SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED August 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number:
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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)
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(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 No X
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As of October 12, 1998, 7,776,500 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 SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED August 31, 1998
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements............................................................................3
Consolidated Balance Sheets as of August 31, 1998 (unaudited) and May 31, 1998.................................3
Consolidated Statements of Operations (unaudited) for the three months ended August 31,
1998 and 1997..................................................................................................5
Consolidated Statement of Stockholders' Deficit as of August 31, 1998 (unaudited) and
May 31, 1998...................................................................................................6
Consolidated Statements of Cash Flows (unaudited) for the three months ended August 31,
1998 and 1997..................................................................................................7
Notes to Unaudited Consolidated Financial Statements...........................................................8
Item 2. Management's Discussion and Analysis or Plan of Operation......................................10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...............................................................14
Signatures....................................................................................................15
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
MDI Entertainment, Inc. and Subsidiaries
Consolidated Balance Sheets
August 31, May 31,
1998 1998
---------- ----------
(unaudited)
ASSETS
Cash and cash equivalents $334,474 $960,398
Accounts receivable 608,175 317,598
Inventory 449,695 417,651
Prepaid expenses 139,379 30,203
---------- ----------
Total current assets 1,531,723 1,725,850
Property and equipment, net 101,044 107,852
Marketing costs, net 175,328 213,077
Other 73,811 52,643
---------- ----------
Total other assets 249,139 265,720
Total assets $1,881,906 $2,099,422
---------- ----------
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
3
MDI Entertainment, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
August 31, May 31,
1998 1998
------------ ------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $355,024 $346,491
Accrued liabilities 1,269,156 1,320,165
Short-term borrowings 50,000 123,754
Deferred revenue (Note 2) 2,339,827 2,906,047
------------ ------------
Total current liabilities $4,014,007 $4,696,457
Long-term debt 27,000 27,000
Minority interest 35,029 35,268
------------ ------------
Total liabilities 4,076,036 4,758,725
Contingencies (Note 5) - -
Common stock, $0.001 par value,
200,000,000 shares authorized
7,776,500 issued and outstanding 7,777 7,777
Additional paid-in capital 348,348 348,348
Accumulated deficit (2,550,255) (3,015,428)
------------ ------------
Total stockholders' deficit (2,194,130) (2,659,303)
Total liabilities and
stockholders' equity $5,957,942 $6,858,147
------------ ------------
------------ ------------
The accompanying notes are an integral part of these consolidated
financial statements.
4
MDI Entertainment, Inc. and Subsidiaries
Consolidated Statements of Operations
Three months ended
August 31,
1998 1997
--------- ---------
(unaudited) (unaudited)
Revenues $2,102,324 $291,199
Cost of revenues 1,096,139 212,737
--------- ---------
Gross profit 1,006,185 78,462
Selling, general and administrative expenses 546,794 431,646
--------- ---------
Operating profit (loss) 459,391 (353,184)
Interest (income) expense, net (6,366) 8,016
Other income, net (192) (3,335)
Minority interest (243) 368
Net income (loss) before income tax expense 466,192 (358,233)
Income tax expense (Note 4) 1,019 5,650
--------- ---------
Net income (loss) $465,173 $(363,883)
--------- ---------
--------- ---------
Basic earnings (loss) per common share (Note 3) $0.06 N/A
The accompanying notes are an integral part of these consolidated financial
statements.
5
MDI Entertainment, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit
As of August 31, 1998 and May 31, 1998
- - - - - - - - - - - - - - - - - - - -
Par Additional Retained
* Value Paid-In Earnings
Shares $.001 Capital (Deficit) Total
------ ----- ------- --------- -----
BALANCE, May 31, 1998 7,776,500 $ 7,777 $ 348,348 $ (3,015,428) $ (2,659,303)
Net profit - - - $ 465,173 $ 465,173
---------- ------- ---------- --------------- ----------------
BALANCE, August 31, 1998 7,776,500 $ 7,777 $ 348,348 $ (2,550,255) $ (2,194,130)
---------- ------- ---------- --------------- ----------------
---------- ------- ---------- --------------- ----------------
* 200,000,000 shares authorized
The accompanying notes are an integral part of these consolidated financial
statements.
6
MDI Entertainment, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three months ended
August 31,
1998 1997
----------------- ----------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 465,173 $ (363,883)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Minority interest (243) (3,335)
Depreciation and amortization 49,111 60,165
Change in assets and liabilities:
Increase in accounts receivable (290,577) (423,300)
(Increase) decrease in inventory (32,044) 35,709
(Increase) decrease in prepaid expenses (109,176) 12,756
Increase in marketing costs (3,050) (48,394)
(Increase) decrease in other assets (21,168) 29,525
Increase (decrease) in accounts payable 8,553 (43,521)
Increase (decrease) in accrued expenses (51,009) 98,558
Decrease in taxes payable - (44,322)
(Decrease) increase in deferred revenue (566,220) 615,684
----------------- ----------------
Net cash used for operating activities (550,670) (74,358)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,500) -
----------------- ----------------
Net cash used for investing activities (1,500) -
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of financing arrangements (73,754) (92,951)
Borrowings from short-term debt - 200,000
Borrowings from stockholder - 29,116
----------------- ----------------
Net cash provided by (used for) financing activities (73,754) 136,165
----------------- ----------------
NET INCREASE (DECREASE) IN CASH (625,924) 61,807
CASH, beginning of the period 960,398 8,190
----------------- ----------------
CASH, end of the period $ 334,474 $ 69,997
----------------- ----------------
----------------- ----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for -
Interest $ 3,264 $ 40,578
Income taxes $ 181 $ 33,769
Non-cash items:
Issuance of note in connection with exchange
transaction to shareholders $ - $ 300,000
The accompanying notes are an integral part of these consolidated financial
statements.
7
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
1. Presentation of Unaudited Interim Consolidated Financial Statements.
Information in the accompanying interim consolidated financial
statements and notes to the financial statements for the three-month periods
ended August 31, 1998 and 1997 is unaudited. The accompanying interim unaudited
consolidated financial statements have been prepared by the Company in
accordance with generally accepted accounting principles and Regulation S-B.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended August 31, 1998, are not
necessarily indicative of the results that may be expected for the year ending
May 31, 1999. 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 period ended May 31,
1998.
2. Revenue Recognition
Revenue is derived by the Company from contracts with the state
lotteries for scratch ticket games based on licensed brand names and
entertainment properties. The Company provides the lotteries with second chance
prize packages consisting of grand prizes and various consolation prizes in
addition to marketing support related to each of the games. Most of the lottery
contracts require the lotteries to pay the Company in full upon the signing of
the contract. The Company defers this revenue and recognizes the revenue when
the terms of the applicable game are satisfied (i.e., the shipment of contracted
merchandise).
3. Earnings per Share
Basic earnings per common share are based on the average number of
common shares outstanding during the fiscal year. Diluted earnings per common
share include, in addition to the above, a dilutive effect of common share
equivalents during the fiscal year. Common share equivalents represent dilutive
stock options using the treasury method. The Company had no common share
equivalents during the periods ended August 31, 1998 and 1997, respectively. The
number of shares used in the earnings per common share computation for the 1998
and 1997 periods were as follows:
Three Months Ended
August 31,
1998 1997
---- ----
Shares: Basic weighted average common
shares outstanding 7,776,500 N/A*
*Due to the fact that the Company did not issue shares associated with its
reverse mergers until August 1997, an earnings per share computation is not
relevant for the period ended August 31, 1997.
8
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (Continued)
4. 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 its tax return. SFAS 109 provides for
recognition of a deferred tax asset for all future deductible temporary
differences that, more likely than not, will provide the Company a future
benefit. As of August 31, 1998 and May 31, 1998, the Company had a significant
deferred tax asset, primarily as a result of net operating loss carry-forwards.
The Company has established a valuation allowance for the full amount
of this deferred tax asset. No provision for deferred taxes was recorded because
there was no significant item which would result in a deferred tax liability.
The Company has a significant net operating loss carry-forward at
August 31, 1998 and May 31, 1998. Due to such carry-forward, the Company
reported minimal tax expense at August 31, 1998 and May 31, 1998, respectively.
5. Contingencies
The Company is involved in various lawsuits incidental to its business.
The Company believes that these proceedings, in the aggregate, will not have a
material adverse effect on the Company's operations or financial position.
9
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD LOOKING STATEMENTS THAT
INVOLVE CERTAIN RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS.
Item 2. Management's Discussion and Analysis or Plan of Operations
The following discussion and analysis should be read in conjunction
with the Company's 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 the Company's current business strategy and the Company's 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 the Company and its
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 contained in the Company's
Registration Statement on Form 10-SB under the caption "Description of
Business--Risk Factors." The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which statements are
made pursuant to the Private Litigation Reform Act of 1995 and, as such,
speak only as of the date made.
The Company's principal business has been the scratch ticket segment
of the government lottery industry. The Company is a leader in designing and
marketing instant scratch ticket games based on licensed brand names and
entertainment properties and the Company's lottery promotions feature such
properties licensed by the Company. 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 logoed
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, -Registered Trademark- Harley-Davidson 1200 Sportster
motorcycles.
The Company developed its strategy of identifying such properties in
early 1996. Prior to that time, the Company had developed a series of promotions
that utilized popular videotapes, compact discs and audiocassettes as second
chance lottery prizes. Those promotions enabled the Company 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.
The Company derives over ninety-five percent (95%) of its revenues
from lotteries in two distinct ways. First, the Company will usually charge a
lottery a license and royalty fee to utilize a particular licensed property
as a lottery game. License fees are a fixed assessment while royalties are a
percentage of the printing cost of the tickets. License fees typically
include an up-front license fee and a royalty based on the manufacturing
costs of tickets. Manufacturing costs of tickets usually range from $10.00
per thousand to $30.00 per thousand. Actual costs depend on the size of the
ticket and the quantity printed. Ticket quantities range from about one
million to as many as 60 million with an average quantity of about five
million. The Company's second source of lottery revenue is the sale of logoed
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.
10
Typically, the Company purchases merchandise from other licensees of
the property and resells the merchandise to the lottery at a price that is
designed to include overhead costs, profit, shipping and handling and any
marketing support the Company provides the lottery such as brochures, posters or
other advertising assistance for which there are no separate charges.
The Company is in negotiations to obtain additional properties and
expects to reach several agreements over the next six to 12 months; however
there can be no assurance that such agreements will actually be reached. Some of
these agreements may require the expenditures of significant sums as up-front
advances.
The Company is finalizing a joint venture with Fancaster, Inc., a
marketing and sales company, to establish networks of alpha-numeric pagers for
the purpose of selling banner advertising on the various news slots available on
such pagers. Should an agreement be finalized, the Company does not expect to
generate significant revenue until the second quarter of fiscal year 2000.
However, there can be no assurance that an agreement will be finalized or that
the joint venture will produce significant revenue at such time or at all.
Three Months Ended August 31
1998 % 1997 %
---- - ---- -
Total revenue........................... $ 2,102,324 100.0% $ 291,199 100.0%
Cost of revenue......................... 1,096,139 52.1% 212,737 73.1%
Gross profit............................ 1,006,185 47.9% 78,462 26.9%
Selling, general and
Administrative expenses.............. 546,794 26.0% 431,646 148.2%
Operating income (loss)................. 459,391 21.9% (353,184) -121.3%
Interest expense........................ 486 -0.0% 15,317 -5.3%
Interest income......................... (6,852) 0.3% (7,031) 2.5%
Other income, net....................... (192) 0.0% (3,335) 1.1%
Minority interest....................... (243) 0.0% 368 -0.1%
Net income (loss) before income
tax expense........................... 466,192 22.2% (358,233) -123.0%
Income tax expense...................... 1,019 -0.0% 5,650 -1.9%
Net income (loss)....................... $ 465,173 22.1% $ (363,883) -125.0%
Three Months Ended August 31, 1998 Compared to Three Months Ended August 31,
1997
Results for the three months ended August 31, 1998 reflect revenue
of $2,102,000 as compared to $291,000 for the same period in 1997. This sales
increase reflects the shift of the Company's business to licensed promotions.
Revenue during the 1998 period was derived primarily from sales based on
three entertainment-based or brand name properties, including Harley-Davidson
- -Registered Trademark- (65% of sales), Wheel of Fortune -Registered Trademark-
(17% of sales) and Star Trek (17% of sales).
11
Cost of revenue as a percentage of sales decreased to 52.1% from 73.1%
for the three months ended August 31, 1998 compared to the same period in 1997.
The three-month period ended August 31, 1998 more accurately reflects the
current cost to sales ratio of the Company's licensed promotions. The low sales
and "base" marketing promotion costs that are semi-fixed and could not be
properly absorbed in the three-month period ended August 31, 1997 resulted in
the significantly higher cost to sales ratio of 73.1%.
Gross profit increased in the three months ended August 31, 1998 to
$1,006,000 (47.9% of sales) from $78,000 (26.9% of sales) in the same period in
1997 due to the increased sales volume and a more representative matching of
operational costs to revenue in the 1998 period, as mentioned in the discussion
of cost of revenue above.
Selling, general and administrative expenses were $547,000 (26.0% of
sales) for the three months ended August 31, 1998 compared to $432,000 (148.2%
of sales) for the same period in 1997. Salary expense increased by $68,000 in
the 1998 period due to the Company's efforts to add human resources to properly
manage the growth expected to continue during fiscal year 1999. The decrease as
a percentage of sales reflects fixed or partially fixed costs spread over a
greater revenue base.
Operating income was $459,000 (21.9% of sales) for the three months
ended August 31, 1998 compared to an operational loss of $353,000 for the same
period in 1997. This was principally due to the cost absorption realized by the
significantly increased sales volume of the 1998 period over the 1997 period.
Interest expense was $500 for the three months ended August 31, 1998
compared to $15,300 for the same period in 1997. This reduction is attributable
to a reduction in the principal amount of debt outstanding.
For the reasons set forth above, the Company had a profit of $466,000
before taxes for the period ended August 31, 1998 as compared to a loss of
$358,000 for same period in 1997.
Liquidity And Capital Resources
As of August 31, 1998, the Company had cash and cash equivalents of
$334,000 compared to $70,000 as of the same period in 1997. The increase was due
principally to a profitable first quarter. On August 31, 1998, the Company had a
net working capital deficit of $2,450,000. However, $2,340,000 of this deficit
was deferred revenue (i.e., revenue as to which the Company received payments,
but which is recorded as a deferred revenue liability until the shipment of
contracted merchandise). Accordingly, such liability will not adversely impact
cash flow and, without such liability, the working capital deficit would have
been $110,000.
On August 31, 1997, the Company had a net working capital deficit of
$989,000. However, $616,000 of this deficit was deferred revenue (see
explanation above). Accordingly, such liability did not adversely impact cash
flow and without such liability the working capital deficit would have been
$373,000. The improvement in the three months ended August 31, 1998 was
primarily due to increased business activity and the billing and collection of
contracts either totally or partially in advance of contract performance.
12
The cash requirements of funding the Company's growth have historically
exceeded cash flow from operations. Accordingly, the Company has satisfied its
capital needs primarily through debt and equity financings, as well as cash flow
from operations.
The Company's outstanding indebtedness as of August 31, 1998 was
$77,000 represented by two debt instruments, one at 10% due in August 2001 and
the other at no interest due in November 1998. Subsequent to August 31, 1998,
the Company's indebtedness has not changed other than from making scheduled
principal payments since such date.
The Company does not have any material capital commitments and does not
currently anticipate making any substantial expenditures other than in the
normal course of business activity, including the procurement of new licenses.
Licensed Properties
The Company has entered into nine separate contracts with eight
lotteries based on the Harley-Davidson -Registered Trademark- property, with
a combined total of over $5 million in revenue, a majority of which is
expected to be generated in fiscal 1999. The Company secured the
Harley-Davidson -Registered Trademark- license in December 1997 and will
continue to aggressively market the property to lotteries throughout the
United States and Canada.
The Company's Wheel of Fortune -Registered Trademark- license
expires in November 1998 and the Company is in discussion with Wheel of
Fortune -Registered Trademark- representatives to extend that license. Two
additional lotteries have agreed to launch Wheel of Fortune -Registered
Trademark- games during the fiscal year ending May 31, 1999.
The Company's Star Trek property, which has been used or is scheduled
to be used by a total of ten lotteries, is beginning to decline in popularity.
The Company does not expect to aggressively pursue additional Star Trek
contracts.
The Company has recently signed a new licensing agreement with the
organizers of Times Square 2000, who are running the Times Square ball drop to
mark the start of the new millennium. The Company will commence aggressive
marketing of the Times Square 2000 property to the lottery industry worldwide.
However, the Company anticipates most revenues from the property will be
generated in the second and third quarters of the fiscal year ending May 31,
2000 due to the theme of the property.
Seasonality and Revenue Fluctuations
The Company's business is not seasonal. However, the Company's 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, the Company's 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. Accordingly, period to period comparisons may not
be indicative of future results.
13
Year 2000
Certain of the Company's computer systems and software interpret the
year 2000 as the year 1980 or some other date. The operating systems generally
employed by the Company include Windows 95 and DOS, all of which are Year 2000
compliant. The "SBT" Accounting and Operational software programs require
software updates or modifications to address the Year 2000 problem. The
Company's computer consultants will be installing modifications to address the
Year 2000 issue at no substantial charge to the Company. The Company anticipates
that installation of Year 2000 compliant software will be completed by the end
of the fiscal year ending May 1999. The Company does not believe that the Year
2000 problem will have a material adverse effect on the Company's operations;
however, no assurance can be given that the software updates will resolve the
problem on the contemplated schedule or at all.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 11 Statement re: computation of per share earnings (included in
Note 3 of the "Notes to Unaudited Consolidated Financial
Statements")
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K (None)
14
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: October 15, 1998
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 and Secretary
and Director
(Principal Financial Officer)
15