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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended May 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-27046
QUINTEL ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3322277
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Blue Hill Plaza
Pearl River, New York 10965
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 620-1212
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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The number of shares outstanding of the Registrant's common stock is
15,246,234 (as of 7/10/96).
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QUINTEL ENTERTAINMENT, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
QUARTER ENDED MAY 31, 1996
ITEMS IN FORM 10-Q
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PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to
a Vote of Security Holders 16
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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MAY 31, NOVEMBER 30,
1996 1995
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ASSETS: (UNAUDITED)
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Current assets:
Cash and cash equivalents $ 16,519,449 $ 3,570,468
Accounts receivable, trade 7,349,639 10,097,629
Deferred tax asset 3,768,801 39,957
Due from related parties 691,950 67,162
Prepaid expenses and other current assets 2,572,996 381,292
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Total current assets 30,902,835 14,156,508
Property and equipment, at cost, net of
accumulated depreciation 240,550 142,369
Investment in joint venture, at equity 1,462,400 1,345,304
Other assets 108,264 1,325,775
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$ 32,714,049 $ 16,969,956
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LIABILITIES:
Current liabilities:
Note payable $ 684,713
Accounts payable 1,346,399 $ 1,269,647
Accrued expenses 1,014,449 2,351,644
Reserve for customer chargebacks 5,853,781 4,025,130
Loans payable 1,685,383 2,643,522
Due to related parties 2,850,839 354,751
Income taxes payable 1,419,505 294,187
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Total liabilities 14,855,069 10,938,881
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STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value;
1,000,000 shares authorized;
none issued and outstanding
Common stock - $.001 par value;
authorized 50,000,000 shares; issued
and outstanding 15,236,167 and
12,000,000 shares, respectively 15,236 12,000
Additional paid-in capital 14,534,421 441,258
Retained earnings 3,309,323 5,597,817
Less subscriptions receivable (20,000)
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Total stockholders' equity 17,858,980 6,031,075
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$ 32,714,049 $ 16,969,956
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</TABLE>
See accompanying notes to consolidated financial statements.
3
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QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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THREE MONTHS ENDED SIX MONTHS ENDED
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MAY 31, MAY 31,
1996 1995 1996 1995
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Net revenue $ 13,765,685 $ 12,074,304 $ 29,784,256 $ 20,289,303
Cost of sales 12,127,246 8,430,024 24,805,226 15,239,225
------------ ------------ ------------ ------------
Gross profit 1,638,439 3,644,280 4,979,030 5,050,078
Selling, general and
administrative expenses 1,188,499 796,143 3,261,873 1,292,390
------------ ------------ ------------ ------------
449,940 2,848,137 1,717,157 3,757,688
Interest expense (90,901) (125,236) (230,862) (143,921)
Other income, net 71,802 183,200 437,912 183,200
Equity in earnings of joint venture 712,066 488,655 3,149,096 646,443
------------ ------------ ------------ ------------
1,142,907 3,394,756 5,073,303 4,443,410
Provision for income taxes 547,455 101,450 175,662 103,585
------------ ------------ ------------ ------------
Net income $ 595,452 $ 3,293,306 $ 4,897,641 $ 4,339,825
============ ============ ============ ============
Pro Forma Data (Note 1):
Income before pro forma adjustments $ 1,142,907 $ 3,394,756 $ 5,073,303 $ 4,443,410
Pro forma income tax provision 547,455 1,315,468 175,662 1,721,882
------------ ------------ ------------ ------------
Pro forma net income $ 595,452 $ 2,079,288 $ 4,897,641 $ 2,721,528
------------ ------------ ------------ ------------
Pro forma net income per share $ 0.04 $ 0.17 $ 0.31 $ 0.23
============ ============ ============ ============
Weighted average common shares
outstanding 15,778,844 12,000,000 15,778,844 12,000,000
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
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QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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SIX MONTHS ENDED
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MAY 31, MAY 31,
1996 1995
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Cash flows from operating activities:
Net income $ 4,897,641 $ 4,339,825
Items not affecting cash:
Depreciation and amortization 21,808 3,907
Reserve for customer chargebacks 1,828,651 1,199,147
Deferred income taxes (3,728,844) 19,509
Equity in net earnings of joint venture, net
of dividends received (117,096) (6,443)
Changes in assets and liabilities:
Accounts receivable 2,747,990 (5,315,677)
Prepaid expenses and other current assets (2,214,984) (536,506)
Accounts payable 76,752 779,107
Income tax payable 1,125,318 84,076
Due to related parties 1,871,300 (99,656)
Other, principally accrued expenses (32,915) (405,512)
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Net cash provided by operating activities 6,475,621 61,777
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Cash flows from investing activities:
Investment in joint venture (25,000)
Capital expenditures (119,989) (61,372)
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Net cash used in investing activities (119,989) (86,372)
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Cash flows from financing activities:
Proceeds from collection of common stock subscription 20,000
Proceeds from issuance of common stock, net 13,402,075
Proceeds from exercise of stock options 55,835
Distributions to shareholders (3,000,000) (2,121,137)
Principal payments on notes payable to shareholders (2,926,422)
Loans payable, net (958,139) 2,887,560
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Net cash provided by financing activities 6,593,349 766,423
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Net increase in cash and cash equivalents 12,948,981 741,828
Cash and cash equivalents, beginning of period 3,570,468 981,073
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Cash and cash equivalents, end of period $ 16,519,449 $ 1,722,901
============ ============
Non-cash financing activities:
Notes issued to shareholders for undistributed
S corporation earnings $ 3,611,135
Contribution of capital from S corporation 575,000
</TABLE>
See accompanying notes to consolidated financial statements.
5
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QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL:
The consolidated financial statements for the three and six month
periods ended May 31, 1996 and May 31, 1995 are unaudited and reflect
all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of
the financial position and operating results for the interim period.
The consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto, together
with management's discussion and analysis of financial condition and
results of operations, contained in the Company's Annual Report on Form
10-K for the fiscal year ended November 30, 1995, and Quarterly Report
on Form 10-Q for the quarter ended February 29, 1996. The results of
operations for the three and six months ended May 31, 1996 are not
necessarily indicative of the results for the entire fiscal year ending
November 30, 1996.
2. EARNINGS PER SHARE:
Pro forma net earnings per share have been computed by dividing net
earnings by the weighted average number of common and common
equivalent shares outstanding during the period, computed in
accordance with the treasury stock method.
3. ADVERTISING EXPENSES:
The Company expenses all advertising costs during the year in which
they are incurred, except for certain media costs. For interim
purposes, media costs are expensed as the advertising occurs. Included
in prepaid expenses and other current assets is approximately $611,265
relating to prepaid advertising at May 31, 1996. All costs will be
expensed prior to year end. Total advertising expense incurred for the
three months ended May 31, 1996 and May 31, 1995 were $6,946,526 and
$4,276,612, respectively, and for the six months ended May 31, 1996
and May 31, 1995 were $12,498,775 and $5,451,941, respectively.
4. NEW LAUDERDALE:
On January 17, 1996, the Company entered into a letter of intent to
acquire the remaining 50% interest of New Lauderdale, L.C. from PRN. In
payment for the interest being acquired, the Company has agreed to
issue to PRN 3,200,000 shares of its common stock. Shares totalling up
to 1,200,000 shall be subject to forfeiture in the event New
Lauderdale's programs do not achieve certain agreed-upon pre-tax
earning levels for 1996 or the first and second quarters of that year.
As of the six months ended May 31, 1996, all earning levels have been
achieved.
6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In addition, the Company may make available to PRN's shareholders an
interest-bearing loan secured by the shares issued to cover a portion
of their tax liability attributable to the transaction in the event
that the Company's stock trades below certain levels. The loan shall be
due and payable no later than two years from the date it is made, or
sooner, if the Company's stock trades at certain levels. Consummation
of this transaction is subject to the parties completing due diligence,
securing requisite corporate and other approvals and the execution of
definitive acquisition agreements. The following is condensed financial
data for New Lauderdale:
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3 MONTHS ENDED 6 MONTHS ENDED
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MAY 31, MAY 31,
1996 1995 1996 1995
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(UNAUDITED) (UNAUDITED)
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Net revenues $19,657,602 $ 4,060,149 $41,904,148 $ 5,358,688
Gross profit 2,833,513 1,428,447 8,678,575 1,813,633
Net income 1,424,132 977,309 6,298,192 1,292,885
</TABLE>
5. NEW SUBSIDIARIES:
The Company formed three new wholly-owned subsidiaries during May 1996.
Quintel Products, Inc. and Quintelco, Inc. were formed for the purpose
of developing new business opportunities. NL Corp. was formed for the
purpose of acquiring the remaining 50% interest in New Lauderdale, L.C.
(see Note 4). During the three and six month periods ended May 31,
1996, Quintelco, Inc. and NL Corp. were inactive. Quintel Products,
Inc.'s operations were not significant during its start-up month of
May, 1996.
6. SUBSEQUENT EVENT:
During July 1996, the Company entered into a joint venture agreement
with Paragon Cellular Services, Inc., an unrelated party, to form
Quintel Cellular, LLC, a Delaware limited liability company. The
Company will retain a 50% interest in the joint venture and will
account for it under the equity method of accounting. Quintel Cellular,
LLC expects to market, lease and sell cellular telephones and related
services.
7
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 1996 AND MAY 31, 1995
Net revenue for the three months ended May 31, 1996 was $13,765,685, an
increase of $1,691,381 or 14% as compared to $12,074,304 for the three months
ended May 31, 1995. The increase in net revenue was attributable to increased
calls to the Company's "900" number entertainment services. For the three
months ended May 31, 1996, net revenues from the Company's enhanced voice mail
network services product ("VM product") approximated 3% of net revenues and
net revenues from "900" number entertainment services approximated 97% of net
revenues. For the three months ended May 31, 1995, net revenues from the VM
product (marketed as membership clubs ("Club product") in such three months)
approximated 46% of net revenues and net revenues from "900" number
entertainment services approximated 54% of net revenues. The Provision for
Chargebacks for the three months ended May 31, 1996 was $10,297,178, an
increase of $6,641,823, or 182%, as compared to $3,655,355 for the three months
ended May 31, 1995. The increase in gross revenues has been partially offset
by the rate of consumer chargebacks. A discussion of chargebacks appears later
in this section under the caption "Increased Chargebacks, Regional Telephone
Carrier and Regulatory Matters."
Cost of sales for the three months ended May 31, 1996 was $12,127,246, an
increase of $3,697,222, or 44%, as compared to $8,430,024 for the three months
ended May 31, 1995. The increase was primarily attributable to increased
service bureau fees and increases in advertising costs. Cost of sales as a
percentage of net revenue increased to approximately 88% from approximately 70%
for these periods. As customers receive entertainment services, the Company
recognizes revenues and incurs the costs of fulfillment, including
transmission, billing and collection, psychic and other costs. However, as
chargebacks are recognized, the related revenues are refunded while the cost
burden remains. Therefore the effect of increased chargebacks in the current
quarter was a contributing factor to the increase in cost of sales as a
percentage of net revenue.
Selling, general and administrative expenses for the three months ended May
31, 1996 were $1,188,499, an increase of $392,356, or 49%, as compared to
$796,143 for the three months ended May 31, 1995. This increase was primarily
attributable to increases in the Company's personnel and the Company's
relocation to larger office space to accommodate the growth of its operations.
8
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Interest income of $142,497 for the three months ended May 31, 1996
related to the investing in short term securities of a portion of the proceeds
of the initial public offering of the Company's common stock.
For the three months ended May 31, 1996, the Company recognized equity in
earnings of the New Lauderdale joint venture of $712,066, $782,000 of which was
distributed to the Company during such three months. This compares to $488,655
equity in earnings and $640,000 distributed for the comparable prior period.
Such increases reflect New Lauderdale's increased earnings which were affected
by increased chargebacks. New Lauderdale experienced increased chargebacks
similar to those experienced by the Company and the discussion under the
caption "Increased Chargebacks, Regional Telephone Carrier and Regulatory
Matters" later in this section also applies to New Lauderdale. The recognized
equity in earnings reflects the Company's 50% interest in New Lauderdale's
income for such period. In the event that the Company acquires the remaining
50% interest in New Lauderdale, as is presently contemplated, the Company will
no longer account for New Lauderdale's operations under the equity method of
accounting, but instead will treat New Lauderdale as a subsidiary and include
its results of operations on a consolidated basis in the Company's consolidated
financial statements from the date of acquisition.
The Net Tax Provision of $547,455 for the three months ended May 31, 1996
was calculated using C corporation statutory rates.
Net income decreased to $595,452 for the three months ended May 31, 1996
from $3,293,306 for the prior comparable period, a decrease of $2,697,854, or
82%. This decrease was primarily due to increased chargebacks. A discussion
of chargebacks appears later in this section under the caption "Increased
Chargebacks, Regional Telephone Carrier and Regulatory Matters."
9
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SIX MONTHS ENDED MAY 31, 1996 AND MAY 31, 1995
Net revenue for the six months ended May 31, 1996 was $29,784,256, an
increase of $9,494,953 or 47% as compared to $20,289,303 for the six months
ended May 31, 1995. The increase in net revenue was attributable to increased
enrollments, during the three months ended February 29, 1996, in the Company's
VM product, which were originally marketed as the Club product, and increased
calls to the Company's "900" number entertainment services during all of the six
months ended May 31, 1996. For the six months ended May 31, 1996, VM product
net revenues approximated 29% of net revenues and "900" number entertainment
services approximated 71% of net revenues. For the six months ended May 31,
1995, VM product (marketed as Club product in such six months) net revenues
approximated 45% of net revenues and "900" number entertainment services
approximated 55% of net revenues. The Provision for Chargebacks for the six
months ended May 31, 1996 was $19,970,251, an increase of $13,386,801, or 203%,
as compared to $6,583,450, for the six months ended May 31, 1995. The increase
in gross revenues has been partially offset by the rate of consumer chargebacks.
A discussion of chargebacks appears later in this section under the caption
"Increased Chargebacks, Regional Telephone Carrier and Regulatory Matters."
Cost of sales for the six months ended May 31, 1996 was $24,805,226, an
increase of $9,566,001, or 63%, as compared to $15,239,225 for the six months
ended May 31, 1995. The increase was primarily attributable to increased
service bureau fees and increases in advertising costs. Cost of sales as a
percentage of net revenue increased to approximately 83% from approximately 75%
for these periods. As customers receive entertainment services, the Company
recognizes revenues and incurs the costs of fulfillment, including
transmission, billing and collection, psychic and other costs. However, as
chargebacks are recognized, the related revenues are refunded while the cost
burden remains. Therefore the effect of increased chargebacks in the current
quarter was a contributing factor to the increase in cost of sales as a
percentage of net revenue.
Selling, general and administrative expenses for the six months ended May
31, 1996 were $3,261,873, an increase of $1,969,483, or 152%, as compared to
$1,292,390 for the six months ended May 31, 1995. This increase was primarily
attributable to increases in the Company's personnel and the Company's
relocation to larger office space to accommodate the growth of its operations.
Interest income of $284,698 for the six months ended May 31, 1996 related
to the investing in short term securities of a portion of the proceeds of the
initial public offering of the Company's common stock.
10
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For the six months ended May 31, 1996, the Company recognized equity in
earnings of the New Lauderdale joint venture of $3,149,096, $3,032,000 of which
was distributed to the Company during such six months. This compares to $646,443
equity in earnings and $640,000 distributed for the comparable prior period.
Such increases reflect New Lauderdale's increased earnings which were affected
by increased chargebacks. New Lauderdale experienced increased chargebacks
similar to those experienced by the Company and the discussion under the caption
"Increased Chargebacks, Regional Telephone Carrier and Regulatory Matters" later
in this section also applies to New Lauderdale. The recognized equity in
earnings reflects the Company's 50% interest in New Lauderdale's income for such
period. New Lauderdale commenced operations during the six months ended May 31,
1995 and the Company recognized equity in earnings of joint venture of $646,443
for such six months. In the event that the Company acquires the remaining 50%
interest in New Lauderdale, as is presently contemplated, the Company will no
longer account for New Lauderdale's operations under the equity method of
accounting, but instead will treat New Lauderdale as a subsidiary and include
its results of operations on a consolidated basis in the Company's consolidated
financial statements from the date of acquisition.
The Net Tax Provision of $175,662 for the six months ended May 31, 1996
included a deferred tax benefit relating to the benefit received when the
Company converted to the accrual basis of accounting in connection with the
termination of its S corporation status.
Net income increased to $4,897,641 for the six months ended May 31, 1996
from $4,339,825 for the prior comparable period, an increase of $557,816, or
13%. This increase was primarily due to the increase of $2,502,653 in income
attributable to the Company's 50% equity interest in New Lauderdale, partially
offset by the decrease in income from operations of $2,040,531 which was due to
increased chargebacks. A discussion of chargebacks appears later in this
section under the caption "Increased Chargebacks, Regional Telephone Carrier
and Regulatory Matters."
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $16,047,766 at May 31, 1996. The
Company has historically financed its working capital requirements principally
through cash flow from operations and receivables financing. In December 1995,
the Company received net proceeds of approximately $13,402,000 from the initial
public offering of its shares of Common Stock.
11
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The Company's primary cash requirements have been to fund the cost of
advertising and promotion. Chargebacks are paid currently from receivables due
from carriers through the Company's service bureaus. Other than the purchase of
equipment in connection with the establishment of in-house telemarketing
operations, the expansion of its customer service department and the relocation
to larger headquarters offices, the Company currently has no plans or material
commitments for capital expenditures. The Company anticipates, based on
currently proposed plans and assumptions relating to its operations (including
the substantial costs associated with its proposed advertising and marketing
activities), that projected cash flow from operations and available cash
resources, including its financing arrangements with service bureaus, will be
sufficient to satisfy its anticipated cash requirements for at least the next
twelve months. The Company does not currently have any long-term obligations
and does not currently intend to incur any such obligations in the future.
During May, 1996, the Company formed three new wholly owned subsidiaries,
Quintel Products, Inc., Quintelco, Inc. and NL Corp. During the three months
ended May 31, 1996, only Quintel Products, Inc. was active. During May, 1996,
its start up month, Quintel Products contributed an immaterial amount to net
income and did not impose any significant cash requirements on the Company.
During the next twelve months, none of these new subsidiaries are expected to
change the working capital or cash requirements of the Company as discussed
above.
During July, 1996, the Company entered into a joint venture agreement with
Paragon Cellular Services, Inc., an unrelated party, to form Quintel Cellular,
LLC. The Company will retain a 50% interest in the joint venture. The joint
venture agreement requires the Company to provide loans to Quintel Cellular,
LLC in the initial amount of $250,000 with additional amounts at the Company's
discretion. Such loans would bear interest at the rate of 7% per annum and be
repaid in installments as a percentage of the joint venture's retained
earnings. The Company expects to be able to fund such loans from its operating
cash flow over the next twelve months and that such loans, if extended, would
not have an adverse effect on the working capital position of the Company.
12
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INCREASED CHARGEBACKS, REGIONAL TELEPHONE CARRIER AND REGULATORY MATTERS
During the previous quarter (the three month period ended February 29,
1996), the Company increased marketing activities and experienced high
enrollments of new customers which caused the Company to experience a high
level of acceptance difficulties with its VM product. These acceptance
difficulties occurred at two levels, consumer and regional telephone carrier.
At the consumer level, customers did not always relate the VM product
billing description on their telephone bills to the entertainment service that
they purchased. This prompted an increase in customer service inquiries to
both the Company and ESBI, the billing service bureau conduit to the regional
telephone carriers and telephone companies. Accordingly, for the first six
months of 1996, the Company experienced a higher level of customer
cancellations and chargebacks relating to the $19.95 per month VM product.
Management believes that its VM products can be successfully modified and
repositioned with shifts in emphasis as part of the marketing process. The
Company and ESBI expanded their customer service departments during the three
months ended February 29, 1996 to better educate the consumer about the
product. Telemarketing efforts during the three months ended May 31, 1996 were
reduced as the marketing shift is being accomplished. Although there can be no
assurance that these marketing efforts and changes will be successful,
management anticipates that the marketing shift along with the expansions in
customer service will reduce customer cancellations and chargebacks for the VM
product to acceptable levels. Several variations, including different pricing
structures, of a substantially revised VM product continue to be tested with
many tests yielding positive results. Management expects one or more of the
successful versions to be actively marketed during the second half of the
fiscal year. The pace of telemarketing and enrollments will proceed gradually,
along with increased customer service support, so as not to repeat the
difficulties of the first half of the fiscal year. Due to the telephone
company billing and collection delays inherent in this business, the higher
cancellation and chargeback level began in the first quarter of fiscal 1996,
continued during the second quarter of fiscal 1996 and may continue into the
third quarter of fiscal 1996.
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At the regional telephone carrier level, five of the regional telephone
carriers suspended billing of the Company's VM products at different times
during the first six months of 1996. The suspensions were the result of the
carriers' belief that the Company and ESBI were unable to provide adequate
customer services to VM product customers in the regions serviced by the
carriers. The Company did not anticipate the increase in customer service
calls during the first three months of fiscal 1996 and was not able to
adequately handle the increased customer service call volume. As stated above,
both the Company and ESBI expanded their customer service departments in
response to such needs. Four of the five carriers, in reaching their
decisions, specifically addressed the Company's VM product and the remaining
carrier addressed the billing platform that encompasses the Company's VM
product. The Company has already resumed billing the VM product with three of
the carriers that specifically addressed the difficulties associated with the
VM product. For the carrier that addressed the difficulties
associated with the billing platform, the Company resumed billing through an
alternate platform with another service bureau. For the four carriers that
resumed billings, the suspensions each lasted less than sixty (60) days and did
not have a material impact on the Company's cash flows and operations.
The Company completed negotiations with the final carrier that suspended
VM product billings and this carrier has agreed to resume the Company's VM
product billings in August. However, the delays in this process resulted in
lost revenues. During the first six months of fiscal 1996, VM product net
revenues billed through this carrier approximated 10% of total net revenues.
Marketing shifts between the VM Product and "900" business are expected to
partially offset the impact of this carrier's suspension. Though the full
amount of the impact of the lost revenues is presently not known, the Company
did incur marketing and fulfillment costs in this carrier's region during the
first six months of fiscal 1996. Therefore, the impact to date has been
significant as costs were incurred without a corresponding revenue stream.
Additional costs for the VM product in this carrier's region will not be
incurred until VM product billings in this region are resumed.
The VM product is independent of the Company's "900" number entertainment
services and these difficulties do not impact the "900" number portion of the
Company's business. The carrier billing suspensions of the VM product are also
limited to the geographic regions serviced by the individual carriers.
The Company intends to continue its promotion of a VM product or similar
voice-mail entertainment services concept as previously discussed. Also, as
previously discussed, recent shifts in marketing and other strategies have
increased the Company's "900" business net revenues, both absolutely and in
relation to the VM product. Therefore, the Company expects that revenues from
the VM (or similar) product will account for a decreasing portion of the
Company's net revenues in the future. Since any reduction in VM product
contributions to total net revenues are expected to be more than offset by
increases in the Company's "900" business net revenues, total net revenues are
expected to increase. However no assurance can be given that these projections
will prove to be accurate.
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In the normal course of business, all of the Company's entertainment
services and advertisements are reviewed by the Company's regulatory counsel,
and management believes that the Company is in substantial compliance with all
material federal and state laws and regulations governing its provision of
"500," "800" and "900" number entertainment services, all of its billing and
collection practices and the advertising of its services and has obtained or is
in the process of obtaining all licenses and permits necessary to engage in
telemarketing activities. Although the Company from time to time receives
requests for information from, or is forwarded consumer complaints by,
regulatory authorities, the Company has not been subject to any enforcement
actions by any regulatory authority. Nevertheless, civil investigative demands
have been received from the Attorneys' General of the States of Idaho, Missouri,
New York, Pennsylvania and Texas, as well as from the Tennessee Public Service
Commission, seeking certain information relating to the Company. Certain
information relating to the Company's programs also has been subpoenaed by the
Attorney General of the State of Texas from West Outbound and from the
Attorneys' General of the States of Texas and Idaho from ESBI. The Company
believes that the information has been sought as part of pending investigations
in connection with certain of the Company's marketing activities. The
investigation by the State of Idaho has been discontinued. The Pennsylvania
Attorney General's investigation has concluded with issuance of a warning letter
to the Company. While management believes that these other investigations will
not result in enforcement actions or claims which would have a material adverse
effect on the Company, there can be no assurance that this will be the case.
Amendments to or interpretations and enforcement of existing statutes and
regulations, adoption of new statutes and regulations and the Company's
expansion into new jurisdictions and "900" number services could require the
Company to continually alter methods of operations, modify the content or use of
its services or the manner in which it markets its services, which could result
in material interruptions in its operations. Failure to comply with applicable
laws and regulations could subject the Company to civil remedies, including
substantial fines, penalties and injunctions, as well as possible criminal
sanctions, which could have a material adverse effect on the Company.
15
<PAGE> 16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As reported in the Registrant's Annual Report on Form 10-K for the
fiscal year ended November 30, 1995, in October 1995, ESBI, a billing service
bureau conduit to the regional telephone carriers and telephone companies used
by the Registrant, was served with a notice of violation under California's
Consumer Legal Remedies Act by an individual acting in her own right and for
others similarly situated, relating to certain billing practices, including
ESBI's alleged billing for one of the Registrant's "800" numbers which the
Registrant allegedly advertised to consumers as a free call. Such notice
demanded that the class of claimants represented therein be compensated for
violations of such consumer laws.
On April 2, 1996, a complaint was filed in the Superior Court of
California, County of Los Angeles, which seeks class action certification
pursuant to California Civil Code Section 1770, et. sec., on behalf of all
consumers alleged to have been damaged by billings for services advertised as
free. The complaint seeks injunctive relief, general damages and punitive
damages arising from alleged fraudulent and misleading advertising practices.
ESBI has not been formally served with the complaint. While the Registrant has
not been named as a party in the complaint, certain of the allegations raised in
the complaint pertain to services of the Registrant billed by ESBI. Management
believes that such claims are without merit and will not have a material impact
on the Registrant. ESBI has sought indemnification from the Registrant pursuant
to the terms of the billing agreement. Accordingly, the Registrant has notified
its insurance carrier of the potential claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
A Preliminary Information Statement was filed by the Registrant with
the Securities and Exchange Commission on June 26, 1996 in connection with the
approval of the proposed Acquisition (the "Acquisition") by a subsidiary of the
Registrant (NL Corp.), of Psychic Readers Network Inc.'s ("PRN") 50% interest in
New Lauderdale L.C. ("New Lauderdale"), a Florida limited liability company, of
which the Registrant's subsidiary, Calling Card Co., Inc., currently owns the
remaining 50% interest. The By-Laws of NASDAQ require shareholder approval of
the Acquisition. Delaware law allows such approval to be obtained without a
shareholders' meeting if written consents approving the Acquisition are obtained
from the holders of a requisite number of shares of common stock of the
Corporation.
16
<PAGE> 17
The five executive officers of the Registrant hold in excess of such requisite
amount and, on May 9, 1996, provided their written consent to the Acquisition
and the definitive forms of agreements pertaining thereto (collectively, the
"Acquisition Agreement").
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
EXHIBIT
NUMBER
- -------
2.1+ Definitive Form of Acquisition Agreement by and between the Registrant,
Calling Card Co., Inc. and Psychic Readers Network (1)
3.1 Articles of Incorporation of the Registrant, as amended (2)
3.2 By-Laws of the Registrant (3)
4.1 Form of certificate evidencing shares of Common Stock (4)
23.1 Preliminary Information Statement filed by the Registrant with the
Securities and Exchange Commission on June 26, 1996 in connection with
the approval of the Acquisition. (5)
27.1* Financial Data Schedule
- --------------
* Filed herewith.
+ Confidential treatment requested as to portions of this Exhibit.
(1) Filed as an exhibit to the Preliminary Information Statement, dated
June 26, 1996, and incorporated herein by reference (see Footnote 5).
(2) Filed as an Exhibit to the Registrant's Registration Statement on Form
8-A, dated October 23, 1995, and incorporated herein by reference.
(3) Filed as an Exhibit to the Registrant's Registration Statement on Form
S-1, dated September 6, 1995 (File No. 33-96632), and incorporated
herein by reference.
(4) Filed as an Exhibit to Amendment No. 1 to the Registrant's Registration
Statement on Form S-1, dated November 14, 1995, and incorporated herein
by reference.
(5) Incorporated herein by reference.
17
<PAGE> 18
(b) REPORTS ON FORM 8-K.
The Registrant filed a report on Form 8-K with the Securities and Exchange
Commission on May 21, 1996, reporting the following information:
1. Acquisition of New Lauderdale. With respect to the Acquisition, the Form
8-K reported that (i) on May 9, 1996, the Board of Directors of the Registrant
approved a definitive form of the Acquisition Agreement, which provided that the
Registrant will become entitled to 100% of New Lauderdale's income only upon the
closing of the Acquisition; (ii) on May 9, 1996, the five principal stockholders
of the Registrant, who own in the aggregate approximately 75% of its outstanding
Common Stock, and who are also the executive officers and members of the Board
of Directors of the Registrant, approved by written consent without a meeting
pursuant to Delaware law, the proposed Acquisition and the definitive form of
the Acquisition Agreement; (iii) the Registrant anticipated sending the
Information Statement to the other stockholders of the Registrant on or about
June 15, 1996; (iv) the closing of the Acquisition is subject to the
Registrant's notification to NASDAQ of the proposed issuance of 3,200,000 shares
of Common Stock to the principal shareholders of PRN in connection with the
Acquisition; and (v) the Registrant anticipated that the execution of the
Acquisition Agreement and the simultaneous closing of the Acquisition would
occur on or about July 15, 1996. [The Company has adjourned the closing of the
Acquisition to allow for the incorporation of the Company's second quarter
financial data in the Definitive Information Statement, which the Company
expects to file with the Securities and Exchange Commission on or about July 29,
1996. The Company now anticipates such closing to occur on or about September 3,
1996.]
2. Amendment to PRN Service Agreement. With respect to an agreement dated
July 7, 1995, pursuant to which PRN provided the Registrant with live psychic
operator services in connection with the operation of the Registrant's telephone
entertainment programs (the "Service Agreement"), with billing for such services
determined by the number of minutes of live psychic services used by the
telephone entertainment programs conducted by the Registrant, the Form 8-K
reported that the Registrant and PRN amended the Service Agreement effective as
of March 1, 1996, pursuant to which (i) the term of the Service Agreement was
extended from June 30, 1996 to May 31, 1997 and (ii) PRN agreed to bill the
Registrant at a reduced rate for a portion of the service minutes provided to
the Registrant.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUINTEL ENTERTAINMENT, INC.
By: /s/ Jeffrey L. Schwartz
-------------------------
Jeffrey L. Schwartz
Date: July 15, 1996 Chairman and CEO
.
By: /s/ Raymond J. Richter
-------------------------
Raymond J. Richter
Date: July 15, 1996 Chief Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Quintel Entertainment, Inc. and Subsidiaries
Financial Data Schedule
This schedule contains summary information extracted from the Quintel
Entertainment, Inc. and Subsidiaries Consolidated Financial Statements as
presented in the Company's Form 10Q for the quarter ended May 31, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAY-31-1996
<CASH> 16,519,449
<SECURITIES> 0
<RECEIVABLES> 7,349,639
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 30,902,835
<PP&E> 275,434
<DEPRECIATION> 34,884
<TOTAL-ASSETS> 32,714,049
<CURRENT-LIABILITIES> 14,855,069
<BONDS> 0
0
0
<COMMON> 15,236
<OTHER-SE> 17,843,744
<TOTAL-LIABILITY-AND-EQUITY> 32,714,049
<SALES> 29,784,256
<TOTAL-REVENUES> 29,784,256
<CGS> 24,805,226
<TOTAL-COSTS> 24,805,226
<OTHER-EXPENSES> 3,261,873
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 230,862
<INCOME-PRETAX> 5,073,303
<INCOME-TAX> 175,662
<INCOME-CONTINUING> 1,717,157
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,897,641
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
</TABLE>
