MGAM’s analysts admit astonishing earnings decline.

At least five Wall Street analysts publish earnings estimates for Multimedia Games, Inc.’s (NASDAQ: MGAM, $25.52) second quarter ending March 31, 2004. The analyst’s estimates are all basically the same. They are either $0.25 per share or $0.26 per share. These estimates represent a drop in Multimedia’s core earnings of at least 30% from last year’s second quarter.

According to the analysts, the steep earnings decline will entirely wipe out any added earnings from Multimedia’s new businesses (New York Lottery, Winstar, California tribal instant lottery, and Alabama charity bingo did not exist last year). In fact, the estimated core earnings decline is expected to occur despite at least 3,000 more player stations and $45 million in additional assets.

Multimedia’s earnings decline has commenced even before the onslaught of new well financed competition with better themes, games, and platforms.

As the attached four financial tables demonstrate, Multimedia’s core earnings have been declining precipitously since reaching their peak profitability in the second quarter of fiscal 2002.

For the peak quarter, which ended March 31, 2002, Multimedia reported net income of $6.8 million with 6,449 installed Class II games and $37.7 million in operating assets (Table I). A comparison of this peak quarter with Multimedia’s most recent quarter shows a decline in core earnings of up to 75% despite a 47% increase in installed player stations and a 176% increase in operating assets (Tables II and III). The earnings decline occurred not only despite the sharp increases in games and assets but also Multimedia’s highly aggressive cost and expense capitalization policy.

The above referenced cost and expense capitalization policy has the effect of inflating earnings. Table IV shows that during fiscal 2003 Multimedia installed 3,335 player stations at a cost of $37 million, or $11,089 per player station. During fiscal 2002 Multimedia installed 3,324 player stations at a cost of $24.4 million, or $7,326 per player station. This is a 51% increase in cost per player station in fiscal 2003 over fiscal 2002. Just this item could have inflated Multimedia’s fiscal 2003 pre-tax earnings by an estimated $12.5 million or 65%.

Asensio & Company, Inc. covers Multimedia Games, Inc. and maintains a Strong Sell and Short Sell opinion. A summary of the basis of our opinion is found in our October 2, 2003 report published on

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