<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending September 30, 1997
Commission File Number 33-26019-LA
Long Distance Direct Holdings, Inc.
(Exact name of small business issuer as specified in its charter)
Nevada 33-0323376
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification No.)
1 Blue Hill Plaza, Pearl River, NY 10965
-----------------------------------------
Issuer's telephone number: 914-620-0765
________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the issuer's common equity, as of
September 30, 1997 is 8,967,000.
Transitional small business disclosure Format (check one):
Yes No X
--- ---
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item I - Financial Statements
LONG DISTANCE DIRECT HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
30-Sep
1997 December 31,
ASSETS (unaudited) 1996
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<S> <C> <C>
CURRENT ASSETS
Cash $ 206,691 $ 962,471
Accounts receivable (net of allowance for
doubtful accounts of $720,618 and
$318,976 respectively) 4,474,639 1,125,986
Other current assets 713,064 924,431
--------------------------------
Total Current Assets 5,394,394 3,012,888
--------------------------------
PROPERTY AND EQUIPMENT
Furniture and equipment 199,588 156,926
Computer equipment and software 500,032 257,108
Leasehold improvements 127,335 91,720
--------------------------------
826,955 505,754
Less: accumulated depreciation 297,404 193,576
--------------------------------
529,551 312,178
--------------------------------
Other Assets 161,927 129,623
Officers' Loans 206,617 260,735
6,292,489 3,715,424
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 3,126,873 1,453,796
Accrued expenses 1,012,926 353,681
Sales and excise taxes payable 409,493 490,716
--------------------------------
Total Current Liabilities 4,549,292 2,298,193
--------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common stock - par value $.001 per share;
authorized 30,000,000 shares; issued
and outstanding 8,967,000 shares 8,967 6,598
Additional paid in capital 10,911,338 8,477,420
Accumulated deficit (9,177,108) (7,066,787)
--------------------------------
Total Stockholders' Equity 1,743,197 1,417,231
--------------------------------
$ 6,292,489 $ 3,715,424
================================
</TABLE>
See notes to Consolidated Financial Statements
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LONG DISTANCE DIRECT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Year to Date Three Months Year to Date
Ended 9/30/97 9/30/97 Ended 9/30/96 9/30/96
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES $2,930,037 $7,659,350 $1,266,227 $4,229,729
CUSTOMER REBATES AND REFUNDS 3,250 7,213 12,101 19,690
------------------------------------------------------------
NET REVENUES 2,926,787 7,652,137 1,254,126 4,210,039
COST OF SERVICES
2,237,638 5,984,576 927,934 3,067,743
------------------------------------------------------------
Gross Profit 689,149 1,667,561 326,192 1,142,296
------------------------------------------------------------
OPERATING EXPENSES
Sales and marketing 168,547 416,669 132,190 448,363
General and administrative 1,196,254 3,353,028 478,660 1,855,774
------------------------------------------------------------
Total Operating Expenses 1,364,801 3,769,697 610,850 2,304,137
------------------------------------------------------------
LOSS FROM OPERATIONS (675,652) (2,102,136) (284,658) (1,161,841)
OTHER EXPENSES (INCOME)
Interest expense -- 1,164 523,956 589,295
Interest income -- -- (1,118) (2,730)
Initial public offering costs -- -- -- --
------------------------------------------------------------
Total Other Expenses (Income) -- 1,164 522,838 586,565
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NET LOSS BEFORE TAX ($675,652) ($2,103,300) ($807,496) ($1,748,406)
State Income Tax 7,023 7,023 -- --
------------------------------------------------------------
Net Loss after Tax (682,675) (2,110,323) ($807,496) ($1,748,406)
============================================================
NET LOSS PER SHARE (.08) (0.26) (.20) (.44)
</TABLE>
<PAGE> 4
LONG DISTANCE DIRECT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
30-Sep-97 30-Sep-96
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($2,110,323) ($1,748,406)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 109,608 47,868
Amortization of note discount
Imputed interest on personal guarantee
Financing expenses
Provision for doubtful accounts 529,373 180,864
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (3,750,295) (329,711)
(Increase) decrease in other current assets 211,367 (313,936)
(Increase) decrease in other assets (32,304) 26,610
Increase in accounts payable 1,647,804 42,696
Increase (decrease) in accrued expenses 659,245 (339,165)
Increase (decrease) in sales and excise taxes payable (81,223) (236,187)
---------- -----------
Total Adjustments to Net Loss (706,425) (920,961)
=========== ===========
Net Cash Used in Operating Activities (2,816,748) (2,669,367)
=========== ===========
CASH FLOWS USED IN INVESTING ACTIVITIES
Acquisition of property and equipment (321,201) (43,545)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (payment) of notes payable (54,118) (595,000)
Proceeds (payment) of related party loans 0 406,497
Proceeds from private placement 2,436,287 3,765,744
=========== ===========
Net Cash Provided by Financing Activities 2,382,169 3,577,241
=========== ===========
NET INCREASE (DECREASE) IN CASH
(755,780) 864,329
=========== ===========
CASH - Beginning of Period 962,471 207,666
CASH - End of Period $206,691 $1,071,995
</TABLE>
<PAGE> 5
LONG DISTANCE DIRECT HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments necessary to present fairly the Company's position as of
September 30, 1997 and December 31, 1996 and results of its operations and cash
flows for the nine month periods ending September 30, 1997 and September 30,
1996.
The accounting policies followed by the Company are set forth in Note 2 to the
Company's financial statements in the Form 10KSB for the period ending
December 31, 1996.
<PAGE> 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with
the Financial Statements and the notes thereto appearing herein. This report
contains forward-looking statements which involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in this discussion and analysis and elsewhere in this report.
The following discussion and analysis relates to the financial
condition and results of operations of the Company for the two years ended
September 30, 1997. The Company has sustained losses for each of the two years
due to the lack of working capital to finance adequate levels of marketing
expenditure, insufficient revenues and other reasons. The Company effected a
recapitalization 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. After the recapitalization and through September 30, 1997, the Company
raised approximately $8.8 million in cash (net of certain expenses) from the
private sale of its Common Stock and converted approximately $1.7 million of its
debt into equity, the proceeds of which were used primarily for working capital.
Historically, the Company has marketed its services through three methods
typically employed by sellers and resellers of telephone services: field sales,
outbound telemarketing, and direct mail. Beginning in the fourth quarter of
1996, the Company began to utilize other marketing techniques. In particular,
the Company has entered into a number of agreements with third parties under
which those parties will be primarily responsible, both financially and
operationally, for marketing the Company's telecommunications services to their
members or customers. The Company test-marketed a televised marketing program in
conjunction with Guthy-Renker Distribution, Inc. ("GRD"), which it rolled out in
January, 1997, to increase its independent sales force. For the month of
September 1997, approximately 56% of the Company's revenues were derived from
this marketing program. In January 1997, the Company signed a mutually exclusive
agreement with National Benefits Consultants, LLC ("NBC"), a company in alliance
with Deloitte & Touche LLP, under which NBC will market the Company's
telecommunications services to audit clients of Deloitte & Touche LLP and other
commercial entities. For the month of September, 1997, approximately 4% of the
Company's revenues was derived from this marketing arrangement. In August,
1997, the Company entered into an agreement with Credit Education Center,
L.L.C. ("CEC") whereby "CEC" will market LDDI's telephone service in
conjunction with its own services. For the month of September, 1997,
approximately 9% of the Company's revenues were derived from this agreement.
The Company has established its own in-house telemarketing operation to respond
to queries generated from these marketing programs and intends to enter into a
number of other marketing agreements with third parties under which those
parties will be primarily responsible, both financially and operationally, for
marketing the Company's telecommunications services to their members or
customers.
Results of Operations
1
<PAGE> 7
Nine months ended September 30, 1997 as compared to Nine months ended September
30, 1996.
Gross revenues for the nine months ended September 30, 1997 were $7,659,350
as compared to $4,229,729 for the nine months ended September 30, 1996. The
increase in sales is attributable to revenue realized from the Company's new
marketing ventures. The Company's televised marketing program generated $1.7
million or 22% of total revenue through the sale of sales agent kits sold during
the program and $3.0 million or 40% of total revenue in billed and unbilled
telephone service. The Company's arrangement with National Benefits
Consultants, L.L.C. generated $47,000 or 1% of total revenue.
Revenue for the period ended 9/30/97 includes a significant volume of
unbilled revenue in respect of certain new customers which were acquired by LDDI
since January 1, 1997 and processed through MCI and which form a large
proportion of the customers who were generated from the Company's televised
marketing program. The accounts in question were confirmed to LDDI's service
but, due to software problems at MCI, the Company has not received the benefit
of these billings. The Company has been in extensive discussions with MCI to
resolve these problems both operationally and financially. From an operational
point of view, MCI has assured the Company that its software difficulties have
been rectified and that all current and future accounts sent to MCI for
provisioning to the Company's network will be processed correctly. MCI and the
Company have also reached an agreement in principle which is currently in the
process of being formalised and under which the Company will forgo the benefit
of its unbilled revenue and release MCI from all claims in respect thereof in
return for, (i) the waiving by MCI of all, or substantially all, of the
Company's shortfall to date under its existing minimum purchase obligations,
(ii) a material reduction of the Company's minimum purchase obligations over the
nine months following formalisation of the revised agreement (anticipated to
take effect from 1 November, 1997), (iii) certain performance credits under the
new purchase obligations, and (iv) reductions in prices charged to the Company
by MCI which the Company could not otherwise expect to achieve without an
increase in its purchase commitments. These arrangements have not been reflected
in the Company's financial statements through 30 September, 1997, and there can
be no assurance that they will be contractually concluded either at all or in
the terms described above.
In May, 1996, the Company, through its wholly owned subsidiary, Long
Distance Direct Marketing, Inc. ("LDDM"), entered into an arrangement with GRD
an infomercial producer and promoter, to produce and market a thirty minute
infomercial selling the right to become an independent sales representative of
the Company. Under the original contract, the Company was responsible for
financing any loss incurred from the sale of sales agent kits sold during the
program. In the nine months ended September 30, 1997, the Company recorded
losses from the sale of sales agent kits amounting to $330,718. In September,
1997, the Company entered into a five-year agreement with Guthy-Renker
Corporation ("GRC"), the parent company of GRD. Under this agreement, which
supersedes the contract between LDDM and GRD, GRC has agreed to finance the
production of a new infomercial and screen it at its own expense. In addition,
GRC is seeking to market the Company's telecommunications services, including
paging and voice mail, through a variety of direct marketing channels and
programs. In consideration for its responsibilities under the new contract,
which will be undertaken without financial recourse to the Company, GRC will be
entitled to receive royalties on telecommunications billings generated by the
Company from customers introduced by GRC. GRC will also be entitled to subscribe
for new common stock in the Company at $2 per share based on the proportion that
revenues from customers introduced by it to the Company bears to the Company's
total revenues for the two-year period over which such revenues shall be
compared.
2
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The Company has established an in-house telemarketing facility and intends
to increase expenditures on direct mail activities. As a result of its new
marketing strategies,the Company believes that it is poised for growth in
revenue and customer base but there can be no assurance that its marketing
ventures will produce or sustain substantial increases in revenue or customer
base.
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 is
presently in the process of obtaining certification to provide local service to
its customers.
The Company also entered the residential market in 1996. Previously, the
Company sold exclusively to commercial customers. The Company has signed an
agreement with MCI which allows the "LECs" (Local Exchange Carriers) to bill and
collect on behalf of the Company. Although the Company continues to bill its
customers directly, it will continue to keep under review whether to bill its
residential customers through the LEC's.
Management believes that the Company's systems, which have been further
upgraded in the third quarter of 1997 to provide quicker response times for the
customer service and collections functions, are capable of supporting the
anticipated growth in the Company's revenues. Management has also recently
enhanced its MIS department, and will continue to do so, in order to take full
advantage of the marketing agreements into which it has entered and is proposing
to enter. There can be no assurance, however, that the Company's systems will be
capable of handling the growth, if any, experienced from these agreements.
Gross profit was $1,667,561 and $1,142,296 for the nine months ended
September 30,1997 and 1996, respectively. As a percentage of net sales, the
gross profit margins for the nine months ended September 30, 1997 and 1996 were
22% and 27%, respectively. This decrease is mainly attributable to a loss
incurred with relation to the sale of sales agent kits sold through the
Company's televised marketing program.
Effective March 1, 1997, the Company entered into a new four-year contract
tariff with AT&T - which supersedes its contract dated September 1, 1995 - for
the supply of inbound and outbound telephone service. The Company's minimum
quarterly purchase requirement remains constant at $1,200,000 in years one to
three and increases to $1,475,000 in year four. (This quarterly purchase
requirement of $1,200,000 is unchanged from the Company's obligation under its
previous contract with AT&T dated September 1, 1995.). Failure to achieve the
minimum will require payment of the shortfall by the Company. The Company
3
<PAGE> 9
has not met its minimum purchase requirements for the first nine months of 1997.
The Company believes that it has been prevented from meeting its commitments
partially because new accounts have been sent to AT&T for provisioning since
January 1, 1997 but have not yet been confirmed to LDDI's service. The Company
has addressed this issue with AT&T who has agreed to research the problem.
Although the Company has not met its minimum purchase requirements, there are
provisions for any current shortfall to be made good by future usage in excess
of the minimum commitments since AT&T assesses the Company's shortfall on the
annual anniversary date of the contract. There can be no assurance that the
Company will achieve future excess usage in sufficient amounts to offset the
current shortfalls. Under the contract tariff, the Company is obligated to make
payments equal to its minimum purchase requirement for the outstanding term of
the agreement if there is an early termination thereof. The Company has received
more favorable pricing from AT&T on both domestic and international usage under
the new contract. In addition, AT&T has agreed to issue a credit waiving the
entire cumulative shortfall charged under the previous contract (approximately
$2.3 million as of December 31, 1996, none of which has been reflected in the
Company's financial statements included herein) within thirty days after the
Company discharges its past due obligation to AT&T. As of June 2, 1997, the
Company satisfied its past due obligation and AT&T has agreed to issue the
Company a credit waiving the entire shortfall balance in the amount of $2.3
million. The Company is currently in discussion with AT&T for either an
amendment to the existing contract, under which the Company would receive more
favorable pricing or a reduced purchase commitment, or the termination of the
existing contract without penalty. In either case, the Company would be released
from any shortfalls to date arising from its minimum purchase obligations in
exchange for releasing AT&T from any liability arising from its failure to
provision accounts sent to it by the Company during 1997. There can be no
assurance that the discussions will result in the outcomes described above.
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, which was amended in September 1996, February, 1997, and April, 1997,
superseded 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. This
new contract, which requires higher minimum purchase levels than the prior
agreement but affords better prices, including more favorable pricing on
international usage, is subject to an 18 month ramp period commencing April,
1996 followed by a 30 month service period.
The objective of the ramp period is to afford the Company time to build up
its customer base at the beginning of the contract term. During the first eight
months of the ramp period, the Company had no minimum purchase obligations.
During the ninth through twelfth months, the Company was obliged to purchase
$250,000 of usage per month; during the thirteenth through fifteenth months,
$500,000; during the sixteenth through eighteenth month, $750,000; and during
the thirty month service period $1,000,000 per month. The Company has not met
its minimum purchase requirements for the first nine months of 1997. Under the
MCI
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agreement, the Company is charged for shortfall in an amount equal to 15% of the
difference between the Company's actual monthly usage and its monthly
commitment. However, at the end of each quarter, if the Company's quarterly
actual usage exceeds its quarterly commitment, the Company is entitled to
receive a credit for any shortfall charges billed for the previous quarter.
The Company believes that it has been prevented from meeting its
commitments because certain new customers acquired by the Company since January
1, 1997 and processed through MCI were confirmed to LDDI's service but, due to
software problems at MCI, the Company has not received the benefit of these
accounts. The Company has been in extensive discussions with MCI to resolve
these problems both operationally and financially. From an operational point of
view, MCI has assured the Company that its software difficulties have been
rectified and that all current and future accounts sent to MCI for provisioning
to the Company's network will be processed correctly. MCI and the Company have
also reached an agreement in principle which is currently in the process of
being formalised and under which the Company will forgo the benefit of its
unbilled revenue and release MCI from all claims in respect thereof in return
for (i) the waiving by MCI of all, or substantially all, of the Company's
shortfall to date under its existing minimum purchase obligations, (ii) a
material reduction of the Company's minimum purchase obligations over the nine
months following formalisation of the revised agreement (anticipated to take
effect from 1 November, 1997), (iii) certain performance credits under the new
purchase obligations, and (iv) reductions in prices charged to the Company by
MCI which the Company could not otherwise expect to achieve without an increase
in its purchase commitments. During the first three months following the
proposed effective date of the proposed revised arrangements, the Company's
minimum purchase obligations will be $200,000 per month; during the second three
months, the minimum purchase obligations will be $300,000 per month, and during
the third three month period, the minium purchase obligations will be $500,000
per month; for the remaining fifteen months the minimum purchase obligations
will be $1,000,000 per month. The provisions for shortfalls under the revised
arrangements will remain as described above in respect of the existing
arrangements. These arrangements have not been reflected in the Company's
financial statements through 30 September, 1997, and there can be no assurance
that they will be contractually concluded either at all or in the terms
described above.
The Company estimates that, in order to meet its combined annual
commitments to AT&T and MCI under the existing contracts with those companies,
it must bill its customers approximately $25 million (annually) at the current
gross profit margin level of 30%. If the proposed arrangements with MCI are
confirmed and if the discussions with AT&T are concluded without amendment to,
or cancellation of, the existing minimum purchase obligations with that company,
the Company's annualised sales levels to its customers, at the current gross
profit level of 30%, would need to be at the rate of $10 million per annum for
the three months ending 31 January, 1998; $12.0 million per annum for the three
months ending 30 April, 1998; $15.5 million per annum for the three months
ending 31 July, 1998; and $24 million per annum thereafter. If the proposed
arrangements with MCI are confirmed, and if the discussions with AT&T result in
the termination of the Company's obligations to AT&T, the annualised sales
levels needed to meet the Company's obligations to MCI would, for the periods
specified above, be $3.5 million per annum, $5.0 million per annum, $8.5 million
per annum and $17 million per annum, respectively.
5
<PAGE> 11
Sales and marketing expenses were $416,669 and $448,363 for the nine
months ended September 30, 1997 and 1996 respectively. As a percentage of gross
sales, sales and marketing expenses decreased from 11% for the nine months ended
September 30, 1996 to 5% for the nine months ended September 30, 1997. The
percentage decrease is attributable to limited expenditure on account
acquisition from outbound telemarketing firms due to concentration on other
marketing strategies in 1997, in particular to the relationships with third
parties who are responsible for marketing the Company's services. The Company
plans to continue to utilize outbound telemarketing firms on a limited basis in
conjunction with its other marketing strategies. The Company has established its
own in-house telemarketing facility and also utilizes direct mail to obtain new
customers.
General and administrative expenses were $3,353,028 and $1,855,774 for the
nine months ended September 30, 1997, and 1996, respectively. As a percentage of
gross sales, general and administrative expenses for the nine months ended
September 30, 1997 and 1996 were 44% and 44% respectively. The principal
elements which comprise general and administrative expenses are mainly related
to the Company's expansion of its resources in anticipation of increased levels
of sales, including payroll and related administrative costs, and legal and
accounting fees. In addition, costs were incurred in 1997 to purchase additional
insurance for Director's & Officer's liability coverage. In 1997, the Company
incurred heavier
6
<PAGE> 12
costs for regulatory compliance when compared to the third quarter of 1996 as a
result of the Company's attempt to seek certification to provide local service
in each state. The Company incurred costs in 1997 to establish a relationship
with a public relations firm.
Interest expense for the nine months ended September 30, 1997 and 1996 was
$1,164 and $586,565 respectively. 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. Interest expense in the amount of $495,000
was recorded as a result of this transaction. This loan was converted to equity
at 9/30/96. In addition, for the nine months ended September 30, 1996, 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 buyout 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. Currently, the Company has no
outstanding debt.
The Company's accounts receivable balance increased from $1.1 million at
December 31, 1996 to $4.4 million at September 30, 1997 (net of reserve for bad
debt of $0.3 million and $.7 million at December 31, 1996 and September 30,
1997, respectively). This significant increase is attributable to an unbilled
receivable from its customers of $1.7 million at September 30, 1997. This
receivable is matched by a corresponding payable of $1.2 million which
represents related carrier costs payable to MCI with respect to this receivable
and by other accruals aggregating $.3 million in respect of direct costs that
would have been incurred if the revenue in question had been billed by the
Company as at September 30, 1997. The receivable, payable, and accruals are in
respect of certain new customers which were acquired by LDDI since January 1,
1997 and processed through MCI and which form a significant proportion of the
customers who were generated from the Company's televised marketing program. The
accounts in question were confirmed to LDDI's service but, due to software
problems at MCI, the Company has not yet received the benefit of these billings.
The Company has been in extensive discussions with MCI to resolve these problems
both operationally and financially. From an operational point of view, MCI has
assured the Company that its software difficulties have been rectified and that
all current and future accounts sent to MCI for provisioning to the Company's
network will be processed correctly. MCI and the Company have also reached an
agreement in principle which is currently in the process of being formalised and
under which the company will forgo the benefit of its unbilled revenue and
release MCI from all claims in respect thereof in return for (i) the waiving by
MCI of all, or substantially all, of the Company's shortfall to date under its
existing minimum purchase obligations, (ii) a material reduction of the
Company's minimum purchase obligations over the nine months following
formalisation of the revised agreement (anticipated to take effect from 1
November, 1997), (iii) certain performance credits under the new purchase
obligations, and (iv) reductions in prices charged to the Company by MCI which
the Company could not otherwise expect to achieve without an increase in its
purchase commitments. These arrangements have not been reflected in the
Company's financial statements through 30 September, 1997, and there can be no
assurance that they will be contractually concluded either at all or in the
terms described above.
7
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A majority of the remaining receivable of $2.7 million (net of reserve for
bad debt of $.7 million) is represented by the Company's receivable from its
customers at September 30, 1997. Customer payments are due to the Company upon
receipt of the invoice; however, in the Company's experience, approximately 80%
of its receivable with respect to one billing period is satisfied within a 60
day period with a majority of the remaining balance satisfied within the next 30
days - with the exception of bad debt which averages approximately 4.0% of
monthly billing. Accordingly, at September 30, 1997, the Company had collected
approximately 80% of its July 1997 billing (June usage), 62% of its August
billing (July usage), and 12% of its September billing (August usage). The
Company utilizes in-house collection efforts such as dunning letters and
collection calls to mitigate bad debt. In addition, external sources such as
collection agencies and legal firms are utilized to further minimize its bad
debt experience.
Paid in capital increased from $8.4 million at December 31, 1996 to $10.9
million at September 30, 1997 due to capital raised in the first four months of
1997 - net of certain expenses.
The Company incurred a net loss of $2,110,323 for the nine months ended
September 30, 1997 compared to a net loss of $1,748,406 for the nine months
ended September 30, 1996.
Three months ended September 30, 1997 compared to Three months ended September
30, 1996
Gross revenues for the three months ended September 30, 1997 were
$2,930,037 as compared to $1,266,227 for the three months ended September 30,
1996. The increase in sales is attributable to revenue realized from the
Company's new marketing ventures. The Company's televised marketing program
generated $538,534 or 18% of total revenue through the sale of sales agent kits
sold during the program and $1,574,222 or 54% of total revenue in billed and
unbilled telephone sales. The Company's arrangement with National Benefits
Consultants, L.L.C. generated $45,357 or 1% of total revenue.
8
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Revenue for the three months ended 9/30/97 includes a significant volume
of unbilled revenue in respect of certain new customers which were acquired by
LDDI since 1/1/97 and processed through MCI and which form a large proportion of
the customers who were generated from the Company's televised marketing program.
The accounts in question were confirmed to LDDI's service but, due to software
problems at MCI, the Company has not received the benefit of these billings.
The Company has been in extensive discussions with MCI to resolve these problems
both operationally and financially. From an operational point of view, MCI has
assured the Company that its software difficulties have been rectified and that
all current and future accounts sent to MCI for provisioning to the Company's
network will be processed correctly. MCI and the Company have also reached an
agreement in principle which is currently in the process of being formalised and
under which the Company will forgo the benefit of its unbilled revenue and
release MCI from all claims in respect thereof in return for (i) the waiving by
MCI of all, or substantially all, of the Company's shortfall to date under its
existing minimum purchase obligations, (ii) a material reduction of the
Company's minimum purchase obligations over the nine months following
formalisation of the revised agreement (anticipated to take effect from
1 November, 1997), (iii) certain performance credits under the new purchase
obligations, and (iv) reductions in prices charged to the Company by MCI which
the Company could not otherwise expect to achieve without an increase in its
purchase commitments. These arrangements have not been reflected in the
Company's financial statements through 30 September, 1997, and there can be no
assurance that they will be contractually concluded either at all or in the
terms described above.
Gross profit was $689,149 and $326,192 for the three months ended
September, 1997 and 1996, respectively. As a percentage of net sales,the gross
profit margins for the three months ended September 30, 1997 and 1996 were 24%
and 26%, respectively. This decrease is mainly attributable to a loss incurred
with relation to the sale of sales agent kits sold through the Company's
televised marketing program.
Sales and marketing expenses were $168,547 and $132,190 for the three
months ended September 30, 1997 and 1996 respectively. As a percentage of gross
sales, sales and marketing expenses decreased from 10% for the three months
ended September 30, 1996 to 6% for the three months ended September 30, 1997.
The percentage decrease is attributable to limited expenditure on account
acquisition from outbound telemarketing firms due to concentration on other
marketing strategies in 1997 in particular to the relationships with third
parties who are responsible for marketing the Company's services. The Company
plans to continue to utilize outbound telemarketing firms on a limited basis in
conjunction with its other marketing strategies. The Company has established its
own in-house telemarketing facility and also utilizes direct mail to obtain new
customers.
General and administrative expenses were $1,196.254 and $478,660 for the
three months ended September 30, 1997, and 1996 respectively. As a percentage of
gross sales, general and administrative expenses for the three months ended
September 30, 1997 and 1996 were 41% and 38% respectively. The principal
elements which contributed to the increase in general and administrative
expenses are mainly
9
<PAGE> 15
related to the Company's expansion of its resources in anticipation of increased
levels of sales. Costs which increased from their 1996 levels include payroll
and related administrative costs, and legal and accounting fees. In addition,
costs were incurred in 1997 to purchase additional insurance for Director's &
Officer's liability coverage. In 1997, the Company incurred heavier costs for
regulatory compliance when compared to the third quarter of 1996 as a result of
the Company's attempt to seek certification to provide local service in each
state. The Company incurred costs in 1997 to establish a relationship with a
public relations firm.
Interest expense for the three months ended September 30, 1997 and 1996
was $0 and $522,838 respectively. 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. Interest expense in the amount of $495,000
was recorded as a result of this transaction. This loan was converted to equity
at 9/30/96. In addition, for the three months ended September 30, 1996, 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 buyout 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. Currently, the Company has no
outstanding debt.
The Company incurred a net loss of $682,675 for the three months ended
September 30, 1997 compared to a net loss of $807,496 for the three months ended
September 30, 1996.
Liquidity and Capital Resources
The Company effected a recapitalization in October, 1995 which
subsequently enabled it to undertake private placements of its common stock
throughout 1995, 1996 and 1997. Since October, 1995, the Company has financed
its operations primarily through the sale of its common stock. In addition to
selling shares of its common stock to provide required working capital, and as
part of the recapitalization, a majority of the Company's loans which had been
outstanding at December 31, 1994 were either repaid or converted to equity in
1995 and 1996. After the recapitalization and through September 30, 1997, the
Company converted approximately $1.7 million of its debt into equity, and raised
approximately $8.8 million
10
<PAGE> 16
in cash (net of certain expenses) from the private sale of its common stock,
the proceeds of which were used primarily for working capital. In the third
quarter of 1996, litigation relating to a buy out of two former partners was
settled, and, as a result, the corresponding actual and contingent indebtedness
was cancelled. As a result of the private placements effected during 1996, the
Company finished the year with net current assets of $975,000 and total net
assets of $1.4 million, as against net current liabilities of $3.4 million and a
deficiency of assets of $3.2 million at December 31, 1995. At September 30, 1997
the Company had working capital of $845,102 compared to $975,000 at December 31,
1996.
The Company has never made a profit since inception in November, 1991. The
Company has sustained operating losses of $1,052,236, $1,096,125 and $1,661,320
for the fiscal years ended December 31, 1994, 1995 and 1996, respectively, and
sustained an operating loss of $2.1 million for the nine months ended September
30, 1997. As of September 30, 1997, the Company had an accumulated deficit of
$9.1 million. The Company has historically used substantial amounts of cash in
operations including $2.8 million for the first nine months of 1997. The
Company's expected expanded sales and marketing efforts could result in
significantly higher operating losses in the future. The Company's trend of
incurring operating losses is likely to continue until its revenues reach
certain levels materially higher than any achieved to date. There can be no
assurance that the Company will not continue to experience operating losses in
the future or that the Company's revenues will reach such levels.
Under its existing contractual arrangements, the Company is obligated to
meet minimum purchase requirements with AT&T and MCI. The Company's existing
contract with AT&T requires the Company to purchase $1,200,000 per quarter in
usage in years one to three beginning in March of 1997 and $1,475,000 per
quarter in usage in year four. The Company has not met its minimum purchase
requirements for the first nine months of 1997. The Company believes that it has
been prevented from meeting its commitments partially because new accounts have
been sent to AT&T for provisioning since January 1, 1997 but have not yet been
confirmed to LDDI's service. The Company has addressed this issue with AT&T who
has indicated that it is researching the problem. Although the Company has not
met its minimum purchase requirements, there are provisions for any current
shortfall to be made good by future usage in excess of the minimum commitments
since AT&T assesses the Company's shortfall on the annual anniversary date of
the contract. There can be no assurance that the Company will achieve future
excess usage in sufficient amounts to offset the current shortfalls. The Company
is currently in discussion with AT&T for either an amendment to the existing
contract, under which the Company would receive more favorable pricing or a
reduced purchase commitment, or the termination of the existing contract without
penalty. In either case, the Company would be released from any shortfalls to
date arising from its minimum purchase obligations in exchange for releasing
AT&T from any liability arising from its failure to provision accounts sent to
it by the Company during 1997. There can be no assurance that the discussions
will result in the outcomes described above.
11
<PAGE> 17
Under its existing contract with MCI, the Company has a minimum purchase
obligation of $3,000,000 per quarter beginning in September of 1997 when the 18
month ramp-up period has expired. Failure to achieve these minimums will require
payment of the shortfall by the Company. The Company has not met its minimum
purchase requirements for the first nine months of 1997. Under the existing MCI
agreement, the Company is charged for shortfall in an amount equal to 15% of the
difference between the Company's actual monthly usage and its monthly
commitment. However, at the end of each quarter, if the Company's quarterly
actual usage exceeds its quarterly commitment, the Company is entitled to
receive a credit for any shortfall charges billed for the previous quarter.
The Company believes and has contended to MCI that it has been prevented
from meeting its commitments because certain new customers acquired by the
Company since January 1, 1997 and processed through MCI were confirmed to LDDI's
service but, due to software problems at MCI, the Company has not yet received
the benefit of these accounts.
The Company estimates that, in order to meet its combined annual
commitments to AT&T and MCI under the existing contracts with those companies,
it must bill its customers approximately $25 million (annually) at the current
gross profit margin level of 30%. If the proposed arrangements with MCI are
confirmed and if the discussions with AT&T are concluded without amendment to,
or cancellation of, the existing minimum purchase obligations with that company,
the Company's annualised sales levels to its customers, at the current gross
profit level of 30%, would need to be at the rate of $10 million per annum for
the three months ending 31 January, 1998; $12.0 million per annum for the three
months ending 30 April, 1998; $15.5 million per annum for the three months
ending 31 July, 1998; and $24 million per annum thereafter. If the proposed
arrangements with MCI are confirmed, and if the discussions with AT&T result in
the termination of the Company's obligations to AT&T, the annualised sales
levels needed to meet the Company's obligations to MCI would, for the periods
specified above, be $3.5 million per annum, $5.0 million per annum, $8.5 million
per annum and $17 million per annum, respectively.
The Company began to market its services through media advertising in
January of 1997 by broadcasting a thirty-minute infomercial designed to increase
its independent sales force. Under its then current arrangement with GRD, the
producer of the infomercial, the Company has financed the loss incurred from the
sale of sales agent kits sold during the program. For the nine months ended
12
<PAGE> 18
September 30, 1997, the Company recorded losses from the sale of sales agent
kits amounting to $330,718. In September, 1997, the Company entered into a
five-year agreement with Guthy-Renker Corporation ("GRC"), the parent company of
GRD. Under this agreement, which supersedes the contract between LDDM and GRD,
GRC has agreed to finance the production of a new infomercial and screen it at
its own expense. In addition, GRC is seeking to market the Company's
telecommunications services, including paging and voice mail, through a variety
of direct marketing channels and programs. In consideration for its
responsibilities under the new contract, which will be undertaken without
financial recourse to the Company, GRC will be entitled to receive royalties on
telecommunications billings generated by the Company from customers introduced
by GRC. GRC will also be entitled to subscribe for new common stock in the
Company at $2 per share based on the proportion that revenues from customers
introduced by it to the Company bears to the Company's total revenues for the
two-year period over which such revenues shall be compared.
Until the Company's revenues reach certain levels materially higher than
any achieved to date, as to which there can be no assurance, the Company will be
required to raise substantial additional amounts of capital from the sale of its
securities to finance its operations. There can be no assurance that additional
financing will be available on acceptable terms, if at all.
13
<PAGE> 19
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 12, 1997 Long Distance Direct Holdings, Inc.
By:/s/ Steven Lampert
--------------------------
Steven Lampert, President
(Principal Executive Officer)
By:/s/ Michael Preston
--------------------------
Michael Preston, Chief
Financial Officer (Principal
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PROFIT/LOSS
STATEMENT AND BALANCE SHEETS OF LONG DISTANCE DIRECT HOLDINGS INC. AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH LONG DISTANCE DIRECT HOLDINGS
INC. FORM 10QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 206,691
<SECURITIES> 0
<RECEIVABLES> 5,195,257
<ALLOWANCES> 720,618
<INVENTORY> 0
<CURRENT-ASSETS> 5,394,394
<PP&E> 826,955
<DEPRECIATION> 297,404
<TOTAL-ASSETS> 6,292,489
<CURRENT-LIABILITIES> 4,549,292
<BONDS> 0
0
0
<COMMON> 8,967
<OTHER-SE> 1,734,230
<TOTAL-LIABILITY-AND-EQUITY> 6,292,489
<SALES> 7,652,137
<TOTAL-REVENUES> 7,652,137
<CGS> 5,984,576
<TOTAL-COSTS> 416,669
<OTHER-EXPENSES> 2,823,655
<LOSS-PROVISION> 529,373
<INTEREST-EXPENSE> 1,164
<INCOME-PRETAX> (2,103,300)
<INCOME-TAX> 7,023
<INCOME-CONTINUING> (2,110,323)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,110,323)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> 0
</TABLE>
