<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: DECEMBER 31, 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)
<TABLE>
<S> <C>
Texas 74-2611034
- ---------------------------------------------- -----------------------------------
(State or Other Jurisdiction of Incorporation) (IRS Employer Identification Number)
</TABLE>
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)
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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 January 27, 1998 there were 5,368,252 shares of the Company's Common
Stock, par value $.01, outstanding.
Transitional Small Business Disclosure Format (Check one)
Yes No X
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<PAGE> 2
FORM 10-QSB
INDEX
Part I. Financial Information
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets
(December 31, 1997 and September 30, 1997)
Consolidated Statements of Operations
(Three months ended December 31, 1997 and 1996)
Consolidated Statements of Cash Flows
(Three months ended December 31, 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
Signatures
<PAGE> 3
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
December September
1997 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,750,000 $ 2,380,000
Accounts Receivable:
Trade, net of allowance for doubtful accounts
of $123,000 1,837,000 1,443,000
Other 151,000 123,000
Inventory 1,051,000 511,000
Prepaid expenses 176,000 61,000
Notes receivable 171,000 286,000
Notes receivable - related parties 123,000 1,427,000
Advance to related party (Note 1) 1,000,000 --
Due from AGN L.L.C -- 381,000
Deferred tax asset 79,000 79,000
------------ ------------
Total current assets 6,338,000 6,691,000
------------ ------------
Restricted cash and cash equivalents 1,786,000 1,783,000
Notes receivable - related party 1,010,000 1,010,000
Property and equipment, net 5,580,000 4,970,000
Other assets 96,000 95,000
Deferred tax asset - non-current 251,000 379,000
Goodwill, net 465,000 472,000
------------ ------------
Total assets $ 15,526,000 $ 15,400,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 351,000 395,000
Accounts payable and accrued expenses 1,498,000 1,853,000
Prize fulfillment fees payable 658,000 597,000
------------ ------------
Total current liabilities 2,507,000 2,845,000
------------ ------------
Long-term debt 625,000 675,000
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, 5,402,251 and 4,825,171 shares issued
and 5,368,252 and 4,791,172 shares outstanding 54,000 48,000
Additional paid-in capital 12,692,000 12,297,000
Stockholder notes receivable (664,000) (596,000)
Treasury stock, 33,999 shares at cost (87,000) (87,000)
Accumulated deficit (1,205,000) (1,386,000)
------------ ------------
Total stockholders' equity 10,791,000 10,277,000
------------ ------------
Total liabilities and stockholders' equity $ 15,526,000 $ 15,400,000
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 4
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Revenues:
Gaming revenue $ 12,167,000 $ 6,804,000
Electronic player station sales 44,000 --
Electronic player station lease revenue 691,000 --
Other 2,000 1,000
------------ ------------
Total revenues 12,904,000 6,805,000
------------ ------------
Operating costs and expenses:
Bingo prizes and related costs 2,457,000 2,216,000
Allotments to hall operators 7,357,000 3,034,000
Cost of electronic player stations sold 27,000 --
Salaries and wages 685,000 477,000
Selling, general and administrative expenses 1,479,000 920,000
Amortization and depreciation 635,000 289,000
------------ ------------
Total operating costs and expenses 12,640,000 6,936,000
------------ ------------
Operating income (loss) 264,000 (131,000)
Interest income 102,000 6,000
Interest expense (26,000) (65,000)
------------ ------------
Income before income taxes 340,000 (190,000)
Income tax 128,000 --
------------ ------------
Net income (loss) $ 212,000 $ (190,000)
============ ============
Basic earnings (loss) per common share $ .04 $ (.06)
============ ============
Diluted earnings (loss) per common and equivalent share $ .03 $ (.06)
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31, 1997 and 1996
(Unaudited)
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<CAPTION>
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 212,000 $ (190,000)
Adjustments to reconcile net income (loss) to
cash provided by (used for) operating activities:
Amortization and depreciation 635,000 289,000
Deferred taxes 128,000 --
Other non-cash (revenue) expenses (1,000) 71,000
(Increase) decrease in:
Accounts and notes receivable 997,000 (139,000)
Inventory (540,000) 155,000
Prepaid expenses and due from AGN L.L.C 266,000 (4,000)
Increase (decrease) in:
Accounts payable and accrued expenses (355,000) 81,000
Hall's share of surplus -- 20,000
Prize fulfillment fees payable 61,000 (108,000)
----------- -----------
Net cash provided by (used for) operating activities 1,403,000 175,000
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (1,239,000) (946,000)
Advance to related party (1,000,000) --
Increase in cash balances in restricted escrow (3,000) (2,000)
----------- -----------
Net cash provided by (used for) investing activities (2,242,000) (948,000)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock 333,000 2,027,000
Increase in long-term debt -- 120,000
Principal repayments of debt (93,000) (63,000)
Payment of preferred stock dividends (31,000) (37,000)
----------- -----------
Net cash provided by (used for ) financing activities 209,000 2,047,000
----------- -----------
Net change in cash and cash equivalents (630,000) 1,274,000
Cash and cash equivalents, beginning of period 2,380,000 1,508,000
----------- -----------
Cash and cash equivalents, end of period $ 1,750,000 $ 2,782,000
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 6
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 December 31, 1997
and for each of the three month periods ended December 31, 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 statement of results for the period. Results for the three months
ended December 31, 1997, 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.
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<CAPTION>
FOR THE THREE MONTHS ENDED
12/31/97
Per Share
Income Shares Amount
---------------- ----------------- ---------------
<S> <C> <C> <C>
Net income $ 212,000
Less: preferred stock dividends (30,000)
Basic EPS:
Income available to ----------
common shareholders 182,000 4,964,749 $ .04
============
Effect of Dilutive Securities:
Options 496,034
Warrants 866,727
Convertible preferred stock 30,000 469,390
Diluted EPS:
Income available to common ---------- ---------
shareholders plus assumed conversions $ 212,000 6,796,900 $ .03
========== ========= ============
</TABLE>
<PAGE> 7
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
12/31/96
Per Share
Income Shares Amount
----------------- --------------- --------------
<S> <C> <C> <C>
Net income (loss) $ (188,000)
Less: preferred stock dividends (37,000)
Basic EPS:
Income (loss) available to -----------
common shareholders (225,000) 3,510,522 $ (.06)
===========
Effect of Dilutive Securities:
Options
Warrants
Convertible preferred stock Diluted EPS:
Income (loss) available to common ----------------------------
shareholders plus assumed conversions $ (225,000) 3,510,522 $ (.06)
=========== ========= =========
</TABLE>
ADVANCE TO RELATED PARTY - On December 31, 1997, the Company made a
$1,000,000 temporary advance to a related party. This temporary advance
was repaid on January 26, 1998.
2. AMERICAN GAMING NETWORK
American Gaming Network L.L.C. and its predecessors ("AGN") was
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 paid off 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 shares upon the payment by AGN Venturers L.L.C. of a
$400,000 note
<PAGE> 8
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
due the former partner in AGN 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,
Mr. Graves acquired 41,200 shares of Common Stock.
3. COMMITMENTS AND CONTINGENCIES
MegaMania Litigation
On December 31, 1997, the U.S. Attorney for the Northern
District of Oklahoma (the "Tulsa U.S. Attorney") 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 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 since that time. No
other seizure or enforcement actions have been instituted or taken
against the Company or any of its customers regarding MegaMania since
the initial actions taken on December 31, 1997.
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"). On January 12, 1998, the Choctaw Nation of Oklahoma, the
Chickasaw Nation of Oklahoma and the Cheyenne-Arapaho Tribe of Oklahoma
filed a similar Complaint For Declaratory Relief in the Federal Court
for the District of Columbia seeking a declaration by the courts that
MegaMania is a legal Class II bingo game.
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, and
agreed to a speedy trial on the merits of MegaMania within 120 days. As
a result of the standstill
<PAGE> 9
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
agreement, the Company believes there will be no seizure or enforcement actions
taken against MegaMania in any of the United States during the pendency of the
trial on the merits of MegaMania as a Class II bingo game. 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.
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
December 31, 1997, the unamortized amount, including certain additional software
development costs, was $455,000, which the Company is continuing to amortize.
The Company believes that the most likely conclusion of the
<PAGE> 10
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
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 December 31, 1997, 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.
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.
<PAGE> 11
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 December 31, 1997, and
the related consolidated statements of operations and cash flows for
the three-month period ended December 31, 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, 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.
COOPERS & LYBRAND L.L.P.
Tulsa, Oklahoma
February 12, 1998
<PAGE> 12
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. The Company also
provides proxy play services for its MegaBingo and MegaCash games to bingo
players located off Indian lands.
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.
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 MegaMania did not begin until
March 1996. As of December 31, 1997, MegaMania is played at 49
independently owned American Indian bingo halls, located in 10 different
states, primarily Oklahoma.
RESULTS OF OPERATIONS
Total revenues were $12,904,000 and $6,805,000 for the three
months ended December 31, 1997 and 1996 respectively, or an increase of
$6,099,000. The increase was primarily a result of an increase in gaming
revenue of $5,363,000, and an increase in electronic players station lease
revenue of $691,000. The increase in gaming revenue was driven by
increased MegaMania gaming revenues during the three months ended December
31, 1997. The Company had an average of approximately 1,490 electronic
player stations in operation during the three months ended December 31,
1997, compared to an average of approximately 699 in daily operations
during the same three months of 1996.
Bingo prizes and related fees were $2,457,000 and $2,216,000 for
the three months ended December 31, 1997 and 1996 respectively, or an
increase of
<PAGE> 13
$241,000. The increase resulted from increased MegaBingo
operations during the current period.
Allotments to hall operators was $7,357,000 and $3,034,000 for
the three months ended December 31, 1997 and 1996 respectively. The
increase of $4,323,000 resulted from the increase in MegaMania operations.
Salaries and wages were $685,000 and $477,000 for the three
months ended December 31, 1997 and 1996 respectively, or an increase of
$208,000. The increase was due to additional staff needed for the
increased MegaMania operations.
Selling, general and administrative expenses were $1,479,000 and
$920,000 for the three months ended December 31, 1997 and 1996,
respectively, or an increase of $559,000. The increase is primarily due to
an increase in business meals and travel of approximately $129,000, an
additional telephone expense of $200,000 due to the increase in MegaMania
operations, an increase in contract services, advertising and trade
shows of $158,000 (due primarily to increase MegaMania operations)
and an increase in professional fees of $64,000, primarily as a result of
increased legal and regulatory activity.
Amortization and depreciation was $635,000 and $289,000 for the
three months ended December 31, 1997 and 1996 respectively, or an
increase of $346,000. The increase results from the acquisition of
MegaMania electronic player stations and computer software costs
capitalized during 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had $1,750,000 in cash and
cash equivalents, excluding a $1,000,000 temporary advance to an
affiliate that was repaid in January 1998. Cash and cash equivalents
decreased during the quarter ended December 31, 1997 by $630,000. At
December 31, 1997, the Company had positive working capital of $3,831,000.
The Company believes that its current operations and the costs
of defending and prosecuting the litigation to which the Company is a
party 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 debt and
equity. However, due to the uncertainties arising from the MegaMania
litigation and the other litigation and regulatory ambiguities relating
to the Company and its business, no assurances can be given that the
Company will be able to obtain such funding or that, if obtained, such
funding will be available on a timely basis or upon terms satisfactory to
the Company.
CONTINGENCIES
MegaMania Litigation
On December 31, 1997, the U.S. Attorney for the Northern
District of Oklahoma (the "Tulsa U.S. Attorney") 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
<PAGE> 14
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 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 since that time. No other
seizure or enforcement actions have been instituted or taken against the
Company or any of its customers regarding MegaMania since the initial
actions taken on December 31, 1997.
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"). On January 12, 1998, the Choctaw Nation of Oklahoma, the Chickasaw
Nation of Oklahoma and the Cheyenne-Arapaho Tribe of Oklahoma filed a
similar Complaint For Declaratory Relief in the Federal Court for the
District of Columbia seeking a declaration by the courts that MegaMania is
a legal Class II bingo game.
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, and agreed to a
speedy trial on the merits of MegaMania within 120 days. As a result of
the standstill agreement, the Company believes there will be no seizure or
enforcement actions taken against MegaMania in any of the United States
during the pendency of the trial on the merits of MegaMania as a Class II
bingo game. 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
<PAGE> 15
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.
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
December 31, 1997, the unamortized amount, including certain additional
software development costs, was $455,000, 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 December 31, 1997,
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.
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.
<PAGE> 16
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, 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> 17
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 31, 1997, the U.S. Attorney for the Northern
District of Oklahoma (the "Tulsa U.S. Attorney") 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 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 since that time. No
other seizure or enforcement actions have been instituted or taken
against the Company or any of its customers regarding MegaMania since
the initial actions taken on December 31, 1997.
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"). On January 12, 1998, the Choctaw Nation of
Oklahoma, the Chickasaw Nation of Oklahoma and the Cheyenne-Arapaho
Tribe of Oklahoma filed a similar Complaint For Declaratory Relief in
the Federal Court for the District of Columbia seeking a declaration by
the courts that MegaMania is a legal Class II bingo game.
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, and
agreed to a speedy trial on the merits of MegaMania within 120 days. As
a result of the standstill agreement, the Company believes there will
be no seizure or enforcement actions taken against MegaMania in any of
the United States during the pendency of the trial on the merits of
MegaMania as a Class II bingo game. The Company intends to
<PAGE> 18
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.
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.
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 December 31, 1997, the unamortized
amount, including certain additional software development costs, was
$455,000, 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 December 31, 1997, other than
normal amortization. However,
<PAGE> 19
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.
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 December 31, 1997, the Company
issued 505,955 shares of Common Stock in transactions exempt for
registration under the Securities Act of 1933, as amended, pursuant to
Section 4(2) thereof as set forth below,
(a) 412,000 shares of Common Stock upon the exercise by AGN
Venturers of a put right pursuant to which the Company acquired a 51%
interest in American Gaming Network LLC in exchange for the issuance of
such shares.
(b) 92,015 shares of Common Stock upon the conversion of
18,403 shares of Series A Preferred stock, at a rate of five shares of
Common Stock for each share of Series A Preferred Stock.
(c) 1,940 shares of Common Stock at a price of $2.00 per share
upon the exercise of a warrant originally granted in January, 1995. Net
proceeds from the issuance of such shares was used by the Company for
general working capital purposes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of the 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.
<PAGE> 20
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: February 11, 1998 Multimedia Games, Inc.
By: /s/ Frederick E. Roll
----------------------------------
Frederick E. Roll, Vice President
and Chief Financial Officer
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
<S> <C>
Exhibit 27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,750
<SECURITIES> 0
<RECEIVABLES> 2,111
<ALLOWANCES> 123
<INVENTORY> 1,051
<CURRENT-ASSETS> 6,338
<PP&E> 8,457
<DEPRECIATION> 2,877
<TOTAL-ASSETS> 15,526
<CURRENT-LIABILITIES> 2,507
<BONDS> 0
0
1
<COMMON> 54
<OTHER-SE> 10,736
<TOTAL-LIABILITY-AND-EQUITY> 15,526
<SALES> 44
<TOTAL-REVENUES> 12,904
<CGS> 27
<TOTAL-COSTS> 12,613
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26
<INCOME-PRETAX> 340
<INCOME-TAX> 128
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 212
<EPS-PRIMARY> .04
<EPS-DILUTED> .03
</TABLE>
