sales to this customer accounted for approximately 12%, 11% and 14%
of net sales for the years ended December 31, 1993, 1994 and 1995,
respectively. At the pricing applicable to such sales, the amount of
revenues generated by this customer approximated the cost of services
provided to it. The customer discontinued the use of the Company's
services in October 1995.
11. LOANS PAYABLE - SHAREHOLDERS
Amounts due to shareholders are non-interest bearing and are due and
payable upon demand.
12. SEC FILINGS
The Company, which is required to file periodic reports with the SEC
pursuant to Section 15(d) of the Securities Exchange Act of 1934, did not
timely file its annual report for the fiscal year ended December 31, 1995.
The Company filed this report in June 1996.
F-17
<PAGE> 59
LONG DISTANCE DIRECT HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
30-Sep
-----------
1996 December 31,
----------- ------------
ASSETS (unaudited) 1995
----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,071,995 $ 207,666
Accounts receivable (net of allowance for
doubtful accounts of $287,501 and$163,149,respectively) 1,809,262 1,103,903
Other current assets 407,165 93,229
----------- -----------
Total Current Assets 3,288,422 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 --
----------- -----------
3,499,674 $ 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 294,923 577,576
Sales and excise taxes payable 466,956 703,143
Loans payable - officers 500,000 74,244
----------- -----------
Total Current Liabilities 4,244,656 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 (5,913,957) (4,665,551)
----------- -----------
Less: Subscriptions receivable 0 (30,000)
----------- -----------
Total Stockholders' Deficit (744,982) (3,262,319)
----------- -----------
$ 3,499,674 $ 1,627,725
=========== ===========
</TABLE>
See notes to Consolidated Financial Statements
F-18
<PAGE> 60
LONG DISTANCE DIRECT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(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
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES $ 1,266,227 $ 4,729,729 $ 2,045,454 $ 6,931,987
CUSTOMER REBATES AND REFUNDS 12,101 19,690 122,854 342,396
----------- ----------- ----------- -----------
NET REVENUES 1,254,126 4,710,039 1,922,600 6,589,591
COST OF SERVICES 927,934 3,067,743 1,440,378 4,932,971
----------- ----------- ----------- -----------
Gross Profit 326,192 1,642,296 482,222 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) (661,841) (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) $(1,248,406) $ (385,288) ($1,533,068)
=========== =========== =========== ===========
NET LOSS PER SHARE (.20) (.31) (.11) (.45)
</TABLE>
F-19
<PAGE> 61
LONG DISTANCE DIRECT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
---------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
30-Sep-96 30-Sep-95
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(1,248,406) $(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 (829,711) 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 (1,420,961) 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)
</TABLE>
F-20
<PAGE> 62
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.
F-21
<PAGE> 63
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
22. Indemnification of Directors and Officers
[To be completed.]
23. Other Expenses of Issuance and Distribution
Registration fee $ 3,178
Legal fees and expenses 25,000
Accounting fees and expenses 5,000
Blue sky fees and expenses 1,000
Printing 10,000
Miscellaneous 5,822
----------
TOTAL $50,000(1)
- ----------
(1) All of the above expenses except the SEC registration fee are estimates.
All of the above expenses will be paid by the Company.
24. Recent Sales of Unregistered Securities
The Company has sold the following securities within the last three years:
In October, 1995, the Company issued 3,000,000 shares of Common Stock
to the stockholders of Long Distance Direct, Inc. (LDDI) in exchange for all of
the shares of LDDI stock pursuant to the terms and conditions of an Agreement
and Plan of Reorganization among the Company, LDDI and the stockholders of
LDDI. The issuance of such securities was exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof and Regulation D
promulgated thereunder.
In November, 1995, the Company granted options under the Company's 1995
Option Plan to purchase 1,000,000 shares of Common Stock to officers, employees
and consultants. The grant of such options was exempt from registration under
the Securities Act of 1933 pursuant to Section 4(2) thereof and Regulation D
promulgated thereunder.
Between November, 1995 and January, 1996, the Company sold 440,833
shares of Common Stock at a price of $3.00 per share to a total of
approximately 18 accredited investors, none of whom were U.S. persons. The
shares were issued pursuant to Regulation S promulgated under the Securities
Act of 1933.
In February, 1996, the Company issued 23,000 shares of Common Stock to
an aggregate of five individuals for consulting services. The issuance of such
shares was exempt under Section 4(2) of the Securities Act of 1933 and
Regulation D promulgated thereunder.
Between April and July 1996, the Company sold 204,000 shares of Common
Stock at a price of $3,30 per share to a total of approximately 5 accredited
investors, none of whom were U.S. persons. The shares were issued pursuant to
Regulation S promulgated under the Securities Act of 1933.
Between April and July, 1996, the Company sold 303,151 shares of Common
Stock at a price of $3.30 per share to two accredited investors. The sale of
such securities was exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof and Regulation D promulgated thereunder.
In May, 1996, the Company issued 7,988 shares of Common Stock to two
individuals in consideration of their having made bridge loans to the Company.
The issuance of such shares was exempt under Section 4(2) of the Securities Act
of 1933 and Regulation D promulgated thereunder.
In May, 1996, the Company issued 150,000 shares of Common Stock to
Business Systems Consultants Limited, an accredited investor, in consideration
of its having provided a convertible loan to the Company. The issuance of such
shares was exempt under Section 4(2) of the Securities Act of 1933 and
Regulation D promulgated thereunder.
II-1
<PAGE> 64
In July, 1996, the Company issued 150,000 shares to Manhattan West, Inc.
for consulting services. The issuance of such shares was exempt under Section
4(2) of the Securities Act of 1933 and Regulation D promulgated thereunder.
In August, 1996, the Company issued warrants to purchase 25,500 shares
of Common Stock at a price of $3.00 per share and warrants to purchase 14,000
shares of Common Stock at a price of $3.30 per share, to Thomas Scichili, a
non-U.S. person. The warrants were issued pursuant to Regulation S promulgated
under the Securities Act of 1933.
In September, 1996, the Company sold 60,606 shares of Common Stock at a
price of $3.30 per share and issued warrants to purchase an aggregate of 60,606
shares of Common Stock at $4.00 per share to two accredited investors, neither
of whom was a U.S. person. The shares were issued pursuant to Regulation S
promulgated under the Securities Act of 1933.
In September, 1996, the Company sold 151,515 shares of Common Stock at
a price of $3.30 per share to Business Systems Consultants Ltd., an accredited
investor. The shares were issued pursuant to Section 4(2) of the Securities
Act of 1933 and Regulation D promulgated thereunder.
In an offering that terminated on November 18, 1996, the Company sold
812,970 shares of Common Stock at a price of $3.30 per share and issued
warrants to purchase an aggregate of 401,362 shares of Common Stock at a price
of $4.00 per share. The offering was made on behalf of the Company by Capital
Growth International LLC as placement agent. The securities were issued to a
limited number of investors, none of whom were U.S. persons. The securities
were issued pursuant to Regulation S promulgated under the Securities Act of
1933. The Company also issued to the placement agent, as a portion of its
compensation, warrants to purchase, at a price of $3.30 per share, up to
283,454 shares of Common Stock. The placement agents' warrants were issued
pursuant to Section 4(2) of the Securities Act of 1933 and Regulation D
promulgated thereunder.
In an offering that terminated on November 18, 1996, the Company sold
77,500 shares of Common Stock at a price of $3.30 per share. The offering was
made on behalf of the Company by Capital Growth International LLC as placement
agent. The shares were issued to a limited number of accredited investors. The
issuance of such shares was exempt from registration under the Securities Act
of 1933 pursuant to Section 4(2) thereof and Regulation D promulgated
thereunder. The Company also issued to the placement agent, as a portion of its
compensation, warrants to purchase, at a price of $3.30 per share, up to 30,706
shares of Common Stock. The placement agents' warrants were issued pursuant to
Section 4(2) of the Securities Act of 1933 and Regulation D promulgated
thereunder.
On November 4, 1996, the Company sold 140,000 shares of Common Stock at
a price of $2.50 per share to Business Systems Consultants Ltd., an
accredited investor. The shares were issued pursuant to Section 4(2) of the
Securities Act of 1933 and Regulation D promulgated thereunder.
On November 22, 1996, the Company granted options to purchase
1,045,000 shares of Common Stock to officers, employees and consultants.
Options to purchase 1,000,000 of the shares were granted under the Company's
1995 Option Plan. The grant of such options was exempt under Section 4(2) of
the Securities Act of 1933 and Regulation D promulgated thereunder.
On November 25, 1996, the Company sold 400,000 shares of Common Stock
at a price of $2.50 per share to Business Systems Consultants Ltd., an
accredited investor. The shares were issued pursuant to Section 4(2) of the
Securities Act of 1933 and Regulation D promulgated thereunder.
In November 1996, the Company issued 166,667 shares to Wingmead
Securities, Ltd. a non-U.S. person, at a price of $3.00 per share. The shares
were issued pursuant to Regulation S promulgated under the Securities Act of
1933.
II-2
<PAGE> 65
In November, 1996, the Company issued warrants to purchase, at a price
of $3.30 per share, 6,400 shares and 6,060 shares to Business Systems
Consolidated Ltd. and Alberdale Partners Limited, respectively, both non-U.S.
persons. The warrants were issued pursuant to Regulation S promulgated under
the Securities Act of 1933.
In November, 1996, the Company issued 16,250 and 6,955 shares of Common
Stock respectivly to Business Systems Consultants Ltd. and Mr. Michael Preston
in consideration of their having made bridge loans to the Company. The issuance
of these shares was exempt under Section 4(2) of the Securities Act of 1933 and
Regulation D promulgated thereunder.
25. Exhibits
<TABLE>
<S> <C>
2.1 Agreement and Plan of Reorganization dated October 6, 1995 between
Golden Ark, Inc. (now known as Long Distance Direct Holdings, Inc.)
Long Distance Direct, Inc. and the stockholders of Long Distance
Direct, Inc.
3.1 Amended and Restated Articles of Incorporation of Long Distance
Direct Holdings, Inc. (formerly known as Golden Ark, Inc.).*
3.2 Certificate of Amendment of Articles of Incorporation of Long
Distance Direct Holdings, Inc.*
3.3 Bylaws, as amended, of Long Distance Direct Holdings, Inc.*
5.1 Opinion of Day, Campbell & McGill.**
10.1 Buy-out Agreement between Long Distance Direct, Inc., and Steven
Lampert, Michael Preston, Jeffrey Schwartz, Michael Miller and JAMI
Marketing Services, Inc.*
10.2 Lease Agreement for Suite 1430, 1 Blue Hill Plaza, Pearl River, New
York 10965.*
10.3 Agreement with AT&T dated July, 1995 for supply of long distance
telephone service for resale.*
</TABLE>
II-3
<PAGE> 66
<TABLE>
<S> <C>
10.4 Agreement with MCI dated March, 1996 for supply of long distance telephone service
for resale.*
10.5 1995 Stock Option Plan.*
10.6 Agreement with Guthy-Renker-Engler dated May 15, 1996 regarding the marketing and distribution
of an infomercial.
10.7 Agreement with Schulberg MediaWorks, Inc. dated June 10, 1996 regarding the production of an infomercial.
21 List of Subsidiaries.
23.1 Consent of Adelman, Katz & Mond, L.L.P.
23.2 Consent of Day, Campbell & McGill, included in Exhibit 5.1.**
27 Financial Data Schedule.
</TABLE>
- ----------
* Incorporated by reference to the Company's Form 10-K/A dated
November 7, 1996 filed with the Commission on November 7, 1996.
** To be filed by amendment.
26. Undertakings
A. Supplementary and Periodic Information, Documents and Reports
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the Registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority in that
Section.
B. Item 512 Undertaking with Respect to Rule 415 Under the Securities Act
of 1933
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(b) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement; and
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and
II-4
<PAGE> 67
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
C. Indemnification
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 ("Securities Act") may be permitted to directors, officers or persons
controlling the Registrant pursuant to the foregoing provisions or otherwise,
the Registrant has been informed that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
D. Item 512 Undertaking with Respect to Rule 430A
The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act
of 1933, the registrant will treat the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part
of this registration statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Securities
Act of 1933, the registrant will treat each post-effective amendment that
contains a form of prospectus as a new registration statement for the
securities offered in the registration statement, and the offering of such
securities at that time as the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Pearl River, State of New York on December 17, 1996.
LONG DISTANCE DIRECT HOLDINGS, INC
.
Steven Lampert
By: -------------------------------
Steven Lampert, President
Each person whose signature to this Registration Statement appears below
hereby appoints Steven Lampert and Michael Preston, and each of them, as his
attorney-in-fact to sign on his behalf individually and in the capacity stated
below and to file all amendments and post-effective amendments to this
Registration Statement as such attorney-in-fact may deem necessary or
appropriate.
II-5
<PAGE> 68
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Steven Lampert December 17, 1996
- --------------------------
Steven Lampert, President
and Director
Michael Preston December 17, 1996
- --------------------------
Michael Preston
Chief Financial Officer
and Director
Lori Colin December 17, 1996
- --------------------------
Lori Colin
Controller
Rowland W. Day II December 17, 1996
- --------------------------
Rowland W. Day II
II-6
<PAGE> 69
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
NO. EXHIBIT DESCRIPTION PAGE
--- ------- ----------- ----
<S> <C>
2.1 AGREEMENT AND PLAN OF REORGANIZATION DATED OCTOBER 6, 1995 BETWEEN GOLDEN
ARK, INC. (NOW KNOWN AS LONG DISTANCE DIRECT HOLDINGS, INC.) LONG DISTANCE
DIRECT, INC. AND THE STOCKHOLDERS OF LONG DISTANCE DIRECT, INC.
3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF LONG DISTANCE DIRECT
HOLDINGS, INC. (FORMERLY KNOWN AS GOLDEN ARK, INC.).*
3.2 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF LONG DISTANCE
DIRECT HOLDINGS, INC.*
3.3 BYLAWS, AS AMENDED, OF LONG DISTANCE DIRECT HOLDINGS, INC.*
5.1 OPINION OF DAY, CAMPBELL & MCGILL.**
10.1 BUY-OUT AGREEMENT BETWEEN LONG DISTANCE DIRECT, INC., AND STEVEN LAMPERT,
MICHAEL PRESTON, JEFFREY SCHWARTZ, MICHAEL MILLER AND JAMI MARKETING
SERVICES, INC.*
10.2 LEASE AGREEMENT FOR SUITE 1430, 1 BLUE HILL PLAZA, PEARL RIVER, NEW YORK
10965.*
10.3 AGREEMENT WITH AT&T DATED JULY, 1995 FOR SUPPLY OF LONG DISTANCE TELEPHONE
SERVICE FOR RESALE.*
10.4 AGREEMENT WITH MCI DATED MARCH, 1996 FOR SUPPLY OF LONG DISTANCE TELEPHONE
SERVICE FOR RESALE.*
10.5 1995 STOCK OPTION PLAN.*
10.6 AGREEMENT WITH GUTHY-RENKER-ENGLER DATED MAY 15, 1996 REGARDING THE
MARKETING AND DISTRIBUTION OF AN INFOMERCIAL
10.7 AGREEMENT WITH SCHULBERG MEDIAWORKS, INC. DATED JUNE 10, 1996 REGARDING THE
PRODUCTION OF AN INFOMERCIAL
21 LIST OF SUBSIDIARIES
23.1 CONSENT OF ADELMAN, KATZ & MOND, L.L.P
23.2 CONSENT OF DAY, CAMPBELL & MCGILL, INCLUDED IN EXHIBIT 5.1.**
27 FINANCIAL DATA SCHEDULE
</TABLE>
- ----------
* INCORPORATED BY REFERENCE TO THE COMPANY'S FORM 10-K/A DATED
NOVEMBER 7, 1996 FILED WITH THE COMMISSION ON NOVEMBER 7, 1996.
**TO BE FILED BY AMENDMENT.
<PAGE> 1
Exhibit 2.1
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") made and
entered into as of the 6th day of October, 1995, is by and among Golden Ark,
Inc., a Nevada corporation (hereinafter referred to as the "Company"), Long
Distance Direct, Inc., a New York corporation (hereinafter referred to as
"LDDI") and each of the holders of shares of Common Stock of LDDI listed on
Exhibit A hereto (sometimes hereinafter collectively referred to as the "LDDI
Stockholders").
RECITALS
WHEREAS, prior to the date hereof, LDDI has acted as the general partner
of Long Distance Direct L.P. (the "Partnership"), a limited partnership formed
under the laws of the State of New York;
WHEREAS, on the date hereof, all of the limited partners of the
Partnership transferred and assigned all of their respective interests in the
Partnership to LDDI in exchange for shares of LDDI Common Stock (unless
otherwise indicated, references hereinafter to LDDI include the Partnership).
WHEREAS, the LDDI Stockholders own a total of 3,293,334 shares of LDDI
Common Stock (the "LDDI Shares") which constitutes all of the issued and
outstanding Common Stock of LDDI; and
WHEREAS, the Company desires to acquire all of the LDDI Shares and the
LDDI Stockholders desire to exchange all of the LDDI Shares for shares of Common
Stock of the Company in a transaction intended to qualify under Section
368(a)(1)(B) of the Internal Revenue Code of 1986, as amended (the "Code").
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and in reliance upon the representations and warranties
hereinafter set forth, the parties agree as follows:
1. EXCHANGE OF THE SHARES AND CONSIDERATION
1.1 Shares Being Exchanged. Subject to the terms and conditions
of this Agreement, at the closing provided for in Section 2 hereof (the
"Closing"), each of the LDDI Stockholders shall sell, assign, transfer and
deliver to the Company all of the LDDI Shares which each of them respectively
own.
<PAGE> 2
1.2 Consideration. Subject to the terms and conditions of this
Agreement and in consideration of the sale, assignment, transfer and delivery of
the LDDI Shares to the Company, at the Closing the Company shall issue and
deliver to the LDDI Stockholders a total of Three Million (3,000,000) shares of
Common Stock of the Company (hereinafter referred to as the "Company Shares"),
each LDDI Stockholder to receive as full consideration for the LDDI Shares held
by such LDDI Stockholder the number of Company shares set forth opposite each
such LDDI Stockholder's name on Exhibit C attached hereto.
2. THE CLOSING
2.1 Time and Place. The closing of the transactions contemplated
by this Agreement shall be held at the offices of Day & Campbell, 3070 Bristol
Street, Suite 650, Costa Mesa, California 92626, at 10:00 a.m. on the date first
above written, or at such other time and place as the parties may agree upon in
writing (the "Closing").
2.2 Deliveries by the LDDI Stockholders. At the Closing, each
LDDI Stockholder shall deliver to the Company the following: (a) stock
certificates representing the number of LDDI Shares set forth opposite the name
of such LDDI Stockholder on Exhibit A hereto, duly endorsed or accompanied by
stock powers duly executed in blank and otherwise in form acceptable for
transfer on the books of LDDI, and (b) an investment letter in the form attached
hereto as Exhibit B executed by such LDDI Stockholder.
2.3 Deliveries by LDDI. At the Closing, in addition to the
documents referred to in Section 9.1 hereof, LDDI shall deliver to the Company
the following: (a) certified resolutions of the LDDI Board of Directors
authorizing the execution and delivery of this Agreement and the performance by
LDDI of its obligations hereunder, and (b) a certificate of good standing of
LDDI from the Secretary of State of New York dated as of the most recent
practicable date.
2.4 Deliveries by the Company. At the Closing, in addition to
the documents referred to in Section 9.2 hereof, the Company shall deliver to
the LDDI Stockholders the following: (a) a stock certificate issued in the name
of each LDDI Stockholder representing the number of Company Shares each such
LDDI Stockholder is entitled to receive; (b) certified resolutions of the
Company's Board of Directors authorizing the execution and delivery of this
Agreement and the performance by the Company of its obligations hereunder; (c) a
certificate of good standing of the Company from the Secretary of State of
Nevada dated as of the most recent practicable date; (d) the written resignation
of all of the officers and directors of the Company effective as of the date of
Closing; and (e) the Company's minute book, corporate seal and copies of all
corporate and financial books and records.
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3. INDIVIDUAL REPRESENTATIONS AND WARRANTIES BY THE LDDI
STOCKHOLDERS
Each of the LDDI Stockholders, severally but not jointly,
represents and warrants to the Company as follows:
3.1 Title. Such LDDI Stockholder owns the number of LDDI Shares
set forth opposite such LDDI Stockholder's name on Exhibit A hereto, and shall
transfer to the Company at the Closing good and valid title to the LDDI Shares,
free and clear of all liens, claims, options, charges, and encumbrances of every
kind, character or description.
3.2 Authority. Such LDDI Stockholder has full power and
authority to execute this Agreement and consummate the transactions contemplated
hereby, and this Agreement is binding on such LDDI Stockholder and enforceable
in accordance with its terms. The execution and delivery of this Agreement and
consummation of the transactions contemplated hereby do not violate or conflict
with or constitute a default under any contract, commitment, agreement,
understanding, arrangement or restriction of any kind to which such LDDI
Stockholder is a party or by which such LDDI Stockholder or such LDDI
Stockholder's property is bound, or to such LDDI Stockholder's knowledge any
existing applicable law, rule, regulation, judgment, order or decree of any
government, governmental instrumentality or court, domestic or foreign, having
jurisdiction over such LDDI Stockholder or any of such LDDI Stockholder's
property.
3.3 Investment Representation. Such LDDI Stockholder intends to
acquire the Company Shares for investment and not with a view to the public
distribution or resale thereof, and such LDDI Stockholder shall confirm such
intention to the Company by delivering to the Company at the Closing an
investment letter in the form attached as Exhibit B hereto. Such LDDI
Stockholder agrees that the Company may endorse on any stock certificate for the
Company Shares to be delivered pursuant to this Agreement an appropriate legend
referring to the provisions of the investment letter attached as Exhibit B
hereto, and that the Company may instruct its transfer agent not to transfer any
Company Shares unless advised by the Company that such provisions have been
complied with.
4. REPRESENTATIONS AND WARRANTIES OF LDDI
LDDI represents and warrants to the Company as follows:
4.1 Authority. LDDI has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated herein. The execution and delivery of this Agreement and the
consummation of the transactions contemplated herein have been duly authorized
and approved by all necessary corporate action on the part of LDDI This
Agreement has been duly executed and delivered by LDDI and constitutes the valid
and binding obligation of LDDI, enforceable in accordance with its terms.
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4.2 Organization.
(a) LDDI is a corporation duly organized, validly existing
and in good standing under the laws of the State of New York. LDDI has the
corporate power and authority to carry on its business as presently conducted,
possesses all licenses, franchises, rights and privileges material to the
conduct of its business, and is qualified to do business in all jurisdictions
where the failure to be so qualified would have a material adverse effect on its
business or financial condition.
(b) The copies of the Articles of Incorporation and all
amendments thereto of LDDI, as certified by the Secretary of State of New York,
and the Bylaws and all amendments thereto, as certified by the Secretary of
LDDI, which have heretofore been delivered to the Company, are complete and
correct copies of the Articles of Incorporation and Bylaws of LDDI as amended
and in effect on the date hereof. All minutes of meetings and actions in writing
without a meeting of the Board of Directors and stockholders of LDDI are
contained in the minute book of LDDI heretofore delivered to the Company for
examination, and no minutes or actions in writing without a meeting have been
included in such minute book since such delivery to the Company that have not
also been delivered to the Company.
4.3 Capitalization.
(a) The authorized capital stock of LDDI consists of
20,000,000 shares of Common Stock, $.01 par value, of which 3,293,334 shares are
issued and outstanding, and 1,000,000 shares of Preferred Stock, none of which
are issued and outstanding. All of the issued and outstanding shares of Common
Stock of LDDI were issued in compliance with applicable state and Federal
securities laws, are duly authorized, validly issued, fully paid and
nonassessable, and are not subject to preemptive rights created by statute,
LDDI's Articles of Incorporation or Bylaws or any agreement to which LDDI is a
party or is bound.
(b) There are no options, warrants, calls, rights,
commitments or agreements of any character to which LDDI is a party or by which
it is bound obligating LDDI to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock of LDDI or obligating LDDI
to grant, extend or enter into any such option, warrant, call, right, commitment
or agreement.
4.4 Acquisition of Partnership. LDDI has entered into an
agreement (the "Partnership Acquisition Agreement") with all of the limited
partners (the "Limited Partners") of Long Distance Direct L.P., a limited
partnership formed under the laws of the State of New York (the "Partnership"),
a fully executed copy of which has been delivered to the Company, pursuant to
which the Limited Partners transferred and assigned all of their respective
interests in the Partnership to LDDI in exchange for shares of LDDI Common
Stock.
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4.5 Financial Statements. LDDI has delivered to the Company
copies of its audited combined balance sheets for the fiscal years ended
December 31, 1993 and 1994 and the related combined statements of operations,
stockholders' equity and cash flows for the periods then ended together with
appropriate notes to such financial statements, and copies of its unaudited
combined balance sheet as of March 31, 1995 and the related combined statement
of operations, stockholders' equity and cash flows for the three month period
then ended (the "LDDI Combined Financial Statements"), copies of which are
attached hereto as Schedule 4.5. The LDDI Combined Financial Statements consist
of the accounts of the Company and the Partnership. All significant intercompany
balances and transactions have been eliminated. The LDDI Combined Financial
Statements have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved, and
present fairly the financial condition of LDDI and the results of its operations
as of the dates and for the periods indicated thereon, subject in the case of
the unaudited portion of the LDDI Combined Financial Statements to normal
year-end audit adjustments, which will not be material, and the absence of
certain footnote disclosures.
4.6 Absence of Undisclosed Liabilities. At the date of the most
recent balance sheet of LDDI included in the LDDI Combined Financial Statements
and as of the Closing Date, LDDI had and will have no liability or obligation of
any nature, whether accrued, absolute, contingent, or otherwise, and whether
due, or to become due, other than liabilities or obligations individually or in
the aggregate less than $5,000, that is not reflected or reserved against in the
most recent balance sheet of LDDI or the accompanying notes thereto included in
the LDDI Combined Financial Statements, or set forth in Schedule 4.6 hereto,
except for those that may have been incurred after the date of such balance
sheet and those that are not required by generally accepted accounting
principles to be included in such balance sheet or the accompanying notes
thereto. All liabilities and obligations incurred after the date of such balance
sheet were incurred in the ordinary course of business and are usual and normal
in amount both individually and in the aggregate.
4.7 Business Changes. Since the date of the most recent balance
sheet of LDDI included in the LDDI Combined Financial Statements, except as
otherwise contemplated by this Agreement or set forth on Schedule 4.7 hereto,
LDDI has conducted its business only in the ordinary and usual course and,
without limiting the generality of the foregoing, there have been no changes in
the condition (financial or otherwise), business, net worth, assets, prospects,
properties, employees, operations, obligations or liabilities of LDDI which, in
the aggregate, have had or may be reasonably expected to have a materially
adverse effect on the condition, business, net worth, assets, prospects,
properties or operations of LDDI
4.8 Properties. The most recent LDDI combined balance sheet
included in the LDDI Combined Financial Statements reflects all of the real and
personal property used by LDDI in its business or otherwise held by LDDI except
for (i) property acquired or disposed of in the ordinary and usual course of the
business of LDDI since the date of the most recent LDDI combined balance sheet
included in the LDDI Combined Financial Statements, and (ii) property
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<PAGE> 6
not required under generally accepted accounting principles to be reflected
thereon. Except as set forth on Schedule 4.8 attached hereto, LDDI has good and
marketable title to all assets and properties listed on the most recent LDDI
combined balance sheet included in the LDDI Combined Financial Statements and
thereafter acquired, free and clear of any imperfections of title, lien, claim,
encumbrance, restriction, charge or equity of any nature whatsoever, except for
the lien of current taxes not yet delinquent. All of the fixed assets and
properties listed on the most recent LDDI combined balance sheet included in the
LDDI Combined Financial Statements or thereafter acquired are in satisfactory
condition and repair for the requirements of the business as presently conducted
by LDDI.
4.9 Taxes. Except as described on Schedule 4.9 hereto, within
the times and in the manner prescribed by law, LDDI has filed all federal,
state, and local tax returns and reports required by law and has paid in full
all taxes, assessments, known penalties and interest (all such items are
collectively referred to as "Taxes") due to, or claimed to be due by, any
governmental authority. The most recent combined balance sheet of LDDI included
in the LDDI Combined Financial Statements fully accrues all current and deferred
Taxes. Except as described on Schedule 4.9 hereto, LDDI is not a party to any
pending action or proceeding, nor, to the actual knowledge of LDDI, is any such
action or proceeding threatened by any governmental authority for the assessment
or collection of Taxes, and there are no liens for Taxes except for liens for
property taxes not yet delinquent.
4.10 Litigation. Except as described on Schedule 4.10 hereto,
there is no claim, action, suit or proceeding, at law or in equity, pending
against LDDI, or involving any of its assets or properties, before any court,
agency, authority, arbitration panel or other tribunal (other than those, if
any, with respect to which service of process or similar notice has not been
made on LDDI), and, to the knowledge of LDDI, none have been threatened. LDDI is
not subject to any order, writ, injunction or decree of any court, agency,
authority, arbitration panel or other tribunal, nor is it in default with
respect to any notice, order, writ, injunction or decree.
4.11 No Conflict. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby do not and will not
conflict with, or result in a breach of any term or provision of, or constitute
a default under or result in a violation of, the Articles of Incorporation or
Bylaws of LDDI, any agreement, contract, lease, license or instrument to which
LDDI is a party or by which it or any of its properties or assets are bound, or
any judgment, decree, order, or writ by which LDDI is bound or to which it or
any of its properties or assets are subject.
4.12 Consent. No consent, approval, order or authorization of,
or registration, declaration or filing with, any court, administrative agency or
commission or other governmental authority or instrumentality is required by or
with respect to LDDI in connection with the execution and delivery of this
Agreement or the consummation by LDDI of the transactions contemplated herein.
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<PAGE> 7
4.13 Brokers or Finders. LDDI has not dealt with any broker or
finder in connection with the transactions contemplated by this Agreement. LDDI
has not incurred, and shall not incur, directly or indirectly, any liability for
any brokerage or finders' fees or agents commissions or any similar charges in
connection with this Agreement or any transaction contemplated herein.
4.14 Underlying Documents. Copies of any underlying documents
listed or described as having been disclosed to the Company pursuant to this
Agreement, if requested by the Company, have been furnished to the Company. All
such documents furnished to the Company are true and correct copies, and there
are no amendments or modifications thereto that have not been disclosed to the
Company.
4.15 Full Disclosure. Any information furnished to the Company
by or on behalf of LDDI in writing pursuant to this Agreement at any time prior
to the Closing, does not and will not contain any untrue statement of a material
fact and does not and will not omit to state any material fact necessary to make
any statement, in light of the circumstances under which such statement is made,
not misleading.
4.16 LDDI Schedules. The Schedules attached hereto by LDDI
pursuant to Article 4 of this Agreement are sometimes hereinafter referred to as
the LDDI Schedules.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to LDDI and the LDDI
Stockholders as follows:
5.1 Authority. The Company has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated herein. The execution and delivery of this Agreement, the
consummation of the transactions contemplated herein, and the issuance of the
Company Shares in accordance with the terms hereof, have been duly authorized by
all necessary corporate action on the part of the Company. This Agreement has
been duly executed and delivered by the Company and constitutes the valid and
binding obligation of the Company, enforceable in accordance with its terms.
5.2 Organization.
(a) The Company is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Nevada. The
Company has the corporate power and authority to carry on its business as
presently conducted, and is qualified to do business in all jurisdictions where
the failure to be so qualified would have a material adverse effect on its
business or financial condition.
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(b) The copies of the Articles of Incorporation and all
amendments thereto of the Company, as certified by the Secretary of State of
Nevada, and the Bylaws of the Company and all amendments thereto, as certified
by the Secretary of the Company, which have heretofore been delivered to LDDI
and made available to the LDDI Stockholders, are complete and correct copies of
the Articles of Incorporation and Bylaws of the Company as amended and in effect
on the date hereof. All minutes of meetings and actions in writing without a
meeting of the Board of Directors and stockholders of the Company are contained
in the minute book of the Company heretofore delivered to LDDI and made
available to the LDDI Stockholders, and no minutes or actions in writing without
a meeting have been included in such minute book since such delivery to LDDI
that have not also been delivered to LDDI and made available to the LDDI
Stockholders.
5.3 Capitalization.
(a) The authorized capital stock of the Company consists of
100,000,000 shares of Common Stock, $.001 par value, of which 400,000 shares
(plus up to an additional 50 shares to be issued by the Company in connection
with rounding up fractional shares resulting from a recent 1.4700477 for one
stock split) are issued and outstanding. All of the issued and outstanding
shares of Common Stock of the Company were issued in compliance with applicable
state and Federal securities laws, are duly authorized, validly issued, fully
paid and non-assessable, and are not subject to preemptive rights created by
statute, the Company's Articles of Incorporation or Bylaws or any agreement to
which the Company is a party or is bound.
(b) There are no options, warrants, calls, rights,
commitments or agreements of any character to which the Company is a party or by
which it is bound obligating the Company to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of capital stock of the Company
or obligating the Company to grant, extend or enter into any such option,
warrant, call, right, commitment or agreement.
5.4 Equity Investments. Company does not own any equity interest
in any corporation, partnership, or other form of business entity.
5.5 Financial Statements. Company has delivered to LDDI and made
available to the LDDI Stockholders copies of its audited balance sheets for the
years ended December 31, 1993 and 1994 and the related statements of
operations, stockholders' equity and cash flows for the periods then ended
together with appropriate notes to such financial statements, and copies of its
unaudited balance sheet as of June 30, 1995 and the related statement of
operations, stockholders' equity and cash flows for the six month period then
ended (the "Company Financial Statements"), a copy of which is attached hereto
as Schedule 5.5. The Company Financial Statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis during the periods involved, and present fairly the financial condition of
the Company and the results of operations as of the dates and for the periods
indicated therein, subject
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in the case of the unaudited portion of the Company Financial Statements to
normal year-end audit adjustments, which will not be material, and the absence
of certain footnote disclosures.
5.6 Absence of Undisclosed Liabilities. At the date of the most
recent balance sheet of the Company included in the Company Financial Statements
and as of the Closing Date, the Company had and will have no liability or
obligation of any nature, whether accrued, absolute, contingent or otherwise,
and whether due or to become due, that is not reflected or reserved against in
the most recent balance sheet of the Company included in the Company Financial
Statements, or set forth in Schedule 5.6 hereto, except for those that are not
required by generally accepted accounting principles to be included in such
balance sheet or the accompanying notes thereto and except for fees (including
legal and accounting fees), costs and expenses incurred in connection with the
activities and transactions contemplated by this Agreement.
5.7 Business Changes. The Company has not been actively engaged
in business or any activities other than seeking to acquire an operating
business since 1991.
5.8 Taxes. Within the times and in the manner prescribed by law,
the Company has filed all federal, state, and local tax returns required by law
and has paid all taxes, assessments, penalties and interest (all such items are
collectively referred to as "Taxes") due to, or claimed to be due by, any
governmental authority. The most recent balance sheet of the Company included in
the Company Financial Statements fully accrues all current and deferred Taxes.
5.9 Litigation. There is no claim, action, suit or proceeding,
at law or in equity, pending against the Company, or involving any of its assets
or properties, before any court, agency, authority, arbitration panel or other
tribunal (other than those, if any, with respect to which service of process or
similar notice has not been made on the Company), and, to the actual knowledge
of the Company, none have been threatened. The Company is not subject to any
order, writ, injunction or decree of any court, agency, authority, arbitration
panel or other tribunal, nor is it in default with respect to any notice, order,
writ, injunction or decree.
5.10 Contracts and Undertakings. The Company is not a party to
or bound by nor are any of its properties and assets subject to any contract,
instrument, lease, license, agreement, commitment or undertaking.
5.11 No Conflict. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby do not and will not
conflict with, or result in a breach of any term or provision of, or constitute
a default under or result in a violation of, the Articles of Incorporation or
Bylaws of the Company, any agreement, contract, lease, license, or instrument to
which the Company is a party or by which it or any of its assets are bound, or
any judgment, decree, order or writ by which the Company is bound or to which it
or any of its assets are subject.
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5.12 Consent. No consent, approval, order or authorization of,
or registration, declaration or filing with, any court, administrative agency or
commission or other governmental authority or instrumentality is required by or
with respect to the Company in connection with the execution and delivery of
this Agreement or the consummation by the Company of the transactions
contemplated herein, except for (a) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required under
applicable state law and (b) such other consents, approvals, orders,
authorizations, registrations, declarations and filings which if not obtained or
made would not have a material adverse effect on the Company.
5.13 Brokers or Finders. The Company has not dealt with any
broker or finder in connection with the transactions contemplated by this
Agreement. The Company has not incurred, and shall not incur, directly or
indirectly, any liability for any brokerage or finders' fees or agents
commissions or any similar charges in connection with this Agreement or any
transaction contemplated herein.
5.14 Compliance with Securities Laws.
(a) The Company has delivered to LDDI and the LDDI
Stockholders, true and complete copies of the Company's Registration Statement
on Form S-18, Registration No. 33-26019-LA, (the "Registration Statement") which
was declared effective by the Securities and Exchange Commission ("SEC") on
February 14, 1991.
(b) The Company has delivered to LDDI and the LDDI
Stockholders true and complete copies, including exhibits and, as applicable,
amendments thereto, of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 and all Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K filed since December 31, 1994. All reports required to be
filed by the Company with the Securities and Exchange Commission (collectively,
the "Reports") have been properly filed and comply in all material respects with
the requirements of the Securities Exchange Act of 1934 and the rules and
regulations promulgated thereunder with respect to such Reports. The Reports and
the Registration Statement do not contain any untrue statements of a material
fact, or fail to state any material fact required to be stated therein or
necessary to make the statements made therein not misleading.
(c) No formal or informal investigation or examination by
the Securities and Exchange Commission ("SEC") or by the securities
administrator of any state is pending or, to the knowledge of the Company,
threatened against the Company, any officer or director of the Company or any of
the Company's stockholders.
(d) Neither the Company nor any of its officers, directors,
promoters or beneficial owners of more than 10% of its Common Stock have been
convicted of any felony or misdemeanor in connection with the purchase and sale
of any security or involving the making of any false filing with the SEC.
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(e) Neither the Company nor any of its officers, directors,
promoters or beneficial owners of more than 10% of its Common Stock are subject
to any order, judgement or decree of any court of competent jurisdiction,
temporarily or preliminarily restraining or enjoining, or subject to any order,
judgment or decree of any court of competent jurisdiction, permanently
restraining or enjoining, such person from engaging in or continuing any conduct
or practice in connection with the purchase or sale of any security or involving
the making of any false filing with the SEC.
(f) All of the outstanding securities of the Company,
including, without limitation, the securities issued pursuant to the
Registration Statement, have been issued in compliance with all applicable
Federal and state securities laws.
(g) No individual, corporation, partnership, joint venture
or other business enterprise or entity has demand or other rights to cause the
Company to file any registration statement under the Securities Act of 1933
relating to any securities of the Company or any rights to participate in any
such registration statement.
5.15 Underlying Documents. Copies of any underlying documents
listed or described as having been disclosed to LDDI and made available to the
LDDI Stockholders pursuant to this Agreement, if requested by LDDI or the LDDI
Stockholders, have been furnished to LDDI and made available to the LDDI
Stockholders. All such documents furnished to LDDI and made available to the
LDDI Stockholders are true and correct copies, and there are no amendments or
modifications thereto that have not been disclosed to LDDI and made available to
the LDDI Stockholders.
5.16 Full Disclosure. Any information furnished by or on behalf
of the Company in writing pursuant to this Agreement, at any time prior to the
Closing does not and will not contain any untrue statement of a material fact
and does not and will not omit to state any material fact necessary to make any
statement, in light of the circumstances under which such statement is made, not
misleading.
5.17 Company Schedules. The Schedules attached hereto by the
Company pursuant to Article 5 of this Agreement are sometimes hereinafter
referred to as the Company Schedules.
6. COVENANTS RELATING TO CONDUCT OF BUSINESS OF LDDI
During the period from the date of this Agreement and continuing
until the Closing, LDDI and the LDDI Stockholders agree (except as expressly
contemplated by this Agreement or to the extent that the Company shall otherwise
consent in writing) that:
6.1 Ordinary Course. LDDI shall carry on its business in the
usual and ordinary course, in substantially the same manner as heretofore
conducted and, to the extent consistent with
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such business, use all reasonable efforts consistent with past practice and
policies to preserve intact its present business organization, keep available
the services of its present officers and key employees and preserve its
relationship with customers, providers and others having business dealings with
it to the end that its goodwill and ongoing business shall be unimpaired at the
Closing.
6.2 Dividends; Changes in Stock. LDDI shall not and shall not
propose to (i) declare or pay any dividends on or make other distributions in
respect of any of its capital stock, (ii) split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of capital stock of LDDI,
or (iii) repurchase or otherwise acquire any shares of its capital stock or
rights to acquire any shares of its capital stock.
6.3 Issuance of Securities. LDDI shall not issue, deliver or
sell or authorize or propose the issuance, delivery or sale of, or purchase or
propose the purchase of, any shares of its capital stock of any class or
securities convertible into, or rights, warrants or options to acquire, any such
shares or other convertible securities.
6.4 Governing Documents. LDDI shall not amend its Articles of
Incorporation or Bylaws.
7. COVENANTS RELATING TO CONDUCT OF BUSINESS OF THE COMPANY
During the period from the date of this Agreement and continuing
until the Closing, the Company agrees (except as expressly contemplated by this
Agreement or to the extent that LDDI and the LDDI Stockholders shall otherwise
consent in writing) that:
7.1 Ordinary Course. The Company shall carry on its business in
the usual and ordinary course in substantially the same manner as heretofore
conducted.
7.2 Dividends; Changes in Stock. The Company shall not and shall
not propose to (i) declare or pay any dividends on or make other distributions
in respect of any of its capital stock, (ii) split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of capital stock of the
Company, or (iii) repurchase or otherwise acquire any shares of its capital
stock or rights to acquire any shares of its capital stock.
7.3 Governing Documents. The Company shall not amend its
Articles of Incorporation or Bylaws.
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8. ADDITIONAL AGREEMENTS
8.1 Access to Information.
(a) LDDI and the LDDI Stockholders shall afford to the
Company and shall cause its independent accountants to afford to the Company,
and its accountants, counsel and other representatives, reasonable access during
normal business hours during the period prior to the Closing to all information
concerning LDDI, as the Company may reasonably request, provided that LDDI and
the LDDI Stockholders shall not be required to disclose any information which
either of them is legally required to keep confidential. The Company will not
use such information for purposes other than this Agreement and will otherwise
hold such information in confidence (and the Company will cause its consultants
and advisors also to hold such information in confidence) until such time as
such information otherwise becomes publicly available, and in the event of
termination of this Agreement for any reason the Company shall promptly return,
or cause to be returned, to the disclosing party all documents obtained from
LDDI and the LDDI Stockholders, and any copies made of such documents, extracts
and copies thereof.
(b) The Company shall afford to LDDI and the LDDI
Stockholders and shall cause its independent accountants to afford to LDDI and
the LDDI Stockholders, and their accountants, counsel and other representatives,
reasonable access during normal business hours during the period prior to the
Closing to all of the Company's properties, books, contracts, commitments and
records and to the audit work papers and other records of the Company's
independent accountants. During such period, the Company shall use reasonable
efforts to furnish promptly to LDDI and the LDDI Stockholders such information
concerning the Company as LDDI and the LDDI Stockholders may reasonably request,
provided that the Company shall not be required to disclose any information
which it is legally required to keep confidential. LDDI and the LDDI
Stockholders will not use such information for purposes other than this
Agreement and will otherwise hold such information in confidence (and LDDI and
the LDDI Stockholders will cause their respective consultants and advisors also
to hold such information in confidence) until such time as such information
otherwise becomes publicly available, and in the event of termination of this
Agreement for any reason LDDI and the LDDI Stockholders shall promptly return,
or cause to be returned, to the disclosing party all documents obtained from the
Company, and any copies made of such documents, extracts and copies thereof.
8.2 Communications. Between the date hereof and the Closing
Date, neither LDDI nor the Company will, without the prior written approval of
the other party, furnish any communication to its shareholders or to the public
generally if the subject matter thereof relates to the other party or to the
transactions contemplated by this Agreement, except as may be necessary, in the
opinion of their respective counsel, to comply with the requirements of any law,
governmental order or regulation.
8.3 Blue Sky Laws. The Company shall take such steps as may be
necessary to comply with the securities and Blue Sky laws of all jurisdictions
which are applicable in
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connection with the issuance of the Company Shares to the LDDI Stockholders
pursuant to this Agreement. LDDI shall use its best efforts to assist the
Company as may be necessary to comply with such laws.
8.4 Update to Disclosures. Without limiting the Company's right
to rely on the representations and warranties as of the date of this Agreement,
LDDI shall provide the Company with updates to the disclosures provided or made
available to the Company as to material facts which arise between the date of
this Agreement and the Closing and which, if they had occurred and been known
prior to the date of this Agreement, would have been required to have been
disclosed in order to make the representations and warranties contained in
Article 4 true and correct as of the date of this Agreement.
8.5 Securities Law Matters. The Company Shares issued to the
LDDI Stockholders shall be issued without registration under the Securities Act
of 1933, as amended, (the "Act"), in reliance upon certain exemptions from the
registration requirements of the Act, including Regulation D adopted thereunder.
Accordingly, the Company Shares may not be resold by the holders thereof without
registration under the Act unless a further exemption from the registration
requirements of the Act is available for such resale. All certificates
representing the Company Shares shall bear the following legend or a legend of
similar import:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR UNDER CERTAIN STATE SECURITIES LAWS. NO SALE OR
TRANSFER OF THESE SHARES MAY BE MADE IN THE ABSENCE OF (1) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR (2) AN OPINION
OF COUNSEL THAT REGISTRATION UNDER THE ACT OR UNDER APPLICABLE
STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH
PROPOSED SALE OR TRANSFER."
9. CONDITIONS PRECEDENT
9.1 Conditions to Obligations of the Company. The obligations of
the Company to consummate the transactions contemplated by this Agreement are
subject to the satisfaction on or before the Closing of the following
conditions, unless waived by the Company:
(a) Representations and Warranties of the LDDI Stockholders.
The representations and warranties of the LDDI Stockholders set forth in this
Agreement shall be true and correct in all material respects as of the date of
this Agreement and as if made at and as of the Closing.
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<PAGE> 15
(b) Representations and Warranties of LDDI. The
representations and warranties of LDDI set forth in this Agreement shall be true
and correct in all material respects as of the date of this Agreement and as if
made at and as of the Closing, and the Company shall have received a certificate
or certificates to such effect signed by the chief executive officer and chief
financial officer of LDDI
(c) Acquisition of Interests in the Partnership. LDDI shall
have acquired all of the Limited Partners' interests in the Partnership from the
Limited Partners in accordance with the terms of the Partnership Acquisition
Agreement, and such Partnership Acquisition Agreement shall not have been
rescinded, terminated or amended in any manner prior to the Closing.
(d) Additional Closing Documents. The Company shall have
received the following documents and instruments:
(1) Certified resolutions of the LDDI Board of Directors
authorizing the execution and delivery of this Agreement and the performance by
LDDI of its obligations hereunder;
(2) A certificate of good standing of LDDI from the
Secretary of State of New York dated as of the most recent practicable date;
(3) Such other documents and instruments as are required
to be delivered pursuant to the provisions of this Agreement or otherwise
reasonably requested by the Company.
9.2 Conditions to Obligations of LDDI and the LDDI Stockholders.
The obligations of LDDI and the LDDI Stockholders to consummate the transactions
contemplated by this Agreement are subject to the satisfaction on or before the
Closing of the following conditions unless waived by LDDI and the LDDI
Stockholders:
(a) Representations and Warranties. The representations and
warranties of the Company set forth in this Agreement shall be true and correct
in all material respects as of the date of this Agreement and as if made at and
as of the Closing, and LDDI and the LDDI Stockholders shall have received a
certificate signed by the chief executive officer of the Company to such effect.
(b) Performance of Obligations of the Company. The Company
shall have performed in all material respects all obligations required to be
performed by it under this Agreement prior to the Closing, and LDDI and the LDDI
Stockholders shall have received a certificate signed by the chief executive
officer of the Company to such effect.
15
<PAGE> 16
(c) No Material Adverse Change. Since the date of the most
recent balance sheet included in the Company Financial Statements, except as
expressly contemplated by this Agreement and except for fees (including legal
and accounting fees), costs and expenses paid or incurred by the Company in
connection with the activities and transactions contemplated by this Agreement,
there shall have been no changes in the condition (financial or otherwise),
business, obligations or liabilities of the Company which, in the aggregate,
have had or may be reasonably expected to have a materially adverse effect on
the financial condition, business or operations of the Company.
(d) Resignations. The Company shall have received and
accepted the written resignations of all of the Company's officers and directors
as of the Closing, and shall have delivered such resignations to LDDI.
(e) Election of Directors and Officers. The Board of
Directors of the Company shall have elected the following persons to serve as
directors and officers of the Company effective as of the date of Closing:
Name Position
Steven Lampert Director and President
Michael Preston Director, Vice President and Chief
Financial Officer
9.3 Additional Closing Documents. LDDI and the LDDI Stockholders
shall have received the following documents and instruments:
(1) Certified resolutions of the Company's Board of
Directors authorizing the execution and delivery of this Agreement and the
performance by the Company of its obligations hereunder;
(2) A certificate of good standing of the Company from the
Secretary of State of Nevada dated as of the most recent practicable date;
(3) A list of the Company's stockholders as of a date within
ten (10) days prior to the Closing certified by the Company's stock transfer
agent;
(4) Such other documents and instruments as are required to
be delivered pursuant to the provisions of this Agreement or otherwise
reasonably requested by LDDI and the LDDI Stockholders.
16
<PAGE> 17
10. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNITY
10.1 Survival of Representations and Warranties. The respective
representations and warranties of the parties contained herein shall survive the
Closing, but shall expire on the first anniversary date following the date of
Closing, unless a specific claim in writing with respect to these matters shall
have been made, or any action at law or in equity shall have been commenced or
filed before this anniversary date. The limitation period for the survival of
the representations and warranties of the parties contained herein shall not
apply to any fraudulent breach, representation or warranty or to any breach or
inaccuracy in any representation or warranty known to such party on or before
the date of Closing.
10.2 Indemnification.
(a) LDDI and the LDDI Stockholders agree to indemnify and
hold the Company and its officers, directors, stockholders, agents and
affiliates harmless from and against all damages, claims, losses, liabilities
and expenses (including, without limitation, reasonable attorneys' fees and
expenses) resulting from or arising out of (1) any breach or violation of this
Agreement by LDDI or the LDDI Stockholders; or (2) any breach of any of the
representations, warranties or covenants made in this Agreement by LDDI or the
LDDI Stockholders; or (3) any inaccuracy or misrepresentation in the LDDI
Schedules attached hereto or in any certificate, document or instrument
delivered in accordance with the terms of this Agreement by LDDI or the LDDI
Stockholders.
(b) The Company agrees to indemnify and hold LDDI and the
LDDI Stockholders and their respective officers, directors, stockholders, agents
and affiliates harmless from and against all damages, claims, losses,
liabilities and expenses (including, without limitation, reasonable attorneys'
fees and expenses) resulting from or arising out of (1) any breach or violation
of this Agreement by the Company; or (2) any breach of any of the
representations, warranties or covenants made in this Agreement by the Company;
or (3) any inaccuracy or misrepresentation in the Company Schedules attached
hereto or in any certificate, document or instrument delivered in accordance
with the terms of this Agreement by the Company.
(c) The obligations to indemnify and hold harmless pursuant
to this Section 10.2 shall survive the Closing for a period of one (1) year
after the date of Closing.
11. OBLIGATIONS OF THE COMPANY AFTER THE CLOSING
11.1 SEC Filing. The Company shall file a Form 8-K which
contains the financial and other information required by Form 8-K with the SEC
within the time periods specified in Form 8-K.
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<PAGE> 18
12. PAYMENT OF EXPENSES
The Company, LDDI and the LDDI Stockholders shall each pay their
own fees and expenses incurred incident to the preparation and carrying out of
the transactions herein contemplated (including legal and accounting fees).
13. TERMINATION
13.1 Termination. This Agreement may be terminated at any time
prior to the Closing Date:
(a) by mutual written consent of the Company, LDDI and the
LDDI Stockholders;
(b) by the Company if there has been a material breach of
any representation, warranty, covenant or agreement contained in this Agreement
by LDDI or the LDDI Stockholders;
(c) by LDDI and the LDDI Stockholders if there has been a
material breach of any representation, warranty, covenant or agreement contained
in this Agreement by the Company.
13.2 Effect of Termination. Termination of this Agreement in
accordance with Section 13.1 may be effected by written notice from either the
Company or LDDI and the LDDI Stockholders, as appropriate, specifying the
reasons for termination and shall not subject the terminating party to any
liability for any valid termination.
14. MISCELLANEOUS
14.1 Tax Treatment. The transaction contemplated herein is
intended to qualify as a so-called "tax-free" reorganization under the
provisions of Section 368 of the Internal Revenue Code. LDDI, the LDDI
Stockholders and the Company acknowledge, however, that they each have been
represented by their own tax advisors in connection with this transaction; that
no party hereto has made any representation or warranty to the other with
respect to the treatment of such transaction or the effect thereof under
applicable tax laws, regulations, or interpretations; and that no attorney's
opinion or private revenue ruling has been obtained with respect to the effects
thereof under the Internal Revenue Code of 1986, as amended.
14.2 Further Assurances. From time to time, at the other party's
request and without further consideration, each of the parties will execute and
deliver to the others such documents and take such action as the other party may
reasonably request in order to consummate more effectively the transactions
contemplated hereby.
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<PAGE> 19
14.3 Payment of Fees and Expenses. If any legal action or any
arbitration or other proceeding is brought for the enforcement of this
Agreement, or because of an alleged dispute, breach, default, or
misrepresentation in connection with any of the provisions of this Agreement,
the successful or prevailing party or parties shall be entitled to recover
reasonable attorneys' fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it or they may be entitled.
14.4 Parties in Interest. Except as otherwise expressly provided
herein, all the terms and provisions of this Agreement shall be binding upon,
shall inure to the benefit of and shall be enforceable by the respective heirs,
beneficiaries, personal and legal representatives, successors and assigns of the
parties hereto.
14.5 Entire Agreement; Amendments. This Agreement, including the
Schedules, Exhibits and other documents and writings referred to herein or
delivered pursuant hereto, which form a part hereof, contains the entire
understanding of the parties with respect to its subject matter. There are no
restrictions, agreements, promises, warranties, covenants or undertakings other
than those expressly set forth herein or therein. This Agreement supersedes all
prior agreements and understandings between the parties with respect to its
subject matter. This Agreement may be amended only by a written instrument duly
executed by the parties or their respective successors or assigns.
14.6 Headings. The section and paragraph headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
14.7 Pronouns. All pronouns and any variations thereof shall be
deemed to refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person, persons, entity or entities may require.
14.8 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
14.9 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
14.10 Notices. Any and all notices, demands or other
communications required or desired to be given hereunder by any party shall be
in writing and shall be validly given or made to another party if given by
personal delivery, telex, facsimile, telegram or if deposited in the United
States mail, certified or registered, postage prepaid, return receipt requested.
If such notice, demand or other communication is given by personal delivery,
telex, facsimile or telegram, service shall be conclusively deemed made at the
time of receipt. If such notice, demand or other communication is given by mail,
such notice shall be conclusively deemed
19
<PAGE> 20
given forty-eight (48) hours after the deposit thereof in the United States mail
addressed to the party to whom such notice, demand or other communication is to
be given as hereinafter set forth:
If to LDDI or the LDDI Stockholders: At the addresses set forth below their
names on the signature page of this
Agreement or on Exhibit A hereto
If to Company: At the address set forth below its name
on the signature page of this Agreement
15. APPOINTMENT OF AGENT
The LDDI Stockholders hereby irrevocably constitute and appoint
Michael Preston as their true and lawful attorney (the "Agent") with full right
and power in their names and stead to take any and all action by and on behalf
of them necessary or desirable to consummate the transactions contemplated by
this Agreement, including without limitation, the right and power to receive
certificates representing the Company Shares on behalf of each of the LDDI
Stockholders, to deliver to the Company the certificates representing the LDDI
Shares, to waive performance of any of the obligations of the Company or waive
compliance by the Company with any of its covenants hereunder, to deliver
investment letters of the LDDI Stockholders referred to in Section 3.3 hereof,
and to amend or terminate this Agreement as herein provided. Any such action
taken by the Agent on behalf of a LDDI Stockholder shall be binding upon such
LDDI Stockholder. The Company shall not have any responsibility to the LDDI
Stockholders or any of them for the distribution by the Agent of the
certificates representing the Company Shares to be delivered to the LDDI
Stockholders, nor shall the Company be liable in any manner whatsoever to the
LDDI Stockholders or any of them by or on account of any act or omission of the
Agent.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the parties hereto as of the date first above written.
GOLDEN ARK, INC.,
a Nevada corporation
By: /s/
----------------------------------
It: President
------------------------------
Address:
20
<PAGE> 21
LONG DISTANCE DIRECT, INC.,
a New York Corporation
By:
-----------------------------------
Its: Vice President
-----------------------
Address: 1 Blue Hill Plaza
Pearl River
NY 10965
(Signatures of LDDI stockholders commences on the next page)
21
<PAGE> 22
LDDI STOCKHOLDERS
SIGNATURE PAGE
/s/
- ---------------------------------------------------------------------
/s/ Michael Preston
- ---------------------------------------------------------------------
/s/ Business Systems Consultants by Michael Preston, Attorney in Fact
- ---------------------------------------------------------------------
/s/ Wardley Securities S.A. by Michael Preston, Attorney in Fact
- ---------------------------------------------------------------------
/s/ Alan Wheatley by Michael Preston, Attorney in Fact
- ---------------------------------------------------------------------
/s/ Charles Wilkinson by Michael Preston, Attorney in Fact
- ---------------------------------------------------------------------
/s/ Wingmead Securities Limited by Michael Preston, Attorney in Fact
- ---------------------------------------------------------------------
*Michael Preston, by signing his name hereto, does sign this Agreement
and Plan of Reorganization among Golden Ark, Inc., Long Distance Direct, Inc.,
and the stockholders of Long Distance Direct, Inc. on behalf of each of the
indicated persons on October 6, 1995, pursuant to a power of attorney duly
executed by such person.
/s/ October 6, 1995
- -----------------------------------
22
<PAGE> 23
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF LDDI
LDDI STOCKHOLDERS SHARES OWNED
----------------- ------------
<S> <C>
Michael David Preston 1,194,865
8 Oak Hill Park Mews
London NW3 7LH
Steven Lampert 1,194,865
9 Lansdale Road
New City, New York 10956
Jerry Lott 162,567
23 Cranford Drive, New City, New York 10956
Business Systems Consultants Ltd. 487,700
16 New Street, St. Peter Port,
Guernsey, Channel Islands
Wardley Securities S.A. 162,567
16 Bd des Tranchees, Case Postale 345,
1211 Geneve 12, Switzerland
Alan Wheatley 32,513
Highcroft, 79 Kippington Road,
Sevenoaks, Kent TN13 2LN
Charles Wilkinson 16,257
22 Lower Common South, Putney,
London SW15 1 BP
Wingmead Securities Limited 42,000
18 Allandale Avenue,
London N3 3PJ
----------
TOTAL 3,293,334
</TABLE>
SCHEDULE A
<PAGE> 24
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF COMPANY
LDDI STOCKHOLDERS SHARES TO BE ISSUED
- ----------------- -------------------
<S> <C>
Michael David Preston 1,087,065
8 Oak Hili Park Mews
London NW3 7LH
Steven Lampert 1,087,065
9 Lansdale Road
New City, New York 10956
Jerry Lott 147,900
23 Cranford Drive, New City, New York 10956
Business Systems Consultants Ltd. 443,700
16 New Street, St. Peter Port,
Guernsey, Channel Islands
Wardley Securities S.A. 147,900
16 Bd des Tranchees, Case Postale 345,
1211 Geneve 12, Switzerland
Alan Wheatley 29,580
Highcroft, 79 Kippington Road,
Sevenoaks, Kent TN13 2LN
Charles Wilkinson 14,790
22 Lower Common South, Putney,
London SW15 1 BP
Wingmead Securities Limited 42,000
18 Allandale Avenue,
London N3 3PJ
----------
TOTAL 3,000,000
</TABLE>
EXHIBIT C
<PAGE> 1
Exhibit 10.6
[GUTHY-RENKER LETTERHEAD]
DATE: May 15, 1996
TO: Steven Lampert, Michael Preston (Via Fax #914-620-1889)
and Caldwell Campbell (Via Fax #714-556-7923)
FROM: Brian Kelly
SUBJECT: LDDI Distribution Agreement
- --------------------------------------------------------------------------------
Gentlemen:
The following describes the agreement by and between Guthy-Renker-Engler, a
California general partnership ("GRE") and Long Distance Direct Marketing,
Inc., a New York corporation ("LDDI") regarding the marketing and distribution
of that certain product presently known as "Sales Agent Kit" (or any re-make or
derivative of such product) ("Product") through, initially, a thirty (30)
minute infomercial and, potentially a thirty (30), sixty (60), ninety (90)
and/or one hundred twenty (120) second direct response commercial (collectively
"Infomercial"). The Product is defined in Exhibit "A" attached hereto. LDDI is
a wholly-owned subsidiary of Long Distance Direct Holdings, Inc., a Nevada
corporation (the "Company").
1. Payment.
1.1 GRE Payments. For its sales of the Product, GRE shall pay
LDDI fifty percent (50%) of the "net profits" generated by GRE's Product sales
as LDDI's total compensation hereunder. "Net profits" are defined on Exhibit
"B" attached to this letter agreement.
1.2 LDDI Stock Payments. For every five million dollars
($5,000,000) worth of gross revenue excluding taxes received by LDDI resulting
from the sale of LDDI's services by Product purchasers who become LDDI sales
agents, GRE shall receive, at GRE's sole option, either (i) a number of shares
of Company Common Stock determined by dividing one hundred thousand dollars
($100,000) by an amount equal to seventy-five percent (75%) of the closing bid
price of a share of Company Common Stock on the day immediately preceding the
delivery to
1
<PAGE> 2
LDDI of written notice of GRE's election to receive such shares, or (ii) one
hundred thousand dollars ($100,000) paid via cashier's check. GRE acknowledges
and agrees that any shares of Company Common Stock issued to GRE hereunder
shall be "restricted securities" and shall bear a legend to the effect that
they cannot be sold or transferred in the absence of an effective registration
statement for the shares under the Securities Act of 1933 (the "Act") or
pursuant to an exemption from registration under the Act, the availability of
which is to be established to the satisfaction of the Company. The sale of the
shares shall be governed by the provisions of Rule 144 or any other rule
promulgated by the Securities and Exchange Commission under the Act. The
Company agrees that GRE shall have so-called "piggyback" registration rights
with respect to any shares of Company Common Stock issued to GRE hereunder
pursuant to and in accordance with the provisions of the Registration Rights
Certificate attached hereto as Exhibit "D" and incorporated herein by
reference. LDDI hereby acknowledges GRE's election to sign this letter agreement
is contingent on receiving this material benefit.
2. Production. LDDI shall produce/create and finance the Infomercial
designed to sell the Product. GRE shall assist LDDI in producing the
Infomercial and in developing the Product offer. LDDI shall provide GRE with
a copy of the script prior to commencing production of the Infomercial and this
script shall be subject to GRE's approval. LDDI shall provide GRE with budgets
prior to and during production and those budgets will be subject to GRE
approval. LDDI shall (i) cause a substantiation expert, subject to GRE's
reasonable approval, to review and approve the Infomercial and the Product, as
evidenced by an unqualified opinion letter from such expert setting forth such
approval, and (ii) provide GRE with a copy of all contracts, claims,
substantiation materials, trademark confirmation, patent confirmation and
federal and state business opportunity statute review relating to the
Infomercial and Product. GRE shall assist LDDI in finding such substantiation
expert; however, LDDI shall have final approval over the selection of such
expert.
3. Spokesperson. LDDI and GRE shall mutually agree upon a celebrity
spokesperson for the Infomercial.
4. Production Reimbursement. If the Infomercial achieves successful
"Test Marketing" as defined below, GRE shall reimburse LDDI its production
costs subject to the provisions of this paragraph. To repay LDDI its actual
production costs, which in no event shall exceed three hundred thousand dollars
($300,000), GRE shall pay LDDI one percent (1%) of GRE's Gross Receipts
(defined below) until LDDI is repaid its actual production costs; this
production reimbursement shall apply only if (i) monthly Infomercial media
expenses are less than sixty percent (60%) of GRE's gross receipts and (ii)
Product returns are less than fifteen percent (15%) of GRE's gross receipts.
However, if Product sales are insufficient to repay LDDI's production costs, GRE
shall have no obligation to pay such production costs. LDDI shall provide GRE
with reasonably particularized invoices, certified by a corporate officer of
LDDI as true and correct, detailing LDDI's actual production costs incurred.
5. Duties. GRE and LDDI shall perform the duties described in
Exhibit "C".
2
<PAGE> 3
6. Reporting. GRE shall pay LDDI its share of profits monthly and GRE
shall provide LDDI with reasonably particularized invoices for all costs it
incurs simultaneous to its payment of its share of profits. GRE shall provide
LDDI with lists of Product purchasers names on a weekly basis. LDDI shall
provide GRE with reasonably particularized monthly accountings for any and all
revenues received by LDDI resulting from the sale of LDDI's services by Product
purchasers who become LDDI sales agents.
7. Grant of Rights.
7.1 Exclusivity. LDDI hereby licenses GRE the exclusive worldwide
right to purchase media for the Infomercial, and market and distribute the
Product and Infomercial (to include, if any, revisions and/or new versions of
the Infomercial) through direct response television and shop-at-home
television, GRE shall permit LDDI to purchase supplemental media through GRE
(and permit GRE to handle fulfillment, etc.) in any market in which GRE does
not distribute the Product and Infomercial.
7.2 Quota. GRE shall maintain the exclusive right to market and
distribute the Product and Infomercial through direct response television so
long as GRE purchases at least ten thousand (10,000) Product units per quarter
year through all distribution channels, beginning at the end of the term of the
permissible Test Marketing period; however, if GRE has averaged over ten
thousand (10,000) Product units purchased over any two (2) consecutive
quarters, then this quota shall be deemed satisfied for the applicable two (2)
quarters. This quota shall also be deemed satisfied if GRE is not provided with
sufficient product for GRE to satisfy Product orders. If this quota is
unsatisfied, GRE shall maintain the non-exclusive right to market and distribute
the Product and Infomercial through direct response television. In no event
shall LDDI, or any party on behalf of LDDI, sell Product without providing GRE
first rights on any and all inventory.
7.3 Non-Exclusivity. LDDI hereby licenses GRE the worldwide right
to non-exclusively market and distribute the Product through 8/900 numbers,
database marketing, Internet/on-line, retail, print media, outbound
telemarketing, package inserts, catalogs, direct sales, radio, credit card
syndication, direct mail and seminars.
7.4 Music Sequels. LDDI and GRE shall split all publishing rights
to the Infomercial music and, if Test Marketing is successful, GRE shall have
the right to distribute any sequel to this project upon the terms described
herein.
8. Delivery. LDDI shall deliver GRE a final, completed Product
(including all mock-ups) at its actual cost, mutually agreed upon by both
parties, without markup of any kind and not including overhead amortization of
any kind, FOB GRE's designated fulfillment center on a consignment basis. LDDI
shall provide GRE with invoices (certified by a corporate officer as true and
correct) describing actual Product cost and GRE will pay such invoices to the
manufacturer on a timely basis. LDDI shall cause the manufacture of the Product
and shall cause the manufacturer to (i) produce enough Product at a price agreed
upon by GRE and in a timely
3
<PAGE> 4
manner, and (ii) manufacture the Product with the quality levels GRE determines
appropriate. If LDDI's product manufacturer fails to satisfy (i) or (ii) above,
LDDI shall reimburse GRE for all expenses resulting from such failure. If GRE
is dissatisfied with the Product manufacturer for any reason, GRE shall have
the right, but not the obligation, to commission a manufacturer of its choice
to manufacture the Product.
9. Shop-at-Home. The parties shall cause an appropriate Infomercial
participant to make up to eight (8) trips to the shop-at-home outlets per year.
GRE shall pay for such participant's business class travel expenses and
reasonable hotel accommodations.
10. Audit. At any time within one (1) year after a payment is made
hereunder, each party shall have the reasonable right to examine the other's
books and records for the purpose of determining its accuracy. This examination
shall be conducted (i) after providing the other at least thirty (30) days
prior written notice of its election to examine the applicable books and
records, (ii) during normal business hours at the place where the applicable
books and records are maintained, and (iii) at the examining party's sole cost
and expense. If it is mutually determined by GRE and LDDI that the paying party
has under-paid the other by an amount exceeding five percent (5%), then the
paying party shall pay the reasonable costs of such examination (which
reasonable cost will not include travel, living and other personal expenses of
the examiner). Any such determination shall not be deemed a breach of this
Agreement unless such party fails to pay the agreed upon underpayment within
ten (10) business days.
11. Third-Party Royalties. Third-party royalties and fees shall not
collectively exceed two percent (2%) of GRE's "gross receipts" from Product
sales without the mutual consent of both parties; to the extent more than two
percent (2%) of GRE's gross receipts are owed to third-parties, then LDDI shall
pay such amount. (For purposes of this Agreement, "Gross Receipts" shall be
defined as GRE's revenue from Infomercial Product sales, including shipping and
handling, less refunds, returns, credit card chargebacks and fees, declines and
cancels.) LDDI shall obtain written acknowledgement from all Product and
Infomercial participants acknowledging their consent to this relationship.
12. Indemnity. LDDI agrees to defend and indemnify GRE, at LDDI's
cost, with legal counsel selected by GRE, for any liability GRE may incur as a
result of its sale of the Product, its airing of the Infomercial or any other
matter related to this project (other than if such liability is incurred due to
GRE's gross negligence or wilful misconduct). If applicable, GRE shall offset
LDDI's royalty share to pay such amount. GRE agrees to defend and indemnify
LDDI, at GRE's cost, with legal counsel selected by GRE, for any liability LDDI
may incur as a result of GRE's purchase of media for the Infomercial.
13. Representations. LDDI represents and warrants that (a) it is the
sole owner of the Product and Infomercial and all rights in and to the ideas,
concepts and materials (written or otherwise) related to the Product and
Infomercial, (b) the use and sale of the existing Product and Infomercial, and
the titles, logos and references made therein, are permitted and do not
infringe upon
4
<PAGE> 5
the rights of any third-party, (c) to its knowledge the sale and/or
distribution of the Product and Infomercial shall not be restricted or
prohibited by any Federal, State, or local law, or NIMA guideline, (d) LDDI has
not entered into any oral or written contract which would impair the rights
granted to GRE or limit the effectiveness of this agreement, nor is LDDI aware
of any claims or actions which may limit or impair any of the rights granted to
GRE hereunder, (e) LDDI shall not devise, produce or sell any infomercials
similar to the Infomercial during the term (or any renewal) of this agreement,
and (f) the full exercise of the rights granted GRE hereunder will not violate
or infringe upon any intellectual property rights or any other right of any
third party. Each party represents and warrants it has no knowledge of any
pending or threatened claims which would impair or diminish any of the rights it
has granted to the other herein. The parties have the right and power to enter
into this agreement, and the execution and delivery of this agreement will not
result in a breach of, or default under, any other agreement, law or
regulation.
14. Customer List. GRE shall compile a list of names and addresses of
those ordering the Product and the parties shall co-own such list; the parties
agree not to rent such customer list to competitors of the other.
15. Test. GRE shall conduct an Infomercial media test during a period
of not less than three (3) days and not more than one hundred twenty (120) days
on such cable and broadcast television networks and stations and at such times
as GRE, in its sole judgment, determines are likely to draw favorable response
rates ("Test Marketing"). LDDI shall contribute five thousand dollars ($5,000)
toward the set-up of such test. GRE shall evaluate the results of Test Marketing
and determine, in its sole good faith judgment, whether Test Marketing has been
successful. If GRE determines that Test Marketing has been successful, then it
shall aggressively purchase media in a manner consistent with the media ratio
achieved by the Infomercial and available inventory. If GRE determines that Test
Marketing has been unsuccessful, then this agreement shall be (i) terminated
except that all representations, warranties and indemnities shall survive such
termination and LDDI shall be permitted to air the Infomercial in any and all
venues or (ii) extended for a mutually agreed upon time period while the parties
engage in corrective action designed to improve the Infomercial.
16. Control. Subject to this Agreement, LDDI shall own and maintain
all rights in and to the Product; however, for the purpose of this Agreement
and during the term of this Agreement, LDDI hereby licenses to GRE, pursuant to
paragraph 7 of this Agreement, (i) the Product and Infomercial so it can
fulfill its obligations herein during the term of this Agreement, and (ii) all
associated marketing and distribution rights related to the Product and
Infomercial, including without limitation, trademarks, patents and copyrights
associated thereto. LDDI further agrees that once it has granted an approval to
GRE on a particular matter, such approval shall not be required by GRE
thereafter.
17. Insurance. If GRE determines that Test Marketing is successful,
then GRE shall secure media liability insurance customarily maintained by
Infomercial distributors. LDDI shall obtain appropriate general commercial and
product liability insurance with policy limits of not less than one million
dollars ($1,000,000) per occurrence and two million dollars ($2,000,000) in the
aggregate customarily maintained by Product owners. The parties agree that (i)
the deductible on any insurance policy acquired hereunder shall not exceed ten
thousand dollars ($10,000), (ii) the other party shall
5
<PAGE> 6
be named as an additional insured on the applicable insurance policies, (iii)
the insurance policies shall be endorsed to provide no less than ten (10) days
notice to all named insureds if any insurance benefit decreases, and (iv) all
insurance shall have no less than an "A" rating (or equivalent thereof) in the
Best Guide.
18. Independent. GRE and LDDI agree they are dealing with the other
as independent contractors, and each shall be responsible, without liability to
the other, for the timely payment of all taxes and other withholdings,
deductions and payments required by law with respect to its own operations and
employees.
19. Law. This Agreement shall be governed by California law and, in
the event of a dispute hereunder, each party agrees to nominate one
representative to resolve such dispute. If, after using best efforts for thirty
(30) days, the dispute cannot be resolved, the parties shall submit to binding
AAA arbitration. The prevailing party shall receive reimbursement of attorneys'
fees and related costs.
20. Fiduciary. No fiduciary duty obligations shall be created as a
result of this Agreement.
21. Term. The term of this Agreement shall be for three (3) years
following the execution of this Agreement. This Agreement shall be
automatically renewed for consecutive two (2) year periods if GRE sells at
least ten million dollars ($10,000,000) of Product during the initial Term of
this Agreement, and in each subsequent two-year (2) period following which
automatic renewal is to take place. Upon termination of this Agreement, GRE
shall only retain the right to 1) accept and process orders for Products that
were placed prior to the termination of this Agreement and 2) sell Product on
home shopping channels through home shopping appearances that were negotiated
prior to termination of this Agreement.
22. Entire Agreement. This Agreement contains the entire
understanding of the parties with respect to the subject matter hereof and
supersedes in their entirety all prior agreements and understandings between
the parties with respect to the subject matter hereof, whether oral or written,
which shall have no further force or effect. The terms of this Agreement as set
forth in the numbered Sections hereof are contractual and not mere recitals.
Each party has executed this Agreement without reliance upon any promise,
representation or warranty other than those expressly set forth herein. Each
party acknowledges that (i) it has carefully read this Agreement; (ii) it has
had the assistance of legal counsel of its choosing (and such other
professionals and advisors as it has deemed necessary) in the review and
execution hereof; (iii) the meaning and effect of the various terms and
provisions hereof have been fully explained to it by such counsel; (iv) it has
conducted such investigation, review and analysis as it has been necessary to
understand the provisions of this Agreement and the transactions contemplated
hereby; and (v) it has executed this Agreement of its own free will.
6
<PAGE> 7
If the terms described herein are acceptable to you, please sign your name
below, keep one original for your files and return the other to me.
Guthy-Renker-Engler a California
general partnership
By: Guthy-Renker Corporation, its
general partner
By: /s/ Ben Van de Bunt
----------------------------
Ben Van de Bunt
Its: Corporate Secretary
AGREED AND ACCEPTED THIS
20th DAY OF MAY, 1996
---- ---
LONG DISTANCE DIRECT MARKETING, INC.
By: /s/ Michael Preston
-----------------------
its: Vice President
----------------------
7
<PAGE> 8
Exhibit "A"
Product Definition
For purposes of this agreement, Product shall be defined as the following:
A sales agent kit that provides all materials necessary for a purchaser of the
kit to become a sales agent capable of marketing the products and services for
LDDI (LDDI is a re-seller of AT&T and MCI products). The Product shall contain
a training and operating manual, audio tapes, forms, scripting and all
materials necessary for a Product purchaser to become a sales agent for LDDI.
8
<PAGE> 9
Exhibit "B"
Net Profit
"Net Profit" shall equal the gross revenues generated by GRE's Product sales
(including shipping and handling) less the following:
1. Actual product manufacturing, packaging costs (including damaged
goods expenses) and shipping and handling costs (including duty, freight,
insurance, etc.);
2. Television and other actual media/advertising gross costs charged
by stations (inclusive of a twelve and one-half percent (12.5%) media buyers
commission), to purchase air time for the Infomercial; costs paid to third
parties for print advertising, outbound telemarketing sales and other
direct-marketing advertising;
3. Actual inbound-telemarketing costs;
4. The distribution and management fee including the internal cost GRE
incurs for customer service, managing the project, fulfilling the functions
described on Exhibit "C", order processing, data processing, accounting and
reporting expenses, which amount shall equal, for purposes of this Agreement,
seven percent (7%) of all revenues generated by Product sales;
5. Royalties, percentage of net profits or other compensation or fees
of any type due or payable to talent, producers, executive producers or any
other third party not to exceed two percent (2%) of gross receipts from GRE's
Product sales;
6. Actual AFTRA pension and welfare contributions owed for Infomercial
participants;
7. Actual Infomercial substantiation and editing cost, if any, and
insurance premiums, legal costs (including trademark costs, if any) incurred by
GRE for the Product and/or Infomercial or LDDI (as approved by GRE) as it
relates to the Infomercial.
8. Actual order processing, other marketing, distribution and other
expenses not otherwise listed herein paid to third parties (e.g., costs third
parties charge for fulfillment);
9. Actual telemarketing setup fees and expenses, tape dubbing, traffic
to stations, actual fulfillment, freight costs and 800# customization;
10. Actual follow-up phone call costs incurred by GRE;
11. Actual production reimbursement costs incurred by GRE;
12. Refunds, returns, credit card fees and chargebacks and bad debts;
and
9
<PAGE> 10
Exhibit "B" Continued
---------------------
13. Net losses from the prior months; net losses for prior months
shall mean the gross revenues during such months less the costs listed in
paragraphs (1) through (10) above. Each month, GRE shall create a reserve for
subsequent Product returns, provided such reserve is consistent in manner and
amount with GAAP accounting principles.
10
<PAGE> 11
Exhibit "C"
I. RESPONSIBILITIES OF EACH PARTY
Responsible Party
GRE LDDI ITEM
X Write, finance and produce completed Infomercial (including
- --- --- generic end tag, applicable credit card notations, shipping
and handling, taxes and addresses as required by GRE) and
Product.
X Purchase all media and receive and process mail orders.
- --- ---
X Obtain direct response phone numbers.
- --- ---
X Sales tax collection and filings.
- --- ---
X Provide answering service scripts and manage answering
- --- --- service(s).
X Customize the show with direct response phone numbers.
- --- ---
X Payment of actually owed royalties (up to two percent (2%) of
- --- --- GRE's gross receipts from Product sales).
X Duplicate sub-masters for stations.
- --- ---
X Traffic tapes to stations.
- --- ---
X Manufacture sufficient quantity of Product at designated price
- --- --- and quality.
X Initiate follow-up phone call to Product purchasers.
- --- ---
11
<PAGE> 12
Exhibit "C" Continued
Responsible Party
GRE LDDI ITEM
X Cause inventory to be delivered to designated fulfillment
- --- --- center.
X Provide order processing functions including receipt of orders
- --- --- from answering services, credit card authorization and deposit,
manifest and shipping label production, refund processing and
the like.
X Provide order fulfillment for the Product and the Upsell.
- --- ---
X Select and manage fulfillment center.
- --- ---
12
<PAGE> 13
LONG DISTANCE DIRECT HOLDINGS, INC.
REGISTRATION RIGHTS CERTIFICATE
1. DEFINITIONS.
(a) The term "Company" shall mean Long Distance Direct Holdings,
Inc., a Nevada corporation.
(b) The term "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended, or any similar federal statute then in effect, and a
reference to a particular section thereof or rule thereunder shall be deemed to
include a reference to the comparable section or rule, if any, of any such
similar federal statute.
(c) The term "Holder" shall mean Guthy-Renker-Engler, a California
general partnership.
(d) The term "person" shall mean an individual, partnership,
corporation, trust, unincorporated organization or other entity.
(e) The term "Registrable Securities" shall mean shares of Common
Stock of the Company issued pursuant to the terms of the Distribution Agreement
dated April , 1996 between the Company and Holder. As to any particular
Registrable Securities, once issued, such shares shall cease to be Registrable
Securities when (i) such shares shall have been registered under the Securities
Act, the registration statement with respect to the sale of such shares shall
have become effective under the Securities Act and such shares shall have been
disposed of pursuant to such effective registration statement, (ii) such shares
shall have been distributed pursuant to Rule 144 (or any similar provision
relating to the disposition of securities then in force) under the Securities
Act, (iii) such shares shall have been otherwise transferred, new certificates
or other evidences of ownership for them not bearing a legend restricting
further transfer and not subject to any stop-transfer order or other
restrictions on transfer shall have been delivered by the Company and
subsequent disposition of such shares shall not require registration or
qualification of such shares under the Securities Act or any state securities
laws then in force or (iv) such shares shall cease to be outstanding.
(f) The term "Registration Expenses" shall mean all expenses
incident to the Company's performance of or compliance with this Certificate,
including, without limitation, all SEC and stock exchange or National
Association of Securities Dealers, Inc. registration and filing fees and
expenses, fees and expenses of compliance with securities or blue sky laws
(including, without limitation, reasonable fees and disbursements of counsel
for the underwriters in connection with blue sky qualification of the
Registrable Securities), rating agency
Exhibit D
<PAGE> 14
fees, printing expenses, messenger and delivery expenses, the fees and expenses
incurred in connection with the listing of the shares to be registered on each
securities exchange on which similar securities issued by the Company are then
listed, fees and disbursements of counsel for the Company and all independent
certified public accountants (including the expenses of any annual audit,
special audit or "cold comfort" letters required by or incident to such
performance and compliance), securities acts liability insurance (if the Company
so desires or if the underwriters so desire), the fees and disbursements of
underwriters customarily paid by issuers or sellers of securities, the
reasonable fees and expenses of any special experts retained by the Company in
connection with such registration, and fees and expenses of other persons
retained by the Company (but not including any underwriting discounts or
commissions attributable to the sale of Registrable Securities by the Holder).
(g) The term "SEC" shall mean the Securities and
Exchange Commission or any other federal agency at the time administering the
Securities Act or the Exchange Act.
(h) The term "Securities Act" shall mean the
Securities Act of 1933, as amended, or any similar federal statute then in
effect, and a reference to a particular section thereof or rule thereunder
shall be deemed to include a reference to the comparable section or rule, if
any, of any such similar federal statute.
2. Incidental Registration.
(a) If the Company proposes to register any of its
securities under the Securities Act (other than a registration on Form S-4 or
Form S-8, or any successor or similar forms or a registration in connection with
any merger of the Company with and into a company subject to the reporting
requirements of the Exchange Act), whether or not for sale for its own account,
in a manner which would permit registration of the Registrable Securities for
sale to the public under the Securities Act, the Company will give prompt
written notice to the Holder of its intention to do so and of such Holder's
rights under this Certificate at least twenty (20) days prior to the anticipated
filing date of the registration statement relating to such registration. Such
notice shall offer the Holder the opportunity to include in such registration
statement such number of Registrable Securities as Holder may request. Upon the
written request of Holder made within ten (10) days after the receipt of the
Company's notice (which request shall specify the number of Registrable
Securities intended to be disposed of by Holder and the intended method of
disposition thereof), the Company will use its best efforts to effect the
registration under the Securities Act of all Registrable Securities which the
Company has been so requested to register by Holder, to the extent requisite to
permit the disposition (in accordance with such intended methods thereof) of the
Registrable Securities so to be registered; provided, that if such registration
involves an underwritten offering, Holder must sell the Registrable Securities
to the underwriters selected by the Company on the same terms and conditions as
apply to the Company. If a registration requested pursuant to this Certificate
involves an underwritten public offering, Holder may elect, in writing prior to
the effective date of the registration statement filed in connection with such
registration, not to register such securities in connection with such
2
<PAGE> 15
registration. The Company will pay all Registration Expenses in connection with
each registration of Registrable Securities requested pursuant to this
Certificate.
(b) If a registration pursuant to this Certificate involves
an underwritten offering and the managing underwriter advises the Company in
writing that, in its opinion, the number of securities which the Company, the
Holder and any other persons intend to include in such registration exceeds the
number which would have an adverse effect on such offering, including the price
at which such securities can be sold, the Company will include in such
registration (i) first, all the securities the Company proposes to sell for its
own account and (ii) second, a number of such securities equal to the number,
in the opinion of such underwriters, which can be sold without having the
adverse effect referred to above, such amount to be allocated pro rata among
Holder and other persons on the basis of the relative number of securities
Holder and each other person has requested to be included in such registration.
(c) Notwithstanding the provisions of this Section 2, the
Company shall have the right at any time after it shall have given written
notice pursuant to this Section 2 (irrespective of whether a written request
for inclusion of any Registrable Securities shall have been made) to elect not
to file any such proposed registration statement, or to withdraw the same after
the filing but prior to the effective date thereof. The Company shall not be
obligated to maintain effectiveness of any registration statement in which
Registrable Securities are included pursuant to this Section 2 for any period
of time.
3. REGISTRATION PROCEDURES. In the case of each registration
pursuant to this Certificate, the Company shall:
(a) Furnish to Holder a copy of the prospectus included in
such registration statement in conformity with the requirements of the
Securities Act and such other documents as Holder may reasonably request in
order to facilitate the disposition of the Registrable Securities owned by
Holder.
(b) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities
or blue sky laws of such jurisdictions as shall be reasonably requested by
Holder, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify as a foreign corporation or as a dealer in
securities or to file a general consent to service of process in any such
states or jurisdictions in which it has not already done so and except as may
be required by the Securities Act.
(c) Notify Holder at any time when a prospectus is required
to be delivered under the Securities Act of the happening of any event as a
result of which the prospectus, as then in effect, includes an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances then existing.
3
<PAGE> 16
4. INFORMATION BY HOLDER. Holder shall furnish in writing to the
Company such information regarding Holder and the distribution of the
Registrable Securities proposed by Holder as the Company may request in writing
and as shall be required in connection with any registration referred to in this
Certificate. The Company's obligations under this Certificate are conditioned
upon compliance by Holder with the provisions of this Section 4.
5. NOTICES. Any and all notices, demands or other communications
required or desired to be given hereunder by any party shall be in writing and
shall be validly given or made to another party if given by personal delivery,
telex, facsimile, telegram or if deposited in the United States mail, certified
or registered, postage prepaid, return receipt requested. If such notice,
demand or other communication is given by personal delivery, telex, facsimile
or telegram, service shall be conclusively deemed made at the time of receipt.
If such notice, demand or other communication is given by mail, such notice
shall be conclusively deemed given forty-eight (48) hours after the deposit
thereof in the United States mail addressed to the party to whom such notice,
demand or other communication is to be given as hereinafter set forth (or to
such other address as the party shall have furnished in writing in accordance
with the provisions of this Section 5):
If to the Company: 1 Blue Hill Plaza
Pearl River, New York 10965
If to the Holder: 3340 Ocean Park
2nd Floor
Santa Monica, California 90405
The Company has caused this Registration Rights Certificate to be duly
executed as of April , 1996.
COMPANY:
LONG DISTANCE DIRECT HOLDINGS, INC.
By:__________________________________
Its:_________________________
4
<PAGE> 1
Exhibit 10.7
AGREEMENT
The Agreement is made this 10 day of June 1996, by and between Long Distance
Direct Marketing, Inc., having its principal place of business at 1 Blue Hill
Plaza, Pearl River, NY 10965 (hereafter "Company") and Schulberg MediaWorks
Inc., having its principal place of business at 69 Green Street, San Francisco,
CA 94111 (hereafter "Producer"), with respect to the following facts:
A. Producer has certain expertise and knowledge in the areas of
television production, especially in the creation of infomercials and related
promotions; and
B. Producer has developed potential promotions for Company under
separate agreement therefor, and Company has paid Producer a creative fee in
conjunction therewith; and
C. Company wishes to retain Producer to participate in the production
of specific infomercial and infomercial-related projects identified on Exhibit A
attached hereto (hereafter "the Program"), and Producer is willing to produce
the Program on Company's behalf.
NOW, THEREFORE, the parties agree as follows:
a. Company engages Producer and Producer accepts Company's engagement
to create, manage, produce and deliver in a timely manner the Program, on the
terms and conditions set forth herein.
b. Company shall execute this Agreement and provide Producer with
Budget and Timeline approvals not less than five (5) days prior to commencement
of any work on the Program.
c. Company shall own and hold all proprietary rights in all production
materials, including but not limited to the Program or portions thereof, and all
production masters. Company shall have the exclusive, unlimited right in
perpetuity throughout the world to broadcast and re-run the Program on free and
basic cable television and to otherwise exploit the Program and/or any portion
thereof, by any means, whether now known or hereafter devised. All sums payable
to Producer as set forth in paragraph 4(a.) of Exhibit A attached herein shall
constitute payment in full for the maximum exhibition of the Program.
(1) Intellectual Property Rights All scripts, raw video
footage and completed master video tapes created pursuant to
this Agreement and performances recorded thereon shall be and
remain the sole property of Company, with the exception of
music publishing rights (see section
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(1)
<PAGE> 2
4.(d.)(5.)). Company shall own and control all rights, title
and interest in all such property (including, without
limitation, all rights arising under the United States
copyright act, 17 U.S.C. Section 101 et seq.), and Producer
hereby agrees to execute and deliver or cause to be executed
and delivered to Company all such further and other documents
as may be necessary to evidence or perfect such rights in
Company.
d. Any written changes by the Company to the content, material, or
specifications of production of or for the Program, from those contained in the
Budget, or delays in production due to any such changes or changes to the
production schedule or Budget made at the written request of Company, shall be
billed as additional time and service charges as specified on Producer's rate
card prices attached herein, and shall be accepted by Producer only after a work
order therefore has been issued to Producer, in writing; facsimile transmissions
to Producer will be sufficient to constitute binding work orders. Company shall
only be responsible for its written authorization of costs exceeding those set
out in the Budget.
e. Any request for approval required hereunder shall be submitted in
writing to Company, along with all applicable information and materials. If
Company does not respond in writing as to its approval or disapproval within
seven days from the date of Company's receipt of written request therefor, then
Company shall be deemed to have disapproved such request. If the Company fails
to approve, in writing, changes requested by it in a timely manner, and after
reasonable efforts to seek such approval, Producer may at its election, at any
time after notification to Company of its intent to do so, shut down production
pending resolution of the requested changes.
f. Each of the parties hereto shall make every reasonable effort in the
performance of their respective obligations hereunder to comply with all
applicable municipal, county, state, NIMA, and federal laws, ordinances and
regulations.
2. Production of Services
a. Producer shall write a script(s) for the Program, select a
studio(s) or location(s), create and design content, direction, production, and
set design, supervise production elements, obtain all equipment and below the
line services, including without limitation producers, writers, directors,
editors, testimonial participants, personnel and other individuals required to
work with Producer to complete the Program, and in general, manage all aspects
of the Production, including pre-production, production and post-production.
Producer shall select all vendors for creation and production of the Program.
The Program shall be edited on Producer's in-house IMMIX non-linear editing
system, and the final version shall be delivered on a D2 Master videotape.
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(2)
<PAGE> 3
b. Producer shall make itself available at all reasonable
times at the request of Company for discussions regarding the Program, and shall
promptly perform editing, re-editing, recordings, shooting and all other
activities related to the Program.
c. Producer has submitted, and Company has approved, a
Preliminary Budget Estimate of the total production costs of the Program's
costs, not inclusive of talent fees and expenses, in the amount set forth in
Exhibit A. Producer will submit a definitive budget of the total production
costs ("Budget"), not to exceed $300,000, together with a production timeline
("Timeline"), for Company's approval prior to scheduling production of the
Program. In the event the initial Budget presented for approval exceeds
$300,000, not inclusive of talent fees and expenses such as travel and
accommodations, Company shall have the option to terminate the Program. The
Budget will be submitted by Producer to Company for approval no more than 5
business days following approval of Creative Treatment, a four-page outline of
Program structure and elements.
The Budget for the Program will include all fees,
costs and expenses necessary for the completion of the Program (excluding talent
fees and expenses such as travel and accommodations) including, but not limited
to, Producer's Fees, mark-up, and all Program costs, based upon the Program as
then written and as then planned for production. Producer shall be responsible
for any additional costs incurred in excess of those set forth in the Budget,
unless such costs are approved in writing by Company.
d. Company shall be allowed, and the Budget shall include, a
reasonable number of drafts of the script and rough cut revisions, all as
specified and approved in writing on the estimated Timeline for the Program. Any
additions or changes thereafter shall be billed as additional costs and will
necessarily delay the timetable for completion.
e. Producer shall provide a description of the online edit
effects for discussion with Company prior to the online session and after final
offline edit approval. Any additions or changes thereafter shall be billed as
additional costs and may delay the timetable for completion.
f. Approval by Company of the First Draft, the Final Shooting
Script, the Budget, the Rough Cut, the Fine Cut and the final master shall be
within 7 business days of receipt of each. Producer shall be given a reasonable
amount of time to prepare for any changes as specified by Company to any of the
items referred to.
3. Company's Obligations and Duties
a. Company shall make itself available at all reasonable times
to consult with the Producer on script writing, shooting, or editing of the
Program. Company is entitled and encouraged to have a representative authorized
to make
Schulberg MediaWorks, Inc.
6/9/96
(3)
<PAGE> 4
decisions concerning the Program present at all stages of production of the
Program, including script development, pre-production planning, production and
post-production. Notwithstanding the foregoing, should Company elect to not have
an authorized representative present during any step of Program production, and
upon condition that Company has in a timely manner approved respectively, the
First Draft, the Final Shooting Script, the Rough Cut, the Fine Cut, and the
Final Master, Producer shall as to each such step be entitled to proceed without
Company's participation.
b. Company shall pay for any and all costs, including creative
services, studio time and additional production and post-production costs, at
Producer's standard rates, with respect to re-edits after the media test period,
provided that estimates of such costs are submitted and approved by Company in
advance of such re-edit or re-shoot.
c. Company shall provide celebrities, at Company's cost, for
the production of the Program, as Company deems appropriate. Company also agrees
to pay all costs for any talent appearing in the Program as either on-camera or
off-camera performers, and talent hair, makeup, wardrobe, transportation, hotel
and per diem expenses. Should Company request that Producer provide such
celebrities, Producer shall do so, but Company shall pay, in addition to all
costs therefor, Producer's standard charges for its services in conjunction
therewith.
d. Company shall provide testimonial contacts, to include
prescreened product users, their addresses, telephone numbers and sample
products, at Company's cost, sufficient for the needs of the production of the
Program. Should Company elect to have Producer provide such contacts Producer
shall do so, but Company shall pay, in addition to all costs therefor,
Producer's standard charges for its services in conjunction therewith.
e. Company shall copyright or cause to be registered for
copyright, the Program and all related Products including but not limited to
additional video products, original music and written products which are created
by the Producer, in the name of the Company.
f. Company shall offer Producer the first right of refusal
upon the terms described herein for production of any revisions to the Program
and/or to any sequel, remake, derivatives, or follow-up programs.
4. Compensation
a. In full and complete consideration for the production of
the Program, and for all services to be performed by Producer, Company shall pay
to
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6/9/96
(4)
<PAGE> 5
Producer the total cost of the Program, as set forth in the Budget, and all
additional costs authorized by Company in writing.
b. Any and all post-production work requested by Company, in writing,
subsequent to the submission of the Final Master, such as broadcast dubs,
slides, audio tapes, shipping, etc., will be billed at net cost plus Producer's
standard markup of 20%, and shall be payable 15 days after billing therefor.
c. Notwithstanding the foregoing, if Company requests in writing
services in excess of those specified in this Agreement, Company shall pay to
Producer the actual costs for such agreed upon additional services upon
performance of such services, in addition to the compensation specified herein.
d. Company shall pay to Producer a royalty on all Products sold through
any utilization of the Program or any edited version or portion thereof ("Gross
Product Sales", or "GPS"), in the amount set forth in paragraph 5 of Exhibit A.
GPS shall be defined for the purposes of this paragraph as all gross product
sales resulting from any utilization of the Program, including direct response
television sales, upsells, continuity programs, and foreign sales, less any
returns, refunds, cancellations, credit card chargebacks and fees, sales taxes
and shipping and handling charges. Producer acknowledges it has no right to any
telecommunications billings generated as a result of Product sales. Payment
shall be rendered to Producer by Company as follows;
(1) Company shall submit to Producer by the last day of each
month, monthly statements detailing all Product sales activities for the
preceding month, and shall at that time pay all sums shown to be due thereon.
(2) Company shall pay Producer royalties based on total
Product sales during each month, regardless of any multiple payment program that
may be utilized by the customer. Company may elect to create an escrow account
as a reserve for returns. The reserve for returns and uncollectibles shall not
exceed eight percent of Gross Revenues during the month for which such amounts
are calculated, and shall be liquidated at the end of each calendar quarter
after adjustment to reflect actual returns and uncollectibles.
(3) Producer reserves the right to request and receive, at
Producer's expense, an audited accounting of all Product sales and royalty
payments on a semi-annual basis; Producer shall additionally be entitled to
inspect an audit of Company's records related to royalties due thereunder on
reasonable notice all at the Producer's expense. In the event that Producer's
audit shows an additional amount due in excess of 5% of the royalties claimed by
Company as due for the period subject to audit, Company shall additionally pay
all Producer's reasonable audit costs.
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(5)
<PAGE> 6
(4) Producer will retain and receive fifty percent (50%) of any and all
music publishing rights and payments, and Company shall retain and receive fifty
percent (50%) of any and all music publishing rights and payments. Company shall
receive an unlimited, fully paid, non-exclusive license to use music from the
Program in all media, on the sole conditions that Producer be credited as
co-publisher and that Company provide Producer with specific identification of
each such use.
e. In the event that Company terminates the Program pursuant
to Paragraph 2.c. above, Company shall have no liability to Producer for any
costs, expenses, or royalties. In the event that Company terminates the Program
herein for any other reason, other than for breach of this agreement by
Producer, Producer shall be entitled to keep all actual costs incurred by
Producer up to the time of termination and Producer's standard markup on such
costs, and in the event Company subsequently completes the Program without
Producer, all royalties otherwise due to Producer pursuant to paragraph 5.d.
above. Payments received by Producer in excess of such actual costs shall be
promptly refunded to Company.
5. Credits In addition to Company credits, provided that Producer
shall satisfactorily perform all of its services as required herein, Producer
shall receive audio and video credit in the end titles of the Program,
substantially as follows: "Produced by Schulberg MediaWorks Inc."
6. Miscellaneous Provisions
a. Notices All notices required or permitted under this
Agreement shall be effective when received at the addresses or facsimile numbers
as set forth on Exhibit A, or at such other addresses or facsimile numbers as
the parties may from time to time designate in writing and delivered to the
other party hereto in the manner provided for notice herein.
The designation for the person to be so notified may
be changed from time to time by notice thereunder. Any notice or other
communication required or permitted to be given under this Agreement shall be in
writing, and may be provided by facsimile transmission.
b. Entire Agreement. This Agreement contains the entire
understanding of the parties with respect to the subject matter thereof and
supersedes in its entirety all prior agreements and understandings between the
parties with respect to the subject matter hereof, whether oral or written,
which shall have no further force or effect.
c. Modification and Assignment This Agreement cannot be
modified except by a writing signed by all of the parties hereto. Company may
Schulberg MediaWorks, Inc.
6/9/96
(6)
<PAGE> 7
at any time assign this Agreement, and/or any of its rights or obligations
hereunder, to any affiliated person, firm, or corporation, provided that Company
shall remain primarily liable for all obligations hereunder. Any such assignee
shall be bound by the terms and conditions of the Agreement. Producer shall not
assign any of its obligations to any third party without Company's prior written
approval.
d. Submission, Warranties and Indemnities Company agrees and
warrants that its approval of any material for use in the Program verifies that
to the best of its knowledge the content therein is truthful and that the sale
of Product promoted therein is not restricted or prohibited by any Federal,
state or local law. If any lawsuit or other proceeding, whether instituted by
any governmental body, or any other person or organization, is brought or
threatened against Producer, or any of its affiliates, executives, or employees,
Company will indemnify and hold harmless Schulberg MediaWorks, Inc., and its
affiliates, executives and employees, as appropriate, from any and all damages
resulting thereof, including, but not limited to; actual damages, punitive
damages and fines, and all legal fees and other costs reasonably incurred in
defending against the said claim, lawsuit, or other proceeding.
e. California Law This Agreement shall be governed by and
interpreted in accordance with the laws of the State of California.
f. Attorneys Fees In the event of any legal action relative
to this Agreement, the prevailing party therein will be entitled to recover its
reasonable attorneys' fees therein in addition to any other relief rewarded.
g. Arbitration Producer reserves the right, in the event any
amounts due hereunder remain unpaid, to institute arbitration proceedings, at
its election, which proceedings shall be conducted in San Francisco under the
then current rules of the American Arbitration Association. Any award rendered
therein in favor of Producer may be enforced in any court of competent
jurisdiction. Nothing contained in this paragraph shall limit or deprive either
party of its rights to resort to judicial enforcement of any of the obligations
set forth hereunder, or to seek provisional remedies from any court of competent
jurisdiction pending the conclusion of any arbitration initiated hereunder.
Schulberg MediaWorks, Inc.
6/9/96
(7)
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
Dated: June 10, 1996 SCHULBERG MEDIAWORKS, INC., a
--------------------- California corporation,
By: /s/ ILLEGIBLE
---------------------------
Dated: 6-10-96 LONG DISTANCE DIRECT
--------------------- MARKETING, INC., a New York
corporation,
By: /s/ ILLEGIBLE
---------------------------
Schulberg MediaWorks, Inc.
6/9/96
(8)
<PAGE> 9
EXHIBIT A
TO
AGREEMENT BETWEEN SCHULBERG MEDIAWORKS, INC. (PRODUCER) and
LONG DISTANCE DIRECT MARKETING, INC., (COMPANY)
1. RECITAL C, PROGRAM DESCRIPTION:
An infomercial promoting the marketing and sale of Long
Distance Direct Marketing, Inc. long distance telephone
services as a business opportunity for individual consumers.
2. Paragraph 2, Program Description:
Currently described by the parties as an original infomercial,
which will include multiple locations, customer testimonials,
direct-to-camera host segments, graphic treatments of
consumer savings, and expert testimonials.
3. Paragraph 2.c., Preliminary Budget Estimate:
$275,000
4. Paragraph 4.a., Payment Schedule:
(1) $91,666.66, heretofore paid upon commencement of
preproduction;
(2) Second payment of $91,666.66, due upon Company's
approval of Producer's production budget;
(3) Third payment of $45,833.33, due upon delivery of
Rough Cut;
(4) and final payment of $45,833.33, due upon delivery of
D2 Master of completed program.
5. Paragraph 4.d. Royalties:
(1) 1% percent of the Gross Product Sales ("GPS"), as
defined in paragraph 4(d.), through utilization of
the Program. Producer shall have no right to any
telecommunications billings generated as a result
of Product sales.
Schulberg MediaWorks Inc.
6/9/96
1
<PAGE> 10
6. Paragraph 6.a., Addresses for Notice:
To Producer: To Company:
Jon Schulberg Steven Lampert
President Chief Executive Officer
Schulberg MediaWorks Inc. Long Distance Direct, Inc.
69 Green Street, 4th Floor 1 Blue Hill Plaza
San Francisco, CA 94111 Pearl River, NY 10965
Fax (415) 362-5390 Fax (914) 620-1889
SCHULBERG MEDIAWORKS INC., LONG DISTANCE DIRECT
California corporation MARKETING, INC.
New York corporation
By: By: /s/ Illegible
--------------------- ------------------
Schulberg MediaWorks Inc.
6/9/96
2
<PAGE> 11
<TABLE>
<S> <C> <C>
- ------------------------------- ---------------------------------- ---------------------------------------
[SCHULBERG MEDIAWORKS LOGO]
69 GREEN STREET, 4TH FLOOR
BUSINESS TERMS SAN FRANCISCO, CA 94111
AND CONDITIONS TEL: (415) 362 5300 TAPE TRANSFERS
FAX: (415) 362 5390
PAYMENT NET 15 DAYS
D2
A SERVICE CHARGE OF 18% R A T E C A R D 15 MINUTE / $75 MINIMUM
PER ANNUM WILL BE CHARGED $3 / MINUTE THEREAFTER
FOR INVOICES NOT PAID PERSONNEL
WITHIN 15 DAYS 3/4" SP
DIRECTOR $2000 DAY 15 MINUTE / $45 MINIMUM
OVERNIGHT COURIER PRODUCER $ 600 DAY $1 / MINUTE THEREAFTER
BILLED AS USED. IMMIX EDITOR $ 400 DAY
COORDINATOR $ 200 DAY BETACAM SP
ANY TAPES NOT COLLECTED BY 15 MINUTE / $45 MINIMUM
CLIENT 30 DAYS AFTER COMPLETION PRE-PRODUCTION SERVICES $1.25 / MINUTE THEREAFTER
OF PRODUCTION WILL INCUR
STORAGE CHARGES, PRODUCT CONSULTATION $200 DAY
$1 PER TAPE QUARTERLY. CREATIVE DEVELOPMENT $200 DAY
TESTIMONIAL RECRUITMENT $ 20 HR VHS DUBS
HALF DAYS ARE BILLED AT TRANSCRIPTION $ 40 HR AMT. 15MIN 30 60 90 120
60% OF FULL DAY RATES. LOCATION SCOUTING $ 40 HR
1 $25 $30 $40 $50 $60
OVERTIME WILL BE BILLED AFTER POST-PRODUCTION SERVICES 2-9 $17 $20 $25 $30 $40
10 HOURS AS TIME AND A HALF. 10-49 $13 $17 $20 $25 $33
IMMIX SUITE $1000 DAY
LIABILITY: IT IS THE CLIENT'S MAC GRAPHICS
PHOTOSHOP 3.0 $ 125 HR WINDOW DUBS ADD $7/EACH
RESPONSIBILITY TO APPROVE OF ALL DIGITIZING $ 60 HR PRICES INCLUDE TAPE STOCK, BOX & LABELS
WORK AND MATERIALS BEFORE IT
LEAVES SCHULBERG MEDIAWORKS
IN TERMS OF ACCURACY AND
TECHNOLOGY.
- ------------------------------- ---------------------------------- ---------------------------------------
</TABLE>
<PAGE> 12
[SCHULBERG MEDIAWORKS LOGO]
69 Green Street
San Francisco, CA 94111
Tel. 415.362.5300
Fx. 415.362.5390
LDDI/SMW Preliminary Timeline - May 29, 1996
Week 1
- --------------------------------------------------------------------------------
- - SMW meets/conferences with LDDI for a full creative session,
reiterating the goals of the infomercial, discussing positioning and developing
creative concepts.
- - LDDI delivers all product information relevant to the show and we would
discuss further research that may be necessary.
- - SMW develops a creative treatment for approval.
Weeks 2-5
- --------------------------------------------------------------------------------
- - SMW budget is presented for approval.
- - Scripting begins. Scripts are delivered for review and revision during
this time period.
- - Pre-production begins - this entails selection of locations, contacting
and seeding testimonials, hiring the production team, etc.
Weeks 6-7
- --------------------------------------------------------------------------------
- - Principal photography. On average, a "magazine-style" show will require
5-7 shooting days, including host days in an interview and/or direct-to-camera
environment, testimonial days, product shoots, and possible live events.
Weeks 8-11
- --------------------------------------------------------------------------------
- - Post-production. Approximately 10 days after completion of principal
photography a rough cut is delivered to you for approval. Production such as
music and graphics are then incorporated into the program.
Week 12
- --------------------------------------------------------------------------------
- - Delivery of final program.
- - Initial test.
<PAGE> 1
LIST OF SUBSIDIARIES
EXHIBIT 21
The Company has the following subsidiaries, all of which are wholly
owned by the Company:
Long Distance Direct, Inc., a New York corporation
Long Distance Direct Marketing, Inc., a New York corporation
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement on Form SB-2 of our
report dated September 20, 1996 (except for Note 4 which is dated September 27,
1996) relating to the financial statements of Long Distance Direct Holdings,
Inc. for the years ended December 31, 1995 and December 31, 1994, respectively,
and the reference to our firm under the caption "EXPERTS" in the Prospectus.
Adelman, Katz & Mond, LLP
Certified Public Accountants
New York, NY
December 16, 1996
LONG DISTANCE DIRECT HOLDINGS, INC.
FORM SB-2
EXHIBIT 23.1
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,071,995
<SECURITIES> 0
<RECEIVABLES> 2,096,763
<ALLOWANCES> 287,501
<INVENTORY> 0
<CURRENT-ASSETS> 3,288,422
<PP&E> 333,884
<DEPRECIATION> 177,071
<TOTAL-ASSETS> 3,499,674
<CURRENT-LIABILITIES> 4,244,656
<BONDS> 0
0
0
<COMMON> 5,109
<OTHER-SE> (750,090)
<TOTAL-LIABILITY-AND-EQUITY> 3,499,674
<SALES> 4,710,039
<TOTAL-REVENUES> 4,710,039
<CGS> 3,067,743
<TOTAL-COSTS> 448,363
<OTHER-EXPENSES> 1,674,910
<LOSS-PROVISION> 180,864
<INTEREST-EXPENSE> 589,295
<INCOME-PRETAX> (1,248,406)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,248,406)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,248,406)
<EPS-PRIMARY> (.31)
<EPS-DILUTED> 0
</TABLE>
