<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 Quarter Ended Commission File Number
March 31, 1995 0-10737
Stuart Entertainment, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-0402207
- ------------------------ ----------------------
(State of incorporation) (I.R.S. Employer
Identification Number)
3211 Nebraska Avenue, Council Bluffs, IA 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 May 1, 1995 there were 6,594,388 shares of the Registrant's common
stock, $.01 par value, outstanding.
<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 Months Ended March 31, 1995 and 1994................ 3
Consolidated Balance Sheets as of March 31, 1995 and
December 31, 1994......................................... 4- 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1995 and 1994................ 6
Notes to Consolidated Financial Statements................. 7-13
Item 2:
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 14-18
PART II. OTHER INFORMATION..................................... 19
Signatures................................................. 20
Exhibit Index.............................................. 21
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Items 1. FINANCIAL STATEMENTS
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 31, 1994
(Amounts In Thousands, Except Per Share Amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1995 1994
-------- --------
<S> <C> <C>
NET SALES $27,464 $15,428
COST OF GOODS SOLD 19,222 11,079
------- -------
GROSS MARGIN 8,242 4,349
OTHER EXPENSES AND INCOME:
Selling, general and administrative expenses 6,379 3,102
Equity in (earnings) losses of joint ventures (15) 225
Amortization of goodwill 203 14
Interest expense 1,072 257
Interest income (40) (36)
Royalty income (66) (53)
------- -------
Other expenses and income - net 7,533 3,509
------- -------
INCOME BEFORE INCOME TAXES 709 840
INCOME TAX PROVISION 471 311
------- -------
NET INCOME $ 238 $ 529
======= =======
EARNINGS PER SHARE $ .04 $ .15
======= =======
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 6,677 3,498
======= =======
</TABLE>
Note: No dividends were paid or declared during the three months
ended March 31, 1995 and March 31, 1994.
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 4
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1995 And DECEMBER 31, 1994
(Amounts In Thousands)
<TABLE>
<CAPTION>
ASSETS March 31, December 31,
1995 1994
--------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,084 $ 2,116
Receivables:
Trade receivables, less allowance for
doubtful accounts of $1,900 and $1,598,
respectively:
Related parties 1,031 838
Other 16,446 14,163
Current portion of notes receivable,
less allowance for doubtful notes
of $199 and $199, respectively 678 761
Inventories (Note 3) 17,549 16,103
Refundable income taxes - 225
Deferred income taxes 1,845 1,513
Prepaid expenses and other 684 388
------- -------
Total Current Assets 40,317 36,107
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 4,850 4,710
Equipment 27,574 24,520
------- -------
Total 32,424 29,230
Less accumulated depreciation 10,290 9,387
------- -------
Property, Plant And Equipment - Net 22,134 19,843
OTHER ASSETS:
Notes receivable, less allowance for doubtful
notes of $423 and $423, respectively 1,229 1,366
Goodwill, net of accumulated amortization
of $617 and $426, respectively 29,254 28,958
Investment in joint venture 171 155
Deferred financing costs, net of accumulated
amortization of $86 and $16, respectively 1,550 1,613
Other 1,074 783
------- -------
Total Other Assets 33,278 32,875
------- -------
TOTAL ASSETS $95,729 $88,825
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 5
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1995 AND DECEMBER 31, 1994
(Amounts In Thousands)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, December 31,
1995 1994
--------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt (Note 5) $ 6,455 $ 6,482
LSA Purchase Price Adjustment (Note 4) 1,642 1,642
Trade payables:
Related parties 555 276
Other 9,495 10,180
Accrued payroll and benefits 1,762 1,597
Income taxes payable 36 -
Other accrued liabilities 3,100 1,476
------- -------
Total Current Liabilities 23,045 21,653
LONG-TERM DEBT (Note 5)
Related party 5,000 5,000
Other 34,069 29,416
------- -------
Total Long-Term Debt 39,069 34,416
DEFERRED INCOME TAXES 2,442 2,270
DEFERRED INCOME 331 333
------- -------
TOTAL LIABILITIES 64,887 58,672
STOCKHOLDERS' EQUITY:
Common stock 66 66
Additional paid-in capital 26,083 25,776
Retained earnings 4,977 4,739
Less treasury stock (56,260 shares at cost) (189) (189)
Cumulative translation adjustment,
net of deferred taxes ( 95) (239)
------- -------
Total Stockholders' Equity 30,842 30,153
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $95,729 $88,825
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE> 6
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 31, 1994
(Amounts In Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1995 1994
--------- ---------
<S> <C> <C>
Net income $ 238 $ 529
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Payment on termination of Consulting Agreement (1,000) -
Depreciation and amortization 1,111 496
Provision for doubtful accounts 151 112
Equity in (earnings) losses of joint ventures (15) 225
Deferred income taxes (390) (134)
Other noncash expenses - net 733 246
Change in operating working capital items:
Trade receivables (2,536) (1,999)
Inventories (791) (41)
Trade payables 966 52
Other - net 689 538
-------- --------
Net cash provided by (used in) operating activities (844) 24
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,577) (113)
Payments received on notes receivable 286 280
Investment in joint ventures - (498)
Costs of acquisition of LSA (274) -
Investment in distributor (117) -
Acquisition of Reliable (296) -
Other (21) -
-------- --------
Net cash used in investing activities (1,999) (331)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under Revolving Facility 4,253 -
Net borrowings on previous line of credit - 724
Payments on Term Facility (743) -
Payments on other long-term debt (697) (582)
Costs on issuance of stock (17) -
-------- --------
Net cash provided by financing activities 2,796 142
Effect of currency exchange rate changes on cash
of foreign subsidiaries 15 -
-------- --------
NET CHANGE IN CASH (32) (165)
CASH AT BEGINNING OF PERIOD 2,116 512
-------- --------
CASH AT END OF PERIOD $ 2,084 $ 347
======== ========
Interest paid $ 1,150 $ 255
Income taxes paid $ 459 $ -
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
6
<PAGE> 7
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of Stuart
Entertainment, Inc. and 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 management of Stuart Entertainment, Inc. (the
"Company"), the foregoing Consolidated Financial Statements reflect all
adjustments considered necessary for a fair presentation of the results
of the Company for the periods shown. Operating results for the three
months ended March 31, 1995 and 1994 are not necessarily indicative of
the results that may be expected for the full year ending December 31,
1995. These financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto for the year
ended December 31, 1994, filed with the Securities and Exchange
Commission on the Company's Annual Report on Form 10-K.
Certain reclassifications have been made to the 1994 financial statements
to conform to those classifications used in 1995.
2. EARNINGS PER SHARE:
The number of shares used in earnings per share calculations for the
three-month periods ended March 31, 1995 and 1994 are based on the
weighted average number of shares of common stock outstanding and, if
dilutive, common stock equivalents (stock options and warrants) of the
Company using the treasury stock method.
3. INVENTORIES:
Inventories consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
----------- ------------
<S> <C> <C>
Raw Materials $ 5,696,000 $ 4,380,000
Work-In-Process 3,171,000 2,418,000
Finished Goods 8,682,000 9,305,000
----------- -----------
Total $17,549,000 $16,103,000
=========== ===========
</TABLE>
7
<PAGE> 8
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
4. ACQUISITIONS AND FINANCING
BINGO PRESS & SPECIALTY LIMITED:
On December 13, 1994, the Company completed the acquisition (the
"Acquisition") of Len Stuart & Associates Limited ("LSA") pursuant to a
Stock Purchase Agreement (the "LSA Agreement") with LSA and Mr. Leonard
A. Stuart, the sole shareholder of LSA and the Chairman and former Chief
Executive Officer of the Company. LSA was the holding company for i)
Bingo Press & Specialty Limited, an Ontario, Canada corporation and a
major manufacturer of bingo supplies and related products in Canada,
which operates under the trade name Bazaar & Novelty ("Bazaar"), and ii)
Niagara Bazaar & Novelty Limited, an Ontario, Canada corporation and a
retailer of bingo supplies and related products ("Niagara").
The total purchase price was $36,786,000, consisting of the following:
i) payment of $30,000,000 cash at closing, ii) issuance of a senior
subordinated note for $5,000,000, iii) issuance of warrants to purchase
100,000 shares of the Company's common stock at an exercise price of
$5.75 per share (valued by the Company at $144,000) and iv) the Bazaar
Purchase Price Adjustment (as defined below). In connection with the
Acquisition, the Company incurred $1,129,000 of transaction costs.
Under the LSA Agreement, there would be an adjustment to the purchase
price ("Bazaar Purchase Price Adjustment") to the extent that the
Consolidated Net Book Value (as defined in the LSA Agreement) of LSA and
its subsidiaries on September 30, 1994 was more or less, respectively,
than the Consolidated Net Book Value of LSA and its subsidiaries on
December 31, 1993. The Bazaar Purchase Price Adjustment was determined
to be $1,642,000.
To partially finance the Acquisition, the Company entered into an
agreement with MLGA Fund II, L.P. and Bingo Holdings, Inc., affiliates
of the investment banking firm of Morgan Lewis Githens & Ahn, Inc.
("MLGA, Inc."), whereby Bingo Holdings, Inc. purchased i) 3,130,435 newly
issued shares of the Company's common stock for $5.75 per share and ii)
received warrants to acquire 775,000 shares of the Company's common stock
at an exercise price of $5.75 per share, for an aggregate purchase price
of $18,000,000 (the "Equity Financing"). With the net proceeds from the
Equity Financing and amounts borrowed under the new Credit Agreement (see
Note 5), the Company acquired LSA.
8
<PAGE> 9
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
4. ACQUISITIONS AND FINANCING: (Continued)
BINGO PRESS & SPECIALTY LIMITED: (Continued)
The Acquisition has been accounted for using the purchase method of
accounting. The purchase price has been allocated to the fair value of
the acquired assets and liabilities, resulting in the
recording of goodwill of $27,316,000.
The results of operations of Bazaar have been consolidated since the date
of the Acquisition.
THE RELIABLE CORPORATION OF AMERICA, INC.:
Effective January 1, 1995, the Company acquired i) substantially all the
assets and assumed substantially all existing liabilities (the "Net
Assets") from The Reliable Corporation of America, Inc. ("Reliable") and
ii) two presses owned by Reliable's shareholders (the "Presses").
The total purchase price paid for the Net Assets and the Presses was
$1,300,000 subject to adjustment. The purchase price was paid as
follows: i) $200,000 paid in cash, ii) $320,000 paid through the issuance
of 55,652 shares of the Company's common stock valued at $5.75 per share,
and iii) $780,000 in the form of a promissory note with equal principal
payments over 90 months plus accrued interest at the rate of 1% over
national prime.
The Company entered into non-competition agreements with the shareholders
of Reliable. Under these agreements, the Company will make monthly
payments of approximately $5,000 for 90 months to the Reliable
shareholders. The present value of these payments (using a 9% discount
factor) is $301,000. The Company also entered into an employment
agreement with the President of Reliable.
The results of operations of Reliable have been consolidated since
January 1, 1995.
9
<PAGE> 10
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
4. ACQUISITIONS AND FINANCING: (Continued)
PRO FORMA INFORMATION:
The following pro forma condensed consolidated statements of operations
for the three-month periods ended March 31, 1995 and 1994 give effect to
the acquisition of LSA and Reliable, the Equity Financing and borrowings
on the new Credit Agreement as if such transactions had occurred as of
January 1, 1994. The pro forma consolidated statement of operations do
not purport to represent what the Company's results of operations would
have been if such transactions had in fact occurred on such dates and
should not be viewed as predictive of the Company's financial results of
the future.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Three Months Ended Three Months Ended
March 31, 1995 March 31, 1994
------------------ ------------------
<S> <C> <C>
Net Sales $ 27,464,000 $ 25,888,000
Net Income $ 536,000 $ 670,000
Earnings Per Share $ 0.08 $ 0.10
Average Common and Common
Equivalent Shares Outstanding 6,676,705 6,710,649
</TABLE>
The pro forma results above do not include the following non-recurring
charge that was included in the results of operations after the date of
the Acquisition:
i) In accordance with the application of purchase accounting to the
assets of Bazaar, the finished goods of Bazaar were recorded at sales
value less costs to sell and a reasonable margin on the costs to sell.
This resulted in the write-up of finished goods inventory of Bazaar
which was included in costs of goods sold in 1994 and 1995 as the
finished goods were sold during the periods. The amount charged to
cost of goods sold in the three months ended March 31, 1995 was
$489,000 and the reduction of net income, net of taxes of $191,000,
was $298,000.
10
<PAGE> 11
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
5. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
----------- ------------
<S> <C> <C>
Borrowings under Credit Agreement:
Revolving Facility $16,918,000 $12,601,000
Term Facility 14,169,000 14,840,000
Subordinated note payable to
Mr. Stuart 5,000,000 5,000,000
Other term loans and mortgages
payable to banks 2,351,000 1,208,000
Obligations under capital leases 3,813,000 4,211,000
Notes payable to others 3,273,000 3,038,000
----------- -----------
Total 45,524,000 40,898,000
Less current portion 6,455,000 6,482,000
----------- -----------
Total long-term debt $39,069,000 $34,416,000
=========== ===========
</TABLE>
CREDIT AGREEMENT:
In connection with the Acquisition, on December 13, 1994, the Company
entered into an agreement (the "Credit Agreement") with a national bank
("Bank") for a financing facility of $35,000,000, with a senior secured
revolving line of credit of $20,000,000 (the "Revolving Facility") and
a senior secured term loan facility of $15,000,000 (the "Term Facility").
The Credit Agreement expires and all amounts outstanding are due on
December 12, 1999. The Credit Agreement provided funding to complete the
Acquisition, refinance existing debt of the Company and Bazaar and to
provide a working capital line.
On December 13, 1994, i) the Revolving Facility was separated into a U.S.
Facility for $10,000,000 and a Canadian Revolving Facility for C$13,875,000
($10,000,000) and ii) the Term Facility was separated into a U.S. Term
Facility for $5,000,000 and a Canadian Term Facility for C$13,875,000
($10,000,000). Loans under the U.S. Revolving and U.S. Term Facility can,
at the option of the Company, be priced either as (a) a Base Rate Loan (at
Bank's prime rate plus 1/2%) or (b) an Offshore Loan (at LIBOR rates plus
1.75%). Loans under the Canadian Revolving and the Canadian Term Facility
can, at the option of the Company, be priced either as (i) a Base Rate Loan
(at Bank's Canadian prime rate plus 1/2%) or (ii) an Offshore Loan (at
Bankers Acceptance Rates plus 1.75%). Interest payments are due (a) monthly
on Base Rate Loans and (b) at the end of an Offshore Loan period, which
could be from one to 180 days.
11
<PAGE> 12
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED
(Continued)
5. LONG-TERM DEBT: (Continued)
CREDIT AGREEMENT: (Continued)
The Credit Agreement requires quarterly principal payments of $250,000
under the U.S. Term Facility and C$694,000 ($492,000) under the Canadian
Term Facility until maturity. No principal payments are required on the
Revolving Facility until maturity.
At March 31, 1995, loans outstanding on the U.S. Revolving Facility
totaled $8,200,000 (all Offshore Loans at an interest rate of 7.81%) and
loans outstanding on the Canadian Revolving Facility totaled
C$12,200,000($8,718,000) (primarily Offshore Loans at a weighted average
interest rate of 10.16%). At March 31, 1995, loans outstanding on the
U.S. Term Facility totaled $4,750,000 (an Offshore Loan at an interest
rate of 7.81%) and loans outstanding on the Canadian Term Facility
totaled C$13,181,000 ($9,419,000) (an Offshore Loan with an interest rate
of 10.16%).
The Credit Agreement contains various covenants, such as minimum net
worth, fixed coverage ratio, leverage ratio and restrictions on
additional borrowings, cash dividends and capital expenditures. At
December 31, 1994 and March 31, 1995, the Company was not in compliance
with the leverage ratio covenant based on the combined operating results
of the Company and Bazaar for the full year. In April, 1995, the Bank
and the Company entered into a Waiver and First Amendment to the Credit
Agreement pursuant to which the Bank waived any event of default solely
as a result of a breach of the leverage ratio covenant for the periods
of December 31, 1994 and March 31, 1995, and amended and restated the
definition of leverage ratio. At March 31, 1995, the Company was not in
compliance of the minimum net worth covenant, however, the Bank and the
Company are currently discussing a waiver and amendment to the covenants.
Management anticipates it will be granted a waiver and the covenants will
be revised to be mutually agreeable to the Company and the Bank.
FINANCING ASSUMED WITH RELIABLE NET ASSET PURCHASE:
Pursuant to the purchase of Net Assets from Reliable, the Company assumed
a line of credit and term loan credit facility with a Michigan bank which
had been the primary bank for Reliable. Amounts borrowed under the line
of credit are based on percentages of eligible trade accounts receivable
and certain types of inventory. Interest at the rate of 2% over the
Michigan bank's prime rate is paid monthly on the line of credit
facility. Advances under the line of credit are limited to the greater
of i) $600,000 or ii) eligible accounts receivable and inventory less the
balance of a certain term loan which at the closing of the bank agreement
was approximately $241,000.
12
<PAGE> 13
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED
(Continued)
5. LONG-TERM DEBT: (Continued)
FINANCING ASSUMED WITH RELIABLE NET ASSET PURCHASE: (Continued)
The term loan credit facility includes three term loans with balances at
the closing date of $35,000, $368,000 and $241,000. The term loans
require monthly principal payments of approximately $21,700 plus interest
at 2% over the Michigan bank's prime rate. The maturity date of both the
line of credit and the term loans is July 1, 1995. The Company expects
the Michigan bank credit agreement to be extended.
The Company assumed another note payable in the amount of $250,000 which
requires monthly principal payments of approximately $10,400 plus accrued
interest at national prime plus 1.6%.
As part of the payment for the purchase of the Net Assets of Reliable,
the Company issued $780,000 in the form of a promissory note payable to
The Reliable Corporation of America, Inc. with equal principal payments
over 90 months plus accrued interest at a rate of 1% over national prime.
6. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING INFORMATION:
During the first three months of 1995 and 1994, the Company financed the
acquisition of equipment totaling $0 and $247,000, respectively, through
the assumption of obligations under capital leases.
In connection with the acquisition of the Net Assets and the Presses from
Reliable, the Company i) assumed Reliable's line of credit and term loan
credit facility with a Michigan bank, which totaled $1,237,000, ii)
assumed another note payable of $250,000, iii) issued a note payable to
the shareholders' of Reliable for $780,000 and iv) issued 55,652
unregistered shares of the Company's common stock, which was valued at
$320,000 ($5.75 per share).
13
<PAGE> 14
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1995 And 1994
Net Sales - Net sales in the first quarter 1995 increased $12,036,000 (78.0%)
to $27,464,000 from $15,428,000 in the same period of 1994. The sales growth
in 1995 was primarily attributable to the inclusion of sales from Bazaar,
Reliable and Stuart Entertainment England for the three month period in 1995
which increased sales $11,645,000 (75.5%). Excluding the effect of Bazaar,
Reliable and Stuart Entertainment England sales, Bingo paper increased
$918,000 (12.2%) and ink products increased $242,000 (14.9%). These increases
were offset by a decrease in Video King sales of $463,000 (43.0%), Bingo
electrical equipment of $246,000 (13.0%) and slight decreases in break-open
tickets. Bingo paper units increased 4.9% from 1994 to 1995 and ink products
experienced unit increases of 20.7%. Break-open tickets experienced a unit
sales decrease of 5.4% during the same three-month periods.
Overall sale price levels increased for Bingo paper and break-open tickets
while sale price levels for ink products decreased during the three-month
period of 1995 compared to the same period in 1994. Bingo paper sale prices
increased approximately 6.9%. This increase was the result of raw material
price increases on newsprint paper. Break-open ticket prices increased 2.7%
during 1995. Ink products decreased approximately 4.3% due primarily from
a shift in the mix of ink products sold to lower priced products from higher
priced ink products.
Cost Of Goods Sold - Cost of goods sold, as a percentage of sales, decreased
from 71.8% for the three months ended March 31, 1994 to 70.0% for the three
months ended March 31, 1995. The decrease in the cost of goods sold
percentage is due i) to a lower cost of goods sold percentage for Bazaar sales
versus the historical percentage for the Company, ii) the increase in sale
prices as discussed above, and iii) improvements in manufacturing
efficiencies. These improvements were partially offset by increases in raw
material newsprint paper and general labor rate increases. Additionally, the
Company recorded an adjustment to cost of goods sold of $489,000 (1.7%) to
record the effect of purchase accounting on the finished goods inventory of
Bazaar at the date of the Acquisition which was sold subsequently during the
first quarter of 1995. The total adjustment to the Bazaar finished goods
inventory ($870,000) has been reflected in cost of goods sold during the
fourth quarter of 1994 ($381,000) and the first quarter of 1995 ($489,000).
During 1994 and the first three months of 1995, the Company has experienced
significant increases in the price of paper products purchased for the
manufacturing of Bingo paper and for packaging. The Company initiated sales
price increases on Bingo paper during this period that approximated the amount
of the increase in the paper products purchased.
14
<PAGE> 15
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
Comparison of Three Months Ended March 31, 1995 And 1994 (Continued)
The Company anticipates further increases in the price of paper products
purchased during 1995. Management intends to increase the sales price on
Bingo paper during 1995 to offset this increase in costs. Management believes
that this increase in the sales price of Bingo paper will not place the
Company at a competitive disadvantage.
Selling, General and Administrative Expenses - Selling, general and
administrative ("SG&A") expenses increased approximately $3,277,000 from
$3,102,000 for the three months ended March 31, 1994 to $6,379,000 during the
first three months of 1995. SG&A expenses, as a percent of sales, increased
to 23.2% in the first three months of 1995 from 20.1% during the same period
of 1994. The increase in SG&A expenses was due primarily to two factors.
First, approximately $2,879,000 resulted from the consolidation of Bazaar,
Reliable and Stuart Entertainment England for the three-month period ended
March 31, 1995. Second, excluding the effect of Bazaar, Reliable and Stuart
Entertainment England, salaries and related costs increased $483,000 primarily
due to increases in number of employees, salary levels and incentive
compensation accruals.
Equity Earnings (Losses) In Joint Ventures - Equity income in joint ventures
total $15,000 for the first quarter of 1995 compared with a loss of $225,000
for the same period in 1994. Under the joint venture agreement, the earnings
or loss for Stuart Entertainment Mexico was allocated to the Company based on
the percentage of total production that was sold to the Company. During the
period from January 1, 1994 through March 31, 1994, the Company recognized
losses related to its investment in Stuart Entertainment Mexico of $129,000
which represented SG&A expenses. The equity loss for Stuart Entertainment
England of $96,000 represents 50% of the net operating loss of Stuart
Entertainment England for the period January 1, 1994 through March 31, 1994.
With the Acquisition, Stuart Entertainment England and Stuart Entertainment
Mexico became, in effect, wholly owned subsidiaries of the Company.
Interest Expense - Interest expense for the three month period ended March 31,
1995 totaled $1,072,000 compared with $257,000 in the same period in 1994.
The increase of $815,000 was due to i) the consolidation of Bazaar, Stuart
Entertainment England and Reliable which increased interest expense by
$545,000, ii) higher interest rates experienced in 1995 compared to the same
period in 1994 and iii) significantly higher borrowing levels at March 31,
1995 compared to March 31, 1994.
Interest Income - Interest income increased $4,000 for the three month period
ended March 31, 1995 to $40,000 compared to $36,000 for the same period in
1994. The increase was due to higher interest rates charged partially offset
by reduced balances in notes receivable at March 31, 1995 compared to March
31, 1994.
15
<PAGE> 16
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
Comparison of Three Months Ended March 31, 1995 And 1994 (Continued)
Royalty Income - Royalty income of $66,000 for the three month period ended
March 31, 1995 was primarily received under an agreement with a distributor
for royalty payments based on the number of units of bingo paper printed on
a press leased by the Company to the distributor. This compares to royalty
income of $53,000 for the same period in 1994. The increase was due to
greater units produced by the distributor.
Net Income - Net income for the three month period ended March 31, 1995 was
$238,000 ($.04 per share) compared with net income of $529,000 ($.15 per
share) for the same period of 1994. The decrease in net income and earnings
per share was largely due to i) increased losses of Stuart Entertainment
England of $337,000 ($.05 per share), and ii) the purchase accounting
adjustment required for Bazaar's finished good inventory of $298,000 ($.04 per
share).
Other - The effective tax rate for 1995 was greater than the federal statutory
rate primarily due to the effect of non-recognition of NOL carryforwards for
Stuart Entertainment England and goodwill amortization offset by state,
foreign tax, and research and development credits.
Inflation did not have a material effect on the Company's operations for the
three month periods in 1995 or 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company completed the Acquisition of LSA during the fourth quarter of
1994. As a result of the Bazaar Purchase Price Adjustment, the Company is
obligated to pay Mr. Stuart an additional $1,642,000. The Company has paid
to Mr. Stuart $720,000 of the Bazaar Purchase Price Adjustment in April, 1995,
and the remaining balance will accrue interest payable monthly at 2.25% over
the prime rate shown in The Wall Street Journal beginning March 6, 1995.
(See Note 4 of the Notes to Consolidated Financial Statements.)
16
<PAGE> 17
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
At December 31, 1994, the Company was not in compliance with the leverage
ratio covenant under the Credit Agreement based on the combined operating
results of the Company and Bazaar for the full year. In April, 1995, the Bank
and the Company entered into a Waiver and First Amendment to the Credit
Agreement pursuant to which the Bank waived any event of default solely as a
result of a breach of the leverage ratio covenant for the periods of December
31, 1994 and March 31, 1995, and amended and restated the definition of
leverage ratio. At March 31, 1995, the Company was not in compliance of the
minimum net worth covenant, however, the Bank and the Company are currently
discussing a waiver and amendment to the covenants. Management anticipates
it will be granted a waiver and the covenants will be revised to be mutually
agreeable to the Company and the Bank.
The Company's long-term debt at March 31, 1995, including the current portion
thereof, totaled $45,524,000 compared to $40,898,000 at December 31, 1994.
Cash payments on long-term debt during the first quarter of 1995 totaled
approximately $1,440,000 compared to $582,000 for the same period in 1994.
Additions to long-term debt in 1995 were related to the acquisition of the Net
Assets of Reliable and the Presses. Long-term debt at March 31, 1995,
consisted of amounts borrowed under the Credit Agreement of $31,087,000, notes
payable to banks and others of $10,624,000 and leases totaling $3,813,000.
The notes payable have remaining payment terms as of March 31, 1995, ranging
from less than one (1) year to approximately five (5) years. These notes bear
interest at a rate of 1.75% over LIBOR, 0.5% over prime, or at a fixed rate
ranging from 6.0% to 13.5%. The obligations under capital leases have
remaining payment terms of from less than one (1) year to approximately five
(5) years. Lease payments are determined based upon simple interest
equivalent rates of 7.9% to 15.2%.
Pursuant to the purchase of net assets from Reliable, the Company assumed a
line of credit and term loan credit facility with a Michigan bank which had
been the primary bank for Reliable. (See Note 5 of the Notes to Consolidated
Financial Statements.)
Capital expenditures during the first three months of 1995 totaled $1,577,000.
During the second quarter of 1995 (through May 12, 1995), the Company
received funding from lease finance companies totalling approximately
$1,145,000. The Company currently expects to receive an additional $1,341,000
from lease finance companies that relate primarily to expenditures in the
first quarter of 1995 and the fourth quarter of 1994. As of March 31, 1995,
the Company had outstanding capital expenditure commitments of $608,000.
Capital expenditures for fiscal 1995 are projected to be $6,400,000.
17
<PAGE> 18
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
The Company is currently in negotiations with financial institutions to lease
specific pieces of equipment as well as to obtain new lease lines of credit.
The Company believes, but has no assurances, that it will be able to obtain
additional financing to fund the Company's future financial requirements.
Total trade receivables increased $2,476,000 from $15,001,000 at December 31,
1994 to $17,477,000 at March 31, 1995. The increase is due primarily to the
consolidation of Reliable (approximately $1,340,000) at March 31, 1995 and
increased sales levels in 1995. Total notes receivable (including current and
long-term portions) decreased $220,000 from a balance of $2,127,000 at
December 31, 1994, to $1,907,000 at March 31, 1995. During the three-month
period ended March 31, 1995, trade receivables totaling $28,000 were converted
to notes receivable from non-related parties. The conversion was made to
assist a customer in resolving cash flow deficiencies and to aid the customer
in accomplishing their long term growth plans. At March 31, 1995, the Company
had aggregate trade receivables and notes receivable from twelve customers
totaling $6,711,000, with balances from individual customers ranging from
$1,303,000 to $303,000. While the Company believes these receivables to be
collectible, the Company has provided a total allowance for doubtful accounts
at March 31, 1995 of approximately $2,522,000.
Inventories increased $1,446,000 from $16,103,000 at December 31, 1994, to
$17,549,000 at March 31, 1995. Substantially all of the increase ($1,395,000)
was due to the consolidation of Reliable at March 31, 1994.
18
<PAGE> 19
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
b. Reports on Form 8-K:
1. The Company filed a Current Report on Form 8-K, dated
January 13, 1995, under Item 5 regarding the acquisition
of the Net Assets of The Reliable Corporation of America,
Inc. and the installation of System 12 trademark at the
Casino Sandia in Albuquerque, New Mexico.
2. The Company filed a Current Report on Form 8-K, dated
December 15, 1995, on Form 8-K/A-1, regarding the
acquisition of Len Stuart & Associates Limited.
19
<PAGE> 20
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: May 12, 1995 /s/ Timothy R. Stuart
Timothy R. Stuart
President
Date: May 12, 1995 /s/ John A. McCray
John A. McCray
Director of Finance
Date: May 12, 1995 /s/ Michael T. Nealon
Michael T. Nealon
Corporate Controller
20
<PAGE> 21
EXHIBIT INDEX
The following Exhibits are filed herewith.
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
11 Statement Regarding Computation
of Per Share Earnings 22
27 Financial Data Schedule 23
</TABLE>
<PAGE> 1
EXHIBIT NO. 11
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(Amounts In Thousands, Except Per Share Amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1995 1994
------- -------
<S> <C> <C>
Shares of common stock outstanding
at beginning of period (1) 6,539 3,405
Weighted-average shares issued
during the period 56 0
Weighted-average shares assumed
issued under stock option plans
and exercise of warrants during
the period (assuming the treasury
stock method) 82 93
------- -------
Average common and common equivalent
shares outstanding 6,677 3,498
======= =======
Net income $ 238 $ 529
======= =======
Earnings per share $ .04 $ .15
======= =======
</TABLE>
(1) This represents total outstanding shares of common stock less treasury
shares. See Note 2 of Notes to Consolidated Financial Statements.
See Notes to Consolidated Financial Statements in Part I.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS OF THE COMPANY FOR THE
THREE MONTHS ENDED MARCH 31, 1995 AND ITS CONSOLIDATED BALANCE SHEET AS OF
MARCH 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPANY'S
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1995.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 2,084
<SECURITIES> 0
<RECEIVABLES> 20,254
<ALLOWANCES> 2,099
<INVENTORY> 17,599
<CURRENT-ASSETS> 40,317
<PP&E> 32,424
<DEPRECIATION> 10,290
<TOTAL-ASSETS> 95,729
<CURRENT-LIABILITIES> 23,045
<BONDS> 39,069
<COMMON> 66
0
0
<OTHER-SE> 30,776
<TOTAL-LIABILITY-AND-EQUITY> 95,729
<SALES> 27,464
<TOTAL-REVENUES> 27,464
<CGS> 19,222
<TOTAL-COSTS> 6,310
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 151
<INTEREST-EXPENSE> 1,072
<INCOME-PRETAX> 709
<INCOME-TAX> 471
<INCOME-CONTINUING> 238
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 238
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
