Shares in the company plummeted by over 28% on the news, trading at 49.5p this morning, down 19.5p on the opening price.
SMG blamed the profits dip on the weak market for TV and cinema advertising, affecting its Scottish TV franchises and its cinema advertising sales business Pearl & Dean.
It said that Virgin Radio and its outdoor advertising business Primesight are outperforming their respective markets.
"However, due to the high operational gearing of its television and cinema businesses, the board now believes that SMG's profits for the full year 2006 will fall materially behind its previous expectations," it said in a statement this morning.
"As a result, the group is in discussions with its banks in relation to a potential breach of certain of its financial covenants and a satisfactory outcome is expected."
The fall in earnings means SMG could breach its commitment to lenders for its earnings to account for a particular proportion of its £152m borrowing.
The company, which turned its back on a possible merger with Ulster Television last month, added that its auction of Pearl & Dean and outdoor advertising business Primesight had attracted a significant number of interested buyers.
A company spokesman said the proceeds from any sale would put it in a much stronger financial position.
Chris Masters, SMG chairman, is currently interviewing candidates for the chief executive role left vacant by Andrew Flanagan's resignation in July.
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