As filed with the Securities and Exchange Commission on September 14, 1999
REGISTRATION NO.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MDI ENTERTAINMENT, INC.
(Name of small business issuer in its Charter)
DELAWARE 7900 73-1515699
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(State or jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Identification No.)
Code Number)
201 ANN STREET
HARTFORD, CONNECTICUT 06103
(860) 527-5359
(Address and telephone number of principal executive offices and principal
place of business)
STEVEN M. SAFERIN, PRESIDENT
201 ANN STREET
HARTFORD, CONNECTICUT 06103
(860) 527-5359
(Name, address and telephone number of agent for service)
Copies to:
KENNETH R. KOCH, ESQ.
SQUADRON, ELLENOFF, PLESENT & SHEINFELD, LLP
551 FIFTH AVENUE
NEW YORK, NEW YORK 10176
(212) 661-6500 / (212) 697-6686 (FAX)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: From time to time after the
effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
<PAGE>
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
============================= ---------------- ---------------- --------------- ---------------
TITLE OF EACH CLASS OF AMOUNT TO PROPOSED PROPOSED AMOUNT OF
SECURITIES TO BE REGISTERED BE MAXIMUM MAXIMUM REGISTRATION
REGISTERED OFFERING AGGREGATE FEE
PRICE OFFERING
PER SHARE PRICE
- ----------------------------- ---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Common Stock, par value 2,027,000 $1.4375 $2,913,813 $810.04
$.001 (1)(2)
per share, issuable upon
conversion of, and interest
and other amounts due
under, the Company's Series
A Preferred Stock (the
"Preferred Stock").
============================= ================ ================ =============== ===============
</TABLE>
(1) Determined pursuant to Rule 457(c) under the Securities Act of 1933, as
amended, on the basis of fluctuating market prices, solely for the
purpose of calculating the registration fee.
(2) Pursuant to Rule 416 of the Securities Act of 1933, as amended, the
Registrant hereby registers such additional shares as may be issuable
pursuant to certain anti-dilution provisions of the Preferred Stock.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED SEPTEMBER 14, 1999
<PAGE>
PROSPECTUS
- ----------
MDI ENTERTAINMENT, INC.
201 ANN STREET
HARTFORD, CONNECTICUT 06103
(860) 527-5359 (PHONE)
(860) 527-5920 (FAX)
2,027,000 SHARES OF COMMON STOCK
Certain stockholders of MDI Entertainment, Inc. are offering and selling
up to 2,027,000 shares of the MDI's common stock under this prospectus. All of
such shares are or may be issuable upon conversion of, and interest and other
amounts due under, MDI's Series A Preferred Stock. See the "Plan of
Distribution" on page 46.
MDI will not receive any proceeds from the sale of the common stock by
the selling stockholders.
Information concerning the selling stockholders may change from time to
time and will be set forth in supplements to this prospectus.
Nasdaq Bulletin Board Symbol -- "MDIH"
On September 9, 1999, the closing bid price of the common stock as
reported by the Nasdaq Bulletin Board was $ 1.4375.
See "RISK FACTORS" beginning on page 4 for a discussion of certain
matters that should be considered by potential investors.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ___________, 1999.
-1-
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ ALL OF THIS PROSPECTUS, ESPECIALLY THE SECTION "RISK
FACTORS" STARTING ON PAGE 4, AND THE CURRENT PUBLIC INFORMATION AND AUDITED
FINANCIAL STATEMENTS DESCRIBED IN "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE
48 OF THIS PROSPECTUS, BEFORE DECIDING WHETHER TO PURCHASE THE COMMON STOCK
OFFERED IN THIS PROSPECTUS.
MDI ENTERTAINMENT, INC.
We specialize in creating, marketing and implementing
entertainment-based promotions to North American lotteries. Our principal
business has been the scratch ticket segment of the government lottery industry,
although we have run on-line entertainment-based promotions with a lotto and
daily numbers type games featuring one of our licensed properties. We are a
leader in designing and marketing instant scratch ticket games based on licensed
brand names and entertainment properties. Our current promotions feature a wide
variety of such properties including:
o Wheel of Fortune(R)
o Jeopardy!(TM)
o Harley-Davidson(R)
o Star Trek(TM)
o Twilight Zone(TM)
o Times Square 2000(TM)
o Rock & Roll Hall of Fame(TM)
o Betty Boop(TM)
o Louisville Slugger(R)
o Dick Clark's American Bandstand(R)
o The Nashville Network(R)/TNN
o Country Music Television(R)/CMT
o Heroes of Space(TM)
o James Bond 007(TM)
o Pink Panther(TM)
o Outer Limits(TM)
Prizes awarded in our promotions typically include a number of "second
chance" prizes of logo-bearing merchandise. A promotion may include any of the
following prizes:
o posters;
o T-shirts;
o caps;
o jackets;
o watches;
o clocks;
o money clips;
o telephones;
o playing cards;
o film cells;
o video and music collections;
o stadium blankets;
o carryall bags;
o credit cards with prepaid credit;
o trips; and
o electronic games.
-2-
<PAGE>
We developed our strategy of identifying brand name and entertainment
properties in early 1996. Prior to that time, we had developed a series of
promotions that utilized popular videotapes, compact discs and audiocassette as
second chance lottery prizes. Those promotions enabled us to develop an
expertise in sourcing and distributing products as second chance lottery prizes.
They also enabled us to develop a reputation with lottery personnel as a
reliable organization attuned to the special needs of lotteries and their
players.
We derive over ninety-five percent (95%) of our revenues from lotteries
in two distinct ways. First, we usually charge a lottery a license and royalty
fee to utilize a particular licensed property as a lottery game. License fees
are fixed while royalties are a percentage of the printing cost of the tickets.
Manufacturing costs of tickets usually range from $10.00 per thousand to $30.00
per thousand. Actual costs depend on the size of the ticket and the quantity
printed. Ticket quantities range from about one million to as many as 60 million
with an average quantity of about five million.
Our second source of lottery revenue is the sale of logo-bearing
merchandise to the lotteries as second chance prizes. In merchandise-based
lottery games, between 5% to 10% of a lottery's prize fund is typically used for
the purchase of merchandise related to the property the lottery is utilizing.
Typically, we purchase merchandise from other licensees of the property and
resell the merchandise to the lottery at a price that is designed to include
overhead costs, profit, shipping and handling and any marketing support we
provide the lottery such as brochures, posters or other advertising assistance
for which there are no separate charges.
THE OFFERING
COMMON STOCK OFFERED 2,027,000 shares. All of such shares are or may be
issuable upon conversion of, and dividends and
other amounts due under, MDI's Series A Preferred
Stock.
USE OF PROCEEDS MDI will not receive any of the proceeds from the
sale of the common stock offered by the selling
stockholders.
RISK FACTORS The securities offered hereby involve a high
degree of risk. See "RISK FACTORS" on page 4.
OFFERING PRICE All or part of the shares of common stock offered
hereby may be sold from time to time in amounts
and on terms to be determined by the selling
stockholders at the time of sale.
NASDAQ TRADING SYMBOL "MDIH"
-3-
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS
IS SUBJECT TO MANY RISKS. WE SUMMARIZE SOME OF THE MOST SERIOUS RISKS BELOW. MDI
IS ALSO SUBJECT TO MORE GENERAL RISKS DESCRIBED IN THE SECTION "SPECIAL NOTE
REGARDING FORWARD LOOKING STATEMENTS" BEGINNING ON PAGE 48. YOU SHOULD READ AND
UNDERSTAND ALL OF THE RISK FACTORS BEFORE MAKING A DECISION TO INVEST.
We have had losses.
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Although we had net income for the fiscal year ended May 31, 1999, we incurred a
net loss of $2,118,893 for the fiscal year ended May 31, 1998. We cannot assure
you that we will operate profitably in the near future or at all.
We have a negative net worth.
- ------------------------------
We have a negative net worth of $1,499,657, as of May 31, 1999. We cannot assure
you that we will be able to operate profitably in the future or at all.
We may continue to need financing or additional equity to meet our future
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capital requirements.
- ----------------------
As of May 31, 1999, our current liabilities (including "billings in excess of
costs and estimated earnings on uncompleted contracts" and "deferred income" of
$1,964,291) exceeded our current assets by $1,790,577 and our total liabilities
exceeded our total assets by $1,499,657. We have raised $1,750,000 on August 4,
1999, through the sale of Series A Convertible Preferred Stock in a private sale
to an investor. See "Liquidity and Capital Resources" for details on this
transaction. However, we may still seek additional financing sources to meet our
needs. We have not determined the amount we may seek to raise or the form of
this financing (i.e. debt or equity). We cannot assure you that we will obtain
additional financing for future operations or capital needs on favorable terms
if at all.
We may be unable to maintain all or renew our current licenses.
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Our success will be dependent upon maintaining our current licenses for the
rights to use names and well known logo bearing merchandise. Some of these
licenses are terminable if Steven M. Saferin does not control at least 50% and
will need to be renegotiated if we plan to expand through the acquisition of new
companies through the issuance of stock or the issuance of securities to raise
additional equity capital. The terms of the current licenses are generally for
1.5 to 3 years, although they may be terminated sooner under certain
circumstances. We cannot assure you that the current licenses will be renewed
once they expire.
We may be unable to provide necessary merchandise to the lotteries when needed.
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We supply the lotteries with logo bearing merchandise related to existing
contracts. We obtain approximately 95% of this merchandise from authorized
representatives of the licensor. We cannot assure you that the logo bearing
merchandise will be available from such authorized representatives when needed
by us to satisfy our obligations to the lotteries.
-4-
<PAGE>
We may be unable to acquire new licenses.
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Our success is dependent on our ability to obtain rights to use well known
entertainment and other similar properties for use on lottery tickets and
related merchandise. We cannot assure you that we will continue to obtain such
licenses on favorable terms or at all.
We depend on customer relationships with North American lotteries.
- -------------------------------------------------------------------
Many of our licensing rights are, by design, currently limited to United States,
North American or worldwide lotteries. There are currently 38 United States
lotteries and five additional Canadian lotteries. The extremely limited
potential customer base means that if any target lottery refuses to purchase a
particular promotion from us or if it only uses a promotion once, there may be a
significant negative impact on our revenue and earnings. The three state
lotteries that purchased promotions accounting for the highest percentage of our
revenues during fiscal 1999 were Wisconsin, Pennsylvania and New Jersey with
30%, 19% and 16%, respectively. We cannot assure you that these lotteries will
maintain the same level of promotions or that other lotteries will increase
promotions beyond current levels, if at all.
We have no on-going sources of revenue.
- ----------------------------------------
Our revenues are derived on a contract-by-contract basis from state lotteries.
There are no regular on-going sources of revenue at the present time and we
continually create and market new promotions to our lottery customers. Lotteries
frequently move start dates for promotions thereby causing gaps in our cash
flow. Moreover, the useful life of a license is generally relatively short as
the novelty of the game or the popularity of the licensed material wanes over
time. We may depend on a particular promotion in any given year, and a decrease
in sales of the promotion or the loss of the underlying license would seriously
impact our revenues and earnings.
We may be adversely affected by government regulation of lotteries and gambling.
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Since most lotteries are government agencies with lottery executives appointed
by the state's governor or other high ranking official, opportunities or
projects in progress can be slowed after an election if the incumbent governor
is not reelected. There is a growing concern in the United States about the
explosion of gaming. The creation of The National Gambling Impact Study
Commission and its recently released report, may negatively impact state
lotteries and other gaming activities and hence our business. We cannot assure
you that there will not be an adverse change in the lottery laws of any
jurisdiction in which we do business. In addition, we cannot predict the nature
of the regulatory process in any jurisdiction that may authorize the use of
instant tickets in the future. Any such regulatory process may be burdensome to
us and our customers or their key personnel and could include requirements that
we would be unable to satisfy. See "Government Regulation."
-5-
<PAGE>
Existing stockholders are able to exercise control over us.
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Our officers and directors beneficially own approximately 61% of the outstanding
Common Stock and Steven M. Saferin owns approximately 56%. Our Certificate of
Incorporation does not provide for cumulative voting for the Board of Directors.
As a result, Steven M. Saferin and management have the ability to control the
election of a majority of our directors and the outcome of issues submitted to a
vote of our stockholders. See "Security Ownership of Certain Beneficial Owners
and Management."
The loss of the services of Steven M. Saferin could harm our business.
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Our success depends to a significant extent on the performance and continued
service of Steven M. Saferin, an officer and director. MDIP has entered into an
employment agreement with Mr. Saferin which expires on August 8, 2002 or three
years from the date we first file a registration statement the SEC, whichever is
later. We do not carry key man insurance. See "Executive Compensation-Employment
Agreements."
Intense competition could reduce our market share.
- ---------------------------------------------------
We acquire exclusive rights to license entertainment and other properties to the
U.S. lottery industry. To date, we have not faced substantial competition in
acquiring such rights. However there are several organizations that also design
and promote lottery games and promotions based on licensed brands. One company
has, to date, limited itself to board games and another, puzzles and fortunes.
There is no guarantee these companies would not more aggressively pursue the
types of entertainment properties we have targeted. In addition, it is possible
that potential licensors may design their own lottery games and seek to market
them directly to the lotteries, thus bypassing us. Another potential source of
competition are the printers of instant tickets who, to improve their own
competitive standing, might attempt to acquire licensing rights for various
properties to offer exclusively to their lottery customers and enhance their
competitive bidding for lottery printing contracts. See "Competition."
We do not anticipate paying any dividends.
- -------------------------------------------
We have never paid any cash or other dividends on our Common Stock. At present,
we do not anticipate paying dividends on our Common Stock in the foreseeable
future and intend to devote any earnings to the development of our business.
Investors who anticipate the need for immediate income from their investment
should refrain from purchasing our Common Stock.
Our Common Stock may lack liquidity.
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Our Common Stock is not traded on the NASDAQ Stock Market or any stock exchange.
We cannot assure you that a stockholder could buy or sell shares when desired.
We indemnify our directors and officers against certain expenses and
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liabilities.
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So far as permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation and By-Laws provide that we will indemnify our
directors and officers against expenses and liabilities they incur to defend,
settle or satisfy any civil or criminal action brought against them on account
of their being or having been directors or officers unless, in any such action,
they are adjudged to have acted with gross negligence or to have engaged in
willful misconduct. As a result of such provisions, stockholders may be unable
to recover damages against our directors and officers for actions taken by them
which constitute negligence or a violation of their fiduciary duties, which may
reduce the likelihood of stockholders instituting derivative litigation against
directors and officers and may discourage or deter stockholders from suing our
directors, officers, employees and agents for breaches of their duty of care,
even though such action, if successful, might otherwise benefit us and our
stockholders.
-6-
<PAGE>
If the Internet does not grow as a medium for commerce, our E-commerce sales
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strategy could be materially adversely affected.
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We have invested resources in developing our E-Commerce and catalog sales
strategy. See "--Recent Developments." However, a portion of our future revenues
and profits in connection with this strategy are partially dependent upon the
widespread acceptance and use of the Internet and on-line services as an
effective medium for commerce. Rapid growth in the use of and interest in the
Internet is a recent phenomenon, and we cannot assure you that acceptance and
use will continue to develop or that a sufficiently broad base of consumers will
adopt, and continue to use, the Internet as a medium for commerce. In addition,
critical issues concerning the commercial use of the Internet, such as ease of
access, security, reliability, cost and quality of service, remain unresolved
and may affect the growth of Internet use. If use of the Internet does not
continue to grow or grows more slowly than expected or if the Internet does not
become a viable commercial marketplace, the E-Commerce portion of our E-Commerce
and catalog sales strategy could be materially adversely affected.
We have certain registration obligations to our Series A Preferred Stockholders.
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We are obligated to register the underlying Common Stock issuable upon
conversion of our Series A Preferred Stock. We will be subject to severe
penalties if we do not timely fulfill our registration obligations with respect
to such stock, including penalties for failing to timely file such registration
statement and having it declared effective by the Securities and Exchange
Commission.
Future sales of common stock by our existing stockholders could adversely affect
- --------------------------------------------------------------------------------
our stock price.
- -----------------
The market price of our Common Stock could decline as a result of sales of a
substantial number of shares of our Common Stock in the market, or the
perception that such sales could occur. Such sales also might make it more
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate. As of the date of this Form SB-2, we had
7,776,500 outstanding shares of Common Stock, as well as 2,027 shares of Series
A Preferred Stock. Of these shares, 3,289,322 shares of Common Stock are freely
tradeable.
As of the date of this Form SB-2, options to purchase a total of 967,500
shares of our Common Stock are outstanding. Of such options, options to purchase
300,000 shares are currently exercisable while the remaining options vest and
are exercisable in three installments over a period of three years commencing
November 18, 1999. In addition, warrants to purchase a total of 596,875 shares
of our Common Stock are outstanding. Of such warrants, warrants to purchase
30,000 shares are currently exercisable while the remaining warrants became
exercisable on September 4, 1999. The Series A Preferred Stock is convertible
into 2,027,000 shares of our Common Stock. Shares issued upon the exercise of
such options and warrants or conversion of the Series A Preferred Stock will be
eligible for resale in the public market from time to time.
We are obligated to file a registration statement covering approximately
2,027,000 shares of our Common Stock reserved for issuance in connection with
the conversion of our Series A Preferred Stock. Upon the effectiveness of that
registration statement, all shares covered by that registration statement will
be freely tradeable. If a large number of such shares are sold in the public
market, the price of our Common Stock may fall.
-7-
<PAGE>
The book value per share of our Common Stock is substantially lower than the
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market price
- -------------
As of May 31, 1999 the book value per share of our Common Stock was $ (0.01),
after giving pro forma effect to the sale of 2,027 shares of Preferred Stock
sold on August 4, 1999, and assuming that such Preferred Stock had been
converted into Common Stock. The market price per share of our Common Stock on
May 31, 1999 was $1.0625. Accordingly, based on the current price of the Common
Stock, $1.44 as of September 9, 1999, purchases of such Common Stock would be
paying $1.45 more than such pro forma book value.
USE OF PROCEEDS
MDI will not receive any proceeds from any sale of the shares offered hereby.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock commenced trading on the OTC Bulletin Board on August 8,
1997 under the symbol "MDIH." The following table sets forth, for the fiscal
periods indicated, the high and low bid prices of a share of Common Stock as
reported by the OTC Bulletin Board for periods on and subsequent to August 8,
1997. Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
High Low
FISCAL YEAR 1998
1st Quarter (commencing August 8, 1997)............ $2 7/8 $ 5/8
2nd Quarter........................................ $2 1/8 $43/64
3rd Quarter........................................ $ 3/4 $21/64
4th Quarter........................................ $ 1/2 $17/64
FISCAL YEAR 1999
1st Quarter........................................ $1 $ 1/4
2nd Quarter........................................ $ 3/4 $ 5/16
3rd Quarter........................................ $1 9/32 $33/64
4th Quarter........................................ $1 5/8 $17/32
FISCAL YEAR 2000
1st Quarter....................................... $1 29/32 $1 1/7
As of September 9, 1999, the high and low bid prices per share of
Common Stock were $1.50 and $ 1.375, respectively and there were approximately
1,110 holders of record of the Common Stock.
-8-
<PAGE>
SALE OF PREFERRED STOCK
We received gross proceeds of $1,750,000 on August 4, 1999 from the
private sale to an investor of 2,027 shares of Series A Preferred Stock (the
"Preferred Stock"), representing approximately 20% of our outstanding Common
Stock on an as converted basis. The Preferred Stock has a liquidation preference
of $1,750,000, pays a dividend at the rate of 10% per annum, payable in cash or
Common Stock at our option and is convertible into an aggregate of 2,027,000
shares of Common Stock, subject to adjustment under certain circumstances. As
long as 2,027 shares of the Preferred Stock remain outstanding, the holders of a
majority of such shares may elect one of our directors. In addition, such
holders are entitled to a right of first refusal on new securities issued by us,
subject to certain exclusions. We may not create or increase the authorized
number of shares of any class or series of stock ranking prior to or on parity
with the Preferred Stock either as to dividends or liquidation without approval
of a majority of the holders of the Preferred Stock.
We have agreed to file a registration statement with respect to the
resale of the Common Stock underlying the Preferred Stock within 45 days
following closing, which is required to be declared effective within 120 days of
closing, subject to certain exceptions. If such filing and effectiveness are not
achieved by the deadlines, the investor may be entitled to certain penalties. In
addition, upon effectiveness of such registration statement, the Preferred Stock
will pay a reduced dividend at the rate of 5% per annum. If not previously
converted by the investor, the Preferred Stock will automatically convert into
common stock in quarterly installments over a period of one year following the
effectiveness of the registration statement.
In connection with the placement, MDI paid Venture Partners Capital,
LLC, a registered broker-dealer, a $140,000 cash fee and issued seven-year
warrants to purchase 566,875 shares of Common Stock at $1.31 per share.
WARRANTS
During the fiscal year ended May 31, 1999, we issued warrants to
purchase 30,000 shares of Common Stock at an exercise price of $0.28 to a public
relations firm and one of its key executives for services related to investor
relations.
In addition, we issued 566,875 warrants in connection with the Preferred
Stock sale discussed above. These warrants and the 30,000 warrants discussed
above are outside of our 1998 Stock Options and Award Plan.
-9-
<PAGE>
DIVIDEND POLICY
We have not paid dividends on our common stock since inception and do
not intend to pay any dividends to our stockholders in the foreseeable future.
We currently intend to retain earnings, if any, for the development and
expansion of our business. The declaration of dividends in the future will be at
the election of the Board of Directors and will depend upon our earnings,
capital requirements and financial position, general economic conditions and
other factors our Board believes are relevant.
CAPITALIZATION
The following table sets forth as of May 31, 1999 (i) our actual capitalization,
(ii) our capitalization as adjusted to give effect to the sale of 2,027 shares
of Series A Convertible Preferred Stock at a price of $863.33 per share (after
deducting fees and offering expenses) and (iii) our capitalization as adjusted
to give effect to the mandatory conversion of the 2,027 shares of Series A
Convertible Preferred Stock into 2,027,000 common shares over the twelve months
following the SEC approval of this Registration Statement. This table should be
read in conjunction with our consolidated financial statements and the notes
thereto included elsewhere in this registration statement.
<TABLE>
<CAPTION>
May 31, 1999
Actual As Adjusted As Adjusted
(1) (2) (3)
----------- ----------- -----------
<S> <C> <C> <C>
Long-Term debt $ 595,613 $ 595,613 $ 595,613
----------- ----------- -----------
Shareholders' deficit:
Common stock, $.001 par value:
25,000,000 shares authorized; 7,776,500 shares issued and outstanding
actual; 7,776,500 shares issued and outstanding as adjusted (2); and
9,803,500 shares issued
and outstanding as adjusted (3) 7,777 7,777 9,804
Preferred Stock, $.001 par value:
0 shares authorized actual; 2,027 shares authorized, issued and
outstanding as adjusted (2); 0 shares
issued and outstanding as adjusted (3) - 2 -
Additional paid in capital 348,348 1,750,954 1,748,929
Accumulated deficit (1,855,782) (1,855,782) (1,855,782)
----------- ----------- -----------
Total shareholders' deficit (1,499,657) (97,049) (97,049)
----------- ----------- -----------
Total capitalization $ (904,044) $ 498,564 $ 498,564
=========== =========== ===========
</TABLE>
(1) Excludes common stock reserved for issuance upon exercise of options and
warrants outstanding as of May 31, 1999.
(2) As adjusted to give effect to the sale of 2,027 shares of Series A
Convertible Preferred Stock at a price of $863.33 per share, after
deducting fees and offering expenses.
The difference in additional paid in capital ($1,402,606) is due to the
proceeds in excess of par value less fees and offering expenses.
(3) As adjusted to give effect to the mandatory conversion of the 2,027 shares
of Series A Convertible Preferred Stock into 2,027,000 common shares over
the twelve months following the SEC approval of this Registration
Statement. The difference in par value between the Series A Convertible
Preferred Stock and Common Stock is adjusted to additional paid in capital.
-10-
<PAGE>
SELECTED FINANCIAL DATA
The financial information set forth below for the years ended May 31,
1999 and 1998 are derived from our audited consolidated financial statements
included elsewhere in this registration statement.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31
1999 % 1998 %
---- - ---- -
<S> <C> <C> <C> <C>
Total revenue $ 7,204,712 100.0 $ 1,984,840 100.0
Cost of revenue 3,812,169 52.9 2,313,831 116.6
----------- ---- ----------- -----
Gross profit (loss) 3,392,543 47.1 (328,991) (16.6)
Selling, general and
administrative expenses 2,158,849 30.0 1,797,631 90.6
----------- ---- ----------- -----
Operating profit (loss) 1,233,694 17.1 (2,126,622) (107.2)
Interest expense 28,200 0.4 51,821 2.6
Interest income (20,487) (0.3) (36,894) (1.9)
Other expense 10,976 0.1 12,405 0.6
Minority interest (341) -- (31,936) (1.6)
----------- ---- ----------- -----
Income (loss) before income taxes 1,215,346 16.9 (2,122,018) (106.9)
Income tax (expense) benefit (55,700) (0.8) 3,125 0.2
----------- ---- ----------- -----
Net income (loss) $ 1,159,646 16.1 $(2,118,893) (106.7)
=========== ==== =========== =====
Basic Earnings (Loss) Per Common
Share $ .15 $ (.37)
Diluted Earnings (Loss) Per Common
Share $ .14 $ (.37)
=========== ===========
</TABLE>
Year Ended May 31, 1999 Compared to Year Ended May 31, 1998
Results for the fiscal year ended May 31, 1999 ("FY 99") reflected
income of $1,159,646 compared to a loss for the fiscal year ended May 31, 1998
("FY 98") of $2,118,893. The income in FY 99 was primarily attributable to a
complete phase-in of our licensing promotions compared to the phasing out of our
Instant Entertainment Connection ("IEC") video and music promotions. However, we
did begin earning substantial revenue in the early stages of licensing
promotions in the fourth quarter of FY 98.
-11-
<PAGE>
Total revenue for FY 99 was $7,204,712 as compared to $1,984,840 for FY
98, an increase of $5,219,872 (263%). This revenue increase reflects the
successful shift of our business to licensed promotions. Revenue during this
year was derived primarily from sales based on four entertainment-based or brand
name properties including Harley-Davidson(R) (64% of revenue), Wheel of
Fortune(R) (13% of revenue), Star Trek(TM) (13% of revenue) and Pepsi Cola(R)
(8% of revenue).
Cost of revenues as a percentage of sales for FY 99 was $3,812,169
(52.9%) compared to $2,313,831 (116.6%) for the year ended May 31, 1998. The
major costs of revenue include merchandise awarded as prizes, fulfillment of the
prizes to lottery winners and project marketing costs associated with creating
and printing brochures, mailers, posters, and catalogs. However, $154,885 of
previous years commissions payable to Mr. Saferin were relinquished by him in FY
99 which reduced cost of revenue by that amount. Had this reduction in expense
not occurred, cost of revenue would have been $3,967,054 (55.1%). This FY99 cost
to revenue ratio more accurately reflects our business cost for licensed
promotions.
Certain marketing promotion costs that are fixed or partially fixed
could not be properly absorbed during FY 98, as a result of lower revenues,
resulting in a higher cost to revenue ratio of 116.6%. Additionally, in FY 98 we
expensed $786,000 of commissions related to an agreement for procurement
services related to video and audio entertainment media. The contract began in
1994 and was to be paid on a formula basis over a number of years. Due to the
strategic change in our business, which included the phase out of the IEC
promotions, we expensed the remainder of the contract obligation. Had we not
expensed the remaining commissions for procurement services, cost of revenue
would have been $1,527,831 (77% of sales).
Gross profit increased to $3,392,543 (47.1% of revenue) for FY 99
compared to a gross loss in FY 98 of $328,991 (16.6% of revenue). This was due
to the significantly higher revenue and the improved profit margin of licensed
promotions.
Selling, general and administrative expenses for FY 99 were $2,158,849
(30% of revenue) compared to $1,797,631 (90.6% of revenue) in FY 98. Although
revenue increased by 263% for FY 99, actual expenses increased by only 20% as
compared to FY 98. This 20% increase, or approximately $350,000, is due to added
costs of being a SEC reporting company and added human resources to properly
manage our growth for FY 99. Investor relations costs, legal and accounting were
approximately $167,000 higher this year due to reporting requirements. Salary
and employee fringe expenses accounted for most of the remaining increased
costs.
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<PAGE>
Operating income was $1,233,694 (17.1% of revenue) for FY 99 as compared
to an operating loss of $2,126,622 for FY 98. This was principally due to the
factors described above.
Interest expense was $28,200 for FY 99 compared to $51,800 for FY 98.
This decrease was attributable to a reduction in the principal amount of debt
outstanding for most of the year. However, in January 1999, we converted accrued
commissions of $600,000 into a 24-month note bearing interest at 10.75% per
annum. This is discussed more fully in "Liquidity and Capital Resources."
Interest income was approximately $20,500 for the FY 99 period compared
to approximately $37,000 for FY 98. The interest income for FY 99 was
principally from savings interest. The interest income for FY 98 was principally
from a $7,000 per quarter charge for the debt owed by Steven M. Saferin, the
Company's President and CEO, which was paid in full in February 1998.
Other expense for FY 99 was approximately $11,000 compared to $12,400
for FY 98. The expense for FY 99 was due to the disposal of a fixed asset at
less than recorded book value. Other expense for FY 98 was associated with our
efforts in going public prior to the mergers and primarily represents legal
expenses.
The minority interest of MDIT owned by third parties (66.7% owned by
MDIP and 33.3% owned by third parties) (the "Minority Interest") was reduced in
FY 99 to $300 as compared to $31,900 in FY 98 due to net losses of MDIT. These
amounts are income to us as losses reduce the amount of remaining accumulated
Minority Interest obligations owed by us, as shown on the balance sheet. Final
year taxes was the only activity for this year. Last year was the final
operating year for MDIT.
LIQUIDITY AND CAPITAL RESOURCES
As of May 31, 1999, we had cash of $340,400 compared to $960,400 as of
May 31, 1998. However, receivables from lottery clients were $817,600 as of May
31, 1999 compared to $317,600 as of May 31, 1998. This is a $120,400 decrease in
combined cash and receivables at May 31, 1999 compared to May 31, 1998. This
decrease is due to receiving large contract amounts for promotions which
launched in the fourth quarter of FY 98, increasing cash significantly at May
31, 1998.
On May 31, 1999, we had a net working capital deficit of $1,790,600.
However, $1,964,300 of this deficit were "billings in excess of costs and
estimated earnings on uncompleted contracts" and "deferred revenue." Both
"billings in excess of costs and estimated earnings on completed contracts" and
"deferred revenue" represent unrecognized revenue (i.e., revenue which we have
already been paid for but which cannot be recognized until we purchase and ship
the contracted merchandise after game drawings have occurred). Accordingly, such
liability will not adversely impact cash flow and, without such liability,
working capital would have been $173,700.
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<PAGE>
Our indebtedness as of May 31, 1999 was $595,600, primarily represented
by a note with a remaining balance of $485,400, bearing interest at 10.75% per
annum and payable in monthly installments of $27,895 with the final payment date
of December 15, 2000. The note is secured by liens on substantially all of our
assets. This note resulted from the conversion of $600,000 of accrued
commissions due to a third party, which allows the Company to better manage its
cash flow requirements.
The cash requirements of funding our growth have historically exceeded
cash flow from operations. Accordingly, we have satisfied our capital needs
primarily through debt and equity financing, as well as cash flow from
operations. Therefore, to address our immediate needs, we received gross
proceeds of $1,750,000 on August 4, 1999 from the private sale to an investor of
2,027 shares of Series A Convertible Preferred Stock (the "Preferred Stock"),
representing approximately 20% of our outstanding Common Stock on an as
converted basis. The Preferred Stock has a liquidation preference of $1,750,000,
pays a dividend at the rate of 10% per annum, payable in cash or common stock at
our discretion, and is convertible into an aggregate of 2,027,000 shares of our
Common Stock, subject to adjustment under certain circumstances. As long as
2,027 shares of the Preferred Stock remain outstanding, the holders of a
majority of such shares may elect one director. In addition, such holders are
entitled to a right of first refusal on new securities issued by us, subject to
certain exclusions. We may not create or increase the authorized number of
shares of any class or series of stock ranking prior to or on parity with the
Preferred Stock either as to dividends or liquidation without approval of a
majority of the holders of the Preferred Stock.
We have agreed to file a registration statement with respect to the
resale of the Common Stock underlying the Preferred Stock within 45 days
following closing, which is required to be declared effective within 120 days of
closing, subject to certain exceptions. If such filing and effectiveness are not
achieved by the deadlines, the investor may be entitled to certain penalties. In
addition, upon effectiveness of such registration statement, the Preferred Stock
will pay a reduced dividend at the rate of 5% per annum. If not previously
converted by the investor, the Preferred Stock will automatically convert into
Common Stock in quarterly installments over a period of one year following the
effectiveness of the registration statement.
We do not have any material specific capital commitments and do not
currently anticipate making any substantial expenditures other than in the
normal course of business. We have undertaken an aggressive program of acquiring
new licenses, some of which may require substantial up front payments. Several
such licenses have been obtained recently and others are in the process of being
finalized.
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<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS No. 133) "Accounting
for Derivative Instruments and Hedging Activities." In June 1998, the FASB
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. Adoption of SFAS No. 133 is
required beginning with the first quarter of fiscal 2000. The adoption of SFAS
No. 133 is not expected to have a material impact on our financial condition or
results of operations.
In June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS
No.133.", which defers SFAS No. 133 for fiscal years begining after June 15,
2000.
YEAR 2000
We have commenced an assessment of the hardware, software and network
components of our information technology systems. To date, we have replaced all
of our 22 CPUs with those that, according to manufacturers' representations, are
Year 2000 compliant. We also purchased a new server less than a year ago which,
according to manufacturer's representations, is Year 2000 compliant. The
operating systems we use are Windows 95 and Microsoft Office 97, which are both
Year 2000 compliant according to manufacturers' representations. We have
upgraded our network as well.
New accounting and operational "SBT" software has been obtained which,
according to manufacturer's representations, is Year 2000 compliant and which is
expected to be installed by September 1999 to safeguard against delays in
meeting financial reporting requirements. Peripheral operational software, which
was customized, is being reviewed for integration with the "SBT" accounting and
operational software. Due to our shift to licensed promotions, it is anticipated
that the customized software previously required does not have to be completely
rewritten. FoxPro which houses the additional database required to operate the
customized software is being upgraded to Version 6.0 which, according to
manufacturer's representations, is Year 2000 compliant. We have retained a Year
2000 compliance service provider (the "Compliance Service Provider") to make the
required changes and integrate this software accordingly. Scheduling of this
work has been undertaken by the Compliance Service Provider.
We utilize two third-party subcontractors. One is a fulfillment facility
and the other a data collection house. We have historically provided the
software needed to support these two functions. This software is also being
upgraded by the Compliance Service Provider to be Year 2000 compliant. Both
subcontractors have provided us with assurances that their hardware will also be
Year 2000 compliant.
The original budget for Year 2000 compliance work was $50,000. As of May
31, 1999, we had incurred expenses of $45,600. We have revised this budget to
$65,000.
Our most substantial foreseeable risk in respect of the Year 2000 is
with third-party subcontractors and their own customized software which supports
them. To insure our ability to function in this period of uncertainty, we have
developed a contingency plan to permit fulfillment to be accomplished by
alternate procedures utilizing existing third-party subcontractors. Similar
contingency plans have been developed to manage inventory and data management
and accounting.
We believe we have taken appropriate steps to be Year 2000 compliant. We
have also prepared a contingency plan to handle as many risks as we can
reasonably address. However, we cannot assure you that problems will not be
encountered in connection with the date change from December 31, 1999 to January
1, 2000. We do not believe these problems will have a material adverse effect on
operations.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
All statements contained herein that are not historical facts, including
but not limited to, statements regarding our current business strategy and our
plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Generally, the words "anticipates,"
"believes," "estimates," "expects" and similar expressions as they relate to us
and our management are intended to identify forward looking statements. Actual
results may differ materially. Among the factors that could cause actual results
to differ materially are those set forth under the caption "Risk Factors." We
wish to caution readers not to place undue reliance on any such forward-looking
statements, which statements speak only as of the date made.
Our principal business has been the scratch ticket segment of the
government lottery industry. We are a leader in designing and marketing instant
scratch ticket games based on licensed brand names and entertainment properties
and our lottery promotions feature such properties licensed by us. Prizes
awarded in such promotions typically include a number of "second chance" prizes
related to the licensed property, including collectible logo bearing merchandise
such as logo bearing T-shirts and caps, and other related merchandise such as
posters, money clips, telephones, playing cards, film cells, stadium blankets,
carryall bags, jackets, electronic games, video and music collections, watches,
clocks, credit cards with prepaid credit, trips and, in the case of
Harley-Davidson(R), Harley-Davidson 1200 Sportster motorcycles.
We developed our strategy of identifying such properties in early 1996.
Prior to that time, we had developed a series of promotions that utilized
popular videotapes, compact discs and audiocassettes as second chance lottery
prizes. Those promotions enabled us to develop an expertise in sourcing and
distributing products as second chance lottery prizes and to develop a
reputation with lottery personnel as a reliable organization attuned to the
special needs of lotteries and their players.
The financial results of the last fiscal year are not indicative the
results of the current 1999 fiscal year or, we believe, other future years. As
we cut back our video and music promotions during FY98 in order to shift to our
current licensing strategy, revenue from such promotions decreased at an
accelerated rate. Our decision to embark on this licensing strategy in mid-96
did not result in any appreciable revenues for us until the fourth quarter of
fiscal year 1998. Our shrinking revenues, combined with one-time charges in
fiscal year 1998 resulted in substantial losses for that year. It should be
noted, however, that at the conclusion of fiscal year 1998 we had over $2.9
million in deferred revenues from license-based promotions, and that fourth
quarter revenue numbers were almost equivalent of revenues for the rest of the
year. Fiscal 1999 reflects full integration of our licensing strategy.
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<PAGE>
We derive over ninety-five percent (95%) of our revenues from lotteries
in two distinct ways. First, we will usually charge a lottery a license and
royalty fee to utilize a particular licensed property as a lottery game. License
fees are a fixed assessment while royalties are a percentage of the printing
cost of the tickets. Contracts for licensed properties typically include an
up-front license fee and a royalty based on the manufacturing cost of tickets.
Manufacturing costs of tickets usually range from $10.00 per thousand to $30.00
per thousand. Actual costs depend on the size of the ticket and the quantity
printed. Ticket quantities range from about one million to as many as 60 million
with an average quantity of about five million.
Our second source of lottery revenue is the sale of logo bearing
merchandise to the lottery as second-chance prizes. In merchandise-based lottery
games, between 5% to 10% of a lottery's prize fund is typically used for the
purchase of merchandise related to the property the lottery is utilizing.
Typically, we purchase merchandise from other licensees of the property and
resell the merchandise to the lottery at a price that is designed to include
overhead costs, profit, shipping and handling and any marketing support we
provide the lottery such as brochures, posters or other advertising assistance
for which there are no separate charges.
Our success is dependent on our ability to maintain and secure licensed
properties, sell these properties to lotteries and the performance of the
properties once they are introduced as lottery games to players. We believe that
revenues will fluctuate as individual license-based promotions commence or wind
down and terminate. In addition, our licenses (which are generally for 1.5 to 3
years) terminate at various times over the next several years. Moreover, the
useful life of a license is generally relatively short as the novelty of the
game or the popularity of the licensed material wanes over time. The timing of
agreements with the lotteries to run promotions, the acquisition of new licenses
and the commencement of new promotions is unpredictable. Accordingly, period to
period comparisons may not be indicative of future results.
We are in continuous negotiations to obtain additional properties and
expect to reach several agreements over the next six to 12 months; however we
cannot assure you that such agreements will actually be reached. Some of these
agreements may require the expenditures of significant up-front advances.
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<PAGE>
BUSINESS
MDI Entertainment, Inc. specializes in creating, marketing and
implementing entertainment-based promotions to North American lotteries. Our
principal business has been the scratch ticket segment of the government lottery
industry, although we have run on-line entertainment-based promotions with a
lotto and daily numbers type games featuring our licensed Harley-Davidson(R)
logo. Our lottery promotions feature well-known brand names and entertainment
properties licensed to us and designed to attract new lottery players while
providing a new experience for existing lottery players. Our current promotions
feature a wide variety of such brand names and entertainment properties
including:
o Wheel of Fortune(R)
o Jeopardy!(TM)
o Harley-Davidson(R)
o Star Trek(TM)
o Twilight Zone(TM)
o Times Square 2000(TM)
o Rock & Roll Hall of Fame(TM)
o Betty Boop(TM)
o Louisville Slugger(R)
o Dick Clark's American Bandstand(R)
o The Nashville Network(R)/TNN
o Country Music Television(R)/CMT
o Heroes of Space(TM)
o James Bond 007(TM)
o The Pink Panther(TM)
o The Outer Limits(TM)
o Dale Earnhardt
The scratch tickets feature the licensed properties, usually displaying
a scene and/or logo from the entertainment-based and brand name properties.
Prizes awarded in such promotions typically include a number of "second chance"
prizes related to the licensed property, including collectible logo bearing
merchandise such as Harley-Davidson(R) T-shirts and caps, and other related
merchandise such as posters, money clips, telephones and, in the case of
Harley-Davidson(R), Harley-Davidson 1200 Sportster motorcycles. We currently
derive most of our revenues from the sale to the lotteries of such merchandise.
Merchandise associated with the licensed properties accounted for 90% of
revenues for fiscal year ended May 31, 1999, 66.7% of revenues for the fiscal
year ended May 31, 1998 and 0% of revenues for fiscal year ended May 31, 1997,
reflecting our shift to licensed promotions.
We offer a full range of services, including ticket and point of sale
design, prize structure development, promotional event planning, market
research, fulfillment services, customer service support and second chance
drawing assistance.
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<PAGE>
RECENT DEVELOPMENTS
New Products and Web Site
The New Jersey Lottery's Harley-Davidson game "Ticket to Ride" will
debut MDI's Lottery Prize Shop, which will afford players the opportunity to use
their non-winning ticket as a coupon for discounts off the purchase price of
Harley-Davidson merchandise. Players can purchase merchandise through a catalog
printed by MDI, by calling a toll-free 1-800 number, or through a special Web
Site, exclusively designed for this purpose, called www.nj.lotteryprizeshop.com.
"Ticket to Ride" is a third-chance opportunity for the players, and it marks the
first step in MDI's E-Commerce and catalog sales strategy.
We recently launched our Corporate Web Site (www.mdientertainment.com)
that links directly to our SEC filings and to Finance Yahoo for stock trading
activity.
Licensed Properties
In the past two years, we have entered into 18 separate contracts with
14 lotteries based on the Harley Davidson(R) property and such contracts
represent a combined total of over $7.2 million in revenue, of which
approximately $4.7 million was earned in fiscal 1999. The remaining $ 2.4
million should be earned in fiscal 2000. Included is our first contract with a
Canadian lottery, the British Columbia Lottery Corporation. We secured the
Harley Davidson(R) license in December 1997 and will continue to aggressively
market the property to lotteries throughout the United States and Canada.
Our Wheel of Fortune(R) license expired in November 1998. However, this
license was extended for another year at a cost of $10,000. Two additional
lotteries agreed to launch the Wheel of Fortune(R) game during the fiscal year
ended May 31, 1999.
Our Star Trek(TM) property, which has been used or is scheduled to be
used by a total of ten lotteries, is beginning to decline in popularity. We do
not expect to renew this license, which expires in November, 1999.
We have entered into a three-year licensing agreement with Universal
Spaceworks LLC for the property Heroes of Space(TM). Heroes of Space(TM) is a
group of 16 former astronauts aligned to call attention to the U.S. Space
program and their participation.
We have entered into a 30-month contract with MGM Consumer Products for
James Bond 007(TM), The Pink Panther(TM) and The Outer Limits(TM). These rights
are U.S. only.
We have entered into a contract with Hillerich and Bradsby for the
Property Louisville Slugger(R). These rights are for government operated
lotteries anywhere in the world. In May 1999, the Iowa lottery implemented a
Louisville Slugger(R) promotion.
We have entered into a three-year Agreement with dick clark productions,
inc. for worldwide rights to American Bandstand(R).
We have entered into a three-year Agreement with CBS Cable for U.S.
rights to cable networks TNN and CMT.
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<PAGE>
We have entered into a three-year Agreement with King Features Syndicate
for the worldwide rights to Betty Boop(TM) and associated characters.
INDUSTRY OVERVIEW
Lotteries are operated by state, local and foreign governmental
authorities and their licensees in over 155 jurisdictions. Governments use
lotteries primarily as a means of generating non-tax revenues. In the United
States, lottery revenues frequently are designated for particular purposes, such
as education, economic development, conservation, transportation and aid to the
elderly. Many states have become increasingly dependent on lotteries as a
significant source of funding for these purposes.
While the specific amounts vary substantially from state to state,
according to LaFleur's Lottery World 1998 Fast Facts (an industry report),
approximately 54% of gross lottery revenues in the United States is returned to
the public in the form of prizes. Approximately 33% of such revenues is used to
support specific public programs or is contributed to the state's general fund.
Typically, 5% to 6% of such revenues is reserved for point-of-purchase
commissions for the retailer, and the remainder of such revenues is used to fund
lottery operations, including the cost of advertising.
Government lotteries can be categorized into two principal groups:
on-line games and "instant" or "scratch" ticket games. On-line varieties
generally refer to games such as lotto, sports pools, daily numbers and keno in
which players make their own selections. Instant ticket games consist of
preprinted tickets in which players scratch off a coating or pull off tabs to
determine whether they have purchased a winning ticket. Instant ticket games
generally have several tiers of cash prizes, ranging from $1.00 up to
$100,000.00. Occasionally instant ticket games provide for second chance
drawings that give scratch ticket purchasers a "second chance" to win prizes on
non-winning tickets. Second chance drawing prizes range from cash prizes or
spots as contestants on game shows to various types of merchandise and trips.
We are a leader in designing and marketing instant scratch ticket games
based on licensed brand names (such as Harley-Davidson(R) or Louisville Slugger
(R)) and entertainment properties (such as James Bond 007(TM) or Wheel of
Fortune(R)). We attempt to identify properties for licensing that have a large
selection of logo bearing products available that appeal to the 18 years of age
and older population, and our instant ticket promotions typically include logo
bearing merchandise related to such promotion as prizes. In certain of our
lottery promotions, merchandise is awarded as first prizes, such as Harley
Davidson(R) motorcycles. In most of our designed games, second chance prizes
typically include logo bearing merchandise such as posters, T-shirts, caps,
jackets, watches, clocks, money clips, telephones, playing cards, film cells,
video and music collections, stadium blankets, carryall bags, credit cards with
prepaid credit, trips and electronic games. We generate most of our revenues
from the sale of such merchandise to the government agency sponsoring the
lottery.
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<PAGE>
Cooperative marketing partnerships are not new to the lottery industry.
Lotteries have been securing licensed brand names in exchange for advertising
for years in hopes of expanding the player base by attracting non-players who
have positive feelings about a particular brand. Licensing the rights for
trademarked entertainment material, however, is relatively new. For the most
part, the practice of purchasing the right to place a popular brand name on a
lottery ticket gained acceptance with the introduction and subsequent sales
success of the Monopoly(R) game in 1989. Since then, lottery jurisdictions have
secured a wide variety of brands and properties for licensed lottery games. The
rights to use or license a particular property can be secured by a lottery
directly from the entity that owns the property or from companies like ours.
The popularity and success of lotteries has increased worldwide in
recent years, and the popularity of instant lotteries has increased at a rate
that is greater than that of lotteries generally, although there was a slight
decrease from 1997 to 1998. Lotteries typically introduce between 25 and 50 new
instant games a year. Currently, lotteries operate in 37 states, the District of
Columbia and all provinces of Canada as compared to 29 states and all provinces
of Canada as of June 30, 1989. According to LaFleur's Lottery World 1998 Fast
Facts and LaFleur's 1991 North American Gambling Abstract, instant ticket games
now comprise approximately 44% of total lottery sales in the United States as
compared to approximately 26% in 1990. Factors contributing to the growth in the
popularity and success of such games include more sophisticated marketing
techniques, the introduction of new state instant ticket lotteries, lotteries
offering multiple games simultaneously, increased technological advances in the
distribution of instant tickets, lotteries offering a variety of instant ticket
price points (a $1.00 ticket, a $2.00 ticket, a $3.00 ticket, a $5.00 ticket and
a $10.00 ticket with related increases in the potential prize money) and higher
prize pay-outs to lottery consumers.
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<PAGE>
LOTTERY PROMOTIONS
We believe that to achieve and sustain growth in the lottery business we
must offer promotions which will attract new or lapsed lottery players while
maintaining or increasing play by current lottery players. Our principal
strategy is to enhance the entertainment value and attractiveness of our
promotions by licensing well known brand names and entertainment properties and
designing games based on such properties. Such games are targeted to niche
markets (such as Pink Panther(TM) fans or Harley-Davidson(R) motorcycle
enthusiasts) to appeal to new or infrequent players while also appealing to the
core player base.
LICENSED-BASED GAMES
Over the past two years, we have secured rights to and targeted specific
properties for instant lottery theme games and promotions that have broad appeal
and significant brand loyalty and that enable us to market collectible logo
bearing merchandise tied directly to the property or brand. The properties are
specifically selected because they possess a substantial following that can aid
a lottery in attracting new players while at the same time providing a different
experience for many existing players. Currently, we have licensing agreements
with 16 companies for 19 licenses. Licenses are generally held between one and a
half and three years. Two of our licenses that were due to expire during fiscal
1999 have been extended for another year. We hold three licenses with three
companies that each resulted in 10% or more of revenues and costs in fiscal
1999. Three of these licenses resulted in 10% or more of our revenues and costs
in fiscal 1998. We continually seek to add to our licensed properties and, to
this end, have contacted, and continue to contact, potential licensors.
We derive most of our revenues from the sale to the lotteries of logo
bearing material (such as T-shirts, posters, hats, playing cards, telephones,
film cells, stadium blankets, carryall bags, money clips, jackets, electronic
games, watches, clocks, motorcycles and credit cards with prepaid credit) used
as second chance prizes. We typically order such merchandise directly from the
licensor or its authorized representatives at wholesale rates, thereby
generating additional income for the licensor either from direct sales or
royalty income. Typically, we rely on third parties for data entry and
verification of the names and addresses on winning tickets, and work with a
third party fulfillment house to deliver prizes to winning lottery players.
Inventory of prizes is typically held and shipped to prize winners by the
fulfillment house. See "-Risk Factors-We may be unable to provide necessary
merchandise to the lotteries when needed."
Our licensing agreements for the targeted properties generally require
us to pay the licensor between 10% to 50% of the gross licensing fees we receive
from contracts with the lotteries. Certain agreements also require us to pay the
licensor an additional 20% of the gross royalty fees received by us from the
printing of the instant tickets, while certain other agreements increase the
percentage of the licensing fees instead. One licensing agreement requires a
50/50 share of gross profit. The agreements generally require an initial payment
upon signing, which is usually credited against other payments that become due
during the term of the license. While all the licensing agreements grant us the
right to market merchandise to the lotteries, certain agreements require that a
minimum amount of merchandise be purchased. The term of the license agreements
usually ranges between 1.5 to 3 years and are sometimes terminable upon the
occurrence of certain events. The licenses are typically exclusive for lottery
scratch tickets, and such exclusivity is generally for the United States and
Canada. In some cases, the licenses are limited to certain regions. We are
attempting to acquire worldwide rights for any new licenses and negotiating
worldwide rights on existing licenses.
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<PAGE>
We have also obtained patents on play styles or formats for instant
games based on existing games of chance or probability games. Such games include
Jacks Or Better(TM), Bonanza Bingo(TM), Hold'Em Poker(TM), Black Jack, Roulette,
Draw Poker, and Spin 2 Pick(TM). See "-Intellectual Property." Promotions
associated with such games generate revenues from licensing fees and royalties
rather than from merchandise sales. We do not currently derive significant
revenues from such games.
CONTRACTS WITH LOTTERIES
Our contracts with the lotteries provide for services that are tailored
to the preferences of the lotteries and include ticket and point of sale design,
prize structure development, promotional event planning, market research,
customer service support, second chance drawing assistance and fulfillment
services. The lottery contracts generally provide us with two sources of revenue
which consist of (1) license and royalty fees for the use of the entertainment
properties and (2) mark-up on the sale and fulfillment of collectible and logo
bearing merchandise. See "-Licensed-Based Games."
We have had contracts with over two-thirds of all North American
lotteries, and currently have approximately 19 promotions that are in progress
or scheduled for introduction during calendar 1999 in 13 state lotteries. In
addition, we launched our first Canadian promotion in British Columbia in March
of 1999. Those states in which we have or have previously had promotions are as
follows:
-23-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- --------------------------------- ------------------------------ ------------------------------
State Promotions In Progress or No Current Promotions (But
Scheduled for Introduction Promotions Previously Sold)
- --------------------------------- ------------------------------ ------------------------------
Arizona X
- --------------------------------- ------------------------------ ------------------------------
Colorado X
- --------------------------------- ------------------------------ ------------------------------
Connecticut X
- --------------------------------- ------------------------------ ------------------------------
Delaware X
- --------------------------------- ------------------------------ ------------------------------
Florida X
- --------------------------------- ------------------------------ ------------------------------
Georgia X
- --------------------------------- ------------------------------ ------------------------------
Idaho X
- --------------------------------- ------------------------------ ------------------------------
Illinois X
- --------------------------------- ------------------------------ ------------------------------
Indiana X
- --------------------------------- ------------------------------ ------------------------------
Iowa X
- --------------------------------- ------------------------------ ------------------------------
Kansas X
- --------------------------------- ------------------------------ ------------------------------
Louisiana X
- --------------------------------- ------------------------------ ------------------------------
Maryland X
- --------------------------------- ------------------------------ ------------------------------
Minnesota X
- --------------------------------- ------------------------------ ------------------------------
Missouri X
- --------------------------------- ------------------------------ ------------------------------
Montana X
- --------------------------------- ------------------------------ ------------------------------
New Hampshire X
- --------------------------------- ------------------------------ ------------------------------
New Jersey X
- --------------------------------- ------------------------------ ------------------------------
New York X
- --------------------------------- ------------------------------ ------------------------------
Ohio X
- --------------------------------- ------------------------------ ------------------------------
Oregon X
- --------------------------------- ------------------------------ ------------------------------
Pennsylvania X
- --------------------------------- ------------------------------ ------------------------------
Rhode Island X
- --------------------------------- ------------------------------ ------------------------------
South Dakota X
- --------------------------------- ------------------------------ ------------------------------
Texas X
- --------------------------------- ------------------------------ ------------------------------
Vermont X
- --------------------------------- ------------------------------ ------------------------------
Virginia X
- --------------------------------- ------------------------------ ------------------------------
Washington X
- --------------------------------- ------------------------------ ------------------------------
Wisconsin X
- --------------------------------- ------------------------------ ------------------------------
</TABLE>
-24-
<PAGE>
We derived more than 10% of our revenue in fiscal 1999 from contracts
with the following lotteries: Wisconsin Lottery (Harley-Davidson(R)) and
Pennsylvania (Harley-Davidson(R)). In fiscal 1998 we had contracts representing
more than 10% of our revenue with the following lotteries: Colorado Lottery
(Wheel of Fortune(R)); Wisconsin Lottery (Wheel of Fortune(R) and other licensed
properties); New Jersey Lottery (Twilight Zone(TM) and other licensed
properties). The principal reason that we had less individual contracts
contributing to over 10% of total revenue in fiscal 1999 was the significantly
higher total revenue this year.
GOVERNMENT REGULATION
Lotteries are not permitted in the various states and jurisdictions of
the United States unless expressly authorized by legislation in the subject
jurisdiction. Currently, 37 states and the District of Columbia have enacted
legislation to allow for the operation of a lottery. The operation of the
lotteries in each of these jurisdictions is strictly regulated. The formal rules
and regulations governing lotteries vary from jurisdiction to jurisdiction but
typically authorize the lottery, create the governing authority administering
the lottery, dictate the prize structure, establish allocation of revenues,
determine the type of games permitted, detail appropriate marketing structures,
specify procedures for selecting vendors and define the qualifications of
lottery personnel.
To ensure the integrity of the lottery, state laws provide for extensive
background investigations of each of the lottery's vendors and their affiliates,
subcontractors, officers, directors, employees and principal stockholders. These
investigations generally require detailed disclosure on a continuous basis with
respect to the vendors, affiliates, subcontractors, officers, directors,
employees and principal stockholders and, in the event the lottery deems any of
such persons to be unsuitable, the lottery may require the termination of such
persons. The failure of any such persons associated with us to obtain or retain
approval in any jurisdiction could have a material adverse effect on us.
Generally, regulatory authorities have broad discretion when granting such
approvals. Although we have never been disqualified from a lottery contract as a
result of a failure to obtain any such approvals, we cannot assure you that such
approvals will be obtained or retained in the future.
We have retained governmental affairs representatives in various
jurisdictions of the United States to monitor legislation, advise us on contract
proposals, and assist with other issues that may affect us. We believe we have
complied with all applicable state regulatory provisions relative to disclosure
concerning the activities of itself and its advisors. We are not dependent on
any such representative for any material contract.
We have employed registered lobbyists and retained paid consultants in
certain states. Failure to comply with state regulatory provisions relating to
the activities of our advisors could adversely affect our ability to bid
successfully upon lottery contracts.
The international jurisdictions in which we intend to market our
products have similar legislation and regulations governing lottery operations.
In addition, restrictions are often imposed on foreign corporations seeking to
do business in such jurisdictions. Failure to comply with these provisions could
result in contract cancellation or the institution of legal proceedings.
-25-
<PAGE>
Laws and regulations of individual states and countries are subject to
change. We cannot assure you that any such change would not adversely affect us.
Our failure to comply with such laws and regulations could have an adverse
impact on our operations.
COMPETITION
We are aware of several other companies which design and promote lottery
games based on licensed brands. However, each is marketing to a particular
niche. Telecom Productions, Inc. licenses a variety of brand name board games,
including Monopoly(R), Trivial Pursuit(R) and Battleship(R). Frost Productions
utilizes brand name puzzles and fortunes. Promo-Travel represents a cruise line,
various casinos and the casino game Let It Ride. More recently, Promo-Travel has
attempted to secure entertainment based licenses and has negotiated with several
of the same license holders that we have spoken with. Several other companies
have made one-shot or sporadic licensing efforts. To date, we have not failed to
acquire the rights to any brand name or entertainment property that we have
sought. However, it is possible that, as the potential for increased revenues
rise, new competitors may enter this market that have considerably greater
financial and other resources, experience and customer recognition than we do
and may compete with us in both obtaining licenses to brand names or
entertainment properties and supplying lottery products to the lottery
jurisdictions.
In addition, to the best of our knowledge, no other company has ever
attempted to utilize substantial quantities of merchandise with a licensed
lottery game. We have positioned ourselves to utilize such merchandise prizes.
Between 1989-1996, the majority of our lottery business had been the
distribution of videos, compact discs and audiocassettes as second-chance
prizes. We distributed nearly five million such prizes and experienced little to
no competition in this area of the business. See "-Risk Factors-Intense
competition could reduce our market share."
INTELLECTUAL PROPERTY
In 1996, we created our Licensed and Patented Games division. To launch
this division, we purchased the assets of a games development company, Vegas
Pull Tabs, Inc. d/b/a GameMakers and Consultants, an unaffiliated third party.
Those assets consisted primarily of (1) a U.S. patent for a series of instant
games; and (2) a U.S. patent application which was subsequently granted for
interactive bingo-like games and methods of play. Due to this acquisition, we
own patents for certain game formats or playstyles of Jacks Or Better(TM),
Bonanza Bingo(TM) and Hold'Em Poker(TM), (based on pre-existing games of chance)
Black Jack, Roulette and Draw Poker (based on pre-existing probability games).
We do not currently derive significant revenues from such games, but may seek to
develop them in the future.
-26-
<PAGE>
In 1998, we developed an on-line lottery game with the trademarked name
Pick 2 Spin(TM). We own the exclusive rights to the trademarked name and patents
for certain game elements. The Pick 2 Spin(TM) is a two-digit numbers game,
which combines two random drawings with a wheel spin. With top prize game odds
of one in 10,000, the Pick 2 Spin(TM) features a top prize of $20,000. We began
marketing the game to North American lotteries in January of 1999 and do not
currently derive any revenues from the game.
Bonus Games, a Tennessee partnership ("BG"), is the owner of the
trademarked name Jacks Or Better(TM). We have the exclusive use to the trademark
name as it pertains to scratch-off instant lottery tickets sold to North
American lotteries pursuant to an agreement with BG dated July 17, 1996. The
agreement terminates on August 1, 2000. Stuart Entertainment, Inc. ("Stuart") is
the owner of the trademarked name Bonanza Bingo(TM). We have the exclusive use
to the trademark name as it pertains to scratch-off instant lottery tickets sold
to North American lotteries (excluding the Canadian Province of Ontario)
pursuant to an agreement with Stuart dated September 24, 1996. This agreement
terminates on December 31, 1999. We cannot assure you that after such license
agreements terminate, we will be able to renew them on an exclusive basis, on
favorable terms or at all. Neither BG nor Stuart are affiliated with us.
HISTORY AND ORGANIZATION
We are a Delaware corporation which was incorporated on December 29,
1994 under the name Puff Process, Inc. Our name was changed to MDI
Entertainment, Inc. and a one share for one hundred reverse stock split was
effected in connection with the purchase, in August 1997, of both Media Drop-In
Productions Inc., a Delaware corporation ("MDIP"), and MDI-Missouri, Inc., a
Missouri corporation ("MDIM" and collectively with MDIP, "MDI"), in exchange for
4,800,000 shares of its common stock, $.001 par value per share (the "Common
Stock"), and notes in the aggregate principal amount of $300,000. The
acquisition of MDI was effected through reverse mergers with two of our
wholly-owned subsidiaries. These transactions resulted in a change in control of
the Company, with Steven Saferin holding approximately 56% of the outstanding
shares of our Common Stock. See "-Risk Factors-Existing stockholders are able to
exercise control over us." Pre-merger holders of Puff Process, Inc. hold
approximately 32.1% of the outstanding shares of Common Stock in post-merger MDI
Entertainment, Inc.
MDIP was incorporated in Texas in 1986 and reincorporated in Delaware in
1989. MDIM was incorporated in Missouri in 1995 to operate our Missouri lottery
program. MDIM was collapsed into MDIP after the Missouri Lottery Contract ended.
MDI-Texas, LLC ("MDIT"), a company of which MDIP owned 66.7%, was formed in 1995
to operate our Texas lottery program. MDIT was collapsed into MDIP after the
Texas lottery contract ended. The equity portion, as of May 31, 1999, of the
minority owners will be distributed in cash in an amount approximating $35,000.
The minority owners are unaffiliated with us.
-27-
<PAGE>
Steven M. Saferin, President, Chief Executive Officer and Director,
founded MDIP in 1986. Our initial mission was the production and sale of quality
drop-in or vignette programming (30-second programs produced in a donut format
to allow an advertiser to insert its commercial in the "hole" of the donut).
MDIP produced a series of vignettes which it sold to Fortune 500 companies,
other nationally known companies and government agencies. In 1989, MDIP began
the development of its first video premium promotion.
MDIP began focusing on lottery promotions in 1987 when it marketed a
drop-in series titled "The New Millionaires" to state lotteries. In 1990 it
created and began marketing its Instant Entertainment Connection ("IEC") lottery
promotion. This promotion, tied to an instant or scratch ticket, allowed
lotteries to offer second-chance entertainment prizes, such as video tapes,
compact discs and audio cassettes, to players with non-cash winning tickets. To
date, this promotion has been utilized by 21 U.S. lotteries, with nearly 5
million prizes distributed to lottery players in those states. We have begun
marketing this promotion on a limited basis internationally. We expect to
implement such a promotion with the New South Wales Lottery in Australia in
fiscal year 2000. In 1996, we changed our focus to concentrate on lottery games
designed around licensed brand names and entertainment properties, leveraging
off of the experience and reputation gained from the IEC promotions. See
"-Lottery Promotions."
POTENTIAL EXPANSION OF BUSINESS
We are currently evaluating several unrelated opportunities in the
lottery industry. Our reputation in the industry results in our receiving
numerous unsolicited approaches for joint ventures and other business
relationships. We anticipate that over the next several years we will attempt to
introduce additional unrelated products to the lottery industry, but there can
be no assurance that we will do so or that such efforts will be successful.
We are beginning to analyze opportunities presented by our current and
potential products with international lotteries. Several of our current licenses
permit us to market the property outside the United States. We have had
discussions with certain of our other license holders about acquiring
international rights on a country-by-country basis. We cannot assure you that
such rights will be obtained. We are seeking full international rights, if
appropriate, for all new properties. We have commenced a limited international
marketing effort and expect to expand it in the year ahead.
We have also begun to investigate licensing opportunities outside the
lottery industry. Specifically, we opened negotiations with license holders
relative to licensing their properties for radio station promotions. We cannot
assure you that such negotiations will be successful or, if successful, will
result in the actual development and sale of such promotions.
We are also evaluating other non-licensing entertainment related
opportunities.
We are at a preliminary stage with respect to the opportunities
described above, and we have not yet determined to pursue any such
opportunities, the cost associated therewith or the sources of funding therefor.
We will likely pursue opportunities with respect to international lotteries;
however, such pursuits depend upon our evaluation of the costs of international
fulfillment, including import and export duties, foreign taxation issues,
currency exchange issues and the costs of marketing and developing our
reputation in international lottery jurisdictions.
-28-
<PAGE>
We have invested significant resources in developing a catalog and
E-Commerce business strategy called "lotteryprizeshop.com". This initiative
permits lottery players of our licensed games to use non-winning tickets for
discounts off the purchase of branded merchandise. This initiative can only be
implemented with the approval of each lottery and we expect to compensate the
lottery for their approval.
EMPLOYEES
As of September 9, 1999, we had 14 full-time employees and one part-time
employee, approximately five of whom were employed in the area of sales and
marketing, four in operations and six in administration. Our employees are not
represented by a union or governed by a collective bargaining agreement. The
Company has entered into employment agreements with Steven M. Saferin and
Kenneth M. Przysiecki. See "Executive Compensation-Employment Agreements." We
have also entered into a consulting agreement with 1010 Productions, Inc., the
president and sole shareholder of which is Linda Kesterson Saferin, spouse of
Steven M. Saferin, and former employee, officer and director of MDIP. See
"Certain Relationships and Related Transactions."
LEGAL PROCEEDINGS
We are involved in various lawsuits incidental to our business. We
believe that these proceedings, in the aggregate, will not have a material
adverse effect on our operations or financial position.
DESCRIPTION OF PROPERTY
We maintain our executive offices in approximately 5,179 square feet of
space in Hartford, Connecticut pursuant to a lease expiring on December 31,
2004. We do not have an option to renew. Monthly lease payments average
approximately $5,826 per month.
-29-
<PAGE>
MANAGEMENT
Our directors and executive officers are as follows:
Name Age Position
---- --- --------
Steven M. Saferin 50 President, Chief Executive Officer and
Director
Kenneth M. Przysiecki 55 Chief Financial Officer, Secretary and
Director
Robert J. Wussler 62 Director
S. David Fineman 53 Director
Todd P. Leavitt 48 Director
Charles W. Kline 39 Vice President of Sales and Marketing
Robert R. Kowalczyk 52 Vice President and General Manager
-30-
<PAGE>
COMMITTEES
The Board of Directors at their April 27, 1999 quarterly meeting
established the following committees and appointed members:
Audit Committee: S. David Fineman
Robert J. Wussler
Compensation Committee: Steven M. Saferin
Todd P. Leavitt
Executive Committee: Steven M. Saferin
S. David Fineman
Kenneth M. Przysiecki
BIOGRAPHIES
Steven M. Saferin
- -----------------
Mr. Saferin has been the President, Chief Executive Officer and a
member of our Board of Directors since August 1997. Since January 1986, Mr.
Saferin has been President and Chief Executive Officer of MDIP, which today is
our wholly-owned subsidiary. In this capacity, Mr. Saferin has been primarily
responsible for product development, marketing and sales. Mr. Saferin conceived
and led MDIP's entry into the lottery industry and has since been the key
employee in revising, refining and creating new products and marketing
initiatives for us to offer to the lottery industry. Prior to founding MDIP, Mr.
Saferin was Director of Program Acquisitions at ESPN from 1982 to 1986. He
supervised a 16 person department in the areas of product acquisition and
scheduling. From 1978 to 1982, Mr. Saferin was active in cable television
franchising as a Vice President with both Viacom Communications and Warner Amex
Cable. In those capacities, he supervised cable television franchising
activities in dozens of major markets. Prior to entering business, Mr. Saferin
was an Attorney-Advisor to the Cable Television Bureau of the Federal
Communications Commission, as well as a member of the law department at Viacom
International, Inc. Mr. Saferin received a B.A. in journalism from American
University and received his J.D. after attending the Georgetown University and
the University of Maryland Schools of Law.
Kenneth M. Przysiecki
- ---------------------
Mr. Przysiecki has been our Chief Financial Officer, Secretary and a member
of our Board of Directors since August 1997. Since August 1994, Mr. Przysiecki
has been Chief Financial Officer of MDIP. Prior to joining MDIP, Mr. Przysiecki
was involved in several business start-ups that required his financial planning,
negotiating and systems implementation skills. He was a Senior Manager for
Noreika, Rosenfeld and Hupp, a C.P.A. firm, from 1989 to 1992 and was employed
as Vice President of Finance for Keeney Manufacturing Company, from 1976 until
1988. He received his C.P.A. while employed at Arthur Andersen & Co. from 1972
to 1976; and received his B.S. in Business Administration from American
International College.
-31-
<PAGE>
Robert J. Wussler
- -----------------
Mr. Wussler has been a member of our Board of Directors since August 1997.
He has been Chairman of the Board of Directors of U.S. Digital Communications,
Inc., a telecommunications company, since March 1997, and President and Chief
Executive Officer of such company since June 1998. He has also been President
and Chief Executive Officer of The Wussler Group, which owns several
telecommunications ventures, since February 1992. From June 1995 to June 1998,
Mr. Wussler served as President and Chief Executive Officer of Affiliate
Enterprises, Inc., a privately held company which acts as the syndication branch
of 51 media companies. Prior to his current activities he was the President and
CEO of Comsat Video, the international satellite telecommunications company from
1990 to 1993. Mr. Wussler is one of the founders of CNN (Cable News Network)
having founded the network when he was Senior Executive Vice President with
Turner Broadcasting from 1980 to 1990. During his tenure with Turner
Broadcasting, he was also President of the Atlanta Braves professional baseball
team and the Atlanta Hawks professional basketball team. Prior to joining the
Turner organization, Mr. Wussler was President of Columbia Broadcasting System
(CBS) Television, a position he attained from his start in the CBS mail room
through being the President of CBS Television. Mr. Wussler is also an
independent business consultant having directed such projects as the
establishment of a French-Kuwaiti television network in 1993 and the acquisition
of MetroMedia Enterprises. He was the founding Chairman of International TelCell
which later became a part of MetroMedia International Group in 1993. Mr. Wussler
also advised and guided the first African American professional basketball
ownership group in the finance, purchase, management and resale of the Denver
Nuggets franchise of the National Basketball Association. Mr. Wussler also
serves on the Board of Directors of Beachport Entertainment Corp., The
Translation Group, Ltd. and EdNet Inc.
S. David Fineman
- ----------------
Mr. Fineman has been a member of our Board of Directors since November
1998. He is the managing attorney and founder of Fineman & Bach, P.C., a
Philadelphia, PA law firm since 1986. Mr. Fineman represents a variety of
clients, including governmental authorities and private clients dealing with the
government. He has an active litigation practice and represents clients
throughout the United States and Japan in both the Federal and State courts. Mr.
Fineman presently serves as special counsel to the Philadelphia Parking
Authority, the Secretary of Banking of the Commonwealth of Pennsylvania, and the
Insurance Commissioner of the Commonwealth of Pennsylvania. In 1995, he was
nominated by President Clinton and confirmed by the United States Senate to a
nine-year term on the Board of Governors of the United States Postal Service, a
nine member Board which directs and controls the expenditures, reviews practices
and policies, and establishes basic objectives and long-range goals for the
Postal Service. In 1994, Mr. Fineman was appointed to the Industry Policy
Advisory Committee, a CEO-level committee which advises the Secretary of
Commerce and the U.S. Trade Representative on international trade policy issues.
Mr. Fineman received a B.A. from American University and received his J.D. from
George Washington University Law School.
-32-
<PAGE>
Todd P. Leavitt
- ---------------
Mr. Leavitt has been a member of our Board of Directors since November
1998. He founded and has been Managing Director of Tulip Media Ltd.("Tulip
Media") since May 1998. Tulip Media furnishes services in areas of feature film,
television and video production and distribution as well as media consulting
services to a variety of United States and international companies engaged in
the entertainment industry. Prior to establishing Tulip Media, Mr. Leavitt
served as Chairman of the Alliance Television Group, supervising all television
production and distribution activities on behalf of Alliance Communications
Corporation, from 1995 to May 1998. Previously, Mr. Leavitt was Executive Vice
President of NBC Production Studios, the in-house production arm of the NBC
Television Network, from 1990 to 1995. Prior to joining NBC, Mr. Leavitt had
been Executive Vice President of Reeves Entertainment Group. Mr. Leavitt is a
Phi Beta Kappa graduate of Kenyon College, Gambier, Ohio, and received a law
degree from the New York University of Law.
Charles W. Kline
- ----------------
Mr. Kline joined us Vice President of Sales and Marketing in February 1998.
Prior to joining us, Mr. Kline was Executive Director of the Pennsylvania State
Lottery, the nation's sixth largest lottery from 1992 to 1997. As Executive
Director, Mr. Kline oversaw the entire $1.7 billion sales operation. During his
five year tenure, Mr. Kline was credited with not only reversing a 3-year slide
in sales, but also engineering and implementing a program that caused the
lottery to undergo five consecutive years of sales growth. Prior to this post,
Mr. Kline served in a variety of key positions in state government. Mr. Kline
received a B.A. in Public Service and a Masters in Public Administration, both
from the Pennsylvania State University.
Robert R. Kowalczyk
- -------------------
Mr. Kowalczyk joined us as Vice President and General Manager in November
1997. Prior to joining us from 1995 to 1997, Mr. Kowalczyk was Vice President
and Management Supervisor of Yaffe and Company Advertising of Southfield,
Michigan ("Yaffe"). At Yaffe, Mr. Kowalczyk supervised the $10 million
advertising and promotions account and aided the product planning for the
Michigan State Lottery. Mr. Kowalczyk also supervised the agency's business
development and research functions, and participated in the account planning and
management for clients including health care, financial services and various
retail chains. Prior to his time in Michigan, Mr. Kowalczyk managed product
planning and marketing, research and the $32 million advertising and promotional
budgets for the Florida Lottery from 1991 to 1995. Under his direction, the
lottery reversed a decline in sales growth in that category. Previous to that,
Mr. Kowalczyk was the Marketing Director for the Ohio Lottery Commission from
1987 to 1991. He successfully expanded the entire lottery market by introducing
instant scratch-off game marketing strategies that have been emulated by
virtually every lottery in the years that followed. During his tenure, Ohio
Lottery sales increased an average of 16% per year, instant ticket sales
increased at 58% per year and profitability increased at the rate of 4% per
year. Mr. Kowalczyk received his Associate Degree from Lorain County Community
College and earned his Executive M.B.A. from the Weatherhead School of
Management, Case Western Reserve University, Cleveland, Ohio.
-33-
<PAGE>
Each director holds office until our annual meeting of stockholders and
until his successor is duly elected and qualified. Officers are elected by the
Board of Directors and hold office at the discretion of the Board of Directors.
There are no family relationships between any of our directors or executive
officers.
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation for
services in all capacities for the fiscal year ended May 31, 1999 paid to Steven
M. Saferin, our President and Chief Executive Officer and a director, Kenneth M.
Przysiecki, our Chief Financial Officer and Secretary and a director, Robert R.
Kowalczyk, Vice President and General Manager and Charles W. Kline, Vice
President of Sales and Marketing. No other executive officer received
compensation exceeding $100,000 during the fiscal year ended May 31, 1999.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
NAME AND FISCAL LONG-TERM COMPENSATION
PRINCIPAL YEAR ANNUAL COMPENSATION AWARDS
POSITION
SALARY BONUS OTHER ANNUAL RESTRICTED SECURITIES LONG-TERM ALL
COMPENSATION COMPENSATION STOCK UNDERLYING INCENTIVE OTHER
(1) AND (2) AWARD(S) OPTIONS/ PLAN (3)
SARS PAYOUTS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven Saferin, 1999 $ 300,000(4) -- ($154,885)(5) -- -- -- $ 5,029
President/CEO 1998 $ 300,000(4) -- $ 114,885 -- -- -- $ 3,654
and Director
Kenneth M Przysiecki, 1999 $ 136,000 $ 4,000 $ 29,084 -- -- -- $ 4,080
Chief Financial 1998 $ 102,000 $ 2,500 $ 37,106 -- -- -- $ 3,030
Officer,
Secretary and
Director
Robert R Kowalczyk 1999 $ 104,000 $ 2,300 -- -- -- -- $ 3,120
Vice President and 1998 $ 69,238 -- -- -- -- -- $ 1,200
General Manager
Charles W Kline 1999 $ 108,000 $ 2,000 -- -- -- -- $ 540
VicePresident of 1998 $ 29,077 -- -- -- -- -- --
Sales and
Marketing
</TABLE>
(1) Represents revenue-based commissions accrued pursuant to employment
agreements. As of May 31, 1999, $147,762 of accrued commissions were owed to
Mr. Saferin and $5,918 of accrued commissions were owed to Mr. Przysiecki.
(2) Excludes prerequisites and other personal benefits, securities and
properties otherwise categorized as salary or bonuses which, in the
aggregate, did not exceed the lesser of either $50,000 or 10% of the total
annual salary reported for such person.
(3) Represents amounts contributed pursuant to our 401(k) Savings Plan.
(4) Excludes amounts paid to Mr. Saferin's mother and the company owned by his
spouse. Such amounts aggregated $110,000 in fiscal 1999 and $110,000 in
fiscal 1998.
(5) Such amount reflects a reduction of commissions owed to Mr. Saferin that he
has relinquished.
-34-
<PAGE>
<TABLE>
OPTIONS TABLE
Options Granted in Last Fiscal Year
Individual Grants
<CAPTION>
Number of Securities % of Total Options
Underlying Options Granted to Employees Exercise or Base Expiration
Name Granted in Fiscal Year Price($/Sh) Date
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Steven M. Saferin 225,000(1) 61.2% 0.33 11/18/08
Kenneth M. 30,000(2) 8.2% 0.33 11/18/08
Przysiecki
Robert Kowalczyk 30,000(3) 8.2% 0.33 11/18/08
Charles W. Kline 20,000(4) 5.4% 0.33 11/18/08
</TABLE>
(1) Options to purchase 75,000 shares of Common Stock vest and are exercisable
commencing November 18, 1999 and an additional 75,000 shares of Common Stock
vest and are exercisable on each November 18, 2000 and November 18, 2001.
(2) Options to purchase 10,000 shares of Common Stock vest and are exercisable
commencing November 18, 1999 and an additional 10,000 shares of Common Stock
vest and are exercisable on each November 18, 2000 and November 18, 2001.
(3) Options to purchase 10,000 shares of Common Stock vest and are exercisable
commencing November 18, 1999 and an additional 10,000 shares of Common Stock
vest and are exercisable on each November 18, 2000 and November 18, 2001.
(4) Options to purchase 6,666 shares of Common Stock vest and are exercisable
commencing November 18, 1999 and an additional 6,667 shares of Common Stock
vest and are exercisable on each November 18, 2000 and November 18, 2001.
-35-
<PAGE>
DIRECTOR COMPENSATION
Upon election or appointment to the Board of Directors, non-employee
directors are granted non-qualified options to purchase 150,000 shares of Common
Stock at the fair market value of the Common Stock on the date of grant. In
September 1998, Mr. Wussler received stock options outside of the Plan (defined
below) for 300,000 shares of Common Stock at an exercise price of $0.37 as
compensation for his services as one of our outside directors. Messrs. Leavitt
and Fineman each received stock options pursuant to the Plan (defined below) for
150,000 shares of Common Stock at an exercise price of $0.33. as compensation
for their services as outside directors
OPTION AND AWARD PLAN
On September 22, 1998, our Board of Directors adopted our 1998 Stock
Option and Award Plan (the "Plan") The stockholders approved the Plan on
February 9, 1999. The Plan provides for the grant of stock awards and options
for up to 800,000 shares of Common Stock to those employees, officers,
directors, consultants or other individuals or entities eligible under the Plan
(as defined) to receive stock awards or options (each, a "Plan Participant").
Options may be either "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
non-qualified options. Incentive stock options may be granted only to our
employees, while non-qualified options may be issued to non-employee directors,
consultants and others, as well as to our employees. Stock awards consist of the
sale or transfer by us to a Plan Participant of one or more shares of Common
Stock which, unless otherwise determined by the Board of Directors or committee
administering the Plan, are subject to transfer restrictions and our right to
repurchase if certain conditions specified in the award are not satisfied prior
to the end of a restriction period. The plan provides for automatic grants of
non-qualified stock options to purchase 150,000 shares of Common Stock to each
non-employee director upon his election or appointment to the Board of Directors
at the fair market value of the Common Stock on the date of the grant. Such
options vest in equal installments over three years. No Plan Participant may
receive more than an aggregate of 250,000 shares of Common Stock by grant of
options and/or stock awards during the term of the Plan.
The Plan is administered by the Board of Directors or a committee
thereof (the "Plan Administrator), which determines, among other things, those
individuals who receive options or awards, the time period during which the
options may be partially or fully exercised, the terms of the restrictions, if
any, on awards, the number of shares of Common Stock issued as an award or
issuable upon the exercise of each option and the option exercise price and the
award and repurchase prices.
The exercise price per share of Common Stock subject to an incentive
option may not be less than the fair market value per share of Common Stock on
the date the option is granted. The per share exercise price of the Common Stock
subject to a non-qualified option may be established by the Plan Administrator.
The aggregate fair market value (determined as of the date the option is
granted) of Common Stock for which any person may be granted incentive stock
options which first become exercisable in any calendar year may not exceed
$100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to such person, 10% or more of the total
combined voting power of all our classes of stock (a "10% Stockholder") shall be
eligible to receive any incentive stock options under the Plans, unless the
exercise price is at least 110% of the fair market value of the shares of Common
Stock subject to the option, determined on the date of grant. Non-qualified
options are not subject to such limitation.
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No stock option may be transferred by a Plan Participant other than by
will or the laws of descent and distribution, and, during the lifetime of a Plan
Participant, the option will be exercisable only by the Plan Participant. In the
event of termination of employment other than by death or disability, the Plan
Participant will have no more than three months after such termination during
which the Plan Participant shall be entitled to exercise the option, unless
otherwise determined by the Plan Administrator. Upon termination of employment
of a Plan Participant by reason of death or permanent disability, such Plan
Participant's options remain exercisable for one year thereafter to the extent
such options were exercisable on the date of such termination.
Options under the Plan must be issued within 10 years from the Plan's
effective date which is September 22, 1998. Incentive stock options granted
under the Plan, cannot be exercised more than 10 years from the date of grant.
Incentive stock options issued to a 10% Stockholder are limited to five-year
terms. All options granted under the Plan provide for the payment of the
exercise price in cash or by delivery to us of shares of Common Stock having a
fair market value equal to the exercise price of the options being exercised, or
by a combination of such methods. Therefore, a Plan Participant may be able to
tender shares of Common Stock to purchase additional shares of Common Stock and
may theoretically exercise all of such Plan Participant's stock options with no
investment.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by us become available again for issuance under the Plan.
As of September 9, 1999, we have issued options to purchase 667,500
shares of Common Stock under the Plan, which includes grants to (1) the Chief
Executive Officer and President for options to purchase 225,000 shares of Common
Stock, (2) other executive officers for options to purchase 80,000 shares of
Common Stock, (3) employees for options to purchase 62,500 shares of Common
Stock and (4) two outside directors for options to purchase a total of 300,000
shares of Common Stock. As of such date, options to purchase 300,000 shares of
Common Stock have been issued outside of the Plan. None of the options granted
have been exercised.
401(k) SAVINGS PLAN
In fiscal 1996, we adopted a 401(k) savings plan whereby participants
can elect to defer up to a specified maximum of their compensation and we will
match their contribution up to 3% of the employee's base salary. In fiscal 1999
and 1998, we contributed $14,687 and $9,429 to the plan, respectively.
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<PAGE>
EMPLOYMENT AGREEMENTS
Steven M. Saferin
- -----------------
MDIP has entered into an employment agreement with Mr. Saferin, guaranteed by
us, which expires on the later of August 8, 2002 or three years from the date we
first file a registration statement with the SEC registering all of the shares
of common or preferred stock owned by Mr. Saferin, and our shares are being
traded on the New York Stock Exchange, the American Stock Exchange or the NASDAQ
Stock Market. See "-Risk Factors-Dependence on Key Executive." Pursuant to his
employment agreement, Mr. Saferin receives an annual base salary of $300,000,
which may be increased each year in an amount between 5% and 10% of the salary
of the immediately preceding year. In addition, Mr. Saferin is entitled to a
bonus equal to 2% of the gross revenues , up to a maximum amount of $335,000
over the term of the agreement. The employment agreement is terminable by MDIP
for "good cause" and by Mr. Saferin for "good reason" upon the occurrence of
certain events. In the event that MDIP terminates Mr. Saferin's employment
without "good cause" or Mr. Saferin resigns for "good reason," MDIP shall pay an
amount equal to the present value sum of the salary fixed at the salary rate on
the date of termination or resignation which Mr. Saferin would have received
through August 7, 2002 had his employment not been terminated. The agreement
does not contain any terms regarding non-competition after the termination of
Mr. Saferin's employment.
Kenneth M. Przysiecki
- ---------------------
MDIP and Mr. Saferin have entered into an employment agreement with Mr.
Przysiecki, as amended, on a year to year basis starting from October 1 of each
year. Pursuant to his employment agreement, Mr. Przysiecki receives an annual
base salary of $136,000. Mr. Przysiecki is entitled to a bonus equal to 0.5% of
all trade revenue. Mr. Przysiecki's employment may be terminated by him or MDIP
at any time upon sixty days' prior written notice. However, if employment is
terminated by MDIP upon notice, or because of Mr. Przysiecki's death or
disability, Mr. Przysiecki is entitled to severance pay equal to one year of his
current base salary. The employment agreement provides that Mr. Przysiecki will
not compete with MDIP in North America for eighteen months after the termination
of his employment. A state court, however, may determine not to enforce such
non-compete clause as against public policy.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us, as of September
9, 1999, regarding the beneficial ownership of our voting securities by (i)
each person who is known by us to own of record or beneficially more than 5% of
the outstanding Common Stock, (ii) each of our directors and the Named Executive
Officers, as defined in Item 6, and (iii) all directors and executive officers
of as a group. Unless otherwise indicated, each of the stockholders listed in
the table below has sole voting and dispositive power with respect to shares
beneficially owned by such stockholder.
NUMBER OF SHARES
NAME OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED PERCENT OF CLASS(2)
- ---------------------------- ------------------ -------------------
Steven M. Saferin 4,366,124 56.1%
International Capital Partners, LLC 2,027,000(3) 20.7%
Agostino T. Galluzzo 433,876 5.6%
Robert J. Wussler 300,000(4) 3.7%
Kenneth J. Przysiecki 231,400(5) 3.0%
Charles Kline 1,725 0%
Robert R. Kowalczyk 0 0%
Todd P. Leavitt 0 0%
S. David Fineman 0 0%
All directors and executive 4,897,849 60.6%
officers as a group (7 persons)
(1) The address for Messrs. Saferin, Galluzzo, Wussler, Przysiecki, Kline,
Kowalczyk, Leavitt and Fineman is c/o MDI Entertainment, Inc., 201 Ann
Street, Hartford, Connecticut 06103. The address for International
Capital Partners, LLC is 50 Federal Street, 5th Floor, Boston, MA,
02110.
(2) Shares of Common Stock are deemed outstanding for purposes of computing
the percentage of beneficial ownership if such shares of Common Stock
are exercisable or convertible within 60 days of the date of this Form
SB-2.
(3) Includes 2,027,000 shares of Common Stock receivable upon conversion of
2,027 shares of Series A Preferred Stock.
(4) Includes 300,000 shares of Common Stock which are subject to currently
exercisable options.
(5) Includes 1,400 shares owned by adult son as to which Mr. Przysiecki
disclaims beneficial ownership.
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SELLING STOCKHOLDERS
The following table sets forth information concerning shares
beneficially owned as of September 9, 1999. The table has been prepared based on
information furnished to MDI by or on behalf of the selling stockholders. On
August 4, 1999, International Capital Partners, LLP purchased 2,027 shares of
the Series A Preferred Stock for $1,750,000, which are convertible to 2,027,000
shares of Common Stock.
Any or all of the shares listed below may be offered for sale by the
selling stockholders from time to time and, therefore, no estimate can be given
as to the number of shares that will be held by the selling stockholders upon
termination of this offering. Except as otherwise indicated, the selling
stockholders listed in the table have sole voting and investment powers with
respect to the shares indicated.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
STOCKHOLDER OFFERED PRIOR TO SALE AFTER SALE
- ----------- ------- ------------- ----------
<S> <C> <C> <C>
International Capital Partners, LLP. 2,027,000 (1) 2,027,000 0 (2)
</TABLE>
(1) Consists of shares of MDI's common stock issuable upon conversion of,
and interest and other amounts due under, the Series A Preferred Stock.
(2) Assumes all of the shares offered for sale on behalf of the selling
stockholders are sold.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Many of the following transactions occurred before, or as a result of,
the reverse mergers of MDIP and MDIM with and into us in August 1997.
Since August 1994, our subsidiary, MDIP, has retained 1010 Productions,
Inc. ("1010") to consult in the areas of trade show activities, software
development, systems design, purchasing and product fulfillment. The president
and sole shareholder of 1010 is Linda Kesterson Saferin, spouse of Steven M.
Saferin, and former employee, officer and director of MDIP. 1010 is currently
paid $8,167 per month plus expenses and is retained until February 1, 2000
pursuant to its current consulting agreement with us.
MDIT, a company of which MDIP owns 66.7%, and MDIM, a company of which
Mr. Saferin previously owned 91%, have paid MDIP an aggregate management fee of
$10,200 in fiscal 1999 and $198,000 in fiscal 1998, to operate the Texas and
Missouri lottery programs. MDIT and MDIM have both been collapsed into MDIP now
that the Texas and Missouri lottery contracts have ended.
MDIT incurred a commission expense of $0 for fiscal 1999 and $10,663 in
fiscal 1998, respectively, to Steven M. Saferin in connection with the Texas
lottery.
As a result of the reverse mergers of MDIP and MDIM with and into us in
August 1997, we executed a promissory note to Agostino T. Galluzzo in the amount
of $27,000. The note has an annual interest rate of 10% (which started on
December 7, 1997) and will be paid in thirty-six equal monthly installments
(beginning September 1998). Mr. Galluzzo was a minority stockholder of MDIP and
MDIM. In addition, Mr. Galluzzo received 433,876 shares of our Common Stock in
such mergers.
On June 1, 1998, Steven M. Saferin guaranteed our $500,000 performance
bond provided to the Wisconsin lottery.
On September 23, 1998, Steven M. Saferin guaranteed our $130,000
performance bond provided to the Louisiana lottery.
Fineman & Bach, P.C., a Philadelphia PA law firm that S. David Fineman,
Director is associated with, from time to time does legal work for us. During
fiscal year 1999 legal expenses for this work totaled $ 9,800.
From September 1992 to February 1998, Steven M. Saferin owed MDIP
approximately $467,260 pursuant to loans from MDIP on September 1, 1992 and May
2, 1995. The interest rate on the debt was the applicable Federal mid-term rate
during the duration of the loan (6.56% for final quarter). The loans were
secured by personal real estate and were paid in full in February 1998.
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Steven M. Saferin loaned MDIP $60,000 in 1998. The loan bore interest at
the Federal funds rate and was paid in full as of May 31,1998.
Since July 1996, Elaine Saferin, the mother of Steven M. Saferin, our
President and CEO, has been a part-time employee of MDIP. She is paid $1,000 per
month for assisting in corporate and bulk mailings and other related tasks.
In August 1997, Kenneth M. Przysiecki, the Company's Chief Financial
Officer, acquired 230,000 shares of our Common Stock, pursuant to his employment
agreement, dated April 30, 1996. He was entitled to 5% of any stock received by
Mr. Saferin as a result of a sale or merger of MDIP.
On August 8, 1997, we executed a promissory note to Steven M. Saferin in
the amount of $273,000 in exchange for Mr. Saferin's agreement to the reverse
mergers of MDIP and MDIM with and into us. The note had an annual interest rate
of 10% (starting on December 7, 1997) and was to be paid in thirty-six equal
monthly installments. The note was paid in full by us in February 1998. In
addition, Mr. Saferin received 4,366,124 shares of Common Stock of us in such
mergers.
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<PAGE>
DESCRIPTION OF SECURITIES
The following summary of the terms of our securities is qualified in its
entirety by reference to the applicable provisions of Delaware law and our
Certificate of Incorporation, as amended, and our Amended and Restated By-Laws.
COMMON STOCK
MDI is authorized to issue 25,000,000 shares of common stock, $.001 par
value, of which 7,776,500 shares are outstanding as of September 9, 1999. Each
share of common stock is entitled to share pro rata in dividends and
distributions with respect to the common stock if and when declared by the Board
of Directors from legally available funds. No holder of any shares of common
stock has any pre-emptive right to subscribe for any of MDI's securities. Upon
dissolution, liquidation or winding up of MDI, the assets will be divided pro
rata on a share-for-share basis among holders of the shares of common stock. All
shares of common stock outstanding are fully paid and nonassessable. Each
stockholder of common stock is entitled to one vote per share with respect to
all matters that are required by law to be submitted to stockholders.
PREFERRED STOCK
MDI is authorized to issue up to 5,000,000 shares of preferred stock,
par value $0.001 per share, of which 2,027 shares have been designated Series A
Preferred Stock. All of the Series A Preferred Stock is outstanding as of
September 9, 1999. The preferred stock may be issued in one or more series, the
terms of which may be determined at the time of issuance by the Board of
Directors, without further action by stockholders, and may include voting rights
such as the right to vote as a series on particular matters, preferences as to
dividends and liquidation, conversion rights, redemption rights and sinking fund
provisions. The issuance of any such preferred stock could adversely affect the
rights of the holders of common stock and, therefore, reduce the value of the
common stock. The ability of the Board of Directors to issue preferred stock
could discourage, delay, or prevent a takeover of MDI.
The Series A Preferred Stock has a liquidation preference of $1,750,000,
pays a dividend at the rate of 10% per annum, payable in cash or common stock at
our discretion, and is convertible into an aggregate of 2,027,000 shares of our
common stock, subject to adjustment under certain circumstances. Upon
effectiveness of this registration statement, the Series A Preferred Stock will
pay a reduced dividend at the rate of 5% per annum. If not previously converted
by the holders, the Series A Preferred Stock will automatically convert into
common stock in quarterly installments over a period of one year following
effectiveness of this registration statement.
As long as 2,027 shares of the Series A Preferred Stock remain
outstanding, the holders of a majority of such shares may elect one of our
directors. In addition, such holders are entitled to a right of first refusal on
new securities we issue, subject to certain exclusions. We may not create or
increase the authorized number of shares of any class or series of stock ranking
prior to or on parity with the Series A Preferred Stock either as to dividends
or liquidation without approval of a majority of the holders of the Series A
Preferred Stock.
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TRANSFER AGENT
Olde Monmouth Stock Transfer Co. is the transfer agent for our common
stock.
DIRECTOR'S LIMITATION OF LIABILITY AND INDEMNIFICATION
Our Certificate of Incorporation includes provisions which eliminate the
personal liability of directors for monetary damages resulting from breaches of
their fiduciary duty, except for (i) liability for breaches of the duty of
loyalty, (ii) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) liability for unlawful payment
of dividends or unlawful stock purchases or redemption by us, or (iv) for any
transaction from which the director derived an improper personal benefit. We
believe that these provisions are necessary to attract and retain qualified
persons as directors and officers.
Section 145 of the Delaware General Corporation Law ("DGCL") permits
indemnification by a corporation of certain officers, directors, employees and
agents. Consistent with this section, our Certificate of Incorporation provides
that we will indemnify any person to the fullest extent permitted by law with
respect to certain liabilities and expenses incurred by such person in any
action, suit or proceeding in which such person was or is made or threatened to
be made a party or is otherwise involved by reason of the fact that such person
is or was a director, officer, employee or agent of us. We are also obligated to
pay the expenses of the directors and officers incurred in defending such
proceedings, subject to reimbursement if it is subsequently determined that such
person is not entitled to indemnification.
We have a liability insurance policy in effect for our officers and
directors. Such insurance, in certain instances, insures our directors and
officers against liabilities arising under the Securities Act of 1933. Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that, in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
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DELAWARE ANTI-TAKEOVER LAW
We are subject to Section 203 of the DGCL, which, subject to certain
exceptions and limitations, prohibits a Delaware corporation from engaging in
any "business combination" with any "interested stockholder" for a period of
three years following the date that such stockholder became an interested
stockholder, unless: (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (for the purposes of determining the number of shares outstanding
under the DGCL, those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer are excluded from the
calculation); or (iii) on or subsequent to such date, the business combination
is approved by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
For purposes of Section 203, a "business combination" includes (i) any
merger or consolidation involving the corporation and the interested
stockholder; (ii) any sale, transfer, pledge or other disposition of 10% or more
of the assets of the corporation involving the interested stockholder; (iii)
subject to certain exceptions, any transaction which results in the issuance or
transfer by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation which has the effect
of increasing the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; or (v) the receipt
by the interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation.
Section 203 defines an "interested stockholder" as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of the filing of this registration statement, we had
7,776,500 outstanding shares of common stock, as well as 2,027 shares of Series
A Preferred Stock. Of these shares, 3,289,322 shares of common stock are freely
tradeable. The remaining approximately 4,500,000 shares of common stock, as well
as 2,027 shares of Series A Preferred Stock, are "restricted securities", as
that term is defined in Rule 144 under the Securities Act, and in the future may
only be sold pursuant to a registration statement under the Securities Act, in
compliance with the exemption provisions of Rule 144 or pursuant to another
exemption under the Securities Act. Commencing approximately 12 months following
the date of issuance of such shares, substantially all of these restricted
securities, including 2,027,000 shares of common stock underlying the
convertible Series A Preferred Stock, would become eligible for sale in the
public market pursuant to Rule 144.
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In general, under Rule 144, as currently in effect, a person, including
a person who may be deemed our "affiliate" as that term is defined under the
Securities Act, who has beneficially owned such shares for at least one year
would be entitled to sell within any three-month period a number of shares
beneficially owned for at least one year that do not exceed the greater of (i)
1% of the then outstanding shares of common stock or (ii) the average weekly
trading volume of the common stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are further subject to certain restrictions relating
to the manner of sale, notice and the availability of current public information
about us. After two years have elapsed from the date of the issuance of
restricted securities by us or their acquisition from an affiliate, such shares
may be sold without limitation by persons who have not been our affiliates for
at least three months.
The sale, or availability for sale, of substantial amounts of common
stock in the public market subsequent to this offering pursuant to Rule 144 or
otherwise could materially adversely affect the market price of the common stock
and could impair our ability to raise additional capital through the sale of its
equity securities or debt financing.
We are obligated to file a registration statement covering approximately
2,027,000 shares of common stock reserved for issuance in connection with the
conversion of our Series A Preferred Stock. Upon the effectiveness of that
registration statement, all shares covered by that registration statement will
be freely tradeable.
No prediction can be made as to the effect, if any, that sales of such
securities, or the availability of such securities for sale, will have on the
market prices prevailing from time to time for the common stock. However, even
the possibility that a substantial number of our securities may, in the near
future, be sold in the public market may adversely affect prevailing market
prices for the common stock and could impair our ability to raise capital
through the sale of equity securities.
PLAN OF DISTRIBUTION
The shares offered hereby may be offered and sold from time to time by
the selling stockholders, or by pledgees, donees, transferees or other
successors in interest. Such offers and sales may be made from time to time on
the NASDAQ Bulletin Board, or otherwise, at prices and on terms then prevailing
or at prices related to the then-current market price, or in negotiated
transactions. The methods by which the shares may be sold may include, but not
be limited to, the following: a block trade in which the broker or dealer so
engaged will attempt to sell the shares as agent but may position and resell a
portion of the block as principal to facilitate the transaction; purchases by a
broker or dealer as principal and resale by such broker or dealer for its
account; an exchange distribution in accordance with the rules of such exchange;
ordinary brokerage transactions and transactions in which the broker solicits
purchasers; privately negotiated transactions; short sales; and a combination of
any such methods of sale. In effecting sales, brokers or dealers engaged by the
selling stockholders may receive commissions or discounts from the selling
stockholders or from the purchasers in amounts to be negotiated immediately
prior to the sale. The selling stockholders may also sell such shares in
accordance with Rule 144 under the Securities Act.
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<PAGE>
Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the shares may not simultaneously engage in
market-making activities with respect to such shares for a period of one or five
business days prior to the commencement of such distribution. In addition to,
and without limiting, the foregoing, each of the selling stockholders and any
other person participating in a distribution will be subject to the applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including, without limitation, Regulation M, which provisions may limit the
timing of purchases and sales of any of the shares by the selling stockholders
or any such other person. All of the foregoing may affect the marketability of
the shares.
MDI has entered into a registration rights agreement with the holders of
the Series A Preferred Stock. Under such agreement, we have agreed to maintain
the effectiveness of the registration of the shares offered hereby until the
earliest of (i) the date that is one year after the closing date when the
preferred stock was issued, (ii) the date when such holders may sell shares of
common stock issuable upon conversion of, or in connection with, the Series A
Preferred Stock under Rule 144 or (iii) the date that the holders no longer own
shares of common stock issuable upon conversion of, or in connection with, the
Series A Preferred Stock. We have also agreed to bear all reasonable expenses
relating to the registration of the shares, including the fees and expenses of
one counsel to the holders of the Series A Preferred Stock.
The registration rights agreement also provides that we will indemnify
and hold harmless the holders of the Series A Preferred Stock, any directors or
officers of such holders or any person who controls such holders against any
losses, claims, damages, liabilities or expenses (joint or several) that arise
out of or are based upon certain statements, omissions or violations of this
registration statement, unless any of the foregoing arise out of information
furnished in writing to MDI by such persons. In such case, such persons shall
indemnify MDI, its officers, directors and agents against any claims arising out
of or based upon such furnished information To the extent any indemnification is
prohibited or limited by law, the indemnifying party has agreed to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable, subject to certain exceptions.
The selling stockholders and any brokers participating in such sales may
be deemed to be underwriters within the meaning of the Securities Act. We cannot
assure you that the selling stockholders will sell any or all of the shares
offered hereby.
Any commissions paid or any discounts or concessions allowed to any
broker, dealer, underwriter, agent or market maker and, if any such broker,
dealer, underwriter, agent or market maker purchases any of the shares as
principal, any profits received on the resale of such shares, may be deemed to
be underwriting commissions or discounts under the Securities Act.
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LEGAL MATTERS
The validity of the shares under applicable state law has been passed
upon for MDI by Squadron, Ellenoff, Plesent & Sheinfeld, LLP, New York, New York
10176.
EXPERTS
The financial statements included in this Prospectus for the year ended
May 31, 1999, have been so incorporated in reliance on the report of Arthur
Andersen LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any materials we file with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549, or at the SEC's regional offices in New York City and
Chicago. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet
site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically(http//:www.sec.gov). You
also may inspect reports and other information concerning us at the offices of
the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. We incorporate by reference and make a part of
this prospectus MDI's Annual Report on Form 10-KSB for the fiscal year ended May
31, 1999.
Each document filed by MDI with the SEC pursuant to Section 13(a),
13(c), 14, or 15(d) of the Exchange Act after the date of this prospectus and
before the end of the offering made hereby is also incorporated by reference
into this prospectus from the filing date of filing of such document.
If any statement in any document incorporated by reference is
inconsistent with this prospectus, the statement in the latest document
supersedes the earlier statement. You should not rely on any statement that has
been superseded.
MDI will provide upon request a free copy of the documents that are
incorporated by reference in the prospectus. Requests for such information
should be directed to: MDI Entertainment, Inc., 201 Ann Street, Hartford,
Connecticut 06103, Attention: Steven M. Saferin. MDI's telephone number is (860)
527-5359.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements included or incorporated by reference into this
prospectus constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, and include statements made in
press releases and oral statements made by our officers, directors or employees
acting on our behalf. All such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of MDI, or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. In addition to
statements which explicitly describe such risks and uncertainties, you are urged
to consider statements labeled with the terms "believes," "belief," "expects,"
"plans," "anticipates" or "intends," to be uncertain and forward-looking.
-48-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
F-2 Report of Independent Public Accountants
F-3 Consolidated Balance Sheets
F-5 Consolidated Statements of Operations
F-6 Consolidated Statements of Shareholders' Deficit
F-7 Consolidated Statements of Cash Flows
F-8 Notes to Consolidated Financial Statements
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
MDI Entertainment, Inc.:
We have audited the accompanying consolidated balance sheets of MDI
Entertainment, Inc. and subsidiaries (formerly Media Drop-In Productions, Inc.
and Affiliates) as of May 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MDI Entertainment,
Inc. and subsidiaries as of May 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Hartford, Connecticut
July 19, 1999 (except for Note 11,
as to which the date is August 4, 1999)
F-2
<PAGE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
----------------------------------------
(FORMERLY MEDIA DROP-IN PRODUCTIONS, INC. AND AFFILIATES)
CONSOLIDATED BALANCE SHEETS
AS OF MAY 31, 1999 AND 1998
ASSETS
------
1999 1998
---- ----
CURRENT ASSETS:
Cash $ 340,350 $ 960,398
Accounts receivable 817,614 317,598
Inventories 57,596 417,651
Other current assets 58,253 30,203
----------- ----------
Total current assets 1,273,813 1,725,850
----------- ----------
PROPERTY AND EQUIPMENT, at cost:
Equipment 354,890 330,052
Furniture and fixtures 101,737 100,571
----------- ----------
456,627 430,623
Less: Accumulated depreciation (350,605) (322,771)
----------- ----------
106,022 107,852
----------- ----------
OTHER ASSETS:
Licensing costs (Note 2) 189,488 213,077
Other (Notes 1 and 11) 260,039 52,643
----------- ----------
Total other assets 449,527 265,720
----------- ----------
$1,829,362 $2,099,422
=========== ==========
The accompanying notes are an integral
part of these consolidated financial statements.
F-3
<PAGE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
----------------------------------------
(FORMERLY MEDIA DROP-IN PRODUCTIONS, INC. AND AFFILIATES)
CONSOLIDATED BALANCE SHEETS
AS OF MAY 31, 1999 AND 1998
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
1999 1998
---- ----
CURRENT LIABILITIES:
Billings in excess of costs and estimated
earnings on uncompleted contracts (Note 1) $ 1,695,886 $ -
Deferred revenue (Note 1) 268,405 2,906,047
Current portion of long-term debt (Note 3) 365,911 123,754
Accounts payable 364,909 346,491
Accrued expenses (Note 7) 313,550 1,170,165
Income taxes payable 55,729 -
----------- ----------
Total current liabilities 3,064,390 4,546,457
LONG-TERM DEBT, less current portion
above (Note 3) 229,702 177,000
MINORITY INTEREST 34,927 35,268
----------- ----------
Total liabilities 3,329,019 4,758,725
----------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 1, 5, 6 and 11)
SHAREHOLDERS' DEFICIT:
Common stock 7,777 7,777
Additional paid-in capital 348,348 348,348
Accumulated deficit (1,855,782) (3,015,428)
----------- ----------
Total shareholders' deficit (1,499,657) (2,659,303)
----------- ----------
$ 1,829,362 $ 2,099,422
=========== ==========
The accompanying notes are an integral
part of these consolidated financial statements.
F-4
<PAGE>
<TABLE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
----------------------------------------
(FORMERLY MEDIA DROP-IN PRODUCTIONS, INC. AND AFFILIATES)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 1999 AND 1998
<CAPTION>
1999 % 1998 %
---- - ---- -
<S> <C> <C> <C> <C>
REVENUES $ 7,204,712 100.0 $ 1,984,840 100.0
COST OF REVENUES 3,812,169 52.9 2,313,831 116.6
----------- ---- ----------- ------
Gross profit (loss) 3,392,543 47.1 (328,991) (16.6)
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 2,158,849 30.0 1,797,631 90.6
----------- ---- ----------- ------
Operating profit (loss) 1,233,694 17.1 (2,126,622) (107.2)
INTEREST EXPENSE, net 7,713 0.1 14,927 0.7
OTHER EXPENSE 10,976 0.1 12,405 0.6
MINORITY INTEREST (341) -- (31,936) (1.6)
----------- ---- ----------- ------
Income (loss) before (provision)
benefit for income taxes 1,215,346 16.9 (2,122,018) (106.9)
(PROVISION) BENEFIT FOR INCOME TAXES (55,700) (0.8) 3,125 0.2
----------- ---- ----------- ------
Net income (loss) $ 1,159,646 16.1 $(2,118,893) (106.7)
=========== ==== =========== ======
Basic Earnings (Loss) Per Common
Share (Note 1) $ .15 $ (.37)
=========== ===========
Diluted Earnings (Loss) Per Common
Share (Note 1) $ .14 $ (.37)
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-5
<PAGE>
<TABLE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
----------------------------------------
(FORMERLY MEDIA DROP-IN PRODUCTIONS, INC. AND AFFILIATES)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED MAY 31, 1999 AND 1998
<CAPTION>
Common Stock
------------------------------------------------------
Par** Par*** Par Additional
* Value Value Value Treasury Paid-In Accumulated
Shares $.01 $1 $.001 Stock Capital Deficit Total
------ ---- -- ----- ----- ------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, May 31, 1997 3,073 $ 10 $ 2,000 $ - $(81,988) $ 90 $ (511,847) $ (591,735)
Redemption of old shares (3,073) (10) (2,000) - 81,988 (90) (79,888) -
Issuance new shares 7,300,000 - - 7,300 - 8,624 (304,800) (288,876)
Proceeds from sale of
common stock 476,500 - - 477 - 339,724 - 340,201
Net loss - - - - - - (2,118,893) (2,118,893)
---------- ---- ------- ------ -------- --------- ----------- -----------
BALANCE, May 31, 1998 7,776,500 - - 7,777 - 348,348 (3,015,428) (2,659,303)
Net income - - - - - - 1,159,646 1,159,646
---------- ---- ------- ------ -------- --------- ----------- -----------
BALANCE, May 31, 1999 7,776,500 $ - $ - $7,777 $ - $348,348 $(1,855,782) $(1,499,657)
========== ==== ======= ====== ======== ========= =========== ===========
</TABLE>
* - 25,000,000 shares authorized
** - 10,000 shares authorized, 1,073 shares issued
*** - 100,000 shares authorized, 2,000 shares issued
The accompanying notes are an integral
part of these consolidated financial statements.
F-6
<PAGE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
----------------------------------------
(FORMERLY MEDIA DROP-IN PRODUCTIONS, INC. AND AFFILIATES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1999 AND 1998
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,159,646 $(2,118,893)
Adjustments to reconcile net income (loss)
to net cash (used for) provided by operating
activities:
Minority interest (341) (31,936)
Depreciation and amortization 140,412 283,792
Loss on disposal of assets 10,976 -
Change in assets and liabilities:
Increase in accounts receivable (500,016) (117,023)
Decrease (increase) in inventories 360,055 (284,677)
Increase in licensing costs (80,339) (249,064)
Increase in other assets (235,446) (25,175)
Increase (decrease) in accounts payable 18,418 (174,815)
(Decrease) increase in accrued expenses (256,615) 540,031
Increase (decrease) in taxes payable 55,729 (44,321)
(Decrease) increase in deferred revenue (2,637,642) 2,906,047
Increase in billings in excess of costs
and estimated earnings on uncompleted
contracts 1,695,886 -
----------- ----------
Net cash (used for) provided by operating
activities (269,277) 683,966
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (45,630) (27,041)
----------- ----------
Net cash used for investing activities (45,630) (27,041)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (305,141) (344,918)
Borrowings from long-term debt - 350,000
Repayments of borrowings from stockholder - (110,000)
Borrowings from stockholder - 60,000
Proceeds from sale of stock - 340,201
----------- ----------
Net cash (used for) provided by financing
activities (305,141) 295,283
----------- ----------
NET (DECREASE) INCREASE IN CASH (620,048) 952,208
CASH, beginning of the year 960,398 8,190
----------- ----------
CASH, end of the year $ 340,350 $ 960,398
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for
Interest $ 34,237 $ 48,734
Income taxes $ 2,319 $ 1,317
Non-cash items:
Conversion of accrued expense to note payable $ 600,000 $ -
Reduction of loan to officer due to
note payable and commissions owed to him $ - $ 456,023
Issuance of note in connection with exchange
transaction $ - $ 300,000
Reduction of accrued expenses used to offset
loan to officer $ - $ 183,023
The accompanying notes are an integral
part of these consolidated financial statements.
F-7
<PAGE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
----------------------------------------
(FORMERLY MEDIA DROP-IN PRODUCTIONS, INC. AND AFFILIATES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
1. Summary of Significant Accounting Policies:
-------------------------------------------
Organization -
--------------
MDI Entertainment, Inc. (the "Company") is a Delaware corporation
incorporated on December 29, 1994 under the name Puff Process, Inc. In
August 1997, the Company purchased 100% of the shares of Media Drop-In
Productions, Inc., a Delaware corporation (Media Drop-In Productions, Inc.
has a 66.7% owned subsidiary, MDI-Texas, Inc.,) and MDI-Missouri, Inc., a
Missouri corporation (herein collectively referred to as "MDI"), in
exchange for 4,800,000 shares of the Company's common stock and notes
payable to the shareholders of MDI for an aggregate of $300,000. In
connection with this acquisition, the name of the Company was changed to
MDI Entertainment, Inc.
All intercompany transactions have been eliminated in the accompanying
financial statements. Since the Company had minimal assets, liabilities and
no business activities prior to its acquisition of MDI, this transaction
was accounted for as a "reverse merger," with MDI as the successor
corporation. Therefore, these financial statements reflect the historical
cost basis of MDI.
MDI's principal activity has been the development and sale of entertainment
based promotions to North American lotteries. MDI is positioned to create a
wide variety of additional entertainment promotions. MDI has established
itself as a source for the creation, supply and administration of
entertainment based lottery promotions.
In 1996, MDI created its Licensed and Patented Games division ("LPG"). MDI
capitalized on current trends in the lottery industry to base some instant
games on pre-existing games of chance and well known brands and logos. MDI
has acquired the rights to several well known entertainment properties to
license as lottery theme games and promotions. Included among the
properties already licensed are "Star Trek," "Wheel of Fortune,"
"Jeopardy," "Twilight Zone," "Rock and Roll Hall of Fame and Museum" and
"Harley-Davidson."
Inventories -
-------------
Inventories represent merchandise used in the Company's fulfillment
operations. The inventory is stated at the lower of cost or market using
the first-in, first-out method.
F-8
<PAGE>
Property and equipment -
------------------------
Property and equipment are recorded at cost. Expenditures for repairs and
maintenance are charged to expense as incurred. For assets sold or
otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts, and any resulting gain or loss is reflected in
income for the period.
Depreciation is calculated on a straight-line basis over the estimated
useful life of the asset. Furniture and fixtures are depreciated over seven
years and office equipment is depreciated over five years.
Long-lived assets -
-------------------
The Company reviews its capitalized marketing costs quarterly to determine
if an impairment has occurred. The Company recognizes that an impairment
has occurred when the proposed lottery promotion is not expected to result
in a contract with positive cash flow.
Other assets -
--------------
Other assets are primarily comprised of prepaid financing costs related to
the convertible preferred stock offering (Note 11).
Revenue and cost recognition -
------------------------------
Revenue is derived from various lottery game contracts (mainly with states)
between MDI and the lotteries. MDI has agreed to provide second chance
prize packages consisting of grand prizes and various merchandise prizes.
MDI also provides marketing support related to each of the games and
obtains the appropriate licenses for the right to use these properties.
Many of the lottery contracts require the lotteries to pay MDI upon signing
of the contract; therefore, MDI defers this revenue and recognizes the
revenue based on the terms of the applicable game.
Revenues from the lottery game contracts that are greater than one year are
recognized on the percentage-of-completion method, determined by the
percentage of costs incurred to date to estimated total costs on a specific
contract basis. This method is utilized as management considers costs
incurred to be the best available measure of progress on these contracts.
Contract costs include all direct costs. General and administrative costs
are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. As of May 31, 1999, no losses were expected from existing
contracts.
F-9
<PAGE>
The liability "billings in excess of costs and estimated earnings on
uncompleted contracts" represents billings in excess of revenues
recognized.
As of May 31, 1999, billings in excess of costs and estimated earnings on
uncompleted contracts was as follows:
<TABLE>
<CAPTION>
Billings in Excess of
Estimated Earnings
Billings Revenue (Cost in Excess of Billings)
Lottery Game to Date Earned on Uncompleted Contracts
------- ---- ------- ------ ------------------------
<S> <C> <C> <C> <C>
Wisconsin Wheel of Fortune $ 510,000 $ 303,920 $ 206,080
Wisconsin Star Trek 475,000 242,312 232,688
Wisconsin Holiday Harley 525,688 441,700 83,988
Wisconsin Harley Davidson 1,276,100 1,105,370 170,730
Wisconsin Pepsi 1,012,215 608,498 403,717
Virginia Star Trek 310,500 239,273 71,227
Virginia Harley Davidson 400,014 157,148 242,866
Louisiana Harley Davidson 129,847 84,262 45,585
Arizona Star Trek 130,250 104,960 25,290
New Hampshire Harley Davidson 128,250 9,446 118,804
Rhode Island Harley Davidson 126,000 26,346 99,654
Iowa Louisville Slugger 63,672 14,136 49,536
Australia Instant Entertainment
Connection - - (54,279)
---------- ---------- ----------
Total $5,087,536 $3,337,371 $1,695,886
========== ========== ==========
</TABLE>
Earnings (loss) per share -
---------------------------
Basic earnings (loss) per common share are based on the average number of
common shares outstanding during the year. Diluted earnings (loss) per
common share assumes, in addition to the above, a dilutive effect of common
share equivalents during the year. Common share equivalents represent
dilutive stock options using the treasury method. The number of shares used
in the earnings (loss) per common share and earnings (loss) per
dilutive share and warrants computation for 1999 and 1998 was as follows:
1999 1998
---- ----
Basic
Average common shares outstanding 7,776,500 5,791,351
Dilutive
Dilutive effect of options and warrants 528,078 -
--------- ---------
Average dilutive common shares
outstanding 8,304,578 5,791,351
========= =========
F-10
<PAGE>
Recent accounting pronouncements -
----------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). This statement
establishes accounting and reporting standards for derivative
instruments and for hedging activities. Adoption of SFAS No. 133 is
required beginning with the first quarter of fiscal 2000. The adoption
of SFAS No. 133 is not expected to have a material impact on the
Company's financial condition or results of operations.
In June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS
No. 133." which defers the adoption of SFAS No.133 to fiscal years
begining after June 15, 2000.
Use of estimates in preparation of financial statements -
---------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reported period. Actual results could differ from
those estimates.
Reclassifications -
-------------------
Certain reclassifications have been made to the 1998 consolidated financial
statements to conform with the 1999 presentation.
2. Licensing Costs:
----------------
The Company capitalizes costs associated with obtaining the exclusive right
to use and to sublicense the use of licensed properties, as defined in the
license agreements. These costs are amortized over the life of the license.
At May 31, 1999, the following costs have been capitalized:
Capitalized Accumulated Net
Costs Amortization Asset
----- ------------ -----
Wheel of Fortune License $ 10,000 $ 7,848 $ 2,152
Star Trek License 85,000 40,000 45,000
Rock & Roll Hall of Fame
License 10,000 - 10,000
Patented Games 83,135 68,637 14,498
Harley Davidson License 100,000 53,673 46,327
Louisville Slugger License 20,000 4,012 15,988
Time Square 2000 License 10,000 - 10,000
Harley Davidson Commercial 48,666 15,643 33,023
Heroes of Space License 10,000 - 10,000
Hummer/Humvee License 2,500 - 2,500
-------- -------- --------
$379,301 $189,813 $189,488
======== ======== ========
F-11
<PAGE>
At May 31, 1998, the following costs have been capitalized:
Capitalized Accumulated Net
Costs Amortization Asset
----- ------------ -----
Australia Lottery $ 56,377 $ 35,500 $ 20,877
Patented Games 83,085 55,390 27,695
Star Trek License 85,000 25,654 59,346
Rock & Roll Hall of
Fame License 10,000 - 10,000
Harley Davidson License 100,000 4,841 95,159
-------- -------- --------
$334,462 $121,385 $213,077
======== ======== ========
3. Notes Payable:
--------------
Notes payable consists of the following:
1999 1998
---- ----
Promissory note payable bearing interest
at a rate of 3% above prime
rate; principal and interest of $27,895
payable monthly through
December 15, 2000 (Note 7). $ 485,363 $ -
Term note payable bearing no interest;
principal of $5,000 payable monthly
through December 1, 2000. 90,000 150,000
Promissory note payable bearing interest
at 10%; principal of $750 payable
monthly through August 2002. 20,250 27,000
Term note payable bearing no interest;
principal of $16,666 payable monthly
through November 30, 1998. - 100,000
Term notes payable bearing interest at
20%; principal and interest of
$12,199 payable monthly through
December 15, 1997, however payment
terms were extended to July 16, 1998. - 23,754
--------- ---------
595,613 300,754
Less - current maturities (365,911) (123,754)
--------- ---------
$ 229,702 $ 177,000
========= =========
F-12
<PAGE>
Repayments of long-term debt for each of the next 5 years and thereafter
are as follows:
Year Ending
May 31,
2000 .........................$365,911
2001 ......................... 227,452
2002 ......................... 2,250
--------
$595,613
========
The notes payable are secured by liens on substantially all of the
Company's assets.
4. Stock Option and Award Plan:
----------------------------
On September 22, 1998, the Board of Directors approved the 1998 Stock
Option and Award Plan (the Plan) which provides for up to 800,000 incentive
and nonqualified common stock options. Options granted under the Plan to
directors, selected employees, officers, agents, consultants, and
independent contractors of the Company are exercisable for a period
determined by the Company, but in no event longer than ten years from date
of grant, subject to certain conditions.
During fiscal 1999, the Company awarded stock options for 300,000 shares
with an exercise price of $.37 outside the Plan. These options are
exercisable for five years from date of grant, subject to certain
conditions.
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 123, (Accounting for Stock-Based Compensation) (SFAS 123).
SFAS 123 requires the measurement of the fair value of stock options or
warrants to be included in the statement of operations or disclosed in the
notes to financial statements. The Company has determined that it will
account for stock-based compensation for employees under Accounting
Principles Board Opinion No. 25 and elect the disclosure-only alternative
under SFAS 123.
The Company has computed the pro forma disclosures required under SFAS 123
for options granted as of May 31, 1999 using the Black-Scholes option
pricing model as prescribed by SFAS 123. For purposes of this calculation,
the fair value of each option grant is estimated on the grant date using
the Black-Scholes option-pricing model with the following assumptions:
Risk free interest rate ....................5.10% - 5.62%
Expected dividend yield .................... 0%
Expected lives .............................5 - 10 years
Expected volatility ........................ 119%
Fair value .................................$0.28 - $0.32
In addition, the Company issued warrants to purchase 30,000 shares of
Common Stock at an exercise price of $0.28 for services provided by third
parties. The estimated fair market value of the warrants was not material.
F-13
<PAGE>
Had compensation cost for the Company's stock option plans been determined
consistent with SFAS 123, the Company's pro forma net income would have
been as follows:
1999
----
Net income:
As reported .................................$1,159,646
Pro forma ................................... 1,066,346
Basic earnings per common share:
As reported .................................$ .15
Pro forma ................................... .14
Diluted earnings per common share:
As reported .................................$ .14
Pro forma ................................... .13
The pro-forma information is not indicative of future years.
The following table summarizes both stock option activities under and
outside the Plan during the year ended May 31, 1999.
Weighted Average
Shares Exercise Price
------ --------------
Outstanding, May 31, 1998 - $ -
Granted 967,500 $0.34
Exercised - -
Cancelled - -
------- -----
Outstanding, May 31, 1999 967,500 $0.34
======= =====
Options exercisable at May 31, 1999 300,000 $0.37
======= =====
Weighted average fair value options
granted during the year 967,500 $0.34
======= =====
The following table summarizes information about stock options at May 31,
1999:
Weighted
Average Weighted
Remaining Average
Exercise Number Contractual Number Exercise
Price Outstanding Life Exercisable Price
----- ----------- ------------ ----------- -----
$0.37 300,000 5 years 300,000 $0.37
0.33 667,500 10 years - 0.33
F-14
<PAGE>
5. Income Taxes:
-------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for
Income Taxes" which requires that a deferred tax liability or asset be
recognized for the estimated future tax effects attributable to temporary
differences between the Company's financial statements and its tax return.
SFAS No.109 provides for recognition of a deferred tax asset for all future
deductible temporary differences that, more likely than not, will provide
the Company a future benefit. As of May 31, 1999 and 1998, MDI had a
deferred tax asset of approximately $1,780,000 and $2,515,000,
respectively, primarily as a result of net operating loss carryforwards.
MDI has established a valuation allowance for the full amount of this
deferred tax asset.
MDI has net operating loss carryforwards amounting to approximately
$4,367,000 and $5,561,000 at May 31, 1999 and 1998. These carryforwards
expire beginning in 2006. Useage of the NOL's is limited in the event
certain ownership changes occur.
The tax expense recorded by the Company for the years ended May 31, 1999
and 1998 was primarily minimum state income taxes.
6. Commitments:
------------
The Company leases office equipment, office space and vehicles under
long-term leases which expire during the next one to four years. Rent
expense totaled $61,415 and $70,976 in 1999 and 1998, respectively. The
following is a schedule of future minimum rental payments required under
operating leases that have initial or remaining noncancelable lease terms
in excess of one year as of May 31, 1999:
2000 .......................$ 75,879
2001 ....................... 71,434
2002 ....................... 74,023
2003 ....................... 70,660
--------
$291,996
========
MDI has agreed to provide the Wisconsin Lottery (the Lottery) a performance
bond acceptable to the Lottery in the amount of $500,000. The Company has
also provided a $130,000 performance bond to the Louisiana Lottery. Steven
Saferin has personally guaranteed these performance bonds.
F-15
<PAGE>
7. Commission Agreement:
---------------------
In December, 1994, MDI entered into a commission agreement with a media
company to assist in the procurement of video and audio entertainment
media. The term of the agreement was from December 15, 1994 through
December 14, 1997. Commissions of 5.33% were required to be paid on monthly
cash receipts in excess of $337,500. If at the end of the term, the
aggregate cash collections were less than $27,300,000, then the media
company could renew the Agreement for an additional year or periods of one
year until MDI reaches $27,300,000. There were commissions of approximately
$186,000 paid in 1999 and none were paid in 1998.
MDI could have elected not to renew this agreement and would then be
required to deliver to the media group a promissory note in the amount of
$808,250, less previously paid commissions, bearing interest at a rate of
3% above prime rate, payable over 24 months. MDI had renewed the agreement
through December 14, 1998. However, since MDI had significantly reduced the
utilization of this media company, they accrued the $786,287 minimum fee
owed to them and charged it to cost of revenues for the year ended May 31,
1998.
During 1999, MDI entered into a formal note agreement with the media group
to repay the remaining outstanding balance due to them in the amount of
$600,000 (Note 3).
8. Contingencies:
--------------
The Company is involved in various lawsuits incidental to its business. The
Company and its outside counsel believe that these proceedings, in the
aggregate, will not have a material adverse effect on the Company's
operations or financial position.
9. Related Party Transactions:
---------------------------
MDI made a loan to the President of the Company which was due August 31,
1997. This note receivable was offset against the commissions owed to this
officer and a note payable which resulted from the reverse merger (Note 1).
The President of the Company loaned MDI $60,000 in 1998. This loan was paid
in full as of May 31, 1998.
In 1999 and 1998, the Company incurred commission expense of $144,000 and
$114,593 and wage expense of $300,000 and $300,000, respectively, to the
President of the Company, in accordance with his Employment Agreement. The
agreement allowed a $300,000 salary for the 12 month period through
February 28, 1998. On March 1, 1998, and each anniversary thereafter, the
President's salary may be increased by 5% or an equation based on the
consumer price index. In no event shall the increase exceed 10% in any
F-16
<PAGE>
one year. In addition, the President receives a commission equal to 2% of
gross revenues of the Company (not to exceed $335,000 over the term of the
Employment contract). The President has waived the right to approximately
$54,000 of commissions during 1999, as well as $100,000 of commissions
relating to prior years. This has been reflected as a reduction in cost of
revenue in fiscal 1999. The contract began August 8, 1997 and terminates
the later of March 1, 2002 or three years from the date the Company files a
registration statement with the Securities and Exchange Commission
registering the shares of common stock, if its traded on NASDAQ.
The Company has retained 1010 Productions, Inc. (1010) to consult in the
areas of trade shows, software development, systems design, purchasing and
product fulfillment. The president and sole shareholder of 1010 is the wife
of the President of the Company. 1010 is currently paid $8,167 per month
plus expenses and is retained until February 1, 2000 pursuant to a
consulting agreement.
10. Employee Benefit Plan:
----------------------
In fiscal 1996, the Company adopted a 401(k) savings plan, whereby
participants can elect to defer up to a specified minimum of their
compensation and the Company will match their contribution up to 3% of the
employee's base compensation. In fiscal 1999 and 1998, the Company
contributed $14,687 and $9,429 to the plan, respectively.
11. Subsequent Event:
-----------------
On August 4, 1999 the Company finalized a $1,750,000 private sale to an
investor of 2,027 shares of Series A Preferred Stock,("Preferred Stock")
representing approximately 20% of the outstanding common stock of the
Company on an as converted basis. The Preferred Stock has a liquidation
preference of $1,750,000, pays a dividend at the rate of 10% per annum
payable in cash or Common Stock at the Company's option and is convertible
into an aggregate of 2,027,000 shares of the Company's Common Stock,
subject to adjustment under certain circumstances. As long as 2,027 shares
of the Preferred Stock remain outstanding, the holders of a majority of
such shares may elect one director of the Company. In addition, such
holders are entitled to a right of first refusal on new securities issued
by the Company, subject to certain exclusions. The Company may not create
or increase the authorized number of shares of any class or series of stock
ranking prior to or on parity with the Preferred Stock either to dividends
or liquidation without approval of the majority of the holders of the
Preferred Stock.
The Company has agreed to file a registration statement with respect to the
resale of the common stock underlying the Preferred Stock within 45 days
following closing, which is required to be declared effective within 120
days of closing, subject to certain exceptions. If such filing and
effectiveness are not achieved by the deadlines, the investor may be
entitled to certain penalties. In addition, upon effectiveness of such
registration statement the Preferred Stock will pay a reduced dividend at
the rate of 5% per annum. If not previously converted by the investor, the
Series A Preferred Stock will automatically convert into Common Stock in
quarterly installments over a period of one year following the
effectiveness of the registration statement.
F-17
<PAGE>
In connection with the placement, the Company paid Venture Partners
Capital, LLC, a registered broker-dealer, a $140,000 cash fee and issued
seven-year warrants to purchase 566,875 shares of Common Stock at $1.31 per
share.
F-18
<PAGE>
No dealer, salesman, or any other person
has been authorized to give any
information or to make any
representation not contained in this
prospectus in connection with the
offering made hereby, and, if given or
made, such information or representation 2,027,000 SHARES
must not be relied upon as having been
authorized by MDI. This prospectus does
not constitute an offer to sell, or a
solicitation of an offer to buy, any of
the securities offered hereby in any
jurisdiction to any person to whom it is MDI ENTERTAINMENT,INC.
unlawful to make such an offer or
solicitation in such jurisdiction. COMMON STOCK
Neither the delivery of this
prospectus nor any sale made hereunder PROSPECTUS
shall under any circumstances create any
implication that there has been no
change in the affairs of MDI since the
date hereof or that the information
contained herein is correct as of any
time subsequent to the dates as of which
such information is furnished.
TABLE OF CONTENTS
Page
Prospectus Summary 2
Risk Factors 4
Use of Proceeds 8
Market For Common Equity and Related
Stockholder Matters 8
Dividend Policy 10
Capitalization 10
Selected Consolidated Financial Data 11
Management's Discussion and Analysis
of Financial Condition and
Results of Operations 16
Business 18
Management 30
Principal Stockholders 39
Selling Stockholders 40
Certain Relationships and Related _____________, 1999
Transactions 41
Description of Securities 43
Shares Eligible for Future Sale 45
Plan of Distribution 46
Legal Matters 48
Experts 48
Changes In and Disagreements with
Accountants on Accounting and
Financial Disclosure 48
Where You Can Find More Information 48
Special Note Regarding Forward
Looking Statements 48
Index to Consolidated Financial
Statements F-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Delaware General Corporation Law, Section 102(b)(7), enables a
corporation in its original certificate of incorporation, or an amendment
thereto validly approved by stockholders, to eliminate or limit personal
liability of members of its Board of Directors for violations of a director's
fiduciary duty of care. However, the elimination or limitation shall not apply
where there has been a breach of the duty of loyalty, failure to act in good
faith, intentional misconduct or a knowing violation of a law, the payment of a
dividend or approval of a stock repurchase which is deemed illegal or an
improper personal benefit is obtained. Delaware General Corporation Law, Section
145, permits a corporation organized under Delaware law to indemnify directors
and officers with respect to any matter in which a director or officer acted in
good faith and in a manner reasonably believed to be not opposed to the best
interests of the corporation, and, with respect to any criminal action, had
reasonable cause to believe the conduct was lawful.
Our Certificate of Incorporation includes the following language:
SEVENTH: Directors of the corporation shall not be liable to either the
corporation or its stockholders for monetary damages for a breach of
fiduciary duties unless the breach involves: (1) a director's duty of
loyalty to the corporation or its stockholders; (2) acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law; (3) liability for unlawful payment of dividends or
unlawful stock purchases or redemption by the corporation; or (4) a
transaction from which the director derived an improper personal
benefit.
-1-
<PAGE>
EIGHTH: 1. To the extent permitted by Delaware law from time to time in
effect and subject to the provisions of paragraph (2) of this Article,
the Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the
Corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by
him in connection with such action, suit or proceeding if he acted in
good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner
which he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was
unlawful.
2. The Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was a
director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense
or settlement of such action or suit if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best
interests of the Corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the Corporation unless and only
to the extent that the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper.
3. To the extent that a present and former director or officer of the
Corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in paragraphs (1) and (2) of
this Article, or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
4. Any indemnification under paragraphs (1) and (2) of this Article
(unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that
indemnification of the present or former director, officer, employee or
agent is proper in the circumstances because he has met the applicable
standard of conduct set forth in said paragraphs (1) and (2). Such
determination shall be made, with respect to a person who is a director
or officer at the time of such determination, (i) by a majority vote of
the directors who are not parties to such action, suit or proceeding,
even though less than a quorum, or (ii) by a committee of such directors
designated by majority vote of such directors, even though less than a
quorum, or (iii) if there are no such directors, or if such directors so
direct, by independent legal counsel in a written opinion, or (iv) by
the stockholders.
-2-
<PAGE>
5. Expenses (including attorneys' fees) incurred by an officer or
director in defending a civil, criminal, administrative or investigative
action, suit or proceeding shall be paid by the Corporation in advance
of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director or officer to repay
such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the Corporation as authorized in this Article. Such
expenses (including attorneys' fees) incurred by former directors and
officers or other employees and agents shall be so paid upon such terms
and conditions, if any, as the Corporation deems appropriate.
6. The indemnification and advancement of expenses provided by, or
granted pursuant to, the other paragraphs of this Article shall not be
deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses shall be entitled under any
by-law, agreement, vote of the stockholders or disinterested directors
or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office.
7. The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against any
liability asserted against him and incurred by him in any such capacity,
or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the
provisions of the Delaware General Corporation Law.
8. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of
the heirs, executors and administrators of such a person.
9. Each person who serves as a director, officer, employee or agent of
the Corporation or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise while this Article
EIGHTH is in effect shall be deemed to be doing so in reliance on the
provisions of this Article EIGHTH, and neither the amendment or repeal
of this Article EIGHTH, nor the adoption of any provision of this
Certificate of Incorporation inconsistent with this Article EIGHTH,
shall apply to or have any effect on the indemnification of such
director, officer, employee or agent occurring prior to such amendment,
repeal, or adoption of an inconsistent provision.
MDI has a liability insurance policy in effect for officers and
directors. Such insurance, in certain instances, insures our directors and
officers against liabilities arising under the Securities Act, including
liabilities arising out of the offering made by this registration statement.
-3-
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or expected to be incurred by MDI in connection with the
issuance and distribution of the securities being offered hereby (items marked
with an asterisk (*) represent estimated expenses):
SEC Registration Fee $ 810*
Legal Fees and Expenses 10,000*
Accounting Fees and Expenses 5,000*
Miscellaneous -*
--------
Total $15,810*
--------
* Estimate
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In the past three years, we have made the following sales of
unregistered securities, all of which sales were exempt from the registration
requirements of the Securities Act of 1933, as amended, by virtue of the
provisions of Section 4(2) and/or Section 3(b) of the Securities Act.
In August 1997, we sold 451,500 shares of common stock at $1.00 per
share (an aggregate of $451,500) to International Buying Power Corporation and
Millenium Holdings Group, Inc.
In November 1997, we sold 25,000 shares of common stock at $0.01 per
share (an aggregate of $250) to Millenium Holdings Group, Inc., a consultant.
In August 1999, we sold 2,027 shares of Series A Preferred stock at
$863.33 per share (an aggregate of $1,750,000) to International Capital
Partners, LLC.
As of September 9, 1999, options to purchase 667,500 shares of common
stock have been issued under our stock option plan and options to purchase
300,000 shares of common stock have been granted outside of our stock option
plan, at prices ranging from $0.28 to $0.37 per share. In addition, warrants to
purchase 596,875 shares of common stock have been issued at prices ranging from
$0.28 to $1.31 per share.
-4-
<PAGE>
ITEM 27. EXHIBITS
IN ADDITION, ADD THE FOLLOWING EXHIBITS TO THIS REGISTRATION STATEMENT:
EXHIBIT NO. DESCRIPTION
3.1 Certificate of Incorporation of MDI Entertainment, Inc. (f/k/a Puff
Process Inc.) dated December 29, 1994, as amended.(2)
3.2 Certificate of Amendment to the Certificate of Incorporation of MDI
Entertainment, Inc. dated February 28, 1999.(3)
3.3 Amended and Restated By-Laws of MDI Entertainment, Inc. dated April 27,
1999.(5)
3.4 Certificate of Designations, Preferences and Rights of Series A
Preferred Stock, dated August 4, 1999.(4)
4.1 Registration Rights Agreement dated August 8, 1997, between MDI
Entertainment Inc., Steven M. Saferin and Agostino T. Galluzzo.(1)
4.2 1998 Stock Option and Award Plan, dated September 22, 1998.(1)
4.3 Registration Statement dated August 4, 1999 between MDI Entertainment,
Inc. and International Capital Partners, LLC.(4)
4.4 Stock Purchase Agreement dated August 4, 1999 between MDI Entertainment,
Inc. and International Capital Partners, LLC.(4)
5 Opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (6)
10.1 Second Amended and Restated Employment Agreement dated August 8, 1997,
as amended, between Media Drop-In Productions, Inc. and Steven M.
Saferin.(1)
10.2 Employment Agreement dated April 30, 1996, as amended, between Media
Drop-In Productions, Inc., Kenneth Przysiecki and Steven M. Saferin.(1)
10.3 First Amended and Restated Consulting Agreement dated August 8, 1997,
between Media Drop-In Productions, Inc. and 1010 Productions, Inc.(1)
10.4 Lease dated June 1992, as amended, between Ann Street Limited
Partnership by Tunxis Management Co., II, and Media Drop-In Productions,
Inc.(1)
10.5 Amended Lease Agreement between KWK IV, LLC. and Media Drop-In
Productions,Inc. dated March 25, 1999.(5)
10.6 Agreement and Plan of Reorganization dated August 8, 1997, between MDI
Entertainment, Inc., MDI-Connecticut, Inc., MDI-Missouri, Inc. (DE),
Media Drop-In Productions, Inc., MDI-Missouri, Inc. (MO), Steven M.
Saferin and Agostino T. Galluzzo.(2)
10.7 Commission Agreement dated December 20, 1994, between Media Drop-In
Productions, Inc. and Stamford Media Group, LLC.(2)
10.8 Letter of Intent dated July 31, 1998, between MDI Entertainment, Inc.,
Fancaster, Inc. and Craig Krueger.(2)
11.1 Statement Regarding Computation of Per Share Earnings (included in Note
1 of the "Notes to Consolidated Financial Statements").(5)
21.1 Subsidiaries of MDI Entertainment, Inc.(5)
23.1 Consent of Arthur Andersen LLP (6)
23.2 Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (contained in
the opinion filed as Exhibit 5)(6)
24 Power of Attorney (included on the signature pages hereto)
27.1 Financial Data Schedule.(5)
--------------------------
(1) Incorporated by reference from the Company's Form 10-SB, filed September
28, 1998.
(2) Incorporated by reference from the Company's Amendment No. 1 to the Form
10-SB, filed February 1, 1999.
(3) Incorporated by reference from the Company's Form 10-QSB for the period
ended February 28, 1999.
(4) Incorporated by reference from the Company's Form 8-K filed August 12,
1999.
(5) Incorporated by reference from the Company's Form 10-KSB filed August
27, 1999.
(6) Filed herewith
-5-
<PAGE>
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Securities and Exchange Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement; provided, however, that paragraphs
(a)(1)(i) and (a)(1)(ii) do not apply if the Registration
Statement is on Form S-3, and the information required to be
included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of
1934, that are incorporated by reference in the registration
statement.
-6-
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) That, insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons pursuant to the foregoing provisions, or otherwise, we have been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by of expenses incurred or paid by a director, officer
or controlling person in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
-7-
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this Registration Statement on Form SB-2
("Registration Statement") and authorized this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
Hartford, State of Connecticut, September 13, 1999.
MDI ENTERTAINMENT, INC.
By: /s/Steven M. Saferin
------------------------
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Steven M. Saferin, his or her true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him or her and in his or her name, place, and stead, in any and all
capacities, to sign any and all pre- or post-effective amendments to this
Registration Statement, and to file the same with exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite or necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent may lawfully do or cause to be done by virtue hereof.
In accordance with to the requirements of the Securities Act, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
-8-
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/Steven M. Saferin President, Chief Executive Officer September 13,1999
- ------------------------- and Director
(Principal Executive Officer)
/s/Kenneth M. Przysiecki Chief Financial Officer, Secretary September 13,1999
- ------------------------- and Director
(Principal Financial Officer)
/s/Robert J. Wussler Director September 13,1999
- -------------------------
/s/Todd P. Leavitt Director September 13,1999
- -------------------------
/s/S. David Fineman Director September 13,1999
- -------------------------
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3.1 Certificate of Incorporation of MDI Entertainment, Inc. (f/k/a Puff
Process Inc.) dated December 29, 1994, as amended.(2)
3.2 Certificate of Amendment to the Certificate of Incorporation of MDI
Entertainment, Inc. dated February 28, 1999.(3)
3.3 Amended and Restated By-Laws of MDI Entertainment, Inc. dated April 27,
1999.(5)
3.4 Certificate of Designations, Preferences and Rights of Series A
Preferred Stock, dated August 4, 1999.(4)
4.1 Registration Rights Agreement dated August 8, 1997, between MDI
Entertainment Inc., Steven M. Saferin and Agostino T. Galluzzo.(1)
4.2 1998 Stock Option and Award Plan, dated September 22, 1998.(1)
4.3 Registration Statement dated August 4, 1999 between MDI Entertainment,
Inc. and International Capital Partners, LLC.(4)
4.4 Stock Purchase Agreement dated August 4, 1999 between MDI Entertainment,
Inc. and International Capital Partners, LLC.(4)
5 Opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (6)
10.1 Second Amended and Restated Employment Agreement dated August 8, 1997,
as amended, between Media Drop-In Productions, Inc. and Steven M.
Saferin.(1)
10.2 Employment Agreement dated April 30, 1996, as amended, between Media
Drop-In Productions, Inc., Kenneth Przysiecki and Steven M. Saferin.(1)
10.3 First Amended and Restated Consulting Agreement dated August 8, 1997,
between Media Drop-In Productions, Inc. and 1010 Productions, Inc.(1)
10.4 Lease dated June 1992, as amended, between Ann Street Limited
Partnership by Tunxis Management Co., II, and Media Drop-In Productions,
Inc.(1)
10.5 Amended Lease Agreement between KWK IV, LLC. and Media Drop-In
Productions,Inc. dated March 25, 1999.(5)
10.6 Agreement and Plan of Reorganization dated August 8, 1997, between MDI
Entertainment, Inc., MDI-Connecticut, Inc., MDI-Missouri, Inc. (DE),
Media Drop-In Productions, Inc., MDI-Missouri, Inc. (MO), Steven M.
Saferin and Agostino T. Galluzzo.(2)
10.7 Commission Agreement dated December 20, 1994, between Media Drop-In
Productions, Inc. and Stamford Media Group, LLC.(2)
10.8 Letter of Intent dated July 31, 1998, between MDI Entertainment, Inc.,
Fancaster, Inc. and Craig Krueger.(2)
11.1 Statement Regarding Computation of Per Share Earnings (included in Note
1 of the "Notes to Consolidated Financial Statements").(5)
21.1 Subsidiaries of MDI Entertainment, Inc.(5)
23.1 Consent of Arthur Andersen LLP (6)
23.2 Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (contained in
the opinion filed as Exhibit 5)(6)
24 Power of Attorney (included on the signature pages hereto)
27.1 Financial Data Schedule.(5)
--------------------------
(1) Incorporated by reference from the Company's Form 10-SB, filed September
28, 1998.
(2) Incorporated by reference from the Company's Amendment No. 1 to the Form
10-SB, filed February 1, 1999.
(3) Incorporated by reference from the Company's Form 10-QSB for the period
ended February 28, 1999.
(4) Incorporated by reference from the Company's Form 8-K filed August 12,
1999.
(5) Incorporated by reference from the Company's Form 10-KSB filed August
27, 1999.
(6) Filed herewith
EXHIBIT 5
[SEP&S LETTERHEAD]
September 13, 1999
MDI Entertainment, Inc.
201 Ann Street
Hartford, CT 06103
Re: Registration Statement on Form SB-2
Ladies and Gentlemen:
You have requested our opinion, as counsel for MDI Entertainment, Inc, a
Delaware corporation (the "Company"), in connection with the registration
statement on Form SB-2 (the "Registration Statement"), filed with the Securities
and Exchange Commission under the Securities Act of 1933, as amended (the
"Act"). The Registration Statement relates to an offering by certain selling
stockholders named therein (the "Stockholders") from time to time of up to
2,027,000 shares (the "Shares") of common stock, par value $.001 per share, of
the Company. All of the Shares being offered hereby are issuable upon the
conversion of, and interest and other amounts due under, the Company's Series A
Preferred Stock, par value $.001 per share (the "Preferred Stock").
We have examined such records and documents and made such examinations
of law as we have deemed relevant in connection with this opinion. We have
assumed that there will be no changes in applicable law between the date of this
opinion and the date the Shares proposed to be sold by the Stockholders pursuant
to the Registration Statement are actually sold. It is our opinion that the
Shares have been duly authorized and, when issued and delivered upon conversion
of the Preferred Stock in accordance its terms, will be validly issued, fully
paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Registration Statement. In so doing, we do not admit that we are
in the category of persons whose consent is required under Section 7 of the Act
or the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
Sincerely,
/s/ Squadron, Ellenoff, Plesent & Sheinfeld, LLP
------------------------------------------------
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated July 19, 1999 included in this Registration Statement and to all
references to our Firm included in this Registration Statement.
/s/Arthur Andersen LLP
-----------------------
Hartford, Connecticut
September 13, 1999
