<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 14, 1997.
REGISTRATION NO. 333-31563
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
AMENDMENT NO. 2
TO
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 PROPOSED SALE TO PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ________________
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _______________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<PAGE> 2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH PROPOSED PROPOSED
CLASS OF MAXIMUM MAXIMUM
SECURITIES BEING AMOUNT TO OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED BE REGISTERED PER UNIT PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock 1,529,491 $ 1.50(1) $2,294,237(1) $696
Common Stock(2) 152,950(3) $ 2.00(3) $ 305,900(3) $ 93
------------ ----------- ------------- ----
Total Registration Fee $835
----
TOTAL DUE $835
----
</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 July 14, 1997, as reported by the OTC
Bulletin Board.
(2) Shares issuable upon exercise of warrants at an exercise price of $2.00 per
share.
(3) Estimated solely for the purpose of calculating the amount of the
registration fee under Rule 457 based upon the exercise price of the warrants.
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.
ii
<PAGE> 3
LONG DISTANCE DIRECT HOLDINGS, INC.
CROSS REFERENCE SHEET
Between Items of Form SB-2 and Prospectus
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM AND PROSPECTUS CAPTION
HEADING
<C> <S> <C>
1. Front of 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 Back Cover 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 Management
Liabilities
15. Organization Within Last 5 Years Not Applicable
</TABLE>
iii
<PAGE> 4
<TABLE>
<S> <C>
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 for Common Equity and Market Price for Common Stock and
Related Stockholder Matters Related Stockholder Matters
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure Not Applicable
</TABLE>
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
OCTOBER 14, 1997
SUBJECT TO COMPLETION
LONG DISTANCE DIRECT HOLDINGS, INC.
1,682,441 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
warrants will be acquired by certain 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 resales 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 September 18, 1997, as reported by the OTC Bulletin
Board were $1.1875 and $1.25 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 October __, 1997.
<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 at the Commission's
principal office 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 Citicorp Center, 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 Commission maintains a web site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission. The Commissions' web site
address is http://www.sec.gov.
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.
2
<PAGE> 7
TABLE OF CONTENTS
PAGE
Prospectus Summary 4
Risk Factors 5
Market For Common Stock and Related Stockholder Matters 11
Selected Financial Data 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Business 19
Management 30
Principal Stockholders 33
Certain Transactions 34
Selling Stockholders 37
Plan of Distribution 38
Description of Securities 39
Legal Matters 40
Experts 40
Further Information 40
Index to Financial Statements F-1
3
<PAGE> 8
PROSPECTUS SUMMARY
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), that involve risks and uncertainties, such as statements of the
Company's strategies, plans, objectives, expectations and intentions. 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 under "Risk Factors" and elsewhere in this Prospectus. The cautionary
statements made in this Prospectus should be read as being applicable to all
related forward-looking statements wherever they appear in this Prospectus. The
following summary is qualified in its entirety by the more detailed information
and the financial statements and notes thereto appearing elsewhere in this
Prospectus.
THE COMPANY
The Company, which was formerly known as Golden Ark, Inc., was originally formed
as a "blank-check" company (a company formed specifically to seek a merger or
acquisition candidate with whom it can merge or whom it can acquire). Golden
Ark, Inc. became a public company on August 28, 1989 and remained 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 Golden Ark.
Subsequent to this transaction, Golden Ark, Inc. changed its name to Long
Distance Direct Holdings, Inc. 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
shares 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 and
residential subscribers. All of the services sold by the Company are currently
provided by AT&T Corporation ("AT&T") or MCI Telecommunications Corporation
("MCI"). According to a 1997 Telemetrix report, AT&T and MCI currently
accounted for approximately 53% and 18% respectively, of total domestic long
distance revenue. 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.
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. As of June 30, 1997, approximately 44%
of the Company's billings were derived from these methods. The Company
test-marketed a televised marketing program during the fourth quarter of 1996,
which it started to roll out in January 1997, to increase its independent sales
force. As of June 30, 1997, approximately 31% of the Company's billings were
derived from this marketing program. In addition 24% of total revenue as of
June 30, 1997 was derived from the sale of sales agents kits with regard to
this televised marketing program. The Company has recently begun to establish
its own in-house telemarketing operation. 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. The Company proposes to amend
this agreement so that it is not mutually exclusive thus enabling the Company to
provide its services through other multi-level marketing companies. As of June
30, 1997, approximately 1% of the Company's billings 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. The Company expects to see the benefit of these billings in
the third quarter of 1997. 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. The Company
expects to realize revenue from this arrangement in the last quarter of 1997.
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) 620-0765.
4
<PAGE> 9
<TABLE>
<S> <C>
THE SELLING STOCKHOLDER OFFERING
Common Stock outstanding on June 30, 1997(1) 8,927,000
Common Stock offered by Selling Stockholders(2) 1,682,441
Risk Factors This Offering involves a high degree of risk.
See "Risk Factors."
OTC Bulletin Board Symbol LDDI
</TABLE>
- ------------------
(1) Excluding 1,765,000 shares issuable upon exercise of outstanding options and
991,038 shares issuable upon exercise of outstanding warrants. The number of
shares issuable upon exercise of outstanding options does not include an
indeterminate number of shares issuable upon exercise of options held by
National Benefits Consultants, L.L.C. See "Description of
Securities - Options."
(2) Includes 152,950 shares issuable upon the exercise of warrants held by
certain Selling Stockholders.
SUMMARY FINANCIAL INFORMATION
The statement of operations data for the years ended December 31, 1994, 1995 and
1996, and the balance sheet data as of December 31, 1995 and 1996 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 significant recurring losses from operations 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 six months
ended June 30, 1997 and the unaudited balance sheet data as of June 30, 1997
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 SIX MONTHS ENDED
DECEMBER 31 JUNE 30
--------------------------------------- -------------------
1994 1995 1996 1996 1997
--------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues, Net $9,083 $7,986 $5,310 $3,456 $ 4,725
Operating Expenses 3,877 3,219 3,321 1,693 2,405
Operating Loss (1,052) (1,096) (1,661) (377) (1,427)
Net Loss (1,221) (1,874) (2,401) (441) (1,428)
<CAPTION>
AS OF AS OF
DECEMBER 31 JUNE 30
----------------- ---------
1995 1996 1997
-------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance Sheet Data:
Working Capital (deficit) $(3,485) $ 975 $1,629
Total Assets 1,627 3,715 6,726
Total Liabilities 4,890 2,298 4,273
Shareholder's Equity (deficiency) (3,262) 1,417 2,453
</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 Prospectus, before deciding to
purchase the Shares. These risk factors are not intended to represent a complete
list of the general or specific risks that may affect the Company. It should be
recognized that other risks may be significant, presently or in the future, and
that the risks set forth below may affect the Company to a greater extent than
indicated.
5
<PAGE> 10
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, $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 $1,427,000 for the six months
ended June 30, 1997. As of June 30, 1997, the Company had an accumulated
deficit of $8,494,435. The Company's expected expanded sales and marketing
efforts could result in significantly higher operating losses in the future.
There can be no assurances that the Company will not continue to 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, 1996 notes that the Company's significant
recurring losses from operations 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. There can be no
assurance that the Company will ever generate positive operating income. See
"Business" and "Financial Statements."
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, and its
contractual minimum long-distance service purchase commitments to AT&T and MCI.
The Company's capital resources are, and will continue to be, extremely limited.
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."
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 or the Company's failure to maintain or
renew or a termination of such agreements by AT&T or MCI would in all likelihood
materially adversely affect the Company's ability to continue to offer long
distance service at commercially reasonable terms, and, in turn, would
materially adversely affect the Company's business, financial condition,
operations and prospects, and could result in the cessation of operations by the
Company. AT&T and MCI may terminate the provision of services under its contract
tariffs for limited reasons, including for non-payment by the Company, for
national defense purposes or if the provision of services to the Company were to
have a substantial adverse impact on the providers' network. There are no
specific notice requirements with respect to such termination. Although the
Company may have the right to switch end users to alternate providers subsequent
to such termination, the end users have the right to discontinue such service at
any time. See "Business." There can be no assurance that if the AT&T or MCI
agreements were terminated or not renewed, the Company would be able to obtain
other long distance communications services from alternate carriers on favorable
terms, if at all.
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.
LDDI 's ability to undersell such primary sellers arises as a result of the
volume discount offered to the Company in accordance with the terms of its
contracts with AT&T and MCI. The Company believes its lower customer bills are
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 material 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 materially adversely affected. The Company depends on this pricing
differential for its revenue. There can be no assurance, however, that such
pricing differential will not narrow or be eliminated entirely. The occurrence
of such narrowing or elimination of the pricing differential would likely
foreclose the
6
<PAGE> 11
prospects for any revenue for the Company whatsoever and could result in
cessation of the Company's operations See "Business."
INTENSE 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 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. Many of the Company's competitors are established enterprises,
such as AT&T, MCI and Sprint Corporation ("Sprint"), that possess greater name
recognition, established customer bases and significantly greater resources than
the Company. There is no 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, Sprint 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. The recently enacted Telecommunications Act of 1996 eliminated many of
the barriers to entry in the telecommunications market, which is likely to
result in increased competition for the Company. Given these factors, it is
highly likely that new competitors may emerge and acquire a significant portion
of the Company's market share, thereby further diminishing the Company's
prospects. In addition to direct competition from other resellers, the Company
competes with the sales organizations of large telecommunications concerns such
as Sprint, 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" and "Business-Regulation."
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 -- Arrangements with
AT&T" and "Business -- Arrangements with MCI." The Company recently entered into
a new four-year negotiated contract tariff with AT&T, effective March 1, 1997,
for the supply of inbound and outbound telephone service with volume discounts
which obligates the Company for a minimum quarterly purchase requirement of
$1,200,000 during the first three years increasing to $1,475,000 in the fourth
year of the contract. The contract provides that failure to achieve the minimum
will require payment of the shortfall by the Company. The Company has not met
its minimum purchase requirements for the first six 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 current shortfall to be made good by future usage in excess of the minimum
commitments. 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 requirements for the outstanding term of the agreement if there is an
early termination of the plan. Under this contract, AT&T agreed to waive payment
of the entire cumulative shortfall charged under the Company's prior contracts
(approximately $2.3 million as of December 31, 1996, none of which has been
reflected in the Company's financial statements included herein) provided that
the Company discharge its past due obligations to AT&T. As of June 2, 1997, the
Company paid its past due obligation to AT&T and AT&T has agreed to waive
payment of the entire $2.3 million shortfall.
In March 1996, the Company signed a four-year negotiated contract with MCI, and
signed amendments to such agreement in September 1996, February, 1997 and April
1997, for the supply of inbound and outbound telephone service with volume
discounts in return for minimum quarterly purchase requirements rising to
$3,000,000 per quarter after the first 18 months of service under the contract.
The first 18 month period of the MCI contract is referred to as the "ramp
period." The purpose of the ramp period is to afford the Company time to build
up its customer base. During the ramp period, the Company had no minimum
purchase obligation during the first 8 months and minimum monthly purchase
obligations of $250,000 during the ninth through twelfth months, $500,000 during
the thirteenth through fifteenth months and $750,000 during the sixteenth
through eighteenth months. Failure to achieve the minimum will require shortfall
payments by the Company. The Company has not met its minimum purchase
requirements for the first six months of 1997. Under the 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 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 is in
discussions with MCI to resolve the problem, to determine an appropriate level
of compensation for the error and to ensure that this problem does not recur
with regard to future orders sent to MCI. MCI has assured the Company that this
problem is being investigated and will be resolved. There can be no certainty,
however, that the result of these discussions will be favorable to the Company
or that the accounts in question will ultimately be recovered by the Company.
The Company is currently re-negotiating its contract with MCI. The Company is
requesting lower prices in turn for higher commitment levels. Under this new
contract, the Company anticipates being released from any shortfall obligations
through, at least, September 1997.
The Company estimates that, in order to meet its current annual commitment to
ATT & MCI of $16.8 million (AT&T annual minimum commitment is $4.8 million and
MCI is $12 million once the ramp-up period is over) it must bill its customers
approximately $25 million annually at the current profit margin level of 30%.
Although the Company is aggressively marketing its services through media,
direct mail and arrangements with National Benefits Consultants, L.L.C. and
Credit Education Center, L.L.C., the Company has not reached this level of sales
to date, and there can be no assurance that this level of sales will be achieved
in the future. Should the Company fail to maintain or renew either of its
agreements with AT&T or MCI, such failure could have a material adverse effect
on the Company's business, financial condition, results of operation and
prospects.
CONTROL BY OFFICERS AND DIRECTORS
As of June 30, 1997, the Company's officers, directors and principal
shareholders with whom certain directors are affiliated beneficially owned or
controlled in the aggregate 5,578,203 shares of Common Stock (including
1,307,960 shares issuable upon the exercise of options held by the Company's
executive officers and directors) or approximately 54% of the outstanding shares
of the Company's Common Stock as of such date. See "Principal Shareholders." As
a result, these shareholders, if acting in concert, will be able to elect a
majority of the Company's directors and affect the outcome of most corporate
actions requiring shareholder approval including delaying or preventing any
change in control.
7
<PAGE> 12
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 or other transaction of the Company, such as an
unsolicited takeover, which change in control or other transaction might be
beneficial to the shareholders.
GOVERNMENTAL REGULATION
The Company's activities are heavily 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 permissible business
activities or pricing practices may have an adverse impact on the Company's
operations. The Company is required to file tariffs for interstate and
international service with the FCC, which tariffs become effective on one day's
notice. The Company is also required to file tariffs or obtain approval for
intrastate service provided in most of the states in which it is marketing
long distance services. 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 a material adverse effect on the Company's activities and on its
future prospects particularly if those policies make it more difficult to obtain
service from AT&T, MCI or other long distance companies at competitive rates, or
otherwise increase the cost and regulatory burdens of providing long distance
service. 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. There can be no assurance that the entry of the BOCs or
other competitors into the long-distance market will not have a material adverse
effect on the Company's business. There can be no assurance that the regulatory
authorities in one or more states or the FCC will not take action having an
adverse effect on the business or financial condition or results of operations
of the Company. Regulatory action by the FCC or the states also could adversely
affect or otherwise increase the cost and regulatory burdens of providing long
distance services. As it engages in direct marketing to end users, the Company
will be subject to applicable regulatory standards for marketing activities and
the increased FCC and state attention to certain marketing practices may become
more significant to the Company. See "Business -- Regulation."
POTENTIAL INSUFFICIENCY OF WORKING CAPITAL TO SUPPORT OPERATIONS
There can be no assurance that the cash generated from operations will be
sufficient to support the Company's anticipated level of operations, or even a
diminished level of operations, for any significant period beyond the date
hereof. If the Company's plans change or its assumptions prove to be inaccurate
or it is otherwise unable to generate sufficient revenues or income, the Company
may require additional funds to maintain its operations or, if such funds are
unavailable, the Company may have to cease its operations altogether. If
additional funds are required, the Company will have to seek additional equity
or debt financing, bank loans, or other financing to sustain its planned
expansion and growth. Such financing, if obtainable at all, may be on terms
materially adverse to the Company's present shareholders and persons who
purchase the Shares, with respect to dilution of book value, dividend
preferences, liquidation preferences, or other terms. The Company currently has
no binding commitments for any additional financing. No assurance can be given
that the Company will be able to obtain any additional financing, if necessary,
on acceptable terms or otherwise. Failure to obtain such additional financing on
reasonable terms or otherwise would materially adversely affect the Company's
ability to fund its operations and could force the Company to restructure, file
bankruptcy, sell assets or otherwise cease operations.
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."
8
<PAGE> 13
DEPENDENCE ON PERFORMANCE OF NON-AFFILIATED COMPANIES TO INCREASE SALES
The Company's future performance depends on the success of certain
non-affiliated companies it is employing to sell its services. These companies
include National Benefits Consultants, LLC ("NBC"), a company which makes
recommendations for alternate sourcing of certain products and services so as to
reduce the cost burden on its clients, Guthy-Renker Corporation
("Guthy-Renker"), a direct response marketing company and infomercial producer
and Credit Education Center, L.L.C. These companies are in addition to the
current and historical agents of the Company, which have been unsuccessful in
increasing the Company's sales. The efforts of the Company's own agents have
been insufficient to create an operating profit. There can be no assurance that
the use of NBC, Guthy-Renker or Credit Education Center, L.L.C. or any other
unaffiliated company will enable the Company to increase revenues, or generate
any operating profit or decrease its operating losses. See "Business" -
"Marketing and Sales," "Televised Marketing Program," "Multi-Level Marketing,"
and "National Benefits Consultants/Deloitte & Touche LLP."
CONFLICTS OF INTEREST
The Company may be subject to certain conflicts of interest arising out of its
relationship with its legal counsel, Day, Campbell & McGill, and the fact that
Rowland W. Day II of such firm sits on the Company's Board of Directors and
certain members of such firm are significant shareholders in the Company. While
not prohibited under applicable law, such a relationship may give rise to
conflicts of interest that could affect the Company's legal representation and,
therefore, could have an adverse affect on the Company's business, financial
condition or operations.
RELIANCE ON INDEPENDENT CARRIER AND MARKETING COMPANIES; LACK OF CONTROL OVER
MARKETING ACTIVITIES
The Company markets its services primarily through independent agents and
non-affiliated companies which generally have entered into mutually exclusive
agreements with the Company. Such agents and non-affiliated companies make no
minimum use or revenue commitments to the Company under these agreements. In the
event that the Company loses access to AT&T or MCI's network or billing
services, the Company's agreements with agents and non-affiliated companies
could be adversely impacted or terminated. Certain marketing practices,
including the methods and means to convert a customer's long distance telephone
service from one carrier to another, have been subject to increased regulatory
review at both the federal and state levels. This increased regulatory review
could adversely affect the acquisition of new business by agents and
non-affiliated companies. Because agents and non-affiliated companies are
independent, the Company is unable to control their activities. The Company is
also unable to predict the extent of its agents' and non-affiliated companies'
compliance with applicable regulations or the effect of such increased
regulatory review. None of the agents or non-affiliated companies has a
substantial operating history with the Company, and therefore no assurance can
be given as to their ability to execute their agreements or to attain a level of
sales sufficient to cover related operating expenses or other future plans.
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 only AT&T long-distance services until April 1996. The
Company believes that its future 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.
9
<PAGE> 14
CUSTOMER ATTRITION
The Company experiences a high level of customer attrition that could materially
adversely affect the Company. 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. Increasing customer attrition
levels would be more detrimental to the Company. 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 favorable to the stockholders.
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, and if issued the rights and privileges issued to preferred stock
holders might be detrimental to holders of the Shares. See "Description of
Securities."
SHARES ELIGIBLE FOR FUTURE SALE; IMPENDING REGISTRATION
Of the 8,927,000 shares of the Company's Common Stock outstanding on June 30,
1997, approximately 1,968,994 are freely tradeable and approximately 3,384,324
shares (excluding approximately 2,038,615 shares which have been previously
registered for resale and approximately 1,529,491 shares outstanding as of June
30, 1997 which are included in the Registration Statement to which this
Prospectus relates) are "restricted securities," as that term is defined under
Rule 144 promulgated under the Securities Act ("Rule 144"). 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. Approximately 3,200,000 of the
restricted securities became eligible for resale under Rule 144 on April 29,
1997, and the balance will be eligible for resale under Rule 144 during 1997 at
various times after April 29 of such year. Generally, under Rule 144, each
person having held restricted securities for one year 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 Common
Stock for two years is entitled to sell such shares without regard to any of the
limitations described above. Actual sales of significant amounts of shares, or
the prospect of such sales, will likely 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.
There can be no assurance that an active trading market for the Company's Common
Stock will develop at any time in the future, especially as long as the
Company's Common Stock continues to be traded only on the Electronic Bulletin
Board. See "Market for Common Stock and Related Stockholder Matters."
10
<PAGE> 15
NASDAQ LISTING REQUIREMENTS; RISK OF LOW-PRICED SECURITIES
The Securities and Exchange Commission recently approved rules imposing more
stringent criteria for the listing of securities on the NASDAQ Small Cap Market
including (1) either $4,000,000 of net tangible assets, $750,000 of net income
in the latest fiscal year or two of the last three fiscal years, or market
capitalization of at least $50,000,000, and (2) a bid price of at least $4.00
per share. Until the Company's Common Stock is eligible for listing on the
NASDAQ small cap market, as to which there can be no assurance, 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 would 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 SEC
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
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. One
of such individuals, however, Rowland W. Day II, is a principal with the law
firm that acts as corporate counsel to the Company. While not prohibited under
applicable law, such a relationship may give rise to conflicts of interest that
could affect the Company's legal representation and, therefore, could have an
adverse affect on the Company's business, financial condition or operations.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical fact included in this Prospectus,
including, without limitation, the statements under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" regarding: the Company's strategies,
plans, objectives and expectations; the Company's ability to market and sell
products; the ability of the Company to meet minimum purchase requirements under
its agreements with AT&T and MCI; the Company's future operating results; the
Company's ability to obtain sufficient additional financing to support
operations and other matters are forward-looking statements. Although the
Company believes that the expectations reflected in such forward looking
statements are reasonable at this time, it can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from the Company's expectations ("Cautionary
Statements") are set forth in these "Risk Factors," as well as elsewhere in this
Prospectus. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.
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
11
<PAGE> 16
has been extremely limited and sporadic, and there is a significant number of
days or weeks when there has been no trading activity at all.
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 September
18, 1997. Such prices are inter-dealer quotations without retail mark-ups,
mark-downs or commissions, and may not represent actual transactions.
<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 $5.00 $2.00
1997
First Quarter $4.50 $2.00
Second Quarter $3.375 $ .25
Third Quarter (through September 18) $1.50 $1.00
</TABLE>
As of June 30, 1997, there were approximately 313 shareholders of record of
the Company's Common Stock. On September 18, 1997, the closing bid price for
the Company's Common Stock was $1.1875.
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, 1994, 1995 and
1996 and the balance sheet data as of December 31, 1995 and 1996 have 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 significant recurring losses from operations 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 six months
ended June 30, 1997 and the unaudited balance sheet data as of June 30, 1997
have 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 SIX MONTHS ENDED
DECEMBER 31 JUNE 30
--------------------------------------- ------------------
1994 1995 1996 1996 1997
--------------------------------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, gross $ 9,528 $ 8,364 $ 5,320 $3,463 $4,729
Customer rebates and refunds 445 378 10 7 4
------- ------- ------- ------ ------
Revenues, net $9,083 $7,986 $5,310 $3,456 $4,725
</TABLE>
12
<PAGE> 17
<TABLE>
<S> <C> <C> <C> <C> <C>
Cost of services 6,258 5,863 3,650 2,140 3,747
Gross Profit 2,825 2,123 1,660 1,316 978
Operating Expenses
Sales and marketing 1,323 519 380 316 248
General and administrative 2,554 2,700 2,941 1,377 2,157
------- ------- ------- ------ ------
3,877 3,219 3,321 1,693 2,405
Loss from operations before interest and tax (1,052) (1,096) (1,661) (377) (1,427)
Interest expense 169 371 740 64 1
------- ------- ------- ------ ------
1994 IPO costs written off -- 407 -- -- --
------- ------- ------- ------ ------
Net Loss (1,221) (1,874) (2,401) (441) (1,428)
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31 JUNE 30
------------------------------ --------
1995 1996 1997
--------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital (deficit) $(3,485) $ 975 $1,629
Total Assets 1,627 3,715 6,726
Total Liabilities 4,890 2,298 4,273
Shareholder's Equity (deficiency) (3,262) 1,417 2,453
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Financial Statements and Notes
thereto included elsewhere in this Prospectus. Except for the historical
information contained herein, the discussion in this Prospectus contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act that involve risks and uncertainties,
such as statements of the Company's strategies, plans, objectives, expectations
and intentions. The cautionary statements made in this Prospectus should be read
as being applicable to all related forward-looking statements wherever they
appear in this Prospectus. The Company's actual results could differ materially
from those discussed here. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors," as well as those
discussed elsewhere herein.
13
<PAGE> 18
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 1996.
Gross revenues for the six months ended June 30, 1997 were $4,729,313
as compared to $3,463,502 for the six months ended June 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 $1.1 million or
24% of total revenue through the sale of marketing kits sold during the program
and $1.4 million or 31% of total revenue in billed and unbilled telephone
service.
Revenue for the period ended 6/30/97 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 yet received the
benefit of these billings. The Company is in discussions with MCI to resolve the
problem, to determine an appropriate level of compensation for the error and to
ensure that this problem does not recur with regard to future orders sent to
MCI. MCI has assured the Company that the problem is being investigated and
will be resolved. There can be no certainty, however, that the result of these
discussions will be favorable to the Company or that the unbilled revenues will
ultimately be recovered by the Company.
In May, 1996, the Company, through its wholly owned subsidiary, Long
Distance Direct Marketing, Inc., entered into an arrangement with Guthy-Renker
Distribution, Inc., ("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 the loss incurred from the sale of sales agent
kits sold during the program. In the six months ended June 30, 1997, the Company
recorded losses from the sale of sales agent kits amounting to $243,603. Guthy
Renker has prepared a revised infomercial pursuant to the Company's new contract
with Guthy Renker dated October 1, 1997. Under the new contract, Guthy Renker is
to bear the expense of producing the revised infomercial and will be responsible
for financing all expenditures, including media advertising, with regard to such
infomercial.
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. To date, the Company has
received approximately 4,500 new accounts through this arrangement and expects
to realize revenue from these new accounts in the last quarter of 1997.
The Company has begun to establish its own in-house
telemarketing facility and intends to increase expenditures on direct mail
activities. Due to its marketing strategies,the Company is poised for growth in
revenue and customer base but there can be no assurance that its marketing
ventures will produce substantial increases in revenue.
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
14
<PAGE> 19
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 will be 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. There can be no assurance,
however, that the Company's systems will be capable of handling such growth, if
any.
Gross profit was $978,412 and $1,316,104 for the six months ended June
30,1997 and 1996, respectively. As a percentage of net sales, the gross profit
margins for the six months ended June 30, 1997 and 1996 were 21% and 38%,
respectively. This decrease is mainly attributable to a loss incurred with
respect to the sale of sales agent kits sold through the Company's televised
marketing program.
The Company recently entered into a new four-year contract tariff with
AT&T - which supersedes its contract dated September 1, 1995 - which became
effective March 1, 1997 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 the same as 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 has not met its minimum purchase requirements for the first
six 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. 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.
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
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<PAGE> 20
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 is obliged to
purchase $250,000 of usage per month; during the thirteenth through fifteenth
month, $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 six months of 1997. Under
the 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 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 is in discussions with MCI to resolve the problem, to
determine an appropriate level of compensation for the error and to ensure that
this problem does not recur with regard to future orders sent to MCI. MCI has
assured the Company that this problem is being investigated and will be
resolved. There can be no certainty, however, that the result of these
discussions will be favorable to the Company or that the accounts in question
will ultimately be recovered by the Company.
The Company is currently re-negotiating its contract with MCI. The Company is
requesting lower prices in turn for higher commitment levels. Under this new
contract, the Company anticipates being released from any shortfall obligations
through, at least, September 1997.
The MCI 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. In addition, rates
paid by the Company to MCI are contingent upon the Company's ability to meet its
minimum purchase requirements. During the first six months of the agreement,
either the Company or MCI had the option to terminate the agreement at will,
with no penalty. This six-month period has expired with no notice of
termination by either party.
The Company estimates that, in order to meet its annual commitment to
ATT and MCI of $16.8 million (AT&T annual minimum commitment is $4.8 million and
MCI is $12 million once the ramp-up period is over) it must bill its customers
approximately $25 million annually at the current profit margin level of 30%.
Although the Company is aggressively marketing its services through media,
direct mail and arrangements with National Benefits Consultants, L.L.C. and
Credit Education Center, L.L.C., the Company has not reached this level of
sales to date, and there can be no assurance that this level of sales will be
achieved in the future.
Prior to February 28, 1996, MCI had been unable to provision the
Company's customers. Subsequent to 3/31/96, 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. This
credit had to be utilized by September, 1997, the expiration date of the
18-month ramp period. Since the Company utilized approximately $200,000 of this
credit to date, the ability to use the remaining credit has now lapsed. However,
the Company anticipates that, through re-negotiations with MCI for a new
contract, it will receive a new credit to replace the unutilized credit under
the existing contract. The Company anticipates that this credit under the new
contract will be an amount which is not less than the unused portion of the
credit under the existing contract.
Sales and marketing expenses were $248,122 and $316,173 for the six
months ended June 30, 1997 and 1996 respectively. As a percentage of gross
sales, sales and marketing expenses decreased from 9% for the six months ended
June 30, 1996 to 5% for the six months ended June 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. The Company plans to continue to utilize outbound telemarketing firms
on a limited basis in conjunction with its other marketing strategies.
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<PAGE> 21
The Company has begun to establish its own in-house telemarketing facility as
well as utilize direct mail to obtain new customers.
General and administrative expenses were $2,156,774 and $1,377,114 for
the six months ended June 30, 1997, and 1996, respectively. As a percentage of
gross sales, general and administrative expenses for the six months ended June
30, 1997 and 1996 were 46% and 40% respectively. 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. 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 second 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 six months ended June 30, 1997 and 1996 was
$1,164 and $65,339 respectively. For the six months ended June 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 $4.0 million at June 30, 1997 (net of reserve for bad
debt of $0.3 million and $0.6 million at December 31, 1996 and June 30, 1997,
respectively). This significant increase is attributable to an unbilled
receivable from its customers of $1.3 million at June 30, 1997. This receivable
is offset by a corresponding payable of $.9 million which represents related
carrier costs payable to MCI with respect to this receivable and by other
accruals aggregating $0.2 million in respect of direct costs that would have
been incurred if the revenue in question had been billed by the Company as at
June 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 is
in discussions with MCI to resolve the problem, to determine an appropriate
level of compensation for the error and to ensure that this problem does not
recur with regard to future orders sent to MCI. MCI has assured the Company that
the problem is being investigated and will be resolved. There can be no
certainty, however, that the result of these discussions will be favorable to
the Company or that the unbilled receivable will ultimately be recovered by the
Company.
The Company has a receivable of $1.1 million at June 30, 1997 from
Guthy Renker Distribution, Inc., its infomercial producer, which represents
amounts owed to the Company with respect to the sale of sales agent kits sold
during the Company's televised marketing program. This $1.1 million receivable
is offset by a related payable of $1.3 million representing amounts owed by the
Company to Guthy Renker with respect to costs incurred to generate kit sales.
Consequently, in the six months ended June 30, 1997, the Company recorded losses
from the sale of sales agent kits amounting to $243,603.
A majority of the remaining receivable of approximately $1.6 million
(net of reserve for bad debt of $0.6 million) is represented by the Company's
receivable from its customers at June 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 June 30, 1997,
the Company had collected approximately 80% of its April 1997 billing, 62% of
its May billing, and 12% of its June billing. 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 June 30, 1997 due to capital raised in the first four months
of 1997 - net of certain expenses.
The Company incurred a net loss of $1,427,648 for the six months ended
June 30, 1997 compared to a net loss of $440,910 for the six months ended June
30, 1996.
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<PAGE> 22
THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AS COMPARED TO THE TWELVE MONTHS ENDED
DECEMBER 31, 1995
Gross revenues for the twelve months ended December 31, 1996 were $5,320,000 as
compared to $8,364,000 for the twelve months ended December 31, 1995. The
Company attributes the decrease of 36% to the Company's inability to finance
adequate levels of marketing expenditure to offset customer attrition and to the
loss, in October 1995, of its largest customer, L.C. Wegard & Company, which had
generated gross revenue of approximately $150,000 per month, as a result of such
customer's bankruptcy.
Gross profit was $1,660,000 and $2,123,000 for the twelve months ended December
31, 1996 and 1995, respectively. As a percentage of net sales, the gross profit
margins for the twelve months ended December 31, 1996 and 1995 were 31% and 27%,
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.
Sales and marketing expenses were $380,000 and $519,000 for the twelve months
ended December 31 1996 and 1995, respectively. As a percentage of gross sales,
sales and marketing expenses were 7% and 6% for the twelve months ended December
31, 1996 and 1995, respectively. The percentage increase is attributable
partially to lower sales in 1996 and partially to one-time adjustments made at
September 30, 1995. 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.
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<PAGE> 23
General and administrative expenses were $2,942,000 and $2,700,000 for the
twelve months ended December 31, 1996 and 1995, respectively. As a percentage of
gross sales, general and administrative expenses for the twelve months ended
December 31, 1996 and 1995 were 55% and 32%, respectively. Total general and
administrative expenses were reduced by $108,000 at December 31, 1996, which
represented a writeoff of amounts payable to two former partners of LDDLP 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 significantly reduce its levels of debt by December 31, 1996. Costs incurred
in 1996, but not in 1995 include increased audit and financial printing fees due
to heavier SEC reporting requirements and increased legal fees incurred to
settle outstanding litigation.
Interest expense for the twelve months ended December 31, 1996 and 1995 was
$749,000 and $376,000, respectively. For the twelve months ending December 31,
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. In the last two quarters of 1996, shares were issued to shareholders of
the Company in consideration for loans made to the Company. Non-cash interest
expense in the amount of $553,000 was recorded as a result of these
transactions. Loans payable in the amount of $500,000 were converted to equity
during the first three quarters of 1996, while another $850,000 of loans were
converted to equity in the last quarter of 1996. Interest expense for the twelve
months ended December 31, 1996 also includes interest paid to taxing authorities
as a result of a program undertaken by the Company to discharge old outstanding
tax liabilities.
The Company incurred a net loss of $2,401,000 for the twelve months ended
December 31, 1996 compared to a net loss of $1,875,000 for the twelve months
ended December 31, 1995. For the twelve months ending December 31, 1995, costs
of $407,000 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. For the twelve months ended December 31,
1996, non-cash interest expense in the amount of $553,000 was recorded when
shares were sold to shareholders of the Company as consideration for such
shareholders making loans to the Company. This expense is non-recurring and
non-operational in nature.
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 June 30, 1997, the Company converted
approximately $1.7 million of its debt into equity, and raised approximately
$8.8 million 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 related to a buy out of two former
partners was settled, and, as a result, the corresponding actual and contingent
indebtedness was canceled. 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 June
30, 1997, the Company had working capital of $1,628,831 compared to $975,000 at
December 31, 1996. The increase was attributable to the cash received from the
private placement of the Company's common stock during the first four months of
1997.
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 $1,427,000 for the six months ended June 30,
1997. As of June 30, 1997, the Company had an accumulated deficit of $8,494,435.
The Company has historically used substantial amounts of cash in operations
including $2,327,000 for the first six 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.
The Company is obligated to meet minimum purchase requirements with AT&T and
MCI. The Company's 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 six 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. There can be no assurance that the Company will achieve
future excess usage in sufficient amounts to offset the current shortfalls.
Under its 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 six months ended June 30, 1997. Under the 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 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 is in discussions with MCI to resolve the problem, to
determine an appropriate level of compensation for the error and to ensure
that this problem does not recur with regard to future orders sent to MCI. MCI
has assured the Company that this problem is being investigated and will be
resolved. There can be no certainty, however, that the result of these
discussions will be favorable to the Company or that the accounts in question
will ultimately be recovered by the Company.
The Company is currently re-negotiating its contract with MCI. The Company is
requesting lower prices in turn for higher commitment levels. Under this new
contract, the Company anticipates being released from any shortfall obligations
through, at least, September 1997.
The Company estimates that, in order to meet its current annual commitment to
ATT & MCI of $16.8 million (AT&T annual minimum commitment is $4.8 million and
MCI is $12 million once the ramp-up period is over) it must bill its customers
approximately $25 million (annually) at the current profit margin level of 30%.
Although the Company is aggressively marketing its services through media,
direct mail and arrangements with National Benefits Consultants, L.L.C. and
Credit Education Center, L.L.C., the Company has not reached this level of sales
to date, and there can be no assurance that this level of sales will be achieved
in the future.
The Company began to market its product through media advertising in January of
1997 by broadcasting a thirty-minute infomercial designed to increase its
independent sales force. Under its arrangement with Guthy Renker, 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 six months ended June 30,
1997, the Company recorded losses from the sale of sales agent kits amounting to
$243,603. Guthy Renker has prepared a revised infomercial pursuant to the
Company's new contract with Guthy Renker dated October 1, 1997. Under the new
contract, Guthy Renker is to bear the expense of producing the revised
infomercial and will be responsible for financing all expenditures, including
media advertising, with regard to such infomercial. See "Business-Televised
Marketing Program".
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.
BUSINESS
Long Distance Direct Holdings, Inc., formerly known as Golden Ark Inc., was
originally formed as a "blank-check" company (a company formed specifically to
seek a merger or acquisition candidate with whom it can merge or whom it can
acquire). Golden Ark, Inc. became a public company on August 28, 1989 and
remained 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 Golden Ark. 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
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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"). In May, 1996, LDDH 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.
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 1997 Telemetrix report, AT&T and MCI
currently accounted for approximately 53% and 18%, respectively, of total
domestic long-distance revenue. 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
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. As of June 30, 1997, approximately 44%
of the Company's billings were derived from these methods. The Company
test-marketed a televised marketing program during the fourth quarter of 1996,
which it started to roll out in January 1997, to increase its independent sales
force. As of June 30, 1997, approximately 31% of the Company's billings were
derived from this marketing program. In addition, 24% of total revenue as of
June 30, 1997 was derived from the sale of sales agent kits with regard to this
televised marketing program. The Company has recently begun to establish its own
in-house telemarketing operation. 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. The Company proposes to amend
this agreement so that it is not mutually exclusive thus enabling the Company to
provide its services through other multi-level marketing companies. As of June
30, 1997, approximately 1% of the Company's billings 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. The Company expects to see the benefit of these billings in
the third quarter of 1997. In August, 1997, the Company entered into a two year
agreement with Credit Education Center, L.L.C. ("CEC") whereby CEC will market
LDDI's telephone service in conjunction with its own services and LDDI will pay
commission to CEC. During the term of the CEC agreement, LDDI has agreed not to
permit its long distance telephone services to be marketed by any business whose
principal activity is the provision of information, goods or services on credit
related matters. The Company expects to realize revenue from this arrangement in
the last quarter of 1997.
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. 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
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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.
The Company proposes to amend this agreement so that it is not mutually
exclusive thus enabling the Company to provide its services through other
multi-level marketing companies. There can be no assurance, however, that Kaire
will be successful in selling LDDI's service to those associates or that the
associates themselves will be successful in selling such service to the public
at large.
In January 1997, the Company signed a mutually exclusive agreement with National
Benefits Consultants, LLC ("NBC"), a company in alliance with Deloitte & Touche
LLP, under which NBC will market the Company's telecommunications services to
audit clients of Deloitte & Touche LLP and other commercial entities. There can
be no assurance, however, that NBC will be successful in selling LDDI's services
pursuant to this agreement.
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 a sales kit
and 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, and its wholly-owned subsidiary, Long Distance Direct
Marketing Inc, entered into a contract in May 1996, with Guthy-Renker
Distribution Inc. ("Guthy-Renker"), an infomercial producer and promoter in the
United States, to produce and market a thirty minute infomercial selling the
right to become an independent sales representative of the Company. The Company
entered into a new contract with Guthy-Renker Corporation ("GRC") dated October
1, 1997 which provides for the marketing and distribution of the Company's
services by GRC through direct response programming including a revised
infomercial produced by GRC. Under this new contract, which supersedes the prior
contract, (i) Guthy-Renker will be responsible for financing the cost of
production of the revised infomercial, the cost of media and the cost of
fulfilling the orders procured by the revised infomercial; (ii) the Company will
be obligated to pay GRC a royalty of 5% (subject to adjustment in the event of
material changes affecting the rates charged by the Company's telecommunications
providers or other costs incurred by the Company in providing its services) of
cash receipts, net of sales, excise or similar taxes, from long distance
telephone billings to customers generated by the revised infomercial, and a
royalty of 2% of cash receipts, net of sales, excise and similar taxes, from
long distance telephone billings to customers generated by the first
infomercial; (iii) in any month in which GRC has introduced at least 9,000 new
customers to the Company, the Company will be obligated to make a royalty
payment to GRC in an amount of not less than $30,000; (iv) the Company will be
obligated to grant GRC an option to purchase, at a price of $2.00 per share, a
number of shares of the Company's Common Stock equal to a percentage (determined
by reference to the proportion that revenues from customers introduced to the
Company by GRC bear to the Company's total revenue for the period immediately
preceding the date on which GRC determines that the calculation is to be made)
of the total number of shares of Common Stock outstanding (including as
outstanding for this purpose, shares issuable upon exercise or conversion of all
options, warrants or convertible securities then outstanding and exercisable at
an exercise price not in excess of the then current market price of the
Company's Common Stock) as of the date on which the calculation is to be made;
(v) the option will not be exercisable for at least 18 months after the
commencement of the proposed new contract, except in certain specified events,
the principal of which is the acquisition of the Company by a third party; and
(vi) the Company will be obligated to grant registration rights to GRC with
respect to the shares of Common Stock issuable upon exercise of the option
granted to GRC.
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Test marketing of the first infomercial took place in late September and October
1996 and achieved a level of success such that the Company and Guthy-Renker
decided to roll out the program in the first quarter of 1997. Such roll-out
commenced in January 1997 and has generated approximately 600 additional sales
representatives and approximately $76,000 of additional billings of telephone
services through June 30, 1997. The revised infomercial has been produced and is
ready for test marketing. There can be no assurance that upon completion of test
marketing GRC will elect to roll out the program, or if the roll out is
commenced, that the roll-out will 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.
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. Kaire
International has historically been a health and body care company and there can
be no assurance that its efforts on the Company's behalf will be successful in
the telecommunications market.
The agreement with Kaire, which is currently mutually exclusive but which the
Company proposes to amend to be non-exclusive and which in its initial period
runs to December 31, 1999, 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.
Although LDDI retains ultimate exposure for Kaire's uncollected billings, Kaire
will mitigate bad debt through offsets against commissions payable by Kaire to
the end-subscriber.
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.
NATIONAL BENEFITS CONSULTANTS/DELOITTE & TOUCHE LLP
In January 1997, the Company signed an 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. NBC was
established in order to review costs and expenses incurred by clients of
Deloitte & Touche LLP, initially in the medical expenses field but subsequently
on a wider basis, and to make recommendations for alternate sourcing of certain
products and services so as to reduce the cost burden on those clients.
The agreement with NBC, which is mutually exclusive and which runs to December
31, 2001, provides that LDDI will supply a full range of telecommunications
services to companies and businesses introduced to it by NBC. In respect of
billings to such companies and businesses, NBC will be entitled to compensation
not exceeding 10% of cash receipts therefrom, net of taxes. Additionally, the
Company has granted to NBC an option to purchase up to 20% of the Company's
stock at $3.00 per share. The actual percentage that may be purchased under this
option will be determined by reference to the proportion that revenues from
customers introduced by NBC bear to LDDI's total revenues for the twenty four
months prior to exercise of the option. The option may not be exercised prior to
thirty months from the date of the agreement except in certain specified
circumstances, the principal of which is any acquisition of the Company by a
third party. In January 1997, LDDI entered into a referral agreement expiring
December 31, 2001 with NBC whereby LDDI will receive a percentage compensation
from NBC for those LDDI customers who purchase NBC services. There can be no
assurance that NBC will be successful in selling LDDI's services pursuant to the
agreement.
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 Defined Network
("SDN") agreement with AT&T, but 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.
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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
the 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
The Company currently resells to its customers 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.
SUPPLY OF SERVICE
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 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 multiple sources of new orders and a growing customer base,
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
derived 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
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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
Systems, Inc. whereby through Perot Systems Inc., it will receive more favorable
pricing with regard to billing MCI traffic and also be able to bill its
customers through the Local Exchange Carriers. Perot will receive daily
electronic "feeds" directly from MCI containing customer call detail records.
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.
ARRANGEMENTS WITH PROVIDERS
AT&T
Prior to February, 1997, the Company operated under an individually-negotiated
contract tariff with AT&T dated September 1, 1995 which embraced both outbound
and inbound long distance service. This contract superseded all previous
arrangements with AT&T and had a fixed term of four years with a one year
extension at the Company's option. Under the contract tariff, the Company had
accepted a minimum purchase requirement under which it was obligated to pay such
minimum regardless of whether its usage reached such levels. The minimum
purchase requirement was 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 elected to
exercise its extension option, was $1,200,000 per quarter. Also included within
the contract tariff was a requirement that a specified minimum proportion of
each quarter's usage relate to "new business", i.e. currently non AT&T business.
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In February 1997, the Company entered into a new four-year contract tariff with
AT&T effective March 1, 1997 for the supply of inbound and outbound telephone
service. The new contract supersedes the Company's prior contract with AT&T
dated September 1, 1995. The Company's minimum quarterly purchase requirement
remains constant at $1,200,000 in years one to three commencing March 1, 1997
and increases to $1,475,000 in year four. Failure to achieve the minimum will
require payment of the shortfall by the Company. Under the contract tariff, the
Company is obligated to make payments equal to its minimum purchase requirement
for the outstanding term of the agreement if there is an early termination
thereof. The Company has received more favorable pricing from AT&T on both
domestic and international usage under the new contract. In addition, AT&T
agreed to issue a credit waiving the entire cumulative shortfall charged under
the old 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.
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, and amendments thereto in September
1996, February, 1997 and April, 1997 which superseded the contract of August
1995. This new contract, which requires higher minimum purchase levels than the
prior agreement but affords better prices, is subject to an eighteen (18) month
ramp period commencing April, 1996 followed by a thirty (30) month service
period.
During the first eight months of the ramp period, the Company has no minimum
purchase obligations. During the ninth through twelfth months, the Company is
obliged to purchase $250,000 of usage per month; during the thirteenth through
fifteenth month, $500,000; during the sixteenth through eighteenth month,
$750,000; and during the thirty month service period, $1,000,000 per month.
Failure to achieve the minimum will require shortfall payments by the Company.
The Company has not met its minimum purchase requirements for the first six
months of 1997. Under the 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 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 is in discussions with MCI to resolve the problem, to
determine an appropriate level of compensation for the error and to ensure that
this problem does not recur with regard to future orders sent to MCI. MCI has
assured the Company that this problem is being investigated and will be
resolved. There can be no certainty, however, that the result of these
discussions will be favorable to the Company or that the accounts in question
will ultimately be recovered by the Company.
The Company is currently re-negotiating its contract with MCI. The Company is
requesting lower prices in turn for higher commitment levels. Under this new
contract, the Company anticipates being released from any shortfall obligations
through, at least, September 1997.
The current 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 could terminate the agreement
at will, with no penalty. This six (6) month period has expired with no notice
of termination by either party.
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. This credit had to be
utilized by September, 1997, the expiration date of the 18-month ramp period.
Since the Company utilized approximately $200,000 of this credit to date, the
ability to use the remaining credit has now lapsed. However, the Company
anticipates that, through re-negotiations with MCI for a new contract, it will
receive a new credit to replace the unutilized credit under the existing
contract. The Company anticipates that this credit under the new contract will
be an amount which is equivalent to the unused portion of the credit under the
existing contract.
RECENT DEVELOPMENTS
On September 24, 1996 AT&T introduced a single-rate calling plan for domestic
residential long-distance calls, under which it would charge a flat rate of
fifteen cents ($.15) per minute. In addition, according to a April, 1997
Telemetrix report, Sprint and MCI are offering the same residential rates.
The Company's current business involves the resale of AT&T service to
commercial customers. The AT&T prices have 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 this residential plan suggests an imminent introduction
of a similar commercial plan. 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.
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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.
The Company has recently entered the residential market through the resale of
MCI telephone service to residential customers. The Company believes that it is
offering and will be able to continue to offer residential telephone service at
prices which are lower than MCI's and Sprint's prices.
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, MCI
or Sprint 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 July 31, 1997, the Company had over 11,000 active billing customers and
approximately 20,000 additional orders for service awaiting provisioning by MCI.
Customers generated by field sales activity are predominately based on the
Eastern seaboard; those generated either by telemarketing, direct mail, or
televised marketing have no particular geographic bias. Through June 30, 1997,
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. The Company has begun to market its services to
residential customers through its televised marketing program. No single current
customer represented more than 3% of billings for the year ended December 31,
1996 or the six months June 30, 1997.
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. Management believes that 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 also believes 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
The following data regarding the U.S. long distance and reseller service
markets is based on an industry report published by a leading market research
firm. 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.
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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.
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.
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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 "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
28
<PAGE> 33
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 time to complete. Although the
Company intends to take advantage of the recent legislation by seeking to resell
local telephone service, there 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 August 31, 1997, the Company had 40 employees, including the executive
officers, of whom 35 are full time and 5 are part-time. Of these 40 employees,
19 are responsible for order entry, customer service and operations, 9 are
responsible for accounting and credit control, 4 are responsible for marketing
support, 7 are responsible for general management and administration and 1 is
responsible for maintaining the computer system. If the Company is successful in
its proposed marketing programs, management envisages that there will be a need
for a continuing 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
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<PAGE> 34
The Company operates out of a 10,700 square foot office at 1 Blue Hill Plaza,
Pearl River, NY, a modern office facility. The space currently occupied by the
Company is leased from a nonaffiliated third party under a lease expiring in
December, 2000 with annual rent of $192,834 rising to $214,260 commencing
January 1999.
LEGAL PROCEEDINGS
The State of New York Department of Taxation and Finance filed two separate
warrants dated May 23, 1994 and January 11, 1994, respectively, against the
Company evidencing judgment liens for uncontested tax liabilities in the amounts
of $10,449.21 and $5,238.61, respectively. The Company negotiated the payment of
these liabilities with the Department with monthly payments being made over a 24
month period ending July 1997, both of which have been paid in full.
The Department has filed an additional warrant dated June 23, 1997 against the
Company evidencing a judgment lien for uncontested tax liabilities in the amount
of $87,227. The Company has negotiated another 24 month payment plan with the
Department as to this new tax liability which commences in August, 1997.
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."
There are no other legal proceedings or claims, threatened or pending, against
the Company except as disclosed herein.
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 48 President Chief Executive Officer and
Chairman of the Board
Michael D. Preston 51 Chief Financial Officer and Vice
President -- Finance, Secretary and
Director
Clair Alpert 54 Vice President -- Administration
Lori Colin 39 Controller
Andrea Grossman 33 Vice President -- Marketing
Rowland W. Day II 41 Director
Julian Levy 32 Director
Conrad J. Morris 64 Director
</TABLE>
Steven 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.
Michael 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
30
<PAGE> 35
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 a previous
offering of securities and was appointed a director of the Company in November
1996. Mr. Levy is a United Kingdom Chartered Accountant.
Conrad Morris is a United Kingdom businessman with extensive investment and
management experience in both the United Kingdom and the United States. Business
Systems Consultants Limited, an investment company registered in Liberia and
beneficially owned by Mr. Morris' two adult daughters, 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, 1994, 1995 and 1996, 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 1996 received total
annual salary and bonus exceeding $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
SECURITIES
NAME AND YEAR ANNUAL COMPENSATION UNDERLYING
PRINCIPAL ENDING OTHER ANNUAL OPTIONS
POSITION DECEMBER 31, SALARY BONUS COMPENSATION SARS (#)
-------- ------------ ------ ----- ------------ --------
<S> <C> <C> <C> <C> <C>
Steven Lampert, 1994 $250,000 -- $ 7,911(1) 0
President 1995 $150,000 -- $10,689(1) 250,000(2)
1996 $150,000 -- $11,745(1) 350,000(3)
Michael Preston, 1994 $100,000 -- $ 5,196(1) 0
Chief Financial 1995 $125,000 -- $ 7,122(1) 250,000(4)
Officer 1996 $125,000 -- $ 9,092(1) 350,000(5)
</TABLE>
31
<PAGE> 36
- ------------------------------
(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 350,000 Shares at a price of $3.30 per Share were
granted to Mr. Lampert under the Company's 1995 Stock Option Plan.
(4) 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.
(5) Options to purchase 350,000 Shares at a price of $3.30 per Share were
granted to Mr. Preston under the Company's 1995 Stock Option Plan.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1996
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
PERCENT OF
TOTAL OPTIONS EXERCISE
NUMBER OF SECURITIES GRANTED TO OR BASE
UNDERLYING EMPLOYEES PRICE
NAME OPTIONS GRANTED IN 1996 ($/SH.) EXPIRATION DATE
---- --------------- ------- ------- ---------------
<S> <C> <C> <C> <C>
Steven Lampert 350,000 35% $ 3.30 10/11/2001
Michael Preston 350,000 35% $ 3.30 10/11/2001
</TABLE>
- ------------------
No executive officer named in the Summary Compensation Table above exercised
stock options during the fiscal year ended December 31, 1996.
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, 1996 AND OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED IN-THE-MONEY
ACQUIRED ON VALUE OPTIONS AT 12/31/96 OPTIONS AT 12/31/96(1)
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Steven Lampert 0 -- 600,000 0 $1,395,000 0
Michael Preston 0 -- 600,000 0 $1,395,000 0
</TABLE>
- ------------------
(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 March
24, 1997 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 June 30, 1997, 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 $3.30 per share had been
granted, of which 790,000 had been exercised by such date.
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<PAGE> 37
The Stock Option Plan will be administered by 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 June 30, 1997 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
OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENTAGE OF CLASS
------------------- ------------------ -------------------
<S> <C> <C>
Steven L. Lampert............................ 1,637,065(1) 17.6%
8 Lady Godiva Way
New City, N.Y. 10956
Michael D. Preston........................... 1,704,020(2) 18.3%
8 Oak Hill Park Mews
London NW3 7LH
England
Rowland W. Day II............................ 682,320(3) 7.4%
3070 Bristol Street, Suite 650
Costa Mesa, CA 92626
Julian Levy.................................. 50,000 (4) less than 1%
Conrad Morris................................ 0 --
Business Systems Consultants, Ltd............ 1,334,798(5) 15%
P.O. Box 222
31-33 Le Pollet
St. Peter Port
Gurnsey GYI 4J6
Channel Islands
</TABLE>
33
<PAGE> 38
<TABLE>
<S> <C> <C>
All directors and officers................... 5,578,203(6) 54.5%
as a group (8 persons)
</TABLE>
- --------------------
(1) Includes 350,000 shares issuable upon the exercise of outstanding options.
(2) Includes 410,000 shares issuable upon the exercise of outstanding options.
(3) Includes approximately 111,960 shares issuable upon the exercise of
outstanding options. Also includes 216,000 of the shares issuable upon the
exercise of options held by Day, Campbell & McGill, which represents Mr. Day's
pecuniary interest in the total number of shares issuable upon exercise of
options held by Day, Campbell & McGill. Mr. Day is also a principal in the firm
of Day, Campbell & McGill, the Company's corporate counsel.
(4) Includes 50,000 shares issuable upon the exercise of outstanding options.
(5) Business Systems Consultants, Ltd. (BSC) is an investment company registered
in Liberia. BSC is beneficially owned by two adult daughters of Conrad Morris, a
director of the Company. Mr. Morris acts as an advisor to but has no beneficial
interest in BSC.
(6) Includes 1,307,960 shares issuable upon exercise of outstanding options, and
the 1,334,798 shares owned by BSC.
CERTAIN TRANSACTIONS
PARTNERSHIP TRANSACTION
Pursuant to the recapitalization 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 was
evidenced by a secured promissory note (the "Wingmead Note"), and bore 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 Mr. Preston, a Director and Chief Financial
Officer of the Company, Mr. 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.
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 bore interest at a rate per annum equal to the Prime Rate plus .5%.
Principal and interest on the BONY Note was 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.
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 was represented by the
BONY Note.
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 November, 1996
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
the repayment
34
<PAGE> 39
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 bore 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 concluded 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 Series A 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 after 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 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 bore interest at the rate of 12% per annum and were repayable within 60
days after receipt of the loan proceeds. The agreements provided 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
were outstanding, 1,250 shares of Common Stock and 535 shares of Common Stock,
respectively, but not less than 5,000 shares
35
<PAGE> 40
and 2,140 shares, respectively. In addition, if the loans were 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. The loan from Mr. Preston
was repaid in November 1996.
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.
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.
COMPANY COUNSEL
The Company has granted to members of the firm of Day, Campbell & McGill, the
Company's corporate counsel, options to purchase an aggregate of 860,000 shares
of Common Stock. In addition, in connection with the Company's agreement to sell
telephone services to Kaire International, the Company agreed to pay a finder's
fee to Day, Campbell & McGill in the amount of 2.5% of the monthly revenues
collected by the Company from the sale of such telephone services during the
three-year term of its agreement with Kaire International which commenced on
December 1, 1996.
RELATIONSHIP WITH ALBERDALE & CO.
Michael Preston, an officer, director and principal shareholder of the Company,
owns a 33.3% interest in Alberdale & Co., a British investment firm whose
associate company, Alberdale Partners Limited, received compensation in
connection with the sale of the Company's securities in a private placement
completed in November 1996 in which Capital Growth International, LLC acted as
the Company's placement agent.
36
<PAGE> 41
ARRANGEMENTS WITH CAPITAL GROWTH INTERNATIONAL, LLC
In August 1996, the Company entered into a Placement Agreement with Capital
Growth International, LLC ("CGI") pursuant to which the Company agreed, among
other things, (i) to use its best efforts to cause the election to the Company's
Board of Directors of a person designated by CGI and reasonably acceptable to
the Company for a period of up to three years (CGI has designated Julian Levy
who has been elected to the Board); (ii) to retain CGI as a financial advisor
for two years and to compensate CGI at the rate of $2,500 per month; and (iii)
for a period of 24 months after the completion of the private placement, to
provide CGI with the first opportunity to negotiate and the right of first
refusal with respect to any debt or equity financings the Company may undertake
during such period. In March 1997, the Company issued or agreed to issue 85,000
shares of Common Stock to CGI for investment banking services.
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 May 31, 1997, and as adjusted to reflect the sale of the Shares.
<TABLE>
<CAPTION>
MAXIMUM NUMBER SHARES
NUMBER OF SHARES OF SHARES TO BE BENEFICIALLY OWNED
BENEFICIALLY OWNED SOLD PURSUANT TO AFTER OFFERING(2)
NAME PRIOR TO OFFERING(1) THIS PROSPECTUS(1) NUMBER PERCENT
- ---- -------------------- ------------------ ------ -------
<S> <C> <C> <C> <C>
P.R. Zaykowski & Co. L.P. 30,000 30,000 0 *
Robert S. London 100,500 100,500 0 *
William F. Coffin 40,000 40,000 0 *
Donald Kearns & Jean Wickersham 37,500 37,500 0 *
Art Granito 22,500 22,500 0 *
Reed Slatkin 100,000 100,000 0 *
Rex Licklider 100,000 100,000 0 *
Emily & Malcolm Fairbairn 27,500 27,500 0 *
Jeffrey Lambert IRA 12,500 12,500 0 *
Emily Fairbairn IRA 5,000 5,000 0 *
Michael Foley IRA 5,000 5,000 0 *
Mark E. Strome, Trustee FBO The
Mark E. Strome Living Trust 125,000 125,000 0 *
Malcolm Fairbairn IRA 17,500 17,500 0 *
Jose & Lillie K. Reines, Trustees
udt dated 4/25/84 FBO The Reines
Family Trust 15,000 15,000 0 *
Howard Miller 37,500 37,500 0 *
Donaldson, Lufkin & Jenrette
Securities Corporation custodian
F/B/O Donald K. Bennett,
Account #4AY964996-1 16,500 16,500 0 *
Storie Partners, L.P. 350,000 350,000 0 *
ING Bank 149,991 149,991 0 *
Kentland Holdings 25,000 25,000 0 *
Ponte Vedra Partners 100,000 100,000 0 *
First Hawaiian Bank, Trustee for
Zippy's Inc., Profit Sharing Plan 50,000 50,000 0 *
G. Tilton Gardner 12,500 12,500 0 *
Bradley N. Potter 50,000 50,000 0 *
Doran Capital Management, L.P. 25,000 25,000 0 *
Guthy-Renker Corporation 50,000 50,000 0 *
Frank Cutler 25,000 25,000 0 *
Cruttenden Roth Incorporated(3) 152,950 152,950 0 *
</TABLE>
37
<PAGE> 42
- ----------
* Less than 1%
(1) Includes, with respect to the following persons, the following number of
Shares which may be acquired through the exercise of warrants: Cruttenden Roth
Incorporated (152,950).
(2) Gives effect to the exercise of all of the warrants as to 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 Stockholders.
(3) Cruttenden Roth Incorporated acted as placement agent for the Company in its
most recent private offering of securities and as a portion of its compensation
received an option to purchase, at an initial price of $2.00 per share, 152,950
shares of Common Stock.
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
38
<PAGE> 43
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 as
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 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 certain anti-manipulative
Rules contained in Regulation M 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 8,927,000 shares were
outstanding as of June 30, 1997.
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 June 30, 1997, 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 $3.30 per share had been granted under the Company's 1995
Stock Option Plan, 790,000 of which have been exercised. See "Management-Stock
Option Plan." In addition, there were options outstanding to purchase 555,000
shares of Common Stock at exercise prices ranging from $2.50 to $3.30 per share.
Under an agreement entered into in January 1997, between the Company and
National Benefits Consultants, LLC ("NBC"), a company in alliance with Deloitte
& Touche LLP, NBC has an option to purchase up to 20% of the Company's Common
Stock at an exercise price of $3.00 per share. See "Business - National Benefits
Consultants/Deloitte & Touche." In addition, the Company entered into a new
contract with Guthy-Renker Corporation dated as of October 1, 1997 pursuant to
which the Company is obligated to grant an option to Guthy-Renker Corporation to
purchase, at an exercise price of $2.00 per share, a number of shares of the
Company's Common Stock equal to a percentage (determined by reference to the
proportion that revenues from customers introduced to the Company by GRC bear to
the Company's total revenue for the period immediately preceding the date on
which GRC determines that the calculation is to be made) of the total number of
shares of Common Stock outstanding (including as outstanding for this purpose,
shares issuable upon exercise or conversion of all options, warrants or
convertible securities then outstanding and exercisable at an exercise price not
in excess of the then current market price of the Company's Common Stock) as of
the date on which the calculation is to be made. See "Business - Televised
Marketing Program".
WARRANTS
As of June 30, 1997, 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
39
<PAGE> 44
461,968 shares of Common Stock at any time prior to November 18, 1998, 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, warrants outstanding to
purchase, at a price of $2.00 per share, up to 152,950 shares of Common Stock at
any time prior to March 31, 2002, and warrants outstanding to purchase, at a
price of $3.00 per share, up to 10,000 shares of Common Stock at any time prior
to April 30, 2002.
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 June 30, 1997, members of the firm owned a total of 555,036
shares of the Company's Common Stock and held options to purchase an additional
600,000 shares of the Company's Common Stock.
EXPERTS
The financial statements of the Company for the fiscal years ended December 31,
1994, 1995 and 1996 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 significant
recurring losses from operations 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 statements contained in this Prospectus as
to the contents of any contract or other document referred to 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 such statement being qualified in any and all respects by such reference.
40
<PAGE> 45
INDEX TO FINANCIAL STATEMENTS
Page
INDEPENDENT AUDITORS' REPORT OF ADELMAN KATZ AND MOND, LLP F-2
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994 F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS
ENDED DECEMBER 31, 1996, 1995 AND 1994 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1997
(UNAUDITED) AND MARCH 31, 1996 (UNAUDITED)
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1997 (UNAUDITED)
AND DECEMBER 31, 1996 F-18
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 1997 (UNAUDITED) AND MARCH 31, 1996 (UNAUDITED) F-19
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 1997 (UNAUDITED) AND MARCH 31, 1996 (UNAUDITED) F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 1997 (UNAUDITED) AND MARCH 31, 1996 (UNAUDITED) F-21
F-1
<PAGE> 46
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. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. 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 financial position of Long Distance Direct
Holdings, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the result
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996 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.
As discussed in Note 5, the Company did not meet certain minimum purchase
requirements with it's primary supplier. The supplier has agreed to waive such
commitments under certain conditions.
Adelman, Katz & Mond
New York, N.Y.
March 21, 1997
F-2
<PAGE> 47
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 962,471 $ 207,666
Accounts receivable (net of allowance for doubtful accounts)
(Notes 2 and 5) 1,125,986 1,103,903
Loans receivable - officers (Note 10) 260,735 -0-
Other current assets 924,431 93,229
----------- -----------
Total Current Assets 3,273,623 1,404,798
----------- -----------
PROPERTY AND EQUIPMENT
Furniture and equipment 156,926 54,856
Computer equipment and software 257,108 196,764
Leasehold improvements 91,720 38,720
----------- -----------
505,754 290,340
Less: accumulated depreciation 193,576 129,203
----------- -----------
312,178 161,137
OTHER ASSETS 129,623 61,790
----------- -----------
$ 3,715,424 $ 1,627,725
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - current (Note 6) $-0- $ 1,165,000
Accounts payable 1,453,796 2,370,081
Accrued expenses 353,681 577,576
Sales and excise taxes payable (Note 5) 490,716 703,143
Loans payable - officers (Note 10) -0- 74,244
----------- -----------
Total Current Liabilities 2,298,193 4,890,044
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 5)
STOCKHOLDERS' EQUITY
Common stock - par value $.001 per share;
authorized 30,000,000 shares 6,598 3,798
Additional paid in capital 8,477,420 1,429,434
Accumulated deficit (7,066,787) (4,665,551)
----------- -----------
1,417,231 (3,232,319)
Less: Subscriptions receivable -0- (30,000)
----------- -----------
Total Stockholders' Equity 1,417,231 (3,262,319)
----------- -----------
$ 3,715,424 $ 1,627,725
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 48
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES $ 5,319,923 $ 8,363,949 $ 9,527,497
CUSTOMER REBATES AND REFUNDS 9,686 377,547 444,998
----------- ----------- -----------
NET REVENUES 5,310,237 7,986,402 9,082,499
COST OF SERVICES 3,650,162 5,862,665 6,257,686
----------- ----------- -----------
Gross Profit 1,660,075 2,123,737 2,824,813
----------- ----------- -----------
OPERATING EXPENSES
Sales and marketing 379,670 519,411 1,322,546
General and administrative 2,941,725 2,700,451 2,554,503
----------- ----------- -----------
Total Operating Expenses 3,321,395 3,219,862 3,877,049
----------- ----------- -----------
LOSS FROM OPERATIONS (1,661,320) (1,096,125) (1,052,236)
----------- ----------- -----------
OTHER EXPENSES (INCOME)
Interest expense 748,711 375,820 173,996
Interest income (8,795) (4,594) (5,515)
Failed IPO costs -0- 407,572 -0-
----------- ----------- -----------
Total Other Expenses (Income) 739,916 778,798 168,481
----------- ----------- -----------
NET LOSS ($2,401,236) ($1,874,923) ($1,220,717)
=========== =========== ===========
NET LOSS PER SHARE ($ .54) ($ .55) ($ .36)
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 49
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Common Stock Additional Paid Accumulated
Shares Amount in Capital Deficit
--------- ------ ----------- -----------
<S> <C> <C> <C> <C>
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) --
Shares of common stock (at par) issued in
private placement and related paid in
capital in excess of par (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)
Shares of common stock (at par) issued in
private placement and related paid in
capital in excess of par (net of expenses
of $1,078,050 2,799,991 2,800 7,047,986 --
Net loss - December 31, 1996 -- -- -- (2,401,236)
--------- ------ ----------- -----------
Balance - December 31, 1996 6,597,826 $6,598 $ 8,477,420 ($7,066,787)
========= ====== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 50
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($2,401,236) ($1,874,923) ($1,220,717)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 64,372 54,580 45,905
Amortization of note discount -0- 116,000 52,000
Imputed interest on personal guarantee -0- -0- 2,000
Financing and other expenses 584,263 49,793 -0-
Provision for doubtful accounts 222,754 310,953 325,634
Forgiveness of interest on partnership buy-out (55,000) -0- -0-
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (244,837) 539,720 (1,388,937)
(Increase) decrease in other current assets (674,952) 252,718 (282,718)
(Increase) decrease in other assets (67,833) 260,827 (302,013)
Increase (decrease) in accounts payable (884,878) 223,398 1,174,456
Increase (decrease) in accrued expenses 154,893 (74,946) 304,874
Increase (decrease) in sales and excise taxes payable (212,427) (40,530) 282,030
----------- ----------- -----------
Total Adjustments to Net Loss (1,423,431) 1,692,513 213,231
----------- ----------- -----------
Net Cash Used in Operating Activities (3,824,667) (182,410) (1,007,486)
----------- ----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Acquisition of property and equipment (215,414) (38,907) (72,284)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (payment) of notes payable (500,000) (155,000) 935,298
Proceeds (payment) of related party loans (319,979) (112,076) 106,602
Proceeds from private placements 6,692,915 776,209 -0-
Payment of private placement costs (1,078,050) (132,165) -0-
----------- ----------- -----------
Net Cash Provided by Financing Activities 4,794,886 376,968 1,041,900
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 754,805 155,651 (37,870)
CASH - Beginning of year 207,666 52,015 89,885
----------- ----------- -----------
CASH - End of year $ 962,471 $ 207,666 $ 52,015
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 51
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND BUSINESS
The consolidated financial statements consist of the accounts of Long
Distance Direct Holdings, Inc. ("LDDH") and its wholly owned subsidiaries,
as follows: Long Distance Direct, Inc. ("LDDI") and Long Distance Direct
Marketing, Inc. ("LDDM") 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 loss 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 year ended December 31, 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 reseller of outbound and inbound
long-distance telephone, teleconferencing, cellular long-distance and
calling card services to commercial customers. All of the services sold by
the Company through December 31, 1995 were provided by AT&T. The Company
commenced operations with MCI during 1996. The Company signs up customers
and provisions them onto the networks of AT&T and MCI, which provide 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
Accounts receivable are net of allowance for doubtful accounts of $318,976
and $163,149 as of December 31, 1996 and 1995, respectively. The Company
estimates an allowance based upon various factors, including credit risk and
industry standards.
F-7
<PAGE> 52
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenues, Collections and Cost Recognition
Revenues are recognized as service is provided to the Company's customers.
Through December 31, 1995, 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. Subsequent to December
31, 1995, the Company contracted with another billing company to provide
billing services. The Company's customers make payments directly to the
Company through a lock-box account. Costs are recognized based on monthly
network usage billings received from AT&T and MCI.
Accounting Estimates
The preparation of consolidated 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. Depreciation and amortization
expense was $64,372, $54,580 and $45,905 for the years ended December 31,
1996, 1995, and 1994, respectively.
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 for the year ended December
31, 1995.
Private Placement Costs
Costs incurred in connection with private placements of common stock are
recorded as a reduction in additional paid in capital.
MCI Usage Credit
During 1996, the Company received service credits from MCI, in amounts not
to exceed $1,000,000, due to MCI's inability to provide service under the
original contract with MCI (Note 5). The Company is due a credit each month
(not to exceed $1,000,000 cumulatively) in an amount equal to the difference
between the Company's actual usage and the required monthly commitment if
the Company's actual usage exceeds the requirement. For the first eight
months of the contract, the monthly commitment was zero. Credits in the
amount of $208,000 are recorded as a reduction in actual network charges
incurred during 1996.
F-8
<PAGE> 53
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Weighted Average of Common Shares
Earnings per share are based on the weighted average number of shares
outstanding (4,467,972 in 1996, 3,416,577 in 1995 and 3,400,000 in 1994).
The assumed exercise of stock options and warrants are anti-dilutive and
therefore is not considered a common stock equivalent.
Direct-Response Advertising
The Company expenses advertising costs except for costs related to direct-
response advertising. The costs of direct-response advertising, the purpose
of which is to elicit sales to customers who could be shown to have
responded specifically to the advertising, are capitalized and amortized
over the period during which future benefits are expected to be received.
Direct-response advertising consists primarily of the Company's televised
marketing program. At December 31, 1996, costs related to this marketing
program amounted to $500,000.
Concentrations of Risk
AT&T and MCI are currently the sole providers of the long distance
telecommunications services that the Company resells to it's customers. The
future business of the Company is currently entirely dependent upon the use
of the AT&T and MCI networks. Changes in tariffs, regulations, or policies
by AT&T and MCI, or the Company's failure to maintain or renew, or a
termination of, such agreements would materially adversely affect the
Company's financial condition and could result in a cessation of operations
by the Company.
The Company's customers are commercial businesses and are not concentrated
in any particular geographic area of the United States.
Preferred Stock
The Company's Articles of Incorporation authorizes the issuance of
10,000,000 shares of preferred stock, $0.001 par value and 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.
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 an accumulated deficit of $7,066,787 at December 31,
1996.
F-9
<PAGE> 54
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996 AND 1995
3. BASIS OF PRESENTATION (continued)
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:
- Increased sales volume through sub-contracted telemarketing and direct
mail activities and establishment of an in-house telemarketing facility.
- Private placement in early 1997.
- Televised marketing program to recruit additional independent sales
representatives.
- Strategic alliances for multi-level and other concentrated marketing
programs.
4. PRIVATE PLACEMENTS
The Company sold approximately 1,899,000 shares of common stock through
private placements during November and December of 1995 and throughout the
year ended December 31, 1996, at prices ranging from $2.50 per share to
$3.30 per share.
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 called for minimum purchase
commitments of $2,400,000 on a semi-annual basis and $4,800,000 on an annual
basis. The agreement also required minimum purchases with respect to new
business usage of $240,000 on a semi-annual basis and $480,000 on an annual
basis.
In February 1997, the Company signed a four-year agreement with AT&T,
effective March 1, 1997, that superseded the contract dated September 1,
1995. The Company's minimum quarterly purchase commitment is $1,200,000 in
years one to three and increases to $1,475,000 in the fourth year. Failure
to achieve the minimum will require payment of the amount of the shortfall.
The agreement is not renewable.
Contingent Liability to AT&T - Failure to Meet Minimum Purchase Obligations
As discussed above, the previous agreement with AT&T called for certain
minimum usage by the Company. The Company did not meet such minimum usage
requirements. The shortfall (the difference between actual usage and the
minimum requirement) asserted by AT&T was
F-10
<PAGE> 55
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996 AND 1995
5. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
Contingent Liability to AT&T - Failure to Meet Minimum Purchase Obligations
(continued)
approximately $2,300,000, of which approximately $965,000 was billed as of
December 31, 1996, with the balance to be billed. On February 6, 1997, the
Company entered into a release and settlement agreement with AT&T whereby
the Company will be released from the entire $2,300,000 obligation subject
to certain conditions, which include payment by the Company of a total of
$320,000 (the amount of the Company's obligations as of November 1, 1996,
excluding the shortfall) over a six (6) month period starting January 1,
1997. The Company has made payments of $180,000 toward this balance Also,
the Company is required to be current on all of its future invoices for
ongoing service. Upon full payment of this amount, AT&T will credit the
Company's account for the full amount of the shortfall. The Company's
obligations under the release agreement are secured by a lien on it's
accounts and accounts receivable. The Company's failure to make any and
all payments on a timely basis would constitute a default under the
settlement agreement and could result in termination of service by AT&T.
These financial statements do not include a provision for the shortfall
amount.
Billing Disputes
For December 1996, the Company was billed approximately $570,000 by AT&T for
certain usage by an unauthorized user of a phone card issued by the Company.
The Company has taken the position that its documentary material with
AT&T relating to credit card fraud demonstrates that its liability for
fraudulent use is limited to $500.00. AT&T has notified the Company that
it is their position that the Company is responsible for the full amount of
the charges. The outcome of this issue is uncertain and the effect of this
dispute, if any, on the Company's current obligations as set forth in the
aforementioned settlement agreement, has not been determined. Accordingly,
these financial statements do not contain a provision for this liability.
Carrier Agreement with MCI - Minimum Commitments
On March 1, 1996, the Company entered into an agreement with MCI under which
the Company is authorized to resell various MCI services. This agreement
superseded a prior agreement dated August 1, 1995 under which MCI was unable
to provide service.
In September of 1996, the Company signed an amendment to its contract with
MCI which extends the initial ramp period and consequently, the term of the
original contract. The amended contract affords the Company an eighteen (18)
month ramp period followed by a thirty (30) month service period. During the
first eight months of the ramp period, the Company has no minimum purchase
obligations. During the ninth through twelfth months, the Company is obliged
to purchase $250,000 of services per month; during the thirteenth through
fifteenth month $500,000; during the sixteenth through eighteenth month,
$750,000; and during
F-11
<PAGE> 56
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996 AND 1995
5. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
Carrier Agreement with MCI - Minimum Commitments (continued)
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 (15) percent of the difference between the amount used and the
respective minimum monthly requirement.
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.
Joint Venture Agreement
The Company has entered into a joint venture agreement with a leading
television production company to launch a marketing program based on
broadcast media. The Company expended approximately $500,000 during 1996 for
production and origination costs, with all media expenditures being borne by
its joint venture partner. All such costs have been capitalized and will be
amortized over the estimated useful life, starting in 1997.
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.
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 had made
all of its payments under the payment plan. As of December 31, 1996, the
Company was awaiting a final determination from the Internal Revenue
Service as to the satisfaction of its liability under this agreement.
F-12
<PAGE> 57
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996 AND 1995
5. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
Leases
The Company conducts its operations in leased facilities under a
noncancellable operating lease expiring in 2000. The Company also leases
automobiles and equipment under noncancellable operating leases expiring in
2001. The minimum rental commitments under operating leases are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1997 $285,924
1998 270,177
1999 215,060
2000 198,224
2001 3,416
--------
Total Minimum Payments Required $972,801
========
</TABLE>
Rent expense charged to operations was $91,688, $100,975 and $98,868 for the
years ended December 31, 1996, 1995 and 1994, respectively.
6. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31, 1995
-----------------
<S> <C>
Note payable to Bank of New York (a) $ 500,000
Notes payable to two former partners, issued in
connection with Partnership buy-out (b) 555,000
Note payable, bearing interest at 20%, payable
in six (6) equal monthly installments (c) 110,000
----------
1,165,000
Less: current portion 1,165,000
----------
$ -0-
==========
</TABLE>
F-13
<PAGE> 58
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996 AND 1995
6. NOTES PAYABLE (continued)
(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. The loan was secured by a $500,000 certificate of deposit
which was issued by the bank to a shareholder of the Company. The
shareholder 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 November 18, 1996, the stockholder purchased
166,667 shares for $500,000 and, on the same date, the bank loan was
repaid in full.
(b) Notes Payable - Partnership Buy-Out Agreement
On April 6, 1993, certain officers and LDDI entered into a buy-out
agreement to purchase the interests of two (2) partners in LDDLP.
A dispute arose with respect to the agreement, and on September 20,
1996 the parties entered into an agreement to settle 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.
As a result of the settlement, the Company recorded cancellation of
indebtedness income of approximately $108,000.
(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 was
evidenced by a promissory note, was payable in six (6) equal monthly
installments starting April 6, 1995, and bore interest at a rate of 20%
per annum. The notes were 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. 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.
F-14
<PAGE> 59
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996 AND 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.
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.
A summary of stock option activity for the years ended December 31, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
Number of Option Price
Options Per Share
--------- ------------
<S> <C> <C>
Granted 1,000,000 $ .001
Exercised -0-
Cancelled -0-
Outstanding, December 31, 1995 1,000,000 $
Granted 1,000,000 $3.30
Exercised 10,000 .001
Cancelled -0-
Outstanding, December 31, 1996 1,990,000
</TABLE>
Subsequent to December 31, 1996, options to purchase 270,000 shares of
common stock were exercised at $.001 per share. In addition to the options
issued under the Stock Option Plan, the Company granted an additional
105,000 options to purchase shares to certain parties.
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, 1996, the Company had net operating loss carryforwards for
financial and U.S. Federal income tax purposes of approximately $7,000,000,
which are available to offset
F-15
<PAGE> 60
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996 AND 1995
8. INCOME TAXES (continued)
future taxable income and begin to expire in the year 2007. The utilization
of such losses against future profits may be limited, dependent on ownership
changes in the Company.
Deferred taxes have not been recorded as the temporary differences,
consisting 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>
1996 1995 1994
-------- -------- ------
<S> <C> <C> <C>
Cash paid during the year for interest $ 119,588 $ 55,151 $3,719
Private placement costs accrued -0- 174,232 -0-
Conversions of debt to equity 1,350,000 337,500 -0-
Financing and other expenses paid in stock 584,263 -0- -0-
Liabilities paid in stock 100,407 -0- -0-
Assets acquired for stock 156,250 -0- -0-
</TABLE>
10. RELATED PARTY TRANSACTIONS
Officers Loans
Loans receivable from officers includes amounts paid to officers who are
principal owners of the Company. Such amounts are non-interest bearing and
have no specific terms regarding repayment. Officers loans are shown net
of accrued compensation of $180,000 to such officers.
As of December 31, 1995, loans payable to officers are non-interest bearing
and have no specific terms regarding repayment.
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
F-16
<PAGE> 61
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996 AND 1995
10. RELATED PARTY TRANSACTIONS (continued)
Shareholder Loans (continued)
common stock to the shareholder, which is recorded as interest expense in
the amount of $495,000 in 1996, 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 1997 infomercial during the first
two (2) years any revenue is received from such infomercial. In September
1996, the shareholder converted the entire amount of the loan into 151,515
shares of common stock.
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 provided that the loans were convertible into
shares of the Company's common stock at a price of $2.50 per share. As
additional consideration for the loans, the Company issued 23,205 shares of
common stock, which is recorded as interest expense in the amount of $58,000
in 1996. The loan in the amount of $350,000 was converted into 140,000
shares of common stock. The loan in the amount of $150,000 was repaid prior
to December 31, 1996.
PLACEMENT FEES
An officer, director and principal shareholder of the Company has a 33.3%
interest in an investment firm whose affiliate received fees in connection
with the sale of the Company's securities in a private placement.
11. OUTSTANDING WARRANTS
At December 31, 1996, the Company had outstanding warrants to purchase
828,088 shares of the Company's common stock at prices ranging from $3.00
to $4.00 per share. The warrants become exercisable at various dates through
1999.
12. 401(k) PLAN
The Company maintains a 401(k) plan that covers all eligible employees.
The Company matches a percentage of employee contributions, up to a set
percentage of compensation, as stated in the plan.
F-17
<PAGE> 62
LONG DISTANCE DIRECT HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
30-JUN
------
1997 DECEMBER 31,
---- -----------
(UNAUDITED) 1996
------------ ------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash $ 910,790 $ 962,471
Accounts receivable (net of allowance for
doubtful accounts of $566,069 and $318,976, respectively) 4,058,962 1,125,986
Other current assets 932,528 924,431
-------------------------
Total Current Assets 5,902,280 3,012,888
-------------------------
PROPERTY AND EQUIPMENT
Furniture and equipment 194,691 156,926
Computer equipment and software 421,377 257,108
Leasehold improvements 116,915 91,720
-------------------------
732,983 505,754
Less: accumulated depreciation $ 258,159 193,576
-------------------------
474,824 312,178
-------------------------
OTHER ASSETS 127,711 129,623
OFFICER'S LOANS 221,416 260,735
-------------------------
6,726,231 3,715,424
=========================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable 3,525,508 1,453,796
Accrued expenses 265,219 353,681
Sales and excise taxes payable 482,722 490,716
-------------------------
Total Current Liabilities 4,273,449 2,298,193
-------------------------
STOCKHOLDERS' DEFICIT
Common stock - par value $.001 per share;
authorized 30,000,000 shares; issued
and outstanding 8,927,000 shares 8,927 6,598
Additional paid in capital 10,938,290 8,477,420
Accumulated deficit (8,494,435) (7,066,787)
-------------------------
Total Stockholders' Equity 2,452,782 1,417,231
-------------------------
$ 6,726,231 $3,715,424
=========================
</TABLE>
See notes to Consolidated Financial Statements
F-18
<PAGE> 63
LONG DISTANCE DIRECT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED SIX MONTHS ENDED
---------------- ---------------
6/30/97 6/30/96
---------------- ---------------
<S> <C> <C>
REVENUES $4,729,313 $3,463,502
CUSTOMER REBATES AND REFUNDS 3,963 7,589
----------------------------------
NET REVENUES 4,725,350 3,455,913
COST OF SERVICES 3,746,938 2,139,809
----------------------------------
Gross Profit 978,412 1,316,104
----------------------------------
OPERATING EXPENSES
Sales and marketing 248,122 316,173
General and administrative 2,156,774 1,377,114
----------------------------------
Total Operating Expenses 2,404,896 1,693,287
----------------------------------
LOSS FROM OPERATIONS (1,426,484) (377,183)
OTHER EXPENSES (INCOME)
Interest expense 1,164 65,339
Interest income -- (1,612)
-- --
----------------------------------
Total Other Expenses (Income) 1,164 63,727
----------------------------------
NET LOSS (1,427,648) ($440,910)
==================================
NET LOSS PER SHARE (0.18) (0.11)
</TABLE>
F-19
<PAGE> 64
LONG DISTANCE DIRECT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
30-Jun-97 30-Jun-96
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($1,427,648) ($440,910)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 64,583 31,269
Amortization of note discount
Imputed interest on personal guarantee
Financing expenses
Provision for doubtful accounts 336,029 126,417
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (3,180,069) (821,711)
(Increase) decrease in other current assets (8,097) (234,338)
(Increase) decrease in other assets 1,912 (145,707)
Increase in accounts payable 2,071,712 798,219
Increase (decrease) in accrued expenses (177,398) (212,281)
Increase (decrease) in sales and excise taxes payable (7,994) (172,678)
----------- ----------
Total Adjustments to Net Loss (899,322) (630,810)
----------- ----------
Net Cash Used in Operating Activities (2,326,970) (1,071,720)
----------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Acquisition of property and equipment (227,229) (36,015)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (payment) of notes payable 0 330,200
Proceeds (payment) of related party loans 39,319 235,490
Proceeds from private placement (net of certain expenses) 2,463,199 1,147,201
----------- ----------
Net Cash Provided by Financing Activities 2,502,518 1,712,891
----------- ----------
NET INCREASE (DECREASE) IN CASH (51,681) 605,156
----------- ----------
CASH - Beginning of Period 962,471 207,666
CASH - End of Period $910,790 $812,822
</TABLE>
F-20
<PAGE> 65
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 June 30, 1997 and December 31, 1996 and results of its operations and cash
flows for the six month periods ending June 30, 1997 and June 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.
OTHER CURRENT ASSETS
Costs of direct-response advertising the purpose of which is to elicit sales to
customers who could be shown to have responded specifically to the advertising
are capitalized and amortized over the period during which future benefits are
expected to be received. The balance sheets at December 31, 1996 and June 30,
1997 contain approximately $500,000 and $700,000, respectively, of such costs.
These costs were incurred with respect to the Company's televised marketing
program. The change in the balance represents amounts paid to Guthy-Renker in
the first six months of 1997 to finance losses incurred with respect to the sale
of sales agent kits sold with regard to this program. In the third quarter of
1997, amounts recorded with respect to this loss will be reclassified to offset
the Company's payable to Guthy-Renker.
ACCOUNTS RECEIVABLE
Accounts Receivable at June 30, 1997 contains an unbilled receivable of $1.3
million from the Company's customers and $1.1 million from Guthy Renker
Distribution, Inc., its infomercial producer. See Managements' Discussion and
Analysis for further explanation.
Stock Option Plan
- -----------------
Subsequent to December 31, 1996 and through June 30, 1997 the Company granted an
additional 450,000 options to purchase shares to certain parties as follows: in
January of 1997, options to purchase 350,000 shares were granted at an exercise
price of $3.00 per share and in April, 1997, options to purchase 100,000 shares
were granted at an exercise price of $2.00 per share.
No Compensation expense has been recorded with respect to these options since
the exercise price was equal to or exceeded the fair market value of the stock
at the date of grant.
F-21
<PAGE> 66
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
22. Indemnification of Directors and Officers
Section 78.751 of the Nevada General Corporation Law provides for
indemnification of directors and officers against certain liabilities. Officers
and directors of the Company may be indemnified generally against expenses
actually and reasonably incurred in connection with actions, suits or
proceedings, whether civil or criminal, provided that it is determined that
they acted in good faith, and, in any criminal matter, had reasonable cause to
believe that their conduct was not unlawful.
23. Other Expenses of Issuance and Distribution
<TABLE>
<S> <C>
Registration fee $ 835
Legal fees and expenses 35,000
Accounting fees and 5,000
expenses
Blue sky fees and expenses 1,000
Printing 5,000
Miscellaneous 3,165
-------
Total $50,000(1)
</TABLE>
(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.
II-1
<PAGE> 67
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.
In May, 1996, the Company granted Guthy-Renker the right to receive shares of
the Company's Common Stock valued at approximately $100,000 for every
$5,000,000 of gross revenue, excluding taxes, received by the Company from the
sale of telephone services by the Company's sales agents recruited through an
infomercial produced by Guthy-Renker. The grant of such right was exempt under
Section 4(2) of the Securities Act of 1933 and Regulation D promulgated
thereunder.
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 June, 1996, the Company issued 12,500 shares of Common Stock to Wise and
Shepard as partial consideration for the cancellation of the Company's debt to
Wise and Shepard for legal services rendered. The shares were issued pursuant
to 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 August, 1996, the Company granted an option to Michael Preston to purchase,
at an exercise price of $2.50 per share, 60,000 shares of the Company's Common
Stock. The grant of such option was exempt under Section 4(2) of the Securities
Act of 1933 and Regulation D promulgated thereunder.
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.
II-2
<PAGE> 68
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.
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
respectively to Business Systems Consultants Ltd. and Michael Preston in
consideration of their having made bridge loans to the Company. The shares were
issued pursuant to Section 4(2) of the Securities Act of 1933 and Regulation D
promulgated thereunder.
In January, 1997, the Company granted an option to National Benefits
Consultants, LLC to purchase up to 20% of the Company's Common Stock at $3.00
per share. The option was granted pursuant to Section 4(2) of the Securities
Act of 1933 and Regulation D promulgated thereunder.
In January, 1997, the Company granted an option to Rowland W. Day to purchase,
at an exercise price of $3.00 per share, 350,000 shares of Common Stock. The
option was granted pursuant to Section 4(2) of the Securities Act of 1933 and
Regulation D promulgated thereunder.
In March, 1997, the Company issued 85,000 shares of Common Stock to Capital
Growth International, L.L.C. or nominee for investment banking services. 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 April 17, 1997, the Company sold 1,529,491
shares of Common Stock at a price of $2.00 per share. The offering was made on
behalf of the Company by Cruttenden Roth Incorporated 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 $2.00 per share, up to 152,950 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 April 21, 1997, the Company agreed to issue 15,000 shares of Common Stock and
grant an option to Day, Campbell & McGill to purchase, at an exercise price of
$2.00 per share, 400,000 shares of Common Stock. The option was granted pursuant
to Section 4(2) of the Securities Act of 1933 and Regulation D promulgated
thereunder. The shares will be registered on Form S-8.
On October 1, 1997, the Company granted an option to Guthy-Renker Corporation to
purchase, at an exercise price of $2.00 per share, a number of shares of the
Company's Common Stock equal to a percentage (determined by reference to the
proportion that revenues from customers introduced to the Company by GRC bear to
the Company's total revenue for the period immediately preceding the date on
which GRC determines that the calculation is to be made) of the total number of
shares of Common Stock outstanding (including as outstanding for this purpose,
shares issuable upon exercise or conversion of all options, warrants or
convertible securities then outstanding and exercisable at an exercise price not
in excess of the then current market price of the Company's Common Stock) as of
the date on which the calculation is to be made. The option was granted
pursuant to Section 4(2) of the Securities Act of 1933 and Regulation D
promulgated thereunder.
25. Exhibits
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.***
II-3
<PAGE> 69
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 Amended Lease Agreement for Suite 1430, 1 Blue Hill
Plaza, Pearl River, New York 10965, dated December,
1996.**
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 Corporation dated as of
October 1, 1997, 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.**
10.8 Agreement with Kaire International, Inc. dated November,
1996 and extension thereof dated December, 1996
regarding supply of telecommunications services.**
10.9 Agreement with National Benefits Consultants, LLC dated
January, 1997 regarding supply of telecommunications
services.**
10.10 Agreement with AT&T dated February, 1997 for supply of
long distance telephone service for resale.**
10.11 Amendment to MCI Agreement dated September 23, 1996.**
10.12 Amendment to MCI Agreement dated February 4, 1997.***
10.13 Amendment to MCI Agreement dated April 25, 1997.***
10.14 Addendum to MCI Agreement dated January 7, 1997***
10.15 Agreement with Credit Education Center, L.L.C. dated
August, 1997.***
21 List of Subsidiaries.**
23.1 Consent of Adelman, Katz & Mond, LLP****
23.2 Consent of Day, Campbell & McGill, included in Exhibit
5.1.***
27 Financial Data Schedule.***
- ----------------
* Incorporated by reference to the Company's Form 10-K/A dated November 7,
1996 filed with the Commission on November 7, 1996.
** Incorporated by reference to the Company's Registration Statement on Form
SB-2 (File No. 333-18039) filed with the Commission on December 17, 1996
and Pre-Effective Amendment No. 1 thereto filed with the Commission on
March 25, 1997.
*** Previously filed.
**** Filed herewith.
26. Undertakings
A. Supplementary and Periodic Information, Documents and Reports
II-4
<PAGE> 70
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 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.
II-5
<PAGE> 71
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 October 14, 1997.
LONG DISTANCE DIRECT HOLDINGS, INC.
By: /s/ Steven Lampert
--------------------------------
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.
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.
/s/ Steven Lampert
- -------------------------- October 14, 1997
Steven Lampert, President
and Director
/s/ Michael Preston
- -------------------------- October 14, 1997
Michael Preston
Chief Financial Officer
and Director
/s/ Lori Colin
- -------------------------- October 14, 1997
Lori Colin
Controller
/s/ Rowland W. Day II
- -------------------------- October 14, 1997
Rowland W. Day II
Director
II-6
<PAGE> 72
EXHIBIT INDEX
-------------
Exhibit No. Description
----------- -----------
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 Amended Lease Agreement for Suite 1430, 1 Blue Hill
Plaza, Pearl River, New York 10965, dated December,
1996.**
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 Corporation dated October 1, 1997
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.**
10.8 Agreement with Kaire International, Inc. dated November,
1996 and extension thereof dated December, 1996
regarding supply of telecommunications services.**
10.9 Agreement with National Benefits Consultants, LLC dated
January, 1997 regarding supply of telecommunications
services.**
10.10 Agreement with AT&T dated February, 1997 for supply of
long distance telephone service for resale.**
10.11 Amendment to MCI Agreement dated September 22, 1996.**
10.12 Amendment to MCI Agreement dated February 4, 1997.***
10.13 Amendment to MCI Agreement dated April 25, 1997.***
10.14 Addendum to agreement with MCI dated January 7, 1997.***
10.15 Agreement with Credit Education Center, L.L.C. dated
August, 1997.***
21 List of Subsidiaries.**
23.1 Consent of Adelman, Katz & Mond, LLP****
23.2 Consent of Day, Campbell & McGill, included in Exhibit
5.1.
27 Financial Data Schedule.***
- ----------------
* Incorporated by reference to the Company's Form 10-K/A dated November 7,
1996 filed with the Commission on November 7, 1996.
** Incorporated by reference to the Company's Registration Statement on Form
SB-2 (File No. 333-18039) filed with the Commission on December 17, 1996
and Pre-Effective Amendment No. 1 thereto filed with the Commission on
March 25, 1997.
*** Previously filed.
**** Filed herewith.
<PAGE> 1
DISTRIBUTION AGREEMENT
This Distribution Agreement (the "Agreement") is made and entered into as
of October 1, 1997 (the "Effective Date") by and between Long Distance Direct
Holdings, Inc., a Nevada corporation ("LDDI") and Guthy-Renker Corporation, a
Delaware corporation ("GRC").
RECITALS
WHEREAS, LDDI's principal business is the provision of long distance
telephone service and certain ancillary telecommunications services which are,
in general, co-extensive with the services offered by AT&T Corporation ("AT&T")
and MCI Telecommunications Corporation ("MCI") to their own customers (such
services as more particularly described on Schedule I attached hereto are
hereinafter referred to as the "LDDI Services").
WHEREAS, GRC's principal business is the marketing and distribution of
products and services primarily through direct response programming, including
without limitation, television infomercials produced by GRC.
WHEREAS, Long Distance Direct Marketing, Inc. ("LDDM"), a subsidiary of
LDDI, and Guthy-Renker-Engler ("GRE"), a California general partnership and
affiliate of GRC, previously entered into an agreement dated May 15, 1996 (the
"Initial Agreement") regarding the marketing and distribution of a certain
product known as a Sales Agent Kit through a television infomercial produced by
GRE (the "Initial Infomercial");
WHEREAS, LDDI and GRC wish to terminate the Initial Agreement as of the
Effective Date and enter into this Agreement with respect to the marketing and
distribution of LDDI Services by GRC through direct response programming,
including television infomercials, or otherwise, all on the terms and subject to
the conditions set forth herein.
AGREEMENT
NOW THEREFORE, in consideration of the Recitals and the mutual covenants
and agreements contained herein, LDDI and GRC agree as follows:
1. Termination of Initial Agreement. LDDI and GRC agree on behalf of
themselves, and LDDM and GRE, respectively, that upon their execution of
this Agreement and effective as of the Effective Date, the Initial
Agreement shall terminate and neither LDDI, GRC, LDDM or GRE shall have
any obligations or liabilities to the other under the Initial Agreement.
Notwithstanding the foregoing, (i) GRC shall be entitled to receive and
LDDI shall pay on the terms set forth in the Initial Agreement a two
percent (2%) commission on all Net Receipts (as detailed below) received
by LDDI from long distance telephone billings to LDDI customers generated
directly or indirectly by the Initial Infomercial (the "Initial
Infomercial Customers"), except that if GRC elects, pursuant to Section
4.1.1 below, to
<PAGE> 2
substitute the Initial Infomercial for the New Infomercial (as defined in
Section 4.1.1), then the provisions of Section 5 and not this Section 1
shall govern with respect to amounts to be paid to GRC on all Net Receipts
received by LDDI from billings to Initial Infomercial Customers following
such election; (ii) LDDI shall provide LDDI Services to the Initial
Infomercial Customers; (iii) the provisions of paragraph 10 of the Initial
Agreement shall remain in full force and effect; and (iv) the amount of
Net Billings (as defined below) to such Initial Infomercial Customers
after the Effective Date shall be included in making certain calculations
pursuant to Section 5.2. below.
In addition, (a) Schedule 1-A attached hereto sets forth the amount owed
by LDDI to GRC under and pursuant to the terms of the Initial Agreement and the
terms for the payment of such amounts, and (b) LDDI shall provide GRC with
reasonably detailed information following the Effective Date regarding the
Initial Infomercial Customers, including summary information regarding any
Initial Infomercial Customers who were misappropriated by MCI or any other
carrier.
As used herein, the term "Net Receipts" shall mean all cash or other
consideration received by or on behalf of LDDI and its affiliates or agents, net
of sales, excise and other similar taxes, for LDDI Services for the relevant
period, and the term "Net Billings" shall mean all billings by or on behalf of
LDDI and its affiliates or agents, net of sales, excise and similar taxes, for
LDDI Services and any other services performed by LDDI pursuant to Section 4.2
for the relevant period.
2. Term. This Agreement shall be effective as of the Effective Date and shall
continue in effect until January 1, 2003, unless terminated earlier as
provided herein.
3. LDDI Services. In consideration for GRC generating additional customers
for LDDI, LDDI agrees to perform LDDI Services for (i) New Infomercial
Customers (as defined in Section 5.1 below), (ii) customers introduced to
LDDI directly or indirectly by GRC or agents of GRC and (iii) other agents
or customers introduced to LDDI by GRC with respect to which LDDI and GRC
shall have jointly entered into arrangements pursuant to Section 4.2 below
(all of such customers are referred to herein as "GRC Customers"). The
LDDI Services shall be performed on the terms and conditions specified on
Schedule 1 attached hereto or on such other terms and conditions as may be
agreed to, in writing, by LDDI. LDDI shall bear and be responsible for all
costs and expenses associated with the performance of the LDDI Services,
including without limitation, the costs and expenses set forth on Schedule
I attached hereto.
4. GRC Services.
4.1 Infomercial.
4.1.1 Production. GRC shall create and produce a new television
infomercial (the "New Infomercial") designed to sell the LDDI products described
on Schedule 2 attached hereto (the "LDDI Products"). As of the Effective Date,
LDDI shall have received, reviewed and approved the latest version of the New
Infomercial. LDDI shall have the right to approve any subsequent changes
2
<PAGE> 3
to the New Infomercial which in any way affect the terms and conditions upon
which LDDI shall be obligated to perform LDDI Services for New Infomercial
Customers (as defined in Section 5.1.1 below) GRC shall bear and be responsible
for all costs and expenses associated with the creation and production of the
New Infomercial, including without limitation, the costs and expenses set forth
on Schedule 3 attached hereto, but excluding all costs incurred by GRC in
editing the New infomercial due to the failure of LDDI to provide adequate
substantiation or necessitated by any material misrepresentations made by LDDI
hereunder. LDDI shall not be entitled to any profits or charged with any losses
associated with the marketing, distribution and sale of LDDI Products trough the
New Infomercial. In the event that GRC determines that the results of the test
marketing of the New Infomercial are unsuccessful, GRC shall have the right to
make, at its own expense, such changes to the Initial Infomercial as may be
agreed to, in writing, by LDDI and GRC and to televise the Initial Infomercial
on the terms set out herein in relation to the New Infomercial. If GRC elects to
exercise this right, then for all purposes of this Agreement, the term "New
Infomercial" shall include the Initial Infomercial in respect of all televisings
of the Initial Infomercial from The date that the Initial Infomercial is
operated by GRC pursuant to the terms of this paragraph 4.1.1.
4.1.2 Telemarketing Services. Subject to Section 4.3 below, GRC shall
provide or retain one or more telemarketing agencies to provide telemarketing
services, including without limitation, the telemarketing services set forth on
Schedule 3 attached hereto. GRC shall bear and be responsible for all costs and
expenses associated with providing such telemarketing services. GRC shall
diligently monitor and evaluate the performance of any telemarketing agency
providing telemarketing services in connection with the New Infomercial. If GRC
determines that such performance is not producing the desired results, GRC may,
at its option, request LDDI to establish a telemarketing department to provide
such telemarketing services at such prices and upon such terms as shall be
mutually agreed upon, it being understood that LDDI shall not be required to
provide such telemarketing services at prices and on terms that would result in
a net loss to LDDI.
4.1.3 Manufacture and Distribution of LDDI Products. Subject to Section
4.3, GRC shall manufacture and deliver all of the LDDI Products offered and sold
through the New Infomercial. GRC shall bear and be responsible for all costs and
expenses associated with the manufacture and delivery of the LDDI Products,
including without limitation, the costs and expenses set forth on Schedule 3
attached hereto; provided, however, that LDDI, and not GRC, shall be responsible
for all costs and expenses associated with any premiums, such as free long
distance telephone time, provided by LDDI in connection with the New
Infomercial.
4.2 Other Activities. LDDI and GRC may from time to time jointly enter
into activities other than the New Infomercial relating to the marketing and
distribution of LDDI Services ("Other Activities") upon such terms and
conditions, including without limitation, the amount of royalties or other
compensation payable to GRC in connection with such Other Activities, as shall
be contained in an amendment or addendum to this Agreement signed by the parties
hereto. The parties understand that in connection with such Other Activities and
except as otherwise agreed to by the parties, (a) GRC shall bear and be
responsible for all of its own marketing, distribution and GRC customer account
acquisition fees, costs and expenses, whether such accounts are procured by GRC
or by or through agents procured by GRC, such that at the time such accounts are
delivered to LDDI
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for proposed activation of service on LDDI's network, all fees, costs and
expenses incurred in procuring and delivering such prospective accounts shall
have been paid by GRC, and (b) LDDI shall bear and be responsible for the costs
and expenses associated with providing such LDDI Services, including, without
limitation, all costs of activating such prospective accounts on LDDI's network.
4.3(a) LDDI's Right to Operate New Infomercial. If, in the calendar
quarter commencing January 1, 1998 or any calendar quarter thereafter during the
term of this Agreement, GRC shall have failed to deliver a minimum of 25,000 new
GRC Customers generated by (i) the New Infomercial or (ii) the New Infomercial
and any other direct response programming or other means by which GRC markets
LDDI Services, and less than 40% of such new GRC Customers are generated by the
New Infomercial, LDDI shall have the right, on a non-exclusive basis, to operate
the New Infomercial and distribute the LDDI Products sold thereunder as a
principal. In such event, GRC shall be obligated to provide services with
respect to the televising of the New Infomercial (the "Marketing Services") on
terms comparable with the terms set forth in Schedule 4 attached hereto. The
exercise of such right by LDDI shall be without prejudice to the continuance of
this Agreement in respect of Other Activities, but in such case, customer
accounts, revenues, and Net Receipts or Net Billings attributable to the New
Infomercial as operated by LDDI shall not be included for purposes of
calculating royalties under Section 5.1 or for the purposes of calculating the
Referral Percentage under Section 5.2.2, as the case may be.
4.3(b) If LDDI desires to exercise its right to operate the New
Infomercial, LDDI shall deliver a notice to GRC in the manner set forth in
Section 23 below of LDDI's intention to operate the New Infomercial.
4.3(c) Effective thirty (30) days after receipt of the notice, GRC shall
be obligated to provide the Marketing Services on the terms specified in Section
4.3(a) above for a period of two (2) years following the effective date of such
notice.
5. Compensation to GRC.
5.1 Royalties.
5.1.1 LDDI shall pay to GRC a five percent (5%) royalty on (a) all Net
Receipts during the term of this Agreement from long distance telephone billings
(but not from billings for any other LDDI Services unless otherwise agreed to,
in writing, by LDDI) to New Infomercial Customers (as defined below) and (b) all
compensation, whether cash, service credits or otherwise, received by LDDI from
MCI or any other carrier arising out of or in connection with any
misappropriation of New Infomercial Customers by MCI or any other carrier. "New
Infomercial Customers" shall mean (i) all sales agents recruited or "signed up"
by LDDI after their purchase of LDDI Products; (ii) all third party customers
introduced to LDDI by the sales agents referred to in (i) above; (iii) all sales
agents recruited or "signed up" by LDDI who responded to the New Infomercial but
did not purchase any LDDI Products; (iv) all third party customers introduced to
LDDI by the sales agents referred to in (iii) above; (v) all other customers of
LDDI who shall have become such as a direct
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or indirect result of responding to the New Infomercial and (vi) all third party
customers introduced to LDDI directly or indirectly by agents of GRC, provided
that the amounts of any royalty paid by LDDI to such agents shall reduce the
amount that LDDI is obligated to pay GRC under this Section 5.1.1.
5.1.2 LDDI shall pay to GRC royalties in amounts and on terms mutually
agreed to, in writing, by the parties in connection with any Other Activities
jointly entered into by the parties pursuant to Section 4.2 above.
5.1.3 LDDI and GRC agree that the amount of the royalty payable to GRC
under Sections 5.1.1 has been or, in the case of any royalty payable under
Section 5.1.2 (only as it relates to long distance telephone services), will be,
calculated so as to provide GRC with an amount equal to approximately 50% of
LDDI's Anticipated Net Profits (as defined below) derived from all GRC-related
Revenue (as defined below) which is attributable to the New Infomercial or any
Other Activities for each fiscal year of LDDI during the term of this Agreement.
Each royalty rate shall be reviewed quarterly, as hereinafter provided, to
determine if any adjustment to such rate is warranted (so as to continue to
provide GRC with an amount equal to the greater of (i) 50% of LDDI's Anticipated
Net Profits derived from all GRC-related Revenue attributable to the New
Infomercial or Other Activities or (ii) the aggregate amount of royalties
payable under Section 5.1.1) in future quarters as a result of any material
changes in the rates charged by AT&T, MCI or other carriers to LDDI or any other
material changes affecting LDDI's cost of providing LDDI Services. Such review
shall be undertaken within thirty (30) days after the end of each calendar
quarter during the term of this Agreement and any agreed upon change in the
royalty rate shall become effective as of the first day of the calendar quarter
in which such adjustment is made. No change in the royalty rate set forth in
Section 5.1.1 above, or in any royalty rate hereafter established pursuant to
Section 5.1.2 above (only as it relates to long distance telephone services),
shall be effective unless agreed to, in writing, by the parties. As used herein,
the term "GRC-related Revenue" shall mean all Net Receipts received by LDDI from
billings to GRC Customers for LDDI Services or Other Activities during the term
of this Agreement, and the term "Anticipated Net Profits" shall mean the gross
revenues of LDDI attributable to the New Infomercial or other Activities less
all direct costs incurred by LDDI in connection therewith and a ratable
proportion of all substantiated indirect costs and expenses, including all
general and administrative expenses, incurred by LDDI in the management of its
business, but not subtracting any amounts for income taxes of any kind.
5.1.4 LDDI shall pay royalties to GRC on a monthly basis during the term
of this Agreement, with each payment to be made no later than thirty (30) days
after the end of each month based on the amount of "GRC-related Revenue"
received by LDDI in the preceding month. LDDI shall provide GRC with reasonably
detailed monthly accounting statements for all GRC-related Revenue received by
LDDI during such month. if any payment of royalties under this Agreement is not
made within sixty (60) days after the end of the month for which such payment is
due, LDDI shall pay a late charge in an amount equal to ten percent (10%) of the
unpaid amount.
5.1.5 During the term of this Agreement LDDI agrees to pay a minimum
amount of Thirty Thousand Dollars ($30,000) (the "Minimum Royalty") to GRC on
account of royalties payable to
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GRC pursuant to Section 5.1.1 or 5.1.2 above in any month in which GRC shall
have introduced not less than 9,000 new GRC Customers to LDDI (a "Minimum
Royalty Month"). No Minimum Royalty payment or any portion thereof shall be
payable to GRC with respect to any month in which GRC shall not have introduced
at least 9,000 new GRC Customers to LDDI; provided, however, that if GRC has
introduced an average of at least 9,000 new GRC Customers to LDDI for the two
months comprising the Minimum Royalty Month and the preceding month, LDDI shall
continue to pay the Minimum Royalty with respect to such month. The amount of
Minimum Royalty payable with respect to a Minimum Royalty Month shall be reduced
by the amount of royalty actually paid by LDDI for such month pursuant to
Section 5.1.1 above. The monthly Minimum Royalty, or such portion thereof as
shall be payable after reduction of the amount of royalty actually paid for such
month pursuant to Section 5.1.1, shall be paid simultaneously with the royalty
payments due pursuant to Section 5.1.1.
5.1.6 Notwithstanding the provisions of Section 5.1.1, 5.1.3 and 5.1.4 to
the contrary, however, GRC agrees that LDDI shall only be obligated to pay and
GRC shall only be entitled to receive fifty percent (50%) of the amount of any
royalties payable to GRC under Section 5.1.1 until such time as the total amount
of royalties actually paid to GRC under Section 5.1.1 has reached $250,000.
Thereafter, LDDI shall be obligated to pay and LDDI shall be entitled to receive
the full amount of royalties payable to GRC under Section 5.1.1. Nothing in this
Section 5.1.6 is intended, however, to reduce the amount of any Minimum Royalty
to be paid pursuant to Section 5.1.5.
5.1.7 GRC agrees that notwithstanding anything in Section 5.1 to the
contrary, in any month in which LDDI is not obligated to make a Minimum Royalty
payment under Section 5.1.5 (a "Non-Minimum Royalty Month"), the amount of any
royalty payable under Section 5.1.1 or 5.1.2 above in such month shall be
cumulatively offset to the extent that the total amount of royalties paid to GRC
pursuant to Section 5.1 from the Effective Date to the end of the month
preceding the Non-Minimum Royalty Month exceeds the amount of royalties paid to
GRC under Sections 5.1.1 and 5.1.2 above during such period.
5.2 Stock Option As a material inducement for GRC to enter into this
Agreement, LDDI hereby irrevocably grants the right and option ("Option") to GRC
to purchase at the Option Price (as defined below) that number of shares of LDDI
common stock ("Option Shares") constituting the Referral Percentage (as
calculated in accordance with Section 5.2.2 below) of the Total Shares (as
defined in Section 5.2.1 below) upon the following terms and conditions:
5.2.1 "Total Shares" shall mean the sum of (i) the total number of shares
of LDDI common stock outstanding as of the Determination Date (as defined in
Section 5.2.2) and (ii) any shares then issuable upon conversion of convertible
debt instruments or convertible stock outstanding and exercisable as of the
Determination Date or upon exercise of options or warrants outstanding and
exercisable as of the Determination Date, except for shares issuable under such
instruments where the conversion or exercise price is above the Current Market
Price (as defined in Section 5.2.4(d) below) of LDDI's common stock as of the
Determination Date.
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5.2.2 "Referral Percentage" shall mean the percentage calculated for the
Measurement Period (as defined below), which percentage shall be determined by
dividing (i) the sum of (x) all Net Billings by LDDI to Initial Infomercial
Customers during the Measurement Period, (y) all Net Billings by LDDI to GRC
Customers during the Measurement Period and (z) all compensation, whether cash,
service credits or otherwise, received by LDDI during the Measurement Period
from MCI or any other carrier, arising out of or in connection with any
misappropriation of GRC Customers by MCI or any other carrier, by (ii) the sum
of (x) all Net Billings by LDDI to all of its customers during the Measurement
Period, and (y) all compensation, whether cash, service credits or otherwise,
received by LDDI during the Measurement Period from MCI or any other carrier
arising out of or in connection with any misappropriation of any of LDDI's
customers by MCI or any other carrier. The "Measurement Period" shall be the (6)
full calendar quarters ending immediately prior to the first day of the month
in which the Election Notice described in Section 5.2.3 below is given to LDDI
and commencing not earlier than the end of the calendar quarter ending December
31, 1997 (the "Initial Quarter"), except where an Acceleration Event occur prior
to the elapse of five (5) full calendar quarters after the end of the Initial
Quarter. The date on which the Measurement Period ends is referred to herein as
the "Determination Date", and the date on which the initial Measurement Period
ends is referred herein to as the "Initial Determination Date".
5.2.3 If GRC desires to determine the number of Option Shares as to which
the Option shall be exercisable, GRC Shall deliver a notice (the "Election
Notice") to LDDI in accordance with Section 23 below of its intention to do so.
Within thirty (30) days after receipt of the Election Notice, LDDI shall
calculate the Referral Percentage for a Measurement Period determined in
accordance with Section 5.2.2 above, compute the number of Total Shares in
accordance with Section 5.2.1 above and give notice of such calculation and
computation to GRC in accordance with Section 23 below. Upon receipt of such
notice from LDDI, GRC shall be entitled to exercise the Option with respect to a
number of Option Shares determined by multiplying the Referral Percentage times
the Total Shares. At any time within one year after receipt of such notice from
LDDI, GRC shall be entitled to review LDDI's books and records with respect to
such calculations and computations. If GRC disputes such calculations or
computations, the parties agree to use their best efforts to resolve any
difference. If within 30 days they are unable to do so, then the parties agree
to submit such dispute to arbitration in accordance with Section 18.
5.2.4(a) GRC may exercise its Option by delivering to LDDI written notice
thereof (the "Option Notice") together with frill payment by GRC check of the
exercise price which shall be an amount equal to Two Dollars ($2.00) per share
of common stock ("Exercise Price"). At the option of GRC, in lieu of payment of
the Exercise Price for Option Shares in cash, GRC may request that the Company
issue to it the number of Option Shares determined in accordance with the
following formula:
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NS = OS - [(EP/CMP) x OS]
As used in the formula:
NS = "Net" Option Shares
OS = No. of Option Shares issuable upon exercise of the
Option.
EP = Exercise Price
CMP = Current Market Price as defined in Section 5.2.4(d)
hereof.
The "Option Exercise Date" shall be the date the Option Notice is deemed given
under Section 23 hereof. Upon full payment of the Exercise Price, GRC shall have
all rights of a shareholder of LDDI effective as of the Option Exercise Date.
Subject to the rights of GRC to exercise the Option in the case of an
Acceleration Event as set forth in Section 5.2.6(a) below, the Option may be
exercised at any time and from time to time after the end of the fifth full
calendar quarter following the end of the Initial Quarter as to all or any
portion of the Option Shares as to which the Option is then exercisable.
(b) A stock certificate for the number of Option Shares as to which the
Option is exercised by GRC shall be delivered to GRC within thirty (30) days
after the Option Notice and payment has been received by LDDI.
(c) LDDI shall at all times during the period the Option may be exercised,
keep reserved out of its authorized common stock such number of shares of common
stock as shall be issuable upon exercise of the Option.
(d) LDDI shall not be required to issue fractional shares upon exercise of
the Option. If any fraction of a share would, except for the provisions hereof
be issuable on the exercise of the Option (or portion thereof), LDDI shall pay
an amount in cash equal to the then Current Market Price multiplied by such
fraction. For purposes of this Agreement, the term "Current Market Price" shall
mean (i) if the common stock is traded in the over-the-counter market and not in
the NASDAQ National Market System nor on any national securities exchange, the
average per share closing bid prices of the common stock on the fifteen (15)
consecutive trading days immediately preceding the date in question, as reported
by NASDAQ or an equivalent generally accepted reporting service, or (ii) if the
common stock is traded in the NASDAQ National Market System or on a national
securities exchange, the average for the fifteen (15) consecutive trading days
immediately preceding the date in question of the daily per share closing prices
of the common stock in the NASDAQ National Market System or on the principal
stock exchange on which it is listed, as the case may be. For purposes of clause
(i) above, if trading in the common stock is not reported by NASDAQ, the average
referred to in said clause shall be as reported in the "pink sheets" published
by National Quotation Bureau, Incorporated. The closing price referred to in
clause (ii) above shall be the last reported sale price or, in case no such
reported sale takes place on such day, the avenge of the reported closing bid
and asked prices, in either case, in the NASDAQ National Market System or on the
national securities exchange on which the common stock is then listed.
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(e) The Option shall terminate (i) upon the date which is one (1) year
after the expiration of this Agreement, (ii) upon the occurrence of an
Acceleration Event (as defined in Section 5.2.5) provided the Acceleration
Notice (as defined in Section 5.2.6(a) below) is properly given to GRC, (iii)
upon termination of this Agreement by LDDI due to a material breach of this
Agreement by GRC pursuant to Section 20(d), or (iv) upon the one (1) year
anniversary date of the termination of this Agreement for any other reason other
than pursuant to (i), (ii) or (iii) above, whichever occurs first, and may
thereafter no longer be exercised.
5.2.5 At any time after the initial Determination Date selected by GRC
pursuant to Section 5.2.3 above, and prior to or upon the termination of this
Agreement, GRC shall have the right to calculate the Referral Percentage with
respect to a second Measurement Period (the "Second Measurement Period"),
provided that such Second Measurement Period shall not commence earlier than the
calendar quarter commencing after the end of the Initial Quarter and shall not
be coterminous with the Measurement Period ending with the Initial Determination
Date. The date on which the Second Measurement Period ends is referred to herein
as the Second Determination Date. For purposes of calculating the Referral
Percentage with respect to the Second Measurement Period, the words
"Determination Date" contained in Section 5.2.1 shall be changed to "Second
Determination Date," and for purposes of calculating Total Shares pursuant to
Section 5.2.1, none of the Option Shares determined in accordance with Section
5.2.3 shall be included in such calculation. If the number of Option Shares
determined in accordance with this Section 5.2.5 is greater than the number of
Option Shares determined in accordance with Section 5.2.3, then notwithstanding
any provision in this Section 5.2 to the contrary, the number of Option Shares
as to which the Option shall be exercisable pursuant to Section 5.2.3 shall be
increased by such additional number of Option Shares.
5.2.6(a) At least 30 days prior written notice ("Acceleration Notice") of
any of the following proposed transactions or events ("Acceleration Event")
shall be given by LDDI to GRC: (i) the dissolution or liquidation of LDDI; (ii)
a reorganization, merger or consolidation as a result of which LDDI is not the
surviving corporation or as a result of which the outstanding shares of LDDI
common stock are changed into or exchanged for cash, property or securities not
of LDDI's issue, except for a merger or consolidation of LDDI with a
wholly-owned subsidiary of LDDI or a transaction effected primarily to change
the state of LDDI's incorporation; (iii) the sale or other transfer of all or
substantially all of the assets of LDDI; or (iv) a reorganization, merger or
consolidation in which LDDI is the surviving entity if the shareholders of LDDI
immediately prior to the reorganization, merger or consolidation shall own
(immediately after the reorganization, merger or consolidation) less than fifty
percent (50%) of the shares of LDDI common stock outstanding immediately after
the reorganization, merger or consolidation.
(b) If an Acceleration Event occurs, the Option shall terminate upon the
closing of the Acceleration Event, provided, however, during the period from the
Acceleration Notice to the closing of the Acceleration Event GRC may exercise
the Option as set forth above or, if less than six (6) full calendar quarters
have expired prior to the closing of the Acceleration Event, purchase Option
Shares equal to an "Adjusted Referral Percentage" determined by computing the
Referral Percentage based upon an "Adjusted Measurement Period" defined as The
period (i) commencing
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with the first day of the Initial Quarter and ending with the last day of the
calendar quarter immediately preceding the calendar quarter in which the
Acceleration Event shall have occurred, or (ii) if less than two (2) full
calendar quarters have expired prior to the closing of the Acceleration Event,
commencing with the first day of the first full month following the Effective
Date and ending with the month immediately preceding the month in which the
Acceleration Event shall have occurred.
(c) An Acceleration Event shall also entitle LDDI, in it sole discretion
and upon written notice to GRC, to terminate this Agreement effective as of the
date of the closing of the Acceleration Event provided that the Acceleration
Notice is properly given to GRC; provided, however, that GRC shall be entitled
to receive, on the date of termination, (x) all royalties and other payments due
and payable to GRC through the date of termination and (y) a lump gum royalty
payment in an amount determined by multiplying (a) the average monthly royalty
payment payable to GRC pursuant to Sections 5.1.1 and 5.1.2 above (excluding for
this purpose any Minimum Royalty Payment payable pursuant to Section 5.1.5) for
the three months immediately preceding the first day of the month in which an
Acceleration Event occurs times, (b)(i) 18, if the closing of the Acceleration
Event occurs within six months after the Effective Date, or (ii) 12, if the
closing of the Acceleration Event occurs after 6 months but no later than 12
months after the Effective Date, or (iii) 6, if the closing of the Acceleration
Event occurs after 12 months but no later than 18 months after the Effective
Date, or (iv) 3, if the closing of the Acceleration Event occurs after 18 months
but no later than 24 months after the Effective Date.
5.2.7 In case the Company shall (a) pay a dividend in common stock or any
other security or make a distribution in common stock or any other security, (b)
subdivide its outstanding common stock, (c) combine its outstanding common stock
into a smaller number of shares of common stock, or (d) issue by
reclassification of its common stock other securities of the Company, the number
and kind of Option Shares purchasable upon exercise of the Option immediately
prior thereto shall be adjusted so that GRC shall be entitled to receive the
kind and number of Option Shares or other securities of the Company which it
would have owned or would have been entitled to receive immediately after the
happening of any of the events described above had the Option been exercised
immediately prior to the happening of such event or any record date with respect
thereto, all without any change in the aggregate exercise price applicable to
the unexercised portion of the Option, but with a corresponding adjustment in
the exercise price per share. Any adjustment made pursuant to this Section 5.2.7
shall become effective immediately after the effective date of such event.
5.2.8 LDDI agrees that GRC shall have the registration rights set forth in
the Registration Rights Certificate attached hereto as Exhibit A with respect to
the Option Shares. Such registration rights shall survive the termination of
this Agreement as provided in the Registration Rights Certificate.
5.3 Sale of Customer Base. In the event LDDI sells all or any portion of a
customer base consisting, in whole or in part, of GRC Customers, and provided
such sale does not constitute an Acceleration Event, GRC shall be entitled to
receive fifty percent (50%) of the net proceeds (as defined below) relating to
the sale of GRC Customer Accounts included in such customer base
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received by LDDI from such sale. In such event Net Billings by LDDI to the GRC
Customers included in such customer base shall be excluded from all of the Net
Billings by LDDI used in calculating the Referral Percentage referred to in
Section 5.2 above. As used in this Section 5.3, net proceeds shall mean the
total amount of cash or other consideration received by LDDI less all
transaction costs, including, without limitation, sales commissions, finder's
fees and attorneys' fees, but excluding any income taxes, incurred by LDDI.
6. Exclusivity. GRC agrees that for a period of one (1) year following the
Effective Date, it will not market or distribute any long distance
telecommunication services of any third party pursuant to an infomercial
or any other direct response channel. LDDI agrees that for a period of one
(1) year following the Effective Date, or, if shorter than such one (1)
year period, until such time, if any, that GRC markets and distributes any
long distance telecommunication services of any third party as otherwise
permitted by this Section 6, LDDI shall not market or distribute its long
distance telecommunication services pursuant to an infomercial or any
other direct response channel which is produced or provided by any person
or entity other than GRC. Notwithstanding the first sentence of this
Section 6 to the contrary, however; if during such one (1) year period,
GRC receives a bona fide offer from any third party provider of long
distance telecommunication services to market or distribute its long
distance services and GRC desires to accept such offer, GRC shall provide
LDDI in writing with all of the relevant terms and conditions of such
offer and LDDI shall have a period of thirty (30) days following receipt
of such terms and conditions to elect, by written notice to GRC, to enter
into an agreement with GRC to market or distribute LDDI's long distance
telecommunication services on the same terms and conditions as set forth
in the offer, in which event GRC shall not be permitted to accept the
offer of such third party. If, however, LDDI does not elect within the
thirty (30) day period to enter into such an agreement with GRC, then GRC
shall be permitted to enter into an agreement with the third party to
market or distribute such third party's long distance telecommunication
services on the terms and conditions set forth in the written notice to
LDDI.
7. Right to Appoint Member of LDDI's Board of Directors. During the term of
this Agreement, GRC shall have the right to nominate one person to serve
on the Board of Directors of LDDI. If such person is either Bill Guthy,
Greg Renker or Brian Kelly, he may be nominated by GRC at any time after
the Effective Date and LDDI shall thereupon use its best efforts to elect
him to the LDDI Board. If such person is someone other than Messrs. Guthy,
Renker or Kelly, he may be nominated at any time after GRC has introduced
at least a total of 100,000 GRC Customers to LDDI after the Effective Date
and, provided that he is reasonably acceptable to LDDI, LDDI shall
thereupon use its best efforts to elect such person to the LDDI Board.
Upon election to the LDDI Board, such individual may serve on the LDDI
Board until the last to occur of (i) the date on which this Agreement
terminates or (ii) the date on which the number of shares of the Company's
Common Stock owned by GRC (including shares issuable upon exercise of
options held by GRC) constitutes less than five percent (5%) of the total
number of shares of the Company's Common Stock outstanding (including
shares issuable upon exercise of all options and warrants then
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outstanding and exercisable) and LDDI agrees to take all necessary action
to keep such individual on the Board.
8. Grant of Rights.
8.1 Exclusivity. LDDI hereby licenses to GRC on a royalty-free basis the
exclusive worldwide right to market and distribute the LDDI Products and New
Infomercial (to include, if any, revisions and/or new versions of the New
Infomercial) through all direct response channels, including, without limitation
television and "shop at home" television programming, retail, outbound and
international, such license to be contingent on GRC's ensuring that all
telecommunications business so generated is directed to LDDI.
8.2 Non-Exclusivity. LDDI hereby licenses to GRC on a royalty-free basis
the nonexclusive worldwide right to market and distribute the LDDI Products
through 800/900 numbers, database marketing, Internet/on-line, retail, print
media, outbound telemarketing, package inserts, catalogs, direct sales, radio,
credit card syndication, direct mail and seminars, such license to be contingent
on GRC's ensuring that all telecommunications business so generated is directed
to LDDI.
9. Audit. At any time within two (2) years after a payment is made hereunder,
GRC shall have the reasonable right to examine LDDI's books and records
relating to the subject matter of this Agreement. This examination shall
be conducted (i) after providing LDDI at least thirty (30) days prior
written notice of its election to examine the applicable books and records
(including, without limitation LDDI's financial books and records), (ii)
during the normal business hours at the place where the applicable books
and records are maintained, (iii) except as provided below, at GRC's sole
cost and expense, and (iv) not more tan two (2) times per year. if GRC
disputes any amount paid to it under this Agreement, the parties shall use
good faith efforts to resolve such dispute. if despite such efforts, the
parties are unable to resolve this dispute within thirty (30) days
following notice of such dispute from GRC, the parties shall mutually
select an independent auditor to resolve such dispute. If the parties are
unable to agree on such an independent auditor within ten (10) days
following the expiration of such 30-day period, the independent auditor
shall be selected by arbitration in accordance with Section 17 hereof. If
it is determined by the independent auditor that LDDI has underpaid GRC by
an amount exceeding five percent (5%) for any six month period during the
term, then LDDI shall immediately pay the underpayment plus interest from
the date the underpaid amount was due at a rate equal to the then prime
rate of interest as reported in the Wall Street Journal, and in addition
LDDI shall pay the costs of such examination, including the costs of the
independent auditor (but such costs will not include travel, living and
other personal expenses of GRC). Any such determination shall not be
deemed a breach of this Agreement unless LDDI fails to pay the agreed upon
underpayment and accrued interest thereon within ten (10) business days
following a determination of such amount.
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10. Indemnity. LDDI agrees to indemnity and hold harmless GRC, its
shareholders, directors, officers, employees, agents and representatives
against any and all claims, liabilities, losses or damages, including
reasonable attorneys' fees (collectively, "Losses"), which arise from (i)
LDDI' s breach of any of its representations, warranties, covenants or
agreements in this Agreement or (ii) any statements or claims with respect
to LDDI Services or Other Activities made by GRC in connection with the
marketing and distribution of the LDDI Services or Other Activities
provided that such statements had been approved in advance, by LDDI. GRC
agrees to indemnify and hold harmless LDDI, its shareholders, directors,
officers, employees, agents and representatives against all Losses which
arise from GRC's breach of any of its representations, warranties,
covenants or agreements in this Agreement.
11. Representations and Warranties.
11.1 LDDI Representations and Warranties. LDDI represents and warrants to
GRC that (a) LDDI has not entered into any oral or written contract which would
impair the rights granted to GRC hereunder 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 GRC hereunder, (b) LDDI shall not create, produce
or sell any direct response programming during the term of this Agreement,
except as set forth in Schedule 7 attached hereto, (c) LDDI has entered into
valid and binding reseller agreements with AT&T and MCI, which agreements are in
force and effect and LDDI is not in material default under such agreements;
(d) the full exercise of the rights granted GRC hereunder will not violate or
infringe upon any intellectual property rights or any other right of AT&T or MCI
or, to LDDI's knowledge, any intellectual property rights or any other right of
any other third party, (e) the grant of the Option pursuant to Section 5.2 above
and the issuance of the Option Shares underlying the Option has been duly
authorized by all necessary corporate and/or shareholder action of LDDI and (f)
LDDI is authorized to conduct business as a long distance telephone reseller by
the U.S. Public Utilities Commission and has obtained certificates and all
necessary approvals from and filed tariffs in all states in which it is
currently conducting business.
11.2 GRC Representations and Warranties. GRC represents and warrants to
LDDI that (a) to GRC's knowledge, the marketing, distribution and/or sale of the
LDDI Products pursuant to the New Infomercial or otherwise by GRC is not
restricted or prohibited by any Federal, state or local law or NIMA Guideline,
and (b) GRC shall not, without the approval of LDDI, make any changes to the New
Infomercial after the date hereof which in any way affect the terms and
conditions upon which LDDI shall be obligated to perform LDDI Services for New
Infomercial Customers.
11.3 Mutual Representations and Warranties. Each party represents and
warrants to the other that (a) 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; (b) it has the absolute and unrestricted right and power and
authority to enter in this Agreement and perform its obligations hereunder; (c)
the execution and delivery of this Agreement and the performance of its
obligations hereunder will not result in a breach of, or a violation of any law,
rules, regulations or governmental decrees applicable to such party; (d) this
Agreement constitutes the legal, valid and binding obligation of
13
<PAGE> 14
each such party, enforceable against such party in accordance with its terms;
(e) neither the execution and delivery of this Agreement nor the consummation or
performance of the terms and obligations contained herein does or will, directly
or indirectly, contravene or conflict with any provision of the Articles of
Incorporation or Bylaws of such party or result in a default, violation or
breach of any provision of any contract or agreement of such party; and (f) the
execution and delivery of this Agreement has been duly authorized and approved
by all necessary corporate action of each party.
11.4 Survival. The representations and warranties set forth in this
Section 11 shall survive the execution and delivery of this Agreement.
12. Customer List. GRC shall compile a list of names and addresses of all
customers ordering the LDDI Products. GRC shall have exclusive ownership
and rights to this Customer List; provided, however, that GRC agrees to
provide, at LDDI's expense, a current copy of such list to LDDI upon
LDDI's reasonable request at any time and from time to time during the
term of this Agreement. LDDI agrees not to sell, rent or otherwise
transfer or disclose such customer list to any third party, without the
prior written consent of GRC. GRC agrees not to sell, rent, or otherwise
transfer or disclose the Customer List to LDDI's competitors without
LDDI's prior written consent.
13. Control. Subject to the terms of this Agreement, LDDI shall own and
maintain all rights in and to the LDDI Products. However, for the purposes
of this Agreement and during the term of this Agreement, LDDI hereby
licenses to GRC on a royalty fee basis, pursuant to Section 8 of this
Agreement, (i) the LDDI Products, including without limitation,
trademarks, patents and copyrights associated therewith, solely in order
for GRC to fulfill its obligations herein during the term of this
Agreement. Subject to this Agreement, GRC shall own and maintain all
rights in and to the New Infomercial, including, without limitation, all
associated marketing and distribution rights and trademarks, copyrights
and other intellectual property rights with respect to the New
Infomercial.
14. Compliance with Rules and Regulations. LDDI shall comply with all laws,
rules, and regulations of any governmental agency having jurisdiction over
LDDI's performance of the LDDI Services, services provided by LDDI
relating to Other Activities and its other obligations hereunder. LDDI
will be solely responsible for maintaining any and all licenses and
governmental approvals which may be required for the provision of the LDDI
Services, services provided by LDDI relating to Other Activities and the
performance of its obligations hereunder. LDDI shall indemnify and hold
GRC harmless from any Losses, including without limitation, any fines,
penalties, and related expenses incurred by GRC as a result of LDDI's
failure to comply with the laws, rules, and regulations of any
governmental agency having jurisdiction over the performance of the LDDI
Services, services provided by LDDI relating to Other Activities and its
obligations hereunder.
15. insurance. if GRC determines that test marketing for the New Infomercial
is successful, then GRC shall secure media liability insurance customarily
maintained by infomercial
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<PAGE> 15
distributors. if GRC obtains media liability insurance, LDDI shall obtain
appropriate general commercial and project 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 on terms customarily
maintained by companies engaged in similar businesses. 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 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 or is
canceled, and (iv) all insurance tall have no less than an "B+" rating (or
equivalent thereof) as reported in the Best Guide. Each party shall
provide the other with a copy of such insurance policy naming the other
party as an additional named insured.
16. Independent Contractors; No Joint Venture. GRC and LDDI agree they are
dealing with the other as independent contractors, and not as joint
venturers or partners. This Agreement is not intended to create any joint
venture or partnership arrangement between the parties. Each party shall
be responsible for the timely payment of all taxes and all withholdings,
deductions and payments required by law with respect to its own operations
and employees and shall indemnify and hold the other party harmless with
respect to any Losses (as defined in Section 10 above) with respect to
such liabilities.
17. Governing Law. The validity of this Agreement, its construction,
interpretation, and enforcement and the rights of the parties hereto shall
be determined under, governed by and construed in accordance with the laws
of the State of California.
18. Arbitration. The parties hereby stipulate and agree that any and all
disputes between them arising out of or otherwise related to this
Agreement shall be governed exclusively by the Federal Arbitration Act, as
amended, and shall be submitted for resolution to mandatory, exclusive and
binding arbitration in Orange County, California before a single
arbitrator in accordance with the Commercial Arbitration Rules of the
American Arbitration Association. The party initiating arbitration shall
first provide the responding party written notice (the "Notice") of the
initiating party's intention to arbitrate, a brief statement of the nature
of the dispute and a list of proposed arbitrators. The Notice shall be
sent and deemed given in accordance with Section 23. The parties shall
then mutually select an arbitrator. if the parties fail to agree to an
arbitrator within thirty (30) days following the delivery of the Notice in
accordance with Section 23, an arbitrator shall be selected in the manner
provided by the American Arbitration Association. The parties agree to be
bound by any final decision rendered by the arbitrator, which final
decision may be enforced in any court of competent jurisdiction. The
parties hereby consent to the exercise of personal jurisdiction over them
by such courts and the propriety of venue of such courts for the purpose
of carrying out this provision and they waive any objection that they
would otherwise have to the same. The parties agree that the arbitrator
shall have no power or authority to make awards of punitive damages. The
parties further agree that the arbitrator shall have the power to dispense
equitable relief.
15
<PAGE> 16
Either party may, without inconsistency with this Agreement, seek from a
court any interim or provisional relief that is necessary to protect the right
or property of that party, until the arbitration award is rendered or the
controversy is otherwise resolved. The arbitrator shall render a single written
decision setting forth an award, to the extent applicable, and state with
reasonable specificity the reasons for the decision reached. The parties hereby
further stipulate that each party (as determined by the arbitrator) shall pay
the fees and expenses of the Arbitrator. The Arbitrator shall award fees to the
prevailing party, or, in the event no party is clearly prevailing, in a manner
deemed equitable by the Arbitrator. This Section shall survive the termination
of this Agreement. Unless prohibited by applicable law, any arbitration under
this Agreement must be commenced within one (1) year after the conduct or event
giving rise to the dispute. An arbitration shall be deemed commenced upon
effective delivery of the Notice. The parties acknowledge, understand and agree
that in the event of a dispute under this Agreement between the parties, both
parties have waived any right to a jury trial and a judicial resolution of the
dispute.
19. Fiduciary No fiduciary duty obligations between the parties shall be
created as a result of this Agreement.
20. Termination. This Agreement shall terminate earlier than the expiration of
the term (a) upon the mutual written agreement of the parties hereto; (b)
upon written notice from a party to the other party if the other party has
become insolvent, is unable to pay its debts as they become due, becomes
the subject of any bankruptcy proceeding or action (which is not dismissed
within thirty (30) days following the commencement of such action) or the
appointment of a trustee or receiver for all or substantially all of the
assets of the other party; (c) by LDDI, upon thirty (30) days written
notice to GRC, upon the occurrence of an Acceleration Event; (d) upon a
material breach by a party of any covenant or agreement contained in this
Agreement, at the election of the non-breaching party, if such material
breach is not cured within thirty (30) days after written notice from the
non-breaching party, specifying in reasonable detail such breach; provided
however it is agreed that the election of a party to so terminate this
Agreement upon a breach by the other party of this Agreement is not an
exclusive remedy by a party for a breach of this Agreement and each party
shall be entitled to any other remedies available to it under this
Agreement or at law or in equity. Upon termination of this Agreement for
any reason, each party shall be entitled to receive from the other party
all royalty payments and other amounts owed to such party for the period
through the date of termination. Except as provided in Section 5.2.4(e), a
termination of this Agreement shall not terminate the Option granted to
GRC pursuant to Section 5.2 hereof; provided, however that if this
Agreement is terminated pursuant to subsections (c) or (d) above prior to
the end of the fifth calendar quarter following the end of the Initial
Quarter, then for purposes of calculating the Referral Percentage as
described in Section 5.2.2, the percentage shall be determined by dividing
(i) the sum of (x) all Net Billings by LDDI to initial Infomercial
Customers during the period ending on the termination date, (y) all Net
Billings by LDDI to GRC Customers during the period ending on the
termination date and (z) all compensation, whether cash, service credits
or otherwise, received by LDDI from MCI or any other carrier during the
period ending on the termination date arising out of or in connection with
any misappropriation of GRC Customers by MCI or any other
16
<PAGE> 17
carrier, by (ii) the sum of all (x) Net Billings by LDDI to all of its
customers during the period ending on the termination date and (y) all
compensation, whether cash, service credits or otherwise, received by LDDI
from MCI or any other carrier during the period ending on the termination
date arising out of or in connection with any misappropriation of LDDI's
Customers by MCI or any other carrier.
21. Entire Agreement; Amendment; Waiver; Assignment. This Agreement contains
the entire understanding of the parties wit respect to the subject matter
hereof and supersedes in their entirety after the date of this Agreement
all prior agreements and understandings between the parties with respect
to the subject matter hereof whether oral or written, including the
Initial Agreement, which shall have no further force or effect except as
otherwise provided herein. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by the parties
hereto. No waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute, a waiver of any other provisions, whether or
not similar, nor shall any waiver constitute a continuing waiver. This
Agreement shall be binding upon the parties hereto and their respective
successors and permitted assigns. The rights and obligations of a party
may not be assigned without the prior written consent of the other party.
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 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 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.
22. Recitals. The recital clauses to this Agreement are hereby incorporated
and made a part of this Agreement.
23. Notices. All notices, requests, demands and other communications under
this Agreement 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 State 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:
17
<PAGE> 18
If to the Company: Long Distance Direct Holdings, Inc.
One Blue Hill Plaza
Pearl River, New York 10965
Attention: President
Facsimile: (914) 620-1889
If to GRC: Guthy-Renker Corporation
2nd Floor, 3340 Ocean Park
Santa Monica, California 90405
Attention: Bennet Van de Bunt
Facsimile: (310) 581-3443
The parties hereto may change the address at which they are to receive notices
hereunder by notice in writing in the foregoing manner given to the other.
24. Counterparts. This Agreement may be executed in any number of counterparts
each of which, when executed and delivered, shall be deemed to be an
original and all of which, when taken together, shall constitute one and
the same Agreement.
25. Delivery by Facsimile Transmission. Delivery of an executed counterpart of
this Agreement or any exhibit attached hereto by telefacsimile
transmission shall be equally as effective as delivery of an executed hard
copy of the same. Any party delivering an executed counterpart of this
Agreement or any exhibit attached hereto by telefacsimile transmission
shall also deliver an executed hard copy of the same, but the failure by
such party to deliver an executed hard copy shall not affect the validity,
enforceability and binding effect of this Agreement or such exhibit.
IN WITNESS WHEREOF, each of the parties hereto have caused their
duly-authorized officers to execute this Agreement as of the day and year first
above written.
GUTHY-RENKER CORPORATION
By: /s/ Brian J. Kelly
-------------------------------------
Its: Product Distributor
LONG DISTANCE DIRECT HOLDINGS, INC.
By: /s/ Steven Lambert
-------------------------------------
Its: President
18
<PAGE> 19
SCHEDULE 1-A
LDDI and GRC agree that the "negative" amount owed by LDDI to GRC through August
31, 1997 pursuant to the terms of the Initial Agreement is $290,00O. if LDDI and
GRC mutually determine that this "negative" amount owed by LDDI is misstated,
the parties will adjust the amounts due and owing to GRC to reflect the true
amount. The parties agree that the $290,000 owed to GRC shall be paid in monthly
installments of $48,333 commencing on the first day of October, 1997 and
continuing on the first day of each month thereafter until the entire amount has
been paid in full.
<PAGE> 20
SCHEDULE 4
1. Profits (which shall be defined as GRC's gross receipts from LDDI product
sales less actual costs inclusive of a seven percent (7%) overhead fee)
associated with the New Infomercial will be split 50/50 between the
parties. GRC will continue to receive its 2% royalty on all revenue
attributable to GRC-recruited sales agents (as referenced in Paragraph 3
below) from the New Infomercial. LDDI shall fully fund the "negative"
associated with the New Infomercial as referenced in Paragraph 3 below. In
addition, GRC shall have the option to purchase, at a price of $2.00 per
share, one (1) share of LDDI Common Stock for each $666.66 of Net Receipts
(as defined in the Distribution Agreement to which this Schedule 4 is
attached) received by LDDI during the term of the Agreement from long
distance telephone billings to New Infomercial Customers (as defined in
the Distribution Agreement to which this Schedule 4 is attached).
2. GRC agrees to purchase not less than eight million dollars ($8,000,000) in
media if LDDI so requests, so long as LDDI provides GRC the advance
referenced in Paragraph 3 below covering the estimated "negative;" GRC
will provide LDDI access to GRC's P.I. media consistent with access
provided GRC-owned products. GRC will continue to finance LDDI product
purchases if LDDI so requests. GRC will also continue to fund inventory at
a level sufficient to match the sales anticipated from the planned media
buy. GRC's product financing will be recouped as part of the "negative"
solely funded by LDDI.
3. LDDI will continue to solely fund the "negative" associated with the New
Infomercial; LDDI will continue to provide GRC a two week advance payment,
made via wire transfer, covering the estimated "negative." The "negative"
will consist of all costs incurred by GRC in airing the New Infomercial
and distributing the LDDI product along with an overhead fee equal to 7%
of GRC's sales. GRC will continue to receive a 2% royalty on all LDDI
revenue received by LDDI from all sales agents purchasing the LDDI product
plus all revenue received by LDDI from people who respond to the New
Infomercial by purchasing the LDDI product or people who choose not to
purchase the LDDI product during their initial call but are ultimately
"closed" by LDDI. GRC will charge LDDI its actual media costs without the
addition of a media handling fee (including providing LDDI with GRTV time
at no less than a 1.7-to-1 media ratio) incurred instead of the twelve
percent (12%) media buying commission GRC is presently charging LDDI.
<PAGE> 21
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 "Distribution Agreement" shall mean the
Distribution Agreement between the Company and the Holder dated as of October 1,
1997.
(c) 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.
(d) The term "Holder" shall mean Guthy-Renker Corporation, a
Delaware corporation, or any permitted transferee of the Option or any
Registrable Securities.
(e) The term "Option" shall mean the option granted by the
Company to the Holder pursuant to the Distribution Agreement.
(f) The term "person" shall mean an individual, partnership,
corporation, trust, unincorporated organization or other entity.
(g) The term "Registrable Securities" shall mean shares of
Common Stock of the Company issuable upon exercise of the Option. 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 disposed of 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.
Exhibit A
<PAGE> 22
(h) 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 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).
(i) 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.
(j) 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.
(k) The term "Shares" shall mean shares of Common Stock of the
Company issued upon exercise of the Option.
2. Sale or Transfer of Shares; Legend.
(a) The Shares shall not be sold or transferred unless either
(i) they first shall have been registered under the Securities Act, or (ii) the
Company first shall have been furnished with an opinion of legal counsel,
reasonably satisfactory to the Company, to the effect that such sale or transfer
is exempt from the registration requirements of the Securities Act.
(b) Notwithstanding the foregoing, no registration or opinion
shall be required for a transfer made in accordance with Rule 144 under the
Securities Act.
(c) Each certificate representing the Shares shall bear a
legend substantially in the following form:
2
<PAGE> 23
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS AND UNTIL SUCH SHARES
ARE REGISTERED UNDER SUCH ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY IS OBTAINED TO THE EFFECT THAT SUCH
REGISTRATION IS NOT REQUIRED.
3. Demand Registration.
(a) The Company agrees to prepare and file with the SEC a
registration statement under the Securities Act covering the public resale by
the Holder of Registrable Securities (together with all supplements and
amendments, the "Registration Statement") within sixty (60) days following
written notice from GRC, provided that GRC may not give such written notice
until after the Determination Date (as defined in the Distribution Agreement) or
the Second Determination Date (as defined in the Distribution Agreement), as the
case may be, and the Company shall use its best efforts to cause such
Registration Statement to become effective as soon as possible thereafter, all
in accordance with the provisions of this Agreement.
(b) if the Holder does not intend to distribute the
Registrable Securities by means of an underwriting, the Company may, if it is
then eligible to do so, effect the registration of the Registrable Securities on
Form S-3 or any comparable or successor form or forms if such form is available
for use by the Company pursuant to and in accordance with the Securities Act.
The Company agrees to file all reports and supplements required to be filed by
the Company under Section 13(a) of the Exchange Act.
(c) The Company will pay all Registration Expenses in
connection with each Registration Statement filed pursuant to Section 10.3 of
this Agreement.
(d) The Company shall not be required to effect more than two
registrations pursuant to paragraph (a) of this Section 3.
4. Failure to Register.
In the event that the Company fails to file a registration
statement within the time specified in Section 3 (the "Registration Filing
Deadline"), Optionee shall have the irrevocable right and option to purchase, at
the same price as the exercise price of the shares issuable upon exercise of the
Option (the "Option Price"), a number of shares of the Company's Common Stock
equal to one percent (1%) of the number of Shares as to which the Company has
failed to file a registration statement as provided in this Certificate. In
addition, for each period of thirty (30) days after the Registration Filing
Deadline that the Company fails to file a registration statement, Optionee shall
have the irrevocable right and option to purchase, at the Option Price, an
additional number of shares of the Company's Common Stock equal to one percent
(1%) of the number of
3
<PAGE> 24
Shares as to which the Company has failed to file a registration statement. The
option granted under this Section 4 shall be exercisable upon the same terms and
conditions as the Option and the shares issuable upon exercise of such Option
shall be deemed to be Shares issued under the Option for purposes of this
Agreement.
5. 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 covered by
such registration statement.
(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 tune 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.
(d) Notify Holder promptly after the Company shall receive
notice that any registration statement, supplement or amendment has become
effective, any registration statement is required to be amended or supplemented,
or any stop order with respect thereto has been issued.
(e) At its expense, the Company will use its best efforts to
keep such registration statement effective for a period of two (2) years after
the date of termination of the Distribution Agreement or the sale of all of the
Registrable Securities covered thereby, whichever occurs first; provided, that
if the Company fails to file a Registration Statement with the SEC within the
time set forth in Section 3 above, the Company shall maintain the effectiveness
of such Registration Statement for an additional period of time after the date
of termination of the Distribution Agreement equal to the period of time between
the date by which the Company agreed to file such registration statement and the
date it was actually filed; and provided, further that the Company shall not be
obligated to maintain the effectiveness of any registration statement with
respect to any Registrable Securities issuable upon exercise of the Option
granted by the Company to the Holder that have not been purchased prior to the
expiration of the Option. The Company agrees to prepare and file with the SEC
such amendments and supplements, including post-effective
4
<PAGE> 25
amendments, to a registration statement as may be necessary to keep such
registration statement effective for the applicable period.
6. 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 Certificate.
7. Indemnification.
(a) To the extent permitted by law, the Company will indemnify
each Holder, each of its officers, directors and constituent partners, legal
counsel for the Holders, and each person controlling such Holder, with respect
to which registration of Registrable Securities has been effected pursuant to
this Certificate, and each underwriter engaged by the Holder, if any, and each
person who controls any such underwriter, against all claims, losses, damages or
liabilities (or actions in respect thereof) to the extent such claims, losses,
damages or liabilities arise out of or are based upon any untrue statement (or
alleged untrue statement) of a material fact contained in any prospectus or
other document (including any related registration statement) incident to any
such registration, or are based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or any violation by the Company of any rule
or regulation promulgated under the Securities Act applicable to the Company and
relating to action or inaction required of the Company in connection with any
such registration; and the Company will reimburse each such Holder, each such
underwriter and each person who controls any such Holder or underwriter, for any
legal and any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action;
provided, however, that the indemnity contained in this Section 7 shall not
apply to amounts paid in settlement of any such claim, loss, damage, liability
or action if settlement is effected without the consent of the Company (which
consent shall not unreasonably be withheld); and provided, further, that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based upon any untrue
statement or omission based upon written information furnished to the Company by
such Holder, underwriter engaged by the Holder, or person controlling the Holder
and stated to be for use in such prospectus or other documents.
(b) To the extent permitted by law, each Holder will, if
Registrable Securities held by such Holder are included in the securities as to
which registration is being effected pursuant to this Certificate, indemnify the
Company, each of its directors and officers, each legal counsel and independent
accountant of the Company, each underwriter, if any, of the Company's securities
covered by such registration statement, each person who controls the Company or
such underwriter within the meaning of the Securities Act, and each other such
Holder, each of its officers, directors and constituent partners and each person
controlling such other Holder, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based upon any
untrue statement (or alleged untrue statement) of a material fact contained in
any such
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registration statement, prospectus or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or any violation by
such Holder of any rule or regulation promulgated under the Securities Act
applicable to such Holder and relating to action or inaction required of such
Holder in connection with any such registration; and will reimburse the Company,
such Holders, such directors, officers, partners, persons, law and accounting
firms, underwriters or control persons for any legal and any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, in each case to the extent, but only
to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, or other document in reliance upon and in conformity with written
information furnished to the Company by such Holder and stated to be
specifically for use in such registration statement, prospectus or other
document; provided, however, that the indemnity contained in this Section 7
shall not apply to amounts paid in settlement of any such claim, loss, damage,
liability or action if settlement is effected without the consent of the Holder
(which consent shall not unreasonably be withheld); and provided, further, that
in no event shall any indemnity under this Section 7(b) exceed the gross
proceeds from the sale of shares covered by such prospectus received by the
Holder.
(c) Each party entitled to indemnification under this Section
7 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein within a reasonable amount of time, if such
failure is prejudicial to the Indemnifying Party of its obligations under this
Certificate, shall relieve the Indemnifying Party of any liability to the
Indemnified Party under this Section 7, but not of any obligation rising apart
from this Certificate. No Indemnifying Party, in the defense of any such claim
or litigation, shall, except with the consent of each Indemnified Party, consent
to entry of any judgment or enter into any settlement which does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. If any such Indemnified Party shall have reasonably concluded that
there may be one or more legal defenses available to such Indemnified Party
which are different from or additional to those available to the Indemnifying
Party, or that such claim or litigation involves or reasonably could have a
material adverse effect upon matters beyond the scope of the indemnity agreement
provided in this Certificate, the Indemnifying Party shall not have the right to
assume the defense of such action on behalf of such Indemnified Party and such
Indemnifying Party shall reimburse such Indemnified Party and any person
controlling such Indemnified Party for that portion of the fees and expenses of
any counsel retained by the Indemnified Party which are reasonably related to
the matters covered by the indemnity agreement provided in this Section 7.
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8. Transfer of Registration Rights; Survival of Registration Rights.
The rights to cause the Company to register securities granted by the Company
under this Certificate to the Holder may be assigned by any Holder to a
transferee or assignee of any Registrable Securities; provided, however, that
the Company must be given written notice prior to the time of said transfer,
stating the name and address of said transferee or assignee and identifying the
securities with respect to which such registration fights are being assigned.
The rights to cause the Company to register securities granted by the Company
under this Certificate to the Holder shall survive the termination of the
Distribution Agreement for a period of eighteen (18) months.
9. Adjustments Affecting Securities. The Company will not take any
action or permit any change to occur, with respect to the Shares or the
Registrable Securities that would affect adversely the ability of the Holders to
include the Registrable Securities in a registration undertaken pursuant to this
Certificate or the marketability of the Shares or the Registrable Securities in
any registration. If, and as often as, there is any change in the Common Stock
of the Company by way of a stock split, stock dividend, combination or
reclassification; or through a merger, consolidation or reorganization, or by
any other means, appropriate adjustment shall be made in the provisions hereof
so that the rights and privileges granted hereby shall continue with respect to
the Shares and the Registrable Securities.
10. Miscellaneous.
(a) This Certificate shall be governed in all respects by the
laws of the State of California as applied to agreements among California
residents entered into and to be performed entirely within California.
(b) Except as otherwise expressly provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
(c) All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by United States first-class
mail, postage prepaid, sent by facsimile or delivered personally by hand or
nationally recognized courier addressed (a) if to the Holder, at 3340 Ocean
Park, Second Floor, Santa Monica, California 90405 - Facsimile (310) 581-3443,
or at such other address or facsimile number as such Holder or permitted
assignee shall have furnished to the Company in writing, or (b) if to the
Company, at One Blue Hill Plaza, Pearl River, New York 10965 - Facsimile (914)
620-1889, or at such other address or facsimile number as the Company shall have
furnished to the Holder in writing. All such notices and other written
communications shall be effective on the date of mailing, facsimile transfer or
delivery.
(d) The titles of the sections and subsections of this
Certificate are for convenience of reference only and are not to be considered
in construing or interpreting this Certificate.
(e) No supplement, modification or amendment of this
Certificate shall be binding unless executed in writing by the parties hereto.
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The Company and the Holder have caused this Registration Rights
Certificate to be duly executed as of October 1, 1997.
COMPANY:
LONG DISTANCE DIRECT HOLDINGS, INC.
By: /s/ Steven Lambert
-------------------------------------
Its: President
HOLDER:
GUTHY-RENKER CORPORATION
By: /s/ Brian J. Kelly
-------------------------------------
Its: Product Distributor
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Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in Amendment No. 2 to the Registration Statement
on Form SB-2 (File No. 333-31563) of our report dated March 21, 1997 relating
to the financial statements of Long Distance Direct Holdings, Inc. for the
years ended December 31, 1996 and 1995, respectively, and the reference to our
firm under the caption "EXPERTS" in the Prospectus.
Adelman, Katz & Mond, LLP
Certified Public Accountants
New York, NY
October 14, 1997
LONG DISTANCE DIRECT HOLDINGS, INC.
FORM SB-2
EXHIBIT 23.1
