Multimedia Games, Inc.
HOST:  Mr. Gordon Graves
DATE:  January 31, 2002

OPERATOR: Good afternoon and welcome, ladies and gentlemen, to the Multimedia Games Investor Relations Earnings call. At this time, I would like to inform you that this conference is being recorded for a broadcast, and that all participants are in a listen-only mode. At the request of the company, we'll open the conference up for questions and answers after the presentation. I will now turn the conference over to Julia Spencer. Please go ahead, ma'am.

MS. SPENCER: Good afternoon and welcome to the Multimedia Games Investor conference call for our first quarter 2002 earnings. I'd like to mention that we have some MGAM officers on the call with us today. Gordon Graves is our CEO and Chairman of the Board; Clifton Lind, President and Chief Operating Officer; and Craig Nouis, our Chief Financial Officer, are here to talk about this quarter's results and answer your questions. Before we start, I'd like to read a short statement.

"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 30th, 2001, which are incorporated herein by this reference."

I'd like to turn the call over to Mr. Gordon Graves, who is our CEO and Chairman of the Board. Gordon?

MR. GRAVES: Thank you, Julia. We had a great first quarter. Earnings are up more than a factor of seven over last year. And anybody with any arithmetic skill can see it looks as if we have good opportunity to make $2 per share or more for the year pre-split, if we can maintain any growth at all.

The first quarter has always been our weakest quarter of the year. Now this year, our increase in subsequent quarters is not going to be as significant as it was in the past. On the other hand, perhaps we've been a little bit too pessimistic or conservative about the second quarter in our press release and maybe we've been misleading. We didn't make it clear in our press release today that when we said that we would not see any increase in earnings for the second quarter, that we were talking about the second quarter of this year compared to the first quarter of this year; rather than the second quarter of this year compared to the second quarter of last year. If you make that comparison, we'll still see a 300 or 400% increase.

But on the first quarter compared to the second quarter, though, maybe we are a little too conservative. Let me give you some numbers on that. We had an average of about 2,500 of our new MegaMania-type player stations in place in the first quarter. And right now, we have up around 3,300. So we will have 3,400 or 3,500. Our halfway point through the second quarter is a couple of weeks away, and so we'll probably have 3,400 or 3,500 in place by then. 3,500 would be a 40%increase. So we'll be increasing our number of machines by 35-40%.

On the other hand, we've seen our hold per machine drop so far this quarter by about 17% compared to the first quarter. And in our projections, as far as the rest of this quarter, we've been again very, very conservative and maybe a little pessimistic, and we've assumed that's going to drop on down to about 25% by the end of this quarter, compared to the average for the first quarter. We've also got some more contingencies over and above that in our projection, so maybe we're a little bit too conservative. But, as you know, we always are very conservative.

I think it's unfortunate that we maybe had this mistake in there or didn't make it clear in the press release. But on the other hand, on the positive side, I want to point out that our $2 per share guidance for the year uses the same very conservative projections on the hold per machine and assumes it's going to continue to go down even more for the rest of the year.

So overall, we're going to still see fabulous growth for this year. We're very excited about that. Our great performance we've enjoyed in the first quarter really strengthens our balance sheet and it allows us to more easily solidify all of our other money-making resources. I'd like to talk about that a little bit later on in the conference. But at this time I'd like to turn it over to Clifton and Craig and let them go into some more details on the first quarter. Clifton?

MR. LIND: Yes, sir. Thank you very much. The first thing I'd like to say is that it has been a great honor for Gordon and me to work with the key members of the MGAM management team and all of the members of the MGAM team. It's been inspiring to see the amount of work that they put into making this company the success that it is today. And I can't name one person who is on the team today that was on the team a year ago who hasn't had a rather significant learning experience and grown professionally. I know that they will make an even greater contribution to our success next year.

Some of our key team members have made some team hires and you'll be hearing about those over the next few weeks. And it will make MGAM an even stronger company than it was when we started this year, and than we were a year ago. We are excited about the fact that with this new technology that we've been developing and the new team members that we've added, we're poised to enter a second growth market. As far as this year, we're ahead of schedule in our primary market, which is Class II Native American gaming. And we're responding to the first request for proposal in the third potential growth market for MGAM.

It is, as I said, an honor for Gordon and me to get to work with this inspiring team and I know that we can expect a tremendous contribution. And the shareholders have reason to be optimistic about where we are today and the future. Like Gordon, I'd like to come back after Craig has gone over the numbers. Let me say that we are going to focus only on the pre-stock dividend numbers in this conversation. We did the math in the press release and we'll be speaking in the future using the post-split numbers. But for the purpose of this conversation and for clarity, we're going to try to focus only on the guidance we've given and the results we achieved based on the pre-split numbers. So, Craig?

MR. NOUIS: Thank you, Clifton. As Gordon had mentioned earlier, we had a great quarter. First, I'd like to speak in terms of revenue, net income, and EBITDA. Our gross revenues for the quarter ended up at about $58.9 million, which is about a 173% increase over the same quarter of 2001. This also represents about a 23% increase over the last quarter, the fourth quarter of 2001, for which the gross revenues were about $47.8 million.

In terms of net income for the quarter, we came in at about $4.7 million, which is a significant increase over the same period of last year, which was $364,000. And, again, as we mentioned before, we're continuing to show quarter-to-quarter growth. And our net income grew from the previous quarter, the fourth quarter of 2001, from $3.4 million up to $4.7 million. So we're definitely demonstrating this quarter-to-quarter growth. The EBITDA numbers for this quarter was $10.9 million, which is, again, significantly above EBITDA for the same quarter last year of $3,058,000.

In terms of the earnings per share, (again, this is before the stock split) basic EPS for the quarter was $0.59, and the diluted EPS was $0.49. Compare that to the same quarter last year, when EPS was $0.06. As you can see, earnings per share went up significantly. And the number of basic shares outstanding for this quarter was 8,025,000, while the number of fully diluted shares outstanding for the quarter was about 9,650,000.

Now we are continuing to place player stations at a good rate. As the end of the fiscal year ending September 30, 2001, we had 1,966 New-Generation games in service. During the quarter, we placed 967 New-Generation games, which resulted in 2,933 units at December 31, 2001. The number of Legacy games went from 2,979 as of September 30th, 2001, to 2,891, a decrease of about 88 units. As we've discussed previously, we expect some reduction in our Legacy games as we're placing more and more of these New-Generation games. We still feel that in accordance with prior guidance, we're in a position to place at least 2,400 new Class II machines in service during the year. As Gordon was talking about earlier, we are showing this rate of unit placement in our models, but we're also decreasing our hold per day [in those models].

Regarding guidance for the second quarter and for the year 2002, I know Gordon spoke of it a little bit already, but we are showing our diluted earnings per share to be about $2. We hope we can exceed that, but that's where we're at now. And for the second quarter, we are showing that the earnings per share amount is going to be the same as the first quarter; the reason being that we are on target with placing these new units in the field.

We had some market tests running in a couple of locations which resulted in one-time revenues for us that dropped to the bottom line; we will not see [these one-time revenues] in the second quarter. But we're still going to continue placing the units. And, it looks now as if we're going to be in about the same place as we were in the first quarter.

Okay. Having said that, I'll turn it back over to Clifton.

MR. LIND: Okay. Thanks, Craig. A number of important follow-ups to Craig's discussion. As he said, we had previously given guidance for Q1 of $0.40, and this morning, on a pre-split basis, we announced Q1 earnings of $0.48. This figure was $0.08, or 20%, above our guidance for the first quarter of this year. We felt that it was important to note that approximately $0.06 of this represented earnings from two incredibly important proof-of-concept tests that we ran. And what is more important than the one-time earnings that these tests gave us in these markets was the fact that it showed that our New-Generation machines could do exceedingly well in Class III Markets. The opportunity to do this benchmarking has been a very important learning experience for us, both for changes that we want to make to the games and to the systems. And more importantly, it's a good sales tool for us in talking to our new customers who have been considering putting in additional machines, possibly Class II machines, in environments where the number of Class III machines are limited.

The fact is that we have also rolled out our additional New-Generation games in the last month, and we have been very pleased with the player acceptance of our new games. As you saw in our last press release, there are a number of new games that we're coming out with which are much more exciting, we think, to the players. They involve more interactive steps and maybe because of that interactivity, have advantages to us in many different ways, and capitalize on our strength, which is the two-way communication between the player stations.

As Gordon said, and Craig reiterated, as expected, the hold per machine per day has been coming down. As we increase the number of machines in our existing markets, we expect this to continue until we move into new markets. We believe that in the next 120 days, we will move into at least three new markets which will again help stabilize what in the last two months has been an expected decline in hold per machine, since we have in some cases doubled or tripled the number of machines that were in a particular facility.

We asked our manufacturing partners to accelerate delivery of machines so we could provide them to customers earlier than scheduled so that they could have additional play during the holiday season. And we are appreciative of our manufacturing partners and our own manufacturing team that got us significantly ahead of our schedule in deliveries.

The fact is that the new markets that we are entering could be very powerful for us. We are excited about the fact that we're raising our guidance today for our FY2002 earnings to approximately $2, and are pleased with the growth in value that should represent for our shareholders. Gordon?

MR. GRAVES: Okay. Thanks very much, Clifton. I think that we ought to open it up for questions at this time?

OPERATOR: Thank you. The question and answer session will begin now. If you're using a speaker phone, please pick up the handset before pressing any numbers. Should you have a question, please press 1 - 4 on your push-button phone. If you would like to withdraw your question, press 1, followed by 3. Your question will be taken in the order it is received. Please stand by for your first question.

Our first question comes from David Bain. Please state your affiliation, followed by your question.

MR. BAIN: Yes. David Bain, from Roth Capital. Congratulations on a great quarter once again, guys. A quick question on the placement of units. If your target is 2,400 and you currently have 967 in the field today, that would leave 477 per quarter. Are you still doing 600 per quarter?

MR. LIND: Gordon, would you like me to take this --

MR. GRAVES: Please do.

MR. LIND: All right. David, thank you for your comments. It's easy to glean we're ahead of schedule. An important change in what our goals were last year and this year's goals is that last year we had a goal of a minimum of 200 units of the New-Generation games installed per month. This year, we changed our goal to a minimum net growth in all Class II games of over 200 units a month. And we're far ahead of that. We have not changed our goal internally, but we are ahead of schedule in deliveries and we have moved forward some of the some of our tribes' delivery times that had originally been scheduled for later in the year.

Our backlog still remains above the 500 machine level where we like to keep it, and we expect that backlog to stay at that level or grow throughout the year. And you don't have to do much math to know that doesn't leave a very aggressive balance for us to achieve the 2,400 net new placements that we put in the schedule. And we believe in striving mightily to exceed that and feel comfortable that we will exceed that. But want to reiterate, you know, that our original guidance that was given for the year and our updated guidance is a balance between the number of machines you put out and the hold per machine that you are willing to drive any particular hold down to.

Because, as you know, our internal goal is to make sure that on Friday and Saturday night, none of our players who want to play our machines have to wait more than ten minutes in line to do so. We still have some halls where people are standing two and three deep to play at the peak hours on Friday night and Saturday night. So we're going to keep putting in additional machines to satisfy those markets.

MR. BAIN: Great. Right.

MR. LIND: Regrettably, that means that on Mondays, Tuesdays, Wednesdays, and Thursdays, we have a larger number of machines in the halls than we need, so the average hold for the week goes down and suffers. You know, we've spent a lot of time, and Skip Lannert does an excellent job with trying to balance the number of machines in the halls, and the mix of games that we have playing, and the hold per day that we're achieving.

And, so, yes, the simple answer is we should continue to place machines at the rate that was our target rate. But, conservatively, if we do our job right, we can achieve our new guidance by only meeting the 2,400 units for the end-of-year growth. But I want to emphasize the point, David, that we could put out a significantly larger number of machines in the existing halls, but we would just succeed in driving down the hold per machine faster by creating availability on Monday, Tuesday, Wednesday, and Thursday that we don't need.

MR. BAIN: Right.

MR. LIND: And so we try very hard to balance that. The key to our getting the hold to stay up network-wide is they're opening up these new markets. And as I told you, in the next 120 days or so, we expect to enter at least three new Class II markets that would give us significant growth in holds.

MR. BAIN: And you probably don't want to expand on that now.

MR. LIND: For competitive reasons, I would rather not go into details.

MR. BAIN: Okay.

MR. GRAVES: Well, on that let me say just one thing. Right now we've got customers in California, Oklahoma, Washington State, Washington, D.C., Alabama, New York, Michigan, Wisconsin, and Arizona. Most of our machines are in Oklahoma.

MR. BAIN: Right.

MR. GRAVES: And, you know, I think we are going to see California break open in the next -- it's looking -- you know, California is a matter of arithmetic and money. The tribes are at the point where a lot of them got their 2,000 machines in and they need more machines. And, so, I think that just the financial pressure is going to cause that to move forward and we're going to see that break open for us.

MR. BAIN: And would you say also, in possibly New York due to budget shortfalls, or any other jurisdictions?

MR. GRAVES: It's a lot harder to tell in New York because of the compact negotiations that they have going on.

MR. BAIN: Right. Okay.

MR. GRAVES: Yeah.

MR. BAIN: Can you guys give me an update on MegaBingo and Proxy Play?

MR. GRAVES: Clifton?

MR. LIND: It's two different topics. We add one or two tribes a week to the new MegaBingo game.

MR. BAIN: Uh-huh.

MR. LIND: As we speak, we have 15 tribes and two charities playing the [MegaBingo] game, the players enjoy the game, and it's growing. We expect to see that continue to grow through the year. As you know, that is a game in which we try to give a significantly new experience to our Native American players, and are going to try to target an expansion of that into the charity markets.

Proxy Play is moving along, probably slower than you might have expected, based on prior comments, but it is really in control of the tribe that is our Proxy Play partner on that. And as you know, we do not have anything in the forecast this year for income from Proxy Play.

MR. BAIN: Right.

MR. LIND: We do expect to move from a test mode to some form of for-cash play. And, ultimately, when the tribal council is willing to approve accepting some off-reservation betting, and there is court protection to do that, then we expect to be doing that. The time schedule is a little bit indefinite right now because our customers control that more than we do.

MR. BAIN: Right. On the international front, with Liberia possibilities and the UK or Canada, get I get a little color?

MR. GRAVES: Clifton?

MR. LIND: Certainly, we have a formal contract to provide 40 units into the Liberian market. Fortunately we can provide those units without risking a significant number of assets because we can use some of our older equipment for them. Working with our former Vice-Chairman, there are other opportunities in Mexico and in other countries that we are working on on a daily basis, and we think will be at least a good test market, if not a very strong market.

One of our other strong gaming companies that we have an alliance with -- we are working jointly on a significant opportunity that's out of the country, but subject to a confidentiality agreement right now, so I can't disclose that or tell you anymore about that right now, okay?

MR. BAIN: All right.

MR. LIND: There's a great deal of activity on those fronts, but as you know from our prior business, North America is our primary market and within North America, the United States of America. We do not have in the forecast any major contribution from foreign relationships. That will all be upside for us over the next year or two.

MR. BAIN: All right. Well, great job. Again, keep it up. You're doing an excellent job.

MR. LIND: Thank you.

MR. BAIN: Thank you.

OPERATOR: Thank you. Our next question comes from Daniel Davila. Please state your affiliation, followed by your question.

MR. DAVILA: Good afternoon. Hibernia Southcoast Capital. Again, as well, my congratulations on a good quarter. I've got some, I guess, what seems to be a hundred questions. First, for the one-time revenue you passed through in the quarter, what does that represent in EPS?

MR. GRAVES: Represent in what?

MR. DAVILA: What does that represent in earnings per share?

MR. GRAVES: Earnings per share?

MR. DAVILA: Yes.

MR. GRAVES: Clifton, do you want to answer that?

MR. LIND: Yes. It was - out of the first quarter -- six cents of the 48 cents was the effect of that, Danny.

MR. DAVILA: Okay. And if I'm reading your press release correctly, Clifton, they're telling us it's 49 cents, not 48 cents. Anybody want to clarify that penny?

MR. LIND: I guess I was not able to succeed in my argument to keep it down to 48 cents, Danny.

MR. DAVILA: Okay.

MR. LIND: Please forgive me.

MR. DAVILA: It's all right. I mean, you know, we --

MR. LIND: I was on the west coast when the press release went out. I apologize that I didn't study it. Let me say that I approved the press release, but I didn't focus in on that number. I didn't noticed it changed. I'm sorry. Thank you, Danny.

MR. DAVILA: So the real number is 48 then?

MR. LIND: No. The real number is 49.

MR. DAVILA: Okay.

MR. LIND: I am in error. I know that is blowing my credibility with all the listeners. Excuse me.

MR. DAVILA: Well, we'll give you the one pass, Clifton.

MR. LIND: All right. Thanks, Danny.

MR. DAVILA: With respect to what's going on in Florida, that test that you had going on down there, what percentage are you getting from that tribe?

MR. LIND: We currently -- we have completed the test down there, and there is no on-going test, or we do not have any machines turned on down there. But the test was done at our normal rate, so our normal split.

MR. DAVILA: Is there an opportunity there going forward?

MR. LIND: We are working very hard to be a technology and a system provider for them and a provider of content as well. And, you know, there was a tragic accident involving one of their two tribal members, and so they're --

MR. GRAVES: They're a little disorganized right now.

MR. LIND: It will take a while for us to get back on track in the negotiations, but it would be a great honor for us and a great opportunity for us to provide them some technology content and system.

MR. DAVILA: Okay. Just two more questions for you, Clifton, and then I'll leave the call up to other people. I was wondering if you could break out your E-Pull games, the overall Class II?

MR. LIND: We have not put any E-Pull games in the system. Our bingo games have been so well received that there has not been a need to bring our E-Pull games off the shelf and put them out in the field. They are another product line that will be incredibly powerful for us in charity jurisdictions, and as we turn up the heat on those in the next 12 to 18 months, we may actually see that that's the bigger market for our E-Pull system.

Our new bingo games that we're coming out with are just, as I told you earlier, being very well received. And so we will probably focus on those until we get into jurisdictions where the gaming commissioners request the additional variety of the electronic pull-tab game.

MR. DAVILA: Thank you. And, lastly, I guess judging from Gordon's opening remarks, there's a lot of question this morning concerning sequential quarter-to-quarter growth. I still have a lot of questions about that. So I was wondering if you could just clarify one more thing for us now. If I'm to understand what you're saying correctly, then your second quarter will look at least as good as your first quarter. But is that off the 43 cents or the 49 cents?

MR. LIND: That's off the 49 cents.

MR. DAVILA: So your second quarter will look at least as good as 49 cents?

MR. LIND: Yeah.

MR. DAVILA: Okay.

MR. LIND: We believe that to be the case.

MR. DAVILA: Yeah. I mean, all this is based on the --

MR. LIND: Yeah.

MR. DAVILA: Right.

MR. LIND: You know, the warning we gave at first.

MR. DAVILA: Okay. Thank you very much.

MR. LIND: Uh-huh.

OPERATOR: Thank you. Our next question comes from Ronald Rotter. Please state your affiliation, followed by your question.

MR. ROTTER: Ron Rotter, West RLR Partners. Great quarter. Most of my questions were asked and answered. The only comment I would like to make is it would be nice when you release the quarterly information if you would give us the full P[rofit] and L[oss] statement and also a balance sheet. When is that going to be available?

MR. GRAVES: Craig?

MR. NOUIS: Our goal in terms of filing the Q is probably going to be in a week, a week and a half. So, hopefully, by then.

MR. ROTTER: Thank you. I think in the future, though, you should have that information available when you do have the quarterly release so we can really truly analyze the whole story.

MR. GRAVES: Thank you, Ron. We will see that that happens.

OPERATOR: Thank you. Our next question comes from Todd Metcalf. Please state your affiliation followed by your question.

MR. METCALF: Hi. Baker Street Capital. The first question is about one-time revenue this quarter. How much was that?

MR. LIND: It equated to earnings per share of 6 cents of the 49 cents.

MR. METCALF: And how much total revenue associated with that?

MR. LIND: I don't have those numbers broken out at my fingertips. If you will call us back after the conference call, we'll get that for you.

MR. METCALF: Okay. And what about the machines? Do you have that number? How many machines were involved?

MR. LIND: How many machines involved in the test?

MR. METCALF: Yeah.

MR. LIND: There were a total of 128 machines involved in the test.

MR. METCALF: And were they all Class III or?

MR. LIND: They were all Class II.

MR. METCALF: Class II?

MR. LIND: That is correct.

MR. METCALF: Okay. Next question. Has the Indian Gaming Commission issued an advisory opinion on the New- Generation of Class II games?

MR. LIND: They have not.

MR. METCALF: Have you requested one?

MR. LIND: We requested --

MR. GRAVES: Over about a year ago.

MR. METCALF: Okay. The final question. Any new developments in the Alabama situation? Can you think of anything there?

MR. LIND: Yes. We have machines in that market and we will be increasing the number of machines in that market in the near future.

MR. METCALF: Just one clarification. There has been some rumors that there's some internal investigation or state investigation going on. Can you comment on that?

MR. GRAVES: On us?

MR. METCALF: Yeah.

MR. GRAVES: Absolutely not true.

MR. METCALF: Okay. Thanks a lot. Bye.

OPERATOR: Thank you. Our next question comes from George Paoletti. Please state your affiliation, followed by your question.

MR. PAOLETTI: Hi. Digerati. A couple questions. One, kind of along the line of the issue of not having a whole balance sheet and income statement. Can you give the PP&E at the end of the quarter and the depreciation in the quarter?

MR. GRAVES: Craig?

MR. NOUIS: Let's see. The PP&E, as of the end of the quarter, was about -- the net was about $26.9 million.

MR. PAOLETTI: Okay.

MR. NOUIS: The depreciation during the quarter was just under $2.8 million.

MR. PAOLETTI: Okay. And on the P&L, kind of having to guess at the operating expenses, but you seem to have made about 100% incremental EBITDA margin on your incremental revenues. You know, your EBITDA sequentially was up about $2.4 million and your incremental revenues were up sequentially about $2.4 million.

MR. NOUIS: I want to try to get better than that in this next quarter.

MR. PAOLETTI: Yeah. I'd love it. But does that mean operating expenses were flat sequentially? What caused that?

MR. NOUIS: Yeah. I think that is a safe statement, that it was somewhat flat in terms of our operating expenses.

MR. GRAVES: That will not be the case in future quarters.

MR. PAOLETTI: Okay. Very good job.

MR. NOUIS: There was a slight increase, though.

MR. PAOLETTI: Yeah. Okay. But it couldn't be much?

MR. NOUIS: Right.

MR. PAOLETTI: And two other questions. One, you mentioned second and third growth markets. Are you talking geographies or are you talking something else?

MR. NOUIS: I'm talking about market sectors. This year we will enter the charity market and we are also responding to a request to bid the system portion and possibly the machine portion of a video lottery system for our lottery.

MR. PAOLETTI: Okay. And then the last question. You know, from the trials you've done, what other issues do you seem to think you have with the unit itself and the system to kind of co-exist in a Class III market, especially like California?

MR. NOUIS: Well, the only significant issue as the unit now stands is that it is an account-wagering cashless system. And to put it on the floor next to a coin-in, coin-out machine, we have to have a large enough machine that we can train the people to use the players club card and understand the benefits of using the cashless system.

MR. PAOLETTI: Yeah.

MR. NOUIS: So that is in some of the major market places, they're still on coin-in and coin-out. They have not moved to the cashless system, so we have to sell through that opportunity. The other major challenge is to get a position in the casinos, since all of the space is currently occupied by Class III machines. That is a reasonable position within the structure itself because typically when people have new systems they'll try to expand and they put them in the back room or next to the coffee shop or next to the bingo hall. And so it's hard to get a apples-to-apples comparison of what these machines will do. We had that opportunity in the growth test to get in good locations in casinos and compete head-on with other systems. And as I said, the most exciting thing that we saw was that our New-Generation bingo games can do admirably well in Class III environments.

MR. PAOLETTI: Which tribe in California believes that most?

MR. NOUIS: I'm sorry. Which tribe believes that or which tribe did we have the test at?

MR. PAOLETTI: Which tribe believes the most that you can compete head-to-head with Class III?

MR. NOUIS: Well, I was not quoting the tribe. It is common knowledge that our test was at the Seminole nation.

MR. PAOLETTI: Yes.

MR. NOUIS: And we were very pleased with the results of our machines there.

MR. PAOLETTI: I wonder if anyone in California is --

MR. GRAVES: Well, let me say this. I don't think that anybody in California expects our Class II machines to make them as much money per machine as their Class III machines. If a tribe has a choice of putting in a Class III machine or putting in a Class II, they're going to put in a Class III. But our Class II machines is going to make them a whole heck of a lot more money if they've got demand over and above the 2,000 machines they're limited to. And that's the driving factor that's driving them to want to put in our Class II machines.

MR. PAOLETTI: Right. I mean, they're at their limits on the Class III, so I guess the issue is, you know, you still have to convince them, even if they take your machines, not to put them out in the parking lot, right?

MR. GRAVES: They've got to be convinced they want to be serious about making money. Yeah.

MR. PAOLETTI: Yeah.

MR. GRAVES: And it looks like that's starting to happen.

MR. PAOLETTI: All right.

MR. GRAVES: They're starting to get to the point where they're saying, okay, now we've got to continue raising our revenue and the Class II option is their best right now, I think.

MR. PAOLETTI: Okay. Good luck with it.

MR. GRAVES: Thank you.

OPERATOR: Thank you. Our next question comes from Bill Brady. Please state your affiliation, followed by your question.

MR. BRADY: Presidio Management. I have a bunch of questions, you guys. I'm assuming this 4 cents mentioned in the press release at one time was on the basis of the split.

MR. GRAVES: That is correct.

MR. BRADY: 6 cents prior to the split. Is that right?

MR. GRAVES: That's correct.

MR. BRADY: So the first quarter was 43 cents?

MR. GRAVES: No.

MR. BRADY: Well, 49 minus six.

MR. LIND: If you exclude the 6 cents, that is correct.

MR. BRADY: Yeah. But the second quarter will be at least 49 cents.

MR. LIND: That is correct.

MR. BRADY: Not 43 cents, 49 cents.

MR. LIND: Right. Right. Our guidance going forward for this quarter will be based off that 49 cents, second quarter.

MR. BRADY: No. That's 92 cents, so you don't have to have much sequential improvement to get above $2. If you got 6 cents every quarter, that would more than do it.

MR. GRAVES: Well, Bill, I would whole lot rather exceed your expectations than disappoint you.

MR. BRADY: Yeah. Okay. The test in Florida, you said the cashless machine with player tracking numbers, could compete with Class III in comparable locations. Why didn't the Seminole nation go ahead and keep the machines?

MR. GRAVES: They didn't want to pay us the price that we charged for the machines.

MR. BRADY: Well, they objected to your fee?

MR. GRAVES: That is correct.

MR. BRADY: Yeah. Okay. So when you say there's an opportunity there, --

MR. GRAVES: I think, again, it's a matter of economics. I think when they sit back and look at what happens with our machines in and with our machines not in, I think once the confusion there clears, that we'll be back to the negotiating table. But you never know for sure and, you know, the customer is always right. And if he wants to take the machines out, well, the customer is always right. But, you know, we accept when he starts -- he's not right when he says we ought to sell them machines at a lower fee than what our set fee is. And so that's the situation.

MR. BRADY: Yeah. Well, do they have bingo halls that are potential customers, too? Or do they just have Class III casinos where they put the machines?

MR. GRAVES: They don't have Class III. They have what they think is Class II machines. It's a little different situation. I mean, their machines are maybe more like Class III than other places, but they believe they're Class II. And it's not for us to say whether they're Class II or Class III.

MR. BRADY: Do they have any bingo halls where your normal Class II machine could --

MR. GRAVES: They have bingo operations, but they're at the same location where they've got these other machines that they have installed that they believe are Class II.

MR. BRADY: Okay. Then how much did you spend on R&D during their quarter? And I reiterate my comments with Ron Rotter who asked the same question at the last conference call, but it would help to get an P&L.

MR. GRAVES: Well, let me comment on that just a minute. We think it's important to get the numbers out as early as possible on the earnings per share; we think that's real important to do that. And it's obviously a trade-off. We believe that most of the investors would rather see those [EPS] numbers out early before we're ready to release all of the numbers. And if we're wrong about that, we'd like to hear from other investors on that subject. But that's what we think at this time.

MR. BRADY: I'd rather see them as early as possible, but if that's the trade-off, I would rather see them early.

MR. GRAVES: And that is the trade-off.

MR. BRADY: Okay. Then to go on, what was spent on R&D in the quarter?

MR. GRAVES: Clifton?

MR. LIND: Bill, I'd like to just disclose that with our total numbers next week.

MR. BRADY: Okay.

MR. LIND: It was on target with what we had budgeted to spend on R&D for the first quarter of the year. And as you know, that was a ramping-up number.

MR. BRADY: Okay. And for this [potential] lottery contract, who is your competition?

MR. LIND: We have significant competition from a number of people who have successfully won lottery contracts in the past. And those are names that you would recognize; scientific games, GTECH, ETI, --

MR. BRADY: IGT.

MR. LIND: IGT.

MR. BRADY: Those are the big ones.

MR. LIND: And in addition to that, there's a company that we compete with in Washington State, CR Design, that has a system that will work there. The number of the bidders -- it's not clear. The Oneidas have a system that they will probably bid. And there is another slot manufacturer with a system that they will probably bid. So there's a good bit of competition and it is a long shot for anyone to win the first lottery contract they propose, but we're making a hell of a run at it.

MR. BRADY: Yeah. Okay. Then you mentioned in Monrovia, you had a contract for 40 machines. The original announcement said 200. Has that changed?

MR. LIND: No. That's just the first segment -- the first half that we're going to get started.

MR. BRADY: Yeah. Okay. Well, it looks like you've clarified the press release to the extent the stock is up now anyway, so good. Good job.

MR. GRAVES: Thanks very much. What is the stock at?

MR. BRADY: Up 79 cents after being down a little over two [dollars].

MR. GRAVES: Okay.

OPERATOR: Thank you. Our next question comes from Martin Dehen. Please state your affiliation, followed by your question.

MR. DEHEN: Hi, Gordon. Martin Dehen with Capital Swiss Securities.

MR. GRAVES: Hi, Marty.

MR. DEHEN: It's been an honor and a privilege to work with you guys since 1991. I can't tell you how excited everyone up here in Minnesota is. All the past growth has been related to tribal bingo. I've got a lot of questions on whether or not you perceive some of the same Class II machines being able to be used in any kind of charitable halls or possibly even nightclub market type products that are more related to, I suppose, future versions. Can you comment on any of that?

MR. GRAVES: Well, yeah, I think I can a little bit. We've hired a number of new Class II gaming salesmen for Indian country this past quarter. And Tommy LeGassick, our Vice-President, who's been so successful in introducing the MegaManza brand in Native American marketplaces this past year -- he's training the salespeople to pretty much take over the Class II market activities so that Tommy is ready to go out there and focus on the charity sweepstakes and charity bingo marketplace.

And he kind of needs a new challenge. He's exceeded his sales quota by about 100% his month. And it looks like since September 11th, the charities need to find ways of raising more funds so that they can fund the delivery of welfare services as the administration would like to see them do. I think that we're going to see some acceleration there. And I think that we will see first our Legacy Class II bingo games in that marketplace, as well as maybe a sweepstakes version in some states. And then I think we will eventually see our MegaManza series of games going in. But for the short term, I think it will be more of the Legacy type of games.

MR. DEHEN: Gordon, is the charitable market bigger or smaller than the tribal market?

MR. GRAVES: It's many, many times larger. There's about 400 or 500 gaming facilities in Indian Country, and there's 35,000 charity bingo halls. So the charity bingo market is much, much larger.

MR. DEHEN: Is there a product that could be done that's not in a charity or a tribal hall? Just like in the seventies, they had these Pong tables that people used to drink and play at. Is there a nightclub type of product on the shelf anywhere?

MR. GRAVES: For us, no. I think there might be a potential market for us there, but I think that's down the road a pretty good ways before we look at that market.

MR. DEHEN: Okay. Well, again, thanks for everything.

MR. GRAVES: You bet.

OPERATOR: Thank you. Our next question comes from Steve Emerson. Please state your affiliation, followed by your question.

MR. EMERSON: Steve Emerson, Emerson Investment Group. Again, congratulations. Can you give us a flavor for -- if you were not increasing the number of units dramatically, what would be the normal seasonality of one of your tribal halls? Would it be 30% in the fourth quarter, 20% in the first quarter? And could you give us a flavor of what were your average handles per day? Thank you very much.

MR. GRAVES: Well, let me say that normally the first calendar quarter -- use that as the base. Normally, the first calendar quarter and the second calendar quarter are similar. Third calendar quarter is typically down a little bit, and the fourth calendar quarter is normally down significantly. This year was a little different because this year I think a lot more people were doing their gambling at home rather than traveling to do their gambling. So it was higher this year than normal. Clifton, do you feel like you can say anything any more precise than that?

MR. LIND: Sure. Steve, it's a little bit difficult to give you precise numbers because as you will recall, we only introduced our New-Generation game in January of last year. So they've just been running a year. And we have much better data, very good data, on our existing Legacy games that were out there when a different demographic group was playing them. And, you know, the studies that we had run reveal that the average customer on our Legacy games was 63 years old. And because of that, during September, October, November, and December, they refocused a good bit of their disposable income on back-to-school clothing and holidays.

The remarkable thing that happened with MegaManza is that in one year we have lowered the average demographics for our players down to 53 years. And so we've brought a bunch of 20-something or 30-something players into the hall that the halls were not able to attract before. So I think we're going to see the [seasonal] fluctuations go away.

But if you will take the first and second calendar quarters as a base, we usually saw, if you will, 25% [of our annual revenue] with the first calendar quarter and 25% with the second quarter. That would jump up to about 29% of our revenue in the third calendar quarter. And with the fourth calendar quarter of the year being down to about 21% of our annual revenue. So it was that sort of a quarterly swing with the summer months being, you know, four percentage points higher than you would expect, and the fall quarter being down 4%, rather than just a straight pro rata average.

MR. EMERSON: So if this March quarter is as per history, we should expect a possibly very strong increase per unit play compared to the Christmas quarter, and your estimates could be highly conservative as you usually are.

MR. GRAVES: That could be. But I think again, as I said, I think it's important to note that I think that we saw a lot higher play in the local markets overall this year than they normally do. If you look what happened in Illinois, for example, or Indiana, or any local market, the local markets did better this year than they normally do, where, you know, Vegas did a lot worse.

MR. LIND: And, Steve, I agree with Gordon with what he said on that. But in addition to that, we added so many machines in December and January that, remember, we're optimizing on purpose and in some of the halls we're driving the hold per machine down.

MR. EMERSON: Can you give us what the hold was in the June quarter, this quarter, and then about what it's been running quarter-to-date, and then I'll relinquish the line?

MR. LIND: Steve, from a competitive standpoint, I would rather not, as the Chief Operating Officer.

MR. EMERSON: Okay.

MR. LIND: But if Gordon wants to override me.

MR. EMERSON: No. Well, I respect totally your desire for competitive reasons to keep your numbers private at this point.

OPERATOR: Thank you. Our next question comes from Steve Neren. Please state your affiliation followed by your question.

MR. NEREN: Fahnestock and Company. Hi, Gordon; hi, Clifton.

MR. GRAVES: Hi.

MR. NEREN: Just a couple of questions. First, I want to get a clarification. We've all agreed to this point, including you, that your forecast for the second quarter is conservative. Just to throw out some numbers here, to point out how conservatively it appears to me, if you get an average of 2,500 games in the first fiscal quarter and it appears that you'll do an average of at least 3,500 in this quarter, --

MR. GRAVES: 3,400 or 3,500, yes.

MR. NEREN: Well, okay. Then you're talking about roughly 1,000 more games. Now, based upon the numbers that I've been using with my clients, 1,000 games on an annual basis is worth a dollar a share or almost a buck a share. And if you divide that by four, simple arithmetic tells you 25 cents. If I take off from the 25 cents, six cents, that's 19. Nineteen on top of 49 is 68 cents. So I really think you're kind of -- I understand you want to exceed your numbers, but to such an extent that you're low-balling -- I think it's a little -- I don't know what I did wrong in my calculation. If I did, please let me know.

MR. GRAVES: Clifton, do you want to answer that?

MR. LIND: Well, Steve, I stick with the guidance and I think it's conservative. And the fact is that we are investing heavily in R&D and market development, and even though it's not reflected in the first fiscal quarter, you'll see this quarter some significant expenditures that are related to the R&D effort. And the market expansion, both geographically within our current market segment and into the charity and lottery markets --

MR. NEREN: When I get my numbers on the first quarter and, believe me, I was within a penny of your numbers, I used the significant increase in your R&D numbers. So I already have that in there. It happened and I think the reason my numbers -- that your numbers didn't exceed what I expect, was that your deliveries in the quarter appeared to be scooting more towards the end of the quarter than the beginning of the quarter, so that even makes the average. And especially since I know you had an excellent January, it even makes more certain that your numbers in the second quarter significantly exceed the numbers in the first.

MR. GRAVES: Yes, Steve, but I think in looking back at the first quarter, it would appear to me just from this discussion, and I'd rather sit down with you than belabor it here, but that you haven't made the appropriate adjustment in the hold per machine that should've been made for the impact of this six cents a share that we've been talking about.

MR. NEREN: By the way, I did use a number which goes back to a number you had six months ago, rather than increase the number when you guys were getting over 200. Could I, rather than just belabor this since I think you're just being ultraconservative here, could you -- the number that you had on the 6 cents for the Seminoles, what did that work out to be per day on your machines? And what do you think that their house machines were running?

MR. LIND: We have a confidentiality agreement and we just can't comment on that, Steve.

MR. NEREN: Can you give us a multiple of what you think you did? Were you 50% ahead of their machines? 100%? 200%?

MR. LIND: Steve, sorry, I'm not going to comment on that. The potential of doing business with that tribe is so important, and we're going to respect the confidentiality agreement that we signed.

MR. NEREN: Do you think any of the tribes are on the phone?

MR. LIND: Well, that might make it better.

MR. NEREN: That doesn't make any difference. Just kidding. Did you discuss the future? I mean, we know that you're working on some new markets. Is there anything that you can discuss about any of these potentials more than we've already heard, and specifically, California and possibly even Oakland?

MR. GRAVES: No. I don't think we can say much. I think all of what I've said is about all we can really say. There's tribes out there at their limit on their 2,000 units. And they've got a lot of economic pressure to increase revenue, and I think the best way to do that is to put in more Class II machines. And there's a number of tribes out there in California that don't have compacts, and they have an opportunity to get started earlier without a compact by putting in Class II. But I think, again, it's not probably appropriate for us to go into much more detail on that.

MR. NEREN: Gordon, throughout Arizona and the list of places where you have some contracts now, and I guess I haven't heard that one before.

MR. GRAVES: What's that now?

MR. NEREN: Arizona. Are you actually doing anything in Arizona now?

MR. GRAVES: Yeah. We've got a lot of our MegaMania machines out there. We don't have any MegaManzas out there.

MR. NEREN: And do you have any idea when you could have MegaManza?

MR. GRAVES: Well, I think it's liable to happen this year. Clifton, do you want to comment on that?

MR. LIND: I think 120 days is a good middle-of-the-road estimate of when we'll have the New-Generation machines out.

MR. NEREN: Thank you.

OPERATOR: Thank you. Our final question comes from Scott Gambill. Please state your affiliation, followed by your question.

MR. GAMBILL: Hi. Scott Gambill with the Emergent Financial Group. Good afternoon, everyone. Congratulations on a good quarter. My question is, you already sort of covered the seasonal pattern of revenues. I recall, I believe it was the fourth quarter of 2000 fiscal year that you reported a stronger-than-expected earnings and it was because of a shifting of revenues forward in time when the demand was stronger. So you kind of robbed a little revenue in earnings from the December quarter and booked them in September. My question would be: Is there any of that kind of timing of orders here that's responsible for the better-than-expected quarterly report in the flattening out? And a follow-on to that would be: With some of these large new markets that you anticipate entering in the near term, would it be good to guide the Street to an understanding that --

MR. GRAVES: -- solids. And on these other things, if you talk about it too much, you're going to get people anticipating and expectations up to the point where you're not in control of that and you could disappoint people. And I think we've just got to be very, very careful and not talk too much about some of these future opportunities. If they happen, it would be a great upside. You know, we've got a company here that's doubling its earnings every year. Its earnings per share, we're doubling every year. And if let ourselves -- we don't have the discipline to not talk about how it could be even larger if some of these things happen, we're doing ourselves a disservice, I think.

MR. GAMBILL: I actually appreciate that, by the way.

MR. GRAVES: Yeah.

MR. GAMBILL: I remember some of those waits for those new markets. So in other words, it's possible to -- it doesn't affect the longer-term picture here. That's kind of what I wanted to hear actually. Was there any additional business that you booked ahead of original guesstimates?

MR. GRAVES: Oh yeah. As Clifton said before, we're considerably ahead in installations and over and above what we had been projecting where we were going to be.

MR. GAMBILL: Okay. Which is all good. Okay. Thank you.

MR. LIND: I'd just like to add on your question the shift in business that you were referring to in the prior period had primarily to do with the sale of equipment. You know, our primary source of revenue now is recurring revenue. So, you know, we try to get out there every day we can and get a machine out one day earlier because every day that we don't have it there, it's money that we missed and is gone forever. So we continually try to accelerate deliveries where we can just because of the nature of the recurring revenue in the business. And it is not the same impact that you might have seen before when we were talking about specifically some sales of some units in the Washington State market that got moved forward a quarter.

MR. GAMBILL: That was the Q-4 of 2000 you're referring to?

MR. LIND: Yes.

MR. GAMBILL: Oh, okay. I remember that fairly clearly, but wanted to go back to that period to just kind of see if we can replay that here in this last quarter. That's it. I'm real happy with the quarter. Congratulations.

MR. GRAVES: Thanks very much.

OPERATOR: Thank you. As of this time, I'm showing no further questions. I will now turn the conference back to Julia Spencer to conclude.

MS. SPENCER: Thanks everybody for joining us, and we'll see you next quarter.

OPERATOR: Ladies and gentlemen, a rebroadcast of this call will be available today starting at 3 p.m. EST until February 7th at 11:59 p.m. EST. The phone number is 1-800-428-6051 for domestic callers. And for international callers, use 1-973-709-2089. Use the password I.D. number of 229129. That concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

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