SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1998.
------------------
[ ] 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 No X
As of January 14, 1999, 7,776,500 shares of the issuer's common stock were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
__ __
1
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1998
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...........................................................................3
Consolidated Balance Sheets as of November 30, 1998 (unaudited) and May 31, 1998.....................3
Consolidated Statements of Operations (unaudited) for the six months ended
November 30, 1998 and 1997...........................................................................4
Consolidated Statements of Operations (unaudited) for the three months ended
November 30, 1998 and 1997...........................................................................5
Consolidated Statement of Shareholders' Deficit as of November 30, 1998 (unaudited)
and May 31, 1998....................................................................................6
Consolidated Statements of Cash Flows (unaudited) for the six months
ended November 30, 1998 and 1997.....................................................................7
Notes to Unaudited Consolidated Financial Statements.................................................8
Item 2. Management's Discussion and Analysis...........................................................10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..............................................................17
Signatures..........................................................................................18
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 30, May 31,
1998 1998
---------------- ---------------
(unaudited)
ASSETS
Cash and cash equivalents $ 538,792 $ 960,398
Accounts receivable 1,203,301 317,598
Inventory 487,704 417,651
Prepaid expenses 180,875 30,203
---------------- ---------------
Total current assets 2,410,672 1,725,850
Property and equipment, net 96,771 107,852
Licensing costs, net 245,189 213,077
Other 104,248 52,643
---------------- ---------------
Total other assets 349,437 265,720
---------------- ---------------
Total assets $ 2,856,880 $2,099,422
---------------- ---------------
---------------- ---------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Accounts payable $ 344,283 $ 346,491
Accrued liabilities 1,139,581 1,320,165
Notes payable - current portion 9,000 123,754
Deferred revenue (Note 2) 3,085,717 2,906,047
---------------- ---------------
Total current liabilities 4,578,581 4,696,457
Note payable 15,750 27,000
Minority interest 35,029 35,268
---------------- ---------------
Total liabilities 4,629,360 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 (2,128,605) (3,015,428)
---------------- ---------------
Total shareholders' deficit (1,772,480) (2,659,303)
---------------- ---------------
Total liabilities and
shareholders' deficit $ 2,856,880 $2,099,422
---------------- ---------------
---------------- ---------------
The accompanying notes are an integral part of these consolidated financial
statements.
3
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six months ended
November 30,
1998 1997
--------------- --------------
(unaudited) (unaudited)
Revenue $4,106,254 $608,694
Cost of revenue 2,168,206 405,978
--------------- --------------
Gross profit 1,938,048 202,716
Selling, general and administrative expenses 1,031,569 832,479
--------------- --------------
Operating income (loss) 906,479 (629,763)
Interest (income) expense, net (11,301) 8,504
Other expense, net -- 3,128
Minority interest (243) (5,086)
--------------- --------------
Net income (loss) before income tax expense 918,023 (636,309)
Income tax expense (Note 4) 31,200 5,700
--------------- --------------
Net income (loss) $ 886,823 $ (642,009)
--------------- --------------
--------------- --------------
Basic earnings
per common share (Note 3) $ 0.11 N/A
Diluted earnings
per common share (Note 3) $ 0.11 N/A
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
November 30,
1998 1997
--------------- --------------
(unaudited) (unaudited)
Revenue $2,003,929 $ 317,495
Cost of revenue 1,072,067 193,241
--------------- --------------
Gross profit 931,862 124,254
Selling, general and administrative expenses 484,775 400,833
--------------- --------------
Operating income (loss) 447,087 (276,579)
Interest (income) expense, net (4,935) 488
Other expense, net
192 2,760
Minority interest
-- (1,751)
--------------- --------------
Net income (loss) before income tax expense 451,830 (278,076)
Income tax expense (Note 4) 30,180 50
--------------- --------------
Net income (loss) $ 421,650 $(278,126)
--------------- --------------
--------------- --------------
Basic earnings
per common share (Note 3) $ 0.05 $ (0.04)
Diluted earnings $ 0.05 $ (0.04)
per common share (Note 3)
The accompanying notes are an integral part of these consolidated financial
statements.
5
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
As of November 30, 1998 (Unaudited) 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 income -- -- -- 886,823 886,823
----------------------------------------------------------------------
BALANCE, November 30, 1998 7,776,500 $ 7,777 $348,348 $(2,128,605) $(1,772,480)
----------------------------------------------------------------------
----------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
6
MDI ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended
November 30,
1998 1997
-------------- --------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 886,823 $(642,009)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Minority interest (243) (5,086)
Depreciation and amortization 67,738 110,074
Change in assets and liabilities:
Increase in accounts receivable (885,703) (160,599)
(Increase) decrease in inventory (70,053) 3,911
(Increase ) decrease in prepaid expenses (150,672) 5,019
Increase in marketing costs (82,964) (70,104)
(Increase) decrease in other assets (51,601) 38,897
Decrease in accounts payable (2,204) (185,545)
(Decrease) increase in accrued expenses (210,715) 138,038
Increase (decrease) in taxes payable 30,129 (44,322)
Increase in deferred revenue 179,670 740,323
-------------- --------------
Net cash used for operating activities (289,795) (71,403)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment
(5,807) (1,268)
-------------- --------------
Net cash used for investing activities (5,807) (1,268)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of financing arrangements (123,754) (177,291)
Repayment of note payable (2,250) --
Borrowings from long-term debt -- 200,000
Repayment of borrowings from stockholder -- (45,000)
Borrowings from stockholder -- 60,000
Proceeds from sale of stock -- 340,201
-------------- --------------
Net cash provided by (used for)
financing activities (126,004) 377,910
-------------- --------------
NET INCREASE (DECREASE) IN CASH (421,606) 305,239
CASH, beginning of the period 960,398 8,190
-------------- --------------
-------------- --------------
CASH, end of the period $ 538,792 $ 313,429
-------------- --------------
-------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for:
Interest $ 3,572 $ 43,296
Income taxes $ 1,071 $ 35,939
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 FOR PERIOD ENDED NOVEMBER
30, 1998
1. PRESENTATION OF UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
Information in the accompanying interim consolidated financial
statements and notes to the financial statements for the six-month periods ended
November 30, 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 six month period ended November 30, 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 year 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 the games. Many 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 period. 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 188,679 and 101,415
common share equivalents during the three and six month periods ended November
30, 1998. There were no common share equivalents for these same periods in 1997.
The number of shares used in the earnings per common share computation
for the 1998 and 1997 periods were as follows:
Three Months Ended Six Months Ended
November 30, November 30,
1998 1997 1998 1997
---- ---- ---- ----
Shares: Basic weighted average common
shares outstanding 7,776,500 7,696,500 7,776,500 N/A
Diluted weighted average common
shares outstanding 7,965,179 7,696,500 7,877,915 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 aggregate six-month period ended November 30, 1997.
8
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 significant deferred tax asset for all future deductible
temporary differences that, more likely than not, will provide the Company a
future benefit. As of November 30, 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 tax liability 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
November 30, 1998 and May 31, 1998. Due to such carry-forward, the Company
reported minimum tax expense at November 30, 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
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 is 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 licensed 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 up-front advances.
The Company continues to review the possibility of a joint venture with
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.
SIX MONTHS ENDED NOVEMBER 30
---------------------------------------------------------
1998 % 1997 %
---- - ---- -
Total revenue $ 4,106,254 100.0% $ 608,694 100.0%
Cost of revenues 2,168,206 52.8% 405,978 66.7%
Gross profit 1,938,048 47.2% 202,716 33.3%
Selling, general and
Administrative expenses 1,031,569 25.1% 832,479 136.8%
Operating income (loss) 906,479 22.1% (629,763) -103.5%
Interest expense 486 0.0% 26,203 4.3%
Interest income (11,787) -0.3% (17,699) -2.9%
Other expense, net -- 0.0% 3,128 0.5%
Minority interest (243) 0.0% (5,086) -0.8%
Net income (loss) before income tax
expense 918,023 22.4% (636,309) -104.5%
Income tax expense 31,200 0.8% 5,700 0.9%
Net income (loss) $ 886,823 21.6% $(642,009) -105.5%
11
SIX MONTHS ENDED NOVEMBER 30, 1998, COMPARED TO SIX MONTHS ENDED NOVEMBER 30,
1997
Results for the six months ended November 30, 1998 reflect
revenue of $4,106,000 as compared to $609,000 for the same period in 1997.
This revenue increase reflects the successful shift of the Company's business
to licensed promotions. Revenue during the six-month period ended November
30, 1998 was derived primarily from sales based on four entertainment-based
or brand name properties including Harley-Davidson-Registered Trademark- (62%
of revenue), Wheel of Fortune-Registered Trademark-(16% of revenue), Star
Trek-TM- (11% of revenue) and Pepsi Cola-Registered Trademark- (10% of
revenue).
Cost of revenue as a percentage of revenue decreased to 52.8%
from 66.7% for the six months ended November 30, 1998, compared to the same
period in 1997. The six-month period ended November 30, 1998 more accurately
reflects the current cost to revenue ratio of the Company's licensed promotions.
Certain marketing promotion costs that are fixed or partially fixed could not be
properly absorbed in the six-month period ended November 30, 1997, as a result
of lower revenues, resulting in a higher cost to revenue ratio of 66.7%.
Gross profit increased in the six months ended November 30, 1998
to $1,938,000 (47.2% of revenue) from $203,000 (33.3% of revenue) in the same
period in 1997 due to the significantly higher revenue and the improved profit
margin on the licensed promotions.
Selling, general and administrative expenses were $1,032,000
(25.1% of revenue) for the six months ended November 30, 1998 compared to
$832,000 (136.8% of revenue) for the same period in 1997. Salary expense
increases of $132,000 accounted for most of the 1998 increase. This was due to
the Company's efforts to add human resources to properly manage the growth
expected to continue during fiscal year 1999. The decrease of selling, general
and administrative expenses as a percentage of revenue for 1998 (25.1%) reflects
fixed or partially fixed costs spread over a greater revenue base.
Operating income was $906,000 (22.1% of revenue) for the six
months ended November 30, 1998 compared to an operational loss of $630,000 for
the same period in 1997. This was principally due to the factors described
above.
Interest expense was only $500 for the six months ended
November 30, 1998 compared to $26,200 for the same period in 1997. This decrease
is attributable to a reduction in the principal amount of debt outstanding.
Interest income was $12,000 for the six-month period ended
November 30, 1998 compared to $18,000 for the same period in 1997. The interest
income for 1998 was principally from savings interest. The interest income for
1997 during this same period was principally from a $7,000 per quarter charge
for the debt owed by Steven M. Saferin, the Company's President and CEO, which
was paid in full in February 1998.
For the reasons set forth above, the Company had a profit of
$918,000 before taxes for the six months ended November 30, 1998 as compared to
a loss of $636,000 for the same period in 1997.
12
THREE MONTHS ENDED NOVEMBER 30
------------------------------------------------------------
1998 % 1997 %
---- - ---- -
Total revenue $ 2,003,929 100.0% $ 317,495 100.0%
Cost of revenues 1,072,067 53.5% 193,241 60.9%
Gross profit 931,862 46.5% 124,254 39.1%
Selling, general and
Administrative expenses 484,775 24.2% 400,833 126.2%
Operating income (loss) 447,087 22.3% (276,579) -87.1%
Interest expense -- 0.0% 10,886 3.4%
Interest income (4,935) -0.2% (10,398) -3.3%
Other expense, net 192 0.0% 2,760 0.9%
Minority interest -- 0.0% (1,751) -0.6%
Net income (loss) before income
tax expense 451,830 22.5% (278,076) -87.6%
Income tax expense 30,180 1.5% 50 0.0%
Net income (loss) $ 421,650 21.0% $(278,126) -87.6%
THREE MONTHS ENDED NOVEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED NOVEMBER 30,
1997
Results for the three months ended November 30, 1998 reflect revenue
of $2,004,000 as compared to $317,000 for the same period in 1997. This
revenue increase reflects the shift of the Company's business to licensed
promotions. Revenue during the three months ended November 30, 1998 was
derived primarily from sales based on four entertainment-based or brand name
properties, including Harley-Davidson-Registered Trademark- (59% of revenue),
Pepsi Cola-Registered Trademark- (20% of revenue), Wheel of
Fortune-Registered Trademark- (14% of revenue) and Star Trek-TM- (5% of
revenue).
Cost of revenue as a percentage of revenue decreased to 53.5% from
60.9% for the three months ended November 30, 1998 compared to the same period
in 1997. The three-month period ended November 30, 1998 more accurately reflects
the current cost to revenue ratio of the Company's licensed promotions. Certain
marketing promotion costs that are fixed or partially fixed could not be
properly
13
absorbed in the three-month period ended November 30, 1997, as a result of lower
revenues, resulting in a higher cost to revenue ratio of 60.9%.
Gross profit increased in the three months ended November 30, 1998 to
$932,000 (46.5% of revenue) from $124,000 (39.1% of revenue) in the same period
in 1997 due to the significantly higher sales volume and the improved profit
margin on the licensed promotions.
Selling, general and administrative expenses were $485,000 (24.2% of
revenue) for the three months ended November 30, 1998 compared to $401,000
(126.2% of revenue) for the same period in 1997. Salary expense increased by
$64,000 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 revenue reflects fixed or partially fixed costs
spread over a greater revenue base.
Operating income was $447,000 (22.3% of revenue) for the three months
ended November 30, 1998 compared to an operational loss of $277,000 for the same
period in 1997. This was principally due to the factors described above.
Interest expense was $0 for the three months ended November 30, 1998
compared to $10,900 for the same period in 1997. This decrease is attributable
to both a reduction in debt and remaining debt that is interest free. Interest
income dropped to $5,000 for the three months ended November 30, 1998 compared
to $10,000 for the same period ended November 30, 1997. This decrease is due to
a $7,000 quarterly reduction in interest income that was previously charged for
the debt owed by Steven M. Saferin, the Company's President and CEO, which was
paid in full in February 1998.
For the reasons set forth above, the Company had a profit of $451,830
before taxes for the period ended November 30, 1998 as compared to a loss of
$278,076 for same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of November 30, 1998 the Company had cash and cash equivalents of
$539,000 compared to $313,000 as of the same period in 1997. The increase was
due principally to a profitable first six months and the collection of several
large contract receivables. As of November 30, 1998, the Company had a net
working capital deficit of $2,159,000. However, $3,086,000 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).
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 financing, as well as cash flow
from operations. The Company currently intends to seek additional financing over
the next 12 months, however, the Company has not determined the amount it will
seek to raise or the form of such financing (i.e. debt or equity).
The Company's outstanding indebtedness as of November 30, 1998 was
$24,750 represented by a note at 10% due in August 2001. Subsequent to November
30, 1998, the Company's indebtedness changed by converting $600,000 of accrued
commissions into a note payable over 24 months at 10.75% with the final
14
payment December 15, 2001. This conversion allows the Company to better manage
its cash flow requirements.
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 11 separate contracts with ten (10)
lotteries based on the HARLEY-DAVIDSON-Registered Trademark- property, with a
combined total of over $5.5 million in revenue, a majority of which is
expected to be generated in fiscal 1999. Included is MDI's first contract
with a Canadian lottery, the British Columbia Lottery Corporation. 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 expired
in November 1998. However, the Company and WHEEL OF FORTUNE-Registered
Trademark- representatives have agreed to extend this license for another
year at a cost of $10,000. 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.
The Company has signed a new three-year licensing agreement with
LOUISVILLE SLUGGER and has reached agreement with at least one lottery to
utilize the brand in the spring of 1999, resulting in the majority of revenue to
be recognized in FY 2000.
In addition, the Company has reached an agreement with Dick Clark's
American Bandstand to develop a joint venture for lottery promotions throughout
the world.
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. Also, since most lotteries are government agencies
with lottery executives appointed by the
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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.
YEAR 2000
The Company has commenced an assessment of the hardware, software and
network components of its information technology systems. To date, the Company
has replaced approximately 19 of its 22 CPUs with those that, according to
manufacturers' representations, are Year 2000 compliant. The Company
anticipates that the remaining three CPUs will be upgraded before May 31, 1999.
The Company also purchased a new server less than a year ago which, according to
manufacturer's representations, is Year 2000 compliant. The operating systems
used by the Company are Windows 95 and Microsoft Office 97, which are both Year
2000 compliant according to manufacturers' representations. The Company
anticipates that its network will be upgraded as well by May 31, 1999.
New accounting and operational "SBT" software has been obtained which,
according to manufacturer's representations, is Year 2000 compliant and which is
expected to be installed after the close of the Company's fiscal year (May 31,
1999) to safeguard against delays in meeting financial reporting requirements.
Peripheral operational software, which was customized, is being reviewed for
integration with the "SBT" accounting and operational software. Due to the
Company's shift to licensed promotions, it is anticipated that the customized
software previously required does not have to be completely rewritten. Foxpro
which houses the additional database required to operate the customized software
is being upgraded to Version 6.0 which, according to manufacturer's
representations, is Year 2000 compliant. The Company has retained a Year 2000
compliance service provider (the "Compliance Service Provider") to make the
required changes and integrate this software accordingly. Scheduling of this
work has been undertaken by the Compliance Service Provider.
Two third-party subcontractors are utilized by the Company, one is a
fulfillment facility and the other a data collection house. The Company has
historically provided the software needed to support these two functions. This
software is also being upgraded by the Compliance Service Provider to be Year
2000 compliant. Both subcontractors have provided the Company with assurances
that their hardware will also be Year 2000 compliant.
The original budget for Year 2000 compliance work was $50,000. As of
this date, it is expected this budget will be met.
The Company's most substantial foreseeable risk in respect of the Year
2000 is with third-party subcontractors and its own customized software which
supports them. To insure the Company's ability to function in this period of
uncertainty, the Company has developed a contingency plan to permit fulfillment
to be accomplished by alternate procedures utilizing existing third-party
subcontractors. Similar contingency plans have been developed to manage
inventory and data management and accounting.
The Company believes it has taken appropriate steps to be Year 2000
compliant. It has also prepared a contingency plan to handle as many risks as
it foresees. However, no assurance can be given that problems will not be
encountered in connection with the date change from December 31, 1999 to January
1, 2000. The Company does not believe these problems will have a material
adverse effect on the Company's operations.
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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)
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SIGNATURE PAGE
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: January 14, 1999
MDI ENTERTAINMENT, INC.
(Registrant)
By: /S/ STEVEN M. SAFERIN
------------------------
Steven M. Saferin
President and Chief Executive
Officer and Director
(Principal Executive Officer)
By: /S/ KENNETH M. PRZYSIECKI
----------------------------
Kenneth M. Przysiecki
Chief Financial Officer, Secretary and Director
(Principal Financial Officer)
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