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 NOVEMBER 30, 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 January 14, 2001, 10,505,872 shares of the issuer's common stock were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2000
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.........................................................................................1
Consolidated Balance Sheets as of November 30, 2000 (unaudited) and May 31, 2000..................................1
Consolidated Statements of Operations (unaudited) for the six months ended
November 30, 2000 and 1999........................................................................................2
Consolidated Statements of Operations (unaudited) for the three months ended
November 30, 2000 and 1999........................................................................................3
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the
six months ended November 30, 2000 (unaudited) and May 31, 2000..................................................4
Consolidated Statements of Cash Flows (unaudited) for the six months
ended November 30, 2000 and 1999..................................................................................5
Notes to Unaudited Consolidated Financial Statements..............................................................6
Item 2. Management's Discussion and Analysis.........................................................................9
PART II OTHER INFORMATION
Item 1. Legal Proceedings...........................................................................................19
Item 2. Change in Securities and Use of Proceeds....................................................................19
Item 6. Exhibits and Reports on Form 8-K............................................................................20
Signatures.......................................................................................................21
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED BALANCE SHEETS
November 30, May 31,
2000 2000
------------ -------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 210,646 $ 313,435
Investment securities
available-for-sale at market
(Cost $1,333,332 see Note 7) 625,000 -
Accounts receivable, net 1,563,209 801,286
Inventory 252,178 254,187
Other current assets 429,076 266,743
----------- -----------
Total current assets 3,080,109 1,635,651
----------- -----------
PROPERTY AND EQUIPMENT, at cost
Equipment 249,223 228,842
Furniture and fixtures 120,361 102,391
----------- -----------
369,584 331,233
Less: Accumulated depreciation (207,867) (184,126)
----------- -----------
161,717 147,107
----------- -----------
OTHER ASSETS:
Licensing costs, net 814,324 348,604
Other, net (Note 3) 373,345 438,621
----------- -----------
Total other assets 1,187,669 787,225
----------- -----------
Total assets $4,429,495 $ 2,569,983
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Billings in excess of cost and estimated
earnings on uncompleted contracts (Note 2) $ 2,636,502 $ 1,733,288
Deferred revenue (Note 2) - 190,547
Current portion of long-term debt 689,977 195,848
Accounts payable 1,460,822 867,439
Accrued expenses 74,802 360,606
Income taxes payable (Note 5) 11,861 -
Dividends payable - 7,322
----------- -----------
Total current liabilities 4,873,964 3,355,050
----------- -----------
LONG-TERM DEBT AND NOTES PAYABLE,
less current portion above 14,199 99,689
SUBORDINATED DEBENTURE (Note 4) 551,250 540,000
----------- -----------
Total liabilities 5,439,413 3,994,739
----------- -----------
SHAREHOLDERS' DEFICIT:
Common Stock 10,405 8,987
Convertible preferred stock-Series A - 1
Convertible preferred stock-Series B 1 -
Additional paid-in capital 4,356,560 2,473,154
Accumulated deficit (5,014,484) (3,906,898)
Accumulated other comprehensive
income (loss):
Unrealized loss on securities
classified as available-for-
sale (362,400) -
----------- -----------
Total shareholders' deficit (1,009,918) (1,424,756)
Total liabilities and
shareholders' equity (deficit) $ 4,429,495 $ 2,569,983
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
-1-
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
----------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
Six months ended
November 30,
2000 1999
------------- -------------
(unaudited) (unaudited)
Revenues $ 2,800,053 $ 3,227,215
Cost of revenue 1,671,939 1,936,859
----------- -----------
Gross profit 1,128,114 1,290,356
Selling, general and administrative
expenses 1,736,243 1,184,035
----------- -----------
Operating (loss) profit (608,129) 106,321
Interest expense, net 60,570 16,460
----------- -----------
(Loss) income before provision
for income taxes (668,699) 89,861
Provision for income taxes (Note 5) 1,100 2,000
----------- -----------
Net (loss)income $ (669,799) $ 87,861
=========== ===========
Basic (loss) earnings
per common share (Note 6) $ (.11) $ -
Diluted (loss) earnings
per common share (Note 6) $ (.11) $ -
The accompanying notes are an integral part of these consolidated
financial statements.
-2-
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
----------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
November 30,
2000 1999
------------- ------------
(unaudited) (unaudited)
Revenues $ 927,177 $ 1,467,078
Cost of revenues 526,418 777,272
----------- -----------
Gross profit 400,759 689,806
Selling, general and administrative
expenses 1,086,159 667,684
----------- -----------
Operating (loss) profit (685,400) 22,122
Interest expense, net 34,446 9,861
----------- -----------
(Loss)income before provision
for income taxes (719,846) 12,261
Provision for income taxes (Note 5) - 500
----------- -----------
Net (loss) income $ (719,846) $ 11,761
=========== ===========
Basic (loss) earnings
per common share (Note 6) $ (.11) $ -
Diluted (loss)earnings
per common share (Note 6) $ (.11) $ -
The accompanying notes are an integral part of these consolidated
financial statements.
-3-
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
For the six months ended November 30, 2000
(Unaudited)
Shares Amount
--------- ---------
Preferred Stock, par value $.001 per share
authorized 5,000,000 shares:
Series A, 5%, liquidation amount $863.34 per share:
Balance, May 31, 2000 1,015 $1
Converted to common......................... (1,015) (1)
-------- ----------
Balance, November 30, 2000 - -
-------- ----------
Series B, liquidation amount $2,252.25 per share:
Balance, May 31, 2000 - -
Issued 444 1
-------- ---------
Balance November 30, 2000 444 1
-------- ---------
Common Stock, par value $.001 per share,
authorized 25,000,000 shares:
Balance, May 31, 2000 8,987,446 8,987
Stock options exercised 300,000 300
Issuance of common stock 100,624 100
Conversion of Series A convertible preferred
stock to common stock 1,015,000 1,015
Preferred stock dividend paid in common stock 2,802 3
---------- ---------
Balance November 30, 2000 10,405,872 10,405
---------- ---------
Additional Paid-in capital:
Balance, May 31, 2000 2,473,154
Conversion of Series A convertible preferred (1,015)
Stock options exercised 110,700
Issuance of common stock 499,900
Issuance of Series B preferred stock 569,653
Issuance of warrants 417,747
Beneficial conversion feature of
Series B preferred stock 430,346
Preferred stock dividend paid in common stock 14,757
Compensation attributable to
employee stock options (92,556)
Costs of issuing Series B preferred stock (70,673)
Other 4,547
----------
Balance November 30, 2000 4,356,560
----------
Comprehensive
Loss
------------
Accumulated Deficit:
Balance, May 31, 2000 (3,906,898)
Dividends on Series A preferred stock (7,441)
Beneficial conversion feature of
Series B preferred stock (430,346)
Net loss (669,799) (669,799)
-----------
Balance November 30, 2000 (5,014,484)
-----------
Accumulated Other Comprehensive Income (Loss):
Balance, May 31, 2000
Unrealized losses on available -
for sale securities (362,400) (362,400)
----------
Comprehensive Loss ($1,032,199)
----------- ==========
Balance, November 30, 2000 (362,400)
-----------
Total Shareholders' Deficit $(1,009,918)
===========
The accompanying notes are an integral part of these consolidated
financial statements.
-4-
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended
November 30,
2000 1999
----------- --------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net(loss)income $ (669,799) $ 87,861
Adjustments to reconcile net (loss)income to net cash used
for operating activities:
Depreciation and amortization 254,148 124,867
Stock based compensation (92,556) -
Change in assets and liabilities:
(Increase) decrease in accounts receivable (761,923) 451,006
Decrease (increase) in inventory 2,009 (28,859)
Increase in licensing costs (165,251) (229,472)
(Increase) decrease in other assets (116,683) 94,529
Increase (decrease) in accounts payable 593,383 (119,233)
Decrease in accrued expenses (285,808) (253,072)
Increase (decrease) increase in taxes payable 11,861 (52,339)
Decrease in deferred revenue (190,547) (268,405)
Increase (decrease) in billings in excess of costs
and estimated earnings on uncompleted contracts 903,214 (363,084)
----------- -----------
Net cash used for operating activities (517,951) (556,201)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (38,351) (63,161)
----------- -----------
Net cash used for investing activities (38,351) (63,161)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (206,360) (178,985)
Proceeds from short-term debt 615,000 -
Costs of issuing Series B preferred stock (70,672) -
Proceeds from exercise of options to purchase common stock 111,000 -
Other 4,546 -
Proceeds from sale of Series A convertible preferred stock - 1,393,600
Proceeds from subordinated convertible debenture - 612,887
----------- -----------
Net cash provided by
financing activities 453,514 1,827,502
----------- -----------
NET (DECREASE) INCREASE IN CASH (102,788) 1,208,140
CASH, beginning of the period 313,435 340,350
----------- -----------
CASH, end of the period $ 210,647 $ 1,548,490
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 51,267 $ 23,328
Income taxes $ 2,156 $ 54,866
Non-cash investing and financing activities:
Series B preferred stock and warrants issued in exchange for
marketable securities (Note 8) $ 987,400 $ -
Series A preferred stock dividend paid in common stock $ 14,760 $ 25,651
Interest imputed on subordinated convertible debenture $ 11,250 $ 4,375
The accompanying notes are an integral part of these consolidated
financial statements
-5-
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR SIX MONTHS ENDED
NOVEMBER 30, 2000
1. PRESENTATION OF UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
Information in the accompanying interim consolidated financial
statements and notes to the financial statements of MDI Entertainment, Inc. and
subsidiaries (MDI or the Company) for the six-month periods ended November 30,
2000 and 1999 is unaudited. The accompanying interim unaudited consolidated
financial statements have been prepared in accordance with accounting principles
generally 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.
On October 11, 2000, MDI Entertainment, Inc. determined to change its
fiscal year from a fiscal year end of May 31 to a fiscal year end of December 31
. The report covering the transition period will be filed on a Form 10-KSB.
Operating results for the six-month period ended November 30, 2000 are not
necessarily indicative of the results that may be expected for the seven months
ending May 31, 2001. 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,
2000.
2. REVENUE AND COST RECOGNITION
Revenue is derived from various lottery game contracts (mainly with
states) between us and the lotteries. We have agreed to provide second chance
prize packages consisting of grand prizes and various merchandise prizes. We
also provide marketing support related to each of the games and obtain the
appropriate licenses for the right to use these properties. Many of the lottery
contracts require the lotteries to pay us 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 which may be received in more
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.
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
November 30, 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 November 30, 2000 and May 31, 2000 primarily represented
deferred financing costs related to the subordinated convertible debenture,
described in Note 4, which will be 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 November 30, 2000 26,875
-----------
Balance at November 30, 2000 $551,250
===========
-6-
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
November 30, 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 (LOSS) PER SHARE
Basic earnings per common share are based on the average number of
common shares outstanding during the fiscal period. Diluted earnings per common
share include, in addition to the above, a dilutive effect of common share
equivalents during the fiscal period. We had 3,892,266 and 2,109,224 common
share equivalents during the three and six-month periods ended November 30,
2000, respectively. In 1999, we had 2,749,237 and 2,073,570 common share
equivalents for the same three and six month periods. For the three and six
month periods ending November 30, 1999, common share equivalents
represented dilutive stock options and warrants using the treasury method
and the dilutive effect of convertible Series A preferred stock. For the
three and six month periods ended November 30, 2000, options to purchase
674,166 shares of common stock, subordinated debenture convertible into
375,000 shares of common stock, Series B preferred stock convertible into
444,444 shares of common stock and warrants to purchase 2,398,656 shares of
common stock were excluded from the calculation of the diluted loss per
share since their inclusion would be anti-dilutive. For the three and six
month periods ended November 30, 1999, warrants and options to purchase
722,237 shares of common stock and preferred stock convertible into
2,027,000 shares of common stock were excluded for the same reason.
The calculation of an ($.11) loss per share for the six months ended
November 30, 2000 includes a ($.04) loss per share related to the accounting
treatment required to record the stock exchange transaction with Elot, executed
on November 1, 2000. Notwithstanding the effects of this transaction the loss
per share would have been ($.07) for the six months ended November 30, 2000.
Accounting principles require us to allocate a portion of the
proceeds, $417,747, to the warrants issued to eLot. The remainder, $569,653, is
allocated to the Series B preferred stock. Had the preferred stock been
converted on the date of its issuance, the holder would have received 444,444
shares of our common stock, worth $1,000,000. Accounting principles require us
to treat this difference between the fair value and the allocated value
($1,000,000 less $569,653) or $430,347 as a preferred stock dividend.
This is a non-cash transaction which is required by generally accepted
accounting principles. Although this computation affects retained earnings
rather than this period's operations, the transaction must be reflected
in the calculation of earnings per share in the period in which the transaction
takes place. Had this transaction not occured the loss per share would have
been ($.07).
The (loss) income available to common shareholders and the number of
shares used in the earnings (loss) per common share and earnings (loss) per
dilutive share computation for 2000 and 1999 was as follows:
-7-
SIX MONTHS ENDED THREE MONTHS ENDED
NOVEMBER 30 NOVEMBER 30
2000 1999 2000 1999
---- ---- ---- ----
Net(loss)income $ (669,799) $ 87,861 $ (719,846) $ 11,761
Preferred stock dividends (7,441) (40,274) (899) (27,329)
Beneficial conversion feature
of Series B Preferred stock (430,346) (430,346)
--------- -------- --------- ---------
Net (loss)income applicable
to common shareholders (1,107,586) $ 47,587 $ (1,151,091) $ (15,568)
========= ========= ========= =========
SIX MONTHS ENDED THREE MONTHS ENDED
NOVEMBER 30 NOVEMBER 30
2000 1999 2000 1999
---- ---- ---- ----
Basic:
Average common shares
outstanding 9,939,076 7,782,718 10,316,553 7,788,937
Dilutive:
Dilutive effect of options and
warrants N/A 722,237 N/A N/A
Dilutive effect of conversion
of Series A preferred stock N/A 1,351,333 N/A N/A
---------- ---------- ---------- ----------
Average dilutive common shares
outstanding 9,939,076 9,856,288 10,316,553 7,788,937
========== ========== ========== ==========
7. AVAILABLE FOR SALE SECURITIES
All marketable securities are deemed by management to be available for
sale and are reported at fair value with net unrealized gains or losses reported
within shareholders' deficit. Realized gains and losses are recorded based on
the specific identification method. There were no realized gains or losses for
the fiscal periods ending November 30, 2000 and 1999. The carrying amount of the
Company's investments is shown in the table below:
November 30, 2000
Unrealized
Cost Loss Market Value
-------------------------------------------------
U.S. corporate securities $987,400 (362,400) $ 625,000
=================================================
There were no investments in available for sale securities as of May 31, 2000
8. STOCK EXCHANGE AGREEMENT
The Company entered into a stock exchange agreement with eLot, Inc. on
November 1, 2000. The Company received 1,000,000 shares of Elot common stock,
valued at $987,400, in exchange for 444 shares of MDI series B preferred stock
and warrants to purchase 555,556 shares of MDI common stock. The series B
preferred will be converted into 444,444 shares of MDI common stock on November
1, 2001 unless converted sooner by the holder. The preferred stock does not bear
dividends. The warrants issued to Elot are exercisable at $3.50 per common share
and expire November 1, 2003. In connection with this transaction, the Company
recorded a charge to accumulated deficit of $430,346. This amount represents
the beneficial conversion feature of the Series B preferred stock.
9. SUBSEQUENT EVENTS
Extension of short-term note:
A lender has consented to an extension of the due date of a $260,000
short term note until May 15, 2001. In consideration of the extension the
Company issued warrants to purchase 40,000 shares common stock at $1.75 per
share. These warrants are exercisable and will expire November 28, 2005.
Additional short-term financing:
The company borrowed $200,000 in the form of short-term notes in December
2000. These loans bear interest at 12% and are due May 15, 2001. Warrants to
purchase 30,000 shares of common stock at $1.75 per share were issued to the
lenders in connection with these loans. These warrants are exercisable and will
expire November 28, 2003.
Issuance of Common stock:
The Company is in the process of negotiating the settlement of the
outstanding obligations of two law firms through the issuance of comon stock. As
of the date of this filing the amount of the fees to be settled and the
corresponding number of shares to be issued has not been determined.
Litigation
The Company and it subsidiary, MDI Acquisition, Inc. have been named as
defendents in a lawsuit filed by the Lottery Channel, Inc. Lottery Channel,
Inc. is seeking damages of approximately $1.8 million in connection with the
terminated merger agreement. The Company believes the lawsuit is without merit
and will vigorously defend its position and has asserted a varity of
counterclaims against the Lottery Channel, including a demand that the Lottery
Channel, Inc. pay certain expenses under the termination provisions of the
merger agreement. Accordingly, no loss provision has been recorded or
included in these financial statements.
-8-
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
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.
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 and
royalties may be a fixed assessment, a percentage of game sales or a percentage
of manufacturing cost of tickets.
Our second and major 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. A typical prize fund for a scratch game is approximately 60% of
expected revenue. Typically, we purchase merchandise from other licensees of the
property at wholesale and resell the merchandise to the lottery at a price that
is designed to include overhead costs, profit, shipping
-9-
and handling andany marketing support we provide the lottery such as brochures,
posters or otheradvertising 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 continuos 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
NEW CONTRACTS/ LICENSES
In the quarter ended November 30, 2000, there were numerous positive
developments from a contract and licensing standpoint. During the three-month
period ended November 30, 2000, we signed a total of seven contracts,
representing 12 games to be introduced over the next two years. The most
significant was a contract with the New Jersey Lottery for six games over a
two year period. These contracts reflect the success of the reorganization of
our sales and marketing department and of our marketing efforts
in convincing lotteries to incorporate licensed games as an ongoing feature of
their instant ticket marketing.
These new contracts raise our total backlog to approximately $16.2
million, our largest total to date. They will all launch in the next twelve
months.
In addition, we announced a comprehensive internet strategy focusing
on the development of Internet Platform Opportunities for each of our brands.
The Internet Platform will offer a varity of functionalities including
player registration, third chance games and promotions, sweepstakes, information
and trivia about the brands, links to the brands official web site and an
e-commerce store where players can use non-winning tickets as coupons for
discounts off the purchase of merchandise and memorabilia related to the brand.
The first three of these Internet Platforms will launch during the first
quarter of our new fiscal year 2001 (January 1-March 31, 2001). These Internet
Platforms are currently being developed by eLot, Inc. (See Elot, Inc. STRATEGIC
ALLIANCE below)
In addition, we signed a licensing agreement with Green Stuff Licensing
for the exclusive world-wide rights to Emmett Kelly, Jr(R) for a three year
period. We also have extended our licensing agreement with Columbia TriStar,
covering licenses for Wheel of Fortune(R) and Jeopardy(R) through March 2002.
ELOT, Inc. STRATEGIC ALLIANCE:
In November 2, 2000, we announced a Strategic Alliance Agreement with
eLot (NASDAQ:ELOT). ELot has developed, installed and operated systems that have
processed ten million e-commerce lottery ticket sales and transactions. Elot
operates a reward-entertainment lottery portal, ELotteryFreeWay, and is an
application service provider of Internet marketing and advertising technology
for lotteries.
As part of the strategic alliance we will form a joint venture with
eLottery, Inc., a subsidiary of eLot, and develop web sites to allow lottery
players to submit non-winning scratch tickets for additional chances to win.
Under terms of the agreement, we issued 444 shares of series B preferred
stock, convertible into 444,444 shares of common stock, and warrants to purchase
555,556 shares of common stock at $3.50 per share in exchange for 1 million
shares of ELot common stock.
We believe that this relationship, which we expect will begin
generating revenue by the second or third quarter of next fiscal year, will
enhance our ability to sell additional games both domestically and
internationally.
NASDAQ MAINTENANCE REQUIREMENTS:
We have received a letter from NASDAQ to the effect that at the time of
the letter, we were not in compliance with NASDAQ's maintenance requirements. We
have since submitted a plan of compliance to NASDAQ. There can be no assurance
that our plan of compliance will satisfy NASDAQ and that our common stock will
remain listed on NASDAQ's small cap market.
FISCAL YEAR CHANGE:
We are in the process of changing our fiscal year to a calendar year to
ease many of the questions raised by shareholders and others as to our various
reporting periods. Our current fiscal year of June 1 to May 31 makes little
sense given the environment we operate in and seems to cause much confusion with
our shareholders and the investment community. The change will become effective
January 1, 2001, and will result in the company having a seven month stub period
that concludes on December 31, 2000. This seven month period will be audited
and we will file a Form 10-K within 90 days. Therefore, the next Form 10Q will
be filed 45 days after the three months ending March 31, 2001
-10-
SIX MONTHS ENDED NOVEMBER 30,
--------------------------------------------------
2000 % 1999 %
---- - ---- -
Total revenue $ 2,800,053 100.0% $ 3,227,215 100.0%
Cost of revenues 1,671,939 59.7% 1,936,859 60.0%
---------------------------------------------------
Gross profit 1,128,114 40.3% 1,290,356 40.0%
Selling, general and administrative expenses 1,736,243 62.0% 1,184,035 36.7%
---------------------------------------------------
Operating (loss) profit (608,129) (21.7)% 106,321 3.3%
Interest expense 64,566 2.3% 37,911 1.2%
Interest income (3,996) (0.1)% (21,451) (0.7%)
---------------------------------------------------
Net (loss) income
before provision for income taxes (668,699) (23.9)% 89,861 2.8%
Provision for income taxes 1,100 0.0% 2,000 0.1%
---------------------------------------------------
Net(loss)income $ (669,799) (23.9)% $ 87,861 2.7%
===================================================
-11-
SIX MONTHS ENDED NOVEMBER 30, 2000, COMPARED TO SIX MONTHS ENDED
NOVEMBER 30, 1999
Results for the six months ended November 30, 2000 reflect revenue of
$2,800,100 as compared to $3,227,200 for the same period in 1999. This revenue
decrease is the last one we expect for the forseeable future. Our
strong sales backlog of $13,440,000 will begin to turn into revenue as new games
launch in earnest next quarter. Betty Boop(R) and Elvis(R), two of our newest
licensed properties, have just begun to start generating revenue. Each of these
game's revenues came from one state only last quarter; Betty Boop in New Jersey
and Elvis(R) in Kentucky. Next quarter Betty Boop (R) will launch in
Wisconsin and Elvis(R) will launch in New Jersey. NASCAR(R) drivers,
which launched last quarter in Wisconsin, continues to be a strong source of
revenue(10.5% of the quarter's revenue).
The layering effect of these new properties launching in additional
states next quarter will contribute to significantly improved revenues and
bottom line. We expect a return to profitability during the first quarter of our
new fiscal year 2001 and for that to continue throughout the year as we are
forecasting record revenues while returning to profitability. A total of seven
games were launched in the quarter ended November 30, 2000. The total revenue to
be recognized over the duration of these games will be $1.38 million. In
addition, we have 16 games scheduled to launch in the first calendar quarter of
2001. The total revenue to be recognized over the duration of these 16 games
will be $4.5 million.
Finally, we have expanded our resources in adding licensed properties
and reorganizing our sales department, including our recently announced
strategic alliance with eLot, Inc. This has been done in recognition of the need
to improve our overall sales and marketing efforts. These measures, which were
undertaken during the quarter ended November 30, 2000, will contribute to
improved sales results later this year or early next year.
Revenue during the six-month period ended November 30, 2000 was derived
primarily from sales based on three entertainment-based or brand name
properties, including Harley Davidson(R) (35.5% of revenue), NASCAR(R) drivers
(10.5% of revenue) and Wheel of Fortune(R) (10.1% of revenue). The remaining
43.9% of revenue resulted from eleven other entertainment-based or branded name
properties.
Cost of revenue as a percentage of revenue was 59.7% for the six months
ended November 30, 2000 compared to 60.0% for the same period in 1999. This
consistency in costs between periods achieves our goal and falls in line with
our overall gross profit model.
Gross profit maintained the 40% level ($1,128,100), consistent
with the the six months ended November 30, 1999.
Selling, general and administrative expenses were $1,736,200 (62.0% of
revenue) for the six months ended November 30, 2000 compared to $1,184,000
(36.7% of revenue) for the same period in 1999. This $552,200 increase was
incurred primarily in the second quarter ($415,000). This second quarter
increase can be attributed to a restructuring of our sales organization to a
regional format to better present our growing inventory of licensed properties
to the lottery industry. This restructuring began late in the first quarter and
has resulted in a significant contribution to our $16.2 million sales backlog.
Building a quality inventory of licensed properties and presenting
them to the lottery industry in various venues, primarily conventions and trade
shows, has been expensive. Expenditures relating to these items were $275,000
more than for the same period in 1999, but will result in the generation of
recognizable revenue in the immediate future as this backlog of games launches.
Within the next four months, games with total revenues of $4.4 million will be
launched. Revenues from these games will be recognized over the duration of each
game contract based on the prize drawing schedule. Costs related to the Elvis(R)
property represented $129,000 of the $275,000 cost increase over the prior year.
Revenues from the Elvis(R) property amounted to only $47,300 or 3.72% of revenue
for the six months ended November 30, 2000. In addition to $247,100 of
unrecognized revenue from the Elvis(R) game underway in Kentucky, we have a
sales backlog of $943,900 relating to the Elvis(R) property alone. These are
"ramping up" costs (costs expensed prior to the contract game launch) that will
be a "cost of sales" rather than an operating cost in the future. (See analysis
of quarter alone for a more detailed explanation.)
Legal, accounting, financial consulting and investor relations fees
increased by $205,000 over the same period last year. Again this increase
primarily occured in the second quarter ($171,000) due to the noncapitalizable
expenses, significant SEC reporting requirements and litigation expense in
this period versus the same period last year.
In the six month period ending November 30, 2000, we filed four current
Form 8-K reports, a registration statement, a prospectus supplement, a quarterly
10-Q filing and our annual 10-K filing. Additional legal and consulting expenses
were incurred to review and prepare loan proposals, draft and review our
strategic alliance and stock exchange agreements with eLot and litigation
relating to our lawsuit with The Lottery Channel.
Wages and salaries and benefits increased by $153,000 for the six months
ended November 30, 2000 as compared to the same period in 1999. In addition to
normal annual salary increases, this increase in wages, salaries and benefits is
attributable to the addition of three regional sales vice presidents, one
financial reporting manager and one customer fufillment associate.
-12-
Operating loss was $(604,600)(21.6% of revenue) for the six months ended
November 30, 2000 compared to an operating income of $106,300 (3.3% of revenue)
for the same period in 1999. This was principally due to the factors described
above.
Interest expense was $64,500 for the six months ended November 30, 2000
compared to $37,900 for the same period in 1999. This increase in interest
expense is atttributable to new loans obtained in the second quarter more fully
discussed in "Liquidity and Capital Resources".
There was $4,000 of interest income for the six months ended
November 30, 2000 compared to $21,500 for the same period in 1999. This decrease
is related to the decrease in our cash position from the transactions discussed
in "Liquidity and Capital Resources".
For the reasons set forth above, we had a loss before taxes of
$(668,700)for the six months ended November 30, 2000 as compared to an income
before taxes of $89,900 for the same period in 1999.
The calculation of an ($.11) loss per share for the six months ended
November 30, 2000 includes a ($.04) loss per share related to the accounting
treatment required to record the stock exchange transaction with Elot, executed
on November 1, 2000. Notwithstanding the effects of this transaction the loss
per share would have been ($.07) for the six months ended November 30, 2000.
Accounting principles require us to allocate a portion of the
proceeds, $417,747, to the warrants issued to eLot. The remainder, $569,653, is
allocated to the Series B preferred stock. Had the preferred stock been
converted on the date of its issuance, the holder would have received 444,444
shares of our common stock, worth $1,000,000. Accounting principles require us
to treat this difference between the fair value and the allocated value
($1,000,000 less $569,654) or $430,346 as a preferred stock dividend.
This is a non-cash transaction required by generally accepted accounting
principles. Although this computation affects retained earnings rather than
this period's operations, the transaction must be reflected in the calculation
of earnings per share in the period in which the transaction takes place.
Had this transaction not occured the loss per share would have been ($.07).
-13-
THREE MONTHS ENDED NOVEMBER 30,
------------------------------------------------
2000 % 1998 %
---- - ---- -
Total revenue $ 927,177 100.0% $ 1,467,078 100.0%
Cost of revenues 526,418 56.8% 777,272 53.0%
------------------------------------------------
Gross profit 400,759 43.2% 689,806 47.0%
Selling, general and administrative expenses 1,086,159 117.1% 667,684 45.5%
------------------------------------------------
Operating (loss) profit (685,400) (73.9)% 22,122 1.5%
Interest expense 37,280 4.0% 25,502 1.7%
Interest income (2,834) ( .3%) (15,641) ( 1.1%)
------------------------------------------------
Net (loss) income
before provision for income taxes (719,846) (77.6)% 12,261 0.8%
Provision for income taxes - 0.0% 500 0.0%
------------------------------------------------
Net(loss)income $ (719,846) (77.6)% $ 11,761 0.8%
================================================
THREE MONTHS ENDED NOVEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
NOVEMBER 30, 1999.
Results for the three months ended November 30, 2000 reflect revenues of
$927,200 as compared to $1,467,100 for the same period in 1999. This revenue
decrease of $539,900 is expected to be the last quarter in the foreseeable
future where we have declining sales. Contests, representing $4.4 million of
our $16.2 million sales backlog, are scheduled to launch in the next four
months.
Two of our newest licensed properties, Betty Boop(R) and Elvis(R), have
just started to generate sales this quarter. Betty Boop(R), which launched in
New Jersey on September 24, 2000, had the strongest sales this quarter, $256,800
(28% of revenue). There still remains $251,200 of revenue to be recognized on
the New Jersey contract and Betty Boop(R) is scheduled to launch in Wisconsin in
January 2001.
Due to a delayed launch date in Kentucky, Elvis(R) only contributed
$47,300 (5% of revenue) to the second quarter sales. Elvis set a new sales
record for a $3 ticket in Kentucky, selling over $1,000,000 in lottery tickets
in its first week of sales. There still remains $247,100 of revenue to be
recognized on the Kentucky contract. Elvis(R) is scheduled to launch in New
Jersey in January 2001. The total revenues to be recognized over the duration of
the New Jersey Elvis(R) game are expected to be $702,000.
Although the NASCAR(R) Drivers Property was new to MDI last quarter, it
generated 18% of the revenue for the quarter ended November 30, 2000. The
revenue from each of these newly licensed properties (Elvis (R) and NASCAR(R)
Drivers) for the quarter ended November 30, 2000 was generated from only one
state lottery each. NASCAR(R) drivers are scheduled for introduction in two
states in the next four months. Total revenue from these contracts is expected
to be $187,000. There will be a layering effect as additional lotteries launch
these properties.
In the current quarter Harley Davidson(R) has contributed 16% to revenue
and Wheel of Fortune contributed 13%. The remaining 20% of revenue was generated
from seven(7) of our other entertainment based or branded properties.
-14-
Cost of revenue as a percentage of revenue increased to 56.8% for the
three months ended November 30, 2000 from 53.0% for the same period in 1999.
Although the increase was over 3%. We are pleased that our gross profit margins
continue to be in excess of 40% (43.2% of revenue) or $400,800 for the
three-month period ended November 30, 2000 compared to $689,800 (47.0% of
revenue) for the same period in 1999.
Selling, general and administrative expenses were $1,086,100 (117.1% of
revenue) for the three months ended November 30, 2000 compared to $667,700
(45.5% of revenue) for the same period in 1999. This increase of $418,400 in
operating expenses is primarily related to increases in salaries and benefits
and SEC accounting and legal costs
Wages and salaries and employee benefits increased by $103,000. These
increases were necesary to generate the sales backlog that has grown
dramatically over the last two quarters. Specifically, three regional sales vice
presidents and additional support staff have been added during the six months
ended November 30, 2000.
In addition, the costs for obtaining licenses and attending trade shows
have increased significantly ($181,000 over the same period in 1999).
These increases in selling expenses have already resulted in a sales backlog of
$16.2 million, $4.4 million of which is scheduled to launch in the next four
months. The actual revenue recognition continues to be based on the prize
drawing schedule.
The Elvis(R) property accounts for approximately $129,000 of the
$181,000 increase in licensing and trade show cost in the quarter ended
November 30, 2000. Many of these ongoing Elvis(R) costs will be factored into
our profit margin when Elvis(R) launches fully next quarter.
Legal, accounting, SEC reporting and investor relations expenses
increased by approximately $171,000 over the same period in 1999. This large
increase when compared to the same quarter ending November 30, 1999 can be
explained as almost all of the expenses of legal and financial consulting work
in the previous quarter were netted against long-term financial instruments on
the balance sheet (i.e. preferred stock, convertible subordinated debenture),
therefore reflecting minimal expense.
The three months ending November 30, 2000 experienced significant
noncapitalizable legal and financial consulting fees. A required stock
registration statement was filed on October 6, 2000 as were four Form 8-K's
reporting various events. Fees to secure several loans were expensed as all
loans obtained were short term. Significant fees were incurred to secure a
debenture which was abandoned as the terms could not be finalized in the best
interest of the company. Therefore, we shifted to obtaining short term loans to
meet our anticipated short tem cash flow requirements.
The results of what is expected to be the last poor revenue recognition
quarter in the foreseeable future, coupled with significantly higher selling,
general and administrative expenses as discussed above, contributed to an
operating loss was $(681,900) (73.6% of revenue) for the three months
ended November 30, 2000 compared to an operating profit of $22,100 (1.5% of
revenue) for the same period in 1999.
Interest expense was $37,300 for the three months ended November 30,
2000 compared to $25,500 for the same period in 1999. All of this increase is
attributable to new loans obtained during the quarter ended November 30, 2000,
which is more fully discussed in "Liquidity and Capital Resources".
Interest income was $ 2,800 for the three months ended November 30,
2000 compared to $15,600 for the same period in 1999. This decrease is
attributable to the the decrease in our cash position discussed in "Liquidity
and Capital resources".
-15-
For the reasons set forth above, we had a loss before taxes of $719,800
for the three months ended November 30, 2000 compared to a net income before
taxes of $12,300 for the same period in 1999.
The calculation of an ($.11) loss per share for the three months ended
November 30, 2000 includes a ($.04) loss per share related to the accounting
treatment required to record the stock exchange transaction with eLot, executed
on November 1, 2000. Notwithstanding the effects of this transaction the loss
per share would have been ($.07) for the three months ended November 30, 2000.
Accounting principles require us to allocate a portion of the
proceeds, $417,747, to the warrants issued to eLot. The remainder, $569,653, is
allocated to the Series B preferred stock. Had the preferred stock been
converted on the date of its issuance, the holder would have received 444,444
shares of our common stock, worth $1,000,000. Accounting principles require us
to treat this difference between the fair value and the allocated value
($1,000,000 less $569,654) or $430,346 as a preferred stock dividend.
This is a non-cash transaction required by generally accepted accounting
principles. Although this computation affects retained earnings rather than
this period's operations, the transaction must be reflected in the calculation
of earnings per share in the period in which the transaction takes place.
Had this transaction not occured the loss per share would have been ($.07).
LIQUIDITY AND CAPITAL RESOURCES
As of November 30, 2000, we had cash and cash equivalents of $210,600
compared to $1,458,500 as of the same period in 1999. The decrease was due
principally to the closing of two large financing transactions during the same
period last year, the sale of convertible preferred stock and a debenture which
netted the company $2,006,500 accounted for the large cash balance at
November 30, 1999. However the operating loss of this past quarter decreased
cash accordingly.
As of November 30, 2000, we had net working capital deficit of
$1,793,900. However within current liabilities is $2,636,500 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
subsequent fulfillment costs relative to this revenue which approximates 50% of
this revenue. Without such liability, working capital deficit would have
been $475,650.
Our indebtedness as of November 30, 2000 was $1,255,400, represented
principally by our convertible subordinated debenture with an outstanding
balance of $551,250. The remainder of indebtedness consists primarily of an
installment note payable to our President and Chief Executive Officer of
$177,400, a short-term note of $260,000 to our President and Chief Executive
Officer and a short-term note of $260,000 to an unrelated individual.
Common stock received persuant to the Stock Exchange Agreement with
ELot, Inc. increased our working capital by $625,000. These shares are available
for sale and if necessary may be liquidated over a three month period commencing
December 22, 2000.
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. To provide bridge financing, we borrowed $260,000 from Steven
Saferin our President and Chief Executive Officer, and an additonal $260,000
from an unrelated party. These loans mature in 2001.
-16-
On November 28, 2000, we and Media Drop In Productions, a wholly owned
subsidiary, entered into Loan Agreements with unrelated parties totaling
$125,000, the proceeds of which were received in December, 2000.
Pursuant to the Loan Agreements, Media Drop-In may borrow up to an additional
$855,000 on the same terms as the Loan Agreements. As of December 18, 2000,
Media Drop-In received additional loans of $75,000 from additional unrelated
parties. The loans will be used for working capital purposes.
The lenders each received a convertible note, due on May 15, 2001,
in the principal amount of their respective loan amounts. The Convertible Notes
are secured by a security interest in all of Media Drop-Inc.'s assets. The
Convertible Notes bear interest at a fixed rate of 12% per annum, subject to a
late charge equal to 5% of any installment of interest or principal which is not
paid by Media Drop-In within 10 days of the due date. The principal outstanding
balance of the Convertible Notes may be converted into MDI common stock at a
conversion price of $1.75. In the event of a default on the loans, including the
failure to pay interest when due after a 10-day opportunity to cure, the
outstanding principal balance of the loans will bear interest at the rate of 24%
per annum (the "Default Rate"). If Media Drop-In fails to pay the principal and
interest on the maturity date of any of the Convertible Notes, the Default Rate
will be applied to the principal balance of such note retroactive to the date of
the Convertible Note. Pursuant to a Guaranty secured by a security interest in
substantially all of our assets, we have guaranteed all of the obligations of
Media Drop-In to the Lenders. In connection with the loans, the Lenders received
3-year warrants to purchase an aggregate of 40,000 shares of MDI common stock at
a purchase price of $1.75 per share.
Pursuant to a previous Loan Agreement, dated September 28, 2000,
between Robert R. Sparacino, Steven M. Saferin, President and Chief Executive
Officer of MDI, and Media Drop-In, we were required to obtain the consent of
Sparacino and Saferin prior to entering into the Loan Agreements. In exchange
for obtaining such consent from Mr. Sparacino, we agreed to issue to Mr.
Sparacino and his designees 5-year warrants to purchase 50,000 shares of MDI
common stock at a purchase price of $1.75 per share. Mr. Sparacino also agreed
to extend the maturity date of his promissory note until May 15, 2001. Mr.
Saferin did not receive any consideration for giving his consent.
In connection with the Loan Agreement, we have agreed that we will not,
among other things, (i) merge or consolidate with, or sell, assign, lease or
otherwise dispose of all or substantially all of our assets or acquire all or
substantially all of the assets or business of any entity without the lenders'
prior written consent; (ii) sell, lease, assign, transfer or otherwise dispose
of any of our assets owned at or after November 28, 2000, subject to certain
exceptions; (iii) enter into any transactions with any affiliate, subject to
certain exceptions; (iv) incur indebtedness, subject to certain exceptions
(including the ability to borrow up to an additional $780,000 on the same terms
as the Loan Agreements); and (v) cause or suffer to permit any liens to be
placed on any of our assets which secure the loans, subject to certain
exceptions (including liens securing indebtedness up to $780,000).
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.
-17-
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 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.
-18-
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On November 7, 2000, we and our subsidiary, MDI Acquisition, Inc., were
notified that we had been named as defendents in a complaint filed by the
Lottery Channel, Inc. (hereinafter "TLC") on November 2, 2000 in the Hamilton
County, Common Pleas Civil Division, Cincinnati, Ohio,arising from our decision
to terminate our merger agreement with TLC. TLC is seeking to recover
$1,763,343.29 in costs and expenses, damages in excess of $25,000, attorney's
fees and costs in in prosecuting the action, punitive damages and any other
relief to which it is entitled. We believe that the lawsuit is without merit
and will vigorously defend our position, as well as assert a varity of
counterclaims against TLC, including a demand that TLC pay certain expenses
under the termination provisions of the merger agreement.
The lawsuit alleges that we (i) breached the merger agreement by failing
to fufill certain conditions necessary to obligate us to close the merger and by
entering into an agreement with a competitor of TLC and (ii) breached our
fiduciary duty to TLC by entering into an agreement with a competitor of TLC.
The two conditions specifically cited in the complaint are the
requirement of a $10 million investment by the National Broadcasting Company
("NBC"), the partial owner and strategic partner of TLC, and the raising of an
additional $5 million in equity as part of a private placement.
It is our position that the condition for NBC to invest $10 million, as
well as to amend its stock purchase agreement with TLC, were conditions that TLC
was obligated to, but did not, fufill. The condition that $5 million in
additional equity be raised was not satisified by TLC for a variety of reasons,
including the legislative enviroment relating to activities in Congress with
respect to the Internet sale of lottery tickets and because of the change in
financial markets relating to Internet companies.
Steven M. Saferin, our President and Chief Executive Officer, has filed
a complaint, in his individual capicity, against Roger W. Ach II, the President
and Chief Executive Officer of TLC, seeking $108,000 as payment for a promissory
note, due July 30, 2000. Also, on December 19, 2000, we filed a complaint in the
United States District Court for the Southern District of New York against John
Doe, seeking compensatory and punitive damages for defamation occurring on
Internet message boards. There can be no assurance as to the outcome of any such
litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On November 1, 2000, we entered into a Stock Exchange Agreement with
Elot, Inc. We issued 444 shares of Series B Preferred Stock and a three year
warrant to purchase 555,556 shares of common stock at an exercise price of $3.50
per share to eLot in exchange for 1,000,000 shares of Elot common stock. The
Series B Stock has a liquidation preference of $1 million, does not pay a
dividend, and is convertible into an aggregate of 444,444 shares of our common
stock, subject to adjustment under certain circumstances. As long as the sum of
the aggregate number of shares of common stock issuable upon conversion of the
Series B Stock and the MDI common stock owned by eLot and its subsidiaries is
equal to or greater than 444,444, Elot shall have the right to designate an
observer to our Board of Directors. If not previously converted by Elot, the
Series B Stock will automatically convert into common stock on November 1, 2001.
We have granted eLot certain registration rights with respect to the
resale of our common stock issued to Elot. Such rights include certain
piggy-back and S-3 registration rights, as well as eLot's right to demand one
registration commencing any time after closing, subject to certain limitations.
In connection with this placement, we paid Venture Partners Capital,
LLC, a registered broker-dealer, with which our Executive Vice President of
Finance is affiliated, a 2% cash fee.
-19-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 4.1 Form of Convertible Promissory Note in favor of the
Lenders
Exhibit 4.2 Form of Warrant
Exhibit 10.1 Form of Loan Agreement.
Exhibit 10.2 Form of Media Drop-In Productions, Inc. Security
Agreement.
Exhibit 10.3 Form of MDI Entertainment, Inc. Guaranty.
Exhibit 10.4 Form of MDI Entertainment, Inc. Security Agreement.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
Filed on September 13, 2000 (Item 5: Other Events-
Loan Agreements with Sparacino and Saferin)
Filed on October 19, 2000 (Item 5: Change in Fiscal
Year)
Filed on November 9, 2000 (Item 5: Other Events-
Strategic Alliance Agreement and Stock Exchange
Agreement with eLot, Inc.)
Filed on November 17, 2000 (Item 5: Other Events-
Notice of lawsuit with The Lottery Channel, Inc.)
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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: January 19, 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
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Kenneth M. Przysiecki
Chief Financial Officer, Secretary and Director
(Principal Financial Officer)
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