<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1999.
-----------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- -----------------
Commission File Number: 0-24919
MDI ENTERTAINMENT, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 73-1515699
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
201 Ann Street
HARTFORD, CONNECTICUT 06103
----------------------------------------
(Address of principal executive offices)
(860) 527-5359
-------------------------------
(Registrant's telephone number)
(Former Name, Former Address and Former Fiscal Year, if changed since last
Report)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes No X
--- ---
As of April 14, 1999, 7,776,500 shares of the issuer's common stock were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ----
1
<PAGE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements..............................................................................3
Consolidated Balance Sheets as of February 28, 1999 (unaudited) and May 31, 1998........................3
Consolidated Statements of Operations (unaudited) for the nine months ended
February 28, 1999 and 1998..............................................................................4
Consolidated Statements of Operations (unaudited) for the three months ended
February 28, 1999 and 1998..............................................................................5
Consolidated Statement of Shareholders' Deficit as of February 28, 1999 (unaudited)
and May 31, 1998........................................................................................6
Consolidated Statements of Cash Flows (unaudited) for the nine months ended
February 28, 1999 and 1998..............................................................................7
Notes to Unaudited Consolidated Financial Statements....................................................8
Item 2. Management's Discussion and Analysis..............................................................10
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........................................................17
Item 4. Submission of Matters to a Vote of Security Holders..............................................17
Item 6. Exhibits and Reports on Form 8-K.................................................................19
Signatures.............................................................................................20
</TABLE>
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 28, May 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 440,315 $ 960,398
Accounts receivable 643,411 317,598
Inventory 184,994 417,651
Prepaid expenses 116,137 30,203
------------ ------------
Total current assets 1,384,857 1,725,850
Property and equipment, net 103,199 107,852
Licensing costs, net 272,435 213,077
Other (Note 3) 199,951 52,643
----------- -----------
Total other assets 472,386 265,720
----------- -----------
Total assets $ 1,960,442 $ 2,099,422
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Accounts payable $ 290,966 $ 346,491
Accrued liabilities 708,616 1,320,165
Notes payable - current portion 298,073 123,754
Deferred revenue (Note 2) 1,847,624 2,906,047
----------- -----------
Total current liabilities 3,145,279 4,696,457
Notes payable 279,185 27,000
Minority interest 35,029 35,268
----------- -----------
Total liabilities 3,459,493 4,758,725
Contingencies (Note 6)
Common stock, $0.001 par value,
25,000,000 shares authorized
7,776,500 issued and outstanding 7,777 7,777
Additional paid-in capital 348,348 348,348
Accumulated deficit (1,855,176) (3,015,428)
----------- -----------
Total shareholders' deficit (1,499,051) (2,659,303)
----------- -----------
Total liabilities and
shareholders' deficit $ 1,960,442 $ 2,099,422
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months ended
February 28,
1999 1998
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
Revenue $ 6,028,324 $ 1,230,125
Cost of revenue 3,234,381 912,259
------------ -----------
Gross profit 2,793,943 317,866
Selling, general and administrative expenses 1,586,521 1,288,502
------------ -----------
Operating income (loss) 1,207,422 (970,636)
Interest (income) expense, net (7,470) 16,415
Other expense, net -- 6,019
Minority interest (243) (8,755)
------------ -----------
Net income (loss) before income tax expense 1,215,135 (984,315)
Income tax expense (Note 5) 54,883 6,845
------------ -----------
Net income (loss) $ 1,160,252 $ (991,160)
------------ -----------
------------ -----------
Basic earnings (loss)
per common share (Note 4) $ 0.15 N/A
Diluted earnings (loss)
per common share (Note 4) $ 0.14 N/A
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
February 28
1999 1998
----------- ------------
(unaudited) (unaudited)
<S> <C> <C>
Revenue $ 1,922,071 $ 621,429
Cost of revenue 1,066,174 506,281
----------- -----------
Gross profit 855,897 115,148
Selling, general and administrative expenses 554,951 456,023
----------- -----------
Operating income (loss) 300,946 (340,875)
Interest (income) expense, net 3,832 7,909
Other expense, net -- 2,891
Minority interest -- (3,668)
----------- -----------
Net income (loss) before income tax expense 297,114 (348,007)
Income tax expense (Note 5) 23,685 1,145
----------- -----------
Net income (loss) $ 273,429 $ (349,152)
----------- -----------
----------- -----------
Basic earnings (loss)
per common share (Note 4) $ 0.04 $ (0.05)
Diluted earnings (loss)
per common share (Note 4) $ 0.03 $ (0.05)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
AS OF FEBRUARY 28, 1999 (UNAUDITED) AND MAY 31, 1998
-------------------------------------------------------------------
* PAR ADDITIONAL RETAINED
VALUE PAID-IN EARNINGS
SHARES $.001 CAPITAL (DEFICIT) TOTAL
---------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, May 31, 1998 7,776,500 $ 7,777 $ 348,348 $(3,015,428) $(2,659,303)
Net income -- -- -- 1,160,252 1,160,252
---------- ----------- ------------ ------------ ------------
BALANCE, February 28, 1999 7,776,500 $ 7,777 $ 348,348 $(1,855,176) $(1,499,051)
---------- ----------- ------------ ------------ ------------
---------- ----------- ------------ ------------ ------------
</TABLE>
* - 25,000,000 SHARES AUTHORIZED
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
February 28,
1999 1998
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,160,252 $(991,160)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Minority interest (243) (8,754)
Depreciation and amortization 84,034 148,007
Change in assets and liabilities:
Increase in accounts receivable (325,813) (1,750,630)
Decrease (increase) in inventory 232,657 (74,903)
Increase in prepaid expenses (85,934) (15,988)
Increase in licensing costs (124,985) (84,369)
(Increase) decrease in other assets (147,304) 27,069
Decrease in accounts payable (55,525) (218,394)
(Decrease) increase in accrued expenses (667,278) 270,272
Increase (decrease) in taxes payable 55,729 (44,322)
(Decrease) increase in deferred revenue (1,058,423) 3,178,138
-------------- --------------
Net cash (used for) provided by operating activities (932,833) 434,966
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (13,754) (24,157)
-------------- --------------
Net cash used for investing activities (13,754) (24,157)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Conversion of accrued commissions to note payable 600,000 --
Repayment of financing arrangements (173,496) (260,812)
Borrowings from long-term debt -- 200,000
Repayment of borrowings from stockholder -- (70,000)
Borrowings from stockholder -- 60,000
Proceeds from sale of stock -- 340,201
------------ -------------
Net cash provided by financing activities 426,504 269,389
------------ -------------
NET (DECREASE) INCREASE IN CASH (520,083) 680,198
CASH, beginning of the period 960,398 8,190
------------ -------------
CASH, end of the period $ 440,315 $ 688,388
------------ -------------
------------ -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for:
Interest $ 14,120 $ 46,014
Income taxes $ 1,502 $ 40,464
Non-cash items:
Reduction of loan to officer due to
Note payable and commissions owed him $ -- $ 456,023
Issuance of note in connection with exchange
Transaction to shareholders $ -- $ 300,000
Reduction of accrued expenses used to offset
Loan to officer $ -- $ 183,023
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR PERIOD ENDED
FEBRUARY 28, 1999
1. PRESENTATION OF UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
Information in the accompanying interim consolidated financial
statements and notes to the financial statements for the nine-month periods
ended February 28, 1999 and 1998 is unaudited. The accompanying interim
unaudited consolidated financial statements have been prepared by the Company in
accordance with generally accepted accounting principles and Regulation S-B.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month period ended February 28, 1999 are not
necessarily indicative of the results that may be expected for the year ending
May 31, 1999. The consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
audited financial statements of the Company as and for the year ended May 31,
1998.
2. REVENUE RECOGNITION
Revenue is derived by the Company from contracts with the state
lotteries for scratch ticket games based on licensed brand names and
entertainment properties. The Company provides the lotteries with second chance
prize packages consisting of grand prizes and various consolation prizes in
addition to marketing support related to the games. Many of the lottery
contracts require the lotteries to pay the Company in full upon the signing of
the contract. The Company defers this revenue and recognizes the revenue when
the terms of the applicable game are satisfied (i.e., the shipment of contracted
merchandise).
3. OTHER ASSETS
During Fiscal 1999, the Company has capitalized approximately $105,200
of costs associated with investment banking services related to seeking
financing through either the equity markets or debt. Also capitalized is
approximately $62,300 of legal costs associated with the Company's registration
of its securities with the Securities and Exchange Commission for the purpose of
becoming a reporting entity.
4. EARNINGS PER SHARE
Basic earnings per common share are based on the average number of
common shares outstanding during the fiscal period. Diluted earnings per common
share include, in addition to the above, a dilutive effect of common share
equivalents during the fiscal year. Common share equivalents represent dilutive
stock options using the treasury method. The Company had 525,729 and 276,250
common share equivalents during the three and nine month periods ended February
28, 1999. There were no common share equivalents for these same periods in
fiscal 1998. The number of shares used in the earnings per common share
computation for the 1999 and 1998 periods were as follows:
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
1999 1998 1999 1998
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Shares: Basic weighted average common
shares outstanding 7,776,500 7,776,500 7,776,500 N/A
Diluted weighted average common
shares outstanding 8,302,229 7,776,500 8,052,750 N/A
</TABLE>
Due to the fact that the Company did not issue shares associated with its
reverse mergers until August 1997, an earnings per share computation is not
relevant for the aggregate nine-month period ended February 28, 1998.
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 109 provides for
recognition of a significant deferred tax asset for all future deductible
temporary differences that, more likely than not, will provide the Company a
future benefit. As of February 28, 1999 and May 31, 1998, the Company had a
significant deferred tax asset, primarily as a result of net operating loss
carry-forwards.
The Company has established a valuation allowance for the full amount
of this deferred tax asset. No provision for deferred tax liability was recorded
because there was no significant item which would result in a deferred tax
liability.
The Company has a significant net operating loss carry-forward at
February 28, 1999 and May 31, 1998. Due to such carry-forward, the Company
reported minimum tax expense at February 28, 1999 and May 31, 1998,
respectively.
6. CONTINGENCIES
The Company is involved in various lawsuits incidental to its business.
The Company believes that these proceedings, in the aggregate, will not have a
material adverse effect on the Company's operations or financial position.
9
<PAGE>
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD LOOKING STATEMENTS THAT
INVOLVE CERTAIN RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the notes thereto
appearing elsewhere in this Form 10-QSB. All statements contained herein that
are not historical facts, including but not limited to, statements regarding the
Company's current business strategy and the Company's 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 the Company and its
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 contained in the Company's Registration Statement on
Form 10-SB under the caption "Description of Business-Risk Factors." The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which statements are made pursuant to the Private
Litigation Reform Act of 1995 and, as such, speak only as of the date made.
The Company's principal business is the scratch ticket segment of the
government lottery industry. The Company is a leader in designing and marketing
instant scratch ticket games based on licensed brand names and entertainment
properties and the Company's lottery promotions feature such properties licensed
by the Company. 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 logoed 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 (Registered Trademark), Harley-Davidson 1200
Sportster motorcycles.
The Company developed its strategy of identifying such properties in
early 1996. Prior to that time, the Company had developed a series of promotions
that utilized popular videotapes, compact discs and audiocassettes as second
chance lottery prizes. Those promotions enabled the Company 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 Company derives over ninety-five percent (95%) of its revenues from
lotteries in two distinct ways. First, the Company 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. License fees typically include an up-front
license fee and a royalty based on the manufacturing costs 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. License and royalty fees make up less than 7% of total revenues. Ticket
quantities range from about one million to as many as 60 million with an average
quantity of about five million. The Company's second source of lottery revenue
is the sale of logoed 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 licensed property
the lottery is utilizing. This sale of merchandise represents nearly 93% of
MDI's total revenue.
10
<PAGE>
Typically, the Company purchases merchandise from other licensees of
the property and resells the merchandise to the lottery at a price that is
designed to include overhead costs, profit, shipping and handling and any
marketing support the Company provides the lottery such as brochures, posters or
other advertising assistance for which there are no separate charges.
The Company is in negotiations to obtain additional properties and
expects to reach several agreements over the next six to 12 months; however
there can be no assurance that such agreements will actually be reached. Some of
these agreements may require the expenditures of significant up-front advances.
The Company has ceased negotiating a joint venture with a marketing and
sales company to establish networks of alpha-numeric pagers for the purpose of
selling banner advertising on the various news slots available on such pagers.
<TABLE>
<CAPTION>
NINE MONTHS ENDED FEBRUARY 28
-------------------------------------------------------
1999 % 1998 %
----------- ------ ---------- ------
<S> <C> <C> <C> <C>
Total revenue $ 6,028,324 100.0% $1,230,125 100.0%
Cost of revenues 3,234,381 53.7% 912,259 74.2%
Gross profit 2,793,943 46.3% 317,866 25.8%
Selling, general and
Administrative expenses 1,586,521 26.3% 1,288,502 104.7%
Operating income (loss) 1,207,422 20.0% (970,636) -78.9%
Interest expense 11,034 0.2% 41,428 3.4%
Interest income (18,504) -0.3% (25,013) -2.0%
Other expense, net -- 0.0% 6,019 0.5%
Minority interest (243) 0.0% (8,755) -0.7%
Net income (loss) before income tax
expense 1,215,135 20.2% (984,315) -80.0%
Income tax expense 54,883 0.9% 6,845 0.6%
Net income (loss) $ 1,160,252 19.2% $(991,160) -80.6%
</TABLE>
11
<PAGE>
NINE MONTHS ENDED FEBRUARY 28, 1999, COMPARED TO NINE MONTHS ENDED
FEBRUARY 28, 1998
Results for the nine months ended February 28, 1999 reflect
revenue of $6,028,000 as compared to $1,230,000 for the same period in 1998.
This revenue increase of 490% reflects the successful shift of the Company's
business to licensed promotions. Revenue during the nine-month period ended
February 28, 1999 was derived primarily from sales based on four
entertainment-based or brand name properties including
Harley-Davidson (Registered Trademark) (65% of revenue), Wheel of
Fortune (Registered Trademark) (15% of revenue), Star Trek (Trademark)
(12% of revenue) and Pepsi Cola (Registered Trademark) (7% of revenue).
Cost of revenue as a percentage of revenue decreased to 53.7%
from 74.2% for the nine months ended February 28, 1999, compared to the same
period in 1998. The nine-month period ended February 28, 1999 more accurately
reflects the current cost to revenue ratio of the Company's licensed promotions.
Certain marketing promotion costs that are fixed or partially fixed could not be
properly absorbed in the nine-month period ended February 28, 1998, as a result
of lower revenues, resulting in a higher cost to revenue ratio of 74.2%.
Gross profit increased in the nine months ended February 28, 1999
to $2,794,000 (46.3% of revenue) from $317,900 (25.8% of revenue) in the same
period in 1998 due to the significantly higher revenue and the improved profit
margin on licensed promotions.
Selling, general and administrative expenses were $1,587,000
(26.3% of revenue) for the nine months ended February 28, 1999 compared to
$1,289,000 (104.7% of revenue) for the same period in 1998. Salary and employee
fringe expense increases of $203,000 accounted for most of the 1999 increase.
This was due to the Company's efforts to add human resources to properly manage
the growth expected to continue during fiscal year 1999. Although sales
increased by 490% during this period, selling, general and administrative
expenses only increased by 23% in actual dollars. The decrease of selling,
general and administrative expenses as a percentage of revenue for 1999 (26.3%)
reflects fixed or partially fixed costs spread over a greater revenue base.
Operating income was $1,207,000 (20% of revenue) for the nine
months ended February 28, 1999 compared to an operational loss of $971,000 for
the same period in 1998. This was principally due to the factors described
above.
Interest expense was $11,000 for the nine months ended
February 28, 1999 compared to $41,400 for the same period in 1998. This decrease
is attributable to a reduction in the principal amount of debt outstanding.
Interest income was $19,000 for the nine-month period ended
February 28, 1999 compared to $25,000 for the same period in 1998. The interest
income for 1999 was principally from savings interest. The interest income for
1998 during this same period 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.
For the reasons set forth above, the Company had a profit of
$1,215,000 before taxes for the nine months ended February 28, 1999 as compared
to a loss of $984,000 for the same period in 1998.
12
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY 28
-----------------------------------------------------
1999 % 1998 %
------------- ------ -------- ------
<S> <C> <C> <C> <C>
Total revenue $ 1,922,071 100.0% $621,429 100.0%
Cost of revenues 1,066,174 55.5% 506,281 81.5%
Gross profit 855,897 44.5% 115,148 18.5%
Selling, general and
Administrative expenses 554,951 28.9% 456,023 73.4%
Operating income (loss) 300,946 15.7% (340,875) -54.9%
Interest expense 10,549 0.5% 15,224 2.4%
Interest income (6,717) -0.3% (7,315) -1.2%
Other expense, net -- 0.0% 2,891 0.5%
Minority interest -- 0.0% (3,668) -0.6%
Net income (loss) before income
tax expense 297,114 15.5% (348,007) -56.0%
Income tax expense 23,685 1.2% 1,145 0.2%
Net income (loss) $ 273,429 14.2% $(349,152) -56.2%
</TABLE>
THREE MONTHS ENDED FEBRUARY 28, 1999 COMPARED TO THREE MONTHS ENDED
FEBRUARY 28, 1998
Results for the three months ended February 28, 1999 reflect revenue
of $1,922,000 as compared to $621,000 for the same period in 1998. This
revenue increase reflects the shift of the Company's business to licensed
promotions. Revenue during the three months ended February 28, 1999 was
derived primarily from sales based on three entertainment-based or brand name
properties, including Harley-Davidson (Registered Trademark) (72% of revenue),
Star Trek (Trademark) (15% of revenue) and Wheel of Fortune (Registered
Trademark) (13% of revenue).
Cost of revenue as a percentage of revenue decreased to 55.5% from
81.5% for the three months ended February 28, 1999 compared to the same
period in 1998. The three-month period ended February 28, 1999 more
accurately reflects the current cost to revenue ratio of the Company's
licensed promotions. Certain marketing promotion costs that are fixed or
partially fixed could not be properly absorbed in the three-month period
ended February 28, 1998, as a result of lower revenues, resulting in a higher
cost to revenue ratio of 81.5% .
13
<PAGE>
Gross profit increased in the three months ended February 28, 1999 to
$856,000 (44.5% of revenue) from $115,000 (18.5% of revenue) in the same period
in 1998 due to the significantly higher sales volume and the improved profit
margin on licensed promotions.
Selling, general and administrative expenses were $555,000 (28.9% of
revenue) for the three months ended February 28, 1999 compared to $456,000
(73.4% of revenue) for the same period in 1998. Salary and employee fringe
expense increased by $47,000 in the 1999 period due to the Company's efforts
to add human resources to properly manage the growth expected to continue
during fiscal year 1999. Expenses related to being a publicly reporting
company were $49,000 compared to $5,000 for the same period in 1998. These
legal, accounting and shareholder related costs were primarily associated
with the proxy and Annual Meeting of Stockholders held in New York on
February 9, 1999. The decrease as a percentage of revenue reflects fixed or
partially fixed costs spread over a greater revenue base.
Operating income was $301,000 (15.7% of revenue) for the three months
ended February 28, 1999 compared to an operational loss of $341,000 for the same
period in 1998. This was principally due to the factors described above.
Interest expense was $10,500 for the three months ended February 28,
1999 compared to $15,200 for the same period in 1998.
For the reasons set forth above, the Company had a profit of $297,100
before taxes for the period ended February 28, 1999 as compared to a loss of
$348,000 for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of February 28, 1999, the Company had cash and cash equivalents of
$440,300 compared to $960,400 as of the same period in 1998. The decrease was
due principally to the collection of several large contract receivables during
the period ended February 28, 1998, increasing cash at that period end. As of
February 28, 1999, the Company had a net working capital deficit of $1,760,400.
However, $1,847,600 of this deficit was deferred revenue (i.e., revenue as to
which the Company has received payments, but which is recorded as a deferred
revenue liability until the shipment of contracted merchandise).
The cash requirements of funding the Company's growth have historically
exceeded cash flow from operations. Accordingly, the Company has satisfied its
capital needs primarily through debt and equity financing, as well as cash flow
from operations. The Company currently intends to seek additional financing over
the next six months. The Company has not determined the amount it will seek to
raise or the form of such financing (i.e. debt or equity). However, the Company
has had preliminary discussions concerning raising approximately $500,000 of
short-term debt during the period ending May 31, 1999. There can be no assurance
that additional financing will be obtained on favorable terms or at all.
The Company's outstanding indebtedness as of February 28, 1999 was
$577,300, primarily represented by a note with a remaining balance of $554,800,
bearing interest at 10.75% per annum and payable in monthly installments with
the final payment date of December 15, 2001. 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 Company does not have any material capital commitments and does not
currently anticipate making any substantial expenditures other than in the
normal course of business activity, including the procurement of new licenses.
14
<PAGE>
LICENSED PROPERTIES
The Company has entered into 13 separate contracts with eleven (11)
lotteries based on the Harley Davidson (Registered Trademark) property, such
contracts represent a combined total of over $5.4 million in revenue, of
which approximately $3.9 million was contributed thus far in fiscal 1999.
Included is MDI's first contract with a Canadian lottery, the British
Columbia Lottery Corporation. The Company secured the Harley-
Davidson (Registered Trademark) license in December 1997 and will continue to
aggressively market the property to lotteries throughout the United States
and Canada.
The Company's Wheel of Fortune (Registered Trademark) license expired
in November 1998. However, the Company and Wheel of Fortune (Registered
Trademark) representatives have agreed to extend this license for another
year at a cost of $10,000. Two additional lotteries have agreed to launch
Wheel of Fortune (Registered Trademark) games during the fiscal year ending
May 31, 1999.
The Company's Star Trek (Trademark) property, which has been used or
is scheduled to be used by a total of ten lotteries, is beginning to decline
in popularity. The Company is marketing Star Trek (Trademark) on a "last
chance" basis.
The Company has entered into a three-year licensing agreement with
Universal Spaceworks LLC for the property Heroes of Space (Trademark). Heroes
of Space (Trademark) is a group of 16 former astronauts aligned to call
attention to the U.S. Space program and their participation.
SEASONALITY AND REVENUE FLUCTUATIONS
The Company's business is not seasonal. However, the Company's revenues
are expected to fluctuate as individual license-based promotions commence or
wind down and terminate. The useful life of a promotion is generally relatively
short as the novelty of the game or the popularity of the licensed material
wanes over time. In addition, the Company's licenses (which are generally for
1.5 to 3 years) terminate at various times over the next several years. The life
span of a promotion, the timing of agreements with the lotteries to run
promotions, the acquisition of new licenses and the commencement of new
promotions are unpredictable. Also, 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. Accordingly, period to period
comparisons may not be indicative of future results.
YEAR 2000
The Company has commenced an assessment of the hardware, software
and network components of its information technology systems. To date, the
Company has replaced approximately 19 of its 22 CPUs with those that,
according to manufacturers' representations, are Year 2000 compliant. The
Company anticipates that the remaining three CPUs will be upgraded before May
31, 1999. The Company also purchased a new server which, according to
manufacturers' representations, is Year 2000 compliant. The operating systems
used by the Company are Windows 95 and Microsoft Office 97, which are both
Year 2000 compliant according to manufacturers' representations. The Company
anticipates that its network will be upgraded as well by May 31, 1999.
New accounting and operational "SBT" software has been obtained
which, according to manufacturers' representations, is Year 2000 compliant
and is expected to be installed after the close of the Company's fiscal year
(May 31, 1999) to safeguard against delays in meeting financial reporting
requirements. Peripheral operational software, which was customized, is being
15
<PAGE>
reviewed for integration with the "SBT" accounting and operational software.
Due to the Company's 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
manufacturers' representations, is Year 2000 compliant. The Company has
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.
Two third-party subcontractors are utilized by the Company. One is a
fulfillment facility and the other a data collection house. The Company has
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 the Company with assurances
that their hardware will also be Year 2000 compliant.
The original budget for Year 2000 compliance work was $50,000. As of
this date, it is expected this budget will be met.
The Company's most substantial foreseeable risk in respect of the Year
2000 is with third-party subcontractors and the Company's customized software
which supports them. To insure the Company's ability to function in this period
of uncertainty, the Company has 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.
The Company believes it has taken appropriate steps to be Year 2000
compliant. It has also prepared a contingency plan to handle as many risks as it
foresees. However, no assurance can be given that problems will not be
encountered in connection with the date change from December 31, 1999 to January
1, 2000. The Company does not believe these problems will have a material
adverse effect on the Company's operations.
16
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The Company adopted and the stockholders approved amendments to the
Certificate of Incorporation of the Company. Certain of such amendments took
effect on March 17, 1999, when the Company filed a Certificate of Amendment
to the Certificate of Incorporation. As a result of the foregoing, (1) the
aggregate number of shares of Common Stock which the Company has the
authority to issue was decreased from 200,000,000 to 25,000,000; and (2) the
authorized capital stock of the Company was increased such that the Company
has the authority to issue an additional 5,000,000 shares, all of which are
designated "preferred stock." The Board of Directors of the Company is
authorized to issue the preferred stock as preferred stock of any series and,
in connection with the creation of each such series, to fix by the resolution
or resolutions providing for the issue of shares thereof, the number of
shares of such series, and the designations, relative rights, preferences and
limitations, of such series, to the full extent permitted by the laws of the
State of Delaware.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on
February 9, 1999.
The following matters were voted upon at the Annual Meeting of
Stockholders:
1. Election of a Board of Directors.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES VOTED
- ------ ---------------------------------------------
FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C> <C>
Steven M. Saferin 6,238,902 0 7,402
Robert J. Wussler 6,238,902 0 7,402
Kenneth M. Przysiecki 6,238,902 0 7,402
Todd P. Leavitt 6,238,902 0 7,402
S. David Fineman 6,238,902 0 7,402
</TABLE>
17
<PAGE>
PART II
OTHER INFORMATION (CONTINUED)
2. Proposal to amend the Company's Certificate of Incorporation to decrease
the authorized Common Stock of the Company such that the aggregate number
of shares of Common Stock which the Company shall have the authority to
issue shall be decreased from 200,000,000 to 25,000,000.
<TABLE>
<CAPTION>
NUMBER OF SHARES VOTED
-----------------------------------------------
FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C>
6,241,571 11,615 106
</TABLE>
3. Proposal to amend the Company's Certificate of Incorporation to increase
the authorized capital stock of the Company such that the Company shall
have the authority to issue an additional 5,000,000 shares, all of which
shall be designated "Preferred Stock."
<TABLE>
<CAPTION>
NUMBER OF SHARES VOTED
-----------------------------------------------
FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C>
5,087,393 7,871 6,110
</TABLE>
4. Proposal to amend the Company's Certificate of Incorporation by adding an
Article pertaining to indemnification of directors, officers, employees
and agents of the Company.
<TABLE>
<CAPTION>
NUMBER OF SHARES VOTED
-----------------------------------------------
FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C>
6,249,317 11,869 106
</TABLE>
5. Proposal to effect a reverse stock split of the Company's Common Stock
(such split to combine a number of outstanding shares of Common Stock
between two and three, such number consisting of only whole shares and
tenths of shares, into one share of common stock).
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------------------------------
FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C>
6,124,648 116,536 2,108
</TABLE>
18
<PAGE>
PART II
OTHER INFORMATION (CONTINUED)
6. Proposal to adopt the Company's 1998 Stock Option and Award Plan.
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------------------------------
FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C>
5,069,334 10,632 4,108
</TABLE>
7. Ratification of the appointment of Arthur Andersen LLP as the independent
auditors and accountants for the Company for the year ending May 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------------------------------
FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C>
6,234,284 7,000 2,006
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 3.1 Amended Certificate of Incorporation
Exhibit 11 Statement re: computation of per share earnings
(included in Note 4 of the "Notes to
Unaudited Consolidated Financial Statements")
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K (None)
19
<PAGE>
SIGNATURE PAGE
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: April 14, 1999
MDI ENTERTAINMENT, INC.
(Registrant)
By: /s/STEVEN M. SAFERIN
--------------------------------
Steven M. Saferin
President and Chief Executive
Officer and Director
(Principal Executive Officer)
By: /s/KENNETH M. PRZYSIECKI
--------------------------------
Kenneth M. Przysiecki
Chief Financial Officer, Secretary and Director
(Principal Financial and Accounting Officer)
20
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
MDI ENTERTAINMENT, INC.
PURSUANT TO SECTION 242 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
The undersigned, the President of MDI Entertainment, Inc., a Delaware
corporation (the "Corporation"), does hereby certify as follows:
1. The Fourth Article of the Certificate of Incorporation of the Corporation
is hereby amended to read in its entirety as follows:
The aggregate number of shares which the Corporation shall have authority
to issue is thirty million (30,000,000), $.001 par value per share, of
which five million (5,000,000) shall be designated "preferred stock" and
twenty-five million (25,000,000) shall be designated "common stock".
Authority is hereby expressly granted to the Board of Directors of the
Corporation from time to time to issue the preferred stock as preferred
stock of any series and, in connection with the creation of each such
series, to fix by the resolution or resolutions providing for the issue of
shares thereof, the number of shares of such series, and the designations,
relative rights, preferences, and limitations, of such series, to the full
extent now or hereafter permitted by the laws of the State of Delaware.
2. The Certificate of Incorporation of the Corporation is hereby amended by
adding an Eighth Article to read in its entirety as follows:
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.
21
<PAGE>
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. 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.
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
22
<PAGE>
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.
3. The foregoing amendments were adopted by the holders of the number of
shares necessary to authorize or take such action at a meeting of the
stockholders of the Corporation in accordance with the provisions of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, MDI Entertainment, Inc. has caused this certificate to be
signed by its President this 28th day of February, 1999.
/s/ STEVEN M. SAFERIN
----------------------------
Steven M. Saferin, President
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 440,315
<SECURITIES> 0
<RECEIVABLES> 643,411
<ALLOWANCES> 0
<INVENTORY> 184,994
<CURRENT-ASSETS> 1,384,857
<PP&E> 444,377
<DEPRECIATION> (341,178)
<TOTAL-ASSETS> 1,960,442
<CURRENT-LIABILITIES> 3,145,279
<BONDS> 0
0
0
<COMMON> 7,777
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,960,442
<SALES> 6,028,324
<TOTAL-REVENUES> 6,028,324
<CGS> 3,234,381
<TOTAL-COSTS> 3,234,381
<OTHER-EXPENSES> 1,586,521
<LOSS-PROVISION> 1,207,422
<INTEREST-EXPENSE> 11,034
<INCOME-PRETAX> 1,215,135
<INCOME-TAX> 54,883
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,160,252
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.14
</TABLE>
