<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: DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-28318
Multimedia Games, Inc.
----------------------
(Exact Name of Registrant as Specified in its Charter)
Texas 74-2611034
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(State or Other Jurisdiction ) (IRS Employer
of Incorporation Identification Number)
8900 Shoal Creek Blvd., Suite 300
Austin, Texas 78757
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(Address of Principal Executive Offices)
(512) 371-7100
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(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 December 31, 1999 there were 5,653,149 shares of the Company's Common
Stock, par value $.01, outstanding.
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FORM 10-Q
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(December 31, 1999 and September 30, 1999).....................................3
Condensed Consolidated Statements of Income
(Three months ended December 31, 1999 and 1998)................................4
Condensed Consolidated Statements of Cash Flows
(Three months ended December 31, 1999 and 1998)................................5
Notes to Unaudited Condensed Consolidated Financial Statements.................6
Item 2. Management's Discussion and Analysis.................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................15
Item 2. Changes in Securities and Use of Proceeds............................16
Item 6. Exhibits.............................................................16
</TABLE>
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PART I. FINANCIAL INFORMATION
MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
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ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,356,000 $ 1,295,000
Accounts receivable:
Trade 2,011,000 1,897,000
Game reserve 404,000 721,000
Other 291,000 291,000
Allowance for doubtful accounts (507,000) (527,000)
Inventory 3,145,000 3,121,000
Prepaid expenses 837,000 559,000
Notes receivable 400,000 490,000
Deferred tax asset 2,163,000 1,500,000
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TOTAL CURRENT ASSETS 10,100,000 9,347,000
Restricted cash and long-term investments 1,994,000 2,075,000
Inventory, non-current 1,300,000 1,300,000
Property and equipment, net 13,970,000 15,421,000
Investment in Gamebay 287,000 --
Other assets 283,000 320,000
Goodwill, net 411,000 417,000
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TOTAL ASSETS $ 28,345,000 $ 28,880,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 8,145,000 $ 8,137,000
Current portion of long-term debt 1,368,000 1,586,000
Accounts payable and accrued expenses 2,892,000 4,161,000
Prize fulfillment fees payable 177,000 172,000
Deferred revenue 400,000 --
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TOTAL CURRENT LIABILITIES 12,982,000 14,056,000
Long-term debt, less current portion 931,000 1,885,000
Other long-term liabilities 1,814,000 1,816,000
Deferred tax liability 1,525,000 621,000
Stockholders' equity:
Preferred stock, Series A, $.01 par value, 2,000,000 shares
authorized, 90,789 shares issued and outstanding 1,000 1,000
Common stock, $.01 par value, 25,000,000 shares authorized
5,653,149 and 5,528,149 shares issued, and
5,619,150 and 5,494,150 shares outstanding; 57,000 55,000
Additional paid-in capital 13,485,000 13,173,000
Stockholder notes receivable (779,000) (758,000)
Treasury stock, 33,999 shares at cost (87,000) (87,000)
Retained deficit (1,584,000) (1,882,000)
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Total stockholders' equity 11,093,000 10,502,000
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,345,000 $ 28,880,000
============== ==============
</TABLE>
See notes to unaudited consolidated financial statements.
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MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
REVENUES:
Gaming revenue $ 18,620,000 $ 19,409,000
Electronic player station sales -- 301,000
Electronic player station lease revenue 793,000 653,000
Other 109,000 389,000
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TOTAL REVENUES 19,522,000 20,752,000
OPERATING COSTS AND EXPENSES:
Bingo prizes and related costs 1,837,000 2,317,000
Allotments to hall operators 12,036,000 13,016,000
Cost of electronic player stations sold -- 151,000
Salaries and wages 1,193,000 904,000
Selling, general and administrative expenses 2,181,000 3,018,000
NGI judgment and related fees 1,000 166,000
Amortization and depreciation 2,067,000 1,161,000
-------------- --------------
TOTAL OPERATING COSTS AND EXPENSES 19,315,000 20,733,000
OPERATING INCOME 207,000 19,000
OTHER INCOME AND EXPENSES:
Interest income 37,000 13,000
Software licensing rights 600,000 --
Interest expense (217,000) (30,000)
Equity in net loss of affiliate (63,000) --
-------------- --------------
Income before income taxes 564,000 2,000
Income tax expense 241,000 1,000
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NET INCOME $ 323,000 $ 1,000
============== ==============
Basic earnings per share $ .05 $ .00
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Diluted earnings per share $ .04 $ .00
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</TABLE>
See notes to unaudited consolidated financial statements.
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MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 323,000 $ 1,000
Adjustments to reconcile net income to cash
provided by operating activities:
Amortization and depreciation 2,067,000 1,161,000
Deferred taxes 241,000 --
Accounts receivable 672,000 (746,000)
Inventory (24,000) (260,000)
Prepaid expenses (277,000) 70,000
Other assets 163,000 (3,000)
Accounts payable and accrued expenses (1,243,000) 674,000
Equity in undistributed net loss of unconsolidated affiliate (63,000) --
Note payment on NGI lawsuit settlement (800,000) --
Prize fulfillment fees payable 5,000 (11,000)
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NET CASH PROVIDED BY OPERATING ACTIVITIES: 1,064,000 886,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (987,000) (2,848,000)
Increase in restricted cash and long-term investments
and other long-term liabilities 81,000 --
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NET CASH USED FOR INVESTING ACTIVITIES (906,000) (2,848,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock
including collection of shareholder notes (21,000) 88,000
Proceeds from debt 9,000 795,000
Principal payments on debt (60,000) (80,000)
Payment of preferred stock dividends (25,000) (25,000)
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NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (97,000) 778,000
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Net change in cash and cash equivalents 61,000 (1,184,000)
Cash and cash equivalents, beginning of period 1,295,000 1,881,000
------------ ------------
Cash and cash equivalents, end of period $ 1,356,000 $ 697,000
============ ============
SUPPLEMENTAL CASH FLOW DATA:
Interest paid $ 142,000 $ 31,000
NON-CASH TRANSACTIONS:
Acquisition of fixed assets with:
Notes receivable $ -- $ 992,000
Debt -- 211,000
Warrants -- 112,000
</TABLE>
See notes to unaudited consolidated financial statements.
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MULTIMEDIA GAMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements should be read in conjunction with the
Company's consolidated financial statements and footnotes contained within the
Company's Annual Report on Form 10-K for the year ended September 30, 1999.
The financial statements included herein as of December 31, 1999 and for each of
the three months ended December 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. They do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The information
presented reflects all adjustments consisting solely of normal recurring
adjustments which are, in the opinion of management, considered necessary to
present fairly the financial position, results of operations, and cash flows for
the periods. Operating results for the three months ended December 31, 1999, are
not necessarily indicative of the results which will be realized for the year
ending September 30, 2000.
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.
FOR THE THREE MONTHS ENDED
DECEMBER 31, 1999
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
--------- --------- ---------
<S> <C> <C> <C>
Net Income, as reported $ 323,000
Less: preferred stock dividends (25,000) -- --
--------- --------- ---------
Basic EPS:
Income available to common shareholders 298,000 5,505,020 $ .05
Effect of Dilutive Securities:
Options -- 552,288 --
Warrants -- 2,293,393 --
Convertible preferred stock 25,000 435,195 --
--------- --------- ---------
- ----------------------
Diluted EPS:
Income available to common shareholders
plus assumed conversions $ 323,000 8,785,896 $ .04
========= ========= =========
</TABLE>
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FOR THE THREE MONTHS ENDED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
--------- --------- ---------
<S> <C> <C> <C>
Net Income as reported $ 1,000
Less: preferred stock dividends (25,000) -- --
--------- --------- ---------
Basic EPS:
Loss to common shareholders (24,000) 5,455,239 $ .00
Effect of Dilutive Securities:
Options, Warrants and
Convertible preferred stock -- -- --
--------- --------- ---------
- ----------------------------
Diluted EPS:
Loss to common shareholders
plus assumed conversions $ (24,000) 5,455,239 $ .00
========= ========= =========
</TABLE>
At December 31, 1998, options to purchase 1,312,450 shares of common stock at
prices ranging from $2.00 to $5.688, warrants to purchase 2,193,393 shares of
common stock at prices ranging from $1.50 to $9.44, and 90,789 shares of
preferred stock convertible into 435,195 shares of common stock were outstanding
but not included in the computation of diluted EPS because the assumed exercise
of the securities would have an anti-dilutive effect on EPS due to the loss to
common shareholders for the period.
2. COMMITMENTS AND CONTINGENCIES
MEGAMANIA LITIGATION. The Company has designed and operated its MegaMania bingo
game and related equipment so as to meet the requirements of Class II gaming
under the Indian Gaming Regulatory Act of 1988, as amended ("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. The Class III games and equipment sold and operated
by the Company in the state of Washington is pursuant to an agreement between
that state and local Indian tribes.
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 electronic player stations ("EPS") used to play MegaMania were technological
aids to the play of bingo as permitted by IGRA and were not gambling devices.
On May 14, 1998, the Assistant U.S. Attorney for the Northern District of
California also filed a civil forfeiture in Federal District Court that
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 appealed both decisions to the applicable Federal Circuit
Court of Appeals. As of February 1, 2000, no action has been taken by either
appellate court on either appeal. The Company is not able to predict what the
outcome of either appeal will be.
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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 affected, 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 CHALLENGES TO INTERACTIVE GAMES; CHANGES IN LAW AND REGULATIONS. 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. While the Company attempts to design
and operate its Class II games in accordance with IGRA and the regulations and
opinions of the National Indian Gaming Commission (NIGC), it is not always
successful in doing so. For example, in February, 1999, the Company introduced
EverGreen as a Class II game. In November 1999, the NIGC issued an opinion that
EverGreen was not Class II gaming. As a result, the Company modified those
aspects of EverGreen that the NIGC found objectionable. 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
self-regulate Class II gaming, or to change the definition of Class II gaming in
a manner adverse to the Company's business. In addition, the NIGC has issued a
set of minimum internal control standards (MICS) for Indian bingo hall
operations, and will require hall compliance by February, 2000. Compliance with
these standards could have a negative impact on the Company's interactive games.
The Company has complied with the software database and data retention
requirements of MICS in January 2000. Beginning in February 2000, the NIGC has
granted a six-month exception to its requirement for lockable, removable bill
acceptors in each EPS. It has not yet been determined what impact there will be
on the tribes and the Company if the requirement goes into effect.
OTHER LITIGATION
NETWORK GAMING LITIGATION SETTLEMENT. In December 1999, the Company entered into
an agreement with Network Gaming International Corporation ("NGI") that settled
a $3.1 million verdict against the Company for breach of contract. The verdict
was awarded in November 1999 by a jury in the Federal District Court for the
Northern District of Oklahoma. Pursuant to the settlement, the Company paid
$800,000 to NGI in December 1999, and has agreed to pay NGI an additional $2.28
million in cash over three years. In addition, the Company delivered 125,000
shares of Common Stock to NGI. All payments to NGI under the agreement are
secured by a lien on the Company's assets that is junior and subordinate to the
lien of the Company's senior bank lender. If the Company defaults on its payment
obligation to NGI, NGI has reserved the right to pursue collection of its total
judgment, plus interest and attorney's fees, aggregating $3.5 million, less any
amounts previously paid by the Company.
While the Company believes it will be able to meet its obligation to NGI and its
other creditors with cash from operations, there is no assurance that the
Company will be able to do so. In any event, the cash required to pay NGI and to
meet the Company's other obligations will likely have an adverse effect upon the
Company's plans for future growth.
In December 1999, the Company's credit facility with Coast Business Credit was
amended in connection with obtaining Coast's consent to the terms of the
settlement of the NGI litigation. The amendment waives the tangible net worth
covenant violation that resulted from the settlement, increases the early
termination fee payable by the Company in the event the Company prepays the
credit facility prior to its maturity in July 2002, and required the Company to
pay a $100,000 fee to Coast in consideration for the amendment.
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
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<PAGE> 9
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.
LICENSE AGREEMENT WITH WMS GAMING, INC. In December 1999, the Company entered
into a license agreement with WMS Gaming, Inc. (WMS) to use the trademarks,
logos and other audio-visual aids and graphics used by WMS in its highly
successful Class III gaming devices. The license is limited to Indian gaming in
the State of Washington, and commits the Company to purchase a minimum of 1,000
units a year for two years at $2,500 per unit, subject to the right of the
Company to terminate the agreement after one year by paying $500 per each
remaining unit under the commitment.
3. RELATED PARTY TRANSACTIONS
On October 1, 1998, the Company exercised its option to acquire 356 electronic
player stations and related equipment (EPS) for $1.45 million 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 $2.44 million. 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
September 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 $112,000, 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.
On July 31, 1999 the Company exercised its option to acquire 663 EPS for $2.37
million from Equipment Purchasing II LLC ("EP LLC II), a limited liability
company controlled by an affiliate of Gordon T. Graves, the Chairman and Chief
Executive Officer of the Company, and of which an affiliate of Mr. Graves and
Clifton E. Lind, the Company's President and Chief Operating Officer, each owned
6.36%. The Company had originally sold the EPS to EP LLC II in March and June
1998 at an aggregate sales price of approximately $3.75 million. Pursuant to
agreements entered into at the time of the March and June 1998 sale
transactions, the Company had an option to repurchase the EPS from EP LLC II at
fair market value if, after giving effect to the repayment and the income
previously received by EP LLC II, EP LLC II would receive at least a 20% return
on its net investment. While the purchase price paid by the Company was not the
result of an arms-length negotiation, the Company believes that such purchase
price is comparable to what the Company would have paid to an unaffiliated third
party.
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. The Company gave
notice of termination of the agreement on September 30, 1999, but expects it
will continue to use the services of Mr. Montgomery on a month to month basis
after the agreement expires in March 2000. Mr. Montgomery is compensated at the
rate of $126,000 annually, and received a bonus of $57,500 in September 1998,
and 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.
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On September 1, 1999, the Company engaged Jefferies & Company, Inc.
("Jefferies"), an investment banking firm located in Santa Monica, California,
to act as the exclusive financial advisor to the Company in connection with
financing and acquisition related activities. Mr. Ali Alizadeh, a Director of
the Company, is an officer and employee of Jefferies. Pursuant to the agreement,
the Company agreed to pay Jefferies a fee of $120,000 at the rate of $10,000 per
month. In addition, the Company agreed to pay Jefferies a "success fee" for any
financing or acquisition transaction consummated by the Company during the term
of the agreement, which may be terminated by either party upon notice.
Gregory N. Stern, a former Director of the Company who resigned in June 1999,
was involved with establishing Gamebay.com, Inc., a subsidiary of the Company,
while he was a Director of the Company. In connection with his resignation, the
Company agreed to pay Mr. Stern two percent (2%) of whatever interest the
Company retained or received in Gamebay.com, including two percent (2%) of the
490,000 shares of common stock of Gamebay.com held by the Company and two
percent (2%) of any royalties received by the Company from Gamebay.com pursuant
to a license to use the Company's intellectual property.
4. GAMEBAY.COM, INC.
In December 1999, the Company's wholly-owned subsidiary, Gamebay.com, issued 70%
of its equity securities to a group of investors for $5.5 million. In connection
with that transaction, the Company granted Gamebay a license to use the
Company's intellectual property for Internet non-gaming purposes. In
consideration of the license grant, the Company received a one time fee of $1.0
million. $600,000 of this amount was received in cash, and the remaining
$400,000 is payable at the end of one year. The Company is also entitled to a
royalty of 5% of Gamebay's gross revenue.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
GENERAL
The Company designs and develops interactive high-speed Class II bingo games and
Class III video lottery games and related EPS and equipment, 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-path 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 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 or not to continue a card in play, to daub or "cover" a number on a card
and to declare a winning bingo. 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.
Most of 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. During fiscal 1999, the Company also designed, developed and marketed
Class III games and equipment in the state of Washington. As of December 31,
1999, there were 4,374 EPS in operation at 76 independently owned Indian gaming
facilities located in eight different states, of which 556 EPS were Class III,
located in four bingo halls in the state of Washington. This compares to 3,989
Class II EPS that were in operation at December 31, 1998 at 64 bingo halls
located in 11 different states. Also as of December 31, 1999, the Company's live
TV bingo game show, MegaBingo, was being delivered to 39 independently owned
Indian bingo halls located in 11 states and the District of Columbia, a decrease
of 8 bingo halls compared to December 31, 1998.
During fiscal 1999, the Company formed Gamebay.com, Inc. as a wholly-owned
subsidiary, to pursue the development of non-gambling activities on the Internet
using interactive bingo games as a platform to derive advertising and product
sale revenues. In December 1999, Gamebay.com entered into a licensing agreement
with MGAM to use all of the Company's intellectual property for non-gambling
sweepstakes internet applications, for a one-time fee of $1.0 million, of which
$400,000 is payable at the end of one year. The Company will also receive a
perpetual royalty of five percent of Gamebay's gross revenue. In connection with
the license grant, Gamebay issued approximately 70% of its shares of common
stock (including shares of preferred stock convertible into common stock) in a
private placement to a group of investors for $5.5 million.
-10-
<PAGE> 11
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
NET INCOME was $323,000 for the first quarter of fiscal 2000, compared to $1,000
for the first quarter of fiscal 1999. Company operations resulted in income
before income taxes of $564,000 for the three months ended December 31, 1999, an
increase of $562,000 from 1998's $2,000. The Company's earnings before interest,
taxes, depreciation and amortization (EBITDA) amounted to $2,874,000 for the
first fiscal quarter, up 144% from 1999's $1,180,000. During the first quarter
of fiscal 1999, the Company recorded substantial legal and professional fees
related to the MegaMania and Network Gaming litigation. Legal and professional
fees (including fees related to NGI) for the first quarter of fiscal 2000
decreased $539,000, or 69%, over the first quarter of fiscal 1999. At December
31, 1999, there were 4,374 (556 Class III) EPS in operation, as compared to
4,420 (520 Class III) at September 30, 1999, and 3,989 at December 31, 1998. The
amount of depreciation and amortization recorded for the first quarter of fiscal
2000 increased $906,000, or 78% over the first quarter of fiscal 1999.
REVENUES totaled $19,522,000 for the first quarter of fiscal 2000, compared to
$20,752,000 for the first quarter of fiscal 1999, a decrease of $1,230,000, or
6%. The Company's interactive games generated revenues of $16,550,000 for the
three months ended December 31, 1999, including $287,000 from Class III gaming,
as compared to $16,840,000 in the first quarter of fiscal 1998, a decrease of
1%. For the three months ended December 31, 1999, TV bingo game show revenues of
$2,070,000 declined $500,000, or 19% from 1998's $2,569,000. This reflected the
continuation of the trend experienced during fiscal 1999 of player headcounts
declining at most bingo facilities across the country. In addition, the
reduction in the number of halls participating in MegaBingo during fiscal 1999
also affected first quarter performance.
No sales of EPS were recorded in the first quarter of fiscal 2000, in comparison
to $301,000 for 52 EPS units sold in the first quarter of fiscal 1999.
Lease revenues from EPS leased to Native American Tribes increased from $653,000
in the first quarter of fiscal 1999 to $793,000 in 2000. This increase was due
to Class III lease revenue of $364,000 in the three months ended December 31,
1999.
Other revenues decreased to $109,000 in the first quarter of fiscal 2000. Other
revenues consisted of Class III back-office fees totaling $94,000, and equipment
service revenue amounting to $15,000 for the three months ended December 31,
1999. The decrease is due to the discontinuation of MegaRacing in February 1999.
OPERATING COSTS AND EXPENSES totaled $19,315,000 for the first quarter of fiscal
2000, compared to $20,733,000 for the first quarter of fiscal 1999, down
$1,418,000 or 6%, primarily as the result of the following:
BINGO PRIZES AND RELATED COSTS amounted to $1,837,000 for the three months ended
December 31, 1999, compared to $2,317,000 for the three months ended December
31, 1998, a decrease of $480,000, or 20%. This decrease is less than
proportional to the decline in TV Bingo game show revenue, due to the fixed
level of costs required to produce the TV Bingo game shows. Interactive gaming
revenues, on the other hand, are recorded net of prize costs; therefore, those
prizes are not reflected in the above amount.
ALLOTMENTS TO HALL OPERATORS consist of the bingo halls' share of the
interactive gaming revenues after prizes and allocable prize costs. Allotments
to hall operators decreased $980,000, or 8%, to $12,036,000 for the three months
ended December 31, 1999, compared to $13,016,000 for the three months ended
December 31, 1998. 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 $151,000 for the three months
ended December 31, 1999, because no EPS units were sold during the current
period.
SALARIES AND WAGES amounted to $1,193,000 for the three months ended December
31, 1999, compared to $904,000 for the three months ended December 31, 1998, an
increase of $289,000, or 32%. Most of this increase relates to personnel hired
to address the Company's interactive gaming network needs, such as installation,
training and maintenance, the operation of the interactive game ball draw
equipment, and the pursuit of new business, including the Class III video
lottery business.
-11-
<PAGE> 12
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased $836,000 or 28% to
$2,181,000 for the three months ended December 31, 1999, compared to $3,018,000
for the three months ended December 31, 1998. Approximately 45%, or $373,000 of
the decrease reflected the reduction in legal and professional fees and expenses
related to the MegaMania litigation, regulatory and general legal matters. The
aggregate of legal and professional fees amounted to $240,000 for the first
quarter of fiscal 2000, compared to $612,000 in the first quarter of fiscal
1999, down 61%. Contributing to the decrease in the current quarter's overall
cost structure versus the comparable quarter of the prior fiscal year was slower
growth in the interactive gaming network. This factor resulted in the following
changes: consulting and contract labor - down $129,000, or 37%; rent for
facilities and equipment - up $27,000, or 10%; travel - down $131,000, or 43%;
interactive gaming telecommunications - down $77,000, or 15%; repairs,
maintenance and supplies - up $6,000, or 4%; employee benefits - up $46,000, or
21%; advertising and promotions - down $27,000, or 18%; and miscellaneous
expenses - up $133,000, or 86%.
NGI JUDGMENT AND RELATED EXPENSES decreased from $166,000 for the three months
ended December 31, 1998 to $1,000 in the first quarter of fiscal 2000, or 99%.
AMORTIZATION AND DEPRECIATION increased $906,000, or 78%, to $2,067,000 for the
three months ended December 31, 1999, compared to $1,161,000 for the same period
in 1998. The increase results primarily from depreciation on a greater number of
EPS placed in service during fiscal 1999. The growth is also the result of a
$881,000 increase in depreciation on the greater number of EPS under lease in
2000, the amortization of EPS, software programming costs capitalized during
1998 and 1999 (approximately $33,000 of the increase), and the rapid write-off
(approximately $150,000 of the increase) of leased Class III EPS because of
these units' unusually short pay-back time. The Company made $14 million in
capital additions during fiscal 1999.
SOFTWARE LICENSING RIGHTS totaled $600,000 for the current quarter. The Company
licensed the right to use its interactive gaming software for non-gambling
sweepstakes purposes to Gamebay.com. In consideration of the license grant, the
Company received a one-time fee of $1.0 million. $600,000 of this amount was
received in cash, and the remaining $400,000 is payable at the end of one year.
INTEREST INCOME amounted to $37,000 for the three months ended December 31,
1999, compared to $13,000 for the three months ended December 31, 1998, a
increase of $24,000, or 184%. This was a result of interest accruing on notes
receivable from stockholders.
INTEREST EXPENSE amounted to $217,000 for the three months ended December 31,
1999, compared to $30,000 for the three months ended December 31, 1998, an
increase of $187,000, or 623%. This increase resulted from the use of a working
capital line of credit put in place during the second quarter of fiscal 1999.
EQUITY IN NET LOSS OF AFFILIATE amounted to $63,000 for the first quarter of
fiscal 2000. As a result of Gamebay's issuance of 70% of its shares of common
stock, the Company is recognizing its pro rata share of Gamebay's estimated
first quarter net loss as a minority interest owner.
INCOME TAX amounted to $241,000 for the three months ended December 31, 1999,
compared to $1,00 for the three months ended December 31, 1998, an increase of
approximately $240,000. This increase is the result of higher pretax income with
an effective tax rate of 42%.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of fiscal 2000, $1.1 million of cash was provided by
operations, versus $886,000 provided by operations in the comparable quarter of
fiscal 1999. At December 31, 1999, the Company had unrestricted cash and cash
equivalents of $1.36 million, a $61,000 increase from September 30, 1999.
Negative working capital at the end of the first quarter amounted to $2.9
million, compared to a $4.7 million at September 30, 1999. Working capital was
primarily used for the acquisition of additional fixed assets, and consisted
primarily of software development for interactive gaming, and hardware for
interactive gaming player stations and game operation. The Company repaid
$800,000 to NGI in December 1999, as required under the settlement agreement.
The Company invested $987,000 during the current quarter, almost entirely in
additions to interactive gaming assets. These software development and
manufacturing costs are expected to continue at a fixed level to meet customer
demand for internally financed lease and rental products, until the Company
identifies a third-party financing source.
-12-
<PAGE> 13
On July 29, 1999 the Company entered into a revolving credit facility with Coast
Business Credit, a Division of Southern Pacific Bank located in Los Angeles,
California. Pursuant to the credit facility, the Company may borrow up to $10
million, or such lesser amount as is permitted under various borrowing base
formulas. As of December 31, 1999, under the most restrictive of the borrowing
base formulas, there was $8.64 million of borrowings available to the Company,
of which $8.15 million had been borrowed and was outstanding. The credit
facility expires in July 2002, and is secured by all assets of the Company and
the personal guarantee of $1.5 million from the Company's Chairman and CEO,
Gordon T. Graves. The initial application of the funds available under this
facility were used to repay $1.9 million of debt owed to two other banks;
approximately $2.4 million was used for the repurchase of EPS owned by the EP
LLC II partnership, and approximately $4 million was used to relieve outstanding
accounts payable, which for the most part included components for the
manufacture of Class III Video Lottery devices and past due legal and
professional fees. Borrowings under the facility bear interest, payable monthly,
at a rate equal to the greater of 9% or 1.75% above the prime rate from time to
time in effect. All of the Company's revenues are deposited into a "blocked"
account controlled by the Bank, and disbursements from the "blocked" account may
be made only with the approval of the Bank. In December 1999, the credit
facility was amended in connection with obtaining Coast's consent to the terms
of the NGI litigation settlement. The amendment waived any defaults that may
have resulted from the settlement, increased the early termination fee payable
by the Company in the event the Company prepays the credit facility prior to its
July 2002 maturity, and required the Company to pay Coast a $100,000 fee in
consideration for the amendment.
The Company believes that its current operations, including the payment of its
expected legal fees and expenses, can be sustained with cash from operations.
The Company has adequate inventory on hand to support the assembly and
installation of approximately 700 additional EPS to further expand the Company's
interactive gaming operations, requiring little cash from future operations. In
addition, the Company has approximately 300 used EPS available for use in its
rental pool. To expand interactive gaming operations beyond this 1,000 unit
level will require funding from external sources. Due to the terms of the credit
facility with Coast Business Credit, and the settlement agreement with NGI, both
of which are secured by all of the Company's assets, it is not likely that the
Company can obtain funding from external sources in the foreseeable future. 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.
During the quarter ended December 31, 1999, the Company incurred legal and
professional fees and expenses of $240,000, a decrease of $539,000 from the
quarter ended December 31, 1998. The decrease is the result of the resolution of
the NGI matter and lower expenses for the MegaMania litigation. While legal fees
and expenses related to MegaMania and other litigation involving the Company
will continue to be significant in fiscal 2000, such fees and expenses are not
expected to approach the levels experienced throughout fiscal 1998 and 1999.
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 expects it will continue to incur
increased legal and other similar costs associated with regulatory compliance
requirements, and the uncertainties present in the operating environment in
which the Company conducts its business.
IMPACT OF YEAR 2000 PROBLEM ("Y2K")
The "Year 2000 Problem" results from 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.
-13-
<PAGE> 14
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. The Company's accounting software has been certified
Y2K compliant by the vendor. The Company's internal financial systems are in
full Y2K compliance.
INTERACTIVE GAME SOFTWARE. The Company's interactive games have been configured
using the Microsoft four digit system, which is Y2K compliant. All current and
future games are expected to be Y2K compliant. The Company has experienced no
significant Y2K-related problems subsequent to the quarter ended December
31, 1999.
TV BINGO GAME SHOW SOFTWARE. The Company has identified and corrected Y2K
deficiencies relating to its TV bingo game show system. The Company experienced
no significant Y2K-related problems subsequent to the quarter ended December
31, 1999.
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.
Business - Risk Factors," contained in the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1999, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except for the effects of short-term interest rates, under the Company's line of
credit, which the Company does not consider material, the Company is not subject
to any other interest rate, exchange rate, or commodity price risks.
-14-
<PAGE> 15
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MEGAMANIA LITIGATION. The Company has designed and operated its MegaMania bingo
game 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. The Class III games and
equipment sold and operated by the Company in the state of Washington is
pursuant to an agreement between that state and local Indian tribes.
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 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 appealed both decisions to the applicable Federal Circuit
Court of Appeals. As of February 1, 2000, no action has been taken by either
appellate court on either appeal. The Company is not able to predict what the
outcome of either appeal will be.
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 affected, 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 CHALLENGES TO INTERACTIVE GAMES; CHANGES IN LAW AND REGULATIONS. 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. While the Company attempts to design
and operate its Class II games in accordance with IGRA and the regulations and
opinions of the NIGC, it is not always successful in doing so. For example, in
February, 1999, the Company introduced Evergreen as a Class II game. In November
1999, the NIGC issued an opinion that Evergreen was not Class II gaming. As a
result, the Company is modifying those aspects of Evergreen that the NIGC found
objectionable.
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 as described above,
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
-15-
<PAGE> 16
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 self-regulate Class II gaming or to change the definition of Class II gaming
in a manner adverse to the Company's business. In addition, the NIGC has issued
a set of minimum internal control standards for Indian bingo hall operations,
and will require hall compliance by February, 2000. Compliance with these
standards could have a negative impact on the Company's interactive games.
OTHER LITIGATION
NETWORK GAMING LITIGATION SETTLEMENT. In December 1999, the Company entered into
an agreement with Network Gaming International Corporation ("NGI") that settled
a $3.1 million verdict against the Company for breach of contract that had been
awarded in November 1999 by a jury in the Federal District Court for the
Northern District of Oklahoma. Pursuant to the NGI settlement, the Company
accrued $800,000 as of September 30,1999, which amount was paid to NGI in
December 1999. The Company has agreed to pay NGI an additional $2.28 million in
cash over three years. In addition, the Company delivered 125,000 shares of
Common Stock to NGI. All payments to NGI under the agreement are secured by a
lien on the Company's assets that is junior and subordinate to the lien of the
Company's senior bank lender. If the Company defaults on its payment obligation
to NGI, NGI has reserved the right to pursue collection of its total judgment,
plus interest and attorney's fees, aggregating $3.5 million, less any amounts
previously paid by the Company.
While the Company believes it will be able to meet its obligation to NGI and its
other creditors with cash from operations, there is no assurance that the
Company will be able to do so. In any event, the cash required to pay NGI and to
meet the Company's other obligations will likely have an adverse effect upon the
Company's plans for future growth.
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the settlement of the NGI litigation discussed above, the
Company issued to NGI and its attorneys an aggregate of 125,000 shares of common
stock in a transaction exempt from registration under the Securities Act of
1933, as amended, pursuant to Section 4(2) thereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibit filed as part of this Quarterly Report on Form 10-Q is listed
in the attached Index to Exhibits.
(b) The following reports on Form 8-K were filed by the Company during the
quarter ended December 31, 1999:
1. On October 4, 1999, the Company filed a Report on Form 8-K/A that amended
a Report on Form 8-K filed on September 22, 1999, to include as an exhibit
a letter from Arthur Andersen LLP confirming the statements made regarding
it in the September 22, 1999 Form 8-K.
2. On October 8, 1999, the Company filed a Report on Form 8-K announcing the
engagement of BDO Seidman, LLP as the Company's independent certified
public accountants for the fiscal year ended September 30, 1999.
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<PAGE> 17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated February 13, 1999 Multimedia Games, Inc.
By: /s/ Frank W. Rehanek, Jr.
--------------------------------------
Frank W. Rehanek, Jr.
Chief Financial Officer
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<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENTS
OF OPERATIONS AND CASH FLOWS FOR THE QUARTER ENDED DECEMBER 31, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,356,000
<SECURITIES> 0
<RECEIVABLES> 3,943,000
<ALLOWANCES> 507,000
<INVENTORY> 3,145,000
<CURRENT-ASSETS> 10,100,000
<PP&E> 24,732,000
<DEPRECIATION> 10,762,000
<TOTAL-ASSETS> 28,345,000
<CURRENT-LIABILITIES> 12,982,000
<BONDS> 0
0
1,000
<COMMON> 57,000
<OTHER-SE> 11,035,000
<TOTAL-LIABILITY-AND-EQUITY> 28,345,000
<SALES> 0
<TOTAL-REVENUES> 19,522,000
<CGS> 0
<TOTAL-COSTS> 19,315,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 217,000
<INCOME-PRETAX> 564,000
<INCOME-TAX> 241,000
<INCOME-CONTINUING> 323,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 323,000
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.04
</TABLE>
