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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED AUGUST 31, 1998
[ ] 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
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QUINTEL COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 22-3322277
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
<TABLE>
<S> <C>
ONE BLUE HILL PLAZA
PEARL RIVER, NEW YORK 10965
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 620-1212
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's common stock is
16,679,746 (as of 10/14/98).
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QUINTEL COMMUNICATIONS, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
QUARTER ENDED AUGUST 31, 1998
ITEMS IN FORM 10-Q
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PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 6
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ None
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 13
Item 2. Changes in Securities and Use of Proceeds................... None
Item 3. Defaults Upon Senior Securities............................. None
Item 4. Submission of Matters to a Vote of Security Holders......... 14
Item 5. Other Information........................................... None
Item 6. Exhibits and Reports on Form 8-K............................ 15
SIGNATURES
</TABLE>
1
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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<CAPTION>
AUGUST 31, NOVEMBER 30,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 7,069,175 $ 10,063,717
Marketable securities..................................... 16,928,831 24,730,706
Accounts receivable, trade................................ 26,373,163 46,310,960
Deferred income taxes..................................... 11,516,822 10,021,057
Due from related parties.................................. 3,527,601 237,485
Prepaid expenses and other current assets................. 3,985,337 4,090,452
----------- ------------
Total current assets.............................. 69,400,929 95,460,377
Property and equipment, at cost, net of accumulated
depreciation.............................................. 2,177,900 1,041,790
Intangible assets, net...................................... 19,496,608
----------- ------------
$71,578,829 $115,998,775
=========== ============
LIABILITIES:
Current liabilities:
Accounts payable.......................................... $ 6,797,284 $ 4,653,862
Accrued expenses.......................................... 4,071,081 7,956,308
Reserve for customer chargebacks.......................... 15,858,805 38,196,114
Due to related parties.................................... 1,115,244 979,405
----------- ------------
Total current liabilities......................... 27,842,414 51,785,689
Deferred income taxes....................................... 506,789
----------- ------------
Total liabilities................................. 27,842,414 52,292,478
----------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock -- $.001 par value; 1,000,000 shares
authorized; none issued and outstanding...................
Common stock -- $.001 par value; authorized 50,000,000
shares; issued and outstanding 18,649,347 shares.......... 18,649 18,649
Additional paid-in capital.................................. 39,027,700 39,027,700
Retained earnings........................................... 14,302,910 24,663,931
Unrealized (loss) on marketable securities.................. (3,060) (3,983)
----------- ------------
53,346,199 63,706,297
Common stock reacquired and held in treasury -- at cost
2,519,601 shares.......................................... (9,609,784)
----------- ------------
Total stockholders' equity........................ 43,736,415 63,706,297
----------- ------------
$71,578,829 $115,998,775
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
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QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- -----------------------------
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1998 1997 1998 1997
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Net revenue........................ $16,509,577 $44,688,568 $ 74,405,166 $ 142,072,114
Cost of sales...................... 11,438,705 40,536,398 57,455,092 110,590,626
----------- ----------- ------------ -------------
Gross profit..................... 5,070,872 4,152,170 16,950,074 31,481,488
Selling general and administrative
expenses......................... 3,503,384 4,336,142 12,363,517 13,639,093
Goodwill impairment charge......... 18,514,435
----------- ----------- ------------ -------------
1,567,488 (183,972) (13,927,878) 17,842,395
Interest expense................... (57,062) (19,440) (129,971) (57,133)
Other income....................... 545,398 510,461 1,755,851 1,227,693
----------- ----------- ------------ -------------
Income (loss) before provision
for income taxes.............. 2,055,824 307,049 (12,301,998) 19,012,955
Provision (benefit) for income
taxes............................ 594,922 122,820 (1,940,977) 7,560,789
----------- ----------- ------------ -------------
Net income (loss)................ $ 1,460,902 $ 184,229 $(10,361,021) $ 11,452,166
=========== =========== ============ =============
Basic earnings (loss) per share
(Note 2):
Net income (loss)................ $ .09 $ .01 $ (.60) $ .62
----------- ----------- ------------ -------------
Average shares outstanding.... 16,543,638 18,601,751 17,374,571 18,530,707
=========== =========== ============ =============
Diluted income (loss) per common
share (Note 2):
Net income (loss)................ $ .09 $ .01 $ (.60) $ .61
----------- ----------- ------------ -------------
Average shares outstanding.... 16,551,950 18,975,763 17,374,571 18,817,821
=========== =========== ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
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QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
AUGUST 31, AUGUST 31,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income......................................... $ (10,361,021) $ 11,452,166
Items not affecting cash:
Depreciation and amortization.......................... 1,150,334 2,014,704
Goodwill impairment charge............................. 18,514,435
Reserve for customer chargebacks....................... (22,337,309) 11,460,263
Deferred income taxes.................................. (11,786,126) (2,233,539)
Other.................................................. (302,829) (896,002)
Changes in assets and liabilities:
Accounts receivable.................................... 19,937,797 (9,694,496)
Prepaid expenses and other current assets.............. 111,115 (323,259)
Accounts payable....................................... 2,143,422 1,189,412
Income tax payable..................................... (2,068,188)
Due to related parties, net............................ 6,629,295 (367,434)
Other, principally accrued expenses.................... (3,885,227) 3,769,482
------------- -------------
Net cash (used in) provided by operating
activities........................................ (186,114) 14,303,109
------------- -------------
Cash flows from investing activities:
Purchases of securities................................... (59,503,000) (48,661,416)
Proceeds from sales of securities......................... 67,606,000 32,000,000
Other, principally capital expenditures................... (1,301,644) (736,259)
------------- -------------
Net cash provided by (used in) investing
activities........................................ 6,801,356 (17,397,675)
------------- -------------
Cash flows from financing activities:
Acquisition of treasury stock............................. (9,609,784)
Proceeds from exercise of stock options................... 1,167,231
------------- -------------
Net cash (used in) provided by financing
activities........................................ (9,609,784) 1,167,231
------------- -------------
Net decrease in cash and cash equivalents................... (2,994,542) (1,927,335)
Cash and cash equivalents, beginning of period.............. 10,063,717 14,140,987
------------- -------------
Cash and cash equivalents, end of period.................... $ 7,069,175 $ 12,213,652
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
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QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL:
The consolidated financial statements of Quintel Communications, Inc. and
Subsidiaries, formerly known as Quintel Entertainment, Inc. and Subsidiaries,
for the three and nine month periods ended August 31, 1998 and August 31, 1997
are unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results for the interim
period. The consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto, together with
management's discussion and analysis of financial condition and results of
operations, contained in the Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1997. The results of operations for the three and nine
months ended August 31, 1998 are not necessarily indicative of the results for
the entire fiscal year ending November 30, 1998.
2. EARNINGS PER SHARE:
In 1997, the Financial Accounting Standards Board adopted Statement No.
128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Earnings per share amounts for the 1997 periods have
been restated to conform to the SFAS No. 128 requirements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- -----------------------
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Denominator:
Denominator for basic earnings per
share -- weighted-average
shares........................... 16,543,638 18,601,751 17,374,571 18,530,707
Effect of dilutive securities:
Stock options.................... 8,312 297,701 172,938
Warrants......................... 76,311 114,176
---------- ---------- ---------- ----------
Dilutive potential common shares:
Denominator for diluted earnings
per share -- adjusted
weighted-average shares and
assumed conversions............ 16,551,950 18,975,763 17,374,571 18,817,821
========== ========== ========== ==========
</TABLE>
Options and warrants to purchase 1,313,561 shares of common stock were
outstanding for the nine months ended August 31, 1998, respectively, but were
not included in the computation of diluted earnings per share because their
effect would be anti-dilutive.
3. ADVERTISING EXPENSES:
The Company generally expenses advertising costs, which consist primarily
of print, media, production, telemarketing and direct mail related charges, when
the related advertising occurs. For interim purposes, certain telemarketing and
production expenses are deferred and charged to operations over their expected
period of benefit. All such amounts will be expensed prior to year end. Total
advertising expense incurred for the three months ended August 31, 1998 and
August 31, 1997 were approximately $8,982,000 and $17,214,000, respectively and
for the nine months ended August 31, 1998 and August 31, 1997 were approximately
$35,701,000 and $49,509,000, respectively. Included in prepaid expenses and
other current assets is approximately $213,000 and $488,000 relating to prepaid
advertising at August 31, 1998 and November 30, 1997, respectively.
4. TREASURY STOCK:
During the nine months ended August 31, 1998, the Company purchased
2,519,601 shares of its common stock at an aggregate cost of $9,609,784.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following is a discussion of the financial condition and results of
operations of the Company for the three and nine month periods ended August 31,
1998 and August 31, 1997. It should be read in conjunction with the interim
condensed consolidated financial statements of the Company, the notes thereto
and other financial information included elsewhere in this report.
RECENT DEVELOPMENTS
The Company recorded a non-cash charge of approximately $18,500,000 during
the nine month period ended August 31, 1998 regarding an impairment charge taken
against a long lived goodwill asset (see "-- Goodwill Impairment Charge").
During the six month period ended May 31, 1998, the Company determined that due
to significant decreases in margins generated by its "900" entertainment
services, arising, in part, from significant chargeback rate increases, and due
to significant marketing cost increases associated therewith, it would
discontinue marketing such services as an independent revenue source. The
Company believes that its efforts and resources can be better allocated to other
and new service and product offerings. As a result, the Company evaluated the
long-lived assets associated with its "900" entertainment services and
determined that the goodwill arising from its acquisition of the remaining 50%
of New Lauderdale, L.C. was impaired. The Company will continue to offer such
"900" entertainment services as a premium in conjunction with the Company's
other product and service packages.
RESULTS OF OPERATIONS
Three Months Ended August 31, 1998 and August 31, 1997
Net Revenue for the three months ended August 31, 1998 was $16,509,577, a
decrease of $28,178,991, or 63%, as compared to $44,688,568 for the three months
ended August 31, 1997. The decrease was attributable to previously anticipated
reductions in net revenues from the Company's "900" number entertainment
services of $28,713,955 and decreases in net revenues of $7,849,599 resulting
from the discontinuance of the AT&T strategic corporate partnership. See
"-- Strategic Corporate Relationships." Such net revenue decreases were
partially offset by increases in net revenues from enhanced voice mail networks
and other enhanced services ("enhanced services") of $1,744,583, increases in
net revenues of $4,488,786 from residential long distance customer acquisition
services (see "-- Strategic Corporate Relationships") and increases in net
revenues from conventional cellular phone customer acquisitions of $1,849,286.
Additionally, the Company's other product and service net revenues increased
$301,907 over the comparable prior year's quarter. The other product and service
revenues were principally derived from the Company's Club 900 product,
supplemented by revenues from the Company's prepaid cellular phone activities.
For the three months ended August 31, 1997, "900" entertainment services,
residential long distance customer acquisition services, Club 900 product
memberships, enhanced services and other products approximated 64%, 18%, 8%, 9%
and 1% of net revenues, respectively. For the three months ended August 31,
1998, "900" entertainment services, residential long distance customer
acquisition services, Club 900 product memberships, enhanced services,
conventional cellular customer acquisitions and other products approximated 0%,
27%, 24%, 34%, 11% and 4% of net revenues, respectively.
The provisions for chargebacks for the three months ended August 31, 1998
were $8,321,599, a decrease of $27,323,172, or 77%, as compared to approximately
$35,645,000 for the three months ended August 31, 1997. Ninety four percent
(94%) of such decrease, or $25,667,025, is attributable to the Company's
discontinuance of marketing "900" entertainment pay per call services as an
independent revenue source, and its corresponding effect on chargeback
allowances during the quarter ended August 31, 1998. Additionally, during the
quarter ended August 31, 1998, chargebacks on the Company's Club 900 product
decreased $5,475,780 when compared to the prior comparable quarter. This was due
to a reduction in gross revenue for such products from $10,284,894 earned in the
quarter ended August 31, 1997 compared with $5,075,333 earned in the quarter
ended August 31, 1998, resulting from decreases in Club 900 product enrollments.
Club 900 product members are enrolled during a "900" entertainment service call
and the discontinuance of marketing the Company's "900" entertainment services
as an independent revenue source resulted in such
6
<PAGE> 8
reduction of Club 900 product enrollments. The decrease in chargebacks was
further supplemented by improved chargeback experience realized on the Club 900
product during the three months ended August 31, 1998.
The Company's enhanced services' actual chargeback rate experience
increased during the quarter ended August 31, 1998 (51% of related gross sales)
when compared to the three months ended August 31, 1997 (45% of related gross
sales). This increase in enhanced service chargebacks is attributable to a
significant increase in customer service refunds and credits being issued by the
Local Exchange Carriers in the quarter ended August 31, 1998 as compared to the
quarter ended August 31, 1997. The Company believes that the increase in such
refunds and credits resulted from changes in Local Exchange Carriers' customer
refund policies. The Local Exchange Carriers made such changes in response to
concerns expressed by governmental regulatory authorities regarding the
necessity to make it easier for customers to have charges which they claim were
unauthorized removed from their telephone bills. See "Legal Proceedings."
During the three months ended August 31, 1998, "900" entertainment
services, on a pay per call basis, were repositioned and offered as a premium to
entice potential customers to acquire other products and services marketed by
the Company. This process offered a free psychic reading, ranging from two to
ten minutes, after which time, the call became billable. During the three months
ended August 31, 1998, the Company recorded approximately $8,133,000 in billable
usage, offset by related chargebacks of approximately $3,227,000, with respect
to such premium offered calls that exceeded the free time limits. The net effect
of this premium focused activity of approximately $4,906,000 was recorded by the
Company as an offsetting component included in cost of sales, partially
offsetting the costs of marketing pursuant to the Company's repositioned use of
such activity. The Company anticipates such net premium usage to significantly
decrease in future periods. See "Forward Looking Information May Prove
Inaccurate." During the three months ended August 31, 1998, the "900"
entertainment/premium offering's approximate chargeback rate was 40% compared to
approximately 47% recognized during the three months ended August 31, 1997, with
gross revenue during the three months ended August 31, 1997 from the "900"
entertainment services of approximately $54,381,000 and corresponding chargeback
allowances of approximately $25,667,000. During the three months ended August
31, 1998, gross revenues from enhanced services and Club 900 product memberships
were $11,414,713 and $5,075,333, respectively, as compared to $7,156,265 and
$10,284,894, respectively, for the three months ended August 31, 1997. The
chargeback allowances recognized during the three months ended August 31, 1998
for the Company's enhanced services and Club 900 product memberships were
$5,765,797 (51%) and $1,147,870 (23%), respectively, as compared to $3,251,932
(45%) and $6,623,650 (64%), respectively, during the quarter ended August 31,
1997. The Company's combined prepaid and conventional cellular activity
chargebacks approximated $1,395,000 during the three months ended August 31,
1998. These activities were primarily inactive during the three months ended
August 31, 1997. The Company's other products and services contributed an
immaterial amount to chargebacks during the quarters ended August 31, 1998 and
1997. The Company's residential long distance customer acquisition service
revenues are not encumbered by chargebacks.
Cost of revenues for the three months ended August 31, 1998 was
$11,438,705, a decrease of $29,097,693, or 72%, as compared to $40,536,398 for
the three months ended August 31, 1997. The decrease is directly attributable to
reductions in service bureau fees related to decreases in the Company's "900"
entertainment services and Club 900 product membership enrollments and decreases
in advertising costs expended for such services. Additionally, the decrease is
attributable to the Company's repositioned emphasis of the "900" entertainment
services solely as a premium component (as opposed to an independent revenue
source), whereby any calls exceeding the free time premium offering are offset
to cost of sales net of estimated chargebacks. The effect recognized, under such
repositioning, during the three months ended August 31, 1998 amounted to a net
offset to cost of sales of $4,905,804. These decreases were offset by increases
in service bureau fees and marketing costs related to the gross revenue
increases recognized in the Company's enhanced services, residential long
distance customer acquisition services and conventional cellular customer
acquisition services.
Cost of revenues as a percentage of gross revenues decreased to
approximately 46% for the quarter ended August 31, 1998 from approximately 51%
for the quarter ended August 31, 1997. This gross margin
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improvement is specifically attributable to the Company's cessation of marketing
expenditures directed at generating "900" entertainment service revenues, which
had a net-higher cost per unit sale than the Company's other services. As a
result of such increased costs per unit sale for its "900" services, coupled
with the significant chargeback rate increases, as discussed above, the Company
has discontinued marketing the "900" entertainment services as an independent
revenue source. See "-- Goodwill Impairment Charge". Commencing in the quarter
ended August 31, 1998, the "900" entertainment services were offered as a
premium, given in conjunction with the Company's other product and service
packages.
Gross revenues for the quarter ended August 31, 1998 were $24,831,175, with
marketing costs of approximately $8,982,000, or 36% of such gross revenues.
Gross revenues for the quarter ended August 31, 1997 were approximately
$80,333,339, with marketing costs of approximately $23,118,000, or 29% of such
gross revenues. Service bureau fees for the three months ended August 31, 1998
and 1997 were approximately $2,456,000 and $17,419,000, respectively. This
decrease of $14,963,000, or 85%, was primarily attributable to the Company's
cessation of marketing "900" entertainment services as an independent revenue
source and its corresponding reduction in service bureau usage. This decrease
was partially offset by increased service bureau fees relating to the Company's
increase in gross revenue activity from enhanced services, residential long
distance customer acquisitions and combined cellular phone activities.
Selling, general and administrative expenses (SG&A) for the three months
ended August 31, 1998 were $3,503,384, a decrease of $832,758, or 19% as
compared to $4,336,142 for the three months ended August 31, 1997. This
reduction is primarily attributable to decreases in amortization expense of
approximately $626,000 pursuant to the impairment write off of goodwill during
the three months ended May 31, 1998 (see "-- Goodwill Impairment Charge").
Additionally, the decrease is a result of reductions in officers' compensation
of approximately $124,000.
Other income for the three months ended August 31, 1998 and 1997 consisted
primarily of interest income. For the quarter ended August 31, 1998, interest
income was $545,398, an increase of $34,937, or 7%, as compared to $510,461 for
the quarter ended August 31, 1997. The increase is attributable to improved
interest rates earned on the Company's marketable securities, consisting
primarily of direct U.S. government obligations and interest earned on funds
held in reserve for future chargebacks by the Company's primary service bureau,
offset by slight decreases in the carrying values of such assets. See
"-- Liquidity and Capital Resources".
The Company's provision for income taxes is the result of the combination
of federal statutory rates and required state statutory rates applied to pre-tax
income (loss). This combined effective rate was 29% and 40% for the three months
ended August 31, 1998 and 1997, respectively. The Company's effective tax rate,
in the quarter ended August 31, 1998, is less than the federal statutory rate
due certain items of income and expense recognized for financial reporting
purposes that are not includible for income tax purposes. In the quarter ended
May 31, 1998, the Company recorded a goodwill impairment charge of approximately
$18.5 million. See "-- Goodwill Impairment Charge". The initial book basis of
such goodwill exceeded the initial tax basis by approximately $6 million.
Nine Months Ended August 31, 1998 and August 31, 1997
Net revenue for the nine months ended August 31, 1998 was $74,405,166, a
decrease of $67,666,948, or 48%, as compared to $142,072,114, for the nine
months ended August 31, 1997. The decrease was attributable to previously
anticipated decreases in net revenues from the Company's "900" number
entertainment services of $70,723,630 and decreases in net revenues of
$18,036,663 resulting from the discontinuance of the AT&T strategic corporate
relationship. See "-- Strategic Corporate Relationships." Such net revenue
decreases were partially offset by increases in net revenues from the Club 900
product of $6,352,637. Additionally, decreases were offset by increases in net
revenues from the enhanced voice mail networks and other enhanced services
("enhanced services") of $3,482,725 and increases in net revenues of $8,270,540
from residential long distance customer acquisition services. See "-- Strategic
Corporate Relationships". Further offsetting increases were realized from the
Company's net revenues from conventional cellular customer acquisitions of
$3,185,459 in the three months ended August 31, 1998. This activity commenced
during the fourth quarter of
8
<PAGE> 10
fiscal 1997, which ended November 30, 1997. Other product and service net
revenues decreased approximately $198,000 over the comparable prior year's
period. The other product and service revenues were principally derived from the
Company's cellular phone related activities and discontinued hair product
offerings. For the nine months ended August 31, 1998, "900" entertainment
services, the AT&T strategic corporate partnership, residential long distance
customer acquisition services, Club 900 product memberships, enhanced services,
conventional cellular customer acquisition services and other products
approximated 33%, 7%, 11%, 18%, 24%, 4% and 3% of net revenues, respectively.
For the nine months ended August 31, 1997, "900" entertainment services, the
AT&T strategic corporate partnership, Club 900 product memberships, enhanced
services, and other products approximated 67%, 16%, 5%, 10% and 2% of net
revenues, respectively.
The provisions for chargebacks for the nine months ended August 31, 1998
were $49,253,552, a decrease of $22,042,492, or 31%, as compared to $71,296,044
for the nine months ended August 31, 1997. The decrease is primarily
attributable to the Company's discontinuance of marketing "900" entertainment
pay per call services as an independent revenue source in the quarter ended
August 31, 1998 and the resulting decreased effect on the chargeback allowance
within such quarter, accounting for a decrease in provisions for chargebacks of
$29,249,322, or 132%, offset by increases in provisions for chargebacks for
certain of the Company's other services. See " -- Goodwill Impairment Charge".
Additionally, during the nine months ended August 31, 1998, the Company's 900
Club product chargebacks decreased by $857,986 when compared with the prior
comparable quarter. This decrease was the result of improved chargeback rate
experiences realized on the Club 900 product during the nine months ended August
31, 1998, offset by increases in the related gross revenues.
The Company's enhanced services' actual chargeback rate experience also
increased during the nine months ended August 31, 1998(43% of related gross
sales) when compared to the three months ended August 31, 1997 (34% of related
gross sales). This increase in enhanced service chargebacks is attributable to a
significant increase in customer service refunds and credits being issued by the
Local Exchange Carriers, primarily in the six month period from March 1, 1998 to
August 31, 1998, as compared to the prior year's comparable period. The Company
believes that the increase in such refunds and credits resulted from changes in
Local Exchange Carriers' customer refund policies. The Local Exchange Carriers
made such changes in response to concerns expressed by governmental regulatory
authorities regarding the necessity to make it easier for customers to have
charges which they claim were unauthorized removed from their telephone bills.
See "Legal Proceedings." The Company believes that the customer service policy
changes implemented by the Local Exchange carriers also contributed to the
increased chargebacks required by the Company's "900" entertainment services.
During the nine months ended August 31, 1998, gross revenues from "900"
entertainment services were approximately $50,047,000, with corresponding
chargeback allowances of approximately $25,742,000, resulting in an approximate
chargeback rate of 51%. During the nine months ended August 31, 1997, gross
revenues from the "900" entertainment services were approximately $150,019,000,
with corresponding chargeback allowances of approximately $54,991,000, resulting
in an approximate chargeback rate of 37%. During the nine months ended August
31, 1998, gross revenues from enhanced services and Club 900 product memberships
were approximately $32,083,000 and $20,762,000, respectively, as compared to
approximately $22,393,000 and $15,267,000, respectively, for the nine months
ended August 31, 1997. The chargeback allowances recognized during the nine
months ended August 31, 1998 for the Company's enhanced services and Club 900
product memberships were $13,819,242 (43%) and $7,576,622 (36%), respectively,
as compared to $7,611,403 (34%) and $8,434,608 (55%), respectively, for the nine
months ended August 31, 1997. The Company's combined prepaid and conventional
cellular activity chargebacks approximated $1,899,871, representing 31% of the
respective activities' gross revenues of approximately $6,130,000. The Company's
other products and services contributed an immaterial amount to chargebacks
during the nine month periods ended August 31, 1998 and 1997. The Company's
residential long distance customer acquisition service revenues and the AT&T
strategic corporate partnership revenues are not encumbered by chargebacks.
Cost of revenues for the nine months ended August 31, 1998 was $57,455,092,
a decrease of $53,135,534, or 48%, as compared to $110,590,626 for the nine
months ended August 31, 1997. The decrease is directly attributable to
reductions in service bureau fees related to the decrease in the Company's "900"
entertainment
9
<PAGE> 11
services and decreases in advertising costs expended for such services.
Additionally, the decrease is attributable to the Company's commencement during
the three month period ended August 31, 1998 of its strategy to reposition its
emphasis of the "900" entertainment services solely as a premium component (as
opposed to an independent revenue source), whereby any calls exceeding the free
time premium offering are offset to cost of sales net of estimated chargebacks.
The effect recognized, under such repositioning, during the nine months ended
August 31, 1998 amounted to a net offset to cost of sales of $4,905,804. These
decreases were offset by increases in service bureau fees and marketing costs
related to the gross revenue increases recognized in the Company's enhanced
services, Club 900 product, residential long distance customer acquisition
services and conventional cellular customer acquisition services. Additionally,
costs incurred by the Company for continued test marketing of the prepaid
cellular phone business, which approximated $3,521,000 during the nine months
ended August 31, 1998, further offset such decreases. The Company has
effectively discontinued the marketing for new prepaid cellular phone sales
during the three months ended August 31, 1998 but continues to maintain the
remaining customer base.
Cost of revenues as a percentage of gross revenues decreased to
approximately 47% for the nine months ended August 31, 1998 from approximately
52% for the nine months ended August 31, 1997. This gross margin improvement is
specifically attributable to the Company's cessation of marketing expenditures
directed at generating "900" entertainment service revenues, which had a
net-higher cost per unit sale then the Company's other services. As a result of
such increased costs per unit of sale for its "900" services, coupled with the
significant chargeback rate increases, as previously discussed, the Company has
discontinued marketing the "900" entertainment services as an independent
revenue source. See "-- Goodwill Impairment Charge". Commencing in the quarter
ended August 31, 1998, the "900" entertainment services were offered as a
premium, given in conjunction with the Company's other product and service
packages.
Gross revenues for the nine months ended August 31, 1998 were approximately
$123,659,000, with marketing costs of approximately $35,701,000, or 29% of such
gross revenues. Gross revenues for the nine months ended August 31, 1997 were
approximately $213,368,000, with marketing costs of approximately $62,618,000,
or 29% of such gross revenues. Service bureau fees for the nine months ended
August 31, 1998 and 1997 were approximately $21,754,000 and $47,972,000,
respectively. This decrease of approximately $26,218,000, or 55% was primarily
attributable to the Company's decrease in "900" entertainment service revenues
and its corresponding reduction in service bureau usage. This decrease was
partially offset by increased service bureau fees relating to the Company's
increase in gross revenue activity from VM services, Club 900 memberships and
residential long distance customer acquisitions.
Selling, general and administrative expenses (SG&A) for the nine months
ended August 31, 1998 were $12,363,517, an increase of $1,275,576, or 9%, as
compared to $13,639,093 for the nine months ended August 31, 1997. The reduction
is primarily attributable to a decrease in amortization expense of approximately
$981,000 pursuant to the impairment write-off of goodwill during the three
months ended May 31, 1998. Additionally, the decrease is the result of net
reductions in officers' compensation of approximately $1,031,000, offset by
increases in personnel costs and professional fees associated with the Company's
diversification into new products and services.
Other income for the nine months ended August 31, 1998 and 1997 consisted
primarily of interest income. For the nine months ended August 31, 1998,
interest income was $1,755,851, an increase of $528,158, or 43%, as compared to
$1,227,693 for the nine months ended August 31, 1997. The increase is
attributable to interest earned on the Company's marketable securities,
consisting primarily of direct U.S. government obligations and interest earned
on funds held in reserve for future chargebacks by the Company's primary service
bureau. See "-- Liquidity and Capital Resources".
The Company's (benefit) provision for income taxes is the result of the
combination of federal statutory rates and required state statutory rates
applied to pre-tax income (loss). This combined effective rate was (15.8%) and
39.7% for the nine months ended August 31, 1998 and 1997. The Company's
effective tax rate is higher than the federal statutory rate due to the addition
of state income taxes and certain expenses recognized for financial reporting
purposes that are not deductible for federal income tax purposes. In the quarter
ended August 31, 1998, the Company recorded a goodwill impairment charge of
approximately $ 18.5 million. See
10
<PAGE> 12
"-- Goodwill Impairment Charge". The initial book basis of such goodwill
exceeded the initial tax basis by approximately $6 million. It is the
recognition of this permanent difference that causes the tax benefit recognized
in the nine months ended August 31, 1998 to be less than the combination of the
federal and applicable state statutory rates.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1998, the Company had working capital of $41,558,516, a
decrease of $2,116,172, or 5%, as compared to $43,674,688 in working capital at
November 30, 1997. During the three months ended August 31, 1998, the Company
repurchased 550,000 shares of its Common Stock under a share repurchase plan,
the total purchase price of such shares being $1,444,784. On March 13, 1998, the
Company had purchased from Claudia Hirsch, a former director and officer of the
Company, 1,969,601 shares of the Company's Common Stock for an aggregate
purchase price of $8,165,000, of which $8,027,500 was paid within the quarter
ended May 31, 1998. The balance of $137,500 is to be paid in 10 consecutive
monthly installments of $13,750. As at August 31, 1998, $96,250 remains payable
under such agreement. During the previous fourteen months (August 1, 1997 to
September 30, 1998), the Company recognized substantial increases in chargebacks
experienced on its "900" entertainment service revenues. Pursuant to such
increased chargebacks, two of the Company's service providers instituted a cash
reserve policy. Under this cash reserve policy, the service providers withhold
cash flows from carrier collections in amounts that approximate the Company's
future expected chargebacks, as they relate to each service provider. As of
August 31, 1998, the reserves withheld approximated $8,866,000 and are included
in the Company's accounts receivable. Historically, the Company has financed its
working capital requirements principally through cash flow from operations and
receivables financing. Although the Company is not currently dependent on cash
flow from receivables financing, credit lines for this purpose are being
maintained and the Company may avail itself of such financing in the future. See
"Forward Looking Information May Prove Inaccurate."
The Company's primary cash requirements have been to fund the cost of
advertising and promotion. Additional funds will be used in the purchasing of
equipment and services in connection with the commencement of several new
business lines and further development of businesses currently being test
marketed. The Company currently has no other plans or material commitments for
capital expenditures or significant working capital demands. Under currently
proposed operating plans and assumptions (including the substantial costs
associated with the Company's advertising and marketing activities), management
believes that projected cash flows from operations, and available cash
resources, including available financing arrangements with service bureaus, will
be sufficient to satisfy the Company's anticipated cash requirements for at
least the next twelve months. The Company does not have any long-term
obligations and does not intend to incur any such obligations in the future. As
the Company seeks to diversify with new telecommunication products and services,
the Company may use existing cash reserves, long-term financing, or other means
to finance such diversification. See "Forward Looking Information May Prove
Inaccurate."
IMPAIRMENT OF GOODWILL
The Company has experienced decreasing margins on its "900" entertainment
services as well as significant increases in marketing expenditures related
thereto. As a result, commencing in the quarter ended August 31, 1998, the
Company discontinued marketing such services as an independent revenue source.
Accordingly, as required by Statement of Financial Standards No. 121 ("FAS
121"), the Company reviewed long-lived assets, including goodwill, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company has evaluated
the recoverability of its long-lived assets by measuring the carrying amount of
the assets against projected undiscounted future cash flows associated with
them. Applying such criteria, the Company concluded that goodwill associated
with its September 1996 acquisition of the remaining 50% interest in New
Lauderdale, L.C. has been impaired. As such, a non-cash charge of approximately
$18.5 million, representing the remaining balance of goodwill associated with
the New Lauderdale, L.C. acquisition, was recorded at May 31, 1998.
11
<PAGE> 13
STRATEGIC CORPORATE RELATIONSHIPS
During the first quarter of fiscal 1998 the Company entered into an
agreement with the long distance carrier, LCI International Telecom Corp.
("LCI"). Under this agreement the Company provides residential long distance
customer acquisition services to LCI. The Company will use all of its direct
marketing channels to provide these customer acquisition services. The Company
earns a commission for each successful customer installation. The agreement also
calls for the Company to participate in LCI's net revenues earned from such
acquired customer's residential long distance usage.
The Company terminated its strategic corporate partnership with AT&T during
the first quarter of fiscal 1998. Net revenues from the strategic corporate
partnership for the nine months ended August 31, 1998 and 1997 were $4,979,647
and $23,016,310, respectively. The Company terminated the partnership due to
marketing limitations imposed upon the Company by AT&T, limiting the Company's
ability to adequately contact and enlist potential new customers.
During the nine months ended August 31, 1998, the Company recorded revenues
of approximately $8,270,540 under the LCI agreement. To date, the results of the
LCI program have not met Management's expectations.
THE YEAR 2000 PROBLEM
At the time computer programs were first being written, two digits were
used instead of four to define years on such programs. For example, the year
"1998" was written within such computer programs as "98". As a result, at the
onset of the new millennium, any programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. This potential
difficulty is commonly referred to as the "Year 2000 Problem".
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be effected by the Year 2000 Problem. The
Company presently believes that all of its internal computer programs, software
packages, systems and networks are Year 2000 compliant. Within the past 12
months, the Company has replaced all personal computers that were not Year 2000
compliant and rewritten its entire billing system to become compliant. The
Company also recently acquired a new main database server that is compliant and
that runs on a commercially available software package that is compliant. The
Company believes that the only remaining items still required to be updated are
an insignificant number of auto-dialers, which, the Company anticipates, will be
compliant by November 30, 1998 at an inconsequential cost. See "Forward Looking
Information May Prove Inaccurate".
Notwithstanding the foregoing, the Company is reliant on third parties for
the operation of the Company's day-to-day business. The Company cannot provide
any assurances that the steps being taken by such third parties, if any, will be
sufficient to eliminate the Year 2000 problem from the computer systems used by
such third parties and relied upon by the Company. The Company has corresponded
with all its vendors, informing them that the Company will only conduct business
with those entities that are "Year 2000" compliant. In addition, the Company
only accepts inbound files from outside sources that define years with four
digit codes, ensuring compliance. Lastly, the Company's customer service
department operates via the Company's computer network which is complaint.
However, in the event modifications and conversions to computer systems are
required by such third parties and are not completed on a timely basis, the Year
2000 Problem may have a material impact on the operations of the Company.
12
<PAGE> 14
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about May 4, 1998, a complaint entitled "Joseph Chalverus, on behalf
of himself and all others similarly situated v. Quintel Entertainment Inc.,
Jeffrey L. Schwartz and Daniel Harvey" was filed in the United States District
Court for the Southern District of New York; subsequently, a complaint entitled
"Richard M. Woodward, on behalf of himself and all others similarly situated v.
Quintel Entertainment Inc., Jeffrey L. Schwartz and Daniel Harvey" was filed in
that same court, as was a complaint entitled "Dr. Michael Title, on behalf of
himself and all others similarly situated v. Jeffrey L. Schwartz, Jay Greenwald,
Claudia Newman Hirsch, Andrew Stollman, Mark Gutterman, Steven L. Feder, Michael
G. Miller, Daniel Harvey and Quintel Entertainment, Inc. (collectively, the
"Complaints"). In addition to the Company, the defendants named in the
Complaints are present and former officers and directors of the Company. The
plaintiffs seek to bring the actions on behalf of a purported class of all
persons or entities who purchased shares of the Company's Common Stock from July
15, 1997 through October 15, 1997 and who were damaged thereby, with certain
exclusions. The Complaints allege violations of Sections 10(b) and 20 of the
Securities Exchange Act of 1934 and allege that the defendants made
misrepresentations and omissions concerning the Company's financial results,
operations, and future prospects, in particular relating to the Company's
reserves for customer chargebacks and its business relationship with AT&T. The
Complaints allege that the alleged misrepresentations and omissions caused the
Company's Common Stock to trade at inflated prices thereby damaging plaintiffs
and the members of the purported class. The amount of damages sought by
plaintiffs and the purported class has not been specified.
On September 18, 1998, the District Court ordered that the three actions be
consolidated, appointed a group of lead plaintiffs in the consolidated actions,
and approved the lead plaintiffs' selection of counsel for the purported class
in the consolidated actions, and directed the lead plaintiffs to file a
consolidated complaint. The consolidated complaint has not yet been served on
defendants. The Company believes that the allegations in the Complaints are
without merit, and intends to vigorously defend the consolidated actions. No
assurance can be given, however, that the outcome of the consolidated actions
will not have a materially adverse impact upon the results of operations and
financial condition of the Company. See "Forward Looking Information May Prove
Inaccurate."
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. Nevertheless, on or
about September 30, 1998, the Company was notified by the Federal Trade
Commission ("FTC") that the FTC was conducting an inquiry into the past and
present marketing practices of the Company to determine if the Company was
engaging in unfair or deceptive practices. In connection with such inquiry, the
Company was requested to submit certain materials and information to the FTC
relating to the operations of the Company from January 1, 1994 to the present.
The Company is cooperating fully with the FTC in connection with its inquiry. To
date, the Company has not been subject to any enforcement actions by any
regulatory authority and Management believes that the FTC inquiry will not
result in any enforcement actions or claims which would have a material adverse
effect on the Company. However, in the event the Company is found to have failed
to comply with applicable laws and regulations, the Company could be subject to
civil remedies, including substantial fines, penalties and injunctions, as well
as possible criminal sanctions, which would have a material adverse effect on
the Company. See "Forward Looking Information May Prove Inaccurate."
At the request of the Federal Communications Commission, a group of the
largest Local Exchange Carriers (the "LECs") have developed a set of voluntary
Best Practices Guidelines (the "Guidelines") with regard to the problem of
"cramming" -- unauthorized, deceptive or ambiguous charges included on end-user
customers' monthly local telephone bills. The cramming problem has increasingly
been receiving a great deal
13
<PAGE> 15
of attention from federal and state legislators, regulatory agencies, and law
enforcement agencies throughout the country. Legislation is pending to combat
the cramming problem. The Guidelines and legislation, if enacted, require that
service providers obtain detailed and documented authorization from end users
prior to billing for miscellaneous products or services. Advertising for
products and services to be billed through a certain type of billing mechanism
known as the "4250 billing mechanism" will need to be pre-approved by the LECs
and clearinghouses prior to their billing. Moreover, each LEC is in the process
of revising its individual billing and collection agreements to implement the
Guidelines and further restrict the types of services for which it will provide
billing services. Consequently, the LECs will have broad discretionary powers to
restrict services for which the Company may bill through the customer's
telephone bill and assess administrative charges to service providers when a
charge for a product or service not pre-approved by the LEC, and/or authorized
by the end user, is placed on the customer's bill. As the Company employs the
4250 billing mechanism to bill for products and services, the Guidelines (and
possible legislation) and LEC restrictions will impact on, and need to be taken
into account in, formulating the Company's business practices.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
A Proxy Statement was mailed on or about July 20, 1998 to shareholders of
record of the Company as of July 2, 1998 in connection with the Company's 1998
Annual Meeting of Shareholders (the "Meeting"), which was held on August 24,
1998 at the Park Ridge Marriott Hotel, 300 Brae Boulevard, Park Ridge, New
Jersey. At the Meeting, the shareholders voted on three matters and all of such
matters were approved.
The first matter was the election of the members of the Board of Directors.
The nine directors elected and the tabulation of the votes (both in person and
by proxy) were as follows:
<TABLE>
<CAPTION>
NOMINEES FOR DIRECTORS FOR AGAINST WITHHELD
- ---------------------- --- ------- --------
<S> <C> <C> <C>
Jeffrey Schwartz................................... 13,991,444 40,630 0
Jay Greenwald...................................... 13,991,444 40,630 0
Andrew Stollman.................................... 13,991,444 40,630 0
Michael Miller..................................... 13,991,444 40,630 0
Murray L. Skala.................................... 13,991,444 40,630 0
Mark Gutterman..................................... 13,991,444 40,630 0
Edwin Levy......................................... 13,991,444 40,630 0
Paul Novelly....................................... 13,991,444 40,630 0
Steven L. Feder.................................... 13,991,444 40,630 0
</TABLE>
There were zero (0) broker held non-voted shares represented at the Meeting
with respect to this matter.
The second matter upon which the shareholders voted was the proposal to
ratify the appointment by the Board of Directors of Pricewaterhouse Coopers LLP
as independent certified public accountants for the Company for 1998. The
tabulation of the votes (both in person and by proxy) was as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
--- ------- -----------
<S> <C> <C>
14,017,989 7,868 6,217
</TABLE>
There were zero (0) broker held non-voted shares represented at the Meeting
with respect to this matter.
The third matter upon which the shareholders voted was the proposal to
amend the Company's Certificate of Incorporation changing the name of the
Company from Quintel Entertainment, Inc. to Quintel Communications, Inc. The
tabulation of the votes (both in person and by proxy) was as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
--- ------- -----------
<S> <C> <C>
13,302,474 713,279 16,321
</TABLE>
There were zero (0) broker held non-voted shares represented at the Meeting
with respect to this matter.
14
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
3.1.1 Articles of Incorporation of the Registrant(1)
3.1.2* Amendment to the Articles of Incorporation of the Registrant
3.2 By-Laws of the Registrant(2)
27.1* Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form 8-A,
dated October 23, 1995, and incorporated herein by reference.
(2) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1,
dated September 6, 1995 (File No. 33-96632), and incorporated herein by
reference.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the third quarter of the fiscal
year ending November 30, 1998.
FORWARD LOOKING INFORMATION
MAY PROVE INACCURATE
This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q. 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.
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUINTEL COMMUNICATIONS, INC.
By: /s/ JEFFREY L. SCHWARTZ
------------------------------------
Jeffrey L. Schwartz
Chairman and CEO
Date: October 15, 1998
By: /s/ DANIEL HARVEY
------------------------------------
Daniel Harvey
Principal Financial Officer
(Chief Financial Officer)
Date: October 15, 1998
16
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S>
3.1.1 Articles of Incorporation of the Registrant(1)
3.1.2* Amendment to the Articles of Incorporation of the Registrant
3.2 By-Laws of the Registrant(2)
27.1* Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form 8-A,
dated October 23, 1995, and incorporated herein by reference.
(2) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1,
dated September 6, 1995 (File No. 33-96632), and incorporated herein by
reference.
<PAGE> 1
EXHIBIT 3.1.2
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 08/26/1998
981334054 -- 2360603
CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION
OF
QUINTEL ENTERTAINMENT, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "corporation") is
QUINTEL ENTERTAINMENT, INC.
2. The certificate of incorporation is hereby amended by striking out
Article: FIRST thereof and by substituting in lieu of said Article the following
new Article:
"FIRST: The name of the corporation is QUINTEL COMMUNICATIONS, INC."
3. The amendment of the certificate of incorporation herein certified has
been duly adopted and written consent has been given in accordance with the
provisions of Sections 228 and 242 of the General Corporation Law of the State
of Delaware.
/s/ JEFFREY SCHWARTZ
--------------------------------------
Jeffrey Schwartz, President
Dated: 8/25/98
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE QUINTEL
ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENT AS
PRESENTED IN THE COMPANY'S FORM 10Q FOR THE NINE MONTHS ENDED AUGUST 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> AUG-31-1998
<CASH> 7,069,175
<SECURITIES> 16,928,831
<RECEIVABLES> 26,373,163
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 69,400,929
<PP&E> 2,597,271
<DEPRECIATION> 419,371
<TOTAL-ASSETS> 71,578,829
<CURRENT-LIABILITIES> 27,842,414
<BONDS> 0
0
0
<COMMON> 18,649
<OTHER-SE> 43,717,766
<TOTAL-LIABILITY-AND-EQUITY> 71,578,829
<SALES> 74,405,166
<TOTAL-REVENUES> 74,405,166
<CGS> 57,455,092
<TOTAL-COSTS> 57,455,092
<OTHER-EXPENSES> 30,877,962
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 129,971
<INCOME-PRETAX> (12,301,998)
<INCOME-TAX> (1,940,977)
<INCOME-CONTINUING> (13,927,878)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,361,021)
<EPS-PRIMARY> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
