<PAGE> 1
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
JUNE 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 July 23, 1999 there were 6,946,211 shares of the registrant's common
stock, $.01 par value, outstanding.
1
<PAGE> 2
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1:
Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1999 and 1998...................... 3
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998 ..................................................... 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998................................ 5
Notes to Consolidated Financial Statements............................... 6-9
Item 2:
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 10-20
Item 3:
Quantitative and Qualitative Disclosures about
Market Risk............................................................ 21
PART II. OTHER INFORMATION:
Item 3:
Defaults upon Senior Securities.......................................... 22
Item 6:
Exhibits and Reports on Form 8-K......................................... 22
SIGNATURES...................................................................... 23
EXHIBIT INDEX................................................................... 24
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL INFORMATION
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Amounts in thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 29,693 $ 29,717 $ 60,038 $ 61,312
COST OF GOODS SOLD 17,611 20,408 38,425 41,327
-------- -------- -------- --------
GROSS MARGIN 12,082 9,309 21,613 19,985
OTHER EXPENSES:
Selling, general and administrative expenses 10,220 8,942 19,490 17,897
Restructuring charge 3,000 - 3,000 -
Reorganization costs 733 - 733 -
Interest expense, net 3,628 3,146 7,246 6,298
-------- -------- -------- --------
Other expenses 17,581 12,088 30,469 24,195
-------- -------- -------- --------
LOSS BEFORE INCOME TAXES (5,499) (2,779) (8,856) (4,210)
INCOME TAX PROVISION (BENEFIT) (3) (55) (244) 118
-------- -------- -------- --------
NET LOSS $ (5,496) $ (2,724) $ (8,612) $ (4,328)
======== ======== ======== ========
NET LOSS PER COMMON SHARE:
Basic $ (0.79) $ (0.39) $ (1.24) $ (0.62)
======== ======== ======== ========
Diluted $ (0.79) $ (0.39) $ (1.24) $ (0.62)
======== ======== ======== ========
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:
Basic 6,946 6,935 6,946 6,932
======== ======== ======== ========
Diluted 6,946 6,935 6,946 6,932
======== ======== ======== ========
</TABLE>
Note: No dividends were paid or declared during the six months ended June 30,
1999 and 1998.
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
ASSETS 1999 1998
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,019 $ 4,447
Trade receivables, net of allowance for doubtful accounts of $4,312
and $3,735 19,098 19,124
Current portion of notes receivable 1,056 1,587
Inventories 20,734 22,111
Deferred income taxes 2,886 2,886
Prepaid expenses and other current assets 2,323 1,005
--------- ---------
Total Current Assets 49,116 51,160
PROPERTY, PLANT AND EQUIPMENT, net 29,712 29,214
GOODWILL, net of accumulated amortization of $5,718 and $4,670 46,844 46,894
OTHER ASSETS, net 9,197 9,431
--------- ---------
$ 134,869 $ 136,699
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $ 470 $ 469
Trade payables 11,335 12,725
Accrued payroll and benefits 2,849 2,006
Accrued interest 8,018 1,887
Other accrued liabilities 3,154 3,871
Restructuring charge reserve 3,000 -
Income taxes payable 849 1,023
--------- ---------
Total Current Liabilities 29,675 21,981
LONG-TERM DEBT 118,504 119,288
DEFERRED INCOME TAXES 185 178
DEFERRED INCOME 125 143
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 (37,912) (29,280)
Treasury stock (56,260 shares at cost) (189) (189)
Accumulated other comprehensive loss (3,357) (3,259)
--------- ---------
Total Stockholders' Equity (Deficit) (13,620) (4,891)
--------- ---------
$ 134,869 $ 136,699
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 5
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(8,612) $(4,328)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization 4,699 3,850
Provision for doubtful accounts 469 496
Restructuring charge 3,000 -
Payments on restructuring charge - (1,758)
Other non-cash expenses - net (1,399) (635)
Change in operating assets and liabilities:
Trade receivables (727) (2,280)
Inventories 1,776 (1,533)
Trade payables (1,390) 1,097
Accrued interest 6,131 (22)
Other - net (1,368) 1,398
------- -------
Net cash flows from operating activities 2,579 (3,715)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired - (581)
Capital expenditures for electronic bingo systems (3,103) (1,290)
Capital expenditures for property, plant and equipment (773) (3,275)
Other 36 (38)
Payments received on notes receivable 654 893
------- -------
Net cash flows from investing activities (3,186) (4,291)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds(payments) on borrowings under credit facility (527) 5,500
Proceeds from issuance of common stock under employee stock purchase plan 1 -
Cost of debt financing (135) (207)
Payments on long-term debt (108) (50)
------- -------
Net cash flows from financing activities (769) 5,243
Effect of currency exchange rate changes on cash of foreign subsidiaries (52) 47
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,428) (2,716)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,447 7,099
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,019 $ 4,383
======= =======
SUPPLEMENTAL CASHFLOW DISCLOSURES:
Interest paid $ 885 $ 6,288
Income taxes paid $ 375 $ 476
</TABLE>
5
<PAGE> 6
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 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 six months ended June 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. COMPREHENSIVE INCOME (LOSS) - Comprehensive income (loss) is comprised of
net earnings (losses) and net currency translation gains (losses). Total
comprehensive loss for the six months ended June 30, 1999 and 1998 were
$8,710,000 and $5,712,000, respectively.
3. 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.
4. INVENTORIES - Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
(UNAUDITED)
<S> <C> <C>
Raw materials $ 4,555 $ 4,858
Work-in-process 235 250
Finished goods 15,944 17,003
------- -------
$20,734 $22,111
======= =======
</TABLE>
6
<PAGE> 7
5. LONG-TERM DEBT - 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"). As a result, the Notes could be accelerated
and payable in full, which would cause the total amount of the Notes to be
classified as a current liability.
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 "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 provides for maximum borrowings of up to $30.0 million, of which
up to $20.0 million may be borrowed under the US Facility and up to US$10.0
million may be borrowed under the Canadian Facility. The Credit Facility
provides for a three-year term and expiring in November 2000.
The Credit Facility imposes certain covenants and other requirements on the
Company and Bazaar (sometimes collectively referred to herein as the
"Borrowers"), including the requirement that the Company maintain a certain
minimum level of net worth. As of the date of this report, the Company was
not in compliance with certain covenants, including the minimum net worth
covenant. The Credit Facility also contains cross default provisions with
any other agreement, document or instrument relating to indebtedness for
borrowed money in an amount in excess of $50,000 which is owing to any
person other than Congress. These cross default provisions provide that, if
the Company is in default under any other applicable indebtedness, the
Company also is in default under the Credit Facility. Accordingly, the
existing default under the Notes is an "Event of Default" under the Credit
Facility. As of the date of this report, the Company has not obtained a
waiver of these defaults; however, Congress has not indicated any intention
to declare the Company in default. In the event Congress does elect to
exercise its remedies under the Credit Facility, the obligations
outstanding under the Credit Facility may be accelerated and payable in
full, which would cause the total amount of such obligations to be
classified as a current liability. In addition, Congress may foreclose on
the collateral securing the obligations under the Credit Facility, which
would include substantially all of the Company's operating assets.
7
<PAGE> 8
The Borrowers are entitled to draw amounts under the Credit Facility,
subject to availability pursuant to a borrowing base certificate. The
borrowing base is based on the eligible accounts receivable, eligible
inventory and equipment value levels of the Company and Bazaar,
respectively. At June 30, 1999, $4.9 million was available for borrowing
under the Credit Facility. At December 31, 1998, $5.1 million was available
for borrowing under the Credit Facility. At June 30, 1999 and December 31,
1998, the Borrowers had borrowed $17.1 million and $17.7 million,
respectively, under the Credit Facility.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
(UNAUDITED)
<S> <C> <C>
Senior Subordinated Notes $100,000 $100,000
Borrowings Under Credit Facility 17,146 17,673
Notes payable to others 1,828 2,084
-------- --------
118,974 119,757
Less current portion 470 469
-------- --------
$118,504 $119,288
======== ========
</TABLE>
6. 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/St. Paul metropolitan area. 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.
As of June 30, 1999, no payments were made against the restructuring charge
reserve.
7. 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
8
<PAGE> 9
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 six months
ended June 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 to reasonably
determine the breakout of these items by reportable segment. In addition,
as of June 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
NET SALES:
Consumable Bingo Products $ 13,924 $ 15,659 $ 29,556 $ 32,546
Pulltab and Lottery Products 10,047 10,583 20,094 22,386
Electronic Bingo Products 5,722 3,475 10,388 6,380
-------- -------- -------- --------
29,693 29,717 60,038 61,312
-------- -------- -------- --------
GROSS MARGIN
Consumable Bingo Products 6,203 4,171 10,158 9,458
Pulltab and Lottery Products 3,616 3,789 7,628 7,975
Electronic Bingo Products 2,263 1,349 3,827 2,552
-------- -------- -------- --------
12,082 9,309 21,613 19,985
-------- -------- -------- --------
Selling, general and administrative expenses 10,220 8,942 19,490 17,897
Restructuring charge 3,000 - 3,000 -
Reorganization costs 733 - 733 -
-------- -------- -------- --------
Operating income (loss) $ (1,871) $ 367 $ (1,610) $ 2,088
======== ======== ======== ========
</TABLE>
8. 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 Note 5 to the Notes to Consolidated Financial Statements for
a detailed discussion.
9
<PAGE> 10
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 $8.6 million for the six months ended June
30, 1999, compared to a net loss of $4.3 million for the six months ended June
30, 1998. Excluding the restructuring charge of $3.0 million and reorganization
costs of $0.7 million recorded in the second quarter 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. Additionally, the Company has been pursuing an aggressive
acquisition program in an effort to quickly broaden its product offerings. 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 Company competes primarily on the basis of technology, product
availability, performance, quality, price, reliability, distribution and
customer service.
10
<PAGE> 11
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 59.3 68.7 64.0 67.4
------ ------ ------ ------
Gross margin 40.7 31.3 36.0 32.6
Selling, general and administrative expenses 34.4 30.1 32.5 29.2
Restructuring charge 10.1 - 5.0 -
Reorganization costs 2.5 - 1.2 -
------ ------ ------ ------
Income (loss) from operations (6.3) 1.2 (2.7) 3.4
Interest expense 12.2 10.6 12.0 10.3
------ ------ ------ ------
Loss before income tax provision (benefit) (18.5) (9.4) (14.7) (6.9)
Income tax provision (benefit) - (0.2) (0.4) 0.2
------ ------ ------ ------
Net loss (18.5%) (9.2%) (14.3%) (7.1%)
====== ====== ====== ======
</TABLE>
Comparison of Three Months Ended June 30, 1999 and 1998
Net Sales - Net sales were $29.7 million for both the three months ended June
30, 1999 and June 30, 1998.
In Canada, sales decreased $0.3 million, or 3.9%, for the second quarter ended
June 30, 1999, compared to the second quarter ended June 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 $0.1 million or 2.0%
and pulltab and lottery products decreasing $0.4 million or 12.6%. Electronic
bingo products increased $0.1 million, primarily hall equipment for the second
quarter of 1999 compared to the second quarter 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 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. In addition, the weakening Canadian dollar negatively impacted sales by
approximately $0.2 million or 1.8%.
Domestically, the Company's sales experienced a slight increase of $0.3 million,
or 1.5%, for the second quarter ended June 30, 1999 compared to the second
quarter ended June 30, 1998. Specifically, electronic bingo products increased
$2.1 million or 63.3% attributable to the increase of $0.9 million in sales
generated from the installation of Power Bingo King(TM) hand-held electronic
bingo systems and by a $1.3 million increase in sales of fixed based electronic
bingo systems. The increases in the electronic bingo products were partially
offset by a slight decrease of $0.1 million in bingo hall equipment. This
increase was offset in part by a decrease of $1.6 million, or 16.2%, in sales of
consumable bingo products and a decrease of $0.2 million, or 2.2%, in pulltab
and lottery product sales. 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.
11
<PAGE> 12
The Company expects the general decline in the industry to continue in 1999 due
to competitive pressures from other sources of gaming and entertainment.
However, the Company expects sales 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 59.3% for
the second quarter of 1999, a decrease of 9.4 percentage points from 68.7% for
the second quarter of 1998. In terms of dollars, cost of goods sold was $17.6
million for the second quarter of 1999 compared to $20.4 million for the second
quarter of 1998.
In Canada, cost of sales decreased $0.5 million, or 9.5%, in the second quarter
of 1999 compared to 1998. The decrease is attributable in part to lower sales of
pulltab and lottery products of $0.3 million and by lower sales of consumable
bingo products of $0.3 million, or 10.0%, primarily relating to bingo paper.
This decrease was partially offset by a slight decrease in the cost of sales of
$0.1 million, or 0.2%, due to higher sales volumes of general merchandise.
Domestically, cost of sales decreased $2.3 million, or 15.2%, in the second
quarter of 1999 compared to 1998. The decrease is primarily related to a $3.4
million or 41.1% decrease in consumable bingo related products for the second
quarter of 1999 compared to the second quarter of 1998. This decrease is
attributable in part to the decrease in sales of bingo paper, to lower product
costs due to favorable newsprint prices and to an overall improvement in
production efficiencies resulting from the shutdown of the production facility
in Iowa and to the relocation of the interim production facility in Pharr, Texas
to the plant in McAllen, Texas in the second quarter of 1998.
This decrease was offset in part by an increase in electronic bingo products
cost of sales of $1.3 million or 61.5% in the second quarter of 1999 compared to
the second 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 $0.7 million or 74.2% and to the sales of fixed base systems of $0.8
million in the second quarter of 1999 compared to $0.1 million in the second
quarter of 1998.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses were $10.2 million for the three months ended June 30,
1999 compared to $8.9 million for the three months ended June 30, 1998 an
increase of $1.3 million or 14.3%. Selling, general and administrative expense,
as a percentage of sales, was 34.4% for the three months ended June 30, 1999
compared to 30.1% for the period ended June 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) the acquisition of the distribution business of
Alberta Bingo Supply, Inc. in the third quarter of 1998, (iii) higher rent for
administrative offices at the Texas border facilities and (iv) higher than
normal travel expenses incurred in connection with exploring alternatives and
examining the reorganization of the Company's business. These increases were
partially offset by decreases in contract services and research and development
expenses.
Restructuring Charge - During the second quarter of 1999, the Company recorded a
restructuring charge of $3.0 million related to management's 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.
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Reorganization Costs - Legal and professional fees of $0.7 million were incurred
in connection with the pending bankruptcy filing and reorganization of the
Company.
Interest Expense, Net - Interest expense, net of interest income, was $3.6
million for the three months ended June 30, 1999 compared to $3.1 million for
the three months ended June 30, 1998, an increase of $0.5 million, or 16.1%.
Interest expense, as a percentage of sales, was 12.2% for the second quarter of
1999 compared to 10.6% for the second quarter of 1998. The increase is primarily
attributable to accrued interest on the Credit Facility borrowings and to debt
incurred to finance acquisitions in 1998.
Income Tax Provision (Benefit) - The Company recorded an income tax benefit of
$3,000 for three months ended June 30, 1999 compared to an income tax benefit of
$55,000 for the three months ended June 30, 1998 pertaining to income generated
in Canada. 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 Six Months Ended June 30, 1999 and 1998
Net Sales - Net sales were $60.0 million for the six months ended June 30, 1999,
a decrease of $1.3 million, or 2.1% from $61.3 million for the six months ended
June 30, 1998.
In Canada, sales decreased $1.9 million, or 10.1%, for the six months ended June
30, 1999 compared to the six months ended June 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 $.3 million, or 2.9%, and pulltab
and lottery products decreasing $1.7 million, or 24.5%. Electronic bingo
products increased $0.1 million, or 33.1%, for the first half of 1999 compared
to the first half 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 $0.6 million or 3.7%.
Domestically, the Company experienced a slight increase of $0.6 million, or
1.4%, for the first half ended June 30, 1999 compared to the first half ended
June 30, 1998. Specifically, electronic bingo products increased $3.9 million,
or 65.1%, attributable to (i) the increase of $2.0 million in sales generated
from the installation of Power Bingo King(TM) hand-held electronic bingo
systems, (ii) a $0.1 million increase in electronic hall equipment and (iii) a
$1.7 million increase in fixed based electronic bingo systems. This increase was
offset in part by a decrease of $2.7 million or 12.5% in consumable bingo
products and by a decrease of $0.6 million or 3.8% 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.
The Company expects the general decline in the industry to continue in 1999 due
to competitive pressures from other sources of gaming and entertainment.
However, the Company expects sales from the Power Bingo King(TM)
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<PAGE> 14
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 64.0% for
the first half of 1999, a decrease of 3.4 percentage points from 67.4% for the
first half of 1998. In terms of dollars, cost of goods sold was $38.4 million
for the first half of 1999 compared to $41.3 million for the first half of 1998.
In Canada, cost of sales decreased $1.3 million, or 11.4%, in the first half of
1999 compared to 1998. The decrease is attributable to lower sales of pulltab
and lottery products of $1.1 million, or 23.6%, and lower sales of bingo
products of $0.2 million, or 3.3%. This decrease was partially offset by a
slight increase in the cost of sales for electronic products of $0.1 million, or
21.8%, due to higher sales volumes.
Domestically, cost of sales decreased $1.6 million, or 5.4%, in the first half
of 1999 compared to 1998. The decrease is due in part to a $3.5 million, or
20.5%, decrease in consumable bingo products and to a $0.8 million, or 8.4%,
decrease in pulltab and lottery products for the first half of 1999 compared to
the first half of 1998. The decrease in cost of sales for consumable bingo
products is due in part to the decrease in sales volumes, to lower product costs
relating to favorable newsprint prices and to an overall improvement in
production efficiencies resulting from the shutdown of the production facility
in Iowa and the relocation of the interim production facility in Pharr, Texas to
the new plant in McAllen, Texas in the second quarter of 1998. 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 decreases were offset in part by an increase in cost of sales of
electronic bingo products of $2.7 million, or 75.5%, in the first half of 1999
compared to the first half 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 $1.5 million, or 87.1%, an increase of $0.1 million in bingo
hall equipment due to higher sales volume and to the sales of fixed based bingo
system of $1.1 million, primarily in the second quarter of 1999, compared to
$0.1 million in the first half of 1998.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses were $19.5 million for the six months ended June 30,
1999 compared to $17.9 million for the six months ended June 30, 1998 an
increase of $1.6 million, or 8.9%. Selling, general and administrative expenses,
as a percentage of sales, was 32.5% for the six months ended June 30, 1999
compared to 29.2% for the six months ended June 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) the acquisition of the distribution
business of Alberta Bingo Supply, Inc. in the third quarter of 1998, (iii)
higher rent for administrative offices at the Texas border facilities and (iv)
higher than normal travel expenses incurred in connection with exploring
alternatives and examining the reorganization of the Company's business. These
increases were partially offset by decrease in artwork and research and
development expenses.
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.
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<PAGE> 15
Reorganization Costs - Legal and professional fees aggregating $0.7 million were
incurred in the first half of 1999 in connection with the pending bankruptcy
filing and corporate reorganization.
Interest Expense, Net - Interest expense, net of interest income, was $7.2
million for the six months ended June 30, 1999 compared to $6.3 million for the
six months ended June 30, 1998, an increase of $0.9 million, or 14.3%. Interest
expense, as a percentage of sales, was 12.0% for the first half of 1999 compared
to 10.3% for the first half of 1998. The increase is primarily attributable to
accrued interest on the Credit Facility borrowings and to debt incurred to
finance acquisitions in 1998.
Income Tax Provision (Benefit) - The Company recorded an income tax benefit of
$244,000 for six months ended June 30, 1999 compared to an income tax provision
of $118,000 for the six months ended June 30, 1998 pertaining to income
generated in Canada. The effective tax rate was (0.3%) for the six months ended
June 30, 1999 compared to 2.8% for the six months ended June 30, 1998. The low
effective tax rate 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.
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<PAGE> 16
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 purchase of fixed assets and for normal operating expenses. The primary
amounts and ratios relating to liquidity and capital resources for the six
months ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Working capital $ 19,441 $ 37,142
Current ratio 1.7 2.7
Total long-term debt $ 118,974 $ 106,203
Stockholders' equity (deficit) $ (13,620) $ 10,684
Total capitalization $ 105,354 $ 116,887
Debt to capitalization ratio 112.9% 90.9%
Capital expenditures for property, plant and equipment $ 773 $ 3,275
Capital expenditures for electronic bingo systems $ 3,103 $ 1,290
</TABLE>
FINANCING ACTIVITIES
The Company finances its working capital needs out of its operating cash flows
and draws under the Credit Facility. The Company's long-term debt at June 30,
1999, including the current portion thereof totaled $119.0 million compared to
$119.8 million at December 31, 1998. See Note 5 of Notes to Consolidated
Financial Statements. Cash payments on long-term debt for the six months ended
June 30, 1999 totaled $1,557,000 compared to $50,000 for the six months ended
June 30, 1998.
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"). See "--Petition for Reorganization under Chapter 11" and
Part II, Item 3, "Defaults Upon Senior Securities." 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"). As a result, the Notes could be accelerated and payable in full,
which would cause the total amount of the Notes to be classified as a current
liability.
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. See the discussion under the caption "Petition for
Reorganization under Chapter 11" below. 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.
In November 1997, the Company entered into a Credit Facility for a three-year
term expiring in November 2000. The Credit Facility, as amended, provides 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 June 30, 1999, the Company had borrowed $17.1 million
at a weighted-average interest rate of 8.23% of which $12.8 million was borrowed
on the U.S. Facility and $4.3 million was borrowed on the
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<PAGE> 17
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
Company is currently negotiating with a third party to replace this Credit
Facility with a new credit facility in the amount of up to $30.0 million. It is
expected that any such replacement credit facility would be entered into in the
context of the Company's Chapter 11 Case (as defined below).
The Borrowers are entitled to draw amounts under the Credit Facility, subject to
availability pursuant to a borrowing base certificate. The borrowing base is
based on the eligible accounts receivable, eligible inventory and equipment
value levels of the Company and the Canadian Borrower, respectively. At June 30,
1999 and December 31, 1998, $4.9 and $5.1 million, respectively, was available
for borrowing under the Credit Facility.
The Credit Facility generally provides for interest on the US Facility at the
prime rate plus 1/4% to 3/4% or at a Eurodollar rate plus 2 1/4% to 2 3/4%, at
the option of the Company. The Canadian Facility generally provides for interest
at the Canadian prime rate plus 1 1/4 % to 1 3/4%.
The Credit Facility imposes certain covenants and other requirements on the
Borrowers. In general, the affirmative covenants provide for mandatory reporting
by the Borrowers of financial and other information to the lenders and notice of
certain events. The Credit Facility also contains certain negative covenants and
restrictions on actions by the Borrowers that, among other things, restrict (i)
the incurrence and existence of indebtedness or contingent obligations, (ii)
consolidations, mergers and sale of assets, (iii) the incurrence and existence
of liens, (iv) the sales of disposition of assets, (v) investments, loans and
advances, (vi) the payment of dividends and the repurchases of the Company's
common stock (the "Common Stock") and (vii) acquisitions by the Borrowers. In
addition under certain circumstances, the Borrowers must meet a minimum level of
net worth when the Excessive Availability based on the current borrowing base
certificate is less than $5.0 million. As of the date of this report, the
Company was not in compliance with certain covenants, including the minimum net
worth covenant. The Company has not obtained a waiver of these covenant
violations; however, Congress has not indicated any intention to declare the
Company in default. In the event of a declaration of default, the Company may be
required to repay the Credit Facility or Congress may foreclose on the
collateral, which would materially and adversely impact the Company's results of
operations.
The Credit Facility further contains customary events of default including
non-payment of principal, interest or fees and violations of covenants, as well
as cross default provisions which provide that a default under any other
agreement relating to indebtedness for borrowed money in excess of $50,000 is a
default under the Credit Facility. The default under the Notes is an "Event of
Default" under the Credit Facility. The Company has not obtained a waiver of
this covenant violation; however, as noted above Congress has not indicated any
intention to declare the Company in default.
PETITION FOR REORGANIZATION UNDER CHAPTER 11
On August 13, 1999, the Company filed a petition for relief under Chapter 11 of
the Bankruptcy Code 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 1/2% Senior Subordinated Notes due 2004
(the "Notes"), with respect to a consensual reorganization of the Company's debt
and equity.
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<PAGE> 18
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 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 $0.8
million during the first six months of 1999 compared with $3.3 million during
the first six 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.
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<PAGE> 19
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 $3.1 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.
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 third 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 can not 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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<PAGE> 20
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:
- Interest rates on notes receivables.
- Commodity prices, affecting the cost of certain raw materials.
- Interest rates on the Company's debt.
- Foreign exchange rates and other international market risks.
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 June 30, 1999 was $2.8 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's interest sensitive liabilities are its debt instruments consisting
of a floating rate U.S. Credit Facility based on the prime rate plus 1/4% to
3/4% or at Eurodollar rate plus 2 1/4% to 2 3/4% and a Canadian Credit Facility
at Canadian prime rate plus 1 1/4% to 1 3/4%.
Because the interest rate on the 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 both the prime (U.S. and
Canadian) and Eurodollar 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 as compared to the
average level of interest notes in 1998 would result in an increase to pretax
loss of approximately $0.15 million. 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.
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. 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.
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PART II. OTHER INFORMATION
Item 3. DEFAULTS UPON SENIOR SECURITIES
The Company is in default on its Notes. The Company did not make the semiannual
interest payment due May 15, 1999 in the amount of $6.25 million.
The Company also is in default of the U.S. Facility and the Canadian Facility
with Congress. The terms of each Facility require the Company to meet certain
financial and reporting covenants including maintenance of specified levels of
net worth. As of the date of this report, the Company was not in compliance with
many of these covenants. Specifically, the terms of each Facility require the
Company to maintain a minimum level of net worth when the Excess Availability
(as defined in the Credit Facility) based on the current borrowing base
certificate is less than $5.0 million. At June 30, 1999, the Company had a
negative net worth of $13.6 million, which is a violation of the minimum net
worth requirement of $13 million. In addition, the Company's default under the
Notes also is a default under the Credit Facility. The Company is current on its
payments under the Credit Facility and the lender has not indicated an intention
to declare a default. As of June 30, 1999, the aggregate amount borrowed under
the Credit Facility was $17.1 million. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "--Petition for Reorganization under Chapter 11."
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
b. Reports on Form 8-K:
The Company filed the following report on Form 8-K during the
three months ended June 30, 1999:
(1) Report dated May 20, 1999, including a Restructuring
Agreement and press release announcing that the
Company had reached an agreement-in-principle with
the ad hoc committee, which is comprised of certain
of the holders of the Company's $100,000,000 12.5%
Senior Subordinated Notes due 2004, with respect to a
consensual reorganization of the Company's debt and
equity.
22
<PAGE> 23
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: August 16, 1999 /s/ Joseph M. Valandra
----------------------------------------------------
Joseph M. Valandra, Chairman of the Board,
Chief Executive Officer and President
Date: August 16, 1999 /s/ Lawrence X. Taylor, III
----------------------------------------------------
Lawrence X. Taylor, III
Executive Vice President and Chief Financial Officer
23
<PAGE> 24
EXHIBIT INDEX
The following Exhibits are filed herewith.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
11 Statements Regarding Computation
of Per Share Earnings
27 Financial Data Schedule
</TABLE>
24
<PAGE> 1
EXHIBIT NO. 11
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
STATEMENTS REGARDING COMPUTATION OF PER SHARE EARNINGS
(Amounts In Thousands, Except Per Share Amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Shares of common stock outstanding at
beginning of period (1) 6,946 6,934 6,943 6,920
Weighted-average shares issued during the period - 1 3 12
------- ------- ------- -------
Actual weighted average share outstanding
for the period 6,946 6,935 6,946 6,932
Dilutive stock options and warrants using
average market price - - - -
------- ------- ------- -------
Dilutive shares outstanding 6,946 6,935 6,946 6,932
======= ======= ======= =======
Net loss $(5,496) $(2,724) $(8,612) $(4,328)
======= ======= ======= =======
Loss per share - basic and dilutive $ (0.79) $ (0.39) $ (1.24) $ (0.62)
======= ======= ======= =======
</TABLE>
(1) This represents total outstanding shares of common stock less treasury
shares.
See Notes to Consolidated Financial Statements.
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 3,019
<SECURITIES> 0
<RECEIVABLES> 23,410
<ALLOWANCES> 4,312
<INVENTORY> 20,734
<CURRENT-ASSETS> 49,116
<PP&E> 56,896
<DEPRECIATION> 27,184
<TOTAL-ASSETS> 134,869
<CURRENT-LIABILITIES> 29,675
<BONDS> 118,504
0
0
<COMMON> 70
<OTHER-SE> (13,550)
<TOTAL-LIABILITY-AND-EQUITY> 134,869
<SALES> 60,038
<TOTAL-REVENUES> 60,038
<CGS> 38,425
<TOTAL-COSTS> 38,425
<OTHER-EXPENSES> 22,754
<LOSS-PROVISION> 469
<INTEREST-EXPENSE> 7,246
<INCOME-PRETAX> (8,856)
<INCOME-TAX> (244)
<INCOME-CONTINUING> (8,612)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,612)
<EPS-BASIC> (1.24)
<EPS-DILUTED> (1.24)
</TABLE>
