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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to________________________
Commission File Number: 0-24919
MDI ENTERTAINMENT, INC.
-----------------------
(Exact name of Registrant as specified in its Charter)
Delaware 73-1515699
-------- ----------
(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
201 Ann Street
Hartford, Connecticut 06103
---------------------------
(Address of principal executive offices)
(860) 527-5359
--------------
(Registrant's telephone number)
(Former Name, Former Address and Former Fiscal Year, if changed since last
Report)
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X No
As of October 6, 2000, 10,405,872 shares of the issuer's common stock were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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<PAGE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2000
INDEX
-----
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.............................................................................1
Consolidated Balance Sheets as of August 31, 2000 (unaudited) and May 31, 2000........................1
Consolidated Statements of Operations for the three months ended
August 31, 2000 and 1999 (unaudited)..................................................................2
Consolidated Statement of Shareholders' Deficit for the three months ended
August 31, 2000 (unaudited)...........................................................................3
Consolidated Statements of Cash Flows for the three months ended
August 31, 2000 and 1999 (unaudited) .................................................................4
Notes to Unaudited Consolidated Financial Statements..................................................5
Item 2. Management's Discussion and Analysis.............................................................7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................15
Signatures...........................................................................................16
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED BALANCE SHEETS
August 31, May 31,
2000 2000
------------ -------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 64,421 $ 313,435
Accounts receivable 1,118,452 801,286
Inventory 79,574 254,187
Other current assets 231,258 266,743
----------- -----------
Total current assets 1,493,705 1,635,651
PROPERTY AND EQUIPMENT, AT COST:
Equipment 228,842 228,842
Furniture and Fixtures 102,391 102,391
----------- ------------
331,233 331,233
Less: Accumulated Depreciation (195,433) (184,126)
------------ ------------
135,800 147,107
------------ ------------
OTHER ASSETS:
Licensing costs, net 454,217 348,604
Other (Note 3) 495,697 438,621
----------- -----------
Total other assets 949,914 787,225
----------- -----------
Total assets $ 2,579,419 $ 2,569,983
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Billings in excess of costs and estimated
earnings on uncompleted
contracts (Note 2) $ 1,661,216 $ 1,733,288
Deferred revenue (Note 2) 4,860 190,547
Note payable - bank (Note 7) 95,000 -
Current portion of long-term debt 184,006 195,848
Accounts payable 1,187,496 867,439
Accrued expenses 167,252 360,606
Income taxes payable (Note 5) 9,871 -
Dividends payable 3,718 7,322
----------- -----------
Total current liabilities 3,313,419 3,355,050
LONG-TERM DEBT AND NOTES PAYABLE
less current portion above 56,234 99,689
SUBORDINATED DEBENTURE (Note 4) 545,625 540,000
----------- -----------
Total liabilities 3,915,278 3,994,739
SHAREHOLDERS' DEFICIT
Common Stock 9,797 8,987
Convertible preferred stock-Series A, 1 1
Additional paid-in capital 2,517,733 2,473,154
Accumulated deficit (3,863,390) (3,906,898)
----------- -----------
Total shareholders' deficit (1,335,859) (1,424,756)
----------- -----------
$ 2,579,419 $ 2,569,983
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
-1-
<PAGE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
August 31,
2000 1999
------------- ------------
(unaudited) (unaudited)
Revenues $ 1,872,875 $ 1,760,137
Cost of revenue 1,145,521 1,159,587
--------- ---------
Gross profit 727,354 600,550
Selling, general and administrative expenses 650,084 516,351
--------- ---------
Operating profit 77,270 84,199
Interest expense, net 26,123 6,600
--------- ---------
Income before provision for income taxes 51,147 77,599
Provision for income taxes (Note 5) 1,100 1,500
--------- ---------
Net income $ 50,047 $ 76,099
=========== ===========
Basic earnings
per common share (Note 6) $ 0.00 $ 0.01
======== ========
Diluted earnings
per common share (Note 6) $ 0.00 $ 0.01
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
-2-
<PAGE>
<TABLE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
<CAPTION>
For the three months ended August 31, 2000
(unaudited)
-------------------------------------------------------------------------------------------------------
SHARES PAR VALUE $0.001
------------------------------- -------------------------
* Convertible
Convertible ** Preferred Additional
Preferred Stock Common Stock Common Paid-in Accumulated
Series A Stock Series A Stock Capital Deficit Total
----------------- -------------- ----------- ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, May 31, 2000 1,015 8,987,446 $ 1 $ 8,987 $ 2,473,154 $ (3,906,898) $ (1,424,756)
Net income -- -- -- -- -- 50,047 50,047
Dividends on preferred stock -- -- -- -- -- (6,539) (6,539)
Stock options exercised -- 300,000 -- 300 110,700 -- 111,000
Compensation attributable to
employee stock options -- -- -- -- (80,300) -- (80,300)
Conversion of series A convertible
preferred stock to common stock (508) 508,000 -- 508 (508) -- --
Other -- -- -- -- 4,546 -- 4,546
Preferred Stock dividend
paid in common stock -- 1,473 -- 2 10,141 -- 10,143
----- --------- - ----- --------- ------------ ------------
BALANCE, August 31, 2000 507 9,796,919 $ 1 $ 9,797 $2,517,733 $ (3,863,390) $(1,335,859)
===== ========= = ===== ========= ============ ===========
</TABLE>
* 5,000,000 shares of preferred stock authorized
** 25,000,000 shares of common stock authorized
The accompanying notes are an integral part of these consolidated
financial statements.
-3-
<PAGE>
<TABLE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Three months
ended
August 31,
2000 1999
----------- ------------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 50,047 $ 76,099
Adjustments to reconcile net income to net
cash used for operating activities:
Depreciation and amortization 71,134 67,201
Stock based compensation (80,300) -
Change in assets and liabilities:
Increase in accounts receivable (317,166) (401,247)
Decrease(increase) in inventory 174,613 (15,294)
Increase in licensing costs (150,001) (140,732)
Increase in other assets (31,405) (59,882)
Increase in accounts payable 320,060 216,859
Decrease in accrued expenses (192,559) (50,563)
Increase(decrease) in taxes payable 9,073 (34,726)
Decrease in deferred revenue (185,687) (134,194)
Decrease in billings in excess of costs
and estimated earnings on uncompleted
contracts (72,072) (251,530)
----------- -----------
Net cash used for operating activities (404,263) (728,009)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - (56,696)
----------- -----------
Net cash used for investing activities - (56,696)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (55,297) (88,526)
Advances on line of credit 95,000 -
Proceeds from the exercise of common stock options 111,000 -
Other 4,546 -
Proceeds from sale of preferred stock - 1,750,000
Costs associated with sale of preferred stock - (232,798)
----------- -----------
Net cash provided by financing
activities 155,249 1,428,676
----------- -----------
NET (DECREASE) INCREASE IN CASH (249,014) 643,971
CASH, beginning of the period 313,435 340,350
----------- -----------
CASH, end of the period $ 64,421 $ 984,321
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 8,592 $ 12,409
Income taxes $ 2,156 $ 36,376
Non-cash items:
Preferred stock dividend paid in common stock 10,143 -
Imputed interest on subordinated debenture 5,625 -
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-4-
<PAGE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AUGUST 31, 2000
AND 1999
1. PRESENTATION OF UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
Information in the accompanying interim consolidated financial
statements and notes to the consolidated financial statements for the
three-month period ended August 31, 2000 and 1999 is unaudited. The accompanying
interim unaudited consolidated financial statements have been prepared by us in
accordance with accounting principles generaly accepted in the United States and
Regulation S-B. Accordingly, they do not include all the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month
period ended August 31, 2000 are not necessarily indicative of the results that
may be expected for the year ending May 31, 2001. The consolidated financial
statements should be read in conjunction with the financial statements and notes
thereto included in our audited financial statements for the year ended May 31,
2000.
2. REVENUE AND COST RECOGNITION
Revenue is derived from various lottery game contracts (mainly with
states) between MDI and the lotteries. MDI provides second chance prize packages
consisting of grand prizes and various merchandise prizes. MDI also provides
marketing support related to each of the games and obtains the appropriate
licenses for the right to use these properties. Many of the lottery contracts
require the lotteries to pay MDI upon signing of the contract; therefore, MDI
defers this revenue and recognizes the revenue based on the terms of the
applicable game.
Revenues from the lottery game contracts that are greater than one year
are recognized on the percentage of completion method, determined by the
percentage of cost incurred to date to estimated total costs on a specific
contracts basis. This method is utilized as management considers cost incurred
to be the best available measure of progress on these contracts. Contracts costs
include all direct costs. General and administrative costs are charged to
expense as incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. As of August 31,
2000, no losses were expected from existing contracts.
The liability "billings in excess of costs and estimated earnings on
uncompleted contracts" represents billings in excess of revenues recognized.
-5-
<PAGE>
3. OTHER ASSETS
Other assets at August 31, 2000 and May 31, 2000 primarily represented
deferred financing costs related to the subordinated convertible debenture,
described in Note 4, which are being amortized over the life of the debenture
(10 years).
4. SUBORDINATED CONVERTIBLE DEBENTURE
On September 21, 1999, the Company issued a subordinated convertible
debenture (the "Debenture") to Scientific Games, Inc. for $750,000. The
Debenture bears interest at 7% per annum and is payable semi-annually, on June
30 and December 31 of each year, until its maturity on September 21, 2009. The
Debenture is convertible at the option of Scientific Games at the rate of $2.00
per share of common stock, subject to adjustment under certain circumstances,
into an aggregate of 375,000 shares of common stock and convertible at the
Company's option at any time after the earlier of (a) September 21, 2001 or (b)
after the underlying common stock is registered pursuant to the Securities Act
of 1933, as amended, and the price of the Company's common stock exceeds $3.00
per share.
Generally accepted accounting principles require that the interest rate
on debt represent a fair market rate for "comparable" debt instruments. The
Company has determined that a fair market rate for this debt would approximate
10% and, therefore, has discounted the carrying value of the liability, with the
offsetting credit reflected as additional paid-in capital.
Face amount of subordinated convertible debenture $750,000
Less:
Imputed interest discount (difference between 10%
fair market rate and 7% stated rate) (225,625)
-----------
Discounted debenture value 524,375
Discount amortized through August 31, 2000 21,250
-----------
Balance at August 31, 2000 $545,625
===========
Each quarter, the imputed interest for that quarter is amortized with a
corresponding increase in the Debenture until it matures on September 21, 2009
or is converted into common stock.
5. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes", which requires that a deferred tax liability or asset be recognized for
the estimated future tax effects attributable to temporary differences between
the Company's financial statements and tax return. SFAS No. 109 provides for
recognition of deferred tax assets for all future deductible temporary
differences that, more likely than not, will provide a future benefit. As of
August 31, 2000 and May 31, 2000, the Company had a significant deferred tax
asset, primarily as a result of net operating loss carry-forwards. A valuation
allowance has been established for the full amount of this deferred tax asset.
6. EARNINGS PER SHARE
Basic earnings per common share are based on the average number of
common shares outstanding during the fiscal period. Diluted earnings per
common share include, in addition to the above, the dilutive effect of
common share equivalents during the year. For the three months ended August
31, 2000 and 1999, common share equivalents represented dilutive stock
options and warrants using the treasury method. For the three months ended
August 31, 2000, preferred stock convertible into 507,000 shares of common
stock and a subordinated debenture convertible into 375,000 shares of
common stock were excluded from the calculation of the diluted earnings per
share since their inclusion would be anti-dilutive. The income
available to common shareholders and the number of shares used in the
earnings per common share and earnings per dilutive share
computation for 2000 and 1999 was as follows:
THREE MONTHS ENDED
AUGUST 31,
------------------------------
2000 1999
Net income $ 50,047 $ 76,099
Preferred stock dividends (6,539) (12,945)
------------- -----------
Net income applicable
to common shareholders $ 43,508 $ 63,154
============= ===========
THREE MONTHS ENDED
AUGUST 31,
------------------------------
2000 1999
Basic:
Average number of common
shares outstanding 9,565,700 7,776,500
Dilutive:
Dilutive effect of options,
warrants and
convertible
securities 1,227,224 1,507,466
----------- -------------
Average dilutive common
shares outstanding 10,792,924 9,283,966
=========== =============
7. SUBSEQUENT EVENT
On September 1, 2000, the Company received the proceeds of a $260,000
loan from its President and Chief Executive Officer. The loan is secured by
substantially all of the Company's assets, bears interest at 10% and is payable
in full on January 31, 2001.
On September 8, 2000, the Company received the proceeds of a $260,000
loan from an unrelated party. The loan is secured by substantially all of the
Company's assets, bears interest at 15% per year and is payable in full on
January 31, 2001. The Company gave the lender warrants to purchase 13,205 shares
of common stock at $3.94 per share as additional consideration for the loan. The
proceeds of these loans were to replace the Company's line of credit with Fleet
Bank, which had been cancelled by the lender on August 11, 2000 due to the
Company's inability to comply with certain financial covanents. The line of
credit was repaid in September 2000.
On September 5, 2000, the Company issued 100,624 shares of common stock
and warrants to purchase an additional 100,000 shares of common stock at $4.56
per share to a licensor as additional consideration for a license acquired.
On September 15, 2000 the remaining 507 shares of Series A preferred
stock was converted into 507,000 shares of common stock.
-6-
<PAGE>
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD LOOKING STATEMENTS
THAT INVOLVE CERTAIN RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
DESCRIPTION OF BUSINESS
The following discussion and analysis should be read in conjunction with
our Consolidated Financial Statements and the notes thereto appearing elsewhere
in this Form 10-QSB. All statements contained herein that are not historical
facts, including but not limited to, statements regarding our current business
strategy and our plans for future development and operations, are based upon
current expectations. These statements are forward-looking in nature and involve
a number of risks and uncertainties. Generally, the words "anticipates,"
"believes," "estimates," "expects" and similar expressions as they relate to us
and our management are intended to identify forward looking statements. Actual
results may differ materially. Among the factors that could cause actual results
to differ materially are those set forth in our Annual Report on Form 10-KSB
under the caption "Description of Business-Risk Factors." We wish to caution
readers not to place undue reliance on any such forward-looking statements,
which statements speak only as of the date made.
Our principal business has been the scratch ticket segment of the
government lottery industry. We are a leader in designing and marketing instant
scratch ticket games based on licensed brand names and entertainment properties
and our lottery promotions feature such properties licensed by us. Prizes
awarded in such promotions typically include a number of "second chance" prizes
related to the licensed property, including collectible logo bearing merchandise
such as logo bearing T-shirts and caps, and other related merchandise such as
posters, money clips, telephones, playing cards, film cells, stadium blankets,
carryall bags, jackets, electronic games, video and music collections, watches,
clocks, credit cards with prepaid credit, trips and, in the case of
Harley-Davidson(R), Harley-Davidson 1200 Sportster motorcycles.
We developed our strategy of identifying such properties in early 1996.
Prior to that time, we had developed a series of promotions that utilized
popular videotapes, compact discs and audiocassettes as second chance lottery
prizes. Those promotions enabled us to develop an expertise in sourcing and
distributing products as second chance lottery prizes and to develop a
reputation with lottery personnel as a reliable organization attuned to the
special needs of lotteries and their players.
-7-
<PAGE>
We derive over ninety-five percent (95%) of our revenues from lotteries
in two distinct ways. First, we may charge a lottery a license and royalty fee
to utilize a particular licensed property as a lottery game. License fees may be
fixed assessment while royalties are a percentage of the printing cost of the
tickets or a percentage of sales of the ticket. Contracts for licensed
properties typically include an up-front license fee and a royalty based on the
manufacturing cost of tickets. Manufacturing costs of tickets usually range from
$10.00 per thousand to $30.00 per thousand. Actual costs depend on the size of
the ticket and the quantity printed. Ticket quantities range from about one
million to as many as 60 million with an average quantity of about five million.
Our second source of lottery revenue is the sale of logo bearing
merchandise to the lottery as second-chance prizes. In merchandise-based lottery
games, between 5% to 10% of a lottery's prize fund is typically used for the
purchase of merchandise related to the property the lottery is utilizing.
Typically, we purchase merchandise from other licensees of the property and
resell the merchandise to the lottery at a price that is designed to include
overhead costs, profit, shipping and handling and any marketing support we
provide the lottery such as brochures, posters or other advertising assistance
for which there are no separate charges.
Our success is dependent on our ability to maintain and secure licensed
properties, market these properties to lotteries and the performance of the
properties once they are introduced as lottery games to players. We believe that
revenues will fluctuate as individual license-based promotions commence or wind
down and terminate. In addition, our licenses (which are generally for 1.5 to 3
years) terminate at various times over the next several years. Moreover, the
useful life of a license is generally relatively short as the novelty of the
game or the popularity of the licensed material wanes over time. The timing of
agreements with the lotteries to run promotions, the acquisition of new licenses
and the commencement of new promotions is unpredictable. Accordingly, period to
period comparisons may not be indicative of future results.
We are in continuous negotiations to obtain additional licensed
properties and extend some existing licenses. We expect to reach several
agreements over the next six to 12 months; however we cannot assure you that
such agreements will actually be reached. Some of these agreements may require
the expenditures of significant up-front advances.
-8-
<PAGE>
RECENT DEVELOPMENTS
Licensed Properties
Through renewal of existing licensing agreements, acquisition of new
properties and expansion of the geographical territory in which we may market
the properties, we believe we have positioned ourselves favorably for sustained
revenue growth over the next three years.
Our two newest property acquisitions have global appeal among lottery
customers, and we have secured global lottery rights for each.
In August 2000, we signed a three year contract with Elvis Presley
Enterprises (EPE) which grants us exclusive international rights to the use of
the name and image of Elvis Presley(R) on games and promotions undertaken by
government sponsered lotteries. The cost of the Elvis(R) license was
significantly higher than any license previously acquired and resulted from
several year's negotioations with Elvis Presley Enterprises and culminated in
2000 with a competitive bidding process established by the property owner.
The Elvis Presley(R) license is, in our estimation, the most desirable
property in existence for licensed lottery promotions today. Many lotteries have
attempted on their own in past years to secure the rights to Elvis(R) games, and
there is believed to be significant pent-up demand among consumers for Elvis(R)
lottery games, strengthened by EPE's license to International Game Technology
to develop Elvis(R) slot machines for the casino industry and the resulting
popularity of those machines.
Our success is tied in large part to the lottery industry's purchase of
merchandise from us to support their promotions. Demand for the Elvis(R)
property among the lotteries will enable us to increase our sales of merchandise
to the lotteries.
We signed our first Elvis(R) contract with the New Jersey Lottery in
October 2000. The game will launch in January 2001 and is expected to generate
revenues from sales of merchandise of $702,000.
We are in final negotiations on our second Elvis(R) contract. The game
is scheduled to launch in November 2000 and is expected to generate gross
revenues from merchandise sales of $324,000.
In July 2000, we signed a three year license agreement with the
Hollywood Chamber of Commerce granting us exclusive international rights to the
use of the Hollywood Sign(R) and Hollywood Walk of Fame(R). Although this
acquisition has been overshadowed by the Elvis(R) acquisition, it represents a
versatile and effective marketing device for our customers, one which we expect
will have significant global appeal.
During FY 2000 we aggressively sought out new licensed properties in
order to fufill our marketing goal of having each lottery introduce four
licensed lottery games per year. New properties include another highly
sought-after lottery license: a group of six of the most popular drivers on the
NASCAR Winston Cup Series stock car circut: Dale Eanhardt(R), Dale Earnhardt,
Jr.(R), Mark Martin(R), Jeff Burton(R), Bill Elliott(R) and Matt Kenseth(R). The
Wisconsin Lottery became the first U.S. lottery to introduce an instant lottery
game featuring the drivers in September 2000.
Because our business growth potential is tied to lotteries purchasing
many different licensed games over an extended period of time, FY 2000 was
significant in that it saw the widest diversity of branded game introductions in
our history. Lottery promotions introduced or under contract for introduction
during the fiscal year included: Harley-Davidson(R), Jacks or Better(R),
Louisville Slugger(R), Wheel of Fortune(R), Jeopardy!(R), TNN(R), Betty Boop(R),
NASCAR Drivers, Times Square 2000(R), Twilight Zone(R), Ray Charles(R) and
SPAM(R).
Our ability to renew agreements for licensed properties is another
factor in our growth potential. In FY 2000, we reached agreement to renew three
of our most successful properties: Harley-Davidson(R), Wheel of Fortune(R) and
Jeopardy!(R). We have executed the Wheel of Fortune(R) and Jeopardy!(R)
extensions through March of 2002. We are currently negotiating final terms of
the Harley-Davidson(R) renewal.
We have also secured an agreement in principle from King Features
Syndicate to extend the territory of our Betty Boop(R) license to include
lotteries anywhere in the world.
In addition, we have commenced discussions with a variety of entities on
various internet initiatives, some of which may require the agreement of our
licensors or the lotteries. Among the internet initiatives we are researching
are i.) an expansion of our lotteryprizeshop.com e-commerce initiative; ii.) the
creation of internet accessable extended play and probability games built around
several of our licensed properties; iii.)second chance games and drawings
primarily entered and played on the internet and designed to enhance our
standard lottery games; iv.) an extension and monetization of our data base; and
v) the possibility of the sale of lottery tickets over the internet.
More recently we have expanded and reorganized our sales and marketing
departments, adding three former lottery industry executives and have
streamlined our strategic alliance relationship with Scientific Games, Inc. to
make it more effective.
Finally, the experience we have gained over the past several years has
enabled us to reformat many of our promotions so that they perform better in the
marketplace. This has led to great success with Wheel of Fortune(R),
Harley-Davidson(R), Louisville Slugger(R), Betty Boop(R), and SPAM(R). That
sales success has led to reorders by some lotteries and new orders by other
lotteries as our backlog continues to grow and more states agree to multiple
game contracts.
-9-
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31
-----------------------------------------------
2000 % 1999 %
---- - ---- -
<S> <C> <C> <C> <C>
Total revenue $ 1,872,875 100.0% $ 1,760,137 100.0%
Cost of revenues 1,145,521 61.2% 1,159,587 65.9%
------------ ----- ---------- -----
Gross profit 727,354 38.8% 600,550 34.1%
Selling, general and
Administrative expenses 650,084 34.7% 516,351 29.3%
------------ ----- ---------- -----
Operating profit 77,270 4.1% 84,199 4.8%
Interest expense 27,286 1.5% 12,409 0.7%
Interest income (1,163) (.1)% (5,809) 0.3%
------------ ----- ----------- -----
Income before income tax
expense 51,147 2.6% 77,599 4.4%
Provision for income taxes 1,100 .1% 1,500 0.1%
------------ ----- ---------- -----
Net income $ 50,047 2.7% $ 76,099 4.3%
============ ===== ========== =====
</TABLE>
-10-
<PAGE>
THREE MONTHS ENDED AUGUST 31, 2000 COMPARED TO THREE MONTHS ENDED AUGUST
31, 1999
Results for the three months ended August 31, 2000 reflect revenues of
$1,872,900 as compared to $1,760,100 for the same period in 1999. This revenue
increase of $112,800 reflects the recent launching of new games and the final
drawing activity of for nine games which together increased revenue over the
same period last year. More game drawings scheduled by the lotteries for the
quarter ended August 31, 2000 resulted in more costs incurred, which is the
primary trigger point for recognizing revenue. Revenue during the three-month
period ended August 31, 2000 was derived primarily from sales based on two
entertainment-based or brand name properties, including Harley-Davidson(R) (45%
of revenue), and Louisville Slugger(R)(13% of revenue). The remaining 42%
represented activity from nine additional properties reflecting our continued
diversity of promotional sales.
Cost of revenue as a percentage of revenue decreased to 61% from 66% for
the three months ended August 31, 2000 compared to the same period ended August
31, 1999. This decrease in cost percentage was primarily due to improved pricing
of new contracts to achieve our intended profit margin and to offset additional
licensing costs associated with our best selling properties, Harley-Davidson(R)
and Wheel of Fortune(R).
Gross profit increased in the three months ended August 31, 2000 to
$727,400(39% of revenue) from $600,600 (34% of revenue) in the same period in
1999 primarily due to the factors mentioned above.
Selling, general and administrative expenses were $650,100(35% of
revenue) for the three months ended August 31, 2000 compared to $516,400 (29% of
revenue) for the same period in 1999. This increase for the quarter was
primarily attributable to increased payroll of $50,000 due to additional
personnel. In addition, legal costs were $47,000 higher for continued Internet
access lobbying and approximately $40,000 was spent for attendence at two
additional regional and worldwide lottery conferences.
Operating income was $77,300 (4% of revenue) for the three months ended
August 31, 2000 compared to an operating income of $84,200 (5% of revenue) for
the same period in 1999. This was principally due to the factors described
above.
Interest expense was $27,300 for the three months ended August 31, 2000
compared to $12,400 for the same period in 1999. This increase was attributable
to interest on the convertible subordinated debenture of $18,800. As the
debenture was issued on September 21, 1999 there was no interest expense for the
quarter ended August 31, 1999. The remaining interest expense for the quarter
ended August 31, 2000 was for short-term indebtedness. Such indebtedness is
discussed in detail in "Liquidity and Capital Resources".
For the reasons set forth above, we had a profit of $51,100
before taxes for the three months ended August 31, 2000 as compared to a profit
of $77,600 before taxes for the same period in 1999.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of August 31, 2000, we had cash and cash equivalents of $64,400
compared to $984,300 as of the same period in 1999. The relatively large amount
of cash at August 31, 1999 was attributable to the infusion of gross proceeds of
$1,750,000, from the private sale to an investor of 2,027 shares of Series A
Convertible Preferred Stock during August 1999. The decrease in cash at August
31, 2000 is due to the operating loss sustained in the prior fiscal year. Funds
in excess of our normal working capital requirements have been applied to our
short term borrowing arrangements to reduce related interest expense.
As of August 31, 2000, we had a net working capital deficit of
$1,819,800. However, $1,666,000 of this deficit was "billings in excess of costs
and estimated earnings on uncompleted contracts" and "deferred revenue". Both
"billings in excess of costs and estimated earnings on uncompleted contracts"
and "deferred revenue" represent unrecognized revenue (i.e., revenue which we
have already been paid or billed for but which cannot be recognized until we
purchase the contracted merchandise before a game drawing occurs). Accordingly,
such liability will not adversely impact cash flow except to the extent that we
need to purchase merchandise and incur subsequent fufillment costs relative to
this revenue, which generally approximates 50% of this revenue.
Our indebtedness as of August 31, 2000 was $880,865 primarily
represented by a convertible subordinated debenture with a remaining balance of
$545,625. The interest rate is 7% per annum and payable in semiannual
installments of $26,250. The debenture matures September 21, 2009 and is
convertible into common stock under various conditions. The balance of our
indebtedness was primarily represented by a loan payable to Steven Saferin, our
President and Chief Executive Officer of $216,240, and our line of credit with
Fleet bank.
The cash requirements of funding our growth have historically exceeded
cash flow from operations. Accordingly, we have satisfied our capital needs
primarily through debt and equity financing, as well as cash flow from
operations. As a result of our inability to satisfy certain financial covenants,
Fleet Bank cancelled a $500,000 line of credit with us on August 11, 2000. We
obtained financing in September 2000, totalling $520,000, in the form of a short
term loan that matures January 31, 2001 from our President and Chief Executive
Officer and from an unaffiliated individual. The remaining balance of the loan
with Fleet was repaid with the proceeds of the new loan. We believe these
arrangements will satisfy our cash flow requirements until such time as cash
flow from operations is sufficient to sustain our growth.
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<PAGE>
We do not have any specific capital commitments and do not currently
anticipate making any substantial expenditures other than in the normal course
of business. We have undertaken an aggressive program of acquiring new licenses,
some of which may require substantial up front payments. We have approximately
$275,000 of payables relating to the the terminated merger with The Lottery
Channel. These amounts were expensed in the fourth quarter of fiscal 2000. We
anticipate paying these bills, consisting of legal, accounting and investment
banking fees, over a nine to twelve month period.
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<PAGE>
SEASONALITY AND REVENUE FLUCTUATIONS
Our business is not seasonal. However, our 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, our 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.
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<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
Filed on June 2, 2000 (Item 5: Other Events-
Conditional Approval for Listing on Nasdaq Small
Cap Market)
Filed on August 29, 2000 (Item 5: Other Events-
Termination of the Agreement and Plan of Merger)
Filed on September 13, 2000 (Item 5: Other Events-
Loan Agreements with Sparacino and Saferin)
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<PAGE>
SIGNATURE PAGE
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated October 11, 2000
MDI ENTERTAINMENT, INC.
(Registrant)
By: /s/Steven M. Saferin
----------------------------
Steven M. Saferin
President and Chief Executive Officer and Director
(Principal Executive Officer)
By: /s/Kenneth M. Przysiecki
----------------------------
Kenneth M. Przysiecki
Chief Financial Officer, Secretary and Director
(Principal Financial and Accounting Officer)
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