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EXHIBIT 99.1
The following comments, including any statements predicated upon or preceded by
the words "potential," "believe," "expect," and "should," are considered
"forward-looking statements" within the meaning of Federal and state securities
laws. Such statements are subject to a number of uncertainties that could cause
the actual results to differ materially from those expected, including, but not
limited to, those described under "Item 1. Description of Business-Risk
Factors," contained in the Company's Annual Report on form 10-K for the fiscal
year ended September 30, 2000, which are incorporated herein by this reference.
Last month we released our year-end numbers for fiscal year 2000. We beat our
projections by better than 15% and made nearly $14 million in EBITDA. While I
think we can possibly double that this fiscal year, our President, Clifton Lind,
and our staff believe my thoughts are overly optimistic. It is their feeling
that a 30 to 40% growth rate is more reasonable. And, they are probably right.
But as I look at our business model and the developing marketplace, I see some
extremely exciting opportunities for Multimedia Games (MGAM).
Internet gaming, for example, is one such avenue for us to explore which could
provide us with new ways to prosper. I would like to talk about the Internet a
little bit today. But first, for the benefit of those unfamiliar with the
Company, let me talk about our core business.
Multimedia Games is a technology supplier to the gaming industry. In short, we
run Betnet, a multi-channel, interactive communications network that links
gambling halls. We develop and acquire interactive games to run on that network,
and manufacture player stations that allow people at gambling operations to play
those games. Equally important, we write personal computer software that allows
people to see the games being played from anywhere in the world via the
information highway - in our case, Betnet. We receive recurring revenue for the
games delivered over Betnet.
Our first quarter for FY 2001 just ended on December 31st. Typically, given the
seasonality of our business, the first quarter is our weakest. In the first
quarter of last year, we made 5 cents a share, and in the second quarter , we
made about 8 cents per share. I think we will see some improvement in financial
performance in the first and second quarters of this year if we can stay on
schedule in filling the backlog of orders for our new MegaNanza(TM) bingo game.
But it is in the third and fourth quarters that I believe we will start to see
some dramatic improvements over last year.
Our customers are mostly Native American Owned gaming facilities. Next to the
gaming player, they are the most valuable of all gaming customers for two
reasons: First, they are regulated by small, dedicated, and efficient
governments; and second, they are culturally inclined to adapt to rapid change
more easily than people from other societies.
At Multimedia, we have almost 100 Native American tribal customers. With the
Indian Gaming Regulatory Act (IGRA) of 1988, Indian gaming was formally
recognized by the U.S. Congress as a vehicle for achieving economic development
and self-determination on reservations.
Federal law divides Indian gaming into three distinct classes. Class I games are
social games played solely for prizes of minimal value, or involve traditional
tribal ceremonies. Class II gaming activities consist of bingo played for
monetary prizes, pull-tabs, lotto, and instant bingo, as well as similar
non-banked card games. In order to engage in Class III gaming, tribes are
required to negotiate agreements with their respective states. Class III gaming
activities include all forms of games that are not Class I or II, such as slot
machines and other house-banked casino games. Whereas Class II games are
regulated by the Tribes without state interference, Class III games require
state approval and regulation. In both cases, a federal commission, the National
Indian Gaming Commission, oversees the tribal operations and their regulatory
process. Our core business is focused on Class II and Class III gaming.
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Those of us with an eye on MGAM's bottom line focus on another aspect of game
class distinction. Every time we sell a Class III player station, MGAM receives
one-time revenue of $8,000, and EBITDA of $3,000, but our recurring revenue is
only about $1,000 and EBITDA about $900 per year. Contrast that with the latest
generation of Class II e-games, including our latest bonanza-style MegaNanza(TM)
bingo games and our electronically-aided pull tabs, which are much more
profitable. Historically, our revenue and EBITDA has corresponded to the number
of player stations we have installed. With Class II games, we have had recurring
revenue of about $20,000 and EBITDA of $2,500 per year for every player station
installed.
We began designing these Class II e-games after studying the Federal Courts'
interpretation of Class II Game definitions. They tell us how much latitude our
Class II game developers have in using new technology to design better games. We
now have installed our first models of these new-era, electronically aided,
Class II e-games at three different facilities in Oklahoma. These games are
every bit as profitable for the tribes as Class III video lottery games, slot
machines, video poker, or any other gaming player stations, and much more
profitable for us.
A quick look at the marketplace shows that we have been making recurring revenue
of about $3 per day per Class III player station (we have less than 1,300) and
about $55 per day for the older style Class II player stations (we have about
4,000 of those in place). Our recurring EBITDA has been $2.50 per day ($900 per
year) per Class III player station and $7 per day ($2,500 per year) for the
Class II equipment.
From what we have seen so far, we expect the new Class II e-games will bring
revenue of over $100 per day per player station, and our EBITDA will increase to
more than $17 per day (more than $6,000 per year per player station). We expect
to install about 2,000 of these by the end of FY2001. About half of these will
probably be replacements for some of our older Class II machines. Within two
years, I believe we will have 5,000 new electronic player stations running our
new Class II e-games, earning $6,000 in EBITDA per year per player station.
That's more than $30 million in EBITDA per year. I believe the rest of our
business will more than cover all of our fixed costs.
This leads me to the Internet and what I wanted to spend some time discussing
today. The Internet could allow us to double our EBITDA to as much as $60
million per year by 2002.
News and data on Internet gaming continues to pour in. About a year ago, Bear
Stearns estimated that approximately 250 companies share in the ownership,
development, and operation of more than 650 Internet gambling sites. The River
City Group estimated that Internet gambling revenue for 1999 exceeded $1.2
billion and that it will exceed $3.0 billion by 2002. Moreover, Eugene
Christiansen of Christiansen Capital Advisors projected in Michael Pollock's
Gaming Industry Observer newsletter that Internet gambling expenditures will top
$4.5 billion by 2002.
Now, a study called "What Are the Odds" by Greenfield Online, an Internet
research firm, reports that online gaming revenue projections are much smaller
than previously reported and most important, many online gamblers have lots of
gripes about Web-based casinos. The study found that 60% of the 2,000 people
surveyed believe online gambling sites are fixed and that winners are
pre-determined and few and far between. According to Rudy Nadilo, president and
chief executive for Greenfield Online, "The message of this research is that
those behind online gambling sites must do more to win the confidence of people
who visit their site."
Multimedia Games, Inc. and some of our tribal customers believe we can develop
an e-commerce system (ECOM) for the exclusive use of their respective sovereign
nations. This ECOM system will meet a variety of economic development needs
specific to the tribes, most important of which will be to assist the tribes in
becoming leading suppliers of electronic services to game players, advertisers,
retailers and consumers.
The heart of the ECOM system will be a private-channel digital telephone link, a
public access Internet link, and a cable TV link within the Betnet
infrastructure, Multimedia's multi-channel communications network. Through a
newly developed or redesigned tribal web site, we will be able to offer our
tribal partners a
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mechanism enabling them not only to advertise the products
sold by their nation, such as tobacco, art, and crafts, but also to position
them to better serve their community by offering telephone services (including
internet service), shopping agent services, environmental services, relocation
services, as well as, and this is important, installing an Agent Player Station
(or proxy play station).
The Agent Player Station, or proxy play, will allow players at a tribal gaming
facility to play one of MGAM's bingo games on behalf of players who are not
present. This proxy play station will not only allow tribal members (and
non-tribal customers if so desired) to play games, but also to shop, search, or
do research on behalf of people at another reservation or off the reservation.
The station, which we have patented, will be a plug-in appliance that links to
our Betnet in-hall local area network and the Tribe's web site. One of the first
proxy-play games that will be offered on the beta test version of the system
will be a high-speed version of our new MegaBingo game.
Why Proxy Play? In July of 1995, the Chairman of the National Indian Gaming
Commission (NIGC) informed us that our Native American Owned customers could
allow a special Agent to play MegaBingo on behalf of home viewers. He said,
"The NIGC has considered the question of whether this game is actually
being played on Indian Lands. There is no statutory prohibition against
the use of agents for the conduct of bingo. Accordingly, the acts of
the agent, which occur on Indian lands, are deemed to be the acts of
the principal."
After receiving this opinion, MGAM tested proxy play over the Internet for about
a year. As I recall, we had players from Greece, Australia, Canada and Germany,
as well as the United States. We discussed our Internet activity with the NIGC
and they seemed to have no problem with it. The only concern seemed to be
political, not legal. One NIGC legal staff member said she saw no problem as
long as we did not make any serious amount of money for the tribes. At the same
time though, both Missouri and Minnesota took exception to our right to use
proxy play on behalf of the people in their states, and together, we and the
Attorneys General in those states agreed to let the Federal Courts decide. While
we had previously won a Court decision on this issue in Oklahoma, we stopped
proxy play after the "MegaMania Bingo raid" of New Year's Eve 1997 simply
because the MegaMania case was so important, and we didn't want to be distracted
by fighting legal battles on two separate fronts simultaneously.
Since then, in September, 2000, a member of the NIGC staff, who had previously
worked for the Justice Department but was not around when we received our
initial opinion, wrote a contradictory opinion stating that the person for whom
the proxy player is playing must also be on the reservation. Fortunately, case
law does not give much credence to a staff member opinion, especially if that
opinion contradicts the opinion of the Commission Chairman, as was the case in
this example.
Recent Federal decisions in the Ninth and Tenth Circuit Courts regarding MGAM's
MegaMania Bingo game clarify the right of Native American operated gaming
establishments to run just about any bingo game they want, and to use technology
in any way unless clearly prohibited by IGRA. IGRA explicitly instructs the
Tribes to use the latest technology on and off the reservation to run bingo
games, as long the games are played with cards (paper or electronic) bearing
symbols, when objects with similar symbols are drawn or are electronically
determined and in which the game is won by the first person covering a
previously designated arrangement of symbols on such cards. There are no other
restraints.
Meanwhile, Nevada regulators have placed a ban on Internet wagering in that
state, but we believe that there is little question that ban will be reversed
soon. Even today, most state lotteries are running web sites and a few are
allowing game play on the Internet. Horse racing is even being offered over the
Internet and on interactive TV in the U.S., and free play games are everywhere
on the Internet.
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Most interesting, the Greenfield Online survey found that most Internet gamblers
visit multiple betting sites. Our partner and partially owned subsidiary,
Gamebay.com, is among the top ten such sites, with the two most popular being
Freelotto.com and Gamesville.com. All three of these sites offer free games for
prizes. Our site, GameBay.com, has on average more than 200 players online 24
hours per day, while the other two sites have averaged upwards of 2,000 players
on line 24-hours per day. The Greenfield survey did not distinguish between
free-play games-for-prizes sites or true gambling sites, and we do not believe
most players make any distinction except for the size of the prizes and the odds
of winning them. Internet consumers value their time as much as their money.
There is no better group of licensed gaming operators to bring gambling to the
offshore Internet consumer than Native American gaming operators. Native
American-sponsored Internet gambling brings a number of marketing advantages.
1. The world has confidence that Native American gaming is fair and
well regulated.
2. Native American online bingo games have good brand appeal. Games
presently running online across multi-hall private network links
on Native American land are already being played, are well known,
and are generating large jackpots that are won regularly.
3. The world marketplace is interested in American products. Native
Americans are viewed internationally as attractive, heroic,
exotic, and interesting people who command a high degree of
sympathy and respect.
In the end, if we and our tribal partners can recruit as few as 200 on-line
players 24 hours per day to participate in our high-speed bingo games via the
Internet, we will generate an estimated additional revenue of $144,000 per day,
from which we could realize an EBITDA of $30,000 per day. Moreover, if we can
recruit 600 simultaneous players on-line for 24 hours per day, we could realize
a $30 million dollar per year increase in EBITDA.
Clearly, there is tremendous uncertainty in this vision of the future that I
have painted for MGAM here today. New laws significantly changing IGRA's intent
to expand commercial gambling by using the latest technology on and off Indian
land could reverse the entire structure of Native American gaming. Still, I
doubt if a divided Congress will expend much energy on such a difficult and
dubious task.
There is no question in my mind that America's gaming tribes need to focus their
activities on one task - capitalizing on the new court-established definition of
Class II gaming. I realize that they might not feel they have the resources to
fight the political battle of Internet gaming while defending the laws defining
Class II gaming.
In today's rapidly changing environment, it is very difficult to predict the
future. What I have set out to do here is to first describe our present status,
and then give my forward-looking views on the Internet, tribal gaming and
Multimedia Games and how by using their convergence, we can pursue and take
advantage of new market opportunities. One thing that is certain is that we, the
MGAM management team, believe the Company is seriously under-valued. That said,
our board has authorized management to buy back our stock. We are buying back
our stock. And we expect to continue to do so for some time.
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