Multimedia Games Inc. is a leading developer and supplier of comprehensive systems content electronic games and player terminals for the Native American gaming market as well as for the casino charity and international bingo video lottery and sweepstakes markets. The Company's ongoing development and marketing efforts focus on gaming systems and products for use by Native American tribes throughout the United States the commercial casino market video lottery systems and other products for domestic and international lotteries and products for charity and international bingo and emerging markets including sweepstakes promotional amusement with prize and coupon gaming opportunities. Multimedia Games Inc. has a market cap of $73.6 million; its shares were traded at around $2.76 with and P/S ratio of 0.7.
Highlight of Business Operations:Internally developed gaming software is accounted for under the provisions of SFAS No. 86 and is stated at cost, which is amortized over the estimated useful life of the software, generally using the straight-line method. The Company amortizes internally-developed games over a 12 month period, gaming engines over an 18 month period, gaming systems over a three-year period and its central management systems over a five-year period. Software development costs are capitalized once technological feasibility has been established, and are amortized when the software is placed into service. Any subsequent software maintenance costs, such as bug fixes and subsequent testing, are expensed as incurred. Discontinued software development costs are expensed when the determination to discontinue is made. For the three and six month periods ended March 31, 2009, amortization expense related to internally-developed gaming software was $1.0 million and $2.2 million, respectively; $753,000 and $1.5 million, respectively, for the three and six month periods ended March 31, 2008. During the three and six month periods ended March 31, 2009, the Company wrote off $420,000 and $455,000, respectively, related to internally-developed gaming software and patents and trademarks, compared to write-offs of $308,000 in the same periods ended March 31, 2008.
Credit Facility. On April 27, 2007, the Company entered into a $150 million Revolving Credit Facility which replaced its previous Credit Facility in its entirety. On October 26, 2007, the Company amended the Revolving Credit Facility, transferring $75 million of the revolving credit commitment to a fully funded $75 million term loan due April 27, 2012. The Term Loan is amortized at an annual amount of 1% per year, payable in equal quarterly installments beginning January 1, 2008, with the remaining amount due on the maturity date. The Company entered into a second amendment to the Revolving Credit Facility on December 20, 2007. The second amendment (i) extended the hedging arrangement date related to a portion of the term loan to June 1, 2008; and (ii) modified the interest rate margin applicable to the Revolving Credit Facility and the term loan.
The Credit Facility provides the Company with the ability to finance development agreements and acquisitions and working capital for general corporate purposes. Amounts under the $75 million revolving credit commitment and the $75 million term loan mature in five years, and advances under the term loan and revolving credit commitment bear interest at the Eurodollar rate plus the applicable spread, tied to various levels of interest pricing determined by total debt to EBITDA (EBITDA is defined as earnings before interest, taxes, amortization, depreciation, and accretion of contract rights). As of March 31, 2009, the $29.0 million drawn under the revolving credit commitment bore interest at 4.75% and two tranches of the term loan of $50.0 million and $17.1 million bore interest at 8.5% and 5.5%, respectively, also included in the March 31, 2009 and 2008 balances are approximately $1.2 million and $585,000, respectively, of accrued interest.
The Credit Facility is collateralized by substantially all of the Company s assets, and also contains financial covenants as defined in the agreement. These covenants include (i) a minimum fixed-charge coverage-ratio of not less than 1.50 : 1.0; (ii) a maximum total debt to EBITDA ratio of not more than 2.25 : 1.00 through June 30, 2008, and 1.75 : 1.00 from September 30, 2008 thereafter; and (iii) a minimum trailing twelve-month EBITDA of not less than $60 million for each quarter. As of March 31, 2009, the Company is in compliance with its loan covenants. The Credit Facility requires certain mandatory prepayments be made on the term loan from the net cash proceeds of certain asset sales and condemnation proceedings (in each case to the extent not reinvested, within certain specified time periods, in the replacement or acquisition of property to be used in its businesses). In the second quarter of 2008, the Company made a mandatory prepayment of the term loan in the amount of $4.5 million, due to an early prepayment of a development agreement note receivable. As of March 31, 2009, the Credit Facility had availability of $44.8 million, subject to covenant restrictions.
The Credit Facility also required that the Company enter into hedging arrangements covering at least $50 million of the term loan for a three-year period by June 1, 2008. Therefore, on May 29, 2008, the Company purchased, for $390,000, an interest rate cap (5% cap rate) covering $50 million of the term loan. The Company accounts for this hedge in accordance with SFAS No. 133 which requires entities to recognize all derivative instruments as either assets or liabilities in the balance sheet, at their respective fair values. The Company records changes on a mark to market basis, changes to the fair value of the interest rate cap on a quarterly basis. These changes in fair value are recorded in interest expense in the consolidated statement of operations.
In the three and six month periods ended March 31, 2009, options to purchase approximately 6.7 million and 6.5 million shares of common stock, with exercise prices ranging from $1.61 to $18.71 per share and $1.61 to $21.53 per share, respectively, were not included in the computation of dilutive earnings per share, due to the antidilutive effect, and approximately 452,000 and 462,000 equivalent shares were not included, due to the loss generated in the current periods.
Read the The complete ReportMGAM is in the portfolios of Seth Klarman of The Baupost Group.