| Multimedia Games, Inc.
HOST: Mr. Clifton Lind
DATE: April 29, 2003
OPERATOR: Good day everyone, and welcome to the Multimedia
Games second quarter fiscal year 2003 conference call and webcast.
This call is being recorded and will be available for replay by
dialing 888-203-1112 or 719-457-0820 and entering the pass code
of 561345.
With us today from the Company is the President and Chief Executive
Officer, Mr. Clifton E. Lind; the Chief Financial Officer, Mr.
Craig Nouis; and the Director of Investor Communications, Miss
Julia Spencer. Once today’s presentations are complete, we
will conduct a question and answer session. At this time, I would
like to turn the conference over to Mr. Lind. Please go ahead,
sir.
LIND: Thank you, Operator. Welcome to the Multimedia
Games FYO3 second quarter conference call. On the call today with
me is Craig, our CFO. In addition to our strong second quarter
financial results that were reported earlier today, there have
been several positive developments since our last call that will
strengthen our position in Class II gaming while others will
advance our plan to enter new markets by leveraging our core technologies.
So on today’s call we will do the following: Review the
quarterly financial results and our expectations for the third
quarter and fourth quarter of our fiscal year, and therefore, our
full fiscal year; provide data on the installed base of our New
Generation Class II player station and the hold per day produced
by those stations; provide a brief status report on the National
Indian Gaming Commission or NIGC’s, review of our Reel Time Bingo
game; and review the implications of the recent GLI approval of
our Next Generation gaming system. We will also review the status
of our initial installation of Class II gaming devices in
California. We will review our Class III delivery and the
Class II market potential for Washington State. We will discuss
the rulings in the U.S. Courts of Appeals for the Eighth and Tenth
Circuit, which affirmed the exemption from the Johnston Act for
Class II Technological Aids. We will give an update on the
progress of our Dallas Development Project, which we are partially
funding. We will give an update on activities in the charity markets
and other related opportunities, and we will talk about our recent
receipt of a signed contract for the video lottery system in the
racetracks in New York. We plan to make our comments as concise
as possible and allow ample time for Q&A for all investors
and analysts.
But, before we get to the heart of the call, Julia Spencer will
make a few cautionary remarks.
JULIA SPENCER: Thank you, Clifton. I need to remind everyone
that today’s call and our simultaneous Webcast may include
forward-looking statements within the meaning of applicable securities
laws. These statements represent our judgment concerning the future
and are subject to risks and uncertainties that could cause our
actual operating result and financial condition to differ materially.
Please refer to the Risk Factors section of our recent SEC filings.
Today’s call and webcast may also include non-GAAP financial
measures within the meaning of SEC regulation G. A reconciliation
of all non-GAAP financial measures to the most directly comparable
financial measure calculated and presented in accordance with GAAP
can be found on our web site at www.multimediagames.com, under
the Investor Relations tab. I will now turn the conference call
back to Clifton.
LIND: Thanks, Julia. Before I turn the call over to Craig
for detailed commentary on the quarterly financial result, I want
to provide information on Multimedia’s standard-sequence bingo
gaming engine, that is displacing our bonanza bingo gaming engine,
which the market knows as MegaNanza.
During the quarter, we announced that we had entered into an
agreement whereby, among other things, a fast-track 60-day timetable
was established with NIGC for the review and classification of
the new gaming engine. The agreement stipulated that during the
30 days following our submission of Reel Time Bingo, NIGC and the
Company would have discussions to identify and to clarify the workings
of the game, and identify any issues that may preclude the classification
of the game as Class II. While we are still about two to three
weeks away from the date by which we expect to receive a final
letter, I can tell you that our dialogue with NIGC has been, as
we expected, quite constructive.
Furthermore, I wish to state that I sincerely appreciate the
frank and open exchanges that we have had with NIGC’s legal
staff who have been firm, but I must say, fair. Many investors
have asked when the 60-day schedule is complete. While all of us
would prefer this process to be over sooner rather than later,
giving NIGC adequate time to complete this important process is
much more important to our tribal partners and to MGAM than a few
days on either side of the 60-day timetable. That being said, NIGC’s
representatives have indicated that they expect to have their ruling
out on or before May 15th.
In a related development, we were pleased to announce last week
that our Next Generation gaming system was approved by GLI. When
operating in conjunction with our Reel Time Bingo version 2.0 gaming
engine, which will be released early this summer, for the first
time, players of our Class II linked interactive games will
be able to experience the excitement of complex bonus round games
and local- and wide-area progressives. These enhancements have
generally increased the win of traditional slots and VLTs. Our
game development team is eagerly awaiting the release of the Fourth
Generation system and the Reel Time Bingo Version 2.0 gaming engine,
as these two releases will support the subsequent release of a
wide variety of Class II and Class III games, including
a variety of games with progressive jackpots not previously available.
We believe that Reel Time Bingo 2.0 will be the best Class II
overall earner for our tribal casinos after its release.
Two closing comments before turning the call over to Craig for
his financial reviews, first, Reel Time Bingo 2.0 will change the
competitive landscape of Class II gaming. [Games on] our Reel
Time Bingo Version 2.0 [platform] will be the first and the only
Class II devices with both complex bonus round games and local-
and wide-area progressive games. Also, there are many tribal regulators
who feel that regulatory and law enforcement agencies are more
aggressively expressing to the tribes their belief that certain
competitive gaming devices are not in compliance with current interpretations
of the rules issued by NIGC last summer in their attempt to clarify
the old rules on what is a Class II game. This should create
additional demand for Multimedia’s games in both our existing
and our prospective casinos.
I would not like to turn the call over to Craig for a few remarks
about the quarterly financials.
CRAIG NOUIS: Thanks, Clifton. Earlier today we reported
diluted earnings per share of $0.56 for our second fiscal quarter
compared to $0.47 cents in the second quarter of last year, and
$0.50 per share for the first fiscal quarter this year. I believe
that investors who have been following us for sometime will recognize
that this morning’s news release contains more detailed information
than we have previously reported.
What I would like to do now is provide a little color on the
second quarter results. Net revenue from New Generation player
stations was $22.7 million, an increase of 4% compared to revenues
of $21.8 million in the December 2002 quarter. Also, in the second
quarter, we had revenues of $2.0 million from the sale of 344 Class III
player stations and related components in the Washington State
market compared to no revenue for Class III sales in the preceding
first quarter of this year. EBITDA in the current quarter was $17.9
million, an increase of 21.1% from $14.8 million in the March 2002
quarter.
New Generation hold per day in the March 2003 quarter was approximately
$134, which we believe was affected by several factors. These include
weakened economic conditions in Oklahoma and several days of weather-related
closures due to heavy snow, including weekend days which typically
are tribal customers’ busiest days. Also, we saw some effects,
beginning in March, of the focus on the war in Iraq, which had
an impact on casual play on Friday and Saturday nights, since those
numbers declined somewhat from what they had been just prior to
the war. And finally, as we continue to place games in existing
tribal casinos in an effort to accommodate peak weekend demand,
and ultimately optimize our per hall revenues, we see some negative
effect on our holds per day per month as the incremental installed
games see less play during the week.
During the quarter we placed a net of 771 of New Generation player
stations and removed a net of 360 Legacy player stations for a
net Class II placement of 411 units. We were below our normal
net placements during the quarter due to the higher-than-typical
number of removals of Legacy games as casino operators replaced
Legacy games with some higher-earning games.
During the past quarter, our net revenue per player station per
day from Reel Time Bingo player stations was approximately $40
on an average number of 3,039 units installed, and the net revenue
per player station per day for MegaNanza player stations was approximately
$41 on an average of 3,221 units installed. On a casino-to-casino
comparison where we have converted MegaNanza player stations to
Reel Time Bingo, RTB has generally performed equal to or better
than MegaNanza following the initial learning curve period on RTB,
[one] that players go through on any new game when it is first
introduced. During the quarter, the average net revenue per player
station per day for MegaNanza was slightly higher than the net
revenue per day for Reel Time Bingo, due to the fact that the locations
still running MegaNanza are historically our better locations.
We now expect to convert all of the remaining MegaNanza player
stations to RTB by the end of May.
Our operating expenses as a percentage of net revenues remain
constant at 56% in the March 2002 quarter and the March 2003 quarter,
which are both up from 54% for the quarter ended December 31, 2002.
Total operating expenses increased from $14.1 million in the December
2002 quarter to $16.0 million for the current quarter, largely
due to an increase in salaries and wages relating to an increased
head count in our technology department, higher depreciation and
amortization that was primarily the result of a larger installed
base of Class II player stations, higher player station maintenance
costs and increased legal costs. Depreciation and amortization
in the March 2003 quarter was $5.1 million, compared to $3.6 million
in the March 2002 period, and $4.4 million in the December 2002
quarter. Depreciation and amortization expense as a percent of
average net PP&E for the current quarter and the December 2002
quarter was 10.3%, compared to 12.8% in the March 2002 quarter.
Our cash increased to $25.1 million. This increase not only relates
to cash generated from operations in the March quarter, but also
from a reduction in the gross receivables from the $9.0 million
range as of December 31, 2002, down to $5.9 million as of March
31, 2003, which is in line with the expected levels.
As you will note, long-term debt as of March 31, 2003 was $6.0
million, compared to $1.0 million as of December 31, 2002. The
increase in debt during the past quarter includes approximately
$2.9 million for vendor financing from HP and Cisco relating to
our New York Central System contract, $1.7 million related to corporate
aircraft financing, and approximately $400,000 for other debts
such as automobiles and other computer equipment. We believe this
debt level is still very conservative and gives us a little more
flexibility with our cash and balance sheet so that we can take
advantage of opportunities that might present themselves, such
as funding new casino developments for tribes.
Inventory increased from $12.5 million at December 31, 2002 to
$15.1 million as of March 31st. During the quarter, we completed
the purchase of 500 units from WMS Gaming, which completed our
contractual obligation with them. As of March 31, 2003, we had
1,046 finished player stations in inventory with a total cost of
$6.6 million, and had new and used component inventory parts of
$8.5 million. We have commitments for player station installations
that will reduce the levels down to historically normal levels
prior to the end of the quarter, such as the 500 Class III
sales in Washington that we had previously announced.
Our net property and equipment increased from $46.3 million as
of December 31, 2002 to $53.9 million as of March 31, 2003. Total
cash and non-cash cap ex for the March quarter was $12.7 million.
We have provided a detailed breakdown of cap ex in our earnings
release.
Earlier this month, we received a signed contract back from the
offices of the Attorney General and Comptroller for New York State,
and while Clifton will discuss this in a little more detail, I
want to point out that we do not expect to generate any significant
revenue from this project until fiscal 2004. To date, we capitalized
software costs of $1.3 million and hardware purchases of $3
million relating to the New York Central Lottery System project.
As you know, we’ve identified several attractive opportunities
whereby we would commit to fund casino expansion projects in exchange
for a certain percentage of the available floor space. We have
committed to providing approximately $9 million in funding a casino
development project on the Oklahoma-Texas border. Capitalized construction
costs for this project to date are $2.4 million, of which $1.7
million were capitalized during the March quarter. We currently
expect the facility to have a soft opening on March 19, 2003 and
a grand opening in late June.
In keeping with the recent enacted Sarbanes Oxley legislation
and our current policies dealing with loans to officers and directors,
we want to make sure that you are all aware that Gordon Graves,
our former CEO and current Chairman, has repaid an outstanding
note due the Company by surrendering 30,858 shares of common stock
at $20.87 per share, which settles his note to the Company in full.
Also, Clifton Lind recently repaid the portion of his note that
was due during April of 2003, totaling $355,000.
You may also notice from the balance sheet that our other long-term
liabilities increased from approximately $1.4 million as of
September 30, 2002 to approximately $3.5 million at March 31, 2003.
Approximately $2 million, or nearly all of this increase, is related
to a non-compete agreement entered into with Gordon Graves as part
of the CEO succession process. The $2 million, based on the present
value of the expected future payments due Gordon, will be amortized
over a five-year period. This asset is included on the balance
sheet in “other assets.”
Let me address Research and Development expenses. As those who
have followed our Company know, we began reporting R&D last
quarter. We are in the process of gathering and analyzing the required
information to calculate the R&D cost for the second quarter.
We will complete this effort within the next two weeks and R&D
expenses will be broken out and separately reported in the 10Q
for the second quarter.
I am sure that you’ve noticed in our news release this morning
that we’ve initiated Q3 and Q4 2003 financial guidance and
also have adjusted our full year guidance. We currently expect
EBITDA of $19.7 million, net income of $8.7 million and diluted
earnings per share of $0.60 for the June 2003 quarter, and for
our fourth quarter, we expect $22.1 million in EBITDA, $9.6 million
in net income, and diluted earnings per share of $0.64, bringing
the full year diluted earnings per share to $2.30, which represents
a 32% increase over $1.74 in fiscal 2002. This compares to our
prior guidance for the year, which was in the range of $2.30 to
$2.60 per diluted share. Our guidance change is based on current
business trends and general economic conditions, especially in
Oklahoma, where so many of our Class II operations are focused,
and the expectation that incremental large-scale Class II
player station installations will not occur in the second half
of this fiscal year as we had originally expected. Accordingly,
we now believe that our single point estimate of earnings per share
of $2.30 is more appropriate. As we said when reviewing the prior
expected range of earnings per share of $2.30 to $2.60, the potential
upside to the lower end of the range had been predicated on the
potential for several large Class II gaming installations
during the course of fiscal 2003. While the potential for one or
more of these projects being implemented during the remainder of
FY2003 or early fiscal 2004 still exist, we now believe that these
projects will likely occur early in fiscal 2004.
Finally, on the investor relations front, during the quarter,
we participated in the CIBC World Market’s 12th Annual
Gaming, Lodging, Leisure and Travel Service Conference, The Roth
Capital Partners Annual Growth Stock Conference and the Sidoti
and Company 7th Annual Emerging Growth Institutional
Investor Forum, and additionally, we’ve supported the analysts
who cover us by doing meetings with their clients and have taken
time to meet with and update many of the sell-side gaming analysts
who publish on the industry. Clifton and I are committed to an
active outreach with the investment community and will continue
to support the analysts and institutions that follow and own our
shares. If you would like to set up a meeting with us, please contact
our IR firm, Jaffoni and Collins, at 212-835-8500, and they’ll
make sure you get on the schedule.
Now, I’d like to turn the call back over to Clifton Lind.
LIND: Thanks, Craig. As I said earlier, since our last
call, there have been numerous positive developments. We have been
successful in adapting what we believe to be the industry-leading
technology to other forms of gaming, and this will facilitate the
diversification of the Company’s revenue sources. At the same
time, the requirements governing Class II gaming are increasingly
coming into focus, and as the industry leader, we are exerting
our strength in the Class II markets we serve and in potential
new Class II markets. Let me run through a few more items
very quickly and then we will open the floor to discussion.
There’s been a great deal of investor interest in what’s
going on in Oklahoma. Historically, neither the Oklahoma Legislature
nor the voting populace have been receptive to new forms of gaming
in that state. While legislators are currently studying various
forms of legislation that would enact a statewide lottery or other
forms of gaming, and while it is always difficult to predict the
outcome of the political process, if history is a guide, it appears
unlikely that there would be a radical change in the way gaming
is conducted in that state. As such, and given the potential for
MGAM’s Class II products to replace other existing devices
manufactured by competitors that may be rendered illegal by current
interpretations of the new rules, Oklahoma remains a dynamic growth
market and we expect that Multimedia will continue to build on
its industry leading market share there.
Recently Multimedia entered the California marketplace, where
we placed over 200 Reel Time Bingo player stations in two of the
larger Class III Native American casinos, one located in Temecula
and the other near Palm Springs. These player stations are performing
moderately well, but we foresee an improvement in the win per day
as we move to a ticket in/ ticket out currency format consistent
with what is being used elsewhere in these casinos. Although, many
tribes in California have signed, and in the future, many others
will sign compacts with the state to operate Class III gaming
facilities, we continue to believe that California could emerge
as one of the largest Class II jurisdictions in the United
States.
If that occurs, MGAM expects to gain a significant share of the
California Class II market. The reasons that California is
potentially such a strong Class II market are as follows:
- First, not all of the federally recognized tribes in California
have Class III gaming compacts with the state, but all of
these tribes can potentially open up Class II gaming facilities.
We believe these would create the demand for a significant number
of Class II player stations. In addition, a meaningful number
of other tribes which aren’t federally recognized can apply
for state recognition and enter into a Class II gaming compact
with the state, which will open up a number of gaming opportunities
for Multimedia.
- Second, more than ten of the tribes are currently at or near
their current limit of 2,000 player stations. Our current Class II
offering represents a means for the tribes who have met current
limits for Class III player stations to broaden their player
station base without having to share their Class II revenue
with the state.
- Third, we believe that many of the gaming floor managers in
California are waiting for the NIGC opinion letter on Reel Time
Bingo before placing meaningful orders for our Class II
player stations. We believe that our Class II player stations
are recognized in Indian country as high earners, and we were
the first Class II vendor to break into the Class II
California market.
During the second quarter, we sold 334 Class III player
stations to Native American casinos in Washington State and have
announced that we have entered into an agreement to provide the
Tulalip tribe in Washington State with 500 Class III machines
for their new casino which is scheduled to open in June.
We stated previously that we expect about $5.1 million in net
revenue from this gaming equipment order; we delivered [the units]
last week and are currently putting all the machines into operation
there. The machines will go into demo play for 30 days before the
casino has its soft and then its grand opening, which we expect
will occur sometime in June. Given the complex rules in Washington
with regard to the total number of devices allowed, which includes
the tribes’ ability to secure allocations from other tribes,
there exists a strong potential for MGAM as in California to provide
Class II offerings as a means for tribes who have met their
current limits for Class III player stations in Washington
State to broaden their player station base. Again, our strong relationships
in the state, particularly as a provider of Class II games,
as well as our reputation for supplying content with high earning
potential, position us well to take advantage of additional Class II
market opportunities in Washington State.
Last week, we included in our announcement about
the GLI certification of our new gaming system the fact that the
U.S. Court of Appeals for the Tenth Circuit in an important case
had decided in favor of the tribe. This is the fourth such case
in which the Department of Justice has failed to persuade a federal
court that the Johnston Act prohibits the use of electronic or
technological aids on Indian land for Class II gaming. This
consistent rejection by the courts of the Department of Justice’s
position on the Johnston Act remains a bright beacon in stabilizing
the regulatory environment for Class II tribes and their vendors.
In this case, the Tenth Circuit stated that if a piece of equipment
is an Indian Gaming Regulatory Act (IGRA) Class II technological
aid, a court need not assess whether independently of IGRA, that
piece of equipment is a gaming device as proscribed by the Johnston
Act. In making the decision, the Court gave deference to the NIGC
and to newly issued rules governing Class II gaming. We believe
the Tenth Circuit’s decision, coming on the heels of the recent
favorable decision by the Eighth Circuit in the Santee Sioux case,
will prove to be very significant for the sovereign Native American
tribes conducting Class II gaming. The new NIGC rules were
enacted after consultation between the NIGC tribal leaders and
tribal regulators. This was an outstanding example of government-to-government
collaboration, which appears to be a key goal of the new NIGC Chairman
and Associate Commissioners. It is gratifying that the judicial
system recognizes the work of the tribal leaders, tribal regulators
and the NIGC by placing such heavy reliance on the new rules. We
salute the two former Associate Commissioners, who played such
a meaningful role in the adoption of these new rules. Again, we
believe the newly issued rules are more precise and are more positive
for Multimedia and its tribal partners. Further, we believe additional
deference to the NIGC is positive. Through and with tribal regulators,
Multimedia plans to work with the NIGC.
One final note on the Tenth Circuit case, it can be interpreted
to be more favorable to standard-sequence bingo games rather than
to fully electronic pull-tab devices. This Court, just like the
D.C. Circuit Court and the Eighth Circuit, indicated that pull-tab
devices were permitted because they actually dispense a paper tab
directly to the player, and then the player must then take the
paper to a clerk to redeem it for his prize. If this is the case,
then the NIGC may use this opinion to point to several of our competitors
in Indian country who do not use paper pull-tabs in this manner.
There are probably thousands of pull-tab games that do not operate
in this fashion which may potentially have to be replaced at some
time in the future and, if this is the case, we’ll be there
to try to fill that floor space for our customers.
On our last quarter’s conference call, we indicated that
we would be providing financing for a $9 million facility to one
of our customers on the Texas-Oklahoma border for an expanded tribal
facility casino development project. This exciting casino project
will be located about 40 miles north of Dallas. As many of you
are aware, this casino will be closer to Dallas than the Shreveport
gaming facility, which is about a four-hour drive from Dallas.
We are pleased to report that this facility is on schedule for
a soft opening in late May and for a grand opening in June, as
Craig had said. We will be delivering the proxy player stations
during the first three weeks of May and look forward to supporting
the tribe in the opening of this facility.
In addition to the return of principal and interest
in a very short period of time, which could be as short as six
months, MGAM has also been granted additional floor space for roughly
600 incremental New Generation player stations at this tribal casino,
and thus, of course, another long-term source of recurring Class II
revenues. Agreements such as these are viewed as good for MGAM
and for our tribal customers, both on a short-term and a long-term
basis.
For our customers, our financing gives them the opportunity and
the wherewithal to build new facilities or upgrade existing ones,
which not only expands their revenue base but also improves the
quality of the entertainment experience for their customers. As
I have stated many times, we insist that any potential transaction
must be substantial and meaningful for our tribal partners if it
is to be good for MGAM. For MGAM, these transactions provide us
not only with a meaningful short-term return on capital, but they
also increase our base of deployed player stations and provide
us with a long-term contract with recurring revenue sources. And
finally, they maximize the probability that we will dominate the
floor space in this particular casino over the long and the short
term.
As I said in recent industry conferences, we would like to do
as many of these transactions as possible, because they provide
substantial advantages to our customers and for MGAM, afford a
high and consistent return on investment. This type of transaction
appears to be a terrific use of our free cash. We are confident
that our future results will validate the wisdom of this type of
transaction for our tribal partners and for MGAM as well.
As many of you know, we believe that the charity gaming market
is an attractive opportunity to build both our top and bottom line
and to diversify our sources of revenue. We estimate that there
are more than 60,000 organizations currently conducting some form
of charitable gaming in the United States and Canada, and some
form of bingo is legal in every jurisdiction in North America.
We have made what I will characterize as substantial progress in
a number of new jurisdictions in this market and have recently
put one of our top sales executives in charge of penetrating this
market. We think that MGAM is uniquely positioned to enter this
market and we expect to report our first revenue from this market
in fiscal 2004.
As we announced earlier this month, we received a signed contract
from the offices of the New York State Comptroller and the Attorney
General to provide the central system for the Video Lottery gaming
system to be operated at licensed racetracks across the state of
New York. We were named the winning vendor about a year ago following
a procurement process in which we competed with other industry
leaders on the basis of technology, support services, experience,
management resources, and of course, price. I am very proud of
the sales, marketing, technology and operating teams at MGAM who
are creating this new opportunity for the Company by opening up
this new market. This is an ideal expansion for us as we have been
developing and operating central determinant systems for many years.
It is also a great example of our ability to apply our technology
and resources logically and systematically to enter new markets.
With last week’s announcement that GLI had certified our
fourth-generation system, we have moved one step closer to implementing
the New York Lottery project, as this is system is the core of
the central determinant system, which we will be deploying for
the New York State Lottery. Industry analysts estimate that this
system could encompass 20,000 or more VLT terminals state wide
in the near future. We will fund about 85% of the financial requirements
for this project through attractive vendor financing. In the current
environment, we are happy to take such financing so we can preserve
our cash for other high-yield investment in projects that would
allow our tribal partners to expand and fill unsatisfied demand
in their market areas. Importantly, New York will be another step
in our efforts to diversify our revenue sources. Once the New York
Lottery VLT system is up and running, we’ll receive a small
percentage of the daily hold. We expect this project to go live,
hopefully early in fiscal 2004.
Clearly, there is a lot going on. And we’re not only making
great progress in efforts to maintain and build our Class II
business, but also in our efforts to expand geographically, as
well as into other areas where our core competencies can allow
us to be successful in ancillary areas of the gaming business.
Let’s open this up for questions right now. And so, Operator,
if you’ll give us the first question, we’ll move ahead.
OPERATOR: Thank you, sir. Today’s question and answer
session will be conducted electronically. If anyone does have a
question out there, please press *1 on your touch-tone phone. Once
again if you’re using a speakerphone today, please be sure
to release the mute function before pressing *1. Once again, that
is *1 to ask a question. We’ll take your questions in the
order that you signal us. And I’ll pause a moment to give
everyone a chance.
And we’ll hear our first question from David Bain with Seidler
Co.
DAVID BAIN: Yes, Seidler. Hey, good quarter. I have a
couple of questions. You’ve stated in the call and on the
press release that you’re not expecting any large orders for
the second half of this year. But Red River would call for a net
install of 600 Class II games. Can you reconcile that at all?
LIND: Sure, David, as we said in our prior conference
call, the Dallas facility has been under negotiation with our customer
for well over a year now. And it has always been included in our
base forecast because there was no question that that facility
was going to take place. It - the - I believe the press release
says that there are going to be no additional major development
facilities. We do expect significant orders, but we consider a
major facility an order of 750 machines or more, David. And while
we have a number of those under discussion right now, it is not
likely at this point that any of them will fall into our 3rd or
our 4th quarter.
BAIN: OK. But given that if you take the Red River and
put even half of that into Q3 along with your Class III $5.1 million
order, you’re still expecting $0.60 for Q3?
LIND: David, as all of you [know] who know our Company
well, you realize the single most important parameter driving our
net gaming revenue and our bottom line is the hold per day per
machine right now. And over the recent past, [the hold is down]
because of, as Craig stated, because of economic anxiety, weather
considerations and other parameters that we don’t necessarily
fully understand how they’re affecting gaming. As we have
stated, on the weekends, our core players have been staying away
from the halls. And therefore, we have used very conservative numbers
for the balance of our year and the expected win per day off of
our machines. If these numbers prove to be conservative as this
past weekend may indicate that they are, then we will be in a position
to do better than the numbers that we reported for Q3 and Q4. However,
there are so many factors in play, and we can’t identify any
single factor and point to that, we felt it was unwise for us to
be overly optimistic about what the hold per machine is going to
do for the balance of the year.
Now, as I stated earlier in answer to your question, we were
delighted that it appears this immediate past weekend that a number
of our players have started to return in meaningful numbers to
the halls. And our - a survey of our hall managers confirm that
they were seeing some old faces back in the casinos. So it may
be that the war anxiety and the economic anxiety is subsiding a
little bit. I want to point out that particularly for some of our
large casinos in the Tulsa area, that American Airlines is a very
major employer in Oklahoma. And the recent contract disputes may
have in fact, affected, you know, play by some of our players who
are employed by American Airlines.
So the driver that keeps the numbers where they are is primarily
our conservative estimates of hold per day, which is based upon
the experience that the - what we believe is an aberration. We
hope it’s an aberration, what we’ve seen over the last
eight weeks occurring at our primary halls.
BAIN: O.K. In Washington State, the $5.1 million order
is from Tulalip that, you know, is opening in June. Their old casino
then would either need to be shut down according to the Gambling
Control Board in Washington State or be all Class II. And
since you’re supplying the Class III, could that then
translate in to a large Class II order in Q4? It’s nothing
I’m forecasting, but is that a possibility?
LIND: Yes, as I stated when I made my comments, David,
about the Class III situation in Washington State. The tribes
also have the option of going and buying another tribe’s allocation
of machines.
BAIN: Yes. They would still be 970 games over according
to the Gambling Control Board.
LIND: Yes I understand. And, however, the casino, the
tribe has not yet - the tribe is not planning to shut down its
old casino. And it has not decided on its final allocation of machines
between the casinos. It currently plans to operate both casinos
as Class III casinos within the state’s maximum number
of machines. And of course, I don’t presume to speak for them.
They could be making different decisions at the next tribal council
meeting about that. However, they are opening a major new Class II
gaming facility in the future. And we expect to be providing a
significant number of machines for that facility.
BAIN: OK. Also with the NIGC discussions, you’ve
made some minor change to Reel Time. Can we assume, I’m sure
you’re not going to comment on those changes, but can [we]
assume they’ll be transparent to the average Reel Time player?
LIND: In every version - every time we bring out a new
gaming engine, for a period of about two weeks, the changes in
the games are not transparent to the players. And there will be
changes in this game that will not be transparent to the players.
After about two weeks, I don’t think any of the players will
remember that they ever played the game any differently.
BAIN: O.K. And you said that there were thousands of
pull-tabs that didn’t process paper directly to the player
or played in a manner that the 10th circuit detailed. Are there
also thousands that would be deemed predetermined games? And if
so, you know, really don’t pass NIGC muster? And would the
tribes listen to this Chairman differently than the former Chairman
in exchanging those games out for ones that are predetermined and
the like?
LIND: Well again, I don’t presume to speak for the
tribes. But the tribes have been very supportive of the current
Chairman and the Commission. And I can’t imagine that they
would decide to take a stand against this Commission unless they
felt their tribal sovereignty was being trampled on. I think that
the Commission has indicated that it’s going to be - the term
that they used, tough but fair. And I think in the meeting in Oklahoma
last Friday, they indicated that there were a number of machines
that they did not think met the requirements of Class II gaming
devices. And they were encouraging the tribes to take independent
action to remove them from service before the Commission was forced
to take action. So I think you’ll find the tribes, and again
I don’t presume to speak for the sovereign nations that we’re
honored to do business with, but I think you’ll find that
the tribes make good decisions here. And are not going to arbitrarily
pick a fight with a new Commission that has three more years to
serve.
BAIN: OK. Good, OK, final question, then I’ll let
someone else go. If you do get the positive opinion later from
the NIGC, you mentioned that you felt that several tribes are sort
of lying in wait. I assume that meant California in particular.
Also, simultaneously they’re supposed to send out a letter
regarding predetermined games. Would you then be reassessing guidance?
Or is it to early to say at this point?
LIND: I certainly think that it’s early in this
quarter to be reassessing guidance that we only arrived at, you
know, after much thought and deliberation last week. So we’ll
- we obviously know that the market is disappointed with the fact
that we set our guidance where we did. And obviously know that
setting it there was below the consensus. There is nothing that
would make us happier than to be able to come back and have substantial
reasons for changing our position. So, I can assure you that as
soon as Craig recommends to me that we take such action, I am sure
that the audit committee will support it. And we’ll be getting
broad notice of that out to the market.
BAIN: OK. One quick follow up to that, and then I promise
to let you go. If there - if you don’t get the opinion letter
going your way, would guidance change?
LIND: No.
BAIN: OK. Thank you very much.
OPERATOR: Thank you. And next we hear from Jeff Putterman,
with William D. Witter.
JEFF PUTTERMAN: Yes, just two quick things. I’m
sorry. Did you say what the changes were that the NIGC had suggested
that you make?
LIND: No.
PUTTERMAN: O.K. But they were relatively minor. Is that
what you said?
LIND: That is consistent with what I said, yes.
PUTTERMAN: O.K. And then I would just love to year you
explain why we need to be paying Gordon a non compete which clearly
exceeds $2 million. I find that outrageous.
LIND: I would like to say that Gordon has a long and
significant history, not only with this Company, but he is generally
recognized by the industry as the Dean of Class II gaming.
For obvious reasons, I was not included in the negotiations with
Gordon. I want to say that I have complete faith in my Board of
Directors. And that I am confident that they had excellent reason
and logic to arrive at the package that they did. But I simply
can’t comment on it because I was not involved in it.
PUTTERMAN: Well as one of the largest owners, I would
say that I would respectfully request that every member of the
board who approved this package resign. Do me a favor.
LIND: Well obviously, I can’t have a response for
that.
PUTTERMAN: I’m just going on the record.
LIND: I know, I understand.
PUTTERMAN: OK. You know this is egregious theft of shareholder
assets, period. There’s no excuse for it.
LIND: OK. Well this is an appropriate forum for you,
certainly someone - a significant shareholder like yourself, to
have expressed that. And message received and understood. And we’ll
talk - be happy to visit with you in another forum about it. But
I’d like to get on to some other questions if we could.
PUTTERMAN: Go ahead.
OPERATOR: Thank you, sir. Next we move to Jeff Martin
with Roth Capital Partners.
JEFF MARTIN: Good afternoon, and thanks for taking my
questions. Clifton, could you address, you mentioned in the press
release [that] you expect the trend in Class II revenue growth
to reverse, and I assume that means accelerating growth there.
Could you be a bit more specific on what you anticipate will drive
that?
LIND: Sure. Over the last three months there have been
a number of things which have sort of caused our growth plateau.
Among them have been the war and the economic anxiety which we
think and hope both of those will pass. In addition to that, there
has been a proliferation of machines that we do not feel or let
me say many do not feel are legitimate Class II machines in
Oklahoma. And it is clear that there is reason to expect that those
machines may be coming out of the marketplace in the next few months
and [being] replaced with our machines. But most importantly, because
we are about to release our fourth generation of gaming software,
we are going to put into play some new exciting bonus round games,
which are complex bonus round games. And I won’t go in to
the details of those now for competitive reasons.
And also new wide-area and local-area Reel Time implemented progressives
that every time somebody plays them the amount of the progressive
goes up in real time, based upon the actual play at the instant
it’s played. And we think those new games, and the new Las
Vegas game faces that are going to start coming out in May are
going to attract new players into the hall. And the thing that
our Company has done best over the years it to attract new players
into the halls. And so that’s the reason we feel we’re
going to reverse this trend.
MARTIN: OK. Could you elaborate a bit on the wide-area
progressive roll out and bonusing roll out with Version 2.0. Is
that going to be, you know, a 100% switch out? Or is that going
to be gradual?
LIND: Well we’ll roll out six wide area - I’m
sorry - three wide-area progressive games in June. And three more
wide-area progressive games in July. And then in August we will
start with some local-area progressives. The bonus round games
are going to come out in groups of games faces starting in May.
The bonus round can be run on the Las Vegas game faces. Certain
of them can be run on Gen III. And so even before we release Gen
IV in Indian Country, we will start rolling out certain of the
bonus round games, but lots of complex bonus round games. So it
won’t be a gradual changeover, but a very, very rapid one.
MARTIN: OK.
LIND: I men we’re getting out six to nine new Class II
game faces a month, now Jeff.
MARTIN: Anyway, can you quantify what percentage increase
you would anticipate the hold to achieve over, you know, a couple
of quarters’ time?
LIND: Only - no, Jeff. Only to say look, it’s been
meaningful with video lotteries and slots when people have been
able to put out progressives and complex bonus round games. If
it is not a meaningful increase on the hold we will be disappointed
and - so I’ll just have to leave it at that.
MARTIN: OK.
LIND: There’s no way to quantify it.
MARTIN: A couple of balance sheet items for Craig. Craig,
what’s cash flow from operations?
NOUIS: Cash flow from operations, let me pull up my sheet,
is $9.6 million.
MARTIN: O.K. And what are the terms on your new credit
line?
NOUIS: It’s going to be basically a $15 million
line of credit with - it’s going to be two parts, one is a
working line of credit of about $5 million. And the remaining $10
million will in essence be an equipment line. The interest rate
is prime plus one and a quarter. And it’s really secured by
most of our assets.
MARTIN: OK. And you can use those for Class II equipment
or just the ...
NOUIS: Absolutely.
MARTIN: OK. And then final question for Clifton, do you
still anticipate 3,000 New Generation gross installs for fiscal ’03?
LIND: Yes.
MARTIN: OK. And any stab at ’04? Can you maintain
that level?
LIND: We think the rate of installations in ’04
will be equal to or greater than that rate.
MARTIN: OK.
LIND: Than the rate in ’03.
MARTIN: Thank you very much.
LIND: Thank you.
OPERATOR: Thank you. And next we’re moving Arieh
Coll with Eaton Vance.
ARIEH COLL: I just want to ask the prior questioner’s
questions a second time. With win per day, can you just give us
the historical examples of the rate of increase of win per day
that was realized by slot machine or VLT operators in their respective
markets in the past? What are kind of the general rules of thumb?
Maybe the range, the high and the low range.
LIND: It varies so much per game face, there’s no
way I can give you an accurate range. But on any particular game
theme, the addition of a bonus round, and the addition of a progressive,
can easily increase the win per day from 10% to 25%. But it varies
all over the board depending on the design of the pay table, and
how large the progressive is being built. And how much of the pay
table is devoted to various-level surprises for the players. And
so it’s just really hard. We’re going to have such a
big variety that there will be games which are significantly augmented
by these features. And others that it may only be a 10% improvement.
COLL: I understand. And the second thing is the - your
customers, assuming the win per day does increase by a noticeable
amount, what portion of their installed base of Multimedia’s games
do you think they would seek to upgrade to have these - the bonus
round and the swap features, would it be 100% over time or smaller
amount?
LIND: Well certainly the most popular games
today with our players are bonus round games. But there will always
be a mix out there on the floor between the non bonus round games,
the standard game face games, and the progressive games. But in
a facility you might - in a particular facility a given facility
you might see 10% of the machines in one of our Oklahoma locations
go to progressives. You might see another 40% of the machines go
to bonus round [games]. And the remaining 50% stay, you know, normal
one-level game faces.
COLL: And why would the Indian operator maybe only do,
you know, 50% conversions? It would seem as if there’s not
much to lose since we’re doing revenue share here and the
up-front capital costs for them are negligible?
LIND: Well, like in any other commercial casinos, the
hall operators want to offer to their players the faces that they
like to see. I mean, for example, Black&White, which in the
current incarnation is neither a bonus round game nor a progressive,
is extremely popular with players because, you know, a portion
of their players have played that in their trips to Las Vegas and
other gaming centers in the past. So the players will keep a mix
out there. And they will - I mean the casino operators will keep
a mix out there.
And we have the ability, you know, with merely a software change
to change the game mix for the casino managers. And we do that
on a weekly basis. And I’m sure that at some point in time
we’ll be doing that on a daily if not an hourly basis for
them. So it is, you know, there will always be a mix of games.
And there’s no reason that - to believe that ultimately the
mix of games in a Class II gaming facility is going to be
any different than what you see in a Class III gaming facility
or a Las Vegas gaming facility.
COLL: Just two more things. Can you just remind me the
win per day for this quarter is how many dollars per day below
what you were showing three or six months ago?
NOUIS: The hold per say that we’re showing right
now compared to six months ago is probably, without going back
to some of my papers, probably in the $160 to $165 range. Today,
or for this quarter, it was about $134.
COLL: Right. And have you compared the change you’ve
experienced with what other, let’s say riverboat operators
have seen? Because they would be, I guess, the most similar sort
of gaming venue out there, because it will be local and have the
same kind of constituency.
LIND: No, but we have compared it to what our competition,
what’s happened to our competition in our halls. And we’re
generally in line with the drop-off that our competitors have seen.
COLL: Right. But the drop-off you’re seeing is specific
to Oklahoma. Because I’m just wondering if you did look industry
wide, I gather it would - I gather you’re assuming for the
remainder of the year that your hold per day is going to stay at
these new lower levels we’ve seen in March and April. And
I’m just wondering if that has the same view that the riverboat
casinos are also anticipating. Or if they have a different view
of how their business may or may not recover.
LIND: Yes, they would certainly have a different view.
And for example, our business in New York has pretty closely followed
the published information for operators in Connecticut. And so
this is, while it is across the board in our other Class II
states, the New York State Class II casinos are an exception
to this rule.
COLL: So just to summarize, for some reason the win per
day did decline nationwide for reasons mentioned. They have bounced
back in certain regions like New York or Connecticut. But for some
reason, we don’t have an explanation for [why] Oklahoma has
yet to recover.
LIND: Well no, I think we do have a pretty explanation.
The majority of our players are local players. They’re not
destination players. And so they are on, you know, they have limited
disposal income, and are pretty directly affected by economic changes
in the marketplace. Whereas, a traveler going to a destination
casino, you know, they may travel from New York City to a Connecticut
casino to get away from their troubles. And so they’re bringing
new money into that casino that hadn’t been there before.
Whereas we continually draw on a local market.
Now the way we offset that is we continually bring out new products
that attract new players into our casinos. So we’re continually
helping our customs build their playership with exciting new products.
But it is normally local money. Now as we do other facilities,
for example, this one that is 40 miles north of Dallas, we think
that that is a facility that will run contrary to the facilities
that are subject to the economic lows that are being suffered in
Oklahoma, central Oklahoma currently because we’ll be bringing
in new players with new disposable income to leave behind at the
casinos in Dallas. So it is really a phenomenon that depends on
what type of casino it is. And whether it’s serving a destination
market or a local market.
COLL: OK. And just one last thing. What economic changes
have occurred in central Oklahoma in the past six months? I guess
I’m too ignorant and provincial here on the East Coast. I
kind of think of Oklahoma as being driven a lot by the oil commodity
markets which have been fairly robust.
LIND: Well as one might expect. But, you know, WorldCom
was headquartered in Tulsa, Oklahoma. And so they’ve had a
big negative economic impact. They had a major operation there.
And, of course, as I said earlier, American Airlines has their
primary maintenance facility there. And that drives a whole lot
of the marketplace. So, you know, Oklahoma has been suffering here
for over a year now.
COLL: O.K. Well, thank you. Best of luck though.
NOUIS: Thanks so much.
OPERATOR: Thank you. And once again, if anyone does have
a question today that is *1 on your touch-tone phone. Again, that
is *1 if anyone has a question. And next we move to Louis Corrigan
with the Cypress Fund.
LOUIS CORRIGAN: Hi. I wanted to really applaud your additional
disclosure in the press release. It’s very helpful. I had
a question regarding the cost of goods sold on the games that you
sold, I guess, in Washington State this quarter.
NOUIS: Yes.
CORRIGAN: It looks like, you know, just doing the math,
it looks like the cost is about $2,400 per game. Is that right?
Or am I missing something?
NOUIS: No. Actually what - the machines that we sold
in Washington State were actually units that was previously out
there in the field on a revenue-share agreement, in which the machines
were out there for more than three years, and thus were fully depreciated.
So the basis in those assets was zero. What you’re looking
at in the line item on the income statement of $2.5 million
represents our lease revenues from the participation games that
we have up there.
CORRIGAN: OK. So you actually didn’t recognize any
revenue from the sale of those games? Just minimal?
NOUIS: No. I’m sorry. We recognized the full amount.
There was no cost in it. So the entire amount of proceeds is recognized
as revenue.
LIND: So we sold used equipment that had little or no
basis left off because it was out of our rental pool.
CORRIGAN: OK.
NOUIS: I’m sorry - and yes.
CORRIGAN: And so for the games that are going to be sold
in the June quarter in Washington, would those have your kind of
typical $5,000 cost imbedded in them?
NOUIS: Yes. Those are new machines and it’s going
to be the more traditional sales model.
CORRIGAN: OK. And just I’m, you know, trying to
get a feeling for this. You know, the inventory that you have on
the balance sheet, the finished player station inventory, I guess
you’ve got 1,046 games at $6.6 million. So that’s about
6,300 per game. Is that right?
NOUIS: That is correct.
CORRIGAN: And so for the Williams games, you purchased
500 for about $2.6 million. So that’s about $5,200 per game?
NOUIS: Yes.
CORRIGAN: And then would you look - when you look at
the Class II installations in the period, I mean the math
that I’m doing is just saying, you know, $3 million in cap
ex that you recognized, divided by the 771 net new Class II
for about $3,900 per unit. Is that the right way to look at it?
NOUIS: I did not follow that logic. Can you go through
one more time for me, please?
CORRIGAN: Yes, in the capitalization break-out that you
give.
NOUIS: Yes.
CORRIGAN: You talked about $3 million went to the placement
of Class II play stations.
NOUIS: Yes, that is correct.
CORRIGAN: And there were 771 net New Generation games
in there.
NOUIS: That is correct.
CORRIGAN: Is that the right - are those the right numbers
to use to get to an average cost of about $3,900?
NOUIS: The other thing when you’re trying to compare
it to the Class II placements out there, there is another
factor that you have to consider. Whenever we have removals of
player stations throughout the year, we have what we call a rental
pool, which is included in our fixed assets. So those numbers will
- that capital - those placements - the 525 - you’ve got to
add the number from the rental pool which comes out of PP&E.
So you’ve to look at those 525 units kind of on its own.
CORRIGAN: OK. I may have to have you walk me through
that off line. It would probably take too long. But O.K., still
it’s right to think about both the Class II and Class III
games in their form as costing about $5,000 to $5,500. Is that
right?
LIND: This is Clifton. Let me chime in here. It depends.
It gets more complex if you’re looking just at the player
station itself. Sometimes if we purchase one of those player stations
from one of our partners that we represent in Indian Country, that
being either Bally or WMS, sometimes the price will be a little
more and may include in some way a bundling of a license for a
game. And also we have eight different styles of cabinets. And,
you know, they vary rather significantly in their base cost depending
on what cabinet you use. And so if we could we’ll give you
all of the detailed information you want on this - happy to do
it. But let’s get it off line so we can get to some other
questions, O.K.?
CORRIGAN: O.K. Just a quick additional question. Regarding
Reel Time Bingo V2.0, I believe you told David Bain that if the
NIGC doesn’t sign off on the new version for some reason that
that would not affect your guidance at all?
LIND: It will not affect our guidance, no.
CORRIGAN: OK.
LIND: We’ll either substitute another gaming - I
am sure that if NIGC cannot find Reel Time Bingo to be a Class II
game, that the large number of tribes who have certified it as
such will request that it go through the administrative process.
In addition to that, we have other gaming engines that are standard
sequence bingo engines that we may choose to substitute out in
the field because as a public Company, we have always felt that
we needed to, you know, stay away from the line where there was
any regulatory suspicion of what we were doing. So, you know, in
conjunction with the tribes and with permission of the tribes [we
might] substitute another Class II standard sequence bingo
gaming engine. But we would not anticipate any machines coming
out of the field, or any machines that we currently have in that
guidance not to be placed as result of that ruling.
CORRIGAN: But the right reading of that then is that
the Reel Time Bingo that’s actually in the field and that
you deployed, you know, a great many of this past quarter, that
doesn’t pass muster, correct?
LIND: No. That is not correct. As I said in response
to the earlier question, we have made some changes that we thought
were preferences from NGIC that we did not think would affect the
play of the game, and were not questions of whether or not it was
a legal game or not.
CORRIGAN: They wouldn’t make you actually withdraw
the Reel Time Bingo Version One that’s out there?
LIND: I would not - we have had no discussions with NIGC
in that regard. However, we have told NIGC that we were changing
to Reel Time Bingo, V2.0. And we are asking them to analyze that
version, not the current version.
CORRIGAN: So they’re not analyzing the first version
because you felt like that you had a better chance with V2.0 with
a better game?
LIND: No. That is not correct. The - during the process
we realized that by the time the NIGC letter came out, we were
going to be very close to our deployment of the then scheduled
GameOps4 system and the new version of Reel Time bingo
that we had been working on since last December.
CORRIGAN: O.K.
LIND: And so we thought it was foolish to ask NIGC to
look at a version that we did not plan to run. And so what we have
done is taken the opportunity to incorporate a couple of their
preferences, and again, it is our opinion, none of which made the
game illegal in its present form. But it was rendered moot by the
fact that in order to run these bonus round games and progressives
and to utilize the power of the New Generation gaming system that
we’re about to put up, we had to go to Version 2.0. Version
3.0 - I mean, excuse me - version 1.2 of Reel Time Bingo is not
compatible with all of the features of the New Generation gaming
system. So we were going to pull it down all along. And took the
opportunity to rewrite the game description to encompass not only
the new version of the game we’re going to run. And again,
I stand on my statement, they were merely preferences that in our
opinion do not affect the legality of the games. Nor will they
affect the players’ acceptance of the game. It was silly for us
not to have used the process that we set in place and take advantage
of it and incorporate some of the changes that we thought maybe
NIGC would prefer.
CORRIGAN: OK. That was very helpful. What will be the
cost to implement the new version in the field?
LIND: As with all of our game changes, changing out from
Version 1.2 to 2.0 is merely a software change. While we can do
that from Central Control, we will normally do that in the field
because we can change out a larger number of machines in a shorter
period of time. So the cost is nominal. As we did with the change
from MegaNanza to Reel Time Bingo Version 1.2, we changed 700 machines
in one day. You know, with 15 servicemen it wasn’t – at two locations.
So it’s very nominal. Just software – loading new software on the
player station. Now on the new bonus round games and the new progressives,
we will actually be deploying new glass, and so there will be a
glass change as well. And certainly on the progressive machines
we will either have meters in individual machines, or we will have
banks of machines with an overhead meter so there will be additional
cost of the meter for the progressive games. But that is a nominal
cost in relationship to the additional income.
CORRIGAN: But – so you would expect to see some additional
capitalized costs as a result of the new glass and what have you.
LIND: Well, we – I mean, glass is $50 to $75 a unit …
CORRIGAN: Sure.
LIND: … depending on whether you’re changing the top or
the bottom glass. So it’s a very small cost. The meters for individual
machines are not very expensive. But certainly there will be some
additional cost. But it will be primarily just for the meters for
the progressives.
CORRIGAN: So in terms of your overall capital spending,
which was about $12.7 million this quarter, up from $10.4 million,
would you expect to see that kind of flatten out here? Or would
you expect continued spending due to the New York Lottery? Or what
kind of direction would that be?
NOUIS: That is dependent upon several factors. We right
now have quite a few units in our inventory. So depending upon
how good a job our sales guys do out there in the field and how
many sales they’re able to get for us, we may or may not need to
order some player stations here over the next quarter or two. You
know, the [NY] Lottery – most of what we would spend in the Lottery
is going to be financed by vendor financing. So, you now, that’s
very likely to be a pretty chunk – pretty good chunk of cap ex
for the Lottery by itself. And it could range anywhere from $5
million and above depending upon when the tracks come online. In
addition to it, we’ve got the new casino that we’re financing on
the border of Oklahoma/Texas. That will take another $6.6 million
to complete. And that will be done this quarter. Other than that,
the rest of the cap ex should be relatively minimal as we’ve built
up our inventories a little bit in anticipation of these placements.
CORRIGAN: Do you amortize those expenses for the Lottery
and for the gaming facility construction? Do you begin right away,
or only once they start operating?
NOUIS: Only once they start operations.
CORRIGAN: OK.
LIND: Yes. Let me tell you that as far as the Lottery
is concerned, the balance of, the vast majority of the expenditures
required are associated with the two data centers that we’ll put
in New York. And those two data centers will not go in until there
is more certainty about the exact date of the start up. And it
is probably unlikely that there will be any significant purchases
of additional equipment this quarter related to the New York Lottery.
And I would rather expect that they will occur during our last
quarter of this year.
CORRIGAN: So it sounds like cap ex sequentially actually
should come down from where it was in March.
NOUIS: Yes.
CORRIGAN: OK. One final one for you, Craig. The detail
that you gave on the cap ex was great for the quarter. I wonder
if you could give a comparison with December in terms of, you know,
Class II, Class III, Class II internal purposes, you know, the
whole run down of the - I guess - seven categories you got here.
NOUIS: That is a new disclosure for us and I’ll be glad
to get back with you on that. And I did not have it broken down
in that format. What we were trying to accomplish is getting some
better disclosures out there for investors and analysts. And so
this is the kind of an analysis I did on a go-forward basis but
I would be glad to put it together for last quarter.
CORRIGAN: That would be great. Thanks very much.
NOUIS: Thank you.
LIND: So you’ll get back in touch with Craig off line,
I take it.
CORRIGAN: I will.
LIND: OK. Thanks.
OPERATOR: Thank you. And next we move to Jeff Putterman
with William D. Witter with a follow-up.
PUTTERMAN: Yes. On the subject of Gordon leaving the
Company, my understanding was that he was still with the Company.
Is that incorrect?
LIND: Gordon is not active in the day-to-day management
of the Company or the day-to-day operation of the Company. Gordon
is, of course, Chairman of the Board. And at least through September,
Gordon attends our executive committee meetings twice a month.
And after that, it’s a decision for Gordon and the Board as to
whether or not he continues to do that. So it depends on what your
definition is of “still with the Company.”
PUTTERMAN: Well are we paying him a salary? Let’s start
there.
LIND: Gordon is getting compensation for serving on the
executive committee.
PUTTERMAN: OK. And yet we have to pay him not to compete
with our Company. Is that correct also? We’re paying him right
now to sit on the Board of our Company and then we’re paying him
not to compete with us. Is that correct?
LIND: Well I think certainly that is a fair interpretation
of the situation. Yes.
PUTTERMAN: Well I don’t need to tell you that that’s
ridiculous. Thank you.
OPERATOR: Thank you. And at this time, I will turn the
conference back to Mr. Lind for any closing comments.
LIND: Well I would like to thank all of our long-term
supporters and followers as well as some new ones who have recently
invested in our Company. I hope that today’s call leaves you with
the understanding that there’s still an exciting future of opportunity
for Multimedia Games, not only to expand our position in Class II,
but also in other segments of the entertainment and the gaming
market. I also trust that based on this morning’s press release
and this call, all of you who follow Multimedia feel a certain
level of comfort in knowing that we are committed to providing
you with as much detailed information as possible in order to make
our business and growth opportunities clear, while still being
mindful that we can go too far and unwisely help our competitors.
We are confident that our strong balance sheet, our high margins,
our recurring revenue and our ability to generate cash flow from
operations from multiple revenue streams, as well as our focus
on developing new revenue sources will prove to be beneficial to
our shareholders in the upcoming quarters and years ahead. As I’ve
stated to you before, I feel our executive management team is made
up of some of the best talent in the industry, and that through
their contributions and the contributions of all of our employees,
we will continue to provide outstanding services and innovative
new products to our customers and thereby be able to continue reporting
outstanding financial results. As I’ve said publicly, and I’ll
reconfirm today, this management team is committed to giving its
shareholders many additional quarters of incremental quarter-to-quarter
consecutive growth in earnings per share, and we’re committed to
giving you a compounded annual growth rate of earnings per share
which is far above the industry or the market average. We look
forward to reporting to you again on our further progress when
we announce our third quarter results. And we will also of course
be getting back to you sooner than that as soon as we get some
information from NIGC.
Thank you for your patience and thank you for your faith. We
look forward to the future. We hope that you do. We have never
felt that there were more opportunities before this Company and
we feel that this management team is up to facing the challenges,
which every growing business in a competitive marketplace faces.
So thanks again for your support and we look forward to next quarter.
OPERATOR: Thank you. That does conclude today’s conference.
Thank you all for your participation.
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