<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
June 30, 1997 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
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(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 August 8, 1997 there were 6,828,116 shares of the Registrant's common
stock, $.01 par value, outstanding.
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STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
-------
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1:
Consolidated Statements of Operations for the
Six Months Ended June 30, 1997 and 1996 .................... 3
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996 ........................................ 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1997 and 1996 ..................... 5
Notes to Consolidated Financial Statements..................... 6-12
Item 2:
Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 13-16
PART II. OTHER INFORMATION:............................................. 17-18
Signatures..................................................... 19
Exhibit Index.................................................. 20
</TABLE>
<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, 1997 AND 1996
(Amounts in thousands, except per share
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months
June 30, June 30,
------------------------ ------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
NET SALES $ 31,719 $ 27,360 $ 64,388 $ 54,183
COST OF GOODS SOLD 20,575 18,909 43,476 37,319
---------- ---------- ---------- ----------
GROSS MARGIN 11,144 8,451 20,912 16,864
OTHER EXPENSES:
Selling, general and administrative 9,704 6,327 18,706 11,923
Interest expense, net 3,098 1,036 6,208 2,217
---------- ---------- ---------- ----------
Other expenses, net 12,802 7,363 24,914 14,140
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (1,658) 1,088 (4,002) 2,724
INCOME TAX PROVISION (BENEFIT) (543) 214 (1,465) 932
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (1,115) $ 874 $ (2,537) $ 1,792
========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE $ (0.16) $ 0.13 $ (0.37) $ 0.26
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 6,828 6,859 6,828 6,837
========== ========== ========== ==========
EBITDA (Note 1) $ 3,090 $ 3,452 $ 6,948 $ 7,131
========== ========== ========== ==========
</TABLE>
Note: No dividends were paid or declared during the six months ended June 30,
1997
See Notes to Consolidated Financial Statements
3
<PAGE> 4
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
(Amounts in thousands)
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<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1997 1996
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 11,107 $ 13,732
Trade receivables, net of allowance for doubtful accounts of $2,334
and $2,230 25,579 25,998
Current portion of notes receivable, less allowance for doubtful
accounts of $99 and $99 1,615 1,296
Inventories 25,106 28,118
Income taxes receivable 3,000 2,545
Deferred income taxes 2,581 2,581
Prepaid expenses and other current assets 618 989
----------- -----------
Total Current Assets 69,606 75,259
PROPERTY, PLANT AND EQUIPMENT, net 29,313 29,760
GOODWILL, net of accumulated amortization of $2,545 and $1,983 43,528 43,726
OTHER ASSETS, net 5,947 5,850
----------- -----------
$ 148,394 $ 154,595
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 296 $ 370
Trade payables 10,156 11,834
Accrued payroll and benefits 2,570 2,688
Accrued interest 1,586 1,632
Other accrued liabilities 1,200 1,261
Restructuring charge reserve 2,127 3,280
Deferred income taxes 169 169
----------- -----------
Total Current Liabilities 18,104 21,234
LONG-TERM DEBT 100,325 100,396
DEFERRED INCOME TAXES 2,097 2,320
DEFERRED INCOME 239 287
STOCKHOLDERS' EQUITY:
Common stock $.01 par value; 30,000,000 shares authorized;
6,884,376 shares issued 69 69
Additional paid-in capital 27,368 27,368
Retained earnings 757 3,294
Treasury stock (56,260 shares at cost) (189) (189)
Cumulative translation adjustment, net of deferred income taxes (376) (184)
----------- -----------
Total Stockholders' Equity 27,629 30,358
----------- -----------
$ 148,394 $ 154,595
=========== ===========
</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, 1997 AND 1996
(Amounts in thousands)
(UNAUDITED)
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<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,537) $ 1,792
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Depreciation and amortization 3,285 2,398
Provision for doubtful accounts 156 (329)
Other non-cash expenses - net (172) 197
Change in operating assets and liabilities:
Trade receivables (877) (2,115)
Inventories 2,607 (520)
Trade payables (1,678) 1,050
Other - net (1,464) (1,756)
--------- ---------
Net cash flows from operating activities (680) 717
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,358) (268)
Payments received on notes receivable 855 982
Other 92 --
--------- ---------
Net cash flows from investing activities (1,411) 714
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under credit agreements -- 528
Cost of debt financing (411) --
Payments on long-term debt (145) (1,596)
Proceeds from issuance of long-term debt -- 95
Proceeds from exercise of stock options -- 386
--------- ---------
Net cash flows from financing activities (556) (587)
Effect of currency exchange rate changes on cash of foreign subsidiaries 22 --
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,625) 844
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,732 943
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,107 $ 1,787
========= =========
Interest paid $ 6,436 $ 2,157
Income taxes paid $ 262 $ 1,872
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Columnar amounts in thousands, except per share data)
- -------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
NATURE OF OPERATIONS - Stuart Entertainment, Inc. and its subsidiaries
(collectively, the "Company") are primarily engaged in the manufacture
and distribution of a full line of bingo and bingo-related products,
including disposable bingo paper, pulltab tickets, ink dabbers,
electronic bingo systems and related equipment and supplies. 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 is also engaged in the
manufacture and distribution of electronic gaming equipment, primarily
for the Company's bingo markets. The Company does not believe there are
any significant concentrations of credit risk.
BASIS OF PRESENTATION - In the opinion of the Company's management, the
foregoing unaudited 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
and six months ended June 30, 1997 and 1996 are not necessarily
indicative of the results that may be expected for the full year ending
December 31, 1997. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto for the year ended December 31, 1996, filed with the Securities
and Exchange Commission on the Company's Annual Report on Form 10-K.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include Stuart Entertainment, Inc., its wholly-owned subsidiaries and its
indirectly wholly-owned subsidiaries (from the date they became
indirectly wholly-owned). All significant intercompany transactions and
balances have been eliminated in consolidation.
USE OF ESTIMATES - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
FINANCIAL INSTRUMENTS - The carrying values of certain identified notes
receivable and long-term debt are deemed to be reasonable estimates of
their fair values. Interest rates that are currently available to the
Company for the reissuance of debt with similar terms and remaining
maturities are used to estimate fair values of the notes receivable and
long-term debt.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
financial instruments purchased with a maturity of three months or less
to be cash equivalents. The Company utilizes a cash management system
that includes zero balance accounts. Negative
6
<PAGE> 7
cash balances for such accounts, resulting from outstanding checks, are
reclassified to accounts payable in the consolidated financial
statements.
EARNINGS PER SHARE - The number of shares used in the computation of
earnings per share for the three and six months ended June 30, 1997 and
1996 is based upon the weighted average number of shares outstanding and,
if dilutive, common stock equivalents (stock options and warrents) of the
Company using the treasury stock method.
EBITDA - EBITDA is defined herein as earnings before interest, taxes,
depreciation, amortization, purchase accounting adjustments,
restructuring charge and extraordinary item. EBITDA is presented because
it is a measure of a company's ability to service its indebtedness
commonly used by investors. However, items excluded from EBITDA, such as
depreciation and amortization, are significant components in
understanding and assessing financial performance; EBITDA should not be
considered as an alternative to net income as a measure of operating
results or to cash flows or as a substitute for measures of performance
in accordance with generally accepted accounting principles. For more
detailed information regarding cash flows from operating, investing and
financing activities, see the Consolidated Statements of Cash Flows.
EBITDA measures presented herein may not be comparable to other similarly
titled measures of other companies.
FOREIGN CURRENCY TRANSLATION AND REMEASUREMENT - The translation from the
applicable foreign currencies to U. S. dollars is performed for assets
and liabilities using exchange rates in effect at the balance sheet date
and stockholders' equity using historical exchange rates. Revenues and
expenses are translated using the average exchange rate during the
period. The gains or losses, net of applicable deferred income taxes,
resulting from such translation, are included in stockholders' equity.
The remeasurement from the applicable foreign currencies to U.S. dollars
is performed for assets and liabilities at the end of period exchange
rates, except for property and stockholders' equity which are remeasured
using historical exchange rates. Revenues and expenses have been
remeasured at average exchange rates during the periods, except for
depreciation which has been remeasured using historical exchange rates.
Gains and losses from remeasurement are recognized currently in
operations.
INVENTORIES - Inventories are stated at the lower of cost or market, with
cost determined using the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are carried
at cost, less accumulated depreciation. Depreciation is generally
provided on the straight-line method over the estimated useful lives of
the respective assets, as follows:
Buildings and improvements 10-20 years
Equipment 3-10 years
INVESTMENTS - Investments in the common stock of certain affiliated
companies are accounted for using the equity method if the Company has
the ability to exercise significant influence over the investee's
operations and financial policies. Otherwise, the cost method is used.
7
<PAGE> 8
DEFERRED FINANCING FEES - Deferred financing fees are being amortized to
interest expense using the straight-line method over the respective terms
of the credit agreements; five years for the New Credit Agreement and
eight years for the Senior Subordinated Notes.
GOODWILL - Goodwill is amortized on a straight-line basis over periods
ranging from ten to forty years.
INCOME TAXES - The Company uses the balance sheet approach of accounting
for income taxes, whereby deferred assets and liabilities are recorded at
the tax rate currently enacted. The Company's future results may be
affected by changes in the corporate income tax rate.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs are
charged to expense as incurred.
REVENUE RECOGNITION - The Company records revenue as products are
shipped.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1996
financial statements and supporting footnote disclosures in order to
present them in conformity with the 1997 financial statement
presentation.
2. ACQUISITIONS
TRADE PRODUCTS, INC.:
On November 13, 1996, the Company acquired substantially all of the
assets and assumed certain liabilities of Trade Products, Inc. ("Trade")
(the "Trade Acquisition") for a purchase price of $37.4 million, plus the
issuance of warrants to acquire 300,000 shares of the Company's common
stock, with an exercise price of $7.75 per share.
The Trade 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 $16.1 million. The results of operations of Trade have been
consolidated since the date of the Trade Acquisition.
The pro forma results presented below give effect to the Trade
Acquisition, as if such transaction occurred as of the beginning of each
period presented. The unaudited pro forma information does not purport to
represent the Company's results of operations if such transaction had, in
fact, occurred on such dates and should not be viewed as predictive of the
Company's financial results in the future.
8
<PAGE> 9
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1997 1996
<S> <C> <C>
Net sales $ 64,388 $ 73,135
Net income (loss) $ (2,537) $ 566
Income (loss) per share $ (0.37) $ 0.08
Average common and common equivalent shares 6,828 6,837
outstanding
EBITDA (Note 1) $ 6,948 $ 10,436
</TABLE>
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
<S> <C> <C>
Raw materials $ 3,361 $ 3,975
Work-in-process 3,920 4,316
Finished goods 17,825 19,827
---------- ----------
$ 25,106 $ 28,118
========== ==========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
<S> <C> <C>
Land and buildings $ 5,742 $ 5,739
Equipment 40,509 39,759
---------- ----------
46,251 45,498
Less accumulated depreciation 16,938 15,738
---------- ----------
$ 29,313 $ 29,760
========== ==========
</TABLE>
9
<PAGE> 10
5. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
<S> <C> <C>
Deferred financing fees, net of accumulated
amortization of $343 and $104 $ 3,940 $ 3,768
Notes receivable, net of allowance for doubtful
accounts of $124 and $124 984 919
Other investments and assets 767 916
Investments in joint ventures 256 247
-------- --------
$ 5,947 $ 5,850
======== ========
</TABLE>
6. LONG-TERM DEBT
On November 13, 1996, the Company completed a private placement in
reliance on Rule 144A of the Securities Act of 1933, as amended, of $100
million aggregate principal amount of 12.5% Senior Subordinated Notes due
November 15, 2004 (the "Original Notes"). Pursuant to a registration
rights agreement, on March 28, 1997, the Company completed an exchange
offer in which the Original Notes were exchanged for the Company's Series
B 12.5% Senior Subordinated Notes due November 15, 2004 (the "Notes").
Interest on the Notes will be payable semi-annually on each May 15 and
November 15, commencing May 15, 1997. The indenture governing the Notes
imposes certain limitations on the Company's ability to, among other
things, incur additional indebtedness, pay dividends or make certain
other restricted payments and consummate certain asset sales. The
Company used the proceeds of the private placement to finance the Trade
Acquisition, to repay certain existing indebtedness and for general
corporate purposes.
On November 13, 1996, the Company amended and restated its credit
agreement (the " Credit Agreement"). The Credit Agreement consists of a
revolving credit facility in the aggregate principal amount of $30
million, bearing interest with reference to the base rate or the LIBOR
rate, at the Company's option, plus the applicable interest margin, as
defined in the Credit Agreement. The Credit Agreement also charges a
quarterly non-use fee on any unborrowed funds.
The Company may draw amounts under the Credit Agreement, subject to
availability pursuant to a borrowing base requirement, in order to meet
its working capital requirements, including issuing letters of credit.
The loans are secured by substantially all of the Company's otherwise
unencumbered assets, including a pledge of the stock the Company holds in
its subsidiaries, except as specifically excluded under the Credit
Agreement.
The Credit Agreement imposes certain covenants and other requirements on
the Company that, among other things, restricts i) the incurrence and
existence of indebtedness or contingent obligations; ii) consolidations,
mergers and sales of assets; iii) the incurrence and existence of liens;
iv) the sale or disposition of assets; v) investments, loans and
advances; (vi) capital expenditures; (vii) the payment of dividends and
repurchase of common stock; and (viii) acquisitions of the Company. The
Company is also required to meet certain consolidated financial tests,
including minimum level of net worth, minimum level of consolidated
interest coverage, maximum
10
<PAGE> 11
consolidated leverage ratio and minimum consolidated fixed charge coverage
ratio. The Company was in violation of certain covenants at June 30, 1997
and such violations have been waived by the Company's principal banks. At
June 30, 1997, the Company had not drawn any amounts under the Credit
Agreement. The Company expects to renegotiate the Credit Agreement during
the second half of 1997 and until that time, the Company may not draw
amounts under the Credit Agreement.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
<S> <C> <C>
Senior Subordinated Notes $ 100,000 $ 100,000
Notes payable to others 621 766
---------- ----------
100,621 100,766
Less current portion 296 370
---------- ----------
$ 100,325 $ 100,396
========== ==========
</TABLE>
NOTES PAYABLE TO OTHERS:
The Company has notes payable related to i) obligations to former owners
of companies and/or assets that were acquired by the Company; ii)
mortgages; and iii) installment notes relating to the purchase of
property, plant and equipment. Remaining payment terms at June 30, 1997
range from approximately one year to five years. At June 30, 1997, these
notes bear interest at fixed and variable rates ranging from 6% to 11.25%.
7. NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income (SFAS 130). This statement
established standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
Comprehensive income is the total of net income and all other non-owner
changes in equity. The statement is effective for fiscal years beginning
after December 15, 1997. The Company expects to adopt these disclosure
requirements in the first quarter of 1998.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures About Segments of an Enterprise and Related
Information, which is effective for financial statements for periods
beginning after December 15, 1997. This statement establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes
standards for related disclosures about products and services,
geographical areas, and major customers. This statement supersedes SFAS
14, Financial Reporting for Segments of a Business Enterprise, but retains
the requirement to report information about major customers. The Company
expects to adopt these disclosure requirements for the annual reporting
period ended December 31, 1998.
11
<PAGE> 12
8. RESTRUCTURING CHARGE
The Company recorded a restructuring charge of $3.3 million in the fourth
quarter of 1996 due to the consolidation of manufacturing operations in
1997. The consolidation of operations is essential and will allow the
Company to effectively respond to competitive pressures and maintain its
position as a low cost provider. Costs incurred in connection with the
restructuring charge have been charged to the results of operations for
the year ended December 31, 1996. The consolidation of operations has
progressed as planned. A summary of the restructuring charge reserve at
June 30, 1997 and December 31, 1996 is as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
<S> <C> <C>
Severance $ 800 $1,511
Relocation 881 1,087
Elimination of duplicate facilities and equipment 446 682
------ ------
$2,127 $3,280
====== ======
</TABLE>
9. SUBSEQUENT EVENTS
In July 1997, the Company completed the acquisition of substantially all
of the assets of Power Bingo Corp., a market leader in handheld electronic
bingo units. The purchase price consisted of an up front cost of $1.1
million and subsequent payments currently estimated at $2.4 million to
$2.9 million, depending on the future performance of the units.
In August 1997, the Gaming Control Commission (the "Commission") in
Ontario, Canada moved to centralize the manufacture and distribution of
pulltab tickets in Ontario. The Commission believes the creation of a
central warehousing/ticket ordering system will improve efficiency in the
distribution network, reduce costs and generate higher profits for
charities. The move will also simplify the Commission's regulatory review
process. The Company derives a significant portion of its revenues from
the sale of pulltab tickets in Ontario. Until a final decision is
reached, the Company can not estimate what impact, if any, the
Commission's decision will have on its future operations.
12
<PAGE> 13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in this report, if not historical, are forward looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995, and involve risks and uncertainties that could cause actual results to
differ materially from the financial results described in such forward looking
statements. These risks and uncertainties include, among others, the level and
rate of growth in the Company's operations, the impact of newsprint and other
paper costs, and the ability of the Company to achieve earnings per share
growth through internal investment, strategic alliances, joint ventures and
other methods. The success of the Company's business operations is in turn
dependent on factors such as the effectiveness of the Company's marketing
strategies to grow its customer base and improve customer response rates, the
appeal of the Company's mix of products, the Company's success at entering into
and collaborating with others to conduct effective strategic alliances and
joint ventures, general competitive conditions within the entertainment and
gaming industries and general economic conditions. Further, any forward
looking statements or statements speak only as of the date on which such
statement was made, and the Company undertakes no obligation to update any
forward looking statement or statements to reflect events or circumstances
after the date on which such statement is made or to reflect the occurrence of
unanticipated events. Therefore, any forward looking statements should not be
relied upon as a prediction of actual results.
RESULTS OF OPERATIONS
Comparison of Three Months Ended June 30, 1997 and 1996
Net Sales - Net sales were $31.7 million for the three months ended June 30,
1997, an increase of $4.4 million or 16% from $27.4 million for the three
months ended June 30, 1996. The sales increase was primarily attributable to
the consolidation of Trade Products which was acquired in the fourth quarter of
1996, partially offset by i) a continuing softness in the bingo industry that
caused a decrease in sales of consumable products, particularly pulltab
tickets, ii) increased competitive pricing pressures, particularly from smaller
suppliers due to the sluggish industry and iii) quality problems in the ink
products division.
The Company experienced a continuing softness in the U.S. pulltab ticket market
during the three months ended June 30, 1997 due to competitive pressures from
other sources of gaming and entertainment and continued pressure from
competitors within the pulltab industry. Management believes that the Company
will continue to experience softness in the U.S. pulltab ticket market through
the remainder of 1997. The ink quality problems have been corrected and the
Company does not expect the past problems to have a negative impact on future
sales.
Cost of Goods Sold - Cost of goods sold, as a percentage of sales, was 65% for
the three months ended June 30, 1997, a decrease of 4 percentage points from
69% for the three months ended June 30, 1996. The decrease is primarily
attributable to the consolidation of Trade Products, which has lower pulltab
ticket production costs than the historical results of Stuart. The Company
also experienced more favorable raw materials prices, particularly in newsprint
during the second quarter of 1997. Management believes that newsprint prices
may increase in the second half of 1997.
During the second quarter of 1997, the Company completed the consolidation of
its U.S. pulltab ticket manufacturing operations and continued the
consolidation of its U.S. bingo paper manufacturing operations, which will be
completed in early 1998. Pulltab ticket production costs are expected to
decline in the second
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<PAGE> 14
half of 1997 as the Company takes advantage of the manufacturing consolidation
benefits. Bingo paper production costs are expected to decline in the second
half of 1997 as more products are manufactured in the Company's Texas border
facilities. However, until the bingo paper consolidation is complete, the
Company expects to experience certain production inefficiencies associated with
closing some of its existing manufacturing operations.
Selling, General and Administrative Expenses - Selling, general and
administrative (SG&A) expenses were $9.7 million for the three months ended
June 30, 1997, an increase of $3.4 million or 53% from $6.3 million for the
three months ended June 30, 1996. The increase is primarily attributable to
the consolidation of Trade Products that added SG&A expenses of approximately
$2.2 million. Excluding the effect of the consolidation of Trade Products, the
Company experienced increases in i) professional fees, ii) travel costs, iii)
salaries and related benefits and iv) a less favorable bad debt expense
experience.
Interest Expense, net - Interest expense, net was $3.1 million for the three
months ended June 30, 1997, an increase of $2.1 million or 199% from $1.0
million for the three months ended June 30, 1997. The increase is attributable
to accrued interest on the Notes and the amortization of the deferred financing
fees on the Notes and the Credit Agreement, partially offset by interest income
earned on the excess proceeds from the Notes.
EBITDA - EBITDA was $3.1 million for the three months ended June 30, 1997, a
decrease of $2.0 million or 39% from $5.1 million, on a pro forma basis, for
the three months ended June 30, 1996. The decrease in EBITDA is primarily due
to i) a decrease in the sale of consumable products, particularly pulltab
tickets, ii) short-term production inefficiencies experienced during the
consolidation of U.S. pulltab manufacturing operations and iii) increased SG&A
expenses.
Comparison of Six Months Ended June 30, 1997 and 1996
Net Sales - Net sales were $64.4 million for the six months ended June 30,
1997, an increase of $10.2 million or 19% from $54.2 million for the six months
ended June 30, 1996. The sales increase was primarily attributable to the
consolidation of Trade Products which was acquired in the fourth quarter of
1996, partially offset by i) a continuing softness in the bingo industry that
caused a decrease in sales of consumable products, particularly pulltab
tickets, ii) increased competitive pricing pressures, particularly from smaller
suppliers due to the sluggish industry, iii) quality problems in the ink
products division and iv) a decrease in electronic bingo hall equipment sales
due primarily to a $1.2 million sale of System 12(TM) electronic bingo and
gaming units in the first six months of 1996 that was not repeated in 1997.
The Company experienced a continuing softness in the U.S. pulltab ticket market
during the six months ended June 30, 1997 due to competitive pressures from
other sources of gaming and entertainment and continued pressure from
competitors within the pulltab industry. Management believes that the Company
will continue to experience softness in the U.S. pulltab ticket market through
the remainder of 1997. The ink quality problems have been corrected and the
Company does not expect the past problems to have a negative impact on future
sales.
Cost of Goods Sold - Cost of goods sold, as a percentage of sales, was 68% for
the six months ended June 30, 1997, an decrease of 1 percentage point from 69%
for the six months ended June 30, 1996. Excluding the application of a
purchase accounting adjustment of $1.5 million recorded in the first six months
of 1997 to the finished goods inventory of Trade Products, cost of sales, as a
percentage of sales was 65%, or a
14
<PAGE> 15
decrease of 4 percentage points from the first six months of 1996. The
decrease is primarily attributable to the consolidation of Trade Products,
which has lower production costs than the historical results of Stuart. The
Company also experienced more favorable raw materials prices, particularly in
newsprint during the first six months of 1997. Management believes that
newsprint paper prices may increase in the second half of 1997.
During the first six months of 1997, the Company completed the consolidation of
its U.S. pulltab ticket manufacturing operations and continued the
consolidation of its U.S. bingo paper manufacturing operations, which will be
completed in early 1998. Pulltab ticket production costs are expected to
decline in the second half of 1997 as the Company takes advantage of the
manufacturing consolidation benefits. Bingo paper production costs are
expected to decline in the second half of 1997 as more products are
manufactured in the Company's Texas border facilities. However, until the
bingo paper consolidation is complete, the Company expects to experience
certain production inefficiencies associated with closing its existing
manufacturing operations.
Selling, General and Administrative Expenses - Selling, general and
administrative (SG&A) expenses were $18.7 million for the six months ended June
30, 1997, an increase of $6.8 million or 57% from $11.9 million for the six
months ended June 30, 1996. The increase is primarily attributable to the
consolidation of Trade Products that added SG&A expenses of approximately $4.4
million. Excluding the effect of the consolidation of Trade Products, the
Company experienced increases in i) professional fees, ii) travel costs, iii)
salaries and related benefits and iv) a less favorable bad debt expense
experience.
In response to the ongoing softness in the bingo industry that has negatively
impacted the Company's business, management is addressing additional
manufacturing consolidation opportunities and is planning further consolidation
of corporate functions at the Company's Council Bluffs headquarters. These
activities are likely to result in a restructuring charge in second half of
1997 with expected benefits in 1998.
Interest Expense, net - Interest expense, net was $6.2 million for the six
months ended June 30, 1997, an increase of $4.0 million or 180% from $2.2
million for the six months ended June 30, 1996. The increase is attributable
to accrued interest on the Notes and the amortization of the deferred financing
fees on the Notes and the Credit Agreement, partially offset by interest income
earned on the excess proceeds from the Notes.
Net Income (Loss) - Net loss for the six months ended June 30, 1997 was $2.5
million, or $0.37 per share, compared with net income of $1.8 million, or $0.26
per share for the six months ended June 30, 1996. Including a charge in the
current year period of $875,000, net of taxes, or $0.13 per share, for a
purchase accounting adjustment to the finished goods inventory of Trade
Products, the Company had a net loss of $1.7 million, or $0.24 per share.
EBITDA - EBITDA was $6.9 million for the six months ended June 30, 1997, a
decrease of $3.5 million or 33% from $10.4 million, on a pro forma basis, for
the six months ended June 30, 1996. The decrease in EBITDA is primarily due to
i) a decrease in the sale of consumable products, particularly pulltab tickets,
ii) short-term production inefficiencies experienced during the consolidation
of U.S. pulltab manufacturing operations, iii) increased SG&A expenses and iv)
a System 12(TM) electronic bingo sale of $1.2 million in the first six months
of 1996 that was not repeated in the 1997.
15
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
The Company's long-term debt at June 30, 1997, including the current portion,
totaled $100.6 million compared to $100.8 million at December 31, 1996 (see
Note 6 of Notes to Consolidated Financial Statements). Cash payments on
long-term debt for the first six months ended June 30, 1997 totaled
approximately $145,000 compared to $3.1 million for the six months ended June
30, 1996.
As of June 30, 1997, the Company had not drawn any amount available under its
$30 million line of credit facility. The Company was in violation of certain
covenants at June 30, 1997. The Company is in the process of obtaining waivers
of these violations from its principal banks. The Company currently expects to
renegotiate the Credit Agreement during the second half of 1997 and until that
time, the Company may not draw amounts under the Credit Agreement.
Capital expenditures during the six months ended June 30, 1997 totaled $2.4
million. Capital expenditures for fiscal 1997 are projected to be
approximately $3.5 million. The Company's capital expenditure program will
continue to focus on the purchase of equipment designed to expand its product
offerings and/or improve manufacturing efficiencies. The Company expects a
larger portion of its capital expenditure requirements to be allocated to the
upgrade and development of management information systems.
The Company believes that with its current operating plan, the cash flow from
operations, excess cash on hand and amounts available under the Credit
Agreement (upon renegotiation of the Credit Agreement), it will have sufficient
cash to meet its financial obligations including interest on the Notes,
operating expenses, capital expenditures, expenses related to consolidation of
operations and working capital requirements. In addition, with the acquisition
of Power Bingo in July 1997, the Company expects the electronics portion of its
business to generate additional cash flow.
The Company's business plan includes business acquisitions and strategic
alliances. The Company will continue to evaluate additional opportunities and,
as more attractive opportunities develop, the Company plans to make additional
acquisitions in the electronic gaming industry. The Company expects to meet
additional capital needs with the proceeds from sales or issuance of equity
securities, credit facilities and other borrowings. There can be no assurance,
however, that the Company will be successful in raising sufficient additional
capital on terms that it will consider acceptable or the Company's operations
will produce positive consolidated cash flow in sufficient amounts to service
the Notes. The failure to raise and generate sufficient funds may require the
Company to delay or abandon some of its planned future expansion or
expenditures, which could have a material adverse effect on the Company's
growth. In addition, the Company's operating flexibility with respect to
certain business matters will be limited by covenants associated with the
Notes. There can be no assurance that such covenants will not adversely affect
the Company's ability to finance its future operations or capital needs or to
engage in other business activities that may be in the interest of the Company.
16
<PAGE> 17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
An annual meeting of the Stockholders of the Company was held on May 20, 1997,
in Rosemont, Illinois, for the purpose of re-electing Mr. Sangwoo Ahn, Mr.
Albert F. Barber, Mr. Perry J. Lewis, Mr. Harry Poll, Mr. Ronald G. Rudy, Mr.
Richard D. Spizzirri, Mr. Ira Starr, Mr. Leonard A. Stuart, Mr. Timothy R.
Stuart and Mr. Stanley M. Taube to the Board of Directors, approving the
Company's 1997 Employee Stock Purchase Plan and ratifying the appointment of
the Company's independent auditors.
The following votes were cast by the Stockholders with respect to the election
of directors:
<TABLE>
<CAPTION>
Shares Shares Shares
Voted Voted Voted Broker
For Against Abstained Non-Votes
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
Mr. Sangwoo Ahn 5,782,363 0 13,670 0
Mr. Albert F. Barber 5,784,049 0 11,984 0
Mr. Perry J. Lewis 5,784,049 0 11,984 0
Mr. Harry Poll 5,784,049 0 11,984 0
Mr. Ronald G. Rudy 5,784,049 0 11,984 0
Mr. Richard D. Spizzirri 5,784,049 0 11,984 0
Mr. Ira Starr 5,784,049 0 11,984 0
Mr. Leonard A. Stuart 5,784,049 0 11,984 0
Mr. Timothy R. Stuart 5,784,049 0 11,984 0
Mr. Stanley M. Taube 5,784,049 0 11,984 0
</TABLE>
The following votes were cast by the Stockholders with respect to the approval
of the Company's 1997 Employee Stock Purchase Plan:
<TABLE>
<CAPTION>
Shares Shares Shares
Voted Voted Voted Broker
For Against Abstained Non-Votes
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
5,024,934 109,991 4,806 0
</TABLE>
17
<PAGE> 18
The following votes were cast by the Stockholders with respect to the
resolution to ratify the Board of Directors' selection of Deloitte & Touche LLP
as the Company's independent auditors for the fiscal year ending December 31,
1997:
<TABLE>
<CAPTION>
Shares Shares Shares
Voted Voted Voted Broker
For Against Abstained Non-Votes
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
5,788,271 4,060 3,702 0
</TABLE>
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:
There were no reports on Form 8-K filed during the period
covered by this report.
18
<PAGE> 19
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 14, 1997 /s/ TIMOTHY R. STUART
-------------------------------------------
Timothy R. Stuart
President
Date: August 14, 1997 /s/ PAUL C. TUNINK
-------------------------------------------
Paul C. Tunink
Vice President and Chief Financial Officer
19
<PAGE> 20
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>
20
<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,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Shares of common stock outstanding at
beginning of period (1) 6,828 6,717 6,828 6,697
Weighted-average shares issued during the period -- 24 --
Weighted-average shares assumed issued under
stock option plans and exercise of warrants during
the period (assuming the treasury stock method) -- 118 -- 108
-------- -------- -------- --------
Average common and common equivalent
shares outstanding 6,828 6,859 6,828 6,837
======== ======== ======== ========
Net income (loss) $ (1,115) $ 874 $ (2,537) $ 1,792
======== ======== ======== ========
Earnings (loss) per share $ (0.16) $ 0.13 $ (0.37) $ 0.26
======== ======== ======== ========
</TABLE>
(1) This represents total outstanding shares of common stock less treasury
shares.
See Notes to Consolidated Financial Statements.
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 11,107
<SECURITIES> 0
<RECEIVABLES> 29,627
<ALLOWANCES> 2,433
<INVENTORY> 25,106
<CURRENT-ASSETS> 69,606
<PP&E> 46,251
<DEPRECIATION> 16,938
<TOTAL-ASSETS> 148,394
<CURRENT-LIABILITIES> 18,104
<BONDS> 100,325
0
0
<COMMON> 69
<OTHER-SE> 27,560
<TOTAL-LIABILITY-AND-EQUITY> 148,394
<SALES> 64,388
<TOTAL-REVENUES> 64,388
<CGS> 43,476
<TOTAL-COSTS> 43,476
<OTHER-EXPENSES> 24,914
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,208
<INCOME-PRETAX> (4,002)
<INCOME-TAX> (1,465)
<INCOME-CONTINUING> (2,537)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,537)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
