QUINTEL ENTERTAINMENT INC, 10-K, 1997-02-28

QUINTEL ENTERTAINMENT INC
10-K, 1997-02-28
AMUSEMENT & RECREATION SERVICES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-K
(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ________________ TO ________________

COMMISSION FILE NUMBER 0-27046

QUINTEL ENTERTAINMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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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)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 620-1212

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EXCHANGE ON WHICH
TITLE OF CLASS REGISTERED
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Securities registered pursuant to Section 12B of
the Act: Common Stock, NASDAQ National Market
$.001 Par
Value
Securities registered pursuant to Section 12(g)
of the Act: Common Stock,
$.001 par
value
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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 __

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ____
------------------------

The number of shares outstanding of the Registrant's common stock is
18,475,706 (as of 2/21/97). The aggregate market value of the voting stock held
by nonaffiliates of the Registrant was approximately $48,809,450 (as of
2/21/97).

DOCUMENTS INCORPORATED BY REFERENCE

None.
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QUINTEL ENTERTAINMENT, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED NOVEMBER 30, 1996

ITEMS IN FORM 10-K

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FACING PAGE PAGE
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PART I
Item 1. Business............................................................... 1
Item 2. Properties............................................................. 9
Item 3. Legal Proceedings...................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders.................... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.............................................................. 10
Item 6. Selected Financial Data................................................ 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................ 12
Item 8. Financial Statements and Supplementary Data............................ 17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. N/A
PART III
Item 10. Directors and Executive Officers of the Registrant..................... 18
Item 11. Executive Compensation................................................. 21
Item 12. Security Ownership of Certain Beneficial Owners and Management......... 23
Item 13. Certain Relationships and Related Transactions......................... 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........ 26
Signatures.......................................................................... 28
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PART I

ITEM 1. BUSINESS

INTRODUCTION

Quintel Entertainment, Inc. (the "Company") is engaged in providing various
products and services primarily through the use of direct marketing techniques
and in providing services to strategic corporate partners. Throughout the fiscal
year ended November 30, 1996, the Company's primary products and services were
telephone entertainment services which consisted of live conversation and
pre-recorded horoscopes and tarot card readings and live psychic consultations.
The Company also separately offers theme-related club memberships and voice mail
services. During the fiscal year ended November 30, 1996, the Company began
providing services to AT&T Communications, Inc. ("AT&T") to market AT&T's long
distance products. The Company is also test marketing diversified new programs,
including the marketing of hair care, music and cellular phone products, which
programs were not significant in the fiscal year ended November 30, 1996.

TELEPHONE SERVICES MARKET OVERVIEW

The premium billed telephone entertainment services industry emerged during
the late 1980's as an information service designed to increase telephone usage.
Early information services developed by regional carriers consisted primarily of
weather and time announcements. Business enterprises known as "information
providers" soon developed and commercialized additional information and
entertainment services, which were marketed directly to consumers at premium
rates. Entertainment services were initially transmitted exclusively by carriers
in regional markets. By 1989, long distance carriers commenced providing such
services, permitting information providers to expand their potential markets and
customer base nationally and internationally.

Markets for telephone entertainment and information services have grown
steadily in recent years. According to a report published by the consulting firm
of Frost & Sullivan, the combined toll-free and "900"/"976" markets, estimated
at $12.8 billion in 1996, will reach $25.5 billion by 2003. Since inception, the
Company has sought to capitalize on opportunities arising from these expanding
markets, focusing its efforts primarily on developing and expanding its psychic
and astrology related entertainment services, a fast-growing segment of the
industry. As a result of such efforts, the Company has achieved increasing
levels of revenues and profitability. See "Forward Looking Information May Prove
Inaccurate."

TELEPHONE ENTERTAINMENT SERVICES

The Company's telephone entertainment services are accessed by dialing
"900" telephone numbers that are billed at premium per-minute rates.
Entertainment services consist primarily of live conversation and pre-recorded
horoscopes and tarot card readings and live psychic consultations designed to
capitalize on the current popularity of "new age" themes. "New age" refers to
astrological and psychic phenomena which can be explained through the use of
horoscopes, tarot card and psychic readings and prognostications. The Company
currently markets numerous "900" number entertainment services, each offering
programs with distinct features. For the years ended November 30, 1996 and 1995,
the Company's telephone entertainment services accounted for approximately 82%
and 57%, respectively, of the Company's net revenues.

The Company's live psychic entertainment services permit callers to engage
in live one-on-one conversations with psychic operators and to receive
personalized information responsive to the caller's requests. The Company's live
tarot card entertainment services permit callers to receive a live tarot card
reading. The Company's live conversation "900" entertainment services are
currently billed at a rate of either $3.49 or $3.99 per minute depending on the
service; provided, however, that the first two to five minutes of some calls to
such live conversation lines are provided to the customer without charge. For
the years ended November 30, 1996 and 1995, the Company's live conversation
"900" entertainment services accounted for approximately 76% and 45% of the
Company's net revenues, respectively.
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The Company offers several pre-recorded entertainment services, including
horoscopes, tarot card readings and numerology services. Some of such services
contain interactive features which permit callers to access a variety of
services by responding to pre-recorded messages, such as prompts for birthdates.
The Company's pre-recorded "900" entertainment services are currently billed at
rates up to $3.99 per minute; provided, however, that the first two to five
minutes of some calls to such pre-recorded programs are provided to the customer
without charge. For the years ended November 30, 1996 and 1995, the Company's
pre-recorded entertainment services accounted for approximately 6% and 13% of
the Company's net revenues, respectively.

The Company solicits consumers for its "900" number services by providing
access to toll-free "800" numbers for subjects of general interest and as an
introduction to the Company's "900" services. The Company's entertainment
services are available by calling designated "900" numbers from any telephone,
except cellular phones, pay phones or any phone for which "900 blocking" has
been imposed or ordered. The Company's per-minute rates on telephone services
are subject to applicable limitations imposed by carriers, including the
limitation currently imposed by AT&T, the Company's primary long distance
carrier, of $10 per minute.

Psychic Readers Network, Inc. ("PRN") currently provides the Company with
substantially all of its psychic operators. PRN monitors and supervises the
quality of independent psychic operators provided to the Company. The Company
pays PRN a per minute fee based on caller connection time. For the years ended
November 30, 1996 and 1995, the Company paid aggregate fees of approximately
$8,560,000 and $3,993,000, respectively, to PRN for such services. PRN is
controlled by Messrs. Steven L. Feder, Thomas H. Lindsey and Peter Stolz,
shareholders of the Company, who own an aggregate of 3,052,000 shares of Common
Stock of the Company, or 16.5% of the shares outstanding. In addition, Mr. Feder
is a director and employee of the Company. See "Certain Relationships and
Related Transactions."

MEMBERSHIP CLUBS

The Company also offers theme-related membership clubs ("club products").
Club product subscribers, for a monthly $9.95 fee, receive an assortment of new
age theme-related entertainment gifts and services each month, including free
bonus psychic readings. The Company's current club memberships approximate
82,000 members. Club subscribers access their free bonus psychic readings by
dialing designated "800" and "900" numbers.

There have been substantial changes in the nature and marketing of the
Company's club products as a result of both changing consumer tastes and
telephone company acceptance difficulties. In the fiscal year ended November 30,
1994, the basic voice mail services (the "VM services") and club products began
as theme-related membership clubs. Beginning in the fiscal year ended November
30, 1995 and continuing into the fiscal year ended November 30, 1996, club
members were offered enhanced voice mail networks ("VM Enhanced Product") at
prices of either $9.95 or $19.95 per month, which combined theme-related
entertainment services with voice mail networks. In the fiscal year ended
November 30, 1996, the products evolved into new membership club formats with
all new products being offered at $9.95 per month. For the fiscal years ended
November 30, 1996 and 1995, VM services, VM Enhanced Product and club products
and services collectively accounted for approximately 17% and 43%, respectively,
of the Company's net revenues. Subscribers pay monthly subscription fees and
continue to be serviced each month based on their original enrollment format in
a variety of $9.95 and $19.95 products. The Company continues to service
approximately 66,500 subscribers to the VM Enhanced Product and other voice mail
and club products no longer marketed by the Company for new enrollments.

The original $9.95 club product changed to the VM Enhanced Product in
response to changes in telephone company billing platforms and consumer
resistance to the use of certain "900" number platforms to deliver monthly club
services. The VM Enhanced Product, at $19.95 monthly, was initially accepted by
both consumers and telephone companies. However, a combination of increased
enrollments, consumer complaints and confusion, and customer service
difficulties caused certain telephone companies to temporarily suspend the
billings and collections of the $19.95 VM Enhanced Product during the fiscal
year ended November 30, 1996. This also resulted in increased chargebacks
related to this product. See "Management's Discussion and

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Analysis of Financial Condition and Results of Operations." In response to such
actions, the Company increased its customer service capabilities through a
combination of in-house operators and contract customer service providers and
repositioned its marketing of the VM Enhanced Products. Such repositioning led
to the current club products. The Company also continues to explore new billing
platforms for its club products in order to assure continued acceptance by
telephone carriers in the future. See "Forward Looking Information May Prove
Inaccurate."

VOICE MAIL SERVICES

During the fiscal year ended November 30, 1996, the Company began offering
basic voice mail services to customers. As an inducement to potential
subscribers to enroll, the Company may offer certain of its new age services.
Approximately 171,000 current subscribers pay $9.95 per month for the basic VM
Service. This product is independent of the VM Enhanced Product and did not
experience the acceptance difficulties or increased chargebacks associated with
the VM Enhanced Product.

ACQUISITION OF NEW LAUDERDALE

In March 1995, the Company and PRN formed New Lauderdale L.C. ("New
Lauderdale"), a Florida limited liability company, the successor to a joint
venture established in December 1994, for the purpose of creating, developing
and marketing theme-related membership clubs and related telephone entertainment
services.

Pursuant to the terms of an acquisition agreement entered into between the
Company and PRN (the "Acquisition Agreement"), on September 10, 1996, the
Company acquired PRN's interest in New Lauderdale (the "Acquisition"), in
consideration for 3,200,000 shares (the "PRN Shares") of its Common Stock. In
addition to receiving its share of New Lauderdale's earnings through the closing
of the Acquisition, PRN received approximately $1,500,000 in cash for the
deferred tax benefit to New Lauderdale resulting from the transaction. The PRN
Shares delivered at the closing of the Acquisition were issued to the
shareholders of PRN, Steven L. Feder, Thomas Lindsey and Peter Stolz (the "PRN
Principals"). As of February 21, 1997, Messrs. Feder, Lindsey and Stolz owned,
in the aggregate, 3,052,000 shares, or 16.5%, of the outstanding Common Stock of
the Company. Mr. Feder is also an employee and a director of the Company. A
registration statement including the PRN Shares was declared effective by the
Securities and Exchange Commission (the "Commission") on December 19, 1996. The
following is a summary of the relevant and material terms of the Acquisition:

Restriction on Resale of Shares

Two Year Lock-Up Period. Pursuant to the Acquisition Agreement, until
September 10, 1998, the PRN Principals may not sell any of their shares of
Common Stock except, in the event a principal shareholder of Quintel ("Quintel
Principal") elects to sell any of his shares of Common Stock, (the "Selling
Quintel Principal"), he shall give written notice to the PRN Principals of such
sale. The PRN Principals then have the right to sell, in the aggregate, a
percent of the total shares owned by the PRN Principals equal to that percent of
the total shares of Common Stock owned by the Quintel Principals being sold by
the Selling Quintel Principal. Each PRN Principal has the right, individually,
to sell an amount of shares of Common Stock equal to his proportionate ownership
interest in that amount permitted to be sold in the aggregate by the PRN
Principal.

Restrictions on Sales by PRN Principals. Pursuant to the Acquisition
Agreement, for as long as the PRN Principals as a group own 5% or more of
Quintel's outstanding shares of Common Stock, as promulgated under Rule 144(e)
of the Securities Act of 1933, as amended (the "Securities Act"), the PRN
Principals will not sell during any three month period that number of shares
which, in the aggregate, exceeds the greater of (a) 1% of the then outstanding
shares of Common Stock of the Company, or (b) the average weekly trading volume
of the Common Stock as listed on NASDAQ during the four calendar weeks preceding
the sale of such shares of Common Stock, notwithstanding the fact that the
shares owned by the PRN Principals may have been registered for resale under the
Securities Act or that each of the PRN Principals may not be an "affiliate" as
defined under such Rule 144(e).

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Related Agreements

The following are summaries of certain of the agreements which were
executed in connection with the Acquisition.

Non-Competition and Right of First Refusal Agreement.

The Company, PRN and the PRN Principals entered into a Non-Competition and
Right of First Refusal Agreement, whereby PRN, which is a direct competitor of
the Company, and each of the PRN Principals, agreed, for a period of five years
from the closing of the Acquisition, (i) not to engage in any activities
competitive with the Company, except for such business already conducted by PRN
as of the consummation of the Acquisition, and (ii) provide the Company with a
right of first refusal with respect to any future business developed by them.

Employment Agreement.

Upon the effective date of the Acquisition, the Company entered into an
employment agreement with Mr. Feder. Pursuant to the terms of such employment
agreement, Mr. Feder agreed to serve as the General Manager of the business
operated by New Lauderdale until April 30, 2001. Mr. Feder agreed to devote at
least 50% of his time to this employment and be responsible for performing those
services provided by him to New Lauderdale prior to the closing of the
Acquisition. The Company obtained the rights to any venture, new business idea,
product, technology, or item of intellectual property developed by Mr. Feder in
the course of his employment with the Company, as well as a right of first
refusal with respect to any new business venture developed by Mr. Feder with any
third parties. See "Certain Relationships and Related Transactions."

Service Agreement.

The Company and PRN are parties to an agreement pursuant to which PRN
provides the Company with live psychic operator services in connection with the
operation of the Company's telephone entertainment programs (the "Service
Agreement"). In connection with the Acquisition, the Service Agreement was
amended to provide for an extension of its term for five (5) years following the
date of the closing of the Acquisition and to establish a set fee schedule
during the extended five (5) year term. In addition, the PRN Principals agreed
that Mr. Feder will continue to maintain control of PRN and manage its
operations, including the operation of the live psychic operator network used by
the Company in connection with its telephone entertainment programs, and in
order to secure the obligations of PRN, Feder and the other PRN Principals under
the Service Agreement, PRN granted the Company a security interest in PRN's
computer system hardware and software operating PRN's caller distribution and
psychic operators' scheduling and all agreements, arrangements or understandings
between PRN and its live psychic operators.

Other Issues Related to the Acquisition.

Certain media, creative, computer and production operations and personnel,
formerly provided by PRN and/or New Lauderdale, for the benefit of PRN, New
Lauderdale and the Company, were transferred to the Company and are now
performed exclusively by the Company for the benefit of such parties. During the
fiscal year ended November 30, 1996, PRN paid approximately $171,000 to the
Company for media services. In addition to payments for psychic operators as
described above, PRN provides certain non-psychic services and facilities to the
Company at an approximate rate of $30,000 per month.

New Lauderdale continues to provide theme related telephone entertainment
services and products similar to those provided by the Company.

ADVERTISING, MARKETING AND PROMOTION

Strategy

The Company intends to actively pursue a strategy of growth by expanding in
both general consumer and corporate markets, primarily through the use of
telemarketing, direct mail, infomercials and other television advertising and
expanded servicing of corporate clientele and partners. Consistent with its
aggressive growth strategy, the Company intends to produce additional
infomercials and commercials, expand its telemarketing

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activities, increase its levels of syndicated television advertising, and expand
its direct mail marketing programs, targeting existing and potential customers
of all of its products and services. Strategic corporate partners will be
offered the Company's direct marketing expertise, which includes the marketing
of additional products and services to the Company's database of consumer
customers. See "Forward Looking Information May Prove Inaccurate."

Media Advertising and Promotion

The Company focuses its efforts on direct response marketing which is
designed to capture the highest percentage of calls and maximize revenues. The
Company believes that consumer awareness and demand for telephone entertainment
services has been increasing due principally to the use of television
commercials and infomercials. Infomercials typically feature in-depth interviews
and information designed to motivate viewers to place telephone calls to access
services or subscribe to the Company's voice mail networks. The Company's
ability to efficiently produce and air infomercials and commercials is essential
to its marketing strategy.

The Company has emphasized the marketing and promotion of its "900" number
services and voice mail networks through celebrity endorsements. At various
times during the fiscal year ended November 30, 1996, the Company engaged the
services of celebrities such as Dennis Rodman, a National Basketball Association
star, Rhonda Shear, a television entertainer, Philip Michael Thomas, television
co-star of the series Miami Vice, Joyce Jillson, syndicated columnist and noted
astrologer, Catherine Oxenberg, a model and star of the television series
Dynasty, Billy Dee Williams, a television and film actor, Fernando Allende, a
Latin American television actor, and Fran Gare, a nutritionist and weight-loss
expert, to promote the Company's telephone entertainment and voice mail
services. Celebrity agreements are generally for a term of one year, which may
be extended under certain circumstances, and grant worldwide rights to use an
individual's name and likeness in connection with services promoted by
commercials. Compensation varies by individual and generally consists of an
advance payment and royalties for each minute of "900" number calls or a
percentage of monthly voice mail subscription fees.

The Company believes that the quality of media time purchased by the
Company is a critical element in a successful direct marketing effort.
Accordingly, the Company seeks to purchase blocks of quality broadcast and cable
television media time in order to assure meaningful coverage of its infomercials
and commercials in selected time slots and geographic markets. The majority of
media purchases are done by the Company's in-house media department.

Telemarketing

The Company currently retains West TeleServices Corporation ("West") to
perform inbound telemarketing activities. These agencies provide telephone
operators on an ongoing basis to respond to incoming telephone calls from
recipients of mail promotions or viewers of the Company's infomercials and
commercials who are interested in the advertised product or service. The Company
believes that an integral part of inbound telemarketing is the opportunity to
increase revenues by offering or introducing additional products and services.

The Company currently engages West, Advanced Access, Inc., Optima Direct,
Inc., National Market Share, Inc., and APAC TeleServices, Inc. to perform
outbound telemarketing activities. The Company continues outbound telemarketing
on a regular basis to promote its products and services and fulfill marketing
services to strategic corporate partners, including AT&T. These agencies provide
telephone operators on an ongoing basis to place calls to prospective customers
using consumer information and data obtained from the Company's inbound
telemarketing activities, mailing lists, data base and customer lists obtained
from its marketing activities. The Company intends to establish its own in-house
telemarketing capabilities. The Company believes that establishing such
capabilities will allow it to increase call volume and reduce cost relating to
telemarketing activities, thereby maximizing efficiency and revenues. See
"Forward Looking Information May Prove Inaccurate."

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Direct Mail and Print Advertising

The Company engages in direct mail and print advertising campaigns designed
to promote entertainment services and voice mail services, consisting of
notifications, promotions, periodicals and subscription kits.

Other Marketing Activities

The Company entered into a three-year partnership with AT&T, whereby the
Company commenced marketing AT&T's long distance services to the Company's
database of customers. The Company is compensated based on the number of
successful long distance customers delivered by the Company to AT&T.

The Company produces and/or markets video cassettes, music CD's, hair care
products, cellular telephones and service and other consumer products. While the
Company is aggressively testing new products and services, sales and related
expenses of such products and services were not material in the fiscal year
ended November 30, 1996 and may not account for a meaningful portion of the
Company's net revenues in the future.

The Company rents its mailing lists to third parties through Jami Marketing
Services, Inc. ("Jami Marketing"), an affiliate of the Company. Pursuant to a
list management agreement, dated June 1, 1993, between the Company and Jami
Marketing, Jami Marketing serves as exclusive manager in connection with renting
the Company's mailing list. The Company pays Jami Marketing a management fee
equal to 10% of rental revenue to manage its list, plus fees in connection with
processing the mailing list. Revenues from mailing list rentals have not been
material to date. See "Certain Relationships and Related Transactions."

SERVICE BUREAUS

The Company has engaged West, Billing Information Concepts Corporation
("ESBI"), Federal Transtel, Inc. ("FTT") and VRS Billing Systems, a division of
Integretel, Inc., to provide billing and collection services in connection with
the Company's telephone entertainment products and services, "900" number
services, VM services and club memberships. West and ESBI also provide accounts
receivable financing relating to products and services billed through these
companies. Though the facilities are available, the Company is not currently
financing any of its accounts receivable. In addition, West provides other
services, including call processing, inbound and outbound telemarketing and
production of prerecorded programs. The Company is dependent on these service
bureaus to provide quality services on a timely basis on favorable terms. While
the Company believes its service bureau needs could be transferred to alternate
providers, if necessary, no contracts to cover such a contingency are currently
in effect. Accordingly, failure by any existing bureaus to provide such services
would result in material interruptions in the Company's operations.

COMPETITION

The Company faces intense competition in the marketing of its telephone
entertainment services and voice mail networks. The Company competes primarily
on the basis of media placements on television and through direct mail
solicitations for "new age" services and product themes. The Company's telephone
entertainment services, VM services and club products compete for consumer
recognition with services which have achieved significant national, regional and
local consumer loyalty. Many of these entertainment services are marketed by
companies which are well-established, have reputations for success in the
development and marketing of services, have extensive experience in creating and
producing infomercials and commercials featuring high profile celebrities and
have significant financial, marketing, distribution, personnel and other
resources. These financial and other capabilities permit such companies to
implement extensive advertising and promotional campaigns, both generally and in
response to efforts by additional competitors to enter into new markets and
introduce new services.

Certain of these competitors, including Inphomation Inc., Gold Coast Media
and PRN (see "Acquisition of New Lauderdale"), are prominent in the psychic
industry and have the financial resources to enable them to withstand
substantial price competition, which is expected to increase. Inphomation Inc.
is the operator of "Psychic Friends Network," a highly successful "900"
telephone entertainment service marketed through

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frequently broadcast infomercials and commercials featuring Dionne Warwick, as
well as other "900" number services. Gold Coast Media is the operator of a
highly successful "900" number psychic related telephone entertainment service
marketed through infomercials and commercials featuring Kenny Kingston.

In addition, because the telephone entertainment services industry has no
substantial barriers to entry, competition from smaller competitors in the
Company's target markets and from direct response marketing companies not
currently offering telephone entertainment services and services similar to the
Company's voice mail network services are expected to continue to increase
significantly. The Company expects that direct marketing companies that have
developed or are developing new marketing strategies, as well as other companies
that have the expertise to allow the development of direct marketing
capabilities, may attempt to enter the telephone entertainment services industry
or develop voice mail services similar to those provided by the Company, which
would compete with the Company's services. The Company is also aware of other
companies that have developed and introduced or are developing "900" number
programs with a concept similar to the Company's voice mail networks, certain of
which are psychic related. It is also possible for a small company to introduce
a service or program with limited financial and other resources through the use
of third-party agencies. Any such company having the potential for success may
achieve rapid and significant growth as a result of the success of a single
infomercial.

The Company's new age products and services also compete with numerous
other services and products which provide similar entertainment value, such as
in-person psychic consultation and tarot card readings, newspapers, magazines,
books and audio and video cassettes featuring "new age" themes, on-line computer
programs and various other forms of entertainment which may be less expensive or
provide other advantages to consumers.

INSURANCE

The Company may be subject to substantial liability as a result of claims
made by consumers arising out of services provided by the Company's servicing
contractors and their employees. The Company is aware that claims have been made
against other companies engaged in providing telephone entertainment services on
the basis of advice or prognostications disseminated through such services. The
Company maintains a general liability insurance policy that is subject to a per
occurrence limit of $1,000,000, with a $2,000,000 aggregate limit and an
umbrella policy covering an additional $10,000,000 of liability. In addition,
the Company has errors and omissions insurance with a limit of $5,000,000. The
Company also maintains Directors and Officers liability insurance policies
providing aggregate coverage of $5,000,000 for legal costs and claims. Such
insurance may not be sufficient to cover all potential future claims and
additional insurance may not be available in the future at reasonable costs. The
Company seeks to limit any potential liability by providing disclaimers in
connection with its services by identifying its "900" services and the services
provided pursuant to its VM services, club products and VM Enhanced Products as
"entertainment."

GOVERNMENT REGULATION

The telephone entertainment services industry is subject to extensive,
stringent and frequently changing federal, state and local laws and substantial
regulation under these laws by governmental agencies, including the Federal
Communications Commission ("FCC"), the Federal Trade Commission ("FTC"), the
Department of Justice, the United States Postal Service, various state Attorneys
General and state and local consumer protection agencies. Regulations applicable
to carriers and providers of telephone entertainment services are interpreted
and enforced by regulatory authorities with broad discretion and impose
significant compliance burdens and risks on the Company.

The FCC regulates carriers that transmit calls and bill and collect
charges, as well as the broadcast and cable television industry, including
networks and stations that carry the Company's infomercials and commercials. The
FTC, which is the regulatory authority with primary jurisdiction over the
advertising of "900" number services, is responsible for enforcing various
federal laws intended to protect consumers against deceptive trade practices,
including misleading advertising, and has promulgated regulations governing,
among other things, program content and advertising and promotional disclosures
for telephone entertainment

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services and infomercials. In response to substantial complaints by consumers
regarding fraudulent telemarketing activities, the FTC has recently enacted
additional regulations governing telemarketing activities which, among other
things, enable the FTC to impose substantial penalties for fraudulent
telemarketing activities and, require the telemarketer to disclose the product
or service being offered, the cost of such product or service, any restrictions
that may apply before asking for a credit card or bank information and, if there
is a no refund policy, to disclose such policy. Such regulations also restrict
telemarketing calls from being placed between 9:00 p.m. and 8:00 a.m. without
the prior consent of the person being called. In addition, the FTC has empowered
state Attorneys General to seek injunctions in federal courts for fraudulent
telemarketing activities. The Department of Justice and the United States Postal
Service also enforce various federal laws intended to prevent the use of wires
or mail for fraudulent or deceptive purposes.

The principal federal regulation governing pay-per-call operations is the
Telephone Disclosure and Dispute Resolution Act of 1992 ("TDDRA"). Among other
things, TDDRA provides guidelines with respect to pricing and marketing of
telephone entertainment services, including services offered through "800" and
"900" numbers. The recently enacted Telecommunications Act of 1996 (the "TCA")
amends TDDRA by requiring that billing authorization for pay-per-call "800"
number services be in writing and specifically requires: disclosure to consumers
of pricing information, disclosure of information relating to the provider, a
provider's agreement to notify the customer of changes in billing rates in
advance, disclosure of customer payment options, and the customer's signature to
create an obligation to pay for such "800" number services. The Company utilizes
toll-free "800" numbers in connection with the marketing of voice mail services
and consumer solicitation. Management believes that the new requirements set
forth in the provisions of the TCA are not applicable to the Company's
operations, based on its belief that its "800" number services are not pay-
per-call services, as such term is defined under TDDRA, as amended by the TCA.
There can be no assurance that federal or state governmental agencies will not
interpret the provisions of the TCA in a manner which would make it applicable
to the Company's "800" number services, in which event, the Company may be
required to materially change the method in which it markets certain of its
entertainment services. Compliance with such requirements, if determined to be
applicable, could have a material adverse effect on the Company's business. The
TCA also provides the FCC with expanded rule making authority, which could
result in legislation, in the future, applicable to the Company's "800" number
and other services.

The Company's operations in Canada, which have not been significant to
date, are also subject to Canadian regulations governing "900" number services
and consumer protection regulations which govern advertising and other business
activities.

8
<PAGE> 11

submitted to the New York Attorney General's office a letter, setting forth its
position with respect to the investigation. To date, the Company has not
received a response to its letter and there has been no further activity with
respect to the investigation. No assurance can be given, however, that such
investigation is not pending or, if pending, that management will be able to
amicably resolve the outstanding issues with New York State. In the event the
investigation proceeds and the Company is unable to resolve the issues in
dispute, further proceedings may ensue which, if the Company is unsuccessful,
may have a materially adverse effect on the Company's future operations in New
York State. Management further believes that while the other remaining
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 it 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.

EMPLOYEES

The Company currently employs 84 full-time employees, including six
executive officers, and three part-time employees, which are located at the
Company's principal executive offices in Pearl River, New York and New
Lauderdale's offices in Fort Lauderdale, Florida. The Company believes that its
relations with its employees are satisfactory. None of the Company's employees
are represented by a union.

ITEM 2. PROPERTIES

The Company leases approximately 15,000 square feet of space at One Blue
Hill Plaza, Pearl River, New York, all of which is currently used for the
Company's principal executive offices. The lease for such premises expires on
July 31, 2006. The current monthly base rent is $11,875, which amount will be
increased to $21,875 per month commencing on November 1, 1997, and further
increased to $26,875 per month commencing on August 1, 2001, for the remainder
of the term of the lease. The Company currently subleases space from PRN,
pursuant to an oral understanding, for its New Lauderdale operation and is
negotiating a new lease for space in Fort Lauderdale. The Company intends to
move the New Lauderdale operation into the new space by the third quarter of
1997.

ITEM 3. LEGAL PROCEEDINGS

In October 1995, ESBI 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 Company's "800" numbers which
the Company allegedly advertised to consumers as a free call. Such notice
demands 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 sec.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 moved to dismiss the complaint. The motion was granted, in part, but
afforded the plaintiff the right to amend the complaint. We have received
correspondence from plaintiff's counsel that an amended complaint has been filed
and that plaintiff intends to name the Company as a defendant. While the Company
apparently has not yet been served in the action, certain of the allegations
raised in the complaint pertain to services of the Company billed by ESBI. ESBI
has sought indemnification from the Company pursuant to the terms of the billing
agreement. Accordingly, the Company has notified its insurance carrier of the
potential claims. Management believes that such claim is without merit and there
is no basis, at this time, to believe that the claim will have a material
adverse affect on the Company.

9
<PAGE> 12

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Reference is made to the information contained in the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1996.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Market Information.

Since December 1995, the Company's Common Stock has traded on the NASDAQ
National Market System under the symbol "QTEL". The following table sets forth
the high and low bid information of the Common Stock as reported by NASDAQ for
each full quarterly period since such date (and for any subsequent interim
period for which financial statements are included herein).

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
NOVEMBER 30, 1996 HIGH(1) LOW(1)
----------------------------------------------------------- ------- ------
<S> <C> <C>
First Quarter.............................................. $11 1/2 $4 3/8
Second Quarter............................................. 13 3/8 8 1/8
Third Quarter.............................................. 12 5/8 5 3/4
Fourth Quarter............................................. 10 1/8 5 7/8
</TABLE>

- ---------------
(1) Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual
transactions.

Security Holders

To the best knowledge of the Company, at February 21, 1997, there were 33
record holders of the Company's Common Stock. The Company believes there are
numerous beneficial owners of the Company's Common Stock whose shares are held
in "street name." To the best knowledge of the Company, the number of
non-objecting beneficial owners as of February 5, 1997 was 493, with the number
of actual beneficial owners exceeding that number.

Dividends

Except for S corporation distributions made to the Company's stockholders
prior to December 5, 1995 (the effective date of the initial public offering of
the Company's Common Stock), the Company has not paid, and has no current plans
to pay, dividends on its Common Stock. The Company currently intends to retain
all earnings for use in its business.

10
<PAGE> 13

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected historical financial data of the
Company for the period from August 1, 1992 (inception) to November 30, 1992 and
for each of the four fiscal years through November 30, 1996. The following
selected financial data for the years ended November 30, 1996, 1995 and 1994,
are derived from the financial statements of the Company appearing elsewhere
herein or in previous filings. The year ended November 30, 1996 includes the
results of operations of New Lauderdale, L.C. from its acquisition date of
September 10, 1996. The financial data set forth should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements of the Company.

<TABLE>
<CAPTION>
AUGUST 1, 1992
(INCEPTION) TO
YEAR ENDED NOVEMBER 30, NOVEMBER 30
---------------------------------------------------- --------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue..................... $86,666,768 $50,501,266 $22,771,465 $8,262,179 $1,700,322
Costs of sales.................. 64,661,256 36,732,610 17,521,985 5,778,706 986,319
Gross profit.................... 22,005,512 13,768,656 5,249,480 2,483,473 714,003
Selling, general and
administrative expenses....... 10,159,226 3,467,008 3,012,588 1,801,330 448,036
----------- ----------- ----------- ---------- ----------
Income from operations.......... 11,846,286 10,301,648 2,236,892 682,143 265,967
Interest expense................ (473,289) (334,318) (759,211) (117,460) (6,917)
Other income, net............... 760,413 485,250
Equity in earnings of joint
venture....................... 4,939,653 2,860,304
----------- ----------- ----------- ---------- ----------
Income before provision for
income tax and minority
interest...................... 17,073,063 13,312,884 1,477,681 564,683 259,050
Provision (benefit) for income
taxes......................... 4,898,633 220,335 54,842 (76,690) 111,994
----------- ----------- ----------- ---------- ----------
Income before minority
interest...................... 12,174,430 13,092,549 1,422,839 641,373 147,056
Minority interest in net
(income) loss................. 73,528 (73,528)
----------- ----------- ----------- ---------- ----------
Net income...................... $12,174,430 $13,092,549 $ 1,422,839 $ 714,901 $ 73,528
=========== =========== =========== ========== ==========
Income before pro forma tax
provision and minority
interest...................... $13,312,884 $ 1,477,681 $ 564,683 $ 259,050
Pro forma income tax
provision..................... 5,633,116 835,144 257,761 111,994
----------- ----------- ---------- ----------
Pro forma income before minority
interest...................... 7,679,768 642,537 306,922 147,056
Minority interest in net
(income) loss................. 73,528 (73,528)
----------- ----------- ---------- ----------
Pro forma net income............ $ 7,679,768 $ 642,537 $ 380,450 $ 73,528
=========== =========== ========== ==========
Net income per share............ $ .76
===========
Pro forma income per share...... $ .64 $ .05 $ .08 $ .02
=========== =========== ========== ==========
Weighted average number of
common and common equivalent
shares outstanding............ 16,124,743 12,000,000 12,000,000 5,008,219 4,000,000
BALANCE SHEET DATA:
Working capital................. $25,442,192 $ 3,217,627 $ 494,738 $ 788,429 $ 147,056
Total assets.................... 79,029,547 16,969,956 3,976,881 3,894,080 942,960
Total liabilities............... 31,275,864 10,938,881 3,432,355 3,105,651 869,432
Stockholders' equity............ 47,734,933 6,031,075 544,526 788,429 73,528
</TABLE>

11
<PAGE> 14

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The Company's primary products during the fiscal year ended November 30,
1996 were telephone entertainment services, billed as pay-per-call services
through the use of "900" numbers and monthly billed VM services and club
memberships. These services are billed and collected through the use of service
bureaus and local and long distance telephone companies and carriers.
Historically, the products have evolved based on changing consumer tastes as
well as changes in telephone billing practices and government regulations.

Revenues are recorded at the time a customer initiates a billable
transaction, except for customer fees for club and VM products and services. New
customer club and VM product fees are recognized upon approved enrollment and
when the service is rendered. Continuing club and VM product fees are recognized
as customers automatically renew each month. All revenues are recognized net of
an estimated provision for customer chargebacks, which include refunds, credits
and uncollectible amounts. The Company estimates the reserve for monthly
customer chargebacks based on updated chargeback history. New products and
platforms without a history are reserved based on experience with similar
products and platforms and adjusted as further information becomes available.
Since reserves are established prior to the periods in which chargebacks are
actually incurred, the Company's revenues may be adjusted in later periods in
the event that the Company's incurred chargebacks vary from estimated amounts.

During the fiscal year ended November 30, 1996, the Company successfully
marketed a new $19.95 voice mail service and experienced high enrollments of new
customers along with a high level of acceptance difficulties both at the
consumer and regional telephone carrier levels. This caused temporary
suspensions of the Company's billings by five regional telephone carriers and
high levels of customer cancellations and chargebacks for the new product. This
problem began in the early part of the fiscal year and continued through the
third quarter. The Company no longer markets the $19.95 voice mail product but
continues to service approximately 66,500 subscribers to this product and other
products no longer marketed for new enrollments. See "Increased Chargebacks,
Regional Telephone Carrier and Regulatory Matters."

The Company also produces and/or markets video cassettes, music CDs, hair
care products, cellular telephones and service, and other consumer products.
Additionally, the Company has begun marketing services for strategic corporate
partners. While the Company is aggressively pursuing corporate partnerships and
testing new products and services, sales and related expenses of such
partnerships, products and services were insignificant in the fiscal year ended
November 30, 1996 and may not result in a meaningful portion of the Company's
net revenues and income in the future. See "Forward Looking Information May
Prove Inaccurate."

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated the percentage of
net revenue represented by certain items reflected in the Company's statement of
income. The statements of income contained in the Company's financial statements
and the following table include pro forma adjustments for income taxes.

<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Net revenue......................................................... 100.0% 100.0% 100.0%
===== ===== =====
Cost of sales....................................................... 74.6 72.7 76.9
----- ----- -----
Gross Profit........................................................ 25.4 27.3 23.1
Selling, general and administrative expenses........................ 11.7 6.9 13.2
Interest expense.................................................. 0.5 0.7 3.3
Other income...................................................... 0.9 1.0 --
Equity in earnings of joint venture............................... 5.7 5.7 --
Net income.......................................................... 14.0 -- --
Pro forma net income................................................ -- 15.2 2.8
</TABLE>

12
<PAGE> 15

YEAR ENDED NOVEMBER 30, 1996 COMPARED TO YEAR ENDED NOVEMBER 30, 1995

Net revenue for the year ended November 30, 1996 was $86,666,768, an
increase of $36,165,502, or 72%, as compared to $50,501,266 for the year ended
November 30, 1995. The increase in net revenue resulted from the increased
marketing of the Company's products during the year, increased enrollments for
the Company's VM and club products and services and the acquisition of New
Lauderdale in the fiscal fourth quarter of 1996. Chargebacks for the year ended
November 30, 1996 were $46,352,638, an increase of $27,287,561, or 143%, as
compared to $19,065,077 for the year ended November 30, 1995. This increase was
primarily attributable to the increase in the amount of services provided by the
Company and the difficulties encountered with the $19.95 VM Enhanced Product
during the year. See "Increased Chargebacks, Regional Telephone Carrier and
Regulatory Matters."

Cost of sales for the year ended November 30, 1996 was $64,661,256, an
increase of $27,928,646, or 76%, as compared to $36,732,610 for the year ended
November 30, 1995. The increase in cost of sales is directly attributable to the
increased sales volume and the inclusion of New Lauderdale's cost of sales since
the Acquisition. The increase in the relationship of cost of sales to net
revenue is due to marketing and fulfillment costs incurred during certain
carrier billing suspensions for which there is no corresponding revenue stream
and the higher level of chargebacks experienced in the fiscal year ended
November 30, 1996 partially offset by volume discounts received from providers.
See "Increased Chargebacks, Regional Telephone Carrier and Regulatory Matters."

Selling, general and administrative expenses for the year ended November
30, 1996 were $10,159,226, an increase of $6,692,218, or 193%, as compared to
$3,467,008 for the year ended November 30, 1995. This increase was primarily
attributable to amortization of goodwill in the fiscal year ended November 30,
1996 of $1,211,924 relating to the Acquisition, total executives' bonuses of
$898,578, continuing increases in the Company's personnel, the Company's
relocation to larger office space to accommodate the growth of its operations
and the post-Acquisition New Lauderdale selling, general and administrative
expenses included in the fourth quarter of the fiscal year ended November 30,
1996.

Interest expense increased by $138,971, or 42%, to $473,289 for the year
ended November 30, 1996, as compared to $334,318 for the year ended November 30,
1995. The increase was due to related party interest to New Lauderdale prior to
the Acquisition of $100,250 and interest on stockholder notes of approximately
$130,000 relating to the final S corporation distribution, partially offset by
reductions in interest expense relating to receivables financing. Accounts
receivable financing arrangements are available, but currently not in use. See
"Liquidity and Capital Resources" later in this section.

For the year ended November 30, 1996, other income was $760,413, an
increase of $275,163 or 57% as compared to $485,250 for the year ended November
30, 1995. During the fiscal year ended November 30, 1996, other income included
$614,000 in interest and gains from investments of cash generated by operations
and proceeds from the initial public offering of the Company's Common Stock,
offset by reductions in management fee income.

For the year ended November 30, 1996, the Company recognized equity in
earnings of joint venture of $4,939,653, of which $4,432,000 was distributed to
the Company during such year. This reflects the Company's 50% interest in the
income from New Lauderdale's operations for the period prior to the Acquisition.
The increase in equity in earnings of joint ventures of $2,079,349 or 73%
compared to $2,860,304 for the year ended November 30, 1995 resulted from the
increased earnings of New Lauderdale during the period. After the Acquisition,
the Company commenced consolidating the operations of New Lauderdale in its
financial statements.

The provision for income taxes of $4,898,633 for the year ended November
30, 1996 included a $1,782,000 deferred tax benefit for 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 $12,174,430 for the year ended November 30, 1996 as
compared to pro forma net income of $7,679,768 for the prior comparable period,
an increase of $4,494,662, or 59%. This increase was primarily due to an
increase of $1,544,638 in the Company's income from operations directly
attributable to

13
<PAGE> 16

the growth of the Company's business, an aggregate increase of $2,079,349 of net
income attributable to the Company's 50% equity interest in New Lauderdale and
the current year tax benefit of $1,782,000 described above. Such increases were
offset in part by the goodwill amortization of $1,211,924 and executives'
bonuses of $898,578, also described above.

YEAR ENDED NOVEMBER 30, 1995 COMPARED TO YEAR ENDED NOVEMBER 30, 1994

Net revenue for the year ended November 30, 1995 was $50,501,266, an
increase of $27,729,801, or 122%, as compared to $22,771,465 for the year ended
November 30, 1994. The increase in net revenue was attributable primarily to the
introduction of the Company's original membership clubs commencing in late 1994,
which accounted for $21,803,903 of net revenue. Chargebacks for the year ended
November 30, 1995 were $19,065,077, an increase of $8,223,503, or 76%, as
compared to $10,841,574 for the year ended November 30, 1994. This increase was
primarily attributable to the increase in the amount of services provided by the
Company and the corresponding increase in gross revenue between the comparable
periods. Such increase in chargebacks was partially offset by the change of the
Company's telephone entertainment services from billable "800" numbers to "900"
numbers and the addition of the original membership clubs, both of which have
historically lower chargeback rates, as well as the Company's more efficient
utilization of database management systems designed to reduce the number of
unbillable records.

Cost of sales for the year ended November 30, 1995 was $36,732,610, an
increase of $19,210,625, or 110%, as compared to $17,521,985 for the year ended
November 30, 1994. The increase was primarily attributable to increased service
bureau fees and increases in advertising expenditures for television commercials
and infomercials and telemarketing. Cost of sales as a percentage of net revenue
decreased to approximately 73% from approximately 77% for these periods,
primarily as a result of the lower costs associated with the Company's original
club membership services compared to its "900" number entertainment services.
Such decrease was partially offset by increased service bureau and advertising
costs.

Selling, general and administrative expenses for the year ended November
30, 1995 were $3,467,008, an increase of $454,420, or 15%, as compared to
$3,012,588 for the year ended November 30, 1994. This increase was primarily
attributable to a substantial increase in the Company's personnel in 1995 and
the Company's relocation to larger office space to accommodate the growth of its
operations. Such increases were partially offset by decreases in officers'
salaries of approximately $540,000.

Interest expense decreased by $424,893, or 56%, to $334,318 for the year
ended November 30, 1995, as compared to $759,211 for the year ended November 30,
1994. The decrease was due to lower interest rates under financing arrangements.

For the year ended November 30, 1995 and included in other income, the
Company, for the first time, received management fee income in an aggregate
amount of $450,000 from New Lauderdale. Such management fees were discontinued
in February 1996, although such services currently continue to be rendered to
New Lauderdale.

For the year ended November 30, 1995, the Company recognized equity in
earnings of joint ventures of $2,860,304, $1,540,000 of which was distributed to
the Company during such year. This reflects the Company's 50% interest in the
income from New Lauderdale's operations for such period.

Net income increased to $13,092,549 for the year ended November 30, 1995
from $1,422,839 for the prior comparable period, an increase of $11,669,710, or
820%. This increase was primarily due to an increase of $8,064,756 in the
Company's income from operations directly attributable to the growth of the
Company's business, an aggregate increase of $2,860,304 of net income
attributable to the Company's 50% equity interest in New Lauderdale, and a
reduction in interest expense of $424,893. Net income after giving effect to pro
forma income tax provisions would have been $7,679,768 and $642,537 for the
years ended November 30, 1995 and 1994, respectively.

14
<PAGE> 17

LIQUIDITY AND CAPITAL RESOURCES

The Company had working capital of $25,442,192 at November 30, 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. During the year ended November
30, 1996, the Company repaid all loans related to advances received for accounts
receivable financing and fully paid the notes due to shareholders for
undistributed S corporation earnings. Such payments amounted to $2,643,522 and
$3,855,694 respectively. While the Company is not currently financing any
accounts receivable, credit lines for this purpose are being maintained and the
Company may incur obligations for such financing in the future.

The Company's primary cash requirements have been to fund the cost of
advertising and promotion. Chargebacks are paid currently from collections of
receivables 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, the
relocation of it its New Lauderdale offices and the expansion of its computer
database capabilities, 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
currently has no plans to incur any such obligations in the future. As the
Company seeks to diversify with new programs and endeavors, the Board of
Directors, may, at its discretion, authorize the use of existing cash reserves,
long term financing, or other means to finance such programs and endeavors.

During the year ended November 30, 1996, the Company formed several new
wholly owned subsidiaries and entered into two new joint venture agreements. The
joint venture agreements require the Company to provide loans to the ventures in
initial amounts of $250,000 each with additional amounts at the Company's
discretion. Such loans would bear interest at the rate of 7% per annum and are
to be repaid in installments as a percentage of the venture's retained earnings
or net available cash as specified in each agreement. Additionally, the Company
will also advance $20,000 per month to LaBuick Entertainment, Inc. for services
rendered to one of the joint ventures. Such advances are deductible from
distributions, if any, due LaBuick Entertainment, Inc. under the agreement. The
Company expects to be able to fund such loans and advances from its operating
cash flow over the next twelve months and that such loans and advances, as
extended, would not have a significant effect on the working capital position of
the Company. During the fiscal year ended November 30, 1996, the new subsidiary
and joint venture operations have not had a significant effect on net income and
did not impose any significant cash requirements on the Company. The Company
does not anticipate any of these new subsidiaries or joint ventures to
significantly alter the working capital or cash requirements of the Company
during the next twelve months.

INCREASED CHARGEBACKS, REGIONAL TELEPHONE CARRIER AND REGULATORY MATTERS

During the first quarter of the fiscal year ended November 30, 1996 (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
Enhanced Product. These acceptance difficulties occurred at two levels, consumer
and regional telephone carrier.

At the consumer level, customers did not always relate the VM Enhanced
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 nine months of 1996, the Company experienced a higher level of customer
cancellations and chargebacks relating to the $19.95 per month VM Enhanced
Product. The Company no longer markets the $19.95 VM Enhanced Product but
continues to service

15
<PAGE> 18

approximately 66,500 subscribers to this and other products not marketed for new
enrollments. The Company modified and repositioned this product to service the
existing customer base. The Company and ESBI expanded their customer service
departments during the first fiscal quarter of 1996 (three months ended February
29, 1996) to better educate the consumer about the product. Telemarketing
efforts for new products during the second fiscal quarter of 1996 (three months
ended May 31, 1996) were reduced as the repositioning was being accomplished.
Although there can be no assurance that these marketing efforts and changes will
continue to be successful, management anticipates that the repositioning along
with the expansions in customer service will maintain customer cancellations and
chargebacks for the VM Enhanced Product and new products at acceptable levels.
Several variations, including the change to offer customers a basic VM service
or theme-related club membership product, continue to be tested with many tests
yielding positive results. Currently, only $9.95 per month club products are
being marketed to new customers. The pace of telemarketing and enrollments will
continue to proceed gradually, along with increased customer service support, so
as not to repeat the difficulties of the first quarter. Due to the telephone
company billing and collection delays inherent in the telemarketing business,
the higher cancellation and chargeback level began in the first quarter of the
fiscal year ended November 30, 1996 and continued during the current fiscal
year. See "Forward Looking Information May Prove Inaccurate."

At the regional telephone carrier level, five of the regional telephone
carriers suspended billing of the Company's VM Enhanced Products at different
times during the fiscal year ended November 30, 1996. The suspensions were the
result of the carriers' belief that the Company and ESBI were unable to provide
adequate customer services to VM Enhanced 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 the fiscal year ended
November 30, 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 to suspend billings, specifically
addressed the Company's VM Enhanced Product and the remaining carrier addressed
the billing platform that encompasses the Company's VM Enhanced Product. The
Company has resumed billing the VM Enhanced Product with the four carriers that
specifically addressed the difficulties associated with the VM Enhanced 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 four of these carriers, the suspensions each lasted less
than sixty (60) days and did not have a material impact on the Company's cash
flows and operations. For the fifth carrier, the suspension lasted several
months and resulted in lost revenues. During the fiscal year ended November 30,
1996, VM Enhanced Product net revenues billed through this carrier approximated
4% of total net revenues. Marketing shifts between the VM Enhanced 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 not
known, the Company did incur marketing and fulfillment costs in this carrier's
regions during the first six months of the fiscal year ended November 30, 1996.
Therefore, the impact to date has been significant as costs were incurred
without a corresponding revenue stream.

The VM Enhanced 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
Enhanced Product are also limited to the geographic regions serviced by the
individual carriers.

The Company intends to continue its promotion of both VM services and theme
related club membership products 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 these
products and services. While the Company is pursuing new VM service and club
membership product enrollments, it is possible that revenues from these products
and services will account for a stable or decreasing portion of the Company's
net revenues in the future. Since any reduction in contributions from these
products and services 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. See "Forward Looking Information May
Prove Inaccurate."

16
<PAGE> 19

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 "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. In addition, during the fourth quarter of the fiscal year ended
November 30, 1996, a proposed assurance of discontinuance was received from the
Oregon Department of Justice. In November 1996, the Company requested Oregon to
clarify its position before the Company could determine what, if any, future
modifications to the Company's practices would be necessary. Lastly, certain
information relating to the Company's programs has been subpoenaed from West
Outbound by the Attorney General of the State of Texas and from ESBI by the
Attorneys' General of the States of Texas and Idaho. 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.
During the summer of 1996, the Attorney General of the State of New York
commenced an investigation of the Company's pay-per-call consumer billing
practices by issuing subpoenas for documents, which the Company provided. On or
about October 23, 1996, the Company submitted to the New York Attorney General's
office a letter, setting forth its position with respect to the investigation.
To date, the Company has not received a response to its letter and there has
been no further activity with respect to the investigation. No assurance can be
given, however, that such investigation is not pending or, if pending, that
management will be able to amicably resolve the outstanding issues with New York
State. In the event the investigation proceeds and the Company is unable to
resolve the issues in dispute, further proceedings may ensue which, if the
Company is unsuccessful, may have a materially adverse effect on the Company's
future operations in New York State. Management further believes that while the
other remaining 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 it
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.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the Financial Statements referred to in the
accompanying Index, setting forth the consolidated financial statements of
Quintel Entertainment, Inc. and subsidiaries, together with the report of
Coopers & Lybrand L.L.P. dated February 26, 1997.

17
<PAGE> 20

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

Set forth below are the directors and executive officers of the Company,
their respective names and ages, positions with the Company, principal
occupations and business experiences during the past five years and the dates of
the commencement of each individual's term as a director and/or officer.

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- ---- ---------------------------------------------------
<S> <C> <C>
Jeffrey L. Schwartz.................... 48 Chairman of the Board and Chief Executive Officer
Jay Greenwald.......................... 32 President, Chief Operating Officer and Director
Claudia Newman Hirsch.................. 36 Executive Vice President and Director
Andrew Stollman........................ 31 Senior Vice President, Secretary and Director
Steven L. Feder........................ 46 Director
Michael G. Miller...................... 49 Director
Murray L. Skala........................ 50 Director
Mark Gutterman......................... 41 Director
Edwin A. Levy.......................... 59 Director
Vincent Tese........................... 54 Director
</TABLE>

Jeffrey L. Schwartz has been Chairman and Chief Executive Officer of the
Company since January 1995, Secretary/Treasurer from September 1993 to December
1994 and a director since inception of the Company in 1993. Since January 1979,
Mr. Schwartz has also been Co-President and a director of Jami Marketing
Services, Inc. ("Jami Marketing"), a list brokerage and list management
consulting firm, Jami Data Services, Inc. ("Jami Data"), a database management
consulting firm, and Jami Direct, Inc. ("Jami Direct"), a direct mail graphic
and creative design firm (collectively, the "Jami Companies").

Jay Greenwald has been President and Chief Operating Officer of the Company
since January 1995, Vice President from August 1992 to December 1994 and a
director since inception. From January 1991 to August 1992, Mr. Greenwald was
Vice President of Newald Direct, Inc. ("Newald Direct") and, from July 1990 to
January 1991, he was President of Newald Marketing, Inc. ("Newald Marketing"),
companies engaged in direct response marketing.

Claudia Newman Hirsch has been Executive Vice President of the Company
since January 1995, Vice President from August 1992 to December 1994 and a
director since inception. From January 1991 to August 1992, Ms. Newman Hirsch
was President of Newald Direct and from July 1990 to January 1991, was Vice
President of Newald Marketing.

Andrew Stollman has been Senior Vice President, Secretary and a director of
the Company since January 1995 and was President from September 1993 to December
1994. From August 1992 to June 1993, Mr. Stollman was a consultant to Cas-El,
Inc., from November 1992 to June 1993, manager at Media Management Group, Inc.,
and from December 1990 to August 1992, national marketing manager for Infotrax
Communications, Inc. and Advanced Marketing & Promotions, Inc., companies
engaged in providing telephone entertainment services.

Michael G. Miller has been a director of the Company since inception. Since
1979, Mr. Miller has been the Co-President and a director of each of the Jami
Companies, as well as a director of Jakks Pacific, Inc., a publicly-held company
in the business of developing, marketing and distributing children's toys.

Murray L. Skala has been a director of the Company since October 1995. Mr.
Skala has been a partner in the law firm of Feder, Kaszovitz, Isaacson, Weber,
Skala & Bass LLP since 1976. Mr. Skala is also a director of Jakks Pacific, Inc.
and Katz Digital Technologies, Inc., a publicly-held company which is in the
business of producing digital printing and prepress services.

18
<PAGE> 21

Mark Gutterman has been a director of the Company since October 1995. Mr.
Gutterman has been a partner in the accounting firm of Feldman, Gutterman,
Meinberg & Co. and its predecessor, Weiss & Feldman, since 1980. Mr. Gutterman
is a Certified Public Accountant.

Edwin A. Levy has been a director of the Company since November 1995. Mr.
Levy has been the Chairman of the Board of Levy, Harkins & Co., Inc., an
investment advisor, since 1979, and is also a director of Coastcast Corp., a
publicly-held company in the business of manufacturing golf club heads.

Vincent Tese has been a director of the Company since March 1996. Mr. Tese
has been the Chairman of Wireless Cable International, Inc., a cable television
company, since 1988, Chairman of Cross County Wireless, Inc., which was in the
cable television business, from 1988 until July 1995, when such company was sold
to Pacific Telesis Inc., and the co-founder and Chairman of Cross County Cable
TV Inc., from 1976 to July 1995. Mr. Tese is also a director of the Bear Stearns
Companies, Inc., a publicly-held company in the investment banking and brokerage
business.

Steven L. Feder has been a director of the Company since October 1996. Mr.
Feder has been the Chief Executive Officer of PRN since 1991.

The Company has agreed, if so requested by the underwriter of the initial
public offering of the Company's securities, Whale Securities Co., L.P.
("Whale"), to nominate and use its best efforts to elect a designee of Whale as
a director of the Company or, at Whale's option, as a non-voting adviser to the
Company's Board of Directors. The Company's officers, directors and five of its
existing principal stockholders have agreed to vote their shares of Common Stock
in favor of such designee. Whale has not yet exercised its right to designate
such a person. Such right of designation of Whale is in effect until December 5,
2000.

All directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Directors receive no cash
compensation for serving on the Board of Directors other than reimbursement of
reasonable expenses incurred in attending meetings. Non-employee Directors of
the Company are compensated for their services and attendance at meetings
through the grant of options pursuant to the Company's Stock Option Plan.

EXECUTIVE OFFICERS

Four of the Company's executive officers, Jeffrey L. Schwartz, Jay
Greenwald, Claudia Newman Hirsch and Andrew Stollman, are also directors of the
Company. Information with regard to such persons is set forth above under the
heading "Directors," which is hereby incorporated by reference.

Set forth below are the names, ages and certain information with respect to
Daniel Harvey, the Company's Chief Financial Officer and Raymond J. Richter, the
Company's Vice President, Finance and Administration and Treasurer. Officers are
elected annually by the Board of Directors and serve at the direction of the
Board of Directors.

Mr. Harvey, Age 38, has been Chief Financial Officer of the Company since
January 1997. He joined the Company in September 1996. From November 1991 to
August 1996 he was a Senior Manager with the accounting firm of Feldman,
Gutterman, Meinberg & Co. Mr. Harvey is a Certified Public Accountant.

Mr. Richter, age 45, has been Vice President, Finance and Administration
since January 1997 and Treasurer since October 1995. He was also the Chief
Financial Officer of the Company from March 1995 to January 1997. From November
1993 to February 1995, Mr. Richter was a financial consultant. From April 1990
to October 1993, Mr. Richter was the Chief Financial Officer of All-Ways
Advertising Company, a promotional advertising company. Mr. Richter is a
Certified Public Accountant.

The Company has obtained "key man" life insurance in the amount of
$1,000,000 on each of the lives of Jeffrey L. Schwartz, Jay Greenwald, Claudia
Newman Hirsch and Andrew Stollman.

19
<PAGE> 22

THE COMMITTEES

The Board has an Audit Committee, a Compensation Committee and a Stock
Option Committee. The Board of Directors does not have a Nominating Committee,
and the usual functions of such a committee are performed by the entire Board of
Directors.

Audit Committee. The functions of the Audit Committee include
recommendations to the Board of Directors with respect to the engagement of the
Company's independent certified public accountants and the review of the scope
and effect of the audit engagement. The current members of the Audit Committee
are Messrs. Levy, Tese and Skala.

Compensation Committee. The function of the Compensation Committee is to
make recommendations to the Board with respect to compensation of management
employees. In addition, the Compensation Committee administers plans and
programs, with the exception of the Company's stock option plans, relating to
employee benefits, incentives and compensation. The current members of the
Compensation Committee are Messrs. Skala, Gutterman and Feder.

Stock Option Committee. The Stock Option Committee determines the persons
to whom options should be granted under the Company's stock option plans and the
number of options to be granted to each person. The current members of the Stock
Option Committee are Messrs. Tese and Levy.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

To the best of the Company's knowledge, Steven L. Feder, Mark Gutterman,
Edwin Levy, Thomas H. Lindsey, Michael G. Miller, Raymond J. Richter, Murray L.
Skala and Peter Stolz, executive officers, directors and/or beneficial owners of
more than 10% of the Common Stock of the Company, have either untimely filed or
failed to file reports on Forms 3, 4 or 5 during the fiscal year ended November
30, 1996. Messrs. Feder, Lindsey, Miller, Richter and Skala each filed one late
report, reporting one transaction. Messrs. Levy and Gutterman each filed two
late reports, reporting three and eight transactions, respectively. Mr. Stolz
failed to file a required Form 3 and, to the best of the Company's knowledge,
has not yet filed the related Form 5. To the best of the Company's knowledge,
all other Forms 3, 4 or 5 required to be filed during the fiscal year ended
November 30, 1996 were done so on a timely basis.

20
<PAGE> 23

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth the Company's executive compensation paid
during the three fiscal years ended November 30, 1996, 1995 and 1994 for the
Chief Executive Officer and the Company's most highly compensated executive
officers of the Company (other than the Chief Executive Officer) whose cash
compensation exceeded $100,000 (the "Named Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------
AWARDS
ANNUAL COMPENSATION -------------------- PAYOUTS
---------------------------------- -------
(E) (F)
OTHER RESTRICTED (H) (I)
(C) (D) ANNUAL STOCK (G) PLAN ALL OTHER
(A) (B) SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATIONS
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- -------------------------------- ---- -------- -------- ------------ ---------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jeffrey Schwartz................ 1996 $375,000 $269,573 0 0 0 0 0
Chairman and 1995 187,879 0 0 0 25,000 0 0
Chief Executive 1994 381,758 0 0 0 0 0 0
Officer

Jay Greenwald................... 1996 $375,000 $269,573 0 0 0 0 0
President and 1995 518,387 0 0 0 25,000 0 0
Chief Operating Officer 1994 551,152 0 0 0 0 0 0

Claudia Newman-Hirsch........... 1996 $300,000 $ 89,858 0 0 0 0 0
Executive Vice President 1995 405,291 0 0 0 25,000 0 0
1994 422,557 0 0 0 0 0 0

Andrew Stollman................. 1996 $175,000 $269,573 0 0 0 0 0
Senior Vice President 1995 103,346 0 0 0 25,000 0 0
and Secretary 1994 225,518 0 0 0 0 0 0
</TABLE>

The following table sets forth certain information regarding options
exercised and exercisable during the fiscal year ended November 30, 1996 and the
value of the options held as of November 30, 1996 by the Named Officers.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE

<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Jeffrey L. Schwartz........................ 25,000 0 $ 65,625(1) 0
Jay Greenwald.............................. 25,000 0 65,625(1) 0
Claudia Newman Hirsch...................... 25,000 0 65,625(1) 0
Andrew Stollman............................ 25,000 0 65,625(1) 0
</TABLE>

- ---------------
(1) The difference between (x) the product of 25,000 multiplied by $7.625 (the
closing price of the Company's Common Stock at fiscal year ended November
30, 1996, as listed on the NASDAQ National Market and (y) the product of
25,000 multiplied by $5.00 (the exercise price of the options).

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements, effective October 1,
1995, with each of Messrs. Schwartz, Greenwald and Stollman and Ms. Newman
Hirsch, which expire on November 30, 1998. Pursuant to such agreements, Mr.
Schwartz is employed as Chairman and Chief Executive Officer, Mr. Greenwald is
employed as President and Chief Operating Officer, Ms. Newman Hirsch is employed
as Executive Vice President and Mr. Stollman is employed as Senior Vice
President and Secretary. The employment agreements provide for employment on a
full-time basis (except for Mr. Schwartz, whose

21
<PAGE> 24

agreement provides that he will devote not less than 85% of his working time to
the Company's business) and contain a provision that the employee will not
compete or engage in a business competitive with the current or anticipated
business of the Company during the term of the agreement and for a period of two
years thereafter.

Under the agreements, the Company has agreed to pay each of Mr. Schwartz,
Mr. Greenwald, Ms. Newman Hirsch and Mr. Stollman $375,000, $375,000, $300,000,
and $175,000 per annum, respectively, for the fiscal year ending November 30,
1996. (Mr. Stollman's contract was amended, effective January 1, 1997, to
provide for a base salary of $250,000.) The agreements provide for an increase
in each of their base salaries in the amount of 10% for each fiscal year
thereafter, and in the event the Company achieves pre-tax earnings of
$10,000,000 or more for the fiscal year ended November 30, 1996 and each year
thereafter, the Company may grant bonuses, subject to approval of the Company's
Board of Directors, to such persons in an aggregate amount not to exceed 5% of
pre-tax earnings for each such year. For a summary of the bonuses granted in the
fiscal year ended November 30, 1996, see "Summary Compensation Table."

BOARD COMPENSATION

As a result of the Company's policy to compensate non-employee directors
for their services, the Company's Amended and Restated 1995 Stock Option Plan
(the "1995 Plan") provides for the automatic grant to all non-employee directors
of options to purchase 25,000 shares of Common Stock and for the additional
automatic annual grant of options to purchase 5,000 shares of Common Stock. The
exercise prices for all of such non-employee director options are the market
value of the Common Stock on the date of each grant. A new plan was adopted
during the fiscal year ended November 30, 1996 (the "1996 Plan") changing the
number of shares underlying the options included in the additional automatic
grant to options to purchase 6,250 shares of Common Stock each calendar quarter.

COMPENSATION COMMITTEE INTERLOCK AND INSIDER PARTICIPATION

The Compensation Committee of the Company's Board of Directors during the
fiscal year ended November 30, 1996 consisted of Mark Gutterman and Murray L.
Skala. See "Certain Relationships and Related Transactions", incorporated herein
by reference.

22
<PAGE> 25

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information, as of February 21, 1997, based
upon information obtained from the persons named below, regarding beneficial
ownership of the Company's Common Stock by (i) each person who is known by the
Company to own beneficially more than 5% of the outstanding shares of its Common
Stock, (ii) each director of the Company, (iii) each of the Named Officers, and
(iv) all executive officers and directors of the Company as a group.

<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT
BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) OF CLASS(2)
- -------------------------------------------------------- --------------------- -----------
<S> <C> <C>
Jay Greenwald........................................... 3,126,282(3) 16.9%
Steven L. Feder, Thomas
H. Lindsey & Peter Stolz................................ 2,865,000(4) 15.5
2455 East Sunrise Boulevard
Ft. Lauderdale, FL 33304
Michael G. Miller....................................... 2,626,902(5) 14.2
Jeffrey L. Schwartz..................................... 2,609,402(6) 14.1
Claudia Newman Hirsch................................... 2,092,521(7) 11.3
Mellon Bank Corporation................................. 1,227,000 6.6
One Mellon Bank Center
Pittsburgh, PA 15258
Andrew Stollman......................................... 1,173,843(8) 6.3
Edwin A. Levy........................................... 53,000(9) *
767 Third Avenue
New York, NY 10017
Murray L. Skala......................................... 50,500(10) *
750 Lexington Avenue
New York, NY 10022
Mark Gutterman.......................................... 47,500(11) *
280 Plandome Road
Manhasset, NY 11030
Vincent Tese............................................ 37,500(12) *
245 Park Avenue
New York, NY 10167
All executive officers and directors as a group (12
persons).............................................. 13,206,951(13)(14) 70.2%
</TABLE>

- ---------------
* Less than 1% of the Company's outstanding shares.

(1) Unless otherwise provided, such person's address is c/o the Company, One
Blue Hill Plaza, Pearl River, New York 10965.

(2) The number of Shares of Common Stock beneficially owned by each person or
entity is determined under the rules promulgated by the Securities and
Exchange Commission (the "Commission"). Under such rules, beneficial
ownership includes any shares as to which the person or entity has sole or
shared voting power or investment power. The percentage of the Company's
outstanding shares is calculated by including among the shares owned by
such person any shares which such person or entity has the right to acquire
within 60 days after February 27, 1997. The inclusion herein of any shares
deemed beneficially owned does not constitute an admission of beneficial
ownership of such shares.

(3) Includes 25,000 shares of Common Stock issuable upon the exercise of an
option held by Mr. Greenwald.

(4) Messrs. Feder, Lindsey and Stolz have filed a Form 13D with the Commission
classifying themselves collectively as a "group", as that term is defined
in Section 13(d) of the Exchange Act. Such individuals, as a "group", are
the beneficial owners of more than 5% of the outstanding Common Stock of
the Company. The number of shares listed as beneficially owned by such
"group" in the above table does not include 109,000 shares of Common Stock
held by Messrs. Feder and Lindsey, as joint tenants with rights of
survivorship and 78,000 shares of Common Stock held by Mr. Stolz. Such
shares were acquired by Messrs. Feder, Lindsey and Stolz in individual
capacities, rather than as members of the "group".

23
<PAGE> 26

(5) Includes 36,250 shares of Common Stock issuable upon exercise of options
held by Mr. Miller. Also includes 6,250 shares of Common Stock underlying
an immediately exercisable option to be automatically granted to such
individual within 60 days from the date hereof.

(6) Includes 25,000 shares of Common Stock issuable upon exercise of an option
held by Mr. Schwartz.

(7) Includes 25,000 shares of Common Stock issuable upon exercise of an option
held by Ms. Newman Hirsch.

(8) Includes 25,000 shares of Common Stock issuable upon exercise of an option
held by Mr. Stollman.

(9) Includes 36,250 shares of Common Stock issuable upon exercise of options
held by Mr. Levy. Also includes 6,250 shares of Common Stock underlying an
immediately exercisable option to be automatically granted to such
individual within 60 days from the date hereof.

(10) Includes 36,250 shares of Common Stock issuable upon exercise of options
held by Mr. Skala. Also includes 6,250 shares of Common Stock underlying an
immediately exercisable option to be automatically granted to such
individual within 60 days from the date hereof.

(11) Includes 26,250 shares of Common Stock issuable upon exercise of options
held by Mr. Gutterman. Also includes 6,250 shares of Common Stock
underlying an immediately exercisable option to be automatically granted to
such individual within 60 days from the date hereof and 15,000 shares of
Common Stock issuable upon the exercise of an option held by Feldman,
Gutterman, Meinberg & Co., a firm in which Mr. Gutterman is a partner.

(12) Includes 31,250 shares of Common Stock issuable upon exercise of options
held by Mr. Tese. Also includes 6,250 shares of Common Stock underlying an
immediately exercisable option to be automatically granted to such
individual within 60 days from the date hereof.

(13) Includes 12,667 shares of Common Stock beneficially owned by Mr. Raymond J.
Richter, Vice President, Finance and Administration and Treasurer of the
Company (which includes 11,667 shares of Common Stock issuable upon the
exercise of options held by Mr. Richter), and 11,334 shares of Common Stock
issuable upon the exercise of options held by Mr. Daniel Harvey, Chief
Financial Officer of the Company.

(14) Includes 335,501 shares of Common Stock issuable upon the exercise of
options held by the executive officers and directors of the Company. See
footnote (3) and footnotes (5) through (12), above.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company has entered into transactions with Jami Marketing Services,
Inc. ("Jami Marketing"), a list brokerage and list management consulting firm,
Jami Data Services, Inc. ("Jami Data"), a database management consulting firm,
and Jami Direct, Inc. ("Jami Direct"), a direct mail graphic and creative design
firm (collectively, the "Jami Companies"). The Jami Companies are principally
owned and controlled by Jeffrey L. Schwartz, Chief Executive Officer, director
and a principal stockholder of the Company, and Michael G. Miller, a director
and principal stockholder of the Company. Pursuant to a list management
agreement dated June 1, 1993 between the Company and Jami Marketing, Jami
Marketing serves as exclusive manager in connection with the management of the
Company's mailing list for rental to third parties for which Jami Marketing
receives a management fee. Jami Marketing also provides occasional list
brokerage services to the Company, pursuant to an oral agreement, whereby Jami
Marketing obtains mailing lists from third parties for use by the Company in
connection with its telemarketing activities for which the Company pays Jami
Marketing a brokerage fee. In addition, although the Company currently creates
and designs substantially all of its print ads, direct mailings, newsletters and
other communications with club members, the Company has engaged Jami Direct to
provide such services. The Company also engages Jami Data to assist with the
Company's data base requirements. Lastly, the Company obtains a substantial
number of psychics for its live psychic and other services from PRN, and Central
Talk Management ("CTM"), an affiliate of PRN, has created and produced a
significant portion of the Company's television commercials and purchases a
portion of the Company's media time. PRN is principally owned and controlled by
Steven L. Feder, Thomas Lindsey and Peter Stolz, holders of an aggregate of
3,052,000 shares of Common Stock, representing approximately 16.5% of the
outstanding Common Stock of the Company. In addition, Mr. Feder is employed by
the

24
<PAGE> 27

Company as the General Manager of New Lauderdale. The Company believes that all
of the foregoing transactions and agreements were advantageous to the Company
and were on terms no less favorable to the Company than could have been obtained
from unaffiliated third parties. The Company anticipates that any similar future
transactions will be approved by a majority of the independent and disinterested
members of the Board of Directors, outside the presence of any interested
director and, to the extent deemed necessary or appropriate by the Board of
Directors, the Company will obtain fairness opinions or stockholder approval in
connection with any such transaction. See "Forward Looking Information May Prove
Inaccurate."

Mark Gutterman, a director of the Company, is a partner in the firm of
Feldman, Gutterman, Meinberg & Co. ("FGM"), one of the Company's accountants.
Burton Feldman, a partner in FGM, is the father-in-law of Jeffrey L. Schwartz,
the Chairman and Chief Executive Officer of the Company. For the fiscal year
ended November 30, 1996, the Company incurred charges of approximately $242,000
for services rendered by FGM. In December 1996 the Company granted FGM options
to purchase 15,000 shares of Common Stock in consideration for services
rendered. FGM continues to provide services to the Company during its current
fiscal year. Its fees are based primarily on hourly rates. The Company believes
that its relationship with FGM is on terms no less or more favorable to the
Company than could have been obtained from unaffiliated third parties.

Murray L. Skala, a director of the Company, is a partner in the law firm of
Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP, the Company's attorneys
("Feder Kaszovitz"). The Company incurred charges of approximately $334,000
during the fiscal year ended November 30, 1996. In December 1995, the Company
also issued to Feder Kaszovitz 25,000 shares of the Company's Common Stock in
consideration for legal services rendered in connection with the Company's
initial public offering of its shares of Common Stock. Feder Kaszovitz continues
to provide services to the Company during its current fiscal year. Its fees are
based primarily on hourly rates. The Company believes that its relationship with
such firm is on terms no less or more favorable to the Company than could have
been obtained from unaffiliated third parties.

The Company has entered into a consulting agreement, effective October 1,
1995, with Michael Miller, a director and principal stockholder of the Company,
which expires on November 30, 1998. Under the terms of such consulting
agreement, Mr. Miller provides services in connection with identification and
engagement of celebrities to endorse the Company's services, the Company's
engagement of independent producers to produce commercials and infomercials and
the development of new entertainment services. The agreement provides that Mr.
Miller's services are subject to his availability and recognizes his commitment
to other non-competitive business activities. The Company has agreed to pay Mr.
Miller consulting fees of $10,416, $11,458 and $12,604 per month for the fiscal
years ending November 30, 1996, 1997 and 1998, respectively. The agreement
provides that Mr. Miller is precluded from involvement in any other business
which competes with the Company during the term of the consulting agreement and
for a period of two years thereafter. In addition, Mr. Miller has the right to
become a full-time employee of the Company in the event of the sale of the Jami
Companies, and to receive an initial base salary at the rate of $200,000 per
annum with 10% annual increases. Upon commencement of such full-time employment,
Mr. Miller will also be entitled to bonuses along with the Company's other
executive employees.

DISTRIBUTION OF RETAINED EARNINGS

On December 4, 1995 the Company declared a final S corporation distribution
in the approximate amount of $5,000,000, representing all of its retained
earnings in excess of $575,000, $3,000,000 of which was paid to the Company's
stockholders on such date. Such stockholders were issued promissory notes (the
"Stockholder Notes") in the aggregate principal amount of the remaining portion
of such S corporation distribution, which Stockholder Notes bear interest at the
rate of 9% per annum. The actual amount of the final S corporation distribution
was determined to be $6,895,651. Full payment of this amount with interest on
the stockholder notes was completed during the fiscal year ended November 30,
1996.

25
<PAGE> 28

FORWARD LOOKING INFORMATION
MAY PROVE INACCURATE

This Annual Report on Form 10-K contains certain forward-looking statements
and information relating to the Company that are based on the beliefs of
Management, as well as assumptions made by and information currently available
to the Company. When used in this document, the words "anticipate," "believe,"
"estimate," and "expect" and similar expressions, as they relate to the Company,
are intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions, including those described in this
Annual Report on Form 10-K. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated or expected. The Company does not intend to update these
forward-looking statements.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.

(i) Financial Statements:

See Index to Financial Statements.

(ii) Financial Statement Schedules

Schedule of Valuation and Qualifying Accounts and Reserves

All other financial statement schedules have been omitted since either (i)
the schedule or condition requiring a schedule is not applicable or (ii) the
information required by such schedule is contained in the Consolidated Financial
Statements and Notes thereto or in Management's Discussion and Analysis of
Financial Condition and Results of Operation.

(B) REPORTS ON FORM 8-K.

The Company filed no Current Reports on Form 8-K during the fourth quarter
of fiscal year ended November 30, 1996.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- --------
<S> <C>
2.1+ Definitive Form of Acquisition Agreement by and among the Company, Calling Card
Co., Inc. and Psychic Readers Network, Inc. (1)
2.2 Definitive Information Statement(2)
3.1 Articles of Incorporation of the Company, as amended (3)
3.2 By-Laws of the Company (4)
4.1 Form of certificate evidencing shares of Common Stock (5)
10.1 1996 Stock Option Plan (6)
10.2 Employment Agreement by and between the Company and Jeffrey L. Schwartz (5)
10.3 Employment Agreement by and between the Company and Jay Greenwald (5)
10.4 Employment Agreement by and between the Company and Claudia Newman Hirsch (5)
10.5 Employment Agreement by and between the Company and Andrew Stollman (5)
10.6* Amendment No. 1 to Employment Agreement by and between the Company and Andrew
Stollman
10.7 Employment Agreement by and between the Company and Steven L. Feder (1)
10.8 Consulting Agreement by and between the Company and Michael G. Miller (5)
</TABLE>

26
<PAGE> 29

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- --------
<S> <C>
10.9 Definitive Form of Non-Competition and Right of First Refusal Agreement between the
Company and Steven L. Feder, Thomas H. Lindsey and Peter Stolz (1)
10.10 Definitive Form of Non-Competition and Right of First Refusal Agreement between the
Company and Psychic Readers Network, Inc. (1)
10.11* Lease of the Company's offices at One Blue Hill Plaza, Pearl River, New York
10.12+ Servicing Agreement between West Interactive Corporation and the Company (4)
10.13+ Servicing Agreement between West Interactive Corporation and New Lauderdale (4)
10.14 Collateral Note and Security Agreement between West Interactive Corporation and the
Company (4)
10.15 Collateral Note and Security Agreement between West Interactive Corporation and New
Lauderdale (4)
10.16 Telemarketing Services Agreement between West Telemarketing Corporation Outbound
and the Company (4)
10.17+ Billing and Information Management Services Agreement and Advanced Payment
Agreement between Enhanced Services Billing, Inc. and the Company (4)
10.18 Amended and Restated Psychic Readers Network Live Operator Service Agreement
between Psychic Readers Network, Inc. and the Company (1)
10.19*+ Telemarketing Services Agreement between Advanced Access, Inc. and the Company (P)
10.20*+ Telemarketing Services Agreement between APAC TeleServices, Inc. and the Company
(P)
10.21*+ Billing Services Agreement between Hold Billing Services, Ltd. and the Company (P)
10.22*+ Addendum No.1 to Billing Services Agreement between Hold Billing Services, Ltd. and
the Company (P)
10.23*+ Telemarketing Services Agreement between Optima Direct, Inc. and the Company (P)
10.24*+ Billing and Collection Services Agreement between Federal Transtel, Inc. and the
Company (P)
10.25*+ Telemarketing Services Agreements between New Media Telecommunications, Inc. and
the Company (P)
10.26*+ Telecommunications Services Agreement between AT&T Communications, Inc. and the
Company (P)
21* Subsidiaries of the Company
27* Financial Data Schedule
</TABLE>

- ---------------
* Filed herewith.

+ Confidential treatment requested as to portions of this Exhibit.

(1) Filed as an Exhibit to the Definitive Information Statement, dated August
20, 1996, and incorporated herein by reference.

(2) Filed by the Company on August 1, 1996 in connection with the approval of
the Acquisition and incorporated herein by reference.

(3) Filed as an Exhibit to the Company's Registration Statement on Form 8-A,
dated October 23, 1995, and incorporated herein by reference.

(4) Filed as an Exhibit to the Company's Registration Statement on Form S-1 (the
"S-1 Registration Statement"), dated September 6, 1995 (File No. 33-96632),
and incorporated herein by reference.

(5) Filed as an Exhibit to Amendment No. 1 to the S-1 Registration Statement,
dated November 14, 1995, and incorporated herein by reference.

(6) Filed as an Exhibit to the Company's Registration Statement on Form S-8,
Dated December 10, 1996, and incorporated herein by reference.

(P) Filed by paper with the Commission pursuant to a hardship exemption.

27
<PAGE> 30

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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
Chairman and CEO

Dated: February 27, 1997

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- ------------------
<C> <S> <C>

/s/ JEFFREY L. SCHWARTZ Chairman and Chief Executive February 27, 1997
- ------------------------------------------ Officer (Principal Executive
Jeffrey L. Schwartz Officer)

/s/ JAY GREENWALD President, Chief Operating February 27, 1997
- ------------------------------------------ Officer and Director
Jay Greenwald

/s/ DANIEL HARVEY Chief Financial Officer February 27, 1997
- ------------------------------------------ (Principal Financial and
Daniel Harvey Accounting Officer)

/s/ CLAUDIA NEWMAN HIRSCH Executive Vice President and February 27, 1997
- ------------------------------------------ Director
Claudia Newman Hirsch

/s/ ANDREW STOLLMAN Senior Vice President and February 27, 1997
- ------------------------------------------ Director
Andrew Stollman

/s/ MICHAEL G. MILLER Director February 27, 1997
- ------------------------------------------
Michael G. Miller

/s/ MURRAY L. SKALA Director February 27, 1997
- ------------------------------------------
Murray L. Skala

/s/ EDWIN A. LEVY Director February 27, 1997
- ------------------------------------------
Edwin A. Levy

/s/ MARK GUTTERMAN Director February 27, 1997
- ------------------------------------------
Mark Gutterman

/s/ STEVEN L. FEDER Director February 27, 1997
- ------------------------------------------
Steven L. Feder

/s/ VINCENT TESE Director February 27, 1997
- ------------------------------------------
Vincent Tese
</TABLE>

28
<PAGE> 31

QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of Independent Accountants............................................. F-1
Consolidated Balance Sheets as of November 30, 1996 and 1995.................. F-2
Consolidated Statements of Income for the years ended November 30, 1996, 1995
and 1994.................................................................... F-3
Consolidated Statements of Shareholders' Equity for the years ended November
30, 1996, 1995 and 1994..................................................... F-4
Consolidated Statements of Cash Flows for the years ended November 30, 1996,
1995 and 1994............................................................... F-5 - F-6
Notes to Consolidated Financial Statements.................................... F-7 - F-17
Schedule II - Valuation and Qualifying Accounts and Reserves.................. S-1
</TABLE>
<PAGE> 32

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of
Quintel Entertainment, Inc.:

We have audited the accompanying consolidated balance sheets of Quintel
Entertainment, Inc. and Subsidiaries (the "Company") as of November 30, 1996 and
1995 and the related consolidated statements of income, shareholders' equity and
cash flows for each of the years in the three year period ended November 30,
1996. Our audits also included the financial statement schedule included in the
index of Item 14(a). These consolidated financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and schedule based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Quintel
Entertainment, Inc. and Subsidiaries as of November 30, 1996 and 1995 and the
consolidated results of their operations and their cash flows for each of the
years in the three year period ended November 30, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

COOPERS & LYBRAND L.L.P.

Melville, New York
February 26, 1997.

F-1
<PAGE> 33

QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF NOVEMBER 30, 1996 AND 1995

ASSETS:

<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $14,140,987 $ 3,570,468
Marketable securities........................................... 14,595,724
Accounts receivable, trade...................................... 18,030,083 10,097,629
Deferred tax asset.............................................. 6,961,940 39,957
Due from related parties........................................ 644,168 67,162
Prepaid expenses and other current assets....................... 2,345,154 381,292
----------- -----------
Total current assets......................................... 56,718,056 14,156,508
Property and equipment, at cost, net of accumulated
depreciation.................................................... 344,407 142,369
Investment in joint venture, at equity............................ 1,345,304
Other assets...................................................... 1,299,169
Intangible assets, net............................................ 21,967,084 26,606
----------- -----------
$79,029,547 $16,969,956
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable................................................ $ 2,565,383 $ 1,269,647
Accrued expenses................................................ 3,019,760 2,351,644
Reserve for customer chargebacks................................ 20,080,903 4,025,130
Loans payable................................................... 2,643,522
Due to related parties.......................................... 1,478,515 354,751
Income taxes payable............................................ 4,131,303 294,187
----------- -----------
Total liabilities............................................ 31,275,864 10,938,881
----------- -----------
Minority interest................................................. 18,750
Commitments and contingencies (Note 8)

SHAREHOLDERS' 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 18,452,368 shares and 12,000,000 shares,
respectively.................................................... 18,452 12,000
Additional paid-in capital........................................ 37,406,050 441,258
Retained earnings................................................. 10,300,150 5,597,817
Unrealized gain on marketable securities.......................... 10,281
Less subscriptions receivable..................................... (20,000)
----------- -----------
Total shareholders' equity................................... 47,734,933 6,031,075
----------- -----------
$79,029,547 $16,969,956
=========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-2
<PAGE> 34

QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED NOVEMBER 30, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net revenue......................................... $86,666,768 $50,501,266 $22,771,465
Cost of sales....................................... 64,661,256 36,732,610 17,521,985
----------- ----------- -----------
Gross profit...................................... 22,005,512 13,768,656 5,249,480
Selling, general and administrative expenses........ 10,159,226 3,467,008 3,012,588
----------- ----------- -----------
Income from operations............................ 11,846,286 10,301,648 2,236,892
Interest expense.................................... (473,289) (334,318) (759,211)
Other income........................................ 760,413 485,250
Equity in earnings of joint venture................. 4,939,653 2,860,304
----------- ----------- -----------
Income before provision for income taxes.......... 17,073,063 13,312,884 1,477,681
Provision for income taxes.......................... 4,898,633 220,335 54,842
----------- ----------- -----------
Net income........................................ $12,174,430 13,092,549 $ 1,422,839
=========== =========== ===========
Pro forma data (Note 1):
Income before provision for income taxes.......... $13,312,884 $ 1,477,681
Pro forma income tax provision...................... 5,633,116 835,144
----------- -----------
Pro forma net income.............................. $ 7,679,768 $ 642,537
=========== ===========
Net income per share................................ $ .76
===========
Pro forma net income per share...................... $ .64 $ .05
=========== ===========
Weighted average common shares outstanding.......... 16,124,743 12,000,000 12,000,000
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE> 35

QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL GAIN ON TOTAL
-------------------- PAID-IN RETAINED MARKETABLE SUBSCRIPTIONS SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SECURITIES RECEIVABLE EQUITY
---------- ------- ----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, November 30, 1993... 8,000,000 $ 8,000 $ 402,000 $ 788,429 $(410,000) $ 788,429
Net income for the year.... 1,422,839 1,422,839
Purchase of minority
interest................ 33,258 33,258
Distributions to
shareholders............ (2,100,000) (2,100,000)
Issuance of common stock... 4,000,000 4,000 6,000 (10,000)
Collections on
subscriptions
receivable.............. 400,000 400,000
---------- ------ ----------- ----------- ------- --------- -----------
Balance, November 30, 1994... 12,000,000 12,000 441,258 111,268 (20,000) 544,526
Net income for the year.... 13,092,549 13,092,549
Distributions to
shareholders............ (7,606,000) (7,606,000)
---------- ------ ----------- ----------- ------- --------- -----------
Balance, November 30, 1995... 12,000,000 12,000 441,258 5,597,817 (20,000) 6,031,075
Collections on
subscriptions
receivable.............. 20,000 20,000
Distributions to S
corporation
shareholders............ (6,897,097) (6,897,097)
Common stock issued:
Common stock offering... 3,225,000 3,225 13,398,850 13,402,075
Common stock issued in
connection with
acquisition........... 3,200,000 3,200 22,796,800 22,800,000
Stock option
exercises............. 27,368 27 194,142 194,169
Contributed capital........ 575,000 (575,000)
Unrealized gains on
available for sale
securities.............. $10,281 10,281
Net income for the year.... 12,174,430 12,174,430
---------- ------ ----------- ----------- ------- --------- -----------
Balance, November 30, 1996... 18,452,368 $18,452 $37,406,050 $10,300,150 $10,281 $ -- $ 47,734,933
========== ====== =========== =========== ======= ========= ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 36

QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $12,174,430 $13,092,549 $1,422,839
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 1,268,166 21,574 1,480
Reserve for customer chargebacks................ 6,719,018 2,848,228 78,767
Deferred income taxes........................... (6,431,212) (30,676) (9,281)
Gain on sale of securities...................... (384,250)
Equity in net earnings of joint venture, net of
dividends received............................ (507,653) (1,320,304)
Changes in assets and liabilities, net of
effects from acquisition of business:
Accounts receivable............................. (1,582,937) (7,283,534) 797,466
Due from related parties........................ 3,102,976 (67,162)
Prepaid expenses and other current assets....... (893,712) (258,648) (39,599)
Other assets.................................... 1,299,169 (521,135)
Accounts payable................................ 511,786 827,189 264,263
Income tax payable.............................. 3,894,446 225,819 68,368
Accrued expenses................................ 343,368 67,254 1,000,214
Due to related parties.......................... 565,806 149,060 31,944
Other current liabilities....................... (32,580) 32,580
---------- ---------- ---------
Net cash provided by operating activities....... 20,079,401 7,717,634 3,649,041
---------- ---------- ---------
Cash flows from investing activities
Investment in New Lauderdale joint venture......... (25,000)
Purchases of securities............................ (37,434,414)
Proceeds from sales of securities.................. 23,240,075
Acquisition, net of cash acquired.................. 900,040
Capital expenditures............................... (251,628) (140,761) (18,010)
---------- ---------- ---------
Net cash used in investing activities........... (13,545,927) (165,761) (18,010)
---------- ---------- ---------
Cash flows from financing activities:
Loans payable, net................................. (2,643,522) 2,643,522 (1,149,432)
Proceeds from public offering, less expenses....... 13,402,075
Proceeds from collections on common stock
subscriptions................................... 20,000 400,000
Distributions to S corporation shareholders........ (6,897,097) (7,606,000) (2,100,000)
Proceeds from stock options exercised.............. 136,839
Minority interest.................................. 18,750
---------- ---------- ---------
Net cash provided by (used in) financing
activities.................................... 4,037,045 (4,962,478) (2,849,432)
---------- ---------- ---------
Net increase in cash and cash equivalents............ 10,570,519 2,589,395 781,599
Cash and cash equivalents, beginning of year......... 3,570,468 981,073 199,474
---------- ---------- ---------
Cash and cash equivalents, end of year............... $14,140,987 $ 3,570,468 $ 981,073
========== ========== =========
</TABLE>

Continued

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 37

QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Supplemental disclosures:
Cash paid during the year for:
Interest........................................ $ 473,289 $ 334,318 $ 785,093
Income taxes.................................... 6,627,866 50,010 2,902
Noncash investing and financing activities:
Repurchase of minority interest.................... $ 33,258
Details of acquisition (Note 7):
Fair value of assets acquired...................... $36,031,621
Liabilities assumed................................ (11,731,621)
Stock issued....................................... (22,800,000)
----------
Cash paid....................................... 1,500,000
Less: cash acquired................................ (2,400,040)
----------
Net cash received from acquisition.............. $ (900,040)
==========
</TABLE>

During fiscal 1996, options for shares of common stock were exercised by certain
employees and directors. A tax benefit of approximately $57,330 was recorded as
an increase in additional paid-in capital and a reduction to income taxes
currently payable (Note 9.)

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 38

QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The consolidated financial statements of Quintel Entertainment, Inc. (the
"Company") include the accounts of its wholly-owned subsidiaries and its
majority-owned and controlled joint ventures. On September 10, 1996, the Company
acquired the remaining interest in New Lauderdale, L.C. ("New Lauderdale") (see
Note 7). The consolidated financial statements of the Company include the
accounts of New Lauderdale subsequent to this date. New Lauderdale had
previously been accounted for by the equity method as a 50% owned joint venture.
All significant intercompany transactions and balances have been eliminated in
consolidation.

Reorganization and Basis of Presentation

The Company was organized under the laws of the State of Delaware in
November 1993, under the name U.S. Teleconnect, Inc. Pursuant to a plan of
reorganization, as of December 5, 1995, the effective date of a public offering,
(i) the stockholders of Creative Direct Marketing, Inc. ("CDM") and Calling Card
Co., Inc. ("CCCI"), which, prior to the reorganization, were predecessor
entities under common control, contributed their respective shares of common
stock to the Company and the companies became wholly-owned subsidiaries of the
Company, (ii) the Company effected a 60,000-for-one stock split, and (iii) the
Company changed its name to Quintel Entertainment, Inc. and Subsidiaries.

Public Offering

On December 5, 1995, the Company completed an initial public offering (the
"Offering") of 3,225,000 shares of common stock with net proceeds received of
approximately $13,402,000.

In connection with the terms of the offering, the Company declared a final
S corporation distribution to its shareholders in the amount of its aggregate
undistributed taxable income, determined in conformity with generally accepted
accounting principles, except for $575,000 which was contributed to paid-in
capital. The distribution was funded through a series of shareholder notes,
bearing interest at 9%. As of November 30, 1996, there were no amounts
outstanding under such notes. In addition, the Company issued 320,000 warrants
to the underwriter for the purchase of the Company's stock at an exercise price
of $8.25 per share. No warrants have been exercised to date.

Pro Forma Presentation

As a result of the historical presentation and change in tax status in
connection with the public offering, pro forma information, which presents
results as if the Company had always been a C corporation, is presented on the
face of the accompanying statements of income.

Nature of Business

The Company is primarily engaged in providing a variety of telephone
entertainment services to the general public. These services are provided using
several billing platforms (billing and collection vehicles) over the telephone
lines of various local telephone companies and long distance carriers. These
services include various programs such as live psychic readings, tarot card
readings and daily horoscope and astrology readings. Services are accessed by
and billed to consumers primarily through the use of "900" numbers. The Company
currently markets basic voice mail services and theme related club memberships
and continues to service an existing enhanced voice mail product customer base
(collectively "club and VM products and services"). These networks enable all
members to enjoy certain monthly club services for a flat monthly rate.

F-7
<PAGE> 39

QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Consumers are solicited by the Company through a variety of marketing
techniques including television commercials and infomercials, print advertising,
direct mail, telemarketing, and premium gift offerings. Customers are also
obtained through solicitation by Psychic Readers Network, Inc. ("PRN") (see Note
7). The Company has contracts with a limited number of service bureaus for the
purpose of call processing, billing and collection. Under these contracts, the
bureaus process and accumulate call data, summarize the information, and forward
the data to the local telephone companies and/or long distance carriers for the
ultimate billing to and collection from the Company's customers.

The Company also contracts with numerous organizations, including PRN, to
provide live psychics, live operator services, computer services, media
purchasing, telemarketing and other services necessary to establish, fulfill and
maintain the Company's programs. Certain non psychic services previously
provided by PRN came under the direct control of the Company in connection with
the acquisition of New Lauderdale (see Note 7).

Revenue Recognition

Revenues from all billable platforms are recorded at the time the customer
initiates a billable transaction, except for customer fees for club and VM
products and services. New customer club and VM product fees are recognized upon
approved enrollment and when the service is rendered. Continuing club and VM
product fees are recognized as customers automatically renew each month. All
revenues are recognized net of an estimated provision for customer chargebacks,
which include refunds, credits, and uncollectible amounts. The Company estimates
the reserve for customer chargebacks monthly based on updated chargeback
history. New products and platforms without a history are reserved based on
experience with similar products and platforms and adjusted as further
information becomes available. Since reserves are established prior to the
periods in which chargebacks are actually incurred, the Company's revenues may
be adjusted in later periods in the event that the Company's incurred
chargebacks vary from estimated amounts. For the years ended November 30, 1996,
1995 and 1994, provisions for chargebacks were $46,352,638, $19,065,077 and
$10,841,574, respectively.

Included in chargebacks for the year ended November 30, 1995 were
approximately $1,000,000 of refunds and credits issued relating to a billing
platform that was terminated by the Company in late fiscal 1994. This write-off
was the direct result of published third party public awareness reports issued
primarily during 1995 as to the availability of refunds and credits for
telephone charges billed under this discontinued platform.

Accounts Receivable

The Company has agreements with service bureaus that provide advances
against accounts receivable collections at interest rates calculated primarily
at prime plus increments up to 6%. Amounts advanced under the agreements are on
a revolving basis and are primarily limited to 50% of a defined borrowing base,
net of related service fees and costs, as applicable. Certain advances under the
agreements are due on demand and all are collateralized by the accounts
receivable collected by the service bureaus. During fiscal 1996 and 1995, the
gross advances and weighted average interest rate on the advances received were
approximately $9,156,355 and $23,029,599, respectively, and 13.17% and 14.75%,
respectively. As of November 30, 1996, there were no advances outstanding under
these agreements.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash, investments and accounts receivable.

F-8
<PAGE> 40

QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company invests a portion of its excess cash in debt instruments and
has established guidelines relative to diversification that maintain safety and
liquidity. The Company has not experienced any losses to date.

The Company's collections are received primarily through two service
bureaus which process and collect all of the Company's billings. In conjunction
with servicing the accounts receivable, the service bureaus advance amounts
based on eligible accounts receivable and withhold certain cash receipts as a
reserve. As a result, the Company's exposure to the concentration of credit risk
primarily relates to all collections on behalf of the Company by these service
bureaus.

Cash balances are held principally at three financial institutions and may,
at times, exceed insurable amounts. The Company believes it mitigates its risks
by investing in or through major financial institutions. Recoverability is
dependent upon the performance of the institutions.

Cash and Cash Equivalents

All short-term investments with an original maturity of three months or
less are considered to be cash equivalents.

Marketable Securities

During fiscal 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Company's marketable securities consist of government
obligations. These securities, which the Company intends to hold only for an
indefinite period of time, are classified as available for sale. Available for
sale securities are carried at fair value, with unrealized gains and losses, net
of tax effects, reported as a separate component of shareholders' equity, until
realized. The contractual maturities of all available for sale debt securities
at November 30, 1996 are within one year. The amortized cost of available for
sale debt securities is $14,578,589 at November 30, 1996.

Gross unrealized holding gains were $10,281, net of deferred taxes of
$6,854, at November 30, 1996. Proceeds and gross realized gains from the sale of
securities classified as available for sale for the year ended November 30, 1996
were $23,240,075 and $384,250, respectively. For the purpose of determining
gross realized gains, the cost of securities is based upon specific
identification.

Property, Plant and Equipment

Property, plant and equipment are stated at cost and are depreciated using
the straight-line method over a five to seven year useful life depending on the
nature of the asset. Leasehold improvements are amortized over the life of the
improvement or the term of the lease, whichever is shorter. Expenditures for
maintenance and repairs are expensed as incurred while renewals and betterments
are capitalized.

Upon retirement or disposal, the asset cost and related accumulated
depreciation and amortization are eliminated from the respective accounts and
the resulting gain or loss, if any, is included in the results of operations for
the period.

Intangible Assets

Goodwill represents the excess of purchase price over the fair value of
identifiable net assets of companies acquired. Goodwill and other intangibles
are amortized on a straight-line basis from one to fifteen years.

F-9
<PAGE> 41

QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Other Assets

At November 30, 1995, the Company had incurred costs aggregating $1,224,962
in connection with the public offering of its equity securities. These costs
were deferred, and included in other assets and were charged against paid-in
capital as of the effective date of the offering.

Income Taxes

Prior to the reorganization described above, the Company and CDM had
elected treatment as S corporations for Federal and state income taxation as of
November 1, 1994 and August 1, 1994, respectively. CCCI was an S corporation for
federal and state income taxation since inception. S corporation taxable income,
whether distributed or not, is passed through and taxed at the shareholder
level. Accordingly, no provision for Federal income taxes was included in the
accompanying statements of operations for the years ended November 30, 1995 and
1994. For New York and New Jersey income tax purposes, a corporate level
surcharge is imposed on the Company's allocable income, calculated using an
effective rate primarily representing the difference between the subchapter C
corporation level tax and the highest state personal income tax rate.

On closing of the public offering, the Company's income tax status as an S
corporation was terminated. The Company was converted to a C corporation,
adopted the accrual basis of accounting which became effective as of the
beginning of fiscal 1996 and is now subject to both federal and state income
taxes. The deferred tax benefit resulting from the conversion is reflected in
the fiscal 1996 operations. (See Note 5.)

The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.

Earnings Per Share

Earnings per share are computed by dividing net earnings by the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares include the Company's outstanding stock options
and warrants, if dilutive.

Pro forma net earnings per share are computed by dividing pro forma net
earnings by the weighted average number of common and common equivalent shares
outstanding during the period.

Advertising Expenses

The Company expenses advertising costs, which consist primarily of print,
media, production, telemarketing and direct mail related charges, when the
related advertising occurs. Total advertising expense for fiscal 1996, 1995, and
1994 were approximately $31,795,000, $15,325,600 and $7,282,000, respectively.
Included in prepaid expenses and other current assets is approximately
$1,069,700 and $259,000 relating to prepaid advertising at November 30, 1996 and
1995, respectively.

Newly Issued Accounting Standards

Effective December 1, 1995, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of." Pursuant to SFAS No.
121, if events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable, the Company estimates the future cash flows
expected to result from the use of the asset and its eventual disposition. If
the sum of the expected future undiscounted cash

F-10
<PAGE> 42

QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

flows is less than the carrying amount of the asset, an impairment loss is
recognized. There was no effect on the accompanying financial statements related
to the adoption of SFAS No. 121.

In October, 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which establishes financial accounting and reporting standards
for stock based plans. The Statement, which becomes effective in fiscal 1997,
requires the Company to choose between accounting for issuances of stock and
other equity instruments to employees based on their fair value or to continue
to use an intrinsic value based method and disclosing the pro forma effects such
accounting would have had on the Company's net income and earnings per share.
The Company intends to adopt the disclosure only provisions of the statement.

Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain prior year amounts have been reclassified to conform with the
current period presentation.

2. RELATED PARTY TRANSACTIONS:

The Company purchased various mailing lists and design, copyrighting and
artistic development services from related entities owned by certain of the
Company's officers/shareholders. The agreements require the Company to pay fees
equal to 20% of rental revenues and a management fee of 10%, plus any fees in
connection with processing and mailing lists. During fiscal 1996, 1995 and 1994,
costs of approximately $535,000, $160,000 and $871,000, respectively, were
incurred by the Company for such services.

The Company incurred approximately $242,000, $168,000 and $140,000,
respectively, during fiscal 1996, 1995 and 1994, in accounting fees to a firm
having a member who is also a director of the Company. In addition, the Company
incurred approximately $334,000, $140,000 and $89,000, respectively, during
fiscal 1996, 1995 and 1994, in legal fees to a firm having a member who is also
a director of the Company.

The Company received management fee income from New Lauderdale (prior to
acquisition) during fiscal 1996 and 1995 in the amounts of $100,000 and
$450,000, respectively (see Note 7). During fiscal 1996, the Company incurred
approximately $100,250 in interest expense relating to transactions with New
Lauderdale.

For the years ended November 30, 1996 and 1995, the Company paid aggregate
fees of approximately $8,560,000 and $3,993,000, respectively, to PRN for
psychic operator services under an agreement that extends to fiscal 2001. Since
February 1996, PRN also provided certain non-psychic services and facilities to
the Company for approximately $30,000 per month. During fiscal 1996, the Company
received commissions of approximately $171,000 from PRN for purchasing
television media time on their behalf.

In connection with the acquisition of PRN's interest in New Lauderdale (see
Note 7), a principal shareholder of PRN was elected a director of the Company
and entered into an employment agreement with the Company (see Note 8). The
Company incurred approximately $39,000 in expense relating to this employment
agreement in fiscal 1996.

F-11
<PAGE> 43

QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. PROPERTY AND EQUIPMENT:

Property and equipment for the years ended November 30, 1996 and 1995
consists of the following:

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Furniture and fixtures............................... $155,812 $ 55,329
Machinery and equipment.............................. 187,977 73,527
Telephone and facsimile.............................. 46,432 29,915
Leasehold improvements............................... 20,178
-------- --------
410,399 158,771
Less, accumulated depreciation and amortization...... 65,992 16,402
-------- --------
$344,407 $142,369
======== ========
</TABLE>

Depreciation and amortization expense for the years ended November 30,
1996, 1995 and 1994 was approximately $49,590, $14,922 and $1,480, respectively.

4. INTANGIBLE ASSETS:

Intangible assets, at cost, acquired at various dates are as follows:

<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------- AMORTIZATION
1996 1995 PERIOD
----------- ------- ------------
<S> <C> <C> <C>
Goodwill................................ $19,186,635 $33,258 5-15
Customer lists.......................... 567,686 1
Commercials and infomercials............ 714,769 1
Service contract........................ 2,723,222 4
----------- -------
23,192,312
Less accumulated amortization......... 1,225,228 6,652
----------- -------
$21,967,084 $26,606
=========== =======
</TABLE>

Amortization expense was $1,218,576 and $6,652 for the years ended November
30, 1996 and 1995, respectively.

5. INCOME TAXES:

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------------
1996 1995 1994
----------- -------- --------
<S> <C> <C> <C>
Federal:
Current................................ $ 8,852,749
Deferred............................... (4,723,850)
---------- -------- -------
4,128,899
---------- -------- -------
State:
Current................................ 1,661,946 $283,829 $ 87,566
Deferred............................... (892,212) (63,494) (32,724)
---------- -------- -------
769,734 220,335 54,842
---------- -------- -------
Total provision................ $ 4,898,633 $220,335 $ 54,842
========== ======== =======
</TABLE>

F-12
<PAGE> 44

QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following is a reconciliation of the income tax expense computed using
the statutory federal income tax rate to the actual income tax expense and its
effective income tax rate:

<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------------------------
1996 1995 1994
----------- ----------- ---------
<S> <C> <C> <C>
Income tax expense at federal
statutory rate..................... $ 5,975,572 $ 4,659,509 $ 517,188
Benefit of S corporation election.... (4,659,509) (517,188)
State income taxes, net of federal
income tax benefit................. 500,327 220,335 54,842
Deferred benefit arising from
conversion to C corporation........ (1,781,700)
Other, individually less than 5%..... 204,434
---------- -------- -------
$ 4,898,633 $ 220,335 $ 54,842
========== ======== =======
</TABLE>

The components of deferred tax assets are as follows:

<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------
1996 1995
---------- -------
<S> <C> <C>
Deferred tax assets:
Current:
Accrued expenses and reserves not currently
deductible..................................... $6,742,755 $39,957
Miscellaneous.................................... 219,185
---------- -------
Current deferred tax assets................. $6,961,940 $39,957
========== =======
</TABLE>

A deferred tax asset of $1,312,775 was recorded in connection with the
acquisition of New Lauderdale (see Note 7).

6. REGULATORY ISSUES AND OTHER RISK CONSIDERATIONS:

The Company's primary contact with its customers is over the telephone
lines and services of numerous local telephone companies and long distance
carriers. The Company cannot predict the impact, if any, of changes in various
regulations affecting the Company, directly, or through one of the telephone
companies.

There can be no assurance that the Company will be able, for financial or
other reasons, to comply with applicable laws and regulations or that regulatory
authorities will not take action to limit or prevent the Company from
advertising, marketing or promoting its services and club and VM products and
services or otherwise require the Company to discontinue or substantially modify
the content of its services.

The Company has received requests for information from regulatory
authorities, regarding investigations of certain of its telemarketing
activities. Management believes, based on advice from counsel, that their
investigations will not result in enforcement actions or claims which would have
a material adverse effect on the financial statements.

The Company is dependent on service bureaus to process its calls, billings
and collections. While the Company believes its processing can be transferred to
other service bureaus, there are no contracts in place with alternate providers.
Accordingly, failure by any of the existing bureaus would result in material
interruptions to the Company's operations.

7. NEW LAUDERDALE:

In December 1994, the Company entered into an agreement with PRN, an
unrelated entity at that time, to establish a joint venture known as New
Lauderdale, L.C. On September 10, 1996, the Company acquired

F-13
<PAGE> 45

QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

the remaining 50% interest in New Lauderdale for 3,200,000 common shares. PRN
subsequently distributed such shares to its shareholders. In addition to
receiving its share of New Lauderdale's earnings through the closing date, PRN
received approximately $1,500,000 in cash for the deferred tax benefit to New
Lauderdale resulting from the transaction. The common shares were valued at the
market price on the date of the letter of intent ($7.125 per share). The
acquisition has been accounted for using the purchase method of accounting and,
accordingly, the purchase price has been allocated to the assets purchased based
upon the fair values at the date of acquisition. As a result, approximately
$23,159,000 of the purchase price has been allocated to goodwill, customer lists
and other intangibles which are being amortized on a straight line basis over a
period from 1 to 15 years. (See Note 4.)

The operating results of the acquisition have been included in the
consolidated statement of income from the date of the acquisition. The following
pro forma information has been prepared assuming that this acquisition had taken
place at the beginning of the respective periods. The pro forma information
includes adjustments for amortization of intangibles arising from the
transaction and an adjustment of the tax provision for fiscal 1995 representing
the statutory federal rate assuming the Company had always been a C corporation.
The pro forma financial information is not necessarily indicative of the results
of operations as they would have been had the transaction been effected on the
assumed dates.

<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------------
1996 1995
------------ -----------
<S> <C> <C>
Net revenues..................................... $150,284,451 $78,749,359
Net income....................................... 12,351,385 8,594,653
Earnings per share............................... .66 .58
</TABLE>

Prior to the acquisition on September 10, 1996, the terms of the joint
venture agreement required each party to the joint venture to provide
management, consulting and financial services for a monthly fee of $50,000. Such
services included, but were not necessarily limited to, advice and assistance
concerning any and all aspects of the operations, planning and financing of the
venture's operations. The fee provision of the agreement was terminated
effective February 1, 1996.

The Company has recognized income from New Lauderdale (50% of its earnings
which are net of normal costs of its operations and the fees referred to above),
of $4,939,653 and $2,860,304 and received distributions of $4,432,000 and
$1,540,000 for the period December 1, 1995 to September 10, 1996 and for the
year ended November 30, 1995, respectively.

Following is condensed financial data for the joint venture:

<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 10, NOVEMBER 30,
1996 1995
------------- ------------
<S> <C> <C>
Current assets (principally accounts
receivable)..................................... $ 13,584,579 $ 11,205,559
Current liabilities (principally reserve for
customer chargebacks)........................... 11,731,621 8,514,951
Members' equity(a)................................ 1,852,958 2,690,608
</TABLE>

- ---------------

(a) Amount as of September 10, 1996 relates solely to the Company's equity.

<TABLE>
<CAPTION>
FOR THE
PERIOD
ENDED YEAR ENDED
SEPTEMBER 10, NOVEMBER 30,
1996 1995
------------- ------------
<S> <C> <C>
Net revenues...................................... $ 63,617,683 $ 28,248,093
Gross profit...................................... 12,258,916 8,054,330
Net income........................................ 9,879,308 5,720,608
</TABLE>

F-14
<PAGE> 46

QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. COMMITMENTS AND CONTINGENCIES:

Leases

The Company is obligated under a noncancelable real property operating
lease agreements that expires in fiscal 2006. Future minimum rents consist of
the following at November 30, 1996:

<TABLE>
<S> <C>
1997............................................. $ 152,500
1998............................................. 262,500
1999............................................. 262,500
2000............................................. 262,500
2001............................................. 282,500
Thereafter....................................... 1,505,000
----------
$2,727,500
==========
</TABLE>

The lease contains escalation clauses with respect to real estate taxes and
related operating costs. The accompanying financial statements reflect rent
expense on a straight-line basis over the term of the lease as required by
generally accepted accounting principles. Rent expense was $210,153, $96,834 and
$28,800 for fiscal 1996, 1995 and 1994, respectively.

Employment Agreements and Consulting

The Company has executed employment agreements, expiring November 30, 1998,
with certain executive officers of the Company. Minimum future payments under
such agreements are as follows:

Commencing with fiscal 1996, in the event the Company achieves pre-tax
earnings of $10,000,000 or more for any such fiscal year, the Company may grant
bonuses to such persons, subject to approval of the Compensation Committee of
the Board of Directors, in an aggregate amount not to exceed 5% of pre-tax
earnings for such year. Such bonuses amounted to approximately $898,600 at
November 30, 1996

The Company has also entered into a consulting agreement with a
director/shareholder, expiring on November 30, 1998. Under the terms of such
agreement, the director/shareholder is to provide services in connection with
identification and engagement of celebrities to endorse the Company's services,
engagement of independent producers to produce commercials and infomercials and
the development of new entertainment services. In addition, under the agreement,
the director/shareholder has the right to become a full-time employee of the
Company under certain circumstances, and to receive an initial base salary at
the rate of $200,000 per annum with 10% annual increases. Upon commencement of
such full-time employment he is entitled to share in the 5% bonus with the other
executive officers described above. Minimum future payments under the current
consulting arrangement are as follows:

F-15
<PAGE> 47

QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In connection with the acquisition of PRN's interest in New Lauderdale (see
Note 7), a principal shareholder of PRN was elected a director of the Company
and entered into an employment agreement with the Company. Minimum future
payments under this agreement are as follows:

Other

As a result of the acquisition of New Lauderdale (see Note 7), the Company
has agreements with various celebrities to promote its telephone entertainment
services. These agreements are generally for a term of one year, which may be
extended under certain circumstances, and grant worldwide rights to use an
individual's name and likeness in connection with services promoted by
advertisements. Compensation varies by individual and generally consists of an
advance payment and royalties based on defined revenues earned by the Company.
Total royalty expenses incurred for fiscal 1996 and 1995 were $261,566 and
$205,285, respectively.

Litigation

There are pending claims and litigations against the Company arising in the
ordinary course of business. Management believes, on the basis of its
understanding and advice of counsel, that these actions will not result in
payment of amounts, if any, which would have a material adverse effect on the
Company's financial statements.

9. STOCK OPTION PLAN:

During fiscal 1995, the Company implemented the 1995 Stock Option Plan (the
"Stock Option Plan") effective as of October 1995. The Stock Option Plan
provides for the grant of options to purchase up to 750,000 shares of the
Company's common stock either as incentive stock options ("Incentive Stock
Options") within the meaning of Section 422 of the United States Internal
Revenue Code or as options that are not intended to meet the requirements of
such section ("Nonstatutory Stock Options"). Options to purchase shares may be
granted under the Stock Option Plan to persons who, in the case of Incentive
Stock Options, are employees (including officers) of the Company, or, in the
case of Nonstatutory Stock Options, are employees (including officers),
consultants or nonemployee directors of the Company to the Company. The Stock
Option Plan was amended in September 1996 to provide for the granting of options
to purchase an additional 500,000 shares of the Company's common stock. After
this amendment, grants are available under the Stock Option Plan to purchase a
total of 1,250,000 shares of the Company's common stock.

The exercise price of options granted under the Stock Option Plan must be
at least equal to the fair market value of such shares on the date of grant, or,
in the case of Incentive Stock Options granted to the holder of 10% or more of
the Company's Common Stock, at least 110% of the fair market value of such
shares on the date of grant. The maximum exercise period for which Incentive
Stock Options may be granted is ten years from the date of grant (five years in
the case of an individual owning more than 10% of the Company's common stock).
The aggregate fair market value (determined at the date the option is granted)
of shares with respect to which Incentive Stock Options are exercisable for the
first time by the holder of the option during any calendar year shall not exceed
$100,000. If such amount exceeds $100,000, the Board of Directors or the
Committee may, when the Options are exercised and the shares transferred to an
employee, designate those

F-16
<PAGE> 48

QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

shares that will be treated as Incentive Stock Options and those that will be
treated as Nonstatutory Stock Options.

In addition, the Company's Stock Option Plan provides for certain automatic
grants of options to the Company's non-employee directors in consideration for
their services performed as directors of the Company and for attendance at
meetings. It provides for a one-time automatic grant of an option to purchase
25,000 shares of common stock at market value to those directors who were
serving on the Board of Directors at the inception of the Stock Option Plan and
also to those persons who become nonemployee directors of the Company in the
future, upon their appointment or election as directors of the Company. In
addition, the amended Stock Option Plan provides for quarterly grants to each
non-employee director of the Company of options to purchase 6,250 shares of the
Company's common stock at the market value on the date of each grant.

Information regarding the Company's stock option plan is summarized below:

<TABLE>
<CAPTION>
OPTION PRICE NUMBER
STOCK OPTIONS (PER SHARE) OF SHARES
-------------------------------------------------- -------------- ---------
<S> <C> <C>
Outstanding at November 30, 1995.................. $ 5.00 394,000
Granted........................................... 4.75 - 10.12 297,250
Exercised......................................... 5.00 (27,368)
Cancelled or lapsed............................... 5.00 (10,032)
------------- -------
Outstanding at November 30, 1996.................. $4.75 - 10.12 653,850
============= =======
356,000
Available for grant at November 30, 1995.......... =======
Available for grant at November 30, 1996 (all 568,782
currently exercisable).......................... =======
</TABLE>

10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):

The following is a summary of the unaudited quarterly results of operations
for fiscal 1996 and 1995:
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------
NOVEMBER FEBRUARY
30, AUGUST 31, MAY 31, 29,
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1996:
Net revenues.............. $39,383,333 $17,493,179 $13,765,685 $16,018,571
Gross profit.............. 11,288,981 5,737,501 1,638,439 3,340,591
Income before income
taxes.................. 7,080,889 4,918,871 1,142,807 3,930,396
Net income................ 4,165,501 3,111,288 595,452 4,302,189
Earnings per share........ 0.23 0.20 0.04 0.28

<CAPTION>
NOVEMBER FEBRUARY
30, AUGUST 31, MAY 31, 28,
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1995:
Net revenues................ $15,897,677 $14,314,288 $12,074,304 $8,214,988
Gross profit................ 4,752,752 3,965,826 3,644,280 1,405,798
Income before income
taxes....................... 4,678,595 4,190,879 3,394,756 1,048,654
Pro forma net income........ 2,701,683 2,256,577 2,079,288 642,240
Pro forma earnings per
share....................... 0.23 0.19 0.17 0.06
</TABLE>

During the fourth quarter of fiscal 1996, the Company recorded an accrual
of approximately $1,070,000 relating to compensation.

F-17
<PAGE> 49

QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<TABLE>
<CAPTION>
COL. C
----------------------------
COL. B ADDITIONS COL. E
---------- ---------------------------- COL. D -----------
COL. A BALANCE AT CHARGED TO CHARGED TO ------------- BALANCE AT
- --------------------------------- BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS - END OF
DESCRIPTION OF PERIOD EXPENSES RECEIVABLE(1) DESCRIBE(2) PERIOD
- --------------------------------- ---------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED NOVEMBER 30, 1996
Reserve for customer
chargebacks.................... $4,025,130 $46,352,638 $9,336,755 $ 39,633,620 $20,080,903
========== =========== ========== =========== ===========
YEAR ENDED NOVEMBER 30, 1995
Reserve for customer
chargebacks.................... $1,176,902 $19,065,077 -- $ 16,216,849 $ 4,025,130
========== =========== ========== =========== ===========
YEAR ENDED NOVEMBER 30, 1994
Reserve for customer
chargebacks.................... $1,098,135 $10,841,574 -- $ 10,762,807 $ 1,176,902
========== =========== ========== =========== ===========
</TABLE>

- ---------------
(1) Assumed liability in connection with New Lauderdale acquisition (see Note
7).

(2) Chargebacks refunded during the year.

S-1
<PAGE> 50
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>

Exhibit
No. Description
- ------- -----------
<S> <C>
2.1+ Definitive Form of Acquisition Agreement by and among the Company,
Calling Card Co., Inc. and Psychic Readers Network, Inc. (1)
2.2 Definitive Information Statement(2)
3.1 Articles of Incorporation of the Company, as amended (3)
3.2 By-Laws of the Company (4)
4.1 Form of certificate evidencing shares of Common Stock (5)
10.1 1996 Stock Option Plan (6)
10.2 Employment Agreement by and between the Company and
Jeffrey L. Schwartz (5)
10.3 Employment Agreement by and between the Company and Jay Greenwald (5)
10.4 Employment Agreement by and between the Company and Claudia Newman Hirsch (5)
10.5 Employment Agreement by and between the Company and Andrew Stollman (5)
10.6* Amendment No. 1 to Employment Agreement by and between the Company and Andrew
Stollman
10.7 Employment Agreement by and between the Company and Steven L. Feder (1)
10.8 Consulting Agreement by and between the Company and Michael G. Miller (5)
10.9 Definitive Form of Non-Competition and Right of First Refusal Agreement between the
Company and Steven L. Feder, Thomas H. Lindsey and Peter Stolz (1)
10.10 Definitive Form of Non-Competition and Right of First Refusal Agreement between the
Company and Psychic Readers Network, Inc. (1)
10.11* Lease of the Company's offices at One Blue Hill Plaza, Pearl River, New York
10.12+ Servicing Agreement between West Interactive Corporation and the Company (4)
10.13+ Servicing Agreement between West Interactive Corporation and New Lauderdale (4)
10.14 Collateral Note and Security Agreement between West Interactive Corporation and the
Company (4)
10.15 Collateral Note and Security Agreement between West Interactive Corporation and New
Lauderdale (4)
10.16 Telemarketing Services Agreement between West Telemarketing Corporation Outbound
and the Company (4)
10.17+ Billing and Information Management Services Agreement and Advanced Payment
Agreement between Enhanced Services Billing, Inc. and the Company (4)
10.18 Amended and Restated Psychic Readers Network Live Operator Service Agreement
between Psychic Readers Network, Inc. and the Company (1)
10.19*+ Telemarketing Services Agreement between Advanced Access, Inc. and the Company (P)
10.20*+ Telemarketing Services Agreement between APAC TeleServices, Inc. and the Company
(P)
10.21*+ Billing Services Agreement between Hold Billing Services, Ltd. and the Company (P)
10.22*+ Addendum No.1 to Billing Services Agreement between Hold Billing Services, Ltd. and
the Company (P)
10.23*+ Telemarketing Services Agreement between Optima Direct, Inc. and the Company (P)
10.24*+ Billing and Collection Services Agreement between Federal Transtel, Inc. and the
Company (P)
10.25*+ Telemarketing Services Agreements between New Media Telecommunications, Inc. and
the Company (P)
10.26*+ Telecommunications Services Agreement between AT&T Communications, Inc. and the
Company (P)
21* Subsidiaries of the Company
27* Financial Data Schedule

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* Filed herewith.