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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED COMMISSION FILE NUMBER
SEPTEMBER 30, 1999 0-10737
STUART ENTERTAINMENT, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-0402207
------------------------------- ------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3211 NEBRASKA AVENUE
COUNCIL BLUFFS, IOWA 51501
- ---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (712) 323-1488
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of November 8, 1999 there were 6,946,211 shares of the registrant's common
stock, $.01 par value, outstanding.
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STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1:
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1999 and 1998 .......................... 3
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 ................................................................ 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 .................................. 5-6
Notes to Consolidated Financial Statements ...................................... 7-11
Item 2:
Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................................... 12-21
Item 3:
Quantitative and Qualitative Disclosures about
Market Risk ..................................................................... 22
PART II. OTHER INFORMATION:
SIGNATURES ................................................................................ 23
EXHIBIT INDEX .............................................................................. 23
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL INFORMATION
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Amounts in thousands, except per share data)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
NET SALES $ 28,218 $ 28,926 $ 88,256 $ 90,238
COST OF GOODS SOLD 19,610 20,510 58,035 61,837
-------- -------- -------- --------
GROSS MARGIN 8,608 8,416 30,221 28,401
OTHER EXPENSES:
Selling, general and administrative expenses 11,574 8,993 31,064 26,890
Restructuring charge -- -- 3,000 --
Interest expense, net 2,174 3,492 9,420 9,790
-------- -------- -------- --------
Other expenses 13,748 12,485 43,484 36,680
-------- -------- -------- --------
LOSS BEFORE REORGANIZATION COSTS AND
INCOME TAX BENEFIT (5,140) (4,069) (13,263) (8,279)
REORGANIZATION COSTS:
Professional fees 622 -- 1,355 --
-------- -------- -------- --------
LOSS BEFORE INCOME TAX BENEFIT (5,762) (4,069) (14,648) (8,279)
-------- -------- -------- --------
INCOME TAX BENEFIT (1) (264) (245) (146)
-------- -------- -------- --------
NET LOSS $ (5,761) $ (3,805) $(14,373) $ (8,133)
======== ======== ======== ========
NET LOSS PER COMMON SHARE:
Basic $ (0.83) $ (0.55) $ (2.07) $ (1.17)
======== ======== ======== ========
Diluted $ (0.83) $ (0.55) $ (2.07) $ (1.17)
======== ======== ======== ========
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:
Basic 6,946 6,938 6,946 6,936
======== ======== ======== ========
Diluted 6,946 6,938 6,946 6,936
======== ======== ======== ========
Note: No dividends were paid or declared during the nine months ended September
30, 1999 and 1998.
See Notes to Consolidated Financial Statements.
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STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(Dollars in thousands)
SEPTEMBER 30, DECEMBER 31,
1999 1998
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,766 $ 4,447
Trade receivables, net of allowance for doubtful accounts of $4,067
and $3,735 19,726 19,124
Current portion of notes receivable 875 1,587
Inventories 17,915 22,111
Deferred income taxes 2,886 2,886
Prepaid expenses and other current assets 3,911 1,005
--------- ---------
Total Current Assets 48,079 51,160
PROPERTY, PLANT AND EQUIPMENT, net 30,131 29,214
GOODWILL, net of accumulated amortization of $5,173 and $4,670 46,490 46,894
OTHER ASSETS, net 8,176 9,431
--------- ---------
$ 132,876 $ 136,699
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Debtor-In-Possession Credit Facility $ 22,787 $ --
Current portion of long-term debt 470 469
Trade payables 7,499 12,725
Accrued payroll and benefits 3,042 2,006
Accrued interest 33 1,887
Other accrued liabilities 3,140 3,871
Restructuring charge reserve 2,763 --
Income taxes payable 849 1,023
--------- ---------
Total Current Liabilities 40,583 21,981
LONG-TERM DEBT 1,229 119,288
DEFERRED INCOME TAXES 186 178
DEFERRED INCOME 103 143
LIABILITIES SUBJECT TO COMPROMISE 109,375 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value; 30,000,000 shares
authorized; 6,946,211 and 6,942,914 shares
outstanding 70 70
Additional paid-in capital 27,768 27,767
Accumulated deficit (43,673) (29,280)
Treasury stock (56,260 shares at cost) (189) (189)
Accumulated other comprehensive loss (2,576) (3,259)
--------- ---------
Total Stockholders' Equity (Deficit) (18,600) (4,891)
--------- ---------
$ 132,876 $ 136,699
========= =========
See Notes to Consolidated Financial Statements
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STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Dollars in thousands)
(UNAUDITED)
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (14,373) $ (8,133)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization 7,340 5,911
Provision for doubtful accounts 704 776
Restructuring charge 3,000 --
Payments on restructuring charge (237) (2,404)
Other non-cash expenses - net 2,646 (910)
Change in operating assets and liabilities:
Trade receivables (1,571) (2,285)
Inventories 4,801 (2,514)
Trade payables (5,226) (363)
Accrued interest 9,407 --
Other - net (4,691) 4,078
--------- ---------
Net cash flows from operating activities 1,800 (5,844)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired -- (1,385)
Capital expenditures for electronic bingo systems (7,092) (2,308)
Capital expenditures for property, plant and equipment (1,621) (3,713)
Other 40 (88)
Payments received on notes receivable 976 1,278
Proceeds from disposals -- 164
--------- ---------
Net cash flows from investing activities (7,697) (6,052)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on borrowings under DIP Credit Facility 22,787 --
Debt proceeds on borrowings under Credit Facility -- 8,819
Proceeds from issuance of common stock under employee stock purchase plan 1 10
Repayment of Credit Facility borrowings (17,802) --
Cost of debt financing (459) (215)
Payments on long-term debt (256) (89)
--------- ---------
Net cash flows from financing activities 4,271 8,525
Effect of currency exchange rate changes on cash of foreign subsidiaries (55) 149
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,681) (3,222)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,447 7,099
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,766 $ 3,877
========= =========
See Notes to Consolidated Financial Statements.
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STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Dollars in thousands)
(UNAUDITED)
1999 1998
SUPPLEMENTAL CASHFLOW DISCLOSURES:
Cash paid during the fiscal year for:
Interest paid $ 922 $ 6,482
Income taxes paid $ 381 $ 501
Non-cash reorganization activities:
Reclassification of liabilities subject to compromise $ 109,375 $ --
Decrease in accured interest $ (9,375) $ --
Reduction of long-term debt $(100,000) $ --
See Notes to Consolidated Financial Statements.
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STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(COLUMNAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION - The accompanying unaudited consolidated financial
statements of Stuart Entertainment, Inc. and its wholly owned subsidiaries
(collectively, the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial statements
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for annual financial
statements.
In the opinion of the Company's management, the foregoing unaudited
consolidated financial statements reflect all adjustments necessary for a
fair presentation of the results of the Company for the periods shown.
Operating results for the three and nine months ended September 30, 1999
are not necessarily indicative of the results that may be expected for the
full year ending December 31, 1999. These financial statements should be
read in conjunction with the audited consolidated financial statements and
notes thereto for the year ended December 31, 1998, filed with the
Securities and Exchange Commission on the Company's Annual Report on Form
10-K.
Certain reclassifications have been made to the 1998 financial statements
to conform to those classifications used in 1999.
2. PETITION FOR REORGANIZATION UNDER CHAPTER 11 - On August 13, 1999, the
Company filed a petition for reorganization under Chapter 11 of the federal
bankruptcy laws in the United States Bankruptcy Court for the District of
Delaware. See Notes 6 and 7 to the Notes to Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Petition for Reorganization under Chapter 11"
for a detailed discussion.
3. COMPREHENSIVE INCOME (LOSS) - Comprehensive income (loss) is comprised of
net earnings (losses) and net currency translation gains (losses). Total
comprehensive loss for the nine months ended September 30, 1999 and 1998
was $13,690,000 and $10,385,000, respectively.
4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - In June 1998, the Financial
Accounting Standard Board ("FASB") issued Statement of Financial accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities" which established accounting and reporting standards
for derivative instruments and for hedging activities. It requires that
entities recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. In June 1999,
FASB issued SFAS No. 137, which amended SFAS No. 133 to be effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000.
Management is in the process of evaluating the impact, if any, this
accounting pronouncement will have on the Company's financial statements.
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5. INVENTORIES - Inventories consisted of the following:
SEPTEMBER 30, DECEMBER 31,
1999 1998
(UNAUDITED)
Raw materials $ 3,936 $ 4,858
Work-in-process 190 250
Finished goods 13,789 17,003
--------- ---------
$ 17,915 $ 22,111
========= =========
6. FINANCING ARRANGEMENTS:
Long-term debt consisted of the following:
SEPTEMBER 30, DECEMBER 31,
1999 1998
(UNAUDITED)
Senior Subordinated Notes $ 100,000 $ 100,000
Borrowings Under Credit Facility -- 17,673
Notes payable to others 1,699 2,084
--------- ---------
101,699 119,757
Less long-term debt classified as current (470) (469)
Less amounts included as liabilities subject to compromise (100,000) --
--------- ---------
$ 1,229 $ 119,288
========= =========
In November 1996, the Company completed a private placement of $100 million
aggregate principal amount of 12.5% Senior Subordinated Notes due November
15, 2004 (the "Notes"). Interest on the Notes is payable semi-annually on
each May 15 and November 15. The Company did not make the May 15, 1999
interest payment of $6.25 million. The grace period with respect to such
payment expired on June 15, 1999, thereby resulting in an "Event of
Default" under the Indenture governing the terms of the Notes (the
"Indenture").
During February 1999, the Company's executive management determined that
the preliminary year-end financial results for the fiscal year 1998
indicated a level of operating cash flow that might be insufficient to
service the Company's current debt levels. Accordingly, the Company
retained an investment banking firm and other advisors to assist the
Company in analyzing the Company's capital structure and to review various
financial reorganization alternatives.
On May 21, 1999, the Company announced that it had reached an
agreement-in-principle (the "Agreement") with certain of the holders of the
Notes (the "Noteholders"), with respect to the consensual reorganization of
the Company's debt and equity. In accordance with the terms of the
Agreement, the Company filed a petition for relief under Chapter 11 of the
Bankruptcy Code on August 13, 1999 in order to effect a pre-negotiated plan
of reorganization that implements the consensual Agreement with the
Noteholders. Pursuant to the Agreement, the Noteholders have agreed to
refrain from taking any action to enforce the Notes or the obligations of
the Company under the Indenture.
In November 1997, the Company entered into a credit facility consisting of
two loan and security agreements, one between the Company and Congress
Financial Corporation (Central) ("Congress") (the
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"US Facility") and one between Bingo Press & Specialty Limited, a wholly
owned subsidiary of the Company ("Bazaar") and Congress Financial
Corporation (Canada) (the "Canadian Facility") (collectively, the "Credit
Facility"). The Credit Facility provided for maximum borrowings of up to
$30.0 million, of which up to $20.0 million under the US Facility and up to
US$10.0 million under the Canadian Facility. At December 31, 1998, the
Company had borrowed $17.7 million. The Credit Facility was repaid in full
plus accrued interest in connection with financing provided by the
Debtor-in-possession Credit Facility on September 15, 1999.
On September 13, 1999, the Company received approval from the United States
Bankruptcy Court in Delaware (the "Bankruptcy Court") to enter into a
debtor-in-possession credit facility (the "DIP Credit Facility") with
Foothill Capital Corporation. The DIP Credit Facility, which was entered
into on September 15, 1999, replaced the Company's existing credit
facilities (which totaled $30 million) with Congress Financial Corporation
("Congress"). The DIP Credit Facility is secured by substantially all of
the Company's operating assets and provides for maximum borrowings of up to
$30 million, consisting of a $22 million revolving credit facility and an
$8 million term loan. The $8 million term loan and all accrued and unpaid
interest is payable in 60 equal monthly installments of $133,333 of
principal which commenced on October 1, 1999 plus interest on the unpaid
balance at the prime rate plus 1.0%. The DIP Credit Facility provides for a
term expiring on the earliest of: (i) September 15, 2000; (2) the
appointment of a Chapter 11 trustee for the Company; (3) the effective date
of a confirmed plan of reorganization for the Company; (iv) conversion of
the bankruptcy case to a Chapter 7 case, (v) the dismissal of the
bankruptcy case; and (vi) the appointment of an examiner with expanded
powers to manage or operate the financial affairs of the Company. Proceeds
from the DIP Credit Facility were used to repay the Congress Credit
Facilities and are otherwise available for working capital purposes.
The Company is entitled to draw amounts under the DIP Revolving Credit
Facility, subject to availability pursuant to a borrowing base certificate.
The borrowing base is based on the eligible accounts receivable and
eligible inventory of the Company and certain of its wholly owned
subsidiaries, specifically, Bingo Press & Specialty Limited, Video King
Gaming Systems, Inc. and Bingo Systems and Supply, Inc. At September 30,
1999, $16.6 million was available for borrowing under the DIP Revolving
Credit Facility. At such date, the Company had borrowed $14.8 million under
the DIP Revolving Credit Facility, $1.4 million of which was borrowed to
secure letters of credit previously issued by Congress. The DIP Revolving
Credit Facility generally provides for interest on the outstanding
borrowings at prime rate of 0.5% and is required to be paid monthly.
The Credit Facility imposes certain covenants and other requirements on the
Company, including the requirement that the Company have an EBITDA
(earnings before interest, taxes, depreciation and amortization), exclusive
of restructuring costs and charges, of at least $1.5 million, measured for
the fiscal quarter ending December 31, 1999, and an EBITDA, inclusive of
restructuring costs and charges, of at least $2.5 million, measured for the
fiscal quarter ending March 31, 2000 and for each fiscal quarter
thereafter. The DIP Credit Facility also provides that the Company may not
make capital expenditures in any fiscal year in excess of $6 million or in
excess of $3 million in any fiscal quarter (commencing with the fiscal
quarter ended September 30, 1999).
7. LIABILITIES SUBJECT TO COMPROMISE - Liabilities subject to compromise at
September 30, 1999 included the Senior Subordinated Notes and related
accrued interest in the amount of $109,375,000.
On August 13, 1999, the Company discontinued accruing interest on the
long-term debt. The contractual interest expense would be $3,806,000 and
$11,052,000 for the three and nine months ended September 30, 1999,
respectively, as compared to the amounts recorded of $2,174,000 and
$9,420,000 for the three and nine months ended September 30, 1999,
respectively.
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8. RESTRUCTURING CHARGE - During the second quarter of 1999, management
announced the decision by the Company to permanently close its operations
in McAllen, Texas. This restructuring plan involves the reallocation of
bingo paper products and bingo ink markers production to existing Company
facilities located in the United States, Canada and Mexico. This decision
was made based on the results of a capacity study commissioned by the
Company and coincide with an ongoing effort to improve operations, reduce
costs, improve overall financial performance and stimulate growth. The
Company also announced plans to relocate its corporate headquarters from
Council Bluffs, Iowa to the Minneapolis, Minnesota. As a result of these
decisions, the Company recorded a restructuring charge of $3,000,000 in the
second quarter of 1999. The restructuring charge includes approximately
$1,075,000 of recognized severance and termination benefits for
approximately 200 employees and $1,925,000 of facility closure costs.
A summary of restructuring activity is presented below:
ACCRUED
ACCRUED FACILITY
SEVERANCE CLOSURE COSTS TOTAL
-------- ------------- --------
Balance at June 30, 1999 $ 1,075 $ 1,925 $ 3,000
Expenditures 150 87 237
-------- -------- --------
Balance at September 30, 1999 $ 925 $ 1,838 $ 2,763
======== ======== ========
9. BUSINESS OPERATIONS AND SEGMENTS - The Company is primarily engaged in the
manufacture and distribution of a full line of bingo-related products. The
Company's products are sold primarily in the United States and Canada to
distributors, who resell them to non-profit organizations which use such
products for fund-raising purposes and to commercial entities such as
Indian gaming enterprises, casinos and government sponsored entities which
operate bingo games for profit.
The Company reorganized its business on a global product line basis and
accordingly has determined there are three reportable segments:
Consumable Bingo Products: This segment consists of the manufacture
and distribution of disposable bingo paper and ink dabbers, and the
purchase for resale of bingo accessories, equipment and supplies.
Pulltab and Lottery Products: This segment consists of the manufacture
and distribution of pulltab tickets sold primarily to charities for
fundraising and sold to third party retail locations. The Company also
manufacturers and distributes scratch off tickets for promotions by
customers and pulltab tickets used by governmental jurisdictions as
instant lottery ticket sales.
Electronic Bingo Products: This segment includes the manufacture and
distribution of fixed-base and hand-held electronic bingo gaming
systems and electronic bingo hall equipment.
The Company evaluates the performance of its operating segments based on
fully absorbed product line gross margins. For the three and nine months
ended September 30, 1999 and 1998, the Company did not allocate Selling,
General and Administrative, Depreciation and Amortization, Interest Expense
and Non-operating Expense or Income, or Income Taxes to its individual
operating segments. The Company is, therefore, unable
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to reasonably determine the breakout of these items by reportable segment.
In addition, as of September 30, 1999 and December 31, 1998, the Company
did not measure return on investment by reportable segment and accordingly
is not able to report the allocation of assets by reportable segment.
SUMMARY BY BUSINESS SEGMENTS:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
NET SALES:
Consumable Bingo Products $ 13,825 $ 15,252 $ 43,381 $ 47,798
Pulltab and Lottery Products 9,516 9,921 29,610 32,307
Electronic Bingo Products 4,877 3,753 15,265 10,133
-------- -------- -------- --------
28,218 28,926 88,256 90,238
-------- -------- -------- --------
GROSS MARGIN
Consumable Bingo Products 3,341 3,706 13,499 13,164
Pulltab and Lottery Products 3,364 3,506 10,992 11,481
Electronic Bingo Products 1,903 1,204 5,730 3,756
-------- -------- -------- --------
8,608 8,416 30,221 28,401
-------- -------- -------- --------
Selling, general and adminstrative expenses 11,574 8,993 31,064 26,890
Restructuring charge -- -- 3,000 --
-------- -------- -------- --------
Operating income (loss) $ (2,966) $ (577) $ (3,843) $ 1,511
======== ======== ======== ========
10. REORGANIZATION COSTS:
Reorganization costs of $622,000 and $1,355,000 for the three and nine
months ended September 30, 1999, respectively, are comprised of
professional fees.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this report that are not historical fact are
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995), which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates," or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks and
uncertainties. Management wishes to caution the reader that these
forward-looking statements such as the timing, costs and scope of its
acquisition of, or investments in, the bingo industry and new product
development, the implementation of any form of restructuring transaction, year
2000 matters and other matters contained in this report or the documents
incorporated by reference regarding matters that are not historical facts, are
only predictions. No assurances can be given that the future results indicated,
whether expressed or implied, will be achieved. While sometimes presented with
numerical specificity, these projections and other forward-looking statements
are based upon a variety of assumptions relating to the business of the Company,
which, although considered reasonable by the Company, may not be realized.
Because of the number and range of the assumptions underlying the Company's
projections and forward-looking statements, many of which are subject to
significant uncertainties and contingencies that are beyond the reasonable
control of the Company, some of the assumptions inevitably will not materialize,
and unanticipated events and circumstances may occur subsequent to the date of
this report or the documents incorporated by reference. These forward-looking
statements are based on current expectations and the Company assumes no
obligation to update this information. Therefore, the actual experience of the
Company and results achieved during the period covered by any particular
projections or forward-looking statements may differ substantially from those
projected. Consequently, the inclusion of projections and other forward-looking
statements should not be regarded as a representation by the Company or any
other person that these estimates and projections will be realized, and actual
results may vary materially. There can be no assurance that any of these
expectations will be realized or that any of the forward-looking statements
contained herein will prove to be accurate.
GENERAL
The Company incurred a net loss of $14.4 million for the nine months ended
September 30, 1999, compared to a net loss of $8.1 million for the nine months
ended September 30, 1998. Excluding the restructuring charge of $3.0 million and
reorganization costs of $1.4 million recorded in the second and third quarters
of 1999, management believes that the Company's operations continue to be
adversely impacted by increased competition, including competition from
companies offering new forms of gaming that are outside the traditional
consumable bingo and pulltab markets. The Company has attempted to offset the
increase in competition by developing electronic bingo and pulltab systems and
by consolidating manufacturing operations. These actions have not offset the
effects of declining margins caused by increased competition and the apparent
decline in the popularity of traditional forms of bingo and pulltabs.
The Company competes in markets that include a narrow customer base. The markets
for the Company's products are intensely competitive and are subject to
continuous, rapid technological change, short product life cycles and aggressive
pricing. The industry is experiencing increased pressure as it relates to
competitor's pricing structure of consumable bingo products. The Company
competes primarily on the basis of technology, product availability,
performance, quality, price, reliability, distribution and customer service.
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RESULTS OF OPERATIONS
The following data sets forth operating data from the Company's Consolidated
Statements of Operations, stated as a percentage of net sales.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
1999 1998 1999 1998
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 69.5 70.9 65.8 68.5
----- ----- ----- -----
Gross margin 30.5 29.1 34.2 31.5
Selling, general and administrative expenses 41.0 31.1 35.2 29.8
Restructuring charge -- -- 3.4 --
----- ----- ----- -----
Income (loss) from operations (10.5) (2.0) (4.4) 1.7
Interest expense 7.7 12.1 10.7 10.9
Reorganization costs 2.2 -- 1.5 --
----- ----- ----- -----
Loss before income tax provision (benefit) (20.4) (14.1) (16.6) (9.2)
Income tax provision (benefit) -- (0.9) (0.3) (0.2)
----- ----- ----- -----
Net loss (20.4%) (13.2%) (16.3%) (9.0%)
===== ===== ===== =====
Comparison of Three Months Ended September 30, 1999 and 1998
Net Sales - Net sales were $28.2 million for the three months ended September
30, 1999, a decrease of $0.7 million, or 2.4% from $28.9 million for the three
months ended September 30, 1998.
In Canada, sales decreased $0.6 million, or 7.3%, for the third quarter ended
September 30, 1999, compared to the third quarter ended September 30, 1998. Two
of the Company's business segments experienced lower sales volumes in Canada in
1999 compared to 1998 with consumable bingo products decreasing $0.4 million or
6.5% and pulltab and lottery products decreasing $0.4 million or 15.6%.
Electronic bingo products increased $0.2 million, primarily hall equipment for
the third quarter of 1999 compared to the third quarter of 1998. Consumable
bingo products sales in Canada were adversely impacted by increased price
competition from manufacturing rivals, as well as from an increase in other
forms of gaming. The decrease in Canadian pulltab and lottery products is
attributable to the continued adverse impact on the Canadian pulltab and lottery
ticket market resulting from an increase in government fees that reduced the
prize payout levels. The Canadian dollar strengthened in the third quarter of
1999 compared 1998 and favorably impacted sales by approximately $0.2 million or
2.0 %.
Domestically, the Company's sales were slightly lower by $0.1 million, or 0.5%,
for the third quarter ended September 30, 1999 compared to the third quarter
ended September 30, 1998. The decline was due to a decrease in the consumable
bingo products of $1.1 million, or 10.9%. Sales of pulltab and lottery products
were flat. Electronic bingo products increased by $1.0 million or 25.9%
attributable to the increase of $1.0 million in sales generated from the
installation of Power Bingo King(TM) hand-held electronic bingo units. The sales
of consumable bingo products has been adversely impacted by increased
competition, from production inefficiencies due to the closure of the McAllen,
Texas plant.
The Company expects the general decline in the sales of consumable bingo
products to continue in the fourth quarter of 1999 due to competitive pressures
from other sources of gaming and entertainment and due to production and
shipping inefficiencies from the plant closure in McAllen, Texas. However, the
Company expects revenues
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from the Power Bingo King(TM) hand-held electronic bingo systems to continue to
increase, which the Company expects will partially offset the decline in sales
in the consumable bingo products and pulltab and lottery product segments.
Cost of Goods Sold - Cost of goods sold as a percentage of sales was 69.5% for
the third quarter of 1999, a decrease of 1.4 percentage points from 70.9% for
the third quarter of 1998. In terms of dollars, cost of goods sold was $19.6
million for the third quarter of 1999 compared to $20.5 million for the third
quarter of 1998.
In Canada, cost of sales decreased $0.5 million, or 9.1%, in the third quarter
of 1999 compared to 1998. The decrease is attributable in part to lower sales of
pulltab and lottery products of $0.5 million or 21.5% and by lower sales of
consumable bingo products of $0.1 million, or 6.5%, primarily relating to bingo
paper. The lower consumable bingo products cost of sales were offset in part by
higher ink production costs attributable to production inefficiencies resulting
from the transfer of ink manufacturing operations from Texas to Ontario, Canada
in third quarter of 1999. This decrease was partially offset by a slight
increase in the cost of sales of $0.1 million due to higher sales volumes of
electronic bingo products.
Domestically, cost of sales decreased $0.4 million, or 2.8%, in the third
quarter of 1999 compared to 1998. The decrease is primarily related to a $0.9
million or 11.0% decrease in consumable bingo related products for the third
quarter of 1999 compared to the third quarter of 1998 from a decrease in sales
of bingo paper and to lower product costs due to favorable newsprint prices.
This decrease was offset in part by an increase in pulltab and lottery product
of $0.2 million or 4.5% in third quarter of 1999 compared to the third quarter
of 1998 due to higher production costs resulting from the operational
inefficiencies and in part to an increase electronic bingo products cost of
sales of $0.3 million or 13.0% in the third quarter of 1999 compared to the
third quarter of 1998. This increase is due in part to the impact of the
increase in installation of Power Bingo King(TM) electronic handheld bingo
system of $0.4 million or 44.4% and to the sales of fixed base systems of $0.3
million in the third quarter of 1999 compared to $0.1 million in the third
quarter of 1998.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses were $11.6 million for the three months ended September
30, 1999 compared to $9.0 million for the three months ended September 30, 1998
an increase of $2.6 million or 28.7%. Selling, general and administrative
expense, as a percentage of sales, was 41.0% for the three months ended
September 30, 1999 compared to 31.1% for the three-month period ended September
30, 1998. The increase is primarily due to the impact of (i) the acquisition of
Bingo System and Supply, Inc. in the fourth quarter of 1998, (ii) higher postage
expense attributable to the required mailings in connection with the Chapter 11
reorganization and financing, (iii) higher rent for administrative offices at
the Texas border facilities, (iv) higher than normal travel expenses incurred in
connection with exploring alternatives and examining the reorganization of the
Company's business and increased demand for the Company's hand-held electronic
bingo units and (v) a loss nonrecurring in the termination of the Canadian joint
venture of $253,000 in 1999 compared to a gain of $11,000 in 1998. These
increases were partially offset by decreases in telecommunications and research
and development expenses.
Interest Expense, Net - Interest expense, net of interest income, was $2.2
million for the three months ended September 30, 1999 compared to $3.5 million
for the three months ended September 30, 1998, a decrease of $1.3 million, or
37.7%. Interest expense, as a percentage of sales, was 7.7% for the third
quarter of 1999 compared to 12.1% for the third quarter of 1998. The decrease is
primarily attributable to no longer accruing interest on the Notes from August
13, 1999 offset in part by accrued interest on higher Credit Facility
borrowings, debt incurred to finance acquisitions in 1998 and to borrowings
under the DIP credit facility since September 15, 1999.
Reorganization Costs - Legal and professional fees of $0.6 million were incurred
in the third quarter of 1999 in connection with the pending bankruptcy filing
and reorganization of the Company.
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Income Tax Provision (Benefit) - The Company recorded an income tax benefit of
$1,000 for three months ended September 30, 1999 compared to an income tax
benefit of $264,000 for the three months ended September 30, 1998. The decrease
in the income tax benefit is primarily attributable to the recognition of a
valuation allowance due to the uncertainty regarding realization of certain
long-term future tax benefits. Realization of future tax benefits related to the
deferred tax assets is dependent on many factors, including the Company's
ability to generate taxable income in the United States and Canada within the
net operating loss carryforward periods.
Comparison of Nine Months Ended September 30, 1999 and 1998
Net Sales - Net sales were $88.3 million for the nine months ended September 30,
1999, a decrease of $2.0 million, or 2.2% from $90.2 million for the nine months
ended September 30, 1998.
In Canada, sales decreased $2.5 million, or 9.3%, for the nine months ended
September 30, 1999 compared to the nine months ended September 30, 1998. Two of
the Company's business segments experienced lower sales volumes in Canada in
1999 compared to 1998 with consumable bingo products decreasing $0.7 million, or
4.0%, and pulltab and lottery products decreasing $2.1 million, or 22.0%.
Electronic bingo products increased $0.3 million, or 59.7%, for the first nine
months of 1999 compared to the first nine months of 1998. Consumable bingo
products sales in Canada were adversely impacted by increased competition from
manufacturing rivals, as well as from an increase in other forms of gaming. The
decrease in Canadian pulltab and lottery products is attributable in part to
higher than normal first quarter 1998 sales due to customers replenishing
inventories with new pulltab products after the Company was awarded a five year
contract from the Ontario Gaming Commission in November 1997. The decrease is
also partially due to the continued adverse impact on the Canadian pulltab and
lottery ticket market as a result of an increase in government fees that reduced
the prize payout levels. In addition, the weakening Canadian dollar negatively
impacted sales by approximately $0.5 million or 1.9%.
Domestically, the Company experienced a slight increase of $0.5 million, or
0.8%, for the first nine months ended September 30, 1999 compared to the first
nine months ended September 30, 1998. Specifically, electronic bingo products
increased $4.8 million, or 50.1%, attributable to (i) the increase of $3.0
million in revenues generated from the installation of Power Bingo King(TM)
hand-held electronic bingo systems and (ii) a $1.9 million increase in fixed
based electronic bingo systems. This increase was offset in part by a decrease
of $3.7 million or 12.0% in consumable bingo products and by a decrease of $0.6
million or 2.5% in pulltab and lottery products. The sales of consumable bingo
products and pulltab and lottery products has been adversely impacted by
increased competition from manufacturing rivals and an apparent decline in the
popularity of traditional bingo and pulltabs due to the increase in other forms
of gaming and entertainment. In addition consumable bingo product sales were
adversely impacted in the third quarter of 1999 as a result of production and
shipping inefficiencies due to the plant closure in McAllen, Texas.
The Company expects the general decline in the industry to continue in the
fourth quarter of 1999 due to competitive pressures from other sources of gaming
and entertainment. However, the Company expects revenues from the Power Bingo
King(TM) hand-held electronic bingo systems to continue to increase, which the
Company expects will partially offset the decline in sales in the consumable
bingo products and pulltab and lottery product segments.
Cost of Goods Sold - Cost of goods sold as a percentage of sales was 65.8% for
the first nine months of 1999, a decrease of 2.7 percentage points from 68.5%
for the first nine months of 1998. In terms of dollars, cost of goods sold was
$58.0 million for the first nine months of 1999 compared to $61.8 million for
the first nine months of 1998.
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In Canada, cost of sales decreased $1.8 million, or 10.7%, in the first nine
months of 1999 compared to 1998. The decrease is attributable to lower sales of
pulltab and lottery products of $1.6 million, or 22.9%, and lower sales of
consumable bingo products of $0.3 million, or 3.5%. However, cost of sales for
consumable bingo products was unfavorable impacted as a result of production
inefficiencies due to the relocation of ink manufacturing operations from
McAllen, Texas to Ontario, Canada in the third quarter. This decrease was
partially offset by a slight increase in the cost of sales for electronic
products of $0.1 million, or 48.2%, due to higher sales volumes.
Domestically, cost of sales decreased $2.0 million, or 4.5%, in the first nine
months of 1999 compared to 1998. The decrease is due in part to a $4.4 million,
or 17.3%, decrease in consumable bingo products and to a $0.6 million, or 4.4%,
decrease in pulltab and lottery products for the first nine months of 1999
compared to the first nine months of 1998. The decrease in cost of sales for
consumable bingo products is due in part to the decrease in sales volumes and to
lower product costs relating to favorable newsprint prices. The decrease in cost
of sales for pulltab and lottery ticket products is attributable in part to the
decrease in sales volumes and to continued production efficiencies.
These domestic decreases were offset in part by an increase in cost of sales of
electronic bingo products of $3.0 million, or 49.6%, in the first nine months of
1999 compared to the first nine months of 1998. This increase is due in part to
the impact of the increase in installation of Power Bingo King(TM) electronic
hand-held bingo systems of $1.9 million, or 71.3% and to the sales of fixed
based bingo system of $1.6 million, primarily in the second quarter of 1999,
compared to $0.2 million in the first nine months of 1998. This increase was
offset in part by a decrease in bingo hall equipment of $0.3 million or 10.1% as
a result of lower sales volumes year-to-date.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses were $31.1 million for the nine months ended September
30, 1999 compared to $26.9 million for the nine months ended September 30, 1998
an increase of $4.2 million, or 15.5%. Selling, general and administrative
expenses, as a percentage of sales, was 35.2% for the nine months ended
September 30, 1999 compared to 29.8% for the nine months ended September 30,
1998. The increase is primarily due to the impact of (i) the acquisition of
Bingo System and Supply, Inc. in the fourth quarter of 1998, (ii) a loss
nonrecurring in the termination of a Canadian joint venture of $253,000 in 1999
compared to a gain of $11,000 in 1998, (iii) higher rent for administrative
offices at the Texas border facilities, (iv) higher than normal travel expenses
incurred in connection with exploring alternatives and examining the
reorganization of the Company's business and (v) higher postage costs
attributable to the required mailings in connection with the Chapter 11
reorganization and financing. These increases were partially offset by decrease
in artwork, research and development expenses and repairs and maintenance.
Restructuring Charge - The Company, in the second quarter of 1999, recorded a
restructuring charge of $3.0 million related to the decision to relocate its
corporate headquarters from Council Bluffs, Iowa to Minneapolis, Minnesota and
to permanently close its manufacturing operations in McAllen, Texas and relocate
bingo paper and ink dabber production to other manufacturing facilities in the
United States, Canada and Mexico. This action was predicated on the results of a
capacity study commissioned by the Company and coincides with an ongoing effort
to improve operations, reduce costs, improve overall financial performance and
stimulate growth. The restructuring charge includes approximately $1,075,000 of
recognized severance and termination benefits for approximately 200 employees
and $1,925,000 of facility closure costs.
Interest Expense, Net - Interest expense, net of interest income, was $9.4
million for the nine months ended September 30, 1999 compared to $9.8 million
for the nine months ended September 30, 1998, a decrease of $0.4 million, or
3.8%. Interest expense, as a percentage of sales, was 10.7% for the first nine
months of 1999 compared to 10.9% for the first nine months of 1998. The decrease
is primarily attributable to discontinuing accruing interest on the Notes since
August 13, 1999, offset in part by accrued interest on the DIP Credit Facility
borrowings, debt incurred to finance acquisitions in 1998, and to borrowings
under the DIP Credit Facility since September 15, 1999.
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Reorganization Costs - Legal and professional fees aggregating $1.4 million were
incurred in the first nine months of 1999 in connection with the pending
bankruptcy filing and corporate reorganization.
Income Tax Provision (Benefit) - The Company recorded an income tax benefit of
$245,000 for nine months ended September 30, 1999 compared to an income tax
benefit of $146,000 for the nine months ended September 30, 1998. The increase
in the income tax benefit is attributable to no taxable income generated in
Canada in 1999 compared to taxable Canadian income in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal uses of cash are for the purchase, manufacturing and
carrying of inventory, the carrying of accounts receivable and notes receivable,
the manufacture of Power Bingo King(TM) hand-held electronic bingo systems and
carrying of these assets for lease or revenue sharing and the purchase of fixed
assets and for normal operating expenses. The primary amounts and ratios
relating to liquidity and capital resources for the nine months ended September
30, 1999 and 1998 are as follows:
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
(DOLLARS IN THOUSANDS)
Working capital $ 7,971 $ 33,655
Current ratio 1.2 2.4
Total long-term debt $ 1,699 $ 109,483
Liabilities subject to comprise $ 109,375 $ --
Stockholders' equity (deficit) $ (18,600) $ 6,021
Total capitalization $ 92,474 $ 115,504
Debt to capitalization ratio 1.8% 94.8%
Capital expenditures for property, plant and equipment $ 1,621 $ 3,713
Capital expenditures for electronic bingo systems $ 7,092 $ 2,308
FINANCING ACTIVITIES
The Company finances its working capital needs out of its operating cash flows
and draws since September 15, 1999 under the Debtor-In-Possession Credit
Facility provided by Foothill Capital Corporation and previously under the
Credit Facility provided by Congress Financial Corporation.
The Company's cash flow from operations and draws under its existing lines of
credit will not be sufficient to meet its short-term and long-term debt service
and capital requirements, absent a substantial reorganization of its debt
obligations. The Company did not make the scheduled payment of interest on May
15, 1999 of $6.25 million on the Company's 12.5% Senior Subordinated Notes due
2004 (the "Notes"). The grace period with respect to such payment expired on
June 15, 1999, thereby resulting in an "Event of Default" under the Indenture
governing the terms of the Notes (the "Indenture").
On May 21, 1999, the Company reached an agreement-in-principle (the "Agreement")
with certain of the holders of the Notes (the "Noteholders"), with respect to
the consensual reorganization of the Company's debt and equity. In accordance
with the terms of the Agreement, the Company filed a petition for relief under
Chapter 11 of the Bankruptcy Code on August 13, 1999 in order to effect a
pre-negotiated plan of reorganization that implements the consensual Agreement
with the Noteholders. As a result, the Noteholders have agreed to refrain from
taking any action to enforce the Notes or the obligations of the Company under
the Indenture. There can be no assurance that the reorganization will be
successfully initiated or implemented.
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At September 30, 1999 the Senior Subordinated Notes with related interest and
the notes payable to others with related interest were reclassified from
long-term debt to liabilities subject to Compromise.
On September 13, 1999, the Company received approval from the United States
Bankruptcy Court in Delaware (the "Bankruptcy Court") to enter into a
debtor-in-possession credit facility (the "DIP Credit Facility") with Foothill
Capital Corporation. The Credit Facility, which was entered into on September
15, 1999, replaced the Company's existing credit facilities (which totaled $30
million) with Congress Financial Corporation ("Congress"). The DIP Credit
Facility is secured by substantially all of the Company's operating assets and
provides for maximum borrowings of up to $30 million, consisting of a $22
million revolving credit facility and an $8 million term loan. The term loan is
payable in 60 equal monthly installments of $133,333 of principal which
commenced on October 1, 1999, plus interest at the prime rate plus 1.0%. The DIP
Credit Facility provides for a term expiring on the earliest of: (i) September
15, 2000; (2) the appointment of a Chapter 11 trustee for the Company; (3) the
effective date of a confirmed plan of reorganization for the Company; (iv)
conversion of the bankruptcy case to a Chapter 7 case, (v) the dismissal of the
bankruptcy case; and (vi) the appointment of an examiner with expanded powers to
manage or operate the financial affairs of the Company. Proceeds from the DIP
Credit Facility were used to repay the Congress Credit Facilities and are
otherwise available for working capital purposes.
The Company is entitled to draw amounts under the DIP Revolving Credit Facility,
subject to availability pursuant to a borrowing base certificate. The borrowing
base is based on the eligible accounts receivable and eligible inventory of the
Company and certain of its wholly owned subsidiaries, specifically, Bingo Press
& Specialty Limited, Video King Gaming Systems, Inc. and Bingo Systems and
Supply, Inc. At September 30, 1999, $16.6 million was available for borrowing
under the DIP Credit Facility. At such date, the Company had borrowed $14.8
million under the DIP Revolving Credit Facility. The DIP Revolving Credit
Facility generally provides for interest at prime rate plus 0.5% and is required
to be paid monthly.
In November 1997, the Company entered into a Credit Facility with Congress for a
three-year term expiring in November 2000. The Credit Facility, as amended,
provided for maximum borrowings of up to $30.0 million of which up to $20.0
million may be borrowed under the U.S. Facility and up to $10.0 million may be
borrowed under the Canadian Facility. At December 31, 1998, the Company had
borrowed $17.7 million at a weighted-average interest rate of 8.09% of which
$13.9 million was borrowed on the U.S. Facility and $3.8 million was borrowed on
the Canadian Facility. The Company and Bazaar also had $1.2 and $0.2 million,
respectively, in stand-by letters of credit secured by the Credit Facility. The
letters of credit are considered advances and reduce the availability of the
borrowing base. The Credit Facility was repaid in full at September 30, 1999 in
connection with borrowings under the DIP Credit Facility
PETITION FOR REORGANIZATION UNDER CHAPTER 11
On August 13, 1999, the Company filed a petition for reorganization under
Chapter 11 in the United States Bankruptcy Court for the District of Delaware.
Prior to the August 13 Chapter 11 filing, the Company had reached an
agreement-in-principle (the "Agreement") with certain of the holders (the
"Noteholders") of its $100 million 12.5% Senior Subordinated Notes due 2004 (the
"Notes"), with respect to a consensual reorganization of the Company's debt and
equity. Under the Agreement, upon effectiveness (the "Effective Date") of the
Plan of Reorganization (the "Plan") the Notes, including principal, interest,
fees and other charges with respect thereto, will be cancelled and in exchange
therefor, the Noteholders will receive, pro-rata, one hundred percent (100%) of
the Common Stock, $0.001 par value per share, to be authorized under the
Company's amended and restated certificate of incorporation to be filed with the
Delaware Secretary of State after Bankruptcy Court approval of the Plan ("New
Common Stock"), subject to dilution of approximately 10% on a fully diluted
basis by shares reserved for issuance under the options to be issued to the
Company's executive management. The existing common
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stock, $0.01 par value, of the Company ("Existing Common Stock") will be
cancelled and, in exchange therefor, the holders thereof will receive, subject
to approval by the Bankruptcy Court, a pro-rata portion of $150,000 in cash.
Under the Plan, all persons who hold, together with all affiliates of such
persons, $500,000 or less in principal amount of Notes, or who elect to reduce
their holdings to $500,000, will receive a cash payment equal to 25% of such
Noteholder's allowed claim in lieu of New Common Stock, unless such Noteholder
elects to receive New Common Stock. The Company may fund up to an aggregate of
$3 million of such cash payments (the "Company Funding"), with the remainder of
the funding to be supplied by the largest holder of the Notes pursuant to a
Standby Funding Commitment (the "Standby Commitment"). Under the Standby
Commitment, the largest holder of the Notes will receive, in exchange for any
such funding provided, an allowed claim as a Noteholder, thereby entitling such
holder to an additional pro rata distribution of New Common Stock under the
Plan.
The Agreement also provides for certain key executive officers of the Company to
receive vested options to purchase four percent (4%) of the outstanding New
Common Stock, and performance based incentive options to purchase six percent
(6%) of the New Common Stock as of the Effective Date of the Plan on a fully
diluted basis. These percentages are subject to increase based on the amount of
the Company Funding, and the accretive effect thereof, in accordance with a
formula set forth in the Plan. The Noteholders have agreed to support the
payment of all trade claims in the ordinary course of the Company's business. As
a result, the Company's trade creditors will not be impaired or negatively
impacted by the contemplated restructuring.
The Plan filed with the Bankruptcy Court is subject to numerous conditions,
including that the Plan be confirmed by the Bankruptcy Court, that the Company
have sufficient cash on the Effective Date to make all cash payments required to
be made pursuant to the Plan, that the Company receive all required regulatory
approvals, and that there is no order, decree or ruling by any court or
governmental body having jurisdiction, restraining or enjoining the consummation
of the Plan. There is no assurance that the consensual restructuring provided
for in the Agreement and the Plan or any other consensual restructuring will be
finalized or that any restructuring which is contemplated will not be on terms
materially different from those contained in the Agreement and the Plan.
CAPITAL EXPENDITURES
The Company's capital expenditures for property, plant and equipment were $1.6
million during the first nine months of 1999 compared with $3.7 million during
the first nine months of 1998. During 1999, the Company's capital expenditure
program will focus on (i) the upgrading and development of management
information systems, (ii) the purchase of equipment designed to improve
manufacturing efficiency and (iii) the consolidation of United States
manufacturing operations. Capital expenditures for electronic bingo systems
consist of Power Bingo King(TM) and System 12(TM) electronic bingo systems that
are placed in the market and immediately generate revenue on a lease or revenue
sharing basis. The Company's $7.1 million increase for electronic bingo systems
is primarily due to the manufacture and placement of Power Bingo King(TM)
hand-held electronic bingo units. The Company began placing the units following
the July 1997 acquisition of substantially all of the assets of Power Bingo
Corporation.
INFLATION
Management does not believe that inflation has had or is expected to have any
significant adverse impact on the Company's financial condition or results of
operations for the periods indicated.
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YEAR 2000 ISSUE
During 1998, the Company began working to fully determine whether its computer
systems and related software would properly recognize the year 2000 and continue
to process data. The year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year. The
Company is aware of the issues associated with the programming code in its
existing computer systems in order for the systems to recognize date sensitive
information when the year changes to 2000. The Company has a year 2000 program
to address (i) central business systems, (ii) site operations, (iii) products
and (iv) major suppliers. The program consists of the following phases:
awareness, assessment, remediation, testing and contingency planning.
The Company is in the process of remediation and testing with regard to the
central business systems used by the Company. The process includes either hard
testing of the systems and subsystems, vendor declaration and certification, or
both. Currently, management believes those systems to be date compliant such
that they will not pose a significant risk to the Company's future business
operations. However, certain information systems pertaining to a recently
acquired distributor have been determined to be non-compliant. A conversion to
the Company's current information systems is scheduled for completion in the
fourth quarter of 1999. The cost to bring this distributor's information systems
compliant is not expected to be material.
Teams have been established at each of the Company's principal operating
locations throughout the United States, Canada and Mexico and were charged with
assessing the state of compliance for all facility systems and equipment, and
developing remediation plans where necessary. The site assessments have been
completed and management currently believes the facilities systems and equipment
to be year 2000 compliant such that they will not pose a significant risk to the
Company's future business operations.
The Company produces and markets a wide array of products, many of which do not
have year 2000 or date/time issues. Most products that the Company has
identified to have year 2000 issues have been declared year 2000 compliant.
Other products are either in various phases of testing software upgrades or have
final solutions available for implementation. Currently, there is no indication
that any of the identified issues will have a material adverse impact on the
operation of these products.
Currently, an assessment of major suppliers is being performed with substantial
completion expected during the fourth quarter of 1999. As part of this process
the Company will request written assurances from these suppliers that they have
year 2000 readiness programs in place, as well as an affirmation that they will
be compliant when necessary. However, the Company cannot assure that the systems
of suppliers will be successfully converted on a timely basis. Therefore, the
Company could be adversely impacted by such things as loss of revenue,
production delays, lack of third party readiness and other business
interruptions.
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Accordingly, the Company has begun developing contingency plans to address
potential issues, which include, among other actions, development of emergency
back up and recovery procedures, build-up of essential inventories and
identification of alternate suppliers. The ultimate effect of the Company or its
suppliers not being fully year 2000 compliant is not reasonably determinable. As
of the date of this filing, the Company has not finalized a contingency plan to
address the failure of the Company or its suppliers to be year 2000 compliant.
To date, the Company has not incurred any material costs directly associated
with its compliance efforts, except for compensation expenses associated with
employees who have devoted some of their time to the Company's year 2000
program. The Company does not expect the total cost of the year 2000 issue to be
material to its business, results of operations, liquidity or financial
condition.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks (i.e., the risk of loss arising from adverse changes
in market prices and rates) to which the Company is exposed are:
o Interest rates on notes receivables.
o Commodity prices, affecting the cost of certain raw materials.
o Foreign exchange rates and other international market risks.
o Interest rate on the DIP Term Loan and Revolving Credit Facilities
The Company is exposed to market risk from changes in interest rates. The
Company's notes receivable consist primarily of fixed rate interest bearing
securities. The total notes receivable at September 30, 1999 was $2.5 million,
which approximates 2% of the total assets. Management believes the exposure will
be minimal as the Company plans to hold the notes to maturity and the life of
the notes is less than 2 years.
Raw materials used by the Company are exposed to the impact of changing
commodity prices, particularly newsprint, because its ability to recover
increased costs through higher pricing may be limited by the competitive
environment the Company operates in. The Company does not enter into commodity
future and option contacts to manage fluctuations in prices on anticipated
purchases of these raw materials. The Company will study and may develop a
Board-approved policy to use such derivative financial instruments only to the
extent necessary to manage these exposures.
The Company has significant operations in Canada and Mexico. All Canadian
activities are recorded in their functional currency and translated to U.S.
dollars at current exchange rates while Mexican activities are maintained in
pesos and are remeasured into U.S. dollars at current exchange rates. Operating
in international markets involves exposure to movements in currency exchange
rates. The Company does not enter into forward foreign exchange currency
contacts to hedge the exposure on the activities of the operating units
functional currency to minimize the volatility of reported earnings because the
Company does not believe it is justified by the exposure or cost.
The Company estimates that a 10% decrease in Canadian foreign exchange rate
would result in $2.5 million loss in net sales on an annual basis. Management
intends to study whether the management of foreign currency market risk through
the use of a variety of financial and derivative instruments would be
advantageous.
The Company's interest sensitive liabilities are its debt instruments consisting
of a floating rate U.S. Credit Facility based on the prime rate plus 1.0% and
the floating rate DIP Revolving Credit Facility Term Loan based on the prime
rate plus 0.5%.
Because the interest rate on the DIP Credit Facility is variable, the Company's
cash flow may be affected by increases in interest rates, in that the Company
would be required to pay more interest in the event that the prime interest
rates increase. Management does not, however, believe that any risk inherent in
the variable rate nature of the loan is likely to have a material effect on the
Company's interest or available cash.
A 10% proportionate increase in interest rates in 1999 would result in an
increase to pretax loss of approximately $0.20 million on an annual basis. This
increase to the pretax loss is caused by the Company's variable rate Credit
Facility. Conversely, a corresponding decrease in interest rates would result in
a comparable improvement to the pretax loss.
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PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Exhibit 11 Statement Regarding Computation of
Per Share Earnings
Exhibit 27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STUART ENTERTAINMENT, INC.
Date: November 15, 1999 /s/ Joseph M. Valandra
------------------------------------------------
Joseph M. Valandra, Chairman of the Board,
Chief Executive Officer and President
Date: November 15, 1999 /s/ Lawrence X. Taylor, III
------------------------------------------------
Lawrence X. Taylor, III
Executive Vice President and Chief
Financial Officer
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EXHIBIT INDEX
The following Exhibits are filed herewith.
Exhibit No. Description
- ----------- -----------
11 Statements Regarding Computation
of Per Share Earnings
27 Financial Data Schedule
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