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Multimedia Games, Inc. (NASDAQ:MGAM)

F2Q09 Earnings Call

May 6, 2009 9:00 am ET

Executives

Uri L. Clinton - Senior Vice President, General Counsel, Corporate Secretary

Anthony Michael Sanfilippo - President, Chief Executive Officer and Director

Adam D. Chibib - Chief Financial Officer, Senior Vice President

Patrick J. Ramsey - Chief Operating Officer, Senior Vice President

Jenny Shanks - Chief Marketing Officer

Mick Roemer - Senior Vice President of Sales

Analysts

Todd Eilers - Roth Capital Partners

Ryan Worst - Brean Murray, Carret & Co.

Operator

Good day and welcome, everyone to the Multimedia Games fiscal 2009 second quarter conference call and webcast. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Uri Clinton, General Counsel of Multimedia Games. Please go ahead.

Uri L. Clinton

Thank you. I will begin with our Safe Harbor language and then turn it over to Anthony Sanfilippo, our CEO, for the introductions. The following presentations contain statements about future events and expectations that are characterized as forward-looking statements within the meaning of applicable securities laws. These statements are based on management’s beliefs, assumptions, and expectations of our future economic performance, taking into account information currently available to them. Forward-looking statements involve risk and uncertainties that may cause actual results, performance, or financial conditions to be materially different from the expectations of future results, performance or financial conditions.

Please refer to the risk factors section in our recent SEC filings for a description of certain of these risks and uncertainties. The company does not undertake and expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable laws.

Today’s call and webcast may include non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of all non-GAAP financial measures to the most direct comparable financial measures calculated and presented in accordance with GAAP can be found on the earnings release posted on our website at www.multimediagames.com in the investor relations section. Thank you. Anthony.

Anthony Michael Sanfilippo

Uri, thank you and that pretty much took up all the time we had allocated for this call. I do want to welcome everyone who has joined us. Thank you for continuing to show interest in our company, Multimedia Games, and I am pleased to have with me a number of people -- Adam Chibib, our Chief Financial Officer; Pat Ramsey, our Chief Operating Officer; Jenny Shanks, who is our Chief Marketing Officer; Mr. Clinton, who you just heard from, who is our General Counsel; and Mick Roemer, who is our Senior Vice President of Sales.

Adam, Pat, and Jenny will address key topics for the quarter and all of us look forward to questions that you may have at the conclusion of our remarks.

It’s especially great to have with us Mick and Adam. They are two accomplished executives who joined us in the quarter that we are going to be talking about and both of them have made a great difference in a number of ways with Multimedia Games.

A number of things we are going to talk about, and as we’ve continued to do and attempt to do, we want to make sure we are following up on key items that we have talked with you on in the past, and if I take you back a little bit, we have continued to focus on a handful of things that we believe is going to materially change the future success of our company. We foremost want to make sure we are developing competitive products and Jenny is going to talk about that and talk about what we’ve been able to do with that and what’s going to happen here in the near future.

We want to make sure that we continue to focus on improving the performance of existing operations and Pat Ramsey will discuss with you how we’ve done in this past quarter with the markets that we operate in.

We have pointed out to our investors that we had potential risk with litigation, specifically the Diamond Game case, and we are pleased to be able toe report that that case has been settled and the majority of those costs are in this announcement, this earnings report. We have some very insignificant costs going forward that really just had to do with tying up the agreement that we reached on May the 1st, so that is a check off of our list that we feel very good about.

We are not going to spend a lot of time talking about the Diamond Game case. We did talk about it in the announcement. It is a confidential settlement. We have outlined you the cost to the company and it’s, as I talked about last quarter, it is an event that had been both distracting to our company and was consuming both resources from a time standpoint and also from a financial standpoint, so we are very pleased to report that that is now behind us.

The other thing that happened most recently is that we’ve added two new board members, and I want to take a second to talk about that. We continue to talk with you about how we are evolving our management team and you’ve had exposure to the senior management team. We are continuing to do that throughout our organization to making sure we’ve got the best possible management in place to make this company the most successful it can be. Well, I am also pleased to talk about two board members who joined our board.

We expanded our board from six to seven -- six are independent board members, I am the seventh board member. And we added Steve Greathouse. Steve Greathouse is an individual who resides in Las Vegas and has been a part of the gaming industry for close to 30 years. Steve has both experience on the commercial side where he has run a number of facilities and had senior level experience doing that, and he’s also been the Chairman and CEO of a manufacturing firm, which today is known as Bally Technologies. And Steve brings another element of insight in assisting management, as well as other board members, on how we move our company forward.

And then we also brought on board Justin Orlando. Justin is probably the most studied individual on the gaming industry that I have come across. He is extremely bright and insightful and also is part of a firm that has ownership in our company. And in both cases, they have added value to both fellow board members as well as the management of our company, so I am pleased to report that in addition to management improving the level of talent that we have, we are also doing the same thing with the diversity of our board and the talent of our board.

I am going to turn this call now over to Adam, who is going to take us through key financial results. Adam.

Adam D. Chibib

Thank you, Anthony. Revenues for the three months ended March 31, 2009 were $33.9 million, an increase of $1.7 million or approximately 5% year over year, and up $5.3 million, or approximately 19% on a quarterly sequential basis. EBITDA for the three months ended March 31, 2009 was $12.7 million, a decrease of $4.3 million or approximately 25% year over year, and up $4.8 million, or approximately 61% on a quarterly sequential basis.

Adjusted EBITDA, which adds back interest income for the purposes of calculating certain financial covenants related to our $150 million credit facility, was $13.9 million, a decrease of $4.2 million or approximately 23% year over year, and up $4.7 million, or approximately 52% on a quarterly sequential basis.

Our trailing 12 months adjusted EBITDA at March 31, 2009, was $61.2 million.

Net loss for the three months ended March 31, 2009, was $3.4 million, or $0.13 per diluted share, compared to net income of $1.3 million, or $0.05 per diluted share in the prior year period.

Included in our net loss, EBITDA and adjusted EBITDA for the three months ended March 31, 2009, was a $4.2 million pretax charge for costs related to the settlement of recent litigation against the company and a $1.1 million pretax charge for severance related to the reduction in force that occurred during the quarter. Combined, these items total $5.3 million, or a tax adjusted $0.13 per diluted share.

SG&A expenses for the three months ended March 31, 2009 were $20.5 million, an increase of $3.8 million or approximately 23% year over year, and up $200,000, or 1% on a quarterly sequential basis.

Included in SG&A for the three months ended March 31, 2009, was $4.2 million related to the settlement and $1.1 million related to the severance. Also included in SG&A expenses for the period was approximately $500,000 of stock-based compensation. SG&A expenses net of these items totaled $14.7 million, a decrease of $900,000, or 6% year over year.

Depreciation and amortization for the three months ended March 31, 2009, was $15.6 million, an increase of $3.2 million, or approximately 26% year over year, and up $800,000 or approximately 5% on a quarterly sequential basis. The majority of the increase in depreciation and amortization is related to the acquisition of property and equipment in our first fiscal quarter ended December 31, 2008.

Turning to the balance sheet, cash and cash equivalents were $9.2 million as of March 31, 2009, an increase of $2.9 million from September 30, 2008, and an increase of $6.3 million from December 31, 2008. The increase in cash and cash equivalents is attributable to cash from operations, an increase in debt, repayments of development agreements, offset by property and equipment additions, and reductions in accounts payable.

Accounts receivable were $27.1 million as of March 31, 2009, an increase of $3.5 million from September 30, 2008, and an increase of $5.3 million from December 31, 2008. The increase in accounts receivables is attributable to an increase in revenues and slower paying accounts from our operations in Mexico.

Total notes receivable were $62 million as of March 31, 2009, a decrease of $7.8 million from September 30, 2008, and a decrease of $5.4 million from December 31, 2008. The decrease in notes receivable was attributable to repayments made by our customers under certain development agreements.

Leased gaming equipment net was $42.1 million as of March 31, 2009, an increase of $6.1 million from September 30th and an increase of $1.5 million from December 31, 2008. The increase in leased gaming equipment is attributable to an increase in deployed capital.

Property and equipment net was $61.2 million as of March 31, 2009, a decrease of $6.1 million from September 30, 2008 and a decrease of $14.3 million from December 31, 2008. The decrease in property and equipment net is attributable to an increase in deployed units, which moves assets out of property and equipment into leased gaming equipment, a significant reduction in the purchase of property and equipment, and depreciation expense.

For the six months period ended December 31, 2009 [sic], acquisition of PP&E was $27.3 million, with the majority of it occurring in the first quarter ended December 31, 2008. Second quarter additions totaled $2.2 million net of adjustment. This is down significantly from our first fiscal quarter for two reasons -- the first quarter ended December 31, 2008 included a duplication of PP&E additions of approximately $4 million. This item was not material and was neutral to cash flows for the quarter. This item was corrected in the second quarter, educing PP&E additions for the second quarter by $4 million.

Secondly, the company has created a more formal deal review and purchasing analysis process that we believe will refine our decision making and will lead to a more effective deployment of capital. We expect total PP&E additions for the year to fall between $40 million and $50 million.

Intangible assets net were $32.6 million as of March 31, 2009, a decrease of $4.8 million from September 30, 2008, and a decrease of $3.4 million from December 31, 2008. The decrease in net intangible assets is attributable to amortization for the period.

Accounts payable and accrued expenses were $27 million as of March 31, 2009, a decrease of $2.2 million from September 30, 2008, and a decrease of $12 million from December 31, 2008. The decrease in accounts payable and accrued expenses is directly related to our reduction in our capital spend and cash payments made during the quarter to our suppliers and partners for PP&E additions made during the first quarter ended December 31, 2008.

The balance on our revolving credit facility was $29 million as of March 31, 2009, an increase of $10 million from September 30, 2008, and an increase of $3.8 million from December 31, 2008. The increase in the balance on our revolving credit facility is attributable to draws on the facility to fund our first quarter PP&E additions, the majority of which were paid during the second quarter ended March 31, 2009.

The total balance on our term debt was $68 million, which is consistent with the September 30th and December 31, 2008 balances. As Anthony discussed, we are compliant with all our covenants for our $150 million credit facility.

On May 1st, 2009, the company reached a mediated settlement with Diamond Games Enterprises to resolve all claims made against the company. The company treated this settlement as a type one subsequent event and recorded the settlement and the bulk of the legal fees net of insurance proceeds as a charge to earnings in the three-month period ended March 31, 2009.

I will now turn the call over to Pat Ramsey, the company’s Chief Operating Officer, for a more detailed discussion of our key markets. Pat.

Patrick J. Ramsey

Thanks, Adam. As Adam stated, our revenues were up year over year 5% and sequentially 19%. There are a lot of moving parts in the revenue line so I would like to provide some additional detail regarding our results.

First of all, it is important to note that we recognized $4.3 million in equipment sales for the quarter. Approximately $2.7 million of that amount came from the sale of player stations that were previously under our rev share agreement, and the remainder came from other equipment sales in New York and Washington.

On the recurring revenue side, I will first address the Oklahoma market, which represented over $19 million, or 57% of our second quarter revenue. These revenues were essentially flat year over year and were up 7% from the previous quarter, driven by the following three factors.

First revenues at our Winstar facility were up from $8.3 million a year ago to $8.5 million, representing growth of approximately 2%, and were up $578,000, or 7% sequentially.

This quarter was the first quarter in which all of our 2,440 units were in operation, so the year-over-year results are a little lower than we had hoped. The win per unit solution we have seen is driven both by a reduction in the revenue share on the additional units from 30% to 20%, and the overall incremental supply to the floor.

We are actively focusing on ways to drive per unit growth there. Over the next six months, we will be converting our [fab two] product there to a SAS-based protocol which will help drive promotional play on these units. And we are upgrading the product mix on the floor with our own new proprietary class three games and newer third party units. We believe the opening of the hotel in the fall and additional SMB amenities will continue driving traffic as those amenities come online throughout the year.

Additionally, we are constantly partnering with the [Chicasau] Nation to find ways to maximize revenues among their many facilities by looking at their entire portfolio of nearly 5,000 machines and making the appropriate changes facility by facility.

Second, as I mentioned a minute ago and as we have discussed over the past few quarters, there have been a few tribes that have purchased the majority of the equipment that was historically on a rev-share basis. Just looking at those two tribes, our recurring revenue at their facilities this quarter was down $2.0 million, or 74% year over year. If you were to add back the lost revenues for these tribes, our Oklahoma revenues for this quarter would have been up over 10% year over year.

Third, our revenues in the other facilities within the state were up $1.8 million year over year, or 21%, and were up sequentially $1.1 million, or 12%. It is extremely encouraging to see that this growth came almost evenly from two factors -- both the win per unit increase and from footprint expansion.

In Mexico, our revenues year over year were up $230,000, or 9%, and were up sequentially $296,000, or 12%, mainly due to our unit growth there. At the end of the quarter, we had over 5,200 units deployed in the country versus approximately 3,700 a year ago. These results out of Mexico are encouraging for a few reasons -- one, currency [adds to value] approximately 33%; two, as we stated in the past, the rate at which we were deploying units was not sustainable given the revenue volumes in these markets. We have worked with our main customer in Mexico to significantly reduce the amount of capital we allocate in the country while still supplying the opening of the new facilities with appealing product.

In addition, our own proprietary themes are performing quite well, relative to units that require third-party licenses. Therefore, as was our stated goal, our capital investment for our Mexican operations was reduced drastically year over year by over 70%. It is important to note that we announced last week -- that as we announced last week, the majority of the venues in which we operate have been temporarily closed due to the swine flu outbreak. We expect them to reopen in the short-term, hopefully within the next week or two.

In Alabama, our revenues year over year were down $1.6 million, or 35%, and were down at all three of the properties in which we operate. Late in 2008, we embarked on a mission to reverse this trend and are seeing good results. We saw sequential growth from Q1 to Q2 of over 13% in the state, despite being down at one of the three properties, due to the closure we experienced in March.

Finally, our recurring revenues in other jurisdictions, including those in markets such as Washington, New York, and Wisconsin, were down approximately $860,000 year over year, or 14%, but were up from the first quarter over $540,000, or 11%.

In summary, our growth out of Winstar has been lower than expected but we believe there continues to be upside at the property for several reasons stated. The results from elsewhere around Oklahoma are very encouraging and exceed regular seasonality from Q1 to Q2. We have actively worked on maximizing our returns on capital invested in Mexico and are encouraged by the sequential results in almost all of our other markets.

I will now turn the call over to Jenny Shanks, who will fill you in on some of our game development initiatives.

Jenny Shanks

Thank you, Pat. We have made good progress on new game development as we prepared to expand into class three markets, specifically. During the past two quarters, we have released 13 new class three titles, 15 additional titles are in test, with 16 more in various stages of development. We plan to release a total of 28 new class three titles by fiscal year-end. This product plan is in lock step with our entry into new commercial casino markets.

Class two games remain an important part of our portfolio. We now have nearly 50 fast capable titles in our class two library, with 20 more in test and seven in development. We also continue to expand our game library in Mexico and Alabama -- excuse me, Mexico and Washington, with 10 new-to-market games planned for Mexico and 15 new-to-market games on tap for Washington by fiscal year-end.

Sport of Kings, our first community game, will make its debut at Winstar later this quarter. This game has tested very well and we are planning additional deployments in Oklahoma within 30 days of the Winstar installation.

Casino Commander, with its unique tournament feature, will also be released as class three and will launch at Winstar by the end of third quarter. [inaudible] consumer tested approach to game development is beginning to gain traction, as evidenced by the performance of our new video library titles, player HD cabinet, and expanding class two and class three game portfolio.

I will now turn it back over to Anthony for closing comments.

Anthony Michael Sanfilippo

Jenny, thank you, and thank you to Adam and Pat for their comments. We have assembled, both sitting in the room that I am in right now but also in this company, a very talented group of people -- some, if not most of them, were already part of the company when those that have joined the company came on board. And I feel very good about the type of discipline that we have in looking at the business. Our customer focus of making sure that everything we do is going to be beneficial to the customer and will also produce profitable revenue streams, that’s absolutely a priority for us. And the discipline that we have in managing assets and resources that we have as part of this company. We have checked a number of things off the list that we needed to check off to put the -- put our company on very stable ground, and I am very optimistic moving forward that we are going to be able to place products that are relevant to customers, both people that we would sell to and more importantly, those that would actually engage in playing our games, that we are very focused on the systems part of our business. We are providing much better customer service than we have ever done before, and we have a very talented team in place.

We are going to debut a new website, something we are excited about, and that’s going to happen mid-May and Jenny and her team have been the people responsible for that, so mark your calendar for the middle of this month to take a look at our website. It will be focused on truly the customer will highlight our products and will be much more customer focused than it is going to be anything else.

We appreciate you calling in and paying attention to us and also supporting this company through your ownership, and Miss Kelly, at this point what we would like to do is turn it back over to you and ask if there’s any questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first question from Todd Eilers with Roth Capital Partners.

Todd Eilers - Roth Capital Partners

Thanks for taking my question. Anthony, can you maybe -- obviously you guys showed some healthy growth in the quarter, both on the year-over-year and sequential basis, in light of the current macro trends. Can you maybe give us some thoughts on what you have seen in the month of April so far?

Anthony Michael Sanfilippo

Thank you for asking the question, and pointing out that in light of what’s been happening, we are starting to -- we are still seeing growth. I am going to make a comment or two and then ask Pat to comment on it.

First I will tell you that when we started engaging all of you in discussion, we talked about the opportunity we felt like there was to improve the existing business. The mix of games that we have on the floor, whether the games are under our title or someone else’s title, how we manage those assets and we have almost 17,000 revenue share games that are out there, so part of what you are seeing is us doing just that -- is a focus on really putting in place the right tools and the right focus to manage assets to get organic growth.

So that’s been a helpful part of the story and we still believe there’s -- that we’ve just started on that, that there’s a lot to get our arms around and Pat’s one a very nice job focusing on those properties that the greatest immediate opportunity and then reaching out to the rest of the properties.

Mexico is a terrific story. Our concern with Mexico was the amount of capital we were putting down there, it just didn’t -- it just didn’t warrant -- it wasn’t a good investment for our shareholders because of the low to non-existent return down there and Pat has worked effectively with our major customer down there, Televisa, to make sure that we had mutually beneficial outcomes, outcomes that help helped us have more profitable use of our assets and see much more profitable return to our business, as well as help them try to run their business better.

So part of what you are seeing is us just having much more of a focus on each market that we are in, and Pat, I’ll turn it over to you to comment on what you might see happening in April.

Patrick J. Ramsey

Okay. It’s May 6th, so I can’t jump ahead and quote you any numbers that we’ve seen in April. I will tell you, and I think you’ll agree, we were very excited about the momentum we carried from Q1 to Q2 and look forward to that carrying into Q3.

I think the one issue hampering some of that momentum is obviously the swine flu outbreak that we’ve discussed. The closure of all the Mexican facilities is detrimental and slows that down a bit. And also keep in mind Winstar contributes approximately 25% of our revenue and some of the ramifications of the outbreak affected Dallas and Houston and Austin and some of the major cities in Texas. And as you know, Dallas is the major feeder market for Winstar, so we are a little bit concerned about volumes there in the second half of April but hope to continue positive momentum through May and June.

Todd Eilers - Roth Capital Partners

Okay. That’s helpful. With respect to your install base in Oklahoma, I think you guys mentioned that you’ve added increased units at the River Spirit, I believe. Can you maybe tell us how many units were added and are those reflected in the existing installed base that you guys provided with this release?

Patrick J. Ramsey

They came online March 31st. I believe the unit count is reflected in that number. We’re double-checking right now. But yeah, we went from approximately 230, or 240 units in the old facility to 532 in the new facility.

Anthony Michael Sanfilippo

And Pat, I think you’d echo this, it’s a terrific facility. When you look at River Spirit and it’s a great location in Tulsa, it is a beautiful facility that is well run, and there’s plans to continue to expand that facility. So it’s a great place for us to have product and similar to a Winstar or a River Wind in Oklahoma, those properties are going to continue to grow and for us to have a presence and in all three places, a significant presence, it’s a good place for our company to be.

Todd Eilers - Roth Capital Partners

Okay, and then also had a question on your charity markets, saw the install base there decline sequentially by about a little over 100 games. Is that related to the White Hall issue in Alabama? Can you maybe talk a little bit about that?

Anthony Michael Sanfilippo

Well, why don’t we have Mr. Clinton, do you want to talk about White Hall?

Uri L. Clinton

I can talk about White Hall but Pat, will you talk about the decline in the installed base?

Patrick J. Ramsey

Yeah, and let me go back to your original question -- at the -- the 532 units were actually not included in the end of quarter comp, so --

Todd Eilers - Roth Capital Partners

The incremental River Spirit games were not --

Patrick J. Ramsey

Yeah, exactly. There’s about 230 that were not included in the comp.

Todd Eilers - Roth Capital Partners

Okay.

Uri L. Clinton

And the other question?

Todd Eilers - Roth Capital Partners

Yeah, just with respect to Alabama -- I mean, obviously it looks like you guys saw some increased performance of the existing games but just noticed that the install base, at least the charity install based, declined it look like sequentially, unless I am reading it wrong. I just was wondering if that’s related to the White Hall closure removal issue and just kind of wanted to get an update on where we are at on that in terms of getting the assets back and that property being open and all that.

Uri L. Clinton

Okay. The White Hall entertainment center is open and is doing business and in fact was open soon after the closure by the Governor’s task force, and so we have an opportunity there to continue. There were only approximately 34 of our units that were seized in that raid and we have been fighting to get them back. At this point, the Supreme Court has overturned the Circuit Court’s ruling that we were entitled to get them back and so we will be waiting, final resolution of the litigation that was initiated by the charity and the operator in order to get those -- that equipment returned to us.

Todd Eilers - Roth Capital Partners

Okay.

Patrick J. Ramsey

And regarding your question about unit count, the reduction in the unit count was driven by lower unit counts at White Hall but it was countered by the fact that we added 120 units at Victory Land in late January, so those are the two factors.

Todd Eilers - Roth Capital Partners

Okay, and then I just had one last question -- class three expansion with some of the new products, you mentioned Sport of Kings, Casino Commander, HD, Player HD cabinets. You mentioned your first install is going in the Winstar and Q3. Can you maybe update us on markets outside of Oklahoma, when you anticipate to possibly start selling or placing games into those class three markets?

Anthony Michael Sanfilippo

Mick will do that in one second -- let me just clarify one thing -- from a manufacturer’s side and some manufacturers talk about this more than others, the box or the cabinet that you put your content is pretty critical, and we introduced -- we call it HD for high definition and it’s a 23-inch video screen that we use, and the cabinet has been a big hit for us. We have felt terrific about the cabinet. It’s a proprietary cabinet so we own the cabinet and we placed content into that cabinet, both video as well as real content into that, real being mechanical reels. So that’s great.

We’ve got a package that we feel terrific about and we get wonderful feedback on it. In fact, next to our older package or our older cabinet, it does get a premium, so that is -- we’ll separate that to say our package or our cabinet has been a hit and we feel good about it and now second, two products that we have coming out that Mick will talk about, as well as where we are going to take those products. Early testing that we have on both of those products -- one is content with the community game with Sport of Kings. The other is a system. It really is a system that you tie actual units together to be able to do either a revenue play or a non-revenue play. You turn them into a slot tournament, which coming from operations of this industry, it’s extremely important or critical that you are able to have a set of machines that if you want to turn them into a tournament bank, you can do that without having to have a whole separate set of machines that are specifically for tournament and always non-revenue share. Mick.

Mick Roemer

We continue to have good progress in California and we are covering the entire state, Northern California as well as Southern California and the reception is still strong. We had several contracts that are in process of being executed right now and we expect to have product into California and New York in our last quarter, so that would be in the July timeframe.

Still getting a great response from those. We will start to focus on Minnesota, Mississippi trial and Louisiana trial as we enter into that fourth quarter.

Todd Eilers - Roth Capital Partners

And just kind of a follow-up on that, with respect to placing games in the fourth quarter, do you expect to be generating revenue for those games, or would those be a trial -- on a trial basis?

Anthony Michael Sanfilippo

There could be some revenue generated but there is going to be some trials in order to establish performance criteria in all of those locations, but we -- it will be a mixture of both some trials as well as revenue.

Todd Eilers - Roth Capital Partners

Okay. That does it for me. Thanks, guys.

Operator

(Operator Instructions) We’ll take our next question from Ryan Worst with Brean Murray.

Ryan Worst - Brean Murray, Carret & Co.

Thanks. Good morning, guys. Just a question on the machine sales out of the revenue share base in Oklahoma, the 360 -- were those class 2 or class 3 games, and what was the profitability on those sales?

Patrick J. Ramsey

Those were class three units, and when you say profitability, you mean on the sales?

Ryan Worst - Brean Murray, Carret & Co.

Yeah, on the sale.

Patrick J. Ramsey

Probably about $500,000. It wasn’t significant. We sold them for about one times revenue and we had the net book value, after backing out net book value, it was about $500,000 that was contributed to EBITDA.

Ryan Worst - Brean Murray, Carret & Co.

That’s it?

Patrick J. Ramsey

$500,000 to EBITDA.

Ryan Worst - Brean Murray, Carret & Co.

Okay. And you said that on a sales basis, it was one-to-one, in terms of revenue, annual revenue for those games?

Patrick J. Ramsey

Yeah, it was about a one-times revenue.

Ryan Worst - Brean Murray, Carret & Co.

Okay. And then Pat, did you -- I’m sorry if I missed this, but did you provide the revenue for Mexico in the quarter?

Patrick J. Ramsey

Yeah -- well, maybe I didn’t, actually. Maybe I just told you the increase. I can tell it to you right now -- $2.7 million.

Ryan Worst - Brean Murray, Carret & Co.

Okay, great. And that’s the foreign currency impact was about a negative third, did you say on that?

Patrick J. Ramsey

Yeah, that’s right -- year over year.

Ryan Worst - Brean Murray, Carret & Co.

That’s year over year? Okay. And then Anthony, as far as G&A goes, are we going to see further reductions because of reduced legal expenses, or was that kind of in this current -- in the past quarter?

Anthony Michael Sanfilippo

Well, Ryan, since the last three quarters we’ve had very significant legal expenses that are part of SG&A. We absolutely expect going forward with Diamond Games settled that we will see a significant reduction in legal expenses.

Ryan Worst - Brean Murray, Carret & Co.

Okay, so that G&A could be coming down from excluding those things of -- in the quarter, you reported $14.7 million in SG&A and that could come down further?

Anthony Michael Sanfilippo

Well, we are very focused. We have been communicating with you that we are very focused on all components of SG&A, that we’ve addressed the labor that we believe is appropriate for this business at the beginning of the first quarter and so there was really not a lot of net change in that because of our severance expense, which all hit in this quarter. When I say first, I mean the quarter that we are talking about right now. So we are absolutely focused on every line in SG&A to continue to make sure that we are using each dollar appropriately.

So if you would translate that into -- if you were to ask the question, is there anything out there that is going to drive it up, there’s nothing out there that is going to drive it up and our focus continues to be, whether it’s through settling long-term litigation or scrutinizing other parts of it, travel and entertainment -- name the line item, we are laser focused on making sure every dollar counts that we spend with our company.

Ryan Worst - Brean Murray, Carret & Co.

Okay, good. And then just a final question is obviously you guys brought down CapEx significantly in the second quarter, but then you were talking about introducing new, I guess units into Winstar. What’s your outlook for CapEx for the rest of the year?

Adam D. Chibib

We think we’ll end out the year between $40 million and $50 million. I think the first half of the year we are probably at 27 or so, so it will be down for the second half of the year -- not down significantly but it will be down.

Anthony Michael Sanfilippo

Ryan, I’ll tell you, we have got a process in place now that there’s a tight collar around every dollar that gets spent on CapEx. Now, that doesn’t mean we are not going to spend the dollar but we are focused on where it makes the most sense for revenue share opportunities and other opportunities, so we are -- the management of CapEx, there has been some things we’ve uncovered along the way, and we’ve talked about that last quarter. But I am confident today that both Adam and Pat have a process in place that before the dollar gets spent, they have visibility to it and that we can make a decision, if it’s the right use of capital spend and beneficial to our shareholders.

Ryan Worst - Brean Murray, Carret & Co.

Okay, so you are talking about $15 million to $20 million in CapEx for the remainder of the year -- do you think that’s going to result in a growing footprint of revenue share games or is that just going to be really kind of replacing games that are already out there?

Adam D. Chibib

We think it will be a mix of both, and I think if you look at -- even the replacement capital should benefit the company as we expect win per units to increase, so either way, it will either have a direct footprint increase or hopefully an incremental lift in win per unit.

Ryan Worst - Brean Murray, Carret & Co.

Okay. And to Pat, could you just talk about the progress in Winstar? Are you -- you know, outside of the swine flu I guess scare the last couple of weeks, but did you see progress there throughout the quarter as people get more accustomed to that facility?

Patrick J. Ramsey

Yeah, in fact, over the last six months, I mean -- remember, January 1st was the opening of the casino and over the past six months, we’ve seen revenue increases almost every month except for one slight -- one month that was slightly down month-to-month but literally six months in a row, revenue increases month after month. So they are just not at the level that we had sort of originally projected but again, there’s a lot coming online. We have the [inaudible] opening later. Now it’s likely in the early fall, and an additional food and beverage amenity that will be pretty significant. And that will begin to change sort of the traffic through that facility and -- because what we are seeing is we are seeing much lower levels of play on some of the newer product in the newer areas and just because that traffic flow hasn’t carried over to the one-sided facility. So apart from that, and the other issue I think in the other direction is there’s some remodeling plan for late summer, early fall. Again, I am sure the operators will do a great job in minimizing the impact on the remodel, but still whenever you have some sort of remodel, there’s floor disruption and so there’s some potential revenue disruption there.

Ryan Worst - Brean Murray, Carret & Co.

Sure. And then, could you talk about -- I’m sorry, one last question -- the performance of some of your proprietary class three games where you could kind of measure it relative to other suppliers, you know, maybe in Rhode Island or some facilities that kind of remain constant in Oklahoma?

Jenny Shanks

Ryan, we outperform and continue to outperform all vendors in Rhode Island and so that’s very encouraging. We also have probably five or six of our video library titles continue to outperform house average, and as we’ve talked about in the past, those would be the lead games in our expansion portfolio of class three games, so very encouraging results, and as Anthony mentioned, when we package that content on the wide body cabinet, we also see a win per unit premium compared to the same game on a traditional cabinet. So to provide this great test bed and the results that we are seeing, particularly in Rhode Island, where we do get specific information, comparative information, it’s allowing us to shape our class three portfolio in a way that we should really only be launching proven high performers.

Ryan Worst - Brean Murray, Carret & Co.

Okay. Thank you.

Patrick J. Ramsey

I want to take a second real quick to correct an answer regarding the additional units at River Spirit. They are -- the ones that came out on March 31st, it was another 306 units. Those are in the counts in the press release that was released, so Todd, if you are listening, they are in there.

Operator

(Operator Instructions) We will take our next question from [inaudible] with [inaudible] Partners.

Unidentified Participant

Good morning, guys. A quick question on your banks -- have you talked to them about adding back one-time expenses like legal fees and severance to your covenant calculations?

Anthony Michael Sanfilippo

Bill, I like to bring my banker coffee every morning, so I am seeing him on a morning basis. And I am obviously being a little facetious about that but we are in a constant communication with [Co-America], which is the bank and it’s a local bank here and there’s a syndicate attached, on making sure that we -- we talk about a number of issues and we understand the importance of our line of credit, we understand the importance of not having to make an amendment at all, let alone break a covenant, and we have a number of discussions with them about how we can continue to strengthen at least what might be future add backs. So whether it has to do with settling litigation or other things.

I’ll tell you another thing that’s not part of the calculation right now is executive stock comp expense add back. We can’t use that right now and that’s a common thing that is added back with just about everybody else. When we set up this line of credit a couple of years ago, it wasn’t thought to put it in there. So there’s a number of items we are in discussions with them about to make sure we’ve got the most appropriate, is the best way to say it, because they’ve got a business too, but the most appropriate relationship that keeps our business strong and healthy moving forward, and is appropriate to them. So we -- they are people that both Adam and I are in regular communication with.

Unidentified Participant

Okay, but you would agree that $4 million, $5 million one-time legal expense typically, Adam, you would see that added back, wouldn’t you?

Adam D. Chibib

One-time charges typically are allowed -- this was a cash charge versus a non-cash charge, so it’s a little bit trickier but obviously having that behind us makes the conversation much easier than having it ahead of us, so we will certainly work with those guys to get as much flexibility in the agreement as we can.

Unidentified Participant

Okay, great. Thank you.

Operator

And there are no further questions in queue at this time. I would like to turn the conference back over to Mr. Sanfilippo for any closing or additional comments.

Anthony Michael Sanfilippo

Kelly, thank you very much and again I want to thank all of you that have dialed in to listen to this call and who has looked at the press release but more important, those that continue to be investors and believe in what we are doing. I will tell you that we are all committed and we are passionate about what we are doing to make this company a much better company and a company that our shareholders will feel great about, that they kept ownership of this company or are getting ownership of this company.

Thank you all for joining in this morning. Hope you have a terrific day.

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