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 JUNE 30,
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.
-------------------------------------------------
(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 August 10, 2001 11,172,306 shares of the issuer's common stock were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
--- -
<table>
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
INDEX
Page
PART I. FINANCIAL INFORMATION
<s> <c>
Item 1. Financial Statements........................................................................1
Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000...................1
Consolidated Statements of Operations (unaudited) for the six months ended
June 30, 2001 and 2000.............................................................................2
Consolidated Statements of Operations (unaudited) for the three months ended
June 30, 2001 and 2000.............................................................................3
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the six
months ended June 30, 2001 (unaudited).............................................................4
Consolidated Statements of Cash Flows (unaudited) for the six months
ended June 30, 2001 and 2000.......................................................................5
Notes to Unaudited Consolidated Financial Statements................................................6
Item 2. Management's Discussion and Analysis........................................................9
PART II OTHER INFORMATION
Item 1. Legal Proceedings..........................................................................21
Item 2. Change in Securities and Use of Proceeds...................................................22
Item 4. Submission of Matters to a Vote of Security Holders........................................23
Item 6. Exhibits and Reports on Form 8-K...........................................................23
Signatures......................................................................................24
</table>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<table>
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000
---------------- ----------------
ASSETS (unaudited)
<s> <c> <c>
CURRENT ASSETS:
Cash and cash equivalents $ 358,606 $ 528,151
Investment securities
available-for-sale - 180,000
Accounts receivable 2,761,081 1,140,919
Inventory 709,968 285,301
Other current assets 480,771 451,983
---------------- ----------------
Total current assets 4,310,426 2,586,354
---------------- ----------------
PROPERTY AND EQUIPMENT, at cost:
Equipment 261,110 250,456
Furniture and fixtures 120,361 120,361
---------------- ----------------
381,471 370,817
Less: Accumulated depreciation (239,829) (212,137)
---------------- ----------------
Property and equipment, net 141,642 158,680
---------------- ----------------
OTHER ASSETS:
Licensing costs, net 1,594,313 1,397,680
Other (Note 3) 220,071 363,482
---------------- ----------------
Total other assets 1,814,384 1,761,162
---------------- ----------------
Total assets $6,266,452 $4,506,196
================ ================
</table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<table>
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (continued)
June 30, December 31,
2001 2000
-------------------- ---------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) (unaudited)
<s> <c> <c>
CURRENT LIABILITIES:
Billings in excess of costs and estimated earnings
on uncompleted contracts (Note 2) $3,465,888 $2,888,985
Current portion of long term debt 477,740 955,006
Accounts payable 1,128,978 1,378,444
Accrued expenses 856,621 204,400
Income taxes payable (Note 5) 21,107 9,871
-------------------- ------------------
Total current liabilities 5,950,334 5,436,706
SUBORDINATED CONVERTIBLE DEBENTURE (Note 4) - 553,125
-------------------- ------------------
Total liabilities 5,950,334 5,989,831
-------------------- ------------------
SHAREHOLDERS' EQUITY (DEFICIT) (Notes 4 and 6):
Common stock 11,172 10,505
Convertible preferred stock-Series B 1 1
Convertible preferred stock-Series C (Note 10) - -
Additional paid-in capital 5,783,228 5,061,596
Accumulated deficit (5,478,283) (6,555,737)
-------------------- ------------------
Total shareholders' equity (deficit) 316,118 (1,483,635)
Total liabilities and -------------------- ------------------
shareholders' equity (deficit) $6,266,452 $4,506,196
==================== ==================
</table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<table>
Six months ended
June 30,
2001 2000
------------------- ------------------
(unaudited) (unaudited)
<s> <c> <c>
REVENUE $ 6,685,465 $2,730,863
COST OF REVENUES 3,724,105 1,865,363
------------------- ------------------
Gross profit 2,961,360 865,500
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,785,101 1,844,536
TERMINATED MERGER EXPENSES (NOTE 8) - 727,025
COST OF UNSUCCESSFUL FUNDING (NOTE 7) 89,633 -
------------------- ------------------
Operating profit (loss) 1,086,626 (1,706,061)
INTEREST EXPENSE, net 119,972 41,499
OTHER (INCOME) EXPENSE (110,166) 57,218
GAIN ON SALE-INVESTMENT SECURITIES, net (12,669) -
------------------- ------------------
Income (loss) before provision for income taxes 1,089,489 (1,804,778)
PROVISION FOR INCOME TAXES (Note 5) 12,035 2,329
------------------- ------------------
Net income (loss) $ 1,077,454 $ (1,807,107)
=================== ==================
Basic Earnings (Loss) Per Common Share (Note 6) $.10 $ (.20)
=================== ==================
Diluted Earnings (Loss) Per Common Share (Note 6) $.09 $ (.20)
=================== ==================
</table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<table>
Three months ended
June 30,
2001 2000
------------------- ------------------
(unaudited) (unaudited)
<s> <c> <c>
REVENUE $ 3,563,467 $1,715,901
COST OF REVENUES 2,004,222 1,197,492
------------------- ------------------
Gross profit 1,559,245 518,409
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 911,557 1,065,757
TERMINATED MERGER EXPENSES (NOTE 8) - 727,025
COST OF UNSUCCESSFUL FUNDING (NOTE 7) 89,633 -
------------------- ------------------
Operating profit (loss) 558,055 (1,274,373)
INTEREST EXPENSE, net 42,212 23,125
OTHER EXPENSE - 36,441
LOSS ON SALE-INVESTMENT SECURITIES, net 11,637 -
------------------- ------------------
Income (loss) before provision for income taxes 504,206 (1,333,939)
PROVISION FOR INCOME TAXES (Note 5) 4,035 -
------------------- ------------------
Net income (loss) $ 500,171 $(1,333,939)
=================== ==================
Basic Earnings (Loss) Per Common Share (Note 6) $.04 $(.15)
=================== ==================
Diluted Earnings (Loss) Per Common Share (Note 6) $.04 $(.15)
=================== ==================
</table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<table>
For the six months ended June 30, 2001
(Unaudited)
Shares Amount
--------------- --------------------
<s> <c> <c>
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
Series C (Note 10) - -
--------------- --------------------
Balance, June 30, 2001 444 1
=============== --------------------
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
--------------- --------------------
Balance, June 30, 2001 11,172,306 11,172
=============== --------------------
Additional Paid-in Capital:
Balance, December 31, 2000 5,061,596
Stock options exercised 6,571
Issuance of warrants 28,001
Issuance of common stock 269,025
Conversion of subordinated debenture 418,035
--------------------
Balance, June 30, 2001 5,783,228
--------------------
Accumulated Deficit:
Balance, December 31, 2000 (6,555,737)
Net income 1,077,454
--------------------
Balance, June 30, 2001 (5,478,283)
--------------------
Total Shareholders' Equity as of June 30, 2001 $ 316,118
====================
</table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<table>
Six months ended
June 30,
2001 2000
---------------- ----------------
(unaudited) (unaudited)
<s> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,077,454 $(1,807,107)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 416,368 160,136
Stock based compensation - 127,007
Gain on sale of investments, net (12,669) -
Change in assets and liabilities:
Increase in accounts receivable (1,620,162) (842,123)
Increase in inventory (424,667) (115,302)
Increase in licensing costs (563,484) (140,370)
Increase in other assets (13,916) (81,158)
Increase in accounts payable 19,822 723,652
Increase in accrued expenses 652,221 312,976
Increase (decrease) in income taxes payable 11,236 (2,463)
Increase in deferred revenue - 117,208
Increase in billings in excess of costs
and estimated earnings on uncompleted contracts 576,903 531,908
---------------- ----------------
Net cash provided by (used for) operating activities 119,106 (1,015,636)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (10,654) (21,347)
Proceeds of sale of investments 192,669 -
---------------- ----------------
Net cash provided by (used for) investing activities 182,015 (21,347)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (477,266) (13,849)
Proceeds from exercise of common stock options 6,600 42,350
Other - 4,546
---------------- ----------------
Net cash (used for) provided by financing activities (470,666) 33,047
---------------- ----------------
NET DECREASE IN CASH (169,545) (1,003,936)
CASH, beginning of the period 528,151 1,019,456
---------------- ----------------
CASH, end of the period $ 358,606 $ 15,520
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 56,213 $ 25,939
Income taxes $ 799 $ 4,047
Non-cash investing and financing activities:
Preferred stock dividend paid in common stock $ - $ 11,642
Imputed interest on subordinated convertible debenture $ 5,625 $ 11,250
Conversion of subordinated debenture into common stock $ 418,410 $ -
Common stock issued for services $ 269,025 $ -
Expenses related to warrants $ - $ 32,750
</table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
MDI ENTERTAINMENT, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR SIX MONTHS ENDED
JUNE 30, 2001
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
subsidiary (MDI or the Company) for the six-month periods ended June 30, 2001
and 2000 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.
Operating results for the six-month period ended June 30, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 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 seven months ended
December 31, 2000.
2. REVENUE AND COST RECOGNITION
Revenue is derived from various lottery game contracts (mainly with
states) between the Company and the lotteries. The Company provides second
chance prize packages consisting of grand prizes and various merchandise prizes.
The Company 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 upon signing of the contract;
therefore, MDI defers this revenue and recognizes the revenue based on the terms
of the applicable game.
Revenues from the lottery game contracts that are greater than one year
are recognized on the percentage of completion method, determined by the
percentage of cost incurred to date to estimated total costs on a specific
contract basis. This method is utilized since 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 June 30, 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.
3. OTHER ASSETS
Other assets at June 30, 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 additional 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 14, 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
June 30, 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 fiscal period. For the three and six months ended June
30, 2001, common share equivalents represented convertible preferred stock and
dilutive stock options and warrants using the treasury method. For the three and
six months ended June 30, 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 net income (loss) 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 2001 and 2000 were as follows:
<page>
SIX MONTHS ENDED
JUNE 30,
-------------------------------------
2001 2000
Net income (loss) $1,077,454 $(1,807,107)
Preferred stock dividends - (21,785)
--------------- ----------------
Net income (loss) applicable
to common shareholders $1,077,454 $(1,828,892)
=============== ================
SIX MONTHS ENDED
JUNE 30,
-------------------------------------
2001 2000
Basic:
Average number of common
shares outstanding 11,018,145 8,968,793
===========
Dilutive:
Dilutive effect of options,
warrants and
convertible securities 1,610,131 not
applicable
---------------
Average dilutive common
shares outstanding 12,628,276
===============
THREE MONTHS ENDED
JUNE 30,
-------------------------------------
2001 2000
Net income (loss) $ 500,171 $(1,333,939)
Preferred stock dividends - (10,143)
--------------- ----------------
Net income (loss) applicable
to common shareholders $ 500,171 $(1,344,082)
=============== ================
THREE MONTHS ENDED
JUNE 30,
-------------------------------------
2001 2000
Basic:
Average number of common
shares outstanding 11,172,306 9,060,106
===========
Dilutive:
Dilutive effect of options,
warrants and
convertible securities 1,610,131 not
applicable
---------------
Average dilutive common
shares outstanding 12,782,437
===============
7. COST OF UNSUCCESSFUL FUNDING
The Company recorded an expense for $89,633, for costs relating to the
placement and issuance of its Series C Preferred Stock to Oxford International,
Inc. These costs include legal, accounting and investment banking fees paid or
accrued during the six-month period ended June 30, 2001. (See Note 10
"Subsequent Event")
8. TERMINATED MERGER EXPENSES
The Company entered into an Agreement and Plan of Merger with The
Lottery Channel, Inc. and the Company's wholly-owned subsidiary (established to
facilitate the merger), MDI Acquisition, Inc., dated as of January 26, 2000. The
obligations of MDI Acquisition, Lottery Channel and the Company to effect the
merger were subject to the fulfillment of a number of conditions including,
among others, the consummation of certain contemplated investments and receipt
of third party consents. Certain of such conditions were not met, and on August
25, 2000, the Company sent a notice of termination to The Lottery Channel
terminating the Agreement and Plan of Merger. In accordance with generally
accepted accounting principles, $727,025 of costs related to the proposed merger
were written off, as reflected in the accompanying financial statements.
Subsequently, by letter dated August 28, 2000, Lottery Channel responded by
purporting to terminate the merger agreement due to MDI's breach. The letter
claimed that the Company was responsible for all cost and expenses incurred in
connection with the transaction. The Company disputes this assertion.
<page>
On November 7, 2000, the Company and its subsidiary, MDI Acquisition,
Inc., were notified that they had been named as defendants in a complaint filed
by the Lottery Channel on November 2, 2000 in the Hamilton County, Common Pleas
Civil Division, Cincinnati, Ohio, arising from a decision to terminate its
merger agreement with Lottery Channel. Lottery Channel is seeking to recover
$1,763,343.29 in costs and expenses, damages in excess of $25,000, attorney's
fees and costs in prosecuting the action, punitive damages and any other relief
to which it is entitled. The Company believes that the lawsuit is without merit
and is vigorously defending its position, and is asserting a variety of
counterclaims against Lottery Channel, including a demand that Lottery Channel
pay certain expenses under the termination provisions of the merger agreement.
The lawsuit alleges that the Company (i) breached the merger agreement by
failing to fulfill certain conditions necessary to obligate the Company to close
the merger and by entering into an agreement with a competitor of Lottery
Channel and (ii) breached its fiduciary duty to Lottery Channel by entering into
an agreement with a competitor of Lottery Channel. 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 Lottery Channel, and the raising of an additional $5
million in equity as part of a private placement. It is the Company's position
that the condition for NBC to invest $10 million, as well as to amend its stock
purchase agreement with Lottery Channel, were conditions that Lottery Channel
was obligated to, but did not fulfill. The condition that $5 million in
additional equity be raised was not satisfied by Lottery Channel for a variety
of reasons, including the legislative environment 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. There can be no
assurance as to the outcome of any such litigation. Steven M. Saferin, the
Company's President and Chief Executive Officer, has filed a complaint, in his
individual capacity, against Roger W. Ach II, the President and Chief Executive
Officer of Lottery Channel, seeking $108,000 plus interest as payment for a
promissory note, due July 30, 2000. Also, on December 19, 2000, the Company
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.
9. RECENT ACCOUNTING PRONOUNCEMENTS
On June 30, 2001, the Financial Accounting Standards Board (FASB)
finalized Statements of Financial Accounting Standards No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets." Adoption of
FASB 142 is required beginning with the first quarter of 2002. The
Company has no planned or anticipated business combinations which would be
affected by FASB 141. The Company's intangible amortization policies are
consistent with FASB 142. Therefore, the implementation of these two standards
is not expected to have a material impact on the Company's financial condition
or results of operations.
<page>
10. SUBSEQUENT EVENT
The Company entered into a Stock Purchase Agreement with Oxford
International, Inc. ("Oxford") with an effective date of April 25, 2001.
Pursuant to that Agreement, the Company issued to Oxford 2,100 shares of Series
C Preferred Stock (the "Series C Stock") representing approximately 15.8% of the
outstanding common stock of MDI on an as converted basis. The Company
anticipated receipt of $3,200,000 in cash from this transaction.
Oxford failed to pay the consideration of $3,200,000 required by the
April 25, 2001 Stock Purchase Agreement, and because of this failure, the
Company did not release its stock to Oxford and did not consider the transaction
consummated.
The Company entered into an "Agreement" with Oxford with an effective
date of July 9, 2001 whereunder the Company agreed to accept securities of two
publicly traded companies valued in excess of $3.2 million, by reference to the
closing prices of such securities, as of the date of its receipt of the
securities in lieu of the cash investment Oxford agreed to make under the April
25, 2001 Stock Purchase Agreement. Among other things, Oxford agreed that it
would not be entitled to nominate one member to the Company's Board of
Directors; that it could not require performance of any matters under the Stock
Purchase Agreement and Certificates of Designation up to the date of July 9,
2001 Agreement, including but not limited to payments of dividends; and that the
Certificate of Designations was null and void.
Subsequent to the receipt of the securities of the two publicly traded
companies from Oxford, the issuers of those securities and the Federal Bureau of
Investigation made assertions about Oxford. The FBI notified the Company of its
investigations of Oxford, but did not make any assertions concerning the Company
or any of its officers or directors. Neither the Company nor its officers and
directors are under any investigation by the FBI as part of their investigation
of Oxford. The Company was advised that, in the view of the issuers of the
publicly traded securities and the FBI, the securities it received from Oxford
are or may be subject to a dispute between the issuers and Oxford, which could
impair the liquidity and value of the securities. If the liquidity and value of
the securities were, in fact, impaired, then the Company believes it may have
been defrauded by Oxford.
By letter dated July 27, 2001, the Company notified Oxford that,
pursuant to the July 9th Agreement, it was exercising its right to exchange the
publicly traded securities it received from Oxford for all of the Company's
stock issued to Oxford.
Oxford has refused to honor the Company's exchange right. On August 6,
2001, the Company filed a Motion For Temporary Restraining Order and Preliminary
Injunction and a Verified Complaint in the United States District Court of the
District of Maryland against Oxford and Gregory C. Dutcher. See "Item 1: Legal
Proceedings."
Upon the filing of the Company's Form 8-K on July 16, 2001 reporting
these issues, NASDAQ halted trading in its securities. On such date, the Company
also received a letter from NASDAQ asking it to respond to various questions,
which the Company responded to by the July 20, 2001 deadline. Representatives of
the Company met with NASDAQ both on July 30 and August 7, 2001 to discuss the
contents of that submission and other issues concerning the Company's financing
transaction with Oxford.
The Company agreed with NASDAQ that, since the Company exercised its
right of exchange under the Agreement dated July 9, 2001, it no longer meets the
net tangible asset maintenance requirements for continued listing on the NASDAQ
SmallCap Market. Therefore, the Company is in the process of seeking to move the
trading of its securities to the Over-The-Counter Bulletin Board. NASDAQ is
cooperating with the Company in this transition. If, in the future, the Company
meets the criteria for listing on NASDAQ, it may elect to reapply for such
listing.
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD LOOKING STATEMENTS
THAT INVOLVE CERTAIN RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
DESCRIPTION OF BUSINESS
The following discussion and analysis should be read in conjunction
with our Consolidated Financial Statements and the notes thereto appearing
elsewhere in this Form 10-QSB. All statements contained herein that are not
historical facts, including but not limited to, statements regarding our current
business strategy and our plans for future development and operations, are based
upon current expectations. These statements are forward-looking in nature and
involve a number of risks and uncertainties. Generally, the words "anticipates,"
"believes," "estimates," "expects" and similar expressions as they relate to us
and our management are intended to identify forward looking statements. Actual
results may differ materially. Among the factors that could cause actual results
to differ materially are those set forth in our Annual Report on Form 10-KSB
under the caption "Description of Business-Risk Factors." We wish to caution
readers not to place undue reliance on any such forward-looking statements,
which statements speak only as of the date made.
Our principal business has been the scratch ticket segment of the
government lottery industry. We are a leader in designing and marketing instant
scratch ticket games based on licensed brand names and entertainment properties,
and our lottery promotions feature such properties licensed by us. Prizes
awarded in such promotions typically include a number of "second chance" prizes
related to the licensed property, including collectible logo bearing merchandise
such as logo bearing T-shirts and caps, and other related merchandise such as
posters, money clips, telephones, playing cards, film cells, stadium blankets,
carryall bags, jackets, electronic games, video and music collections, watches,
clocks, credit cards with prepaid credit, trips and, in the case of
Harley-Davidson(R), Harley-Davidson 1200 Sportster motorcycles.
We developed our strategy of identifying such properties in early 1996.
Prior to that time, we had developed a series of promotions that utilized
popular videotapes, compact discs and audiocassettes as second chance lottery
prizes. Those promotions enabled us to develop an expertise in sourceing 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.
<page>
We derive over ninety-five percent (95%) of our revenues from lotteries
in two distinct ways. First, we may charge a lottery a license and royalty fee
to utilize a particular licensed property as a lottery game. License fees may be
fixed 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, including those from professional sports leagues, and to 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.
RECENT DEVELOPMENTS
By letter dated July 27, 2001, we exercised our option to exchange
securities received from Oxford, International, Inc. for all of our stock, which
we had a right of exchange under the Agreement dated July 9, 2001.
Under the April 25, 2001 Stock Purchase Agreement, Oxford was to pay
$3.2 million in cash. Under the July 9, 2001 Agreement, we agreed to accept
securities of two publicly traded companies, valued in excess of $3.2 million by
reference to the closing prices of such securities as of the date of its
receipt of the securities in lieu of the cash investment Oxford agreed to make
under the April 25, 2001 Stock Purchase Agreement.
Subsequent to our receipt of the securities of the two publicly traded
companies from Oxford, the issuers of those securities and the Federal Bureau of
Investigation made assertions about Oxford. The FBI notified us of its
investigations of Oxford, but did not make any assertions concerning MDI or any
of its officers or directors. Neither MDI nor its officers and directors are
under any investigation by the FBI as part of their investigation of Oxford. We
were advised that, in the view of the issuers of the publicly traded securities
and the FBI, the securities we received from Oxford are or may be subject to a
dispute between the issuers and Oxford, which could impair the liquidity and
value of the securities. If the liquidity and value of the securities were, in
fact, impaired, then we believe we may have been defrauded by Oxford.
Oxford has refused to honor our exchange right. On August 6,
2001, we filed a Motion For Temporary Restraining Order and Preliminary
Injunction and a Verified Complaint in the United States District Court of the
District of Maryland against Oxford and Gregory C. Dutcher. See "Item 1: Legal
Proceedings."
Upon the filing of our Form 8-K on July 16, 2001, reporting these
issues, NASDAQ halted trading in our securities. On such date, we also received
a letter from NASDAQ asking us to respond to various questions, which we
responded to by the July 20, 2001 deadline. We met with NASDAQ both on July 30
and August 7, 2001 to discuss the contents of that submission and other issues
concerning our financing transaction with Oxford.
We agreed with NASDAQ that, since the we have exercised our right of
exchange under the Agreement, we no longer meet the net tangible asset
maintenance requirements for continued listing on the NASDAQ SmallCap Market.
Therefore, we are in the process of seeking to move the trading of our
securities to the Over-The-Counter Bulletin Board. NASDAQ is cooperating with us
in this transition. If, in the future, we meet the criteria for listing on
NASDAQ, we may elect to reapply for such listing.
OPERATIONAL RESULTS
This quarter ended June 30, 2001 continues the trend of profitable
operations started in the first quarter of fiscal year 2001. 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 second profitable quarter in this fiscal year reflect that
focus. Our revenue of over $3.6 million is a new record for any single quarter.
Our revenue for the three months ended June 30, 2001 is more than twice our
revenue for the same three-month period ended June 30, 2000, and we have earned
$.04 per common share as opposed to a loss of $(.15) per share for the same
period in 2000. We believe our core business is strong. Our contract backlog
continues to be strong and our games continue to perform well in the
marketplace. We believe 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, build a more successful
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 2001 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.
<page>
LICENSES AND CONTRACTS
Thirty-five MDI-licensed lottery promotions were underway in North
America and Australia at the end of the second quarter ended June 30, 2001, with
17 game introductions during the quarter joining another 18 games on sale prior
to the beginning of the quarter. With at least 16 more promotions already
launched after the end of the second quarter or scheduled to launch prior to the
end of the fiscal year, 2001 will mark the first time that lotteries have
launched more than 50 of our proprietary game promotions in a single fiscal
year.
During the quarter ended June 30, 2001, we had active licensed games
on sale in 19 of the 39 government lottery jurisdictions in the United States
and three of the five provincial lotteries in Canada. The quarter also saw the
launch of our first offshore licensed lottery game contracted by the New South
Wales' Lottery Commission.
In addition to the launch of the first MDI-licensed lottery game in New
South Wales, the milestone quarter saw our products continue to break into new
major lottery markets. Following the launch of Harley-Davidson(R) by the
California Lottery (ranked 9th largest lottery in the world in total sales
according to LaFleur's 2000 World Lottery Almanac, TLF Publications, 2000) at
the end of the first quarter, second quarter promotion launches included the
first-ever MDI licensed games to be introduced by the Michigan Lottery
Commission (ranked 18th worldwide). Additionally, in the second quarter, the
Illinois Lottery (ranked 21st worldwide) made final preparations for their first
MDI-licensed game, Harley-Davidson(R), with a mid-July launch.
Some of the licensed games launched during the second quarter ended
June 30, 2001 include:
Indiana Lottery NASCAR Drivers (June 15)
Iowa Lottery NASCAR Drivers (April 9)
Kentucky Lottery NASCAR Drivers (April 30)
Maine Lottery NASCAR Drivers (June 21)
Michigan Lottery Harley-Davidson (April 30)
New Hampshire Lottery Elvis Presley (June 15)
New Jersey Lottery SPAM (April 23)
New Mexico Lottery Harley-Davidson (May 14)
New South Wales
Lotteries Elvis Presley (May 21)
Oregon Lottery Harley-Davidson (June 5)
Pennsylvania Lottery NASCAR Drivers (May 1); Harley-Davidson (June 5)
South Dakota Lottery SPAM (April 30); NASCAR Drivers (May 1)
Wisconsin Lottery Louisville Slugger (April 1); CMT (June 18);
TABASCO (June 25)
Two of MDI's licensed lottery properties, CMT/Country Music Television
and TABASCO, saw their first representation on lottery tickets during the second
quarter of fiscal 2001, with the Wisconsin Lottery's introduction of the scratch
games CMT Jammin' Country and TABASCO Hot Cash.
We have just reached an agreement, in principle, with the Multi-State
Lottery Association ("MUSL"), the consortium of 22 Lotteries that run Powerball,
for what amounts to a first of its kind promotion in the industry. A minimum of
16 of the jurisdictions represented by MUSL have indicated agreement to purchase
a generic Powerball advertising campaign from us starring the American musical
icon Ray Charles. We are currently drafting documents representing our final
agreement with MUSL, however, we cannot provide assurance that these will be
approved and executed by MUSL. This would be the first time that this many
lotteries have attempted to use the same creative entity to promote a lottery
product. We are very excited about the potential that this agreement has for the
Company and we are working on similar projects elsewhere.
We have also reached an agreement, in principle, with the Federation
Internationale De Football ("FIFA"). FIFA sponsers the World Cup soccer
competition, which is the biggest sporting event in the world. We have been
pursuing the World Cup license for some time now. ISL, the organization formerly
representing FIFA, went bankrupt about 90 days ago. The marketing rights,
held by ISL, reverted to FIFA. This presented us with an opportunity to
obtain the World Cup license. We are currently drafting documents representing
our final agreement with FIFA, however, we cannot provide assurance that these
will be approved and executed by FIFA. We believe that if this agreement is
executed it will provide us with tremendous opportunities for international
growth in sales of licensed games.
<table>
Six months ended June 30,
-----------------------------------------------------------
2001 % 2000 %
---- - ---- -
<s> <c> <c> <c> <c>
Revenue $ 6,685,465 100.0% $2,730,863 100.0%
Cost of revenues 3,724,105 55.7% 1,865,363 68.3%
-----------------------------------------------------------
Gross profit 2,961,360 44.3% 865,500 31.7%
Selling, general and administrative expenses 1,785,101 26.7% 1,844,536 67.6%
Terminated merger expenses - 0.0% 727,025 26.6%
Cost of unsuccessful funding 89,633 1.3% - 0.0%
-----------------------------------------------------------
Operating profit (loss) 1,086,626 16.3% (1,706,061) -62.5%
Interest expense 128,745 1.9% 50,488 1.8%
Interest income (8,773) -0.1% (8,989) -0.3%
Other (income) expense (110,166) -1.6% 57,218 2.1%
Gain on sale-investment securities, net (12,669) -0.2% - 0.0%
-----------------------------------------------------------
Income (loss) before provision for income
taxes 1,089,489 16.3% (1,804,778) -66.1%
Provision for income taxes 12,035 0.2% 2,329 0.1%
-----------------------------------------------------------
Net income (loss) $ 1,077,454 16.1% $ (1,807,107) -66.2%
===========================================================
</table>
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Results for the first half of the year ended December 31, 2001 reflect
a 145% increase in revenue as our Harley-Davidson(R) license "leads the pack" of
launching increased revenue and profitability half way through the new year.
Revenue for the six months ended June 30, 2001 was $6,685,500 compared to
$2,730,900 for the six months ended June 30, 2000. Harley-Davidson(R), which
launched in seven states during the six month period ended June 30, 2001,
accounted for 42.3% of our revenue for the 2001 period. This was followed by one
of our newest properties, Elvis(R), which accounted for 15.3% of revenue. Not
far behind were, SPAM(R) (8.8% of revenue), Betty Boop(R) (8.1% of revenue) and
NASCAR(R) Drivers (7.7% of revenue). The remaining 17.8% of revenue was from
seven other licensed properties. We have continued to penetrate new markets.
Sales in one new state alone, California, amounted to $997,000 for the six
months ended June 30, 2001.
<page>
Cost of revenue as a percentage of revenue decreased to 55.7% from
68.3% for the six months ended June 30, 2001 compared to the six months ended
June 30, 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 six months ended June 30, 2001 to
$2,961,400 (44.3% of revenue) compared to $865,500 (31.7 % of revenue) for the
six months ended June 30, 2000. This represents a gross profit percentage
increase of 39.7% over the six months ended June 30, 2000.
Selling, general and administrative expenses were $1,785,100 (26.7% of
revenue) for the six months ended June 30, 2001 compared to $1,844,500 for the
six months ended June 30, 2000. Salaries and employee benefits increased
approximately $135,000 during the first six months of 2001 compared to the same
period in 2000 due to the increased sales staffing to develop our regional sales
reorganization which helped to maintain our sales backlog of $15.5 million as of
June 30, 2001. Total selling general and administrative expenses for the six
months ended June 30, 2001 are lower primarily due to the reduction of lobbying
expenses of $80,000 and $103,000 of employee stock option expense as compared to
the six months ended June 30, 2000.
Costs of unsuccessful funding of $ 89,600 for the six months ended
June 30, 2001 includes legal, accounting and investment banking fees associated
with our unsuccessful placement of our Series C Preferred Stock with Oxford
International, Inc. which is discussed in greater detail in "Item 1 Legal
Proceedings."
Terminated merger expenses for the six months ended June 30, 2000 of
$727,000 relate to our unsuccessful merger with The Lottery Channel, Inc.
Operating income was $1,086,600 (16.3% of revenue) for the six months
ended June 30, 2001 compared to an operating loss of $(1,706,061)(62.5% of
revenue) for the six months ended June 30, 2000. This substantial positive net
change of $2,792,700 is due to the factors described above.
Interest expense was $128,700 for the six months ended June 30, 2001
compared to $50,500 for the six months ended June 30, 2000. This increase in
interest expense is attributable to both interest and amortization of warrant
costs associated with $720,000 of additional short-term debt outstanding during
the six months ended June 30, 2001. All but $260,000 of this debt was paid off
during the second quarter ended June 30, 2001.
Other income was $110,200 for the six months ended June 30, 2001
compared to a $57,200 expense for the six months ended June 30, 2000. This
$110,200 was attributable to the exchange of stock for legal services that was
negotiated during the first quarter of 2001. The $57,200 expense for the six
months ended June 30, 2000 represented legal fees in excess of an inventory loss
judgement favorable to us.
<page>
The gain on sale of securities of $12,669 for the six months ended June
30, 2001 was attributable to the sale of eLot stock held for investment.
For the reasons set forth above, we had income before taxes of
$1,089,500 for the six months ended June 30, 2001 compared to a loss before
taxes of $(1,804,800) for the six months ended June 30, 2000.
The foregoing resulted in a $.10 basic earnings per share and a $.09
diluted earnings per share on net income for the six months ended June 30, 2001.
Had we not incurred the $89,700 of costs attributable to the unsuccessful
placement of our Series C Preferred Stock our basic earnings per share would
have been $.11 and diluted earnings per share would have remained at $.09. For
the six months ended June 30, 2000, we had a basic and diluted loss per share of
$(.20).
<table>
Three months ended June 30,
-------------------------------------------------------------
2001 % 2000 %
---- - ---- -
<s> <c> <c> <c> <c>
Revenue $ 3,563,467 100.0% $1,715,901 100.0%
Cost of revenues 2,004,222 56.2% 1,197,492 69.8%
-------------------------------------------------------------
Gross profit 1,559,245 43.8% 518,409 30.2%
Selling, general and administrative expenses 911,557 25.7% 1,065,757 62.1%
Terminated merger expenses - 0.0% 727,025 42.4%
Cost of unsuccessful funding 89,633 2.5% - 0.0%
-------------------------------------------------------------
Operating profit (loss) 558,055 15.7% (1,274,373) -74.3%
Interest expense 48,531 1.4% 25,350 1.5%
Interest income (6,319) -0.2% (2,225) -0.1%
Other expense - 0.0% 36,441 2.1%
Loss on sale-investment securities, net 11,637 0.3% - 0.0%
-------------------------------------------------------------
Income (loss) before provision for income taxes 504,206 14.1% (1,333,939) -77.7%
Provision for income taxes 4,035 0.1% - 0.0%
-------------------------------------------------------------
Net income (loss) $ 500,171 14.0% $ (1,333,939) -77.7%
=============================================================
</table>
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000.
Results for the second quarter of our new fiscal year ending December
31, 2001 reflect a 108% increase in revenue as our Harley-Davidson(R) license
"leads the pack" of launching increased revenue and profitability into this
year. Revenue for the three months ended June 30, 2001 was $3,563,500 compared
to $1,715,900 for the three months ended June 30, 2000. Harley-Davidson(R),
which launched in four states the second quarter of 2001, accounted for 50.6% of
our revenue. One of our newest properties, Elvis(R), accounted for 14.3% of
revenue. Not far behind were NASCAR(R) Drivers (14.1% of revenue) and SPAM(R)
(11.5% of revenue).The remaining 9.5% represented revenue from seven other
licensed properties.
<page>
Cost of revenues as a percentage of revenue decreased to 56.2% from
69.8% for the three months ended June 30, 2001 compared to the three months
ended June 30, 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 June 30, 2001 to
$1,559,200 (43.8% of revenue) compared to $518,400 (30.2% of revenue) for the
three months ended June 30, 2000. This result represents a gross profit
percentage increase of 45% over the three months ended June 30, 2000.
Selling, general and administrative expenses were $911,600 (25.7% of
revenue) for the three months ended June 30, 2001 compared to $1,065,800 for the
three months ended June 30, 2000. Salaries and employee benefits increased
approximately $76,200 for the three months ended June 30, 2001 due to increased
sales staffing to develop our regional sales reorganization, which has helped to
maintain our sales backlog of $15.5 million as of June 30, 2001. However, total
selling, general and administrative expenses for the three months ended June 30,
2001 are still lower than for the same period ended June 30, 2000 due to a
reduction of lobbying expense of $80,000 and employee stock option expenses of
$103,000 as compared to in the three months ended June 30, 2000.
Costs of unsuccessful funding for the three months ended June 30, 2001
represented legal, accounting and investment banking fees related to our
unsuccessful placement of our Series C Preferred Stock with Oxford
International, Inc. which is discussed in greater detail in "Item 1 Legal
Proceedings"
Terminated merger expenses for the three months ended June 30, 2000 of
$727,000 relate to our unsuccessful merger with The Lottery Channel.
Operating income was $558,100 (15.7% of revenue) for the three months
ended June 30, 2001 compared to an operating loss of $(1,274,400) (74.3% of
revenue) for the three months ended June 30, 2000. This substantial positive net
change of $1,832,500 is due to the factors described above.
Interest expense was $48,500 for the three months ended June 30, 2001
compared to $25,400 for the three months ended June 30, 2000. This increase in
interest expense is attributable to both interest and amortization of warrant
costs associated with $720,000 of additional short-term debt outstanding during
the six months ended June 30, 2001. All but $260,000 of this debt was paid off
during the quarter ended June 30, 2001.
There was no "other expense" for the three months ended June 30, 2001
compared to a $36,400 expense for the three months ended June 30, 2000 which
represented legal fees in excess of an inventory loss judgement favorable to us.
<page>
The loss on sale of investment securities of $11,600 for the three
months ended June 30, 2001 was attributable to the sale of the remaining shares
of eLot stock held for investment. However, we had a total gain of $12,700 on
the liquidation of this investment which took place during the six months ended
June 30, 2001.
For the reasons set forth above, we had income before taxes of $504,200
for the three months ended June 30, 2001 compared to a loss before taxes of
$(1,333,900) for the three months ended June 30, 2000.
The foregoing resulted in a $.04 basic and diluted earnings per share
on net income for the three months ended June 30, 2001. Had we not incurred the
$89,700 of costs attributable to the unsuccessful placement of our Series C
Preferred Stock, our basic and diluted earnings per share would have been $.05.
For the three months ended June 30, 2000 we had a basic and diluted loss per
share of $(.15).
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001, we had cash and cash equivalents of $358,600
compared to $528,200 as of December 31, 2000. This decreased cash position was
in part due to the payment of short-term notes of $460,000 late in the second
quarter ended June 30, 2001. However, accounts receivable were $2,761,100 as of
June 30, 2001 compared to $1,140,900 as of December 31, 2000 reflecting our
increased game launch activity.
As of June 30, 2001, we had a net working capital deficit of
$1,639,900. However, within current liabilities is $3,465,900 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 will not adversely
impact cash flow, except to the extent that we need to purchase merchandise and
incur subsequent fulfillment costs relative to this revenue, which typically
approximates 50% of the related revenue. Without such liability, working capital
would have been $93,050.
As part of our 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
$269,025.
Our indebtedness as of June 30, 2001, was $477,700, consisting of an
installment note payable and a short-term note of $260,000 both payable to to
our President and Chief Executive Officer. As stated earlier, we repaid $460,000
of short-term loans to unrelated parties late in the second quarter ended June
30, 2001.
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 interest payments which would have
been due through September 21, 2001.
As more fully disclosed elsewhere in April 2001, we entered into an
agreement to sell Series C Convertible Preferred Stock for $3.2 million. The
funds were never received and attempts were made to restructure the financing
transaction. We agreed to accept securities in lieu of cash. Ultimately, we
determined to exercise our right to exchange these securities for our stock
under the July 9, 2001 Agreement.
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.
<page>
SEASONALITY AND REVENUE FLUCTUATIONS
Our business is not seasonal. However, our revenues are expected to
fluctuate as individual license-based promotions commence or wind down and
terminate. The useful life of a promotion is generally relatively short as the
novelty of the game or the popularity of the licensed material wanes over time.
In addition, our licenses (which are generally for 1.5 to 3 years) terminate at
various times over the next several years. The life span of a promotion, the
timing of agreements with the lotteries to run promotions, the acquisition of
new licenses and the commencement of new promotions are unpredictable. Also,
since most lotteries are government agencies with lottery executives appointed
by the state's governor or other high ranking official, opportunities or
projects in progress can be slowed after an election if the incumbent governor
is not reelected. Accordingly, period to period comparisons may not be
indicative of future results.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On August 6, 2001, we filed a Motion For Temporary Restraining
Order and Preliminary Injunction and a Verified Complaint in the United States
District Court of the District of Maryland against Oxford International, Inc.and
its principal, Gregory C. Dutcher.
We asked the court to enter an Order and Decree to the effect that
Oxford and Mr. Dutcher (and their officers, agents, servants, employees,
attorneys and any persons in active concert or participation with them) shall
not transfer, alienate, sell, gift, pledge without giving notice of our right to
exchange, hypothecate, give, grant an option as to, or otherwise dispose in any
way any of our shares of stock that we transferred to Oxford. In addition, we
requested the court to set a date for a Preliminary Injunction maintaining such
an Order and Decree, or alternatively, entering a mandatory injunction causing
the parties to exchange our stock for the securities we received from Oxford.
The court held a telephone conference on August 6, 2001. During the
telephone conference, according to the order, Mr. Dutcher stated that he had no
intention of transferring of our stock within the next 20 days. At 4:00 p.m. on
August 6, 2001, the court ordered, among other things, that Oxford and Mr.
Dutcher, and their officers, agents, servants, employees, attorneys, and any
person in active concert or participation with them, shall not transfer or
otherwise dispose in any way of any shares of our stock that were transferred to
Oxford by us. The Temporary Restraining Order issued by the court will expire at
5 p.m. on August 16, 2001, unless within such time the order is extended for
good cause, or unless Oxford and Mr. Dutcher consent to an extension. A copy of
the Temporary Restraining Order has been forwarded to Prudential Securities
Inc., whom we believe has physical possession of the Series C Preferred shares
involved in this order.
In our Verified Complaint, we alleged claims of federal and state
securities fraud and common law fraud, claims of misrepresentation and breach of
contract, and other claims. We asked for remedies including specific performance
that Oxford and Mr. Dutcher transfer our stock to us, rescission, monetary
damages and injunctive relief, as referenced above.
Subsequently, by agreement of the parties, the material terms of the
August 6, 2001 Temporary Restraining Order have been extended to September 7,
2001, with the parties to confer with the Judge during the week of September 4,
2001, to schedule a Preliminary Injunction hearing. Oxford and Mr. Dutcher,
their officers, agents, servants employees, attorneys, and any person in active
concert or participation with them, still cannot transfer or otherwise dispose
of our stock during that time period. Information concerning the contents of
this most recent Order are being forwarded to Prudential Securities, Inc., and a
copy of that Order will be transmitted to Prudential Securities, Inc. as well,
upon receipt of a written Order.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
We entered into a Stock Purchase Agreement with Oxford International,
Inc. with an effective date of April 25, 2001. Pursuant to that Agreement, we
issued to Oxford 2,100 shares of Series C Preferred Stock, representing
approximately 15.8% of the outstanding common stock of MDI on an as converted
basis. We anticipated receipt of $3,200,000 in cash from this transaction.
Oxford failed to pay the consideration of $3,200,000 required by the
April 25, 2001 Stock Purchase Agreement, and because of this failure, we did not
release its stock to Oxford and did not consider the transaction consummated.
We entered into an "Agreement" with Oxford with an effective
date of July 9, 2001 whereunder we agreed to accept securities of two
publicly traded companies valued in excess of $3.2 million, by reference to the
closing prices of such securities, as of the date of its receipt of the
securities in lieu of the cash investment Oxford agreed to make under the April
25, 2001 Stock Purchase Agreement. Among other things, Oxford agreed that it
would not be entitled to nominate one member to our Board of Directors; that it
could not require performance of any matters under the Stock Purchase Agreement
and Certificate of Designations up to the date of July 9, 2001 Agreement,
including but not limited to payments of dividends; and that the Certificates of
Designation was null and void.
The Series C Preferred Stock originally had a liquidation preference
of $1,523.81 per share, paid a cumulative preferred dividend at the rate of 8%
per annum, payable in cash or common stock at our discretion, and was
convertible into an aggregate of 2,100,000 shares of common stock, subject to
adjustment only for events such as stock splits, stock dividends and similar
events and was not adjustable or resettable based on the market price of the
common stock. If not previously converted by Oxford, five hundred twenty five
(525) shares of the Series C Preferred Stock would have been automatically
converted into common stock no later than 120 days from the issue date, and
after a registration statement covering the full amount of the shares of common
stock underlying the Series C Preferred Stock had been filed by us with the
Securities and Exchange Commission, an aggregate of five hundred twenty five
(525) shares of Series C Preferred Stock would have been automatically converted
into common stock every ninety (90) days. We were not permitted to create or
increase the authorized number of shares of any class or series of stock ranking
prior to or on parity with the Series C Preferred Stock either as to dividends
or liquidation without approval of the holders of at least a majority of the
then outstanding shares of Series C Preferred Stock.
Oxford had the option of nominating one member of our Board of
Directors reasonably acceptable to us so long as the sum of (i) the aggregate
number of shares of common stock issuable upon conversion of the Series C
Preferred Stock and (ii) aggregate number of shares of common stock owned by
Oxford and its subsidiaries was equal to or greater than 2,100,000 and Oxford
and its subsidiaries beneficially owned greater than ten percent (10%) of the
number of shares of our common stock outstanding.
In connection with the transaction, we issued an aggregate of 42,000
shares of common stock as an origination fee to persons affiliated with Oxford.
We also contemplated paying Venture Partners Capital, LLC, a registered
broker-dealer with whom our former Executive Vice President of Finance is
affiliated, a $256,000 cash fee. Such fee was not paid due to the circumstances
surrounding the transaction. See "Item 1. Legal Proceedings." In addition,
warrants previously issued to Venture Partners Capital, LLC became exercisable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on June 8, 2001.
The following matters were voted upon at the Annual Meeting of Stockholders:
1. Proposal to amend the Company's Certificate of Incorporation to
authorize staggered terms for election of directors, under which the Board of
Directors will be divided into three classes, Class I, Class II and Class III as
nearly equal in number as possible, to serve initial terms of one, two and three
years, respectively, with each director being assigned to one of the three
classes as provided by the Board.
NUMBER OF SHARES VOTED
FOR AGAINST ABSTAIN
- --------------------------------------------------------------
7,672,705 14,255 504
2. Election of a Board of Directors.
<table>
NAME NUMBER OF SHARES VOTED
----------------------
CLASS FOR AGAINST ABSTAIN
- ---------------------------------------------------------------------------------------------
<s> <c> <c> <c>
Steven M. Saferin III 9,985,869 0 108
Robert J. Wussler I 9,987,871 0 406
Kenneth M. Przysiecki III 9,935,871 0 50,006
Todd P. Leavitt II 9,987,869 0 308
S. David Fineman I 9,987,871 0 306
William G. Malloy II 9,987,871 0 306
</table>
3. Proposal to increase by 800,000 shares the aggregate number of shares
for which stock options may be granted under the Company's 1998 Stock Option and
Award Plan.
NUMBER OF SHARES VOTED
FOR AGAINST ABSTAIN
- --------------------------------------------------------------
7,547,071 138,682 1,712
4. Ratification of the appointment of Arthur Andersen LLP as the
independent auditors and accountants for the Company for the year ending
December 31, 2001.
NUMBER OF SHARES
FOR AGAINST ABSTAIN
- --------------------------------------------------------------
9,974,486 13,860 781
<page>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 4.1 Certificate of Designations for
Series C Preferred Stock of MDI
Entertainment (Incorporated by
reference to Form 8-K filed May 2,
2001).
Exhibit 10.1 Stock Purchase Agreement, dated as
of April 25, 2001, between MDI
Entertainment, Inc. and Oxford
International, Inc. (Incorporated by
reference to Form 8-K filed May 2,
2001).
Exhibit 10.2 Agreement, dated July 9, 2001,
between MDI Entertainment, Inc and
Oxford International, Inc.
(Incorporated by reference to Form
8-K filed July 16, 2001).
(b) Reports on Form 8-K Filed on May 1, 2001 (Item 5: Other
Events-Sale of Series C Preferred
Stock to Oxford International, Inc.
Oxford International, Inc.).
Filed on May 2, 2001 (Item 5: Other
Events-Stock Purchase Agreement with
Oxford International, Inc.).
Filed on July 16, 2001 (Item 5:
Other Events- Amendment of Financing
Agreement regarding Oxford
International, Inc.).
Filed on July 24, 2001 (Item 5:
Other Events-NASDAQ halts trading of
MDI Entertainment, Inc. securities -
Press release dated July 19, 2001).
Filed on July 31, 2001 (Item 5:
Other Events- MDI exercises its
option to exchange stock it received
from Oxford International,Inc. for
MDI Stock issued to Oxford;
Correction to previously reported
date of securities trade halt by
NASDAQ).
Filed on August 8, 2001 (Item 5:
Other Events- Officer Changes and
Filing of Temporary Restraining
Order, Preliminary Injunction and
Verified Complaint against Oxford
International, Inc. and Gregory C.
Dutcher).
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: August 14, 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
Vice President of Accounting and Administration, Secretary and Director
(Principal Financial Officer)
EXHIBIT INDEX
- -------------------------------------------------------------------------------
No. Description
4.1 Certificate of Designations for
Series C Preferred Stock of MDI
Entertainment (Incorporated by
reference to Form 8-K filed May 2,
2001).
10.1 Stock Purchase Agreement, dated
April 25, 2001, between MDI
Entertainment, Inc. and Oxford
International, Inc. (Incorporated by
reference to Form 8-K filed May 2,
2001).
10.2 Agreement, dated July 9, 2001,
between MDI Entertainment, Inc and
Oxford International, Inc.
(Incorporated by reference to Form
8-K filed July 16, 2001).