<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 1997
[ ] 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 0-28318
Multimedia Games, Inc.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Texas 74-2611034
- ---------------------------------------------- ------------------------------
(State or Other Jurisdiction of Incorporation) (IRS Employer Identification
Number)
7335 South Lewis Avenue, Suite 302
Tulsa, Oklahoma 74136
--------------------------------------
(Address of Principal Executive Offices)
(918) 494-0576
--------------------
(Issuer's Telephone Number, Including Area Code)
------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
Check whether the issuer (1) 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 July 15, 1997 there were 4,303,990 shares of the Company's Common Stock,
par value $.01, outstanding.
Transitional Small Business Disclosure Format (Check one)
Yes No X
--- ---
<PAGE> 2
FORM 10-QSB
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
(June 30, 1997 and September 30, 1996)
Consolidated Statements of Operations
(Three months ended June 30, 1997 and 1996)
Consolidated Statements of Operations
(Nine months ended June 30, 1997 and 1996)
Consolidated Statements of Cash Flows
(Nine months ended June 30, 1997 and 1996)
Notes to Unaudited Consolidated Financial Statements
Report of Review By Independent Accountants
Item 2. Management's Discussion and Analysis
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes In Securities
Item 6. Exhibits and Reports on Form 8-K
<PAGE> 3
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, 1997 and September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
ASSETS June September
1997 1996
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 856,000 $ 1,508,000
Notes Receivable 728,000 --
Accounts Receivable:
Trade, net of allowance for doubtful accounts
of $85,000 and $76,000 1,267,000 247,000
Other 168,000 45,000
Inventory, at cost 463,000 358,000
Prepaid expenses 83,000 92,000
------------ -----------
Total current assets 3,565,000 2,250,000
------------ -----------
Restricted cash and cash equivalents 1,541,000 1,534,000
Note receivable from American Gaming Network LLC 336,000 336,000
Notes receivable - Other 314,000 --
Property and equipment, net of accumulated depreciation
of $1,608,000 and $703,000 5,047,000 2,616,000
Other assets 119,000 196,000
Goodwill, net of accumulated amortization of $68,000
and $48,000 479,000 499,000
------------ -----------
Total assets $ 11,401,000 $ 7,431,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 100,000 $ 50,000
Current portion of long-term debt 388,000 197,000
Due to American Gaming Network LLC -- 99,000
Accounts payable and accrued expenses 1,670,000 1,292,000
Hall's share of surplus 89,000 120,000
Prize fulfillment fees payable 299,000 320,000
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Total current liabilities 2,546,000 2,078,000
------------ -----------
Bridge notes payable -- 800,000
Long-term debt 747,000 787,000
Other long-term liabilities 1,372,000 1,372,000
Commitments and Contingencies (Note 4)
Stockholders' equity:
Preferred stock, Series A, $.01 par value, 2,000,000 shares
authorized, 109,192 and 134,318 shares issued and outstanding 1,000 1,000
Common stock, $.01 par value, 25,000,000 shares
authorized, 4,337,989 and 2,859,200 shares issued
and 4,303,990 and 2,825,201 shares outstanding 43,000 29,000
Additional paid-in capital 9,618,000 6,296,000
Stockholder notes receivable (603,000) (1,271,000)
Treasury stock, 33,999 shares at cost (87,000) (87,000)
Accumulated deficit (2,236,000) (2,574,000)
------------ -----------
Total stockholders' equity 6,736,000 2,394,000
------------ -----------
Total liabilities and stockholders' equity $ 11,401,000 $ 7,431,000
============ ===========
</TABLE>
See notes to unaudited consolidated financial statements
<PAGE> 4
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenues:
Gaming revenue $ 8,775,000 $ 6,019,000
Electronic player station sales 1,042,000 --
Electronic player station lease revenue 489,000 --
Other -- 64,000
------------ -----------
Total Revenue 10,306,000 6,083,000
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Operating costs and expenses:
Bingo prizes and commissions 2,388,000 2,253,000
Allotments to hall operators 4,735,000 2,481,000
Cost of electronic player stations sold 613,000 --
Salaries and wages 566,000 439,000
Selling, general and administrative expenses 1,164,000 651,000
Amortization and depreciation 412,000 143,000
------------ -----------
Total operating costs and expenses 9,878,000 5,967,000
------------ -----------
Operating Income 428,000 116,000
Interest Income 10,000 13,000
Interest Expense (33,000) (20,000)
------------ -----------
Net Income $ 405,000 $ 109,000
============ ===========
Income per common and equivalent share,
primary $ 0.08 $ 0.02
============ ===========
Income per common and equivalent share,
fully diluted $ 0.06 $ 0.02
============ ===========
</TABLE>
See notes to unaudited consolidated financial statements
<PAGE> 5
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the nine months ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
--------------- ------------
<S> <C> <C>
Revenues:
Gaming revenue $ 23,633,000 $ 14,421,000
Electronic player station sales 1,445,000 277,000
Electronic player station lease revenue 1,077,000 --
Software license revenue -- 500,000
Other 1,000 377,000
------------ ------------
Total revenues 26,156,000 15,575,000
------------ ------------
Operating costs and expenses:
Bingo prizes and commissions 6,767,000 7,310,000
Allotments to hall operators 12,247,000 4,240,000
Costs of electronic player stations sold 829,000 55,000
Salaries and wages 1,519,000 1,171,000
Selling, general and administrative expenses 3,227,000 2,190,000
Amortization and depreciation 1,015,000 354,000
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Total operating costs and expenses 25,604,000 15,320,000
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Operating income 552,000 255,000
Interest income 22,000 45,000
Interest expense (132,000) (63,000)
------------ ------------
Net income $ 442,000 $ 237,000
============ ============
Income per common and equivalent share, primary $ 0.08 $ 0.05
============ ============
Income per common and equivalent share, fully diluted $ 0.07 $ 0.04
============ ============
</TABLE>
See notes to unaudited consolidated financial statements
<PAGE> 6
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 442,000 $ 237,000
Adjustments to reconcile net income to cash
provided by (used for) operating activities:
Amortization and depreciation 1,015,000 354,000
Other non-cash expenses 77,000 --
(Increase) decrease in:
Accounts and notes receivable (2,185,000) (516,000)
Inventory (105,000) --
Prepaid expenses 9,000 --
Other assets -- (24,000)
Increase (decrease) in:
Accounts payable and accrued expenses 279,000 (181,000)
Hall's share of surplus (31,000) 198,000
Prize fulfillment fees payable (21,000) (124,000)
Other long-term liabilities -- (6,000)
----------- -----------
Net cash provided by (used for) operating activities (520,000) (62,000)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (2,712,000) (1,172,000)
Increase in cash balances in restricted escrow (7,000) --
Other -- --
----------- -----------
Net cash provided by (used for) investing activities (2,719,000) (1,172,000)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock 2,490,000 980,000
Increase in long-term debt 489,000 100,000
Principal repayments of debt (288,000) (106,000)
Payment of preferred stock dividends (104,000) (113,000)
Purchase of treasury stock -- (10,000)
Other -- (5,000)
----------- -----------
Net cash provided by (used for) financing activities 2,587,000 846,000
----------- -----------
Net change in cash and cash equivalents (652,000) (388,000)
Cash and cash equivalents, beginning of period 1,508,000 1,537,000
----------- -----------
Cash and cash equivalents, end of period $ 856,000 $ 1,149,000
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements
<PAGE> 7
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements should be read in conjunction
with the Company's financial statements for the twelve months ended
September 30, 1996 contained within the Company's Annual Report on
Form 10-KSB.
The financial statements included herein as of June 30, 1997
and for each of the three and nine month periods ended June 30, 1997
and 1996, have been prepared by the Company, without an audit,
pursuant to generally accepted accounting principles and the rules and
regulations of the Securities and Exchange Commission. The information
presented reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of financial position and results
of operations for the periods. Results for the three or nine months
ended June 30, 1997, are not necessarily indicative of the results
which will be realized for the year ending September 30,
1997. The September 30, 1996 consolidated balance sheet data was
derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
Certain prior period information has been reclassified to conform to
current period presentation.
INCOME PER COMMON SHARE - Income per common share is computed on
the basis of the weighted average shares of common stock outstanding
for the three and nine months ended June 30, 1997 and 1996. Options
and warrants are common stock equivalents and, along with contingent
stock issuances, are considered in the computation of income per
common share using the treasury stock method when they are dilutive.
To determine income per common share, net income is adjusted for
preferred stock dividends, which were $30,000 and $37,000,
respectively, for the three months ended June 30, 1997 and 1996 and
$104,000 and $113,000 respectively, for the nine months ended June 30,
1997 and 1996. Weighted average shares outstanding were 4,706,431 and
6,413,223 on a primary and fully diluted basis, respectively, for the
three months and 4,370,047 and 6,133,222, respectively, for the nine
months ended June 30, 1997. Weighted average shares outstanding were
3,100,000 and 3,831,000 on a primary and fully diluted basis,
respectively, for the three months and 2,382,000 and 3,271,000,
respectively, for the nine months ended June 30, 1996.
IMPACT OF FINANCIAL ACCOUNTING PRONOUNCEMENTS - In February 1997, the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128. Earnings Per Share ("FAS 128"). FAS 128
will change the computation, presentation and disclosure requirements
for earnings per share. FAS 128 requires the presentation
<PAGE> 8
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
of "basic" and "diluted" earnings per share, as defined,
for all entities with complex capital structures. FAS 128 is effective
for financial statements issued for periods ending after December 15,
1997, and requires restatement of all prior period earnings per share
amounts. The Company has not yet determined the impact that FAS 128
will have on its earnings per share when adopted.
2. FINANCING ACTIVITIES
In November 1996, the Company completed a private placement
of approximately 1.2 million shares of common stock for $3.00 per
share. Each of the 1.2 million shares sold was accompanied by a
redeemable warrant to purchase an additional share of the Company's
common stock for $8 (a "Redeemable Warrant"). After nine months, each
Redeemable Warrant may be called by the Company for $.10 when the
closing bid price of the Company's common stock has been at least
$12.00 for 20 consecutive trading days. Redeemable Warrants totaling
350,000 were granted to the placement agent in connection with the
November Placement. Proceeds from the November Placement (which
included the conversion of the Bridge Debt discussed below) are
intended to finance the expansion of the Company's MegaMania network.
The November Placement was preceded by a private placement of bridge
debt financing in the amount of $800,000 (the "Bridge Debt") which was
completed in early August 1996. Redeemable Warrants representing
360,000 shares accompanied the Bridge Debt and an additional 173,310
Redeemable Warrants were granted to the placement agent. The Bridge
Debt was converted into common stock and Redeemable Warrants in
connection with the completion of the November Placement.
3. RELATED PARTY
On June 30, 1997, Graves Properties, Ltd., a limited
partnership controlled by Gordon T. Graves, the Company's Chairman and
Chief Executive Officer, agreed to loan $437,344 to Equipment
Purchasing L.L.C. ("EPLLC"), an entity owned and controlled by Mr.
Graves which was formed to purchase Megamania play equipment from the
Company. The Company sold 112 MegaMania electronic player stations and
related support equipment to EPLLC for a promissory note of $437,344
due August 15, 1997, bearing interest at 6.0% and a promissory note
of $200,000 due June 30, 1999, bearing interest at 14%. The notes are
collateralized by the underlying equipment. This equipment is subject
to a rental agreement with an Indian tribe and, accordingly, the
rental payments have been assigned to the affiliated company. As in
inducement to consummate the sale, the Company issued to EPLLC 50,000
warrants to acquire common stock at $11.00 per share. The warrants
will become exercisable one year after the date of issue and expire
five years after the date of issue. The warrants are redeemable by
the Company at $.10 per share if the closing price of the common stock
for 20 consecutive trading days has been at least 150% of the effective
exercise price. The estimated fair market value of these warrants is
$3,750. Concurrent with the sale of this equipment, the Company also
entered into a management agreement for a term of two years with the
affiliated entity whereby the Company is responsible for (1) proposing,
establishing and modifying the MegaMania game procedures and the
related game accounting procedures; (2) supervising and administering
the rental agreement with the Indian tribe; (3) using its best efforts
to re-lease the purchased equipment to other parties if the present
rental agreement is terminated; (4) collecting all rents due under the
rental agreement; (5) performing all necessary repairs and maintenance,
but not bear any risk of loss or damage; (6) conducting necessary
marketing; (7) maintaining insurance; and (8) paying all sales and use
taxes and performing other administrative functions. As compensation
the Company will receive $10.00 per electronic player station as a
re-leasing fee and $10.00 per electronic player station per month as a
management fee. The Company has the option to repurchase the equipment
at its then fair market value after the affiliate has received total
rental income equal to the original purchase price plus a 20% internal
rate of return.
4. COMMITMENTS AND CONTINGENCIES
PENDING INVESTIGATION
<PAGE> 9
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
The legal environment in which the Company conducts its
business is relatively new and presents significant operating
challenges and uncertainties. The Indian Gaming Regulatory Act (the
"Gaming Act") was adopted in 1988 and the development of the Federal,
State and Tribal infrastructure to regulate the proliferation of
Indian gaming activities has occurred only since that time.
Fundamental issues concerning the scope and intent of the Gaming Act
and its relationship to other Federal and State gaming laws and
regulations remain unresolved and unclear. The National Indian Gaming
Commission ("NIGC") was not fully operational until February 1993,
and prior to that the Bureau of Indian Affairs was responsible for
certain functions now performed by the NIGC. As a result, the adoption
and implementation of regulations in furtherance of the Gaming Act
have moved cautiously and in comparison to more settled ares of the
law, there is a lack of judicial decisions, regulation or
interpretations of regulations to guide conduct under the Gaming Act.
Moreover, the Company is on the leading edge of the rapid advancement
of technological innovation in gaming, and issues relating, for
example, to the use of technological aide for the playing of games
are either novel or lack historical precedent sufficient to enable the
Company to predict with certainty the outcome of planned actions.
The Company believes that its MegaMania game meets all of the
requirements of a Class II game of bingo and that the NIGC has the
regulatory authority to make final and binding determinations on the
classification of games. In a written opinion dated July 10, 1996, the
Company was informed by the NIGC of its determination that MegaMania
constituted a Class II game. The Company has relied on the NIGC's
written opinion in conducting its MegaMania operations and believes
that the NIGC made its determination with a complete and accurate
understanding of the facts and the applicable law.
On October 16, 1996, the Office of the U.S. Attorney in Tulsa,
Oklahoma (the" U.S. Attorney") orally informed the Company that the
U.S. Attorney was conducting an independent investigation to determine
whether, in the opinion of the U.S. Attorney, the Company's MegaMania
bingo game constituted Class III or Class II gaming as defined in the
Gaming Act, and was therefore in violation of the law or not.
Generally speaking, Class II gaming is regulated by the NIGC and may
be conducted on Indian lands if the state in which the Indian lands
are located permits such gaming for any purpose by any person. Class
III gaming, on the other hand, may only be conducted on Indian lands
pursuant to a compact reached between the Indian tribe and the state
in which the tribe is located.
In an effort to resolve any differences between the NIGC and
the U.S. Attorney and to create an air of certainty for the Company in
the conduct of its operations, on April 8, 1997, the Company entered
into a Memorandum of understanding with the NIGC to implement certain
changes to its MegaMania games. These changes generally require the
bingo card holder to take certain actions in order to daub the bingo
card and to indicate a bingo win, and also require the drawing of
bingo numbers using a physical ball blower or as a result of some
other human activity rather than the use of electronically randomly
generated numbers. In addition, the NIGC issued a letter to the
Company dated April 9, 1997 concluding that the modified MegaMania
game conformed to the definition of bingo in the Gaming Act and thus
was a Class II game.
The Company has modified its MegaMania game to meet the terms
of the Memorandum of Understanding and on June 9, 1997, submitted the
modified version of MegaMania to the NIGC for its review and
evaluation. Based upon that review and evaluation, on July 23, 1997,
the Acting General Counsel of the NIGC informed the Company in a
written advisory opinion that the revised MegaMania game constituted
Class II gaming and that tribes may play the revised MegaMania game
without risk of enforcement action by the NIGC.
In entering the Memorandum of Understanding and agreeing to
modify its MegaMania game, the Company believed that any remaining
interpretive disagreements with the U.S. Attorney and with the
Department of Justice generally over the Class II status of MegaMania
would be resolved. However, the Company has not been advised of this
resolution by the U.S. Attorney.
Since entering into the Memorandum of Understanding and
implementing the changes to the MegaMania game, other U.S. Attorney
offices in Oklahoma have informed tribes that such offices consider
the Company's MegaMania game to be an illegal Class III gaming
activity. The Company is not able to predict whether these offices or
any other local offices of the Department of Justice will be swayed by
the July 23, 1997 advisory opinion of the NIGC, which is not binding
upon the Department of Justice.
There can be no assurance that the NIGC, either on its own
initiative or as the result of pressure from or in cooperation with
other agencies such as the Department of Justice, will adhere to the
conclusion made in its July 23, 1997 advisory opinion. There also can
be no assurances that the Department of Justice, or local U.S.
Attorney's offices will accept any of the opinions or actions of the
NIGC regarding the Company's activities, and not seek to challenge the
legality of the Company's activities.
If adverse determinations or actions are taken by the NIGC, the
Department of Justice, or local U.S. Attorney's offices, the Company
intends to vigorously defend its position that MegaMania is a Class II
game. No assurances can be given that the Company will be successful
on the merits. If MegaMania is ultimately determined to be Class III
gaming, the loss of the MegaMania business would have a material
adverse effect upon the Company's financial condition and results of
operation.
There can be no assurance that the NIGC, either on its own
initiative or as the result of pressure from or cooperation with other
agencies such as the Department of Justice, will not enact additional
regulations or reinterpret existing regulations in a manner that would
have a material and adverse effect upon the Company, including
requiring the Company to restructure its existing contractual
arrangements with Indian tribes or requiring changes in the way the
Company's games are conducted so that such games are classified as
Class II. Any such restructuring of the Company's games has the
additional risk that such games will no longer appeal to consumers or
be acceptable to the tribes. There can also be no assurance that the
Gaming Act or other Federal laws will not be amended, or new
legislation or regulations enacted, so as to limit the authority or
tribes to self-regulate Class II gaming or to change the definition of
Class II gaming.
Over time, the Company does not believe that the changes to its
MegaMania game will materially and adversely affect consumer interest
and acceptance of MegaMania, although no assurances in that regard can
be given. There is evidence to suggest that players of the prior
version of the game will reduce the level of their play until the
changes made in the new version become familiar.
LITIGATION
The Company is a party to various lawsuits and claims arising
out of the ordinary course of its business. No accrual for potential
loss has been made in the accompanying financial statements as
management does not believe that the likelihood of a material loss is
probable at this time.
<PAGE> 10
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Stockholders
Multimedia Games, Inc.
We have reviewed the accompanying consolidated balance sheet
of Multimedia Games, Inc. and Subsidiaries as of June 30, 1997, and
the related consolidated statements of operations for the three and
nine month periods ended June 30, 1997, and the consolidated statement
of cash flows for the nine month period ended June 30, 1997. These
financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public Accountants.
A review of interim financial information consists principally of
applying analytical procedures to financial data and making inquiries
of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying financial
statements for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally
accepted auditing standards, the consolidated balance sheet as of
September 30, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then
ended (not presented herein); and in our report dated December 18,
1996, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of September 30, 1996 is
fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
COOPERS & LYBRAND L.L.P.
Tulsa, Oklahoma
July 31, 1997
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Multimedia Games, Inc. and subsidiaries (the "Company") were
organized to develop, promote and produce lawful gaming activities
over the information highway, including but not limited to satellites,
television, telephone and the Internet. The Company provides satellite
linked, high stakes bingo games and interactive high speed bingo games
played on interconnected electronic player stations to participating
bingo halls owned primarily by American Indian tribes located
throughout the United States. The Company also provides proxy play
services for its MegaBingo and MegaCash games to bingo players located
off Indian lands through a subsidiary's 49% interest in American
Gaming Network L.L.C. ("AGN").
Prior to August 1995, the Company's principal business was to
furnish the marketing and other operating services required in the
conduct of high stakes bingo games conducted under the names
MegaBingo, MegaCash and MegaBingo Lite (the "MegaBingo Games").
MegaBingo and MegaCash are played simultaneously using a
closed-circuit television satellite link at 50 independently owned
bingo halls located in 14 states throughout the United States,
operated primarily on behalf of American Indian tribes. MegaBingo Lite
provides smaller prizes to similarly linked Indian bingo halls and is
presently delivered to 11 bingo halls located in the State of
Oklahoma.
In August 1995, the Company introduced MegaMania, an
interactive high-speed bingo game developed by the Company that is
played on electronic player stations interconnected among
participating Indian bingo halls. Significant revenue generation for
MegaMania did not begin until March 1996. As of June 30, 1997,
MegaMania is played at 41 independently owned American Indian bingo
halls located in 8 different states, primarily Oklahoma and
Washington.
RESULTS OF OPERATIONS
The Three Months Ended June 30, 1997 and 1996:
The Company's total operating revenues were $10,306,000 and
$6,083,000 for the three months ending June 30, 1997 and 1996
respectively, or an increase of $4,223,000 for the current period. The
increase was primarily a result of an increase in gaming revenue of
$2,756,000, an increase of $1,042,000 in electronic player station
sales and an increase in electronic player station lease revenue of
$489,000, partially offset by a decrease in other income of $64,000.
The increase in gaming revenue for the current period was driven by
increased MegaMania gaming revenues from newly-installed electronic
player stations, which were partially offset by MegaBingo revenue
decreases. The Company had approximately 1,060 electronic player
stations in daily operation during the three months
<PAGE> 12
ended June 30, 1997, compared to approximately 612 during the same
three months of 1996.
Bingo prizes and commissions were $2,388,000 and $2,253,000
for the three months ended June 30, 1997 and 1996 respectively, or an
increase of $135,000. The increase resulted from more prizes being won
and an increase in prize related fees, partially offset by a decrease
in MegaBingo revenue during the period.
Allotments to hall operators were $4,735,000 and $2,481,000
for the three months ended June 30, 1997 and 1996 respectively. The
increase of $2,254,000 resulted primarily from the increase in
MegaMania revenues.
Costs of electronic player stations sold were $613,000 for
the three months ended June 30, 1997 as compared to zero in the
comparable period of the prior year. The increase was due to sales of
MegaMania electronic player stations in the current 1997 period as
compared to no such sales in the 1996 period.
Salaries and wages were $566,000 and $439,000 for the three
months ended June 30, 1997 and 1996 respectively, or an increase of
$127,000. The increase was due to additional staff needed for the
increased MegaMania operations.
Selling, general and administrative expenses were $1,164,000
and $651,000 for the three months ending June 30, 1997 and 1996,
respectively, or a increase of $513,000. The increase is primarily due
to an increase in business meals and travel of approximately $125,000,
an increase in legal and professional fees of approximately $13,000
primarily as a result of increased legal and regulatory activity, an
increase in contract labor and services of approximately $50,000 and
increased telephone expenses of approximately $280,000 and other costs
of approximately $45,000 primarily as a result of increased MegaMania
activity.
Amortization and depreciation was $412,000 and $143,000 for
the three months ending June 30, 1997 and 1996 respectively, or an
increase of $269,000. The increase results from the acquisition of
additional MegaMania electronic player stations leased to
independently owned Indian bingo halls.
The Nine Months Ended June 30, 1997 and 1996:
The Company's total operating revenues were $26,156,000 and
$15,575,000 for the nine months ended June 30, 1997 and 1996
respectively, or an increase of $10,581,000 for the current period.
The increase was primarily a result of an increase in gaming revenue
of $9,212,000, an increase of $1,168,000 in electronic player station
sales, and an increase in electronic player station lease revenue of
$1,077,000,partially offset by a decrease in the sale of intellectual
property of $500,000 and a decrease in other income of $376,000. The
increase in gaming revenue for the current period was driven by
increased MegaMania gaming revenues from newly installed electronic
player stations, partially offset by MegaBingo revenue decreases. The
Company averaged approximately 871 electronic
<PAGE> 13
player stations in operation during the nine months ended June 30,
1997, compared to approximately 279 during the same nine months of
1996.
Bingo prizes and commissions were $6,767,000 and $7,310,000
for the nine months ended June 30, 1997 and 1996 respectively, or a
decrease of $543,000. The decrease resulted from decreased MegaBingo
revenue during the period.
Allotments to hall operators were $12,247,000 and $4,240,000
for the nine months ended June 30, 1997 and 1996 respectively. The
increase of $8,007,000 resulted from the increase in MegaMania
revenues.
Costs of electronic player stations sold were $829,000 and
$55,000 for the nine months ended June 30, 1997 and 1996,
respectively, or an increase of $774,000. The increase was due to
increased sales of electronic player stations.
Salaries and wages were $1,519,000 and $1,171,000 for the
nine months ended June 30, 1997 and 1996 respectively, or an increase
of $348,000. The increase was due to additional staff needed for the
increased MegaMania operations.
Selling, general and administrative expenses were $3,227,000
and $2,190,000 for the nine months ending June 30, 1997 and 1996,
respectively, or a increase of $1,037,000. The increase is primarily
due to an increase in business meals and travel of approximately
$109,000, an increase in legal and professional fees of approximately
$173,000, primarily as a result of increased legal and regulatory
activity, and an increase in telephone expenses of approximately
$864,000 related primarily to increased MegaMania activity, partially
offset by a decrease in contract labor of $74,000 and a decrease in
other MegaBingo related costs of $35,000.
Amortization and depreciation was $1,015,000 and $354,000 for
the nine months ending June 30, 1997 and 1996 respectively, or an
increase of $661,000. The increase resulted primarily from the
acquisition of additional MegaMania electronic player stations leased
to independently owned Indian bingo halls and computer software costs
capitalized during 1996.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had $856,000 in unrestricted
cash and cash equivalents, a decrease of $652,000 from September 30,
1996. During the nine month period ended June 30, 1997, the Company
had negative cash flow from operations of $520,000 versus negative
cash flow of $62,000 in the same period of the prior year. The primary
components of cash flows from operations in the current nine month
period include an increase in accounts and notes receivable of
$2,185,000, primarily offset by amortization and depreciation of
$1,015,000 and an increase in accounts payable and accrued expenses of
$279,000. The Company used $2,719,000 for investing activities,
primarily related to capital expenditures for MegaMania electronic
player stations. The capital expenditures were funded by increasing
long term debt and with the proceeds of a private offering of the
Company's common stock in November
<PAGE> 14
1996 which generated net proceeds after offering costs, of $2,027,000.
As a result, at June 30, 1997, the Company had positive working
capital of $1,019,000.
The Company believes that its current operations can be
sustained from cash from operations. However, the purchase and
installation of additional electronic player stations to expand the
Company's MegaMania operations will require funding from external
sources. Such funding is expected to be obtained from proceeds from
the sale of equipment subject to leases and the issuance of additional
equity. No assurances can be given that the Company will be able to
obtain such funding on a timely basis or upon terms satisfactory to
the Company.
On June 30, 1997, Graves Properties, Ltd., a limited
partnership controlled by Gordon T. Graves, the Company's Chairman and
Chief Executive Officer, agreed to loan $437,344 to Equipment
Purchasing L.L.C. ("EPLLC"), an entity owned and controlled by Mr.
Graves which was formed to purchase Megamania play equipment from the
Company. The Company sold 112 MegaMania electronic player stations and
related support equipment to EPLLC for a promissory note of $437,344
due August 15, 1997, bearing interest at 6.0% and a promissory note of
$200,000 due June 30, 1999, bearing interest at 14%. The notes are
collateralized by the underlying equipment. This equipment is subject
to a rental agreement with an Indian tribe and, accordingly, the rental
payments have been assigned to the affiliated company. As in inducement
to consummate the sale, the Company issued to EPLLC 50,000 warrants to
acquire common stock at $11.00 per share. The warrants will become
exercisable one year after the date of issue and expire five years
after the date of issue. The warrants are redeemable by the Company at
$.10 per share if the closing price of the common stock for 20
consecutive trading days has been at least 150% of the effective
exercise price. The estimated fair market value of these warrants is
$3,750. Concurrent with the sale of this equipment, the Company also
entered into a management agreement for a term of two years with the
affiliated entity whereby the Company is responsible for (1) proposing,
establishing and modifying the MegaMania game procedures and the
related game accounting procedures; (2) supervising and administering
the rental agreement with the Indian tribe; (3) using its best efforts
to re-lease the purchased equipment to other parties if the present
rental agreement is terminated; (4) collecting all rents due under the
rental agreement; (5) performing all necessary repairs and maintenance,
but not bear any risk of loss or damage; (6) conducting necessary
marketing; (7) maintaining insurance; and (8) paying all sales and use
taxes and performing other administrative functions. As compensation
the Company will receive $10.00 per electronic player station as a
re-leasing fee and $10.00 per electronic player station per month as a
management fee. The Company has the option to repurchase the equipment
at its then fair market value after the affiliate has received total
rental income equal to the original purchase price plus a 20% internal
rate of return.
FUTURE EXPECTATIONS AND FORWARD LOOKING STATEMENTS
This Quarterly Report and the information incorporated herein
by reference contains various "forward-looking statements" within the
meaning of Federal and state securities laws, including those
identified or predicated by the words "believes," anticipates,"
"expects," " plans," or similar expressions. Such statements are
subject to a number of uncertainties that could cause the actual
results to differ materially from those projected. Such factors
include, but are not limited to, those described under "Item 1.
Description of Business Risk Factors" contained in the Company's
Annual Report on Form 10-KSB for the fiscal year ended September 30,
1996, which are incorporated herein by this reference. Given these
uncertainties, readers of this Quarterly Report are cautioned not to
place undue reliance upon such statements.
<PAGE> 15
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The legal environment in which the Company conducts its business is
relatively new and presents significant operating challenges and uncertainties.
The Indian Gaming Regulatory Act ( the "Gaming Act") was adopted in 1988 and
the development of the Federal, State and Tribal infrastructure to regulate the
proliferation of Indian gaming activities has occurred only since that time.
Fundamental issues concerning the scope and intent of the Gaming Act and its
relationship to other Federal and State gaming laws and regulations remain
unresolved and unclear. The National Indian Gaming Commission ("NIGC") was not
fully operational until February 1993, and prior to that the Bureau of Indian
Affairs was responsible for certain functions now performed by the NIGC. As a
result, the adoption and implementation of regulations in furtherance of the
Gaming Act have moved cautiously and in comparison to more settled areas of the
law, there is a lack of judicial decisions, regulation or interpretations of
regulations to guide conduct under the Gaming Act. Moreover, the Company is on
the leading edge of the rapid advancement of technological innovation in
gaming, and issues relating, for example, to the use of technological aids for
the playing of games are either novel or lack historical precedent sufficient
to enable the Company to predict with certainty the outcome of planned actions.
The Company believes that its MegaMania game meets all of the
requirements of a Class II game of bingo and that the NIGC has the regulatory
authority to make final and binding determinations on the classification of
games. In a written opinion dated July 10, 1996, the Company was informed by
the NIGC of its determination that MegaMania constituted a Class II game. The
Company has relied on the NIGC's written opinion in conducting its MegaMania
operations and believes that the NIGC made its determination with a complete
and accurate understanding of the facts and the applicable law.
On October 16, 1996, the Office of the U.S. Attorney in Tulsa,
Oklahoma (the "U.S. Attorney") orally informed the Company that the U.S.
Attorney was conducting an independent investigation to determine whether, in
the opinion of the U.S. Attorney, the Company's MegaMania bingo game
constituted Class III or Class II gaming as defined in the Gaming Act, and was
therefore in violation of the law or not. Generally speaking, Class II gaming
is regulated by the NIGC and may be conducted on Indian lands if the state in
which the Indian lands are located permits such gaming for any purpose by any
person. Class III gaming, on the other hand, may only be conducted on Indian
lands pursuant to a compact reached between the Indian tribe and the state in
which the tribe is located.
In an effort to resolve any differences between the NIGC and the U.S.
Attorney and to create an air of certainty for the Company in the conduct of
its operations, on April 8, 1997, the Company entered into a Memorandum of
understanding with the NIGC to implement certain changes to its MegaMania
games. These changes generally require the bingo card holder to take certain
actions in order to daub the bingo card and to indicate a bingo win, and also
require
<PAGE> 16
the drawing of bingo numbers using a physical ball blower or as a result of
some other human activity rather than the use of electronically randomly
generated numbers. In addition, the NIGC issued a letter to the Company dated
April 9, 1997 concluding that the modified MegaMania game conformed to the
definition of bingo in the Gaming Act and thus was a Class II game.
The Company has modified its MegaMania game to meet the terms of the
Memorandum of Understanding and on June 9, 1997, submitted the modified version
of MegaMania to the NIGC for its review and evaluation. Based upon that review
and evaluation, on July 23, 1997, the Acting General Counsel of the NIGC
informed the Company in a written advisory opinion that the revised MegaMania
game constituted Class II gaming and that tribes may play the revised MegaMania
game without risk of enforcement action by the NIGC.
In entering into the Memorandum of Understanding and agreeing to
modify its MegaMania game, the Company believed that any remaining interpretive
disagreements with the U.S. Attorney and with the Department of Justice
generally over the Class II status of MegaMania would be resolved. However, the
Company has not been advised of this resolution by the U.S. Attorney.
Since entering into the Memorandum of Understanding and implementing
the changes to the MegaMania game, other U.S. Attorney offices in Oklahoma have
informed tribes that such offices consider the Company's MegaMania game to be
an illegal Class III gaming activity. The Company is not able to predict
whether these offices or any other local offices of the Department of Justice
will be swayed by the July 23, 1997 advisory opinion of the NIGC, which is not
binding upon the Department of Justice.
There can be no assurance that the NIGC, either on its own initiative
or as the result of pressure from or in cooperation with other agencies such as
the Department of Justice, will adhere to the conclusion made in its July 23,
1997 advisory opinion. There also can be no assurances that the Department of
Justice, or local U.S. Attorney's offices, will accept any of the opinions or
actions of the NIGC regarding the Company's activities, and not seek to
challenge the legality of the Company's activities.
If adverse determinations or actions are taken by the NIGC, the
Department of Justice, or local U.S. Attorney's offices, the Company intends to
vigorously defend its position that MegaMania is a Class II game. No assurances
can be given that the Company will be successful on the merits. If MegaMania is
ultimately determined to be Class III gaming, the loss of the MegaMania
business would have a material adverse effect upon the Company's financial
condition and results of operation.
There can be no assurance that the NIGC, either on its own initiative
or as the result of pressure from or in cooperation with other agencies such as
the Department of Justice, will not enact additional regulations or reinterpret
existing regulations in a manner that would have a material and adverse effect
upon the Company, including requiring the Company to restructure its existing
contractual arrangements with Indian tribes or requiring changes in the way the
Company's games are conducted so that such games are classified as Class II.
Any such restructuring of the Company's games has the additional risk that such
games will no longer appeal to consumers or be acceptable to the tribes. There
can also be no assurance that the Gaming Act or other Federal laws will not be
amended, or new legislation or regulations enacted, so as to limit the
authority or tribes to self-regulate Class II gaming or to change the
definition of Class II gaming.
Over time, the Company does not believe that the changes to its
MegaMania game will materially and adversely affect consumer interest and
acceptance of MegaMania, although no assurances in that regard can be given.
There is evidence to suggest that players of the prior version of the game will
reduce the level of their play until the changes made in the new version become
familiar.
<PAGE> 17
ITEM 2. CHANGES IN SECURITIES
During the three months ended June 30, 1997, the Company issued
263,683 shares of Common Stock in transactions exempt from registration under
the Securities Act of 1933, as amended, pursuant to Section 4 (2) thereof as
follows:
1. 125,630 shares of Common Stock upon conversion of 25,126 shares
of Series A Preferred Stock originally issued in January 1995;
2. 8,531 shares of Common Stock at a price of $2.75 per share upon
the exercise of warrants originally issued in July 1994;
3. 10,000 shares of Common Stock at a price of $2.50 per share upon
the exercise of warrants originally issued in February 1995;
4. 18,334 shares of Common Stock at a price of $6.00 per share upon
the exercise of warrants originally issued in July 1993;
5. 45,682 shares of Common Stock at a price of $2.00 per share upon
the exercise of warrants originally issued in January 1995; and
6. 1,506 shares of common stock for services rendered.
7. 54,000 shares of common stock at a price of 2.75 per share upon
the exercise of warrants originally issued in May 1994.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this Quarterly Report on Form
10-QSB are listed in the attached Index to Exhibits.
(b) There were no reports filed on Form 8-K during the current
quarter.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated July 28, 1997 Multimedia Games, Inc.
By: /s/ FREDERICK E. ROLL
----------------------------
Frederick E. Roll, Vice President and
Chief Financial Officer
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.1 July 23, 1997 Advisory Opinion of the NIGC
15 Letter regarding Unaudited Interim Financial Information
27 Financial Data Schedule
</TABLE>
<PAGE> 1
July 23, 1997
Larry Montgomery
President and COO
Multimedia Games, Inc.
7335 South Lewis, Suite 204
Tulsa, OK 74136
Dear Mr. Montgomery:
This letter is in response to your inquiry as to whether the National Indian
Gaming Commission regards the game "MegaMania," as modified, as a Class II or
Class III game under the Indian Gaming Regulatory Act (IGRA). We have reviewed
the game and conclude that you may play your game, as discussed below, as a
Class II game.
This opinion is based on one site visit where I observed a prototype of the
game, a video tape which you made of that visit and a telefax received today,
which makes a small but important change to the game. It is therefore based
solely on my understanding of the game to be played as described below and will
continue to be subject to our review and further site visits by our field
investigators. If there are any changes made to the game as described or
significant factors not discussed, such changes or differences might materially
alter my opinion.
MegaMania is generally understood to be a game whereby not less than twelve
players, situated in one or more of several Indian bingo halls, each of which
have Electronic Player Stations (EPS), which are electronically interconnected,
may simultaneously play the same game. An EPS unit is vertical standing
structure with a computer, computer monitor and a bill acceptor. The player of
MegaMania must pay the cashier as much as she chooses to have credited to his
or her PIN number. The cashier enters the amount paid by the player into the
computer system and gives the player a receipt with a PIN number to enter into
the EPS. The player then sits in front of the EPS. This is a live game where
balls are drawn for the bingo game with a traditional style bingo blower, keyed
in by an operator and immediately transmitted to the tribal halls.
<PAGE> 2
The EPS monitor indicates when the bingo game will start, the amount of credit
available and the game pattern to be played, and displays up to four bingo
cards. Before play is started, the player may change cards. To start play, the
player touches each card or touches "select all" to choose all four of the
cards.
The monitor also projects images of three little ball men with numbers on them
which run up into the top right hand corner of the screen and which represent
the three balls drawn. The corresponding numbers are daubed on each card by the
player touching each card or touching the daub all button. Each time three
balls are drawn, a chip up or ante up system for payment is used. In other
words, each time three balls are drawn a certain amount of money is required
from the PIN credit for each card played. If a player fails to daub the card,
the card is automatically deleted and no more money is required to play that
card.
The game includes different traditional patterns and includes interim two,
three, and four corner games played on the way to completion of the patterns.
The amount a player wins on the interim games in dependent upon how many balls
have been drawn. The monitor indicates when the player has won an interim two
corners, three corners or four corners game. The monitor shows how many cards
are in play and previous numbers that have been drawn. In addition, the monitor
will indicate that a bingo has occurred, at what site the bingo has occurred,
the serial number of the winning cards, and the amount won. If the player's
credit runs out while she or he is playing, the player may simply continue play
by placing dollar bills into the bill acceptor. A player cashes out by taking
the original PIN number receipt back to the cashier.
As modified by Multimedia's July 23 telefax to me, the player must touch the
screen, within about 5 seconds, to indicate a bingo to win. If a player fails
to touch the screen the game will continue until there is a winner. In
addition, the four corners games will also continue until there is a winner or
until all players drop all cards.
The game, as described above, is materially different from the game as
previously played. In our letter of March 28, 1997, we indicated that there
were federal concerns that certain elements of the MegaMania game, as then
configured, could be viewed as Class
-2-
<PAGE> 3
III. We requested that Multimedia make specific changes to the game, and submit
the new version of the game, along with appropriate documentation, to the NIGC
for review. We also requested that the company stop play of the MegaMania game
as then configured within 14 days.
In Multimedia's letter of April 1, the new version of MegaMania was submitted.
The new MegaMania game was described as identical to the MegaMania game
reviewed on July 10, 1996, with the exception of the following changes, which
were requested in our letter of March 28:
1) the numbers or objects drawn for the bingo game are drawn with a
bingo blower instead of by an electronic number generator or other
similar device;
2) an act is required by the card holder, after the balls are drawn, to
daub the cards, instead of a fully automatic daubing system;
3) an act is required by the card holder to indicate a bingo to win,
instead of a fully automatic system; and
4) the "consolation game" is deleted from the game, and replaced by a
"four corners" game that requires players to match two, three or four of
four corners of the bingo card to win. (This letter addition of a four
corners game was not requested in our March 28 letter.)
We reviewed those changes and the materials submitted and concluded that the
new version of MegaMania described in the letter of April 1, 1997, qualified as
a Class II game. We further entered into a Memorandum of Understanding (MOU)
between Multimedia Games and the NIGC that 1) created a timeframe for
Multimedia Games to implement the changes to the MegaMania game, and 2) stated
that the NIGC would not issue a Notice of Violation, Civil Fine or Temporary
Closure Order during the pendency of the changes to the MegaMania game.
On April 30, 1997, Multimedia wrote a letter to the NIGC indicating one of the
changes agreed to in the MOU would not be profitable and therefore the change
would not be made. As a result of that letter, information received about the
use of a bill-accepter and
-3-
<PAGE> 4
our subsequent understanding that the game was not going to be a live bingo
game, we declared the MOU to be null and void. Multimedia later withdrew its
April 30 letter. A July 23, 1997, letter telefaxed to me further modified the
proposed game.
ANALYSIS
"IGRA established the Commission to regulate Indian gaming, and specifically
authorized the Commission to promulgate regulations and guidelines necessary to
implement the provisions of the Act. See 25 U.S.C. Sections 2704, 2706(b)(10)."
Shakopee Mdewakanton Sioux Community v. Hope, 16 F.3d 261, 263 (8th Cir. 1994).
In April 1992, the Commission issued definition regulations.
Those definition regulations establish:
Class II gaming means:
(a) Bingo or lotto (whether or not electronic, computer, or other
technologic aids are used) when players:
(1) Play for prizes with cards bearing numbers or other
designations;
(2) Cover numbers or designations when object, similarly numbered
or designated, are drawn or electronically determined, and
(3) Win the game by being the first person to cover a designated
pattern on such cards;
(b) If played in the same location as bingo or lotto, pull-tabs,
punch boards, tip jars, instant bingo, and other games similar to
bingo ....
25 C.F.R. Section 502.3.
Class III gaming means all forms of gaming that are not class I gaming
or class II gaming, including but not limited to:
* * * *
(b) Any slot machines as defined in 15 U.S.C. 1171(a)(1) and electronic
or electromechanical facsimiles of any game of chance ....
-4-
<PAGE> 5
25 C.F.R. Section 502.4.
Electronic, computer or other technologic aid means a device such as a
computer, telephone, cable, television, satellite or bingo blower and
that when used --
(a) Is not a game of chance but merely assists a player of the
playing of a game;
(b) Is readily distinguishable from the playing of a game of
chance on an electronic or electromechanical facsimile; and
(c) Is operated according to applicable Federal communications
law.
25 C.F.R. Section 502.7.
Electronic or electromechanical facsimile means any gambling device as
defined in 15 U.S.C. 1171(a)(2) or (3).
25 C.F.R. Section 502.8.
Games similar to bingo means any game that meets the requirements for
bingo under Sec. 502.3(a) of this part and that is not a house banking
game under Sec. 501.11 of this part.
25 C.F.R. Section 502.9.
The term "gambling device" is defined in the Johnson Act at 15 U.S.C.
Sec. 1171(a) as:
(1) any so-called "slot machine" or any other machine or mechanical
device an essential part of which is a drum or reel with insignia
thereon, and (A) which when operated may deliver, as the result of the
application of an element of chance, any money or property or (B) by the
operation of which a person may become entitled to receive, as the
result of the application of an element of chance, any money or
property; or
(2) any other machine or mechanical device (including but not limited
to, roulette wheels and similar devices) designed and manufactured
primarily for use in connection
-5-
<PAGE> 6
with gambling, and (A) which when operated may deliver, as the result of
the application of chance, any money or property, or (B) by the
operation of which a person may become entitled to receive, as the
result of the application of an element of chance, any money or
property; or
(3) any subassembly or essential part intended to be used in connection
with any such machine or mechanical device, but which is not attached to
any such machine or mechanical device as a constituent part.
GAMES SIMILAR TO BINGO
As discussed in Shakopee Mdewakanton Sioux Community v. Hope, 798 F.Supp. 1399
(D.Minn. 1992), aff'd 16 F.3d 261 (8th Cir. 1994), to be a game similar to
bingo, we must determine whether the statutory elements of bingo are essential
to the game being presented. In this instance, it is clear that the statutory
elements are key to the game.
The game clearly requires the players to use cards bearing numbers and requires
the player to cover the numbers, by daubing the cards, when the three balls are
drawn. Furthermore, the interim and final game of each play require a
predesignated pattern.
It was not clear during my site visit that players would "win the game by being
the first person to cover a designated pattern." 25 C.F.R. Section 502.3. It
appeared that in both the interim and final games that there is a potential for
having no winners for each of the games. Your subsequent July 23 changes,
however, assure that there will be winners for each of the predesignated
patterns.
Finally, a question has been raised about the ante up feature of your game.
While I am cognizant of the similarities between such a feature and slot
machines, this feature is not essential to the MegaMania game nor does it
appear to impact negatively on our analysis of the statutory and regulatory
criteria for "bingo" or a game "similar to bingo." The feature is essentially
similar to the paper card "speed bingo" or "chip up bingo" games played in
halls where the player antes up money for each number called. Therefore, while
not traditional bingo, the ante up aspect does not change the
-6-
<PAGE> 7
game so fundamentally that it prevents me from ultimately determining that this
is a game similar to bingo.
GAMBLING DEVICES UNDER U.S.C. Section 1171
Specifically included within the regulatory definition of Class III is "any
slot machines as defined in 15 U.S.C. 1171(a)(1) and electronic or
electromechanical facsimiles of any game of chance." Facsimiles is defined as
any gambling device under 15 U.S.C. Sections 1171(a)(2) and (3). Therefore, if
the game similar to bingo is using a gambling device, it would be transformed
under NIGC regulations into a Class III game.
We are not prepared, at this time, to decide whether the game uses gambling
devices. Furthermore, we believe that the manufacturer has made every effort to
develop this game with the aid of technology rather than by using gambling
devices. Therefore, we have determined that the tribes may play MegaMania
without risk of an enforcement action by the NIGC.
Please be advised that this legal opinion is advisory in nature only and that
it may be superseded, reversed, revised or reconsidered by a subsequent General
Counsel or Chairman of the Commission. Furthermore, if there are any changes
made to the game as described, such changes might materially alter our
conclusion.
Finally, by issuing this opinion, we do not speak on behalf of the Department
of Justice or the United States Attorneys who share enforcement
responsibilities with the NIGC over gambling devices.
Sincerely,
Penny J. Coleman
Acting General Counsel
-7-
<PAGE> 1
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Multimedia Games, Inc.
Registration on Forms S-3 and S-8
We are aware that our report dated July 31, 1997 on our review of the interim
financial information of Multimedia Games, Inc. for the period ended June 30,
1997, and included in this Form 10-QSB is incorporated by reference in the
Company's registration statement on Form S-3 (File No. 333-16729) and (File
No. 333-28367), and in the Company's registration statement on Form S-8 (File
No. 333-23123). Pursuant to Rule 436 (C) under the Securities Act of 1933, this
report should not be considered a part of the registration statements prepared
or certified by us within the meaning of Sections 7 and 11 of that Act.
COOPERS & LYBRAND L.L.P.
Tulsa, Oklahoma
August 1, 1997
<TABLE> <S> <C>
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<MULTIPLIER> 1,000
<S> <C>
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<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 856
<SECURITIES> 0
<RECEIVABLES> 1,435
<ALLOWANCES> 85
<INVENTORY> 463
<CURRENT-ASSETS> 3,565
<PP&E> 6,655
<DEPRECIATION> 1,608
<TOTAL-ASSETS> 11,401
<CURRENT-LIABILITIES> 2,546
<BONDS> 0
0
1
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<OTHER-SE> 6,692
<TOTAL-LIABILITY-AND-EQUITY> 11,401
<SALES> 1,445
<TOTAL-REVENUES> 26,156
<CGS> 829
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</TABLE>
