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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
[X] Annual Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year ended September 30, 1998
[ ] Transition report under 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.
(Name of Small Business Issuer in Its Charter)
Texas 74-2611034
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
8900 Shoal Creek Blvd., Suite 300
Austin, Texas 78759
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(Address of Principal Executive Offices) (Zip Code)
(512) 371-7100
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(Issuer's Telephone Number,
Including Area Code)
Securities Registered Under Section 12(b) of the Exchange Act: NONE
Securities Registered Under Section 12(g) of the Exchange Act: Common Stock,
$.01 par value
Class A Warrants
Class B Warrants
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
---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ ]
State the issuer's revenues for its most recent fiscal year:
$70,537,000.
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the issuer as of November 30, 1998 was $31,033,260.
The number of shares outstanding of the issuer's Common Stock as of
November 30, 1998, was 5,409,825.
Transitional Small Business Disclosure Format (check one):
Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Company designs and develops interactive high-speed Class II bingo
games and related electronic player stations (EPS) and equipment that are
marketed to Native American bingo halls located throughout the United States.
The Company operates its interactive bingo games on behalf of its tribal
customers through a multi-pathed communications network. The network
interconnects EPS located at multiple bingo halls thereby enabling players to
simultaneously participate in a live bingo game and to compete against one
another to win a common pooled prize. The Company also produces high stakes TV
bingo game shows that are televised live to multiple participating Indian bingo
halls linked via closed circuit satellite and broadband telephone communications
networks. Through its MegaRacing division, the Company transmits horse racing
signals and provides communications and data services to off-track betting (OTB)
facilities operated by Indian tribes.
Prior to August 1995, the Company's principal business was providing
its TV bingo game shows. In August 1995, the Company introduced MegaMania, its
first interactive high-speed Class II bingo game. MegaMania, and the other
interactive high speed bingo games subsequently designed, developed and
introduced by the Company, are live Class II bingo games transmitted to EPS that
are interconnected to one another through the Company's communications network.
The EPS enable players to log on to the network, select the bingo cards of their
choice and to interact with the game to make game decisions such as whether to
continue a card in play, daubing or "covering" a number on a card and declaring
a winning bingo. The Company's games and equipment are designed and operated to
meet the requirements for Class II gaming as defined in the Indian Gaming
Regulatory Act of 1988 and are marketed to bingo halls owned and operated on
behalf of American Indian tribes. The Company believes that its interactive
games have significantly increased the bingo hall's earnings per player position
at those bingo halls where its interactive games are played. As of September 30,
1998, there were 3,271 EPS in operation at 64 independently owned Indian bingo
halls located in 11 different states. Also as of September 30, 1998, the
Company's live TV bingo game show, MegaBingo, was being delivered to 47
independently owned Indian bingo halls located in 14 different states.
In May 1998, the Company launched MegaRacing, which transmits horse
racing signals and provides communications and data services to OTB facilities
operated by Indian tribes pursuant to compacts with the State in which the
tribes are located. The Company presently serves five OTB facilities in the
State of Oklahoma.
Multimedia Games, Inc. (the "Company") was incorporated under the laws
of the State of Texas on August 30, 1991. Unless the context otherwise requires,
the term the "Company" includes Multimedia Games, Inc., and its subsidiaries -
TV Games, Inc., MegaBingo, Inc., Multimedia Creative Services, Inc. and American
Gaming Network L.L.C. The Company's executive offices are located at 8900 Shoal
Creek Blvd., Suite 300, Austin, Texas, 78757, and its telephone number is (512)
371-7100.
MegaBingo(TM), MegaCash(TM), MegaBingo Lite(TM), MegaMania(TM),
FlashCash(TM), Big Hit Bingo(TM), Bingo Express(TM), Peoples Choice Bingo(TM)
and MegaRacing(TM) are trademarks and tradenames of the Company, and all
references herein are deemed to include the applicable tradename or trademark
designation.
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RISK FACTORS
The following risk factors should be carefully considered in connection
with the other information and financial statements contained in this Report on
Form 10-KSB.
LEGAL CONSIDERATIONS.
INDIAN GAMING. The operation of gaming on Indian lands is subject to
the Indian Gaming Regulatory Act of 1988 ("IGRA" or the "Gaming Act"), which
also created the National Indian Gaming Commission ("NIGC") to promulgate rules
and regulations to enforce certain aspects of IGRA and to protect tribal
interests involved in gaming activities.
The Company has designed and operates its bingo games and related
equipment so as to meet the requirements of Class II gaming under IGRA. Class II
gaming is defined by IGRA as including "the game of chance commonly known as
bingo (whether or not electronic, computer or other technological aids are used
in connection therewith)..." However, the definition of Class II gaming excludes
so-called "gambling devices" which are defined as "electronic or
electromechanical facsimiles of any game of chance or slot machines of any
kind." Generally speaking, IGRA allows Class II gaming to be conducted on Indian
lands if the state in which the Indian land is located permits such gaming for
any purpose by any person. Class III gaming, on the other hand, which includes
gaming such as video casino games, slot machines, most table games (e.g.,
blackjack and craps) , most lottery games and keno, may only be conducted on
Indian land pursuant to an agreement between the Indian tribe and the state in
which the tribe is located.
MEGAMANIA LITIGATION. On December 31, 1997, the U.S. Attorney for the
Northern District of Oklahoma filed a civil forfeiture action in Federal
District Court challenging the Class II status of the Company's interactive
bingo game, MegaMania. On October 23, 1998, the District Court issued a judgment
holding that MegaMania was legal Class II gaming. The decision found that
MegaMania was a game of bingo and that the EPS used to play MegaMania were
technological aids to the play of bingo as permitted by IGRA and were not
gambling devices. On November 9, 1998, the U.S. Attorney filed a motion with the
District Court requesting the District Court to alter or amend its judgment. The
District Court has yet to rule on the November 9 motion.
On May 14, 1998, the Assistant U.S. Attorney for the Northern District
of California filed a civil forfeiture in Federal District Court that also
challenged the Class II status of MegaMania. On November 23, 1998, the District
Court issued a Memorandum and Order holding that MegaMania was legal Class II
gaming. As with the decision of the Oklahoma District Court, the Order of the
California District Court found that MegaMania was a game of bingo and that the
EPS used to play MegaMania were technological aids to the play of bingo as
permitted by IGRA and were not gambling devices.
The Company is not able to predict whether either or both of these
decisions will be appealed by the government to the applicable Federal Circuit
Court of Appeals or what the outcome of any such appeal would be.
No assurances can be given that there will be no other challenges made
to the legality of the Company's interactive bingo activities or that, if made,
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
likely have a material adverse effect upon the Company's financial condition and
results of operation. In addition, if the EPS used to aid the play of MegaMania
are ultimately held to be gambling devices, all of the other Class II bingo
games
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currently offered by the Company would likely be adversely effected which 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 or any future litigation challenging the Company's interactive bingo
activities will likely be significant.
DEVELOPING LEGAL ENVIRONMENT. The environment in which the Company
conducts its business is relatively new and presents significant legal and
operating challenges and uncertainties. Fundamental issues concerning the scope
and intent of IGRA remain unresolved, as do issues relating to the jurisdiction
and authority of different Federal, State, local and tribal governments and
agencies. For example, prior to the initiation by the Department of Justice of
the MegaMania litigation, the Company had received and had relied upon opinions
from the NIGC that MegaMania was Class II gaming. While the NIGC has its own
powers of enforcement, the Department of Justice has been maintaining that it
retains enforcement powers over gambling devices and is not bound by NIGC
determinations. As a result, the Company faces uncertainty as to whether other
actions will be initiated by the Department of Justice in the future.
There can be no assurance that the NIGC, either on its own initiative
or as the result of pressure from or cooperation with other agencies such as the
Department of Justice, will not enact additional regulations or reinterpret
existing regulations in a manner that would have a material and adverse effect
upon the Company, including requiring the Company to restructure its existing
contractual arrangements with Indian tribes or requiring changes in the way the
Company's games are conducted so that such games are classified as Class II. Any
such restructuring of the Company's games has the additional risk that such
games will no longer appeal to consumers or be acceptable to the tribes. There
can also be no assurance that IGRA or other Federal laws will not be amended, or
new legislation or regulations enacted, so as to limit the authority of tribes
to selfregulate Class II gaming or to change the definition of Class II gaming
in a manner adverse to the Company's business.
NETWORK GAMING LITIGATION. On January 23, 1998, the Company filed a
complaint against Network Gaming International Corporation ("NGI") in the
Federal District Court for the Northern District of Oklahoma alleging breach of
contract. On February 2, 1998, NGI filed a complaint against the Company in the
same Federal District Court alleging, among other things, breach of contract,
misappropriation of trade secrets, fraud and interference with prospective
advantage. The complaint by NGI seeks $62 million in damages and other specified
and unspecified relief and also names Gordon T. Graves, the Company's Chairman
of the Board, and Larry D. Montgomery, the Company's former President, as
individual defendants. These actions are in the very preliminary stages and only
limited discovery has 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.
SHAREHOLDER CLASS ACTIONS. On May 29, 1998, a shareholder class action
was filed against the Company in the Federal District Court for the Southern
District of California. Also named as defendants were Gordon T. Graves and Larry
D. Montgomery. The action, 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 the legality of MegaMania. 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. A hearing was held on November 20, 1998
by the Multidistrict Litigation Panel established under Federal law to determine
issues relating to the consolidation of the two cases. To date, no decision has
been made by the Panel. The Company intends to vigorously defend against these
claims and expects to prevail
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on the merits, although no assurances to that effect can be given. In any event,
the cost of defending against the claims could by substantial.
FUTURE FINANCING.
The purchase, assembly and installation of additional EPS to further
expand the Company's interactive gaming operations will require funding from
external sources. Prior to the initiation of the MegaMania litigation, the
Company financed such activities primarily through the issuance of equity
securities and from cash flow from operations. After the initiation of the
MegaMania litigation, the uncertainties relating to the legality of the
Company's interactive bingo activities and the depressed market for the
Company's equity securities made it more difficult and expensive for the Company
to obtain financing. As a result, the Company financed the purchase, assembly
and installation of EPS and the significant cost of prosecuting the MegaMania
litigation primarily through the sale of EPS to private investors, including
related parties. The effective cost of these sale transactions was significantly
higher than could have been obtained by the Company from the more traditional
sources of financing had those sources been available to the Company. Whether
the October 23, 1998 and November 23, 1998 decisions of the Oklahoma and
California Federal District Courts holding that MegaMania is legal Class II
gaming will significantly change these conditions cannot be predicted at this
time; however, there are early indications that the Company's ability to obtain
financing are improving. The inability to obtain additional financing when
needed could have a material adverse effect on the Company's ability to achieve
its planned objectives as well as any expectations the market might have about
the Company's future performance.
COMPETITION.
The Company competes with all forms of gaming and other leisure
activities. Given the limitations placed on Class II gaming, it is difficult for
the Company to compete in places where casino, slot machines and other forms of
Class III gaming are permitted. In Class II gaming facilities, the Company
competes against a growing number of games and competitors. This competition is
expected to increase following the October 23, 1998 and November 23, 1998
decisions of the Oklahoma and California Federal District Courts holding that
MegaMania is legal Class II gaming, which will likely encourage existing and
additional competitors to introduce interactive bingo games based upon the
Company's business model.
TRIBAL REGULATION.
Each Federally recognized Indian tribe has the standing of a sovereign
nation. As such, without approval from the tribes, the tribes cannot be sued or
otherwise held accountable under any but tribal laws. In general, the Company
has obtained waivers of the tribe's sovereign immunity as it relates to
equipment used in the conduct of games or to the revenues of the gaming
facility. Although the Company has never experienced any difficulties in this
regard, there can be no assurance that a particular tribe will not invoke its
sovereign immunities with respect to obligations and/or contracts with the
Company which could have the effect of rendering the Company's contracts
unenforceable.
In addition, gaming on Indian lands is generally closely administered
by tribal officials. Most tribes have established a regulatory framework to
administer the conduct of gaming on Indian lands. These regulations generally
include licensing and approval procedures and reporting and audit requirements.
Not all constituencies within each Indian tribe view gaming favorably, and
changes in tribal officials have in the past, and could in the future, result in
a more difficult environment in which to conduct the Company's business at a
particular tribe. Moreover, perceptions and attitudes concerning the integrity
and morality of gaming are
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highly sensitive matters with most tribes and seemingly minor or irrelevant
matters, including rumor and innuendo about the legality of the Company's
activities, can and have been used by competitors and by competing tribal
constituencies as a basis for changing or attempting to change existing
relationships between tribes and the Company. The Company expects this
environment to continue in the future but believes that its sensitivity to these
matters, and the personnel and policies it has in place, will enable it to
effectively manage the issues that will inevitably arise.
TECHNOLOGICAL INNOVATION.
The Company believes that an important factor to its future success
will include its continued development of new products that appeal to the tastes
of consumers and the introduction of such products in a timely manner.
Successful product development and introduction depends upon a number of
factors, including the identification of products expected to appeal to consumer
preferences and the timely completion of design and testing. Importantly, any
new or modified gaming products that are intended for the Class II gaming market
will be designed and operated to meet the requirements of Class II gaming. The
Company may or may not solicit the approval of the NIGC that any new or modified
gaming products meet the requirements of Class II gaming. Even if the Company
does solicit NIGC approval, the NIGC may or may not grant approval as the NIGC
has recently indicated an unwillingness to rule on the Class II status of games.
As a result of these and other factors, there can be no assurance that the
Company will continue to develop and introduce new products in a timely manner
that will achieve commercial success.
DEPENDANCE UPON FEW CUSTOMERS
For the year ended September 30, 1998, each of two tribes accounted for
approximately 17% (34% combined) of the Company's total gaming revenues. One of
these tribes accounted for approximately 26% of the Company's total gaming
revenues in 1997. No other tribe accounted for more than 10% of the Company's
total gaming revenues in either year. While the Company believes that its
relationship with all of its tribal customers is good, the loss of either of the
two tribes would have a material and adverse effect upon the Company's financial
condition and results of operations.
PRIZE FULFILLMENT.
The prizes awarded under the Company's bingo games are based upon
attaining an assumed level of gross game receipts and statistical assumptions as
to the frequency of winners. With respect to its interactive gaming activities,
the Company has not experienced over any statistically relevant period of time a
"game deficit" where aggregate prizes have exceeded aggregate game revenues.
With respect to its TV bingo game shows, the Company self-insures against
smaller prizes and obtains insurance through a third party for larger jackpots.
Prize risk is also shared with participating bingo halls through funds reserved
from bingo card sale receipts and deposited into a prize allocation account. No
assurances can be given that the Company will not experience abnormally high
rates of jackpot prize wins in the future.
SIGNIFICANT OUTSTANDING OPTIONS AND WARRANTS.
As of September 30, 1998, there were outstanding rights to purchase an
aggregate of 3,255,343 shares of Common Stock at exercise prices ranging from
$2.00 to $13.38 per share (with the vast majority of such rights at exercise
prices ranging from $2.00 to $8.00 per share). Of these outstanding rights,
2,224,218 are immediately exercisable and the remainder become exercisable in
substantially equal annual increments over the next three years. In addition to
such rights, the shares of the Company's Series A Preferred Stock are
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immediately convertible into 435,195 shares of Common Stock. To the extent that
such rights and Series A Preferred Stock are exercised or converted, dilution to
the Company's shareholders will occur. Moreover, the terms upon which the
Company will be able to obtain additional equity capital may be adversely
affected, since the holders of such rights and Series A Preferred Stock can be
expected to exercise or convert them at a time when the Company would, in all
likelihood, be able to obtain any needed capital on terms more favorable to the
Company than the exercise terms provided in such securities.
ABSENCE OF DIVIDENDS.
The Company has never declared or paid any cash dividends on its Common
Stock. The Company intends to retain its earnings to finance the growth and
development of its business and therefore does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-KSB 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 "Risk Factors". Given these uncertainties, investors are
cautioned not to place undue reliance upon such statements.
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PRODUCTS AND SERVICES
GENERAL. The Company designs and develops its own interactive
high-speed Class II bingo games to run over its multi-pathed interactive
communications network. The game design process involves matching game
parameters to the needs of the target consumer group and includes graphics
design, software programming and test feedback. The Company also designs and
assembles the electronic player stations (EPS) used as technological aids to the
play of its interactive bingo games. The EPS, which are essentially smart
computer terminals that allow players to select and play bingo cards by
interacting through touching the EPS screen, are interconnected through a common
carrier communications network, which is the backbone of the Company's
multi-pathed interactive network. This interconnection allows players to compete
against one another in a live bingo game to win a common pooled prize in
accordance with the requirements of Class II gaming. The Company also produces
high stakes TV bingo game shows that are televised live to multiple
participating Indian bingo halls linked via closed circuit satellite and
broadband telephone communications networks. Through its MegaRacing division,
the Company transmits horse racing signals and provides communications and data
services to off-track betting (OTB) facilities operated by Indian tribes.
In connection with all of these activities, the Company provides its
tribal customers virtually all of the "back office" record keeping necessary to
account for revenues and prize payouts. The Company's systems enable it to
account, by bingo hall and individual EPS, for game revenues and payouts and to
prepare and disseminate reports to its tribal customers.
INTERACTIVE GAMES. As of December 1, 1998, the Company's offering of
high speed interactive Class II bingo games consisted of MegaMania, FlashCash,
BingoExpress and Big Hit Bingo. The Company plans to introduce People's Choice
Bingo by the end of this calendar year. All of the interactive games are
variations of bingo and have several attributes in common. For example, to play,
a player first opens an account with a cashier at the bingo hall and is issued a
receipt for the amount deposited containing a personal identification number
("PIN"). Players then use the touch screen on the EPS to input their PIN and
activate the EPS to join a game. Winnings and losses are recorded to each
player's account and the positive balance in a player's account can be claimed
from the cashier at any time. Players can replenish their account by making
additional deposits with the cashier or by inserting money in the bill acceptor
on the EPS. Play commences once the minimum number of players or bingo cards
required for a particular game have logged onto the game. A live ball draw is
conducted at a host Indian bingo hall. The numbers from the ball draw are
transmitted simultaneously via a common carrier digital frame relay
communications network to all other participating bingo halls and appear on the
interconnected EPS participating in the particular game. Players are able to
daub their cards and declare a winning bingo by interacting with the EPS touch
screen or pressing a mechanical button.
The factors that distinguish one game from another are the minimum
number of players or bingo cards required to commence a game, the predetermined
patterns required in order to win a prize, the size and number of prizes, and
the frequency of winning each prize. Each game is also accompanied by its own
unique graphics and sound.
In MegaMania, a game will not begin unless there are at least 48 cards
being played by at least 12 people. Randomly generated cards are displayed at
each EPS and players are given the option of keeping the card(s) displayed,
asking for a different card(s) or not playing the card(s) at all. No player may
play more than four bingo cards per EPS. Each card played costs an initial 25
cents. The bingo numbers drawn are visually displayed on the EPS screen three at
a time and are also communicated audibly. After each three ball sequence, a
player must take the affirmative step of pressing a "daub" button on the
computer screen to daub, or cover,
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the called numbers on each card being played. When a player achieves a
straight-line bingo, they are given eight seconds to declare the "bingo" by
using the touch pad on the EPS. If a player fails to declare the "bingo" within
the allotted time, he or she is said to "sleep" the bingo, and the game
continues. After each sequence of three balls are drawn and announced, the
player is given eight seconds to decide whether to continue a card in play by
electing to "ante up" an additional 25 cents per card, or dropping one or more
of the cards from play. Once a card has been dropped, it cannot be played again
during that game. When the first player(s) covers and declares a straight line
"bingo", all players nationwide are notified of the existence of the bingo. The
declaration of "bingo" by a player ends the straight-line game nationwide. Upon
declaring the bingo, the player wins a prize that is determined by the number of
cards being played by all players, the number of balls that have been drawn, and
the number of other players declaring bingo simultaneously. The largest possible
prize comes if a single player is able to declare bingo after only four balls
have been drawn, the lowest mathematically possible number of ball draws that
would allow a player to declare bingo. Interim prizes are also awarded to each
person who covers two corners of a card based from each three ball draw. A
player can win more than one interim prize by covering more than two corners of
the card. If no interim prize has been awarded prior to a winning straight line
bingo, the game continues until at least one prize is awarded for covering at
least two corners of a card.
FlashCash bingo is a straight line bingo game similar to MegaMania
except that there is no ante-up feature to keep a card in play and there are no
interim prizes awarded for covering corners. BingoExpress awards prizes to
players who cover one or more corners of their card, with the size of the prizes
varying based upon the number of corners covered in relation to the number of
balls drawn. If a player covers two corners on the first two numbers drawn, that
player is eligible for a "jackpot draw" where two additional numbers are drawn
and the player wins an additional prize if one or two of the remaining corners
on a card are covered. Big Hit Bingo awards prizes for covering the four numbers
adjacent to the "free" square in the middle of the bingo card, which is
graphically depicted on the EPS screen as a pitcher's mound on a baseball
diamond. Prizes are awarded for scoring a single (i.e., covering the number to
the right of the "free" square corresponding to first base), double, triple or
home run and the number of balls drawn.
The Company receives a fee of approximately 25% of the net winnings, or
"hold" from its interactive games. During fiscal 1998, the average net winnings
of the Company's interactive games exceeded $20,000 per EPS per year. The annual
incremental cost to the Company and the bingo hall to operate an additional EPS
was less than $2,000.
ELECTRONIC PLAYER STATIONS. The Company currently offers over 11 models
of EPS. Each EPS has a screen that displays the bingo cards being played and the
bingo numbers drawn. The screen also serves as a touch pad that allows a player
to make game decisions, such as which cards to play or drop and to declare a
winning bingo. The EPS house computer terminal equipment that allow the EPS to
communicate with the bingo network. EPS vary according to height, width and
depth (to accommodate, in part, the differing space needs of bingo hall
customers), screen size and other features affecting appearance and the visual
appeal to players.
TV BINGO GAME SHOWS. MegaBingo, MegaCash and MegaBingo Lite are bingo
games and associated TV shows produced by the Company and telecast live to
television monitors at participating bingo halls by means of a closed-circuit,
television satellite and broadband telephone communications network. The
Company's broadcast studio is currently located at a host Indian bingo hall. The
studio houses the equipment used to produce and televise the ball drawings and
verify winning cards, including television production equipment and satellite
up-link equipment. MegaBingo, MegaCash and MegaBingo Lite games are
approximately 12 minutes in duration and represent only a limited percentage of
the total number of bingo
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games conducted by each participating bingo hall operator during any given bingo
session. MegaBingo affords the opportunity for a winning player to win a jackpot
prize of up to $2,000,000 (paid $100,000 in cash and the remainder in the form
of a 24-year annuity) by having a winning bingo within a specified number of
ball draws and spinning the MegaBingo wheel. MegaCash, which is conducted on the
Company's network each Saturday and Sunday in matinee sessions, carries a
jackpot of $100,000 or, by spinning the MegaBingo wheel, up to $1,000,000, for
players with winning bingos within a specified number of ball draws. MegaBingo
Lite is similar to MegaBingo, but involves fewer halls and smaller prizes (e.g.,
jackpot prizes of $25,000). Each game also carries lesser consolation prizes for
players having a winning bingo after more than a specified number of ball draws.
Prizes also vary depending upon the price paid by a player for a card (e.g.,$2,
$3 or $6 per card).
During 1998, revenues from the Company's TV bingo game shows were $12.2
million. While the contribution to net margin from these games was considerably
less significant to the Company than from its interactive bingo games, the TV
bingo game shows are well publicized due to the potential size of jackpots and
offer positive benefits by attracting additional players to bingo halls.
In support of its live broadcasts, the Company utilizes, among other
things, television production equipment, satellite transmission and reception
equipment, computer hardware and software, conference calling equipment and
specially printed ticket stocks typically imprinted with serial numbers and the
game's logo. The Company has contracted with a vendor for the satellite time
necessary to transmit its telecast games. With the exception of the computer
software, which is custom developed by or on behalf of the Company, all other
gaming equipment and supplies required for the operation of the telecast games
are typically available off-the-shelf from a number of vendors. The Company's
central game computers are located on Indian trust land and communications
equipment is located in the Company's offices in Tulsa, Oklahoma and Austin,
Texas.
GAMING CONTRACTS. Virtually all of the Company's revenues are derived
through contracts with Indian tribes. The Company's contract with each bingo
hall operator typically identifies the games, equipment and services to be
provided by the Company and the terms of payment. In general, the Company and
the tribe share in the "hold" or profit generated from the play of the game in
percentages that vary depending upon levels of profitability. Certain tribes
purchase EPS outright from the Company while others purchase EPS on an
installment basis out of a dedicated percentage of the revenues generated by the
EPS. In some instances, the Company has leased EPS to tribes at rentals based
upon a percentage of the "hold."
PRIZE FULFILLMENT
In order to provide protection against the risk that prizes awarded to
players in the MegaBingo, MegaLite and MegaCash games might exceed game
revenues, the terms of the agreements with the various hall operators that
conduct MegaBingo and MegaCash (the "MegaBingo Operators"), provide that a fixed
percentage of gross game receipts from those games (the "MegaBingo Prize
Allocation") is deposited in a prize allocation account from which prizes, prize
fulfillment fees and bank fees are paid ("MegaBingo Prize Allocation Costs").
The MegaBingo Operator and the Company are each entitled to a fee (the
"MegaBingo Fee") which approximates 15% of gross game receipts increased by its
share of cumulative game surplus and decreased, in the case of the Company, by
100% of all game deficits. A surplus (or deficit) exists to the extent that the
MegaBingo Prize Allocation exceeds (or is exceeded by) the MegaBingo Prize
Allocation Costs.
Specified initial portions of the MegaBingo Fee are deposited in
separate prize reserve accounts for the MegaBingo Operators from which loans may
be made to the prize allocation account in the event of a game deficit. However,
during the past five years there has never been a game deficit and no loans have
ever been made. Such loans from the MegaBingo Operators' prize reserve accounts
would be liabilities of the Company
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<PAGE> 11
and would have to be repaid when there are sufficient funds in the prize
allocation account available for such purpose. Each MegaBingo Operator is
entitled to the return of its prize reserve funds upon termination of its IGS
Agreement. In addition, those parties who have completed their prize reserve
funding obligations are entitled to receive formula-determined refunds of their
respective prize reserve funds from time to time to the extent it is determined
that such funds are not required to assure the payment of MegaBingo Prize
Allocation Costs.
The MegaBingo, MegaLite and MegaCash games are designed assuming a
certain minimum level of gross game receipts, with MegaBingo Prize Allocation
Costs averaged over long periods of time expected to be less than the MegaBingo
Prize Allocation. In order to reduce the need for prize reserve account funds
and to further reduce exposure to game deficits during periods of abnormally
high rates of jackpot prize wins, the Company is party to an agreement (the
"Risk Assumption Agreement") with SCA Promotions, Inc. ("SCA"), which
specializes in prize fulfillment services, to pay jackpot prizes won during the
term of the agreement.
For an administrative fee (based on a fixed percentage of gross game
sales receipts) and prize fulfillment fees (based on a varying percentage of
gross game sales receipts) paid to SCA with funds from the MegaBingo Prize
Allocation, the Company receives an amount equal to the present value of the
jackpot prize payments less a deductible of $13,000. The Company also advances
the first $37,000 of SCA's liability for each prize pay-off, which is
subsequently deducted from fees due SCA. These prize fulfillment funds are then
utilized to satisfy the obligation to the jackpot prize winner through a
lump-sum cash payment or the purchase of an annuity.
SCA may cease its prize fulfillment responsibilities if its total
cumulative prize payouts exceed its fees earned under the contract by
$2,500,000. SCA is required at all times to maintain not less than $500,000 of
prize fulfillment resources in the form of a performance bond or other mutually
acceptable escrow arrangement.
The Risk Assumption Agreement expires on December 31, 1998.
MARKETING, ADVERTISING AND PROMOTION
The Company arranges national and local news coverage of the Company's
games and currently provides press releases to local newspapers regarding recent
jackpot wins as well as the introduction of the Company's games at new network
halls. In addition, the Company uses a variety of focused advertising and
promotion, including direct mailings in localities near network halls
advertising the availability of the Company's games, discount coupons for new
players and the purchase of advertising space in specialized bingo newsletters.
The Company's games typically are prominently featured in the participating
halls' program materials, such as calendars and flyers, and on outdoor
billboards near certain participating halls.
INTELLECTUAL PROPERTY
The Company relies on trade secrets, proprietary know-how and
continuing technological innovation to develop and maintain its competitive
position. However, there can be no assurance that, insofar as the Company relies
on trade secrets and unpatented know-how, others will not independently develop
similar technology or that secrecy will not be breached.
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<PAGE> 12
COMPETITION
The Company believes that it competes with virtually all other forms of
gaming, including lotto, table games, sports betting and pari-mutual wagering.
The intensity of such competition depends upon several factors, including the
nature and accessability of the gaming activity and the demographics of the
players' population. Many of the companies engaged in such gaming activities
have substantially greater financial and personnel resources than the Company.
The Company also competes with other bingo operations conducted both on
and off Indian lands, including bingo conducted with the use of electronic aids
such as card minders that provide interactivity and enable players to play
multiple numbers of bingo cards simultaneously. Given the limitations placed on
Class II gaming, it is difficult for the Company to compete in places where
casino, slot machines and other forms of Class III gaming are permitted. In
Class II gaming facilities, the Company competes against a growing number of
games and competitors. This competition is expected to increase following the
October 23, 1998 and November 23, 1998 decisions of the Oklahoma and California
Federal District Courts holding that MegaMania is legal Class II gaming, which
will likely encourage existing and additional competitors to introduce
interactive bingo games based upon the Company's model.
EMPLOYEES
As of September 30, 1998, the Company had 141 full-time and part-time
employees, including 27 engaged in field operations, five in game design, 46 in
computer operations relating to bingo activities, 13 in accounting functions,
two in the design and assembly of EPS, 12 in sales and marketing activities, 12
in other general administrative and executive functions and 14 full-time and
part-time bingo hall employees. The Company does not have a collective
bargaining agreement with any of its employees and considers its relationship
with its current employees to be good. The Company also engages four independent
contractors as computer programmers to produce the Company's interactive gaming
software. In addition, approximately 30 individuals were employed by tribes to
operate the Company's games in their respective halls all of whom are reimbursed
by the Company.
GOVERNMENTAL REGULATION
INDIAN GAMING. The operation of gaming on Indian reservations is
subject to the Indian Gaming Regulatory Act of 1988 (25 U.S.C. Sections 2701, et
seq.) (the "Gaming Act" or "IGRA"), which created the National Indian Gaming
Commission (the "NIGC") to promulgate regulations to enforce certain aspects of
IGRA.
IGRA classifies games that may be played on Indian land into three
categories. Class I gaming includes traditional Indian social and ceremonial
games and is regulated only by the tribes. Class II gaming includes bingo,
pull-tabs, lotto, punch boards, tip jars, instant bingo, certain card games
played under limited circumstances and other games similar to bingo if those
games are played at the same location where bingo is played. Class II gaming
does not include gaming conducted with gambling devices which NIGC regulations
have defined as being gambling devices subject to the Johnson Act (see
discussion below). Class III gaming consists of all forms of gaming that are not
Class I or Class II, such as video casino games, slot machines, most table games
and keno.
IGRA provides that Indian tribes may engage in Class II gaming, if (i)
the state in which the Indian reservation is located permits such gaming for any
purpose by any person, (ii) the gaming is not otherwise specifically prohibited
on the Indian reservation by Federal law, (iii) the gaming is conducted in
accordance
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<PAGE> 13
with a tribal ordinance which has been approved by the NIGC, and (iv) several
other requirements are met, including the requirement that an Indian tribe shall
have the sole proprietary interest and responsibility for the conduct of gaming,
and that primary management officials and key employees must be licensed by the
tribe.
Under IGRA, the NIGC has the power to inspect and examine all Indian
gaming facilities, to conduct background checks on all persons associated with
Class II Indian gaming, to inspect, copy and audit all records of Indian gaming
facilities, and to hold hearings, issue subpoenas, take depositions and adopt
regulations in furtherance of its responsibilities. IGRA authorizes the NIGC to
impose civil penalties for violations of its regulations or of IGRA, and also
imposes Federal criminal sanctions for illegal gaming on Indian reservations and
for theft from Indian gaming facilities.
IGRA also regulates Indian gaming management contracts. IGRA provides
that the NIGC may approve a management contract only after determining that the
contract provides for (i) adequate accounting procedures and verifiable
financial reports, which must be furnished to the tribe, (ii) tribal access to
the daily operations of the gaming enterprise, including the right to verify
daily gross revenues and income, (iii) minimum guaranteed payments to the tribe,
which must have priority over the retirement of development and construction
costs, (iv) a ceiling on the repayment of development and construction costs,
(v) a contract term not exceeding five years and a management fee not exceeding
thirty percent of net revenues, provided that the NIGC may approve up to a seven
year term and a forty percent return to the manager if the Chairman of the NIGC
is satisfied that the capital investment required, and the income projections
for the particular gaming activity, justify the larger percentage and longer
term. Certain other requirements for approval of a management contract are
specified in the regulations promulgated by the NIGC.
The NIGC has determined that the agreements pursuant to which the
Company provides its Class II games, equipment and services are service
agreements and not management contracts, thereby allowing the Company to obtain
more favorable terms than would have been permitted had the contracts been
determined to be management contracts. There is no assurance however, that
further review of these agreements by the NIGC are alternative interpretation of
applicable laws and regulations will not require substantial modifications to
the agreements and cause the operations of the Company to be marginally
profitable or even unprofitable.
JOHNSON ACT. Class II gaming is defined by IGRA as including "the game
of chance commonly known as bingo (whether or not electronic, computer or other
technological aids are used in connection therewith)..." However, the definition
of Class II gaming excludes so-called "gambling devices" which are defined as
"electronic or electromechanical facsimiles of any game of chance or slot
machines of any kind." Regulations adopted by the NIGC further define "gambling
devices" as devices prohibited by the so-called Johnson Act.
The Johnson Act defines an illegal gambling device as a "machine or
mechanical device" designed "primarily" for gambling and that, when operated,
delivers money to a player "as the result of the application of an element of
chance." Courts that have considered the scope of the Johnson Act in relation to
IGRA have generally determined that the Johnson Act does not prohibit the use of
electronic aids to bingo that operate to broaden the participation of players to
play against one another rather than against a machine. In the two cases that
specifically addressed the question of the Company's EPS, the two courts also
held that the element of chance was not inherent within the EPS itself (as would
be the case with a slot machine) but rather was inherent to the game of bingo,
thus also taking the Company's EPS outside the scope of the Johnson Act.
OTHER. Existing Federal and state regulations may also impose civil and
criminal sanctions for various activities prohibited in connection with gaming
operations including false statements on applications and failure
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<PAGE> 14
or refusal to obtain necessary licenses described in the regulations. Violation
of any of these existing or newly adopted regulations may have a substantial
adverse effect on the Company.
ITEM 2. PROPERTIES
In Tulsa, Oklahoma, the Company leases approximately 9,440 sq. ft. of
office space for its operations headquarters which expires in October 2001 and
approximately 1,000 sq. ft. of warehouse space which expires in March, 2000. The
Company leases approximately 2,000 sq. ft. of office space for some of its
computer programmers in Dallas, Texas, which expires in June 1999. In Austin,
Texas, the Company leases approximately 16,000 sq. ft. of factory space for its
EPS assembly operations (expiring in February 2001) and 1,200 sq. ft. of office
space on a month to month basis for its executive headquarters. Aggregate annual
rentals under these five leases are approximately $200,000. The Company believes
that such leases will be renewed as they expire or that alternative properties
can be leased on acceptable terms. The Company also houses a portion of its
satellite link equipment in a trailer located adjacent to the Cheyenne-Arapaho
bingo hall in Concho, Oklahoma at no cost.
ITEM 3. LITIGATION
See "Item 1. Description of the Business-Risk Factors-Legal
Considerations" for a discussion of the material litigation involving the
Company.
In addition, the Company is also the subject of various pending and
threatened claims arising out of the ordinary course of business. Management
believes that any liability resulting from such claims will not have a material
adverse effect on the results of operations or the financial condition of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable
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<PAGE> 15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been listed on the NASDAQ SmallCap Stock
Market under the symbol MGAM since May 15, 1996. Prior to that, the Company's
Common Stock was traded on the OTC Bulletin Board and in the over-the-counter
market "pink sheets" under the symbol "MGAM". The following table sets forth the
range of the quarterly high and low bid prices, as reported in the Wall Street
Journal, for the last two fiscal years.
<TABLE>
<CAPTION>
Fiscal Quarter High Low
- -------------- ---- ---
<S> <C> <C>
First Quarter 1997 6.000 4.375
Second Quarter 1997 10.750 4.750
Third Quarter 1997 12.000 8.250
Fourth Quarter 1997 13.875 10.375
First Quarter 1998 16.875 13.250
Second Quarter 1998 14.875 8.410
Third Quarter 1998 9.688 2.875
Fourth Quarter 1998 5.125 2.375
</TABLE>
There were approximately 150 shareholders of record of the Common Stock
on October 23, 1998. However, included in this total was over 3,868,000 shares
held in street name by Cede & Co., or approximately 72% of the Company's
outstanding Common Stock. The Company believes that the shares held in street
name are held for in excess of 1,500 beneficial owners.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
BUSINESS OVERVIEW
The Company designs and develops interactive high-speed Class II bingo
games and related electronic player stations (EPS) and equipment that are
marketed to Native American bingo halls located throughout the United States.
The Company operates its interactive bingo games on behalf of its tribal
customers through a multi-pathed communications network. The network
interconnects EPS located at multiple bingo halls thereby enabling players to
simultaneously participate in a live bingo game and to compete against one
another to win a common pooled prize. The Company also produces high stakes TV
bingo game shows that are televised live to multiple participating Indian bingo
halls linked via closed circuit satellite and broadband telephone communications
networks. Through its MegaRacing division, the Company transmits horse racing
signals and provides communications and data services to off-track betting (OTB)
facilities operated by Indian tribes.
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<PAGE> 16
Prior to August 1995, the Company's principal business was providing
its TV bingo game shows. In August 1995, the Company introduced MegaMania, its
first interactive high-speed Class II bingo game. MegaMania, and the other
interactive high speed bingo games subsequently designed, developed and
introduced by the Company, are live Class II bingo games transmitted to EPS that
are interconnected to one another through the Company's communications network.
The EPS enable players to log on to the network, select the bingo cards of their
choice and to interact with the game to make game decisions such as whether to
continue a card in play, daubing or "covering" a number on a card and declaring
a winning bingo. The Company's games and equipment are designed and operated to
meet the requirements for Class II gaming as defined in the Indian Gaming
Regulatory Act of 1988 and are marketed to bingo halls owned and operated on
behalf of American Indian tribes. The Company believes that its interactive
games have significantly increased the bingo hall's earnings per player position
at those bingo halls where its interactive games are played. As of September 30,
1998, there were 3,271 EPS in operation at 64 independently owned Indian bingo
halls located in 11 different states. Also as of September 30, 1998, the
Company's live TV bingo game show, MegaBingo, was being delivered to 47
independently owned Indian bingo halls located in 14 different states.
In May 1998, the Company launched MegaRacing, which transmits horse
racing signals and provides communications and data services to OTB facilities
operated by Indian tribes pursuant to compacts with the State in which the
tribes are located. The Company presently serves five OTB facilities in the
State of Oklahoma.
RESULTS OF OPERATIONS
An analysis of the Company's gaming revenues and direct gaming expenses
were as follows for the years ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interactive Gaming:
Gaming Revenue, Net of Prizes(1) $ 49,467,000 $ 20,507,000
Allotments to Hall Operators (37,846,000) (15,334,000)
------------- ------------
Net Interactive Gaming Profit $ 11,621,000 $ 5,173,000
============= ============
TV Bingo Game Shows: (2)
Gross Revenues $ 12,173,000 $ 13,504,000
Bingo Prizes and Related Costs (8,823,000) (9,381,000)
Allotments to Hall Operators (1,741,000) (2,568,000)
------------- ------------
Net TV Bingo Profit $ 1,609,000 $ 1,555,000
============= ============
</TABLE>
- --------------------
(1) Interactive gaming gross revenues and prizes are netted for financial
statement presentation purposes.
(2) TV bingo game shows consist of MegaBingo, MegaCash and MegaBingo Lite.
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<PAGE> 17
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included under Item 7.
Financial Statements.
REVENUES - Total revenues for fiscal year 1998 were $70.5 million as
compared to $39.1 million in 1997, an 80% increase. The increase is due to an
81% increase in gaming revenues over 1997, primarily as a result of the
Company's interactive games which generated revenues of $49.5 million during
1998 as compared to $20.5 million in 1997. The increase in interactive gaming
revenues for 1998 primarily resulted from newly installed electronic player
stations and games. The Company had an average of approximately 2,140 electronic
player stations in daily operation during the year ended September 30, 1998,
compared to an average of approximately 950 during the year ended September 30,
1997. TV bingo game show revenues decreased $1.3 million or 10% in 1998 as
compared to 1997, primarily as the result of player headcount being down at most
bingo facilities across the country, and several bingo halls electing not to
continue playing MegaBingo during 1998.
The Company believes interactive gaming revenues will increase in
fiscal 1999 over fiscal 1998, primarily as the result of an increase in the
average number of electronic player stations that are expected to be in daily
operation. TV bingo game show revenues, however, may continue to decrease as the
result of decreased MegaBingo play at the halls.
Revenue from sales of electronic player stations increased by $1.8
million, going from $3.2 million in 1997 to $5.0 million in 1998, with $1.3
million of the increase coming from related party sales. The increase was
primarily due to the sale of 984 units in 1998 as compared to 616 units in 1997.
Of the 984 units sold in 1998, 663 were sold to Equipment Purchasing II L.L.C.,
an entity controlled by Gordon T. Graves, the Company's Chairman of the Board
and Chief Executive Officer. Of the 616 units sold in 1997, 456 were sold to
Equipment Purchasing L.L.C., an entity owned and controlled by Mr. Graves.
Lease revenues from electronic player stations leased to Indian tribes
grew from $1.8 million in 1997 to $3.4 million in 1998. This increase is due to
the expansion of the number of EPS out on lease to various tribes.
Other revenues increased by $.4 million in 1998 as compared to 1997.
The primary reasons for the increase were the introduction of MegaRacing in 1998
with revenues of $280,000 and management fees of $175,000 derived from equipment
sold to Equipment Purchasing L.L.C. and Equipment Purchasing II, L.L.C.
BINGO PRIZES AND RELATED COSTS - Bingo prizes and related costs
decreased $.6 million or 6% during 1998 as compared to 1997. The decrease in
these costs is commensurate with the decrease in TV bingo game show revenues
discussed above. Interactive gaming revenues are recorded net of prize costs;
therefore, the prizes have no effect on bingo prizes and related costs.
ALLOTMENTS TO HALL OPERATORS - Allotments to hall operators consist of
the halls' share of the gaming income after prizes and allocable prize costs.
Allotments to hall operators increased 121% to $39.6 million in 1998, as
compared to $17.9 million in 1997. The primary reason for the increase is hall
commissions related to interactive gaming where the allotment to hall operators
increased from $15.3 million in 1997 to $37.8 million in 1998, an increase of
147%. The decrease in hall commissions related to TV bingo game shows is caused
primarily by the decrease in MegaBingo revenues discussed above.
COST OF ELECTRONIC PLAYER STATIONS SOLD - Cost of electronic player
stations sold were $2.7 million in 1998 as compared to $1.7 million in 1997, or
an increase of $1.0 million. Cost of
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<PAGE> 18
electronic player stations sold associated with related party sales were $1.9
million in 1998, or an increase of $.7 million over 1997. The overall increase
was due to the higher number of electronic player stations sold in 1998, as
discussed above. The gross margin on electronic player station sales was
$468,000 in 1998 and $270,00 in 1997, and the gross margin for related party
sales was $1.9 million and $1.3 million in 1998 and 1997, respectively.
SALARIES AND WAGES - Salaries and wages increased $.8 million, or 35%
during 1998 as compared to 1997. Most of the increase relates to additional
personnel hired to assist in the installation, training and maintenance related
to the interactive gaming network.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased $4.9 million, or 98% during 1998 as compared
to 1997. Approximately 45% or $2.2 million of the increase was the result of the
MegaMania litigation and legal and regulatory activities. The remainder of the
increase is primarily due to an increase in travel of $.4 million, an increase
in interactive gaming telecommunications of $.4 million, an increase in employee
benefits of $.4 million, an increase of $.3 million in advertising and
promotions and an increase in consulting and contract labor of $.2 million, all
related to the expansion of the interactive gaming network. In addition, there
was a write-off of capitalized software cost of $.4 million.
AMORTIZATION AND DEPRECIATION - Amortization and depreciation increased
$1.2 million, or 66% during 1998 as compared to 1997. The increase results from
electronic player stations and software programming costs capitalized during
1998 and 1997. The Company made $6.0 million in capital additions during 1998.
INTEREST INCOME - Interest income increased $255,000 in 1998 primarily
as a result of electronic player stations sold for cash and notes receivable.
INCOME TAX - Income tax expense increased to $1.5 million in 1998 from
a tax benefit of $.5 million in 1997. The 1998 increase is the result of greater
pretax income in 1998 and reflects an effective tax rate of 40% on pretax income
of $3.7 million. The tax benefit in 1997 resulted from the removal of a
valuation allowance related to net operating losses.
FUTURE EXPECTATIONS AND FORWARD LOOKING STATEMENTS
This Annual 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". Given these uncertainties, readers of this Annual Report are cautioned
not to place undue reliance upon such statements.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had unrestricted cash and cash
equivalents of $1.9 million, a $.5 million decrease from September 30, 1997.
During the year ended September 30, 1998, $5.5 million of cash was provided by
operations versus $.6 million used for operations in 1997. The change is
primarily due to the collection of related party notes receivable, an increase
in accounts payable and accrued expenses, an increase
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<PAGE> 19
in amortization and depreciation and an increase in net income, partially offset
by increases in accounts and notes receivable, inventory and prepaid expenses.
The Company used $6.0 million in investing activities in 1998, almost entirely
for additions to fixed assets, consisting primarily of software development for
interactive gaming and hardware for interactive gaming player stations and game
operation. Working capital at September 30, 1998 was $4.8 million.
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 Officer, 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.
The EPS and related equipment purchased by EPLLC-2 has been leased to a
number of Indian tribes under terms where the Company and EPLLC-2 share in a
percentage of the revenues generated by the use and operation of the EPS at the
tribes' bingo facilities. As an inducement to consummate the March 1998 sale,
the Company had agreed to issue to the original third party issuer, and did
issue to EPLLC-2, warrants to purchase 20,000 shares of common stock
(exercisable for a period of five years, non-exercisable in the first year) at
an exercise price of $9.44 per share, which was the market value of the common
stock on the date the equipment purchase agreement was executed. The estimated
fair market value of these warrants was $1,000 and has been recorded as
additional cost of sales. As an inducement to consummate the June 1998 sale, the
Company issued to EPLLC-2 warrants to purchase 262,500 shares of common stock
(exercisable for a period of five years, non-exercisable in the first year) at
an exercise price of $7.00 per share which was in excess of the market value of
the common stock on the date the equipment purchase agreement was executed
($3.50 per share) The estimated fair market value of these warrants was $26,250
and has been recorded as additional cost of sales.
In connection with the sale of the equipment, the Company also entered
into a two year management agreement with EPLLC-2 whereby the Company is
responsible for proposing, establishing and modifying the MegaMania game
procedures and the related game accounting procedures; supervising and
administering the rental agreement with the Indian tribe; using its best efforts
to re-lease the purchased equipment to other parties if the present rental
agreement is terminated; collecting all rents due under the rental agreement;
performing all necessary repairs and maintenance, but not bearing any risk of
loss for damages; conducting necessary marketing; maintaining insurance; and
paying all sales and use taxes and performing other administrative functions. As
compensation for these services, the Company will receive $10.00 per electronic
player station as a re-leasing fee and $10.00 per electronic player station per
month as a management fee. The Company has
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<PAGE> 20
the option to repurchase the equipment at its then fair market value if after
giving effect to the payment of such repurchase price and the net rental income
received by EPLLC-2, EPLLC-2 has received a 20% internal rate of return.
During the year ended September 30, 1998, the Company incurred legal
and professional fees and expenses of approximately $3.2 million, or an increase
of $2.6 when compared to the year ended September 30, 1997. Most of the increase
was incurred in the second quarter of fiscal 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. While legal fees and expenses
related to MegaMania and other litigation involving the Company will continue to
be significant in fiscal 1999, such fees and expenses are not expected to
approach the levels seen in fiscal 1998.
In December 1998, the Company renewed its Credit Agreement with a bank,
which provides for a term loan of $561,000 and a revolving line of credit of
$1.0 million. Principal of $9,510 and interest are payable monthly until the
loan becomes due on October 31, 2000. The interest rate is the Chase Manhattan
Bank, N.A. prime rate plus 1/2% (9% at September 30, 1998). There was $561,000
outstanding on the term loan and $70,000 was outstanding under the revolving
line of credit at September 30, 1998.
The term loan is collateralized by substantially all of the tangible
and intangible assets of the Company. The debt is also guaranteed by the
Company's Chairman and Chief Executive Officer. The Credit Agreement contains
covenants which, among other things, require the Company to maintain a minimum
net worth, debt service coverage ratio and gross gaming revenues, all as defined
by the Credit Agreement.
The Company believes that its current operations, including the payment
of its expected legal fees and expenses, can be sustained from cash from
operations. However, the purchase, assembly and installation of additional EPS
to further expand the Company's interactive gaming operations will require
funding from external sources. Prior to the initiation of the MegaMania
litigation, the Company financed such activities primarily through the issuance
of equity securities and cash flow from operations. After the initiation of the
MegaMania litigation, the uncertainties relating to the legality of the
Company's interactive bingo activities and the depressed market for the
Company's equity securities made it more difficult and expensive for the Company
to obtain financing. As a result, the Company financed the purchase, assembly
and installation of EPS and the significant cost of prosecuting the MegaMania
litigation primarily through the sale of EPS to private investors, including
related parties. The effective cost of these sale transactions was significantly
higher than could have been obtained by the Company from the more traditional
sources of financing had those sources been available to the company. Whether
the October 23, 1998 and November 23, 1998 decisions of the Oklahoma and
California Federal District Courts holding that MegaMania is legal Class II
gaming will significantly change these conditions cannot be predicted at this
time; however, there are early indications that the Company's ability to obtain
financing have improved. The inability to obtain additional financing when
needed could have a material adverse effect on the Company's ability to achieve
its planned objectives as well as any expectations the market might have about
the Company's future performance.
-20-
<PAGE> 21
CONTINGENCIES
For information regarding contingencies, see "Item 3. Litigation."
INFLATION AND OTHER COST FACTORS
The Company's operations have not been, nor are they expected to be,
materially affected by inflation. However, the Company's operational expansion
is affected by the cost of hardware components, which are not considered to be
inflation sensitive, but rather sensitive to changes in technology and
competition in the hardware markets. In addition, the Company expects it will
continue to incur increased legal and other similar costs associated with
compliance with regulatory requirements and the uncertainties present in the
operating environment in which the Company conducts its business.
IMPACT OF YEAR 2000 ("Y2K")
The "Year 2000 Issue" is the result of computer programs that were written using
two digits rather than four to define the applicable year. If the Company's
computer programs with date-sensitive functions are not Y2K compliant, they may
recognize a date using "00" as the Year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
The Company has identified its Y2K risk in three categories: Internal business
software, interactive game software and TV bingo game show software.
INTERNAL BUSINESS SOFTWARE. During 1997 and 1998, as part of a business
modernization program intended to reduce time and improve profitability, the
Company purchased the windows system of MAS 90, which the software vendor has
indicated is Y2K compliant. The Company is in the implementation phase for this
system and other ancillary financial systems with full implementation scheduled
for July 31, 1999. This system will include a detailed manufacturing and
inventory system. Based on this schedule, the Company expects to be in full Y2K
compliance with its internal financial systems before the year 2000. However, if
due to unforeseen circumstances, the implementation is not completed on a timely
basis, the Y2K could have a material impact on the manufacturing operations of
the Company. Contingency plans have been established in this area, where the
Company believes there is some risk if the system is not implemented before the
year 2000. Those plans include adapting some of the Company's currently existing
MAS 90 systems to be Y2K compliant. The cost of making those adaptations is not
expected to be material and would be expensed in the period incurred.
INTERACTIVE GAME SOFTWARE. The Company's interactive games have been configured
using the Microsoft four digit system which is Y2K compliant. All current games
as well as future games will also be in Y2K compliance.
TV BINGO GAME SHOW SOFTWARE. The Company is currently gathering data to assess
the impact of the Y2K on its TV bingo game show system. If the Company is unable
to achieve Y2K compliance for this system, the Y2K could have a material impact
on the TV bingo game show operations of the Company. Since the Company is in the
information gathering phase, the Company does not currently have a contingency
plan in place.
-21-
<PAGE> 22
ITEM 7. FINANCIAL STATEMENTS
The financial statements filed in this Annual Report on Form 10-KSB are
listed in the Index to Financial Statements appearing in Part III, Item 13.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
-22-
<PAGE> 23
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a)OF THE EXCHANGE ACT
The executive officers and directors of the Company, and their
respective ages and positions with the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gordon T. Graves 61 Chairman of the Board, Chief Executive Officer and
Director
Clifton E. Lind 52 President and Chief Operating Officer
Gordon T. Sjodin 57 President of MegaBingo Inc.
Michael E. Newell 47 Vice President
Frederick E. Roll 55 Vice President, Secretary and Chief Financial Officer
Robert F. Lannert 43 Vice President
Jim Holmes 56 Vice President
Daniel J. Sarnoff 42 President of TV Games, Inc.
George J. Akmon 55 Vice President and Chief Financial Officer Elect
Gary L. Loebig 50 Vice President
Larry D. Montgomery 61 Vice Chairman of the Board and Director
Thomas W. Sarnoff 71 Director
Gregory N. Stern 53 Director
</TABLE>
-----------------------
GORDON T. GRAVES has been Chairman of the Board and a director of the
Company since its inception, and has been Chief Executive Officer since
September 1994. Since December 1993 and from 1989 to 1990, Mr. Graves has been
the President of Graves Management, Inc., a management consultant and investment
company. From 1992 through December 1993, Mr. Graves was president and Chief
Executive Officer of Arrowsmith Technologies, Inc. ("Arrowsmith"), a computer
systems company. From 1991 to 1993, Mr. Graves was employed by KDT Industries,
Inc., a high-tech manufacturing and services company and an affiliate of
Arrowsmith, as, successively, Vice President of Corporate Development and
President. From 1987 to 1989, Mr. Graves was the Chairman of the Board of
Directors of Gamma International Ltd. (currently American Gaming and
Entertainment, Ltd., a company co-founded by him).
-23-
<PAGE> 24
CLIFTON E. LIND has been the President and Chief Operating Officer of
the Company since June 1998. From January 1997 until joining the Company as
President, Mr. Lind was President of Celmark, Inc., an Austin, Texas based
company owned by Mr. Lind that provided management and financial consulting
services to start-up companies and that provided financial consulting services
to the Company. From 1991 to 1993, Mr. Lind was the Executive Vice President,
Chief Operating Officer and Chief Financial Officer of KDT Industries, where he
worked with Mr. Graves. From 1994 until January 1997, Mr. Lind was the President
and Chief Executive Officer of KDT Industries
GORDON T. SJODIN was Vice President of the Company since September 1994
prior to being elected President of the Company's wholly-owned subsidiary,
MegaBingo, Inc., in December 1998. In April 1994, Mr. Sjodin joined MegaBingo,
Inc., as its Vice President - Sales and served in such position until September
1994, when he became Vice President of the Company. From August 1989 until April
1994, Mr. Sjodin was employed by AGE as, successively, Director, Sales and
Marketing, and Director, Corporate Development.
MICHAEL E. NEWELL has been Vice President of the Company since
September 1994. In April 1994, Mr. Newell joined MegaBingo, Inc. as its Vice
President-Chief Operating Officer and served in such position until November
1995, when he became Senior Vice President- of game operations for the Company.
From 1988 until April 1994, Mr. Newell was employed by AGE as Director,
MegaBingo operations.
FREDERICK E. ROLL has been Vice President and Secretary of the Company
since September 1994, having joined the Company in February 1994 as its acting
general manager and Chief Financial Officer. From November 1990 until joining
the Company, Mr. Roll was a certified public accountant in his own practice.
From 1983 until October 1990, Mr. Roll was Chief Financial Officer, Vice
President and an owner of Park Hill Nurseries, Ltd., a commercial nursery. Mr.
Roll has been the Chief Financial Officer of the Company since January 1997. In
January 1999, Mr. Roll will be succeeded as Chief Financial Officer by Mr.
Akmon.
ROBERT F. LANNERT has been Vice President of the Company since August
1997. Mr. Lannert has been employed by the Company since June 1996 as supervisor
of its computer and data processing operations. From 1988 until August 1995, Mr.
Lannert was Director of data processing for Debartolo Racing at Remington Park,
Oklahoma City, Oklahoma , and from August 1995 until joining the Company, Mr.
Lannert was Vice President of Operations for Spector Entertainment Group.
JIM HOLMES was President of MegaBingo, Inc. from August, 1998 until
December 1998 when he was elected Vice President of the Company. Since 1991 and
prior to joining the Company, Mr. Holmes was the President of Jim Holmes &
Company, a corporation owned by Mr. Holmes that provided management and
consulting services to both the private and public sectors primarily with
respect to establishing lotteries. Mr. Holmes was instrumental in establishing
lotteries in the Philippines, UK and the Ukraine. During this period Mr. Holmes
was also an officer of NORAM which provided management services to Class III
gaming facilities of certain Indian tribes.
DANIEL J. SARNOFF was a Vice President of the Company from March, 1995
until July, 1996 and again from February, 1997 to September 1998 when he was
named President of TV Games, Inc., a Company subsidiary. Mr. Sarnoff served as a
director of the Company from September, 1994 until July 10, 1996, and again from
March, 1997 until December 1997 when he resigned to be replaced by his father,
Thomas Sarnoff. Since 1993, Mr. Sarnoff has been President and Chief Executive
Officer of Pioneer Pictures which develops and packages movies for television.
From August, 1989 until May, 1990, Mr. Sarnoff served as President of RKO
Express Pictures and from June, 1990 until May, 1993 Mr. Sarnoff was involved
with production and marketing for Bonanza Ventures Inc. From 1986-1990 Mr.
Sarnoff founded and was Chief Executive Officer
-24-
<PAGE> 25
of Super TVOLTA, which designs international television lottery programs.
Previously, Mr. Sarnoff was responsible for new business development, NBC SPOT
Sales, New York, and was a member of the RCA new business task force.
GEORGE J. AKMON was elected a Vice President of the Company in December
1998 and will become the Chief Financial Officer of the Company effective
January 1, 1999. From September 1994 until joining the Company, Mr. Akmon was
the Chief Operating Officer and Chief Financial Officer of North American Gaming
and Entertainment Corporation, a publicly traded company that operates casino
properties. From February 1994 until September 1994, Mr. Akmon was a consultant
to International Building Materials, Inc. with respect to the development of
international markets. From June 1992 until February 1994, Mr. Akmon was a
consultant to Gaming Associates, Inc. during which time Mr. Akmon provided
management and financial consulting services to an Indian casino and to the
Dunes Hotel and Country Club in Las Vegas, Nevada. For more than five years
prior to that Mr. Akmon served in various management and financial capacities
with Hilton Head Holdings and its related companies in South Carolina.
GARY L. LOEBIG was elected a Vice President of the Company - New Market
Development in December 1998. Since 1984, Mr. Loebig was employed by Stuart
Entertainment, dba Bingo King, Omaha, Nebraska, a publicly traded company
engaged in the manufacture and sale of bingo cards and related equipment and
products. With Bingo King, Mr. Loebig served in various capacities, beginning as
general sales manager and last serving as Senior Vice President - Market and
Product Development.
LARRY D. MONTGOMERY has been a director of the Company since November
1992. Mr. Montgomery was the President of the Company from November 1992 until
December 1996, having held the position of Chief Executive Officer from November
1992 through September 1994. From December 1991 until December 1993, Mr.
Montgomery was also a private consultant to gaming companies. From 1989 through
1991, Mr. Montgomery was the President of Public Gaming Research Institute, and
from 1987 to 1989 was the Executive Director of the Kansas State Lottery. Mr.
Montgomery is currently an independent consultant to the Company specializing in
regulatory affairs.
THOMAS W. SARNOFF was elected as a director of the Company in December
1997, to fill the vacancy resulting from the resignation of his son, Daniel J.
Sarnoff. Thomas W. Sarnoff was employed by the National Broadcasting Company,
Inc. ("NBC") for over 25 years, holding positions that included Vice President,
Production and Business Affairs, Executive Vice President of West Coast
activities, and last serving as President of NBC Entertainment Corporation from
1969 to 1977. After retiring from NBC in 1977, Mr. Sarnoff has been engaged in
the production of television and film entertainment, primarily through Sarnoff
Entertainment Corporation which was formed in 1981. Mr. Sarnoff serves on many
civic and charitable organizations and is currently the President and a member
of the Board of Directors of the Academy of Television Arts & Sciences
Foundation.
GREGORY N. STERN has been a director of the Company since December
1993. Mr. Stern has worked as an independent management consultant to The
Littleton Group, since leaving RKS Associates, a venture capital firm, in 1989,
where he served as a general partner.
All directors hold office until the next annual meeting of shareholders
or until their successors are elected and qualified. Officers are appointed by
the Board of Directors and serve at the discretion of the Board.
No family relationship exists between any of the directors or executive
officers of the Company, except that Thomas W. Sarnoff is the father of Daniel
J. Sarnoff.
-25-
<PAGE> 26
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
During the fiscal year ended September 30, 1998, three officers and one
director were delinquent in making filings under Section 16(a) of the Securities
Exchange Act of 1934, as amended. Larry D. Montgomery, a Director of the
Company, was delinquent in reporting three transactions: an October, 1997
exercise of a stock option, a January 1998 exercise of a warrant, and an April
1998 exercise of four stock options. Frederick E. Roll, Vice President and Chief
Financial Officer of the Company, Mike Newell, Vice President of the Company,
and Gordon Sjodin, Vice President of the Company, were all delinquent in
reporting the acquisition of common stock upon the exercise of warrants in
January, 1998.
-26-
<PAGE> 27
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth certain
information concerning the annual compensation for the Company's chief executive
officer and for each other executive officer earning more than $100,000 for the
fiscal year ended September 30, 1998 (the "named executive officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
Securities
Annual Underlying
Compensation Options/ All Other
Financial Position Year Salary Warrants(#)(1) Compensation(2)
- ------------------ ---- ------ -------------- ---------------
<S> <C> <C> <C> <C>
Gordon T. Graves 1998 $ 87,308 (3) $ 4,213
Chairman and CEO 1997 70,000 (4) 3,877
1996 65,423 -- 485
Clifton E. Lind (5) 1998 156,733 338,000 2,492
President and COO
Larry D. Montgomery(6) 1998 171,777 22,500 3,560
1997 115,160 10,000 6,474
1996 100,939 5,000 3,238
Gordon T. Sjodin 1998 115,731 10,100 7,647
Vice President 1997 120,360 5,000 7,222
1996 115,669 4,445 3,309
</TABLE>
(1) Consists of shares of Common Stock underlying options granted pursuant
to the Company's 1994 Employee Stock Option Plan, 1996 Stock Incentive
Plan and President's Place. (See "Stock Plans" below).
(2) Consists of contributions made by the Company on behalf of the named
executive officers to the Company's 401(k) plan.
(3) Does not include shares of Common Stock underlying warrants issued to
Equipment Purchasing II L.L.C. See Item 12. Certain Relationships and
Related Transactions.
(4) Does not include (i) shares of Common Stock underlying warrants issued
to Equipment Purchasing L.L.C., or (ii) shares of Common Stock issuable
upon the exercise by AGN Venturers of a put right. See Item 12. Certain
Relationships and Related Transactions.
(5) Mr. Lind became President and COO of the Company in June, 1998.
Includes amounts paid to Mr. Lind since that date and for the period
commencing October 1, 1997 through June, 1998 while Mr. Lind served as
a consultant to the Company.
(6) Mr. Montgomery served as President of the Company during 1996 and 1997
and resigned as President in December 1997. Mr. Montgomery remained an
employee of the Company until April 1998 at which time he became a
consultant. Amounts paid in 1998 include all amounts paid to Mr.
Montgomery while an employee and amounts paid to him as a consultant
after April 1998. See Item 12. Certain Relationships and Related
Transactions.
-27-
<PAGE> 28
OPTION/WARRANT GRANT TABLE. The following table sets forth certain
information regarding options and warrants granted by the Company during its
fiscal year ended September 30, 1998 to the named executive officers.
OPTION/WARRANT GRANTS IN LAST FISCAL YEAR
Individual Grants
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/
Underlying Warrants
Options/ Granted to
Warrants Employees in Price Expiration
Name Granted (#) Fiscal Year Per Share (1) Date
- ---- ----------- ------------ ------------- -------
<S> <C> <C> <C> <C>
Gordon T. Graves(2) --- --- --- ---
Clifton E. Lind 338,000 45.68% $3.81 (3)
Larry D. Montgomery 22,500 3.0% $3.81 1/08/08
Gordon T. Sjodin 10,100 1.35% $3.81 1/08/08
</TABLE>
- -----------------
(1) Is the exercise price of the options after giving effect to the repricing
discussed below under "Option Repricing."
(2) Does not include (i) shares of Common Stock underlying warrants issued to
Equipment Purchasing II L.L.C.. See Item 12. Certain Relationships and Related
Transactions.
(3) 27,000 options expire in May 2002; 50,000 options expire in September 2002;
49,000 options expire in February 2007; 162,000 options expire in August 2007;
and 50,000 options expire in January 2008.
-28-
<PAGE> 29
AGGREGATE OPTION/WARRANT EXERCISES AND YEAR-END OPTION TABLE. The
following table sets forth certain information regarding the exercise of stock
options and warrants during the fiscal year ended September 30, 1998, and the
unexercised stock options and warrants held as of September 30, 1998, by the
named executive officers.
<TABLE>
<CAPTION>
Name No. of Value No. of Securities Value of Unexercised In-
- ---- Shares Realized Underlying Unexercised The-Money Options at FY-
Acquired $ (1) Options at FY-End End (2)
Upon --------- ---------------------- ----------------------------
Exercise
-------- Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Gordon T. Graves(3) -------- -------- -------- -------- -------- --------
Clifton E. Lind -------- -------- -------- 338,000 -------- --------
Larry D. Montgomery(4) 64,940 $661,139 ---- 22,500 -------- --------
Gordon T. Sjodin(5) 1,940 $ 15,559 47,250 12,350 $ 6,750 --------
</TABLE>
- -------------------------
(1) Market value of underlying Common Stock on date of exercise, minus the
exercise price.
(2) Market value of the underlying Common Stock at fiscal year end ($2.65
per share), minus the exercise price.
(3) Does not include shares of Common Stock underlying warrants issued to
Equipment Purchasing L.L.C., or Equipment Purchasing II L.L.C.. See
Item 12. Certain Relationships and Related Transactions.
OPTION REPRICING. On June 12, 1998, the Board of Directors of the
Company canceled all outstanding options held by optionees under the 1996 Stock
Incentive Plan and granted new options to all such optionees. The new options
were for the same number of shares and upon the same terms of expiration and
vesting as the canceled options, except that the exercise price for the new
options was $3.81 per share, the market value of the Common Stock on June 12,
1998. In effect, therefore, the Board of Directors reduced the exercise price of
all such outstanding options which had exercise prices at the time of
cancellation ranging from $4.38 per share to $13.38 per share. A total of
275,300 options granted to over 65 employees under the 1996 Stock Incentive Plan
were repriced by the June 12, 1998 action.
Also at the June 12, 1998 meeting, Mr. Lind was offered the position of
President of the Company and the President's Plan was established as an
inducement to Mr. Lind to accept the position. Pursuant to the President's Plan,
Mr. Lind was granted options to purchase 338,000 shares at $3.81 per share, the
market value of the Common Stock on June 12, 1998. In connection with the grant
under the President's Plan, all options and warrants to purchase Common Stock
that had previously been granted to Mr. Lind in consideration of prior financial
and consulting services to the Company (aggregating 338,000 shares at exercise
prices ranging from $5.68 to $13.38 per share) were canceled. These have been
treated as repriced options for purposes of the Repricing Table set forth below.
The Board of Directors took such action in the belief that it was
appropriate in order to attract and retain the qualified personnel desired to
operate the Company. By June 12, 1998, the legality of the Company's activities
was being challenged by the Department of Justice before two Federal District
Courts and one shareholder class action had been filed. The uncertainties raised
by these actions, and the time and attention devoted by personnel to assist in
the defense of these actions while at the same time trying to expand and operate
the business, placed severe strains on all personnel who were asked to meet this
challenge. The
-29-
<PAGE> 30
existence of the Department of Justice litigation had also resulted in a
precipitous decline in the market price of the Company's Common Stock so that
all of the repriced options were significantly "underwater." Since the Board of
Directors believes that the incentives offered by stock options are important to
employee morale and retention, after careful consideration of the challenges and
opportunities facing the Company, the Board of Directors made the good faith
judgment that it was in the best interests of the Company and its stockholders
to lower the exercise price of outstanding options, thus restoring the
opportunity for employees to receive value in the near term by continuing to
persevere against litigation that is perceived by most employees as unfair and
unjust and building the Company through increased and improved operations.
REPRICING TABLE
<TABLE>
<CAPTION>
Number of Shares Option Term
Underlying Exercise Price of New Exercise Remaining at
Name Repriced Options Terminated Options Price of Repriced Options Repricing Date
- ---- ---------------- ------------------ ------------------------- --------------
<S> <C> <C> <C> <C>
Gordon T. Graves ----- ----- ----- -----
Clifton E. Lind 338,000 (1) $3.81 (1)
Larry D. Montgomery 15,000 $7.50 $3.81 9 years
Gordon T. Sjodin 5,000 $4.37 $3.81 8 years
5,000 $9.50 $3.81 9 years
</TABLE>
- ---------------------
(1) The expiration date of new options granted to Mr. Lind remains the same
as the options and warrants that were canceled/repriced. The exercise
price of the canceled/repriced options was as follows; 27,000 options
at $10.00 per share expiring in May 2002; 50,000 warrants at $13.38 per
share expiring in September 2002; 49,000 options at $5.68 per share
expiring in February 2007; 54,000 options at $8.00 per share expiring
in August 2007; 54,000 options at $10.00 per share expiring in August
2007; 54,000 options at $12.00 per share expiring in August 2007; and
50,000 options at $9.50 per share expiring in January 2008.
STOCK PLANS.
In November 1994, the stockholders of the Company approved the
Company's 1994 Employee Stock Option Plan (the "1994 Plan") and the 1994
Director Stock Option Plan ("Director Plan"), under which options to purchase an
aggregate of 360,000 shares and 60,000 shares, respectively, of Common Stock
were reserved for issuance. As of September 30, 1998, options to purchase
182,000 shares and 40,000 shares, respectively, of Common Stock were outstanding
under the 1994 Plan and the Director Plan. No options granted under the Director
Plan had been exercised. After the adoption of the Company's 1996 Stock
Incentive Plan, no new options were granted under the 1994 Plan or the Director
Plan.
In August 1996, the Board of Directors adopted the Company's 1996
Incentive Stock Plan (the "1996 Plan") pursuant to which 543,982 shares of
Common Stock or Common Stock equivalents may be issued plus an additional number
of shares or share equivalents equal to 10% of the number of shares of Common
Stock issued by the Company after September 30, 1998 and prior to December 31,
2000.
The 1996 Plan is administered by the Board of Directors of the Company
(the "Administrator"). The Administrator has the authority, subject to the terms
of the 1996 Plan, to determine when and to whom to make
-30-
<PAGE> 31
grants under the 1996 Plan, the number of shares to be covered by the grants,
the types and terms of "Awards" to be granted under the 1996 Plan (which are
stock based incentives and may include incentive stock options, non-qualified
stock options, stock appreciation rights, restricted stock, performance shares
and deferred stock purchases), the exercise or purchase price of the shares of
Common Stock and Common Stock equivalents subject to the Awards, and to
prescribe, amend and rescind rules and regulations relating to the 1996 Plan.
As of September 30, 1998, there were outstanding under the 1996 Plan
options to purchase 401,950 shares of Common Stock, all at an exercise price of
$3.81 per share. Of these outstanding options, 275,300 were granted in June
1998, in substitution for and cancellation of all options then outstanding under
the 1996 Plan which had exercise prices in excess of $3.81 per share.
In connection with the employment of Clifton E. Lind as President of
the Company in June 1998, the Company established the President's Plan pursuant
to which options to purchase 338,000 shares of Common Stock at $3.81 per share
were granted to Mr. Lind. The options are intended to qualify as incentive stock
options, subject to approval of the stockholders of the Company at the next
annual meeting of stockholders. Approximately a third of the options became
exercisable in December 1998, with the balance becoming exercisable in
substantially equal installments over the next three years. Vesting of the
options accelerate if Mr. Lind is terminated without cause or upon a change of
control of the Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of September 30,
1998, with respect to the number of shares of Common Stock and of Series A
Preferred Stock owned by (i) each person known by the Company to own
beneficially more than 5% of the outstanding shares of, respectively, the Common
Stock and the Series A Preferred Stock, (ii) each director of the Company, (iii)
each named executive officer, and (iv) all directors and executive officers of
the Company as a group:
-31-
<PAGE> 32
<TABLE>
<CAPTION>
Common Stock Preferred Stock
---------------- -----------------
Number of Number of
Shares Shares
Beneficially Percent Beneficially Percent
Beneficial Owner Owned of Class(1) Owned of Class(1)
---------------- ------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
Gordon T. Graves 1,087,620 (2) 20.0 80,175 (3) 88.8%
1604 Crested Butte
Austin, Texas 78746
Clifton E. Lind 135,838 (4) 2.5 ----- ----
2 Las Brisas
Austin, Texas 78746
Larry D. Montgomery 103,184 (5) 1.9 1,411 1.5
1920 S. West Union Road
Topeka, Kansas 66615
Gordon T. Sjodin 69,548 (6) 1.3 1,272 1.4
5804 E. 104th Street
Tulsa, Oklahoma 74137
Thomas W. Sarnoff 2,500 (7) (9) ------- ----
2451 Century Hill
Los Angeles, California 90067
Gregory N. Stern 22,500 (8) (9) --- ---
130 Barton Road
Stow, Massachusetts 01775
All executive officers and 1,547,595 (10) 28.4 83,351 91.8
directors as a group
(11 persons)
</TABLE>
- -------------------------
(1) Based upon 5,439,824 shares of Common Stock and 90,789 shares of Series
A Preferred Stock outstanding.
(2) Consists of (i) 591,545 shares owned of record by Graves Properties,
Ltd., a limited partnership controlled by Mr. Graves, (ii) 51,000
shares owned by Graves Management, Inc. Defined Benefit Trust (Graves
Management, Inc. is a corporation controlled by Mr. Graves), (iii)
44,200 shares owned of record by Mr. Graves, and (iv) 400,875 shares
issuable upon the conversion of the Series A Preferred Stock. Does not
include an aggregate of 90,600 shares as to which Mr. Graves disclaims
beneficial ownership, consisting of: (i) 44,100 shares owned of record
by Cynthia Graves, Mr. Graves' wife, and (ii) 46,500 shares
beneficially owned by the Gordon Graves Grandchildren Trust.
(3) Consists of (i) 5,175 shares owned of record by Mr. Graves, and (ii)
75,000 shares owned of record by Graves Properties, Ltd., a limited
partnership controlled by Mr. Graves.
-32-
<PAGE> 33
(4) Consists of (i) 6,088 shares owned of record by Mr. Lind, and (ii)
129,750 shares issuable upon the exercise of options that become
exercisable on December 12, 1998.
(5) Consists of (i) 96,129 shares owned of record by Mr. Montgomery, and
(ii) 7,055 shares issuable upon conversion of the Series A Preferred
Stock.
(6) Consists of (i) 13,433 shares owned of record by Mr. Sjodin, (ii)
49,750 shares issuable upon the exercise of stock options that are
currently exercisable (48,500 shares) or are exercisable within the
next 60 days (1,250 shares), and (iii) 6,360 shares issuable upon
conversion of the Series A Preferred Stock.
(7) Consists of shares issuable upon the exercise of stock options that
become exercisable on December 12, 1998.
(8) Consists of shares issuable upon the exercise of currently exercisable
stock options (20,000 shares) or that become excusable on December 12,
1998 (2,500 shares).
(9) Less than 1%.
(10) Consists of (i) 810,305 shares owned of record, (ii) 323,000 shares
issuable upon the exercise of stock options that are currently
exercisable (184,500 shares) or are exercisable on or before December
12, 1998 (138,500 shares), and (iii) 414,290 shares issuable upon
conversion of Series A Preferred Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EQUIPMENT SALES
In March 1998, the Company entered into an agreement to sell EPS 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 Officer, and Clifton E. 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 EPS 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 $140,000 in cash and a
promissory note of EPLLC-2 that was due and paid on 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.
-33-
<PAGE> 34
The EPS and related equipment purchased by EPLLC-2 has been leased to
a number of Indian tribes under terms where the Company and EPLLC-2 share in a
percentage of the revenues generated by the use and operation of the EPS at the
tribes' bingo facilities. As an inducement to consummate the March 1998 sale,
the Company had agreed to issue to the original third party issuer, and did
issue to EPLLC-2, warrants to purchase 20,000 shares of common stock
(exercisable for a period of five years, non-exercisable in the first year) at
an exercise price of $9.44 per share, which was the market value of the common
stock on the date the equipment purchase agreement was executed. The estimated
fair market value of these warrants was $1,000 and has been recorded as
additional cost of sales. As an inducement to consummate the June 1998 sale, the
Company issued to EPLLC-2 warrants to purchase 262,500 shares of common stock
(exercisable for a period of five years, non-exercisable in the first year) at
an exercise price of $7.00 per share which was in excess of the market value of
the common stock on the date the equipment purchase agreement was executed
($3.50 per share). The estimated fair market value of these warrants was $26,250
and has been recorded as additional cost of sales.
In June 1997, Graves Properties, Ltd., a limited partnership
controlled by Gordon T. Graves, formed Equipment Purchasing L.L.C. ("EPLLC") for
the purpose of purchasing EPS from the Company and leasing the EPS to Indian
tribes. In June 1997, EPLLC purchased approximately 100 EPS from the Company for
a total purchase price of $637,347, payable in two promissory notes of EPLLC,
one a short term note in the principal amount of $400,000 bearing interest at
approximately 7% per annum, and the other a 12% note in the principal amount of
$237,437 due, as to both principal and interest, in two years. In December 1997,
EPLLC paid the short term note in full. The purchased equipment has been leased
to a tribe under terms where the Company and EPLLC share in a percentage of the
revenues generated by the use and operation of the EPS at the tribe's bingo
hall, with EPLLC receiving a share equal to the greater of a fixed percentage
amount or such amount as is necessary to satisfy EPLLC's monthly payment on the
purchase note due the Company and to amortize on a monthly basis the cash
contributed to EPLLC by Graves Properties, Ltd.
In September 1997, EPLLC purchased approximately 345 MegaMania player
stations from the Company for a total purchase price of approximately
$1,800,000, of which $990,000 was paid in cash in December 1997, and the balance
with a 12% note of EPLLC in the principal amount of $810,000 due, as to both
principal and interest, in two years. The purchased equipment has been leased to
five different tribes under terms where the Company receives a percentage of the
revenues generated by the equipment which is shared with EPLLC under terms
consistent with those of the June 1997 sale to EPLLC discussed above.
As an inducement to consummate the June 1997 sale, the Company issued
to EPLLC warrants to purchase 50,000 shares of common stock at an exercise price
of $11.00 per share, which was the market value of the common stock on the date
of issuance. The estimated fair market value of these warrants was $2,500 and
has been recorded as additional cost of sales. As an inducement to consummate
the September 1997 sale, the Company issued to EPLLC warrants to purchase
100,000 shares of common stock at an exercise price of $13.38 per share which
was the market value of the common stock on the date of issuance. The estimated
fair market value of these warrants was $5,000 and has been recorded as
additional cost of sales. The warrants will become exercisable one year after
the date of issue and expire five years after the date of issue. The warrants
are redeemable by the Company at $.10 per share if the closing price of the
common stock for 20 consecutive trading days has been at least 150% of the
applicable exercise price.
In connection with the sale of the equipment, the Company also entered
into a management agreement with EPLLC and EPLLC-2 whereby the Company is
responsible for proposing, establishing and modifying interactive game
procedures and the related game accounting procedures; supervising and
administering the rental agreement with the Indian tribe; using its best efforts
to re-lease the purchased equipment to other parties if the present rental
agreement is terminated; collecting all rents due under the rental agreement;
performing
-34-
<PAGE> 35
all necessary repairs and maintenance, but not bearing any risk of loss for
damages; conducting necessary marketing; maintaining insurance; and paying all
sales and use taxes and performing other administrative functions. As
compensation for these services, the Company will receive $10.00 per EPS as a
re-leasing fee and $10.00 per EPS per month as a management fee ($15.00 per EPS
per month in the case of EPLLC-2). The Company has the option to repurchase the
equipment at its then fair market value if after giving effect to the payment
of such repurchase price and the net rental income received by EPLLC and
EPLLC-2, respectively, such entity has received a 20% internal rate of return.
During 1998, EPLLC and EPLLC-2 paid $175,000 in management fees to the
Company pursuant to these contracts.
Because of uncertainties relating to the legality of the Company's
interactive gaming activities and the ability of lenders to obtain rights to
collateral located on Indian lands, the Company has found it difficult to obtain
equipment purchase financing on terms acceptable to the Company. Accordingly,
the Company believes that the terms of the equipment sales to EPLLC and EPLLC-2
are at least as favorable as could have been obtained from more traditional
sources of financing.
CONSULTING AGREEMENT
On April 15, 1998, the Company entered into a Consulting Agreement, as
later amended, with Larry D. Montgomery, a Director of the Company. Mr.
Montgomery was the President and COO of the Company until December 1997. The
Consulting Agreement has a term of five years, but may be terminated by either
party with six months notice given at any time after January 1, 1999. Mr.
Montgomery is compensated at the rate of $126,000 annually, and received a bonus
of $57,500 in September 1998 and is to receive an additional bonus of $3,000 in
November 1998. The Company has also agreed to pay the cost of all premiums on
life, health and disability insurance for Mr. Montgomery and his family for five
years and, during the term of the agreement, will pay Mr. Montgomery rent of
$1,000 per month for the use of office space in Topeka, Kansas.
AMERICAN GAMING NETWORK
In August 1996, the Company sold AGN Venturers L.L.C. to a group of
investors that included Mr. Graves as to a 10% interest in AGN Venturers L.L.C.
AGN Venturers L.L.C. owned a 51% interest in AGN, the Company's proxy play
subsidiary. Mr. Graves purchased the 10% interest for $50,000 in cash and a
several guarantee (i.e., 10%) of a $336,000 note payable to the Company by AGN.
As part of the transaction, 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 the 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
provided 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 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, since October 1997, AGN is 100%
owned by the Company. Pursuant to the exercise of the put rights by AGN
Venturers, Mr. Graves acquired 41,200 shares of Common Stock.
-35-
<PAGE> 36
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
THE FOLLOWING REPORTS AND FINANCIAL STATEMENTS ARE INCLUDED IN PART II, ITEM 7-
FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants................................................................................41
Consolidated Balance Sheet, September 30, 1998...................................................................42
Consolidated Statements of Operations, Years Ended September 30,
1998 and 1997..........................................................................................44
Consolidated Statements of Changes in Stockholders Equity, Years Ended
September 30, 1998 and 1997............................................................................45
Consolidated Statements of Cash Flows, Years Ended September 30,
1998 and 1997..........................................................................................46
Notes to Consolidated Financial Statements.......................................................................47
</TABLE>
(a) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS ANNUAL REPORT:
<TABLE>
<CAPTION>
Exhibit No. Title Location
- ----------- ----- --------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation (4)
3.2 Bylaws (1)
10.1 Form of Integrated Gaming Services Agreement (1)
10.2 Contingent Grand Prize Risk Assumption
Agreement dated October 1, 1995, between
the Company and SCA Promotions, Inc. (2)
10.3 Form of 1992-3 Warrant Certificate Issued by the Company (1)
10.4 Form of 1995 Warrant Certificate Issued by the Company (1)
10.5 Registration Rights Agreement dated
January 23, 1995 between the Company
and holders of certain Warrants (1)
10.6 Registration Rights Agreement dated January 23, 1995
between the Company and holders of certain Warrants (1)
10.7 Registration Rights Agreement among the Company and holders of
certain Warrants (2)
10.8 1994 Employee Stock Option Plan (1)
10.9 1994 Director Stock Option Plan (1)
10.10 1996 Stock Incentive Plan (2)
10.11 President's Plan (7)
10.12 Unit Purchase Agreement dated August 14, 1996 between
the Company and the AGN Investor Group (2)
10.13 Right of First Refusal Agreement dated August 14, 1996
between the Company and the AGN Investor Group (2)
</TABLE>
-36-
<PAGE> 37
<TABLE>
<S> <C> <C>
10.14 Put/Call Agreement dated August 14, 1996
between the Company and AGN Venturer L.L.C. (2)
10.15 Registration Rights Agreement between
the Company and AGN Venturer L.L.C. (2)
10.16 Limited Liability Company Agreement
of American Gaming Network L.L.C. (2)
10.17 Certificate of Merger of American Gaming Network LP into
American Gaming Network L.L.C. (2)
10.18 Form of Several Guaranty of AGN Investor Group (2)
10.19 Form of Amendment to Warrants (3)
10.20 Form of Class A Warrant (5)
10.21 Form of Class B Warrant (5)
10.22 Warrant Agreement dated November 12, 1996 between
the Company and Corporate Stock Transfer, as Warrant Agent (5)
10.23 Amendment to Warrant Agreement, dated July 18, 1997 (5)
10.24 Consulting Agreement, dated April 15, 1998, between the
Company and Larry D. Montgomery. (7)
10.25 Amendment to Consulting Agreement dated August 31, 1998. (7)
10.26 Equipment Purchase Agreement (June 1998) (7)
10.27 Rental Pool Agreement (June 1998) (7)
10.28 Management Agreement (June 1998) (7)
10.29 Equipment Purchase Agreement (March 1998) (7)
10.30 Rental Pool Agreement (March 1998) (7)
10.31 Management Agreement (March 1998) (7)
10.32 Equipment Purchase Agreement (June 1997) (7)
10.33 Rental Pool Agreement (June 1997) (7)
10.34 Management Agreement (June 1997) (7)
10.35 Equipment Purchase Agreement (September 1997) (7)
10.36 Rental Pool Agreement (September 1997) (7)
10.37 Management Agreement (September 1997) (7)
10.38 Shareholder Rights Plan (6)
21.1 Subsidiaries of Registrant (7)
23.1 Consent of PricewaterhouseCoopers LLP (7)
24.1 Power of Attorney (included on page 38) (7)
27.1 Financial Data Schedule (7)
</TABLE>
- ---------------
(1) Indicates incorporated by reference to the Company's Form 10-KSB filed
with the Commission for the fiscal year ended September 30, 1994.
(2) Indicates incorporated by reference to the Company's Form 10-KSB filed
with the Commission for the fiscal year ended September 30, 1996.
(3) Indicates incorporated by reference to the Company's Registration
Statement on Form SB-2 filed with the Commission on July 3, 1997.
(4) Indicates incorporated by reference to the Company's Form 10-QSB filed
with the Commission for the quarter ended March 31, 1997.
(5) Incorporated by reference to the Company's registration statement on
Form 8-A, filed with the Commission on July 29, 1997.
-37-
<PAGE> 38
(6) Incorporated by reference to the Company's registration statement on
Form 8-A, filed with the Commission on October 23, 1998.
(7) Filed herewith.
(b) THERE WERE NO REPORTS ON FORM 8-K FILED DURING THE FOURTH QUARTER OF FISCAL
YEAR 1998.
-38-
<PAGE> 39
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature
appears below constitutes and appoints Gordon T. Graves and Frederick E. Roll,
and each of them singly, his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities (including his or
her capacity as a director or officer of Multimedia Games, Inc.) to sign any and
all amendments (including post-effective amendments) to this Annual Report, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
MULTIMEDIA GAMES, INC.
Dated: December 16 , 1998 By: /S/ Frederick E. Roll
---------------------
Frederick E. Roll
Vice President - Controller and
Chief Financial Officer
-39-
<PAGE> 40
In accordance with the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/S/ Gordon T. Graves Chairman of the Board December 16, 1998
- ------------------------------- Chief Executive
Gordon T. Graves Officer and Director
/S/ Frederick E. Roll Vice President and December 16, 1998
- ------------------------------- CFO
Frederick E. Roll
/S/ Larry D. Montgomery Vice Chairman of the Board December 16, 1998
- ------------------------------- and Director
Larry D. Montgomery
/S/ Thomas W. Sarnoff Director December 16, 1998
- -------------------------------
Thomas W. Sarnoff
/S/ Gregory N. Stern Director December 16, 1998
- -------------------------------
Gregory N. Stern
</TABLE>
SUPPLEMENTAL INFORMATION TO BE
FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE EXCHANGE ACT BY
NON-REPORTING ISSUERS
The Registrant has not sent to its security holders any annual report
covering the Registrant's last fiscal year, or any proxy statement, form of
proxy or other proxy soliciting material with respect to any annual or meeting
of security holders. In connection with its 1999 annual meeting of stockholders,
the Company anticipates sending its 1998 annual report and proxy materials to
security holders.
-40-
<PAGE> 41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders
Multimedia Games, Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows present fairly, in all material respects, the financial position
of Multimedia Games, Inc. and Subsidiaries at September 30, 1998, and the
results of their operations and their cash flows for each of the two years in
the period ended September 30, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Tulsa, Oklahoma
December 4, 1998
-41-
<PAGE> 42
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
ASSETS
<S> <C>
Current Assets:
Cash and cash equivalents $ 1,881,000
Accounts Receivable:
Trade, net of allowance for doubtful accounts
of $181,000 2,005,000
Other 637,000
Inventory 2,534,000
Prepaid expenses 568,000
Notes receivable 783,000
Notes receivable - related parties 1,227,000
Deferred tax asset 246,000
-----------
Total current assets 9,881,000
Restricted cash and cash equivalents 1,636,000
Property and equipment, net 7,653,000
Other assets 110,000
Goodwill, net 445,000
-----------
Total assets $19,725,000
===========
</TABLE>
(Continued)
-42-
<PAGE> 43
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(Continued)
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
Current liabilities:
Notes Payable $ 70,000
Current portion of long-term debt 336,000
Accounts payable and accrued expenses 4,371,000
Prize fulfillment fees payable 296,000
------------
Total current liabilities 5,073,000
------------
Long-term debt 531,000
Other long-term liabilities 1,429,000
Deferred tax liability 15,000
Commitments and Contingencies (Note 8)
Stockholders' equity:
Preferred stock, Series A, $.01 par value, 2,000,000 1,000
shares authorized, 90,789 shares
issued and outstanding
Common stock, $.01 par value, 25,000,000 shares 54,000
authorized, 5,439,824 shares issued and
5,405,825 shares outstanding
Additional paid-in capital 12,803,000
Stockholder notes receivable (817,000)
Treasury stock, 33,999 shares at cost (87,000)
Retained Earnings 723,000
------------
Total stockholders' equity 12,677,000
------------
Total liabilities and stockholders' equity $ 19,725,000
============
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
-43-
<PAGE> 44
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Gaming revenue $ 61,640,000 $ 34,011,000
Electronic player station sales 1,273,000 808,000
Electronic player station sales - related party 3,750,000 2,436,000
Electronic player station lease revenue 3,416,000 1,786,000
Other 458,000 11,000
------------ ------------
Total revenues 70,537,000 39,052,000
------------ ------------
Operating costs and expenses:
Bingo prizes and related costs 8,823,000 9,381,000
Allotments to hall operators 39,587,000 17,902,000
Cost of electronic player stations sold 805,000 538,000
Cost of electronic player stations sold - related party 1,878,000 1,183,000
Salaries and wages 3,017,000 2,227,000
Selling, general and administrative expenses 9,932,000 5,049,000
Amortization and depreciation 2,950,000 1,775,000
------------ ------------
Total operating costs and expenses 66,992,000 38,055,000
------------ ------------
Operating income 3,545,000 997,000
Interest income 284,000 29,000
Interest expense (125,000) (167,000)
------------ ------------
Income before income taxes 3,704,000 859,000
Income tax benefit (expense) (1,489,000) 452,000
------------ ------------
Net income $ 2,215,000 $ 1,311,000
============ ============
Basic earnings per share $ .40 $ .29
============ ============
Diluted earnings per share $ .35 $ .23
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-44-
<PAGE> 45
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------------------- ---------------------------- ------------
NUMBER NUMBER ADDITIONAL
OF OF PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1996 134,318 $ 1,000 2,859,200 $ 29,000 $ 6,296,000
Exercise of common stock
warrants -- -- 625,216 6,000 3,154,000
Sale of common stock -- -- 1,159,500 12,000 2,800,000
Exercise of stock options -- -- 47,750 -- 138,000
Conversion of preferred stock
to common stock (25,126) -- 125,630 1,000 (1,000)
Payment of shareholders notes -- -- -- -- --
Registration fees and offering
costs -- -- -- -- (108,000)
Preferred stock dividends
($1.10 per preferred share) -- -- -- -- --
Value of options and warrants
associated with consulting services -- -- -- -- 10,000
Value of warrants associated
with related party equipment sales -- -- -- -- 8,000
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, September 30, 1997 109,192 1,000 4,817,296 48,000 12,297,000
Exercise of common stock
warrants -- -- 4,388 -- 9,000
Exercise of stock options -- -- 114,125 1,000 288,000
Conversion of preferred stock
to common stock (18,403) -- 92,015 1,000 (1,000)
Exercise of AGN option -- -- 412,000 4,000 242,000
Registration fees and offering
costs -- -- -- -- (59,000)
Value of warrants associated with
related party equipment sales -- -- -- -- 27,000
Preferred stock dividends
($1.10 per preferred share) -- -- -- -- --
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, September 30, 1998 90,789 $ 1,000 5,439,824 $ 54,000 $ 12,803,000
============ ============ ============ ============ ============
<CAPTION>
STOCKHOLDER RETAINED TOTAL
NOTES EARNINGS STOCKHOLDERS'
RECEIVABLE TREASURY STOCK (DEFICIT) EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, September 30, 1996 $ (1,271,000) $ (87,000) $ (2,574,000) $ 2,394,000
Exercise of common stock
warrants (13,000) -- -- 3,147,000
Sale of common stock -- -- -- 2,812,000
Exercise of stock options -- -- -- 138,000
Conversion of preferred stock
to common stock -- -- -- --
Payment of shareholders notes 688,000 -- -- 688,000
Registration fees and offering
costs -- -- -- (108,000)
Preferred stock dividends
($1.10 per preferred share) -- -- (123,000) (123,000)
Value of options and warrants
associated with consulting services -- -- -- 10,000
Value of warrants associated
with related party equipment sales -- -- -- 8,000
Net income -- -- 1,311,000 1,311,000
------------ ------------ ------------ ------------
Balance, September 30, 1997 (596,000) (87,000) (1,386,000) 10,277,000
Exercise of common stock
warrants (4,000) -- -- 5,000
Exercise of stock options (149,000) -- -- 140,000
Conversion of preferred stock
to common stock -- -- -- --
Exercise of AGN option (68,000) -- -- 178,000
Registration fees and offering
costs -- -- -- (59,000)
Value of warrants associated with
related party equipment sales -- -- -- 27,000
Preferred stock dividends
($1.10 per preferred share) -- -- (106,000) (106,000)
Net income -- -- 2,215,000 2,215,000
------------ ------------ ------------ ------------
Balance, September 30, 1998 $ (817,000) $ (87,000) $ 723,000 $ 12,677,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-45-
<PAGE> 46
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,215,000 $ 1,311,000
Adjustments to reconcile net income to cash
provided by (used for) operating activities:
Amortization and depreciation 2,950,000 1,775,000
Loss on write-off of software costs 395,000 --
Deferred tax benefit (expense) 227,000 (458,000)
Other non-cash expenses (7,000) 119,000
(Increase) decrease in:
Accounts receivable (1,076,000) (1,274,000)
Notes receivable (497,000) (286,000)
Notes receivable - related party 1,210,000 (2,437,000)
Inventory (2,023,000) (153,000)
Prepaid expenses (507,000) 31,000
Other assets 381,000 (144,000)
Increase (decrease) in:
Accounts payable and accrued expenses 2,518,000 561,000
Hall's share of surplus -- (120,000)
Prize fulfillment fees payable (301,000) 277,000
Other long-term liabilities (13,000) 231,000
----------- -----------
Net cash provided by (used for) operating activities 5,472,000 (567,000)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (5,983,000) (4,104,000)
Increase in cash and restricted cash balances (13,000) (249,000)
----------- -----------
Net cash provided by (used for) investing activities (5,996,000) (4,353,000)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock including collection of
shareholder notes 264,000 5,877,000
Proceeds from debt 335,000 658,000
Principal payments of debt (468,000) (620,000)
Payment of preferred stock dividends (106,000) (123,000)
----------- -----------
Net cash provided by (used for ) financing activities 25,000 5,792,000
----------- -----------
Net change in cash and cash equivalents (499,000) 872,000
Cash and cash equivalents, beginning of period 2,380,000 1,508,000
----------- -----------
Cash and cash equivalents, end of period $ 1,881,000 $ 2,380,000
=========== ===========
Supplemental cash flow data:
Interest paid $ 125,000 $ 167,000
=========== ===========
Income taxes paid $ 239,000 $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-46-
<PAGE> 47
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS - The Company designs and develops interactive high-speed
Class II bingo games and related electronic player stations (EPS) and
equipment that are marketed to Native American bingo halls located
throughout the United States. The Company operates its interactive
bingo games on behalf of its tribal customers through a multi-pathed
communications network. The network interconnects EPS located at
multiple bingo halls thereby enabling players to simultaneously
participate in a live bingo game and to compete against one another
to win a common pooled prize. The Company also produces high stakes
TV bingo game shows that are televised live to multiple participating
Indian bingo halls linked via closed circuit satellite and broadband
telephone communications networks. Through its MegaRacing division,
the Company transmits horse racing signals and provides
communications and data services to off-track betting (OTB)
facilities operated by Indian tribes.
CONSOLIDATION PRINCIPLES - The financial statements include the
activities of Multimedia Games, Inc. and its four wholly owned
subsidiaries, MegaBingo, Inc. ("MBI"), Multimedia Creative Services,
Inc., TV Games, Inc. and American Gaming Network L.L.C..
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
debt instruments with remaining maturities when purchased of three
months or less to be cash equivalents.
RESTRICTED CASH AND CASH EQUIVALENTS - Restricted cash and cash
equivalents include $269,000 held in reserve for MegaBingo prizes
under the provisions of the Integrated Services Agreements with the
tribes and $1,367,000 representing the present value of investments
held by the Company's prize fulfilment firm related to outstanding
jackpot prize winner annuities.
INVENTORY - Inventory consists primarily of computer equipment
components for interactive gaming player stations and completed
interactive gaming player station units. Inventory is carried at the
lower of cost, (first-in, first-out) or market.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
The cost of property and equipment is depreciated over its estimated
useful life generally using the straight line method. Equipment under
leases which convey ownership to the lessee at the end of the lease
term is depreciated over the shorter of the lease term or three
years. Predominately all of the Company's property and equipment is
depreciated over two to five years. Sales and retirements of
depreciable property are recorded by removing the related cost and
accumulated depreciation from the accounts. Gains or losses on sales
and retirements of property are reflected in operations.
Under the provisions of the Integrated Services Agreements with the
tribes, any MegaBingo satellite dishes and monitoring equipment
purchased and placed at the hall locations revert to the ownership of
the tribe at the end of the agreement. This provision does not apply
to interactive gaming player stations and related equipment, except
for interactive gaming player stations purchased by the tribe.
GOODWILL--The amount paid for the assets of MegaBingo plus the
liabilities assumed in excess of the fair value of the identifiable
assets purchased has been recorded as goodwill. The Company
-47-
<PAGE> 48
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
amortizes goodwill over 20 years using the straight-line method.
Goodwill is reported net of accumulated amortization in the
accompanying financial statements. Accumulated amortization amounted
to $102,000 and $75,000 at September 30, 1998 and 1997, respectively.
The Company continually re-evaluates the carrying amount of goodwill
as well as the amortization period to determine whether current
events and circumstances warrant adjustments to the carrying value
and/or estimates of useful lives. Estimated future pre-interest cash
flows associated with the assets of the MegaBingo business is used
for this evaluation. At this time, the Company believes that no
impairment of goodwill has occurred and that no reduction of the
estimated useful life is warranted.
INCOME TAXES - The Company applies the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting
for Income Taxes." Under SFAS No. 109, deferred tax liabilities or
assets arise from differences between the tax basis of assets or
liabilities and their basis for financial reporting, and are subject
to tests of recoverability in the case of deferred tax assets. The
amount of deferred tax liabilities or assets is calculated by
applying the provisions of enacted tax laws to determine the amount
of taxes payable or refundable currently or in future years. A
valuation allowance is provided for deferred tax assets to the extent
realization is not judged to be more likely than not.
TREASURY STOCK - The Company utilizes the cost method for accounting
for its treasury stock acquisitions and dispositions.
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent
assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Examples include provisions for bad debts and inventory
obsolescence, asset lives of equipment, deferred tax assets, and the
provision for and disclosure of litigation and loss contingencies.
Actual results may differ from these estimates in the near term.
RECLASSIFICATIONS - Certain 1997 balances have been reclassified to
conform to 1998 reporting.
-48-
<PAGE> 49
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
INCOME PER COMMON SHARE - Income 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 per share to conform to the new standard. Presented below is
a reconciliation of income available to common stockholders 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 YEAR ENDED
9/30/98
Per Share
Income Shares Amount
------------ ----------- -----------
<S> <C> <C> <C>
Net income $ 2,215,000
Less: preferred stock dividends (106,000)
-----------
Basic EPS:
Income available to common stockholders 2,109,000 5,335,200 $ .40
===========
Effect of Dilutive Securities:
Options 317,154
Warrants 147,456
Convertible preferred stock 106,000 442,050
----------- -----------
Diluted EPS:
Income available to common stockholders
plus assumed conversions $ 2,215,000 6,241,860 $ .35
=========== =========== ===========
</TABLE>
-49-
<PAGE> 50
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
9/30/97
Per Share
Income Shares Amount
----------- ----------- -----------
<S> <C> <C> <C>
Net income $ 1,311,000
Less: preferred stock dividends (123,000)
-----------
Basic EPS:
Income available to common stockholders 1,188,000 4,082,231 $ .29
===========
Effect of Dilutive Securities:
Options 339,042
Warrants 332,199
Convertible preferred stock 123,000 527,210
Contingent shares 376,945
Diluted EPS:
Income available to common
stockholders plus assumed conversions $ 1,311,000 5,657,627 $ .23
=========== =========== ===========
</TABLE>
REVENUE - Revenues from the operation of the MegaBingo, MegaCash and
MegaLite bingo games are recognized as the gaming session for which
the cards were purchased occurs. Interactive gaming revenues are
recorded net of prizes awarded.
Lease revenues from the lease of interactive gaming player stations
are generally based on a percentage of revenue generated by the
player stations and are recognized as the revenues are generated by
the player stations. See Note 13.
Revenues from the sale of electronic player stations are recorded
when the player stations are delivered to the purchaser.
STOCK BASED COMPENSATION - The Company applies Accounting Principles
Board Opinion No. 25 in accounting for its stock option plans. Under
this standard, no compensation expense is recognized for grants of
options which include an exercise price equal to or greater than the
market price of the stock on the date of grant. Accordingly, based on
the Company's grants in 1998 and 1997, no compensation expense has
been recognized.
-50-
<PAGE> 51
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
2. MEGABINGO TRANSACTIONS; INTEGRATED SERVICES AGREEMENTS
In December 1994, MBI purchased substantially all of the assets used
by American Gaming and Entertainment Ltd. (formerly Gamma
International, Ltd. and referred to herein as "AGE") in its bingo
gaming activities (the "AGE Assets"), including the assets used in
the conduct of the MegaBingo and MegaCash games. The AGE Assets did
not include certain Integrated Services Agreements between AGE and
various Indian tribes. Most of the AGE Integrated Services Agreements
have been replaced by Integrated Services Agreements between the
Company and the applicable Indian tribe. The Company continues to
service those AGE Integrated Services Agreements that have not been
replaced (the "AGE Contracts") pursuant to a services agreement with
AGE (the "AGE Services Agreement") for a fee of 100% of the net cash
flow generated by the AGE Contracts plus expenses incurred by the
Company. Since December 1994, the revenues and expenses of the
MegaBingo games serviced under the AGE Contracts have been reflected
in the financial statements at their gross amounts and not netted and
recorded as service fees. The AGE Services Agreement is scheduled to
expire in April 1999.
A substantial portion of the Company's revenues are derived from the
Integrated Services Agreements with various tribes. The Company, in
its name or in the name of AGE, has written agreements with
approximately 50 American Indian tribes that provide the Company with
the right to conduct bingo operations on their respective Indian
lands. Approximately 20 of these agreements were renewed for five (5)
year terms in 1995 and half of the remaining contracts have unexpired
terms of between two and three years. The remaining contracts are
being continued on a month to month basis.
3. PROPERTY AND EQUIPMENT
At September 30, 1998, the Company's property and equipment consisted
of the following:
<TABLE>
<S> <C>
Gaming and satellite equipment $ 9,469,000
Software costs 2,599,000
Other 172,000
--------------
Total property and equipment 12,240,000
Less accumulated depreciation (4,587,000)
--------------
Property and equipment, net $ 7,653,000
==============
</TABLE>
Depreciation expense amounted to $2,900,000 and $1,748,000 during the
years ended September 30, 1998 and 1997, respectively. The net book
value of capitalized software costs at September 30, 1998, was
$1,974,000. Depreciation expense related to software cost amounted to
$621,000 and $310,000, during the years ended September 30, 1998 and
1997, respectively.
In addition, in connection with a December 1995 transaction, the
Company capitalized the $500,000 cost of a license acquired from
National Gaming International Corporation ("NGI"), which the Company
began amortizing over the five-year term of the related license
agreement. As of September 30, 1998, the Company determined that the
then unamortized portion of this asset and certain additional related
software development costs (aggregating $395,000 at September 30,
1998) had been impaired as a result of the status of certain
litigation (see Note 8) and accordingly reduced the carrying value of
the asset to zero.
-51-
<PAGE> 52
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
4. LONG-TERM DEBT
In December 1998, the Company renewed its Credit Agreement with a
bank, which provides for a term loan of $561,000 and a revolving line
of credit of $1.0 million. Principal of $9,510 and interest are
payable monthly until the loan becomes due on October 31, 2000. The
interest rate is the Chase Manhattan Bank, N.A. prime rate plus 1/2%
(9% at September 30, 1998). There was $561,000 outstanding on the
term loan and $70,000 was outstanding under the revolving line of
credit at September 30, 1998.
The term loan is collateralized by substantially all of the tangible
and intangible assets of Multimedia Games, Inc. and MBI. The debt is
also guaranteed by the Company's Chairman/Chief Executive Officer.
The Credit Agreement contains covenants which, among other things,
require the Company to maintain a minimum net worth, debt service
coverage ratio and gross gaming revenues, all as defined by the
Credit Agreement.
The remaining $306,000 of long-term debt consists primarily of notes
used to finance the purchase of electronic gaming player station
components. The notes are due in monthly installments plus interest
at approximately 12%. The notes are collateralized by the equipment
purchased.
Based upon the borrowing rates currently available to the Company for
borrowings with similar terms, the Company believes that the carrying
amount of these borrowings at September 30, 1998, approximates fair
value.
At September 30, 1998, aggregate future maturities of long-term debt
are as follows: 1999 - $336,000; 2000 - $199,000 and 2001 - $332,000.
-52-
<PAGE> 53
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
5. INCOME TAXES
The provision for income taxes (benefit) consisted of the following
for the years ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Current: 1998 1997
---------- ----------
<S> <C> <C>
Federal $1,128,000 $ --
State 134,000 --
Deferred 227,000 (452,000)
---------- ----------
Net income tax expense (benefit) $1,489,000 $ (452,000)
========== ==========
</TABLE>
A reconciliation of the expected income tax expense (benefit) based
upon the federal statutory rate of 34% and the taxes reflected in tax
expense is as follows for the years ended September 30, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Expected federal income
tax expense $1,259,000 $ 292,000
State income tax expense,
net of Federal benefit 148,000 --
Nondeductible expenses 21,000 15,000
Use of net operating losses -- (307,000)
Change in valuation allowance
of net operating losses -- (452,000)
Other 61,000 --
---------- ----------
Net income tax expense (benefit) $1,489,000 $ (452,000)
========== ==========
</TABLE>
-53-
<PAGE> 54
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Differences between the book value and the tax basis of the Company's
assets and liabilities and net operating losses results in deferred
tax assets and liabilities as follows:
<TABLE>
<CAPTION>
1998
---------
<S> <C>
Deferred tax asset - current:
Accounts receivable allowance $ 69,000
Accrued liabilities 83,000
Net operating losses 94,000
---------
Net current deferred tax asset $ 246,000
=========
Deferred tax asset - noncurrent:
Tax credit carryforward $ 5,000
Trademark 19,000
Deferred tax liability - noncurrent
Goodwill (13,000)
Depreciation (26,000)
---------
Net noncurrent deferred tax
(liability) $ (15,000)
=========
</TABLE>
At September 30, 1998, the Company's net operating loss carryforward
for income tax purposes was approximately $250,000. Because of the
sale of equity securities in November 1996, the Company's use of its
net operating loss carryforwards is limited to approximately $800,000
in any one taxable year. The Company's net operating loss
carryforwards expire in 2009 through 2011.
6. STOCKHOLDERS' EQUITY
Series A Preferred Stock
During fiscal year 1995, the Company amended its articles of
incorporation to provide for the issuance of up to 2,000,000 shares
of preferred stock in such series and with such rights and
preferences as may be approved by the Board of Directors. In January
1995, the Board of Directors approved a Series A preferred stock
which is cumulative, voting and convertible. The Series A preferred
stock is subject to redemption at the election of the Company for $10
per share.
During 1997, 25,126 outstanding Series A preferred shares were
converted into 125,630 shares of the Company's common stock. During
1998, 18,403 outstanding Series A preferred shares were converted
into 92,015 shares of the Company's common stock.
Based on the number of shares of Series A preferred stock outstanding
at September 30, 1998, an additional 435,195 shares of common stock
would be issued if a full conversion were to occur. Of the Series A
preferred stock outstanding, 80,175 shares (convertible into 400,875
common shares) are owned by or under the control of the Company's
Chairman/Chief Executive Officer.
-54-
<PAGE> 55
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The Series A preferred stock has a liquidation preference over the
Company's common stock equal to $10 per share of Series A preferred
stock, or $908,000 in the aggregate at September 30, 1998. The
holders of the Series A preferred stock are entitled to a cumulative
preferred dividend, payable quarterly, at the rate of $1.10 per share
per annum. In the event the Company remains in arrears for more than
two quarters, holders of the Series A preferred stock voting as a
class are entitled to elect a majority of the Company's Board of
Directors.
Common Stock
In November 1996, the Company completed a private placement of
approximately 1.2 million shares of the Company's common stock for
$3.00 per share. Each of the 1.2 million shares sold was accompanied
by a redeemable warrant to purchase an additional share of the
Company's common stock for $8 commencing in November 1997 (a "Class A
Warrant"). After November 7, 1997, each Class A Warrant may be
redeemed by the Company for $.10 when the closing bid price of the
Company's common stock has been at least $12.00 for 20 consecutive
trading days. A total of 350,000 Class B Warrants were granted to the
placement agent in connection with the November Placement. Each Class
B warrant represents the right to purchase one share of the Company's
common stock for $8 commencing in November 1997, and may be redeemed
by the Company after February 7, 1999, when the closing bid price of
the Company's common stock has been at least $12.00 for 20
consecutive trading days.
Common Stock Warrants and Options
In connection with past financing arrangements and as compensation
for consulting and professional services, the Company has issued
warrants and options to purchase its common stock. The following
tables summarize such warrant and option activity for 1998 and 1997:
-55-
<PAGE> 56
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1998 ACTIVITY:
<TABLE>
<CAPTION>
Number of Number of
Warrants/ Warrants/
Exercise Options Options
Price Outstanding Outstanding Exercisable
Per Expiration October 1, Expired/ September 30, September 30,
Share Date 1997 Granted Exercised Canceled 1998 1998
- --------- ------------- --------- --------- --------- --------- --------- -------------
<C> <C> <C> <C> <C> <C> <C> <C>
$2.00 Sep 97-Jan 98 4,268 -- 4,268 -- -- --
$4.00 Jul 2000 18,750 -- -- -- 18,750 18,750
$6.60 Jul 98 5,216 -- 120 5,096 -- --
$8.00 Aug 2001 1,792,143 -- -- -- 1,792,143 1,792,143
$5.688 Feb 2007 100,000 -- -- -- 100,000 100,000
$8.00 Aug 2007 54,000 -- -- 54,000 -- --
$10.00 Aug 2007 54,000 -- -- 54,000 -- --
$12.00 Aug 2007 54,000 -- -- 54,000 -- --
$10.00 Aug 2002 27,000 -- -- 27,000 -- --
$11.00 May 2002 50,000 -- -- -- 50,000 50,000
$13.38 Sept 2002 100,000 50,000 50,000 50,000
$9.44* Mar 2003 -- 20,000 -- -- 20,000 --
$7.00* Jan 2003 -- 262,500 -- -- 262,500 --
--------- --------- --------- --------- --------- ---------
2,259,377 282,500 54,388 194,096 2,293,393 2,010,893
========= ========= ========= ========= ========= =========
</TABLE>
-56-
<PAGE> 57
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1997 ACTIVITY:
<TABLE>
<CAPTION>
Number of Number of
Warrants/ Warrants/
Exercise Options Options
Price Outstanding Outstanding
Per Expiration October 1, Expired/ September 30,
Share Date 1996 Granted Exercised Canceled 1997
- --------- ------------- --------- --------- --------- --------- ---------
<C> <C> <C> <C> <C> <C> <C>
$2.00 Sep 97-Jan 98 102,905 -- 98,637 -- 4,268
$2.50 Mar 2000 10,000 -- 10,000 -- --
$2.75 May 97-Jul 97 74,765 -- 71,531 3,234 --
$3.50 Jul 2000 175,000 -- 175,000 -- --
$4.00 Jul 2000 18,750 -- -- -- 18,750
$6.60 Jul 98 23,550 -- 18,334 -- 5,216
$5.688 Feb 2007 -- 100,000 -- -- 100,000
$8.00 Aug 2007 -- 54,000 -- -- 54,000
$10.00 Aug 2007 -- 54,000 -- -- 54,000
$12.00 Aug 2007 -- 54,000 -- -- 54,000
$8.00 Aug. 2001 523,310 1,518,833 250,000 -- 1,792,143
$10.00 May 2002 -- 27,000 -- -- 27,000
$11.00 June 2002 -- 50,000 -- -- 50,000
$13.38 Sept. 2002 -- 100,000 -- -- 100,000
--------- --------- --------- --------- ---------
928,280 1,957,833 623,502 3,234 2,259,377
========= ========= ========= ========= =========
</TABLE>
*Indicates warrant/option is not currently exercisable.
-57-
<PAGE> 58
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
7. STOCK OPTION AND EMPLOYEE BENEFIT PLANS
During fiscal year 1993, the Company's Board of Directors approved a
Salaried Employee Participation Plan (the "1993 Plan") and reserved
an aggregate of 200,000 shares of common stock to be issued
thereunder. Options issued under the 1993 Plan vest ratably over a
five-year period from the date of grant. Commencing with the adoption
of the 1996 Plan discussed below, no further grants of options will
be made under the 1993 Plan.
In November 1994, the stockholders of the Company approved the
Company's 1994 Director Stock Option Plan (the Director Plan) and the
Company's 1994 Employee Stock Option Plan (the 1994 Employee Plan)
previously adopted by the Board of Directors, pursuant to which
60,000 shares and 360,000 shares, respectively, of the Company's
common stock were reserved for issuance. Options issued under the
Director Plan and the 1994 Employee Plan vest ratably over a
five-year period from the date of grant. Commencing with the adoption
of the 1996 Plan discussed below, no further grants of options will
be made under either the Director Plan or the 1994 Employee Plan.
In August 1996, the Board of Directors of the Company approved the
1996 Stock Incentive Plan (the 1996 Plan). Under the 1996 Plan,
various stock based incentive awards may be made including incentive
stock options, non-qualified stock options, stock appreciation
rights, restricted stock, performance shares or deferred stock
purchases. Options issued under the 1996 Plan vest ratably over a
four-year period from the date of grant. The total number of shares
of common stock or common stock equivalents that may be issued under
the 1996 Plan is 543,982 plus an amount equal to 10% of the number of
shares of common stock issued by the Company after September 30, 1998
and prior to December 31, 2000. In order to have grants made which
qualify as incentive stock options, the 1996 Plan was approved by the
Company's stockholders in March 1997.
The activity relating to stock option issuances under the above plans
are as follows for each of the two years ending September 30, 1998
and 1997:
-58-
<PAGE> 59
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1998 ACTIVITY:
<TABLE>
<CAPTION>
Number of
Warrants/ Number of
Exercise Options Options
Price Outstanding Exercised Outstanding Exercisable
Per Expiration October 1, Expired/ September 30, September 30,
Share Date 1997 Granted Canceled 1998 1998
- --------- ------------- --------- --------- --------- --------- ---------
<C> <C> <C> <C> <C> <C> <C>
1993 PLAN:
$ 1.50 Oct 97 35,000 -- 35,000 --
1994
DIRECTOR
PLAN:
$ 2.50 Jul 2004 40,000 -- -- 40,000 40,000
1994
EMPLOYEE
PLAN
$ 2.00 Mar 2005 56,000 -- 28,000 28,000 17,250
$ 2.50 Jul 2004 110,000 -- -- 110,000 110,000
$ 2.50 Feb 2006 30,000 -- 7,500 22,500 7,500
$ 2.75 Jul 2005 7,500 -- -- 7,500 3,750
$ 4.00 Apr 2006 19,000 -- 5,000 14,000 7,000
1996 STOCK
INCENTIVE
PLAN
$ 4.375 Oct 2006 137,000 -- 137,000 -- --
$ 4.750 Jan 2007 17,000 -- 17,000 -- --
$ 5.500 Feb 2007 32,500 -- 32,500 -- --
$ 5.688 Feb 2007 69,000 -- 69,000 -- --
$ 7.141 Feb 2007 10,000 -- 10,000 -- --
$ 8.000 Mar 2007 2,500 -- 2,500 -- --
$ 9.500 Jan 2008 -- 121,100 121,100 -- --
$ 3.813 Oct 2006 -- 85,950 -- 85,950 10,950
Jan 2007 -- 17,000 1,750 15,250 2,500
</TABLE>
-59-
<PAGE> 60
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Number of
Warrants/ Number of
Exercise Options Options
Price Outstanding Exercised Outstanding Exercisable
Per Expiration October 1, Expired/ September 30, September 30,
Share Date 1997 Granted Canceled 1998 1998
- --------- ------------- --------- --------- --------- --------- ---------
<C> <C> <C> <C> <C> <C> <C>
Feb 2007 -- 62,500 7,500 55,000 13,750
Mar 2007 -- 2,500 -- 2,500 625
Jan 2008 -- 118,300 1,500 116,800 --
Jun 2008 -- 101,650 200 101,450 --
Aug 2008 -- 25,000 -- 25,000 --
1998
PRESIDENT'S
PLAN
$ 3.813 May 2002 -- 27,000 -- 27,000 --
$ 3.813 Sept 2002 -- 50,000 -- 50,000 --
$ 3.813 Feb 2007 -- 49,000 -- 49,000 --
$ 3.813 Aug 2007 -- 162,000 -- 162,000 --
$ 3.813 Jan 2008 -- 50,000 -- 50,000 --
--------- --------- --------- --------- ---------
565,500 872,000 475,550 961,950 213,325
========= ========= ========= ========= =========
</TABLE>
-60-
<PAGE> 61
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1997 ACTIVITY:
<TABLE>
<CAPTION>
Number of Number of
Exercise Options Options
Price Outstanding Exercised Outstanding
Per Expiration October 1, Expired/ September 30,
Share Date 1996 Granted Canceled 1997
- --------- ------------- --------- --------- --------- ---------
<C> <C> <C> <C> <C> <C>
1993 PLAN:
$1.50 Oct 97 45,000 -- 10,000 35,000
1994
DIRECTOR
PLAN:
$2.50 Jul 2004 40,000 -- -- 40,000
1994
EMPLOYEE
PLAN
$2.00 Mar 2005 56,000 -- -- 56,000
$2.50 Jul 2004 120,000 -- 10,000 110,000
$2.50 Feb 2006 75,000 -- 45,000 30,000
$2.75 Jul 2005 15,000 -- 7,500 7,500
$4.00 Apr 2006 19,000 -- -- 19,000
1996 STOCK
INCENTIVE PLAN
$4.375 Oct 2006 -- 145,000 8,000 137,000
$4.750 Jan 2007 -- 17,000 -- 17,000
$5.500 Feb 2007 -- 43,000 10,500 32,500
$5.688 Feb 2007 -- 69,000 -- 69,000
$7.141 Feb 2007 -- 10,000 -- 10,000
$8.000 Mar 2007 -- 2,500 -- 2,500
------- ------- ------- -------
370,000 286,500 91,000 565,500
======= ======= ======= =======
</TABLE>
The Company expects to continue to issue stock options to new
employees as they are hired and to current employees as incentives
from time to time.
In June 1998, the Board of Directors of the Company approved the
President's Plan pursuant to which options to purchase 338,000 shares
of common stock were granted to Clifton Lind as an inducement to
become the President and Chief Operating Officer of the Company. The
options are intended to qualify as incentive stock options, subject
to approval of the stockholders of the Company at the next annual
meeting of stockholders. All of the options have an exercise price of
$3.81 per share, which was the market value of the Common Stock on
the date of grant. None of the options were exercisable at September
30, 1998.
-61-
<PAGE> 62
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The Company has elected to follow APB Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for its employee stock
options rather than the alternative fair value accounting provided
for under SFAS No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized in fiscal 1998
and 1997 associated with employee stock options. Pro forma
information regarding net income and earnings per share is required
by SFAS No. 123. This information is required to be determined as if
the Company had accounted for its employee stock options granted
subsequent to September 30, 1995, under the fair value method of that
statement. The fair value of options granted in fiscal years 1998 and
1997 reported below has been estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Weighted average Life 3.5 YEARS 3.5 YEARS
Risk-free interest rate 5.70% 6.56%
Expected volatility 72% 72%
Expected dividend yield None None
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because the Company's
options have characteristics significantly different from those of
traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in the
opinion of management, the existing models do not necessarily provide
a reliable single measure of the fair value of its options. The
weighted average estimated fair value of employee stock options
granted during 1998 and 1997 was $2.33 and $3.22 per share,
respectively. The estimated fair value of options granted during 1998
and 1997 under the Company's stock option plans totaled $2,012,000
and $631,000, respectively.
OPTION REPRICING. On June 12, 1998, the Board of Directors of the
Company canceled all outstanding options held by optionees under the
1996 Stock Incentive Plan and granted new options to all such
optionees. The new options were for the same number of shares and
upon the same terms of expiration and vesting as the canceled
options, except that the exercise price for the new options was $3.81
per share, the market value of the Common Stock on June 12, 1998. In
effect, therefore, the Board of Directors reduced the exercise price
of all such outstanding options and which had exercise prices at the
time of cancellation ranging from $4.38 per share to $13.38 per
share. In connection with the grant under the President's Plan, all
options and warrants to purchase Common Stock that had previously
been granted to Mr. Lind in consideration of prior financial and
consulting services to the Company (aggregating 338,000 shares at
exercise prices ranging from $5.68 to $13.38 per share) were also
canceled. A total of 275,300 options granted to over 65 employees
under the 1996 Stock Incentive Plan were repriced by the June 12,
1998 action. The estimated fair value of the options canceled in 1998
in connection with the repricing of employee stock options totaled
$879,000.
-62-
<PAGE> 63
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period.
The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net income:
As reported $ 2,215,000 $ 1,311,000
Pro forma 1,933,000 969,000
Basic earnings per common share:
As reported $ .40 $ .29
Pro forma $ .34 $ .21
Diluted earnings per common share:
As reported $ .35 $ .23
Pro forma $ .31 $ .17
</TABLE>
The above SFAS No. 123 pro forma disclosures are not necessarily
representative of the effect SFAS No. 123 will have on the pro forma
disclosure of future years.
During 1994, the Company established an employee savings plan
pursuant to Section 401(K) of the Internal Revenue Code. The plan
provides for the employees to make tax deferred deposits into the
plan to the extent of 6% of their annual base compensation. The
Company matches half of the allowed employee contributions and such
Company contributions amounted to $56,000 and $34,000 for the years
ended September 30, 1998 and 1997, respectively.
8. COMMITMENTS AND CONTINGENCIES
MEGAMANIA LITIGATION. On December 31, 1997, the U.S. Attorney for the
Northern District of Oklahoma filed a civil forfeiture action in
Federal District Court challenging the Class II status of the
Company's interactive bingo game, MegaMania. On October 23, 1998, the
District Court issued a judgment holding that MegaMania was legal
Class II gaming. The decision found that MegaMania was a game of
bingo and that the EPS used to play MegaMania were technological aids
to the play of bingo as permitted by IGRA and were not gambling
devices. On November 9, 1998, the U.S. Attorney filed a motion with
the District Court requesting that it alter or amend its judgment.
The District Court has yet to rule on the November 9 motion.
On May 14, 1998, the Assistant U.S. Attorney for the Northern
District of California filed a civil forfeiture in Federal District
Court that also challenged the Class II status of MegaMania. On
November 23, 1998, the District Court issued a Memorandum and Order
holding that MegaMania was legal Class II gaming. As with the
decision of the Oklahoma District Court, the Order of the California
District Court found that MegaMania was a game of bingo and that the
EPS used to play MegaMania were technological aids to the play of
bingo as permitted by IGRA and were not gambling devices.
The Company is not able to predict whether either or both of these
decisions will be appealed by the government to the applicable
Circuit Court of Appeals or what the outcome of any such appeal would
be. No assurances can be given that there will be no other challenges
made to the legality of the
-63-
<PAGE> 64
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Company's interactive bingo activities or that, if made, 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 likely have a material adverse effect upon the Company's
financial condition and results of operation. In addition, if the EPS
used to aid the play of MegaMania are ultimately held to be gambling
devices, all of the other Class II bingo games currently offered by
the Company would likely be adversely effected which 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 or any future litigation
challenging the Company's interactive bingo activities will likely be
significant.
OTHER LITIGATION
NETWORK GAMING. On January 23, 1998, the Company filed a complaint
against Network Gaming International Corporation ("NGI") in the
Federal District Court for the Northern District of Oklahoma alleging
breach of contract. On February 2, 1998, NGI filed a complaint
against the Company in the same Federal District Court alleging,
among other things, breach of contract, misappropriation of trade
secrets, fraud and interference with prospective advantage. The
complaint by NGI seeks $62 million in damages and other specified and
unspecified relief and also names Gordon T. Graves, the Company's
Chairman of the Board, and Larry D. Montgomery, the Company's former
President, as individual defendants. These actions are in the very
preliminary stages and only limited discovery has 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.
SHAREHOLDER CLASS ACTIONS. On May 29, 1998, a shareholder class
action was filed against the Company in the Federal District Court
for the Southern District of California. Also named as defendants
were Gordon T. Graves and Larry D. Montgomery. The action, 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 the legality of MegaMania. 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. A hearing was held on
November 20, 1998 by the Multidistrict Litigation Panel established
under Federal law to determine issues relating to the consolidation
of the two cases. 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.
The Company is a party to various lawsuits and claims arising out of
the ordinary course of its business. No accrual for potential loss
has been made in the accompanying financial statements as management
does not believe that the likelihood of a material loss is probable
at this time.
-64-
<PAGE> 65
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
PRIZE FULFILLMENT FIRM
In order to reduce the need for prize reserve account funds and to
further reduce exposure to game deficits during periods of abnormally
high rates of jackpot prize wins, MBI has engaged a related party
firm specializing in prize fulfillment services to pay jackpot prizes
won during the term of a prize fulfillment agreement. The prize
fulfillment agreement specifies a maximum cumulative liability over
the term of the contract, in exchange for fees based on gross game
receipts. Prize fulfillment premiums amounted to $1,157,000 and
$2,642,000 for the years ended September 30, 1998 and 1997,
respectively. The current arrangements with such firm expire on
December 31, 1998. There can be no assurance that the prize
fulfillment agreement will be available at all or on commercially
acceptable terms upon the expiration of the existing agreement.
Under the terms of the prize fulfillment agreement, the Company is
reimbursed for prizes awarded at an amount equal to the present value
for the jackpot prize payments less a deductible which is $15,000 per
occurrence. These prize fulfillment funds are then utilized to
satisfy the obligation to the jackpot prize winner through a lump-sum
cash payment or the purchase of an annuity. In those cases where the
prize winner elects an annuity, the obligation has historically been
discharged by purchasing annuity contracts from insurance companies
rated by A.M. Best as A+, with the prize winner listed as the sole
beneficiary. Purchased annuity contracts entered into prior to April
15, 1994 by an assignor of such contracts to the Company, which
provide for various insurance companies to make payments directly to
prize winners over a specified period of time in the aggregate amount
of approximately $6,549,000 are outstanding at September 30, 1998.
The outstanding amounts include 22 annuity contracts aggregating
approximately $5,349,000 which were purchased from an insurance
carrier that is currently under an Order of Rehabilitation to the
Michigan State Commissioner of Insurance. Under this Order, payments
under all such contracts will continue until ordered otherwise by the
State of Michigan. It is unknown at this time as to whether further
court actions will result in reductions in amounts owed under these
annuity contracts. There can be no assurance that this or any other
insurance company responsible for outstanding annuities will continue
to fulfill all their obligations under the annuity contracts.
The Company is not responsible for any obligations to prize winners
prior to April 15, 1994, whether in lieu of annuities or in respect
of shortfalls on annuities or otherwise (except for specifically
assumed liabilities which amounted to approximately $63,000 at
September 30, 1998). Further, the Company is not responsible for
prize annuities awarded during the period April 15, 1994 through
December 22, 1994, except as to the obligation to discharge
obligations of the MegaBingo operations with the assets of the
MegaBingo operation and under the indemnification provisions of the
AGE Services Agreement. The present value, at September 30, 1998, of
the prize annuities awarded from April 15, 1994 to December 22, 1994,
which are not reflected in the financial statements, is $171,000. The
present value of the prize annuities and market value of the related
treasury investments at September 30, 1998 of prize annuities awarded
subsequent to December 23, 1994 through September 30, 1997 was
approximately $1,367,000, which has been reflected as restricted
investments and other long-term liabilities in the accompanying
financial statements.
Beginning in August 1994, the Company began a policy of funding prize
annuities with United States Treasury Bills with maturities which
correspond to the due dates of the annuity payments. Under its
arrangements with the prize fulfillment firm, the prize fulfillment
firm purchases the treasury securities
-65-
<PAGE> 66
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
and administrates payments to the winners. The Company believes that
this annuity payment structure will minimize the risk of annuity
defaults on future prizes awarded.
OPERATING LEASES
The Company leases its corporate offices and warehouses under
non-cancelable operating leases. Future minimum rentals by fiscal
year under these arrangements are as follows:
<TABLE>
<S> <C>
1999 $ 202,000
2000 $ 185,000
2001 $ 122,000
2002 $ 39,000
</TABLE>
Rental expense during fiscal years 1998 and 1997 amounted to $229,000
and $131,000, respectively.
9. 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
Officer, 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 cash of $140,000 and 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.
The EPS and related equipment purchased by EPLLC-2 has been leased to
a number of Indian tribes under terms where the Company and EPLLC-2
share in a percentage of the revenues generated by the use and
operation of the EPS at the tribes' bingo facilities. As an
inducement to consummate the March 1998 sale, the Company had agreed
to issue to the original third party issuer, and did issue to
EPLLC-2, warrants to purchase 20,000 shares of common stock
(exercisable for a period of five years, non-exercisable in the first
year) at an exercise price of $9.44 per share, which was the market
value of the common stock on the date the equipment purchase
agreement was executed. The estimated fair
-66-
<PAGE> 67
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
market value of these warrants was $1,000 and has been recorded as
additional cost of sales. As an inducement to consummate the June
1998 sale, the Company issued to EPLLC-2 warrants to purchase 262,500
shares of common stock (exercisable for a period of five years,
non-exercisable in the first year) at an exercise price of $7.00 per
share which was in excess of the market value of the common stock on
the date the equipment purchase agreement was executed ($3.50 per
share) The estimated fair market value of these warrants was $26,250
and has been recorded as additional cost of sales.
In connection with the sales of the electronic player stations to
EPLLC-2, the Company recorded revenues of $3,750,000 during the year
ended September 30, 1998 with related costs of sales of $1,878,000.
In June 1997, Graves Properties, Ltd., a limited partnership
controlled by Gordon T. Graves, the Company's Chairman and Chief
Executive Officer, formed Equipment Purchasing L.L.C. ("EPLLC") for
the purpose of purchasing MegaMania player stations from the Company
and leasing the stations to Indian tribes. In June 1997, EPLLC
purchased approximately 100 MegaMania player stations from the
Company for a total purchase price of $637,347, payable in two
promissory notes of EPLLC, one a short term note in the principal
amount of $400,000 bearing interest at approximately 7% per annum,
and the other a 12% note in the principal amount of $237,344 due, as
to both principal and interest, in two years. In December 1997, EPLLC
paid the short term note in full. The purchased equipment has been
leased to a tribe under terms where the Company receives a percentage
of the revenues generated by the equipment in consideration of
providing the equipment and the MegaMania game to the tribe. The
Company and EPLLC have agreed to a sharing of such percentage of
revenues, with EPLLC receiving a share equal to the greater of a
fixed percentage amount or such amount as is necessary to satisfy
EPLLC's monthly payment on the purchase note due the Company and to
amortize on a monthly basis the cash contributed to EPLLC by Graves
Properties, Ltd.
In September 1997, EPLLC purchased approximately 345 MegaMania player
stations from the Company for a total purchase price of approximately
$1,800,000, of which $990,000 was paid in cash in December 1997, and
the balance with a 12% note of EPLLC in the principal amount of
$810,000 due, as to both principal and interest, in two years. The
purchased equipment has been leased to five different tribes under
terms where the Company receives a percentage of the revenues
generated by the equipment which is shared with EPLLC under terms
consistent with those of the June 1997 sale to EPLLC discussed above.
In connection with the sales of the electronic player stations to
EPLLC, the Company recorded revenues of $2,436,000 during the year
ended September 30, 1997 with related costs of sales of $1,183,000.
As an inducement to consummate the June 1997 sale, the Company issued
to EPLLC warrants to purchase 50,000 shares of common stock at an
exercise price of $11.00 per share, which was the market value of the
common stock on the date of issuance. The estimated fair market value
of these warrants was $2,500 and has been recorded as additional cost
of sales. As an inducement to consummate the September 1997 sale, the
Company issued to EPLLC warrants to purchase 100,000 shares of common
stock at an exercise price of $13.38 per share which was the market
value of the common stock on the date of issuance. The estimated fair
market value of these warrants was $5,000 and has been recorded as
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<PAGE> 68
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
additional cost of sales. The warrants will become exercisable one
year after the date of issue and expire five years after the date of
issue. The warrants are redeemable by the Company at $.10 per share
if the closing price of the common stock for 20 consecutive trading
days has been at least 150% of the applicable exercise price.
In connection with the sale of the equipment, the Company also
entered into a management agreement with EPLLC and EPLLC-2 whereby
the Company is responsible for proposing, establishing and modifying
interactive game procedures and the related game accounting
procedures; supervising and administering the rental agreement with
the Indian tribe; using its best efforts to re-lease the purchased
equipment to other parties if the present rental agreement is
terminated; collecting all rents due under the rental agreement;
performing all necessary repairs and maintenance, but not bearing
any risk of loss for damages; conducting necessary marketing;
maintaining insurance; and paying all sales and use taxes and
performing other administrative functions. As compensation for these
services, the Company will receive $10.00 per electronic player
station as a re-leasing fee and $10.00 per electronic player station
per month as a management fee ($15.00 per electronic player station
per month in the case of EPLLC-2). The Company has the option to
repurchase the equipment at its then fair market value if after
giving effect to the payment of such repurchase price and the net
rental income received by EPLLC and EPLLC-2, respectively, such
entity has received a 20% internal rate of return.
On April 15, 1998, the Company entered into a Consulting Agreement,
as later amended, with Larry D. Montgomery, a Director of the
Company. Mr. Montgomery was the President and COO of the Company
until December 1997. The Consulting Agreement has a term of five
years, but may be terminated by either party with six months notice
given at any time after January 1, 1999. Mr. Montgomery is
compensated at the rate of $126,000 annually, and received a bonus of
$57,500 in September 1998 and is to receive an additional bonus of
$3,000 in November 1998. The Company has also agreed to pay the cost
of all premiums on life, health and disability insurance for Mr.
Montgomery and his family for five years and, during the term of the
agreement, will pay Mr. Montgomery rent of $1,000 per month for the
use of an office in Topeka, Kansas.
10. ELECTRONIC PLAYER STATION LEASES
The Company sells its interactive gaming electronic player stations
to its customers for cash or through revenue sharing arrangements.
Under the revenue sharing arrangements, a portion of the revenue from
the player stations is paid to the Company until the sales price of
the unit, plus interest, is recovered. Approximately $1,786,000 was
received under such provisions during 1997 and $3,416,000 in 1998.
Outstanding principal under equipment sales pursuant to such revenue
sharing arrangements amounted to $4,152,000 at September 30, 1998.
Generally, title to the player stations transfers to the lessee at
the end of the lease period. Revenue from the equipment sales
pursuant to revenue sharing is recorded as revenue as it is earned
because the Company generally must continue to operate the electronic
player station network in order to realize the sales proceeds. There
can be no assurance that the Company will realize the entire amount
of $4,152,000 at September 30, 1998, because customers could elect to
remove the player stations prior to their being fully paid for or
because the economic performance of the player stations at a
particular location is not sufficient to amortize the principal of
the revenue sharing obligation.
-68-
<PAGE> 69
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The cost and net book value at September 30, 1998 of electronic
player station lease equipment amounted to $3,204,000 AND $1,506,000,
respectively. Electronic player station lease equipment is
depreciated over a three year period unless the rate of payments
being received in relation to total payments indicates transfer of
title will occur to the lessee on a more rapid rate.
11. CONCENTRATIONS OF CREDIT RISK
The Company maintains its cash in bank deposit accounts which at
times may exceed the federal depository insurance limits. As of
September 30, 1998, the Company had concentrations of cash in one
bank totaling approximately $1,400,000. The Company has not
experienced any losses on such accounts in the past.
Accounts receivable represent short-term credit granted to customers
for which collateral is generally not required. Substantially all of
the Company's accounts receivable are from Native American Indian
tribes or their gaming enterprises. Additionally, a large percentage
of these tribes have their reservations and gaming operations in the
state of Oklahoma. Despite the industry and geographic concentrations
related to the Company's customers, due to the historical experience
of the Company on receivable collections, management considers credit
risk limited with respect to accounts receivable.
Approximately 48% and 45% of gaming revenues during the years ended
September 30, 1998 and 1997, respectively, were derived from halls
operated by four tribes. Two tribes each accounted for approximately
17% of gaming revenues in 1998 and one tribe accounted for
approximately 26% of gaming revenues in 1997. Accounts receivable
from one tribe at September 30, 1998, accounted for approximately 30%
of total trade accounts receivable.
Notes receivable consist of financial instruments issued by customers
for the purchase of EPS. Substantially all of the Company's notes
receivable are from Native American Indian tribes or their gaming
enterprises, as discussed above. Notes receivable-related parties are
due from EPLLC or EPLLC-II, as discussed in Note 9. All of the
Company's notes receivable are collateralized by the related EPS.
-69-
<PAGE> 70
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Title Location
- ----------- ----- --------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation (4)
3.2 Bylaws (1)
10.1 Form of Integrated Gaming Services Agreement (1)
10.2 Contingent Grand Prize Risk Assumption
Agreement dated October 1, 1995, between
the Company and SCA Promotions, Inc. (2)
10.3 Form of 1992-3 Warrant Certificate Issued by the Company (1)
10.4 Form of 1995 Warrant Certificate Issued by the Company (1)
10.5 Registration Rights Agreement dated
January 23, 1995 between the Company
and holders of certain Warrants (1)
10.6 Registration Rights Agreement dated January 23, 1995
between the Company and holders of certain Warrants (1)
10.7 Registration Rights Agreement among the Company and holders of
certain Warrants (2)
10.8 1994 Employee Stock Option Plan (1)
10.9 1994 Director Stock Option Plan (1)
10.10 1996 Stock Incentive Plan (2)
10.11 President's Plan (7)
10.12 Unit Purchase Agreement dated August 14, 1996 between
the Company and the AGN Investor Group (2)
10.13 Right of First Refusal Agreement dated August 14, 1996
between the Company and the AGN Investor Group (2)
</TABLE>
<PAGE> 71
<TABLE>
<S> <C> <C>
10.14 Put/Call Agreement dated August 14, 1996
between the Company and AGN Venturer L.L.C. (2)
10.15 Registration Rights Agreement between
the Company and AGN Venturer L.L.C. (2)
10.16 Limited Liability Company Agreement
of American Gaming Network L.L.C. (2)
10.17 Certificate of Merger of American Gaming Network LP into
American Gaming Network L.L.C. (2)
10.18 Form of Several Guaranty of AGN Investor Group (2)
10.19 Form of Amendment to Warrants (3)
10.20 Form of Class A Warrant (5)
10.21 Form of Class B Warrant (5)
10.22 Warrant Agreement dated November 12, 1996 between
the Company and Corporate Stock Transfer, as Warrant Agent (5)
10.23 Amendment to Warrant Agreement, dated July 18, 1997 (5)
10.24 Consulting Agreement, dated April 15, 1998, between the
Company and Larry D. Montgomery. (7)
10.25 Amendment to Consulting Agreement dated August 31, 1998. (7)
10.26 Equipment Purchase Agreement (June 1998) (7)
10.27 Rental Pool Agreement (June 1998) (7)
10.28 Management Agreement (June 1998) (7)
10.29 Equipment Purchase Agreement (March 1998) (7)
10.30 Rental Pool Agreement (March 1998) (7)
10.31 Management Agreement (March 1998) (7)
10.32 Equipment Purchase Agreement (June 1997) (7)
10.33 Rental Pool Agreement (June 1997) (7)
10.34 Management Agreement (June 1997) (7)
10.35 Equipment Purchase Agreement (September 1997) (7)
10.36 Rental Pool Agreement (September 1997) (7)
10.37 Management Agreement (September 1997) (7)
10.38 Shareholder Rights Plan (6)
21.1 Subsidiaries of Registrant (7)
23.1 Consent of PricewaterhouseCoopers LLP (7)
24.1 Power of Attorney (included on page 38) (7)
27.1 Financial Data Schedule (7)
</TABLE>
- ---------------
(1) Indicates incorporated by reference to the Company's Form 10-KSB filed
with the Commission for the fiscal year ended September 30, 1994.
(2) Indicates incorporated by reference to the Company's Form 10-KSB filed
with the Commission for the fiscal year ended September 30, 1996.
(3) Indicates incorporated by reference to the Company's Registration
Statement on Form SB-2 filed with the Commission on July 3, 1997.
(4) Indicates incorporated by reference to the Company's Form 10-QSB filed
with the Commission for the quarter ended March 31, 1997.
(5) Incorporated by reference to the Company's registration statement on
Form 8-A, filed with the Commission on July 29, 1997.
(6) Incorporated by reference to the Company's registration statement on
Form 8-A, filed with the Commission on October 23, 1998.
(7) Filed herewith.
<PAGE> 1
EXHIBIT 10.11
MULTIMEDIA GAMES, INC.
STOCK OPTION PLAN AND AGREEMENT
1998 PRESIDENT'S PLAN
THIS STOCK OPTION PLAN AND AGREEMENT, entered into this 12th day of
June, 1998, by and between Multimedia Games, Inc., a Texas corporation (the
"Company"), and Clifton Lind (the "Employee"),
W I T N E S S E T H:
WHEREAS, the Company desires to employ the Employee as its President
and Chief Operating Officer;
WHEREAS, as an inducement to accept such employment, the Company
desires to grant the Employee options to acquire shares of the Company's common
stock, $.01 par value per share ("Common Stock");
WHEREAS, subject to Section 15 of this Agreement, it is intended that
each option qualify as an "Incentive Stock Option" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the Company and the Employee have agreed to terminate and
cancel all of the "Other Options" as provided in Section 14 of this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained herein, the Company and the Employee hereby
agree as follows:
1. Grant of Option. (a) On the terms and conditions hereinafter set
forth, the Company hereby irrevocably grants to the Employee each of the options
(each an "Option" and collectively, the "Options") to purchase shares of Common
Stock (the "Shares") as set forth on Schedule A attached hereto.
(b) Subject to Section 15, it intended that each Option shall be an
Incentive Stock Option.
(c) If an Option is an Incentive Stock Option, the aggregate Fair
Market Value (determined as of the date of this Agreement) of the Shares subject
to the Option and of all other shares of Common Stock subject to options granted
under any other option plans of the Company (or any of its affiliated companies)
that become exercisable for the first time by the Employee during any calendar
year shall not exceed $100,000; and to the extent such $100,000 amount is
exceeded, the Option shall be treated as a Non-Qualified Stock Option.
<PAGE> 2
2. Purchase Price. The purchase price ("Purchase Price") for the Shares
covered by each Option shall be $3.8125 per Share.
3. Time of Exercise of Option; Exercisability. (a) Each Option shall
become exercisable on the Date Initially Exercisable of such Option as set forth
on Schedule A hereto.
(b) Each Option shall expire if and to the extent not exercised prior
to the Expiration Date of such Option as set forth on Schedule A.
(c) Notwithstanding the foregoing provisions of this Section 3,
(i) Upon the death of Employee or upon the occurrence of a "Change of
Control" (as hereinafter defined):
(A) each Option that is then exercisable on the date of such
event shall remain exercisable until the 30th day following such event;
provided that if such event is the death of Employee, such Option shall
remain exercisable for a period of 365 days from the date of Employee's
death; and
(B) each Option that is not then exercisable on the date of
such event shall nevertheless become immediately exercisable as to all
of the Shares subject to such Option shall remain exercisable until the
30th day following such event; provided that if such event is the death
of Employee, such Option shall remain exercisable for a period of 365
days from the date of Employee's death.
(ii) In the event of the termination of the Employee's employment with
the Company for Cause (as hereinafter defined):
(A) each Option that is then exercisable on the date of such
termination shall remain exercisable until the 30th day following such
termination; and
(B) each Option that is not then exercisable on the date of
such termination shall expire on the date of such termination.
(iii) In the event of the termination of the Employee's employment with
the Company due to the death or "disability" (as hereinafter defined) of the
Employee:
(A) each Option that is then exercisable on the date of such
death or disability shall remain exercisable until the 365th day
following such termination; and
(B) each Option that is not then exercisable on the date of
such death or disability shall expire on the date of such termination.
<PAGE> 3
(iv) In the event the Employee's employment with the Company is
terminated by the Company without "Cause" or in the event the Employee
terminates his employment with the Company for "Good Reason" (as hereinafter
defined):
(A) each Option that is then exercisable on the date of such
termination shall remain exercisable until the 90th day following such
termination;
(B) each Option that would become exercisable on or before
the second anniversary of the date of such termination shall become
exercisable as of the date of such termination and shall thereafter
remain exercisable until the 90th day following such termination; and
(C) each other Option not referred to in clauses (A) and (B)
of this Section 3(c)(iv) shall terminate on the date of such
termination.
(v) In the event the Employee's employment with the Company is
voluntarily terminated by the Employee without "Good Reason":
(A) each Option that is then exercisable on the date of such
termination shall remain exercisable until the 90th day following such
termination;
(B) each Option that would become exercisable on or before
the first anniversary of the date of such termination shall become
exercisable as of the date of such termination and shall thereafter
remain exercisable until the 90th day following such termination; and
(C) each other Option not referred to in clauses (A) and (B)
of this Section 3(c)(v) shall terminate on the date of such
termination.
(vi) When used in this Agreement, the following terms shall have the
indicated meanings:
"Cause" shall mean (A) the commission by the Employee of an
act of dishonesty, fraud or embezzlement (including the unauthorized
disclosure of confidential or proprietary information of the Company)
which results in, or reasonably could be expected to result in,
material injury to the Company, (B) a felony conviction of, or plea of
guilty or nolo contendre to a felony by, the Employee, (C) willful
misconduct by the Employee as an employee of the Company which results
in, or reasonably could be expected to result in, material injury to
the Company, or (D) the willful failure of the Employee to render
services to the Company in accordance with the terms of his employment
which failure amounts to a material neglect of his duties to, and
results in material injury to, the Company, as determined in each case
in good faith by the Company's Board of Directors.
"Change of Control" shall mean (A) the merger or consolidation
of the Company with any Person (other than a merger or consolidation to
change the place of domicile of the Company) where the Company is not
the surviving entity (or survives only as the subsidiary of another
Person), or (B) the sale of all or substantially all of the Company's
assets to any
<PAGE> 4
Person, or (C) the dissolution of the Company, or (D) if any Person
together with its affiliates shall become, directly or indirectly, the
beneficial owner of at least 51% of the voting stock of the Company
"disability" shall mean the permanent disability of the
Employee in accordance with the then-applicable provisions of the
disability policy of the Company as in effect from time to time or, if
no such policy is in effect, in accordance with the definition of
disability under the Social Security Act of 1935, as amended.
"Good Reason" shall mean (i) the failure to pay the Employee
an annual salary at least equal to that in effect on the date of this
Agreement (or any greater amount that may be in effect after the date
of this Agreement, (ii) the failure to retain the Employee as the
President and Chief Operating Officer of the Company, (iii) the
imposition upon the Employee of duties materially less in stature than
those performed by a president and chief operating officer of a
publicly traded company, and (iv) the imposition upon the Employee of
any requirement to perform any illegal act.
"Person" shall mean an individual, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization, a
limited liability company or any other entity.
(d) Anything to the contrary in this Section 3 notwithstanding, in no
event shall any Option be exercised prior to December 17, 1998; and should any
of the events specified in Section 3(c) require the exercise of an Option prior
to December 17, 1998, the right to make such exercise shall be continued until
December 17, 1998.
4. Manner of Exercise of Option. (a) To the extent that the right to
exercise an Option is then in effect, such Option may be exercised in full or in
part by giving written notice to the Company stating the number of Shares
exercised and accompanied by payment in full for the Purchase Price of such
Shares. Payment may be made, at the election of the Employee,
(i) in cash (or by authorizing a third party to sell all or
a portion of the Shares being purchased on the condition that an
appropriate portion of such sale proceeds are remitted to the Company),
or
(ii) by check payable to the Company, or
(iii) in shares of Common Stock (having a Fair Market Value on
the date of payment equal to that portion of the Purchase Price being
paid in such shares), or
(iv) by a promissory note of the Employee payable to the
Company (having the terms set forth in Section 4(d) below), or
(v) a combination of the foregoing, or
<PAGE> 5
(vi) in such other form of consideration as the Board of
Directors of the Company may, in its sole discretion, agree;
provided that, if at the time of exercise such Option (or a portion of such
Option) is a Non-Qualified Stock Option then Employee shall be required to pay
to the Company an amount of cash at least equal to the Company's obligation to
withhold for federal and state income taxes. Upon such exercise, delivery of a
certificate for paid-up, non-assessable Shares shall be made to the Employee at
the principal office of the Company not more than thirty (30) days from the date
of receipt of the notice by the Company.
(b) The Company shall at all times during the term of each Option
reserve and keep available such number of Shares of its Common Stock as will be
sufficient to satisfy the require ments of such Option.
(c) Notwithstanding the provision of Section 4(a) of this Agreement,
the Company may delay the issuance of Shares covered by the exercise of an
Option and the delivery of a certificate for such Shares until one of the
following conditions shall be satisfied:
(i) The Shares with respect to which such Option has been
exercised are at the time of the issue thereof effectively registered
or qualified under applicable federal and state securities acts now in
force or as hereafter amended; or
(ii) Counsel for the Company shall have given an opinion,
which opinion shall not be unreasonably conditioned or withheld, that
such Shares are exempt from registration and qualification under
applicable federal and state securities acts now in force or as
hereafter amended. The Company shall use its best efforts to obtain a
favorable opinion to the foregoing effect.
(d) Any promissory delivered by the Employee shall be due and payable
as to principal on the third anniversary of the date of the note, and shall be
payable as to interest on a monthly basis at a rate per annum equal to the
"applicable federal rate" as then in effect for notes of like duration and terms
of payment.
5. Non-Transferability. The right of the Employee to exercise an
Option shall not be assignable or transferable by the Employee otherwise than by
will or the laws of descent and distribution, and each Option may be exercised
during the lifetime of the Employee only by the Employee. Any transfer or
purported transfer of an Option in violation of the preceding sentence shall be
null and void and without effect, including without limitation any purported
transfer or assignment, whether voluntary or by operation of law, pledge,
hypothecation or other disposition contrary to the provisions hereof, or levy of
execution, attachment, trustee process or similar process, whether legal or
equitable, upon an Option.
6. Restrictions. (a) In the event that for any reason the Shares to be
issued upon exercise of an Option shall not be effectively registered under the
Securities Act of 1933 (the "1933 Act"), upon any date on which an Option is
exercised in whole or in part, the Employee shall give
<PAGE> 6
a written representation to the Company in the form attached hereto as Exhibit 1
and the Company shall place an "investment legend", as described in Exhibit 1
hereto, upon any certificate for the Shares issued by reason of such exercise.
(b) Within 90 days from the date of this Agreement, the Company shall
file a registration statement on Form S-3 for the purpose of registering under
the 1933 Act the resale of the Shares. The Company shall use its best efforts to
cause such registration statement to be declared effective and to remain in
effect until registration of the Shares is no longer necessary in order for the
Employee to sell the Shares publicly under Rule 144.
7. Recapitalizations, Reorganizations, Changes in Control and the
Like. In the event that the outstanding shares of the Common Stock of the
Company are changed into or exchanged for a different number or kind of shares
or other securities of the Company or of another Person by reason of any
reorganization, merger, consolidation, recapitalization, reclassification, stock
split-up, combination of shares, Change of Control or dividends payable in
capital stock, appropriate adjust ment shall be made in the number and kind of
Shares or other securities as to which each Option shall be exercisable. Such
adjustment shall be made without change in the total purchase price applicable
to the unexercised portion of an Option.
8. No Special Employment Rights. Nothing contained in this Agreement
shall be construed or deemed by any person under any circumstances to bind the
Company to continue the employment of the Employee for the period within which
any Option may be exercised.
9. Rights as a Shareholder. The Employee shall have no rights as a
shareholder with respect to any Shares which may be purchased by exercise of any
Option unless and until a certificate or certificates representing Shares are
duly issued and delivered to the Employee and the Employee has executed and
delivered to the Company any and all agreements, instruments and other documents
required by the Company pursuant to Section 6(a) hereof.
10. Withholding Taxes. Whenever Shares are to be issued upon exercise
of an Option, the Company shall have the right to require the Employee to remit
to the Company an amount sufficient to satisfy all Federal, state and local
withholding tax requirements prior to the delivery of any certificate or
certificates for Shares. In all events Employee shall pay such withholding tax
in cash to the Company.
11. Fractional Shares. No fraction of a Share shall be purchasable or
deliverable upon the exercise of an Option, but in the event any adjustment
hereunder of the number of Shares or other securities covered by an Option shall
cause such number to include a fraction of a Share, such fraction shall be
adjusted to the nearest smaller whole number of a Share.
12. Notices. Any communication or notice required or permitted to be
given under this Agreement shall be in writing and shall be deemed duly given if
sent by telecopy, upon dispatch thereof (answerback received), or if hand
delivered upon receipt thereof or if mailed by registered or certified mail,
postage prepaid, return receipt requested, upon the third business day after
dispatch thereof, as follows:
<PAGE> 7
If to the Company:
Multimedia Games, Inc.
7335 South Lewis Avenue, Suite 204
Tulsa, Oklahoma 74136
Attention: Chairman of the Board
Telecopy: (918) 494-0177
If to the Employee:
At the address set forth below
the signature of Employee
13. Miscellaneous. (a) This Agreement constitutes the entire Agreement
between the parties hereto with regard to the subject matter hereof, terminating
and superseding all prior understandings and agreements, whether written or
oral. This Agreement may not be amended or revised except by a writing signed by
the parties.
(b) Captions herein have been inserted solely for convenience of
reference and in no way define, limit or describe the scope or substance of any
provision of this Agreement.
(c) This Agreement shall be construed under and governed by the laws of
the State of Oklahoma.
14. Cancellation of Other Options. The Company and the Employee hereby
mutually agree to terminate and cancel, effective immediately, each and every of
the warrants, options and other rights to purchase Common Stock heretofore
granted by the Company to the Employee as in effect immediately prior to the
date of this Agreement.
15. Shareholder Approval of Incentive Stock Options. This Agreement is
intended to be a "plan" within the meaning of Section 422 of the Code. The total
number of shares of Common Stock subject to this "plan" that may be issued as
Incentive Stock Options is 338,000 shares. This Agreement and the Options
granted hereunder shall become effective with respect to Incentive Stock Options
on the date the Company's stockholders formally approve the Plan; provided that,
if such approval is not obtained on or before June 17, 1999, the Options shall
remain in effect in accordance with their respective terms but shall be
non-qualified stock options.
<PAGE> 8
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Employee has hereunto set his or
her hand, all as of the day and year first above written.
MULTIMEDIA GAMES, INC.
By:
--------------------------------------
EMPLOYEE
-----------------------------------------
Name: Clifton Lind
Address:
---------------------------------
---------------------------------
Social Security No.:
---------------------
<PAGE> 9
STOCK OPTION PLAN AND AGREEMENT
EXHIBIT 1
-------------
Gentlemen:
In connection with the exercise by me as to shares of Common Stock,
$.01 par value per share, of Multimedia Games, Inc. (the "Company") under the
Stock Option Agreement dated _____________, granted to me under the 1996 Stock
Incentive Plan, I hereby acknowledge that I have been informed as follows:
1. The shares of Common Stock of the Company to be issued to me
pursuant to the exercise of said option have not been registered under the
Securities Act of 1933, as amended (the "Act"), and accordingly, must be held
indefinitely unless such shares are subsequently registered under the Act, or an
exemption from such registration is available.
2. Routine sales of securities made in reliance upon Rule 144 under the
Act can be made only after the holding period and in limited amounts in
accordance with the terms and conditions provided by that Rule, and in any sale
to which that Rule is not applicable, registration or compliance with some other
exemption under the Act will be required.
3. The Company is under no obligation to me to register the shares or
to comply with any such exemptions under the Act.
4. The availability of Rule 144 is dependent upon adequate current
public information with respect to the Company being available and, at the time
that I may desire to make a sale pursuant to the Rule, the Company may neither
wish nor be able to comply with such requirement.
In consideration of the issuance of certificates for the shares to me,
I hereby represent and warrant that I am acquiring such shares for my own
account for investment, and that I will not sell, pledge or transfer such shares
in the absence of an effective registration statement covering the same, except
as permitted by the provisions of Rule 144, if applicable, or some other
applicable exemption under the Act. In view of this representation and warranty,
I agree that there may be affixed to the certificates for the shares to be
issued to me, and to all certificates issued hereafter representing such shares
(until in the opinion of counsel, which opinion must be reasonably satisfactory
in form and substance to counsel for the Company, it is no longer necessary or
required) a legend as follows:
"These securities have not been registered under the Securities Act of
1933 and may not be sold, transferred, offered for sale, pledged or
hypothecated in the absence of an effective registration statement as
to the securities under said Act or an opinion of counsel satisfactory
to the Company, both as to opinion and counsel, that such registration
is not required."
I further agree that the Company may place a stop order with its
Transfer Agent, prohibiting the transfer of such shares, so long as the legend
remains on the certificates representing the shares.
Very truly yours,
<PAGE> 10
SCHEDULE A
LIST OF OPTIONS
<TABLE>
<CAPTION>
Number of Shares
Subject to Option Date Initially Exercisable Expiration Date
- ----------------- -------------------------- ---------------
<S> <C> <C>
27,000 June 17, 1998 May 29, 2002
50,000 September 30, 1998 September 30, 2002
12,250 June 17, 1998 February 20, 2007
12,250 February 20, 1999 February 20, 2007
12,250 February 20, 2000 February 20, 2007
12,250 February 20, 2001 February 20, 2007
12,500 January 8, 1999 January 8, 2008
12,500 January 8, 2000 January 8, 2008
12,500 January 8, 2001 January 8, 2008
12,500 January 8, 2002 January 8, 2008
40,500 August 28, 1998 August 28, 2007
40,500 August 28, 1999 August 28, 2007
40,500 August 28, 2000 August 28, 2007
40,500 August 28, 2001 August 28, 2007
</TABLE>
<PAGE> 1
EXHIBIT 10.24
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (this "Agreement") is made and entered into
to become effective on April 15, 1998, by and between MULTIMEDIA GAMES, INC., a
Texas corporation (the "Company"), and LARRY D. MONTGOMERY, an individual
("Consultant").
W I T N E S S E T H:
WHEREAS, the Company wishes to retain Consultant on an exclusive basis
as an independent consultant, in order to utilize Consultant's knowledge and
expertise in matters of interest to the Company and its affiliates, including
Indian gaming and regulatory matters, and Consultant desires to provide such
knowledge and expertise to the Company and its affiliates and to perform certain
services in connection therewith; and
WHEREAS, the Company and Consultant desire to enter into this Agreement
to set forth their respective rights and obligations.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereby agree as follows:
1. Independent Consultant. The Company does hereby engage Consultant,
effective April 15, 1998, as a consultant and advisor with respect to the
matters set forth in Section 3 hereof and Consultant hereby accepts such
engagement for the compensation hereinafter set forth. Prior to April 15, 1998,
Employee shall remain a regular employee of the Company.
The Company and Consultant specifically understand and agree that
Consultant is and shall be and remain at all times under this Agreement an
independent contractor and not the servant, agent or employee of the Company,
and that Consultant shall be free from interference or direction from the
Company as to his day-to-day activities in the performance of his duties
hereunder. Except as otherwise expressly provided in Section 4 hereof,
Consultant shall not be considered under the provisions of this Agreement as
having employee status or as being entitled to participate in any plans,
arrangements, or distributions by the Company pertaining to or in connection
with any pension, stock bonus, profit-sharing, or any other benefit available to
a regular employee of the Company.
2. Term. The term of this Agreement shall commence on April 15, 1998,
and continue until December 31, 2002 (the "Scheduled Term"), unless this
Agreement is earlier terminated as hereinafter set forth. The period commencing
with April 15, 1998, and ending on the date of any termination of this Agreement
is hereinafter called the "Term".
3. Duties. During the Term of this Agreement, Consultant agrees to
consult with the Company through its Chairman of the Board and President (or any
Vice President identified to Consultant by the Chairman of the Board or
President) with respect to various matters, including but not limited to advice
and assistance in connection with Indian gaming and regulatory matters.
Consultant agrees to devote an average of forty (40) hours per week for
forty-four (44) weeks a year
<PAGE> 2
(pro rated as to the number of weeks remaining during the period commencing with
the date of this Agreement and ending with December 31, 1998) and to perform
such duties diligently and to the best of his ability. Consultant further agrees
that he will not during the Term of this Agreement be an independent contractor
to, or an employee of, or provide any services to, any other person that
provides goods and services in competition with, or whose interests or adverse
to those of, the Company.
4. Compensation. As compensation for all duties performed by Consultant
under this Agreement:
(a) During the Term of this Agreement, the Company shall pay Consultant
at the rate of one hundred twenty six thousand dollars ($126,000) per annum,
payable in bi-monthly installments of $5,250.00 each, on the fifteenth day and
the last day of each calendar month, commencing with April 30, 1998 and ending
with the last day of the Term.
(b) During the Scheduled Term of this Agreement, the Company shall pay
all premiums on all life, disability and health insurance with respect to
Consultant and his spouse in order to provide benefits to Consultant and his
spouse to the same extent enjoyed by them on Consultant's last day of employment
with the Company.
(c) Consultant was granted a Stock Option on January 8, 1998, pursuant
to the Company's 1996 Stock Incentive Plan (the "1996 Plan") to purchase 15,000
shares of the Company's Common Stock at a price of $10.50 per share, as
evidenced by a separate Stock Option Agreement between the Company and
Consultant.
5. Reimbursement for Expenses. Consultant shall be reimbursed for his
reasonable expenses incurred in connection with the performance of his duties
hereunder to the extent the same have been authorized in advance by the Chairman
of the Board, President or Chief Financial Officer of the Company and Consultant
submits proper documentation with respect thereto.
6. Taxes. Any taxes or similar charges assessed against Consultant as a
result of the compensation received by him hereunder shall be for the account of
Consultant.
7. Termination. The Company shall have the right at its option to
terminate this Agreement for any reason or for no reason by delivering, at any
time after December 31, 1998, a written notice to Consultant. Such written
notice shall specify the date of termination of this Agreement which in no event
shall be earlier than one hundred eighty days (180) days' from the date such
written notice is delivered to Consultant. Consultant shall also have the right
at his option to terminate this Agreement for any reason or for no reason by
delivering, at any time after December 31, 1998, a written notice of termination
to the Company. Such written notice shall specify the date of termination of
this Agreement which in no event shall be earlier than ninety (90) days' from
the date such written notice is delivered to the Company. The Term of this
Agreement shall also terminate upon the death of Consultant.
8. Confidential Information. Consultant shall not, without the prior
written consent of the Company, publish, disclose or make accessible to any
person, firm or corporation, or himself use, any "Confidential Information" (as
hereinafter defined), relating to the Company and its affiliates
<PAGE> 3
which Consultant may now possess or may obtain or create prior to the
termination of this Agreement. "Confidential Information" shall include all
information, whether oral or written, respecting the Company's and its
affiliates' business, including, but not limited to, existing, proposed or
prospective acquisitions and investments, customers, marketing techniques or
strategies, pricing policies, cost information, commercial relationships,
financial results and research and development. "Confidential Information" shall
not include information which is public knowledge or which shall become public
knowledge through no direct or indirect involvement on the part of Consultant.
9. Authority. Consultant shall not have the authority, express or
implied, to bind the Company and its affiliates with respect to any matter,
except with the prior consent of the Chairman of the Board or President (or
identified Vice President) of the Company, which consent may be given orally or
in writing.
10. Indemnity. The Company shall indemnify and hold harmless Consultant
against and in respect of any and all damages, claims, losses, expenses, costs,
obligations and liabilities (including reasonable attorney's fees) incident to
any suit, action, investigation, claim or proceeding which Consultant may incur
or may suffer by reason of providing services pursuant to this Agreement or by
reason of acting for or on behalf of the Company pursuant to any authority
granted or delegated to Consultant under this Agreement; provided, that the
foregoing indemnification shall not include or apply to any liability arising by
reason of any act or omission of Consultant which resulted from his fraud, gross
negligence or willful misconduct or breach or default under this Agreement or
any such power or authority.
11. Remedies. Consultant acknowledges that the Company would have no
adequate remedy at law and would be irreparably harmed if Consultant would
breach any of the provisions of Section 8 above and, therefore, agrees that the
Company shall be entitled to injunctive relief to prevent any such breaches or
threatened breaches and to specific performance of such terms in addition to any
other legal or equitable remedies. Consultant further agrees that he shall not
in any proceeding in equity relating to the enforcement of Section 8 above raise
the defense that the Company has an adequate remedy at law. Nothing contained
herein shall be construed as prohibiting the Company from pursuing any other
remedies at law or in equity which it may have.
12. Severability. If any one or more of the provisions or part of a
provision contained in this Agreement shall for any reason be held to be
invalid, illegal or unenforceable in any respect in any jurisdiction, such
invalidity, illegality or unenforceability shall not affect the validity,
legality or enforceability of this Agreement in any other jurisdiction or any
other provision or part of a provision of this Agreement, but this Agreement
shall be reformed and construed in such jurisdiction as if such invalid, illegal
or unenforceable provision or part of a provision had never been contained
herein and such provision or part shall be reformed so that it would be valid,
legal and enforceable in such jurisdiction to the maximum extent possible.
13. Notices. All notices or other communications required or permitted
hereunder shall be in writing and shall be deemed delivered on the date
personally delivered by hand, facsimile or by similar means, or on the third
(3rd) day after mailing if mailed to the party to whom notice is to be given by
first class mail, postage prepaid and properly addressed as follows:
<PAGE> 4
If to Consultant:
Larry D. Montgomery
1920 S.W. Union Road
Topeka, Kansas 66615
Telecopy: (913) 256-6038
If to the Company:
Multimedia Games, Inc.
7335 South Lewis Avenue
Suite 204
Tulsa, Oklahoma 74136
Attention: President
Telecopy: (918) 497-1391
Either party may change its address for purposes of this Section 13 by giving
the other party written notice of the new address in the manner set forth above.
14. Assignment. Neither this Agreement nor any of the rights or
obligations hereunder may be assigned by either party hereto without the prior
written consent of the other.
15. Governing Law. This Agreement shall be governed, construed and
enforced in accordance with the laws of the State of Oklahoma.
16. Outstanding Options. Except for options granted to Consultant under
the 1996 Plan (which shall remain in full force and effect in accordance with
their terms), the vesting of all other options granted to Consultant pursuant to
the Company's 1994 Employee Stock Option Plan shall be accelerated to April 15,
1998, and Consultant shall have the right until April 15, 1998, to exercise all
or any part of such options in accordance with their terms.
17. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes any and all prior and contemporaneous promises, agreements and
representations not set forth in this Agreement. This Agreement may not be
amended or modified except by a writing signed by both parties.
18. Captions. The captions and headings contained herein are solely for
convenience and reference and do not constitute a part of this Agreement.
<PAGE> 5
IN WITNESS WHEREOF, the Company and Consultant have executed and
delivered this Agreement as of the day and year first above written.
MULTIMEDIA GAMES, INC.
By:
--------------------------------------
Name: Gordon T. Graves
Title: Chairman of the Board
CONSULTANT
-----------------------------------------
Larry D. Montgomery
<PAGE> 1
EXHIBIT 10.25
August 31, 1998
One (1) Page Telefax to:
Mr. Gordon Graves, Chairman & CEO
Mr. Clifton Lind, President & COO
Multimedia Games, Inc.
8900 Shoal Creek Blvd., Suite 300
Austin, TX 78757
Dear Gordon and Clifton:
In accordance with our conversation today, this will confirm our mutual
agreement:
1. MGAM will pay $1,000/month rent from January 1998 through
December 1999;
2. My consulting contract remains unchanged;
3. MGAM will grant me an additional 7,500 consulting options at
$3.81 with vesting anniversaries based on a 1/8/98 grant date;
4. MGAM will pay me a $57,500 bonus in September of which I will
apply $52,500 to liquidate my $52,500 note for stock purchased
on 10/17/97 and I will secure the remaining liability of
$100,195 with a "negative pledge" on my ranch; and
5. An additional bonus of $3,000 will be paid before Thanksgiving
1998, which will be applied to interest.
My promissory note to Multimedia Games, Inc. (the "Company") for stock
purchased October 17, 1997 in the amount of $52,500 will be liquidated by
applying $52,500 of a $57,500 bonus to be paid on September 15, 1998. My new
promissory note to the Company in the amount of $100,195 for stock purchased
January 23, 1998 in the amount of $3,880 and on April 15, 1998 in the amount of
$96,315 shall be secured by a negative pledge on my Kansas ranch. The "negative
pledge" is intended to assure the Company that the unencumbered equity in the
ranch (which is assumed to have a fair market value of $400,000 and is currently
encumbered by approximately $60,000 in mortgages) will at all times be at least
$100,195.
If the foregoing accurately sets forth our mutual understanding, please
so indicate by signing a copy of this letter in the place provided below.
Sincerely,
Larry Montgomery
Agreed and Accepted this
31st day of August, 1998
By:
----------------------------------
Gordon Graves, Chairman & CEO
<PAGE> 1
EXHIBIT 10.26
EQUIPMENT PURCHASE AGREEMENT
THIS EQUIPMENT PURCHASE AGREEMENT (the "AGREEMENT") is made and entered
into this 30th day of June, 1998, by and between MULTIMEDIA GAMES, INC., a Texas
corporation ("SELLER") and EQUIPMENT PURCHASING II, L.L.C., a Delaware limited
liability company ("BUYER").
W I T N E S S E T H :
WHEREAS, Seller owns and operates a Class II gaming business at its
offices located at 7335 South Lewis, Suite 302, Tulsa, Oklahoma (the
"BUSINESS");
WHEREAS, Buyer desires to purchase from Seller and Seller desires to
sell to Buyer, subject to the terms and conditions of this Agreement, certain
gaming equipment relating to the Business;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto, intending to be legally bound, agree as
follows:
ARTICLE I
PURCHASE AND SALE OF EQUIPMENT
Section 1.1 Sale of Equipment. On the Closing Date (as hereinafter
defined), Seller shall sell, assign, transfer and convey to Buyer, and Buyer
shall purchase and acquire from Seller, free and clear of all liens,
encumbrances and adverse claims (other than claims of lessees of the Equipment
related to the lease and use thereof) that certain gaming equipment set forth on
EXHIBIT 1.1 hereto (collectively, the "EQUIPMENT" and individually, an "EPS").
Section 1.2 Purchase Price. The purchase price (the "PURCHASE PRICE")
for the Equipment shall be Two Million Three Hundred Fifty Thousand Dollars
($2,350,000) as set forth on EXHIBIT 1.1 as the sum of the total cost of the
Equipment. The Purchase Price shall be paid as follows:
(a) the delivery of a promissory note to Seller in the form
attached as EXHIBIT 1.2(A) ("NOTE 1") in the principal amount
of One Million Four Hundred Ten Thousand Dollars ($1,410,000)
with interest payable at the applicable federal rate and a
maturity dated July 15, 1998; and
<PAGE> 2
(b) the delivery of a promissory note to Seller in the form
attached as EXHIBIT 1.2(B) in the principal amount of Nine
Hundred Forty Thousand Dollars ($940,000) ("NOTE 2") with
interest payable at a rate of ten percent (10%) per annum and
a maturity date sixty (60) months from the date of issuance.
Section 1.3 Warrants. As additional inducement for Buyer to enter into
this Agreement, Seller agrees to issue to Buyer at Closing, two hundred
sixty-three thousand two hundred (263,200) warrants to purchase the Common Stock
of Seller (the "Warrants"). The terms of each warrant shall be as set forth in
the Warrant Agreement attached hereto as EXHIBIT 1.3 (the "WARRANT AGREEMENT").
The purchase price per share of Common Stock of Seller purchasable pursuant to
each Warrant shall be initially $7.00, and the number of shares of Common Stock
purchasable upon the exercise of each Warrant shall be initially one (1) share
of Common Stock of Seller. The Warrants shall become exercisable one (1) year
from the Closing Date and shall expire on the fifth anniversary of the Closing
Date.
Section 1.4 Risk of Loss. The risk of loss or destruction or damage to
any or all of the Equipment from any cause whatsoever at all times prior to the
Closing Date of the purchase of the Equipment shall be borne by Seller.
Subsequent to the Closing Date of the purchase of the Equipment, the risk of
loss or destruction of or damage to any or all the Equipment from any cause
whatsoever shall be borne by Buyer, subject to the agreements and indemnities of
the "Manager" for the benefit of the "Owner" as provided in, and as such terms
are defined in, the Management Agreement of even date referred to in Section
2.2(b) below.
Section 1.5 Lease of Equipment. Ownership of Equipment shall transfer
subject to any and all lease or use agreements relating to such Equipment,
including leases that entitle the lessee thereunder to purchase the Equipment.
If any lessee of equipment exercises its rights under a lease agreement to
purchase the underlying equipment, Buyer shall transfer title to lessee.
Section 1.6 Certain Taxes and Fees. Buyer shall be responsible for (i)
any sales and use taxes which may become due and owing by reason of the sale of
the Equipment hereunder, (ii) all transfer, documentary and similar taxes and
all other duties, levies or other governmental charges incurred by or imposed on
the parties hereto with respect to the property transfer contemplated pursuant
to this Agreement, and (iii) all recording fees, if any, relating to the filing
of instruments transferring title to Buyer from Seller.
Section 1.7 Ad Valorem Taxes. Ad valorem, property and similar taxes
and assessments with respect to the Equipment for the assessment year in which
Closing occurs shall be prorated to the Closing Date, so that Seller shall be
responsible for such taxes for the period prior to the Closing Date and Buyer
shall be responsible for such taxes for the period on and after the Closing
Date.
Section 1.8 Other Expenses. All other costs and expenses incurred by
each party hereto in connection with all things required to be done by it
hereunder, including attorneys' and accountant fees, shall be borne by the party
incurring same.
<PAGE> 3
Section 1.9 Assignment of Warranties. Seller agrees to assign to Buyer
at closing; any and all valid warranties it may have in and to the Equipment;
provided that Seller shall not be obligated to assign any warranties which are
non-assignable pursuant to their terms.
Section 2.0 Intellectual Property. Buyer is not acquiring any license
or other right to use, or any ownership interest in, the intellectual property
of Seller, including without limitation the trade names "MegaMania" and
"FlashCash" or any software related to such games.
ARTICLE II
CLOSING
Section 2.1 Closing. Closing of the purchase and sale of Equipment
provided for herein ("CLOSING") shall take place on or before June 30, 1998 at a
time and place mutually satisfactory to both parties (the "CLOSING DATE"). At
Closing, Seller shall deliver to Buyer a duly executed bill of sale in
substantially the form of EXHIBIT 2.1 hereto. Buyer shall deliver to Seller, the
Purchase Price as provided in Section 1.2 hereof.
Section 2.2 Conditions to Each Party's Obligations. The respective
obligations of Seller and Buyer to consummate the transactions contemplated by
this Agreement shall be subject to each of the following conditions, in addition
to those set forth in Section 2.1 hereof:
(a) the parties shall have received the Rental Pool Agreement,
duly authorized and executed by the other, in substantially the form
attached as EXHIBIT 2.2(A);
(b) the parties shall have received the Management Agreement,
duly authorized and executed by the other, in substantially the form
attached as EXHIBIT 2.2(B); and
(c) Buyer shall have received the Warrants from Seller.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer, and covenants with
Buyer as follows:
Section 3.1 Corporate Existence; Authority. Seller is a corporation,
duly organized, validly existing and in good standing under the laws of the
State of Texas. The execution, delivery and performance of this Agreement by
Seller has been duly authorized by all necessary corporate and other action; and
no further corporate or other action is necessary for Seller to execute and
deliver this Agreement and to consummate and perform its obligations hereunder.
<PAGE> 4
Section 3.2 Consents. No consent, approval, waiver or authorization of,
or the making of any declaration or filing with, any governmental authority or
any other person is necessary in connection with the execution, delivery or
performance by Seller of this Agreement, and the consummation of the transaction
contemplated by this Agreement will not require the approval of any entity or
person in order to prevent the breach or termination of any agreement or other
right, privilege, license or agreement of Seller.
Section 3.3 No Conflicting Agreements. Neither the execution and
delivery of this Agreement by Seller nor the fulfillment of or compliance with
the terms or provisions hereof will result in a breach of the terms, conditions
or provisions of, or constitute a default under, or result in a violation of the
Certificate of Incorporation or Bylaws of Seller, or any other agreement,
mortgage, lease, license or other instrument or obligation to which Seller is a
party or by which the Equipment is bound, or any provision of any applicable
law, rule, regulation or ordinance or any order, decree, writ or injunction of
any court, administrative agency or governmental authority by which any Seller
is bound.
Section 3.4 Validity and Binding Effect. Seller has all requisite power
and authority to enter into this Agreement and to perform its obligations
hereunder. This Agreement has been duly executed and delivered by or on behalf
of Seller and constitutes the legal, valid and binding obligation of Seller,
enforceable against Seller in accordance with its terms, except as the same may
be limited by insolvency, bankruptcy or other laws of general application
affecting the enforcement of creditors' rights and by general equitable
principles.
Section 3.5 Title to Equipment. Seller has good and marketable title
to, and is the owner of, the Equipment, free and clear of all liens, mortgages,
security agreements, leases, options, pledges, charges, covenants, conditions,
restrictions and other encumbrances and claims of any kind or character
whatsoever (other than claims of lessees of the Equipment pursuant to the terms
thereof) and will convey the same to Buyer at Closing.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Seller hereby represents and warrants to Buyer, and covenants with
Buyer as follows:
Section 4.1 Corporate Existence; Authority. Buyer is a limited
liability company duly organized, validly existing and in good standing under
the laws of the State of Delaware. The execution, delivery and performance of
this Agreement by Buyer has been duly authorized by all necessary corporate and
other action; and no further corporate or other action is necessary for Buyer to
execute and deliver this Agreement and to consummate and perform its obligations
hereunder.
<PAGE> 5
Section 4.2 Consents. No consent, approval, waiver or authorization of,
or the making of any declaration or filing with, any governmental authority or
any other person is necessary in connection with the execution, delivery or
performance by Buyer of this Agreement, and the consummation of the transaction
contemplated by this Agreement will not require the approval of any entity or
person in order to prevent the breach or termination of any agreement or other
right, privilege, license or agreement of Buyer.
Section 4.3 No Conflicting Agreements. Neither the execution and
delivery of this Agreement by Buyer nor the fulfillment of or compliance with
the terms or provisions hereof will result in a breach of the terms, conditions
or provisions of, or constitute a default under, or result in a violation of,
the internal charter or operation documents of Buyer or any agreement or other
instrument to which Buyer is a party or by which it is bound, or result in the
violation of any provision of any applicable law, rule, regulation or ordinance
or any order, decree, writ or injunction of any court, administrative agency or
governmental authority by which Buyer is bound.
Section 4.4 Validity and Binding Effect. Buyer has all requisite power
and authority to enter into this Agreement and to perform its obligations
hereunder. This Agreement has been duly executed and delivered on behalf of
Buyer and constitutes the legal, valid and binding obligation of Buyer,
enforceable against Buyer in accordance with its terms, except as the same may
be limited by insolvency, bankruptcy or other laws of general application
affecting the enforcement of creditors' rights or by general equitable
principles.
ARTICLE V
CERTAIN COVENANTS OF THE PARTIES
Section 5.1 Registrations, Filings and Consents. Seller will cooperate
in good faith, at Buyer's request, to make all registrations, filings, and
applications and to give all notices and to obtain all governmental and other
consents, transfers, approvals, orders, qualifications and waivers necessary or
desirable for the consummation of the transactions contemplated hereby or which
may thereafter be reasonably necessary or desirable to effect the transfer or
renewal of the Equipment.
Section 5.2 Further Assurances. Seller agrees from time to time,
whether at or after the Closing Date, to execute and deliver, and will cause its
affiliates to execute and deliver, such further instruments of conveyance and
transfer and take such other action as Buyer may reasonably request in order to
more effectively convey and transfer to Buyer the Equipment.
Section 5.3 Disclaimer; Limitation of Remedies. THE PARTIES AGREE THAT
THE EQUIPMENT SOLD, CONVEYED, TRANSFERRED AND ASSIGNED HEREBY IS SOLD AND
CONVEYED ON AN "AS IS, WHERE IS" BASIS AND THAT THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR
<PAGE> 6
PURPOSE AND ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, ARE EXCLUDED FROM THIS
TRANSACTION AND SHALL NOT APPLY TO THE GOODS SOLD. BUYER ACKNOWLEDGES THAT
SELLER SHALL NOT BE LIABLE FOR ANY INCIDENTAL, SPECIAL, INDIRECT OR
CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO, LOSS OF USE OR LOSS OF
PROFITS INCURRED BY BUYER IN CONNECTION WITH OR RELATING TO THE PURCHASE OF THE
EQUIPMENT PURSUANT TO THIS AGREEMENT OR THE USE OF THE EQUIPMENT. THE PARTIES
AGREE THAT, TO THE EXTENT REQUIRED BY LAW, THE DISCLAIMERS CONTAINED HEREIN ARE
"CONSPICUOUS" DISCLAIMERS FOR THE PURPOSE OF ANY LAW, RULE OR ORDER.
ARTICLE VI
MISCELLANEOUS
Section 6.1 Survival of Representations, Warranties and Agreements. The
representations, warranties, covenants and agreements made in this Agreement or
in any certificate or instrument delivered in connection herewith shall be in
full force and effect notwithstanding any investigation made by or disclosure
made to any party hereto, whether before or after the date hereof, shall survive
Closing and shall continue to be applicable and binding thereafter.
Section 6.2 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Oklahoma without reference
to the choice of law principles thereof.
Section 6.3 Entire Agreement. This Agreement, including any exhibits
and schedules hereto, contains the entire agreement and understanding between
the parties hereto, and supersedes any and all prior agreements, arrangements
and understandings, relating to the subject matter hereof. There are no written
or oral agreements, understandings, representations or warranties between the
parties other than those set forth or referred to in this Agreement. No
supplement, amendment, alteration, modification or waiver of this Agreement
shall be binding unless consented to in writing by Buyer and Seller.
Section 6.4 Expenses. Each party hereto shall separately bear the
expenses incurred by it in connection with this Agreement and in connection with
all things required to be done by it hereunder.
Section 6.5 Notices. All notices or other communications required or
permitted hereunder shall be in writing and shall be deemed given when delivered
personally or when sent by facsimile or on the third day after being mailed by
registered or certified mail, postage prepaid, addressed as follows:
<PAGE> 7
To Seller: Multimedia Games, Inc.
7335 S. Lewis, Suite 302
Tulsa, OK 74136
Attention: Contract Administration
To Buyer: Equipment Purchasing II, L.L.C.
c/o Multimedia Games, Inc.
7335 S. Lewis, Suite 302
Tulsa, OK 74136
Attention: Frederick E. Roll
Any party may change its address for receiving notices by giving
written notice of such change to the other party in accordance with this Section
6.5.
Section 6.6 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, this Agreement may not be assigned by
either party without the written consent of the other, which consent shall not
be unreasonably withheld.
Section 6.7 Parties In Interest. Nothing in this Agreement shall
entitle any party other than Buyer or Seller to any claim, cause of action,
remedy or right of any kind.
Section 6.8 Waiver. No waiver of any term, provision or condition of
this Agreement shall be effective unless in writing, signed by the party against
which such waiver is sought to be enforced, and no such waiver shall be deemed
to be or construed as a further or continuing waiver of any such term, provision
or condition or as a waiver of any other term, provision or condition of this
Agreement, unless specifically so stated in such written waiver.
Section 6.9 Severability. If any term, covenant or condition of this
Agreement or the application thereof to any person or circumstance (other than a
term, covenant, condition or application which affects the essence of this
Agreement) shall, to any extent, be invalid or unenforceable, the remainder of
this Agreement, or the application of such term, covenant or condition to those
persons or circumstances other than those as to which it has been held invalid
or unenforceable, shall not be affected thereby, and each term, covenant and
condition of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
Section 6.10 Bulk Sales. The parties hereby waive any necessary
compliance with the provisions of any applicable bulk sales or transfer laws.
Buyer hereby jointly and severally agrees to indemnify, defend and hold Buyer
harmless from and against any loss or liability Seller may suffer because of
noncompliance with such bulk sales or transfer laws or any similar laws of any
state.
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their duly authorized representatives on the day
first above written.
EQUIPMENT PURCHASING II, L.L.C.
By: Rio Grande Management Corp.
By:
--------------------------------
Name: Clifton Lind
Its: President
MULTIMEDIA GAMES, INC.
By:
--------------------------------
Name: Gordon Graves
Its: Chief Executive Officer
<PAGE> 9
EXHIBIT 1.1
EQUIPMENT
See Exhibit 1.1 attached
<PAGE> 10
EXHIBIT 2.1
BILL OF SALE
KNOW ALL PERSONS BY THESE PRESENTS:
MULTIMEDIA GAMES, INC., a Texas corporation ("SELLER"), in
consideration of Ten and No/100 Dollars ($10.00) and other good and valuable
consideration, receipt and sufficiency of which are hereby acknowledged, does
hereby sell, assign, transfer and set over to EQUIPMENT PURCHASING II, L.L.C., a
Delaware limited liability company ("BUYER"), all of Seller's right, title and
interest in and to the equipment and other tangible personal property described
on Schedule "A" attached hereto and made a part hereof (all of such personal
property is hereinafter collectively referred to as the "EQUIPMENT") except to
the extent that such equipment is specifically excluded therein.
Seller hereby represents and warrants to Buyer that Seller is the
absolute owner of the Equipment, that the Equipment is free and clear of all
liens, charges and encumbrances (other than claims of lessees of the Equipment
related to the lease and use thereof), and that Seller has full right, power and
authority to sell the Equipment and to make this Bill of Sale.
THE PARTIES AGREE THAT THE EQUIPMENT SOLD, CONVEYED, TRANSFERRED AND
ASSIGNED HEREBY IS SOLD AND CONVEYED ON AN "AS IS, WHERE IS" BASIS AND THAT THE
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND
ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, ARE EXCLUDED FROM THIS TRANSACTION AND
SHALL NOT APPLY TO THE GOODS SOLD. BUYER ACKNOWLEDGES THAT SELLER SHALL NOT BE
LIABLE FOR ANY INCIDENTAL, SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES, INCLUDING
BUT NOT LIMITED TO, LOSS OF USE OR LOSS OF PROFITS INCURRED BY BUYER IN
CONNECTION WITH OR RELATING TO THE PURCHASE OF THE EQUIPMENT PURSUANT TO THIS
AGREEMENT OR THE USE OF THE EQUIPMENT. THE PARTIES AGREE THAT, TO THE EXTENT
REQUIRED BY LAW, THE DISCLAIMERS CONTAINED HEREIN ARE "CONSPICUOUS" DISCLAIMERS
FOR THE PURPOSE OF ANY LAW, RULE OR ORDER.
IN WITNESS WHEREOF, Seller has caused this Bill of Sale to be duly
executed by its officer thereunto duly authorized this 30th day of June, 1998.
MULTIMEDIA GAMES, INC.,
a Texas corporation
By:
----------------------------
Name: Gordon Graves
Its: Chief Executive Officer
<PAGE> 1
EXHIBIT 10.27
AMENDED AND RESTATED
RENTAL POOL AGREEMENT
THIS AMENDED AND RESTATED RENTAL POOL AGREEMENT (the "AGREEMENT") is
made and entered into to become effective on June 30, 1998, by and between
EQUIPMENT PURCHASING II L.L.C., a Delaware limited liability company ("OWNER"),
and MULTIMEDIA GAMES, INC., a Texas corporation (the "COMPANY").
W I T N E S S E T H:
WHEREAS, the Company and Owner, as assignee, entered into a certain
Equipment Purchase Agreement, dated as of March 31, 1998 (the "MARCH 31 PURCHASE
AGREEMENT"), to consummate Owner's purchase of MegaMania electronic player
stations (the "MARCH 31 EQUIPMENT") from the Company;
WHEREAS, in connection with the March 31 Purchase Agreement, the
Company and Owner entered into a Rental Pool Agreement, (the "MARCH 31 RENTAL
POOL AGREEMENT") pursuant to which the Company agreed to pay to Assignor certain
revenues derived from the March 31 Equipment;
WHEREAS, the Company and Owner have entered into a certain Equipment
Purchase Agreement, dated to be effective as of June 30 , 1998 (the "JUNE 30
PURCHASE AGREEMENT"), to consummate Owner's purchase of MegaMania electronic
player stations (the "JUNE 30 EQUIPMENT" and, together with the March 31
Equipment, the "EQUIPMENT") from the Company;
WHEREAS, the Equipment is, and from time to time in the future will be,
either (i) leased (such leased Equipment being herein and in the Management
Agreement (defined below) called the "RENTAL POOL EQUIPMENT"), or (ii) sold
under lease/purchase (such lease/purchase Equipment being herein and in the
Management Agreement called the "LEASE/PURCHASE EQUIPMENT"), to Indian tribes
("TRIBE") for use in Class II bingo facilities;
WHEREAS, the terms under which the Company provides Rental Pool
Equipment to Tribes compensates the Company with a percentage of the net
profits, or "hold" derived from use of the Equipment (the "COMPANY REVENUE");
WHEREAS, the terms under which the Company provides Lease/Purchase
Equipment to Tribes amortizes the purchase price (plus interest) of the
Lease/Purchase Equipment by paying the Company a percentage of Adjusted Gross
Revenue derived from use of the Equipment (the "INSTALLMENT PURCHASE REVENUE");
and
WHEREAS, Owner and the Company desire to amend and restate the March 31
Rental Pool Agreement in its entirely so that it will relate to all of the
Equipment.
<PAGE> 2
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto, intending to be legally bound, agree as
follows:
1. Term. This Agreement shall be effective on June 30, 1998, (the
"EFFECTIVE DATE") and shall continue and remain in full force and effect for the
Term of the Amended and Restated Management Agreement entered into between the
Company and Owner, dated even date herewith (the "MANAGEMENT AGREEMENT").
2. Adjusted Gross Revenue. As partial consideration for Owner's
purchase of the Equipment, the Company agrees to assign to Owner:
(a) an absolute two percent (2%) of the Company Revenue; and
(b) all of the Installment Purchase Revenue.
This assignment does not assign the Company's right to a management fee
as provided in the Management Agreement nor does it assign to Owner any right of
the Company to receive any other fees or compensation from Tribes with respect
to the Lease/Purchase Equipment. The Company also expressly retains the right to
receive the balance of the Company Revenue (the "COMPANY PERCENTAGE"). In the
event the Company Revenue received from a Tribe is modified for any reason, or
in the event the Equipment is transferred to another facility and the Company
Revenue (or Installment Purchase Revenue) is subject to agreement with another
Tribe, the parties agree that they shall renegotiate the revenue percentages to
be received by each party in good faith. The Company reserves the right, in its
sole and absolute discretion and with no obligation whatsoever to do so, to
increase the Owner's share of the Company Revenue so as to accelerate the
Company's right to repurchase the Equipment as permitted in the Management
Agreement.
3. Collection. The Company agrees to be responsible for the collection
and remittance of the Owner Percentage and the Installment Purchase Revenue as
provided in the Management Agreement, including any necessary legal action
related to such collection. The Company shall not, however, be required to
compensate Owner in the event the Tribe, or any other third party, fails to pay,
or provides an inaccurate or fraudulent accounting of, the Owner Percentage or
the Installment Purchase Revenue. The Company agrees that it will subrogate its
claim to the Owner Percentage and the Installment Purchase Revenue upon the
request of Owner, and that it will cooperate in all subsequent efforts by Owner
to collect the Owner Percentage and the Installment Purchase Revenue from the
Tribe.
4. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Oklahoma without reference to the
choice of law principles thereof.
5. Entire Agreement. This Agreement, including any exhibits and
schedules hereto, contains the entire agreement and understanding between the
parties hereto, and supersedes any and all prior agreements, arrangements and
understandings relating to the subject matter hereof. There are no written or
oral agreements, understandings, representations or warranties between the
parties other than those set forth or referred to in this Agreement. No
supplement, amendment, alteration,
<PAGE> 3
modification or waiver of this Agreement shall be binding unless consented to in
writing by the Company and Owner.
6. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns; provided, however, this Agreement may not be assigned by either party
without the written consent of the other, which consent shall not be
unreasonably withheld.
7. Parties In Interest. Nothing in this Agreement shall entitle any
party other than Buyer or Seller to any claim, cause of action, remedy or right
of any kind.
8. Waiver. No waiver of any term, provision or condition of this
Agreement shall be effective unless in writing, signed by the party against
which such waiver is sought to be enforced, and no such waiver shall be deemed
to be or construed as a further or continuing waiver of any such term, provision
or condition or as a waiver of any other term, provision or condition of this
Agreement, unless specifically so stated in such written waiver.
9. Severability. If any term, covenant or condition of this Agreement
or the application thereof to any person or circumstance (other than a term,
covenant, condition or application which affects the essence of this Agreement)
shall, to any extent, be invalid or unenforceable, the remainder of this
Agreement, or the application of such term, covenant or condition to those
persons or circumstances other than those as to which it has been held invalid
or unenforceable, shall not be affected thereby, and each term, covenant and
condition of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
10. March 31 Rental Pool Agreement. This Agreement amends and restates
the March 31 Rental Pool Agreement in its entirety which, as so amended, remains
in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their duly authorized representatives on the day
first above written.
EQUIPMENT PURCHASING II L.L.C.
By: Rio Grande Management Corp.
By:
-------------------------------
Name: Clifton Lind
Its: President
MULTIMEDIA GAMES, INC.
By:
-------------------------------
Name: Gordon Graves
Its: Chief Executive Officer
<PAGE> 1
EXHIBIT 10.28
AMENDED AND RESTATED
MANAGEMENT AGREEMENT
THIS AMENDED AND RESTATED MANAGEMENT AGREEMENT (the "AGREEMENT") is
made and entered into to be effective on June 30, 1998, by and between EQUIPMENT
PURCHASING II L.L.C., a Delaware limited liability company ("OWNER"), and
MULTIMEDIA GAMES, INC., a Texas corporation ("MANAGER").
W I T N E S S E T H:
WHEREAS, Manager and Owner entered into a certain Equipment Purchase
Agreement, dated as of March 31, 1998 (the "MARCH 31 PURCHASE AGREEMENT"),
whereby Owner purchased MegaMania electronic player stations (collectively, the
"MARCH 31 EQUIPMENT" and individually, an "EPS");
WHEREAS, Manager and Owner have entered into a certain Equipment
Purchase Agreement, dated as of June 30, 1998 (the "JUNE 30 PURCHASE
AGREEMENT"), whereby Owner has purchased MegaMania electronic player stations
(collectively, the "JUNE 30 EQUIPMENT" and together with the March 31 Equipment,
the "EQUIPMENT");
WHEREAS, in connection with the March 31 Purchase Agreement, Manager
and Owner entered into a Management Agreement, (the "MARCH 31 MANAGEMENT
AGREEMENT") pursuant to which the Company agreed to manage the March 31
Equipment; and
WHEREAS, Owner and Manager desire to amend and restate the March 31
Management Agreement so as to relate to all of the Equipment.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto, intending to be legally bound, agree as
follows:
ARTICLE I
ENGAGEMENT AND AUTHORIZATION
Section 1.01 Engagement as Manager. Owner hereby engages Manager to
manage the Equipment in accordance with the terms and conditions hereof. The
Equipment includes systems subject to lease/purchase agreements (the
"LEASE/PURCHASE EQUIPMENT") and systems subject to rental pool agreements (the
"RENTAL POOL EQUIPMENT"). Manager may engage such independent contractors as
Manager deems necessary to supplement and complement Manager's employees and
properly and adequately manage, operate and maintain the Equipment.
<PAGE> 2
Section 1.02 Grant of Authority. Owner hereby grants to Manager the
power and authority to manage, operate, control and direct the Equipment of
Owner to the full extent of Owner's power and authority; provided that Manager
shall not have the power or authority to (i) perform any act that is expressly
required to be performed by Owner; or (ii) grant by contract any encumbrance,
security interest or pledge in any of the Equipment (other than to lessees of
the Equipment).
Section 1.03 Employees; Independent Contractor.
(a) Manager shall be responsible for all of its employees and/or
independent contractors engaged by it. All matters pertaining to the employment,
supervision, compensation, promotion and discharge of Manager's employees and
others engaged by Manager for the management, operation and maintenance of the
Equipment are the responsibility of Manager, and Manager shall be liable to such
employees for their compensation (in whatever form or amount such compensation
may be). Manager shall fully comply with all applicable laws and regulations
having to do with worker's compensation, social security, unemployment,
insurance, hours of labor, wages, working conditions, and other
employer-employee related subjects in connection with the Equipment.
(b) This Agreement is entered into solely to provide for the
performance of the services set forth herein and to define the rights,
obligations and liabilities of the parties hereto. This Agreement, and any
document or understanding entered into in connection herewith, shall not be
deemed to create any other relationship between Manager and Owner other than as
expressly provided herein. It is understood that the relationship of Manager to
Owner shall be that of an independent contractor. Nothing contained herein or
inferable here from shall be deemed or construed to (1) make Manager the agent,
servant or employee of Owner, or (2) to create any partnership, joint venture,
or other association between Owner and Manager. Owner shall not be responsible
for any injury sustained by Manager of its employees or by third parties arising
out of the performance of this Agreement by Manager under Owner's workers'
compensation policy or otherwise, and the doctrine of "respondeat superior"
shall not apply between Owner and Manager.
Section 1.04 Compliance with Laws and Contracts. Manager shall be
responsible for management, operation and maintenance of the Equipment in
substantial compliance with all applicable federal, state and municipal laws,
ordinances and regulations. Manager shall promptly remedy, at Manager's expense,
any violation of any law, ordinance, rule, regulation, or order which comes to
its attention to the extent such remedy is within the control of Manager.
Manager further agrees to obtain any licenses and approvals required for the
operation of the Equipment.
ARTICLE II
TERM AND TERMINATION
Section 2.01 Term. This Agreement shall be effective as of June 30,
1998 (the "EFFECTIVE DATE") and shall continue and remain in full force and
effect until of the earlier of (i) five (5) years from the Effective Date or
(ii) upon the occurrence of any of the events specified in Section 2.02 (the
"TERM").
<PAGE> 3
Section 2.02 Termination. This Agreement may be canceled and terminated
at any time by Owner or Manager (the "TERMINATING PARTY") under any of the
following circumstances:
(a) upon three (3) days prior written notice for any breach or default
in the payment of any amounts due the Terminating Party pursuant to this
Agreement;
(b) upon thirty (30) days prior written notice for any other breach or
default of any covenant or condition by the non-Terminating Party; or
(c) upon the sale of all of the Equipment by the Owner, subject,
however, to a right of first refusal of Manager; or
(d) upon the purchase of the Equipment by Manager pursuant to its right
to purchase in Section 2.04.
Section 2.03 Effect of Termination.
(a) Upon termination of this Agreement by Owner as the Terminating
Party and at the end of the Term, Owner's obligation to pay Manager's
compensation shall cease immediately, and except as provided herein, the parties
shall have no further rights or obligations to the other. Manager agrees that
upon Owner's request, it shall deliver to Owner all records, books, accounts,
and other files.
(b) Upon termination of the Agreement by Manager as the Terminating
Party, all obligations of Manager hereunder shall cease and Manager shall have
all rights of a non-defaulting party at law or in equity.
(c) Notwithstanding the foregoing, the termination of this Agreement
shall not affect the rights of the terminating party with respect to any damages
at law or in equity it may have suffered as a result of any breach of the
Agreement, nor shall it affect the rights of Owner with respect to liability or
claims accrued, or arising out of events occurring, prior to the date of
termination.
Section 2.04 Right to Purchase. At any time during the Term, Manager
shall have the option to repurchase the Equipment, or any portion thereof, from
Owner, at a fair market price to be mutually agreed upon by Owner and Manager at
the time of repurchase (the "OPTION PRICE"), provided that after giving effect
to the payment of the Option Price and the receipt of Owner of all payments of
the Owner Percentage (as defined in Section 3.04) and the Installment Purchase
Revenue (as defined in Section 3.04) with respect to such Equipment to the date
of such payment, Owner shall have received an amount equal to one hundred
percent (100%) of the purchase paid by Owner for such Equipment to be
repurchased (the "PURCHASE PRICE") plus a twenty percent (20%) compounded rate
of return on the Cash Amount paid with respect to such Equipment. As used
herein, the term "Cash Amount" shall mean the sum of (i) the cash purchase price
of the March 31 Equipment less all distributions to Owner for the period ending
June 30, 1998 (other than distributions in payment of debt or management fees
due Manager, plus (ii) $1,410,000 (assuming
<PAGE> 4
the note in such amount as partial consideration for the purchase of the June 30
Equipment is paid in full in accordance with its terms (as the same may from
time to time be in effect).
ARTICLE III
MANAGER'S DUTIES
Section 3.01 General. Manager shall manage, operate and maintain the
Equipment on behalf of Owner in accordance with the provisions of this
Agreement.
Section 3.02 Gaming Procedures and Gaming Accounting Procedures.
Manager shall be responsible for proposing, establishing and modifying from time
to time (a) the "GAME PROCEDURES," hereby defined as the technical, financial
and other plans, arrangements, systems, rules and procedures defining and used
in the operation and use of the Equipment and the playing of the MegaMania and
Flash Cash games and (b) the "GAME ACCOUNTING PROCEDURES" which are defined as
specific written procedures to be followed regarding the handling of revenues
derived from use of the Equipment. Manager shall communicate, negotiate and
coordinate with each third party which may have leased or contracted to use the
Equipment, regarding the implementation of the Gaming Procedures and the Game
Accounting Procedures.
Section 3.03 Use/Lease Contracts; Re-leasing.
(a) Manager is responsible for supervising and administering the
leasing of the Equipment to the Indian tribes as specified in EXHIBIT 3.03
hereto, or to such other tribes as may from time to time lease or use the
Equipment (each a "TRIBE") and agrees to perform whatever service may be
required in connection with the negotiation of renewals, extensions,
modifications or cancellations thereof, subject to Owner's final approval. In
the event a lease of the Equipment with a Tribe is terminated, Manager shall use
its best efforts to enter into another lease/purchase or rental pool agreement
for the use of the Equipment at the earliest possible date, after making all
necessary modifications to insure the marketability of the Equipment, and
provided that Owner has approved the terms and conditions pursuant to which the
Equipment is to be leased or used. Manager shall use its best efforts in good
faith to not enter into any future lease/purchase agreements if such agreements
result in more than fifty-percent (50%) of the Equipment being subject to
lease/purchase agreements.
(b) Manager agrees that it will not place other MegaMania electronic
player stations at a bingo facility that has returned the Equipment (a
"RETURNING FACILITY") to Manager or Owner unless the Equipment has subsequently
been leased to another party upon terms and conditions equally or more favorable
to Owner than the terms and conditions of the agreement with the Returning
Facility. Manager shall use its best efforts to ensure that the Equipment is
leased or in use at all times during the Term of this Agreement. Owner agrees to
pay a fee of Ten Dollars ($10.00) per electronic player station for the cost and
expense of re-leasing the Equipment (the "RE-LEASING FEE").
<PAGE> 5
(c) If the Manager resituates Equipment subject to a rental pool
agreement, such Equipment shall be subject to the Rental Pool Agreement entered
into between Owner and Manager dated even date herewith.
Section 3.04 Collection of Rents or Other Income. Manager shall
collect, identify and remit to Owner its Owner Percentage and Installment
Purchase Revenue (as such terms are defined in the Amended and Restated Rental
Pool Agreement between the parties of even date herewith attached hereto as
EXHIBIT 3.04 (the "RENTAL POOL AGREEMENT")). All monies so collected shall be
delivered to Owner within thirty (30) business days of collection by Manager.
Manager shall use due diligence to promptly collect and remit to Owner all
proceeds received from Tribes with respect to the purchase of Equipment
(including the interest component thereof).
Section 3.05 Repair and Maintenance; Risk of Loss. Manager shall attend
to the making and supervision of all ordinary and extraordinary repairs and
alterations to the Equipment such that the Equipment is at all times in good
working order, repair and appearance, normal wear, tear or depreciation
excepted. Manager shall furnish any and all parts, mechanisms and devices to
keep the Equipment in good mechanical working order and shall install and
license to Owner, any and all software upgrades developed by or for Manger
related to the MegaMania game, at no cost to Owner. All risk of loss or damage
to the Equipment shall be borne by Owner, subject to Article V hereof.
Section 3.06 Marketing. Manager shall conduct such market analyses and
research and place such paid advertisements and promotions as Manager, in its
sole discretion, deems necessary or advisable in order to promote use of the
Equipment.
Section 3.07 Insurance. Manager shall, at its sole expense, maintain in
effect at all times during the Term, insurance coverages with limits reasonably
acceptable to Owner, with insurers licensed to do business in the State of
Oklahoma acceptable to Owner, and under forms of policies satisfactory to Owner.
None of the requirements contained herein as to types, limits or Owner's
approval of insurance coverage to be maintained by Manager are intended to and
shall not in any manner limit, qualify or quantify the liabilities and
obligations assumed by Manager under the Agreement or otherwise provided by law.
The types of coverage shall, at a minimum, include Property and Casualty
Insurance to cover risk of loss or damage to the Equipment, Workers'
Compensation, Employers' Liability, Commercial General Liability, Comprehensive
Automobile Liability and Umbrella Excess Liability Insurance. Owner shall be
named as additional insurer on all such policies.
Section 3.08 Gaming Insurance; Protection. As part of Manager's
Management Fee, Manager shall provide reasonably commercially available errors
and omissions insurance coverage or other protection suitable to Owner against
the possibility of duplication of prize liabilities due to the malfunction of
the Equipment and/or the personnel provided by Manager and its subcontractor to
operate and manage the Equipment. Further, Manager shall guaranty, and be solely
responsible for, the payment of prizes won while using the Equipment by letters
of credit, performance bonds, escrowed funds, insurance and/or other guarantees.
<PAGE> 6
Section 3.09 Forms; Payment of Taxes. Manager shall keep the Equipment
free and clear of all levies, liens and encumbrances. Manager shall, on behalf
of Owner, prepare, execute and file punctually when due all forms, reports and
returns required by law relating to the use of the Equipment, including any
sales or use tax returns and income tax returns. In addition, as part of
Manager's Management Fee, Manager shall pay punctually when due any sales, use,
employment or other taxes relating to the use of the Equipment.
Section 3.10 Financial Reporting, Record Keeping and Accounting.
(a) All financial reporting, record keeping, and accounting with
respect to the Equipment and the leasing, management, operation, repair and
maintenance thereof, as well as all collections of revenues and expenditures
relating thereto, shall be the responsibility of Manager and shall be adequately
maintained at all times. Such books and records shall be owned by Owner and
shall be kept in all material respects in accordance with the standards of the
industry. Manager will not disclose to any party other than Owner the contents
of such books and records, except as may be required by law. Manager shall also
take reasonable steps to ensure that neither Manager nor any of Manager's
employees or independent contractors at any time discloses or otherwise makes
use of in any manner, whether during or after the Term, any information
regarding the Owner's business or affairs without the prior written consent of
Owner. This obligation shall survive the termination of this Agreement. All
books and records relating to the Equipment shall be delivered to Owner or
Owner's designated representative immediately upon request of Owner.
(b) Owner, its accountants, attorneys, and agents, may, subject to the
lease of the Equipment with a Tribe or any agreement with a third party, examine
or inspect the Equipment and any books and records relating to the Equipment for
any purpose which Owner, in its sole discretion, deems necessary or advisable.
Such inspection shall occur with as little disruption to the Tribe's or
Manager's business as possible. Owner also reserves the right to perform
additional audits relating to the Manager's activities.
ARTICLE IV
MANAGEMENT FEE AND REIMBURSEMENTS
Section 4.01 Management Fee.
(a) Lease/Purchase Equipment - Manager shall receive as consideration
and remuneration for managing and operating the Lease/Purchase Equipment a fee
equal to Fifteen Dollars ($15.00) per electronic player station, per month.
(b) Rental Pool Equipment - Manager shall receive as consideration and
remuneration for managing and operating the Rental Pool Equipment a base fee
equal to twelve percent (12%) of the Owner's Percentage, as that term is used in
the Rental Pool Agreement. The Manager shall also receive as additional
consideration certain monthly, non-cumulative bonuses as determined by the
schedule below:
<PAGE> 7
<TABLE>
<CAPTION>
Owner's Percentage
(Per unit in Rental Pool) Bonus Amount
------------------------- ------------
<S> <C>
Under $65 for a one month period No Bonus
$65.01 to $85.00 9% of Owner's Percentage
$85.01 to $105.00 21.5% of Owner's Percentage
$105.01 to $125.00 31% of Owner's Percentage
$125.01 to $145.00 38% of Owner's Percentage
Over $145.00 45.5% of Owner's Percentage
</TABLE>
(c) Owner hereby grants Manager the right to withhold the fees
described in paragraphs (a) and (b) (collectively, the "MANAGEMENT FEE") and the
Re-Leasing Fee from Manager's payment to Owner of the Owner's Percentage.
Section 4.02 Costs and Expenses. Other than the Re-Leasing Fee, Manager
shall be responsible for all costs, expenses and fees incurred in rendering
services in connection with the Equipment, including, but not limited to, the
cost of maintenance, insurance, compensation of Manager's employees, license
fees, taxes, legal fees associated with any contracts related and any other cost
or expense necessary to manage, operate or maintain the Equipment, such costs
and expenses to be included as part of the Management Fee and Re-Leasing Fee
paid by Owner pursuant to this Agreement.
ARTICLE V
INDEMNIFICATION
Manager hereby agrees to and does indemnify and hold Owner, its
members, officers, managers, employees and agents, harmless from and against any
and all costs and expenses, losses, liabilities, damages, causes of action,
claims and demands whatsoever, howsoever arising, including but not limited to
those arising out of, concerning, or affecting the services provided by Manager
under this Agreement. Such costs and expenses shall include, but shall not be
limited to, costs and expenses, losses, liabilities, damages, causes of action,
claims and demands, arising out of bodily injury, personal injury, or demands
for property damage, or any other violation of rights of others, warranties or
other undertakings or duties of Manager, together with reimbursement to Owner
for reasonable attorneys' fees and expenses.
<PAGE> 8
ARTICLE VI
GENERAL PROVISIONS
Section 6.01 Survival of Representations, Warranties and Agreements.
The representations, warranties, covenants and agreements made in this Agreement
or in any certificate or instrument delivered in connection herewith shall be in
full force and effect notwithstanding any investigation made by or disclosure
made to any party hereto, whether before or after the date hereof, shall survive
Closing and shall continue to be applicable and binding thereafter.
Section 6.02 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Oklahoma without reference
to the choice of law principles thereof.
Section 6.03 Entire Agreement. This Agreement, including any exhibits
and schedules hereto, contains the entire agreement and understanding between
the parties hereto, and supersedes any and all prior agreements, arrangements
and understandings, relating to the subject matter hereof. There are no written
or oral agreements, understandings, representations or warranties between the
parties other than those set forth or referred to in this Agreement. No
supplement, amendment, alteration, modification or waiver of this Agreement
shall be binding unless consented to in writing by Owner and Manager.
Section 6.04 Notices. All notices or other communications required or
permitted hereunder shall be in writing and shall be deemed given when delivered
personally or when sent by facsimile or on the third day after being mailed by
registered or certified mail, postage prepaid, addressed as follows:
To Manager: Multimedia Games, Inc.
7335 S. Lewis, Suite 302
Tulsa, OK 74136
Attention: Contract Administration
To Owner: Equipment Purchasing II LC
8900 Shoal Creek Blvd., Suite 300
Austin, Texas 78757
Any party may change its address for receiving notices by giving
written notice of such change to the other party in accordance with this Section
6.04.
Section 6.05 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, this Agreement may not be assigned by
either party without the written consent of the other, which consent shall not
be unreasonably withheld.
<PAGE> 9
Section 6.06 Parties In Interest. Nothing in this Agreement shall
entitle any party other than Buyer or Seller to any claim, cause of action,
remedy or right of any kind.
Section 6.07 Waiver. No waiver of any term, provision or condition of
this Agreement shall be effective unless in writing, signed by the party against
which such waiver is sought to be enforced, and no such waiver shall be deemed
to be or construed as a further or continuing waiver of any such term, provision
or condition or as a waiver of any other term, provision or condition of this
Agreement, unless specifically so stated in such written waiver.
Section 6.08 Severability. If any term, covenant or condition of this
Agreement or the application thereof to any person or circumstance (other than a
term, covenant, condition or application which affects the essence of this
Agreement) shall, to any extent, be invalid or unenforceable, the remainder of
this Agreement, or the application of such term, covenant or condition to those
persons or circumstances other than those as to which it has been held invalid
or unenforceable, shall not be affected thereby, and each term, covenant and
condition of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
Section 6.09 March 31 Management Agreement. This Agreement amends and
restates in its entirety the March 31 Management Agreement which, as so amended,
remains in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their duly authorized representatives on the day
first above written.
EQUIPMENT PURCHASING II L.L.C.
By: Rio Grande Management Corp.
By:
-------------------------------
Name: Clifton Lind
Its: President
MULTIMEDIA GAMES, INC.
By:
-------------------------------
Name: Gordon Graves
Its: Chief Executive Officer
<PAGE> 1
EXHIBIT 10.29
EQUIPMENT PURCHASE AGREEMENT
(With EPII, as Assignee)
THIS EQUIPMENT PURCHASE AGREEMENT (the "AGREEMENT") is made and entered
into this 31st day of March, 1998, by and between MULTIMEDIA GAMES, INC., a
Texas corporation ("SELLER") and EQUIPMENT PURCHASING II L.L.C., a Delaware
limited liability company, as assignee of Patricia McGinty ("BUYER").
W I T N E S S E T H :
WHEREAS, Seller owns and operates a Class II gaming business at its
offices located at 7335 South Lewis, Suite 302, Tulsa, Oklahoma (the
"BUSINESS");
WHEREAS, Buyer is the assignee of an Equipment Purchase Agreement (the
"ASSIGNED AGREEMENT") between Seller and Patricia McGinty ("ASSIGNOR") pursuant
to which Assignor agreed to purchase from Seller certain gaming equipment used
by Seller in the Business; and
WHEREAS, Buyer has assumed the obligations of Assignor under the
Assigned Agreement and desires to purchase from Seller, and Seller desires to
sell to Buyer, subject to the terms and conditions of this Agreement (which
amends and restates the Assigned Agreement solely to reflect Buyer as assignee
and to extend the maturity date of the Note referred to below), certain gaming
equipment relating to the Business;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto, intending to be legally bound, agree as
follows:
ARTICLE I
PURCHASE AND SALE OF EQUIPMENT
Section 1.1 Sale of Equipment. On the Closing Date (as hereinafter
defined), Seller shall sell, assign, transfer and convey to Buyer, and Buyer
shall purchase and acquire from Seller, free and clear of all liens,
encumbrances and adverse claims (other than claims of lessees of the Equipment
related to the lease and use thereof) that certain gaming equipment set forth on
EXHIBIT 1.1 hereto (collectively, the "EQUIPMENT" and individually, an "EPS").
Section 1.2 Purchase Price. The purchase price (the "PURCHASE PRICE")
for the Equipment shall be the dollar amount set forth on EXHIBIT 1.1 as the sum
of the total cost of the Equipment. The Purchase Price shall be payable at the
Closing (as hereinafter defined) by the delivery of a promissory note to Seller
in the form attached as Exhibit 1.2 in the principal amount of the Purchase
Price with interest payable at two percent (2%) above prime rate (as published
in the Wall Street Journal), and an initial maturity date of April 30, 1998,
which is hereby extended to May 14, 1998 (the "NOTE").
<PAGE> 2
Section 1.3 Warrants. As additional inducement for Buyer to enter into
this Agreement, Seller agrees to issue to Buyer at Closing, one hundred (100)
warrants to purchase the Common Stock of Seller (the "WARRANTS") for each EPS
indicated on EXHIBIT 1.1 as being subject to Lease. The terms of each warrant
shall be as set forth in the Warrant Agreement attached hereto as EXHIBIT 1.3
(the "WARRANT AGREEMENT"). The purchase price per share of Common Stock of
Seller purchasable pursuant to each Warrant shall be initially $9.44, which was
the closing market price on day before Closing, and the number of shares of
Common Stock purchasable upon the exercise of each Warrant shall be initially
one (1) share of Common Stock of Seller. The Warrants shall become exercisable
one (1) year from the Closing Date and shall expire on the fifth anniversary of
the Closing Date.
Section 1.4 Risk of Loss. The risk of loss or destruction or damage to
any or all of the Equipment from any cause whatsoever at all times prior to the
Closing Date of the purchase of the Equipment shall be borne by Seller.
Subsequent to the Closing Date of the purchase of the Equipment, the risk of
loss or destruction of or damage to any or all the Equipment from any cause
whatsoever shall be borne by Buyer, subject to the agreements and indemnities of
the "Manager" for the benefit of the "Owner" as provided in, and as such terms
are defined in, the Management Agreement of even date referred to in Section
2.2(b) below.
Section 1.5 Lease of Equipment. Ownership of Equipment shall transfer
subject to any and all lease or use agreements relating to such Equipment,
including leases that entitle the lessee thereunder to purchase the Equipment.
If any lessee of equipment exercises its rights under a lease agreement to
purchase the underlying equipment, Buyer shall transfer title to lessee.
Section 1.6 Certain Taxes and Fees. Buyer shall be responsible for (i)
any sales and use taxes which may become due and owing by reason of the sale of
the Equipment hereunder, (ii) all transfer, documentary and similar taxes and
all other duties, levies or other governmental charges incurred by or imposed on
the parties hereto with respect to the property transfer contemplated pursuant
to this Agreement, and (iii) all recording fees, if any, relating to the filing
of instruments transferring title to Buyer from Seller.
Section 1.7 Ad Valorem Taxes. Ad valorem, property and similar taxes
and assessments with respect to the Equipment for the assessment year in which
Closing occurs shall be prorated to the Closing Date, so that Seller shall be
responsible for such taxes for the period prior to the Closing Date and Buyer
shall be responsible for such taxes for the period on and after the Closing
Date.
Section 1.8 Other Expenses. All other costs and expenses incurred by
each party hereto in connection with all things required to be done by it
hereunder, including attorneys' and accountant fees, shall be borne by the party
incurring same.
<PAGE> 3
Section 1.9 Assignment of Warranties. Seller agrees to assign to Buyer
at closing; any and all valid warranties it may have in and to the Equipment;
provided that Seller shall not be obligated to assign any warranties which are
non-assignable pursuant to their terms.
Section 2.0 Intellectual Property. Buyer is not acquiring any license
or other right to use, or any ownership interest in, the intellectual property
of Seller, including without limitation the trade names "MegaMania" and
"FlashCash" or any software related to such games.
ARTICLE II
CLOSING
Section 2.1 Closing. Closing of the purchase and sale of Equipment
provided for herein ("CLOSING") shall take place on or before March 31, 1998 at
a time and place mutually satisfactory to both parties (the "CLOSING DATE"). At
Closing, Seller shall deliver to Buyer a duly executed bill of sale in
substantially the form of EXHIBIT 2.1 hereto. Buyer shall deliver to Seller, the
Purchase Price as provided in Section 1.2 hereof.
Section 2.2 Conditions to Each Party's Obligations. The respective
obligations of Seller and Buyer to consummate the transactions contemplated by
this Agreement shall be subject to each of the following conditions, in addition
to those set forth in Section 2.1 hereof:
(a) the parties shall have received the Rental Pool Agreement,
duly authorized and executed by the other, in substantially the form
attached as EXHIBIT 2.2(A);
(b) the parties shall have received the Management Agreement,
duly authorized and executed by the other, in substantially the form
attached as EXHIBIT 2.2(B); and
(c) Buyer shall have received the Warrants from Seller.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer, and covenants with
Buyer as follows:
Section 3.1 Corporate Existence; Authority. Seller is a corporation,
duly organized, validly existing and in good standing under the laws of the
State of Texas. The execution, delivery and performance of this Agreement by
Seller has been duly authorized by all necessary corporate and other action; and
no further corporate or other action is necessary for Seller to execute and
deliver this Agreement and to consummate and perform its obligations hereunder.
<PAGE> 4
Section 3.2 Consents. No consent, approval, waiver or authorization of,
or the making of any declaration or filing with, any governmental authority or
any other person is necessary in connection with the execution, delivery or
performance by Seller of this Agreement, and the consummation of the transaction
contemplated by this Agreement will not require the approval of any entity or
person in order to prevent the breach or termination of any agreement or other
right, privilege, license or agreement of Seller.
Section 3.3 No Conflicting Agreements. Neither the execution and
delivery of this Agreement by Seller nor the fulfillment of or compliance with
the terms or provisions hereof will result in a breach of the terms, conditions
or provisions of, or constitute a default under, or result in a violation of the
Certificate of Incorporation or Bylaws of Seller, or any other agreement,
mortgage, lease, license or other instrument or obligation to which Seller is a
party or by which the Equipment is bound, or any provision of any applicable
law, rule, regulation or ordinance or any order, decree, writ or injunction of
any court, administrative agency or governmental authority by which any Seller
is bound.
Section 3.4 Validity and Binding Effect. Seller has all requisite power
and authority to enter into this Agreement and to perform its obligations
hereunder. This Agreement has been duly executed and delivered by or on behalf
of Seller and constitutes the legal, valid and binding obligation of Seller,
enforceable against Seller in accordance with its terms, except as the same may
be limited by insolvency, bankruptcy or other laws of general application
affecting the enforcement of creditors' rights and by general equitable
principles.
Section 3.5 Title to Equipment. Seller has good and marketable title
to, and is the owner of, the Equipment, free and clear of all liens, mortgages,
security agreements, leases, options, pledges, charges, covenants, conditions,
restrictions and other encumbrances and claims of any kind or character
whatsoever (other than claims of lessees of the Equipment pursuant to the terms
thereof) and will convey the same to Buyer at Closing.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Seller hereby represents and warrants to Buyer, and covenants with
Buyer as follows:
Section 4.1 Consents. No consent, approval, waiver or authorization of,
or the making of any declaration or filing with, any governmental authority or
any other person is necessary in connection with the execution, delivery or
performance by Buyer of this Agreement, and the consummation of the transaction
contemplated by this Agreement will not require the approval of any entity or
person in order to prevent the breach or termination of any agreement or other
right, privilege, license or agreement of Buyer.
Section 4.2 No Conflicting Agreements. Neither the execution and
delivery of this Agreement by Buyer nor the fulfillment of or compliance with
the terms or provisions hereof will
<PAGE> 5
result in a breach of the terms, conditions or provisions of, or constitute a
default under, or result in a violation of, the internal charter or operation
documents of Buyer or any agreement or other instrument to which Buyer is a
party or by which it is bound, or result in the violation of any provision of
any applicable law, rule, regulation or ordinance or any order, decree, writ or
injunction of any court, administrative agency or governmental authority by
which Buyer is bound.
Section 4.3 Validity and Binding Effect. Buyer has all requisite power
and authority to enter into this Agreement and to perform its obligations
hereunder. This Agreement has been duly executed and delivered on behalf of
Buyer and constitutes the legal, valid and binding obligation of Buyer,
enforceable against Buyer in accordance with its terms, except as the same may
be limited by insolvency, bankruptcy or other laws of general application
affecting the enforcement of creditors' rights or by general equitable
principles.
ARTICLE V
CERTAIN COVENANTS OF THE PARTIES
Section 5.1 Registrations, Filings and Consents. Seller will cooperate
in good faith, at Buyer's request, to make all registrations, filings, and
applications and to give all notices and to obtain all governmental and other
consents, transfers, approvals, orders, qualifications and waivers necessary or
desirable for the consummation of the transactions contemplated hereby or which
may thereafter be reasonably necessary or desirable to effect the transfer or
renewal of the Equipment.
Section 5.2 Further Assurances. Seller agrees from time to time,
whether at or after the Closing Date, to execute and deliver, and will cause its
affiliates to execute and deliver, such further instruments of conveyance and
transfer and take such other action as Buyer may reasonably request in order to
more effectively convey and transfer to Buyer the Equipment.
Section 5.3 Disclaimer; Limitation of Remedies. THE PARTIES AGREE THAT
THE EQUIPMENT SOLD, CONVEYED, TRANSFERRED AND ASSIGNED HEREBY IS SOLD AND
CONVEYED ON AN "AS IS, WHERE IS" BASIS AND THAT THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND ALL OTHER WARRANTIES,
EXPRESS OR IMPLIED, ARE EXCLUDED FROM THIS TRANSACTION AND SHALL NOT APPLY TO
THE GOODS SOLD. BUYER ACKNOWLEDGES THAT SELLER SHALL NOT BE LIABLE FOR ANY
INCIDENTAL, SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT
LIMITED TO, LOSS OF USE OR LOSS OF PROFITS INCURRED BY BUYER IN CONNECTION WITH
OR RELATING TO THE PURCHASE OF THE EQUIPMENT PURSUANT TO THIS AGREEMENT OR THE
USE OF THE EQUIPMENT. THE PARTIES AGREE THAT, TO THE EXTENT REQUIRED BY LAW, THE
DISCLAIMERS CONTAINED HEREIN ARE "CONSPICUOUS" DISCLAIMERS FOR THE PURPOSE OF
ANY LAW, RULE OR ORDER.
<PAGE> 6
ARTICLE VI
MISCELLANEOUS
Section 6.1 Survival of Representations, Warranties and Agreements. The
representations, warranties, covenants and agreements made in this Agreement or
in any certificate or instrument delivered in connection herewith shall be in
full force and effect notwithstanding any investigation made by or disclosure
made to any party hereto, whether before or after the date hereof, shall survive
Closing and shall continue to be applicable and binding thereafter.
Section 6.2 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Oklahoma without reference
to the choice of law principles thereof.
Section 6.3 Entire Agreement. This Agreement, including any exhibits
and schedules hereto, contains the entire agreement and understanding between
the parties hereto, and supersedes any and all prior agreements, arrangements
and understandings, relating to the subject matter hereof. There are no written
or oral agreements, understandings, representations or warranties between the
parties other than those set forth or referred to in this Agreement. No
supplement, amendment, alteration, modification or waiver of this Agreement
shall be binding unless consented to in writing by Buyer and Seller.
Section 6.4 Expenses. Each party hereto shall separately bear the
expenses incurred by it in connection with this Agreement and in connection with
all things required to be done by it hereunder.
Section 6.5 Notices. All notices or other communications required or
permitted hereunder shall be in writing and shall be deemed given when delivered
personally or when sent by facsimile or on the third day after being mailed by
registered or certified mail, postage prepaid, addressed as follows:
To Seller: Multimedia Games, Inc.
7335 S. Lewis, Suite 302
Tulsa, OK 74136
Attention: Contract Administration
To Buyer: Equipment Purchasing II L.L.C.
c/o Multimedia Games, Inc.
7335 S. Lewis, Suite 302
Tulsa, OK 74136
Attention: Frederick E. Roll
Any party may change its address for receiving notices by giving
written notice of such change to the other party in accordance with this Section
6.5.
<PAGE> 7
Section 6.6 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, this Agreement may not be assigned by
either party without the written consent of the other, which consent shall not
be unreasonably withheld; further provided that Buyer may assign this Agreement
to a controlled entity at any time without the consent of the Seller, but such
assignment shall not relieve Buyer from her obligations under the Note.
Section 6.7 Parties In Interest. Nothing in this Agreement shall
entitle any party other than Buyer or Seller to any claim, cause of action,
remedy or right of any kind.
Section 6.8 Waiver. No waiver of any term, provision or condition of
this Agreement shall be effective unless in writing, signed by the party against
which such waiver is sought to be enforced, and no such waiver shall be deemed
to be or construed as a further or continuing waiver of any such term, provision
or condition or as a waiver of any other term, provision or condition of this
Agreement, unless specifically so stated in such written waiver.
Section 6.9 Severability. If any term, covenant or condition of this
Agreement or the application thereof to any person or circumstance (other than a
term, covenant, condition or application which affects the essence of this
Agreement) shall, to any extent, be invalid or unenforceable, the remainder of
this Agreement, or the application of such term, covenant or condition to those
persons or circumstances other than those as to which it has been held invalid
or unenforceable, shall not be affected thereby, and each term, covenant and
condition of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
Section 6.10 Bulk Sales. The parties hereby waive any necessary
compliance with the provisions of any applicable bulk sales or transfer laws.
Buyer hereby jointly and severally agrees to indemnify, defend and hold Buyer
harmless from and against any loss or liability Seller may suffer because of
noncompliance with such bulk sales or transfer laws or any similar laws of any
state.
Section 6.11 Assigned Agreement. This Agreement amends and restates the
Assigned Agreement which, as so amended, remains in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their duly authorized representatives on the day
first above written.
EQUIPMENT PURCHASING II L.L.C.
By: Rio Grande Management Corp.
By:
----------------------------------
Name: Clifton Lind
Its: President
MULTIMEDIA GAMES, INC.
By:
----------------------------------
Name: Gordon Graves
Its: Chief Executive Officer
<PAGE> 8
EXHIBIT 1.1
EQUIPMENT
See Exhibit 1.1 attached
<PAGE> 9
EXHIBIT 2.1
BILL OF SALE
KNOW ALL PERSONS BY THESE PRESENTS:
MULTIMEDIA GAMES, INC., a Texas corporation ("SELLER"), in
consideration of Ten and No/100 Dollars ($10.00) and other good and valuable
consideration, receipt and sufficiency of which are hereby acknowledged, does
hereby sell, assign, transfer and set over to EQUIPMENT PURCHASING L.L.C., a
Delaware limited liability company ("BUYER"), all of Seller's right, title and
interest in and to the equipment and other tangible personal property described
on Schedule "A" attached hereto and made a part hereof (all of such personal
property is hereinafter collectively referred to as the "EQUIPMENT") except to
the extent that such equipment is specifically excluded therein.
Seller hereby represents and warrants to Buyer that Seller is the
absolute owner of the Equipment, that the Equipment is free and clear of all
liens, charges and encumbrances (other than claims of lessees of the Equipment
related to the lease and use thereof), and that Seller has full right, power and
authority to sell the Equipment and to make this Bill of Sale.
THE PARTIES AGREE THAT THE EQUIPMENT SOLD, CONVEYED, TRANSFERRED AND
ASSIGNED HEREBY IS SOLD AND CONVEYED ON AN "AS IS, WHERE IS" BASIS AND THAT THE
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND
ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, ARE EXCLUDED FROM THIS TRANSACTION AND
SHALL NOT APPLY TO THE GOODS SOLD. BUYER ACKNOWLEDGES THAT SELLER SHALL NOT BE
LIABLE FOR ANY INCIDENTAL, SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES, INCLUDING
BUT NOT LIMITED TO, LOSS OF USE OR LOSS OF PROFITS INCURRED BY BUYER IN
CONNECTION WITH OR RELATING TO THE PURCHASE OF THE EQUIPMENT PURSUANT TO THIS
AGREEMENT OR THE USE OF THE EQUIPMENT. THE PARTIES AGREE THAT, TO THE EXTENT
REQUIRED BY LAW, THE DISCLAIMERS CONTAINED HEREIN ARE "CONSPICUOUS" DISCLAIMERS
FOR THE PURPOSE OF ANY LAW, RULE OR ORDER.
IN WITNESS WHEREOF, Seller has caused this Bill of Sale to be duly
executed by its officer thereunto duly authorized this 31st day of March, 1998.
MULTIMEDIA GAMES, INC.,
a Texas corporation
By:
------------------------------
Name: Gordon Graves
Its: Chief Executive Officer
<PAGE> 1
EXHIBIT 10.30
RENTAL POOL AGREEMENT
THIS RENTAL POOL AGREEMENT (the "AGREEMENT") is made and entered into
this 31st day of March, 1998, by and between EQUIPMENT PURCHASING II L.L.C., a
Delaware limited liability company, as assignee of Patricia McGinty ("OWNER")
and MULTIMEDIA GAMES, INC., a Texas corporation (the "COMPANY").
W I T N E S S E T H:
WHEREAS, the Company and Owner, as assignee, have entered into a
certain Equipment Purchase Agreement, dated of even date herewith (the "PURCHASE
AGREEMENT"), to consummate Owner's purchase of MegaMania electronic player
stations (the "EQUIPMENT") from the Company;
WHEREAS, Owner is the assignee of a Rental Pool Agreement (the
"ASSIGNED AGREEMENT") between the Company and Patricia McGinty ("ASSIGNOR")
pursuant to which the Company agreed to pay to Assignor certain revenues derived
from the Equipment;
WHEREAS, Owner has assumed the rights and obligations of Assignor under
the Assigned Agreement and desires to enter into this Agreement with the Company
in order to amend and restate the Assigned Agreement solely to reflect Owner as
assignee) ;
WHEREAS, the Equipment is, and from time to time in the future will be,
leased to Indian tribes ("TRIBE") for use in Class II bingo facilities under
terms where the Company receives a percentage of Adjusted Gross Revenue derived
from use of the Equipment (the "COMPANY REVENUE"); and
WHEREAS, as additional consideration for Owner entering into the
Purchase Agreement, the Company wishes to grant Owner a percentage of the
Company Revenue.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto, intending to be legally bound, agree as
follows:
1. Term. This Agreement shall be effective upon execution (the
"EFFECTIVE DATE") and shall continue and remain in full force and effect for the
Term of the Management Agreement entered into between the Company and Owner,
dated even date herewith.
2. Adjusted Gross Revenue. As partial consideration for Owner's
purchase of the Equipment, the Company agrees to assign two percent (2%) of the
Adjusted Gross Revenue derived from use of the Equipment (the "OWNER
PERCENTAGE"). This assignment does not assign the Company's right to a
management fee as provided in the Management Agreement between the parties of
even date herewith (the "MANAGEMENT AGREEMENT"). The Company retains the right
to
<PAGE> 2
receive the balance of the Adjusted Gross Revenue derived from the use of the
Equipment (the "COMPANY PERCENTAGE"). In the event the Company Revenue received
from a Tribe is modified for any reason, or in the event the Equipment is
transferred to another facility and the Company Revenue is subject to agreement
with another Tribe, the parties agree that they shall renegotiate the revenue
percentages to be received by each party in good faith.
3. Collection. The Company agrees to be responsible for the collection
and remittance of the Owner Percentage as provided in the Management Agreement,
including any necessary legal action related to such collection. The Company
shall not, however, be required to compensate Owner in the event the Tribe, or
any other third party, fails to pay, or provides an inaccurate or fraudulent
accounting of, the Owner Percentage. The Company agrees that it will subrogate
its claim to the Owner Percentage upon the request of Owner, and that it will
cooperate in all subsequent efforts by Owner to collect the Owner Percentage
from the Tribe.
4. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Oklahoma without reference to the
choice of law principles thereof.
5. Entire Agreement. This Agreement, including any exhibits and
schedules hereto, contains the entire agreement and understanding between the
parties hereto, and supersedes any and all prior agreements, arrangements and
understandings relating to the subject matter hereof. There are no written or
oral agreements, understandings, representations or warranties between the
parties other than those set forth or referred to in this Agreement. No
supplement, amendment, alteration, modification or waiver of this Agreement
shall be binding unless consented to in writing by the Company and Owner.
6. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns; provided, however, this Agreement may not be assigned by either party
without the written consent of the other, which consent shall not be
unreasonably withheld.
7. Parties In Interest. Nothing in this Agreement shall entitle any
party other than Buyer or Seller to any claim, cause of action, remedy or right
of any kind.
8. Waiver. No waiver of any term, provision or condition of this
Agreement shall be effective unless in writing, signed by the party against
which such waiver is sought to be enforced, and no such waiver shall be deemed
to be or construed as a further or continuing waiver of any such term, provision
or condition or as a waiver of any other term, provision or condition of this
Agreement, unless specifically so stated in such written waiver.
9. Severability. If any term, covenant or condition of this Agreement
or the application thereof to any person or circumstance (other than a term,
covenant, condition or application which affects the essence of this Agreement)
shall, to any extent, be invalid or unenforceable, the remainder of this
Agreement, or the application of such term, covenant or condition to those
persons or circumstances other than those as to which it has been held invalid
or unenforceable, shall not be
<PAGE> 3
affected thereby, and each term, covenant and condition of this Agreement shall
be valid and enforceable to the fullest extent permitted by law.
10. Assigned Agreement. This Agreement amends and restates the Assigned
Agreement which, as so amended, remains in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their duly authorized representatives on the day
first above written.
EQUIPMENT PURCHASING II L.L.C.
By: Rio Grande Management Corp.
By:
-------------------------------------
Name: Clifton Lind
Its: President
MULTIMEDIA GAMES, INC.
By:
-------------------------------------
Name: Gordon Graves
Its: Chief Executive Officer
<PAGE> 1
EXHIBIT 10.31
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (the "AGREEMENT") is made and entered into
this 31st day of March, 1998, by and between EQUIPMENT PURCHASING II L.L.C., a
Delaware limited liability company, as assignee of Patricia McGinty ("OWNER")
and MULTIMEDIA GAMES, INC., a Texas corporation ("MANAGER").
W I T N E S S E T H:
WHEREAS, Manager and Owner, as assignee, have entered into a certain
Equipment Purchase Agreement, dated of even date herewith (the "PURCHASE
AGREEMENT"), whereby Owner has purchased MegaMania electronic player stations
(collectively, the "EQUIPMENT" and individually, an "EPS");
WHEREAS, Owner is the assignee of a Management Agreement (the "ASSIGNED
AGREEMENT") between the Company and Patricia McGinty ("ASSIGNOR") pursuant to
which the Company agreed to manage the Equipment;
WHEREAS, Owner has assumed the rights and obligations of Assignor under
the Assigned Agreement and desires to enter into this Agreement with the Company
in order to amend and restate the Assigned Agreement solely to reflect Owner as
assignee) ; and
WHEREAS, Owner desires to have Manager manage, operate and maintain the
Equipment.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto, intending to be legally bound, agree as
follows:
ARTICLE I
ENGAGEMENT AND AUTHORIZATION
Section 1.01 Engagement as Manager. Owner hereby engages Manager to
manage the Equipment in accordance with the terms and conditions hereof. The
Equipment includes systems subject to lease/purchase agreements (the
"LEASE/PURCHASE EQUIPMENT") and systems subject to rental pool agreements (the
"RENTAL POOL EQUIPMENT"). Manager may engage such independent contractors as
Manager deems necessary to supplement and complement Manager's employees and
properly and adequately manage, operate and maintain the Equipment.
Section 1.02 Grant of Authority. Owner hereby grants to Manager the
power and authority to manage, operate, control and direct the Equipment of
Owner to the full extent of Owner's power and authority; provided that Manager
shall not have the power or authority to (i) perform any act that
<PAGE> 2
is expressly required to be performed by Owner; or (ii) grant by contract any
encumbrance, security interest or pledge in any of the Equipment (other than to
lessees of the Equipment).
Section 1.03 Employees; Independent Contractor.
(a) Manager shall be responsible for all of its employees and/or
independent contractors engaged by it. All matters pertaining to the employment,
supervision, compensation, promotion and discharge of Manager's employees and
others engaged by Manager for the management, operation and maintenance of the
Equipment are the responsibility of Manager, and Manager shall be liable to such
employees for their compensation (in whatever form or amount such compensation
may be). Manager shall fully comply with all applicable laws and regulations
having to do with worker's compensation, social security, unemployment,
insurance, hours of labor, wages, working conditions, and other
employer-employee related subjects in connection with the Equipment.
(b) This Agreement is entered into solely to provide for the
performance of the services set forth herein and to define the rights,
obligations and liabilities of the parties hereto. This Agreement, and any
document or understanding entered into in connection herewith, shall not be
deemed to create any other relationship between Manager and Owner other than as
expressly provided herein. It is understood that the relationship of Manager to
Owner shall be that of an independent contractor. Nothing contained herein or
inferable here from shall be deemed or construed to (1) make Manager the agent,
servant or employee of Owner, or (2) to create any partnership, joint venture,
or other association between Owner and Manager. Owner shall not be responsible
for any injury sustained by Manager of its employees or by third parties arising
out of the performance of this Agreement by Manager under Owner's workers'
compensation policy or otherwise, and the doctrine of "respondeat superior"
shall not apply between Owner and Manager.
Section 1.04 Compliance with Laws and Contracts. Manager shall be
responsible for management, operation and maintenance of the Equipment in
substantial compliance with all applicable federal, state and municipal laws,
ordinances and regulations. Manager shall promptly remedy, at Manager's expense,
any violation of any law, ordinance, rule, regulation, or order which comes to
its attention to the extent such remedy is within the control of Manager.
Manager further agrees to obtain any licenses and approvals required for the
operation of the Equipment.
ARTICLE II
TERM AND TERMINATION
Section 2.01 Term. This Agreement shall be effective upon the date of
execution (the "EFFECTIVE DATE") and shall continue and remain in full force and
effect until of the later of (i) three (3) years from the Effective Date or (ii)
until the Buyer has received as Compensation one hundred and forty percent
(140%) of the Purchase Price under the Equipment Purchase Agreement (the
"TERM"). In no event shall the Term exceed four (4) years from the Effective
Date. "COMPENSATION" as used in this section shall mean all amounts received by
Owner with respect to the Equipment, less any Management Fees paid to Manager
hereunder.
<PAGE> 3
Section 2.02 Termination. This Agreement may be canceled and terminated
at any time by Owner or Manager (the "TERMINATING PARTY") under any of the
following circumstances:
(a) upon three (3) days prior written notice for any breach or default
in the payment of any amounts due the Terminating Party pursuant to this
Agreement;
(b) upon thirty (30) days prior written notice for any other breach or
default of any covenant or condition by the non-Terminating Party; or
(c) upon the sale of all of the Equipment by the Owner, subject,
however, to a right of first refusal of Manager.
Section 2.03 Effect of Termination.
(a) Upon termination of this Agreement by Owner as the Terminating
Party and at the end of the Term, Owner's obligation to pay Manager's
compensation shall cease immediately, and except as provided herein, the parties
shall have no further rights or obligations to the other. Manager agrees that
upon Owner's request, it shall deliver to Owner all records, books, accounts,
and other files.
(b) Upon termination of the Agreement by Manager as the Terminating
Party, all obligations of Manager hereunder shall cease and Manager shall have
all rights of a non-defaulting party at law or in equity.
(c) Notwithstanding the foregoing, the termination of this Agreement
shall not affect the rights of the terminating party with respect to any damages
at law or in equity it may have suffered as a result of any breach of the
Agreement, nor shall it affect the rights of Owner with respect to liability or
claims accrued, or arising out of events occurring, prior to the date of
termination.
ARTICLE III
MANAGER'S DUTIES
Section 3.01 General. Manager shall manage, operate and maintain the
Equipment on behalf of Owner in accordance with the provisions of this
Agreement.
Section 3.02 Gaming Procedures and Gaming Accounting Procedures.
Manager shall be responsible for proposing, establishing and modifying from time
to time (a) the "GAME PROCEDURES," hereby defined as the technical, financial
and other plans, arrangements, systems, rules and procedures defining and used
in the operation and use of the Equipment and the playing of the MegaMania and
Flash Cash games and (b) the "GAME ACCOUNTING PROCEDURES" which are defined as
specific written procedures to be followed regarding the handling of revenues
derived from use of the Equipment. Manager shall communicate, negotiate and
coordinate with each third party which may have leased or contracted to use the
Equipment, regarding the implementation of the Gaming Procedures and the Game
Accounting Procedures.
<PAGE> 4
Section 3.03 Use/Lease Contracts; Re-leasing.
(a) Manager is responsible for supervising and administering the
leasing of the Equipment to the Indian tribes as specified in EXHIBIT 3.03
hereto, or to such other tribes as may from time to time lease or use the
Equipment (each a "TRIBE") and agrees to perform whatever service may be
required in connection with the negotiation of renewals, extensions,
modifications or cancellations thereof, subject to Owner's final approval. In
the event a lease of the Equipment with a Tribe is terminated, Manager shall use
its best efforts to enter into another lease/purchase or rental pool agreement
for the use of the Equipment at the earliest possible date, after making all
necessary modifications to insure the marketability of the Equipment, and
provided that Owner has approved the terms and conditions pursuant to which the
Equipment is to be leased or used. Manager shall use its best efforts in good
faith to not enter into any future lease/purchase agreements if such agreements
result in more than fifty-percent (50%) of the Equipment being subject to
lease/purchase agreements.
(b) Manager agrees that it will not place other MegaMania electronic
player stations at a bingo facility that has returned the Equipment (a
"RETURNING FACILITY") to Manager or Owner unless the Equipment has subsequently
been leased to another party upon terms and conditions equally or more favorable
to Owner than the terms and conditions of the agreement with the Returning
Facility. Manager shall use its best efforts to ensure that the Equipment is
leased or in use at all times during the Term of this Agreement. Owner agrees to
pay a fee of Ten Dollars ($10.00) per electronic player station for the cost and
expense of re-leasing the Equipment (the "RE-LEASING FEE").
(c) If the Manager resituates Equipment subject to a rental pool
agreement, such Equipment shall be subject to the Rental Pool Agreement entered
into between Owner and Manager dated even date herewith.
Section 3.04 Collection of Rents or Other Income. Manager shall
collect, identify and remit to Owner its Owner Percentage (as defined in the
Rental Pool Agreement between the parties of even date herewith attached hereto
as EXHIBIT 3.04 (the "RENTAL POOL AGREEMENT")). All monies so collected shall be
delivered to Owner within thirty (30) business days of collection by Manager.
Manager shall use due diligence to promptly collect and remit to Owner all
proceeds received from Tribes with respect to the purchase of Equipment
(including the interest component thereof).
Section 3.05 Repair and Maintenance; Risk of Loss. Manager shall attend
to the making and supervision of all ordinary and extraordinary repairs and
alterations to the Equipment such that the Equipment is at all times in good
working order, repair and appearance, normal wear, tear or depreciation
excepted. Manager shall furnish any and all parts, mechanisms and devices to
keep the Equipment in good mechanical working order and shall install and
license to Owner, any and all software upgrades developed by or for Manger
related to the MegaMania game, at no cost to Owner. All risk of loss or damage
to the Equipment shall be borne by Owner, subject to Article V hereof.
<PAGE> 5
Section 3.06 Marketing. Manager shall conduct such market analyses and
research and place such paid advertisements and promotions as Manager, in its
sole discretion, deems necessary or advisable in order to promote use of the
Equipment.
Section 3.07 Insurance. Manager shall, at its sole expense, maintain in
effect at all times during the Term, insurance coverages with limits reasonably
acceptable to Owner, with insurers licensed to do business in the State of
Oklahoma acceptable to Owner, and under forms of policies satisfactory to Owner.
None of the requirements contained herein as to types, limits or Owner's
approval of insurance coverage to be maintained by Manager are intended to and
shall not in any manner limit, qualify or quantify the liabilities and
obligations assumed by Manager under the Agreement or otherwise provided by law.
The types of coverage shall, at a minimum, include Property and Casualty
Insurance to cover risk of loss or damage to the Equipment, Workers'
Compensation, Employers' Liability, Commercial General Liability, Comprehensive
Automobile Liability and Umbrella Excess Liability Insurance. Owner shall be
named as additional insurer on all such policies.
Section 3.08 Gaming Insurance; Protection. As part of Manager's
Management Fee, Manager shall provide reasonably commercially available errors
and omissions insurance coverage or other protection suitable to Owner against
the possibility of duplication of prize liabilities due to the malfunction of
the Equipment and/or the personnel provided by Manager and its subcontractor to
operate and manage the Equipment. Further, Manager shall guaranty, and be solely
responsible for, the payment of prizes won while using the Equipment by letters
of credit, performance bonds, escrowed funds, insurance and/or other guarantees.
Section 3.09 Forms; Payment of Taxes. Manager shall keep the Equipment
free and clear of all levies, liens and encumbrances. Manager shall, on behalf
of Owner, prepare, execute and file punctually when due all forms, reports and
returns required by law relating to the use of the Equipment, including any
sales or use tax returns and income tax returns. In addition, as part of
Manager's Management Fee, Manager shall pay punctually when due any sales, use,
employment or other taxes relating to the use of the Equipment.
Section 3.10 Financial Reporting, Record Keeping and Accounting.
(a) All financial reporting, record keeping, and accounting with
respect to the Equipment and the leasing, management, operation, repair and
maintenance thereof, as well as all collections of revenues and expenditures
relating thereto, shall be the responsibility of Manager and shall be adequately
maintained at all times. Such books and records shall be owned by Owner and
shall be kept in all material respects in accordance with the standards of the
industry. Manager will not disclose to any party other than Owner the contents
of such books and records, except as may be required by law. Manager shall also
take reasonable steps to ensure that neither Manager nor any of Manager's
employees or independent contractors at any time discloses or otherwise makes
use of in any manner, whether during or after the Term, any information
regarding the Owner's business or affairs without the prior written consent of
Owner. This obligation shall survive the termination of this Agreement. All
books and records relating to the Equipment shall be delivered to Owner or
Owner's designated representative immediately upon request of Owner.
<PAGE> 6
(b) Owner, its accountants, attorneys, and agents, may, subject to the
lease of the Equipment with a Tribe or any agreement with a third party, examine
or inspect the Equipment and any books and records relating to the Equipment for
any purpose which Owner, in its sole discretion, deems necessary or advisable.
Such inspection shall occur with as little disruption to the Tribe's or
Manager's business as possible. Owner also reserves the right to perform
additional audits relating to the Manager's activities.
ARTICLE IV
MANAGEMENT FEE AND REIMBURSEMENTS
Section 4.01 Management Fee.
(a) Lease/Purchase Equipment - Manager shall receive as consideration
and remuneration for managing and operating the Lease/Purchase Equipment a fee
equal to Fifteen Dollars ($15.00) per electronic player station, per month.
(b) Rental Pool Equipment - Manager shall receive as consideration and
remuneration for managing and operating the Rental Pool Equipment a base fee
equal to twelve percent (12%) of the Owner's Percentage, as that term is used in
the Rental Pool Agreement. The Manager shall also receive as additional
consideration certain monthly, non-cumulative bonuses as determined by the
schedule below:
<TABLE>
<CAPTION>
Owner's Percentage
(Per unit in Rental Pool) Bonus Amount
------------------------- ------------
<S> <C>
Under $65 for a one month period No Bonus
$65.01 to $85.00 9% of Owner's Percentage
$85.01 to $105.00 21.5% of Owner's Percentage
$105.01 to $125.00 31% of Owner's Percentage
$125.01 to $145.00 38% of Owner's Percentage
Over $145.00 45.5% of Owner's Percentage
</TABLE>
(c) Owner hereby grants Manager the right to withhold the fees
described in paragraphs (a) and (b) (collectively, the "MANAGEMENT FEE") and the
Re-Leasing Fee from Manager's payment to Owner of the Owner's Percentage.
Section 4.02 Costs and Expenses. Other than the Re-Leasing Fee, Manager
shall be responsible for all costs, expenses and fees incurred in rendering
services in connection with the Equipment, including, but not limited to, the
cost of maintenance, insurance, compensation of
<PAGE> 7
Manager's employees, license fees, taxes, legal fees associated with any
contracts related and any other cost or expense necessary to manage, operate or
maintain the Equipment, such costs and expenses to be included as part of the
Management Fee and Re-Leasing Fee paid by Owner pursuant to this Agreement.
ARTICLE V
INDEMNIFICATION
Manager hereby agrees to and does indemnify and hold Owner, its
members, officers, managers, employees and agents, harmless from and against any
and all costs and expenses, losses, liabilities, damages, causes of action,
claims and demands whatsoever, howsoever arising, including but not limited to
those arising out of, concerning, or affecting the services provided by Manager
under this Agreement. Such costs and expenses shall include, but shall not be
limited to, costs and expenses, losses, liabilities, damages, causes of action,
claims and demands, arising out of bodily injury, personal injury, or demands
for property damage, or any other violation of rights of others, warranties or
other undertakings or duties of Manager, together with reimbursement to Owner
for reasonable attorneys' fees and expenses.
ARTICLE VI
GENERAL PROVISIONS
Section 6.01 Survival of Representations, Warranties and Agreements.
The representations, warranties, covenants and agreements made in this Agreement
or in any certificate or instrument delivered in connection herewith shall be in
full force and effect notwithstanding any investigation made by or disclosure
made to any party hereto, whether before or after the date hereof, shall survive
Closing and shall continue to be applicable and binding thereafter.
Section 6.02 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Oklahoma without reference
to the choice of law principles thereof.
Section 6.03 Entire Agreement. This Agreement, including any exhibits
and schedules hereto, contains the entire agreement and understanding between
the parties hereto, and supersedes any and all prior agreements, arrangements
and understandings, relating to the subject matter hereof. There are no written
or oral agreements, understandings, representations or warranties between the
parties other than those set forth or referred to in this Agreement. No
supplement, amendment, alteration, modification or waiver of this Agreement
shall be binding unless consented to in writing by Owner and Manager.
Section 6.04 Notices. All notices or other communications required or
permitted hereunder shall be in writing and shall be deemed given when delivered
personally or when sent by facsimile or on the third day after being mailed by
registered or certified mail, postage prepaid, addressed as follows:
<PAGE> 8
To Manager: Multimedia Games, Inc.
7335 S. Lewis, Suite 302
Tulsa, OK 74136
Attention: Contract Administration
To Owner: Patricia McGinty
312 Cherry Lane
Palm Beach, FL 33480
Any party may change its address for receiving notices by giving
written notice of such change to the other party in accordance with this Section
6.04.
Section 6.05 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, this Agreement may not be assigned by
either party without the written consent of the other, which consent shall not
be unreasonably withheld.
Section 6.06 Parties In Interest. Nothing in this Agreement shall
entitle any party other than Buyer or Seller to any claim, cause of action,
remedy or right of any kind.
Section 6.07 Waiver. No waiver of any term, provision or condition of
this Agreement shall be effective unless in writing, signed by the party against
which such waiver is sought to be enforced, and no such waiver shall be deemed
to be or construed as a further or continuing waiver of any such term, provision
or condition or as a waiver of any other term, provision or condition of this
Agreement, unless specifically so stated in such written waiver.
Section 6.08 Severability. If any term, covenant or condition of this
Agreement or the application thereof to any person or circumstance (other than a
term, covenant, condition or application which affects the essence of this
Agreement) shall, to any extent, be invalid or unenforceable, the remainder of
this Agreement, or the application of such term, covenant or condition to those
persons or circumstances other than those as to which it has been held invalid
or unenforceable, shall not be affected thereby, and each term, covenant and
condition of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
Section 6.09 Assigned Agreement. This Agreement amends and restates the
Assigned Agreement which, as so amended, remains in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their duly authorized representatives on the day
first above written.
<PAGE> 9
EQUIPMENT PURCHASING II L.L.C.
By: Rio Grande Management Corp.
By:
-------------------------------------
Name: Clifton Lind
Its: President
MULTIMEDIA GAMES, INC.
By:
-------------------------------------
Name: Gordon Graves
Its: Chief Executive Officer
<PAGE> 1
EXHIBIT 10.32
EQUIPMENT PURCHASE AGREEMENT
THIS EQUIPMENT PURCHASE AGREEMENT (the "AGREEMENT") is made and entered
into this 30th day of June, 1997, by and between MULTIMEDIA GAMES, INC., a Texas
corporation ("SELLER") and EQUIPMENT PURCHASING L.L.C., a Delaware limited
liability company ("BUYER").
W I T N E S S E T H :
WHEREAS, Seller owns and operates a gaming business at its offices
located at its offices located at 7335 South Lewis, Suite 302, Tulsa, Oklahoma
(the "BUSINESS"); and
WHEREAS, Buyer desires to purchase from Seller, and Seller desires to
sell to Buyer, subject to the terms and conditions of this Agreement, certain
gaming equipment relating to the Business;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto, intending to be legally bound, agree as
follows:
ARTICLE I
PURCHASE AND SALE OF EQUIPMENT
Section 1.1 Sale of Equipment. On the Closing Date (as hereinafter
defined), Seller shall sell, assign, transfer and convey to Buyer, and Buyer
shall purchase and acquire from Seller, free and clear of all liens,
encumbrances and adverse claims that certain gaming equipment set forth on
EXHIBIT "1.1" hereto (the "EQUIPMENT").
Section 1.2 Purchase Price. The purchase price (the "PURCHASE PRICE")
for the Equipment shall be SIX HUNDRED THOUSAND DOLLARS ($600,000) paid as
follows:
(a) the delivery of a promissory note to Seller in the form
attached as EXHIBIT 1.2(A) ("NOTE 1")in the principal amount of FOUR
HUNDRED THOUSAND DOLLARS ($400,000) with interest payable at the
applicable federal rate and a maturity date of July 28, 1997; and
(b) the delivery of a promissory note to Seller in the form
attached as EXHIBIT 1.2(B) ("NOTE 2") in the principal
<PAGE> 2
amount of TWO HUNDRED THOUSAND DOLLARS ($200,000) with interest payable
at a rate of fourteen percent (14%) per annum and a maturity date
twenty-four (24) months from the date of issuance of Note 2.
Section 1.3 Warrants. As additional inducement for Buyer to enter into
this Agreement, Seller agrees to issue to Buyer at Closing, fifty thousand
(50,000) warrants to purchase the Common Stock of Seller (the "WARRANTS")
pursuant to the terms of the Warrant Agreement attached hereto as EXHIBIT 1.3
(the "WARRANT AGREEMENT"). The purchase price per share of Common Stock of
Seller purchasable pursuant to each Warrant shall be initially $8.00, and the
number of shares of Common Stock purchasable upon the exercise of each Warrant
shall be initially one (1) share of Common Stock of Seller. The Warrants shall
become exercisable one (1) year from the Closing Date and shall expire on the
fifth anniversary of the Closing Date.
Section 1.4 Risk of Loss. The risk of loss or destruction or damage to
any or all of the Equipment from any cause whatsoever at all times prior to the
Closing Date of the purchase of the Equipment shall be borne by Seller.
Subsequent to the Closing Date of the purchase of the Equipment, the risk of
loss or destruction of or damage to any or all the Equipment from any cause
whatsoever shall be borne by Buyer.
Section 1.5 Certain Taxes and Fees. Buyer shall be responsible for (i)
any sales and use taxes which may become due and owing by reason of the sale of
the Equipment hereunder, (ii) all transfer, documentary and similar taxes and
all other duties, levies or other governmental charges incurred by or imposed on
the parties hereto with respect to the property transfer contemplated pursuant
to this Agreement, and (iii) all recording fees, if any, relating to the filing
of instruments transferring title to Buyer from Seller.
Section 1.6 Ad Valorem Taxes. Ad valorem, property and similar taxes and
assessments with respect to the Equipment for the assessment year in which
Closing occurs shall be prorated to the Closing Date, so that Seller shall be
responsible for such taxes for the period prior to the Closing Date and Buyer
shall be responsible for such taxes for the period on and after the Closing
Date.
Section 1.7 Other Expenses. All other costs and expenses incurred by
each party hereto in connection with all things required to be done by it
hereunder, including attorneys' and accountant fees, shall be borne by the party
incurring same.
<PAGE> 3
Section 1.8 Assignment of Warranties. Seller agrees to assign to Buyer
at closing; any and all valid warranties it may have in and to the Equipment;
provided that Seller shall not be obligated to assign any warranties which are
non-assignable pursuant to their terms.
ARTICLE II
CLOSING
Section 2.1 Closing. Closing of the purchase and sale of Equipment
provided for herein ("CLOSING") shall take place on or before June 30, 1997 at a
time and place mutually satisfactory to both parties (the "CLOSING DATE"). At
Closing, Seller shall deliver to Buyer a duly executed bill of sale in
substantially the form of EXHIBIT "2.1" hereto. Buyer shall deliver to Seller,
the Purchase Price as provided in Section 1.2 hereof.
Section 2.2 Conditions to Each Party's Obligations. The respective
obligations of Seller and Buyer to consummate the transactions contemplated by
this Agreement shall be subject to each of the following conditions:
(a) the parties shall have received the Rental Pool Agreement,
duly authorized and executed by the other, in substantially the form
attached as EXHIBIT 2.2(A);
(b) the parties shall have received the Management Agreement,
duly authorized and executed by the other, in substantially the form
attached as EXHIBIT 2.2(B); and
(c) Buyer shall have received the Warrants from Seller.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer, and covenants with Buyer
as follows:
Section 3.1 Corporate Existence; Authority. Seller is a corporation,
duly organized, validly existing and in good standing under the laws of the
State of Texas. The execution, delivery and performance of this Agreement by
Seller has been duly authorized by all necessary corporate and other action; and
no further corporate or other action is necessary for Seller to execute and
deliver this Agreement and to consummate and perform its obligations hereunder.
<PAGE> 4
Section 3.2 Consents. No consent, approval, waiver or authorization of,
or the making of any declaration or filing with, any governmental authority or
any other person is necessary in connection with the execution, delivery or
performance by Seller of this Agreement, and the consummation of the transaction
contemplated by this Agreement will not require the approval of any entity or
person in order to prevent the breach or termination of any agreement or other
right, privilege, license or agreement of Seller.
Section 3.3 No Conflicting Agreements. Neither the execution and
delivery of this Agreement by Seller nor the fulfillment of or compliance with
the terms or provisions hereof will result in a breach of the terms, conditions
or provisions of, or constitute a default under, or result in a violation of the
Certificate of Incorporation or Bylaws of Seller, or any other agreement,
mortgage, lease, license or other instrument or obligation to which Seller is a
party or by which the Equipment is bound, or any provision of any applicable
law, rule, regulation or ordinance or any order, decree, writ or injunction of
any court, administrative agency or governmental authority by which any Seller
is bound.
Section 3.4 Validity and Binding Effect. Seller has all requisite power
and authority to enter into this Agreement and to perform its obligations
hereunder. This Agreement has been duly executed and delivered by or on behalf
of Seller and constitutes the legal, valid and binding obligation of Seller,
enforceable against Seller in accordance with its terms, except as the same may
be limited by insolvency, bankruptcy or other laws of general application
affecting the enforcement of creditors' rights and by general equitable
principles.
Section 3.5 Title to Equipment. Seller has good and marketable title to,
and is the owner of, the Equipment, free and clear of all liens, mortgages,
security agreements, leases, options, pledges, charges, covenants, conditions,
restrictions and other encumbrances and claims of any kind or character
whatsoever and will convey the same to Buyer at Closing.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Seller hereby represents and warrants to Buyer, and covenants with Buyer
as follows:
Section 4.1 Corporate Existence; Authority. Buyer is a limited liability
company duly organized, validly existing and in good standing under the laws of
the State of Delaware. The
<PAGE> 5
execution, delivery and performance of this Agreement by Buyer has been duly
authorized by all necessary corporate and other action; and no further corporate
or other action is necessary for Buyer to execute and deliver this Agreement and
to consummate and perform its obligations hereunder.
Section 4.2 Consents. No consent, approval, waiver or authorization of,
or the making of any declaration or filing with, any governmental authority or
any other person is necessary in connection with the execution, delivery or
performance by Buyer of this Agreement, and the consummation of the transaction
contemplated by this Agreement will not require the approval of any entity or
person in order to prevent the breach or termination of any agreement or other
right, privilege, license or agreement of Buyer.
Section 4.3 No Conflicting Agreements. Neither the execution and
delivery of this Agreement by Buyer nor the fulfillment of or compliance with
the terms or provisions hereof will result in a breach of the terms, conditions
or provisions of, or constitute a default under, or result in a violation of,
the Certificate of Incorporation or Bylaws of Buyer or any agreement or other
instrument to which Buyer is a party or by which it is bound, or result in the
violation of any provision of any applicable law, rule, regulation or ordinance
or any order, decree, writ or injunction of any court, administrative agency or
governmental authority by which Buyer is bound.
Section 4.4 Validity and Binding Effect. Buyer has all requisite power
and authority to enter into this Agreement and to perform its obligations
hereunder. This Agreement has been duly executed and delivered on behalf of
Buyer and constitutes the legal, valid and binding obligation of Buyer,
enforceable against Buyer in accordance with its terms, except as the same may
be limited by insolvency, bankruptcy or other laws of general application
affecting the enforcement of creditors' rights or by general equitable
principles.
ARTICLE V
CERTAIN COVENANTS OF THE PARTIES
Section 5.1 Registrations, Filings and Consents. Seller will cooperate
in good faith, at Buyer's request, to make all registra tions, filings, and
applications and to give all notices and to obtain all governmental and other
consents, transfers, approvals, orders, qualifications and waivers necessary or
desirable for the consummation of the transactions contemplated hereby or which
<PAGE> 6
may thereafter be reasonably necessary or desirable to effect the transfer or
renewal of the Equipment.
Section 5.2 Further Assurances. Seller agrees from time to time, whether
at or after the Closing Date, to execute and deliver, and will cause its
affiliates to execute and deliver, such further instruments of conveyance and
transfer and take such other action as Buyer may reasonably request in order to
more effectively convey and transfer to Buyer the Equipment.
Section 5.3 Disclaimer; Limitation of Remedies. THE PARTIES AGREE THAT
THE EQUIPMENT SOLD, CONVEYED, TRANSFERRED AND ASSIGNED HEREBY IS SOLD AND
CONVEYED ON AN "AS IS, WHERE IS" BASIS AND THAT THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND ALL OTHER WARRANTIES,
EXPRESS OR IMPLIED, ARE EXCLUDED FROM THIS TRANSACTION AND SHALL NOT APPLY TO
THE GOODS SOLD. BUYER ACKNOWLEDGES THAT SELLER SHALL NOT BE LIABLE FOR ANY
INCIDENTAL, SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT
LIMITED TO, LOSS OR USE OR LOSS OF PROFITS INCURRED BY BUYER IN CONNECTION WITH
OR RELATING TO THE PURCHASE OF THE EQUIPMENT PURSUANT TO THIS AGREEMENT OR THE
USE OF THE EQUIPMENT. THE PARTIES AGREE THAT, TO THE EXTENT REQUIRED BY LAW, THE
DISCLAIMERS CONTAINED HEREIN ARE "CONSPICUOUS" DISCLAIMERS FOR THE PURPOSE OF
ANY LAW, RULE OR ORDER.
ARTICLE VI
BUYER'S INDEMNITY
Notwithstanding any investigation made by or on behalf of Seller prior
to or after Closing, Buyer agrees to indemnify, defend and hold harmless Seller
and Seller's officers, directors and shareholders from and against, and in
respect of, and will reimburse such persons for:
(a) any and all damages, deficiencies, claims, losses, expenses,
obligations, indebtedness and liabilities (collectively, "LIABILITIES")
resulting from any misrepre sentation, breach of warranty or
nonfulfillment of any covenant or agreement by or on the part of Buyer
hereunder;
(b) any and all Liabilities arising out of Buyer's actions, or
the actions of Buyer's employees or agents, which relate to any period
ending, matter occurring or state of facts existing after the Closing
Date (whether absolute, contingent or otherwise, and whether or not
known or unknown) including without limitation, all taxes related to
such period and all Liabilities to third parties or to employees or
agents of Buyer
<PAGE> 7
for tort, negligence, personal injury, products liability, breach of
contract, property damage or for other casualty loss or occurrence
howsoever arising out of or in any way related to this Agreement
(including workers' compensation and claims for strict liability and
tort), whether or not any litigation or claim with respect thereto is
now pending or has been threatened but excluding Liabilities the
existence or occurrence of which would constitute or cause a breach or
violation of any agreement, representation or warranty of Seller herein;
and
(c) any and all actions, claims, suits, proceedings, demands,
assessments, judgments and costs incident to any of the foregoing,
including without limitation reasonable attorneys' fees, court costs and
interest.
ARTICLE VII
SELLER'S INDEMNITY
Notwithstanding any investigation made by or on behalf of Buyer prior to
or after Closing, Seller agrees to indemnify, defend and hold harmless Buyer and
Buyers's officers, directors and shareholders from and against, and in respect
of, and will reimburse such persons for:
(a) any and all damages, deficiencies, claims, losses, expenses,
obligations, indebtedness and liabilities (collectively, "LIABILITIES")
resulting from any misrepre sentation, breach of warranty or
nonfulfillment of any covenant or agreement by or on the part of Seller
hereunder;
(b) any and all Liabilities which relate to any period ending,
matter occurring or state of facts existing prior to the Closing Date,
other than related to Buyer's action, or the actions of Buyer's
employees or agents, (whether absolute, contingent or otherwise, and
whether or not known or unknown) including without limitation, all taxes
related to such period and all Liabilities to third parties or to
employees or agents of Buyer for tort, negligence, personal injury,
products liability, breach of contract, property damage or for other
casualty loss or occurrence howsoever arising out of or in any way
related to this Agreement (including workers' compensation and claims
for strict liability and tort), whether or not any litigation or claim
with respect thereto is now pending or has been threatened but excluding
Liabilities the existence or occurrence of which would constitute or
cause a breach or violation of any agreement, representation or warranty
of Seller herein; and
<PAGE> 8
(c) any and all actions, claims, suits, proceedings, demands,
assessments, judgments and costs incident to any of the foregoing,
including without limitation reasonable attorneys' fees, court costs and
interest.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 Survival of Representations, Warranties and Agreements. The
representations, warranties, covenants and agreements made in this Agreement or
in any certificate or instrument delivered in connection herewith shall be in
full force and effect notwithstanding any investigation made by or disclosure
made to any party hereto, whether before or after the date hereof, shall survive
Closing and shall continue to be applicable and binding thereafter.
Section 8.2 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Oklahoma without reference
to the choice of law principles thereof.
Section 8.3 Entire Agreement. This Agreement, including any exhibits and
schedules hereto, contains the entire agreement and understanding between the
parties hereto, and supersedes any and all prior agreements, arrangements and
understandings, relating to the subject matter hereof. There are no written or
oral agreements, understandings, representations or warranties between the
parties other than those set forth or referred to in this Agreement. No
supplement, amendment, alteration, modification or waiver of this Agreement
shall be binding unless consented to in writing by Buyer and Seller.
Section 8.4 Expenses. Each party hereto shall separately bear the
expenses incurred by it in connection with this Agreement and in connection with
all things required to be done by it hereunder.
Section 8.5 Notices. All notices or other communications required or
permitted hereunder shall be in writing and shall be deemed given when delivered
personally or when sent by facsimile or on the third day after being mailed by
registered or certified mail, postage prepaid, addressed as follows:
To Seller: Multimedia Games, Inc.
7335 S. Lewis, Suite 302
Tulsa, OK 74136
Attention: Contract Administration
<PAGE> 9
To Buyer: Equipment Purchasing L.L.C.
7335 S. Lewis, Suite 302
Tulsa, OK 74136
Attention: Contract Administration
Any party may change its address for receiving notices by giving written
notice of such change to the other party in accordance with this Section 8.5.
Section 8.6 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns; provided, however, this Agreement may not be assigned by either
party without the written consent of the other, which consent shall not be
unreasonably withheld.
Section 8.7 Parties In Interest. Nothing in this Agreement shall entitle
any party other than Buyer or Seller to any claim, cause of action, remedy or
right of any kind.
Section 8.8 Waiver. No waiver of any term, provision or condition of
this Agreement shall be effective unless in writing, signed by the party against
which such waiver is sought to be enforced, and no such waiver shall be deemed
to be or construed as a further or continuing waiver of any such term, provision
or condition or as a waiver of any other term, provision or condition of this
Agreement, unless specifically so stated in such written waiver.
Section 8.9 Severability. If any term, covenant or condition of this
Agreement or the application thereof to any person or circumstance (other than a
term, covenant, condition or application which affects the essence of this
Agreement) shall, to any extent, be invalid or unenforceable, the remainder of
this Agreement, or the application of such term, covenant or condition to those
persons or circumstances other than those as to which it has been held invalid
or unenforceable, shall not be affected thereby, and each term, covenant and
condition of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
Section 8.10 Bulk Sales. The parties hereby waive any necessary
compliance with the provisions of any applicable bulk sales or transfer laws.
Buyer hereby jointly and severally agrees to indemnify, defend and hold Buyer
harmless from and against any loss or liability Seller may suffer because of
noncompliance with such bulk sales or transfer laws or any similar laws of any
state.
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their duly authorized representatives on the day
first above written.
EQUIPMENT PURCHASING L.L.C.
By: Rio Grande Management Corp.
By:
----------------------------------
Name: Clinton Lind
Its: President
MULTIMEDIA GAMES, INC.
By:
--------------------------------------
Name: Gordon Graves
Its: Chief Executive Officer
<PAGE> 11
EXHIBIT "1.1"
EQUIPMENT
Quantity Description
Approx. 100 MegaMania electronic player stations (exact serial
numbers to be provided)
Approx. 5 Sets of support equipment
<PAGE> 12
EXHIBIT "2.1"
BILL OF SALE
KNOW ALL PERSONS BY THESE PRESENTS:
MULTIMEDIA GAMES, INC., a Texas corporation ("SELLER"), in
consideration of Ten and No/100 Dollars ($10.00) and other good and valuable
consideration, receipt and sufficiency of which are hereby acknowledged, does
hereby sell, assign, transfer and set over to EQUIPMENT PURCHASING L.L.C., a
Delaware limited liability company ("BUYER"), all of Seller's right, title and
interest in and to the equipment and other tangible personal property described
on Schedule "1.1" attached hereto and made a part hereof (all of such personal
property is hereinafter collectively referred to as the "EQUIPMENT") except to
the extent that such equipment is specifically excluded therein.
Seller hereby represents and warrants to Buyer that Seller is the
absolute owner of the Equipment, that the Equipment is free and clear of all
liens, charges and encumbrances, and that Seller has full right, power and
authority to sell the Equipment and to make this Bill of Sale.
THE PARTIES AGREE THAT THE EQUIPMENT SOLD, CONVEYED, TRANSFERRED AND
ASSIGNED HEREBY IS SOLD AND CONVEYED ON AN "AS IS, WHERE IS" BASIS AND THAT THE
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND
ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, ARE EXCLUDED FROM THIS TRANSACTION AND
SHALL NOT APPLY TO THE GOODS SOLD. BUYER ACKNOWLEDGES THAT SELLER SHALL NOT BE
LIABLE FOR ANY INCIDENTAL, SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES, INCLUDING
BUT NOT LIMITED TO, LOSS OR USE OR LOSS OF PROFITS INCURRED BY BUYER IN
CONNECTION WITH OR RELATING TO THE PURCHASE OF THE EQUIPMENT PURSUANT TO THIS
AGREEMENT OR THE USE OF THE EQUIPMENT. THE PARTIES AGREE THAT, TO THE EXTENT
REQUIRED BY LAW, THE DISCLAIMERS CONTAINED HEREIN ARE "CONSPICUOUS" DISCLAIMERS
FOR THE PURPOSE OF ANY LAW, RULE OR ORDER.
IN WITNESS WHEREOF, Seller has caused this Bill of Sale to be duly
executed by its officer thereunto duly authorized this 30th day of June, 1997.
MULTIMEDIA GAMES, INC.,
a Texas corporation
By:
--------------------------------------
Its:
-------------------------------------
<PAGE> 1
EXHIBIT 10.33
RENTAL POOL AGREEMENT
THIS RENTAL POOL AGREEMENT (the "AGREEMENT") is made and entered into
this 30th day of June, 1997, by and between EQUIPMENT PURCHASING L.L.C., a
Delaware limited liability company ("OWNER") and MULTIMEDIA GAMES, INC., a Texas
corporation (the "COMPANY").
W I T N E S S E T H:
WHEREAS, the Chickasaw Nation (the "TRIBE") has entered into an
agreement (the "CHICKASAW AGREEMENT") with the Company to place MegaMania
electronic player stations (the "EQUIPMENT") in its bingo facility in exchange
for the Company receiving 4.5% of the Adjusted Gross Revenue (as defined in the
Integrated Gaming Services Agreement Addendum attached as EXHIBIT "A") derived
from use of the Equipment (the "COMPANY REVENUE");
WHEREAS, the Company and Owner have entered into a certain Equipment
Purchase Agreement, dated of even date herewith (the "PURCHASE AGREEMENT"), to
consummate Owner's purchase of the Equipment from the Company; and
WHEREAS, as additional consideration for Owner entering into the
Purchase Agreement, the Company wishes to grant Owner a percentage of the Hold
Revenue.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto, intending to be legally bound, agree as
follows:
1. Term. This Agreement shall be effective upon execution (the
"EFFECTIVE DATE") and shall continue and remain in full force and effect until
such time as the Company shall purchase the Equipment.
2. Adjusted Gross Revenue . As partial consideration for Owner's
purchase of the Equipment, the Company agrees to assign two percent (2%) of the
Adjusted Gross Revenue derived from use of the Equipment under the Chickasaw
Agreement to Owner (the "OWNER PERCENTAGE"). This assignment does not assign the
Company's right to a management fee as provided in the Management Agreement
between the parties of even date herewith (the "MANAGEMENT AGREEMENT"). The
Company retains the right to receive two and one half percent (2.5%) of the
Adjusted Gross Revenue derived from the use of the Equipment under the Chickasaw
Agreement (the "COMPANY PERCENTAGE"). In the event the Company Revenue received
from the Tribe is
<PAGE> 2
modified for any reason, or in the event the Equipment is transferred to another
facility and the hold revenue is subject to agreement with someone other than
the Tribe, the parties agree that they shall renegotiate the revenue percentages
to be received by each party in good faith.
3. Collection. The Company agrees to be responsible for the collection
and remittance of the Owner Percentage as provided in the Management Agreement,
including any necessary legal action related to such collection. The Company
shall not, however, be required to compensate Owner in the event the Tribe, or
any other third party, fails to pay, or provides an inaccurate or fraudulent
accounting of, the Owner Percentage. The Company agrees that it will subrogate
its claim to the Owner Percentage upon the request of Owner, and that it will
cooperate in all subsequent efforts by Owner to collect the Owner Percentage
from the Tribe.
4. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Oklahoma without reference to the
choice of law principles thereof.
5. Entire Agreement. This Agreement, including any exhibits and
schedules hereto, contains the entire agreement and understanding between the
parties hereto, and supersedes any and all prior agreements, arrangements and
understandings relating to the subject matter hereof. There are no written or
oral agreements, understandings, representations or warranties between the
parties other than those set forth or referred to in this Agreement. No
supplement, amendment, alteration, modification or waiver of this Agreement
shall be binding unless consented to in writing by the Company and Owner.
6. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns; provided, however, this Agreement may not be assigned by either party
without the written consent of the other, which consent shall not be
unreasonably withheld.
7. Parties In Interest. Nothing in this Agreement shall entitle any
party other than Buyer or Seller to any claim, cause of action, remedy or right
of any kind.
8. Waiver. No waiver of any term, provision or condition of this
Agreement shall be effective unless in writing, signed by the party against
which such waiver is sought to be enforced, and no such waiver shall be deemed
to be or construed as a further or continuing waiver of any such term, provision
or condition or as a waiver of any other term, provision or condition of this
Agreement, unless specifically so stated in such written waiver.
<PAGE> 3
9. Severability. If any term, covenant or condition of this Agreement
or the application thereof to any person or circumstance (other than a term,
covenant, condition or application which affects the essence of this Agreement)
shall, to any extent, be invalid or unenforceable, the remainder of this
Agreement, or the application of such term, covenant or condition to those
persons or circumstances other than those as to which it has been held invalid
or unenforceable, shall not be affected thereby, and each term, covenant and
condition of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their duly authorized representatives on the day
first above written.
EQUIPMENT PURCHASING L.L.C.
By: Rio Grande Management Corp.
By:
----------------------------------
Name: Clifton Lind
Its: President
MULTIMEDIA GAMES, INC.
By:
--------------------------------------
Name: Gordon Graves
Its: Chief Executive Officer
<PAGE> 1
EXHIBIT 10.34
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (the "AGREEMENT") is made and entered into
this 27th day of June, 1997, by and between EQUIPMENT PURCHASING L.L.C., a
Delaware limited liability company ("OWNER") and MULTIMEDIA GAMES, INC., a Texas
corporation ("MANAGER").
W I T N E S S E T H:
WHEREAS, the Chickasaw Nation (the "TRIBE") has entered into an
agreement (the "CHICKASAW AGREEMENT") with Manager to place MegaMania electronic
player stations (the "EQUIPMENT") in its bingo facility.
WHEREAS, Manager and Owner have entered into a certain Equipment
Purchase Agreement, dated of even date herewith (the "PURCHASE AGREEMENT"),
whereby Owner agreed to pay Manager, in the form of two (2) promissory notes
(the "NOTES"), six hundred thousand dollars ($600,000) for the Equipment (the
"PURCHASE PRICE") and to place the Equipment in operation at the Tribe's bingo
facility; and
WHEREAS, Owner desires to have Manager manage, operate and maintain the
Equipment.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto, intending to be legally bound, agree as
follows:
ARTICLE I
ENGAGEMENT AND AUTHORIZATION
Section 1.01 Engagement as Manager. Owner hereby engages Manager to
manage the Equipment in accordance with the terms and conditions hereof. Manager
may engage such independent contractors as Manager deems necessary to supplement
and complement Manager's employees and properly and adequately manage, operate
and maintain the Equipment.
Section 1.02 Grant of Authority. Owner hereby grants to Manager the
power and authority to manage, operate, control and direct the Equipment of
Owner to the full extent of Owner's power and authority; provided that Manager
shall not have the power or authority to (i) perform any act that is expressly
required to be performed by the Board of Directors of Owner by the laws of the
State of Oklahoma; or (ii) grant by contract any encumbrance, security interest
or pledge in any of the Equipment.
<PAGE> 2
Section 1.03 Employees; Independent Contractor.
(a) Manager shall be responsible for all employees and/or independent
contractors. All matters pertaining to the employment, supervision,
compensation, promotion and discharge of Manager's employees and others engaged
by Manager for the management, operation and maintenance of the Equipment are
the responsibility of Manager, and Manager shall be liable to such employees for
their compensation (in whatever form or amount such compensation may be).
Manager shall fully comply with all applicable laws and regulations having to do
with worker's compensation, social security, unemployment, insurance, hours of
labor, wages, working conditions, and other employer-employee related subjects
in connection with the Equipment.
(b) This Agreement is entered into solely to provide for the
performance of the services set forth herein and to define the rights,
obligations and liabilities of the parties hereto. This Agreement, and any
document or understanding entered into in connection herewith, shall not be
deemed to create any other relationship between Manager and Owner other than as
expressly provided herein. It is understood that the relationship of Manager to
Owner shall be that of an independent contractor. Nothing contained herein or
inferable herefrom shall be deemed or construed to (1) make Manager the agent,
servant or employee of Owner, or (2) to create any partnership, joint venture,
or other association between Owner and Manager. Owner shall not be responsible
for any injury sustained by Manager of its employees or by third parties arising
out of the performance of this Agreement by Manager under Owner's workers'
compensation policy or otherwise, and the doctrine of "respondeat superior"
shall not apply between Owner and Manager.
Section 1.04 Compliance with Laws and Contracts. Manager shall be
responsible for management, operation and maintenance of the Equipment in
substantial compliance with all applicable federal, state and municipal laws,
ordinances and regulations. Manager shall promptly remedy, at Manager's expense,
any violation of any law, ordinance, rule, regulation, or order which comes to
its attention to the extent such remedy is within the control of Manager.
Manager further agrees to obtain any licenses and approvals required for the
operation of the Equipment and to use its best efforts to avoid any default
under the Chickasaw Agreement or any future contract regarding use or lease of
the Equipment.
ARTICLE II
TERM AND TERMINATION
2.01 Term. This Agreement shall be effective upon execution (the
"EFFECTIVE DATE") and shall continue and remain in full force and effect for a
period of two (2) years from the Effective Date (the "TERM").
2.02 Termination. This Agreement may be canceled and terminated at any
time by Owner or Manager without cause upon giving the non-terminating party
thirty (30) days' prior written notice of its intention to do so.
<PAGE> 3
2.03 Effect of Termination.
(a) Upon termination of this Agreement, Owner's obligation to pay
Manager's compensation shall cease immediately, and except as provided herein,
the parties shall have no further rights or obligations to the other. Manager
agrees that upon Owner's request, it shall deliver to Owner all records, books,
accounts, files and other
(b) Notwithstanding the foregoing, the termination of this Agreement
shall not affect the rights of the terminating party with respect to any damages
at law or in equity it may have suffered as a result of any breach of the
Agreement, nor shall it affect the rights of Owner with respect to liability or
claims accrued, or arising out of events occurring, prior to the date of
termination.
ARTICLE III
MANAGER'S DUTIES
3.01 General. Manager shall manage, operate and maintain the Equipment
on behalf of Owner in accordance with the provisions of this Agreement.
3.02 Gaming Procedures and Gaming Accounting Procedures. Manager shall
be responsible for proposing, establishing and modifying from time to time (a)
the "GAME PROCEDURES," hereby defined as the technical, financial and other
plans, arrangements, systems, rules and procedures defining and used in the
operation and use of the Equipment and the playing of the MegaMania game and (b)
the "GAME ACCOUNTING PROCEDURES" which are defined as specific written
procedures to be followed regarding the handling of revenues derived from use of
the Equipment. Manager shall communicate, negotiate and coordinate with the
Tribe, or any other third party which may have leased or contracted to use the
Equipment, regarding the implementation of the Gaming Procedures and the Game
Accounting Procedures.
3.03 Use/Lease Contracts; Re-leasing.
(a) Manager is responsible for supervising and administering the
Chickasaw Agreement and agrees to perform whatever service may be required in
connection with the negotiation of renewals, extensions, modifications or
cancellations thereof, subject to Owners final approval. In the event the
Chickasaw Agreement is terminated, Manager is authorized to enter into another
use or lease agreement for the use of the Equipment, provided that Owner has
approved the terms and conditions pursuant to which the Equipment is to be
leased or used.
(b) Manager agrees that it will not place other MegaMania electronic
player stations at a bingo facility that has returned the Equipment (a
"RETURNING FACILITY") to Manager or Owner unless the Equipment has subsequently
been leased to another party upon terms and conditions equally or more favorable
to Owner than the terms and conditions of the agreement with the Returning
Facility. Manager shall use its best efforts to ensure that the Equipment is
leased or in use at all times during the Term of this Agreement. Owner agrees to
pay a fee of ten dollars ($10.00) per electronic player station for the cost and
expense of re-leasing the Equipment.
<PAGE> 4
3.04 Collection of Rents or Other Income. Manager shall collect,
identify and remit to Owner its Percentage (as defined in the Rental Pool
Agreement between the parties of even date herewith attached hereto as EXHIBIT
3.04.) All monies so collected shall be delivered to Owner within thirty (30)
business days of collection by Manager. Manager shall use due diligence to
promptly collect Owner's EP Percentage from the Tribe including taking any
necessary legal action.
3.05 Repair and Maintenance; Risk of Loss. Manager shall attend to the
making and supervision of all ordinary and extraordinary repairs and alterations
to the Equipment such that the Equipment is at all times in good working order,
repair and appearance, normal wear, tear or depreciation excepted. Manager shall
furnish any and all parts, mechanisms and devices to keep the Equipment in good
mechanical working order and shall install and license to Owner, any and all
software upgrades developed by or for Manger related to the MegaMania game, at
no cost to Owner. All risk of loss or damage to the Equipment shall be borne by
Manager.
3.06 Marketing. Manager shall conduct such market analyses and research
and place such paid advertisings and promotions as Manager, in its sole
discretion, deems necessary or advisable in order to promote use of the
Equipment.
3.07 Insurance. Manager shall, at its sole expense, maintain in effect
at all times during the Term, insurance coverages with limits reasonably
acceptable to Owner, with insurers licensed to do business in the State of
Oklahoma acceptable to Owner, and under forms of policies satisfactory to Owner.
None of the requirements contained herein as to types, limits or Owner's
approval of insurance coverage to be maintained by Manager are intended to and
shall not in any manner limit, qualify or quantify the liabilities and
obligations assumed by Manager under the Agreement or otherwise provided by law.
The types of coverage shall, at a minimum, include Workers' Compensation,
Employers' Liability, Commercial General Liability, Comprehensive Automobile
Liability and Umbrella Excess Liability Insurance.
3.08 Gaming Insurance; Protection. Manager shall provide reasonably
commercially available errors and omissions insurance coverage or other
protection suitable to Owner against the possibility of duplication of prize
liabilities due to the malfunction of the Equipment and/or the personnel
provided by Manager and its subcontractor to operate and manage the Equipment.
Further, Manager shall guaranty, and be solely responsible for, the payment of
prizes won while using the Equipment by letters of credit, performance bonds,
escrowed funds, insurance and/or other guarantees.
3.09 Forms; Payment of Taxes. Manager shall keep the Equipment free and
clear of all levies, liens and encumbrances. Manager shall, on behalf of Owner,
prepare, execute and file punctually when due all forms, reports and returns
required by law relating to the use of the Equipment, including any sales or use
tax forms, reports and income tax returns. In addition Manager shall pay
punctually when due any sales, use, employment or other taxes relating to the
use of the Equipment.
<PAGE> 5
3.10 Financial Reporting, Recordkeeping and Accounting.
(a) All financial reporting, recordkeeping, and accounting with respect
to the Equipment and the leasing, management, operation, repair and maintenance
thereof, as well as all collections of revenues and expenditures relating
thereto, shall be the responsibility of Manager and shall be adequately
maintained at all times. Such books and records shall be owned by Owner and
shall be kept in all material respects in accordance with the standards of the
industry. Manager will not disclose to any party other than Owner the contents
of such books and records, except as may be required by law. Manager shall also
take reasonable steps to ensure that neither Manager nor any of Manager's
employees or independent contractors at any time discloses or otherwise makes
use of in any manner, whether during or after the Term, any information
regarding the Owner's business or affairs without the prior written consent of
Owner. This obligation shall survive the termination of this Agreement. All
books and records relating to the Equipment shall be delivered to Owner or
Owner's designated representative immediately upon request of Owner.
(b) Owner, its accountants, attorneys, and agents, may, subject to the
Chickasaw Agreement or any agreement with a third party, examine or inspect the
Equipment and any books and records relating to the Equipment for any purpose
which Owner, in its sole discretion, deems necessary or advisable. Such
inspection shall occur with as little disruption to the Owner's business as
possible. Owner also reserves the right to perform additional audits relating to
the Manger's activities.
ARTICLE IV
MANAGEMENT FEE AND REIMBURSEMENTS
4.01 Management Fee. Manager shall receive as consideration and
remuneration for managing and operating the Equipment a fee equal to one percent
(1%) of two percent (2%) (1% x 2%) of the Ownership Percentage.
4.02 Costs and Expenses. Other than the re-leasing fee provided in
Section 3.03 above, Manager shall be responsible for all costs, expenses and
fees incurred in rendering services in connection with the Equipment, including,
but not limited to, the cost of maintenance, insurance, compensation of
Manager's employees, license fees, taxes, legal fees associated with any
contracts related and any other cost or expense necessary to manage, operate or
maintain the Equipment.
ARTICLE V
REPURCHASE OPTION
At any time during the Term, Manager shall have the option to
repurchase the Equipment from Owner, at a price to be mutually agreed upon by
Owner and Manager at the time of repurchase (the "OPTION PRICE"), provided that
after giving effect to the payment of the Option Price and the receipt by Owner
of all payments of the Ownership Percentage to the date of such payment, (a)
<PAGE> 6
Owner shall have received an amount equal to one hundred percent (100%) of the
Purchase Price plus a twenty percent (20%) internal rate of return on the amount
of such Purchase Price.
ARTICLE VI
INDEMNIFICATION
Manager hereby agrees to and does indemnify and hold Owner, its
members, officers, managers, employees and agents, harmless from and against any
and all costs and expenses, losses, liabilities, damages, causes of action,
claims and demands whatsoever, howsoever arising, including but not limited to
those arising out of, concerning, or affecting the Equipment and/or the services
provided by Manager under this Agreement. Such costs and expenses shall include,
but shall not be limited to, costs and expenses, losses, liabilities, damages,
causes of action, claims and demands, arising out of bodily injury, personal
injury, or demands for property damage, or any other violation of rights of
others, warranties or other undertakings or duties of Manager, together with
reimbursement to Owner for reasonable attorneys' fees and expenses.
ARTICLE VII
GENERAL PROVISIONS
Section 7.01 Survival of Representations, Warranties and Agreements.
The representations, warranties, covenants and agreements made in this Agreement
or in any certificate or instrument delivered in connection herewith shall be in
full force and effect notwithstanding any investigation made by or disclosure
made to any party hereto, whether before or after the date hereof, shall survive
Closing and shall continue to be applicable and binding thereafter.
Section 7.02 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Oklahoma without reference
to the choice of law principles thereof.
Section 7.03 Entire Agreement. This Agreement, including any exhibits
and schedules hereto, contains the entire agreement and understanding between
the parties hereto, and supersedes any and all prior agreements, arrangements
and understandings, relating to the subject matter hereof. There are no written
or oral agreements, understandings, representations or warranties between the
parties other than those set forth or referred to in this Agreement. No
supplement, amendment, alteration, modification or waiver of this Agreement
shall be binding unless consented to in writing by Owner and Manager.
Section 7.04 Notices. All notices or other communications required or
permitted hereunder shall be in writing and shall be deemed given when delivered
personally or when sent by facsimile or on the third day after being mailed by
registered or certified mail, postage prepaid, addressed as follows:
<PAGE> 7
To Manager: Multimedia Games, Inc.
7335 S. Lewis, Suite 302
Tulsa, OK 74136
Attention: Contract Administration
To Owner: Equipment Purchasing L.L.C.
7335 S. Lewis, Suite 302
Tulsa, OK 74136
Attention: Contract Administration
Any party may change its address for receiving notices by giving written
notice of such change to the other party in accordance with this Section 7.04.
Section 7.05 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, this Agreement may not be assigned by
either party without the written consent of the other, which consent shall not
be unreasonably withheld.
Section 7.06 Parties In Interest. Nothing in this Agreement shall
entitle any party other than Buyer or Seller to any claim, cause of action,
remedy or right of any kind.
Section 7.07 Waiver. No waiver of any term, provision or condition of
this Agreement shall be effective unless in writing, signed by the party against
which such waiver is sought to be enforced, and no such waiver shall be deemed
to be or construed as a further or continuing waiver of any such term, provision
or condition or as a waiver of any other term, provision or condition of this
Agreement, unless specifically so stated in such written waiver.
Section 7.08 Severability. If any term, covenant or condition of this
Agreement or the application thereof to any person or circumstance (other than a
term, covenant, condition or application which affects the essence of this
Agreement) shall, to any extent, be invalid or unenforceable, the remainder of
this Agreement, or the application of such term, covenant or condition to those
persons or circumstances other than those as to which it has been held invalid
or unenforceable, shall not be affected thereby, and each term, covenant and
condition of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their duly authorized representatives on the day
first above written.
EQUIPMENT PURCHASING L.L.C.
By: Rio Grande Management Corp.
By:
---------------------------------
Name: Clinton Lind
Its: President
<PAGE> 8
MULTIMEDIA GAMES, INC.
By:
--------------------------------------
Name: Gordon Graves
Its: Chief Executive Officer
<PAGE> 1
EXHIBIT 10.35
EQUIPMENT PURCHASE AGREEMENT
THIS EQUIPMENT PURCHASE AGREEMENT (the "AGREEMENT") is made and entered
into this 30th day of September, 1997, by and between MULTIMEDIA GAMES, INC., a
Texas corporation ("SELLER") and EQUIPMENT PURCHASING L.L.C., a Delaware limited
liability company ("BUYER").
W I T N E S S E T H :
WHEREAS, Seller owns and operates a gaming business at its offices
located at its offices located at 7335 South Lewis, Suite 302, Tulsa, Oklahoma
(the "BUSINESS"); and
WHEREAS, Buyer desires to purchase from Seller, and Seller desires to
sell to Buyer, subject to the terms and conditions of this Agreement, certain
gaming equipment relating to the Business;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto, intending to be legally bound, agree as
follows:
ARTICLE I
PURCHASE AND SALE OF EQUIPMENT
Section 1.1 Sale of Equipment. On the Closing Date (as hereinafter
defined), Seller shall sell, assign, transfer and convey to Buyer, and Buyer
shall purchase and acquire from Seller, free and clear of all liens,
encumbrances and adverse claims that certain gaming equipment set forth on
EXHIBIT "1.1" hereto (the "EQUIPMENT").
Section 1.2 Purchase Price. The purchase price (the "PURCHASE PRICE")
for the Equipment shall be THREE HUNDRED FORTY-NINE THOUSAND DOLLARS ($349,000)
paid as follows:
(a) ONE HUNDRED NINETY-ONE THOUSAND NINE HUNDRED FIFTY DOLLARS
($191,950) payable in cash at Closing (the "CASH AMOUNT"); and
(b) the delivery of a promissory note to Seller in the form
attached as EXHIBIT 1.2(A) ("NOTE")in the principal amount of ONE HUNDRED
FIFTY-SEVEN THOUSAND FIFTY DOLLARS ($157,050)(the "DEBT AMOUNT") with interest
payable in monthly installments, bearing interest at a rate of twelve percent
(12%) per annum with a maturity date twenty-four (24) months from the date of
issuance of the Note.
Section 1.3 Risk of Loss. The risk of loss or destruction or damage to
any or all of the Equipment from any cause whatsoever at all times prior to the
Closing Date of the purchase of the
<PAGE> 2
Equipment shall be borne by Seller. Subsequent to the Closing Date of the
purchase of the Equipment, the risk of loss or destruction of or damage to any
or all the Equipment from any cause whatsoever shall be borne by Buyer.
Section 1.4 Certain Taxes and Fees. Buyer shall be responsible for (i)
any sales and use taxes which may become due and owing by reason of the sale of
the Equipment hereunder, (ii) all transfer, documentary and similar taxes and
all other duties, levies or other governmental charges incurred by or imposed on
the parties hereto with respect to the property transfer contemplated pursuant
to this Agreement, and (iii) all recording fees, if any, relating to the filing
of instruments transferring title to Buyer from Seller.
Section 1.5 Ad Valorem Taxes. Ad valorem, property and similar taxes and
assessments with respect to the Equipment for the assessment year in which
Closing occurs shall be prorated to the Closing Date, so that Seller shall be
responsible for such taxes for the period prior to the Closing Date and Buyer
shall be responsible for such taxes for the period on and after the Closing
Date.
Section 1.6 Other Expenses. All other costs and expenses incurred by
each party hereto in connection with all things required to be done by it
hereunder, including attorneys' and accountant fees, shall be borne by the party
incurring same.
Section 1.7 Assignment of Warranties. Seller agrees to assign to Buyer
at closing; any and all valid warranties it may have in and to the Equipment;
provided that Seller shall not be obligated to assign any warranties which are
non-assignable pursuant to their terms.
Section 1.8 Warrants. As additional inducement for Buyer to enter into
this Agreement, the Seller agrees to issue to Buyer at Closing seventeen
thousand four hundred forty-two (17,442) warrants to purchase the Common Stock
of Seller (the "WARRANTS") pursuant to the terms of the Warrant Agreement
attached hereto as Exhibit 1.8 (the "WARRANT AGREEMENT"). The purchase price per
share of Common Stock of Seller purchasable pursuant to each Warrant shall be
initially $13.375, and the number of shares of Common Stock purchasable upon the
exercise of each Warrant shall be initially one (1) share of Common Stock of
Seller. The Warrants shall become exercisable one (1) year from the Closing Date
and shall expire on the fifth anniversary of the Closing Date.
ARTICLE II
CLOSING
Section 2.1 Closing. Closing of the purchase and sale of Equipment
provided for herein ("CLOSING") shall take place on or before September 30, 1997
at a time and place mutually satisfactory to both parties (the "CLOSING DATE").
At Closing, Seller shall deliver to Buyer a duly executed bill of sale in
substantially the form of EXHIBIT "2.1" hereto. Buyer shall deliver to Seller,
the Purchase Price as provided in Section 1.2 hereof.
<PAGE> 3
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer, and covenants with Buyer
as follows:
Section 3.1 Corporate Existence; Authority. Seller is a corporation,
duly organized, validly existing and in good standing under the laws of the
State of Texas. The execution, delivery and performance of this Agreement by
Seller has been duly authorized by all necessary corporate and other action; and
no further corporate or other action is necessary for Seller to execute and
deliver this Agreement and to consummate and perform its obligations hereunder.
Section 3.2 Consents. No consent, approval, waiver or authorization of,
or the making of any declaration or filing with, any governmental authority or
any other person is necessary in connection with the execution, delivery or
performance by Seller of this Agreement, and the consummation of the transaction
contemplated by this Agreement will not require the approval of any entity or
person in order to prevent the breach or termination of any agreement or other
right, privilege, license or agreement of Seller.
Section 3.3 No Conflicting Agreements. Neither the execution and
delivery of this Agreement by Seller nor the fulfillment of or compliance with
the terms or provisions hereof will result in a breach of the terms, conditions
or provisions of, or constitute a default under, or result in a violation of the
Certificate of Incorporation or Bylaws of Seller, or any other agreement,
mortgage, lease, license or other instrument or obligation to which Seller is a
party or by which the Equipment is bound, or any provision of any applicable
law, rule, regulation or ordinance or any order, decree, writ or injunction of
any court, administrative agency or governmental authority by which any Seller
is bound.
Section 3.4 Validity and Binding Effect. Seller has all requisite power
and authority to enter into this Agreement and to perform its obligations
hereunder. This Agreement has been duly executed and delivered by or on behalf
of Seller and constitutes the legal, valid and binding obligation of Seller,
enforceable against Seller in accordance with its terms, except as the same may
be limited by insolvency, bankruptcy or other laws of general application
affecting the enforcement of creditors' rights and by general equitable
principles.
Section 3.5 Title to Equipment. Seller has good and marketable title to,
and is the owner of, the Equipment, free and clear of all liens, mortgages,
security agreements, leases, options, pledges, charges, covenants, conditions,
restrictions and other encumbrances and claims of any kind or character
whatsoever and will convey the same to Buyer at Closing.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Seller hereby represents and warrants to Buyer, and covenants with Buyer
as follows:
<PAGE> 4
Section 4.1 Corporate Existence; Authority. Buyer is a limited liability
company duly organized, validly existing and in good standing under the laws of
the State of Delaware. The execution, delivery and performance of this Agreement
by Buyer has been duly authorized by all necessary corporate and other action;
and no further corporate or other action is necessary for Buyer to execute and
deliver this Agreement and to consummate and perform its obligations hereunder.
Section 4.2 Consents. No consent, approval, waiver or authorization of,
or the making of any declaration or filing with, any governmental authority or
any other person is necessary in connection with the execution, delivery or
performance by Buyer of this Agreement, and the consummation of the transaction
contemplated by this Agreement will not require the approval of any entity or
person in order to prevent the breach or termination of any agreement or other
right, privilege, license or agreement of Buyer.
Section 4.3 No Conflicting Agreements. Neither the execution and
delivery of this Agreement by Buyer nor the fulfillment of or compliance with
the terms or provisions hereof will result in a breach of the terms, conditions
or provisions of, or constitute a default under, or result in a violation of,
the Certificate of Incorporation or Bylaws of Buyer or any agreement or other
instrument to which Buyer is a party or by which it is bound, or result in the
violation of any provision of any applicable law, rule, regulation or ordinance
or any order, decree, writ or injunction of any court, administrative agency or
governmental authority by which Buyer is bound.
Section 4.4 Validity and Binding Effect. Buyer has all requisite power
and authority to enter into this Agreement and to perform its obligations
hereunder. This Agreement has been duly executed and delivered on behalf of
Buyer and constitutes the legal, valid and binding obligation of Buyer,
enforceable against Buyer in accordance with its terms, except as the same may
be limited by insolvency, bankruptcy or other laws of general application
affecting the enforcement of creditors' rights or by general equitable
principles.
ARTICLE V
CERTAIN COVENANTS OF THE PARTIES
Section 5.1 Registrations, Filings and Consents. Seller will cooperate
in good faith, at Buyer's request, to make all registrations, filings, and
applications and to give all notices and to obtain all governmental and other
consents, transfers, approvals, orders, qualifications and waivers necessary or
desirable for the consummation of the transactions contemplated hereby or which
may thereafter be reasonably necessary or desirable to effect the transfer or
renewal of the Equipment.
Section 5.2 Further Assurances. Seller agrees from time to time, whether
at or after the Closing Date, to execute and deliver, and will cause its
affiliates to execute and deliver, such further instruments of conveyance and
transfer and take such other action as Buyer may reasonably request in order to
more effectively convey and transfer to Buyer the Equipment.
<PAGE> 5
Section 5.3 Disclaimer; Limitation of Remedies. THE PARTIES AGREE THAT
THE EQUIPMENT SOLD, CONVEYED, TRANSFERRED AND ASSIGNED HEREBY IS SOLD AND
CONVEYED ON AN "AS IS, WHERE IS" BASIS AND THAT THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND ALL OTHER WARRANTIES,
EXPRESS OR IMPLIED, ARE EXCLUDED FROM THIS TRANSACTION AND SHALL NOT APPLY TO
THE GOODS SOLD. BUYER ACKNOWLEDGES THAT SELLER SHALL NOT BE LIABLE FOR ANY
INCIDENTAL, SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT
LIMITED TO, LOSS OR USE OR LOSS OF PROFITS INCURRED BY BUYER IN CONNECTION WITH
OR RELATING TO THE PURCHASE OF THE EQUIPMENT PURSUANT TO THIS AGREEMENT OR THE
USE OF THE EQUIPMENT. THE PARTIES AGREE THAT, TO THE EXTENT REQUIRED BY LAW, THE
DISCLAIMERS CONTAINED HEREIN ARE "CONSPICUOUS" DISCLAIMERS FOR THE PURPOSE OF
ANY LAW, RULE OR ORDER.
ARTICLE VI
BUYER'S INDEMNITY
Notwithstanding any investigation made by or on behalf of Seller prior
to or after Closing, Buyer agrees to indemnify, defend and hold harmless Seller
and Seller's officers, directors and shareholders from and against, and in
respect of, and will reimburse such persons for:
(a) any and all damages, deficiencies, claims, losses, expenses,
obligations, indebtedness and liabilities (collectively, "LIABILITIES")
resulting from any misrepresentation, breach of warranty or
nonfulfillment of any covenant or agreement by or on the part of Buyer
hereunder;
(b) any and all Liabilities arising out of Buyer's actions, or
the actions of Buyer's employees or agents, which relate to any period
ending, matter occurring or state of facts existing after the Closing
Date (whether absolute, contingent or otherwise, and whether or not
known or unknown) including without limitation, all taxes related to
such period and all Liabilities to third parties or to employees or
agents of Buyer for tort, negligence, personal injury, products
liability, breach of contract, property damage or for other casualty
loss or occurrence howsoever arising out of or in any way related to
this Agreement (including workers' compensation and claims for strict
liability and tort), whether or not any litigation or claim with respect
thereto is now pending or has been threatened but excluding Liabilities
the existence or occurrence of which would constitute or cause a breach
or violation of any agreement, representation or warranty of Seller
herein; and
(c) any and all actions, claims, suits, proceedings, demands,
assessments, judgments and costs incident to any of the foregoing,
including without limitation reasonable attorneys' fees, court costs and
interest.
<PAGE> 6
ARTICLE VII
SELLER'S INDEMNITY
Notwithstanding any investigation made by or on behalf of Buyer prior to
or after Closing, Seller agrees to indemnify, defend and hold harmless Buyer and
Buyers's officers, directors and shareholders from and against, and in respect
of, and will reimburse such persons for:
(a) any and all damages, deficiencies, claims, losses, expenses,
obligations, indebtedness and liabilities (collectively, "LIABILITIES")
resulting from any misrepresentation, breach of warranty or
nonfulfillment of any covenant or agreement by or on the part of Seller
hereunder;
(b) any and all Liabilities which relate to any period ending,
matter occurring or state of facts existing prior to the Closing Date,
other than related to Buyer's action, or the actions of Buyer's
employees or agents, (whether absolute, contingent or otherwise, and
whether or not known or unknown) including without limitation, all taxes
related to such period and all Liabilities to third parties or to
employees or agents of Buyer for tort, negligence, personal injury,
products liability, breach of contract, property damage or for other
casualty loss or occurrence howsoever arising out of or in any way
related to this Agreement (including workers' compensation and claims
for strict liability and tort), whether or not any litigation or claim
with respect thereto is now pending or has been threatened but excluding
Liabilities the existence or occurrence of which would constitute or
cause a breach or violation of any agreement, representation or warranty
of Seller herein; and
(c) any and all actions, claims, suits, proceedings, demands,
assessments, judgments and costs incident to any of the foregoing,
including without limitation reasonable attorneys' fees, court costs and
interest.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 Survival of Representations, Warranties and Agreements. The
representations, warranties, covenants and agreements made in this Agreement or
in any certificate or instrument delivered in connection herewith shall be in
full force and effect notwithstanding any investigation made by or disclosure
made to any party hereto, whether before or after the date hereof, shall survive
Closing and shall continue to be applicable and binding thereafter.
Section 8.2 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Oklahoma without reference
to the choice of law principles thereof.
<PAGE> 7
Section 8.3 Entire Agreement. This Agreement, including any exhibits and
schedules hereto, contains the entire agreement and understanding between the
parties hereto, and supersedes any and all prior agreements, arrangements and
understandings, relating to the subject matter hereof. There are no written or
oral agreements, understandings, representations or warranties between the
parties other than those set forth or referred to in this Agreement. No
supplement, amendment, alteration, modification or waiver of this Agreement
shall be binding unless consented to in writing by Buyer and Seller.
Section 8.4 Expenses. Each party hereto shall separately bear the
expenses incurred by it in connection with this Agreement and in connection with
all things required to be done by it hereunder.
Section 8.5 Notices. All notices or other communications required or
permitted hereunder shall be in writing and shall be deemed given when delivered
personally or when sent by facsimile or on the third day after being mailed by
registered or certified mail, postage prepaid, addressed as follows:
To Seller: Multimedia Games, Inc.
7335 S. Lewis, Suite 302
Tulsa, OK 74136
Attention: Contract Administration
To Buyer: Equipment Purchasing L.L.C.
7335 S. Lewis, Suite 302
Tulsa, OK 74136
Attention: Contract Administration
Any party may change its address for receiving notices by giving written
notice of such change to the other party in accordance with this Section 8.5.
Section 8.6 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns; provided, however, this Agreement may not be assigned by either
party without the written consent of the other, which consent shall not be
unreasonably withheld.
Section 8.7 Parties In Interest. Nothing in this Agreement shall entitle
any party other than Buyer or Seller to any claim, cause of action, remedy or
right of any kind.
Section 8.8 Waiver. No waiver of any term, provision or condition of
this Agreement shall be effective unless in writing, signed by the party against
which such waiver is sought to be enforced, and no such waiver shall be deemed
to be or construed as a further or continuing waiver of any such term, provision
or condition or as a waiver of any other term, provision or condition of this
Agreement, unless specifically so stated in such written waiver.
<PAGE> 8
Section 8.9 Severability. If any term, covenant or condition of this
Agreement or the application thereof to any person or circumstance (other than a
term, covenant, condition or application which affects the essence of this
Agreement) shall, to any extent, be invalid or unenforceable, the remainder of
this Agreement, or the application of such term, covenant or condition to those
persons or circumstances other than those as to which it has been held invalid
or unenforceable, shall not be affected thereby, and each term, covenant and
condition of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
Section 8.10 Bulk Sales. The parties hereby waive any necessary
compliance with the provisions of any applicable bulk sales or transfer laws.
Buyer hereby jointly and severally agrees to indemnify, defend and hold Buyer
harmless from and against any loss or liability Seller may suffer because of
noncompliance with such bulk sales or transfer laws or any similar laws of any
state.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their duly authorized representatives on the day
first above written.
EQUIPMENT PURCHASING L.L.C.
By: Rio Grande Management Corp.
By:
---------------------------------
Name: Clifton Lind
Its: President
MULTIMEDIA GAMES, INC.
By:
--------------------------------------
Name: Gordon Graves
Its: Chief Executive Officer
<PAGE> 9
EXHIBIT "1.1"
EQUIPMENT
Quantity Description
60 MegaMania electronic player stations (exact serial numbers to be
provided)
<PAGE> 10
EXHIBIT "2.1"
BILL OF SALE
KNOW ALL PERSONS BY THESE PRESENTS:
MULTIMEDIA GAMES, INC., a Texas corporation ("SELLER"), in
consideration of Ten and No/100 Dollars ($10.00) and other good and valuable
consideration, receipt and sufficiency of which are hereby acknowledged, does
hereby sell, assign, transfer and set over to EQUIPMENT PURCHASING L.L.C., a
Delaware limited liability company ("BUYER"), all of Seller's right, title and
interest in and to the equipment and other tangible personal property described
on Schedule "1.1" attached hereto and made a part hereof (all of such personal
property is hereinafter collectively referred to as the "EQUIPMENT") except to
the extent that such equipment is specifically excluded therein.
Seller hereby represents and warrants to Buyer that Seller is the
absolute owner of the Equipment, that the Equipment is free and clear of all
liens, charges and encumbrances, and that Seller has full right, power and
authority to sell the Equipment and to make this Bill of Sale.
THE PARTIES AGREE THAT THE EQUIPMENT SOLD, CONVEYED, TRANSFERRED AND
ASSIGNED HEREBY IS SOLD AND CONVEYED ON AN "AS IS, WHERE IS" BASIS AND THAT THE
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND
ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, ARE EXCLUDED FROM THIS TRANSACTION AND
SHALL NOT APPLY TO THE GOODS SOLD. BUYER ACKNOWLEDGES THAT SELLER SHALL NOT BE
LIABLE FOR ANY INCIDENTAL, SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES, INCLUDING
BUT NOT LIMITED TO, LOSS OR USE OR LOSS OF PROFITS INCURRED BY BUYER IN
CONNECTION WITH OR RELATING TO THE PURCHASE OF THE EQUIPMENT PURSUANT TO THIS
AGREEMENT OR THE USE OF THE EQUIPMENT. THE PARTIES AGREE THAT, TO THE EXTENT
REQUIRED BY LAW, THE DISCLAIMERS CONTAINED HEREIN ARE "CONSPICUOUS" DISCLAIMERS
FOR THE PURPOSE OF ANY LAW, RULE OR ORDER.
IN WITNESS WHEREOF, Seller has caused this Bill of Sale to be duly
executed by its officer thereunto duly authorized this 30th day of September 30,
1997.
MULTIMEDIA GAMES, INC.,
a Texas corporation
By:
--------------------------------------
Its:
-------------------------------------
<PAGE> 1
EXHIBIT 10.36
AMENDMENT TO THE RENTAL POOL AGREEMENT
THIS AMENDMENT (this "AMENDMENT") is made and entered into this 30th
day of September, 1997, by and between MULTIMEDIA GAMES, INC., a Texas
corporation (the "COMPANY") and EQUIPMENT PURCHASING L.L.C., a Delaware limited
liability company ("OWNER").
W I T N E S S E T H:
WHEREAS, on June 30, 1997, Owner and Manager entered into a certain
Rental Pool Agreement (the "RENTAL POOL AGREEMENT") whereby the Company agreed
to assign to Owner two percent (2%) of the Adjusted Gross Revenue (as defined in
the Integrated Gaming Services Agreement Addendum attached thereto) it derived
from MegaMania electronic player stations placed at the Chickasaw Nation bingo
facility; and
WHEREAS, the Company and Owner wish to amend the Rental Pool Agreement
to provide for an assignment by the Company of Adjusted Gross Revenue derived
from MegaMania electronic player stations owned by Owner("EQUIPMENT") located at
other bingo locations under Gaming Services Agreements with other tribes (the
"GAMING SERVICES AGREEMENTS") and to allow for an increase in the amount of such
assignments to Owner.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto, intending to be legally bound, agree as
follows:
1. Recitals. The Recitals of the Agreement shall be deleted in their
entirety and revised as follows:
WHEREAS, the Company has entered into various agreements with
Indian tribes to place MegaMania electronic player stations
("EQUIPMENT") in their bingo facilities in exchange for the Company
receiving a specified percentage of the Adjusted Gross Revenue (as
defined in the Integrated Gaming Services Agreement Addendum attached
as EXHIBIT "A") derived from use of the Equipment (the "COMPANY
REVENUE");
WHEREAS, the Company and Owner contemplate entering into
numerous equipment purchase agreements (the "PURCHASE AGREEMENTS") to
consummate Owner's purchase of Equipment from the Company (the "EP
EQUIPMENT");
WHEREAS, as additional consideration for Owner entering into
the Purchase Agreements, the Company shall grant Owner a percentage of
the Company Revenue.
NOW, THEREFORE, in consideration of the mutual promises and
covenants contained herein, the parties hereto, intending to be legally
bound, agree as follows:
<PAGE> 2
2. Adjusted Gross Revenue. Paragraph 2 shall be deleted in its entirety
and replaced with the following:
As partial consideration for Owner's purchase of the EP Equipment, the
Company agrees to assign as much of its Company Revenue received
pursuant to the Gaming Services Agreement related to the specific EP
Equipment as is necessary, or which the Company desires, to pay Owner's
monthly payment due the Company under the promissory note given by
Owner to the Company to purchase the specific EP Equipment and to pay
Owner's monthly payment due Graves Properties, Ltd. under the
promissory note given by Owner to Graves Properties, Ltd. to finance
purchase of the specific EP Equipment; provided, however, that no event
shall such amount received by Owner be less than two percent (2%) of
the Company Revenue (the "OWNER PERCENTAGE"). This assignment does not
assign the Company's right to a management fee as provided in the
Management Agreement between the parties of even date herewith (the
"MANAGEMENT AGREEMENT"). In the event the Company Revenue received from
the any particular tribe is modified for any reason, the parties agree
that they shall renegotiate the revenue percentages to be received by
both parties in good faith. Except for the assignment of the Company
Revenue as provided above, the Company shall have no obligation to make
payments to Owner.
3. Effect of Amendment Upon Agreements. Except as otherwise expressly
amended by this Agreement, all of the terms and provisions of the Agreements
shall be and remain in full force and effect.
4. Miscellaneous Provisions.
(a) No party shall assign this Agreement or any of its rights and
obligations hereunder without the prior written consent of the other parties
which consent shall not be unreasonably withheld.
(b) Nothing in this Agreement is intended to confer on any person other
than the parties hereto, and their respective successors and assigns, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement.
(c) This Agreement may be executed in any one or more counterparts,
each of which will be deemed an original but all of which together will
constitute one and the same instrument.
(d) This Agreement shall be governed by the laws of the State of
Oklahoma without regard to the conflict of law rules thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their duly authorized representatives on the day
first above written.
<PAGE> 3
MULTIMEDIA GAMES, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
EQUIPMENT PURCHASING L.L.C.
By: Rio Grande Management Corp.
By:
----------------------------------
Name: Clifton Lind
Its: President
<PAGE> 1
EXHIBIT 10.37
AMENDMENT TO THE MANAGEMENT AGREEMENT
THIS AMENDMENT (this "AMENDMENT") is made and entered into this 30th
day of September, 1997, by and between MULTIMEDIA GAMES, INC., a Texas
corporation ("MANAGER") and EQUIPMENT PURCHASING L.L.C., a Delaware limited
liability company ("OWNER").
W I T N E S S E T H:
WHEREAS, on June 30, 1997, Owner and Manager entered into a certain
Management Agreement (the "MANAGEMENT AGREEMENT") whereby Manager agreed to
manage, operate and maintain certain MagaMania electronic player stations (the
"EQUIPMENT") located at the Chickasaw Nation bingo facility; and
WHEREAS, Manager and Owner wish to amend the Management Agreement to
expand Manager's management, operation and maintenance responsibility's beyond
those machines located at the Chickasaw Nation bingo facility to include all
Equipment as may from time to time be purchased by Owner from Manager.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto, intending to be legally bound, agree as
follows:
1. Recitals. The Recitals of the Agreement shall be deleted in their
entirety and revised as follows:
WHEREAS, Manager has entered into various agreements with
Indian tribes to place MegaMania electronic player stations in their
bingo facilities;
WHEREAS, Manager and Owner contemplate entering into one or
more separate equipment purchase agreements (each a "Purchase
Agreement") whereby Owner will purchase MegaMania electronic player
stations from Manager (the "EQUIPMENT");
WHEREAS, Owner desires to have Manager manage, operate and
maintain the Equipment.
NOW, THEREFORE, in consideration of the mutual promises and
covenants contained herein, the parties hereto, intending to be legally
bound, agree as follows:
2. Repurchase Option. Article V shall be deleted in its entirety and
replaced with the following:
At any time during the Term, Manager shall have the option to
repurchase the Equipment that is the subject of a separate Purchase
Agreement, or any portion
<PAGE> 2
thereof, from Owner, at a fair market price to be mutually agreed upon
by Owner and Manager at the time of repurchase (the "OPTION PRICE"),
provided that after giving effect to the payment of the Option Price
and the receipt of Owner of all payments of the Owner Percentage with
respect to such Equipment to the date of such payment, Owner shall have
received an amount equal to one hundred percent (100%) of the purchase
paid by Owner for such Equipment to be repurchased (the "PURCHASE
PRICE") plus a twenty percent (20%) compounded rate of return on the
Cash Amount paid with respect to such Equipment and a fourteen percent
(14%) compounded rate of return on the Debt amount paid with respect to
such Equipment.
3. Effect of Amendment Upon Agreements. Except as otherwise expressly
amended by this Agreement, all of the terms and provisions of the Agreements
shall be and remain in full force and effect.
4. Miscellaneous Provisions.
(a) No party shall assign this Agreement or any of its rights and
obligations hereunder without the prior written consent of the other parties
which consent shall not be unreasonably withheld.
(b) Nothing in this Agreement is intended to confer on any person other
than the parties hereto, and their respective successors and assigns, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement.
(c) This Agreement may be executed in any one or more counterparts,
each of which will be deemed an original but all of which together will
constitute one and the same instrument.
(d) This Agreement shall be governed by the laws of the State of
Oklahoma without regard to the conflict of law rules thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their duly authorized representatives on the day
first above written.
MULTIMEDIA GAMES, INC.
By: _____________________________
Name: ___________________________
Title: __________________________
EQUIPMENT PURCHASING L.L.C.
By: Rio Grande Management Corp.
By: _________________________
Name: Clifton Lind
Title: President
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
TV Games, Inc., a Delaware corporation
MegaBingo, Inc., a Delaware corporation
Multimedia Creative Services, Inc., a Delaware corporation
American Gaming Network L.L.C, a Delaware limited liability company
(100% owned as of October 1997)
<PAGE> 1
EXHIBIT 23.1
Consent of PricewaterhouseCoopers LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Multimedia Games, Inc., on Form S-8 (File No. 333-23123) and Form S-3 (File Nos.
333-16729; 333-28367; and 333-36319) of our report dated December 4, 1998, on
our audits of the consolidated financial statements of Multimedia Games, Inc.
and subsidiaries as of September 30, 1998 and for each of the two years in the
period ended September 30, 1998, which report is included in this Annual Report
on Form 10-KSB.
COOPERS & LYBRAND L.L.P.
Tulsa, Oklahoma
December 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THIS ANNUAL REPORT ON FORM 10-KSB AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,881,000
<SECURITIES> 0
<RECEIVABLES> 2,642,000
<ALLOWANCES> 181,000
<INVENTORY> 2,534,000
<CURRENT-ASSETS> 9,881,000
<PP&E> 12,240,000
<DEPRECIATION> 4,587,000
<TOTAL-ASSETS> 19,725,000
<CURRENT-LIABILITIES> 5,073,000
<BONDS> 0
0
1,000
<COMMON> 54,000
<OTHER-SE> 12,622,000
<TOTAL-LIABILITY-AND-EQUITY> 19,725,000
<SALES> 5,023,000
<TOTAL-REVENUES> 70,537,000
<CGS> 2,683,000
<TOTAL-COSTS> 66,992,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125,000
<INCOME-PRETAX> 3,704,000
<INCOME-TAX> 1,489,000
<INCOME-CONTINUING> 2,215,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,215,000
<EPS-PRIMARY> .40
<EPS-DILUTED> .35
</TABLE>
