reaper, this one may be up your alley. From Herb Greenberg
Bizarre's the Word at Multimedia Games
By Herb Greenberg
Senior Columnist
07/02/2002 10:27 AM EDT
Do stories get any more bizarre than Multimedia Games (MGAM:Nasdaq - news - commentary - research - analysis)? (Of course they do, but not by much!)
Multimedia makes interactive electronic gambling machines primarily used in Native American bingo and gaming halls. These games receive either Class II or Class III ratings. Class II games are games like bingo, which can be operated by any tribe without special approval. Class III games are Las Vegas-style games such as slot machines and table and card games, all of which require state approval.
This is where the bizarreness of our story comes in. On Monday, June 17, Multimedia announced that the National Indian Gaming Commission, an agency that governs Indian gaming, would publish new rules "regarding how technological aids can be used to play bingo on Indian reservations."
Mega Class Issues
Reading between the lines, points out my associate Brian Harris, who did the legwork on this story, the NIGC was really declaring Multimedia's biggest game -- MegaNanza, which generates 70% of revenue -- a Class III game.
Not that you would know from Multimedia CEO Gordon Graves, who responded to the news by saying, "We are extremely pleased about the adoption of these new rules. ... It is good for Indian Country and good for American gaming. Management firmly believes whatever is good for Indian Country usually turns out to be the best for MGAM."
Huh? The NIGC has just declared Multimedia's biggest game illegal for Class II gaming halls and bingo parlors, and the company says it's pleased?!
There's more: Graves went on to say that there had been threats from NIGC field agents to cite tribes with violations if they continued to run the MegaNanza games. Not to worry: Graves also said "it is unlikely that scarce government resources will be expended on these types of enforcement actions." (So it doesn't matter if Multimedia is breaking the law because he doesn't think the government will have the resources to enforce the law?!)
Graves continued: "Frankly, I don't expect the threats to have any impact on our existing earnings per share guidance for FY 2002."
Remember, that was on Monday.
Mega Violation
On Tuesday, Multimedia announced that late Monday one of its tribal customers "received a notice" from the NIGC that it was in violation of gaming regulations "for continuing to run MegaNanza."
Not that you would have known that from the headline on Multimedia's press release, which touted, "MGAM Accelerates Introduction of New Bingo Game in Response to Increased Government Enforcement." (But wait, I thought the government's resources were too "scarce" to enforce the law. "We were wrong," Graves said in the same press release.)
Later in the day, on a conference call, Multimedia trimmed its guidance by 8 cents, to 10 cents per share. The lowered guidance, Multimedia said, included a one-time 3-cent charge for the cancellation of a secondary offering.
Enter Wednesday, and less than 18 hours after Multimedia lowered guidance, the bizarreness continued as the company apparently had a change of heart about its earnings guidance. Instead of lowering guidance by 8 cents, to 10 cents per share, Multimedia now said earnings would be lower by 5 cents, to 15 cents per share. That newly revised guidance, the company added, did not include that one-time charge of 3 cents per share. (Glad we got that straight.)
Which brings us to Thursday: The Oklahoman reported that a federal judge "issued a temporary restraining order to prevent the National Indian Gaming Commission from fining Oklahoma tribes or closing any of their casinos that house the MegaNanza machines." A reprieve? Perhaps, but the NIGC, which didn't return Brian's calls, has been telling investors that no matter what the courts say, MegaNanza will remain a Class III game.
Mega Selloff
Multimedia's stock, meanwhile, tumbled 23% during the bizarreness of that week. Short-sellers, who were betting the stock would fall from higher levels, believe it could go even lower. This, after all, is a company that was raided by the Justice Department in 1997, which claimed that MegaMania, the predecessor of MegaNanza, violated gaming rules and should be a Class III, not Class II, game. Courts eventually ruled in Multimedia's favor. The big difference then was that the NIGC sided with Multimedia.
This is also a company that has had thee auditors in three years. Multimedia's second auditor during that stretch, Arthur Andersen, quit after less than three months on the job.
It's unclear why the auditors quit, but this much is known: Multimedia isn't without a record of related-party transactions and management self-dealing. (Sure, they're disclosed, but so what?)
In June and September 1997, the last months of the Multimedia's third and fourth fiscal quarters, the company sold $2.4 million worth of gaming machines to Equipment Purchasing LLC, a "company owned by an affiliate of Gordon T. Graves," the CEO. Multimedia then repurchased 356 of the machines in October 1998 for $1,448,000. (Not bad!)
Multimedia didn't pay much cash for the repurchase of the machines. According to SEC filings, the repurchase was paid by "the cancellation of $992,000 in notes receivable from Equipment Purchasing ... the assumption of $77,800 in debt owed by the affiliate of Mr. Graves," $133,000 in cash, a 6% promissory note of $133,000, and the issuance of 100,000 warrants to purchase Multimedia stock at $3.81. (At the time Multimedia's stock was trading around $2.50. The warrants, some of which expired Sunday and some of which will expire on Sept. 30, are now well in the money. Multimedia's stock, which closed Monday at $21.84, traded at an all-time high on March 20 of $37.05.)
Multimedia and Equipment Purchasing engaged in a similar trade in the last months of its second and third fiscal quarters of 1998, again, with the sales and repurchase arrangements involving a convoluted mess of notes, warrants and other mostly noncash dealings.
Finally, in a throwback to the old days of corporate governance, Multimedia has consulting agreements with two of its three outside directors.
Multimedia didn't return Brian's phone calls. |
