|---------------------------|
|This Amendment alters |
|Items 2, 3, and 6, and the |
|Notes to the Financial |
|Statements |
|---------------------------|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(AMENDMENT NUMBER 1)
(Mark One)
|X| Quarterly Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2005.
|_| Transition Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from _____________ to
_________.
Commission File No. 000-30294
Amendment Number 1 to
DIALOG GROUP, INC.
----------------------------------------------
(Name of Small Business Issuer in its Charter)
Delaware 87-0394290
- --------------------------------------- ---------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
Twelfth Floor, 257 Park Avenue South, New York, NY 10010
- ----------------------------------------------------- -----------------
(Address of Principal Executive Offices) (Zip Code)
212.254.1917
----------------------------
(Issuer's Telephone Number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12
months (or 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 |_|
Check whether the registrant filed all documents and reports required to be
filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes |X| No |_|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
At May 20, 2004 there were 149,081,084 shares of common stock, par value $.001
per share outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
DIALOG GROUP, INC. AND SUBSIDIARIES
INDEX
Page Number
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
F-1 Condensed Consolidated Balance Sheets as of December 31, 2004
(audited) and March 31, 2005 (unaudited)
F-2 Condensed Consolidated Statements of Operations and Comprehensive
Loss for the Three Months Ended March 31, 2005 (unaudited) and March
31, 2004 (unaudited)
F-3 Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2005 (unaudited) and March 31, 2004 (unaudited)
F- 4 to
F- 26 Notes to Condensed Consolidated Financial Statements (unaudited)
3 - 9 Item 2.Management's Discussion and Analysis or Plan of Operation
10 Item 3.Controls and Procedures
PART II - OTHER INFORMATION
11-12 Item 1 Legal Proceedings
12 Item 2 Recent Unregistered Sales of Equity Securities and Use
of Proceeds
13 Item 6. Exhibit
2
DIALOG GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31
2005 2004
---- ----
(Unaudited)
CURRENT ASSETS:
Cash - 131,690
Accounts receivable (Net) 834,324 608,985
Prepaid expenses and other current assets 208,133 68,114
----------------- -------------------
Total current assets 1,042,457 808,789
----------------- -------------------
PROPERTY AND EQUIPMENT, NET 39,922 42,087
OTHER ASSETS:
Data Assets (Net) 554,067 538,978
Website (Net) 74,583 89,364
Security Deposits 73,088 75,338
----------------- -------------------
Total other assets 701,738 703,680
----------------- -------------------
TOTAL ASSETS 1,784,117 1,554,556
================= ===================
LIABILITIES
CURRENT LIABILITIES:
Bank overdraft 34,558 -
Accounts payable 1,852,374 1,615,925
Accrued expenses 979,752 880,547
Deferred revenue 614,200 808,490
Notes and Loans Payable 491,867 226,915
Current Liabilities Due to related parties 51,000 113,011
Other current liabilities 59,837 18,139
----------------- -------------------
Total current liabilities 4,083,588 3,663,027
----------------- -------------------
LONG TERM DEBT:
Griffin Xover Fund 5% Convertible Note - Related Party 555,000 510,000
Convertible Notes - Related Parties 118,045 118,045
----------------- -------------------
TOTAL LONG TERM DEBT: 673,045 628,045
----------------- -------------------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock 313 313
Common stock 149,082 116,673
Additional paid-in-capital 6,080,346 5,912,491
Accumulated deficit (9,162,457) (8,765,993)
Dividends- Preferred Stock (39,800) -
----------------- -------------------
Total stockholders' equity (deficiency) (2,972,516) (2,736,516)
----------------- -------------------
----------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) 1,784,117 1,554,556
================= ===================
F-1
DIALOG GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited)
2005 2004
---- ----
REVENUES $1,716,718 $1,945,432
COST OF REVENUES 692,653 939,970
--------- ---------
GROSS PROFIT 1,024,065 1,005,462
OPERATING EXPENSES:
Selling, General and Administrative Expenses 1,316,040 1,390,901
--------- ---------
Total Operating Expenses 1,316,040 1,390,901
---------- ---------
INCOME/( LOSS) FROM OPERATIONS (291,974) (385,440)
OTHER INCOME (EXPENSES):
Interest expense (43,336) (18,504)
Other (Expenses) 1,400
Forgiveness of Debt 3,750
Other income - 92,264
--------- ---------
Net Other Income (Expenses) (39,586) 75,160
--------- ---------
INCOME/(LOSS)FROM CONTINUING OPERATIONS (331,560) (310,280)
INACTIVE & DISCONTINUED OPERATIONS
Income (Loss) from Inactive Operations (290)
NET INCOME/( LOSS) $(331,850) $(310,280)
= ========= =========
Preferred E Series share dividends (39,800) (36,200)
Interest paid on convertible notes 8,923 2,500
--------- ---------
Income/(loss) applicable to common shareholders from continuing operations (362,437) (343,980)
Inactive and discontinued operations (290) (45,417)
--------- ---------
Net Income/(loss) applicable to common shareholders ($362,727) ($389,397)
= ========= =========
EARNINGS/( LOSS) PER SHARE, BASIC AND DILUTED ON NET INCOME/(LOSS) ($0.003) ($0.004)
FROM CONTINUING OPERATIONS
EARNINGS/(LOSS) PER SHARE ON DISCONTINUED OPERATIONS, BASIC AND DILUTED ($0.000) ($0.001)
NET EARNINGS/( LOSS) PER SHARE, BASIC AND DILUTED ($0.003) ($0.004)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, 117,685,615 87,796,266
BASIC AND DILUTED
F-2
DIALOG GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDING MARCH 31, 2005 & 2004
2005 2004
--------- ---------
Cash Flows from Operating Activities:
Net Loss form Continuing Operations $(331,560) $(310,280)
Gain/(Loss)from Inactive Operations (290)
--------- ---------
Loss from Operations $(331,850) $(310,280)
Adjustments to reconcile net loss
to net cash used in operating activities of continuing operations:
Gain on debt settlement 3,750
Depreciation and amortization 99,223 82,994
Bad debt expense 4,008 11,447
Common stock, warrants and stock options issued for services 78,161
Changes in operating assets and liabilities: (Increase) Decrease
Accounts receivable (229,348) (311,022)
Prepaid and other current assets (230,019) 18,877
Other current receivables (1,320)
Security Deposits 2,250
Accounts payable and accrued expenses: Increase (Decrease) 429,151 196,676
Current liabilities - Due to related parties 27,989
Other current liabilities 41,698 (98,536)
Deferred revenues (194,290) 226,900
--------- ---------
Net Cash Used in Operating Activities (299,277) (184,264)
--------- ---------
Cash Flows from Investing Activities of Continuing Operations:
Purchase of property and equipment (1,662) (13,543)
Purchase of database (95,703)
Net Cash Used in Investing Activities (97,365) (13,543)
--------- ---------
Cash Flows from Financing Activities of Continuing Operations:
Note Receivable - Findstar 25,000
Short Term Borrowing, net 264,952 (9,439)
Proceeds from sale of common stock - 35,000
--------- ---------
Net Cash Provided by Financing Activities 264,952 50,561
--------- ---------
Increase (decrease) in cash (131,690) (147,246)
Cash at Beginning of Period $131,690 $147,246
--------- ---------
Cash at Period End $ - $ -
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
--------- ---------
Interest Paid During the Period $43,336 $17,982
--------- ---------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
--------- ---------
Conversion of Accounts Payable to Common Stock $7,500
--------- ---------
Conversion of Accrued Expenses to Common Stock $52,524 $20,000
--------- ---------
F-3
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
ORGANIZATION AND CAPITALIZATION
Dialog Group, Inc. was incorporated under the laws of the State of Delaware on
October 4, 2002. The Company's authorized capital stock consisted of 1,000
shares with no par value.
IMX Pharmaceuticals, Inc., formerly IMX Corporation, was organized under the
laws of the State of Utah on June 2, 1982. The Company changed its name to IMX
Pharmaceuticals, Inc. on June 30, 1997.
On November 12, 2002, IMX Pharmaceutical, Inc. and Dialog Group, Inc. merged
into a single Delaware corporation (the "Company") for the sole purpose of
reincorporating IMX Pharmaceutical, Inc. in Delaware. The name of the surviving
corporation is Dialog Group, Inc.
In conjunction with the merger, the Company's Certificate of Incorporation was
restated to increase the total number of shares of capital stock that the
Company has the authority to issue to 101,000,000. The total number of
authorized shares of common stock, $0.001 par value, was 100,000,000 and the
total number of authorized preferred stock, $0.001 par value, was 1,000,000. The
Board of Directors is authorized to establish the preferred stock in one or more
series and to fix the rights, preferences, privileges, and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting each
series or the designation of such series.
On May 23, 2003, the Company further increased the total number of shares of
capital stock of authorized shares of $0.001 par value common stock available
for issuance to 175,000,000 and the total number of authorized $0.001 par value
preferred stock available for issuance to 1,500,000.
Further, on June 18, 2004, the Company increased the total number of shares of
capital stock of authorized shares of $0.001 par value common stock available
for issuance to 200,000,000 and the total number of authorized $0.001 par value
preferred stock available for issuance to 1,500,000. And, on June 18, 2004, the
Company eliminated its Class C preferred stock. Also, on June 18, 2004 the terms
of the Company's Class E preferred stock were restated. The number of shares of
authorized Class E preferred stock is 200 shares. In the event of liquidation,
dissolution or winding-up or sale of more than 50% of the voting securities of
the Company, holders of the Class E preferred stock shall be entitled to
Liquidation Rights equivalent to $10,000.00 per share plus any accumulated but
unpaid dividends.
BUSINESS ACTIVITY
The Company, which is headquartered in New York, NY, has offices in Valencia,
California; Sunrise, Florida; and Houston, Texas. The Company's two divisions,
Data Dialog and Healthcare Dialog, provide a combination of traditional
advertising (print, broadcast) and marketing services (broadcast, new media, and
internet-based promotional venues); as well as a broad spectrum of proprietary
and exclusive databases for healthcare, pharmaceutical, consumer and
business-to-business market clients.
F-4
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
Additionally, the Company maintains exclusive contracts with leading
multi-national pharmaceutical companies to operate, maintain and provide content
for their consumer-directed Web sites.
Both Dialog Group's divisions currently market its product and service offerings
through three branded, business organizations. The Healthcare Dialog division:
nFusion, +Media, and iData. The Data Dialog division: Data Dialog Marketing,
Data Dialog Digital and Mail Mogul.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash.
The Company maintains cash balances at several banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. From time to time, the Company had cash in financial institutions in
excess of federally insured limits.
ACCOUNTS RECEIVABLE
The Company conducts business and extends credit based on the evaluation of its
customers' financial condition, generally without requiring collateral. Exposure
to losses on receivables is expected to vary by customer due to the financial
condition of each customer. The Company monitors credit losses and maintains
allowances for anticipated losses considered necessary under the circumstances.
Recoveries of accounts previously written off are recognized as income in the
periods in which the recoveries are made. The Company has a $350,000 line of
credit with a commercial asset-backed lender with a term of two years beginning
August 2004.It is secured by the Company's accounts receivables, equipment, and
inventory. At March 31, 2005, the allowance for doubtful accounts is $142, 085.
Of this amount, $132,500 is related to an agreement and issuance of
non-qualified stock options (see Note 6- Non-Trade Accounts Receivable) and the
Company's collection efforts.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful life of the assets, which range
from three years to five years. Expenditures for major betterments and additions
are capitalized, while replacement, maintenance and repairs, which do not extend
the lives of the respective assets, are charged to expense currently. Any gain
or loss on disposition of assets is recognized currently. The Company has a
$350,000 line of credit with a commercial asset-backed lender with a term of two
years beginning August 2004.It is secured by the Company's accounts receivables,
equipment, and inventory.
GOODWILL AND OTHER ASSETS
Goodwill
The Company tests goodwill and other assets for impairment annually. The
provisions of SFAS No. 142 require the completion of an annual impairment test,
with the impairments recognized in current earnings.
F-5
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
Databases
The databases consist of the one acquired from Healthcare Horizons and other
acquired from Azimuth Target Marketing along with the costs of expanding the
databases through the use of telephone surveys. As the databases, along with
current telephone surveys, are generating revenue streams and are expected to do
so in the future, no impairment is required. The databases are amortized over a
three year period, while the telephone surveys are amortized over a five year
period.
Website
The Company accounts for website development and maintenance costs in accordance
with the guidance of EITF 00-2 "Accounting for Website Development Costs" and
Statement of Position 98-1 "Software Developed or Obtained for Internal Use".
Costs incurred in the planning stage are expensed as incurred. Costs incurred in
connection with the development stage are capitalized during the application
development stage and amortized over a three year period. Costs incurred during
the post-implementation operation stage, and fees incurred for web hosting, are
expensed as incurred
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs to
sell.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable, other receivable, accounts payable, accrued expenses, current
liabilities and debt. The carrying amounts of such financial instruments
approximate their respective estimated fair value due to the short-term
maturities and approximate market interest rates of these instruments. The
estimated fair value is not necessarily indicative of the amounts the Company
would realize in a current market exchange or from future earnings or cash
flows.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reported period. Actual results could differ from those estimates.
F-6
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
COMPENSATED ABSENCES
The Company only accrues for compensated absences of employees with employment
agreements with the Company that require the Company to provide for this
benefit. Accordingly, the liability, if any, for such absences has been recorded
in the accompanying consolidated financial statements.
REVENUE RECOGNITION
The Company recognizes revenues in accordance with SAB 101, which reflects the
basic principles of revenue recognition in existing generally accepted
accounting principles. Accordingly, revenues are recognized in the Healthcare
Division upon a monthly review by management of each agreement to determine the
percentage of the goods, or services actually delivered, or provided to
customers. In the Data Division revenues derived from the sale of twelve-month
subscriptions to the Company's mailing lists are deferred and included in income
on a monthly basis as revenues are earned. Revenues are earned on other goods or
services when actually delivered or provided to the customer.
SHIPPING AND HANDLING COSTS
The Company records shipping and handling costs in the cost of sales in the
statement of operations.
NET LOSS PER COMMON SHARE AND DILUTIVE SECURITIES
Earnings (loss) per share are computed in accordance with SFAS No. 128,
"Earnings per Share". Basic earnings per share is computed by dividing net
income, after deducting preferred stock dividends accumulated during the period,
by the weighted-average number of shares of common stock outstanding during each
period. Diluted earnings (loss) per share is computed by dividing net income
(loss) by the weighted-average number of shares of common stock, common stock
equivalents and other potentially dilutive securities outstanding during the
period.
The following is a summary of the securities that could potentially dilute basic
earning (loss) per share in the future. These were not included in the
computation of the diluted earnings (loss) per share because their exercise or
conversion would be anti-dilutive.
Period Period
Ended Ended
March 31, March 31,
2005 2004
--------------- ----------------
Preferred stock 20,786,274 20,296,904
Warrants 6,921,865 2,991,640
Stock options 3,477,500 1,877,500
Convertible notes 12,934,083 1,818,182
--------------- ----------------
Total 44,119,722 26,984,225
=============== ================
F-7
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
Three Months Ended
March 31,
2005 2004
---- ----
Numerator:
Income/(loss) from continuing operations ($331,560) ($310,280)
Preferred E Series share dividends (39,800) (36,200)
Interest paid on convertible notes 8,923 2,500
--------- ---------
Income/(loss) applicable to common shareholders
from continuing operations (362,437) (334,980)
Inactive and discontinued operations (290) (45,417)
--------- ---------
Net Income/(loss) applicable to common shareholders ($362,727) ($389,397)
Denominator:
Basic earning(loss) per share-weighted average shares 117,685,615 87,796,266
Effect of dilutive securities:
Convertible notes 0 0
Preferred stock 0 0
Share options 0 0
Warrants 0 0
--------- ---------
Diluted earning(loss) per share-adjusted weighted average shares
and assumed conversions 117,685,615 87,796,266
Earnings(loss) per share data:
Basic-continuing operations ($0.003) ($0.004)
Basic-inactive and discontinued operations (0.000) (0.001)
--------- ---------
Basic ($0.003) ($0.004)
Diluted-continuing operations ($0.003) ($0.004)
Diluted-inactive and discontinued operations (0.000) (0.001)
--------- ---------
Diluted ($0.003) ($0.004)
The conversion of convertible notes, preferred stock, share options, and
warrants are anti-dilutive ( assuming conversion into common shares would
increase earnings per share or decrease loss per share) and, therefore, not
included in the calculation of diluted earnings/(loss) per share
INCOME TAXES
The Company accounts for income taxes using SFAS No. 109, "Accounting for Income
Taxes," which requires recognition of deferred tax liabilities and assets for
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, 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. A
valuation allowance is recorded for deferred tax assets if it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
ADVERTISING COSTS
Advertising costs are expensed as incurred. The Company incurred $8,061 and
$7,091in advertising costs for the period ended March 31, 2005 and March 31,
2004, respectively.
F-8
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
STOCK-BASED COMPENSATION
On December 2004, the FASB issued SFAS No. 123R, "Accounting for Stock-Based
Compensation". This statement is a revision to SFAS No. 123, "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No.25, "Accounting for
Stock Issued to Employees". This statement requires a public entity to measure
the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited
exceptions). That cost will be recognized over the period during which an
employee is required to provide service, the requisite service period (usually
the vesting period). The grant-date fair value of employee share options and
similar instruments will be estimated using option-pricing models.
In addition, a public entity is required to measure the cost of employee
services received in exchange for an award of liability instruments based on its
current value. The fair value of that award will be re-measured subsequently at
each reporting date through the settlement date. Changes in fair value during
the requisite service period will be recognized as compensation cost over the
period.
For public entities that file as small business issuers, this statement is
effective as of the beginning of the first interim or annual reporting period
that begins after December 15, 2005.
At the required effective date, all public entities that used the fair value
method for either recognition or disclosure under Statement 123 are required to
apply this statement using a modified version of prospective application. Under
that transition method, compensation cost is recognized on or after the required
effective date for the portion of outstanding awards for which the requisite
service has not yet been rendered, based on the grant-date fair value of those
awards calculated under Statement 123 for either recognition or pro-forma
disclosures. For periods before the required effective date, those entities may
elect to apply the modified version of retrospective application under which
financial statements for prior periods are adjusted on a basis consistent with
the pro forma disclosures required for those periods by Statement 123. The
Company does not expect SFAS No. 123R to have a material effect on its financial
statements.
PRINCIPLES OF CONSOLIDATION
In the opinion of the Company, the accompanying unaudited consolidated financial
statements prepared in accordance with instructions for Form 10-QSB, include all
adjustments (consisting only of normal recurring accruals) which are necessary
for a fair presentation of the results for the periods presented. It is
suggested that these consolidated financial statements be read in conjunction
with the Company's Annual Report for the year ended December 31, 2004.The
balance sheet as of December 31, 2004 was derived from audited financial
statements as of that date. The results of operations for the three months ended
March 31, 2005 are not necessarily indicative of the results to be expected for
the full year.
The consolidated financial statements include the accounts of the Company,
Dialog Group, Inc., and its wholly-owned subsidiaries; Data Dialog, Inc.
Healthcare Dialog, Inc., IP2M, and Mail Mogul, Inc. All material inter-company
transactions and balances have been eliminated in consolidation.
F-9
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
REPORTING PERIOD
The accompanying condensed consolidated financial statements for the three
months ended March 31, 2005 depict the results of operations and cash flows of
DDI, DGI, HCD, IP2M, and MMI.
NOTE 2- ACTUAL RESULTS OF OPERATIONS
The following set forth the Company's actual results of operations for the three
months ended March 31, 2005, with comparative actual results for the three
months ended March 31, 2004
Unaudited
Three months Three months
Ending Ending
March 31, 2005 March 31, 2004
-------------- --------------
REVENUE $1,716,718 $1,945,432
COST OF SALES 692,652 939,970
--------- ---------
GROSS PROFIT 1,024,065 1,005,462
--------- ---------
OPERATING EXPENSES:
Other Selling, General, and Administrative Expenses 1,316,040 1,390,901
--------- ---------
TOTAL OPERATING EXPENSE 1,316,040 1,390,901
--------- ---------
INCOME (LOSS) FROM OPERATIONS (291,974) (385,440)
--------- ---------
Other Income (Expenses):
Interest expenses (43,336) (18,504)
Other expenses 1,400
Other income 92,264
Forgiveness of Debt 3,750
Total other income (expenses) (39,586) 75,160
Net Profit/(Loss) Before Inactive and Discontinued Operations (331,560) (310,280)
--------- ---------
Discontinued Operations (290) 0
--------- ---------
Net Loss (331,850) (310,280)
========= =========
NOTE -4 INACTIVE AND DISCONTINUED SUBSIDARIES
During the fourth quarter of 2004, the Company treated IP2M as an inactive
business unit. IP2M did not have operational activity for more than fifteen
months. The activities formally conducted by IP2M have been absorbed into the
operating activities and results of Healthcare
F-10
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
Dialog. This required the elimination of inter-company balances and related
transactions of Dialog Group, Healthcare Dialog, and of IP2M. During 2004, in
addition to transactions related to IP2M, discontinued operations included
transactions related primarily to ThinkDirectMarketing employees' labor
arbitration awards and related expenses for legal services.
NOTE 5 - GOING CONCERN CONSIDERATIONS
-----------------------------
The accompanying condensed consolidated financial statements have been presented
assuming the continuity of the Company as a going concern. However, the Company
has incurred substantial losses resulting in an accumulated deficit of
$8,982,457 as of March 31, 2005. These conditions raise substantial doubt as to
the ability of the Company to continue as a going concern.
Management's plans with regards to this issue are as follows:
LIQUIDITY
The Company continues review means of raising funds including issuing debentures
and equity instruments. The Company is also reviewing the sale of non-core
assets.
The Company reduced its current obligations of approximately $133,000 which
consisted of accounts payable, accrued payroll, and accrued vacation. The
President and C.E.O. along with the C.O.O. and C.F.O. amended their employment
contacts for 2005 with the Company that reduced the Company's payroll
requirements. Additionally, the President and C.E.O., C.O.O. and C.F.O, and a
related party converted approximately $52,000 of accrued compensation to common
stock, while a supplier converted approximately $8,000 of open invoices to
common stock. See Note 18- Subsequent events, item along with two for additional
transactions.
PROFITABILITY
The Company intends to develop new and increased revenues and gross margins in
all areas of operations. Specifically, the Company intends to:
o Restructure its sales organization to allow for more effective sales
processes. These steps include, among others, consolidating sales
operations, and the expansion of sales organization.
o Reduce expenses through improved labor utilization. o Enter into strategic
relationships with data suppliers that will return higher levels of match
rate with a better quality of data.
o Reduce operating costs through improved procurement procedures.
Presently, the Company cannot ascertain the eventual success of management's
plans with any degree of certainty. The accompanying condensed consolidated
financial statements do not include any adjustments that might result from the
eventual outcome of the risks and uncertainty described above.
NOTE 6- NON-TRADE RECEIVABLE
On November 19, 2004, the Company amended a prior agreement pursuant to which a
non-qualified stock option had been issued. On November 19, 2004, the optionee
executed its rights to purchase $200,000 of Dialog Group, Inc. common stock at
the price of $0.06 per share for a total of 3,333,333 immediately upon the
registration and delivery of shares. The Company complied with the requirements
of Notice of Option Purchase. The optionee, to date, has provided only
approximately $67,000 of the $200,000 that it is committed to pay to the
Company. The Company has reserved for the entire unpaid balance of $132,500 due
to the uncertainty of collection. The Company has hired an attorney In March to
pursue collection of the unpaid balance. Prior to hiring the attorney, the
Company was pursuing collection of the unpaid balance directly with optionee.
F-11
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 7- LETTER OF CREDIT
In connection with supplier agreement of Healthcare Dialog, the Company arranged
for a standby Letter of Credit in the amount of $90,000 in February of 2005. The
Letter of Credit is in effect for one year from February 2005. The collateral
for the Letter of credit is secured by personal assets of the Company's
President and C.E.O. (See Note 15-Related Party Transactions).The agreement with
the supplier requires Healthcare Dialog to replenish any draws by the supplier
against the standby Letter of Credit. During the first quarter of 2005, the
supplier did not draw against the Letter of Credit.
NOTE 8- STOCK-BASED COMPENSATION
During the period ending March 31, 2005, the Company entered into the following
stock-based compensation transactions.
As consideration for personally guaranteeing certain obligations of the Company,
the Board of Directors authorized the Company to issue 4,750,000 shares of
common stock for $23,750 the President and C.E.O. for 4,750,000 shares and
350,000 shares of common stock for $1,750 to the C.O.O. and C.F.O.
In connection with amending their employment contracts with the Company for the
balance of 2005, the President and C.E.O agreed to a salary reduction of
$100,000, while the C.O.O. and C.F.O agreed to a salary reduction of $65,000,
the Board of Directors authorized 10,000,000 and 6,500,000 shares of common
stock to be issued to the President and C.E.O and to the C.O.O. and C.F.O,
respectively.
For performing additional services that are not included in his employment
contract, the Company agreed to issue 2,000,000 shares of common stock for
$10,000, to the Secretary of the Corporation.
The Company amended one existing consulting services agreement to limit its
obligation to 1,456,398 shares and entered into new consulting services
agreement for 1,000,000 shares, for $13,836 and $7,000, respectively. The
companies will, or have provided general investor relations and marketing
services.
The Company offered two employees with potential stock awards. The Company will
provide 350,000 shares valued at $3,500. To receive the award, the employees
must be employed at the Company at December 31, 2005.
The Company will issue the shares in the near future. The Company accounted for
the transactions in accordance with FASB 123R as issued in December 2004.
F-12
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
The table presented below provides additional information on the stock-based
compensation for the period ending March 31, 2005.
Number of Value Value
Shares Per of the
Transaction Issued Share Transaction Classification
- ----------- ------ ----- ----------- --------------
Consulting 1,456,398 $0.010 $13,836 Expense included in income from operations
Employee stock awards 350,000 0.010 3,500 Prepaid and amortize to expense
Consulting 1,000,000 0.007 7,000 Prepaid and amortize to expense
Employee compensation 2,000,000 0.005 10,000 Expense included in income from operations
Guarantee and credit
extension by President/C.E.O. 4,750,000 0.005 23,750 Prepaid and amortize to expense
Guarantee and credit
extension by C.O.O./C.F.O 350,000 0.005 1,750 Prepaid and amortize to expense
Employment contract
reduction by President/C.E.O. 10,000,000 0.005 50,000 Prepaid and amortize to expense
Employment contract
reduction by C.O.O./C.F.O 6,500,000 0.005 32,500 Prepaid and amortize to expense
Total 1st quarter 26,406,398 $142,336
The value of the transaction is based upon the price per share of the common
stock on the date of the transaction along with a valuation factor for the size
of the block of stock relative to the average daily trading volume of the stock
during immediate thirty trading days prior to date the stock is issued along
with trading restrictions placed upon the stock
NOTE 9- ACCRUED LIABILITES
As of March 31, 2005, accrued liabilities consisted of the following:
Accrued professional fees and other expenses $ 183,211
Accrued payroll and payroll taxes 292,055
Accrued interest 20,438
Accrued settlements and contingencies 484,046
$979,752
========
See Note 16-Litigation for the specific items that comprise the $484,046 in
Accrued settlements and contingencies.
F-13
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 10 - EQUITY
COMMON STOCK
During the period ending March 31, 2005, the Company issued 2,839,076 shares in
connection with the payment of the series E Preferred Stock dividends. As a
result of non completion of an agreement in the 1st quarter, the Company
cancelled 799,999 shares.
PREFERRED STOCK
Each share of the Company's Class B and Class B-1 Preferred Stock can be
converted into 40 shares of Common Stock and each share of the Class E Common
Stock can be converted into 83,333 shares of Common Stock. Each Class B or B-1
share casts 40 votes for the election of directors and one vote on all other
matters. Each Class E share casts one vote for each share of Common Stock into
which it could be converted. The preferred stock does not contain unconditional
obligations requiring the Company to redeem the instruments by transferring
assets at a specified or determinable date or upon an event to occur.
During the first quarter of 2005, no preferred stock was issued. During the
first quarter of 2005, no debt was converted into preferred stock.
STOCK OPTIONS
Stock options to purchase 100,000 shares of common stock were granted to an
unrelated party, with a fair market value of $1,200, while no options were
exercised during the period ending March 31, 2005.
STOCK WARRANTS In connection with issuance of a $45,000 convertible note,
convertible into common stock at price of $0.025 per share, warrants provide
holders to purchase the common stock at the price of $0.025. Warrants to
purchase 540,000 shares have been issued to the holder of this convertible note.
The warrants are exercisable until September 30, 2009. Warrants to purchase a
total of 6,381,865 shares have been issued to all convertible note holders.
CLASS E PREFERRED STOCK DIVIDENDS
The dividends accrue at the rate of $400 per share per quarter. Pursuant to the
provisions of the Class E Preferred Stock Declaration, shares of common stock,
based on the average closing price for the shares during the last 20 trading
days before the dividends were due, may be paid in lieu of cash.
During the first quarter of 2005, quarterly dividends accrued on its Class E
Preferred Stock at the rate of $400 per share, per quarter, for a total of
$39,800 accrued and unpaid for at March 31, 2005.
CONVERSION OF PREFERRED STOCK INTO COMMON STOCK
During the first quarter of 2005, 247,120 shares of series B Preferred stock was
converted into 3,086,196 shares of common stock.
F-14
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
CONVERSION OF DEBT
During the first quarter of 2005, approximately $60,000 of debt and accrued
expenses were converted into common stock. The table presented below provides
additional information related to conversion of debt during the period ending
March 31, 2005
Gain or
Loss
Number of Price Amount if any
Shares Per of the on the
Transaction Issued Share Conversion Transaction
- ----------- ------ ----- ---------- -----------
Conversion of accrued
vacation- President/C.E.O 2,403,846 $0.010 $24,038.46 Total amount of conversion realized to equity
Conversion of accrued
vacation- C.O.O./C.F.O 1,422,308 0.010 $14,223.08 Total amount of conversion realized to equity
Conversion of accrued
payroll-employee, related party 1,406,249 0.010 $14,062.49 Total amount of conversion realized to equity
Conversion of accounts payable 750,000 0.010 $7,500.00 $3,750 gain is realized to Forgiveness of Debt
Total 1st quarter 5,982,403 59,824.03 $3,750
NOTE 11 - STOCK OPTIONS
During the quarter ended March 31, 2005, 100,000 stock options were granted to
employees, non-employee directors, officers, or consultants. 180,900 options
vested in the three months ending March 31, 2005, while 9,504 options are
forfeited by former employees during the first quarter of 2005.
The table presented below provides additional information on the options based
compensation for the period ending March 31, 2005.
Number of Value Value
Shares Per of the
Transaction Issued Share Transaction Classification
- ----------- ------ ----- ----------- --------------
Consulting 100,000 $0.012 $1,200 Expense included in income from operations
Total 1st quarter 100,000 1,200
The value of the transaction is based upon the price per share of the common
stock on the date of the transaction along with a valuation factor for the size
of the block of stock relative to the average daily trading volume of the stock
along with during the immediate thirty trading days prior to date the stock is
issued along with trading restrictions placed upon the stock
F-15
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
Stock options activity for 2005 at March 31, 2005 is as follows:
Number Weighted Average
Of Shares Exercise Price
--------- ----------------
Options Outstanding, December 31, 2004 3,366,898 $0.121
Options Granted 100,000 0.012
Options Forfeited (9,504) 3.000
Options Expired 0 0
Options Exercised 0 0
- -
Options outstanding, March 31, 2005 3,457,394 0.112
========= =====
NOTE 12- COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has entered into five lease obligations for office space along with
a corporate apartment in New York City. The offices are located in California,
Florida, New York, and Texas.
California Lease
The California lease was executed on June 19, 2003. The term of the lease is
from August 1, 2003 through October 31, 2006. The lease contains an option for
the Company to extend the lease for an additional three-year period.
Florida Lease
The Florida lease was executed on April 15, 2003. The term of the lease is from
May 1, 2003 through April 30, 2008. The lease includes in addition to the office
space, various office furniture remaining from a prior lessee.
New York
The New York lease was executed on June 8, 2004. The term of the lease is from
June 1, 2004 through May 31, 2007.
The corporate apartment in New York City lease was renewed on January 1, 2005.
The term of the lease is from January 1, 2005 through December 31, 2007.
Texas Lease
The lease was amended on September 1, 2003 to extend the lease agreement period
to September 30, 2006.
F-16
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
EMPLOYMENT CONTRACTS
The Company has employment contracts with four employees. Employment contracts
at March 31, 2005 are as follows.
Annual
Position Compensation
- -------- ------------
President and C.E.O $250,000
C.O.O. and C.F.O. $150,000
Administrative Head of Healthcare Dialog $150,000
Corporate Secretary $ 66,000
The employment contracts for the President and C.E.O, C.O.O. and C.F.O., and the
Administrative Head of Healthcare Dialog are for one year, with initial term
ending March 31, 2005, extendable for successive one year terms, unless
terminated at the end of the term by either party upon ninety days written
notice to the other party. Annual increases at the first of every year shall be
at least the percentage of the prior year's C.P.I. If for any reason, the
employee is not paid the employee's base salary for the year, the difference
between the base salary and the amount paid shall be paid to the employee prior
to payment of any year-end bonus to any other employee. Employee shall be
entitled to not less than five (5) weeks paid vacation for each full calendar
year prorated for any partial year. Employee shall accrue earned and unused
vacation. Employee shall receive all benefits and fringes made available to
other employees and officers of the Company including pension, medical, dental,
life, and disability insurance and other similar plans. Employee and spouse
shall receive these benefits fully paid by the Company. Health insurance for the
employee and family will be provided by the Company. Health club memberships for
the employee will be paid for by the company. Life insurance at a cost of at
least $1,000 per month will be paid by the Company. Long and short term
disability insurance for the employee will be paid by the Company. The employee
is entitled to a monthly automobile allowance of $1,500 per month.
The employment agreement with the Corporate Secretary is effective June 1, 2004
to May 31, 2005. It does not contain a renewal clause. If for any reason, the
employee is not paid the employee's base salary for the year, the difference
between the base salary and the amount paid shall be paid to the employee prior
to payment of any year-end bonus to any other employee. Health insurance for the
employee is paid by the Company. Employee shall accrue earned and unused
vacation. Employee shall receive all benefits and fringes made available to him
from time to time by the Company.
F-17
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 13 - SEGMENT DISCLOSURES
The Company's reportable operating segments are categorized in three components:
(1) Healthcare; which includes Healthcare Dialog, Inc., (2) Data; which includes
Mail Mogul, Inc., and Data Dialog, Inc., (3) Corporate which is Dialog Group,
Inc.
HEALTHCARE
Healthcare Dialog designs, develops and distributes direct marketing and
customer relationship management products and services for the healthcare
industry.
Revenues are generated by Strategic and Creative Services:
----------------------------------------------------------
o direct mail campaigns
o creation of sales representative training materials
o creation and dissemination of patient and professional education
materials
o consumer advertising
o creation and management of websites
o to place internet advertising
o for the use of our healthcare database
+ Media provides, maintains and delivers healthcare information over the
internet and television.
DATA
Mail Mogul is an online market place for sellers of direct mail, providing
leads, website applications, mailing lists, mailing supplies as well as other
products and services.
Revenues are generated from
---------------------------
o data from data dialog master database
o mail room supplies
o membership in "RFQ" an online marketplace for quoting direct mail
jobs
o sale of licensed databases and database products and services
o data updating services
Data Dialog provides online marketing list, direct mail programs and creates
target lists for specific direct marketing categories for small to medium sized
businesses. The company allocates the costs of revenues and direct operating
expenses to these segments.
Revenues are generated from
---------------------------
o data from the Dialog Group databases
o Data Dialog Digital, a product that automatically appends names and
addresses to telephone numbers on inbound calls to telephone service
centers.
o direct mail campaigns
CORPORATE
This is comprised of general and administrative functions and related expenses.
These costs are retained at corporate and are not allocated to the business
segments. Costs that are specifically attributable to a business unit are
charged to that unit. Management's philosophy is charging the units for specific
attributable costs, such as I.T services, rent, and depreciation or amortization
of assets owned by Corporate that have a benefit to the business unit more
accurately reflects the operating costs of Corporate and the matching of
revenues and costs of the respective business unit.
F-18
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
SIGNIFICANT CUSTOMERS
No customer in any segment accounted for10%, or greater of the Company's
consolidated revenues for 2005, while one customer in the Healthcare segment
accounted for approximately 17% of the consolidated revenues, while another
customer accounted for 14% of the consolidated revenues for 2004. No customer in
the Data segment accounted for more than 3% of the consolidated revenues of the
Company in either 2005 or in 2004.
Management is not aware of any known trends, uncertainties, or circumstances
that are reasonably likely to have material effect on composition or percentages
of significant customers for 2005.
Three months ended March 31, 2005 Actual Unaudited Results
Consolidated
Corporate Healthcare Data Total
--------- ---------- ---- ------------
REVENUE $0 $803,199 $913,519 1,716,718
COST OF SALES 0 353,643 339,009 692,653
- ------- ------- -------
GROSS PROFIT 0 449,556 574,509 1,024,065
OPERATING EXPENSES:
Selling, General and Administration Expenses 465,536 316,372 534,131 1,316,040
------- ------- ------- ---------
TOTAL OPERATING EXPENSE 465,536 316,372 534,131 1,316,040
------- ------- ------- ---------
INCOME (LOSS) FROM OPERATIONS (453,536) 133,184 40,378 (291,974)
Other Income(Expenses)
Interest income
Interest expense (24,556) (15,863) (2,916) (43,336)
Other (expense)
Other income
Forgiveness of debt 3,750 3,750
----- -----
Total other income(expenses) (20,806) (15,863) (2,916) (39,586)
------- ------- ------- -------
Income/(Loss) Before Inactive and Discontinued Operations (486,343) 117,321 37,462 (331,850)
Inactive Operations (290)
Discontinued operations
Net Income/(Loss) (486,343) 117,031 37,462 (331,850)
========= ======= ====== =========
Total Net Assets 813,051 795,787 266,279 1,874,117
======= ======= ======= =========
Gross Fixed and Other Assets 1,054,807 0 255,034 1,309,841
========= = ======= =========
Accumulated Depreciation and Amortization 518,384 0 122,886 641,270
======= = ======= =======
Depreciation and Amortization Expense 78,533 0 20,690 99,223
====== = ====== ======
F-19
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
Three months ended March 31, 2004 Actual Results
Consolidated
Corporate Healthcare Data Total
--------- ---------- ---- ------------
REVENUE $0 $933,817 $1,011,615 $1,945,432
COST OF SALES 449,318 490,652 939,970
--------- ------- -------- ----------
GROSS PROFIT 484,499 520,963 1,005,462
OPERATING EXPENSES:
Selling, General and Administration Expenses 605,243 199,147 586,511 1,390,901
--------- ------- -------- ----------
TOTAL OPERATING EXPENSE 605,243 199,147 586,511 1,390,901
--------- ------- -------- ----------
INCOME (LOSS) FROM OPERATIONS (605,243) 285,352 (65,549) (385,440)
--------- ------- -------- ----------
Other Income(Expenses)
Interest income
Interest expense (10,336) (8,168) (18,504)
Other (expense)
Other income
Forgiveness of debt 92,264 1,400 93,663
--------- ------- -------- ----------
Total other income(expenses) 81,927 (8,168) 1,400 75,160
Income/(Loss) Before Inactive and Discontinued Operations (523,316) 277,184 (64,150) (310,280)
--------- ------- -------- ----------
Inactive Operations
Discontinued operations
Net Income/(Loss) (523,316) 277,184 (64,150) (310,280)
========= ======= ======== =========
Total Net Assets 678,763 821,794 459,732 1,960,289
========= ======= ======== =========
Gross Fixed and Other Assets 816,313 0 197,973 1,014,286
========= ======= ======== =========
Accumulated Depreciation and Amortization 227,343 0 47,399 274,742
========= ======= ======== =========
Depreciation and Amortization Expense 68,026 0 14,967 82,993
========= ======= ======== =========
F-20
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 14 - LOANS AND NOTES PAYABLE
Loans and notes payable due to non-related parties consisted of the following as
of March 31, 2005.
Convertible notes in the aggregate amount of $100,000 due to three former IP2M
note holders assumed by the Company. The notes are due August 31, 2004. The
notes bear interest at the rate of 10% per annum. The notes are convertible into
shares of the Company's common stock. The number of shares to be issued upon
conversion will be determined by the closing bid price of the Company's common
stock on the date of conversion. Each holder is entitled to convert up to 25% of
the initial balance of the note (including accrued interest) each month. During
the Second Quarter of 2004 $75,000.00 of Notes were converted to Common Stock $ 25,000
$115,000 revolving credit agreement with a commercial bank matured on October
13, 2004. The Company is currently in discussions with the bank. The line of
credit bears interest at prime plus 2% per annum and is personally guaranteed by
the Company's President and C.E.O. $ 114,689
Small business loan assumed upon the purchase of Azimuth Target Marketing. The
loan bears interest at prime plus 2 1/4 % per annum, due in equal installments
over 36 months, maturing during 2006. $ 2,911
$350,000 line of credit with commercial asset-backed lender with a term of two
years beginning August 2004. The line of credit bears interest at prime plus 4%
per annum plus on-going fees. It is secured by the Company's accounts
receivables, equipment, inventory, and up to $150,000 of the debt is personally
guaranteed by the President and C.E.O. of the Company and his spouse.
$ 349,267
Total loans and notes payable $ 491,867
Less: Current maturities $ (491,867)
-----------
Long Term Debt $ 0
===========
Please see Note 15- Related Party Transactions Due to Related Parties for
information about additional Company debt.
F-21
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE15 - RELATED PARTY TRANSACTIONS
CONVERTIBLE NOTES DUE TO RELATED PARTIES
During 2004, the Company began issuing a Convertible Note. The notes all bear
interest at the rate of five (5%) percent per annum. They mature on May 31,
2006. The holders of the notes can convert them into Company common stock at a
price of $0.06 per share. After the Company's shares close over $0.12 per share
for twenty trading days, the Company can compel the holders to convert their
notes and all accrued interest into shares of common stock at the conversion
price.
By the end of the 1st quarter, 2005, the Company had issued notes with an
aggregate of $628,045 in initial principal amount. At the time the notes were
issued, the Company issued warrants granting the holders the right to purchase
an aggregate of 3,140,225 shares at a price of $0.075.
Convertible Notes in the aggregate amount of $118,045 were issued to the
President and C.E.O, the C.O.O. and C.F.O., along with two employees for unpaid
payroll at December 31, 2004. $ 118,045
Three notes, in the initial principal amounts of $250,000, $135,000, $125,000,
and $45,000 were issued to a fund through the efforts of an affiliated
broker-dealer. The Company paid an aggregate of approximately $55,000 to a
company whose president is a member of the board of directors of the Company for
arranging the sale of these notes. See Note-18 Subsequent events, item one for
additional information. $ 555,000
DUE TO RELATED PARTIES
In December 2004, a group of individuals, including a member of board of
directors provided approximately $113,000 directly to a supplier for unpaid
invoices. The advance is non-interest bearing and due on demand. In January of
2005, a significant portion was repaid. $ 26,000
In conjunction with the Company obtaining a Standby Letter of Credit for the
benefit of a supplier of Healthcare Dialog (see Note-7 Letter of Credit), the
President and C.E.O. of the Company personally secured the Letter of Credit by
pledging $90,000 of personal assets, the amount of the Standby Letter of credit.
Unless, the Letter of Credit is drawn down on, no amount is payable to the
President and C.E.O. to reimburse the amount drawn against the Standby Letter of
Credit
The President and C.E.O. of Company provided the Company with $25,000 of
short-term, $ 25,000 interest-free, unsecured debt.
Total loans and notes payable due to related parties $ 724,045
Less: Current maturities $ (51,000)
----------
Long Term Debt due to related parties $ 673,045
==========
F-22
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
CONVERSION OF DEBT DUE TO RELATED PARTIES
During the period ending March, 31, 2005, related parties converted
approximately $53,000 of debt, or accrued expenses into equity of the Company.
The table presented below provides additional information of conversion of debt
due to related parties.
Gain or
Loss
Number of Price Amount if any
Shares Per of the on the
Transaction Issued Share Conversion Transaction
- ----------- ------ ----- ---------- -----------
Conversion of accrued
vacation- President/C.E.O 2,403,846 $0.010 $24,038.46 Total amount of conversion is realized to equity
Conversion of accrued
vacation- C.O.O./C.F.O 1,422,308 0.010 $14,223.08 Total amount of conversion is realized to equity
Conversion of accrued
payroll-employee, related
party 1,406,249 0.010 $14,062.49 Total amount of conversion is realized to equity
Total 1st quarter 5,232,403 52,324.03
The value of the transactions is based upon the price per share of the common
stock on the date that the transaction occurred.
RENT TO RELATED PARTIES
The Company leases an apartment from January 1, 2005 through December 31, 2007
from a company controlled by the C.O.O. and C.F.O. of the Company. Rent expense
paid to the company controlled by the related parties amounted to $6,000 for
three months ended March 31, 2005.
NOTE 16 -LITIGATION
SUPPLIERS
During July of 2003, Axiom Corporation commenced an action against
ThinkDirectMarketing, Inc., a discontinued subsidiary. The complaint seeks
$400,000 on a note payable, and $295,415 for unpaid data usage, and $1,250,000
for unused minimum usage requirements for 2003 and 2004. The debts, if any, are
those of the discontinued entity. This litigation is still in the preliminary
stages and no amounts have been accrued.
Wells Fargo Financial Leasing, Inc. filed an action against the Company for
non-payment of equipment lease commitments made by Healthcare Dialog, Inc.
Subsequent to year-end, a settlement was reached and both parties executed the
agreement. The amount is fully recorded in the accounts payables of the Company.
The balance at March 31, 2005 is $5,000. In April, 2005 balance was paid in full
by check.
F-23
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
Collins Ink, in June 2004, obtained a judgment of $92,347 for unpaid invoices.
The full amount is recorded in the accounts payable of the Company. In January
2005, the Company made two payments of $5,000 each for a total of $10,000 by
check. The balance at March 31, 2005 is $33,109. The Company did not make any
payments for the period ending June 30, 2005. The balance at June 30, 2005 is
$33,109.
Label Source, in June 2004, obtained a judgment of $121,037 for unpaid invoices.
The full amount is recorded in the accounts payable of the Company. The balance
at March 31, 2005 is $87,314. As payments are behind the payment plan schedule,
the Company was informed that plaintiff obtained a lawyer in New York.
USA Direct, in April 2004 obtained a $39,025 judgment related to a discontinued
operation of the Company. This amount is recorded in the accounts payable of the
Company. In December 2004, the Company and USA Direct reached an agreement of
$20,000 and a payment plan. The balance at March 31, 2005 is $10,000.
The New York State Department of Taxation in December 2004 provided a letter to
QD Corporation, a discontinued unit that the Department claims that QD
Corporation owes $7,936 in taxes and interest for corporate income taxes for the
period ending December 31, 2002. After reviewing the consolidated tax return, QD
Corporation is not required to file a separate return. This information has been
provided to New York State Department of Taxation in response to its December
2004 letter. As the Company believes it has properly reported the taxes to the
State of New York, no accrual for additional taxes and charges are recorded.
EMPLOYEES
In April 2003, Dialog Group received a summons from a Colorado State District
Court seeking to enforce a former employee's termination agreement. A settlement
agreement was reached for $47,330. TDMI, a discontinued subsidiary, made
payments of approximately $45,000 during 2003 and 2004. The balance at March 31,
2005, is $2000 and recorded as an accrual on the books of the Company. This
amount is included in accrued settlements and contingencies in Note 9.The
balance was paid in full in April, 2005 by check.
In April 2003, two former TDMI employees commenced arbitration proceeding
against the Company relating to their termination of employment. The employees
seek damages totaling $375,789. TDMI, a discontinued subsidiary, accrued
$147,000 against this potential liability. The Company has accrued for
additional legal fees to contest the claims. In January 2005, the Company
received notice from the American Arbitration Association Employment Arbitration
Tribunal that reviewed the claims. Its decision was to award the claimants a
total of approximately $478,000 including fees. The amount is fully accrued for
in the financial statements of the Company. The balance at March 31, 2005 is
$473,898. This amount is accrued on the books of the Company. It is included in
accrued settlements and contingencies in note 9. In April, the Company and the
two former employees of TDMI executed a settlement agreement for $501,872 that
includes a schedule of payments over two and half years that includes
approximately $25,000 of interest.
The Company reached a settlement with a former employee for claims against an
employment contract. It was settled by conversion to series E preferred stock in
2004.The Company accrued for a liability sufficient to cover the settlement. The
balance at March 31, 2005 is $8,149 and is included in accrued settlements and
contingencies in Note 9.
F-24
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 17-FORGIVENESS OF DEBT
During the period ending June 30, 2005
During the period ending March 31, 2005, Management arranged the settlement of
accounts payable and other obligations resulting in approximately $3,800 in
forgiveness of debt recorded in the Statement of Operations. The table presented
below provides additional information on the forgiveness of debt for the period
ending March 31, 2005.
Gain or
Loss
Number of Value Value if any
Shares Per of the on the
Transaction Issued Share Transaction Transaction
- ----------- ------ ----- ----------- -----------
Conversion of accrued
vacation- President/C.E.O 2,403,846 $0.005 $12,019.23 Total value of transaction is realized to equity
Conversion of accrued
vacation- C.O.O./C.F.O 1,422,308 0.005 $7,111.54 Total value of transaction is realized to equity
Conversion of accrued
payroll-employee, related
party 1,406,249 0.005 $7,031.25 Total value of transaction is realized to equity
Conversion of accounts payable 750,000 0.005 $3,750.00 $3,750 gain is realized to Forgiveness of Debt
Total 1st quarter 5,982,403 29,912.02 50
The value of the transaction is based upon the price per share of the common
stock on the date of the transaction along with a valuation factor for the size
of the block of stock relative to the average daily trading volume of the stock
along with during the immediate thirty trading days prior to date the stock is
issued along with trading restrictions placed upon the stock
NOTE 18-SUBSEQUENT EVENTS
In April, 2005, the Company and the holder of $555,000 in convertible notes had
these notes cancelled and purchased by another related party. As part of
canceling the notes, the accrued interest was forgiven and the attached warrants
were cancelled. A new note, for $555,000 was issued to replace the four notes
that were cancelled.
In April, 2005, the Company issued a 5% convertible note in the amount of
$550,000 in a related party transaction. The Company obtained $500,000 in April.
In connection with arranging the sale of this note, the Company paid $50,000 to
a company whose president is a member of the board of directors of the Company.
F-25
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
In May, 2005, the Company signed a letter of intent to acquire an online
advertising and affiliate marketing company. The company has developed several
new highly customizable online technologies that enhance advertising and
marketing performance. The proposed acquisition would allow Dialog Group, Inc.
to expand our means of distributing our data services and increase our online
presence. The exact terms of the transaction are subject to board of directors'
approval along with agreement on a definitive contract.
In April, 2005, the Company entered into a settlement agreement and payment
arrangement with two former employees of TDMI, a discontinued operation. See
Note16-Litagation, Employees. The settlement agreement's payment plan stated the
former employees be paid an initial amount of $100,000 and the balance over the
next thirty months. The $100,000 payment was made by check in April 2005.
F-26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
Dialog Group, Inc. (DLGG) is a publicly traded corporation, headquartered
at 257 Park Avenue South, Suite 1201, New York, New York 10010, with offices in
Valencia, California; Sunrise, Florida; and Houston, Texas. The company's two
divisions, Data Dialog and Healthcare Dialog, provide a broad spectrum of
proprietary and exclusive databases for healthcare, pharmaceutical, consumer and
business-to-business market clients. The company also provides a combination of
traditional customer relationship management support applications such as
advertising (print, broadcast) and marketing services (broadcast, new media, and
Internet-based promotional venues). Dialog Group maintains exclusive contracts
with leading multinational pharmaceutical companies to operate, maintain, and
provide content for their consumer-directed Web sites.
DESCRIPTION OF THE DIVISIONS
Both of Dialog Group's divisions each currently market its product and
service offerings through three branded business organizations. The Data Dialog
Division's are Data Dialog Marketing, Data Dialog Digital and Mail Mogul. The
Healthcare Dialog Division's are nFusion, +Media, and iData.
DATA DIALOG DIVISION
DATA DIALOG MARKETING serves the direct marketing needs of small- and
medium-sized businesses with systems and tools that generate business and
consumer prospect leads, provide data services, and streamline business
processes by integrating the collection and distribution of data. Data Dialog
Marketing offers a host of data-related services, such as targeted marketing
lists, turnkey direct mail programs, and data cleansing to multiple market
segments including insurance, financial planning, real estate, auto dealerships
and other segments that are users of direct mail and prospect marketing. Data
Dialog Marketing also offers a unique subscription-based product featuring
limited selections of data specifically designed for the small business segment.
The unit markets a proprietary online list creation tool, Data Dialog Select.
DATA DIALOG DIGITAL is a customer data integration product that
automatically appends name and address information, as well as demographic &
sociographic information, to telephone numbers on calls made by consumer and
business customers to CTI Platforms. Data Dialog Digital primarily markets its
products to call centers and Interactive Voice Response system users operating
in-bound and blended call centers with 5 to 500 seats. Data Dialog Digital
currently has contracts and sub-contracts with 27 businesses in this market
segment and an additional 20 agreements with resellers which service this
market. The real time format of this unit's products gives customers instant
access to data, and speeds up their promotional efforts and improves customer
service.
MAIL MOGUL brings one-stop shopping to the small- to medium-sized mail
shop industry. Mail Mogul helps mail shops improve their business opportunities
through a total-business-solutions approach. Proprietary and external lists are
sold at competitive prices both on and off line to mail shops for their
customers. In addition, list hygiene services are offered to mail shops that
have customer lists which need to be updated and or standardized. Its "Hot
Leads" product is this market's first online commerce center to link customers
who need direct mail job quotes with mail shops and direct marketing service
organizations with letter-shop capabilities. Finally, Mail Mogul offers
consumable supplies to its customers for their equipment and to round out its
offerings.
3
HEALTHCARE DIALOG DIVISION
IDATA uses proprietary technologies to support healthcare and
pharmaceutical clients in their direct marketing efforts, clinical trial
recruitment, and consumer/patient market research efforts. It offers unique
healthcare data on almost 2 million households, and serves as the foundation for
the highly targeted and efficient communication plans of pharmaceutical
companies, retailers, and other healthcare companies. Its exclusive data is
compiled from respondents who agree to telephone interviews. The primary
function of this business unit is to identify patient/consumer targets and
enhance patient/consumer databases.
NFUSION delivers advertising, relationship marketing and communications
services to the healthcare industry. Clients use its strategic and creative
services to build comprehensive programs for healthcare professionals,
consumers, and sales representatives. These include training materials
development, patient and professional education materials distribution, and
targeted direct mail and advertising campaigns. Clients rely on NFUSION'S
interactive services to produce sophisticated promotional Web sites, educational
Web sites, interactive training and educational CD-ROMs, Internet advertising,
e-mail campaigns, and proprietary marketing programs.
+MEDIA'S platform provides, maintains, and delivers healthcare, beauty and
pet content across a national network of 87 local affiliate TV and radio station
Web sites. The content, which includes over 15,000 text articles, attracts over
a million unique health information seekers per day to the broadcast stations'
Web sites for a combined US household penetration of 75%. Here, client public
relations, promotional material, and educational material are blended into a
seamless presentation for maximum viewer impact. To maintain repeat traffic, all
features are refreshed daily.
RESULTS OF OPERATIONS
DIALOG GROUP
----------------------------------------------------------------------------------------------------
INCOME STATEMENT ITEM FIRST QUARTER 2005 FIRST QUARTER 2004
--------------------- ------------------- -------------------
----------------------------------------------------------------------------------------------------
Revenue $1,717,000 $1,945,000
----------------------------------------------------------------------------------------------------
Cost of Revenue 692,000 940,000
----------------------------------------------------------------------------------------------------
Operating Expenses 1,317,000 1,391,000
----------------------------------------------------------------------------------------------------
Result of Operations (292,000) (385,000)
----------------------------------------------------------------------------------------------------
Net Other Income (39,000) 75,000
----------------------------------------------------------------------------------------------------
Net Result (332,000) (310,000)
------------------------------------------------------------------- --------------------------------
4
Management continued to evaluate the margins of some of the products
offered and focused more on profit improvement and not Revenue alone. Revenues
for the quarter ended March 31, 2005 were $1,716,700 compared with $1,945,400
for the quarter ended March 31, 2004. This represents a decline of $228,700 or
11% from the same period a year ago. Sales from the high margin data companies
were $913,500 or 47% of total. With the addition of iData sales, which are
reported in the Healthcare Dialog total, data sales were $1,038,400 or 53% of
total Revenue. Data Sales in total for the first quarter of 2005 are ahead of
the first quarter of 2004. Revenue for each of the companies and some of the
products will be addressed in more detail below.
Costs of Revenues for the quarter ended March 31, 2005 were $692,700, some
40% of sales, compared with $940,000 or approximately 48% of sales in the
quarter ended March 31, 2004. The decline in Revenue of $228,700 was offset by
the $247,300 decline in Cost of Revenue from a year ago for the same period.
Improved terms from data suppliers and the greater utilization of company data
assets rather than relying on external sources and a change in the mix of
Revenue drove down Cost of Revenue in the first quarter of 2005 from the same
quarter of the prior year. The sources of the Revenue and costs for each
division are discussed in more detail by company in the sections which follow.
Operating Expenses for the quarter ended March 31, 2005 were $1,316,000
compared with $1,390,900 for the quarter ended March 31, 2004. This represents a
reduction of $74,900 from the first quarter of 2004. Management plans to
continue to reduce overhead in the quarters ahead. Dialog Group in 2005 is
allocating some administrative and IT expenses to the divisions which it did not
do in 2004, the details of which are explained in more detail in the individual
company comments.
Losses from Operations were $292,000 for the quarter ended March 31, 2005,
compared with $385,400 for the quarter ended March 31, 2004, an improvement of
approximately $93,400 from the same period a year ago. The positive results can
be attributed to lower Cost of Revenue resulting from higher margin businesses
making up a greater percentage of Total Sales in the first quarter of 2004 than
for the comparable period in 2004. A reduction of Operating Expenses also
contributed to the improved results. "Reduce Overhead" has and will continue to
be the Dialog Group credo.
Net Other Income/Expense was an expense of $39,600 for the quarter ended
March 31, 2005, compared with Net Other Income/Expense was income of $75,200 for
the quarter ended March 31, 2004, an increase of $114,800. The company's other
income/expense for this year included interest expenses of approximately $43,300
and income of $3,800, arising from gain on forgiveness of debt. Last year
included interest expense of $18,500 and other income of $93,700 that arose
primarily from the review of accrued expenses and adjustment to current
estimates.
5
The Net Loss for the quarter ended March 31, 2005 was $331,800, compared
with a Net Loss $310,300 in the quarter ended March 31, 2004, representing an
increase of $21,500.
DATA DIALOG DIVISION:
------------------------------------------------------------------------------------
INCOME STATEMENT ITEM FIRST QUARTER 2005 FIRST QUARTER 2004
--------------------- ------------------ ------------------
------------------------------------------------------------------------------------
MAIL MOGUL DATA DIALOG MAIL MOGUL ONLY
---------- ----------- ---------------
------------------------------------------------------------------------------------
Revenue $521,000 $392,000 $814,000
------------------------------------------------------------------------------------
Cost of Revenue 224,000 115,000 438,000
------------------------------------------------------------------------------------
Operating Expenses 236,000 330,000 217,000
------------------------------------------------------------------------------------
Result of Operations 62,000 (53,000) 158,000
------------------------------------------------------------------------------------
Net Other Income (2,000) (1,000) -0-
------------------------------------------------------------------------------------
Net Result 60,000 (54,000) 158,000
------------------------------------------------------------------------------------
Data Dialog had Sales of $392,000 for the period ending March 31, 2005,
compared to approximately $198,000 for the first quarter of 2004. Data Dialog
Marketing, which sells data and marketing services to small- and mid sized-end
users, accounted for approximately $261,000 of total Data Dialog Sales for the
period ending March 31, 2005. The company's Data Dialog Digital call center
reverse append product was the second largest revenue producer for the first
quarter, contributing $102,100 in Revenue. Data Dialog Management, which sells
data to large end users and brokers, produced the balance. Specialty List sales
sold by two of the divisions provided the greatest proportion of the Revenue for
Data Dialog. The Data Dialog Marketing subscription list products were the
second strongest Revenue producer.
Mail Mogul's Revenues were $521,500 for the quarter ended March 31, 2005,
compared with $813,700 for the same period ended March 31, 2004. The year began
with weak sales resulting from fewer experienced sales people on staff and
increased competition. During the first quarter of 2005, Sales from Mail Mogul's
highest margin "Hot Lead" category was up from the same period a year ago. While
highly profitable list Sales were off for the period ending March 31, 2005 from
the same periods a year ago, the Sales of low margin consumable supplies were
off more significantly from the first quarter of 2004 to first quarter 2005.
Data Dialog's Costs of Revenue for the first three months of 2005 were
$114,800 or 29% of Sales, compared with $52,500, or 27% of sales in the first
quarter of 2004. The savings from the Company sales from company-owned data
assets was negatively offset by the increase in sales of the lower margin
wholesale products along with sales of printing and fulfillment. Cost of Revenue
by product varied from 17% of sales to 43% of sales. As sales continue to
improve in the quarters ahead, Cost of Revenue percentage should continue to
improve as a result of fixed expenses relating to data acquisition and Internet
marketing.
6
Mail Mogul's Costs of Revenue were $224,200 for the quarter ended March
31, 2005, representing 43% of revenue, compared with $438,100 and 54% of revenue
for the quarter ended March 31, 2004. The mix of the business was the major
reason for the reduction in the Cost of Revenues percent for Mail Mogul in the
first quarter. Sales from the company's lowest Cost of Revenue product "Hot
Leads" in the first quarter of 2005 was up for the period ending March 31, 2005,
compared to the period ending March 31, 2004. "Hot Leads" is an online community
where member mail shops bid on mailing jobs. Sales of low margin mail shop
consumable supplies were down significantly from a year ago while sales of
higher margin data made up a greater percentage of the total Revenue for the
period. Mail Mogul's Cost of Revenue reduction of approximately $214,000 helped
to offset the reduction in Revenue during the first quarter of 2005 compared to
the first quarter of 2004.
Data Dialog's Operating Expenses for the three month period ended March
31, 2005 were $330,000, an improvement of approximately $65,000 from the same
period a year ago when the figure was $394,900. Operating Expenses decreased
from the first quarter of 2004 to the first quarter of 2005, while sales doubled
during the same period, contributing to the overall profit improvement of this
company. Certain data expenses paid exclusively by Data Dialog in 2004 are being
shared in the amount of $17,500 with Mail Mogul in 2005, along with $28,000 of
inter-company cost allocations to other divisions, and approximately $ 25,000
related to the transfer of employees from Data Dialog.
Mail Mogul's Operating Expenses $235,600 for the quarter ended March 31,
2005 compared with $228,000 for the quarter ended March 31, 2004. In 2005,
allocation of $35,000 for marketing, administrative and IT expenses were charged
to Mail Mogul during the period ending March 31, 2005 that were not charged for
the same period in 2004. Management believes the 2005 approach yields a more
accurate presentation of operating results.
Data Dialog's Net Loss from Operations was $52,800 for the first quarter
of 2005, compared to a loss of approximately $250,000 for the first quarter of
2004. Investments made in sales staff and an online platform for Data Dialog
Marketing are having a positive impact on Data Dialog. Data Dialog Digital was
the one product line of the three which showed a profit for the first quarter.
Mail Mogul's Net Income from Operations for the quarter ended March 31,
2005 was $61,700, compared with approximately $158,000 for the same quarter in
2004. Mail Mogul sales ending March 31, 2005 were down almost $300,000 from the
same period a year ago, while Net Income is down by less than $100,000.
Management believes the results of the first quarter were attributed to the
turnover of experienced sales people and a conscious effort to divert resources
away from lower margin categories. Even with a decrease in Revenue, this company
was still profitable in the first quarter of 2005, and Management believes the
strategy in place will return the bottom line to past year levels.
7
HEALTHCARE DIALOG DIVISION
----------------------------------------------------------------------------------
INCOME STATEMENT ITEM FIRST QUARTER 2005 FIRST QUARTER 2004
--------------------- ------------------- -------------------
----------------------------------------------------------------------------------
Revenue $803,000 $934,000
-------- --------
----------------------------------------------------------------------------------
Cost of Revenue 354,000 449,000
----------------------------------------------------------------------------------
Operating Expenses 316,000 199,000
----------------------------------------------------------------------------------
Result of Operations 133,000 285,000
----------------------------------------------------------------------------------
Net Other Income (16,000) (8,000)
----------------------------------------------------------------------------------
Net Result 117,000 277,000
----------------------------------------------------------------------------------
Total Revenue for Healthcare Dialog was $803,200 for the first quarter of
2005 compared to $933,800 for the same period a year ago. A metamorphosis of
Dialog Group into a company with products that are broader-based and include
clients other than pharmaceutical companies is taking place. The company is less
dependent on a few large pharmaceutical clients than in the past. Resources and
assets formally allocated to Healthcare Dialog are being deployed in other
divisions.
Sales in NFUSION for the three months ended March 31, 2005 were $518,000,
or about 64% of the total Healthcare Dialog business in the first quarter of
2005. This healthcare-focused marketing business is the single largest segment
of Healthcare Dialog. Sales of NFUSION for the first quarter of 2004 were
$470,000.
+MEDIA produced sales of $160,300 for the period ending March 31, 2005,
which was also below the 2004 level of $461,700 for the same period. While
orders placed were below last year by about $100,000, sales the first quarter of
2004 were further depressed because inventory was not made available from the
supplier which owns the TV Web Sites.Sales that were booked but not placed as a
result of a shortage of online inventory in the first quarter will be filled and
revenue realized later in 2005.
The remaining healthcare segment, IDATA, which conducts telephone surveys
primarily for healthcare companies, had Revenue for the first quarter of 2005 of
$125,000. This compares favorably to the same period a year ago when Sales were
about $40,000. Contracted Sales for 2005 are ahead of 2004 actual revenues.
Healthcare Dialog's Costs of Revenue was $335,000 for the quarter ended
March 31, 2005, or 42% of revenue compared with $424,000, and 45% of revenue for
the quarter ended March 31, 2004 The reduction is related to using fewer
consultants and freelancers for savings of approximately $125,000.. One factor
affecting the Cost of Revenue rate was a change in the technology used for the
IDATA surveys. This more cost-effective approach was not introduced until after
the end of the first quarter of 2004.
The Healthcare Dialog's consolidated Total Operating Expenses were
approximately $316,400 for the three months ended March 31, 2005, compared to
$199,100 for the same period a year ago. In the first quarter of 2005, expenses
included allocation of approximately $80,000 for IT and administration that were
not included in 2004 along with approximately $43,000 related to transfers of
employees to Healthcare Dialog from other divisions. Management believes the new
approach more accurately presents operating results for each business unit.
8
For the three months ended March 31, 2005, Healthcare Dialog's
consolidated Net Income from Operations was approximately $153,000 compared to
$311,000 in the first quarter of 2004. Healthcare Dialog experienced a decline
in volume in the first quarter of 2005, compared to the same period a year ago.
It still produced the highest Income from Operations of any of the Dialog Group
companies and was still able to produce a 19% Net Income from Operations.
LIQUIDITY & CAPITAL RESOURCES
DGI had a consolidated working capital deficit of approximately
($3,041,000) on March 31, 2005 as compared to a deficit of approximately
($2,854,000) at December 31, 2004. The increase of approximately $187,000 is the
result increase in accounts payable, accrued expenses and short-term borrowing
due a reduced level of sales in the first quarter that did not provide the level
of accounts receivable required to fund operations.
On March 31, 2005 the Healthcare Dialog Division's financial condition
included a working capital deficit, of about ($952,000) as compared to a deficit
of approximately ($909,000) at December 31, 2004.
At the end of March, the Data Dialog Division had a working capital
deficit of approximately ($867,000) as compared to a deficit of about ($665,000)
on December 31, 2004. This is the result of current assets essentially remaining
unchanged while accounts payable and other current liabilities increased.
KNOWN TRENDS
HEALTHCARE
Two significant trends continue to influence Healthcare Marking. The first
is the marketing of prescription medication directly to the patient. In addition
to enabling the patient to better understand the medication they are using it
offers the patients choices which they can discuss with their physician. The
second trend is the utilization of the internet to educate healthcare
professionals, patients and consumers about not only health related topics, but
the internet offers healthcare marketers an additional opportunity to promote
prescription and over the counter products to these groups as well. Both of
these trends should prove beneficial and provide sales opportunities for
Healthcare Dialog and iData.
DATA
Privacy regulations and concerns continue to grow and affect the methods
of operation for all data suppliers. The costs of complying with these
regulations are an added expense and fines for non-compliance can be significant
and may increase in the future. In addition the trend towards collecting data
using new technologies continues to increase. The internet as a vehicle for
collecting data continues to grow while the methods improve every year.
Computerized telephone surveys have begun to replace tradition methods like
paper surveys and live operators taking information over the phone. The trend
towards new technology has and should continue to reduce the expenses relating
to data capture.
INFLATION
Inflation rates in the United States have not had a significant impact on
operating results for the periods presented.
9
ITEM 3. CONTROLS AND PROCEDURES.
The Company evaluated, under the supervision and with the participation of
the Company's management (including its chief executive officer and with its
chief financial officer), the effectiveness of the design and operation of its
disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).
Based upon their evaluation of such disclosure controls and procedures,
the Company's chief executive officer and chief financial officer have concluded
such controls were effective as of December 31, 2004, are operating as designed
and will alert them on a timely basis to any material information relating to
the Company required to be included in the Company's periodic SEC filings.
10
PART II. OTHER INFORMATION
Items 3, 4, and 5 are omitted as they are either not applicable or have
been included in Part I.
ITEM 1. LEGAL PROCEEDINGS
Suppliers
During July of 2003, Axiom Corporation commenced an action against
ThinkDirectMarketing, Inc., a discontinued subsidiary. The complaint seeks
$400,000 on a note payable, and $295,415 for unpaid data usage, and $1,250,000
for unused minimum usage requirements for 2003 and 2004. The debts, if any, are
those of the discontinued entity. This litigation is still in the preliminary
stages and no amounts have been accrued.
Wells Fargo Financial Leasing, Inc. filed an action against the Company
for non-payment of equipment lease commitments made by Healthcare Dialog, Inc.
Subsequent to year-end, a settlement was reached and both parties executed the
agreement. The amount is fully recorded in the financial statements of the
Company. The balance at March 31, 2005 is $5,000. In April, balance was paid.
Collins Ink, in June 2004, obtained a judgment of $92,347 for unpaid
invoices. The full amount is recorded in the financial statements of the
Company. The balance at March 31, 2005 is $33,109.
Label Source, in June 2004, obtained a judgment of $121,037 for unpaid
invoices. The full amount is recorded in the financial statements of the
Company. The balance at March 31, 2005 is $87,314. As payments are behind the
payment plan schedule, the Company was informed that plaintiff obtained a lawyer
in New York.
USA Direct, in April 2004 obtained a $39,025 judgment related to a
discontinued operation of the Company. This amount is fully accrued in the
financial statements of the Company. In December 2004, the Company and USA
Direct reached an agreement of $20,000 and a payment plan. The balance at March
31, 2005 is $10,000.
The New York State Department of Taxation in December 2004 provided a
letter to QD Corporation, a discontinued unit that the Department claims that QD
Corporation owes $7,936 in taxes and interest for corporate income taxes for the
period ending December 31, 2002. After reviewing the consolidated tax return, QD
Corporation is not required to file a separate return. This information has been
provided to New York State Department of Taxation in response to its December
2004 letter. As the Company believes it has properly reported the taxes to the
State of New York, no additional taxes and charges are recorded.
11
Employees
In April 2003, Dialog Group received a summons from a Colorado State
District Court seeking to enforce a former employee's termination agreement. A
settlement agreement was reached for $47,330. TDMI, a discontinued subsidiary,
made payments of approximately $45,000 during 2003 and 2004. The balance at
March 31, 2005, is $2000. The balance was paid in April.
In April 2003, two former TDMI employees commenced arbitration proceeding
against the Company relating to their termination of employment. The employees
seek damages totaling $375,789. TDMI, a discontinued subsidiary, accrued
$147,000 against this potential liability. The Company has accrued for
additional legal fees to contest the claims. In January 2005, the Company
received notice from the American Arbitration Association Employment Arbitration
Tribunal that reviewed the claims. Its decision was to award the claimants a
total of approximately $478,000 including fees. The amount is fully accrued for
in the financial statements of the Company. The balance at March 31, 2005 is
$473,898. In April, the Company and the two former employees of TDMI executed a
settlement agreement for $501,872 that includes a schedule of payments over two
and half years that includes approximately $25,000 of interest.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Class E Preferred Stock Dividends
During the second quarter, the Board decided to pay the quarterly
dividends on the Company's Class E Preferred Stock in shares of common stock.
The dividends, at a rate of $400 per share per quarter, for the last three
quarters of 2004 had not been paid. Pursuant to the provisions of the Class E
Preferred Stock Declaration, shares of common stock, based on the average
closing price for the shares during the last 20 trading days before the
dividends were due, maybe paid in lieu of cash. During January a total of
2,839,076 shares were issued to settle $109,000 of dividends due at that time.
The holders of the Class E Preferred Stock had represented themselves in writing
to be accredited investors who were purchasing those shares and any shares
issued as dividends for their own investment and agreed to restrictions on
resale placed with the Company's transfer agent and the printing of a legend on
his certificate. Because of these factors, this issuance is exempt from
registration under the Securities Act as not involving a public distribution
under section 4(2).
Consultants
In January the Company issued 1,456,298 shares of common stock to
Knightsbridge Holdings, Inc. in connection with consulting services related to
regaining Bulletin Board trading status. These shares were valued at $13,835.78.
Also in January, the Company issued 1,000,000 shares to Peter Nasca
Associates, Inc. for public relations services. These shares were valued at
$7,000.
Both consultants are accredited investors who accepted those shares for
their own investment and agreed to restrictions on resale placed with the
Company's transfer agent and the printing of a legend on his certificate.
Because of these factors, this issuance is exempt from registration under the
Securities Act as not involving a public distribution under section 4(2).
12
Employees
In January, the Company issued a total of 350,000 shares to two employees
on the condition that they remain Company employees through the end of 2005. The
shares are held in escrow to assure their compliance with their obligations.
These shares are valued at $3,500. Both employees are accredited investors who
accepted these shares for their own investment and agreed to restrictions on
resale placed with the Company's transfer agent and the printing of a legend on
his certificate. Because of these factors, this issuance is exempt from
registration under the Securities Act as not involving a public distribution
under section 4(2).
Guarantees
Peter DeCrescenzo and Vincent DeCrescenzo, Sr. have guaranteed Company
obligations and provided Company access to their personal credit cards, on which
the Company carries substantial balances. Pursuant to Board of Directors
resolutions, they have been issued 4,750,000 and 350,000 shares respectively as
compensation for providing these guarantees and access to credit. These shares
were values at $19,000 and $1,400 respectively. Both guarantors are accredited
investors who accepted these shares for their own investment and agreed to
restrictions on resale placed with the Company's transfer agent and the printing
of a legend on his certificate. Because of these factors, this issuance is
exempt from registration under the Securities Act as not involving a public
distribution under section 4(2).
Convertible Note
In January 2005, Dialog Group issued its convertible note to one
purchaser. The note is due May 31, 2006, bears interest at a rate of 5% per
annum, and is convertible with respect to both principal and interest at $0.025
commencing April 1, 2005. At the same time, Dialog Group granted to the
purchaser a warrant to purchase 540,000 shares of common stock at $0.025 per
share commencing April 1, 2005 and continuing until September 30, 2009. The
purchaser represented itself in writing to be an accredited investor who was
purchasing these notes for its own investment. The note and the warrant will
bear a Securities Act legend and the purchaser has agreed, with respect to any
common shares to be issued upon conversion or exercise, to restrictions on
resale placed with the Company's transfer agent and the printing of a legend on
any certificates. Because of these factors, this sale is exempt from
registration under the Securities Act as not involving a public distribution
under section 4(2).
Other issues
See Current Report on Form 8-K, filed April 27, 2005, for details of other
recent sales of securities.
The proceeds of all shares issued for cash were used for general business
purposes.
13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
Exhibit
Number Description Page
2.1 Third Amended Plan of Reorganization - Incorporated by reference from X
Report on Form 8-K filed on October 12, 2001
2.2 Amendment dated February 27, 2003 to an Agreement for Merger by and X
among IMX Pharmaceuticals, Inc., a Utah corporation ("IMX") (for
itself and for Dialog Group, Inc., its successor by merger), HCD
Acquisition, Inc. ("HCD Acquisition"), a Delaware corporation,
Healthcare Dialog, Inc., a Delaware corporation ("HCD"), and Peter V.
DeCrescenzo, Vincent DeCrescenzo, Sr., and Cindy Lanzendoen, each an
individual, (collectively, the "Shareholders") and Cater Barnard,
plc, an a corporation of England and Wales ("CB") - Incorporated by
reference from Report on Form 8-K filed on March 15, 2003
2.3 Agreement for Merger dated February 24, 2003 among Dialog Group, X
Inc., a Delaware corporation ("DGI"), IP2M Acquisition Corp.
("Acquisition"), a Delaware corporation, IP2M, Inc., a Delaware
corporation ("IP2M"), and Robin Smith, William Donovan, Five Don,
Ltd. (a/k/a 5 Don Ltd.), Cameron Bevis, and Art Sadin - Incorporated
by reference from Report on Form 8-K filed on March 15, 2003
3(i).1 Amended and Restated Articles of Incorporation - Incorporated by X
reference from Interim Report on Form 8-K filed on March 14, 2003
3(i).2 Certificate of Designation of Class C-1 Preferred Stock - X
Incorporated by reference from the initial filing of registration
statement file number 333-106490
3(i).3 Certificate of Designation of Class C-2 Preferred Stock - X
Incorporated by reference from the initial filing of registration
statement file number 333-106490
3(i).4 Certificate of Designation of Class C-3 Preferred Stock - X
Incorporated by reference from the initial filing of registration
statement file number 333-106490
3(i).5 Certificate of Cancellation of Class C and Class D Preferred Stock X
-Incorporated by reference from the initial filing of
registration statement file number 333-106490
3(i).6 Certificate of Amendment for Increased Shares - Incorporated by X
reference from the initial filing of registration statement file
number 333-106490
3(i).7 Certificate of Designation of Class E Preferred Stock - X
Incorporated by reference from Amendment # 1 to Annual Report on
Form 10-KSB filed on October 3, 2005
3(i).8 Certificate of Elimination of Classes C-1, C-1, and C-3 Preferred X
Stock - Incorporated by reference from Amendment # 1 to Annual
Report on Form 10-KSB filed on J October 3, 2005
3(i).9 Certificate of Amendment for Increased Shares - Incorporated by X
reference from Amendment # 1 to Annual Report on Form 10-KSB filed
on October 3, 2005
3(ii).1 By-laws - Incorporated by reference from Interim Report on Form X
8-K filed on March 14, 2003
4.1 Instruments defining the rights of security holders - Incorporated
by X reference from Exhibit 3(i).1 through Exhibit 3(i).10.
10 Material contracts
10.1 Employment Agreement for Peter V. DeCrescenzo Incorporated by X
reference from the Annual Report on Form 10-KSB filed on April 14,
2003
10.2 Employment Agreement for Vincent DeCrescenzo Incorporated by X
reference from the Annual Report on Form 10-KSB filed on April 14,
2003
10.3 Employment Agreement for Cindy Lanzendoen Incorporated by reference X
from the Annual Report on Form 10-KSB filed on April 14, 2003
10.5 2002 Stock Option Plan, as amended- Incorporated by reference from X
the initial filing of registration statement file number 333-106490
10.6 Amendment to Employment Agreement for Peter V. DeCrescenzo - X
Incorporated by reference from Amendment # 1 to Annual Report on Form
10-KSB filed on October 3, 2005
10.7 Amendment to Employment Agreement for Vincent DeCrescenzo, Sr. - X
Incorporated by reference from Amendment # 1 to Annual Report on Form
10-KSB filed on October 3, 2005
10.8 Guarantee Agreement with Peter DeCrescenzo - Incorporated by X
reference from Amendment # 1 to Annual Report on Form 10-KSB filed
on October 3, 2005
10.9 Guarantee Agreement with Vincent DeCrescenzo - Incorporated by X
reference from Amendment # 1 to Annual Report on Form 10-KSB filed
on October 3, 2005
21.1 Subsidiaries of the registrant - Incorporated by reference from X
Amendment # 1 to Annual Report on Form 10-KSB filed on October 3, 2005
31(i) 302 Certification of Chief Executive Officer E-1
31(ii) 302 Certification of Chief Financial Officer E-3
32(i) 906 Certification of Chief Executive Officer E-4
32(ii) 906 Certification of Chief Financial Officer E-4
REPORTS ON FORM 8-K
Current Report on Form 8-K filed March 4, 2005 covering
Item 8.01.
SIGNATURES
In accordance with 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.
DIALOG GROUP, INC.
Date: September 30, 2005
By: /s/ Peter V. DeCrescenzo
---------------------------------------
Peter V. DeCrescenzo
President and Chief Executive Officer
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Peter V. DeCrescenzo Chief Executive Officer September 30, 2005
- ------------------------
Peter V. DeCrescenzo
/s/ Vincent DeCrescenzo Chief Financial September 30, 2005
- ------------------------ and Accounting Officer
Vincent DeCrescenzo
INDEX TO EXHIBITS
Exhibit No. Page Description
No.
31(i) 302 Certification of Chief Executive Officer
31(ii) 302 Certification of Chief Financial Officer
32(i) 906 Certification of Chief Executive Officer
32(ii) 906 Certification of Chief Financial Officer