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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
MDI Entertainment, Inc.
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(Name of Small Business Issuer in Its Charter)
Delaware 73-1515699
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(State or Other Jurisdiction of (I.R.S. Employer Incorporation
Organization) or Identification No.)
201 Ann Street
Hartford, Connecticut 06103
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(Address of Principal Executive Offices) (Zip Code)
(860) 527-5359
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(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
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----------------------------- ------------------------------
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Securities to be registered under Section 12(g) of the Act:
Common Stock, Par Value $.001 per Share
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(Title of Class)
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(Title of Class)
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THIS REGISTRATION STATEMENT ON FORM 10-SB CONTAINS STATEMENTS WHICH CONSTITUTE
FORWARD- LOOKING STATEMENTS. THESE STATEMENTS APPEAR IN A NUMBER OF PLACES IN
THIS FORM 10-SB AND INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT
EXPECTATIONS OF MDI ENTERTAINMENT, INC. (TOGETHER WITH ITS SUBSIDIARIES, THE
"COMPANY") WITH RESPECT TO (I) THE COMPANY'S FINANCING PLANS, (II) TRENDS
AFFECTING THE COMPANY'S FINANCIAL CONDITION OR RESULTS OF OPERATIONS, (III) THE
IMPACT OF COMPETITION, AND (IV) THE EXPANSION OF CERTAIN OPERATIONS. INVESTORS
ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT THE ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AS A
RESULT OF VARIOUS FACTORS. THE INFORMATION CONTAINED IN THIS FORM 10-SB,
INCLUDING, WITHOUT LIMITATION, THE INFORMATION UNDER "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS" AND "DESCRIPTION OF
BUSINESS" IDENTIFIES IMPORTANT FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES. SEE "DESCRIPTION OF BUSINESS--RISK FACTORS--CAUTIONARY STATEMENTS
REGARDING FORWARD-LOOKING STATEMENTS."
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
MDI Entertainment, Inc. (the "Company") specializes in creating, marketing
and implementing entertainment-based promotions to North American lotteries. The
Company's principal business has been the scratch ticket segment of the
government lottery industry and the Company recently ran its first on-line
entertainment-based promotion, a lotto-type game featuring the Company's
licensed HARLEY-DAVIDSON-Registered Trademark- logo. The Company's lotteries
feature well-known brand names and entertainment properties licensed by the
Company and designed to attract new lottery players while providing a new
experience for existing lottery players. The Company's current promotions
feature a wide variety of such brand names and entertainment properties
including STAR TREK, WHEEL OF FORTUNE,-Registered Trademark- TWILIGHT ZONE, THE
ROCK AND ROLL HALL OF FAME AND MUSEUM, TIMES SQUARE 2000,
HARLEY-DAVIDSON,-Registered Trademark- PEPSI-COLA,.-Registered Trademark-
LOUISVILLE SLUGGER-Registered Trademark- and HEROS OF SPACE. 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-Registered Trademark- logoed T-shirts and caps, and other
related merchandise such as posters, money clips, telephones and, in the case of
HARLEY-DAVIDSON,-Registered Trademark- HARLEY-DAVIDSON 1200 Sportster
motorcycles. The Company currently derives most of its revenues from the sale to
the lotteries of such merchandise. Merchandise associated with the licensed
properties accounted for 66.7% of revenues for fiscal year ended May 31, 1998
and 0% of revenues for fiscal year ended May 31, 1997, reflecting the Company's
shift to licensed promotions.
The Company offers 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.
The Company also promotes non-lottery incentive programs to supermarkets,
financial institutions and hotels. The incentive programs include the
distribution of an incentive, such as a
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coupon, and the fulfillment of the promise that the coupon represents (i.e.
video, audio, talking book or CD title) when it is redeemed. The Company does
not currently derive significant revenues from such programs.
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 $2.00 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.
The Company is a leader in designing and marketing instant scratch ticket
games based on licensed brand names (such as HARLEY-DAVIDSON-Registered
Trademark- or PEPSI-COLA-Registered Trademark-) and entertainment properties
(such as STAR TREK). The Company attempts to identify properties for licensing
that have a large selection of logoed products available that appeal to adults
18 years of age and older, and the Company's instant ticket promotions typically
include logo-bearing merchandise related to such promotion as prizes. In certain
of its lottery promotions, merchandise is awarded as first prizes, such as
HARLEY DAVIDSON-Registered Trademark- motorcycles. In most of the Company
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. The Company generates most of its revenues from the sale of such
merchandise to the government agency sponsoring the lottery.
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.
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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-Registered Trademark-
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 the Company.
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
sale 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.
LOTTERY PROMOTIONS
The Company believes that to achieve and sustain growth in the lottery
business it must offer promotions which will attract new or lapsed lottery
players while maintaining or increasing play by current lottery players. The
Company's principal strategy is to enhance the entertainment value and
attractiveness of its 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 STAR TREK fans or
HARLEY-DAVIDSON-Registered Trademark- 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, the Company has 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 the Company 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, the
Company has licensing agreements with seven companies for nine licenses. The
Company is finalizing written agreements with two companies for two additional
licenses (Dick Clark Productions' AMERICAN BANDSTAND and BETTY BOOP-Registered
Trademark-). Such licenses are generally held between 1.5 and three years. Two
of the Company's licenses have expired in fiscal 1999, although the Company and
representatives of the licensor have agreed to extend one of the licenses for
another year. Included among the properties already licensed are STAR TREK,
WHEEL OF FORTUNE,-Registered Trademark- TWILIGHT ZONE, THE ROCK AND ROLL HALL OF
FAME AND MUSEUM, TIMES SQUARE 2000, HARLEY-DAVIDSON,,-Registered Trademark-
PEPSI-
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COLA,-Registered Trademark- LOUISVILLE SLUGGER-Registered Trademark- and HEROS
OF SPACE. The Company holds three licenses with two companies that each
resulted in 10% or more of the Company's revenues and costs in fiscal 1998.
None of the licenses resulted in 10% or more of the Company's revenues and costs
in fiscal 1997. The Company continually seeks to add to its licensed properties
and, to this end, has contacted, and continues to contact, potential licensors.
The Company derives most of its 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. The Company typically orders 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, the Company relies on third
parties for data entry and verification of the names and addresses on winning
tickets, and works 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-Dependance on
Suppliers."
The Company's license agreements for the targeted properties generally
require the Company to pay the licensor between 10% to 20% of the gross
licensing fees received by the Company from contracts with the lotteries.
Certain agreements also require the Company to pay the licensor an additional
20% of the gross royalty fees received by the Company from the printing of the
instant tickets, while certain other agreements increase the percentage of the
licensing fees instead. 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 the Company
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, such as
the PEPSI-COLA-Registered Trademark- license, which is limited to Wisconsin.
The Company has also obtained patents on playstyles or formats for instant
games based on existing games of chance or probability games. Such games include
JACKS OR BETTER,-Registered Trademark- BONANZA BINGO,-Registered Trademark-
HOLD'EM POKER,-TM- BLACK JACK, ROULETTE and DRAW POKER. See "-Intellectual
Property." Promotions associated with such games generate revenues from
licensing fees and royalties rather than from merchandise sales. The Company
does not currently derive significant revenues from such games.
CONTRACTS WITH LOTTERIES
The Company's 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 the Company 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 logoed merchandise. See "-Lottery Promotions-Licensed-Based
Games."
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The Company has had contracts with over two-thirds of all North American
lotteries, and currently has approximately 22 promotions that are in progress or
scheduled for introduction during 1999 in 16 state lotteries. In addition, the
Company intends to expand into other countries, starting with British Columbia
(Canada). Those states in which the Company has or has previously had promotions
are as follows:
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STATE PROMOTIONS IN PROGRESS OR NO CURRENT PROMOTIONS (BUT
SCHEDULED FOR INTRODUCTION PROMOTIONS PREVIOUSLY SOLD)
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Arizona X
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Colorado X
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Connecticut X
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Delaware X
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Florida X
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Georgia X
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Idaho X
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Illinois X
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Indiana X
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Iowa X
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Kansas X
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Louisiana X
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Maryland X
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Minnesota X
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Missouri X
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Montana X
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New Hampshire X
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New Jersey X
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New York X
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Ohio X
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Oregon X
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Pennsylvania X
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Rhode Island X
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<TABLE>
<CAPTION>
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STATE PROMOTIONS IN PROGRESS OR NO CURRENT PROMOTIONS (BUT
SCHEDULED FOR INTRODUCTION PROMOTIONS PREVIOUSLY SOLD)
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<S> <C> <C>
South Dakota X
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Texas X
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Vermont X
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Virginia X
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Washington X
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Wisconsin X
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The Company derived more than 10% of its revenues in fiscal 1998 from
contracts with the following lotteries: Colorado lottery (WHEEL OF FORTUNE);
Wisconsin lottery (WHEEL OF FORTUNE and other licensed properties); New Jersey
lottery (TWILIGHT ZONE) and New Jersey lottery (STAR TREK). The Company did not
derive more than 10% of its revenues in fiscal 1997 from any one contract with
the lotteries.
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 the Company to obtain
or retain approval in any jurisdiction could have a material adverse effect on
the Company. Generally, regulatory authorities have broad discretion when
granting such approvals. Although the Company has never been disqualified from a
lottery contract as a result of a failure to obtain any such approvals, no
assurance can be given that such approvals will be obtained or retained in the
future.
The Company has retained governmental affairs representatives in various
jurisdictions of the United States to monitor legislation, advise the Company on
contract proposals, and assist with other issues that may affect the Company.
The Company believes it has complied with all applicable state regulatory
provisions relative to disclosure concerning the activities of itself and its
advisors. The Company is not dependent on any such representative for any
material contract.
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The Company has employed registered lobbyists and retained paid consultants
in certain states. Failure to comply with state regulatory provisions relating
to the activities of the Company's advisors could adversely affect the Company's
ability to bid successfully upon lottery contracts.
The international jurisdictions in which the Company intends to market its
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.
Laws and regulations of individual states and countries are subject to
change. There can be no assurance that any such change would not adversely
affect the Company. The failure of the Company to comply with such laws and
regulations could have an adverse impact on the operations of the Company.
COMPETITION
The Company is 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,-Registered Trademark- TRIVIAL
PURSUIT-Registered Trademark- and BATTLESHIP.-Registered Trademark- Frost
Productions utilizes brand name puzzles and fortunes. Promo-Travel represents a
cruise line, casino and the casino game LET IT RIDE. Several other companies
made one-shot or sporadic licensing efforts. To date, the Company has not faced
substantial competition in attempting to acquire the rights to any brand name or
entertainment property. 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 does the Company, and may compete with the Company in both
obtaining licenses to brand name or entertainment properties and supplying
lottery products to the lottery jurisdictions.
In addition, to the best of the Company's knowledge, no other company has
ever attempted to utilize merchandise with a licensed lottery game. The Company
has positioned itself to utilize such merchandise prizes. For the last five
years, a large portion of the Company's lottery business has been the
distribution of videos, compact discs and audio cassettes as second-chance
prizes. The Company has distributed nearly five million such prizes and has
experienced little to no competition in this area of the business. See "-Risk
Factors-Competition."
INTELLECTUAL PROPERTY
In 1996, the Company created its Licensed and Patented Games division. To
launch this division, the Company 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, the Company owns patents for certain game formats or playstyles of
JACKS OR BETTER,-Registered Trademark- BONANZA BINGO-Registered Trademark- and
HOLD'EM POKER,-TM- (based on pre-existing games of chance) BLACK JACK, ROULETTE
and DRAW POKER (based on pre-existing probability games). The Company does
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not currently derive significant revenues form such games, but may seek to
develop them in the future.
Bonus Games, a Tennessee partnership ("BG"), is the owner of the
trademarked name JACKS OR BETTER. The Company has 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. The Company has
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. The agreement terminates on December 31, 1999. There can be no assurance
that after such license agreements terminate, the Company will be able to renew
them on an exclusive basis, on favorable terms or at all. Both BG and Stuart are
unaffiliated with the Company.
HISTORY AND ORGANIZATION
The Company is a Delaware corporation which was incorporated on December
29, 1994 under the name, Puff Process, Inc. The name of the Company 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
wholly-owned subsidiaries of the Company. These transactions resulted in a
change in control of the Company, with Steven Saferin holding approximately 56%
of the outstanding shares of Common Stock. See "-Risk Factors-Control By
Management." 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 the Company's
Missouri lottery program. MDI-Texas, LLC ("MDIT"), a company of which MDIP owns
66.7%, was formed in 1995 to operate the Company's Texas lottery program. MDIT
is being collapsed into MDIP now that the Texas lottery contracts have ended.
The equity portion remaining of the minority owners will be distributed in cash
in an amount, as of November 30, 1998, of approximately $35,000. The minority
owners are unaffiliated with the Company.
Steven M. Saferin, President, Chief Executive Officer and Director of the
Company, founded MDIP in 1986. Its 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.
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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 (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. The Company still markets
this promotion on a limited basis, although there are currently no IEC
promotions in progress or scheduled for introduction in the near future. In
1996, the Company changed its focus to concentrate on lotteries 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
The Company is currently evaluating several unrelated opportunities in the
lottery industry. The Company's reputation in the industry results in it
receiving numerous unsolicited approaches for joint ventures and other business
relationships. The Company anticipates that over the next several years, it
will attempt to introduce additional unrelated products to the lottery industry,
but there can be no assurance that it will do so or that such efforts will be
successful.
The Company is beginning to analyze opportunities presented by its current
and potential products with international lotteries. With the exception of
TIMES SQUARE 2000, none of the Company's current licenses permit it to market
the property outside the United States or, in one instance, North America. The
Company has had discussions with certain license holders about acquiring
international rights on a country-by-country basis. There can be no assurance
that such rights will be obtained. The Company is seeking full international
rights, if appropriate, for all new properties. In the next year, the Company
believes it will acquire international rights to several properties and commence
an international marketing effort.
The Company has also begun to investigate licensing opportunities outside
the lottery industry, but in gaming. Specifically, the Company opened
negotiations with license holders relative to licensing their properties for
slot machines. There can be no assurance that such negotiations will be
successful or, if successful, will result in the actual development and sale of
such slot machines.
In July 1998, the Company entered into a Letter of Intent with a marketing
and sales company to establish a joint venture for networks of alpha-numeric
pagers for the purpose of selling banner advertising on the various news slots
available on such pagers. The Company continues to review the possibility of a
joint venture. Should an agreement be finalized, the Company does not expect to
generate significant revenue until the second quarter of fiscal year 2000.
However, there can be no assurance that an agreement will be finalized or that a
joint venture will produce significant revenue at such time or at all.
The Company is at a preliminary stage with respect to the opportunities
described above, and the Company has not yet determined to pursue any such
opportunities, the cost associated
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therewith or the sources of funding therefor. The Company is likely to pursue
opportunities with respect to international lotteries; however, such pursuits
depend upon the Company's 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 the Company's reputation in
international lottery jurisdictions.
RECENT DEVELOPMENTS
LICENSED PROPERTIES
The Company has entered into 11 separate contracts with ten (10) lotteries
based on the HARLEY-DAVIDSON-Registered Trademark- property, with a combined
total of over $5.5 million in revenue, a majority of which is expected to be
generated in fiscal 1999. Included is the Company'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 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 does not expect to aggressively pursue additional STAR TREK contracts.
The Company has recently signed a new licensing agreement with the
organizers of TIMES SQUARE 2000, who are running the Times Square ball drop to
mark the start of the new millennium. The Company will commence aggressive
marketing of the TIMES SQUARE 2000 property to the lottery industry worldwide.
However, the Company anticipates most revenues from the property will be
generated in the second and third quarters of the fiscal year ending May 31,
2000 due to the theme of the property.
The Company has signed a new three-year licensing agreement with LOUISVILLE
SLUGGER and has reached agreement with at least one lottery to utilize the brand
in the spring of 1999, resulting in the majority of revenue to be recognized in
FY 2000.
In addition, the Company has reached an agreement with Dick Clark
Production's AMERICAN BANDSTAND to develop a joint venture for lottery
promotions throughout the world.
EMPLOYEES
As of January 28, 1999, the Company had fourteen 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. The
Company's employees are not represented by a union or governed by a collective
bargaining agreement. The Company has entered into employment
11
<PAGE>
agreements with Steven M. Saferin and Kenneth M. Przysiecki. See "Executive
Compensation-Employment Agreements." The Company has 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."
RISK FACTORS
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS. Statements in this
Registration Statement on Form 10-SB under the captions "Description of
Business," "Management's Discussion and Analysis or Plan of Operations," and
elsewhere in this Form 10-SB, as well as statements made in press releases and
oral statements that may be made by the Company or by officers, directors or
employees of the Company acting on the Company's behalf, that are not statements
of historical fact, constitute forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors,
including those described in this Form 10-SB under the caption "Risk Factors,"
that could cause the actual results of the Company to be materially different
from the historical results or from any future results expressed or implied by
such forward-looking statements. In addition to statements which explicitly
describe such risks and uncertainties, readers are urged to consider statements
labeled with the terms "believes," "belief," "expects," "plans," "anticipates,"
or "intends," to be uncertain and forward-looking. All cautionary statements
made in this Form 10-SB should be read as being applicable to all related
forward-looking statements wherever they appear. Investors should consider the
following risk factors as well as the risks described elsewhere in this Form
10-SB.
HISTORY OF LOSSES. The Company has incurred net losses of $1,413,053 and
$2,118,893 for the fiscal years ended May 31, 1997 and 1998. There can be no
assurance that the Company will operate profitably in the near future or at all.
NET WORTH. The Company had a negative net worth of $2,659,303, as of May 31,
1998. There is no assurance that the Company will be able to operate profitably
in the future or at all.
ADDITIONAL FINANCING. As of May 31, 1998, the Company's current liabilities
exceeded its current assets by $2,970,607 and its total liabilities (including
deferred income) exceeded it total assets by $2,659,303. In order to complete
its current licensing plan, the Company will need additional financing. The
Company currently intends to seek additional financing over the next 12 months;
however, the Company has not determined the amount which it will seek to raise
or the form of such financing (i.e. debt or equity). There can be no assurance
that the Company will obtain additional financing for its future operations or
capital needs on favorable terms, if at all.
RELIANCE ON MAINTAINING RIGHTS. The success of the Company will be dependent
upon the Company maintaining its current licenses for the rights to use names
and well known logoed merchandise. Certain of such licenses are terminable if
Steven M. Saferin does not control at least 50% of the Company and will need to
be renegotiated if the Company plans 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
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<PAGE>
to 3 years, although they may be terminated sooner under certain circumstances.
There is no assurance that the current licenses will be renewed once they
expire.
DEPENDENCE ON SUPPLIERS. The Company supplies the lotteries with logoed
merchandise pursuant to its contracts. The Company obtains approximately 95% of
this merchandise from authorized representatives of the licensor. There can be
no assurance that the logoed merchandise will be available from such authorized
representatives when needed by the Company to satisfy its obligations to the
lotteries.
RELIANCE ON ACQUIRING RIGHTS. The Company's success is dependent on its ability
to obtain rights to use well known entertainment and other similar properties
for use on lottery tickets and related merchandise. There is no assurance that
the Company will continue to obtain such licenses on favorable terms or at all.
RELIANCE ON KEY CUSTOMERS. The Company's licensing rights are, by design,
currently limited to United States or North American lotteries. There are
currently 37 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 the Company or if it only uses a
promotion once, there may be a significant negative impact on the Company's
revenue and earnings. The two state lotteries that purchased promotions
accounting for the highest percentage of the Company's revenues during fiscal
1998 were Wisconsin and New Jersey with 38% and 39%, respectively. There can be
no assurance that these lotteries will maintain the same level of promotions or
that other lotteries will increase promotions beyond current levels, if at all.
FLUCTUATING REVENUES. The Company's 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 the Company continually creates and
markets new promotions to its lottery customers. Lotteries frequently move
start dates for promotions thereby causing gaps in the Company's 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.
The Company 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 the Company's revenues and earnings.
UNCERTAIN MARKET/GOVERNMENT REGULATION. 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 expected report, may negatively impact state
lotteries and other gaming activities and hence the Company's business. No
assurance can be given that there will not be an adverse change in the lottery
laws of any jurisdiction in which the Company does business. In addition, the
Company 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 the Company and its customers or their key
personnel and could include requirements that the Company would be unable to
satisfy. See "-Government Regulation."
CONTROL BY MANAGEMENT. The Company's officers and directors beneficially own
approximately 61% of the outstanding Common Stock and Steven M. Saferin owns
approximately 56%. The Certificate of Incorporation of the Company does not
provide for cumulative voting for the Board
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of Directors. As a result, Steven M. Saferin and management have the ability to
control the election of the directors of the Company and the outcome of issues
submitted to a vote of the stockholders of the Company. See "Security Ownership
of Certain Beneficial Owners and Management."
DEPENDENCE ON KEY EXECUTIVE. The Company's success depends to a significant
extent on the performance and continued service of Steven M. Saferin, an officer
and director of the Company. MDIP has entered into an employment agreement with
Mr. Saferin which expires on August 8, 2002 or three years from the date the
Company first files a registration statement with the Securities and Exchange
Commission (the "SEC"), whichever is later. The Company does not carry key man
insurance. See "Executive Compensation-Employment Agreements."
COMPETITION. The Company acquires exclusive rights to license entertainment and
other properties to the U.S. lottery industry. To date, the Company has 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 that either of
these companies would not more aggressively pursue the types of entertainment
properties the Company has 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 the Company. 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."
NO LIKELIHOOD OF DIVIDENDS. The Company has never paid any cash or other
dividends on its Common Stock. At present, the Company does not anticipate
paying dividends on its Common Stock in the foreseeable future and intends to
devote any earnings to the development of the Company's business. Investors who
anticipate the need for immediate income from their investment should refrain
from purchasing the Company's Common Stock.
LACK OF LIQUIDITY. The Company's Common Stock is not traded on The Nasdaq Stock
Market or any stock exchange. There can be no assurance that a stockholder would
be able to buy or sell shares when desired.
INDEMNIFICATION AND EXCLUSION OF LIABILITY OF DIRECTORS AND OFFICERS. So far as
permitted by the Delaware General Corporation Law, the Company's Certificate of
Incorporation and By-Laws provide that the Company will indemnify its 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 Company 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 the directors and officers of the Company 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 directors, officers, employees and agents of the Company
for
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<PAGE>
breaches of their duty of care, even though such action, if successful, might
otherwise benefit the Company and its stockholders.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
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 set forth 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 speak
only as of the date made.
The Company's principal business has been 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 financial results of the last two fiscal years are not indicative of
the results of the current 1999 fiscal year or, the Company believes, other
future years. As the Company cut back its video and music promotions during
fiscal years 1997 and 1998 in order to shift to its licensing strategy, revenue
from such promotions decreased at an accelerated rate. The Company's decision to
embark on its licensing strategy in mid-1996 did not result in any appreciable
revenues for the Company until the fourth quarter of fiscal year 1998. The
Company's shrinking revenues, combined with one-time charges in both fiscal
years 1998 and 1997, resulted in substantial losses for both of those years. It
should be noted, however, that at the conclusion of fiscal year 1998, the
Company had over $2.9 million in deferred revenues from license-based
promotions, and that fourth quarter revenue numbers were almost the equivalent
of revenues for the rest of the fiscal year. The Company expects first quarter
fiscal year 1999 results to reflect a full integration of its licensing strategy
with significantly improved revenues, income, margins
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<PAGE>
and cash flow.
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. 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.
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 property the lottery is utilizing.
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's ability to maintain its projected earning stream is dependent
on its 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. The Company believes that revenues will fluctuate as
individual license-based promotions commence or wind down and terminate. In
addition, the Company's 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.
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<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED MAY 31
-----------------
1998 % 1997 %
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Total revenue $1,984,840 100.0 $4,019,407 100.0
Cost of revenues 2,313,831 116.6 2,662,170 66.2
Gross (loss) profit (328,991) (16.6) 1,357,237 33.8
Selling, general and
Administrative expenses 1,797,631 90.6 2,717,652 67.6
Operating loss (2,126,622) (107.2) (1,360,415) (33.8)
Interest expense 51,821 2.6 76,634 1.9
Interest income (36,894) (1.9) (28,040) (.7)
Other expense 12,405 .6 15,757 .4
Minority interest (31,936) (1.6) (27,916) (.7)
Loss before income taxes (2,122,018) (106.9) (1,396,850) (34.7)
Income tax benefit
(expense) 3,125 .2 (16,203) (.4)
Net loss $(2,118,893) (106.7) $(1,413,053) (35.1)
</TABLE>
YEAR ENDED MAY 31, 1998 COMPARED TO YEAR ENDED MAY 31, 1997
Results for the fiscal year ended May 31, 1998 ("FY 98") reflect a loss of
$2,118,893, compared to a loss for the fiscal year ended May 31, 1997 ("FY 97")
of $1,413,053. The loss from FY 97 was primarily attributable to early stages
of phasing out the Company's Instant Entertainment Connection ("IEC") video and
music promotions and the early stages of development of the Company's licensing
strategy. The phase out accelerated in FY 98 as the Company completed nearly
all of its IEC promotions but was unable to generate substantial revenue from
licensing promotions until the fourth quarter of FY 98.
Total revenue for FY 98 was $1,984,840 as compared to $4,019,407 for FY 97,
a decrease of $2,034,567 (103%). The overall decrease in revenue was primarily
attributable to the winding down and completion of the IEC promotions with most
of the lotteries.
Revenues for the Company's new licensed properties promotions increased to
$1,702,356 in FY 98 compared to $124,267 for FY 97 when the Company first
developed its licensed game strategy. Revenue for FY 98 does not include
$2,906,047 from contracted promotions of
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<PAGE>
licensed properties with various lotteries as to which the Company has already
received payment because this revenue had not yet been earned as of May 31,
1998. Such amount will be recorded as revenue upon the shipment of contracted
merchandise and is recorded on the balance sheet as a deferred revenue
liability, reflecting the Company's obligation to ship such merchandise.
Cost of revenues as a percentage of sales for FY 98 was $2,313,831 (116.6%)
compared to $2,662,170 (66.2%) for the year ended May 31, 1997. 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. The increase in cost of
revenues as a percentage of sales is attributable to a one-time accounting
write-off. See discussion in following paragraph.
The gross loss for FY 98 was $328,991 (16.6% of sales) compared to gross
profit for FY 97 of $1,357,237 (33.8% of sales). Gross profit (loss) for both
years was affected by one-time accounting write-offs and compliance with
recently issued accounting Pronouncements. For FY 98, the Company 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 the Company's business, which included the phase out of the IEC promotions,
the Company expensed the remainder of the contract obligation this year. Had the
Company not expensed the remaining commissions for procurement services, gross
profit would have been $457,009 (23.0% of sales) for FY 98.
Selling, general and administrative expenses for FY 98 were $1,797,631
(90.6% of sales) compared to $2,717,652 (67.6%) in FY 97. The major selling,
general and administrative expenses for the Company are salaries, consulting
fees, rent, convention and travel expenses. The increase as a percentage of
sales is primarily due to certain fixed or partially fixed costs which did not
decrease as revenues decreased in FY 98. However, compliance with SOP 98-5
"Reporting on the Costs of Start-up Activities" (see "-Recently Issued
Accounting Standards"), also resulted in $83,000 being charged all in FY 98.
Absolute dollars were higher in FY 97 due primarily to three items. First,
related party compensation under agreements no longer in existence resulted in
payments of $213,000 more than under the agreements the Company currently has
with certain officers and directors. Second, a $240,000 legal fee settlement
associated with the successful resolution of a potential lawsuit the Company was
prepared to file over a licensed property. Finally, compliance with accounting
Pronouncement SFAS No. 121 (see "-Recently Issued Accounting Standards")
resulted in a one-time charge to selling general and administrative expenses of
$281,000 for the write-off of costs in excess of net assets acquired associated
with the Company's purchase of assets in 1989. Had these charges not occurred,
SG&A would have been $1,983,652 (49.4%) for FY 97.
Interest expense decreased to $51,800 in FY 98 from $76,600 in FY 97. This
decrease was due to a reduction in short-term borrowing requirements in FY 98.
Interest income increased to $37,000 in FY 98 from $28,000 in FY 97
primarily due to investment of larger cash balances during FY 98.
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<PAGE>
Other expense net for FY 98 was $12,400 compared to $15,800 for FY 97.
Expenses for both years were associated with the Company's efforts in going
public prior to the mergers and primarily represent 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 98
by $31,900 as compared to $27,900 in FY 97 due to increases in net losses of
MDIT. These amounts are income to the Company as losses reduce the amount of
remaining accumulated Minority Interest obligations owed by the Company, as
shown on the balance sheet.
For the reasons set forth above, the Company had a loss before taxes of
$(2,122,018) for FY 98 as compared to a loss before taxes of $(1,396,850) for FY
97.
LIQUIDITY AND CAPITAL RESOURCES
As of May 31, 1998, the Company had cash of $960,400 compared to $8,200 as
of May 31, 1997. The increase was due principally to receiving large contract
amounts for promotions launching in the fourth quarter of FY 98. On May 31,
1998, the Company had a net working capital deficit of $2,970,600. However,
$2,906,000 of this deficit is deferred revenue (i.e. revenue as to which the
Company received payment, but which is recorded as a deferred revenue liability
until the shipment of contracted merchandise). Accordingly, such liability will
not adversely impact cash flow and without such liability, the working capital
deficit would have been $64,600. On May 31, 1997, the net working capital
deficit was $708,400. The improvement in FY 98 is primarily due to increased
business activity and the billing and collection of contracts either totally or
partially in advance of contract performance.
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 financings, as well as cash flow
from operations.
The Company's outstanding indebtedness as of May 31, 1998 was $150,754,
represented by a variety of debt instruments which bear interest at fixed rates
ranging from 10% to 20% per annum.
Subsequent to May 31, 1998, the Company's indebtedness changed by
converting $600,000 of accrued commissions into a note payable over 24 months at
10.75% with the final payment December 15, 2001. This conversion allows the
Company to better manage its cash flow requirements. In addition, as of November
30, 1998, the Company's indebtedness was $24,750 represented by one debt
instrument at 10% due in August 2001.
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.
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RECENTLY ISSUED ACCOUNTING STANDARDS
STATEMENT OF POSITION (SOP) 98-5 "REPORTING ON THE COSTS OF START-UP
ACTIVITIES." In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities" ("SOP"). The SOP is effective for financial statements for
fiscal years beginning after December 15, 1998 with earlier application allowed
in fiscal years for which annual statements have not been issued. The Company
has chosen an early adoption of this SOP and therefore, expensed $34,727 of
organizational costs incurred during fiscal 1998 as a component of selling,
general and administrative costs. In addition, included in amortization expense
is $48,269 of organization costs incurred in prior periods.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS NO. 121) "ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS." In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets and
certain identifiable intangible assets to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
The Company reviews it capitalized marketing costs annually to determine if
an impairment has occurred. The Company recognizes that an impairment has
occurred when the state's proposed lottery program is not expected to result in
a contract with positive cash flow. Effective June 1, 1996, MDI adopted SFAS
No. 121 which identified an impairment of certain capitalized marketing costs of
$226,000. MDI recorded this impairment as a component of the cost of revenues.
As a result of SFAS No. 121, MDI also recognized an impairment of $281,000
in the value of the cost in excess of assets acquired during fiscal 1997.
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.
20
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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 less than a year ago which, according to
manufacturer's 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 manufacturer's representations, is Year 2000 compliant and which 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 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 manufacturer's
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 its own 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.
21
<PAGE>
ITEM 3. DESCRIPTION OF PROPERTY.
The Company maintains its executive offices in approximately 3,400 square
feet of space in Hartford, Connecticut pursuant to a lease expiring on December
31, 1999. The Company does not have an option to renew. Monthly lease payments
average approximately $3,800 per month.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to the Company, as of
January 28, 1999, regarding the beneficial ownership of the Company's voting
securities by (i) each person who is known by the Company to own of record or
beneficially more than 5% of the outstanding Common Stock, (ii) each of the
Company's directors and the Named Executive Officers, as defined in Item 6, and
(iii) all directors and executive officers of the Company 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
- --------------------------- ------------------ ----------------
Steven M. Saferin 4,366,124(2) 56.0%
Agostino T. Galluzzo 433,876 5.6%
Kenneth M. Przysiecki 230,000(3) 3.0%
Robert J. Wussler 300,000(4) 3.7%
Todd P. Leavitt 0(5) 0%
S. David Fineman 0(5) 0%
All directors and executive
officers as a group (7 persons) 4,896,124(6) 60.6%
- --------------------
(1) The address for Messrs. Saferin, Galluzzo, Przysiecki , Wussler, Leavitt
and Fineman is c/o MDI Entertainment, Inc., 201 Ann Street, Hartford,
Connecticut 06103
(2) Excludes 225,000 shares underlying options granted, subject to stockholder
approval of the Plan.
(3) Excludes 30,000 shares underlying options granted, subject to stockholder
approval of the Plan.
(4) Includes 300,000 shares underlying exercisable options.
(5) Excludes 150,000 shares underlying options granted, subject to stockholder
approval of the Plan.
(6) Excludes 50,000 shares underlying options granted, subject to stockholder
approval of the Plan, to executive officers not named above.
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ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
Steven M. Saferin 50 President, Chief Executive Officer and
Director
Robert J. Wussler 62 Director
Kenneth M. Przysiecki 54 Chief Financial Officer, Secretary and
Director
Charles W. Kline 38 Vice President of Sales and Marketing
Robert R. Kowalczyk 51 Vice President and General Manager
Todd P. Leavitt 47 Director
S. David Fineman 53 Director
STEVEN M. SAFERIN
Mr. Saferin has been the President, Chief Executive Officer and a member of
the Board of Directors of the Company since August 1997. Since January 1986,
Mr. Saferin has been President and Chief Executive Officer of MDIP, which today
is a wholly-owned subsidiary of the Company. 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 the Company 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.
ROBERT J. WUSSLER
Mr. Wussler has been a member of the 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 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
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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.
KENNETH M. PRZYSIECKI
Mr. Przysiecki has been Chief Financial Officer, Secretary and a member of
the Board of Directors of the Company 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 1989-1992
and was employed as Vice President of Finance for the Keeney Manufacturing
Company (a plumbing supply manufacturing company) from 1976 until 1988. He
received his C.P.A. while with Arthur Andersen & Co. from 1972 to 1976, and
received his B.S. in Business Administration from American International
College.
CHARLES W. KLINE
Mr. Kline joined the Company as Vice President of Sales and Marketing in
February 1998. Prior to joining the Company, 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.
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<PAGE>
ROBERT R. KOWALCZYK
Mr. Kowalczyk joined the Company as Vice President and General Manager in
November 1997. Prior to joining the Company 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.
TODD P. LEAVITT
Mr. Leavitt has been a member of the 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.
S. DAVID FINEMAN
Mr. Fineman has been a member of the 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
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<PAGE>
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.
Each director holds office until the Company's 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 the
directors or executive officers of the Company.
ITEM 6. 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, 1998 paid to Steven
M. Saferin, the Company's President and Chief Executive Officer and a director
and to Kenneth M. Przysiecki, the Company's Chief Financial Officer and
Secretary and a director (together the "Named Executive Officers"). No other
executive officer received compensation exceeding $100,000 during the fiscal
year ended May 31, 1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
-------------------------------------- ---------------------------------
SECURITIES LONG-TERM
RESTRICTED UNDERLYING INCENTIVE
NAME AND FISCAL OTHER ANNUAL STOCK OPTIONS/ PLAN ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1)(2) AWARD(S) SARS (#) PAYOUTS COMPENSATION
- ------------------ ------ ------ ----- ------------------- ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven Saferin, 1998 $300,000(4) - $114,593 - - - $3,654(5)
President/CEO
and Director (3)
Kenneth M. Przysiecki, 1998 $102,000 $2,500 $37,106 - - - $3,030(5)
Chief Financial Officer,
Secretary and Director
</TABLE>
__________
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<PAGE>
(1) Represents revenue-based commissions accrued pursuant to employment
agreements. As of November 30, 1998, $180,459 of accrued commissions were owed
to Mr. Saferin and $10,874 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) The Chief Executive Officer of Puff Process, Inc. did not receive any
compensation.
(4) Excludes amounts paid to Mr. Saferin's mother and the company owned by his
spouse. Such amounts aggregated $110,000 in fiscal 1998.
(5) Represents amounts contributed pursuant to the Company's 401(k) Savings
Plan.
DIRECTOR COMPENSATION
Directors did not receive compensation for serving on the Board of
Directors during the fiscal year ended May 31, 1998. However, the Company now
compensates its outside directors. In September 1998, Mr. Wussler received stock
options outside of the Plan (defined below) for 300,000 shares of Common Stock
as compensation for his services as an outside director of the Company. Messrs.
Leavitt and Fineman each received stock options pursuant to the Plan (defined
below), subject to stockholder approval of the Plan, for 150,000 shares of
Common Stock as compensation for their services as outside directors of the
Company.
OPTION AND AWARD PLAN
On September 22, 1998, the Board of Directors of the Company adopted the
Company's 1998 Stock Option and Award Plan (the "Plan"), subject to stockholder
approval. 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 employees
of the Company, while non-qualified options may be issued to non-employee
directors, consultants and others, as well as to employees of the Company.
Stock awards consist of the sale or transfer by the Company 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 the right of the Company 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
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<PAGE>
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 classes of stock of the Company (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.
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 the Company 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 the Company become available again for issuance under
the Plan.
Subject to stockholder approval of the Plan, as of January 28, 1999, the
Company has issued options to purchase 667,500 shares of Common Stock under the
Plan, which includes grants to (1) the Chief Executive Officer and President of
the Company for options to purchase 225,000 shares of Common Stock, (2) other
executive officers of the Company for options to purchase 80,000 shares of
Common Stock, (3) employees of the Company for options to purchase 62,500
shares of Common Stock and (4) two outside directors of the Company for options
to purchase a total of
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<PAGE>
300,000 shares of Common Stock. As of such date, options to purchase 330,000
shares of Common Stock have been issued outside of the Plan. None of the
options granted have been exercised.
The Company has adopted, subject to stockholder approval at the Annual
Meeting of Stockholders scheduled for February 9, 1999 (the "Annual Meeting"),
the Plan. Steven M. Saferin has indicated that he will approve the Plan.
Accordingly, after the Annual Meeting, the Plan will be approved.
401(k) SAVINGS PLAN
In fiscal 1996, the Company adopted a 401(k) savings plan, whereby
participants can elect to defer up to a specified maximum of their compensation
and the Company will match their contribution up to 3% of the employee's base
salary. In fiscal 1998 and 1997, the Company contributed $9,429 and $15,037 to
the plan, respectively.
EMPLOYMENT AGREEMENTS
STEVEN M. SAFERIN
MDIP has entered into an employment agreement with Mr. Saferin, guaranteed by
the Company, which expires on the later of August 8, 2002 or three years from
the date the Company first files a registration statement with the SEC
registering all of the shares of common or preferred stock owned by Mr. Saferin,
and the Company's shares are being traded on the New York Stock Exchange, the
American Stock Exchange or The Nasdaq Stock Market. See "Description of
Business-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 of the Company, 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 with the Company
after the termination of Mr. Saferin's employment.
KENNETH M. PRZYSIECKI
MDIP, Mr. Saferin and the Company 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 of the Company and its wholly owned entities (reduced
proportionately to reflect the Company's ownership interest if less than 100%).
Mr.
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<PAGE>
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.
ITEM 7. 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 the Company in August 1997.
Since July 1996, Elaine Saferin, the mother of Steven M. Saferin, the
Company's 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.
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
22, 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.
Since August 1994, the Company's 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 the Company.
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
$198,000 in fiscal 1998 and $1,020,000 in fiscal 1997, to operate the Texas and
Missouri lottery programs. MDIT is being collapsed into MDIP now that the Texas
lottery contracts have ended. MDIM is now a wholly owned subsidiary of the
Company.
MDIT has incurred a commission expense of $10,663 and $51,590 in fiscal
1998 and 1997, respectively, to Steven M. Saferin in connection with the Texas
lottery.
Steven M. Saferin loaned MDIP $50,000 in 1997 and $60,000 in 1998. The
loans bore interest at the Federal funds rate and were paid in full as of May
31, 1998.
In August 1997, Kenneth M. Przysiecki, the Company's Chief Financial
Officer, acquired 230,000 shares of Common Stock of the Company from Steven M.
Saferin, pursuant to his
30
<PAGE>
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, the Company 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 the Company. 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 the Company
in February 1998. In addition, Mr. Saferin received 4,366,124 shares of Common
Stock of the Company in such mergers.
As a result of the reverse mergers of MDIP and MDIM with and into the
Company in August 1997, the Company 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. The note has not been paid. In addition, Mr. Galluzzo
received 433,876 shares of Common Stock of the Company in such mergers.
On June 1, 1998, Steven M. Saferin guaranteed the Company's $500,000
performance bond provided to the Wisconsin lottery.
On September 23, 1998, Steven M. Saferin guaranteed the Company's $130,000
performance bond provided to the Louisiana lottery.
ITEM 8. DESCRIPTION OF SECURITIES.
The Company is authorized to issue 200,000,000 shares of its Common Stock,
$.001 par value, of which 7,776,500 shares are outstanding as of January 28,
1999. Each share of Common Stock is entitled to share pro rata in dividends and
distributions with respect to the Common Stock when, as and if declared by the
Board of Directors from funds legally available therefor. No holder of any
shares of Common Stock has any pre-emptive right to subscribe for any of the
Company's securities.
Upon dissolution, liquidation or winding up of the Company, 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
shareholders. The stockholders are not entitled to cumulative voting in the
election of directors.
The Company has adopted, subject to stockholder approval at the Annual
Meeting, certain amendments to the Certificate of Incorporation. Such amendments
include: (1) a decrease of 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; (2) an
increase of the authorized capital stock of the Company such that the Company
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<PAGE>
shall have the authority to issue an additional 5,000,000 shares, all of which
shall be designated "Preferred Stock"; and (3) 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. Steven M. Saferin has
indicated that he will vote for such amendments. Accordingly, after the Annual
Meeting, such amendments will likely occur.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER 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 $ 1/2 $ 21/64
4th Quarter $ 1/2 $ 9/32
FISCAL YEAR 1999
1st Quarter $1 $ 1/4
2nd Quarter $ 3/4 $ 21/64
As of January 4, 1999, there were approximately 1,135 holders of record of the
Common Stock.
The Company has not paid dividends on the Common Stock since inception and
does not intend to pay any dividends to its stockholders in the foreseeable
future. The Company currently intends to retain earnings, if any, for the
development of its business. The declaration of dividends in the future will be
at the election of the Board of Directors and will depend upon the earnings,
capital requirements, financial position of the Company, general economic
conditions, and other factors the Board of Directors deems relevant.
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<PAGE>
ITEM 2. LEGAL PROCEEDINGS.
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.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
Not Applicable.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
In the past three years, the Company has 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 (the "Securities Act"),
by virtue of the provisions of Section 4(2) and/or Section 3(b) of the
Securities Act.
In August 1997, the Company 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, the Company sold 25,000 shares of Common Stock at $0.01
per share (an aggregate of $250) to Millenium Holdings Group, Inc., a
consultant.
As of January 28, 1999, options to purchase 667,500 shares of Common Stock
have been granted under the Plan, subject to stockholder approval, and options
to purchase 330,000 shares of Common Stock have been granted outside of the Plan
at prices ranging from $0.28 to $0.37 per share.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Delaware General Corporation Law ("DGCL"), 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. DGCL, 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.
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The Company's Certificate of Incorporation includes the following language:
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.
The Company's By-Laws include the following language:
Each director and officer of this corporation shall be indemnified by the
corporation against all costs and expenses actually and necessarily
incurred by him or her in connection with the defense of any action, suit
or proceeding in which he or she may be involved or to which he or she may
be made a party by reason of his or her being or having been such director
or officer, except in relation to matters as to which he or she shall be
finally adjudged in such action, suit or proceeding to be liable for
negligence or misconduct in the performance of duty.
The Company has a liability insurance policy in effect for officers and
directors. Such insurance, in certain circumstances, insures the directors and
officers of the Company against liabilities arising under the Securities Act of
1933 and the Securities Exchange Act of 1934.
The Company has adopted, subject to stockholder approval at the Annual
Meeting, amendments to the Certificate of Incorporation. Such amendments include
adding an Article pertaining to indemnification of directors, officers,
employees and agents of the Company. Steven M. Saferin has indicated that he
will vote for such an amendment. Accordingly, after the Annual Meeting, such
amendment will likely occur.
PART F/S
The Financial Statements and Notes thereto can be found beginning on page
F-1, "Index to Financial Statements," following Part III of this Form 10-SB.
PART III
ITEM 1. INDEX TO EXHIBITS
EXHIBIT
**2.1 Certificate of Incorporation of MDI Entertainment, Inc. (f/k/a Puff
Process Inc.) dated December 29, 1994, as amended.
*2.2 By-Laws of MDI Entertainment, Inc. dated January 11, 1995.
34
<PAGE>
*3.1 Registration Rights Agreement dated August 8, 1997, between MDI
Entertainment Inc., Steven M. Saferin and Agostino T. Galluzzo.
*3.2 1998 Stock Option and Award Plan, dated September 22, 1998.
*6.1 Second Amended and Restated Employment Agreement dated August 8, 1997,
as amended, between Media Drop-In Productions and Steven M. Saferin.
*6.2 Employment Agreement dated April 30, 1996, as amended, between Media
Drop-In Productions, Inc., Kenneth Przysiecki and Steven M. Saferin.
*6.3 First Amended and Restated Consulting Agreement dated August 8, 1997,
between Media Drop-In Productions, Inc. and 1010 Productions, Inc.
*6.4 Lease dated June 1992, as amended, between Ann Street Limited
Partnership by Tunxis Management Co., II, and Media Drop-In Productions,
Inc.
**6.5 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.
**6.6 Commission Agreement dated December 20, 1994, between Media Drop-In
Productions, Inc. and Stamford Media Group, LLC.
**6.7 Letter of Intent dated July 31, 1998, between MDI Entertainment, Inc.,
Fancaster, Inc. and Craig Krueger.
*27.1 Financial Data Schedule
______________
* Previously filed.
** Filed herewith.
ITEM 2. DESCRIPTION OF EXHIBITS
See Part III, Item 1. of this Registration Statement on Form 10-SB.
35
<PAGE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
----------------------------------------
(FORMERLY MEDIA DROP-IN PRODUCTIONS, INC. AND AFFILIATES)
---------------------------------------------------------
FINANCIAL STATEMENTS
--------------------
AS OF MAY 31, 1998 AND 1997
---------------------------
TOGETHER WITH
-------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors and Shareholders of
MDI Entertainment, Inc.:
We have audited the accompanying balance sheets of MDI Entertainment, Inc. and
Subsidiaries (formerly Media Drop-In Productions, Inc. and Affiliates) as of May
31, 1998 (consolidated) and 1997 (combined), and the related statements of
operations, shareholders' deficit and cash flows for the years then ended. These
financial statements referred to above 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 financial statements referred to above present fairly, in
all material respects, the financial position of MDI Entertainment, Inc. and
Subsidiaries as of May 31, 1998 and 1997 and the results of their operations and
their cash flows for the years then ended in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Hartford, Connecticut
July 21, 1998
F-2
<PAGE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
----------------------------------------
(FORMERLY MEDIA DROP-IN PRODUCTIONS, INC. AND AFFILIATES)
---------------------------------------------------------
BALANCE SHEETS
--------------
AS OF MAY 31, 1998 AND 1997
---------------------------
ASSETS
------
<TABLE>
<CAPTION>
1998 1997
---- ----
(consolidated) (combined)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 960,398 $ 8,190
Accounts receivable 317,598 200,575
Inventories 417,651 132,974
Other current assets 30,203 52,429
Loan to officer (Note 8) - 456,023
---------- -----------
Total current assets 1,725,850 850,191
---------- -----------
PROPERTY AND EQUIPMENT, at cost:
Equipment 330,052 306,993
Furniture and fixtures 100,571 96,589
---------- -----------
430,623 403,582
Less: Accumulated depreciation (322,771) (274,075)
---------- -----------
107,852 129,507
---------- -----------
OTHER ASSETS:
Licensing costs (Note 2) 213,077 150,840
Organizational costs, net (Note 1) - 48,269
Other 52,643 5,242
---------- -----------
Total other assets 265,720 204,351
---------- -----------
$2,099,422 $ 1,184,049
---------- -----------
---------- -----------
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
1998 1997
---- ----
(consolidated) (combined)
CURRENT LIABILITIES:
Deferred revenue (Note 1) $2,906,047 $ -
Financing arrangements (Note 3) 123,754 268,672
Accounts payable 346,491 521,306
Accrued expenses (Note 6) 1,320,165 674,309
Note payable to shareholder (Note 8) - 50,000
Taxes payable - 44,321
----------- -----------
Total current liabilities 4,696,457 1,558,608
OTHER LONG-TERM LIABILITIES 27,000 150,000
MINORITY INTEREST 35,268 67,176
----------- -----------
Total liabilities 4,758,725 1,775,784
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 1, 5, 6 and 7)
SHAREHOLDERS' DEFICIT:
Common stock 7,777 2,010
Additional paid-in capital 348,348 90
Retained deficit (3,015,428) (511,847)
----------- -----------
(2,659,303) (509,747)
Treasury stock, at cost - (81,988)
----------- -----------
Total shareholders' deficit (2,659,303) (591,735)
----------- -----------
$ 2,099,422 $ 1,184,049
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
----------------------------------------
(FORMERLY MEDIA DROP-IN PRODUCTIONS, INC. AND AFFILIATES)
---------------------------------------------------------
STATEMENTS OF OPERATIONS
------------------------
FOR THE YEARS ENDED MAY 31, 1998 AND 1997
-----------------------------------------
<TABLE>
<CAPTION>
1998 % 1997 %
----------- ------ ----------- -----
(Consolidated) (Combined)
<S> <C> <C> <C> <C>
REVENUES $ 1,984,840 100.0 $ 4,019,407 100.0
COST OF REVENUES (Note 6) 2,313,831 116.6 2,662,170 66.2
----------- ------ ----------- -----
Gross (loss) profit (328,991) (16.6) 1,357,237 33.8
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (Note 1) 1,797,631 90.6 2,717,652 67.6
----------- ------ ----------- -----
Operating loss (2,126,622) (107.2) (1,360,415) (33.8)
INTEREST EXPENSE, net (Note 3) 14,927 0.7 48,594 1.2
OTHER EXPENSE, net 12,405 .6 15,757 0.4
MINORITY INTEREST (Note 1) (31,936) (1.6) (27,916) (0.7)
----------- ------ ----------- -----
Loss before benefit (provision)
for income taxes (2,122,018) (106.9) (1,396,850) (34.7)
BENEFIT (PROVISION) FOR INCOME TAXES 3,125 0.2 (16,203) (0.4)
----------- ------ ----------- -----
Net loss $(2,118,893) (106.7) $(1,413,053) (35.1)
----------- ------ ----------- -----
----------- ------ ----------- -----
Basic Earnings (Loss) Per Common
Share (Note 1) $(.37) N/A
----- ----
----- ----
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-4
<PAGE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
----------------------------------------
(FORMERLY MEDIA DROP-IN PRODUCTIONS, INC. AND AFFILIATES)
---------------------------------------------------------
STATEMENTS OF SHAREHOLDERS' DEFICIT
-----------------------------------
FOR THE YEARS ENDED MAY 31, 1998 AND 1997
-----------------------------------------
<TABLE>
<CAPTION>
Common Stock
------------------------------------
Par** Par*** Par Additional Retained
* Value Value Value Treasury Paid-In Earnings
Shares $.01 $1 $.001 Stock Capital (Deficit) Total
--------- ----- ------- ------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, May 31, 1996 .... 3,073 $ 10 $ 2,000 $ -- $ (81,988) $ 90 $ 901,206 $ 821,318
Net loss ............... -- -- -- -- -- -- (1,413,053) (1,413,053)
--------- ----- ------- ------- --------- --------- ----------- -----------
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)
--------- ----- ------- ------- --------- --------- ----------- -----------
Exchange transaction ... 7,296,927 (10) (2,000) 7,300 81,988 8,534 (384,688) (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)
--------- ----- ------- ------- --------- --------- ----------- -----------
--------- ----- ------- ------- --------- --------- ----------- -----------
</TABLE>
* - 200,000,000 shares authorized
** - 10,000 shares authorized, 1,073 shares issued and outstanding.
*** - 100,000 shares authorized, 2,000 shares issued and outstanding.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
----------------------------------------
(FORMERLY MEDIA DROP-IN PRODUCTIONS, INC. AND AFFILIATES)
---------------------------------------------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED MAY 31, 1998 AND 1997
-----------------------------------------
<TABLE>
<CAPTION>
1998 1997
-------------- -----------
(consolidated) (combined)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,118,893) $(1,413,053)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Minority interest (31,936) (27,916)
Depreciation and amortization 283,792 442,714
Impairment of marketing costs - 347,185
Impairment of costs in excess of net
assets acquired - 305,116
Change in assets and liabilities:
(Increase) decrease in accounts receivable (117,023) 99,369
(Increase) decrease in inventories, net (284,677) 257,237
Increase in marketing costs (249,064) (350,104)
Increase in other assets (25,175) (54,220)
Decrease in accounts payable (174,815) (77,953)
Increase in accrued expenses 690,031 556,728
(Decrease) increase in taxes payable (44,321) 10,521
Increase in deferred revenue 2,906,047 -
----------- -----------
Net cash provided by operating activities 833,966 95,624
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (27,041) (24,480)
----------- -----------
Net cash provided by (used for) investing
activities (27,041) (24,480)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of financing arrangements (344,918) (152,340)
Borrowings from long-term debt 200,000 -
Repayments of borrowings from stockholder (110,000) -
Borrowings from stockholder 60,000 50,000
Proceeds from sale of stock 340,201 -
----------- -----------
Net cash provided by (used for)
financing activities 145,283 (102,340)
----------- -----------
NET INCREASE (DECREASE) IN CASH 952,208 (31,196)
CASH, beginning of the year 8,190 39,386
----------- -----------
CASH, end of the year $ 960,398 $ 8,190
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for -
Interest $ 48,734 $ 76,634
Income taxes $ 1,317 $ 5,500
Non-cash items:
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 $ -
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
----------------------------------------
(FORMERLY MEDIA DROP-IN PRODUCTIONS, INC. AND AFFILIATES)
---------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
MAY 31, 1998 AND 1997
---------------------
1. Summary of Significant Accounting Policies:
-------------------------------------------
Organization -
------------
MDI Entertainment, Inc. (formerly known as Puff Process, 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 has been
treated as a "reverse merger, with MDI as the successor corporation.
Therefore, these financial statements reflect the historical results of
MDI.
MDI's principal activity has been the development and sale of
entertainment based promotions to North American lotteries and is
uniquely 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 acquired 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 (FIFO) method.
F-7
<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.
Organizational costs -
--------------------
Organizational costs were incurred in connection with the "reverse
merger". The costs consist of legal and other professional fees. On April
3, 1998, the Accounting Standards Executive Committee issued the
Statements of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities". The Company has chosen an early adoption of this SOP and
therefore, expensed $34,727 of organizational costs incurred during
fiscal 1998 as a component of selling, general and administrative costs
in the accompanying statement of operations. In addition, included in
amortization expense is $48,269 of organization costs incurred in prior
periods.
Long-lived assets -
-----------------
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." SFAS No. 121 requires that long-lived assets and certain
identifiable intangible assets to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
The Company reviews its capitalized marketing costs annually to determine
if an impairment has occurred. The Company recognizes that an impairment
has occurred when the state's proposed lottery program is not expected to
result in a contract with positive cash flow. Effective June 1, 1996, MDI
adopted SFAS No. 121 which identified an impairment of certain
capitalized marketing costs of $226,000. MDI recorded this impairment as
a component of the cost of revenues in the accompanying statement of
operations.
As a result of SFAS No. 121, MDI also recognized an impairment of
$281,000 in the value of the cost in excess of assets acquired during
fiscal 1997.
Revenue recognition -
-------------------
Revenue is derived from various state lottery game contracts between MDI
and the state lotteries. MDI has agreed to provide second chance prize
packages consisting of grand prizes and various consolation prizes. MDI
also provides marketing support related to each of the games and obtains
the appropriate licenses for the right to use these properties. Most 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.
F-8
<PAGE>
As of May 31, 1998, deferred revenue was as follows:
<TABLE>
<CAPTION>
Cash Revenue Deferred
Lottery Game Received Earned Revenue
---------- ------------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Wisconsin Wheel of Fortune $ 510,000 $ 255,000 $ 255,000
Wisconsin Star Trek 475,000 118,750 356,250
Wisconsin Harley Davidson 1,287,800 128,780 1,159,020
New Jersey Wheel of Fortune 400,000 120,000 280,000
New Jersey Star Trek 648,750 238,740 410,010
New Jersey Twilight Zone 300,000 266,667 33,333
Colorado Wheel of Fortune 200,000 200,000 -
Virginia Wheel of Fortune 255,000 - 255,000
South Dakota Harley Davidson 120,000 - 120,000
Maryland Harley Davidson 37,434 - 37,434
---------- ---------- ----------
Total $4,233,984 $1,327,937 $2,906,047
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Earnings per share -
------------------
Basic earnings per common share are based on the average number of common
shares outstanding during the year. Diluted earnings 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 Company had no common share
equivalents during 1998. The number of shares used in the earnings per
common share computation for 1998 was as follows:
<TABLE>
Basic
<S> <C>
Average common shares outstanding 5,791,351
</TABLE>
Earnings per share for 1997 is not applicable since the entities were not
consolidated at that time.
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 1997 financial statements
to conform with the 1998 presentation.
F-9
<PAGE>
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, 1998, the following costs have been capitalized:
<TABLE>
<CAPTION>
Capitalized Accumulated Net
Costs Amortization Asset
----------- ------------ -----
<S> <C> <C> <C>
Australia Lottery $ 56,377 $ 35,500 $ 20,877
Wheel of Fortune 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
-------- -------- --------
-------- -------- --------
</TABLE>
At May 31, 1997, the following costs have been capitalized:
<TABLE>
<CAPTION>
Capitalized Accumulated Net
Costs Amortization Asset
----------- ------------ -----
<S> <C> <C> <C>
Texas Lottery $462,065 $445,440 $ 16,625
Missouri Lottery 187,297 169,182 18,115
Louisiana Lottery 56,096 50,501 5,595
Australia Lottery 44,377 35,500 8,877
Ohio Lottery 4,628 - 4,628
Wheel of Fortune License 10,000 - 10,000
Twilight Zone License 5,000 - 5,000
Star Trek License 82,000 - 82,000
-------- -------- --------
$851,463 $700,623 $150,840
-------- -------- --------
-------- -------- --------
</TABLE>
F-10
<PAGE>
3. Financing Arrangements:
-----------------------
Notes payable consists of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
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. 23,754 165,863
-------- --------
$123,754 $165,863
-------- --------
-------- --------
</TABLE>
The notes payable are secured by liens on substantially all of the
Company's assets.
The $23,754 term note due December 15, 1997 was paid subsequent to
yearend 1998.
During 1997, the Company had an agreement with a lending institution to
borrow funds against accounts receivable. Interest was payable at an
interest rate that approximated 18%. Interest paid for the year ended May
31, 1997 was $56,289. These short-term borrowings were secured by liens
on accounts receivable and inventories of MDI.
4. 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 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, 1998 and 1997, MDI
had a deferred tax asset of approximately $1,731,500 and $1,319,000,
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. No provision for deferred taxes was recorded because
there was no significant item which would result in a deferred tax
liability.
MDI has a net operating loss carryforward amounting to approximately
$3,500,000 and $3,000,000 at May 31, 1998 and 1997. These carryforwards
expire beginning in 2006.
F-11
<PAGE>
The tax expense recorded by the Company for the years ended May 31, 1998
and 1997 was primarily minimum state income taxes.
5. 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 $87,359 and $86,483 in 1998 and 1997, 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, 1998:
<TABLE>
<S> <C>
1999 $59,816
2000 34,354
2001 2,221
2002 2,221
-------
$98,612
-------
-------
</TABLE>
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.
6. Commission Agreement:
---------------------
In December, 1994, MDI entered into a commission agreement (the
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% are 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 no
commissions paid to the media group in fiscal 1998 or 1997.
MDI could elect not to renew this agreement and will 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 has renewed the Agreement through
December 14, 1998. However, since MDI has significantly reduced the
utilization of this media company, they have accrued the $786,287 minimum
fee owed to them and charged it to cost of revenues for the year ended
May 31, 1998.
F-12
<PAGE>
7. 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.
8. 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
(see Note 1).
The President of the Company loaned MDI $50,000 in 1997 and $60,000 in
1998. Both loans were paid in full as of May 31, 1998.
The Company has incurred commission and wage expense of $114,593 and
$300,000, respectively, to the President of the Company, in accordance
with his Employment Agreement. The agreement allows a $300,000 salary for
the 12 month period through February 28, 1998. On March 1, 1998, and each
anniversary thereafter, the employee's salary may be increased based on
5% or an equation based on the consumer price index. In no event shall
the increase exceed 10% in any one year. In addition, this shareholder
receives a bonus equal to 2% of gross revenues of the Company (not to
exceed $335,000 over the term of the Employment contract). The contract
began August 8, 1997 and terminates the later of March 1, 2002 or 3 years
from the date the Company files a registration statement with the
Securities and Exchange Commission registering the shares of common
stock.
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.
9. 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 1998 and 1997, the Company
contributed $9,429 and $15,037 to the plan, respectively.
F-13
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
MDI Entertainment, Inc.
(Registrant)
Date: January 29, 1999 By: /s/ Steven M. Saferin
---------------------- -------------------------------------
Name: Steven M. Saferin
Title: President, Chief Executive
Officer and Director
Date: January 28, 1999 By: /s/ Kenneth M. Przysiecki
---------------------- -------------------------------------
Name: Kenneth M. Przysiecki
Title: Chief Financial Officer,
Secretary and Director
Date: January 31, 1999 By: /s/ Robert J. Wussler
---------------------- -------------------------------------
Name: Robert J. Wussler
Title: Director
Date: January 29, 1999 By: /s/ Todd P. Leavitt
---------------------- -------------------------------------
Name: Todd P. Leavitt
Title: Director
Date: January 29, 1999 By: /s/ S. David Fineman
---------------------- -------------------------------------
Name: S. David Fineman
Title: Director
<PAGE>
EXHIBIT 2.1
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 12/29/1994
944259584 - 2465597
CERTIFICATE OF INCORPORATION
OF
PUFF PROCESS INC.
FIRST: The name of this corporation is PUFF PROCESS INC.
SECOND: Its registered office in the state of Delaware is to be located at
Three Christina Centre, 201 N. Walnut Street, Wilmington DE 19801, New Castle
County. The registered agent in charge thereof is The Company Corporation,
address "same as above".
THIRD: The nature of the business and, the objects and purposes proposed to
be transacted, promoted and carried on, are to do any or all the things
herein mentioned as fully and to the same extent as natural persons might or
could do, and in any part of the world, viz:
The purpose of this corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
FOURTH: The amount of the total authorized capital stock of this corporation
is divided into 20,000,000 shares of stock at $.001 par value.
FIFTH: The name and mailing address of the incorporator is as follows:
Vanessa Foster, Three Christina Centre, 201 N. Walnut Street; Wilmington
DE 19801
SIXTH: The Directors shall have power to make and to alter or amend the
By-Laws; to fix the amount to be reserved as working capital, and to
authorize and cause to be executed, mortgages and liens without limit as to
the amount, upon the property and franchise of the Corporation. With the
consent in writing, and pursuant to a vote of the holders of a majority of
the capital stock issued and outstanding, the Directors shall have the
authority to dispose, in any manner, of the whole property of this
corporation.
The By-Laws shall determine whether and to what extent the accounts and books
of this corporation, or any of them shall be open to the inspection of the
stockholder; and no stockholder shall have any right of inspecting any
account, or book or document of this Corporation, except as conferred by the
law or the By-Laws, or by resolution of the stockholders. The stockholders
and directors shall have power to hold their meetings and keep the books,
documents, and papers of the Corporation outside of the State of Delaware, at
such places as may be from time to time designed by the By-Laws or by
resolution of the stockholders or directors, except as otherwise required by
the laws of Delaware.
It is the intention that the objects, purposes and powers specified in the
Third paragraph hereof shall, except where otherwise specified in said
paragraph, be nowise limited or restricted by reference to or inference from
the terms of any other clause or paragraph in this certificate of
incorporation, that the objects, purposes and powers specified in the Third
paragraph and in each
<PAGE>
of the clauses or paragraphs of this charter shall be regarded as independent
objects, purposes and powers.
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 payments of dividends or unlawful stock purchase
or redemption by the corporation; or (4) a transaction from which the
director derived an improper personal benefit.
I, THE UNDERSIGNED, for the purpose of forming a Corporation under the laws
of the State of Delaware, do make, file and record this Certificate and do
certify that the facts herein are true, and I have accordingly hereunto set
my hand.
DATED: December 29, 1994 /s/ Vanessa Foster
------------------
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 02/06/1997
971040311 - 2465597
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PUFF PROCESS INC.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Puff Process Inc., a corporation organized and existing under and
by virtue of the General Law of the State of Delaware (the "Corporation"),
does hereby certify:
FIRST: The amendment to the Corporation's Certificate of
Incorporation set forth in the following resolution approved by the
Corporation's Board of Directors and shareholders was duly adopted in
accordance with Section 222 of the General Corporation Law of the State of
Delaware:
RESOLVED, that the Certificate of Incorporation of Puff Process
Inc. is hereby amended by restating the First Article so that, as restated,
the Article shall be and read as follows:
The name of the corporation (hereinafter called "corporation") is
MDI Entertainment, Inc.
FURTHER RESOLVED, that the Certificate of Incorporation of Puff
Process Inc. is hereby amended by restating the Fourth Article so that, as
restated, the Article shall be and read as follows:
The amount of the total authorized capital stock of this
Corporation is 200,000,000 common shares with a $.001 par value, for
total authorized capital of $200,000.00.
<PAGE>
SECOND: that the amendment was duly adopted in accordance with the
provisions of Section 228 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, Puff Process Inc., has caused the Certificate
to be signed by its President, Jesse A. Clayton, and attested to by Susan A.
Willis, its Secretary, both duly authorized officers on this 5th day of
February, 1997.
PUFF PROCESS INC.
By: /s/ Jesse A. Clayton
---------------------
Jesse A. Clayton, President
ATTEST:
/s/ Susan A. Willis
- --------------------------
Susan A. Willis, Secretary
<PAGE>
EXHIBIT 6.5
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement")
made as of the 8th day of August, 1997, by and among MDI Entertainment, Inc.,
a Delaware corporation, formerly known as Puff Process, Inc. ("Parent"), MDI
- -Connecticut, Inc., a Delaware corporation ("Sub 1"), MDI - Missouri, Inc., a
Delaware corporation ("Sub 2"), Media Drop-In Productions, Inc., a Delaware
Corporation ("MDIP"), MDI-Missouri, Inc., a Missouri Corporation
("MDI-Missouri"), and Steven M. Saferin ("Saferin") and Agostino T. Galluzzo
("Galluzzo").
RECITALS
A. Parent wishes to acquire MDIP and MDI-Missouri by means of mergers
of its wholly-owned subsidiaries, Sub 1 and Sub 2, with and into MDIP and
MDI-Missouri respectively in which MDIP and MDI-Missouri will be the
surviving corporations and will each become a wholly owned subsidiary of
Parent.
B. These acquisitions are intended to qualify as reorganizations
under Section 368 of the Internal Revenue Code of 1986, as amended (the
"Code") and to be accounted for by Parent by the "purchase" method of
accounting.
C. The Boards of Directors of each of MDIP and MDI-Missouri and the
Subs have respectively authorized the merger of their respective corporations
pursuant to the terms of this Agreement.
D. Saferin and Galluzzo are the sole shareholders of MDIP and
MDI-Missouri and have approved the merger of Sub 1 with and into MDIP and Sub
2 with and into MDI-Missouri pursuant to the terms of this Agreement.
E. The Board of Directors of Parent has approved the acquisition of
MDIP and MDI-Missouri pursuant to the terms of this Agreement.
NOW THEREFORE, the parties hereto agree as follows:
ARTICLE I
1.1 Additional Defined Terms.
1
<PAGE>
When used herein the following terms shall have the meanings
set forth below:
(i) The "Subs" - Sub 1 and Sub 2, collectively.
(ii) The "MDI Companies" - MDIP and MDI-Missouri
collectively.
(iii) The "Shareholders" - Saferin and Galluzzo,
collectively.
(iv) "Parent Stock" - Common Shares of Parent
(par value $.001).
(v) "Constituent Corporations" - the Parent, the Subs
and the MDI Companies respectively.
(vi) "Subordinated Debt" means the obligation of the
Parent to the Stockholders for the payment in the
aggregate of Three Hundred Thousand Dollars
($300,000.00) as part of the consideration for
the Merger, which indebtedness shall be
subordinate to any secured indebtedness of the
MDI Companies and shall be in the form of the
Subordinated Promissory Note attached hereto and
made a part hereof as Exhibit D (a "Subordinated
Note").
(vii) "Merger" shall mean the transactions contemplated
by this Agreement.
ARTICLE II - MERGER
2.1 Merger.
(a) As of the Effective Date (as hereinafter defined), the
separate existence of the Subs shall cease, and the Subs shall be
respectively merged into The MDI Companies pursuant to the Articles of Merger
and Certificate of Merger attached hereto and made a part hereof as Exhibits
A-1, A-2 and A-3 respectively (the "Merged Corporations"). The Effective Date
shall be the later of (i) the date of Closing pursuant to Section 2.7 hereof,
or (ii) the date that the Articles of Merger are accepted for filing by the
States of Delaware and Missouri, respectively. The Constituent Corporations
agree to execute and file the Articles of Merger with the States of Missouri
and Delaware.
2
<PAGE>
(b) The respective parties to each of the Articles of
Merger agree to amend the Articles of Merger, if necessary, to conform to any
requirement, as to form, required by the jurisdiction in which a party to
such agreement is incorporated.
2.2 By-Laws; Directors; Officers: Subject to the approvals of the
Boards of Directors of the Parent and Merged Corporations respectively after
the Effective Date, the By-Laws of the Parent and the Merged Corporations
shall be as set forth in Exhibits B-1, B-2 and B-3, attached hereto and made
a part hereof, and the officers and directors of the Parent and the Merged
Corporations shall be as listed on Exhibits C-1, C-2 and C-3 attached hereto
and made a part hereof.
2.3 Basic Agreements: The parties agree to enter into the following
agreements as of the date of Closing:
(a) Employment Agreement: Saferin, the Parent and MDIP
agree that on the Effective Date they shall execute the Employment Agreement,
attached hereto and made a part hereof, as Exhibit E.
(b) Consulting Agreement: MDIP and the Parent agree to
enter into a Consulting Agreement with Linda Kesterson Saferin in the form
attached hereto and made a part hereof as Exhibit P.
(c) Registration Rights Agreement: The Stockholders and the
Parent agree to enter into the Registration Rights Agreement in the form
attached hereto and made a part hereof as Exhibit Q.
2.4 Conversion of Shares in the Merger: The mode of carrying into
effect the Merger provided in this Agreement, shall be as set forth in the
Articles of Merger and include the following:
2.4.1 MDIP's Stock: On the Effective Date, each share of
Common Stock of MDIP, issued and outstanding shall be surrendered to MDIP,
and the holders thereof shall receive in exchange therefor 4,361.6029 shares
of the Common Stock of the Parent and $272.60 of Subordinated Debt, and each
holder of outstanding Common Stock of MDIP, upon surrender to MDIP of one or
more stock certificates for Common Stock of MDIP for cancellation, shall be
entitled to receive one or more stock certificates for the full number of
shares of the Parent's Stock to which such holder is entitled under this
paragraph 2.4.1 and a Subordinate Note for the amount of Subordinated Debt to
which
3
<PAGE>
such holder is entitled under this paragraph 2.4.1. Each issued share of MDIP
Common Stock held in its treasury on the Effective Date shall be cancelled
and shall not be converted.
2.4.2 MDI-Missouri's Stock: On the Effective Date, each
share of Common Stock of MDI-Missouri, issued and outstanding shall be
surrendered to MDI-Missouri, and the holders thereof shall receive in
exchange therefor sixty (60) shares of the Common Stock of the Parent and
$3.75 of Subordinated Debt, and each holder of outstanding Common Stock of
MDI-Missouri, upon surrender to MDI-Missouri of one or more stock
certificates for Common Stock of MDI-Missouri for cancellation, shall be
entitled to receive one or more stock certificates for the full number of
shares of the Parent's Stock to which such holder is entitled under this
paragraph 2.4.2 and a Subordinate Note for the amount of Subordinated Debt to
which such holder is entitled under this paragraph 2.4.2. Each issued share
of MDI-Missouri Common Stock held in its treasury on the Effective Date shall
be cancelled and shall not be converted.
2.4.3 Subs' Stock: On the Effective Date, each share of
Common Stock of the Subs, issued and outstanding, shall be converted into and
become one share of the Common Stock of the Merged Corporation into which the
Sub was merged, and each holder of outstanding common stock of a Sub, upon
surrender to the respective Merged Corporation, for cancellation, shall be
entitled to receive one ore more Certificates of Common Stock of the
respective Merged Corporation for the full number of shares of Merged
Corporation Stock to which such holder is entitled under this Section 2.4.3.
Each issued share of a Sub held in its treasury on the Effective Date shall
be cancelled and shall not be converted.
2.4.4 Parent's Stock: Parent shall make available to the
Subs sufficient shares of the Parent's stock to effect the mergers pursuant
to the terms of this Agreement.
2.4.5 Surrender of Certificates: As soon as practicable
after the Effective Date, the stock certificates representing Common Stock of
the Constitute Corporations issued and outstanding at that time shall be
surrendered for exchange as above provided. Until so surrendered for
exchange, each such stock certificate nominally representing Common Stock of
a Constituent Corporation, shall be deemed for all corporate purposes (except
for payment of dividends, which shall be subject to the exchange of stock
certificates as above provided) to evidence the ownership of the number of
shares of Consolidated
4
<PAGE>
Stock which the holder thereof would be entitled to receive upon its
surrender to the Consolidated Corporation.
2.4.6 Securities Matters: The Constituent Corporations and
the Stockholders acknowledge that the shares of the Parent Stock have not and
will not be registered under either the Federal Securities Act of 1933 (the
"Act"), or applicable state securities laws (the "State Acts") and therefore,
cannot be resold unless they are registered under the Act and the State Act
or unless an exemption of such registration is available. Any shares of the
Parent Stock to be owned by the Stockholders shall be acquire by the
Stockholder for investment only, and not with a view to, offer for sale or
sell such shares.
2.5 Effect of Merger: As of the Effective Date, the Merged
Corporations shall succeed to, without other transfer, and shall possess and
enjoy all the rights, privileges, immunities, powers and franchises both of a
public and a private nature, and be subject to all the restrictions,
disabilities and duties of each of the Constituent Corporations, and al
property, real, personal and mixed, and all debts due to any Constituent
Corporation in whatever account, for stock subscriptions as well as for all
other things in action or belonging to each of said corporations, shall be
vested in the respective Merged Corporation; and all property, rights,
privileges, immunities, powers and franchises, and all and every other
interest shall be thereafter as effectually the property of the respective
Merged Corporation as they were of the respective Constituent Corporation,
the title to real estate, if any, vested by deed or otherwise in any of the
Constituent Corporations shall revert or be in any way impaired by the
consolidation; provided, however, that all rights of creditors and all liens
upon any property of any Constituent Corporation shall be preserved
unimpaired, limited in lien to the property affected by such liens, as of the
Effective Date, and all debts, liabilities and duties of any Constituent
Corporation shall thenceforth attach to the respective Merged Corporation and
may be enforced against it to the same extent as if said debts, liabilities
and duties had been incurred or contracted by that Merged Corporation.
2.6 Accounting Matters: The assets and liabilities of the
Constituent Corporations as at the effective time of the Merger, shall be
taken upon on the books of the respective Merged Corporation at the amounts
at which they shall be carried at that time on the books of the respective
Constituent Corporations. The amount of capital of the respective Merged
Corporation after the consolidation shall be equal to the sum of the
aggregate amount of the capital of each of the respective Constituent
5
<PAGE>
Corporations immediately prior to the Merger. The surplus of each respective
Merged Corporation after the Merger, including any surplus arising in the
Merger, shall be available to be used for any legal purposes for which
surplus may be used.
2.7 Closing: Closing of the Transactions as herein defined shall
occur simultaneously with the execution of this Agreement at the offices of
MDIP on or before August 15, 1997.
III - REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of MDIP. MDIP represents and
warrants to Sub 1 and Parent as follows:
(a) Organization: MDIP is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of
Delaware. MDIP has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its business. MDIP is duly
qualified and in good standing as a foreign corporation in each jurisdiction
where its ownership of property of operation of its business requires
qualification, except where the failure to be qualified would not have a
material adverse effect on MDIP.
(b) Authorized Capitalization: The authorized
capitalization of MDIP consists of Ten Thousand (10,000) shares of $.01 par
value Common Stock, of which One Thousand Seventy-Three (1,073) shares have
been issued and outstanding. The Shares have been duly authorized, validly
issued, are fully paid and nonassessable with no personal liability attaching
to the ownership thereof and were offered, issued, sold and delivered by MDIP
in compliance with all applicable state and federal laws. Except as set forth
in Exhibit F-1 attached hereto, MDIP is not a party to and is not bound by
any agreement, contract, arrangement or understanding, whether oral or
written, giving any person or entity any interest in , or any right to share,
participate in or receive any portion of, MDIP's income, profits or assets,
or obligating MDIP to distribute any portion of its income, profits or assets.
(c) Authority: MDIP has full power and lawful authority to
execute and deliver the Agreement, the Articles of Merger and any of the
other contracts or agreement attached hereto as Exhibits, which are required
to be executed on or before Closing (as herein defined the "Basic
Agreements") and to which MDIP is a party and to consummate and perform the
transactions contemplated thereby (the "Transactions"). The Basic Agreements
constitute (or shall, upon execution,
6
<PAGE>
constitute) valid and legally binding obligations of MDIP. Neither the
consummation nor performance of the Transactions, conflict with, requires the
consent, waiver or approval of, results in a breach of or default under, or
gives to others any interest or right of termination, cancellation or
acceleration in or with respect to, any material agreement by which MDIP is a
party or by which MDIP or any of its material properties or assets are bound
or affected.
(d) Company Financial Statements: MDIP's Financial Statements are
complete as of the date thereof, were prepared in accordance with generally
accepted accounting principles applied on a basis consistent with prior
periods and fairly present the financial position of MDIP as of November 30,
1996.
(e) No Undisclosed Liabilities: Except as set forth in MDIP's
Financial Statements previously delivered bo Parent and as set forth on
Exhibit G-1 attached hereto, MDIP is not aware of any material liabilities
for which MDIP is liable or will become liable in the future.
(f) Taxes: MDIP has filed all federal, state, local tax and other
returns and reports which were required to be filed with respect to all
taxes, levies, imposts, duties, licenses and registration fees, charges or
withholdings of every nature whatsoever ("Taxes"), and there exists a
substantial basis in law and fact for all positions taken in such reports. No
waivers of period of limitation are in effect with respect to any taxes
arising from and attributable to the ownership of properties or operations of
the business of MDIP.
(g) Properties: MDIP has good and marketable title to all its
material personal property, equipment, processes, patents, copyrights,
trademarks, franchises, licenses and other material properties and assets
(except for items leased or licensed to the Company), including all property
reflected in MDIP's Financial Statements (except for assets reflected therein
which have been sold in the normal course of its business where the proceeds
from such sale or other disposition have been properly accounted for in the
financial statements of MDIP), in each case free and clear of all material
liens, claims and encumbrances of every kind and character, except as set
forth in Exhibit H-1. The assets and properties owned, operated or leased by
MDIP and used in its business are in good operating condition, reasonable
wear and tear excepted, and suitable for the uses for which intended.
(h) Books and Records: The books and records of MDIP are
complete and correct in all material respects, have been
7
<PAGE>
maintained in accordance with good business practices and accurately reflect
in all material respects the business, financial condition and results of
operations of MDIP as set forth in the MDIP's Financial Statements.
(i) Insurance: Exhibit I-1 contains an accurate and
complete list and brief description of all performance bonds and policies of
insurance, including fire and extended coverage, general liability, workers
compensation, products liability, property, and other forms of insurance or
indemnity bonds held by MDIP. MDIP is not in default with respect to any
provisions of any such policy or indemnity bond and has not failed to give
any notice or present any claim thereunder in due and timely fashion. To the
best of MDIP's knowledge, all policies of insurance and bonds are: (1) in
full force and effect; (2) are sufficient for compliance by MDIP with all
requirements of law and of all agreements and instruments to which MDIP is a
party; (3) are valid, outstanding and enforceable; (4) provide adequate
insurance coverage for the assets, business and operations of MDIP in the
amounts at least equal to customary coverage in MDIP's history; (5) will
remain in full force and effect through the Closing; and (6) will not be
affected by, and will not terminate or lapse by reasons of, the transactions
contemplated by this Agreement.
(j) Transactions with Certain Persons: Except as disclosed
in Exhibit J-1, MDIP has no outstanding material agreement, understanding,
contract, lease, commitment, loan or other material arrangement with any
officer, director or shareholder of MDIP or any relative of any such person,
or any corporation or other entity in which such person owns a beneficial
interest.
(k) Material Contract: Except as set forth in Exhibit K-1,
MDIP has no purchase, sale, commitment, or other contract, the breach or
termination of which would have a materially adverse effect on the business,
financial condition, results of operations, assets, liabilities, or prospects
of MDIP.
(l) Employment Matters: Exhibit L-1 contains a list of all
officers, their base salaries, accrued vacation pay, sick pay, and severance
pay through November 30, 1996. Except as set forth in Exhibit L-1, MDIP is
not a party to any employment agreement, or any pension, profit sharing,
retirement or other deferred compensation plan or agreement. MDIP has not
incurred any unfunded deficiency or liability within the meaning o the
Employee Retirement Income Security Act of 1974 ("ERISA"), has not incurred
any liability to the Pension Benefit Guaranty
8
<PAGE>
Corporation established under ERISA in connection with any employee benefit
plan. MDIP has not been a party to a "prohibited transaction", which would
subject MDIP to any tax or penalty. There is no collective bargaining
agreement or negotiations therefor, labor grievance or arbitration proceeding
against MDIP pending or threatened, and to the knowledge of MDIP, there are
no union organizing activities currently pending or threatened against or
involving MDIP.
(m) Authorizations: MDIP has no licenses, permits,
approvals and other authorizations from any governmental agencies and other
entities that are materially necessary for the conduct of its business,
except as set forth in Exhibit M-1 which contains a list of all material
licenses, permits, approvals, and other material authorizations, as well as a
list of all material copyrights, patents, trademarks, trade names, service
marks, franchises, licenses and other material permits, each of which is
valid and in full force and effect.
(n) No Powers of Attorney: MDIP has no powers of attorney
or similar authorizations outstanding.
(o) Compliance with Laws: To the best of MDIP's knowledge,
MDIP is not in violation of any federal, state, local or other law,
ordinance, rule or regulation applicable to its business, and has not
received any actual or threatened complaint, citation or notice of violation
or investigation from any governmental authority, in each case where such
violation would have a material adverse effect on MDIP.
(p) Compliance with Environmental Laws: MDIP is in
compliance with all applicable pollution control and environmental laws,
rules and regulations in all material respects. MDIP has no environmental
licenses, permits and other authorizations held by MDIP relative to
compliance with environmental laws, rules and regulations.
(q) No Litigation: There are no actions, suits, claims,
complaints or proceedings pending or threatened against MDIP, at law or in
equity, or before or by any governmental department, commission, court,
board, bureau, agency or instrumentality; and there are no facts which would
provide a valid basis for any such action, suit or proceeding, which, if
determined adversely to MDIP, would have a material averse effect on MDIP.
There are no orders, judgments or decrees of any governmental authority
outstanding which specifically apply to MDIP or any of its assets.
9
<PAGE>
(r) Validity: All material contracts, agreements, leases
and licenses to which MDIP is a party or by which it or any of its material
properties or assets are bound or affected, are valid and in full force and
effect; and no breach or default exists, or upon the giving of notice or
lapse of time, or both, would exist, on the part of MDIP or by any other
party thereto.
(s) No Adverse Changes: Since November 30, 1996, there have
been no actual or threatened developments of nature that is materially
adverse to or involves any materially adverse effect upon the business,
financial condition, results of operations, assets, liabilities, or prospects
of MDIP.
(t) Fees: All negotiations relating to the Basic Agreements
and the Transactions have been conducted by MDIP in such a manner as not to
give rise to any valid claim for any finder's fees, brokerage commission,
financial advisory fee or related expense or other like payment for which
MDIP or Sub 1 and Parent may be liable.
(u) Full Disclosure: All statements of MDIP contained in
the Basic Agreements and in any other written documents delivered by or on
behalf of the MDIP or Shareholders to Parent are true and correct in all
material respects and do not omit any material fact necessary to make the
statements contained therein not misleading in light of the circumstances
under which they were made. Except as described on Exhibit S attached hereto
and made a part hereof, there are no facts known to MDIP which could have a
materially adverse effect upon the business, financial condition, results of
operations, assets, liabilities, or prospects of MDIP, which have not been
disclosed to Sub 1 and Parent in the Basic Agreements.
3.2 Representations and Warranties of MDI-Missouri:
(a) Organization: MDI-Missouri is a corporation duly
incorporated, validly existing and in good standing under the laws of the
State of Delaware. MDI-Missouri has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its
business. MDI-Missouri is duly qualified and in good standing as a foreign
corporation in each jurisdiction where its ownership of property of operation
of its business requires qualification, except where the failure to be
qualified would not have a material adverse effect on MDI-Missouri.
(b) Authorized Capitalization: The authorized
capitalization of MDI-Missouri consists of One Hundred Thousand
10
<PAGE>
(100,000) shares of $1.00 par value Common Stock, which Two Thousand (2,000)
shares have been issued and outstanding. The Shares have been duly
authorized, validly issued, are fully paid and nonassessable with no personal
liability attaching to the ownership thereof and were offered, issued, sold
and delivered by MDI-Missouri in compliance with all applicable state and
federal laws. Except as set forth in Exhibit F-2 attached hereto,
MDI-Missouri is not a party to and is not bound by any agreement, contract,
arrangement or understanding, whether oral or written, giving any person or
entity any interest in , or any right to share, participate in or receive any
portion of, MDI-Missouri's income, profits or assets, or obligating
MDI-Missouri to distribute any portion of its income, profits or assets.
(c) Authority: MDI-Missouri has full power and lawful
authority to execute and deliver the Basic Agreements to which MDI-Missouri
is a party and to consummate and perform the Transactions. The Basic
Agreements constitute (or shall, upon execution, constitute) valid and
legally binding obligations of MDI-Missouri. Neither the consummation nor
performance of the Transactions, conflict with, requires the consent, waiver
or approval of, results in a breach of or default under, or gives to others
any interest or right of termination, cancellation or acceleration in or with
respect to, any material agreement by which MDI-Missouri is a party or by
which MDI-Missouri or any of its material properties or assets are bound or
affected.
(d) MDI-Missouri's Financial Statements: MDI-Missouri's
Financial Statements are complete as of the date thereof, were prepared in
accordance with generally accepted accounting principles applied on a basis
consistent with prior periods and fairly present the financial position of
MDI-Missouri as of November 30, 1996.
(e) No Undisclosed Liabilities: Except as set forth in
MDI-Missouri's Financial Statements previously delivered to Parent and as set
forth on Exhibit G-2 attached hereto, MDI-Missouri is not aware of any
material liabilities for which MDI-Missouri is liable or will become liable
in the future.
(f) Taxes: MDI-Missouri has filed all federal, state, local
tax and other returns and reports which were required to be filed with
respect to all taxes, levies, imposts, duties, licenses and registration
fees, charges or withholdings of every nature whatsoever ("Taxes"), and there
exists a substantial basis in law and fact for all positions taken in such
reports. No waivers of period of limitation are in effect with respect to any
taxes
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arising from and attributable to the ownership of properties or operations of
the business of MDI-Missouri.
(g) Properties: MDI-Missouri has good and marketable title
to all its material personal property, equipment, processes, patents,
copyrights, trademarks, franchises, licenses and other material properties
and assets (except for items leased or licensed to the Company), including
all property reflected in MDI-Missouri's Financial Statements (except for
assets reflected therein which have been sold in the normal course of its
business where the proceeds from such sale or other disposition have been
properly accounted for in the financial statements of MDI-Missouri), in each
case free and clear of all material liens, claims and encumbrances of every
kind and character, except as set forth in Exhibit H-2. The assets and
properties owned, operated or leased by MDI-Missouri and used in its business
are in good operating condition, reasonable wear and tear excepted, and
suitable for the uses for which intended.
(h) Books and Records: The books and records of
MDI-Missouri are complete and correct in all material respects, have been
maintained in accordance with good business practices and accurately reflect
in all material respects the business, financial condition and results of
operations of MDI-Missouri as set forth in the MDI-Missouri's Financial
Statements.
(i) Insurance: Exhibit I-2 contains an accurate and
complete list and brief description of all performance bonds and policies of
insurance, including fire and extended coverage, general liability, workers
compensation, products liability, property, and other forms of insurance or
indemnity bonds held by MDI-Missouri. MDI-Missouri is not in default with
respect to any provisions of any such policy or indemnity bond and has not
failed to give any notice or present any claim thereunder in due and timely
fashion. To the best of MDI-Missouri's knowledge, all policies of insurance
and bonds are: (1) in full force and effect; (2) are sufficient for
compliance by MDI-Missouri with all requirements of law and of all agreements
and instruments to which MDI-Missouri is a party; (3) are valid, outstanding
and enforceable; (4) provide adequate insurance coverage for the assets,
business and operations of MDI-Missouri in the amounts at least equal to
customary coverage in MDI-Missouri's history; (5) will remain in full force
and effect through the Closing; and (6) will not be affected by, and will not
terminate or lapse by reasons of, the transactions contemplated by this
Agreement.
(j) Transactions with Certain Persons: Except as disclosed
in Exhibit J-2, MDI-Missouri has no outstanding
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material agreement, understanding, contract, lease, commitment, loan or other
material arrangement with any officer, director or shareholder of
MDI-Missouri or any relative of any such person, or any corporation or other
entity in which such person owns a beneficial interest.
(k) Material Contract: Except as set forth in Exhibit K-2,
MDI-Missouri has no purchase, sale, commitment, or other contract, the breach
or termination of which would have a materially adverse effect on the
business, financial condition, results of operations, assets, liabilities, or
prospects of MDI-Missouri.
(l) Employment Matters: Exhibit L-2 contains a list of all
officers, their base salaries, accrued vacation pay, sick pay, and severance
pay through November 30, 1996. Except as set forth in Exhibit L-2,
MDI-Missouri is not a party to any employment agreement, or any pension,
profit sharing, retirement or other deferred compensation plan or agreement.
MDI-Missouri has not incurred any unfunded deficiency or liability within the
meaning o the Employee Retirement Income Security Act of 1974 ("ERISA"), has
not incurred any liability to the Pension Benefit Guaranty Corporation
established under ERISA in connection with any employee benefit plan.
MDI-Missouri has not been a party to a "prohibited transaction", which would
subject MDI-Missouri to any tax or penalty. There is no collective bargaining
agreement or negotiations therefor, labor grievance or arbitration proceeding
against MDI-Missouri pending or threatened, and to the knowledge of
MDI-Missouri, there are no union organizing activities currently pending or
threatened against or involving MDI-Missouri.
(m) Authorizations: MDI-Missouri has no licenses, permits,
approvals and other authorizations from any governmental agencies and other
entities that are materially necessary for the conduct of its business,
except as set forth in Exhibit M-2 which contains a list of all material
licenses, permits, approvals, and other material authorizations, as well as a
list of all material copyrights, patents, trademarks, trade names, service
marks, franchises, licenses and other material permits, each of which is
valid and in full force and effect.
(n) No Powers of Attorney: MDI-Missouri has no powers of
attorney or similar authorizations outstanding.
(o) Compliance with Laws: To the best of MDI-Missouri's
knowledge, MDI-Missouri is not in violation of any federal, state, local or
other law, ordinance, rule or regulation
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applicable to its business, and has not received any actual or threatened
complaint, citation or notice of violation or investigation from any
governmental authority, in each case where such violation would have a
material adverse effect on MDI-Missouri.
(p) Compliance with Environmental Laws: MDI-Missouri is in
compliance with all applicable pollution control and environmental laws,
rules and regulations in all material respects. MDI-Missouri has no
environmental licenses, permits and other authorizations held by MDI-Missouri
relative to compliance with environmental laws, rules and regulations.
(q) No Litigation: There are no actions, suits, claims,
complaints or proceedings pending or threatened against MDI-Missouri, at law
or in equity, or before or by any governmental department, commission, court,
board, bureau, agency or instrumentality; and there are no facts which would
provide a valid basis for any such action, suit or proceeding, which, if
determined adversely to MDI-Missouri, would have a material averse effect on
MDI-Missouri. There are no orders, judgments or decrees of any governmental
authority outstanding which specifically apply to MDI-Missouri or any of its
assets.
(r) Validity: All material contracts, agreements, leases
and licenses to which MDI-Missouri is a party or by which it or any of its
material properties or assets are bound or affected, are valid an din full
force and effect; and no breach or default exists, or upon the giving of
notice or lapse of time, or both, would exist, on the part of MDI-Missouri or
by any other party thereto except with respect to a dispute between
MDI-Missouri with its landlord over insufficient air conditioning on leased
premises in Hartford, Connecticut.
(s) No Adverse Changes: Since November 30, 1996, there have
been no actual or threatened developments of nature that is materially
adverse to or involves any materially adverse effect upon the business,
financial condition, results of operations, assets, liabilities, or prospects
of MDI-Missouri.
(t) Fees: All negotiations relating to the Basic Agreements
and the Transactions have been conducted by MDI-Missouri in such a manner as
not to give rise to any valid claim for any finder's fees, brokerage
commission, financial advisory fee or related expense or other like payment
for which MDI-Missouri or Sub 2 and Parent may be liable.
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(u) Full Disclosure: All statements of MDI-Missouri
contained in the Basic Agreements and in any other written documents
delivered by or on behalf of the MDI-Missouri or Shareholders to Parent are
true and correct in all material respects and do not omit any material fact
necessary to make the statements contained therein not misleading in light of
the circumstances under which they were made. There are no facts known to
MDI-Missouri which could have a materially adverse effect upon the business,
financial condition, results of operations, assets, liabilities, or prospects
of MDI-Missouri, which have not been disclosed to Sub 2 and Parent in the
Basic Agreements.
3.3 Representations and Warranties of Shareholders: Each
Shareholder represents and warrants to the Parent, with respect to the shares
of the MDI Companies owned by that Shareholder, as follows:
(a) Title to the Shares: At Closing, Shareholder shall own
of record and beneficially the number of the shares listed on Exhibit N of
the respective MDI Company, free and clear of all liens, encumbrances,
pledges, claims, options, charges and assessments of any nature whatsoever,
with full right and lawful authority to transfer the shares to the Parent.
Except for certain rights of Shareholders which shall be waived at the
Closing, no person has any preemptive rights or rights of first refusal with
respect to any of the shares. There exists no voting agreement, voting trust,
or outstanding proxy with respect to any of the shares. There are no
outstanding rights, options, warrants, calls, commitments, or any other
agreements of any character, whether oral or written, with respect to the
shares.
(b) Investment Intent: Each Shareholder is acquiring the
shares of the Parent for his own account for investment purposes only, and
not with a view to the sale or distribution of any part thereof, and each
Shareholder has no present intention of selling, granting participation in,
or otherwise distributing the same. Each Shareholder understands the specific
risks related to an investment in the shares of Parent, especially as it
relates to the financial performance of Parent.
3.4 Representations and Warranties of Parent: Parent represents
and warrants to the Shareholders as follows:
(a) Parent is a corporation duly incorporated, validly
existing and in good standing under the laws of the state of Delaware. Parent
has all requisite corporate power and authority to own, lease and operate its
properties and to carry on its
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business. Parent is duly qualified and in good standing as a foreign
corporation in each jurisdiction where its ownership of property or operation
of this business requires qualification, except where the failure to be
qualified would not have a material adverse effect on Parent.
(b) Authorized Capitalization: The authorized
capitalization of Parent consists of Two Hundred Million (200,000,000) shares
of .001 par value Common Stock, of which not more than Two Million Five
Hundred Thousand (2,500,000) shares have been issued and are outstanding.
Parent's shares have been duly authorized, validly issued, are fully paid and
nonassessable with no personal liability attaching to the ownership thereof
and were offered, issued, sold and delivered by Parent in compliance with all
applicable state and federal laws. Except as set forth in Exhibit O attached
hereto, Parent is not a party to and is not bound by any agreement, contract,
arrangement or understanding, whether oral or written, giving an person or
entity any interest in, or any right to share, participate in or receive any
portion of Parent's income, profits or assets, or obligating Parent to
distribute any portion of its income, profits or assets.
(c) Authority: The execution, delivery and performance by
Parent of this Agreement and the consummation by it of the transactions
contemplated hereby have been duly and validly authorized and approved by all
necessary corporate action on the part of Parent, and this Agreement is a
valid and binding agreement of Parent enforceable against it in accordance
with its terms subject to applicable laws relating to bankruptcy and
receivers and to general rules and principles of equity. Neither the
execution and delivery by Parent of this Agreement, nor the consummation of
the transactions contemplated hereby, will (i) conflict with or result in a
breach of any provision Parent's Articles of Incorporation or By-Laws, (ii)
result in a default (or give rise to any right of termination, cancellation
or acceleration) under any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, license, permit, lease, agreement or other
instrument or obligation to which Parent is a party, or by which it or any of
its properties or assets may be bound, or (iii) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to Parent, or any
of its properties or assets.
(d) Brokers and Finders: Parent has not employed any broker
or finder on its behalf or incurred any liability for any brokerage or
finders' fees or commissions in connection with the transactions contemplated
hereby.
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(e) The Subs: The Subs are first tier wholly owned
subsidiaries of Parent.
(f) Parent's Financial Statements: Parent's Financial
Statements are complete, were prepared in accordance with generally accepted
accounting principles applied on a basis consistent with prior periods and
fairly present the financial position of Parent as of January 31, 1997.
(g) No Undisclosed Liabilities: Except as set forth in
Parent's Financial Statements previously delivered to the MDI Companies,
Parent is not aware of any material liabilities for which it is liable or
will become liable in the future.
(h) Adverse Change: There has been no material adverse
change in the business, financial condition, operations, financial results or
prospects of Parent since January 31, 1997.
(i) No Prior Registration Rights: Except as provided by
this Agreement, there exist no statutory, contractual or other rights or
arrangements granting to any person or entity the right to participate in any
registration of Parent stock, or the right to cause Parent to prepare and/or
file a registration statement under the Securities Act, or otherwise
enabling, or purporting to enable, any person or entity to participate in an
offering of Parent stock or to cause Parent to register shares of Parent
stock.
(j) Tax Representations: The MDI Companies and the
Shareholders have informed Parent that it is a material factor in their
entering into this Agreement that the transactions contemplated by this
Agreement constitute a tax free reorganization within the provisions of
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code. Consequently, Parent
represents, warrants, covenants and agrees, as follows:
(i) Parent has no plan or intention to redeem
or otherwise reacquire any of the Parent Stock issued in the Mergers.
(ii) Parent has no plan or intention to
liquidate the MDI Companies, to merge the MDI Companies with and into another
corporation or each other, to sell or otherwise dispose of the stock of the
MDI Companies or to cause the MDI Companies to sell or otherwise dispose of
any of the assets of the MDI Companies, except for dispositions made in the
ordinary course of business.
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(iii) The Subs will have no liabilities except
obligations arising in the normal course in connection with the incorporation
and organization, assumed by the MDI Companies, and will not transfer to the
MDI Companies any assets subject to liability in the mergers.
(iv) Following the Mergers, Parent will cause
the MDI companies to continue the historic businesses of the MDI Companies or
use a significant portion of the businesses of the MDI Companies in a
business.
(v) Following the Mergers, Parent will not
permit the MDI Companies to issue additional shares of stock that would
result in Parent's losing control of the MDI Companies within the meaning of
Section 368(c) of the Code.
(vi) Following the transactions contemplated
by this Agreement, all United States tax returns filed by Parent, by the
Subs, and by the MDI Companies will be filed in a manner consistent with the
transactions contemplated by this Agreement constituting a tax-free
reorganization within the provisions of Section 368 of the Code.
(vii) Parent and each affiliate thereof shall
timely file a valid protective carryover basis election pursuant to the
requirements of Treas. Reg. Section 1.338-4T, with respect to the
transactions contemplated by this Agreement. Further, Parent and its
affiliates shall cooperate with MDI Companies to file any additional tax
elections as may be necessary or desirable to reduce the federal tax
liabilities of the Shareholders or the MDI Companies.
(viii) Neither Parent nor any of the Subs is on
the date hereof, nor shall on the Closing Date be, an "investment company"
within the meaning of Section 368(a)(2)(f) of the Code.
(k) No Litigation: There are no actions, suits, claims
complaints or proceedings pending or threatened against Parent, at law or in
equity, or before or by any governmental department, commission, court,
board, bureau, agency or instrumentality; and there are no facts which would
provide a valid basis for any such action, suit or proceeding, which, if
determined adversely to Parent, would have a material adverse effect on
Parent. There are no orders, judgments or decrees of any governmental
authority outstanding which specifically apply to Parent or any of its assets.
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(l) Due Diligence Documents: All documents provided to the
MDI Companies and the Shareholders by the Parent in connection with this
Agreement are true and complete and have not been subsequently modified or
amended by the Parent.
(m) Taxes: Parent has filed all federal, state, local tax
and other returns and reports which were required to be filed with respect to
all taxes, levies, imposts, duties, licenses and registration fees, charges
or withholdings of every nature whatsoever ("Taxes"), and there exists a
substantial basis in la and fact for all positions taken in such reports. No
waivers of periods of limitation are in effect with respect to any Taxes
arising from and attributable to the ownership of properties or operations of
the business of Parent.
(n) Transactions: Except for this Agreement and the
Transactions, as contemplated hereby, Parent has no outstanding material
agreement, understanding, contract, lease, commitment, loan or other material
arrangement to which it or its assets are bound.
(o) Full Disclosure: All statements of Parent contained in
the Basic Agreements and in any other written documents delivered by or on
behalf of Parent to the MDI Companies or Shareholders are true and correct in
all material respects and do not omit any material fact necessary to make the
statements contained therein not misleading in light of the circumstances
under which they were made. There are no facts known to Parent which could
have a materially adverse affect upon the business, financial condition,
results of operations, assets, liabilities, or prospects of Parent, which
have not been disclosed to the MDI Companies or Shareholders in the Basic
Agreements.
(p) Compliance with Securities Laws: Parent is in
compliance with all applicable federal and state securities laws and
regulations, has made all requisite filings thereunder, and has not received
any notice of violation of any kind with respect to the foregoing.
IV - COVENANTS
4.1 Covenants of the MDI Companies: The MDI Companies covenant and
agree that from the date hereof to the Closing without the prior written
consent of Parent:
(a) Ordinary Course of Business: The MDI Companies will
operate their business only in the ordinary course and will
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use their best efforts to preserve their respective business, organization,
goodwill and relationships.
(b) Maintain Properties: The MDI Companies will maintain
all of their properties in good working order, repair and condition
(reasonable wear and use excepted) and will take all steps reasonably
necessary to maintain in full force and effect its patents, trademarks,
service marks, trade names, brand names, copyrights and other intangible
assets.
(c) Compensation: The MDI Companies will not (1) enter into
or alter any employment agreements; (2) grant any increase in compensation
other than normal merit increases consistent with their general prevailing
practices to any officer or employee; or (3) enter into or alter any labor or
collective bargaining agreement or any bonus or other employee fringe benefit.
(d) No Indebtedness: The MDI Companies will not create,
incur, assume, guarantee or otherwise become liable with respect to any
obligation for borrowed money, indebtedness, capitalized lease or similar
obligations, except in the ordinary course of business consistent with past
practices, where the entire net proceeds thereof are deposited with and used
by and in connection with the business of the MDI Companies.
(e) Maintain Books: The MDI Companies will maintain their
books, accounts and records in the usual, regular ordinary and sound business
manner and in accordance with generally accepted accounting principles
applied on a basis consistent with past practices.
(f) No Amendments: The MDI Companies will not amend their
corporate charter or by-laws (or similar documents) without prior consent of
Parent and the MDI Companies will maintain their respective corporate
existence, licenses, permits, powers and rights in full force and effect.
(g) Taxes and Accounting Matters: The MDI Companies will
file when due all federal, state and local tax returns and reports which
shall be accurate and complete, including but not limited to income,
franchise, excise, ad valorem, and other taxes with respect to their
businesses and properties, and to pay as they become due all taxes or
assessments, except for taxes for which adequate reserves are established and
which are being contested in good faith by appropriate proceedings. The MDI
Companies will not change its accounting methods or practices or any
depreciation, amortization or inventory valuation policies or practices.
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(h) No Disposition or Encumbrance: Except in the ordinary
course of business consistent with past practice, the MDI Companies will not
(1) dispose of or encumber any of their properties and assets, (2) discharge
or satisfy any lien or encumbrance or pay any obligation or liability (fixed
or contingent) except for previously scheduled repayment of debt, (3) cancel
or compromise any debt or claim, (4) transfer or grant any rights under any
concessions, leases, licenses, agreements, patents, inventions, proprietary
technology or process, trademarks, service marks or copyrights, or with
respect to any know-how, or (5) enter into or modify in any material respect
or terminate any existing license, lease, or contract.
(i) Insurance: The MDI Companies will maintain in effect
all its current insurance policies.
(j) No Securities Insurances: The MDI Companies will not
issue any shares of any class of capital stock, or enter into any contract,
option, warrant or right calling for the issuance of any such shares of
capital stock, or create or issue any securities convertible into any
securities of the MDI Companies.
(k) No Dividends: The MDI Companies will not declare, set
aside or pay any dividends or other distributions of any nature whatsoever.
(l) Contracts: The MDI Companies will not enter into or
assume any contract, agreement, obligation, lease, license or commitment
except in the ordinary course of business consistent with past practice or as
contemplated by this Agreement.
(m) No Breach: The MDI Companies will not do any act or
omit to do any act which would cause a breach of any of its material
contracts, commitments or obligations.
(n) Due Compliance: The MDI Companies will comply will all
laws, regulations, rules and ordinances applicable to it and to the conduct
of its business, the violation of which would have a material adverse effect
on the MDI Companies.
(o) No Waivers of Rights: The MDI Companies will not amend,
terminate or waive any material right whether or not in the ordinary course
of business.
(p) Capital Commitments: The MDI Companies will not make or
commit to make any material capital expenditure, capital addition or capital
improvement.
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(q) No Related Party Transactions: The MDI Companies will
not make any loans to, or enter into any transaction, agreement, arrangement
or understanding of any material nature with any of their officers, directors
or employees.
(r) Notice of Change: The MDI Companies will promptly
advise Parent in writing of any material adverse change, or the occurrence of
any event which involves any substantial possibility of a material adverse
change, in their business, financial condition, results of operations,
assets, liabilities or prospects.
(s) Consents: The MDI Companies will use their best good
faith efforts to obtain the consent or approval of each person or entity
whose consent or approval is required for the consummation of the
Transactions contemplated hereby and to do all things necessary to consummate
the Transactions contemplated by the Basic Agreements.
4.2 Covenants of Parent: Parent covenants and agrees to perform the
following acts:
(a) No Indebtedness: Parent will not create, incur, assume,
guarantee or otherwise become liable with respect to any obligation for
borrowed money, indebtedness, capitalized lease or similar obligation, except
in the ordinary course of business consistent with past practices, where the
entire net proceeds thereof are deposited with and used by and in connection
with the business of Parent.
(b) No Amendments: Parent will not amend its corporate
charter or bylaws (or similar documents) without prior consent of the MDI
Companies (except as described above in Section 1.3(a) and Parent will
maintain its corporate existence, licenses, permits, powers and rights in
full force and effect.
(c) No Securities Issuances: Parent will not issue any
shares of any class of capital stock, or enter into any contract, option,
warrant or right calling for the issuance of any such shares of capital
stock, or create or issue any securities convertible into any securities of
Parent except for the transactions contemplated herein.
(d) No Dividends: Parent will not declare, set aside or pay
any dividends or other distributions of any nature whatsoever.
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(e) Contracts; Parent will not enter into or assume any
contact, agreement, obligation, lease, license, or commitment.
(f) Capital Commitments: Parent will not make or commit to
make any material capital expenditure, capital addition or capital
improvement.
(g) Notice of Change: Parent will promptly advise the MDI
Companies in writing of any material adverse change, or the occurrence of any
event which involves any substantial possibility of a material adverse
change, in their businesses, financial conditions, results of operations,
assets, liabilities or prospects.
(h) Consents: Parent will use its best good faith efforts
to obtain the consent or approval of each person or entity whose consent or
approval is required for the consummation of the Transactions contemplated
hereby and to do all things necessary to consummate the Transactions
contemplated by the Basic Agreements.
V
CONDITIONS PRECEDENT TO THE
OBLIGATIONS OF PARENT TO CLOSE
The obligation of Parent to close the Transactions is subject to the
fulfillment by the MDI Companies contained in this Agreement shall have been
true and correct when made and shall be true and correct as of the Closing
with the same force and effect as if made at the Closing. The MDI Companies
shall have performed all agreements, covenants and conditions required to be
performed by the MDI Companies and Shareholders prior to the Closing.
5.1 Compliance with Representations, Warranties and Covenants: The
representations and warranties of the MDI Companies and Shareholders
contained in this Agreement shall have been true and correct when made and
shall be true and correct as of the Closing with the same force and effect as
if made at the Closing. The MDI Companies and Shareholders shall have
performed all agreements, covenants and conditions required to be performed
by the MDI Companies prior to the Closing.
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5.2 No Adverse Change: Subsequent to the date hereof and prior to
the Closing, there shall have been no event which has had or may have a
material adverse effect upon the businesses, financial conditions, results of
operations, assets, liabilities or prospects of the MDI Companies.
5.3 No Legal Proceedings: No suit, action or other legal or
administrative proceeding before any court or other governmental agency shall
be pending or threatened seeking to enjoin the consummation of the
Transactions.
5.4 Documents to be Delivered by the MDI Companies and Shareholders:
The MDI Companies and Shareholders shall have delivered the following
documents:
(a) Stock certificates representing all of the shares of
the MDI Companies duly endorsed in blank or accompanied by duly executed
stock powers.
(b) A copy of (i) the Articles of Incorporation of the MDI
Companies, as amended to date, certified as correct by the MDI Companies; and
(ii) the Bylaws of the MDI Companies certified as correct by the MDI
Companies; and (iii) a certificate from each of the MDI Companies, to the
effect that the Company is in good standing and has paid all franchise taxes
in such state.
(c) All of the Basic Agreements shall be executed by all
parties thereto other than Parent.
(d) All corporate and other records of or applicable to the
MDI Companies included but not limited to current and up-to-date minute
books, stock transfer books and registers, books of accounts, leases and
material contracts.
VI
CONDITIONS PRECEDENT TO THE
OBLIGATIONS OF THE MDI COMPANIES
AND SHAREHOLDERS TO CLOSE
The obligation of the MDI Companies and the Shareholders to close
the Transactions subject to the fulfillment prior to Closing of each of the
following conditions, any of which may be waived in whole or in part by the
Parent and Subs:
6.1 Compliance with Representations, Warranties and Covenants: The
representations and warranties made by Parent in this Agreement shall have been
true and correct when made and shall be true and correct in all material
respects at the Closing
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with the same force and effect as if made at the Closing, and Parent and Subs
shall have performed al agreements, covenants and conditions required to be
performed by Parent and Subs prior to the Closing.
6.2 No Legal Proceedings: No suit, action or other legal or
administrative proceedings before any court or other governmental agency
shall be pending or threatened seeking to enjoin the consummation of the
Transactions contemplated hereby.
6.3 Other Agreements: All parties other than the MDI Companies and
Shareholders shall have executed and delivered the Basic Agreements.
6.4 Payments: Shareholders shall have received from Parent
certificates for all shares of Parent Stock and Subordinate Notes to be
issued at the Closing by Parent pursuant to the terms hereof to all of the
Basic Agreements.
6.5 Tax Opinions: Arthur Andersen, LLP, auditors to the MDI
Companies, shall have provided the MDI Companies and Shareholders with
written confirmation that (i) after the Transactions are completed, the book
value of the assets and liabilities of the MDI Companies may be recorded at
the same book values as recorded by the MDI Companies prior to the
Transactions, and (ii) except for income tax due on proceeds of the
Subordinate Notes, the Transactions are free from federal income tax to the
Shareholders.
6.6 Listing: The common stock of Parent shall have been approved for
listing on the NASDAQ Bulletin Board.
6.7 Stock Certification: The transfer agent for Parent's common
stock shall have provided a certification as to the number of shares
currently issued and outstanding, which shall in no event exceed Two Million
Five Hundred Thousand (2,500,000) shares. Counsel for the Parent shall have
provided an opinion that all of the issued and outstanding shares of Parent
have been duly authorized and issued, and are fully paid, and all shares
issued since January 1, 1997 have been issued in compliance with all
applicable federal and state securities laws.
6.8 Resignations: Resignations of all of the current officer and
directors of Parent shall have been tendered effective immediately after the
Merger becomes effective.
VII
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CONDITION SUBSEQUENT
It is the intention of Parent to enter into an Investment Banking
Agreement with Clark Capital Corporation in the form attached hereto and made
a part hereof as Exhibit R, pursuant to which Clark shall assist the Parent
in becoming listed on the NASDAQ Bulletin Board or a similar national
securities exchange acceptable to Shareholders (the "Listing"), and shall
represent the Parent in connection with a private placement offering in an
amount up to One Million Dollars ($1,000,000.00) (the "Offering"). In the
event that for any reason Clark is unable to complete the Listing or complete
Seven Hundred Thousand Dollars ($700,000.00) of the Offering on or before
ninety (90) days from the date of Closing, then Saferin, in his sole and
absolute discretion, by written notice to the Parent and the Merged Companies
shall have the right at any time hereafter until Completion of the Listing
and the Offering, to declare the Transactions annulled and void ah initio, in
which even within five (5) days after the date of Saferin's notice, the
parties agree as follows:
(a) Shareholders shall surrender to Parent certificate
representing all shares of common stock of the Parent issued pursuant to this
Agreement, duly endorsed in blank, and all Subordinate Notes duly endorsed in
blank.
(b) Parent shall surrender to the Merged Companies
certificates representing all shares of common stock of the Merged Companies
issued pursuant to this Agreement, duly endorsed in blank.
(c) Parent shall cause the Merged Companies to issue to the
Shareholder the number of shares of the MDI Companies owned by the respective
Shareholders prior to consummation of the Transactions.
(d) Each party shall take any other actions reasonably
requested by any other party to return the requesting party to its position
prior to the consummation of this Agreement, provided the foregoing shall not
require any party to pay any fees or expenses incurred by any other party in
connection with the Transactions.
Upon performance of those items set forth in paragraphs (a) through
(d) above, each of the parties hereby waives, releases and discharges all
other parties from all obligations under the Basic Agreements.
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VIII
MODIFICATION, WAIVERS,
TERMINATION AND EXPENSES
8.1 Modification: Shareholders and Constituent Corporations may
amend, modify or supplement this Agreement in any manner as they may all
mutually agree in writing.
8.2 Waivers: The parties may in writing extend the time for or waive
compliance by the other with any of the covenants or conditions of the other
contained herein.
8.3 Termination and Abandonment: This Agreement may be terminated
and the Transactions may be abandoned before the Closing.
(a) By the mutual consent of all parties hereto;
(b) By Parent, if the representations and warranties of the
MDI Companies or Shareholders set forth herein shall not be accurate, or the
conditions precedent set forth in Article VI shall have not have been
satisfied, in all material respects; or
(c) By the MDI Companies or Shareholders, if the
representations and warranties of Parent set forth herein shall not be
accurate, or the conditions precedent set forth in Article V shall not have
been satisfied in all material respects.
Termination shall be effective on the date of receipt of written
notice specifying the reasons therefor.
IX - MISCELLANEOUS
9.1 Representations and Warranties to Survive: Unless otherwise
provided, all of the representations and warranties contained in this
Agreement and in any certificate, exhibit or other document delivered
pursuant to this Agreement shall survive the Closing for a period of two (2)
years. No investigation made by any party hereto or their representatives
shall constitute a waiver of any representation or warranty, and no such
representations or warranty shall be merged into the Closing.
9.2 Binding Effect of the Basic Agreements: The Basic Agreements and
the certificate and other instruments delivered by or on behalf of the
parties pursuant thereto, constitute the entire agreement between the
parties. The terms and conditions of the Basic Agreements shall inure to the
benefit of and be binding upon the respective heirs, legal representatives,
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<PAGE>
successor and assigns of the parties hereto. Nothing in the Basic Agreements,
expressed or implied, confers any rights or remedies upon any party other
than the parties hereto and their respective heirs, legal representatives and
assigns. Whenever Shareholders are authorized to act hereunder, any action
authorized by those Shareholders holding a majority of the Shares shall be
deemed the act of and binding on all Shareholders.
9.3 Applicable Law: The Basic Agreements are made pursuant to, and
will be construed under, the laws of the State of Delaware.
9.4 Notices: All notices, request, demands and other communications
hereunder shall be in writing and will be deemed to have been duly given when
delivered or mailed, first class postage prepaid:
(a) If to MDI Companies
of Saferin:
Media Drop-In Productions, Inc.
ATTN: Steven M. Saferin, President
201 Ann Street
Hartford, CT 06103
Telephone: (860) 527-5359
FAX: (860) 527-5920
With a copy to:
Barry Weiskopf, Esquire
Kaplan, Heyman, Greenberg,
Engelman & Belgrad, P.A.
10th Floor, Sun Life Building
20 S. Charles Street
Baltimore, MD 21201
Telephone: (410) 539-6967
Fax: (410) 752-0685
(b) If to Parent or Subs:
G. David Gordon
Gordon & Associates, P.C.
7633 E. 63rd Place, Suite 210
Tulsa, OK 74133
Telephone: (918) 254-4997
Fax: (918) 254-2988
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(c) If to Galluzzo:
Agostino T. Galluzzo
Azura International Holdings, Ltd.
805 3rd Avenue, 10th Floor
New York, New York 10022
Telephone: (212) 805-8338
Fax: (212) 486-9495
With a copy to:
C. Robton Perelli-Minetti, Esquire
Albert, Ward & Johnson
125 Mason Street
Greenwich, CT 06836
Telephone: (203) 661-8600
Fax: (203) 661-8051
These addresses may be changed from time to time by written notice
to the other parties.
9.5 Headings: The headings contained in this Agreement are for
reference only and will not affect in any way the meaning or interpretation
of this Agreement.
9.6 Counterparts: This Agreement may be executed in counterparts,
each of which will be deemed an original and all of which together will
constitute one instrument.
9.7 Severability: If any one or more of the provisions of this
Agreement shall, for any reasons, be held to be invalid, illegal or
unenforceable under applicable law, this Agreement shall be construed as if
such invalid, illegal or unenforceable provision had never been contained
herein. The remaining provisions of this Agreement shall be given effect to
the maximum extent then permitted by law.
9.8 Forbearance Waiver: Failure to pursue any legal or equitable
remedy or right available to a party shall not constitute a waiver of such
right, nor shall any such forbearance, failure or actual waiver imply or
constitute waiver of subsequent default or breach.
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<PAGE>
9.9 Attorneys' Fees and Expenses: The prevailing party in any legal
proceeding based upon this Agreement shall be entitled to reasonable
attorney's fees and expenses and court costs.
9.10 Expenses: Each party shall pay all fees and expenses incurred
by it incident to this Agreement and in connection with the consummation of
all transactions contemplated by this Agreement. However, should either party
choose to terminate this Agreement under Section 8.3(a), that party
initiating the termination shall be responsible for all legal fees and other
expenses incurred in connection with the preparation of this Agreement.
9.11 Exhibits: All of the Exhibits to this Agreement are
incorporated herein in the places referenced in this Agreement as if fully
set forth herein.
9.12 Integration: This Agreement and all documents and instruments
executed pursuant hereto merge and integrate all prior agreements and
representations respecting the Transactions, whether written or oral, and
constitute the sole agreement of the parties in connection therewith. This
Agreement has been negotiated by and submitted to the scrutiny of both
Shareholders and Parent and their counsel and shall be given a fair and
reasonable interpretation in accordance with the words hereof, without
consideration or weight being given to its having been drafted by either
party hereto or its counsel.
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IN WITNESS WHEREOF, the undersigned parties hereto have duly
executed this Agreement on the date first above written.
PARENT:
ATTEST: MDI ENTERTAINMENT, INC.
/s/ Susan A. Willis By: /s/ Jesse Clayton
- -------------------------- --------------------------------
Susan A. Willis, Secretary Jesse Clayton, President
MDI COMPANIES:
ATTEST: MEDIA DROP-IN PRODUCTIONS, INC.
/s/ Kenneth Przysiecki By: /s/ Steven M. Saferin
- -------------------------- --------------------------------
Secretary Steven M. Saferin, President
ATTEST: MDI-MISSOURI, INC., a Missouri
corporation
/s/ Kenneth Przysiecki By: /s/ Steven M. Saferin
- -------------------------- --------------------------------
Secretary Steven M. Saferin, President
WITNESS: SHAREHOLDERS:
/s/ Barry Weiskopf /s/ Steven M. Saferin
- -------------------------- --------------------------------
STEVEN M. SAFERIN
/s/ Kelly Quinn /s/ Agostino T. Galluzzo
- -------------------------- --------------------------------
Kelly Quinn AGOSTINO T. GALLUZZO
SUBS:
ATTEST: MDI-CONNECTICUT, INC.
/s/ Susan A. Willis By: /s/ Jesse Clayton
- -------------------------- --------------------------------
Susan A. Willis, Secretary Jesse Clayton, President
ATTEST: MDI-MISSOURI, INC., a Delaware
corporation
/s/ Susan A. Willis By: /s/ Jesse Clayton
- -------------------------- --------------------------------
Susan A. Willis, Secretary Jesse Clayton, President
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<PAGE>
EXHIBIT 6.6
COMMISSION AGREEMENT
THIS AGREEMENT made this 20th day of December, 1994 by and
between MEDIA DROP-IN PRODUCTIONS, INC., a Delaware corporation, ("MDI") and
STAMFORD MEDIA GROUP, LLC , a Connecticut limited liability company
("Company").
R E C I T A L S
WHEREAS, MDI is a corporation which engages in the business of
promotional fulfillment, including fulfillment of second chance prizes in the
lottery industry, having its principal offices in Hartford, Connecticut; and
WHEREAS, Company is knowledgeable regarding procurement of video
tapes, audio tapes and compact disks as a result of its involvement in the
entertainment industry; and
WHEREAS, Company is willing to act as a procurement representative
for MDI, provided that it receive a commission based on the Collections (as
herein defined) of MDI, and MDI desires the services of Company as a
procurement representative, upon commission schedule and the other terms and
conditions herein contained.
NOW, THEREFORE, in consideration of the mutual promises herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, MDI and Company agree as
follows:
1. SERVICES. MDI hereby contracts for the services of
Company, as an independent contractor, and Company agrees to render such
services, upon the terms and conditions herein contained. Nothing herein
contained shall require Company to maintain any fixed schedule or minimum
number of hours of work. The services to be rendered by Company are as
follows:
(a) During the term of this Agreement, Company
shall assist MDI in procurement of video and audio entertainment media upon
favorable terms and conditions. Company shall perform the foregoing duties by
introducing MDI to individuals and corporations in the entertainment industry
(collectively the "Supply Sources"), and assisting MDI in the negotiation of
supply contracts with the Supply Sources. MDI acknowledges that most of the
Supply Sources are located in New York or California, and as a result
thereof, the work to be performed under this Agreement will be performed
outside of the State of Connecticut.
(b) During the term of this Agreement (as defined
in paragraph 2 below), a representative of Company shall be available at
reasonable times for purposes of telephonic discussions with MDI, its
officers and directors, with regard to the marketing of the business of MDI,
and such other areas as MDI may request. When reasonably requested, a
representative of Company shall participate in meetings with the management
or the customers or suppliers of MDI, at the expense of MDI, including the
representative's transportation, lodging and meal expenses. In carrying out
the foregoing, Company shall use its best efforts to further MDI's interest
and not to in any way, directly or indirectly, injure the reputation of MDI.
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(c) Company shall faithfully and industriously
assume and perform with skill, care, diligence and attention all
responsibilities and duties imposed upon Company under this Agreement.
(d) Company shall have no authority to enter into
any contracts binding upon MDI, which would create any obligations on the
part of MDI, except as may be specifically authorized by MDI.
(e) During the term of this Agreement, Company
shall not engage and/or perform services of any nature in any capacity for
any person, corporation, partnership or other entity engaged in the lottery
prize fulfillment business, provided that the foregoing shall not in any way
restrict or prohibit Company from engaging in any other consulting services,
employment, or other gainful activity outside of the lottery prize
fulfillment business.
2. TERM.
(a) This Agreement shall be binding and fully
enforceable against the parties immediately upon the execution hereof. The
term of this Agreement (the "Term") shall be for a period commencing on
December 15,1994 (the "Start Date"), and this Agreement shall terminate on
December 14, 1997.
(b) In the event that by the expiration of the
Term, Collections (as herein defined) during the Term are less than
$27,300,000.00, then Company shall have the right to renew this Agreement for
additional periods of one (1) year each running from December 15, 1997 until
$27,300,000.00 of Collections accounting from December 15, 1994 is reached,
after which time there shall be no right of renewal. Such right of renewal
shall be exercised by written notice from Company to MDI at least fifteen
(15) days prior to the expiration of the Term or the then current renewal
term. In the event that Company validly exercises its renewal option and MDI
desires not to have this Agreement renewed, then MDI shall deliver notice
thereof to Company on or before the expiration date of the Term or the then
current renewal term, which notice shall be accompanied by MDI's Promissory
Note in the form attached hereto and made a part hereof as Exhibit A, wherein
MDI shall agree to pay Company the difference between $808,250.00 and the
amount of Commission (as herein defined) previously paid under this
Agreement, together with interest at the rate of three percent (3%) above the
Wall Street Journal Prime Rate, payable in twenty-four (24) consecutive equal
monthly installments of principal and interest, the first of which shall be
due on the fifteenth day of the first month after the expiration of this
Agreement. Upon delivery of the Promissory Note, MDI shall be released from
all obligations under this Agreement, including any further obligations to
pay Commission. Except as expressly provided in this subparagraph (b),
neither party shall have any right of renewal.
3. COMMISSIONS. For the procurement services to be rendered
hereunder, MDI shall pay to Company a commission (the "Commission") to be
calculated and paid as follows:
(a) DEFINITIONS: The following terms shall have
the meanings indicated:
(i) "BILLINGS" shall mean the amount of
all invoices rendered by MDI
2
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during the Term, or any renewal term of this Agreement, for all products and
services, excluding sales tax and freight, as well as the value received from
bartering products or services, all determined in accordance with generally
accepted accounting principles ("GAAP"). MDI agrees to shall use reasonable
efforts to render invoices on a weekly basis to those customers who will
permit billing on a weekly basis.
(ii) "COLLECTIONS" shall mean the amount
of payments received by MDI on Billings directly from the party billed and
payments received by MDI on Billings from any factor who purchases those
Billings, all determined in accordance with GAAP.
(iii) "MINIMUM" for any calendar month
shall mean the sum of $337,500.00 multiplied by the number of months (with
any partial month expressed as a fraction) since the beginning of the Term,
provided the Minimum shall never be greater than $12,150,000.00. The Minimum
shall be calculated as of the end of each calendar month.
(b) AMOUNT AND PAYMENT. The Commission shall be
calculated and payable in accordance with the following provisions:
(i) For the period from December 15, 1994
through February 28, 1995, MDI shall pay to Company a Commission equal to
five and one-third percent (5.33%) of all Collections during the said period
in excess of $843,750.00, which Commission shall be due and payable on or
before March 15, 1995.
(ii) On April 15, 1995 and on the
fifteenth (15th) day of each month thereafter until MDI no longer has
Collections, MDI shall pay to Company, as Commission, an amount equal to: (A)
five and one-third percent (5.33%) of those Collections received from the
Start Date until the last day of the prior calendar month in excess of the
Minimum, MINUS (B) any Commission previously paid by MDI to Company.
(c) EXAMPLE. An Example of the application of
subparagraph (b) (ii) is as follows: If by May 31, 1995, MDI has Collections
of $3,000,000.00, but has already paid Commission of $55,000.00, then the
Commission due on June 15, 1995 would be $7,906.25, calculated as follows:
(i) Minimum equals $337,500 x 5.5 =
$1,856,250.00
(ii) Collections ($3,000,000.00) minus Minimum
($1,856,250.00) = $1,143.750.00
(iii) Multiplied by 5.33% = $60,961.88
(iv) Less Commission previously paid
($55,000.00) = $5,961.88
(d) MONTHLY STATEMENT. Together with each payment
of Commission, or if no Commission is due then on the date that said payment
would otherwise be due, MDI shall provide Company with a statement setting
forth the Billings and Collections of the previous month.
(e) RIGHT OF AUDIT. Company shall have the right
to audit MDI's books and records relating to Billings and Collections no more
than once in any twelve month period. In
3
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the event that such audit reveals that the monthly statements for the prior
twelve (12) months have under-reported Collections by five (5%) percent or
more, MDI shall reimburse Company for the cost of the audit, in addition to
payment of amount under-reported.
4. INDEPENDENT CONTRACTOR STATUS. Company shall perform
services for MDI pursuant to this Agreement as an independent contractor.
Company will pay all withholding taxes due on behalf of its employees and any
and all income taxes and other taxes of any type or description whatsoever
without withholding or contribution by MDI. Additionally, Company
acknowledges that neither it nor its employees or owners shall not be
entitled to fringe benefits of any nature, as a result of serving as a
consultant pursuant to the terms of this Agreement, including, but not
limited, pension benefits, life insurance, paid vacation, use of company
vehicles, or any other benefits similarly offered by MDI to its employees.
Company is under the control of MDI as to the result of Company's work only
and not as to the means by which such results are accomplished. This
Agreement shall not be construed as a partnership and neither party hereto
shall be liable for any obligation incurred by the other except as provided
elsewhere herein.
5. RECORDS OF MDI. Company, during the term of this
Agreement may work on and be consulted with respect to matters for customers
of MDI. All such matters are highly confidential. Company understand and
agrees that Company shall acquire no rights to any of this information. All
records, notes, memoranda, files, financial statements, client and customer
lists, brochures, documents and all other similar material relating to MDI or
its business or those of its customers (hereinafter referred to as the
"Records") which shall come into possession of Company, shall remain and be
deemed to be the property of MDI. Company shall promptly return any originals
and all copies of the Records to MDI upon request. Upon the termination of
this Agreement for whatever reason, Company shall promptly deliver to MDI the
Records in his possession or delivered to or otherwise acquired by him
concerning MDI or its clients.
6. NON-DISCLOSURE. Except with the prior written consent of
MDI, which consent is within the sole discretion of MDI, Company agrees that
it will not directly or indirectly, during or after the term of this
Agreement, disclose or reveal (except as Company is required to disclose by
court order, summons, subpoena or similar process of law or to Company's
attorney in connection with the foregoing) to or use for itself or others,
the confidential information of MDI or its customers including, but not
limited to proprietary information, secrets, the lists of MDI's customers,
any secret or confidential information or data regarding the business of MDI,
any secret or confidential information or data concerning the customers or
prospective customers of MDI. Such secrets shall include but are not limited
to programs, data systems, processes, computer programs, computer systems,
equipment and configurations, financial information, and pricing policies.
8. DEFAULT. MDI shall not be deemed to be in default of
any of its obligations to Company hereunder, unless and until a Commission
payment has not been made for thirty (30) days after the date due. At such
time the delinquent payment shall accrue interest at the rate of three
percent (3%) per annum above the Wall Street Journal Prime Rate until paid,
and if any payment is not paid within ninety (90) days of the date due, then
Company shall have the right to terminate this Agreement by written notice to
MDI. In such event, Company may,
4
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at its option either: (i) bring one or more actions against MDI to collect
the Commission as and when it would become due under the terms of this
Agreement, or (ii) bring a single action for liquidated damages calculated as
the greater of (A) the monthly Commission payment for the twelve (12) months
prior to the default or such lesser number of months as the Agreement has
been in effect, multiplied by the number of months remaining during the Term
after the month of default, or (B) the sum of $833,250.00 minus any
Commission previously paid by MDI to Company.
10. MISCELLANEOUS.
(a) This Agreement shall be binding upon and the
benefits shall inure to the heirs, successors and assigns of the parties
hereto, subject to paragraph 10(c) below.
(b) All notices provided for under this Agreement
shall be in writing and shall be sufficient if sent by certified mail to the
following listed addresses of the parties hereto or to such other address as
shall be designated in writing to the other party:
MDI: 201 S. Ann Street
Hartford, CT 06103
ATTN: Mr. Steven Saferin
With a copy to: Barry Weiskopf, Esquire
Kaplan, Heyman, Greenberg,
Engelman & Belgrad, P.A.
20 S. Charles Street, 10th Flr.
Baltimore, Maryland 21201
Company: 157 Breezy Hill Road
Stamford, CT 06903
Attn: Mr. Richard Kelly
With a copy to: Alice Ann Fitzpatrick, Esquire
Cacace, Tusch & Santagata
777 Summer Street
P. O. Box 15859
Stamford, CT 06901-0859
(c) This Agreement is personal to the parties
hereto and may not be assigned,sold or otherwise conveyed by either of them,
except that MDI may assign or sell its rights hereunder in connection with a
sale of all or substantially all of the assets of MDI, provided that at the
time of such sale, MDI shall be required to satisfy all payment obligations
to Company under this Agreement, even if such payments are not yet due.
(d) The failure of any party hereto to enforce at
any time any of the provisions or terms of this Agreement shall not be
construed to be a waiver of such provision or term, nor of the right of any
party thereafter to enforce such term or provision.
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(e) This Agreement constitutes the entire
agreement between MDI and Company regarding rendering procurement services,
and there are no agreement or understandings concerning such Agreement which
are not fully set forth herein or in other agreements referenced herein.
(f) If any provision of this Agreement is invalid
or unenforceable in any jurisdiction, the other provisions herein shall
remain in full force and effect in such jurisdiction and shall be liberally
construed in order to effectuate the purpose and intent of this Agreement,
and the invalidity or unenforceability of any provision of this Agreement in
any jurisdiction shall not affect the durability of enforceability of any
such provision in any other jurisdiction.
(g) The titles of the paragraphs throughout this
Agreement are for convenience and reference only, and the words contained
therein shall in no way be held to explain, modify, amplify or aid in the
interpretation, construction or moaning of the provisions of this instrument.
(h) Whenever any provision in this Agreement
assumes a right or responsibility to MDI or Company after termination of this
Agreement, said right or responsibility shall survive the termination of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have signed, or
caused to be signed these presents.
ATTEST: MEDIA DROP-IN PRODUCTIONS, INC.
/s/ Barry Weiskopf By: /s/ Steven Saferin
- ---------------------------------- ----------------------------------.
Steven Saferin, President
WITNESS: STAMFORD MEDIA GROUP, LLC
By: /s/
- ---------------------------------- ----------------------------------.
Company
Its:
------------------------
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EXHIBIT 6.7
[MDI LETTERHEAD]
July 31, 1998
VIA FEDERAL EXPRESS
Mr. Craig Krueger
President
Fancaster, Inc.
85 Sixty Second Avenue, Suite 1213
Silver Spring, MD 20910
Dear Craig:
As a result of our recent discussions, we have formulated this revised Letter
of Intent by which MDI ENTERTAINMENT, INC., OR ITS ASSIGNS, (HEREINAFTER
"MDI") PROPOSES TO ENTER INTO A JOINT VENTURE WITH FANCASTER, INC. AND CRAIG
KRUEGER (HEREINAFTER COLLECTIVELY "FANCASTER") to develop and market certain
concepts associated with broadcast advertising to pager networks. This Letter
of Intent is hereby submitted as a proposal of the principal terms and
conditions upon which MDI and Fancaster are prepared to proceed.
1. MDI and Fancaster (hereinafter collectively the "Companies") will
form a new Delaware corporation (hereinafter "Newco"), with a name
to be determined, with MDI and Fancaster owning 50% of the initial
common stock, respectively.
2. MDI shall, for consideration of its 50% ownership in Newco, pay
Krueger $25,000 in cash at the time of closing and as additional
consideration for its ownership, provide Newco with all
administrative, sales, marketing and financial services at no charge
for a period ending one year after the closing. Fancaster shall, for
consideration of its 50% ownership in Newco, provide the services of
Craig Krueger to Newco, arrange to have Thomas Stroup and William
West sit on the Board of Directors of Newco, and have Craig Krueger
execute such five (5) year non-compete agreement as Newco may
require. MDI shall also execute a five year non- compete agreement.
Stroup and West shall each receive in non-voting stock equivalent to
1% of the common stock options of Newco and an additional 1/4% per
quarter for two years for a total of the equivalent of 3%.
<PAGE>
Mr. Craig Krueger
July 31, 1998
Page 2
3. MDI shall, in addition to its initial investment, agree to loan
Newco an amount, not to exceed $200,000, to fund its ongoing
operations (hereinafter the "Loan").
4. Such funds shall be advanced in MDI's sole discretion and shall be
secured by all the assets of Newco. The Loan shall bear interest at
a rate of Prime plus 1% per annum. Newco will begin repayment of the
loan according to a schedule to be determined prior to the closing.
Such schedule shall contain covenants that factor in Newco's
profitability and cash flow. At such time as MDI is repaid all money
loaned to Newco, Newco shall repay Krueger an amount equal to
$200,000 under the same repayment terms agreed to for the MDI loan.
Such $200,000 will take the form of a note for funds advanced to
Fancaster by Krueger. There shall be no interest on the Krueger loan.
5. The Board of Directors of Newco shall consist of five members, in
addition to Stroup and West; four named by MDI and one named by
Fancaster.
6. Newco shall provide a consulting agreement to Krueger for a period
of no less than eighteen (18) months, at a monthly compensation of
$8,000. Krueger will receive all benefits offered employees of MDI
with the exception of 401(k) participation. These benefits shall
include major medical insurance, dental insurance, and three weeks
paid vacation. Newco will pay all out-of-pocket expenses incurred by
Mr. Krueger during the course of his consulting work. In addition,
during these 18 months, Newco will pay Krueger, upon the achievement
of goals relating to the addition of increments of 250,000 paging
units that receive news and other information feeds to Newco's
advertising network, up to a maximum of 1,000,000, with such paging
units to be committed for a minimum period of no less than twelve
(12) months on a non-exclusive basis. Newco shall pay Krueger
$25,000 for each 250,000 unit increment achieved within ten (10)
days after the confirmed validation of mutuals size through a
statistical validation method agreed to by the partners. Such
payments shall be advanced by MDI and shall be in addition to any
funds specified in Sections 2 and 3 above and subject to the terms
in Section 4 above.
7. Mr. Krueger will be President and Chief Operating Officer of Newco
and shall provide his knowledge and expertise in developing and
marketing the concept as directed by the Board of Newco.
8. Mr. Saferin will be the Chairman and Chief Executive Officer of
Newco and shall provide his knowledge and expertise in developing
and marketing the concept as directed by the Board of Newco.
<PAGE>
Mr. Craig Krueger
July 31, 1998
Page 3
9. MDI shall provide an administrative services contract to Newco, at
no cost to Newco for the first year after closing. Thereafter, Newco
and MDI shall mutually agree on the terms for ensuing years. Newco
shall pay all of MDI's out-of-pocket expenses associated with its
administrative services contract.
10. MDI may withdraw from the joint venture for any good faith reason
after six (6) months from the date of execution of the formal Joint
Venture agreement.
Fancaster acknowledges MDI's right to conduct detailed evaluations and due
diligence investigations of Fancaster and its patents. In connection with
these evaluations, Fancaster shall make its facilities, management and
employees available to MDI during agreed upon hours, and shall be responsive
to any and all reasonable requests for information made by MDI.
Simultaneously to such evaluations, but no later than thirty (30) days from
Fancaster's execution of this Letter of Intent, MDI intends to provide
Fancaster with a definitive joint venture agreement for Fancaster's review
and execution
With the exception of paragraphs A, B, C and D below, by which the parties
hereto agree to be legally bound, this Letter of Intent is not intended to
serve as a legally binding document, since MDI and Fancaster do not intend to
be legally bound or under any legal obligation to one another prior to the
execution and delivery of a definitive agreement which is mutually acceptable
to both parties.
A. In consideration of the substantial expenditure of time, effort and
expense to be undertaken by MDI in connection with the proposed
transaction, Fancaster undertakes and agrees that it shall not, for
sixty (60) days after the execution of this Letter of Intent, enter
into any contract with any other prospective purchaser, investor,
partner, joint venturer or creditor concerning a sale of Fancaster,
or any associated assets or liabilities.
B. MDI and Fancaster mutually agree that neither party shall disclose
to any third party that MDI and Fancaster have exchanged information
or correspondence with respect to the foregoing. Further, both
parties agree not to disclose to any third party or entity any
information, whether written or oral, received from the other in
connection with this matter and that all such information shall be
maintained on a confidential basis and shall not be used for any
purpose other than to evaluate the proposed transaction. Excluded
from these non-disclosure provisions are financial institutions and
co-investors who may participate in this transaction, and advisors
to both MDI and Fancaster. It is explicitly understood by both
parties that the non-disclosure provision of this paragraph shall
include all other prospective buyers of Fancaster or its assets.
<PAGE>
Mr. Craig Krueger
July 31, 1998
Page 4
C. Each party further agrees, whether or not the proposed transaction
outlined herein is consummated, to pay its own (and their
representatives) respective fees and expenses incurred in connection
with the proposed transaction.
D. This agreement shall be governed by and construed under the laws of
the State of Connecticut.
If the contents of this letter accurately reflect your understanding, kindly
indicate your acceptance of the foregoing by signing the enclosed counterpart
of this letter in the space provided below and returning same to the
undersigned. The terms of this Letter of Intent will expire at close of
business on August 7, 1998, unless signed by both parties. MDI and Fancaster
agree that telecopied or "faxed" agreements are binding on both parties.
In order to expedite the finalization of this agreement, the parties shall
execute faxed copies, but will also execute two (2) original agreements.
We look forward to successfully concluding this transaction to our mutual
benefit.
Very truly yours,
MDI ENTERTAINMENT, INC.
/s/ Steven M. Saferin
Steven M. Saferin
President and CEO
AGREED TO AND ACCEPTED UPON THE AFOREMENTIONED TERMS AND CONDITIONS THIS 5th
DAY OF AUGUST, 1998.
BY: /s/ Craig Krueger, President
------------------------------------------------
Mr. Craig Krueger, President
Fancaster, Inc.
BY: /s/ Craig Krueger
------------------------------------------------
Mr. Craig Krueger, Individually
