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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001.
[ ] 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.
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(Exact name of Registrant as specified in its Charter)
Delaware 73-1515699
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(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
201 Ann Street
Hartford, Connecticut 06103
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(Address of principal executive offices)
(860) 527-5359
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(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, 2001, 11,172,306 shares of the issuer's common stock were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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MDI ENTERTAINMENT, INC. AND SUBSIDIARY
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
INDEX
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.............................................................................1
Condensed Consolidated Balance Sheets as of March 31, 2001 (unaudited) and December 31, 2000..........1
Condensed Consolidated Statements of Operations for the three months ended
March 31, 2001 and 2000 (unaudited)...................................................................2
Condensed Consolidated Statement of Shareholders' Deficit for the three months ended
March 31, 2001 (unaudited)............................................................................3
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2001 and 2000 (unaudited) ..................................................................4
Notes to Unaudited Condensed Consolidated Financial Statements........................................5
Item 2. Management's Discussion and Analysis.............................................................7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................15
Signatures...........................................................................................16
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
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CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2001 2000
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ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 749,900 $ 528,151
Investment securities
available-for-sale 145,152 180,000
Accounts receivable 2,315,410 1,140,919
Inventory 234,474 285,301
Other current assets 374,038 451,983
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Total current assets 3,818,974 2,586,354
PROPERTY AND EQUIPMENT, at cost:
Equipment 251,489 250,456
Furniture and fixtures 120,361 120,361
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371,850 370,817
Less: Accumulated depreciation (225,931) (212,137)
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145,919 158,680
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OTHER ASSETS:
Licensing costs, net 1,431,141 1,397,680
Other (Note 3) 223,956 363,482
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Total other assets 1,655,097 1,761,162
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Total assets $5,619,990 $4,506,196
============== ==============
March 31, December 31,
2001 2000
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LIABILITIES AND SHAREHOLDERS' DEFICIT (unaudited)
CURRENT LIABILITIES:
Billings in excess of costs and estimated earnings
on uncompleted contracts (Note 2) $3,102,413 $2,888,985
Current portion of long-term debt
and short-term notes payable 939,990 955,006
Accounts payable 1,094,354 1,378,444
Accrued expenses 695,286 214,271
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Total current liabilities 5,832,043 5,436,706
LONG-TERM DEBT AND NOTES PAYABLE:
SUBORDINATED CONVERTIBLE DEBENTURE (Note 4) - 553,125
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Total liabilities 5,832,043 5,989,831
SHAREHOLDERS' DEFICIT (Note 4):
Common stock 11,172 10,505
Convertible preferred stock-Series B 1 1
Additional paid-in capital 5,755,227 5,061,595
Accumulated deficit (5,978,453) (6,555,737)
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Total shareholders' deficit (212,053) (1,483,635)
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Total liabilities and
shareholders' deficit $5,619,990 $4,506,196
============== ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-1-
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
March 31,
2001 2000
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(unaudited) (unaudited)
REVENUES $ 3,121,999 $1,014,963
COST OF REVENUES 1,719,883 667,871
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Gross profit 1,402,116 347,092
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 873,544 778,778
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Operating profit(loss) 528,572 (431,686)
INTEREST EXPENSE, net 77,761 18,375
OTHER (INCOME) EXPENSE (110,166) 20,777
GAIN-Investment Securities (24,307) -
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Income(loss) before provision for income taxes 585,284 (470,838)
PROVISION FOR INCOME TAXES(Note 5 ) 8,000 2,329
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Net income (loss) $ 577,284 $ (473,167)
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Basic Earnings(Loss) Per Common Share (Note 6 ) $ .05 $ (.05)
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Diluted Earnings(Loss) Per Common Share (Note 6 ) $ .05 $ (.05)
=================== ===================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-2-
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2001 (UNAUDITED)
Shares Amount
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Preferred Stock, par value $.001 per share
authorized 5,000,000 shares:
Series B, liquidation amount $2,252.25 per share:
Balance, December 31, 2000 444 $ 1
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Balance, March 31, 2001 444 1
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Common Stock, par value $.001 per share,
authorized 25,000,000 shares:
Balance, December 31, 2000 10,505,872 10,505
Stock options exercised 28,934 29
Issuance of common stock 262,500 263
Conversion of subordinated debenture 375,000 375
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Balance, March 31, 2001 11,172,306 11,172
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Additional Paid-in capital:
Balance, December 31, 2000 5,061,596
Stock options exercised 6,571
Issuance of common stock 269,025
Conversion of subordinated debenture 418,035
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Balance, March 31, 2001 5,755,227
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Accumulated Deficit:
Balance, December 31, 2000 (6,555,737)
Net Income 577,284
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Balance, March 31, 2001 (5,978,453)
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Total Shareholders' Deficit $ (212,053)
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* 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 condensed consolidated financial statements.
-3-
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
March 31,
2001 2000
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(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ 577,284 $ (473,167)
Adjustments to reconcile net income (loss) to net
cash (used for) provided by operating activities:
Depreciation and amortization 134,672 56,502
Gain on sale of investments (24,307)
Change in assets and liabilities:
Increase in accounts receivable (1,174,491) (499,042)
Decrease (increase) in inventory 50,827 (111,968)
Increase in licensing costs (138,900) (67,476)
Decrease (increase) in other assets 67,317 (392,638)
(Decrease) increase in accounts payable (55,910) 273,667
Increase in accrued expenses 522,123 99,624
Increase in billings in excess of costs
and estimated earnings on uncompleted
contracts 213,428 210,731
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Net cash provided by (used for)
operating activities 172,043 (903,767)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,033) (17,005)
Proceeds of sale of investments 59,155 -
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Net cash provided by
(used for) investing activities 58,122 (17,005)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (15,016) (54,054)
Proceeds from exercise of common stock options 6,600 42,350
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Net cash provided by (used for) financing activities (8,416) (11,704)
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NET INCREASE(DECREASE)IN CASH 221,749 (932,476)
CASH, beginning of the quarter 528,151 1,019,456
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CASH, end of the quarter $ 749,900 $ 86,980
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 49,362 $ 16,634
Income taxes $ 325 $ 9,213
Non-cash investing and financing activities:
Preferred stock dividend paid in common stock $ - $ 11,642
Imputed interest on subordinated convertible debenture $ 5,625 $ 5,625
Conversion of subordinated debenture into common stock $ 558,750 $ -
Common stock issued for services $ 269,288
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-4-
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31,
2001 AND 2000
1. PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
Information in the accompanying interim condensed consolidated financial
statements and notes to the condensed consolidated financial statements for the
three-month periods ended March 31, 2001 and 2000 are unaudited. The
accompanying interim unaudited condensed consolidated financial statements have
been prepared by us in accordance with accounting principles generaly accepted
in the United States and Regulation S-B. Accordingly, they do not include all
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 2001 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001. The condensed consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in our
audited financial statements for the seven months ended December 31, 2000 and
year ended May 31, 2000.
2. REVENUE AND COST RECOGNITION
Revenue is derived from various lottery game contracts (mainly with
states) between MDI and the lotteries. MDI provides second chance prize packages
consisting of grand prizes and various merchandise prizes. MDI also provides
marketing support related to each of the games and obtains the appropriate
licenses for the right to use these properties. Many of the lottery contracts
require the lotteries to pay MDI upon signing of the contract; therefore, MDI
defers this revenue and recognizes the revenue based on the terms of the
applicable game.
Revenues from the lottery game contracts that are greater than one year
are recognized on the percentage of completion method, determined by the
percentage of cost incurred to date to estimated total costs on a specific
contracts basis. This method is utilized as management considers cost incurred
to be the best available measure of progress on these contracts. Contracts costs
include all direct costs. General and administrative costs are charged to
expense as incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. As of March 31,
2001, no losses were expected from existing contracts.
The liability "billings in excess of costs and estimated earnings on
uncompleted contracts" represents billings in excess of revenues recognized.
-5-
3. OTHER ASSETS
Other assets at March 31, 2001 consisted primarily of prepaid
financing costs and security deposits. Other assets at December 31, 2000 also
included deferred financing costs related to the subordinated convertible
debenture, described in Note 4. These costs were charged to paid in capital when
the debenture was converted into common stock on March 14, 2001.
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 was converted on March 24, 2001, as discussed below. The Debenture
bore interest at 7% per annum and was payable semi-annually, on June 30 and
December 31 of each year, until its maturity on September 21, 2009. The
Debenture was 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 was 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 exceeded $3.00
per share.
On March 14, 2001, the holder of the subordinated convertible debenture
exercised its conversion privilege and was issued 375,000 shares of common
stock. The carrying amount of the debenture was $558,750 and the Company's
common stock was trading for $1.75 on the date of conversion. The Company
recorded the transaction utilizing the book value method and accordingly,
recognized no gain or loss from the conversion.
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
March 31, 2001 and December 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.
The primary difference between the Company's effective tax rate and the
statutory tax rate is the utilization of the net operating loss carryforwards
and the related reversal of the valuation allowance.
6. EARNINGS PER SHARE
Basic earnings per common share are based on the average number of
common shares outstanding during the fiscal period. Diluted earnings per
common share include, in addition to the above, the dilutive effect of
common share equivalents during the year. For the three months ended March
31, 2001, common share equivalents represented convertible preferred stock and
dilutive stock options and warrants using the treasury method. For the three
months ended March 31, 2000, preferred stock convertible into 1,015,000 shares
of common stock, a subordinated debenture convertible into 375,000 shares of
common stock, warrants to purchase 817,895 shares of common stock and options
to purchase 974,166 shares of common stock were excluded from the calculation
of the diluted earnings per share since their inclusion would be anti-dilutive.
The income available to common shareholders and the number of shares used in the
earnings per common share and earnings per dilutive share
computation for 2001 and 2000 was as follows:
THREE MONTHS ENDED
MARCH 31,
------------------------------
2001 2000
Net income (loss) $ 577,284 $ (473,167)
Preferred stock dividends - (11,641)
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Net income (loss) applicable
to common shareholders $ 577,284 $ (484,808)
============= ============
THREE MONTHS ENDED
MARCH 31,
------------------------------
2001 2000
Basic:
Average number of common
shares outstanding 10,797,539 8,847,861
Dilutive:
Dilutive effect of options,
warrants and
convertible
securities 1,796,733 N/A
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Average dilutive common
shares outstanding 12,594,272 8,847,861
============ =============
7. PREFERRED STOCK
On March 19, 2001, the Company signed a firm commitment letter with an
investor which, upon consummation, will provide $3,200,000 of new equity in the
form of senior convertible preferred stock. The new issue will provide for 8%
dividends and will be convertible into 2,100,000 shares of common stock at the
option of the investor. In addition, the preferred stock will be automatically
converted into common stock over a 13-month period in quarterly installments.
The Company has paid the investor a $25,000 commitment fee relating to this
transaction and upon consummation of the transaction, will pay an additional fee
of 2% of the consideration received.
-6-
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD LOOKING STATEMENTS
THAT INVOLVE CERTAIN RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
DESCRIPTION OF BUSINESS
The following discussion and analysis should be read in conjunction with
our Condensed Consolidated Financial Statements and the notes thereto appearing
elsewhere in this Form 10-QSB. All statements contained herein that are not
historical facts, including but not limited to, statements regarding our current
business strategy and our plans for future development and operations, are based
upon current expectations. These statements are forward-looking in nature and
involve a number of risks and uncertainties. Generally, the words "anticipates,"
"believes," "estimates," "expects" and similar expressions as they relate to us
and our management are intended to identify forward looking statements. Actual
results may differ materially. Among the factors that could cause actual results
to differ materially are those set forth in our Annual Report on Form 10-KSB
under the caption "Description of Business-Risk Factors." We wish to caution
readers not to place undue reliance on any such forward-looking statements,
which statements speak only as of the date made.
Our principal business has been the scratch ticket segment of the
government lottery industry. We are a leader in designing and marketing instant
scratch ticket games based on licensed brand names and entertainment properties
and our lottery promotions feature such properties licensed by us. Prizes
awarded in such promotions typically include a number of "second chance" prizes
related to the licensed property, including collectible logo bearing merchandise
such as logo bearing T-shirts and caps, and other related merchandise such as
posters, money clips, telephones, playing cards, film cells, stadium blankets,
carryall bags, jackets, electronic games, video and music collections, watches,
clocks, credit cards with prepaid credit, trips and, in the case of
Harley-Davidson(R), Harley-Davidson 1200 Sportster motorcycles.
We developed our strategy of identifying such properties in early 1996.
Prior to that time, we had developed a series of promotions that utilized
popular videotapes, compact discs and audiocassettes as second chance lottery
prizes. Those promotions enabled us to develop an expertise in sourcing and
distributing products as second chance lottery prizes and to develop a
reputation with lottery personnel as a reliable organization attuned to the
special needs of lotteries and their players.
-7-
We derive over ninety-five percent (95%) of our revenues from lotteries
in two distinct ways. First, we may charge a lottery a license and royalty fee
to utilize a particular licensed property as a lottery game. License fees may be
fixed assessments while royalties are a percentage of the printing cost of the
tickets or a percentage of sales of the ticket. Contracts for licensed
properties typically include an up-front license fee and a royalty based on the
manufacturing cost of tickets. Manufacturing costs of tickets usually range from
$10.00 per thousand to $30.00 per thousand. Actual costs depend on the size of
the ticket and the quantity printed. Ticket quantities range from about one
million to as many as 60 million with an average quantity of about five million.
Our second source of lottery revenue is the sale of logo bearing
merchandise to the lottery as second-chance prizes. In merchandise-based lottery
games, between 5% to 10% of a lottery's prize fund is typically used for the
purchase of merchandise related to the property the lottery is utilizing.
Typically, we purchase merchandise from other licensees of the property and
resell the merchandise to the lottery at a price that is designed to include
overhead costs, profit, shipping and handling and any marketing support we
provide the lottery such as brochures, posters or other advertising assistance
for which there are no separate charges.
Our success is dependent on our ability to maintain and secure licensed
properties, market these properties to lotteries and the performance of the
properties once they are introduced as lottery games to players. We believe that
revenues will fluctuate as individual license-based promotions commence or wind
down and terminate. In addition, our licenses (which are generally for 1.5 to 3
years) terminate at various times over the next several years. Moreover, the
useful life of a license is generally relatively short as the novelty of the
game or the popularity of the licensed material wanes over time. The timing of
agreements with the lotteries to run promotions, the acquisition of new licenses
and the commencement of new promotions is unpredictable. Accordingly, period to
period comparisons may not be indicative of future results.
We are in continuous negotiations to obtain additional licensed
properties and extend some existing licenses. We expect to reach several
agreements over the next six to 12 months; however we cannot assure you that
such agreements will actually be reached. Some of these agreements may require
the expenditures of significant up-front advances.
-8-
RECENT DEVELOPMENTS
As previously reported 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 then submitted a plan of compliance to Nasdaq. Nasdaq has given
us until April 16, 2001 to come into compliance with its rules. If we are not in
compliance at such time Nasdaq may provide us with notification that our
securities may be delisted. To address that issue we have signed a firm
commitment letter with an investor which, upon consummation, will increase our
net equity to a level acceptable to Nasdaq and bring us into compliance. It is
unlikely that the proceeds of the new equity offering will be received by the
April 16th deadline but is exected to close on or about April 25th. We plan to
ask Nasdaq for an extension to that date. It is our hope that the investor's
commitment letter combined with this quarter's earnings and the current strength
of our stock's price relative to the market as a whole will make Nasdaq more
favorably inclined to extend their compliance deadine. However should we receive
such notification from Nasdaq we intend to appeal as we believe we will be in
compliance upon consummation of the equity offering. We can, however, offer no
assurance that Nasdaq will extend their compliance deadline or that our common
stock will remain listed on the Nasdaq SmallCap Market.
This quarter ended March 31, 2001 represents our return to profitability.
As we indicated after the termination of our merger with The Lottery Channel in
August 2000, and through the ensuing months, our focus has been on developing
our core business. The results of this quarter reflect that focus. Our revenue
of $3.1 million and net income of $577,000 are both records for any single
quarter to date. The revenue represents three times our revenue for the same
three-month period last year and we have earned $.05 as opposed to a loss of
$(.05) per share for the same period in 2000.
We believe our core business is strong. Our contract backlog is encouraging and
our games continue to perform well in the marketplace. The acceptance of
licensed games by lotteries in North America has never been higher.
It is our aim to continue to focus on the core business as we strive to increase
shareholder value and build a world class company and become the leader in our
market.
INTERNET PLATFORMS: Our value-added initiative to provide customers with
Internet components related to our licensed games is being perceived positively
by the lottery industry, based on the performance of the first three such
initiatives that were introduced in January in New Jersey (Elvis), Kentucky
(Elvis) and Indiana (SPAM). All three lotteries have determined to retain our
Internet service for upcoming new promotions, using the model that we
implemented for Indiana. This model enables a lottery consumer to register
non-winning tickets for second chance merchandise drawings on the Internet,
instead of going to the expense of physically mailing the tickets to the
lottery, thus providing a tangible convenience and a real cost savings for
lottery consumers.
GAME INTRODUCTIONS: Our properties are being accepted by lotteries at
unprecedented levels. As of the date of this 10-QSB, lottery promotions
involving fifteen different properties are either currently on sale or are
planned for introduction in this fiscal year.
ELVIS: The Elvis Presley property is leading all brands with ten promotions
either launched or having scheduled launch dates during the current fiscal year,
and five additional promotions with no scheduled launch date established but
expected to launch in 2001.
NASCAR DRIVERS: At least eight lotteries have established launch dates in fiscal
2001 for MDI's licensed drivers' game.
HARLEY-DAVIDSON: At least six lotteries have launched or will launch
Harley-Davidson instant game promotions in fiscal 2001, including California and
Florida.
FIRST APPEARANCES BY BRANDS: Several of our licensed properties are scheduled to
make their first appearance as lottery promotions during fiscal 2001, with games
either currently on sale or with scheduled launch dates for CMT/COUNTRY MUSIC
TELEVISION, TABASCO, HOLLYWOOD SIGN/HOLLYWOOD WALK OF FAME, HOLLYWOOD SQUARES
and DICK CLARK'S AMERICAN BANDSTAND.
OTHER BRANDS: Other properties that are now on sale or with scheduled launch
dates include JACKS OR BETTER, LOUISVILLE SLUGGER, WHEEL OF FORTUNE, BETTY BOOP,
RAY CHARLES, SPAM and TNN.
-9-
Three months ended March 31, 2001 and March 31, 2000 (UNAUDITED)
---------------------------------------------------------------
2001 % 2000 %
Total revenue $ 3,121,999 100.0% $ 1,014,963 100.0%
Cost of revenues 1,719,883 55.1% 667,871 65.8%
---------------------------------------------------------------
Gross profit 1,402,116 44.9% 347,092 34.2%
Selling, general and administrative expenses 873,544 28.0% 778,778 76.7%
---------------------------------------------------------------
Operating profit 528,572 16.9% (431,686) -42.5%
Interest expense 80,215 2.6% 25,138 2.5%
Interest income (2,454) -0.1% (6,763) -0.7%
Other (income) expense (110,166) -3.5% 20,777 2.0%
Gain-Investment Securities (24,307) -0.8% - 0.0%
---------------------------------------------------------------
Income (loss) before provision for income taxes 585,284 18.7% (470,838) -46.4%
Provision for income taxes 8,000 .2% 2,329 0.2%
---------------------------------------------------------------
Net income (loss) $ 577,284 18.5% $ (473,167) -46.6%
===============================================================
-10-
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH
31, 2000
Results for the first quarter of our new fiscal year ended December 31,
2001 reflect a 207% increase in revenue as our Harley-Davidson(R) license "leads
the pack" of launching increased revenue and profitability into the new year.
Revenue for the three months ended March 31, 2001 was $3,122,000 compared to
$1,015,000 for the three months ended March 31, 2000.Harley-Davidson(R), which
launched in California, Florida and Ohio accounted for 33% of our revenue. This
was followed by one of our newest properties, Elvis(R), which accounted for
16.3% of revenue. Not far behind were Ray Charles(R)(13% of revenu), Wheel of
Fortune(R)(13.3% of revenue) and Betty Boop(R)((13.2% of revenue). The remaining
11.2% represented revenue from seven other licensed properties.
Cost of revenue as a percentage of revenue decreased to 55% from 66% for
the three months ended March 31, 2001 compared to the three months ended March
31, 2000. This decrease in the cost ratio reflects our ability to achieve a
higher gross profit due to product mix and creative game design.
The gross profit increased in the three months ended March 31, 2001 to
$1,402,100(44.9% of revenue) compared to $347,100(34.2 % of revenue) for the
three months ended March 31, 2000. This achieved a gross profit percentage of
44.9% for the three months ended March 31, 2001.
Selling, general and administrative expenses were $873,500(28.0% of
revenue) for the three months ended March 31, 2001 compared to $778,800 for the
three months ended March 31, 2000. Salaries and employee benefits increased
approximately $60,000 this quarter due to increased sales staffing to accomplish
our regional sales reorganization which has helped to achieve our record backlog
of $16.2 million.
Operating income was $528,600(16.9% of revenue) for the three months
ended March 31, 2001 compared to an operating loss of $(431,700)(42.5% of
revenue) for the three months ended March 31, 2000. This reversal to operating
profitability is due to the factors described above.
Interest expense was $80,200 for the three months ended March 31, 2001
compared to $25,100 for the three months ended March 31, 2000. Of this amount
$6,400 represents the amortization of financing costs attributable to short-
term loans obtained during the latter part of 2000. The remaining $73,800
primarily represents interest on these short term notes as well as interest on
the convertible subordinated debenture converted in March 2001.
Other income was $110,200 for the three months ended March 31, 2001
compared to a $20,800 expense for the three months ended March 31, 2000. This
$110,200 was attributable to the favorable exchange of stock for legal services
that was negotiated during the first quarter of 2001. The $24,300 gain on
securities for the three months ended March 31, 2001 was attributable to the
sale of 193,000 shares of eLot stock held for investment.
For the reasons set forth above, we had income before taxes of $585,300
for the three months ended March 31, 2001 compared to a loss before taxes of
$(470,800) for the three months ended March 31, 2000.
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LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001 we had cash and cash equivalents of $749,900
compared to $528,200 as of December 31, 2000. This improved cash position was in
part due to the collection of receivables for games launched this quarter.
Accounts receivable of $2,315,400 as of March 31, 2001 compared to $1,140,900 as
of March 31, 2000 also reflects this increased game launch activity.
As of March 31, 2001 we had a net working capital deficit of $2,013,100
However, within current liabilities is $3,102,400 of "Billings in excess of cost
and estimated earnings on uncompleted contracts" representing unrecognized
revenue (i.e., revenue which we had 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 wil not adversely impact cash flow,
except to the extent that we need to purchase merchandise and subsequent
fufillment costs relative to this revenue which approximates 50% of this
revenue. Without such liability, working capital deficit would have been
$461,900.
As a further continuing effort to improve working capital, in January
2001, we negotiated a stock for fees exchange with two of our law firms and our
investment banking firm. The cash flow savings from this exchange totaled
$364,410.
On March 19, 2000 the we signed a firm committment letter with an
investor which, upon consumation, will provide $3,200,000 of new equity in the
form of senior convertible preferred stockThe preferred stock will provide for
8% dividends will be convertible into 2,100,000 shares of common stock at the
option of the investor. In addition, the preferred stock will be automatically
converted into common stock over a 13-month period in quarterly installments.
We have paid the investor a $25,000 committment fee relating to this transaction
and upon consumation of the transaction, will pay an additional fee of 2% of the
consideration received.
Our indebtedness as of March 31, 2001 was $940,000, including an
installment note payable to our President and Chief Executive Officer of
$229,600, a short-term note of $260,000 to our President and Chief Executive
Officer and short-term notes of $460,000 to unrelated individuals. The short-
term notes were obtained to bridge our then immediate cash flow needs before our
new games launched. The short-term notes all mature on May 15, 2001 and will be
paid from the proceeds of an equity offering currently being negotiated.
The convertible subordinated debenture, with an outstanding balance of
$558,750, was converted into common stock on March 14, 2001. Under the terms of
the conversion we will continue to pay the scheduled interest payments through
September 21, 2001.
We do not have any material capital commitments and do not currently
anticipate making any substantial expenditure 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.
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SEASONALITY AND REVENUE FLUCTUATIONS
Our business is not seasonal. However, our revenues are expected to
fluctuate as individual license-based promotions commence or wind down and
terminate. The useful life of a promotion is generally relatively short as the
novelty of the game or the popularity of the licensed material wanes over time.
In addition, our licenses (which are generally for 1.5 to 3 years) terminate at
various times over the next several years. The life span of a promotion, the
timing of agreements with the lotteries to run promotions, the acquisition of
new licenses and the commencement of new promotions are unpredictable. Also,
since most lotteries are government agencies with lottery executives appointed
by the state's governor or other high ranking official, opportunities or
projects in progress can be slowed after an election if the incumbent governor
is not reelected. Accordingly, period to period comparisons may not be
indicative of future results.
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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 11, 2001
MDI ENTERTAINMENT, INC.
(Registrant)
By: /s/Steven M. Saferin
----------------------------
Steven M. Saferin
President and Chief Executive Officer and Director
(Principal Executive Officer)
By: /s/Kenneth M. Przysiecki
----------------------------
Kenneth M. Przysiecki
Chief Financial Officer, Secretary and Director
(Principal Financial and Accounting Officer)
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