<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, 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: 0-28318
Multimedia Games, Inc.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Texas 74-2611034
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(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation)
7335 South Lewis Avenue, Suite 302
Tulsa, Oklahoma 74136
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(Address of Principal Executive Offices)
(918) 494-0576
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(Issuer's Telephone Number, Including Area Code)
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(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 30, 1998 there were 5,405,825 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, 1998 and September 30, 1997)
Consolidated Statements of Operations
(Three months ended June 30, 1998 and 1997)
Consolidated Statements of Operations
(Nine months ended June 30, 1998 and 1997)
Consolidated Statements of Cash Flows
(Nine months ended June 30, 1998 and 1997)
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, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
June September
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,145,000 $ 2,380,000
Accounts Receivable:
Trade, net of allowance for doubtful accounts
of $101,000 and $123,000 2,437,000 1,443,000
Other 119,000 123,000
Inventory 2,314,000 511,000
Prepaid expenses 283,000 61,000
Notes receivable 266,000 286,000
Notes receivable - related parties 1,400,000 1,427,000
Due from AGN L.L.C -- 381,000
Deferred tax asset 79,000 79,000
------------ ------------
Total current assets
8,043,000 6,691,000
------------ ------------
Restricted cash and cash equivalents 1,793,000 1,783,000
Notes receivable - related parties 1,196,000 1,010,000
Property and equipment, net 6,166,000 4,970,000
Other assets 102,000 95,000
Deferred tax asset-non-current 127,000 379,000
Goodwill, net 452,000 472,000
------------ ------------
Total assets $ 17,879,000 $ 15,400,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 713,000 395,000
Accounts payable and accrued expenses 2,966,000 1,853,000
Prize fulfillment fees payable 522,000 597,000
------------ ------------
Total current liabilities 4,201,000 2,845,000
------------ ------------
Long-term debt 32,000 675,000
Other long-term liabilities 1,603,000 1,603,000
Commitments and Contingencies (Note 3)
Stockholders' equity:
Preferred stock, Series A, $.01 par value, 2,000,000
shares authorized, 90,789 and 109,192 shares
issued and outstanding 1,000 1,000
Common stock, $.01 par value, 25,000,000 shares
authorized, 5,439,824 and 4,825,171 shares issued
and 5,405,825 and 4,791,172 shares outstanding 54,000 48,000
Additional paid-in capital 12,812,000 12,297,000
Stockholder notes receivable (818,000) (596,000)
Treasury stock, 33,999 shares at cost (87,000) (87,000)
Retained earnings (deficit) 81,000 (1,386,000)
------------ ------------
Total stockholders' equity 12,043,000 10,277,000
------------ ------------
Total liabilities and stockholders' equity $ 17,879,000 $ 15,400,000
============ ============
</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, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Gaming revenue $ 16,402,000 $ 8,775,000
Electronic player station sales 536,000 409,000
Electronic player station sales - related parties 1,400,000 633,000
Electronic player station lease revenue 921,000 489,000
Other 217,000 --
------------ ------------
Total revenues 19,476,000 10,306,000
------------ ------------
Operating costs and expenses:
Bingo prizes and related costs 2,134,000 2,388,000
Allotments to hall operators 10,737,000 4,735,000
Cost of electronic player stations sold 283,000 303,000
Cost of electronic player stations sold - related parties 716,000 310,000
Salaries and wages 828,000 566,000
Selling, general and administrative expenses 2,504,000 1,164,000
Amortization and depreciation 814,000 412,000
------------ ------------
Total operating costs and expenses 18,016,000 9,878,000
------------ ------------
Operating income 1,460,000 428,000
Interest income 84,000 10,000
Interest expense (23,000) (33,000)
------------ ------------
Income before income taxes 1,521,000 405,000
Income taxes
577,000 --
------------ ------------
Net income $ 944,000 $ 405,000
============ ============
Basic earnings per common share $ .17 $ .09
============ ============
Diluted earnings per common and equivalent share $ .15 $ .06
============ ============
</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, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Gaming revenue $ 42,383,000 $ 23,633,000
Electronic player station sales 580,000 812,000
Electronic player station sales - related parties 3,750,000 633,000
Electronic player station lease revenue 2,352,000 1,077,000
Other 223,000 1,000
------------ ------------
Total revenues 49,288,000 26,156,000
------------ ------------
Operating costs and expenses:
Bingo prizes and related costs 6,831,000 6,767,000
Allotments to hall operators 26,730,000 12,247,000
Cost of electronic player stations sold 310,000 519,000
Cost of electronic player stations sold - related parties 1,878,000 310,000
Salaries and wages 2,275,000 1,519,000
Selling, general and administrative expenses 6,753,000 3,227,000
Amortization and depreciation 2,160,000 1,015,000
------------ ------------
Total operating costs and expenses 46,937,000 25,604,000
------------ ------------
Operating income 2,351,000 552,000
Interest income 225,000 22,000
Interest expense (81,000) (132,000)
------------ ------------
Income before income taxes 2,495,000 442,000
Income taxes 948,000 --
------------ ------------
Net income $ 1,547,000 $ 442,000
============ ============
Basic earnings per common share $ .28 $ .09
============ ============
Diluted earnings per common and equivalent share $ .23 $ .08
============ ============
</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, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,547,000 $ 442,000
Adjustments to reconcile net income to cash
provided by (used for) operating activities:
Amortization and depreciation 2,160,000 1,015,000
Deferred taxes 252,000 --
Other non-cash expenses (7,000) 77,000
(Increase) decrease in:
Accounts and notes receivable (1,129,000) (2,185,000)
Inventory (1,803,000) (105,000)
Prepaid expenses and due from AGN LLC 159,000 9,000
Increase (decrease) in:
Accounts payable and accrued expenses 1,113,000 279,000
Hall's share of surplus -- (31,000)
Prize fulfillment fees payable (75,000) (21,000)
----------- -----------
Net cash provided by (used for) operating activities 2,217,000 (520,000)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (3,336,000) (2,712,000)
Increase in cash balances in restricted escrow (10,000) (7,000)
----------- -----------
Net cash provided by (used for) investing activities (3,346,000) (2,719,000)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock 299,000 2,490,000
Increase in long-term debt -- 489,000
Principal repayments of debt (325,000) (288,000)
Payment of preferred stock dividends (80,000) (104,000)
----------- -----------
Net cash provided by (used for) financing activities (106,000) 2,587,000
----------- -----------
Net change in cash and cash equivalents (1,235,000) (652,000)
Cash and cash equivalents, beginning of period 2,380,000 1,508,000
----------- -----------
Cash and cash equivalents, end of period $ 1,145,000 $ 856,000
=========== ===========
</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, 1997 contained within the Company's Annual Report on Form 10-KSB.
The financial statements included herein as of June 30, 1998 and for
each of the three and nine month periods ended June 30, 1998 and 1997, 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 statement of results for the
periods. Results for the three and nine months ended June 30, 1998, are not
necessarily indicative of the results which will be realized for the year
ending September 30, 1998. The September 30, 1997 consolidated balance sheet
data was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
INCOME (LOSS) PER COMMON SHARE - Income (loss) per common share is
computed in accordance with Statement of Financial Accounting Standards No.
128 ("FAS 128"), which is effective for reporting periods ending after
December 15, 1997. FAS 128 requires the restatement of prior year's earnings
(loss) per share to conform to the new standard. Presented below is a
reconciliation of income (loss) available to common shareholders and the
differences between actual weighted average shares outstanding, which are
used in computing basic earnings per share and diluted weighted average
shares, which are used in computing diluted earnings per share.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
6/30/98
Per Share
Income Shares Amount
------------ ------------ ----------
<S> <C> <C> <C>
Net income (loss) $ 944,000
Less: preferred stock dividends (25,000)
Basic EPS:
------------
Income (loss) available to
common shareholders 919,000 5,374,144 $ .17
=========
Effect of Dilutive Securities:
Options 325,143
Warrants 29,811
Convertible preferred stock 25,000 435,195
Diluted EPS:
------------ ------------
Income (loss) available to common
Shareholders plus assumed conversions $ 944,000 6,164,293 $ .15
============ ============ =========
</TABLE>
<PAGE> 8
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
6/30/97
Per Share
Income Shares Amount
------------ ------------ ----------
<S> <C> <C> <C>
Net income (loss) $ 405,000
Less: preferred stock dividends (30,000)
Basic EPS:
------------
Income (loss) available to
common shareholders 375,000 4,294,431 $ .09
=========
Effect of Dilutive Securities:
Options 429,334
Warrants 712,490
Contingent shares 383,437
Convertible preferred stock 30,000 527,510
Diluted EPS:
------------ ------------
Income (loss) available to common
Shareholders plus assumed conversions $ 405,000 6,347,202 $ .06
============ ============ =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
6/30/98
Per Share
Income Shares Amount
------------ ------------ ----------
<S> <C> <C> <C>
Net income (loss) $ 1,547,000
Less: preferred stock dividends (80,000)
Basic EPS:
------------
Income (loss) available to
Common shareholders 1,467,000 5,311,400 $ .28
=========
Effect of Dilutive Securities:
Options 595,948
Warrants 434,787
Convertible preferred stock 80,000 444,359
Diluted EPS:
------------ ------------
Income (loss) available to common
Shareholders plus assumed conversions $ 1,547,000 6,786,494 $ .23
============ ============ =========
</TABLE>
<PAGE> 9
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
6/30/97
Per Share
Income Shares Amount
------------ ------------ ----------
<S> <C> <C> <C>
Net income (loss) $ 442,000
Less: preferred stock dividends (104,000)
Basic EPS:
------------
Income (loss) available to
common shareholders 338,000 3,958,047 $ .09
=========
Effect of Dilutive Securities:
Options 331,072
Warrants 231,429
Contingent Shares 372,000
Convertible preferred stock 104,000 527,510
Diluted EPS:
------------ ------------
Income (loss) available to common
shareholders plus assumed conversions $ 442,000 5,420,058 $ .08
============ ============ =========
</TABLE>
2. AMERICAN GAMING NETWORK
American Gaming Network L.L.C. and its predecessors ("AGN") were
originally formed by the Company and a 50% third party partner in July 1995
to pursue the development of gaming opportunities on the Internet.
In July 1996, the Company purchased the 50% interest of the third party
partner through a newly formed entity ("AGN Venturers L.L.C."), for
consideration that included a $400,000 note payable by the new entity to the
third party partner (the " $400,000 Note"). Contemporaneously, the Company
sold AGN Venturers L.L.C. to a group of investors ("Investors"), for
$100,000, the agreement of the Investors to contribute $400,000 to AGN and a
several guarantee of each Investor of AGN's note payable to the Company in
the amount of $336,000, which evidenced working capital advances previously
made to AGN by the Company. One of the Investors is Gordon T. Graves, the
Company's Chairman of the Board and Chief Executive Officer, who acquired
10% of AGN Venturers L.L.C. At September 30, 1997, in addition to the
$336,000 note, AGN owed the Company $45,000. The $336,000 note was repaid in
October 1997.
Simultaneously with the sale of AGN Venturers L.L.C., the Company and
AGN Venturers L.L.C. entered into a Put and Call Agreement pursuant to which
AGN Venturers L.L.C. had the right to "put" back to the Company its 51%
interest in AGN and repay the $336,000 note in exchange for 278,667 shares
of Common Stock. The Put and Call Agreement further provides that the
Company would issue AGN Venturers L.L.C. an additional 133,333
<PAGE> 10
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
shares upon the payment by AGN Venturers L.L.C. of the $400,000 note which
was guaranteed by AGN. In October 1997, AGN Venturers L.L.C. exercised its
"put" right with respect to the 278,667 shares and in December 1997 paid
the $400,000 note and exercised its "put" right with respect to the 133,333
shares. As a result, beginning in the first quarter of fiscal 1998, AGN is
100% owned by the Company. As a result of the exercise of the put rights by
AGN Venturers L.L.C., Mr. Graves acquired 41,200 shares of Common Stock.
3. COMMITMENTS AND CONTINGENCIES
MegaMania Litigation
NORTHERN DISTRICT OF OKLAHOMA. On December 31, 1997, the U.S. Attorney
(the "Tulsa U.S. Attorney") for the Northern District of Oklahoma (the
"Northern District") filed a civil forfeiture action in the Federal District
Court for the Northern District against the player stations and centralized
computer equipment used to play MegaMania located in the Northern District.
On that same day, agents of the Federal Bureau of Investigation entered the
Company's headquarters in Tulsa, Oklahoma and seized the Company's central
computer system, which caused the play of MegaMania to cease throughout the
Company's nationwide MegaMania network. Agents also entered the bingo halls
of the Cherokee Nation and Seneca-Cayuga tribe in the Northern District and
seized in-place approximately 300 MegaMania player stations. Agents also
entered the bingo hall of the Choctaw nation in the Eastern District of
Oklahoma and seized the Company's bingo ball blower that was used to draw
numbers for the play of MegaMania. No other seizure or enforcement action
was taken outside the Northern District. About 18 hours following the
seizure actions, the Company was again operating MegaMania throughout its
MegaMania network through the use of back-up systems, except at the bingo
halls in the Northern District where the MegaMania player stations were
seized, and such play has continued without interference or interruption by
governmental authorities since that time.
On January 5, 1998, the Company and the Seneca-Cayuga tribe filed a
Complaint For Declaratory Relief in the Northern District seeking a
declaration by the courts that MegaMania is a legal Class II bingo game as
permitted by the Indian Gaming Regulatory Act of 1988 (the "Gaming Act").
The Cherokee Nation subsequently joined the Company and the Seneca-Cayuga
tribe as plaintiffs in the action.
<PAGE> 11
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
On January 23, 1998, the Company, the Seneca-Cayuga tribe and the
Cherokee Nation entered into a standstill agreement with the Tulsa U.S.
Attorney and the other U.S. Attorneys in Oklahoma which allowed the bingo
halls of the Seneca-Cayuga's and Cherokee's to immediately commence playing
MegaMania, assured the Company and the tribes that no other seizure or
enforcement action would be taken in Oklahoma while the matter was before
the court, and agreed to a speedy trial on the merits of MegaMania. On May
5, 1998, the Company, the Seneca-Cayuga tribe and the Cherokee Nation filed
a Motion for Partial Summary Judgment seeking a declaration by the court
that MegaMania is a Class II game. On July 17, 1998, the Company, the
Seneca-Cayuga tribe and the Cherokee Nation filed a second Motion for
Partial Summary Judgment seeking a determination that the electronic player
stations used to play MegaMania are legal technological aids to the play of
bingo and not illegal "gambling devices" in violation of the Johnson Act. In
August 1998, these two motions were consolidated into a single motion for
Summary Judgment. Very preliminary discovery has been commenced by the Tulsa
U.S. Attorney who has not yet filed any substantive response to the Motion
for Summary Judgment.
WASHINGTON D.C. On January 12. 1998, the Choctaw Nation of Oklahoma,
the Chickasaw Nation of Oklahoma and the Cheyenne-Arapaho Tribe of Oklahoma
filed a Complaint against the Department of Justice (DOJ) in the Federal
Court for the District of Columbia seeking a declaration that MegaMania is a
legal Class II bingo game. Three additional tribes, the Shoalwater Bay
Indian Tribe from the State of Washington, and the Cabazon Band of Mission
Indians and the Viejas Band of Kumeyaay Indians from the state of
California, subsequently intervened as additional plaintiffs. The DOJ has
filed a motion to transfer this case to the Northern District, which has
been opposed by the plaintiffs. The Judge has yet to rule on this motion.
NORTHERN DISTRICT OF CALIFORNIA. On May 14, 1998, the Assistant U.S.
Attorney (the "San Francisco AUSA") for the Northern District of California
filed a Complaint for Civil Forfeiture against approximately 100 electronic
gaming devices operated by the Red Fox tribe at its casino in Laytonville
Rancheria, California. This action was one of approximately 30 other actions
taken in California against Indian tribes that had refused to sign the
so-called "Pala Compact" with the State of California. Included in the Red
Fox complaint were approximately 20 MegaMania electronic player stations.
MegaMania player stations operated by other tribes in California were not
included in any complaints. On July 13, 1998, the San Francisco AUSA advised
the Company that he would not dismiss the Company's MegaMania player
stations from the Red Fox Complaint and on July 22, 1998, the San Francisco
AUSA filed a motion with the court seeking permission to seize the machines
that were the subject of the May 14, 1998 Complaint. The Company has opposed
the seizure motion and has filed its own motions for summary judgment
seeking determinations that MegaMania is a legal Class II bingo game and
that the MegaMania electronic player stations are legal technological aids
to the play of bingo and not illegal "gambling devices" in violation of the
Johnson Act. A hearing on the government's seizure motion and on the
Company's summary judgment motions is scheduled for early September, 1998.
<PAGE> 12
The Company intends to vigorously defend its position that MegaMania is
a Class II game; however, 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. Even if the Company is successful on the merits, the legal fees
and expenses to be incurred by the Company related to the MegaMania
litigation will be significant and are expected to materially and adversely
affect the Company's reported earnings during the periods in which legal
services are rendered and the related costs are incurred by the Company.
Network Gaming Litigation
On February 2, 1998, a complaint was filed by Network Gaming
International Corporation ("NGI") in the Federal District Court for the
Northern District of Oklahoma against the Company alleging, among other
things, breach of contract, misappropriation of trade secrets, fraud and
interference with prospective advantage. The complaint, which seeks $62
million in damages and other specified and unspecified relief, also names
Gordon T. Graves, the Company's Chairman of the Board, and Larry D.
Montgomery, the Company's former President, as individual defendants. On
January 23, 1998, the Company had filed its own action in the Court against
NGI for breach of contract.
The dispute arises out of a series of related agreements entered into
between the parties in December 1995 and May and June 1996. In general,
these agreements contemplate the cross-licensing of certain intellectual
property and equipment distribution rights. In its January 23 complaint, the
Company alleges that NGI failed to perform certain obligations owed the
Company under a Licensing and Distribution Agreement wherein the Company
licensed certain rights to NGI with respect to Canada and China and that NGI
failed to perform certain obligations owed the Company under a Licensing and
Distribution Agreement wherein NGI licensed certain rights to the Company
with respect to the United States. In its February 2 complaint, NGI alleges
just the opposite - that the Company failed to perform the obligations owed
by it to NGI under both contracts.
<PAGE> 13
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
These actions are in the very preliminary stages and no discovery has
yet been taken by either party. The Company intends to vigorously defend
against the claims of NGI and to prosecute its own claim. While the Company
believes that it will ultimately prevail on the merits, no assurances to
that effect can be given. In any event, the cost of defending the actions
could be substantial. In connection with the December 1995 transaction, the
Company capitalized the $500,000 cost of the license acquired from NGI,
which the Company is amortizing over the five-year term of the related
License and Distribution Agreement. As of June 30, 1998, the unamortized
amount, including certain additional software development costs, was
$386,000, which the Company is continuing to amortize. The Company believes
that the most likely conclusion of the dispute with NGI will include an
affirmation of the Company's right to use the NGI license in connection with
the Company's planned business. As a result, the Company has determined that
it is only reasonably possible that this asset has been impaired and
accordingly has recorded no reduction in the carrying value of the asset as
of June 30, 1998, other than normal amortization. However, subsequent events
may occur which would cause the Company to determine that it is necessary
and appropriate to reduce, or to accelerate the rate of amortization of, all
or a portion of such capitalized cost. Any such reduction or acceleration
will have an adverse effect upon the reported earnings of the Company for
the period in which such action is taken which could, depending upon the
period involved and the earnings of the Company for such period, be
material. See Notes 4 and 5 of Notes to Consolidated Financial Statements
contained within the Company's Annual Report on Form 10-KSB for the fiscal
year ended September 30, 1997.
FlashCash Litigation
In February 1998, the Company introduced FlashCash; a bingo game played
on interconnected electronic player stations located at participating Indian
bingo halls. The Company has submitted FlashCash to the NIGC for approval of
the game as Class II gaming; no determination has yet been made by the NIGC.
The Company also submitted FlashCash to the Tulsa U.S. Attorney and
requested a letter from the Tulsa U.S. Attorney that FlashCash was a legal
Class II bingo game. The Tulsa U.S. Attorney declined to issue an opinion
and in February 1998, the Company filed a Complaint for Declaratory Relief
in the Northern District of Oklahoma seeking a declaration by the court that
FlashCash is a legal Class II bingo game as permitted by the Gaming Act. No
discovery has commenced and the matter remains in a very preliminary stage.
The Company intends to vigorously defend its position that FlashCash is a
Class II bingo game; however, no assurances can be given that the Company
will be successful on the merits. To date, FlashCash has been well received
by customers so that, if FlashCash is ultimately determined to be Class III
gaming, the loss of the FlashCash business could have a material and adverse
effect upon the Company's financial condition and results of operations.
Even if successful on the merits, the Company will incur legal fees and
expenses in defending its position, which could be significant and which
could, therefore, have a material and adverse effect upon the Company's
reported earnings for the periods in which such legal services are rendered
and the related costs are incurred by the Company.
<PAGE> 14
Shareholder Class Actions
On June 9, 1998, the company received a copy of a Summons and Class
Action Complaint for Violations of Federal Securities Laws, that was filed
on May 29, 1998, in the Federal District Court for the Southern District of
California. Also named as defendants were Gordon T. Graves, the Company's
Chairman of the Board, and Larry D. Montgomery, the Company's former
President. The Complaint, which seeks an unspecified amount of damages on
behalf of all similarly situated shareholders, alleges that the Company
violated federal securities laws by making allegedly false and misleading
statements regarding MegaMania, the Company's interactive, high speed, bingo
game.
On July 24, 1998, a similar class action was filed in the Federal Court
for the Northern District of Oklahoma.
These actions are in very preliminary stages. The Company intends to
vigorously defend against these claims and expects to prevail on the merits.
However, the cost of defending against the claims could by substantial.
<PAGE> 15
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Other Litigation
The Company is a party to various other 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.
4. RELATED PARTY TRANSACTIONS
In March 1998, the Company entered into an agreement to sell electronic
player stations and related equipment to a third party for a sales price of
approximately $2.4 million. The sales price was paid in March 1998 by
delivery to the Company of a promissory note of the third party purchaser
that was due and payable on or before April 30, 1998. Subsequent to March
31, 1998, the third party purchaser assigned its right under the purchase
agreement to a newly-formed limited liability company ("EPLLC-2"). An
affiliate of Gordon T. Graves, the Company's Chairman of the Board and Chief
Executive Office, and Clifton Lind, the Company's President and Chief
Operating Officer, each owned a 10.5% interest in EPLLC-2. Mr. Graves also
owns and controls the corporation having management authority over EPLLC-2.
The terms of the sale which was assigned to EPLLC-2 are the same as the
original terms entered into with the third party purchaser in March 1998.
The promissory note was paid by EPLLC-2 on May 15, 1998.
In June 1998, the Company sold electronic player stations and related
equipment to EPLLC-2 for a sales price of approximately $1.4 million, which
included a non-refundable deposit of $140,000 received on the effective date
of this transaction. The sales price was paid in June 1998 by delivery to
the Company of a promissory note of EPLLC-2 that was due and payable on or
before July 15, 1998 out of funds contributed to EPLLC-2 from a group of
investors that did not include either Mr. Graves or Mr. Lind or any other
officer, director or employee of the Company. As a result of the additional
contribution, the ownership interest of each of Mr. Graves and Mr. Lind in
EPLLC-2 was reduced to 6.36%. Mr. Graves continues to own and control the
corporation having management authority over EPLLC-2.
<PAGE> 16
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, 1998, and the related
consolidated statements of operations for the three and nine month periods
ended June 30, 1998, and the consolidated statement of cash flows for the
nine month period ended June 30, 1998. 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, 1997,
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 23, 1997, 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, 1997 is
fairly stated in all material respects in relation to the consolidated
balance sheet from which is has been derived.
PricewaterhouseCoopers LLP
Tulsa, Oklahoma
August 7, 1998
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
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.
Prior to August 1995, the Company's principal business was to
conduct high stakes bingo games under the names MegaBingo, MegaCash and
MegaBingo Lite. MegaBingo and MegaCash are played simultaneously at
multiple bingo halls using a closed-circuit television satellite link
thereby allowing a greater number of players to compete against one
another for prizes generally larger than could be offered by a bingo
hall acting alone. The participating bingo halls are owned and operated
on behalf of American Indian tribes and are located in the States of
Arizona, California, Kansas, Minnesota, New Mexico, Oklahoma and South
Dakota, among others. MegaBingo Lite provides smaller prizes to
similarly linked Indian bingo halls and is presently delivered to bingo
halls located primarily in the State of Oklahoma.
In August 1995, the Company introduced MegaMania, a high-speed
bingo game developed by the Company that allows customers to purchase
bingo cards and to play bingo on an interactive electronic player
station that requires rapid decisions and presents game results in a
fast-action color video format featuring graphics and animation
accompanied by sound. In February 1998, the Company introduced another
Class II game similar to MegaMania called FlashCash. In June 1998
another Class II Bingo game was introduced called CornerCash. In all
three games, the stations are interconnected with other stations at
participating bingo halls through the Company's computer network, thus
allowing players to compete against one another to win a common pooled
prize.
Significant revenue generation for FlashCash did not begin until
March 1998, and CornerCash has yet to generate significant revenue. As
of June 30, 1998, MegaMania, FlashCash, and CornerCash are played at 58
independently owned American Indian bingo halls, located in 11 different
states, primarily Oklahoma.
In June 1998, the Company launched MegaRacing, which provides
horse racing signals and related services to off-track betting (OTB)
facilities operated by Indian tribes pursuant to compacts with the State
in which the tribes are located. The Company presently serves two OTB
facilities in the State of Oklahoma.
RESULTS OF OPERATIONS
The Three Months Ended June 30, 1998 and 1997:
The Company's total operating revenues were $19,476,000 and
$10,306,000 for the three months ending June 30, 1998 and 1997
respectively, or an increase of $9,170,000. The increase was primarily a
result of an increase in gaming revenue of $7,627,000, an increase in
electronic player station sales of $127,000, an increase in electronic
player station sales to related parties of $767,000, an increase in
electronic player station lease revenue of $432,000 and an increase of
$217,000 in other income consisting of $101,000 of MegaRacing income and
<PAGE> 18
management fee increases of $116,000. The increase in gaming revenue was
driven by increased MegaMania gaming revenues of $4,588,000, revenues of
$3,362,000 from FlashCash that was introduced in February 1998, and
revenues of $118,000 from CornerCash that was introduced in June 1998,
which were partially offset by MegaBingo revenue decreases. The Company
had an average of approximately 2,450 electronic player stations in
operation during the three months ended June 30, 1998 compared to an
average of approximately 1,060 during the same three months of 1997,
which accounts for a substantial portion of the increase in gaming
revenues during the current period.
Bingo prizes and related costs were $2,134,000 and $2,388,000 for
the three months ended June 30, 1998 and 1997 respectively, or a
decrease of $254,000. The decrease resulted from decreased MegaBingo
operations during the period, partially offset by a change in the
MegaBingo prize structure.
Allotments to hall operators were $10,737,000 and $4,735,000 for
the three months ended June 30, 1998 and 1997 respectively. The increase
of $6,002,000 resulted primarily from the increase in MegaMania and
FlashCash gaming operations.
Cost of electronic player stations sold was $283,000 and $303,000
for the three months ended June 30, 1998 and 1997, respectively, or a
decrease of $20,000, primarily due to fewer units sold during the
current period.
Cost of electronic player stations sold to related parties was
$716,000 and $310,000 for the three months ended June 30, 1998 and 1997
respectively, or an increase of $406,000, primarily due to an increase
in the number of units sold to related parties during the current
period.
Salaries and wages were $828,000 and $566,000 for the three
months ended June 30, 1998 and 1997 respectively, or an increase of
$262,000. The increase was primarily due to additional staff needed for
the increased MegaMania, FlashCash, and CornerCash operations.
Selling, general and administrative expenses were $2,504,000 and
$1,164,000 for the three months ending June 30, 1998 and 1997,
respectively, or an increase of $1,340,000. The increase is primarily
due to an increase in legal and professional fees of approximately
$614,000 primarily as a result of the MegaMania litigation, an increase
in business meals and travel of approximately $94,000, an increase in
contract labor and services of approximately $114,000, an increase in
advertising expenses of approximately $77,000, an increase in telephone
expense of approximately $132,000, primarily as a result of increased
MegaMania and FlashCash activity, an increase in rent expense of
approximately $25,000 due to the additional office and warehouse space
in Austin, Texas, an increase in bad debt expense of $46,000, and
increased other costs of approximately $157,000 primarily as a result of
increased MegaMania and FlashCash activity. In addition MegaRacing was
launched during the current quarter and had expenses of $81,000.
Amortization and depreciation expense was $814,000 and $412,000
for the three months ending June 30, 1998 and 1997 respectively, or an
increase of $402,000. The increase results from the acquisition of
additional MegaMania, FlashCash, and CornerCash electronic player
stations.
<PAGE> 19
The Nine Months Ended June 30, 1998 and 1997:
The Company's total operating revenues were $49,288,000 and
$26,156,000 for the nine months ended June 30, 1998 and 1997
respectively, or an increase of $23,132,000. The increase was primarily
a result of an increase in gaming revenue of $18,750,000, a decrease in
electronic player station sales of $232,000, an increase in electronic
player station sales to a related party of $3,117,000, an increase in
electronic player station lease revenue of $1,275,000 and an increase of
$222,000 in other income consisting of $101,000 of MegaRacing income and
management fee increases of $121,000. The increase in gaming revenue was
driven by increased MegaMania gaming revenues of $14,896,000, revenues
of $4,134,000 from the introduction of FlashCash in February 1998 and
revenues of $118,000 from CornerCash that was introduced in June 1998,
partially offset by MegaBingo revenue decreases. The Company had an
average of approximately 1,930 electronic player stations in operation
during the nine months ended June 30, 1998 compared to an average of
approximately 871 during the same nine months of 1997, which accounts
for a substantial portion of the increase in gaming revenues during the
current period.
Bingo prizes and related costs were $6,831,000 and $6,767,000 for
the nine months ended June 30, 1998 and 1997 respectively, or an
increase of $64,000. The increase resulted from a change in the
MegaBingo prize structure partially offset by decreased MegaBingo
operations during the period.
Allotments to hall operators were $26,730,000 and $12,247,000 for
the nine months ended June 30, 1998 and 1997 respectively. The increase
of $14,483,000 resulted primarily from the increase in MegaMania and
FlashCash gaming operations.
Cost of electronic player stations sold was $310,000 and $519,000
for the nine months ended June 30, 1998 and 1997, respectively, or a
decrease of $209,000, primarily due to fewer untis sold during the
current period.
Cost of electronic player stations sold to related parties was
$1,878,000 and $310,000 for the nine months ended June 30, 1998 and
1997, respectively, or an increase of $1,568,000, primarily due to an
increase in the number of units sold to related parties during the
current period.
Salaries and wages were $2,275,000 and $1,519,000 for the nine
months ended June 30, 1998 and 1997 respectively, or an increase of
$756,000. Salaries and wages increased during the nine months ended June
30, 1998 due to additional staff needed for the increased MegaMania,
FlashCash, and CornerCash operations.
Selling, general and administrative expenses were $6,753,000 and
$3,227,000 for the nine months ending June 30, 1998 and 1997,
respectively, or an increase of $3,526,000. The increase is primarily
due to an increase in legal and professional fees of approximately
$1,773,000, primarily as a result of the MegaMania litigation and of
increased legal and regulatory activity, an increase in contract labor
and service expenses of approximately $317,000 related primarily to
increased MegaMania and FlashCash activity, an increase of $284,000 for
advertising and the annual report to stockholders, an increase in
business meals and travel of approximately $305,000, an increase in
telephone expense of $345,000, primarily as a result of increased
MegaMania and FlashCash activity, an increase in rent expense of $56,000
due to the additional office and warehouse space in Austin, Texas, an
increase in bad debt expense of $46,000 and increased other costs of
approximately $319,000 primarily as a result of increased MegaMania
<PAGE> 20
and FlashCash activity. In addition MegaRacing was launched during the
period and had expenses of approximately $81,000.
Amortization and depreciation expense was $2,160,000 and
$1,015,000 for the nine months ending June 30, 1998 and 1997
respectively, or an increase of $1,145,000. The increase resulted
primarily from the acquisition of additional MegaMania and FlashCash
electronic player stations.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had $1,145,000 in unrestricted cash
and cash equivalents, a decrease of $1,235,000 from September 30, 1997.
During the nine month period ended June 30, 1998, the Company had
positive cash flow from operations of $2,217,000 versus negative cash
flow of $520,000 in the same period of the prior year. The primary
components of cash flows from operations in the current nine month
period include a significant increase in net income, net of non-cash
charges, an increase in accounts and notes receivable of $1,129,000, an
increase in inventory of $1,803,000, and an increase in accounts payable
accrued expenses and prize fulfillment fees payable of $1,038,000. As a
result, at June 30, 1998, the Company had positive working capital of
$3,842,000.
In March 1998, the Company entered into an agreement to sell
electronic player stations and related equipment to a third party for a
sales price of approximately $2.4 million. The sales price was paid in
March 1998 by delivery to the Company of a promissory note of the third
party purchaser that was due and payable on or before April 30, 1998.
Subsequent to March 31, 1998, the third party purchaser assigned its
right under the purchase agreement to a newly-formed liability company
("EPLLC-2"). An affiliate of Gordon T. Graves, the Company's Chairman of
the Board and Chief Executive Office, and Clifton Lind, the Company's
President and Chief Operating Officer, each owned a 10.5% interest in
EPLLC-2. Mr. Graves also owns and controls the corporation having
management authority over EPLLC-2. The terms of the sale which was
assigned to EPLLC-2 are the same as the original terms entered into with
the third party purchaser in March 1998. The promissory note was paid by
EPLLC-2 on May 15, 1998.
In June 1998, the Company sold electronic player stations and
related equipment to EPLLC-2 for a sales price of approximately $1.4
million, which included a non-refundable deposit of $140,000 received on
the effective date of the transaction. The sales price was paid in June
1998 by delivery to the Company of a promissory note of EPLLC-2 that was
due and payable on or before July 15, 1998 out of funds contributed to
EPLLC-2 from a group of investors that did not include either Mr. Graves
or Mr. Lind or any other officer, director or employee of the Company.
As a result of the additional contribution, the ownership interest of
each of Mr. Graves and Mr. Lind in EPLLC-2 was reduced to 6.36%. Mr.
Graves continues to own and control the corporation having management
authority over EPLLC-2.
During the quarter ended March 31, 1998, the Company incurred
legal fees and expenses of approximately $1,288,000, or an increase of
$1,099,000 when compared to the quarter ended December 31, 1997. Most of
the increase was incurred in the month of January 1998, as the Company
responded to the December 31, 1997 actions by the Tulsa U.S. Attorney in
attempting to shut-down the Company's MegaMania bingo game. During the
quarter ending June 30, 1998, legal fees and expenses were $690,000.
While legal fees and expenses related to MegaMania and other litigation
involving the Company will continue to be significant and will continue
to materially and adversely effect the Company's reported earnings for
the periods in which the legal services are performed and the related
costs are incurred by the Company, such fees and expenses are not
expected to approach the levels seen in January 1998, and are expected
to approximate the
<PAGE> 21
levels seen during the third fiscal quarter. The Company believes that
its current operations, including the payment of its expected legal
fees and expenses and the purchase, assembly and installation of
approximately 250 player stations per month, can be sustained from cash
from operations, which is expected to include sales of electronic player
stations to private investors, which may include related parties. Any
sales of electronic player stations to private investors will likely
have an effective cost to the Company that is significantly greater than
could otherwise be obtained through traditional financing sources. The
purchase, assembly and installation of additional electronic player
stations to further expand the Company's electronic gaming operations
will require funding from external sources. The Company does not
anticipate being able to access the more traditional sources of
equipment financing pending a satisfactory outcome of the MegaMania
litigation. No assurances can be given that the Company will be able to
obtain such additional funding on a timely basis or upon terms
satisfactory to the Company.
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, the uncertainties inherent to the outcome of any litigation
as well as 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, 1997, 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> 22
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MegaMania Litigation
NORTHERN DISTRICT OF OKLAHOMA. On December 31, 1997, the Tulsa U.S.
Attorney for the Northern District of Oklahoma filed a civil forfeiture action
in the Federal District Court for the Northern District against the player
stations and centralized computer equipment used to play MegaMania located in
the Northern District. On that same day, agents of the Federal Bureau of
Investigation entered the Company's headquarters in Tulsa, Oklahoma and seized
the Company's central computer system, which caused the play of MegaMania to
cease throughout the Company's nationwide MegaMania network. Agents also entered
the bingo halls of the Cherokee Nation and Seneca-Cayuga tribe in the Northern
District and seized in-place approximately 300 MegaMania player stations. Agents
also entered the bingo hall of the Choctaw nation in the Eastern District of
Oklahoma and seized the Company's bingo ball blower that was used to draw
numbers for the play of MegaMania. No other seizure or enforcement action was
taken outside the Northern District. About 18 hours following the seizure
actions, the Company was again operating MegaMania throughout its MegaMania
network through the use of back-up systems, except at the bingo halls in the
Northern District where the MegaMania player stations were seized, and such play
has continued without interference or interruption by governmental authorities
since that time.
On January 5, 1998, the Company and the Seneca-Cayuga tribe filed a
Complaint For Declaratory Relief in the Northern District seeking a declaration
by the courts that MegaMania is a legal Class II bingo game as permitted by the
Indian Gaming Regulatory Act of 1988 (the "Gaming Act"). The Cherokee Nation
subsequently joined the Company and the Seneca-Cayuga tribe as plaintiffs in the
action.
On January 23, 1998, the Company, the Seneca-Cayuga tribe and the
Cherokee Nation entered into a standstill agreement with the Tulsa U.S. Attorney
and the other U.S. Attorneys in Oklahoma which allowed the bingo halls of the
Seneca-Cayuga's and Cherokee's to immediately commence playing MegaMania,
assured the Company and the tribes that no other seizure or enforcement action
would be taken in Oklahoma while the matter was before the court, and agreed to
a speedy trial on the merits of MegaMania. On May 5, 1998, the Company, the
Seneca-Cayuga tribe and the Cherokee Nation filed a Motion for Partial Summary
Judgment seeking a declaration by the court that MegaMania is a Class II game.
On July 17, 1998, the Company, the Seneca-Cayuga tribe and the Cherokee Nation
filed a second Motion for Partial Summary Judgment seeking a determination that
the electronic player stations used to play MaegaMain are legal technological
aids to the play of bingo and not illegal "gambling devices" in violation of the
Johnson Act. In August 1998, these two motions were consolidated into a single
motion for Summary Judgment. Very preliminary discovery has been commenced by
the Tulsa U.S. Attorney who has not yet filed any substantive response to the
Motion for Summary Judgment.
<PAGE> 23
WASHINGTON D.C. On January 12. 1998, the Choctaw Nation of Oklahoma,
the Chickasaw Nation of Oklahoma and the Cheyenne-Arapaho Tribe of Oklahoma
filed a Complaint against the Department of Justice (DOJ) in the Federal Court
for the District of Columbia seeking a declaration that MegaMania is a legal
Class II bingo game. Three additional tribes, the Shoalwater Bay Indian Tribe
from the State of Washington, and the Cabazon Band of Mission Indians and the
Viejas Band of Kumeyaay Indians from the State of California, subsequently
intervened as additional plaintiffs. The DOJ has filed a motion to transfer this
case to the Northern District, which has been opposed by the plaintiffs. The
Judge has yet to rule on this motion.
NORTHERN DISTRICT OF CALIFORNIA. On May 14, 1998, the Assistant U.S.
Attorney (the "San Francisco AUSA") for the Northern District of California
filed a Complaint for Civil Forfeiture against approximately 100 electronic
gaming devices operated by the Red Fox tribe at its casino in Laytonville
Rancheria, California. This action was one of approximately 30 other actions
taken in California against Indian tribes that had refused to sign the so-called
"Pala Compact" with the State of California. Included in the Red Fox complaint
were approximately 20 MegaMania electronic player stations. MegaMania player
stations operated by other tribes in California were not included in any
complaints. On July 13, 1998, the San Francisco AUSA advised the Company that he
would not dismiss the Company's MegaMania player stations from the Red Fox
Complaint and on July 22, 1998, the San Francisco AUSA filed a motion with the
court seeking permission to seize the machines that were the subject of the May
14, 1998 Complaint. The Company has opposed the seizure motion and has filed its
own motions for summary judgment seeking determinations that MegaMania is a
legal Class II bingo game and that the MegaMania electronic player stations are
legal technological aids to the play of bingo and not illegal "gambling devices"
in violation of the Johnson Act. A hearing on the government's seizure motion
and on the Company's summary judgment motions is scheduled for early September,
1998.
The Company intends to vigorously defend its position that MegaMania
is a Class II game; however, 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. Even if the
Company is successful on the merits, the legal fees and expenses to be incurred
by the Company related to the MegaMania litigation will be significant and are
expected to materially and adversely affect the Company's reported earnings
during the periods in which legal services are rendered and the related costs
are incurred by the Company.
Network Gaming Litigation
On February 2, 1998, a complaint was filed by Network Gaming
International Corporation ("Network Gaming") in the Federal District Court for
the Northern District of Oklahoma against the Company alleging, among other
things, breach of contract, misappropriation of trade secrets, fraud and
interference with prospective advantage. The complaint, which seeks $62 million
in damages and other specified and unspecified relief, also names Gordon T.
Graves, the Company's Chairman of the Board, and Larry D. Montgomery, the
Company's former President, as individual defendants. On January 23, 1998, the
Company had filed its own action in the Court against NGI for breach of
contract.
The dispute arises out of a series of related agreements entered into
between the parties in December 1995 and May and June 1996. In general, these
agreements contemplate the cross-licensing of certain intellectual property and
equipment distribution rights. In its January 23
<PAGE> 24
complaint, the Company alleges that NGI failed to perform certain obligations
owed the Company under a Licensing and Distribution Agreement wherein the
Company licensed certain rights to NGI with respect to Canada and China and that
NGI failed to perform certain obligations owed the Company under a Licensing and
Distribution Agreement wherein NGI licensed certain rights to the Company with
respect to the United States. In its February 2 complaint, NGI alleges just the
opposite - which the Company failed to perform the obligations owed by it to NGI
under both contracts.
These actions are in the very preliminary stages and no discovery has
yet been taken by either party. The Company intends to vigorously defend against
the claims of NGI and to prosecute its own claim. Which the Company believes
that it will ultimately prevail on the merits, no assurances to that effect can
be given. In any event, the cost of defending the actions could be substantial.
In connection with the December 1995 transaction, the Company capitalized the
$500,000 cost of the license acquired from NGI, which the Company is amortizing
over the five-year term of the related License and Distribution Agreement. As of
June 30, 1998, the unamortized amount, including certain additional software
development costs, was $386,000, which the Company is continuing to amortize.
The Company believes that the most likely conclusion of the dispute with NGI
will include an affirmation of the Company's right to use the NGI license in
connection with the Company's planned business. As a result, the Company has
determined that it is only reasonably possible that this asset has been impaired
and accordingly has recorded no reduction in the carrying value of the asset as
of June 30, 1998, other than normal amortization. However, subsequent events may
occur which would cause the Company to determine that it is necessary and
appropriate to reduce, or to accelerate the rate of amortization of, all or a
portion of such capitalized cost. Any such reduction or acceleration will have
an adverse effect upon the reported earnings of the Company for the period in
which such action is taken which could, depending upon the period involved and
the earnings of the Company for such period, be material. See Notes 4 and 5 of
Notes to Consolidated Financial Statements contained within the Company's Annual
Report on Form 10-KSB for the fiscal year ended September 30, 1997.
Flash Cash Litigation
In February 1998, the Company introduced FlashCash; a bingo game played
on interconnected electronic player stations located at participating Indian
bingo halls. The Company has submitted FlashCash to the NIGC for approval of the
game as Class II gaming; no determination has yet been made by the NIGC. The
Company also submitted FlashCash to the Tulsa U.S. Attorney and requested a
letter from the Tulsa U.S. Attorney that FlashCash was a legal Class II bingo
game. The Tulsa U.S. Attorney declined to issue an opinion and in February 1998,
the Company filed a Complaint for Declaratory Relief in the Northern District of
Oklahoma seeking a declaration by the court that FlashCash is a legal Class II
bingo game as permitted by the Gaming Act. No discovery has commenced and the
matter remains in a very preliminary stage. The Company intends to vigorously
defend its position that FlashCash is a Class II bingo game; however, no
assurances can be given that the Company will be successful on the merits. To
date, FlashCash has been well received by customers so that, if FlashCash is
ultimately determined to be Class III gaming, the loss of the FlashCash business
could have a material and adverse effect upon the Company's financial condition
and results of operations. Even if successful on the merits, the Company will
incur legal fees and expenses in defending its position, which could be
significant and which could, therefore, have a material and adverse effect upon
the Company's reported earnings for the periods in which such legal services are
rendered and the related costs are incurred by the Company.
<PAGE> 25
Shareholder Class Actions
On June 9, 1998, the company received a copy of a Summons and Class
Action Complaint for Violations of Federal Securities Laws, that was filed on
May 29, 1998, in the Federal District Court for the Southern District of
California. Also named as defendants were Gordon T. Graves, the Company's
Chairman of the Board, and Larry D. Montgomery, the Company's former President.
The Complaint, which seeks an unspecified amount of damages on behalf of all
similarly situated shareholders, alleges that the Company violated federal
securities laws by making allegedly false and misleading statements regarding
MegaMania, the Company's interactive, high speed, bingo game.
On July 24, 1998, a similar class action was filed in the Federal
Court for the Northern District of Oklahoma.
These actions are in very preliminary stages. The Company intends to
vigorously defend against these claims and expects to prevail on the merits.
However, the cost of defending against the claims could by substantial.
Other.
The Company is a party to various other 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended June 30, 1998;
(a) the Company issued 120 shares of Common Stock in a transaction
exempt from registration under the Securities Act of 1933, as amended pursuant
to Section 4 (2) thereof. The shares were issued upon the exercise of a warrant
originally issued in July 1993 at an exercise price of $6.60 per share. Net
proceeds from the issuance of the shares were used for general corporate
purposes.
(b) the Company granted options to purchase 338,000 shares of Common
Stock to Clifton Lind, President and Chief Operating Officer, at a purchase
price of $3.8125 per share, in a transaction exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4 (2) thereof.
(c) the Company granted warrants to purchase 262,500 shares of Common
Stock to Equipment Purchasing II LLC at a purchase price of $7.00 per share in a
transaction exempt from registration under the Securities Act of 1933, as
amended pursuant to Section 4 (2) thereof.
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.
<PAGE> 26
(b) The following reports on Form 8-K were filed by the Company during
the quarter ended June 30, 1998:
On June 9, 1998, the Company filed a report of Form 8-K reporting under
Item 5. Other Information the institution of a shareholder class action in the
Southern District of California alleging securities laws violations.
<PAGE> 27
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 August 11, 1998 Multimedia Games, Inc.
By: /s/ FREDERICK E. ROLL
--------------------------------------
Frederick E. Roll, Vice President and
Chief Financial Officer
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
15 Letter regarding Unaudited Interim Financial Information
27.1 Financial Data Schedule
27.2 Restated FDS
27.3 Restated FDS
</TABLE>
<PAGE> 1
EXHIBIT 15
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 Form S-3
We are aware that our report dated August 7, 1998 on our review of the interim
financial information of Multimedia Games, Inc. for the period ended June 30,
1998, and included in this Form 10-QSB is incorporated by reference in the
Company's registration statements on Form S-3 (File Nos. 333-16729, 333-28367
and 333-36319) and 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.
PricewaterhouseCoopers LLP
Tulsa, Oklahoma
August 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,145
<SECURITIES> 0
<RECEIVABLES> 2,437
<ALLOWANCES> 101
<INVENTORY> 2,314
<CURRENT-ASSETS> 8,043
<PP&E> 10,579
<DEPRECIATION> 4,413
<TOTAL-ASSETS> 17,879
<CURRENT-LIABILITIES> 4,201
<BONDS> 0
0
1
<COMMON> 54
<OTHER-SE> 11,988
<TOTAL-LIABILITY-AND-EQUITY> 17,879
<SALES> 4,330
<TOTAL-REVENUES> 49,288
<CGS> 2,188
<TOTAL-COSTS> 46,937
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81
<INCOME-PRETAX> 2,495
<INCOME-TAX> 948
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,547
<EPS-PRIMARY> .28
<EPS-DILUTED> .23
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<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
<COMMON> 43
<OTHER-SE> 6,692
<TOTAL-LIABILITY-AND-EQUITY> 11,401
<SALES> 1,445
<TOTAL-REVENUES> 26,156
<CGS> 829
<TOTAL-COSTS> 25,604
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 132
<INCOME-PRETAX> 442
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 442
<EPS-PRIMARY> .09
<EPS-DILUTED> .08
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,782
<SECURITIES> 0
<RECEIVABLES> 507
<ALLOWANCES> 76
<INVENTORY> 203
<CURRENT-ASSETS> 3,512
<PP&E> 4,260
<DEPRECIATION> 981
<TOTAL-ASSETS> 9,281
<CURRENT-LIABILITIES> 2,136
<BONDS> 0
0
1
<COMMON> 40
<OTHER-SE> 4,993
<TOTAL-LIABILITY-AND-EQUITY> 9,281
<SALES> 0
<TOTAL-REVENUES> 6,805
<CGS> 0
<TOTAL-COSTS> 6,903
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65
<INCOME-PRETAX> (190)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (190)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
