SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 29, 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 (IRS 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 April 12, 2000, 8,986,459 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 SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 29, 2000
INDEX
<TABLE>
Page
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements............................................................................1
Consolidated Balance Sheets as of February 29, 2000 (unaudited) and May 31, 1999....................1
Consolidated Statements of Operations (unaudited) for the nine months ended
February 29, 2000 and February 28, 1999.............................................................2
Consolidated Statements of Operations (unaudited) for the three months ended
February 29, 2000 and February 28, 1999.............................................................3
Consolidated Statement of Shareholders' Deficit for the nine months ended
February 29, 2000 (unaudited) and May 31,1999.......................................................4
Consolidated Statements of Cash Flows (unaudited) for the nine months ended
February 29, 2000 and February 28, 1999.............................................................5
Notes to Unaudited Consolidated Financial Statements................................................6
Item 2. Management's Discussion and Analysis...........................................................11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..............................................................22
Signatures.........................................................................................23
</TABLE>
<PAGE>
Item 1. FINANCIAL STATEMENTS
<TABLE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 29, May 31,
2000 1999
------------- ------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 498,257 $ 340,350
Accounts receivable 1,162,389 817,614
Inventory 158,502 57,596
Other current assets 212,823 58,253
------------- ------------
Total current assets 2,031,971 1,273,813
Property and equipment, net 153,190 106,022
------------- ------------
Pre-acquisition costs (Note 8) 264,280 -
Licensing costs, net 279,285 189,488
Other, net (Note 3) 197,359 260,039
------------- ------------
Total other assets 740,924 449,527
------------- ------------
Total assets $2,926,085 $1,829,362
============= ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Accounts payable $ 634,410 $ 364,909
Accrued liabilities 101,545 369,279
Current portion of long-term debt 54,000 365,911
Note payable to shareholder 153,752 -
Deferred revenue (Note 2) - 268,405
Billings in excess of costs and estimated earnings
on uncompleted contracts (Note 2) 1,603,776 1,695,886
Dividends payable 7,220 -
------------- ------------
Total current liabilities 2,554,703 3,064,390
Long-term debt, less current portion above 4,500 229,702
Note payable to shareholder, less current portion above 137,831 -
Minority interest - 34,927
Subordinated convertible debenture (Note 4) 534,375 -
------------- ------------
Total liabilities 3,231,409 3,329,019
Common stock 8,986 7,777
Convertible preferred stock-Series A 1 -
Additional paid-in capital 2,065,644 348,348
Accumulated deficit (2,370,791) (1,855,782)
------------- ------------
(296,160) (1,499,657)
Treasury stock, at cost (9,164) -
------------- ------------
Total shareholders' deficit (305,324) (1,499,657)
------------- ------------
Total liabilities and
stockholders' deficit $2,926,085 $1,829,362
============= ============
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
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<TABLE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine months ended
February 29, 2000 and February 28, 1999
2000 1999
--------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues $ 4,166,995 $ 6,028,324
Cost of revenues 2,627,181 3,234,381
--------------- ---------------
Gross profit 1,539,814 2,793,943
Selling, general and administrative expenses 2,020,077 1,586,521
--------------- ---------------
Operating profit (loss) (480,263) 1,207,422
Interest expense (income), net 35,592 (7,470)
Other income (Note 9) (60,000) -
Minority interest - (243)
--------------- ---------------
Income (loss) before provision for income taxes (455,855) 1,215,135
Provision for income taxes (Note 5) 4,169 54,883
--------------- ---------------
Net income (loss) $(460,024) $ 1,160,252
=============== ===============
Basic earnings (loss)
per common share (Note 6) $ (0.06) $ 0.15
Diluted earnings (loss)
per common share (Note 6) $ (0.06) $ 0.14
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
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<TABLE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
February 29, 2000 and February 28, 1999
2000 1999
--------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues $ 939,779 $ 1,922,071
Cost of revenues 690,322 1,066,174
--------------- ---------------
Gross profit 249,457 855,897
Selling, general and administrative expenses 836,042 554,951
--------------- ---------------
Operating profit (loss) (586,585) 300,946
Interest expense, net 19,130 3,832
Other income (Note 9) (60,000) -
--------------- ---------------
Income (loss) before provision for income taxes (545,715) 297,114
Provision for income taxes (Note 5) 2,169 23,685
--------------- ---------------
Net income (loss) $(547,884) $ 273,429
=============== ===============
Basic earnings (loss)
per common share (Note 6) $ (0.06) $ 0.04
Diluted earnings (loss)
per common share (Note 6) $ (0.06) $ 0.03
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
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<TABLE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIT
For the nine months ended February 29, 2000
(unaudited)
------------------------------------------------------------------------------------------------
Shares Par Value $.001
------------------------ --------------------------------
*
Convertible ** Preferred Additional
Preferred Stock Common Stock Common Treasury Paid In Accumulated
Series A Stock Series A Stock Stock Capital Deficit Total
------------- ---------- ---------- -------- --------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, May 31, 1999 - 7,776,500 $ - $ 7,777 $ - $ 348,348 $ (1,855,782) $ (1,499,657)
Proceeds from sale of
Preferred stock - Series A, net
of expenses of $356,400 2,027 - 2 - - 1,393,600 - 1,393,602
Imputed interest on
convertible debenture (Note 4) - - - - - 225,625 - 225,625
Net loss - - - - - - (460,024) (460,024)
Dividends on preferred stock:
Quarter ended 8/31/99 (13,425) (13,425)
Quarter ended 11/30/99 (26,868) (26,868)
Quarter ended 2/29/00 (14,692) (14,692)
Conversion of preferred stock to common (1,012) 1,012,000 (1) 1,012 - (1,011) - -
Stock options exercised:
Common stock issued - 144,804 - 128 - 42,222 - 42,350
Treasury stock resulting from
cashless options - 13,794 - 31 (9,164) 9,133 - -
Preferred stock dividend
paid in common stock - 39,361 - 38 - 47,727 - 47,765
------------------------------------------------------------------------------------------------
BALANCE, February 29, 2000 1,015 8,986,459 $ 1 $ 8,986 $(9,164) $ 2,065,644 $ (2,370,791) $ (305,324)
================================================================================================
* 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.
</TABLE>
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<TABLE>
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine months ended
February 29, 2000 and February 28, 1999
2000 1999
-------------- ----------------
(unaudited) (audited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (460,024) $ 1,160,252
Adjustments to reconcile net income (loss) to net
cash used for operating activities:
Minority interest - (243)
Depreciation and amortization 178,249 84,034
Change in assets and liabilities:
Increase in accounts receivable (344,775) (325,813)
Increase in pre-acquisition costs (264,280) -
(Increase) decrease in inventory (100,906) 232,657
Increase in licensing costs (234,448) (124,985)
Increase in other assets (91,891) (233,238)
Increase (decrease) in accounts payable 234,573 (55,525)
Decrease in accrued expenses (210,627) (667,278)
(Decrease) increase in taxes payable (47,103) 55,729
Decrease in deferred revenue (268,405) (1,058,423)
Decrease in billings in excess of costs
and estimated earnings on uncompleted contracts (92,110) -
-------------- ----------------
Net cash used for operating activities (1,701,747) (932,833)
-------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (80,765) (13,754)
Costs associated with sale of convertible preferred stock (356,400) -
-------------- ----------------
Net cash used for investing activities (437,165) (13,754)
-------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Conversion of accrued commissions to note payable - 600,000
Repayment of debt (245,531) (173,496)
Proceeds from exercise of common stock options 42,350 -
Proceeds from sale of preferred stock 1,750,000 -
Proceeds from subordinated convertible debenture 750,000 -
-------------- ----------------
Net cash provided by
financing activities 2,296,819 426,504
-------------- ----------------
NET INCREASE (DECREASE) IN CASH 157,907 (520,083)
CASH, beginning of the period 340,350 960,398
-------------- ----------------
CASH, end of the period $ 498,257 $ 440,315
============== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 30,583 $ 14,120
Income taxes $ 64,079 $ 1,502
Non-cash items:
Preferred stock dividend
paid "in-kind" common stock $ 47,765 $ -
Imputed interest on subordinated
convertible debenture $ 10,000 $ -
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
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MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR PERIOD ENDED
FEBRUARY 29, 2000
1. PRESENTATION OF UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
Information in the accompanying interim consolidated financial
statements and notes to the consolidated financial statements of MDI
Entertainment, Inc. and subsidiaries (MDI or the Company) for the three and
nine-month periods ended February 29, 2000 and February 28, 1999 is unaudited.
The accompanying interim unaudited consolidated financial statements have been
prepared by us in accordance with generally accepted accounting principles and
Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine-month periods ended
February 29, 2000 are not necessarily indicative of the results that may be
expected for the fiscal year ending May 31, 2000. The consolidated financial
statements should be read in conjunction with the financial statements and notes
thereto included in the audited financial statements of the Company as and for
the year ended May 31, 1999.
2. REVENUE AND COST RECOGNITION
Revenue is derived from various lottery game contracts (mainly with
states) between MDI and the lotteries. MDI has agreed to provide second chance
prize packages consisting of grand prizes and various merchandise prizes. MDI
also provides marketing support related to each of the games and obtains the
appropriate licenses for the right to use these properties. Many of the lottery
contracts require the lotteries to pay MDI upon signing of the contract;
therefore, MDI defers this revenue and recognizes the revenue based on the terms
of the applicable game.
Revenues from the lottery game contracts that are greater than one year
are recognized on the percentage of completion method, determined by the
percentage of cost incurred to date to estimated total costs on a specific
contract basis. This method is utilized as management considers cost incurred to
be the best available measure of progress on these contracts. Contract costs
include all direct costs. General and administrative costs are charged to
expense as incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. As of February 29,
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.
3. OTHER ASSETS
Other assets at February 29, 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) or
when the debenture is converted into common stock if sooner.
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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.
<TABLE>
<S> <C>
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 February 29, 2000 10,000
-----------
Balance at February 29, 2000 $534,375
===========
</TABLE>
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
February 29, 2000 and May 31, 1999, the Company had a significant deferred tax
asset, primarily as a result of net operating loss carry-forwards. A valuation
allowance for the full amount of this deferred tax asset since its utilization
is not assured.
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The Company has significant federal and state net operating loss
carry-forwards at February 29, 2000 and May 31, 1999. Due to such
carry-forwards, the Company has reported minimum state income tax expense at
February 29, 2000 and May 31, 1999, respectively.
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 fiscal period. Common share equivalents include dilutive
stock options and warrants using the treasury method and the dilutive effect of
the subordinated convertible debenture and the convertible Series A preferred
stock.
MDI had 525,729 and 276,250 common share equivalents for the three and
nine-month periods ended February 28, 1999. The diluted share base for the three
and nine-month periods ended February 29, 2000 excludes incremental shares of
3,182,061 related to convertible securities, stock options and warrants. These
shares are excluded due to their antidilutive effect as a result of the
Company's loss from continuing operations during 2000. The number of shares used
in the earnings per common share computations for the 2000 and 1999 periods are
as follows:
-8-
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<TABLE>
NINE MONTHS ENDED THREE MONTHS ENDED
FEBRUARY 29, (28) FEBRUARY 29, (28)
------------------------------ -----------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic:
Average number of common
shares outstanding 8,035,884 7,776,500 8,544,999 7,776,500
Dilutive:
Dilutive effect of options,
warrants and convertible Not Not
securities Applicable 276,250 Applicable 525,729
------------ ----------- ------------ -------------
Average dilutive common
shares outstanding 8,035,884 8,052,750 8,544,999 8,302,229
============ =========== ============ =============
</TABLE>
7. RECENT ACCOUNTING PRONOUNCEMENTS
During 1999, the Financial Accounting Standards Board (FASB) issued FASB
No.133, Accounting for Derivative Instruments and Hedging Activities, which
provides new guidance relative to accounting for derivatives and hedging
transactions. This pronouncement is effective for fiscal years beginning after
June 15, 2000 (which was deferred through the issuance of SFAS No. 137).
Management has determined that the Company currently has no transactions pending
or contemplated that would be effected by FASB No.133.
-9-
<PAGE>
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No 101, "Revenue Recognition in Financial Statements"
("SAB No. 101"). SAB No. 101, among other things, provides guidance on revenue
recognition. SAB No. 101 was adopted by the Company on January 1, 2000. The
cumulative effect of applying SAB No. 101 did not have a material effect on the
Company's operating results or financial position upon adoption.
8. PREACQUISITION COSTS
Preacquisition costs represent legal, accounting and investment costs
associated with the Company's anticipated merger with The Lottery Channel, Inc.
It is anticipated that the merger will be completed before the end of the
current fiscal year and these costs will be reclassified as goodwill on the
Company's balance sheet as of that date.
9. OTHER INCOME - SETTLEMENT
The company as the plaintiff initiated litigation for which a settlement
was reached for $60,000.
10. SUBSEQUENT EVENT
The company secured a line of credit for $500,000 with Fleet Bank in
March, 2000. The line is one point below the Bank's prime rate.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
GENERAL
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.
We derive over ninety-five percent (95%) of our revenues from lotteries
in two distinct ways. First, we usually charge a lottery a license and royalty
fee to utilize a particular licensed property as a lottery game. License fees
are 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 costs of tickets.
Manufacturing costs of tickets usually range from $10.00 per thousand to $30.00
per thousand. Actual costs depend on the size of the ticket and the quantity
printed. Ticket quantities, per lottery, range from about one million to as many
as 60 million with an average quantity of about five million.
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Our primary 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 licensed 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 and market these properties to lotteries. Our success also depends on
the performance of the properties once they are introduced as lottery games to
players. Our revenues fluctuate as individual license-based promotions commence
or wind down and terminate. 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 and success 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 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.
RECENT DEVELOPMENTS
PROPOSED MERGER WITH THE LOTTERY CHANNEL
We are currently in the process of satisfying the remaining conditions
to our merger with The Lottery Channel, Inc. as of the date of this filing.
Details of the merger agreement were previously reported in a current report on
Form 8-K, filed on February 7, 2000. In anticipation of the merger, MDI
Entertainment, Inc. and The Lottery Channel, Inc. have each hosted an
orientation meeting. These meetings enabled employees from all locations and
levels within both companies to meet in one place to discuss integration of
marketing strategies, operations and current and future developments within the
organizations. In addition to these orientation sessions, MDI Entertainment,
Inc. and The Lottery Channel employees have jointly participated in lottery
industry conferences. Future marketing strategy sessions are scheduled. We are
hopeful of consummating the merger in the fourth quarter of our fiscal year,
although certain conditions to closing have not yet been satisfied.
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<PAGE>
NEW CONTRACTS / LICENSES
In the quarter ended February 29, 2000, there were numerous positive
developments from a contract and licensing standpoint. During the three-month
period ended February 29, 2000, we signed a total of 6 contracts, representing
seven games to be introduced over the next twelve months. This is in addition to
the 8 contracts for twenty-one games we reported last quarter.
In addition to the signed agreements for new licenses last quarter
with Michael Buffer's "Let's Get Ready to Rumble"(R) , "SPAM"(R) and
"Ray Charles"(R), this quarter we added "Greatest Sports Legends"(R), which
includes twelve sports legends such as Willie Mays, Lou Gehrig and Jackie
Joyner-Kersee. We also renewed "Hummer"(R) for an additional year through
March, 2001.
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<TABLE>
Nine months ended February 29, 2000 and February 28, 1999
---------------------------------------------------------
2000 % 1999 %
------ --- ------ ---
<S> <C> <C> <C> <C>
Total revenue $ 4,166,995 100.0% $6,028,324 100.0%
Cost of revenues 2,627,181 63.0% 3,234,381 53.7%
----------------------------------------------------
Gross profit 1,539,814 37.0% 2,793,943 46.3%
Selling, general and administrative expenses 2,020,077 48.5% 1,586,521 26.3%
----------------------------------------------------
Operating profit (loss) (480,263) -11.5% 1,207,422 20.0%
Interest expense 68,236 1.6% 11,034 0.2%
Interest income (32,644) -0.8% (18,504) -0.3%
Other income (60,000) -1.4% - 0.0%
Minority interest - 0.0% (243) 0.0%
----------------------------------------------------
Net income (loss) before provision for income taxes (455,855) -10.9% 1,215,135 20.1%
Provision for income taxes 4,169 0.1% 54,883 0.9%
----------------------------------------------------
Net income (loss) $ (460,024) -11.0% $1,160,252 19.2%
====================================================
</TABLE>
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NINE MONTHS ENDED FEBRUARY 29, 2000 COMPARED TO NINE MONTHS ENDED
FEBRUARY 28, 1999
Results for the nine months ended February 29, 2000 reflect revenue of
$4,167, 000 as compared to $6,028,300 for the same period in 1999. This decrease
in revenue is a result of several factors. Among those factors was our inability
earlier in the year to generate significant interest in properties other than
Harley Davidson(TM) or Wheel of Fortune(TM) that would have resulted in
additional third quarter revenue.
While we are disappointed with our performance for the quarter and year
to date, our revamped sales and marketing efforts and strategic alliance with
Scientific Games, Inc. are beginning to yield significant results as evidenced
by our contract backlog.
We currently have signed contracts that are expected to generate gross
revenues of over $2.5 million that have launched or are expected to launch
during the fourth quarter and signed contracts that are expected to generate
an additional $3.3 million in gross revenues that are expected to launch
some time in fiscal 2001. Actual revenue recognition for these contracts will
vary depending on actual launch dates and the duration of the game,
but we are greatly encouraged by the backlog and diverse properties it
represents.
We have successfully expanded lotteries acceptance of licensed games
away from just Harley Davidson(R) and Wheel of Fortune(R). This backlog
contains contracts for no less than 10 different properties including Harley
Davidson(TM) and Wheel of Fortune(R)
Among the new properties scheduled to launch are Betty Boop(R);
Spam(R), Jacks or Better(R) Louisville Slugger(R), NASCAR drivers including
Dale Ernhardt, Sr. and Jr., Bill Elliot, Jeff Burton and Matt Kinseth, The Pink
Panther(R) and Ray Charles(R). This breadth of properties will continue to
expand our sales and marketing opportunities with our lottery customers.
Revenue during the nine month period ended February 29, 2000 was
derived primarily from sales based on three entertainment-based or brand name
properties, including Harley-Davidson(TM) (50% of revenue), Wheel of Fortune(R)
(18% of revenue) and Times Square 2000 (11% of revenue). The remaining 21% of
revenue resulted from six other entertainment-based or branded name properties
and newer licensed properties being utilized.
Cost of revenue as a percentage of revenue was 63% ($2,627,181) for the
nine months ended February 29, 2000 compared to 53.7% ($3,234,381) for the same
period in 1999. This was a 3% cumulative increase over the first six months
ended November 30, 1999, primarily due to the lower sales volume of this past
quarter which resulted in a higher cost to revenue relationship.
-15-
<PAGE>
Gross profit dipped back below our corporate goal of 40% to 37%
($1,539,800) for the nine months ended February 29, 2000 compared to 46.3%
($2,793,900) for the same period in 1999. Lower sales were primarily responsible
for the decreased gross profit percentage.
Selling general and administrative expenses were $2,020,100 (48.5% of
revenues) for the nine months ended February 29, 2000 compared to $1,586,500
(26.3% of revenue) for the same period in 1999. Many of the costs in this area
are fixed, therefore a decline in sales greatly affects the percentage of these
costs to revenue. Several cost areas however are specifically attributable to
the $434,000 increase in absolute dollars. Promotional marketing costs increased
by $101,000 and outside consulting increased by $74,000. Both of these areas
increased for the purpose of securing new business and licenses. Legal expenses
increased $77,000 over the same period last year and $52,000 of such amount was
for securing a settlement in a litigation in which we were the plaintiff. A
settlement for $60,000 (included in other income) was secured as a result of the
litigation. SEC related expenses were approximately $72,000 higher than in the
same period last year due to significant additional reporting this fiscal year.
Major fixed expense increases were for salaries and employee benefits, up
$50,000 (or 6.3% on an annualized basis) compared to the same period last year.
The operating loss was ($480,300) for the nine months ended February
29, 2000 compared to an operating profit of $1,207,400 for the same period in
1999. This was principally due to the factors described above.
Interest expense was $68,200 for the nine months ended February 29,
2000 compared to $11,000 for the same period in 1999. Approximately $30,100 of
the increase is attributable to interest on the note for $600,000 discussed in
detail in "Liquidity and Capital Resources." The remaining $33,300 was for
interest on the convertible subordinated debenture discussed in detail in
"Liquidity and Capital Resources."
Interest income was $32,600 for the nine months ended February 29, 2000
compared to $18,500 for the same period in 1999. This increase is discussed in
detail in "Liquidity and Capital Resources" and is primarily related to higher
levels of cash.
Other income was $60,000 for the nine months ended February 29, 2000
compared to $0 for the same period in 1999. The entire amount represents the
receipt by us of a settlement of the litigation referred to above.
For reasons set forth above, we had a loss before taxes of ($455,900)
for the nine months ended February 29, 2000 compared to a profit before taxes of
$1,215,100 for the same period in 1999.
-16-
<PAGE>
<TABLE>
Three months ended February 29, 2000 and February 28, 1999
----------------------------------------------------------
2000 % 1999 %
------ --- ------ ---
<S> <C> <C> <C> <C>
Total revenue $ 939,779 100.0% $1,922,071 100.0%
Cost of revenues 690,322 73.5% 1,066,174 55.5%
---------------------------------------------------
Gross profit 249,457 26.5% 855,897 44.5%
Selling, general and administrative expenses 836,042 89.0% 554,951 28.9%
---------------------------------------------------
Operating profit (loss) (586,585) 62.5% 300,946 15.6%
Interest expense 30,324 3.2% 10,549 0.5%
Interest income (11,194) -1.2% (6,717) -0.3%
Other income, net (60,000) -6.4% - 0.0%
---------------------------------------------------
Net income (loss) before provision for income taxes (545,715) -58.1% 297,114 15.4%
Provision for income taxes 2,169 0.2% 23,685 1.2%
---------------------------------------------------
Net income (loss) $ (547,884) -58.3% $ 273,429 14.2%
===================================================
</TABLE>
-17-
<PAGE>
THREE MONTHS ENDED FEBRUARY 29, 2000 COMPARED TO THREE MONTHS ENDED
FEBRUARY 28, 1999
Results for the three months ended February 29, 2000 reflect revenue of
$939,800 as compared to $1,922,100 for the same period in 1999. This revenue
decrease of $982,300 is due to several factors.
While we are disappointed with our performance for the quarter and year
to date, our revamped sales and marketing efforts and strategic alliance with
Scientific Games, Inc. are beginning to yield significant results as evidenced
by our contract backlog.
We currently have signed contracts that are expected to generate gross
revenues of over $2.5 million that have launched or are expected to launch
during the fourth quarter and signed contracts that are expected to generate
an additional $3.3 million in gross revenues that are expected to launch
some time in fiscal 2001. Actual revenue recognition for these contracts will
vary depending on actual launch dates and the duration of the game,
but we are greatly encouraged by the backlog and diverse properties it
represents.
We have successfully expanded lotteries acceptance of licensed games
away from primarily Harley Davidson(R) and Wheel of Fortune(R). This backlog
contains contracts for no less than 10 different properties including Harley
Davidson(R) and Wheel of Fortune(R)
Among the new properties scheduled to launch are Betty Boop(R);
Spam(R), Jacks or Better(R) Louisville Slugger(R), NASCAR drivers including
Dale Ernhardt, Sr. and Jr., Bill Elliot, Jeff Burton and Matt Kinseth, The Pink
Panther(R) and Ray Charles(R). This breadth of properties will continue to
expand our sales and marketing opportunities with our lottery customers.
Revenue during the three-month period ended February 29, 2000 was derived
primarily from sales based on brand name properties including Harley
Davidson(R) (39% of revenue), Times Square 2000 (27% of revenue) and Wheel of
Fortune(R) (21% of revenue). The remaining 13% of sales resulted from primarily
two other properties. One of the properties was Betty Boop(R), which launched
for the first time this quarter in Wisconsin.
Cost of revenue as a percentage of revenue increased to 73.5% for the
three months ended February 29, 2000 compared to 55.5% for the same period in
1999. The higher percentage of cost of revenue for this period ended February
29, 2000 was primarily due to two factors. First, although most costs are
variable and attributable to specific contracts, we had fixed costs of
approximately $51,000 which due to lower sales volume were not absorbed,
therefore disproportionately increasing the cost of revenue percentage for this
quarter. Second, one of the Company's contracts that began last quarter and
ended this quarter incurred additional costs due to a contract change that
resulted in a contract loss for this quarter but remained profitable over the
contract term. These two factors increased the cost of revenue percentage by
13.6%. Therefore the cost of revenue percentage would have been 59.5% for the
three months ended February 29, 2000.
-18-
<PAGE>
Gross profit decreased in the three months ended February 29, 2000 to
$249,500 (26.5% of revenue) for the reasons discussed above, compared to
$855,900 (44.5% of revenue) for the same period in 1999.
Selling general and administrative expenses were $836,000 (88.9% of
revenue) for the three months ended February 29, 2000 compared to $555,000
(28.9% of revenue) for the same period in 1999. Many costs in this area are
fixed, therefore a decline in sales greatly affects the percentage of these
costs to revenue. However there was also a significant increase in these costs
overall by $281,000.
The increase in selling, general and administrative expenses for the
three months ended February 29, 2000 was primarily in four areas. Promotional
marketing costs increased by $58,000 and outside consulting increased by
$34,000. Both of these areas increased for the purpose of securing new business
and licenses. Legal expenses increased by $60,000 of which $52,000 was for
securing a settlement in a litigation in which we were the plaintiff. A
settlement for $60,000 (included in other income) was secured as a result of the
litigation. SEC related expenses were approximately $50,000 higher due to
significant reporting and investor relations activity this quarter. Salaries and
employee benefits, the major fixed expense area, increased by $43,000 (a 6.3%
increase on an annualized basis).
The operating loss was ($586,600) for the three months ended February
29, 2000 compared to an operating profit of $300,900 for the same period in
1999. This was principally due to the factors described above.
Interest expense was $30,300 for the three months ended February 29,
2000 compared to $10,500 for the same period in 1999. Approximately $18,800 of
this increase was for interest on the convertible subordinated debenture
discussed in detail in "Liquidity and Capital Resources."
Interest income was $11,200 for the three months ended February 29,
2000 compared to $6,700 for the same period in 1999. This increase was primarily
due to our cash position during this quarter.
Other income was $60,000 for the three months ended February 29, 2000
compared to $0 for the same period in 1999. The entire amount represents the
settlement of the litigation referred to above.
For the reasons set forth above, we had a loss before taxes of
($545,700) for the three months ended February 29, 2000 compared to a profit
before taxes of $297,100 for the same period in 1999.
-19-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of February 29, 2000, we had cash and cash equivalents of $498,300
compared to $440,300 as of the same period in 1999.
As of February 29, 2000, we had a net working capital deficit of
$527,700. However, included in current liabilities is $1,603,800 of "billings in
excess of cost and estimated earnings on uncompleted contracts" representing
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 fulfillment costs relative to this revenue, which generally
approximates 50% of this revenue, and without such liability, working capital
would have been $274,200.
Our indebtedness as of February 29, 2000 was $350,083 primarily
represented by a note with a remaining balance of $291,583, payable to Steven
Saferin, President and CEO. This note originated from the conversion of $600,000
of accrued commissions into a note with an outside third party in January 1999.
On January 19, 2000 Mr. Saferin exchanged a portion of his restricted stock in
exchange for the remaining principal of the note. The note was rewritten at a 8%
interest rate instead of 10.75% and extended its maturity to December 1, 2001
from December 15, 2000. This reduced the monthly payment from $27,895 to
$14,294. Mr. Saferin did this to facilitate an easier closing with Fleet bank on
our recently acquired line of credit and to improve cash flow.
The cash requirements of funding our growth have historically exceeded
cash flow from operations. Accordingly, we have satisfied our capital needs
primarily through debt and equity financing, as well as cash flow from
operations. Therefore, to address our immediate needs, we have entered into an
agreement for a $500,000 line of credit in March, 2000 with Fleet Bank. This
line is secured by liens on substantially all of our assets. Interest on the
line is at one point below the Bank's prime rate.
We do not have any specific capital commitments and do not currently
anticipate making any substantial expenditure other than in the normal course of
business except in connection with the contemplated acquisition of The Lottery
Channel, Inc. We have undertaken an aggressive program of acquiring new
licenses, some of which may require substantial up front payments. Several such
licenses have been obtained recently at a cost of $15,000 and others are in the
final stages of negotiations.
-20-
<PAGE>
LICENSED PROPERTIES
The following sets forth the recent developments relating to properties licensed
by us for use in lotteries:
We have entered into a three-year agreement with Legends Enterprises,
Inc. for the worldwide rights to "Greatest Sports Legends"(R) which includes
twelve sports legends such as Willie Mays, Lou Gehrig and Jackie Joyner-Kersee.
Our Wheel of Fortune(R) license expired in November 1999. However, Wheel
of Fortune(R) representatives have agreed to extend this license for two
additional years and we are awaiting the formal agreement. Two additional
lotteries have agreed to launch Wheel of Fortune(R) games during the fiscal year
ending May 31, 2000.
Our Star Trek(R) property, which has been used by a total of ten
lotteries, had declined in popularity. This license expired in November 1999.
We have entered into a three-year licensing agreement with Universal
Spaceworks LLC for the North American, Australian, New Zealand and Israeli
rights to Heroes of Space(R). Heroes of Space(R) is a group of 16 former
astronauts aligned to call attention to the U.S. Space program and their
participation.
We have entered into a 30-month contract with MGM Consumer Products for
U.S. rights to James Bond 007(R), The Pink Panther(R) and The Outer
Limits(R).
We have entered into a three-year agreement with CBS Cable for U.S.
rights to cable networks TNN and CMT.
We have entered into a three-year agreement with King Features Syndicate
for the worldwide rights to Betty Boop(R) and associated characters.
We have entered into a two-year agreement with Hormel Foods Corp. for
the North American rights to SPAM(R).
In addition, we entered into a three year agreement for worldwide rights
to Michael Buffer's "Let's Get Ready to Rumble"(R) and a one year agreement
with "Ray Charles"(R) with two 1-year options to renew.
-21-
<PAGE>
SEASONALITY AND REVENUE FLUCTUATIONS
Our business is not seasonal. However, our revenues are expected to
fluctuate as individual license-based promotions commence, 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K Filed on February 7, 2000 (Item 5: Other
Events - Merger Agreement with The Lottery
Channel, Inc.)
-22-
<PAGE>
SIGNATURE PAGE
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: April 12, 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 Officer)
-23-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-1-1999
<PERIOD-END> FEB-29-2000
<CASH> 498,257
<SECURITIES> 0
<RECEIVABLES> 1,162,389
<ALLOWANCES> 0
<INVENTORY> 158,502
<CURRENT-ASSETS> 2,031,971
<PP&E> 537,393
<DEPRECIATION> (384,203)
<TOTAL-ASSETS> 2,926,085
<CURRENT-LIABILITIES> 2,554,703
<BONDS> 0
0
1
<COMMON> 8,986
<OTHER-SE> (314,311)
<TOTAL-LIABILITY-AND-EQUITY> 2,926,085
<SALES> 4,166,995
<TOTAL-REVENUES> 4,166,995
<CGS> 2,627,181
<TOTAL-COSTS> 2,627,181
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,236
<INCOME-PRETAX> (455,855)
<INCOME-TAX> 4,169
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (460,024)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
