UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| Quarterly Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2006.
|_| 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
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 |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
At November 1, 2006 there were 1,984,646 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 September 30, 2006
(unaudited)
F-2 Condensed Consolidated Statements of Operations and Comprehensive
Loss for the Three and Nine Months Ended September 30, 2006
(unaudited) and September 30, 2005 (unaudited)
F-3 Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2006 (unaudited) and September 30, 2005
(unaudited)
F-4 to
F-21 Notes to Condensed Consolidated Financial Statements (unaudited)
3 - 8 Item 2. Management's Discussion and Analysis or Plan of Operation
9 Item 3. Controls and Procedures
Part II - Other Information
10 Item 1 Legal Proceedings
11 Item 2 Recent Unregistered Sales of Equity Securities and Use of
Proceeds
13 Item 6. Exhibits
DIALOG GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
September 30,
2006
-------------
(Unaudited)
ASSETS
CURRENT ASSETS
Accounts receivable (net) $ 425,102
Note receivable (net) 28,703
Prepaid expenses and other current assets 67,772
------------
Total current assets 521,577
------------
PROPERTY AND EQUIPMENT, NET 19,366
------------
OTHER ASSETS:
Data Assets (Net) 210,202
Website (Net) 35,000
Security Deposits 55,080
Note Receivable (Net) 111,297
------------
Total other assets 411,579
------------
TOTAL ASSETS $ 952,522
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Bank overdraft $ 204,222
Accounts payable 1,250,183
Accrued expenses 1,154,127
Deferred revenue 216,828
Notes and loans payable 233,799
Due to officer 73,102
Pearl Street Holdings Convertible Notes - Related Party 1,105,000
Convertible Notes - Related Parties 244,045
Other current liabilities 422,993
------------
Total current liabilities 4,904,299
------------
LONG TERM DEBT
Convertible debentures 479,778
Loans Payable - Commadore 321,118
------------
TOTAL LONG TERM DEBT 800,896
------------
Commitments and contingencies
STOCKHOLDERS' DEFICIENCY
Preferred stock, $.001 par value; 1,500,000 authorized
Class B, 305,858 shares issued and outstanding
Class E, 200 shares authorized,
99.5 shares issued and outstanding 306
Common stock, $.001 par value, 75,000,000 shares authorized;
1,984,646 shares issued and outstanding 1,985
Additional paid-in-capital 8,219,255
Accumulated deficit (12,974,219)
------------
Total stockholders' deficiency (4,752,673)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 952,522
============
The accompanying notes are an integral part of these condensed consolidated
financial statements
F-1
DIALOG GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(Unaudited)
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------- ------------------------------
2006 2005 2006 2005
------------- ------------- ------------- -------------
REVENUES $ -- $ -- $ -- $ --
COST OF REVENUES
------------- ------------- ------------- -------------
GROSS PROFIT -- -- -- --
OPERATING EXPENSES
Selling, general and
administrative expenses 988,644 1,240,262 347,143 376,220
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (988,644) (1,240,262) (347,143) (376,220)
OTHER INCOME (EXPENSES)
Interest income 14,524 -- 4,586 --
Interest expense (206,827) (127,287) (78,454) (38,111)
Other expense -- (1,409) -- (1,409)
Forgiveness of debt -- 53,021 -- 30,857
------------- ------------- ------------- -------------
Net Other Income (Expenses) (192,303) (75,675) (73,868) (8,663)
------------- ------------- ------------- -------------
LOSS FROM CONTINUING
OPERATIONS (1,180,947) (1,315,937) (421,011) (384,883)
INACTIVE & DISCONTINUED
OPERATIONS
Income (loss) from
discontinued operations 552,279 (149,884) 296,609 (161,932)
------------- ------------- ------------- -------------
NET LOSS $ (628,668) $ (1,465,821) $ (124,402) $ (546,815)
============= ============= ============= =============
EARNINGS/( LOSS) PER SHARE,
BASIC AND DILUTED ON NET
INCOME/(LOSS) $ (0.63) $ (0.011) $ (0.21) $ (0.003)
FROM CONTINUING OPERATIONS
EARNINGS/(LOSS) PER SHARE
ON DISCONTINUED OPERATIONS,
BASIC AND DILUTED $ 0.30 (0.001) $ 0.15 (0.001)
------------- ------------- ------------- -------------
NET EARNINGS/( LOSS) PER
SHARE, BASIC AND DILUTED $ (0.33) $ (0.011) $ (0.06) $ (0.003)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING, 1,868,611 140,313,708 1,984,646 153,417,666
============= ============= ============= =============
F-2
DIALOG GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDING SEPTEMBER 30, 2006 AND 2005
2006 2005
----------- -----------
Cash Flows from Operating Activities:
Net Loss form continuing operations $(1,063,274) $(1,415,252)
Gain from discontinued operations 434,606 (50,569)
----------- -----------
Loss from Operations (628,668) (1,465,821)
Adjustments to reconcile net loss
to net cash used in operating activities of continuing
operations:
Gain on debt settlement -- (94,960)
Depreciation and amortization 186,434 327,514
Bad debt expense -- 23,554
Common stock, warrants and stock options issued for services -- 133,155
Changes in operating assets and liabilities:
(Increase) decrease in accounts and note receivable 400,532 (544,297)
(Increase) decrease in prepaid and other current assets 51,877 (65,715)
(Increase) decrease in security deposits -- 16,018
Increase (decrease) in accounts payable and accrued expenses (437,026) 1,136,640
Increase (decrease) in other current liabilities 343,269 76,834
Increase (decrease) in deferred revenues (126,465) (299,271)
----------- -----------
Net Cash Used in Operating Activities (210,047) (756,349)
----------- -----------
Cash Flows from Investing Activities of Continuing Operations:
Purchase of property and equipment -- (16,282)
Purchase of database -- (174,368)
Loss of property and equipment 4,963 1,566
Net cash aquired in acquisition of Advaliant -- 49,795
Purchase of web platform -- (251,992)
Purchase of website -- (17,000)
----------- -----------
Net cash provided by (used in) investing activities 4,963 (408,281)
----------- -----------
Cash Flows from Financing Activities of Continuing Operations:
Bank overdraft (19,540) 3,977
Short Term Borrowing, net (39,128) 225,974
Current liabilities - due to related parties 23,102 31,989
Proceeds from sale of common stock -- 50,000
Proceeds from issuance of convertible debt to related parties -- 621,000
Proceeds from issuance of convertible debt to employees 240,650 100,000
----------- -----------
Net Cash Provided by Financing Activities 205,084 1,032,940
----------- -----------
Increase (decrease) in cash -- (131,690)
Cash at Beginning of Period -- 131,690
----------- -----------
Cash at Period End $ -- $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest Paid During the Period $ 146,946 $ 129,387
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of Accounts Payable to Common Stock $ 0 $ 7,500
=========== ===========
Conversion of Accrued Expenses to Common Stock $ 0 $ 59,624
=========== ===========
Exchangeable shares issued in acquistion of Advaliant $ -- $ 3,663,204
=========== ===========
F-3
Dialog Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2006
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GOING CONCERN:
As more fully described in Note 4, the Company has experienced the following
negative trends:
1. Recurring operating losses
2. Working capital deficiencies,
3. Negative cash flows from operating activities and
4. Adverse key financial ratios. Additionally, the Company has a significant
accumulated deficit. These factors raise substantial doubt about its ability to
continue as a going concern.
ORGANIZATION AND CAPITALIZATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions of Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. The preparation requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results may differ from these estimates. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine month period ended September 30, 2006 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2006.
The condensed consolidated financial statements include the accounts of the
Company, Dialog Group, Inc., and its wholly-owned subsidiaries; Healthcare
Dialog, Inc. and Data Dialog, Inc. All significant inter-company balances and
transactions have been eliminated in consolidation.
Certain reclassifications have been made to the prior year financial statements
in order for them to be in conformity with the current year presentation.
F-4
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.
On September 18, 2006, the Company's 1 for 100 common stock consolidation took
effect. As a result, $198,498 was transferred from common stock to additional
paid in capital.
F-5
BUSINESS ACTIVITY
Dialog Group, Inc. (DLGO) is a publicly traded corporation, headquartered at 257
Park Avenue South, Suite 1201, New York, New York 10010, with an administrative
and sales office in Sunrise, Florida. The company's two Segments, Data and
Communications, provide a broad spectrum of proprietary and exclusive databases
for healthcare, consumer and business-to-business market clients. The company
also provides a combination of traditional customer relationship management
support applications such as advertising and marketing services (Internet-based
promotional venues).
Description of the Segments
Both of Dialog Group's Segments each currently market its product and service
offerings through branded product lines. The Data Segment products are Data
Dialog Marketing, Data Dialog Data Management, direct mail quotes and Adialogin.
The Communication Segment is Healthcare Dialog Communications.
Data Segment
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 the distribution
of data. Data Dialog Marketing offers a host of data-related services, such as
targeted marketing lists, lead generation, turnkey direct mail programs, and
data cleansing to multiple market segments including insurance, financial
planning, real estate, auto dealerships, printers, letter shops 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 user.
Data Dialog Data Management serves the database needs of list brokers and
managers marketing nearly 200 different lists created from both licensed and
proprietary databases. Data Dialog Management provides access to this list via
its branded online platform; Access Dialog. Access Dialog is designed for use by
both our internal sales force and list professionals and requires registration
and training. It also promotes and markets list products via
DataDialogDataManagement.com where list and marketing professionals can learn
about its products and run counts and purchase list online after qualifying.
Adialogin is a consumer and business data integration product that automatically
appends name and address information, as well as demographic, financial and
lifestyle information, to telephone numbers on calls made by consumer and
business customers to CTI Platforms. Adialogin initially marketed its products
executively to call centers and Interactive Voice Response system users
operating in-bound and blended call centers with 5 to 500 seats. Adialogin
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. In 2005 and the first quarter of 2006 Adialogin developed a web
application for its technology which was introduced during the second quarter of
2006.
F-6
Direct Mail Quotes "Request for Quote" product was 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
Communications Segment
Healthcare Dialog Communications 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 Healthcare Dialog Communications' 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.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
F-7
In December 2004 the FASB issued SFAS No. 123R, "Share-Based Payment." SFAS No.
123R is a revision of SFAS No. 123 and supersedes APB 25. SFAS No. 123R
eliminates the use of the intrinsic value method of accounting and requires
companies to recognize the cost of employee services received in exchange for
awards of equity instruments based on the grant-date fair value of those awards.
On April 14, 2005, the Securities and Exchange Commission adopted a new rule
that amended the compliance date to adopt SFAS 123R, effective January 1, 2006.
SFAS No. 123R permits companies to adopt its requirements using either a
"modified prospective" method or a "modified retrospective" method. Under the
"modified prospective" method compensation cost is recognized in the financial
statements beginning with the effective date, based on the requirements of SFAS
No. 123R for all share-based payments granted after that date, and, based on the
requirements of SFAS No. 123R, for all unvested awards granted prior to the
effective date of SFAS No. 123R. Under the "modified retrospective" method the
requirements are the same as under the "modified prospective" method, except
that entities also are allowed to restate financial statements of previous
periods based on pro forma disclosures made in accordance with SFAS No. 123. The
Company has chosen to use the "modified prospective" method as explained in Note
7 to these unaudited condensed consolidated financial statements.
In May 2005 the FASB issued Statement No. 154 "Accounting Changes and Error
Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3". This
Statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement
No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes
the requirements for the accounting for and reporting of a change in accounting
principle. This Statement applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions, those
provisions should be followed. This Statement requires retrospective application
to prior periods' financial statements of changes in accounting principle,
unless it is impracticable to determine either the period-specific effects or
the cumulative effect of the change. This Statement defines retrospective
application of a different accounting principle to prior accounting periods as
if that principle had always been used or of the adjustment of previously issued
financial statements to reflect a change in the reporting entity. This Statement
also redefines restatement as the revising of previously issued financial
statements to reflect the correction of an error. This Interpretation is
effective for years beginning after December 31, 2005. Adoption of FAS No. 154
has not had a material effect on our unaudited consolidated financial
statements.
F-8
In June 2006 the FASB issued Interpretation No. 48 "Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109". The
Interpretation clarifies the accounting for uncertainty in income taxes and
prescribes recognition thresholds and derecognition guidance for the measurement
of tax positions and interest penalties, accounting in interim periods,
disclosure and transition. Additionally, this Interpretation establishes a
consistent threshold for recognizing current and deferred taxes. This
Interpretation requires evaluation of a Company's tax positions as to whether
they are more-likely-than-not i) to be sustained under tax audit and ultimate
settlement in related appeals or litigation and ii) to be measured at a 50%
likelihood for quantification when realized. This Interpretation is effective
for fiscal years beginning after December 15, 2006. The Company is evaluating
the effect, if any, adoption will have on our unaudited condensed consolidated
financial statements.
In September 2006 the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 108 "Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements (SAB 108)",
to address diversity in practice in quantifying financial statement
misstatements. SAB 108 requires that the Company quantify misstatements based on
their impact on each of the Company's financial statements and related
disclosures. SAB 108 is effective as of the end of the Company's 2006 fiscal
year, allowing a one-time transitional cumulative effect adjustment to retained
earnings as of January 1, 2006 for errors that were not previously deemed
material, but are material under the guidance in SAB 108. The Company is
currently evaluating the impact of adopting SAB 108 on its financial statements.
In September 2006 the FASB issued SFAS 157 "Fair Value Measurements", which
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. The provisions of SFAS 157
are effective as of the beginning of the Company's 2008 fiscal year. The Company
is currently evaluating the impact of adopting SFAS 157 on its financial
statements.
F-9
NOTE 3 - DISPOSITION OF SUBSIDIARY
Sale of Mail Mogul
On February 28, 2006 the Company sold the entire capital stock of its Mail
Mogul, Inc. subsidiary which consisted of 1,000 shares of common stock to an
unrelated third party. Mail Mogul results were reported in the Data Segment. The
Mail Mogul business consisted of sales of data and supplies and the provision of
business leads to the mail shop market. As part of its business, Mail Mogul
operated the Direct Mail Quotes platform.
As consideration for the sale of Mail Mogul, the Company released approximately
$296,623 of the Company's and its subsidiaries' debt to Mail Mogul. The Company
paid approximately $3,000 of expenses in connection with the sale. The Company
enjoyed a gain on the sale of Mail Mogul of approximately $210,894.
After the transaction, Mail Mogul's new owner remained in debt to one of the
Company's subsidiaries, Data Dialog for about $319,100. In settlement of the
debt, the new owner of Mail Mogul sold the Direct Mail Quotes platform to Data
Dialog. As part of the transaction an additional consideration was made. Data
Dialog assumed the existing liability of Mail Mogul to the Direct Mail Quotes
customers of about $59,000.
Revenue and net income for discontinued operation is as follows:
Nine months ended Three months ended
September 30, September 30,
--------------------- ------------------
2006 2005 2006 2005
-------- ---------- ---- --------
Total Revenues $113,645 $1,196,048 $-- $425,973
-------- ---------- --- --------
Pre-tax income (loss) from discontinued
operations 210,894 (11,543) (0) 1,419
Income tax benefit -- -- -- --
-------- ---------- --- --------
Income (Loss) from discontinued operations,
net of income taxes $210,894 $ (11,543) $(0) $ 1,419
Sale of Dialog Group Operating Assets
On August 31, 2006, Dialog Group entered into an agreement with Dialog Marketing
Services, Inc. a subsidiary of Redi-Direct Marketing, Inc. a privately held
information services company. The agreement provides for the sale of
substantially all of Registrant's operating assets for a cash purchase price of
$1,900,000. Registrant would retain its financial assets, including its
receivables, and would be relieved of the liability for its office leases. The
agreement provides a breakup fee of $150,000 to be paid by the Registrant if the
sale is not consummated for any reason. Prior to the execution of the agreement,
there was no material relationship between either party and the other or the
other's affiliates. Under Delaware law, this transaction must be submitted to
the shareholders for their approval.
Revenue and net income for discontinued operation is as follows:
Nine months ended Three months ended
September 30, September 30,
------------------------ ------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Total Revenues $ 2,773,582 $ 2,271,571 $ 871,229 $ 563,474
----------- ----------- ----------- -----------
Pre-tax income (loss) from discontinued operations 117,672 (99,316) 61,390 (156,884)
Income tax benefit -- -- -- --
----------- ----------- ----------- -----------
Income (Loss) from discontinued operations, net of income taxes $ 117,672 ($ 99,316) $ 61,390 ($ 156,884)
Sale of Adavaliant USA, Inc.
On September 29, 2006 the Company sold the entire capital stock of its
AdValiant USA, Inc. subsidiary to an unrelated third party. AdValiant USA
results were reported in the Data Segment. The AdValiant USA business consisted
of online marketing channels - affiliate performance marketing, contextual ad
network, lead generation, web publishing and marketing solutions. In
consideration of the release of approximately $374,643 of the Company's and its
subsidiaries' debt to AdValiant USA, the Company delivered the stock to the
buyer. The Company enjoyed a gain of approximately $223,712 on the sale of
AdValiant, USA.
F-10
Revenue and net income for discontinued operation is as follows:
Nine months ended Three months ended
September 30, September 30,
--------------------- ---------------------
2006 2005 2006 2005
-------- ---------- -------- ----------
Total Revenues $ 12,980 $1,595,693 $ -- $1,595,693
-------- ---------- -------- ----------
Pre-tax income (loss) from discontinued operations 223,712 19,239 223,712 (13,762)
Income tax benefit -- -- -- --
-------- ---------- -------- ----------
Income (Loss) from discontinued operations, net of income taxes $223,712 $1,614,932 $223,712 $1,581,931
NOTE 4 - GOING CONCERN CONSIDERATIONS
LIQUIDITY
In the first quarter of 2006 the company raised funds through the private sale
of approximately $280,000 of convertible debentures to a group of investors
associated with Midtown Partners. & Co. LLC. The Company continues to review
means of raising funds including issuing additional debentures and other or
equity instruments securities. If unsuccessful the Company may not be able to
meet its short-term capital needs.
F-11
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 5 - ACCRUED LIABILITES
As of September 30, 2006, accrued liabilities consisted of the following:
Accrued professional fees and other expenses $ 52,420
Accrued payroll and payroll taxes 721,911
Accrued interest 126,003
Accrued settlements and contingencies 206,358
Other 47,435
----------
$1,154,127
==========
NOTE 6 - EQUITY
DEBT CONVERSION
In May of 2006 Peter DeCrescenzo, the company's president and Vincent
DeCrescenzo, Sr. the company's executive vice president agreed that each would
convert $100,000 of past due salary and vacation into convertible debentures.
The debentures are due and payable on March 21, 2008 and bear interest at the
rate of 12% per annum. The principal and any unpaid interest is convertible, at
the holder's election, into common stock at the rate of one share of common
stock for each $0.01 of principal or interest converted. No compensation was
paid with respect to this transaction.
F-12
Peter DeCrescenzo and Vincent DeCrescenzo are both officers of the company and
accredited investors who are purchasing the debentures and warrants and any
shares issued upon their conversion or exercise, respectively, for their own
investment and not for resale. They agreed in writing 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) and 4(6.
STOCK CONSOLIDATION
On September 18, 2006, the Company's 1 for 100 common stock consolidation took
effect. As a result, $198,498 was transferred from Common Stock to Additional
Paid in Capital.
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, can be paid in lieu of cash.
During the nine months ended September 30, 2006, quarterly dividends accrued on
its Class E Preferred Stock at the rate of $400 per share, per quarter, for a
total of $119,400. During the first quarter of 2006, 5,135,486 shares were
issued to settle $119,400 of dividends due from dividends accrued and not paid
in 2005.
NOTE 7 - STOCK OPTIONS
We account for option issues according to FASB Statement No. 123R, "Share-Based
Payment, an amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R
requires companies to recognize in the statement of operations the grant-date
fair value of stock options and other equity-based compensation issued to
employees beginning January 1, 2006. During the nine months ended September 30,
2006, the Company did not issue any employee stock options nor did any employee
stock options vest.
At September 30, 2006, the Company had one stock based compensation plan, which
is described below. There was no compensation cost that has been charged against
income for this plan for the nine months ended September 30, 2006.
Under the 2002 Employee stock Option Plan (as amended), the Company may grant
options to its employees for up to 1.5 million shares of common stock. Under
this plan, the exercise price of each option equals the market price of the
Company's stock on the date of grant and an option's maximum term is 10 years.
Options are granted on various dates and vest in one-third increments commencing
at the grant date with subsequent vesting at approximately the first and second
anniversary of the options grant date.
F-13
Pro forma information regarding option grants made for compensation expense is
based on specified valuation techniques that produce estimated compensation
charges. The following table reflects the pro forma information:
Nine months ended Three months ended
September 30, September 30,
----------------- ------------------
2005 2005
----------- ---------
Compensation expense related to
stock option plans, net of tax:
-- As reported $ 1,200 $ 1,200
-- Proforma $ 1,200 $ 1,200
Net income
-- As reported $(1,465,821) $(546,815)
-- Proforma $(1,465,821) $(546,815)
Basic earnings per share
-- As reported $ (0.011) $ (0.003)
-- Proforma $ (0.011) $ (0.003)
Dilluted earnings per share
-- As reported $ (0.011) $ (0.003)
-- Proforma $ (0.011) $ (0.003)
The fair value of each option grant is estimated on the date of the grant using
the prospective method of transition as prescribed by FASB Statement No. 123R.
A summary of the status of the Company's stock option plans as of September 30,
2006 and changes during the period ending on that dates is presented below:
F-14
Stock options activity for period ending September 30th is as follows:
Options Outstanding, January 1, 2006 291,403 $1.80
Options Granted 0 0
Options Forfeited 0 0
Options Expired 0 0
Options Exercised 0 0
--------- -----
Options outstanding, September 30, 2006 291,403 $1.80
--------- -----
NOTE 8 - INCOME TAXES
As of September 30, 2006, the Company had federal and state net operating losses
of approximately $12,894,000 that are subject to annual limitations through
2025. The losses are available to offset future taxable income.
The temporary differences that give rise to the deferred tax asset at September
30, 2006 are as follows:
Deferred tax asset:
Net operating losses $ 4,512,900)
Less valuation allowance (4,512,900)
-----------
Net deferred tax asset $ 0
-----------
In assessing the amount of the deferred tax asset to be recognized, management
considers whether it is more likely than not that some portion or the entire
deferred tax asset will not be realized. It is not possible at this time to
determine that the deferred tax asset is more likely to be realized than not.
Accordingly, a full valuation allowance has been established for all periods
presented.
The Tax Reform Act of 1986 imposed substantial restrictions on the utilization
of net operating losses and tax credits in the event of an "ownership change",
as defined by the Internal Revenue Code. Federal and state net operating losses
are subject to limitations as a result of these restrictions. The Company
experienced a substantial change in ownership exceeding 50%. As a result, the
Company's ability to utilize its net operating losses against future income has
been significantly reduced.
F-15
The effective tax rate for the periods ended September 30, 2006 and 2005 are as
follows:
U.S. statutory tax rate 35%
State and local taxes 4
Less valuation reserve (39)
---
Effective tax rate 0%
===
NOTE 9 - SEGMENT DISCLOSURES
The Company's reportable operating segments are categorized in three components:
(1) Communications, which includes Healthcare Dialog, Inc., (2) Data, which
includes Data Dialog, Inc., and (3) Corporate which is Dialog Group, Inc.
Communications
Healthcare Dialog designs, develops and distributes products and services that
automate and streamline direct marketing and customer relationship management
processes to 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
DATA
Data Dialog provides online marketing lists, 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 Data Dialog master database
o "Adialogin" A product that automatically appends names and addresses to
telephone numbers on inbound calls to telephone service centers or on the
web.
o direct mail campaigns
o membership and bidding in Request for Quotes "RFQ" an online marketplace
for quoting direct mail jobs
F-16
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.
SIGNIFICANT CUSTOMERS
Two customers in the Healthcare segment accounted for approximately 62% of the
Healthcare revenues for 2006, while one customer in the Healthcare
segment accounted for approximately 40% of the healthcare revenues for 2005.
In January 2006 a major pharmaceutical company advised Heathcare that in June
2006 it would be discontinuing a program that began in 2003.
Management is not aware of any known trends, uncertainties, or circumstances
that are reasonably likely to have a material effect on composition or
percentages of significant customers.
Nine months ended September 30, 2006
Corporate Communications Data Totals
----------- -------------- ---------- -----------
REVENUE $ $ $ $
COST OF SALES
----------- -------- ---------- -----------
GROSS PROFIT
----------- -------- ---------- -----------
TOTAL OPERATING EXPENSES 988,644 988,644
----------- -------- ---------- -----------
INCOME (LOSS) FROM OPERATIONS (988,644) (988,644)
----------- -------- ---------- -----------
OTHER INCOME (EXPENSES)
Interest income 14,524 14,524
Interest expense (206,827) (206,827)
----------- -------- ---------- -----------
TOTAL OTHER INCOME (EXPENSES) (192,303) (192,303)
----------- -------- ---------- -----------
INCOME/(LOSS) FROM CONTINUING
OPERATIONS (1,180,947) (1,180,947)
Income (loss) from discontinued
operations 0 166,925 385,354 552,279
----------- -------- ---------- -----------
NET INCOME/(LOSS) $(1,180,947) $166,925 $ 385,354 $ (628,668)
=========== ======== ========== ===========
F-17
Nine months ended September 30, 2005
Corporate Communications Data Totals
----------- -------------- ---------- -----------
REVENUE $ 0 $ $ $
COST OF SALES 0
----------- ---------- ---------- -----------
GROSS PROFIT 0
TOTAL OPERATING EXPENSE 1,240,262 1,240,262
----------- ---------- ---------- -----------
INCOME (LOSS) FROM OPERATION (1,240,262) (1,240,262)
----------- ---------- ---------- -----------
OTHER INCOME (EXPENSES)
Interest expense (127,286) (127,286)
Other expense (1,409) (1,409)
Gain on debt settlements 53,021 53,021
----------- ---------- ---------- -----------
TOTAL OTHER INCOME (EXPENSES) (75,674) (75,674)
----------- ---------- ---------- -----------
INCOME/(LOSS) FROM CONTINUING OPERATIONS (1,315,937) (1,315,937)
----------- ---------- ---------- -----------
(Loss) from discontinued operations (57,975) 124,161 (216,070) (149,884)
----------- ---------- ---------- -----------
NET INCOME/(LOSS) $(1,373,912) $ 124,161 $ (216,070) $(1,465,821)
=========== ========== ========== ===========
F-18
NOTE 10 - RELATED PARTY TRANSACTIONS
CONVERTIBLE NOTES DUE TO RELATED PARTIES
During 2005, the Company's issued a convertible note of $100,000 to an officer
and director. In addition the Company issued a convertible note of $26,000 to a
company controlled by a director. Convertible notes in the aggregate amount of
$118,045 were issued to four employees for unpaid wages at December 31, 2004.
Pearl Street Holdings has convertible notes which consist of $510,000 and
$595,000. The $595,000 notes were taken over from a non-related party during
2005. All of these convertible notes bear interest at the rate of five (5%)
percent per annum and mature on February 1, 2007. The holders of the notes can
convert them into Company common stock at a price of $0.01 per share. After the
Company's shares close over $0.04 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.
In May of 2006 Peter DeCrescenzo, the company's president and Vincent
DeCrescenzo, Sr. the company's executive vice president converted $100,000 of
past due salary and vacation into convertible debentures. The debentures mature
in 2008 and bear interest at the rate of 12% per annum. The principal and any
unpaid interest is convertible, at the holder's election, into common stock at
the rate of one share of common stock for each $0.01 of principal or interest
converted. No compensation was paid with respect to this transaction during the
nine months ended September 30, 2006.
DUE TO OFFICER
In December 2005, an officer and director provided approximately $50,000 at 8%
per annum and due on demand. This loan was made directly to the Company to help
in the financing of other loans.
The Company accepted a non-binding interest free deposit of $85,493 from an
officer, to be repaid from subsequent financings or the proceeds of an asset
sale transaction. See Note 11.
RENT TO RELATED PARTIES
The Company leases two apartments from January 1, 2006 through December 31, 2007
from a company controlled by the President and C.E.O. along with the C.O.O. and
C.F.O. Rent expense to these related parties amounted to $36,000 for the nine
months ended September 30, 2006.
NOTE 11 - SUBSEQUENT EVENT
On August 31, 2006, Dialog Group, Inc (the "DGI") entered into an agreement with
Dialog Marketing Services, Inc. a subsidiary of Redi-Direct Marketing, Inc. a
privately held information services company. The agreement provides for the sale
of substantially all of DGI's operating assets for a cash purchase price of
$1,900,000. DGI would retain its financial assets, including its receivables,
and would be relieved of the liability for its office and equipment leases. The
agreement provides a breakup fee of $150,000 to be paid by the DGI if the sale
is not consummated for any reason. The proposed sale will be submitted to
shareholders for approval during the fourth quarter.
As a condition of closing, the Purchaser has required that two officers and
directors, Peter V. DeCrescenzo and Vincent DeCrescenzo, Sr., the Chief
Executive Officer and the Chief Financial Officer respectively, sign employment
agreements with the Purchaser. The levels of compensation provided in the
agreements is less than the amounts provided in their present employment
agreements.
Peter DeCrescenzo's contract extends through March of 2009 and provides for a
base compensation of $150,000 per year with increases eventually reaching
$250,000 if the executive performs successfully for the Purchaser. The agreement
also provides for bonuses of up to $75,000 for successful performance as defined
in the agreement. In addition, if certain sales and results targets are met, Mr.
DeCrescenzo could receive an equity interest of up to 10% of the Purchaser. He
would have no interest in the Purchaser's parent.
Vincent DeCrescenzo Sr.'s agreement is identical except that the salary
commences at $95,000 and does not provide for increases or bonuses. In addition,
the maximum amount that he may receive in Purchaser equity is two and one-half
percent. He would have no interest in the Purchaser's parent.
F-19
In addition, Dialog Marketing Services has lent the Registrant $200,000. The
note bears interest at the annual rate of eight percent and, after December 1,
2006, is payable on demand. The debt is secured by the pledge of the Company's
assets, including its databases.
F-20
Item 2. Management's Discussion and Analysis or Plan of Operation.
General
Dialog Group, Inc. (DLGO) is a publicly traded corporation, headquartered
at 257 Park Avenue South, Suite 1201, New York, New York 10010, with an
administrative and sales office in Sunrise, Florida. The company's two Segments,
Data and Communications, provide a broad spectrum of proprietary and exclusive
databases for healthcare, consumer and business-to-business market clients. The
company also provides a combination of traditional customer relationship
management support applications such as advertising and marketing services.
Proposed Sale of Assets
On August 31, 2006, Dialog Group, Inc (the "DGI") entered into an agreement with
Dialog Marketing Services, Inc. a subsidiary of Redi-Direct Marketing, Inc. a
privately held information services company. The agreement provides for the sale
of substantially all of DGI's operating assets for a cash purchase price of
$1,900,000. DGI would retain its financial assets, including its receivables,
and would be relieved of the liability for its office and equipment leases. The
agreement provides a breakup fee of $150,000 to be paid by the DGI if the sale
is not consummated for any reason. The proposed sale will be submitted to
shareholders for approval during the fourth quarter. As a result of this pending
transaction, all of the Company's operations are now classified as discontinued
operations. The Management Discussion below only covers the operations of the
central management office.
Sale of Mail Mogul
On February 28, 2006 the Company sold the entire capital stock of its Mail
Mogul, Inc. subsidiary to an unrelated third party. Mail Mogul results were
reported in the Data Segment. The Mail Mogul business consisted of sales of data
and supplies and the provision of business leads to the mail shop market. As
part of its business, Mail Mogul operated the Direct Mail Quotes platform.
In consideration of the release of approximately $296,623 of the Company's
and its subsidiaries' debt to Mail Mogul, the Company delivered the stock to the
buyer and paid approximately $3,000 of expenses in connection with the sale. The
Company enjoyed a gain of approximately $210,894 on the sale of Mail Mogul.
After the transaction, Mail Mogul's new owner remained in debt to the
Company's Data Dialog subsidiary for about $319,000. In settlement of the debt,
the new owner of Mail Mogul sold the Direct Mail Quotes platform to Data Dialog.
As additional consideration, Data Dialog assumed Mail Mogul's existing liability
to the Direct Mail Quotes customers of about $59,000.
Sale of AdValiant USA, Inc.
On September 30, 2006 the Company sold the entire capital stock of its AdValiant
USA, Inc. subsidiary to an unrelated third party. AdValiant USA results were
reported in the Data Segment. The AdValiant USA business consisted of online
marketing channels - affiliate performance marketing, contextual ad network,
lead generation, web publishing and marketing solutions.
3
In consideration of the release of approximately $374,643 of the Company's and
its subsidiaries' debt to AdValiant USA, the Company delivered the stock to the
buyer. The Company enjoyed a gain of approximately $223,712 on the sale of
AdValiant, USA.
Description of the Segments
Prior to the reclassification of the Company's results because of the pending
sale, both of Dialog Group's Segments marketed its product and service offerings
through branded product lines. The Data Segment products are Data Dialog
Marketing, Data Dialog Data Management, Direct Mail Quotes and Adialogin. The
Communications Segment is Healthcare Dialog Communications.
Data Segment
Data Dialog Marketing serves the direct marketing needs of small- and
medium-sized businesses with data and direct services. Data Dialog Marketing
offers a host of data-related services, such as targeted marketing lists, lead
generation, turnkey direct mail programs, and data cleansing to multiple market
segments including insurance, financial planning, real estate, auto dealerships,
printers 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 user.
Data Dialog Data Management serves the database needs of list brokers and
managers marketing nearly 200 different lists created from both licensed and
proprietary databases. Data Dialog Management provides access to these lists via
its branded online platform: Access Dialog. Access Dialog is designed for use by
both our internal sales force and list professionals and requires registration
and training. It also promotes and markets list products via
DataDialogDataManagement.com where list and marketing professionals can learn
about its products and run counts and purchase list online after qualifying.
Direct Mail Quotes "Request for Quote" product was 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.
Adialogin is a consumer and business data integration product that
automatically appends name and address information, as well as demographic,
financial and lifestyle information, to telephone numbers on calls made by
consumer and business customers to CTI Platforms. Adialogin initially marketed
its products executively to call centers and Interactive Voice Response system
users operating in-bound and blended call centers with 5 to 500 seats. Adialogin
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 to speed up their promotional efforts and improve customer
service. In 2005 and the first quarter of 2006 Adialogin developed a web
application for its technology which was introduced during the second quarter of
2006.
4
Communications Segment
Healthcare Dialog Communications 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 Healthcare Dialog Communications' 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.
The results of operations set forth below reflect only the central
administrative expenses and carrying charges because all of the income and
expense related to the divisions have been allocated to discontinued operations
because of the pending sale.
Results of Operations for the Three Months Ended September 30, 2006 Compared to
the Three Months Ended September 30, 2005
Dialog Group
Income Statement Item Third Quarter 2006 Third Quarter 2005
Revenue $ - 0 - $ - 0 -
Cost of Revenue - 0 - - 0 -
Operating Expenses 347,143 376,220
Result of Operations (347,143) (376,143)
Net Other Income (73,868) (8,663)
Discontinued Operations 296,609 (161,932)
Net Result $(124,401) $(546,815)
Operating expenses for the quarter ended September 30, 2006 were $347,143
compared with $376,220 for the quarter ended September 30, 2005. This represents
an decrease of $29,077 from 2005.
Because there is no continuing income, the losses from operations were
equal to the expenses.
Net other income/expense was an expense of $73,868 for the quarter ended
September 30, 2006 of which $78,454 is attributed to interest payments, compared
with net other expense of $8,663 for the quarter ended September 30, 2005, an
increase of $62,205 Last year included interest expense of $59,567 and
forgiveness of debt income of $62,704.
The net loss for the quarter ended September 30, 2006 was $124,401,
compared with a net loss of $546,815 in the quarter ended September 30, 2005,
representing an improvement of $422,414. This improvement can be attributed to
the gain from discontinued operations of $296,609 compared to the loss from
discontinued operations of $161,932 for 2005, an improvement of $458,541.
Results of Operations for the Nine Months Ended September 30, 2006 Compared to
the Nine Months Ended September 30, 2005
Dialog Group
Income Statement Item First three quarters 2006 First three quarters 2005
Revenue $ - 0 - $- 0 -
Cost of Revenue - 0 - - 0 -
Operating Expenses 988,664 1,240.262
Result of Operations (988,664) (1,240,262)
Net Other Income (192,303) (75,675)
Discontinued Operations 552,279 (149,884)
Net Result $(628,668) $(1,465,821)
Operating expenses for the three quarters ended September 30, 2006 were
$988,664 compared with $1,240,262 for the three quarters ended September 30,
2005. This represents an decrease of $251,598 from the first three quarters of
2005.
Because there is no continuing income, the losses from operations were
equal to the expenses.
Net other income/expense was an expense of $192,303 for the first three
quarters ended September 30, 2006 the overwhelming majority of which is
attributed to interest payments, compared with net other income/expense which
was an expense of $75,675 for the first three quarters ended September 30, 2005,
an increase of $116,628. Last year included interest expense of $187,291 and a
forgiveness of debt of $75,892.
The net loss for the first three quarters ended September 30, 2006 was
$628,668, compared with a net loss of $1,465,821 in the first three quarters
ended September 30, 2005, representing an improvement of $837,153. This
significant improvement can be attributed to the gain from discontinued
operations of $552,279 in 2006 compared to a loss from discontinued operations
in 2005 of $149,884.
10
Significant Customers
Two customers in the Healthcare segment accounted for over 70% of the
Company's healthcare revenues for 2006, while one customer in the Healthcare
segment accounted for 40% of the healthcare revenues for 2005.
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.
Liquidity & Capital Resources
DGI had a consolidated working capital deficit of approximately
($4,383,000) on September 30, 2006 as compared to a deficit of approximately
($2,854,000) at December 31, 2005. The increase of approximately $1,529,000 is
the result of an increase in accounts payable, accrued expenses and short-term
borrowings due a level of sales in the first three quarters that did not provide
the level of accounts receivable required to fund operations. An additional
reason for the increase is that the convertible notes are now included in the
short term liabilities.
Going Concern
In the first quarter of 2006 the company raised funds through the private
sale of approximately $280,000 of convertible debentures to a group of investors
associated with Midtown Partners & Co. LLC. In the second quarter, Peter V.
DeCrescenzo and Vincent DeCrescenzo, Sr. each completed the conversion of
$100,000 in salary to the debenture as well. The Company continues to review
means of raising funds including issuing additional debentures or equity
securities. If unsuccessful the Company may not be able to meet its short-term
capital needs.
In the past suppliers were prepared to extend the company payments terms
for larger dollars amounts over longer periods. As a result of the company's
poor payment history fewer suppliers than in the past are willing to give the
company the kind of payment terms it needs. In the past members of management
lent the company money.
In the past members of management have used their personal credit cards to
pay for company expenses, but there is no reason to believe they will do so in
the future. In the past employees have been willing to work for reduced wages
and or convert wages to shares of the company, but there is no reason to believe
they will do so in the future.
11
Inflation
Inflation rates in the United States have not had a significant impact on
operating results for the periods presented.
Off-Balance Sheet Transactions
At no time during the third quarter did the Company have any relationships
with unconsolidated entities or financial partnerships, including as entities
often referred to as structured finance or special purpose entities, which would
have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
Item 3 Controls and Procedures.
The Company evaluated, under the supervision and with the participation of
the Company's management (including its chief executive and chief financial
officers), the effectiveness of the design and operation of its disclosure
controls and procedures as defined in Exchange Act Rule 13a-15(e). The term
"disclosure controls and procedures," as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended, (the Exchange
Act) means controls and other procedures of a company that are designed to
ensure that this information is recorded, processed, summarized, and reported
within the time periods specified in the SEC's rules and forms. Disclosure
controls and procedures include controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the
company's management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required
disclosure. Based upon their evaluation of its disclosure controls and
procedures, the Company's chief executive and chief financial officers had
concluded as of March 31, 2006, that the controls, as a result of the
resignation of the controller and one bookkeeper, did not operate as designed
and did not alert them on a timely basis to all material information relating to
the Company required to be included in the Company's periodic SEC filings. Based
on the evaluation of the disclosure controls and procedures as of September 30,
2006, the chief executive and chief financial officers concluded that, as of the
end of the second quarter, the revised disclosure controls and procedures were
effective at a reasonable assurance level.
Management continues its focus on the issue of internal control in
particular. To that end, in 2005 management centralized the accounting function.
In May of 2006 an accounting firm was hired to work with management to improve
controls. Management will continue to evaluate and test present and new measures
while at the same time reviewing areas that may require improvement.
Additionally, it continues the process of hiring persons with the skill sets
appropriate to fill the Company's needs as they have evolved as a result of the
sale of subsidiaries in 2005 and 2006.
The Company's chief executive and chief financial officers have concluded
that, as a result of the retention of the CPA firm, as of June 30, 2006 the
controls, which are designed to 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, will now operate as designed.
12
Dialog Group maintains certain internal controls over financial reporting
that are appropriate, consistent with cost-benefit considerations, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. The retention of the accounting firm,
a change in our internal control over financial reporting, occurred during the
fiscal quarter ended June 30, 2006. It has materially affected, or is reasonably
likely to affect, the Company's internal control over financial reporting in a
positive manner.
Part II. Other Information
Item 1. Legal Proceedings
Suppliers
In 2003 Acxiom Corporation commenced an action against Dialog Group and
its then ThinkDirectMarketing subsidiary in the Circuit Court of Faulkner
County, Arkansas. The action was for a breach of written contracts, including a
promissory note and a Data License Agreement. Acxiom sought $400,000 on the note
and $295,415 for unpaid data usage, and $1,250,000 for unused minimum usage
requirements for 2003 and 2004. In January 2006 the Company settled with Acxiom
for Ninety Thousand ($90,000.00) Dollars to be paid over forty-two months. As of
September 30 2006, the company is behind in payments on the unpaid balance of
$85,000.
Also in January 2006 Healthcare Dialog was contacted by an attorney for
CBS Market Watch concerning their claim for $45,510 for content. The claim was
initially settled for $36,408. As of September 30, 2006 the balance remaining
was $26,408. The company has been unable to make additional payments and in
September the attorney did attempt to bring the case to court.
In April 2004 USA Direct obtained a default judgment for $39,025 against
Dialog Group in the Common Pleas Court of the State of Pennsylvania, York
County. The Company has agreed to settle the claim for $20,000. As of September
30, 2006 the balance remaining was $15,000.
Former Subsidiaries
In April 2003, Dean Eaker and Bruce Biegel commenced an arbitration
proceeding against Dialog Group and its former subsidiary, TDMI, relating to the
termination of their employment before the American Arbitration Association in
New York City. On January 17, 2005, the arbitration panel awarded $313,764 to
Dean Eaker and $160,133 to Bruce Biegel. The full amount of the award has been
accrued on the Dialog Group books and charged to loss on discontinued operation.
On April 17, 2005 the company settled with both Eaker and Biegel for a series of
payments aggregating $473,898. As of September 30 approximately $140,000 was
unpaid. As a result of payments being behind schedule, the attorney for Mr.
Ecker and Mr. Biegel was able to receive a default judgment. The Company agreed
at that time to pay the remaining balance from the receipt of a pending sale of
substantially all of the company's assets.
13
Except as specified above, there are no material presently pending legal
proceedings to which Dialog Group is a party, or to which any of its properties
or assets are subject.
Items 2, 3, 4 and 5 are omitted, as there is no information to report there
under.
Item 6. Exhibits
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, Inc., X
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 - Incorporated X
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 - Incorporated X
by reference from the initial filing of registration statement file
number 333-106490
14
3(i).4 Certificate of Designation of Class C-3 Preferred Stock - Incorporated X
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 Incorporated by X
reference from Amendment No.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 No.1 to Annual Report
on Form 10-KSB filed on October 3, 2005.
3(i).9 Certificate of Amendment for Increased Shares Incorporated by X
reference from Amendment No.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 8-K X
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.
4.2 Convertible Debenture - Incorporated by reference from the Current X
Report on Form 8-K filed March 27, 2006.
4.3 Warrant - Incorporated by reference from the Current Report on Form X
8-K filed March 27, 2006.
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 reference X
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 the X
initial filing of registration statement file number 333-106490
15
10.6 Amendment to Employment Agreement for Peter V. DeCrescenzo. X
Incorporated by reference from Amendment No.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 No.1 to Annual Report on Form
10-KSB filed on October 3, 2005.
10.8 Guarantee Agreement with Peter DeCrescenzo Incorporated by reference X
from Amendment No.1 to Annual Report on Form 10-KSB filed on October
3, 2005.
10.9 Guarantee Agreement with Vincent DeCrescenzo Incorporated by reference X
from Amendment No.1 to Annual Report on Form 10-KSB filed on October
3, 2005.
21.1 Subsidiaries of the registrant. Incorporated by reference from the X
Quarterly Report on Form 10-QSB filled September 2, 2006
31(i) 302 Certification of Chief Executive Officer 47
31(ii) 302 Certification of Chief Financial Officer 49
32(i) 906 Certification of Chief Executive Officer 51
32(ii) 906 Certification of Chief Financial Officer 51
16
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: November 17, 2006
By: /s/ Peter V. DeCrescenzo
------------------------------------
Peter V. DeCrescenzo, President and
Chief Executive Officer
17
INDEX TO EXHIBITS
Exhibit Page
Number Number Description
- ------- ------ --------------------------------------------
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
18