<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-28318
Multimedia Games, Inc.
----------------------
(Exact Name of Registrant as Specified in its Charter)
Texas 74-2611034
- -------------------------------------------------------------------------------
(State or Other Jurisdiction (IRS Employer Identification Number)
of Incorporation)
8900 Shoal Creek Blvd., Suite 300
Austin, Texas 78759
-------------------
(Address of Principal Executive Offices)
(512) 371-7100
--------------
(Registrant's Telephone Number, Including Area Code)
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days:
Yes X No
----- -----
As of March 31, 1999 there were 5,455,450 shares of the Company's Common Stock,
par value $.01, outstanding.
<PAGE> 2
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
(March 31, 1999 and September 30, 1998)
Consolidated Statements of Operations
(Three months ended March 31, 1999 and 1998)
Consolidated Statements of Operations
(Six months ended March 31, 1999 and 1998)
Consolidated Statements of Cash Flows
(Six months ended March 31, 1999 and 1998)
Notes to Unaudited Consolidated Financial Statements
Report of Review By Independent Accountants
Item 2. Management's Discussion and Analysis
Part II. Other Information
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
-2-
<PAGE> 3
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ASSETS MARCH SEPTEMBER
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 872,000 $ 1,881,000
Accounts Receivable:
Trade, net of allowance for doubtful accounts
of $260,000 and $181,000 1,890,000 2,005,000
Other receivables 417,000 637,000
Inventory 3,154,000 2,534,000
Prepaid expenses 523,000 568,000
Notes receivable 352,000 783,000
Notes receivable - related parties -- 1,227,000
Deferred tax asset 61,000 246,000
------------ ------------
Total current assets 7,269,000 9,881,000
Restricted cash and cash equivalents 1,666,000 1,636,000
Property and equipment, net 10,925,000 7,653,000
Other assets 122,000 110,000
Goodwill, net 431,000 445,000
------------ ------------
Total assets $ 20,413,000 $ 19,725,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes Payable $ 865,000 $ 70,000
Current portion of long-term debt 283,000 336,000
Accounts payable and accrued expenses 3,527,000 4,371,000
Prize fulfillment fees payable 297,000 296,000
------------ ------------
Total current liabilities 4,972,000 5,073,000
------------ ------------
Long - term debt 406,000 531,000
Other long - term liabilities 1,461,000 1,429,000
Deferred tax liability 581,000 15,000
Stockholders' equity:
Preferred stock, Series A, $.01 par value, 2,000,000
shares authorized, 90,789 issued and outstanding 1,000 1,000
Common stock, $.01 par value, 25,000,000 shares
authorized 5,489,449 and 5,439,824 shares issued and
5,455,450 and 5,405,825 shares outstanding 55,000 54,000
Additional paid - in capital 12,936,000 12,803,000
Stockholder notes receivable (802,000) (817,000)
Treasury stock, 33,999 shares at cost (87,000) (87,000)
Retained earnings 890,000 723,000
------------ ------------
Total stockholders' equity 12,993,000 12,677,000
------------ ------------
Total liabilities and stockholders' equity $ 20,413,000 $ 19,725,000
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
-3-
<PAGE> 4
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Gaming revenue $ 21,517,000 $ 13,814,000
Electronic player station sales 69,000 --
Electronic player station sales - related party -- 2,350,000
Electronic player station lease revenue 651,000 740,000
Other 369,000 4,000
------------ ------------
Total revenues 22,606,000 16,908,000
Operating costs and expenses:
Bingo prizes and related costs 2,068,000 2,240,000
Allotments to hall operators 14,394,000 8,636,000
Cost of electronic player stations sold 39,000 --
Cost of electronic player stations sold - related party -- 1,162,000
Salaries and wages 1,351,000 762,000
Selling, general and administrative expenses 3,244,000 2,770,000
Amortization and depreciation 1,235,000 711,000
------------ ------------
Total operating costs and expenses 22,331,00 16,281,000
------------ ------------
Operating income 275,000 627,000
Interest income 128,000 39,000
Interest expense (42,000) (32,000)
------------ ------------
Income before income taxes 361,000 634,000
Income taxes (144,000) (243,000)
------------ ------------
Net income $ 217,000 $ 391,000
------------ ------------
Basic earnings per share $ .03 $ .07
------------ ------------
Diluted earnings per share $ .03 $ .06
------------ ------------
</TABLE>
See notes to unaudited consolidated financial statements.
-4-
<PAGE> 5
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Gaming revenue $ 40,925,000 $ 25,981,000
Electronic player station sales 370,000 44,000
Electronic player station sales - related party -- 2,350,000
Electronic player station lease revenue 1,305,000 1,431,000
Other 758,000 6,000
------------ ------------
Total revenues 43,358,000 29,812,000
Operating costs and expenses:
Bingo prizes and related costs 4,385,000 4,697,000
Allotments to hall operators 27,410,000 15,993,000
Cost of electronic player stations sold 190,000 27,000
Cost of electronic player stations sold - related party -- 1,162,000
Salaries and wages 2,255,000 1,447,000
Selling, general and administrative expenses 6,428,000 4,249,000
Amortization and depreciation 2,396,000 1,346,000
------------ ------------
Total operating costs and expenses 43,064,00 28,921,000
------------ ------------
Operating income 294,000 891,000
Interest income 141,000 141,000
Interest expense (72,000) (58,000)
------------ ------------
Income before income taxes 363,000 974,000
Income taxes (145,000) (371,000)
------------ ------------
Net income $ 218,000 $ 603,000
------------ ------------
Basic earnings per share $ .03 $ .10
------------ ------------
Diluted earnings per share $ .03 $ .09
------------ ------------
</TABLE>
See notes to unaudited consolidated financial statements.
-5-
<PAGE> 6
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 218,000 $ 603,000
Adjustments to reconcile net income to cash
provided by (used for) operating activities:
Amortization and depreciation 2,396,000 1,346,000
Deferred taxes 751,000 371,000
Other non-cash expenses -- (3,000)
(Increase) decrease in:
Accounts and notes receivable 975,000 (1,512,000)
Inventory (620,000) (895,000)
Prepaid expenses 45,000 139,000
Other assets (12,000) --
Increase (decrease) in:
Accounts payable and accrued expenses (844,000) 1,351,000
Prize fulfillment fees payable 1,000 (47,000)
------------ ------------
Net cash provided by (used for) operating activities: 2,910,000 1,353,000
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (4,662,000) (2,362,000)
Increase in cash balances in restricted escrow 2,000 (5,000)
------------ ------------
Net cash provided by (used for) investing activities (4,660,000) (2,367,000)
Cash flows from financing activities:
Proceeds from sale of common stock 134,000 244,000
Increase in notes payable 795,000 --
Principal repayments on debt (178,000) (201,000)
Payment of preferred stock dividends (25,000) (55,000)
Stockholder Notes Receivable 15,000 15,000
------------ ------------
Net cash provided by (used for) financing activities 741,000 (12,000)
------------ ------------
Net change in cash and cash equivalents (1,009,000) (1,026,000)
Cash and cash equivalents, beginning of period 1,881,000 2,380,000
------------ ------------
Cash and cash equivalents, end of period $ 872,000 $ 1,354,000
============ ============
Supplemental disclosure of non-cash investing activities:
Acquisition of equipment through cancellation of note receivable $ 992,000 $ -0-
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
-6-
<PAGE> 7
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements should be read in conjunction with the
Company's financial statements for the twelve months ended September 30,
1998 contained within the Company's Annual Report on Form 10-KSB.
The financial statements included herein as of March 31, 1999 and for each
of the three and six months ended March 31, 1999 and 1998, have been
prepared by the Company, without an audit, pursuant to generally accepted
accounting principles and the rules and regulations of the Securities and
Exchange Commission. The information presented reflects all adjustments
(consisting solely of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair statement of results for the
periods. Results for the three and six months ended March 31, 1999, are not
necessarily indicative of the results which will be realized for the year
ending September 30, 1999. The September 30, 1998 consolidated balance sheet
data was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
INCOME PER COMMON SHARE - Income per common share is computed in accordance
with Statement of Financial Accounting Standards No. 128 ("FAS 128").
Presented below is a reconciliation of income available to common
shareholders and the differences between actual weighted average shares
outstanding, which are used in computing basic earnings per share and
diluted weighted average shares, which are used in computing diluted
earnings per share.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
----------------------------------------- ---------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 217,000 $ 391,000
Less: preferred stock dividends (25,000) (25,000)
--------- ---------
Basic EPS:
Income (loss) available to
common shareholders 192,000 5,446,546 $ .03 366,000 5,369,772 $ .07
Effect of Dilutive Securities:
Options 441,058 373,015
Warrants 39,116 373,398
Convertible preferred stock 25,000 435,195 25,000 435,195
--------- ---------- --------- ----------
Diluted EPS:
Income available to common
shareholders plus assumed
conversions $ 217,000 6,361,915 $ .03 $ 391,000 6,551,380 $ .06
--------- --------- --------- ---------
</TABLE>
-7-
<PAGE> 8
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
----------------------------------------- ---------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 218,000 $ 603,000
Less: preferred stock dividends (50,000) (55,000)
---------- ----------
Basic EPS:
Income (loss) available to
common shareholders 168,000 5,429,870 $ .03 548,000 5,270,175 $ .10
Effect of Dilutive Securities:
Options 367,890 454,429
Warrants 32,166 659,692
Convertible preferred stock 50,000 435,195 55,000 448,942
---------- --------- ---------- ---------
Diluted EPS:
Income available to common
shareholders plus assumed
conversions $ 218,000 6,265,121 $ .03 $ 603,000 6,833,238 $ .09
---------- --------- ---------- ---------
</TABLE>
At March 31, 1999, warrants to purchase 2,074,643 shares of common stock at
prices ranging from $7.00 to $9.44, were outstanding but not included in the
computation of EPS because the assumed exercise of the warrants would have had
an anti-dilutive effect on EPS.
2. 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
January 21, 1999, the District Court denied a motion filed by the U.S. Attorney
that requested the District Court to alter or amend its judgment.
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 government has preserved its right to appeal in both cases. The Company
expects it will prevail on the merits if the government does appeal, but the
outcome cannot be predicted with certainty.
No assurances can be given that there will be no other challenges made to the
legality of some other aspects of the Company's 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 could have a material
adverse effect upon the Company's financial condition and results of operation.
In addition, if the type of EPS used to aid the play of MegaMania is ultimately
held to be a gambling device, all of the other interactive Class II bingo games
currently offered by the Company and other vendors 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 any
appeal of the MegaMania litigation or any future litigation challenging other
aspects of the Company's activities will likely be significant.
-8-
<PAGE> 9
OTHER LITIGATION
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. The Company intends to vigorously defend
against the claims of NGI and to prosecute its own claim. Discovery has been
virtually completed and the matter is scheduled for trial in June 1999. 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 has been and through the trial will continue to 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 Chief Executive Officer and former President respectively, of
the Company. 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. In January
1999, the two cases were consolidated in the Northern District of Oklahoma. On
March 22, 1999, the class action plaintiffs filed an amended complaint that also
named Clifton E. Lind, the Company's President and Chief Operating Officer, as
an additional defendant and included allegations that the Company violated
federal securities laws by making allegedly false and misleading statements
regarding transactions between the Company and Equipment Purchasing LLC and
Equipment Purchasing II LLC. On April 19, 1999, the Company filed its Motion to
Dismiss all of the claims of the plaintiffs. The Court has yet to rule on the
Company's Motion. The Company intends to vigorously defend against these claims
and expects to prevail on the merits, although no assurances to that effect can
be given. In any event, the cost of defending against the claims could be
substantial.
3. RELATED PARTY TRANSACTIONS
On October 1, 1998, the Company exercised its option to acquire 356 electronic
player stations and related equipment (EPS) for $1,349,000 from Equipment
Purchasing LLC ("EP LLC"), a limited liability company owned by an affiliate of
Gordon T. Graves, the Chairman and Chief Executive Officer of the Company. The
Company had originally sold the EPS to EP LLC in June and September 1997 at an
aggregate sales price of approximately $2,436,000. Pursuant to agreements
entered into at the time of the June and September 1997 sale transactions, the
Company had an option to repurchase the EPS from EP LLC at fair market value.
While the purchase price paid by the Company was not the result of an
arms-length negotiation with an unaffiliated third party, the Company believes
that such purchase price is comparable to what the Company would have paid to an
unaffiliated third party. The purchase price was paid by (i) cancellation by the
Company of $992,000 in notes receivable due from EP LLC, (ii) the assumption by
the Company of $77,800 in debt owed by the affiliate of Mr. Graves to a
financial institution, (iii) the payment by the Company of $133,000 to EP LLC,
(iv) the delivery to EP LLC of a 6% promissory note of the Company in the
principal amount of $133,000 due on April 1, 1999 (which was later extended to
June 30, 1999), (v) the issuance of 50,000 warrants to purchase shares of common
stock of the Company at $3.81 per share expiring on June 30, 2002, and (vi) the
issuance of 50,000 warrants to purchase shares of common stock of the Company at
$3.81 per share expiring on September 30, 2002. On October 1, 1998, the closing
price of the Company's common stock as quoted on the Nasdaq SmallCap market was
$2.50 per share. The warrants, which were valued by the Company and EP LLC at
$12,000, were issued in cancellation of warrants to purchase the same number of
shares that had been granted to EP LLC in connection with the June and September
1997 sale transactions at exercise prices of $11.00 and $13.38 per share. The
$133,000 paid to EP LLC was applied by the affiliate of Mr. Graves to pay a
portion of outstanding notes due the Company by such affiliate.
-9-
<PAGE> 10
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Stockholders
Multimedia Games, Inc.
We have reviewed the accompanying consolidated balance sheet of Multimedia
Games, Inc. and Subsidiaries as of March 31, 1999, and the related consolidated
statements of operations for the three and six month periods ended March 31,
1999 and 1998 and cash flows for the six month periods ended March 31, 1999 and
1998. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquires of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of September 30, 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended (not presented herein); and in our report dated
December 4, 1998, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of September 30, 1998 is fairly
stated in all material respects in relation to the consolidated balance sheet
from which it has been derived.
PricewaterhouseCoopers LLP
Tulsa, Oklahoma
May 6, 1999
-10-
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
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 March 31, 1999, there were 4,024 EPS in operation at 67 independently owned
Indian bingo halls located in 8 different states. Also as of March 31, 1999,
the Company's live TV bingo game show, MegaBingo, was being delivered to 45
independently owned Indian bingo halls located in 14 different states.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA) amounted
to $1,510,000, for the second fiscal quarter, up 13% from 1998's $1,338,000. Net
Income was $217,000 for the second quarter of fiscal 1999 compared to $391,000
for the first quarter of fiscal 1998, a decrease of 45%. Company operations
resulted in income before income taxes of $361,000 for the three months ended
March 31, 1999, a decrease of $273,000 or 43% from 1998's $634,000. During the
second quarter of fiscal 1998 the Company began recording substantial legal and
professional fees related to the MegaMania and Network Gaming litigation. Legal
and professional fees for the second quarter of fiscal 1999 decreased $616,000,
or 48% over the second quarter of fiscal 1998. During the current quarter, the
Company continued the expansion of its market share in the placement of EPS
throughout its network. By March 31, 1999, there were 4,024 EPS in operation as
compared to 3,295 at September 30, 1998 and 2,422 at March 31, 1998. This rapid
deployment of EPS resulted in incremental operating costs for the second quarter
of fiscal 1999 of $827,000, an increase of 55% over the comparable quarter of
the prior year. The amount of depreciation and amortization recorded for the
second quarter of fiscal 1999 increased $524,000, or 74% over the second quarter
of fiscal 1998 primarily due to the increase in the number of EPS placed in
service.
REVENUES totaled $22,606,000 for the second quarter of fiscal 1999 compared to
$16,908,000 for the second quarter of fiscal 1998, an increase of $5,698,000, or
34%. This growth was primarily due to the increase in the Company's interactive
games which generated revenues of $18,726,000 for the three months ended March
31, 1999 as compared to $10,795,000 in the second quarter of fiscal 1998, an
increase of 73%. The average daily revenue per EPS was $53 for the three months
ended March 31, 1999 compared to $55 for the three months ended March 31, 1998.
This reduction in average daily revenue was primarily the result of a low level
of player interest in two new games introduced by the Company during fiscal
1998. TV bingo game show revenues of $2,791,000 declined $228,000 or 8% for the
three months ended March 31, 1999 from 1998's $3,019,000, reflecting the
continuation of the trend experienced during fiscal 1998 of player participation
declining on the TV bingo game show across the country. In addition, a reduction
in the number of halls participating in MegaBingo during fiscal 1998 is also
being experienced in fiscal 1999.
-11-
<PAGE> 12
The Company believes interactive gaming revenues will increase throughout the
remainder of fiscal 1999 over fiscal 1998, primarily as the result of an
increase in the average number of EPS 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 the sale of 10 EPS amounted to $68,000 for the second quarter of
fiscal 1999, a decrease of $2,282,000 from 1998's $2,350,000. The $2,350,000 in
sales in 1998 were to a related party, EPLLC (see note 2). No such related party
sales were made during the second quarter of fiscal 1999.
Lease revenues from EPS leased to Native American Tribes decreased 12%, from
$740,000 in the second quarter of fiscal 1998 to $651,000 in the current quarter
of 1999.
Other revenues increased to $369,000 in the second quarter of fiscal 1999 mainly
due to the inclusion of $304,000 of revenue from MegaRacing "an operation that
was begun in late fiscal 1998 and terminated in January 1999." The remainder of
other revenue was contributed by management fees on the related party equipment
contracts totaling $56,000 and equipment service revenue amounting to $9,000 for
the three months ended March 31, 1999.
OPERATING COSTS AND EXPENSES totaled $22,331,000 for the second quarter of
fiscal 1999 compared to $16,281,000 for the second quarter of fiscal 1998, up
$6,050,000 or 37%, primarily as the result of the following:
BINGO PRIZES AND RELATED COSTS consists primarily of prizes paid to players of
the Company's TV bingo game shows and amounted to $2,068,000 for the three
months ended March 31, 1999 compared to $2,240,000 for the three months ended
March 31, 1998, a decrease of $172,000, or 8%. This decrease is proportional to
the decline in TV bingo game show revenue. Interactive gaming revenues are
recorded net of prize costs; therefore, the prizes are not reflected in bingo
prizes and related costs.
ALLOTMENTS TO HALL OPERATORS consists primarily of the bingo halls' share of
the interactive gaming revenues after prizes and allocable prize costs.
Allotments to hall operators increased $5,758,000, or 67% to $14,394,000 for
the three months ended March 31, 1999 compared to $8,636,000 for the three
months ended March 31, 1998. The increase was mainly related to the growth in
the Company's interactive gaming network of EPS and the introduction of new
games. Hall commissions related to TV bingo game shows declined as a result of
the decrease in the play of MegaBingo.
COST OF ELECTRONIC PLAYER STATIONS SOLD decreased $1,123,000 to $39,000 for the
three months ended March 31, 1999 from $1,162,000 for the three months ended
March 31, 1998 due to the fewer number of EPS sold during the current period.
The gross margin recorded on EPS sales was $29,000 for the second quarter of
fiscal 1999 compared to $1,188,000 in the second quarter of fiscal 1998.
SALARIES AND WAGES amounted to $1,351,000 for the three months ended March 31,
1999 compared to $762,000 for the three months ended March 31, 1998, an
increase of $589,000, or 77%. Most of this increase relates to additional
operations personnel hired to assist in the installation, training and
maintenance related to the interactive gaming network. Also contributing to
this increase were the payroll costs associated with additions to corporate
staff.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $474,000, or 17% to
$3,244,000 for the three months ended March 31, 1999 compared to $2,770,000 for
the three months ended March 31, 1998. MegaRacing, which was discontinued
effective January 31, 1999, added $246,000 to the current quarter operating
costs. Other contributing factors to the increase in the overall cost structure
for the current quarter versus the comparable quarter of the prior fiscal year
were a direct result of the expansion of the interactive gaming network:
consulting and contract labor - up $77,000, or 35%; rent for facilities and
equipment - up $146,000, or 113%; travel - up $76,000, or 33%; interactive
gaming telecommunications up $89,000, or 24%; repairs, maintenance and supplies
- - up $50,000, or 71%; employee benefits - up $107,000, or 68%; advertising and
promotions - up $6,000, or 3%; and miscellaneous expenses - up $237,000, or
182%. Partially offsetting these increases was a $434,000 decrease in legal and
professional fees from $1,288,000 in the second quarter of fiscal 1998 to
$672,000 for the second quarter of fiscal 1999, down 48%.
AMORTIZATION AND DEPRECIATION increased $524,000, or 74% to $1,235,000 for the
three months ended March 31, 1999 compared to $711,000 for the three months
ended March 31, 1998. The increase results from EPS and software
-12-
<PAGE> 13
programming costs capitalized during fiscal 1998 and 1999. The Company made
$6.0 million in capital additions during fiscal 1998. Capital additions for the
first quarter of fiscal 1999 totaled $2.8 million.
INTEREST INCOME consists primarily of interest earned on notes receivable and
amounted to $128,000 for the three months ended March 31, 1999 compared to
$39,000 for the three months ended March 31, 1998, an increase of $89,000, or
228%.
INTEREST EXPENSE amounted to $42,000 for the three months ended March 31, 1999
compared to $32,000 for the three months ended March 31, 1998, an increase of
$10,000, or 31%. This increase resulted from the use of a working capital line
of credit put in place during the first quarter of fiscal 1999.
INCOME TAX amounted to $144,000 for the three months ended March 31, 1999
compared to $243,000 for the three months ended March 31, 1998, a decrease of
approximately $99,000 which was due to a lower pre-tax income.
SIX MONTHS ENDED MARCH 31, 1999 AND 1998
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA) amounted
to $2,690,000, for the six months ended March 31, 1999, up 20% from 1998's
$2,237,000. Net Income was $218,000 for the six months ended March 31, 1999
compared to $603,000 in 1998, a decrease of 64%. Company operations resulted in
income before income taxes of $363,000 for the period, a decrease of $611,000
from 1998's $974,000. In 1998 the Company recorded a sale of electronic player
stations to a related party which produced operating income of $1,188,000.
During the second quarter of fiscal 1998 the Company began recording substantial
legal and professional fees related to the MegaMania and Network Gaming
litigation. Legal and professional fees for the six months ended March 31, 1999
totaled $1,451,000, a decrease of $28,000, or 2% from the six months ended March
31, 1998. During the six months ended March 31, 1999, the Company continued the
expansion of its market share in the placement of EPS throughout its network. By
March 31, 1999, there were 4,024 EPS in operation as compared to 3,295 at
September 30, 1998 and 2,422 at March 31, 1998. This rapid deployment of EPS
resulted in incremental operating costs for the six months ended March 31, 1999
of $1,632,000, an increase of 59% over the comparable period of the prior year.
The amount of depreciation and amortization recorded for the six months ended
March 31, 1999 increased $1,050,000, or 78% over the first six months of fiscal
1998, primarily due to the increase in the number of EPS placed in service.
MegaRacing, which was not in operation during the first six months of fiscal
1998, incurred an operating loss of $69,000 during the six months ended March
31, 1999; MegaRacing operations were discontinued January 31, 1999. Fiscal
year-to-date operations were also adversely effected by the disappointing
performance of two interactive games that were introduced in fiscal 1998.
Another new game was introduced at the end of the first fiscal quarter and thus
far player acceptance has been positive.
REVENUES totaled $43,358,000 for the six months ended March 31, 1999 compared
to $29,812,000 for the first six months of fiscal 1998, an increase of
$13,546,000, or 45%. This growth was primarily due to the increase in the
Company's interactive games which generated revenues of $35,565,000 for the six
months ended March 31, 1999 as compared to $19,349,000 in the first six months
of fiscal 1998, an increase of 84%. The average daily revenue per EPS was $51
for the six months ended March 31, 1999 compared to $55 for the six months
ended March 31, 1998. This reduction in average daily revenue was primarily the
result of a low level of player interest in the two new games introduced during
fiscal 1998. TV bingo game show revenues of $5,360,000 declined $992,000 or 16%
for the six months ended March 31, 1998 from 1998's $6,353,000, reflecting the
continuation of the trend experienced during fiscal 1998 of player
participation declining on the TV bingo game show across the country. In
addition, the reduction in the number of halls participating in MegaBingo
during fiscal 1998 also affected fiscal year-to-date performance.
The Company believes interactive gaming revenues will increase each quarter
throughout the remainder of fiscal 1999 over fiscal 1998, primarily as the
result of an increase in the average number of EPS 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 the sale of 62 EPS amounted to $370,000 for the six months ended
March 31, 1999, a decrease of $2,024,000 from 1998's $2,394,000. The $2,394,000
in sales in 1998 was primarily to a related party, EPLLC (see note 2). No such
related party sales were made in fiscal 1999.
-13-
<PAGE> 14
Lease revenues from EPS leased to Native American Tribes amounted to $1,304,000
in the first six months of fiscal 1999, down 9% from 1998's $1,431,000. This
decrease was primarily due to the maturity of lease/purchase contracts during
fiscal year 1998.
Other revenues increased to $758,000 in the six months ended March 31, 1999
mainly due to the inclusion of $626,000 of revenues from MegaRacing. The
remainder of other revenue was contributed by management fees on the related
party equipment contracts totaling $108,000 and equipment service revenue
amounting to $24,000 for the six months ended March 31, 1999.
OPERATING COSTS AND EXPENSES totaled $43,064,000 for the six months ended March
31, 1999 compared to $28,921,000 for the first six months of fiscal 1998, up
$14,143,000 or 49%, primarily as the result of the following:
BINGO PRIZES AND RELATED COSTS consists primarily of prizes paid to players of
the Company's TV bingo game shows and amounted to $4,385,000 for the six months
ended March 31, 1999 compared to $4,697,000 for the six months ended March 31,
1998, a decrease of $312,000, or 7%. This decrease is less than proportional to
the decline in TV bingo game show revenue due to the level of fixed costs
required to produce the TV bingo game shows. Interactive gaming revenues are
recorded net of prize costs; therefore, the prizes are not reflected in bingo
prizes and related costs.
ALLOTMENTS TO HALL OPERATORS consists primarily of the bingo halls' share of the
interactive gaming revenues after prizes and allocable prize costs. Allotments
to hall operators increased $11,417,000, or 71% to $27,410,000 for the six
months ended March 31, 1999 compared to $15,993,000 for the six months ended
March 31, 1998. The increase was mainly related to the growth in the Company's
interactive gaming network of EPS and the introduction of new games. Hall
commissions related to TV bingo game shows declined as a result of the decrease
in the play of MegaBingo.
COST OF ELECTRONIC PLAYER STATIONS SOLD decreased $999,000 to $190,000 for the
six months ended March 31, 1999 from $1,189,000 for the six months ended March
31, 1998 due to the fewer number of EPS sold in the current period. The gross
margin recorded on EPS sales was $179,000 for the first six months of fiscal
1999 compared to $1,205,000 in the first six months of fiscal 1998.
SALARIES AND WAGES amounted to $2,255,000 for the six months ended March 31,
1999 compared to $1,447,000 for the six months ended March 31, 1998, an
increase of $808,000, or 56%. Most of this increase relates to additional
operations personnel hired to assist in the installation, training and
maintenance related to the interactive gaming network. Also contributing to
this increase were the labor costs associated with additions to corporate
staff.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $2,179,000, or 51% to
$6,428,000 for the six months ended March 31, 1999 compared to $4,249,000 for
the six months ended March 31, 1998. MegaRacing added $558,000 to the current
six month's operating costs. Other contributing factors to the increase in the
overall cost structure for the current period versus the comparable six month
period of the prior fiscal year were a direct result of the expansion of the
interactive gaming network: consulting and contract labor - up $252,000, or
65%; rent for facilities and equipment - up $285,000, or 116%; travel - up
$189,000, or 44%; interactive gaming telecommunications - up $188,000, or 44%;
repairs, maintenance and supplies - up $135,000, or 92%; employee benefits - up
$191,000, or 65%; advertising and promotions - up $37,000, or 12%; and
miscellaneous expenses - up $307,000, or 142%. Partially offsetting these
increases was a $28,000 decrease in legal and professional fees from $1,479,000
in the second quarter of fiscal 1998 to $1,451,000 for the second quarter of
fiscal 1999, down 2%.
AMORTIZATION AND DEPRECIATION increased $1,050,000, or 78% to $2,396,000 for
the six months ended March 31, 1999 compared to $1,346,000 for the six months
ended March 31, 1998. The increase results from EPS and software programming
costs capitalized during fiscal 1999 and 1998. The Company made $6.0 million in
capital additions during fiscal 1998. Capital additions for the first six
months of fiscal 1999 totaled $4.6 million.
INTEREST INCOME consists primarily of interest earned on notes receivable and
amounted to $141,000 for the six months ended March 31, 1999 and 1998.
-14-
<PAGE> 15
INTEREST EXPENSE amounted to $72,000 for the six months ended March 31, 1999
compared to $58,000 for the six months ended March 31, 1998, an increase of
$14,000, or 24%. This increase resulted from the use of a working capital line
of credit put in place during the first quarter of fiscal 1999.
INCOME TAX amounted to $145,000 for the six months ended March 31, 1999
compared to $371,000 for the six months ended March 31, 1998, a decrease of
$226,000 which was due to a lower pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended March 31, 1999, $2,910,000 of cash was provided by
operations versus $1,353,000 provided by operations in the comparable period of
fiscal 1998. At March 31, 1999, the Company had unrestricted cash and cash
equivalents of $872,000, a $1,009,000 decrease from September 30, 1998. Working
capital at the end of the second quarter amounted to $2,297,000 compared to
$4,808,000 at September 30, 1998. Working capital was applied in the
development and manufacture of EPS which were distributed into lease/purchase
and rental pools rather than direct cash sales, resulting in the use of cash
generated from operations to finance the growth of the Company's interactive
gaming network. As a result of the expansion of the gaming network, an increase
of $620,000 in inventory negatively impacted cash flows from operations. The
Company used $4,660,000 in investing activities during the six months ended
March 31, 1999, almost entirely for additions of interactive gaming assets.
These software development and manufacturing costs are expected to continue at
a high level to meet customer demand for internally financed lease and rental
products until such time that the Company identifies a third party to finance
these products for its customers.
The rapid expansion of the Company's interactive gaming network and the
deployment of over 1,600 EPS over the last twelve months has increased cash
requirements to install, operate, market, maintain and monitor the network.
These expenses are expected to be sustained at a higher level to support the
overall growth in revenue. The Company is planning system and component
upgrades to accommodate next generation game and video technology, which again,
will step up cash requirements through the remainder of fiscal 1999.
The Company will rely on increasing its average daily revenue per EPS and
promoting a higher proportion of cash sales for EPS until external financing can
be secured. Until the Company's current liabilities are satisfied by an external
financing source, hardware production and component upgrades will be held back.
During the six months ended March 31, 1999 the Company used $795,000 of its
revolving credit line and the application of funds collected on outstanding
accounts receivable to reduce a back-log of legal and professional service fees
as well as manufacturing billings, decreasing accounts payable and accrued
expenses $844,000. Legal and professional fees continue at a high level as the
Network Gaming litigation is ramping up and as MegaMania litigation costs have
begun to subside. Year-to-date legal and professional fees amounted to
$1,451,000 for the first six months of fiscal 1999 compared to 1998's
$1,479,000. A comparable quarter to quarter decline has been realized from the
second quarter of fiscal 1998 of $1,288,000 to $672,000 for the current quarter.
It is expected that legal and professional fees during the third quarter of
fiscal 1999 will continue at the same rate experienced during the second
quarter, primarily due to the NGI trial that is scheduled to commence in June
1999, but there are no assurances that this will be the case.
As a result of the MegaMania litigation, the Company is evaluating alternative
investment strategies to insure that the elimination of one product line will
not subject the Company to financial turmoil in the future. Diversification to
protect the asset base of the Company is being explored to position the Company
for future growth and stability. To accomplish this goal corporate development
staff was hired during fiscal 1998 and in the first quarter of fiscal 1999.
Costs associated with this effort are currently funded from operations, but it
is expected that new product lines and/or expanded network opportunities will
begin to cover these development costs during the third or fourth quarters of
fiscal 1999.
The growth in the Company's interactive gaming network experienced during
fiscal 1998 was fueled by related party financings and the use of internally
generated funds. The Company is current on all federal tax liabilities with the
filing of this report. The Company is currently working to resolve deficiencies
in prior state tax filing requirements. It is anticipated that these state tax
deficiencies will be resolved during the third quarter of fiscal 1999. The
Company is diligently working to secure financing to cover its past due
liabilities, as well as sufficient working capital to continue its growth, but
there are no assurances that this will be the case.
-15-
<PAGE> 16
The Company reported an interactive game reserve deficit that exceeded
$1,000,000 for the quarter ended December 31, 1998. At March 31, 1999, this
deficit had been reduced to $255,000. Further improvements realized at the
beginning of the third quarter have brought the deficit into balance. This was
accomplished by modifying the prize payout structure in a manner that did not
have a negative influence on player participation in interactive gaming.
Efforts to improve the Company's cash position have been focussed on reducing
the deficit in the interactive game reserve as well as improving on the
timeliness in the collection of accounts receivable. Accounts receivable from
the halls totaled $1,890,000 at March 31, 1999 compared to $2,403,000 at
December 31, 1998 and $2,005,000 for September 30, 1998.
At the beginning of the first fiscal quarter ended December 31, 1998, the
Company exercised its purchase option to acquire 356 EPS that had been sold in
June 1997 and September 1997 to EP LLC. The combined repurchase (buy-back)
price was $1,349,000. It is expected that revenue derived from these EPS will
increase reported revenue and cash flow by approximately $90,000 per month. It
is also expected that during fiscal 1999 the Company will exercise its purchase
options in the related party equipment sales transactions made in March 1998 and
June 1998. It is expected that revenue derived from these EPS will increase
reported revenue and cash flow by approximately $180,000 per month.
In December 1998, the Company renewed its Credit Agreement with a bank, which
provided for a term loan of $561,000. Principal of $9,510 and interest are
payable monthly until October 31, 2000. In addition, the Credit Agreement
provides for a revolving line of credit of $1.0 million. As of March 31, 1999,
the Company had drawn $865,000 against this line of credit. The interest rate
is the Chase Manhattan Bank, N.A. prime rate plus 1/2%. 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 payment of accrued professional fees and 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 defending the MegaMania litigation primarily through the
sale of EPS to private investors, including related parties. The effective cost
of these sales 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.
CONTINGENCIES
For information regarding contingencies, see "PART II - Item 1. Legal
Proceedings."
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
-16-
<PAGE> 17
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.
FUTURE EXPECTATIONS AND FORWARD LOOKING STATEMENTS
This Quarterly Report and the information incorporated herein by reference
contains various "forward-looking statements" within the meaning of Federal and
state securities laws, including those identified or predicated by the words
"believes," "anticipates," "expects," " plans," or similar expressions. Such
statements are subject to a number of uncertainties that could cause the actual
results to differ materially from those projected. Such factors include, but
are not limited to, the uncertainties inherent to the outcome of any litigation
of the type described in this quarterly report under "PART II - Item 1. Legal
Proceedings," as well as those other factors as described under "Item 1.
Description of Business - Risk Factors," contained in the Company's Annual
Report on Form 10-KSB for the fiscal year ended September 30, 1998, which are
incorporated herein by this reference. Given these uncertainties, readers of
this Quarterly Report are cautioned not to place undue reliance upon such
statements.
-17-
<PAGE> 18
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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
January 21, 1999, the District Court denied a motion filed by the U.S. Attorney
that requested the District Court to alter or amend its judgment.
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 government has preserved its right to appeal in both cases. The Company
expects it will prevail on the merits if the government does appeal, but the
outcome cannot be predicted with certainty.
No assurances can be given that there will be no other challenges made to the
legality of some other aspects of the Company's 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 could
have a material adverse effect upon the Company's financial condition and
results of operation. In addition, if the type of EPS used to aid the play of
MegaMania is ultimately held to be a gambling device, all of the other
interactive Class II bingo games currently offered by the Company and other
vendors 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 any appeal of the MegaMania litigation or
any future litigation challenging other aspects of the Company's 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 or opinions 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
-18-
<PAGE> 19
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
self-regulate 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. The Company intends to vigorously defend
against the claims of NGI and to prosecute its own claim. Discovery has been
virtually completed and the matter is scheduled for trial in June 1999. 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 has been and through the trial will continue to 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. In January 1999, the two cases were consolidated in the Northern
District of Oklahoma. On March 22, 1999, the class action plaintiffs filed an
amended complaint that also named Clifton E. Lind, the Company's President and
Chief Operating Officer, as an additional defendant and included allegations
that the Company violated federal securities laws by making allegedly false and
misleading statements regarding transactions between the Company and Equipment
Purchasing LLC and Equipment Purchasing II LLC. On April 19, 1999, the Company
filed its Motion to Dismiss all of the claims of the plaintiffs. The Court has
yet to rule on the Company's Motion. The Company intends to vigorously defend
against these claims and expects to prevail on the merits, although no
assurances to that effect can be given. In any event, the cost of defending
against the claims could be substantial.
OTHER. The Company is a party to various other lawsuits and claims arising out
of the ordinary course of its business. No accrual for potential loss has been
made in the accompanying financial statements, as management does not believe
that the likelihood of a material loss is probable at this time.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this Quarterly Report on Form 10-Q
are listed in the attached Index to Exhibits.
(b) No reports on Form 8-K were filed by the Company during the
quarter ended March 31, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated May 11, 1999 Multimedia Games, Inc.
By: /s/ George J. Akmon
George J. Akmon, Vice President and
Chief Financial Officer
-19-
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<S> <C>
15 Letter regarding Unaudited Interim Financial Information
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 15
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Multimedia Games, Inc.
Registration on Forms S-3 and S-8
We are aware that our report dated May 6, 1999 on our review of the interim
financial information of Multimedia Games, Inc. for the periods ended March 31,
1999 and 1998, and included in this Form 10-Q is incorporated by reference in
the Company's registration statements on Forms S-3 (File No. 333-16729,
333-28367 and 333-36319) and Form S-8 (File No. 333-23123). Pursuant to Rule
436 (C) under the Securities Act of 1933, this report should not be considered
a part of the registration statements prepared or certified by us within the
meaning of Sections 7 and 11 of that Act.
PricewaterhouseCoopers LLP
Tulsa, Oklahoma
May 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999 AND THE CONSOLIDATED STATEMENTS
OF OPERATIONS AND CASH FLOWS FOR THE QUARTER ENDED MARCH 31, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 872,000
<SECURITIES> 0
<RECEIVABLES> 2,662,000
<ALLOWANCES> 260,000
<INVENTORY> 3,154,000
<CURRENT-ASSETS> 7,269,000
<PP&E> 17,897,000
<DEPRECIATION> 6,972,000
<TOTAL-ASSETS> 20,413,000
<CURRENT-LIABILITIES> 4,972,000
<BONDS> 0
0
1,000
<COMMON> 55,000
<OTHER-SE> 12,937,000
<TOTAL-LIABILITY-AND-EQUITY> 20,413,000
<SALES> 370,000
<TOTAL-REVENUES> 43,358,000
<CGS> 190,000
<TOTAL-COSTS> 43,064,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72,000
<INCOME-PRETAX> 363,000
<INCOME-TAX> 145,000
<INCOME-CONTINUING> 218,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 218,000
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
