SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section
14(c) of the Securities Exchange Act of 1934
Check the appropriate box:
|_| Preliminary Information Statement.
|_| Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2).
|X| Definitive Information Statement
Commission File No. 000-30294
DIALOG GROUP, INC.
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(Name of Registrant as Specified in its Charter)
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|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i) and 0-11.
(1) Title of each class of securities to which the transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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maximum aggregate value of the transaction:
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number, or the Form or Schedule and the date of its filing. (1) Amount
Previously Paid:
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Dialog Group, Inc
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Notice of Special Meeting
10:00 O'clock AM, Sunday December 31, 2006
------------------------------------
Please take notice that a Special Meeting of the holders of the Common
Stock and the Class B and B-1, and Class E Preferred Stock of Dialog Group, Inc,
(the "Company") shall be held at the Offices of the Company 257 Park Avenue
South, 12th Floor New York, New York 10010 at ten o'clock, AM on the 31 day of
December 2006 to consider all of the following:
1. Authorize the sale of most of the Company's Assets
2. Any other business as may properly come before the meeting.
No proxies will be solicited by the Company's management in connection
with this meeting.
Respectfully submitted,
Mark Alan Siegel
Secretary of the Company
Dialog Group, Inc.
----------------------
INFORMATION STATEMENT
Special Meeting of Stockholders
to be held December 31, 2006
------------------------------------
This Information Statement is furnished by Dialog Group, Inc. (the "Company") in
connection with the Company's Special Meeting of Stockholders to be held on
December 31, 2006 at 10:00 A.M. at the Company's offices, 257 Park Avenue South
(Twelfth Floor Conference Room), New York, New York. This Information Statement
was first mailed to holders of Class B and B-1, and Class E Preferred and Common
Stock on or about December 21, 2006. The mailing address of the Company's
executive office is 257 Park Avenue South, New York, NY 10010. The telephone
number is 212.254.1917.
Outstanding Voting Securities and Voting Rights
The Board of Directors fixed the close of business on November 2nd, 2006 as the
record date for determining the stockholders eligible to vote at the meeting. As
of the record date, the Company had outstanding 49,332 and 256,526 shares,
respectively of its B and B-1 Preferred Stock, 99.5 shares of its Class E
Preferred Stock, and 1,984,646* shares of its Common Stock. The holder of each
share of the Class B and B-1 Preferred Stock is entitled to one vote per share.
The holder of each share of Class E Preferred Stock is entitled to 10,000 votes.
The holder of each share of Common Stock is entitled to one vote per share.
You may vote your shares either by attending the meeting or submitting a written
consent in lieu of a meeting indicating how you cast your vote on any question
scheduled to come before the Special Meeting. The Company will not provide any
consent form to you. Any written consent you may submit is solely for your
convenience and may not appoint or authorize anyone to vote on your behalf. This
is not a solicitation to send a proxy appointing anyone to vote on your behalf,
which will not be accepted if submitted.
The number of shares held by investors who are present or who have submitted a
written consent will determine the presence of a quorum. A quorum consists of a
majority of the votes entitled to be cast at the meeting. For this special
meeting, a quorum requires participation by the holders of approximately
1,552,000 votes. No business can be conducted in the absence of a quorum.
We Are Not Asking You for a Proxy and
You are Requested Not To Send Us a Proxy
- ----------
* Does not include approximately 1,214 shares to which creditors are entitled
under the Plan of Reorganization which have not been claimed.
Introduction and Summary
The purpose of this Special Meeting is to approve the sale of all of the
Company's working assets to an unrelated company for One Million Nine Hundred
Thousand Dollars. The Board of Directors has unanimously approved this sale.
o The Purchase Price is $1,900,000.
o All of the Company's working assets, including its equipment,
intangibles, work in progress, telephone numbers and web addresses,
intellectual property and trade names.
o The Company will be relieved of its lease obligations. o The Company
will retain its accounts receivable. o The Company will be barred for
three years from employing any of its
current employees or contractors used in the current business.
o The company will use the proceeds of the sale for the following
purposes: >> $350,000 to pay off the bridge loan.
>> $439,000 to pay an existing secured creditor.
>> $94,000 to settle bank overdrafts
>> $623,000 to settle past due salary, payroll taxes, and
retirement contributions.
>> $85,000 to refund a deposit from another potential purchaser.
>> $165,000 to pay past due rent and credit cards
>> $144,000 to pay a litigation settlement
The balance of the funds will be used for general corporate overhead while the
Company seeks new acquisitions.
General
Dialog Group, Inc. (DGI) is a publicly traded corporation (OTCBB:DLGO),
headquartered at 257 Park Avenue South, Suite 1201, New York, New York 10010,
with an office in Sunrise, Florida. DGI provides a suite of technology and
database solutions and services that enable marketers to advertise, generate
leads, and manage customers. DGI is an original compiler and distributor of
proprietary and licensed data products and online and off-line marketing
services as well as a creative services support.
DGI has two operating segments, Data Services, including Online Services
and Communications Services. Data Services (New York and Sunrise) offers its
customers Data, Data Compiling, Appending and Verification, List Management,
Broker and Direct Client services. Communications Services (New York) offers its
clients Creative, Strategy, Customer Relationship Management, Website
Development, and Account Services.
Agenda Item 1 Approval of Sale to Dialog Marketing Services
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 Situation
Through the end of the first quarter of 2006, the Company had accumulated an
equity deficit of over $4,000,000 and faced a working capital deficit of about
the same amount. Please see the financial statements included herein and in the
Annual Report sent to you in September for additional information. As a result,
no unrelated party was interested in a merger or corporate acquisition.
Efforts to raise additional capital were also unavailing to produce anywhere
near the amounts needed to save the Company's business. On January 17th 2006
Dialog Group had signed an agreement with MidTown Partners to service as a
placement agent. Midtown facilitated meetings with Ram Capital on February 16th
2006, Nite Capital on March 7th 2006, Harborview Capital on March 7th 2006,
Saffron Capital Partners on March 16th 2006, Whalen Capital on April 5th 2006
and Burnham Hill Partners May 11th 2006 and May 23rd 2006. In addition Dialog
Group worked with Wellfleet partners, Inc. from May 10th to July 11th 2006 with
no success. MidTown finally resigned its responsibilities on November 16, 2006.
During April, the principals of MidTown partners invested almost 280,000 in
convertible notes and in May Peter and Vincent DeCrescenzo each converted
$100,000 owed to them by the Company into convertible notes on the same terms as
the MidTown group of investors. The cash flow and working capital problems
continued unabated.
Other offers
As a result of Dialog Group's relationship with Midtown Partners, as placement
agent, Dialog Group was contacted by InTouch Media Group on September 29, 2006.
They had expressed an interest in acquiring Dialog Group for stock and offered
to provide $2 Million in working capital. After InTouch completed its due
diligence, they determined that they would not be able to raise the funds
required; no additional negotiations took place.
On July 20th 2006 Mr. Peter DeCrescenzo, Mr. Vincent DeCrescenzo and Ms Cindy
Lanzendoen, who also works for the Company, offered to purchase some of the
assets and license others from Dialog Group for a price of Three Million seven
hundred fifty thousand ($3,750,000) dollars, subject to bank financing of
$1,500,000. The price was to be paid through forgiveness of the debts due thee
purchasers from the Company and its subsidiaries, assumption of the Company's
and its subsidiaries debt to Commodore Factors Corp. and other debt, a $90,000
refundable deposit, a $540,000 note, and about $500,000 cash at closing. The
directors preferred this offer but the purchasers were unsuccessful in raising
the required funding. The deposit, which was received, will be repaid from the
proceeds of the proposed sale to Redi-Direct.
This Transaction's History
Dialog Marketing Services' parent, Redi-Direct Marketing, has been a supplier of
mailing service to Dialog Group for several years. Prior to the execution of the
acquisition agreement, however, there was no material relationship between
either party and the other or the other's affiliates and there had been no prior
transactions or negotiations between the parties, other than normal business
contacts concerning mailing services and data transaction.
During April of 2006, the Company's CEO, Peter DeCrescenzo, asked Redi-Direct's,
owner Mr. Tom Buckley, if he or his company was interested in making a strategic
investment in Dialog Group. Mr. Buckley, after some review, indicated that,
while he was not interesting in investing in Dialog Group, his company would be
willing to purchase Dialog's assets for cash. A merger or other corporate
acquisition was ruled out because of Dialog's substantial working capital and
equity deficits described above.
On May 31st 2006 Mr. DeCrescenzo meet in person with Mr. Buckley to discuss the
possible purchase of Dialog Group's assets. Mr. DeCrescenzo suggested that the
Board of Directors would consider a $3 Million dollar offer and that we would be
willing to take that offer on behalf of Redi-Direct to the Board of Directors.
Mr. Buckley expressed that the amount was considerably higher then he had in
mind and that he would get back to Mr. DeCrescenzo.
On June 1st Mr. Mr. Buckley requested a detailed breakout of the assets,
liabilities and a forecast for the current business. On June 4th Mr. DeCrescenzo
sent a list of all assets and liabilities to Mr. Buckley and informed him that
he would have the forecast for him the next day. On June 5th Mr. DeCrescenzo
sent Mr. Buckley a forecast for 2007.
Mr. DeCrescenzo and Mr. Buckley met again on June 7th 2006 to review the
information that had been provided. Mr. DeCrescenzo and Mr. Buckley agreed to
follow up on June 12th 2006. Mr. DeCrescenzo continued to try to get Mr. Buckley
to invest in the company and the two exchanged emails on June 9th 2006. Mr.
Buckley was unable to get back to Mr. DeCrescenzo on June 12th 2006 as
previously planned and sent an offer via email on June 14th, for $1.9 Million
for all assets except accounts receivables. All accrued salary, vacation,
payroll etc, would be the responsibility of Dialog Group. As a consideration for
the transaction, the new company would need to have hired most of Dialog's
employees. The two continued to talk over the next few weeks while Mr.
DeCrescenzo continued his efforts to raise funds.
On July 17th 2006, Mr. Buckley submitted a written proposal to purchase Dialog
Group's non-financial assets. The purchase price of $1,600,000 was lower then
previously discussed. It was still to be paid in cash at the Closing. Among the
other conditions were the approval of the Asset Purchase by Dialog's board of
directors and shareholders, Purchaser's satisfaction, in its sole and absolute
discretion, with the results of its business, financial and legal due diligence
of Dialog, Dialog obtaining all requisite consents and governmental approvals
with respect to the Asset Purchase, including without limitation, the approval
of the Securities and Exchange Commission, if required, Purchaser's execution of
separate Employment Agreements with Peter DeCrescenzo, Vincent DeCrescenzo, Sr.
and Cindy Lanzendoen ("Dialog's Officers") on terms satisfactory to the parties,
and no material adverse change, in Purchaser's sole opinion, having occurred
with respect to Dialog or Dialog's business. There was to be a breakup fee of
$350,000.
Mr. DeCrescenzo forwarded this proposal to Dialog Group's Board of Directors for
consideration. On July 17th and July 18th Mr. DeCrescenzo discussed terms with
the Board of Directors and was authorized to seek the restoration $1.9 Million
purchase price and reduction of the breakup fee. Mr. DeCrescenzo spoke with Mr.
Buckley on July 18th and he agreed that they agreed on a $1.9 Million purchase
price and the reduction of the break up fee to $150,000. No other material
changes were made. A revised proposal reflecting these changes was received and
forwarded to the Board of Directors on July 20th 2006. The revised term sheet
was approved and signed and set via FedEx on July 24th 2006.
On August 31, 2006 a definitive agreement was signed. The closing only awaits
approval by the shareholders at this meeting.
Other information
No regulatory approvals are necessary. No reports, opinions, or appraisals were
requested or received from any outside party in connection with this
transaction. The outside directors, as well as management, relied on their
experience in evaluating the purchase price. Included in their review were the
facts that the purchase price substantially exceeds the book value of the assets
to be sold, represents an amount in excess of the Company's market
capitalization, and, as described above, that no other purchasers or investors
offered anything for the business, despite many months of efforts to find
strategic partners and raise needed capital.
On August 31, 2006, Dialog Marketing Services lent DGI $200,000. The note
bears interest at the annual rate of eight percent and, after December 1, 2006,
is payable on demand. On December 8, 2006 Dialog Marketing Services lent an
additional $150,000 on the same terms. Both debts are secured by the pledge of
the Company's assets, including its databases. Both Notes will be paid off at
the closing of the asset sale.
The affirmative vote or consent of the holders of more than half of the
votes cast by all outstanding shares of stock is necessary for the approval of
this amendment. As there are a total of about 3, 103,000 potential votes, about
1,552,000 will be needed to approve the proposed sale. The directors, who own,
directly or indirectly, shares casting approximately 1,123,000 votes, and Cindy
Lanzendoen, Mark Alan Siegel, Andreja Fah, Edward Fleiss, Howard Reiss, and
Sherri Eisenpress who collectively control, directly or indirectly, almost
539,000 votes have informed the Company that they intend to vote in the
affirmative.
The board of directors has reviewed this proposed sale, and all the
directors recommend it to the shareholders as in the best interests of the
Company.
No Dissenter's Rights
Under the Delaware General Corporation Law, stockholders are not entitled
to dissenter's rights with respect to the sale of the assets, and Dialog Group's
documents do not independently provide stockholders with any such right.
Interest of Related Parties in this Transaction
After the conclusion of this transaction, the Company will continue to
have over 300 shareholders and its common stock will continue to be traded on
the NASD's over the counter bulletin board.
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.
FINANCIAL INFORMATION
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA OF
DIALOG GROUP, INC.
Dialog Group, Inc. (DGI) is a publicly traded corporation (OTCBB:DLGO),
headquartered at 257 Park Avenue South, Suite 1201, New York, New York 10010,
with an office in Sunrise, Florida. DGI provides a suite of technology and
database solutions and services that enable marketers to advertise, generate
leads, and manage customers. DGI is an original compiler and distributor of
proprietary and licensed data products and online and off-line marketing
services. The following unaudited pro forma condensed consolidated financial
statements have been prepared to give effect to the completed sale of assets.
The following unaudited pro forma condensed consolidated balance sheet as
of September 30, 2006 and the unaudited pro forma condensed consolidated
statement of operations for the year ended December 31, 2005 and the nine months
ended September 30, 2006 are derived from the historical financial statements of
the DGI as of and for the nine months ended September 30, 2006 and for the year
ended December 31, 2005. The assumptions, estimates and adjustments herein have
been made solely for purposes of developing these pro forma financial
statements.
The unaudited pro forma condensed consolidated balance sheet gives effect
to the sale of assets as if it had occurred on September 30, 2006. The unaudited
pro forma condensed consolidated statement of operations for the nine months
ended September 30, 2006 gives effect to the sale of assets as if it had
occurred on January 1, 2006. The unaudited pro forma condensed consolidated
statement of operations for the year ended December 31, 2005 gives effect to the
sale of assets as if it had occurred on January 1, 2005.
The unaudited pro forma condensed consolidated financial statements should
be read in conjunction with the historical audited financial statements and
related notes of the DGI and its "Plan of Operation" contained in the DGI's Form
10-KSB/A filed on July 28, 2006. The unaudited pro forma condensed consolidated
financial statements are not intended to represent or be indicative of the
results of operations or financial condition of the DGI that would have been
reported had the asset sale been completed as of the dates presented, and should
not be construed as representative of the future results of operations or
financial condition after the asset sale.
Please also see the Consolidated Balance Sheets as of December 31, 2004
and 2005 and the Consolidated Statements of Operations and Comprehensive Loss,
the Consolidated Statements of Stockholders' Deficiencies, and the Consolidated
Statements of Cash Flows for the years ended December 31, 2004 and 2005 together
with the related notes and the Management Discussion and Analysis included in
the Annual Report on Form 10-KSB mailed to you on or about August 14, 2006. They
are hereby incorporated herein by this reference.
Please also see the Condensed Consolidated Balance Sheet as of September
30, 2006 and the Condensed Consolidated Statements of Operations and
Comprehensive Loss and the Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2006 (unaudited) and the related notes and
Management Discussion. They all follow the proforma statements set forth next in
this document.
Dialog Group, Inc.
Proforma Condensed Consolidated Balance Sheet
Unaudited
Pro Forma
September 30, Pro Forma September 30,
2006 Adjustments 2006
--------------- ------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - a 200,000 $ 343,212
d 1,900,000
e (1,756,788)
Accounts receivable (net) 425,102 425,102
Notes receivable, current portion 28,703 28,703
Prepaid expenses and other current assets 67,772 f (67,772) -
--------------- ----------------
Total current assets 521,577 797,017
--------------- ----------------
PROPERTY AND EQUIPMENT, NET 19,366 d (19,366) -
--------------- ----------------
OTHER ASSETS:
Data assets (net) 210,202 d (210,202) -
Website (net) 35,000 d (35,000) -
Security deposits 55,080 d (55,080) -
Notes receivable (net) 111,297 111,297
--------------- ----------------
Total other assets 411,579 111,297
--------------- ----------------
TOTAL ASSETS $ 952,522 $ 908,314
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft $ 204,222 e (204,222) $ -
Accounts payable 1,250,183 e (171,858) 1,078,325
Accrued expenses 1,154,127 e (552,689) 601,438
Deferred revenue 216,828 216,828
Due to officer 73,102 e (73,102) -
Pearl Street Holdings convertible note - related party 1,105,000 1,105,000
Current notes and loans payable 233,799 a 200,000 -
e (233,799)
e (200,000)
Convertible notes - related parties 244,045 244,045
Other current liabilities 422,993 422,993
--------------- ----------------
Total current liabilities 4,904,299 3,668,629
--------------- ----------------
LONG TERM DEBT
Convertible debentures 479,778 479,778
Loan payable - Commodore 321,118 e (321,118) -
--------------- ----------------
Total long term debt 800,896 479,778
--------------- ----------------
STOCKHOLDERS' DEFICIENCY:
Preferred stock, $.001 par value; 1,500,000 authorized 306 306
Class B, 305,858 shares issued and outstanding
Class E, 200 shares authorized,
99.5 shares issued and outstanding
Common stock, $.001 par value, 200,000,000 shares authorized; 1,985 1,985
198,482,755 shares issued and outstanding
Additional paid-in-capital 8,219,255 8,219,255
Accumulated deficit (12,974,219) d 1,580,352 (11,461,639)
f (67,772)
--------------- ----------------
Total stockholders' deficiency (4,752,673) (3,240,093)
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 952,522 $ 908,314
=============== ================
Dialog Group, Inc.
Proforma Condensed Consolidated Statement of Operations
(Unaudited)
Pro Forma
Year ended Year ended
December 31, Pro Forma December 31,
2005 Adjustments 2005
---------------- -------------------------------------
REVENUES $ - $ -
COST OF REVENUES - -
---------------- ----------------
GROSS PROFIT - -
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,677,750 1,677,750
---------------- ----------------
LOSS FROM OPERATIONS (1,677,750) (1,677,750)
---------------- ----------------
OTHER INCOME (EXPENSES):
Interest expense (179,390) h 60,393 (126,997)
c (8,000)
Other expense (1,409) (1,409)
Gain on sale of assets - d 1,077,876 1,077,876
---------------- ----------------
Total Other Income (Expenses) (180,799) 949,470
---------------- ----------------
LOSS FROM CONTINUING OPERATIONS (1,858,549) (728,280)
---------------- ----------------
INACTIVE AND DISCONTINUED OPERATIONS
Income (Loss) from inactive operations (290) (290)
Income (loss) from operations of discontinued operations (659,933) h (1,405,067.00) (2,065,000)
Gain on disposal of discontinued operations 736,815 736,815
---------------- ----------------
Total Gain from discontinued operations 76,592 (1,328,475)
---------------- ----------------
NET LOSS $ (1,781,957) $ (2,056,755)
================ ================
LOSS PER SHARE, BASIC AND DILUTED ON NET LOSS
FROM CONTINUING OPERATIONS $ (0.012) $ (0.005)
================ ================
LOSS PER SHARE ON DISCONTINUED OPERATIONS, BASIC AND DILUTED$ 0.001 $ (0.009)
================ ================
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.011) $ (0.014)
================ ================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 149,782,653 149,782,653
================ ================
Dialog Group, Inc.
Proforma Condensed Consolidated Statement of Operations
(Unaudited)
Pro Forma
Nine Months Nine Months
Ended September 30, Pro Forma Ended September 30,
2006 Adjustments 2006
--------------------- -----------------------------------------
REVENUES $ - $ -
COST OF REVENUES - -
--------------------- ---------------------
GROSS PROFIT - -
OPERATING EXPENSES
Selling, general and administrative expenses 988,644 988,644
--------------------- ---------------------
LOSS FROM OPERATIONS (988,644) (988,644)
OTHER INCOME (EXPENSES)
Interest income 14,524 14,524
Interest expense (206,827) b (6,000) (167,532)
g 45,295
Gain on sale of assets - d 1,320,841 1,320,841
--------------------- ---------------------
Net Other Income (Expenses) (192,303) 1,167,833
--------------------- ---------------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (1,180,947) 179,189
INACTIVE & DISCONTINUED OPERATIONS
Income from discontinued operations 552,279 g (758,097) (205,818)
--------------------- ---------------------
NET (LOSS) INCOME $ (628,668) $ (26,629)
===================== =====================
(LOSS)/EARNINGS/ PER SHARE, BASIC AND DILUTED ON NET
(LOSS)/INCOME FROM CONTINUING OPERATIONS $ (0.63) $ 0.22
EARNINGS PER SHARE ON DISCONTINUED OPERATIONS,
BASIC AND DILUTED $ 0.30 $ (0.11)
--------------------- ---------------------
NET (LOSS)/EARNINGS PER SHARE, BASIC AND DILUTED $ (0.33) $ 0.11
===================== =====================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 1,868,611 1,868,611
===================== =====================
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA OF DIALOG
GROUP, INC.
Note 1. Basis of presentation
On August 31, 2006, Dialog Group, Inc (the "Registrant") 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 and equipment 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.
Dialog Group, Inc. (DGI) is a publicly traded corporation (OTCBB:DLGO),
headquartered at 257 Park Avenue South, Suite 1201, New York, New York 10010,
with an office in Sunrise, Florida. DGI provides a suite of technology and
database solutions and services that enable marketers to advertise, generate
leads, and manage customers. DGI is an original compiler and distributor of
proprietary and licensed data products and online and off-line marketing
services. The following unaudited pro forma condensed consolidated financial
statements have been prepared to give effect to the completed sale of assets.
Also, on August 31, 2006, 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.
The following unaudited pro forma condensed consolidated balance sheet
as of September 30, 2006 and the unaudited pro forma condensed consolidated
statement of operations for the year ended December 31, 2005 and the nine months
ended September 30, 2006 are derived from the historical financial statements of
the Registrant as of and for the nine months ended September 30, 2006 and for
the year ended December 31, 2005. The assumptions, estimates and adjustments
herein have been made solely for purposes of developing these pro forma
financial statements.
The unaudited pro forma condensed consolidated balance sheet gives effect
to the sale of assets as if it had occurred on September 30, 2006. The unaudited
pro forma condensed consolidated statement of operations for the nine months
ended September 30, 2006 gives effect to the sale of assets as if it had
occurred on January 1, 2006. The unaudited pro forma condensed consolidated
statement of operations for the year ended December 31, 2005 gives effect to the
sale of assets as if it had occurred on January 1, 2005.
The unaudited pro forma condensed consolidated financial statements
should be read in conjunction with the historical audited financial statements
and related notes of the Registrant and its "Plan of Operation" contained in the
Registrant's Form 10-KSB/A filed on July 28, 2006. The unaudited pro forma
condensed consolidated financial statements are not intended to represent or be
indicative of the results of operations or financial condition of the Registrant
that would have been reported had the asset sale been completed as of the dates
presented, and should not be construed as representative of the future results
of operations or financial condition after the asset sale.
Note 2. Pro forma adjustments
Pro forma adjustments are necessary to adjust amounts to reflect the sale of
assets and the resultant use of proceeds.
The pro forma adjustments included in the unaudited pro forma condensed combined
financial statements are as follows:
A - to reflect loan of $200,000 from Dialog Marketing Services B - to reflect
interest at 8% on the loan (six months) C - to reflect interest at 8% on the
loan (annual) D - to reflect the sale of certain assets to Dialog Marketing
Services for $1,900,000 in cash E - to reflect the use of proceeds to pay-off
certain obligations identified by management to be paid off with the proceeds F
- - to reflect the immediate recognition of prepaid expenses upon the sale of the
operating assets and related discontinuance of operations G - to reflect the
removal of all discontinued operations related to the sale of the assets (nine
months) H - to reflect the removal of all discontinued operations related to the
sale of the assets (annual)
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 - Commodore 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 MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2006 2005
------------- -------------
REVENUES $ -- $ --
COST OF REVENUES
------------- -------------
GROSS PROFIT -- --
OPERATING EXPENSES
Selling, general and
administrative expenses 988,644 1,240,262
------------- -------------
LOSS FROM OPERATIONS (988,644) (1,240,262)
OTHER INCOME (EXPENSES)
Interest income 14,524 --
Interest expense (206,827) (127,287)
Other expense -- (1,409)
Forgiveness of debt -- 53,021
------------- -------------
Net Other Income (Expenses) (192,303) (75,675)
------------- -------------
LOSS FROM CONTINUING
OPERATIONS (1,180,947) (1,315,937)
INACTIVE & DISCONTINUED
OPERATIONS
Income (loss) from
discontinued operations 552,279 (149,884)
------------- -------------
NET LOSS $ (628,668) $ (1,465,821)
============= =============
EARNINGS/( LOSS) PER SHARE,
BASIC AND DILUTED ON NET
INCOME/(LOSS) $ (0.63) $ (0.011)
FROM CONTINUING OPERATIONS
EARNINGS/(LOSS) PER SHARE ON DISCONTINUED OPERATIONS,
BASIC AND DILUTED $ 0.30 (0.001)
------------- -------------
NET EARNINGS/( LOSS) PER
SHARE, BASIC AND DILUTED $ (0.33) $ (0.011)
============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING, 1,868,611 140,313,708
============= =============
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 acquired 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 acquisition 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 AdValiant 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
September 30,
---------------------
2006 2005
-------- ----------
Total Revenues $ 12,980 $1,595,693
-------- ----------
Pre-tax income (loss) from discontinued operations 223,712 19,239
Income tax benefit -- --
-------- ----------
Income (Loss) from discontinued operations, net of income taxes $223,712 $1,614,932
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
September 30,
-----------------
2005
-----------
Compensation expense related to stock option plans, net of tax:
-- As reported $ 1,200
-- Proforma $ 1,200
Net income
-- As reported $(1,465,821)
-- Proforma $(1,465,821)
Basic earnings per share
-- As reported $ (0.011)
-- Proforma $ (0.011)
Diluted earnings per share
-- As reported $ (0.011)
-- Proforma $ (0.011)
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 Healthcare 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
Management's Discussion and Analysis or Plan of Operation.
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.
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.
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 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 a 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.
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.
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.
Control Persons and their Holdings
On the record date, Peter V. DeCrescenzo, President, Chief Executive
Officer, and a Director of the Company, controlled, directly or indirectly,
103,795 shares Class B-1 Preferred Stock, constituting about 40% of the
outstanding Class B-1 Preferred Shares (about 34% of all Class B preferred
shares as a group), 24 shares of the outstanding Class E Preferred Stock,
constituting about 24 % of the outstanding Class E Shares, and 608,184 shares of
Common Stock, constituting about 31 % of the outstanding Common Shares. In the
aggregate, Mr. DeCrescenzo holds about 29.8% of the total voting shares. Mr.
DeCrescenzo has informed the Company that he intends to vote his shares in favor
of the proposed sale.
In April 2005, Pearl Street Holdings plc, an English company controlled by
Stephen Dean and Vince Nicholls lent Dialog Group $550,000 and purchased
$555,000 of the Company's Convertible Notes from the Griffin Crossover Fund,
LLC. These shares are convertible into 1,105,000 shares of common stock. Pearl
could own, after conversion of all its notes, almost 35.8% of the Dialog Group
common stock, representing about 33.0% of the total voting shares. At that time,
Pearl, and its directors and officers, Stephen Dean and Vince Nichols, would be
included in the control group of Dialog Group. Pearl has the right to elect a
Pearl designee so long as Pearl Street Holdings owns or can obtain on exercise
of instruments already owned at least twenty-five percent of the fully diluted
common stock of Dialog Group. Pearl declined to designate a successor to John
Hand, its original designee. Mr. Hand had served as a director from August 11,
2005 to February 9, 2006.
On March 22, a group of five investors associated with Midtown Partners &
Co. LLC purchased convertible debentures with an aggregate initial principal of
$278,778. The debentures mature in 2008 and bear interest at the rate of 12% per
annum; it is payable monthly in cash. The principal and any unpaid interest is
convertible, at the holders election, into common stock at the rate of one share
of common stock for each $1.00 or principal or interest converted.
In addition, the investors received warrants to purchase a total of 83,933
for $1.00 per share. The warrants are exercisable immediately and expire on the
tenth anniversary of their issue. In addition, they provide for cashless
exercise.
In connection with this transaction, the investment banking firm of
Midtown Partners & Co. LLC received an investment banking fee of $ 27,778 plus a
$2,000 non-accountable expense allowance. In addition, as additional
compensation, the Company issued identical ten-year warrants to purchase 50,090
shares of common stock for $1.00 per share.
If all the debentures and warrants were converted or exercised, the
Midtown group would own a total of up to about 400,000 shares, about 17% of the
then outstanding common shares and about 9% of all the voting shares. If all the
convertible securities now outstanding were to be converted, the Midtown group
would own about 9 percent of the equity securities. Thus, depending on the
circumstances under which the debentures are converted and the warrants
exercised, the Midtown group might join the present control group.
On March 24, 2006 Peter DeCrescenzo, the company's president agreed that
he would convert $100,000 of and past due 2005 and 2006 accrued salary and
unpaid vacation pay and part of the Company's debt to him into convertible
debentures on the same terms as the Midtown Partners investors. In addition, on
the same day, Vincent DeCrescenzo, Sr. the company's executive vice president
agreed that he would convert $100,000 of past due 2005 and 2006 accrued salary
and unpaid vacation pay into convertible debentures on the same terms as the
Midtown Partners investors. However, no compensation was paid with respect to
these transactions. This transaction was consummated on May 1, 2006
Common Stock Ownership by Directors and Executive Officers
The following table sets forth information, as of September 11, 2006, with
respect to the beneficial ownership of the Company's Common Stock by (a) the
present executive officers and directors and nominees for Director of the
Company and (b) the present directors and officers of the Company as a group.
Peter DeCrescenzo and Vincent DeCrescenzo, Sr. are the Company's only executive
officers. Unless otherwise noted, the shares are owned directly or indirectly
with sole voting and investment power. All numbers reflect the 100 into one
consolidation of the Company's common stock effective September 18, 2006
========================================================================
Name and Address of Beneficial Owner Amount and Nature Percent of
of Beneficial Class (1)
Ownership (1)
------------------------------------------------------------------------
Peter V. DeCrescenzo,
President and a Director 1,219,702(2) 23.1%
257 Park Avenue South
New York, NY 10010
------------------------------------------------------------------------
Vincent DeCrescenzo,
Executive Vice-President and a 375,335(3) 7.1%
Director
257 Park Avenue South
New York, NY 10010
------------------------------------------------------------------------
Adrian Stecyk, a Director
17 State Street 31,890(4) * %
New York, New York 10021
------------------------------------------------------------------------
Richard P. Kundrat, a Director
39 Flaming Arrow Road 25,118(5) * %
Mahwah, New Jersey 07430
------------------------------------------------------------------------
All present officers and directors 1,652,245(6) 31.2%
as a group (4 persons)
------------------------------------------------------------------------
* Less than one percent
(1) All numbers include, in addition to the 1,984,646 shares outstanding as of
the record date, 122,343 shares issuable upon conversion of the Class B
and B-1 Preferred Stock, 995,000 shares issuable upon conversion of the
Class E Preferred Stock, 1,828,823 shares issuable upon conversion of
convertible notes, and 353,215 shares issuable upon exercise of warrants
or options but do not reflect approximately 1,214 shares to which
creditors are entitled under the Plan of Reorganization which have not
been claimed. They are based upon information furnished to the Company by
the security holders or obtained from the stock transfer books of the
Company. Other than indicated in the notes, the Company has been informed
that these persons have sole voting and investment power with respect to
their shares. Certain options disclosed hereunder may not have been fully
vested as of the date of this report.
(2) This includes 608,184 shares of Common Stock now held by Mr. DeCrescenzo
personally and by retirement trusts for him and his spouse, 41,518 shares
of Commons Stock issuable upon conversion of 103,795 shares Class B-1
Preferred, 240,000 issuable upon conversion of 24 shares of the Class E
Preferred Stock, and 330,000 shares issuable upon the exercise of
convertible notes, warrants, and employee stock options.
(3) This includes 152,437 shares of Common Stock now held and 6,648 shares of
Common Stock issuable upon conversion of 16,619 shares Class B-1
Preferred, 50,000 issuable upon conversion of 5 shares of the Class E
Preferred Stock, and 166,250 shares issuable upon the exercise of
convertible notes, warrants, and employee stock options.
(4) Includes 2,390 shares of Common Stock and 29,500 shares issuable upon the
exercise of convertible notes and stock options.
(5) Includes 22,118 shares of Common Stock and 3,000 shares issuable upon the
exercise of stock options.
(6) This includes 937,564 shares of Common Stock now held and 48,166 shares of
Common Stock issuable upon conversion of 120,414 shares Class B-1
Preferred, 290,000 shares issuable upon conversion of 29 shares of the
Class E Preferred Stock, and 528,750 shares issuable upon the exercise of
convertible notes, warrants, and employee stock options.
Principal Holders of Common Stock.
The following table sets forth information, as of September 11, 2006, with
respect to the beneficial ownership of the Company's Common Stock by each person
known by the Company to be the beneficial owner of more than five percent (5%)
of the Company's outstanding Common Stock. All numbers reflect the 100 into one
consolidation of the Company's common stock effective September 18, 2006
=======================================================================
Name and Address of Beneficial Amount and Nature of Percent of
Owner Beneficial Ownership Class (1)
(1)
-----------------------------------------------------------------------
Peter V. DeCrescenzo
257 Park Avenue South 1,219,702(2) 23.1%
New York, NY 10010
-----------------------------------------------------------------------
Vincent DeCrescenzo
257 Park Avenue South 375,335(3) 7.1%
New York, NY 10010
-----------------------------------------------------------------------
Cede & Co. (4)
55 Water Street 216,614 5.0%
New York, NY 10004
-----------------------------------------------------------------------
Mercury Group plc
f/k/a Cater Barnard PLC 137,080(5) 3.1%
6 Lloyds Avenue
London EC3N 3AX
England
-----------------------------------------------------------------------
Peter Bordes
62 White Street, Suite 3E 139,194(6) 3.2%
New York, NY 10013
-----------------------------------------------------------------------
(1) All numbers include, in addition to the 1,984,646 shares outstanding as of
the record date, 122,343 shares issuable upon conversion of the Class B
and B-1 Preferred Stock, 995,000 shares issuable upon conversion of the
Class E Preferred Stock, 1,828,823 shares issuable upon conversion of
convertible notes, and 353,215 shares issuable upon exercise of warrants
or options but do not reflect approximately 1,214 shares to which
creditors are entitled under the Plan of Reorganization which have not
been claimed. They are based upon information furnished to the Company by
the security holders or obtained from the stock transfer books of the
Company. Other than indicated in the notes, the Company has been informed
that these persons have sole voting and investment power with respect to
their shares. Certain options disclosed hereunder may not have been fully
vested as of the date of this report.
(2) This includes 608,184 shares of Common Stock now held by Mr. DeCrescenzo
personally and by retirement trusts for him and his spouse, 41,518 shares
of Commons Stock issuable upon conversion of 103,795 shares Class B-1
Preferred, 240,000 issuable upon conversion of 24 shares of the Class E
Preferred Stock, and 330,000 shares issuable upon the exercise of
convertible notes, warrants, and employee stock options.
(3) This includes 152,437 shares of Common Stock now held and 6,648 shares of
Common Stock issuable upon conversion of 16,619 shares Class B-1
Preferred, 50,000 issuable upon conversion of 5 shares of the Class E
Preferred Stock, and 166,250 shares issuable upon the exercise of
convertible notes, warrants, and employee stock options.
(4) Cede & Co, as the nominee of Depository Trust Company, is the record but
not the beneficial owner of 216,614 shares of Common Stock.
(5) This includes 137,080 shares held of record, constituting 6.9% of the
outstanding Common Stock.
(6) This includes 106,756 shares of Common Stock, constituting 5.4% of the
issued and outstanding common, 349 shares of Commons Stock issuable upon
conversion of 872 shares Class B-1 Preferred, and 32,000 shares issuable
upon the exercise of warrants.
Agenda Item 2 Other Matters
Management knows of no other matters to be brought before the Special
Meeting, but if other matters properly come before the meeting, the votes cast
by the Messrs. DeCrescenzo, Ms. Lanzendoen, and Mr. Siegel, whose votes
constitute more than a majority of the votes that may be cast by all class of
stock as a group, will determine the outcome.
Expenses of Meeting
The Company will bear the expenses in preparing, printing, and mailing the
Information Statement to the stockholders. No proxies will be solicited by the
Company's management in connection with this meeting. We are not asking you for
a proxy and you are requested not to send us a proxy.
By Order of the Board of Directors,
Mark Alan Siegel
Secretary of the Company
Dated: December 20, 2006