<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
September 30, 1997 0-10737
Stuart Entertainment, Inc.
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(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 November 10, 1997 there were 6,920,140 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 and
Nine Months Ended September 30, 1997 and 1996 ........................................... 3
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996 .................................................................... 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996 ........................................... 5
Notes to Consolidated Financial Statements.................................................6-11
Item 2:
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... .................12-15
PART II. OTHER INFORMATION:.................................................................... 16
Signatures................................................................................ 17
Exhibit Index............................................................................. 18
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Information
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Amounts in thousands, except per share data)
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 30,482 $ 27,149 $ 94,870 $ 81,332
COST OF GOODS SOLD 21,460 18,647 64,936 55,966
---------- ---------- ---------- ----------
GROSS MARGIN 9,022 8,502 29,934 25,366
OTHER EXPENSES:
Selling, general and administrative expenses 9,740 6,400 28,446 18,323
Interest expense, net 3,188 1,069 9,396 3,286
---------- ---------- ---------- ----------
Other expenses, net 12,928 7,469 37,842 21,609
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (3,906) 1,033 (7,908) 3,757
INCOME TAX PROVISION (BENEFIT) (1,385) 402 (2,850) 1,334
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (2,521) $ 631 $ (5,058) $ 2,423
========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE $ (0.37) $ 0.09 $ (0.74) $ 0.35
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 6,896 6,996 6,851 6,890
========== ========== ========== ==========
</TABLE>
Note: No dividends were paid or declared during the nine months ended September
30, 1997 and 1996.
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(Amounts in thousands)
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<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
(UNAUDITED)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 13,233 $ 13,732
Trade receivables, net of allowance for doubtful accounts of $2,565
and $2,230 24,469 25,998
Current portion of notes receivable, less allowance for doubtful
accounts of $99 and $99 1,667 1,296
Inventories 24,733 28,118
Income taxes receivable 4,067 2,545
Deferred income taxes 2,581 2,581
Prepaid expenses and other current assets 1,376 989
----------- -----------
Total Current Assets 72,126 75,259
PROPERTY, PLANT AND EQUIPMENT, net 25,569 29,760
GOODWILL, net of accumulated amortization of $2,704 and $1,983 44,501 43,726
OTHER ASSETS, net 6,889 5,850
----------- -----------
$ 149,085 $ 154,595
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 119 $ 370
Trade payables 11,443 11,834
Accrued payroll and benefits 2,072 2,688
Accrued interest 4,745 1,632
Other accrued liabilities 1,110 1,261
Restructuring charge reserve 1,667 3,280
Deferred income taxes 169 169
----------- -----------
Total Current Liabilities 21,325 21,234
LONG-TERM DEBT 100,290 100,396
DEFERRED INCOME TAXES 2,101 2,320
DEFERRED INCOME 254 287
STOCKHOLDERS' EQUITY:
Common stock $.01 par value; 30,000,000 shares authorized;
6,975,174 and 6,884,376 shares issued, respectively 69 69
Additional paid-in capital 27,368 27,368
Retained earnings (deficit) (1,764) 3,294
Treasury stock (56,260 shares at cost) (189) (189)
Cumulative translation adjustment, net of deferred income taxes (369) (184)
----------- -----------
Total Stockholders' Equity 25,115 30,358
----------- -----------
$ 149,085 $ 154,595
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 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) $ (5,058) $ 2,423
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Depreciation and amortization 5,306 3,472
Provision for doubtful accounts 344 (198)
Payments on restructuring charge (1,613) --
Other non-cash expenses - net (654) 65
Change in operating assets and liabilities:
Trade receivables (346) (2,712)
Inventories 3,086 (856)
Trade payables (392) 278
Other - net 436 (763)
--------- ---------
Net cash flows from operating activities 1,109 1,709
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (1,200) --
Capital expenditures (3,290) (950)
Proceeds from disposals 2,839 --
Payments received on notes receivable 1,026 1,179
Other (142) --
--------- ---------
Net cash flows from investing activities (767) 229
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under Revolving Facility -- 2,049
Payment on Term Facility -- (2,278)
Cost of debt financing (505) --
Payments on long-term debt (357) (2,316)
Proceeds from exercise of stock options -- 521
--------- ---------
Net cash flows from financing activities (862) (2,024)
Effect of currency exchange rate changes on cash of foreign subsidiaries 21 2
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (499) (84)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,732 943
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,233 $ 859
========= =========
Interest paid $ 6,508 $ 3,107
Income taxes paid (refunded), net $ (1,179) $ 1,805
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER, 1997 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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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
nine months ended September 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 nine months or less to
be cash equivalents. The Company utilizes a cash management system that
includes zero balance accounts. Negative cash balances for such accounts,
resulting from outstanding checks, are reclassified to accounts payable in
the consolidated financial statements.
6
<PAGE> 7
EARNINGS PER SHARE - The number of shares used in the computation of
earnings per share for the three and nine months ended September 30, 1997
and 1996 is based upon the weighted average number of shares outstanding
and, if dilutive, common stock equivalents (stock options and warrants) of
the Company using the treasury stock method.
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:
<TABLE>
<S> <C>
Buildings and improvements 10-20 years
Equipment 3-10 years
</TABLE>
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.
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 Credit Agreement and
eight years for the Senior Subordinated Notes.
GOODWILL - Goodwill represents the excess of the purchase price over the
fair value of the net identifiable assets acquired in business
combinations. The Company reviews its intangible assets for impairment at
least annually or whenever events or changes in circumstances indicate
that the carrying amount of such asset may not be recoverable. In such
cases, the expected future cash flows (undiscounted and without interest
charges) resulting from the use of the asset are estimated and an
impairment loss recognized if the sum of such cash flows is less than the
carrying amount of the asset. Should such an assessment indicate that the
value of the intangible asset may be impaired, an impairment loss is
recognized for the difference between the carrying value of the asset and
its estimated fair value. Goodwill is amortized on a straight-line basis
over periods ranging from ten to forty years. In 1995, the Company
recognized an impairment of goodwill, via a one-time pre-tax charge
related to the discontinuation of its manufacturing operations in the
United Kingdom.
7
<PAGE> 8
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 $37.6 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
$16.3 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.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1997 1996
<S> <C> <C>
Net sales $ 94,870 $ 109,876
Net income (loss) $ (5,058) $ 1,060
Income (loss) per share $ (0.74) $ 0.15
Average common and common equivalent shares 6,851 6,890
outstanding
</TABLE>
8
<PAGE> 9
POWER BINGO CORP.:
On July 1, 1997, the Company completed the acquisition of substantially
all the assets of Power Bingo Corp., a market leader in handheld
electronic bingo units for a purchase price of $1.2 million, consisting of
$1.1 million in cash and forgiveness of a note receivable plus subsequent
payments currently estimated at $2.4 million to $2.9 million, depending on
the future performance of the units.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
<S> <C> <C>
Raw materials $ 3,352 $ 3,975
Work-in-process 4,102 4,316
Finished goods 17,279 19,827
--------- ---------
$ 24,733 $ 28,118
========= =========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
<S> <C> <C>
Land and buildings $ 2,011 $ 5,739
Equipment 40,520 39,759
--------- ---------
42,531 45,498
Less accumulated depreciation 16,962 15,738
--------- ---------
$ 25,569 $ 29,760
========= =========
</TABLE>
5. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
<S> <C> <C>
Deferred financing fees, net of accumulated
amortization of $485 and $104, respectively $ 3,892 $ 3,768
Notes receivable, net of allowance for doubtful
accounts of $114 and $124, respectively 1,053 919
Other investments and assets 1,681 916
Investments in joint ventures 263 247
--------- ---------
$ 6,889 $ 5,850
========= =========
</TABLE>
9
<PAGE> 10
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
are payable semi-annually on each May 15 and November 15. 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. At
September 30, 1997, the Company was in violation of certain covenants and
therefore had not been able to draw any amounts under the Credit Agreement.
The Company anticipates that it will terminate the Credit Agreement and
replace it with a new $30 million revolving credit facility in the fourth
quarter of 1997. See - Liquidity and Capital Resources.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
<S> <C> <C>
Senior Subordinated Notes $ 100,000 $ 100,000
Notes payable to others 409 766
----------- -----------
100,409 100,766
Less current portion 119 370
----------- -----------
$ 100,290 $ 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 September 30, 1997 range from
approximately one year to five years. At September 30, 1997, these notes bear
interest at fixed and variable rates ranging from 6% to 11.25%.
10
<PAGE> 11
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.
8. RESTRUCTURING CHARGE
During the fourth quarter of 1996, management authorized and committed the
Company to undertake consolidation of its United States manufacturing
operations producing pulltab tickets, bingo paper and ink dabbers. This
restructuring plan involves closing or substantially closing four
facilities and transferring operations to other manufacturing facilities.
This consolidation decision was made to improve customer service, improve
productivity and asset utilization and to reduce costs.
Accordingly, the Company recorded a restructuring charge of $3,280,000 in
1996. A summary of the restructuring reserve of September 30, 1997 and
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
<S> <C> <C>
Severance and termination benefits for approximately
400 employees $ 507 $ 1,511
Facility shutdown and relocation costs 1,160 1,769
--------- ---------
$ 1,667 $ 3,280
========= =========
</TABLE>
9. SUBSEQUENT EVENTS
In August 1997, the Gaming Control Commission (the "Commission") in
Ontario, Canada moved to centralize the manufacture and distribution of
pulltab tickets in Ontario. Effective November 3, 1997, Bingo Press and
Specialty, Limited (d/b/a Bazaar & Novelty) was awarded a five year
contract from the Commission to supply pulltabs to all charity licensed
retail locations in the Province of Ontario. The Company derives a
significant portion of its revenues from the sales of pulltabs in Ontario
and the award of this contract broadens the Company's market in Ontario
and brings stability to the operations there.
11
<PAGE> 12
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 September 30, 1997 and 1996
Net Sales - Net sales were $30.5 million for the three months ended September
30, 1997, an increase of $3.3 million or 12% from $27.1 million for the three
months ended September 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) the impact of the Company's ongoing
consolidation of manufacturing operations and iv) a decrease in bingo hall
equipment sales due to a $2.4 million sale of System 12(R) electronic fixed-base
gaming systems that occurred in the third quarter of 1996 that was not repeated
in 1997.
The Company experienced a continuing softness in the U.S. pulltab ticket market
during the three months ended September 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 fourth quarter of 1997. All pulltab operations have been consolidated at
Lynnwood, Washington, positioning the Company as a low cost provider and
allowing for a focused marketing effort.
Effective November 3, 1997, Bingo Press and Limited, (d/b/a Bazaar & Novelty)
was awarded a five-year contract from the Ontario Gaming Commission to supply
pulltabs to all charity licensed retail locations in the Province of Ontario.
The Company derives a significant portion of its revenue from the sale of
pulltabs in Ontario and the award of this contract broadens the Company's market
in Ontario and brings stability to its operation there.
12
<PAGE> 13
Cost of Goods Sold - Cost of goods sold, as a percentage of sales, was 70.4% for
the three months ended September 30, 1997 compared to 68.7% for the three months
ended September 30, 1996. The increase is primarily attributable to i) an
increase in the cost of labor and overhead to manufacture Bingo paper, somewhat
offset, by more favorable raw materials prices for newsprint and ii) production
inefficiencies attributable to consolidation of paper and ink manufacturing
operations in Texas and lower sales volume in the current period.
Selling, General and Administrative Expenses - Selling, general and
administrative (SG&A) expenses were $9.7 million for the three months ended
September 30, 1997, an increase of $3.3 million or 52% from $6.4 million for the
three months ended September 30, 1996. The increase is primarily attributable to
the consolidation of Trade Products that added SG&A expenses of approximately
$2.1 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) bad debt expense.
Interest Expense, net - Interest expense, net was $3.2 million for the three
months ended September 30, 1997, an increase of $2.1 million from $1.1 million
for the three months ended September 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.
Comparison of Nine Months Ended September 30, 1997 and 1996
Net Sales - Net sales were $94.9 million for the nine months ended September 30,
1997, an increase of $13.6 million or 16.6% from $81.3 million for the nine
months ended September 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) the impact of the Company's ongoing
consolidation of manufacturing operations and iv) a decrease in electronic bingo
hall equipment sales due primarily to $3.6 million in sales of System 12(R)
electronic fixed-base gaming systems in the first nine months of 1996 that was
not repeated in 1997.
The Company experienced a continuing softness in the U.S. pulltab ticket market
during the nine months ended September 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.
Cost of Goods Sold - Cost of goods sold, as a percentage of sales, was 68.4% for
the nine months ended September 30, 1997 compared to 68.8% for the nine months
ended September 30, 1996. Included in the 1997 results is a first-quarter
reduction in margins of $1,458,000, or $0.13 per share, related to a purchase
accounting adjustment to the finished goods inventory of Trade Products. This
decrease is primarily attributable to the Company reducing its pulltab
production costs. The Company also experienced more favorable newsprint prices
in 1997 partially offset by production inefficiencies. In addition, cost of
sales in 1996 reflects the cost of System 12(R) electronic fixed-base gaming
systems that were not repeated in 1997.
13
<PAGE> 14
During the first nine months, the Company completed the consolidation of its
U.S. pulltab ticket manufacturing operations and continued the consolidation of
its U.S. bingo paper and ink manufacturing operations, which will be completed
in 1998. Pulltab ticket production costs are expected to continue to decline in
the fourth quarter of 1997 compared to the prior year as the Company benefits
from the consolidation. However, bingo paper production inefficiencies are
expected to unfavorably impact the fourth quarter of 1997 and first half of 1998
as a result of closing the existing operations. Bingo paper production costs are
expected to decline in the future as more products are manufactured in the
Company's Texas border facilities.
Selling, General and Administrative Expenses - Selling, general and
administrative (SG&A) expenses were $28.4 million for the nine months ended
September 30, 1997, an increase of $10.1 million or 55% from $18.3 million for
the nine months ended September 30, 1996. The increase is primarily attributable
to the consolidation of Trade Products that added SG&A expenses of approximately
$6.5 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) bad debt expense.
The competitive pressure in the bingo industry has negatively impacted the
Company's business. In response to this continuing softness, the Company is
addressing additional manufacturing consolidation opportunities and is planning
on further consolidation of administrative support functions. These activities
are likely to result in a fourth quarter charge.
Interest Expense, net - Interest expense, net was $9.4 million for the nine
months ended September 30, 1997, an increase of $6.1 million from $3.3 million
for the nine months ended September 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 nine months ended September 30, 1997 was
$5.1 million, or $0.74 per share, compared with net income of $2.4 million, or
$0.35 per share for the nine months ended September 30, 1996. Including a charge
in the current year 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 $4.2 million, or $0.61 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's long-term debt at September 30, 1997, including the current
portion, totaled $100.4 million compared to $100.8 million at December 31, 1996
(see Note 6 of Notes to Consolidated Financial Statements). Principal payments
on long-term debt for the first nine months ended September 30, 1997 totaled
approximately $.4 million compared to $4.6 million for the nine months ended
September 30, 1996.
As of September 30, 1997, the Company was in violation of certain covenants
under its Credit Agreement and therefore had not been able to draw amounts under
the Credit Agreement. The Company is currently in the process of negotiating a
new credit facility to replace its existing Credit Agreement. The Company
expects that the new credit facility will be a $30 million dollar revolving
credit facility, subject to availability, and will be secured by inventory,
receivables and equipment. The Company expects to finalize the new credit
facility in the fourth quarter.
14
<PAGE> 15
Capital expenditures during the nine months ended September 30, 1997 totaled
$3.3 million. Capital expenditures for fiscal 1997 are projected to be
approximately $4.5 million. The Company's 1997 capital expenditure program
continues to emphasize improving manufacturing efficiencies. In addition,
resources have been allocated to the purchase of equipment designed to expand
the Company's product offerings and to the upgrade and development of management
information systems. The Company expects that a significant portion of 1998
capital expenditures will continue to be allocated to the upgrade and
development of its management information systems.
The Company believes that with its current operating plan, the cash flow from
operations, excess cash on hand and amounts available upon completion of the new
credit facility in the fourth quarter of 1997, 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.
15
<PAGE> 16
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:
The Company filed a Current Report on Form 8-K dated July 1, 1997
regarding the Asset Purchase Agreement between the Company and
Power Bingo Corp.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STUART ENTERTAINMENT, INC.
Date: November 14, 1997 /s/ Timothy R. Stuart
------------------------------------------
Timothy R. Stuart
President
Date: November 14, 1997 /s/ Paul C. Tunink
------------------------------------------
Paul C. Tunink
Vice President and Chief Financial Officer
17
<PAGE> 18
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>
<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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Shares of common stock outstanding at
beginning of period (1) 6,828 6,808 6,828 6,697
Weighted-average shares issued during the period 68 5 23 60
Weighted-average shares assumed issued under
stock option plans and exercise of warrants during
the period (assuming the treasury stock method) -- 183 -- 133
--------- --------- --------- ---------
Average common and common equivalent
shares outstanding 6,896 6,996 6,851 6,890
========= ========= ========= =========
Net income (loss) $ (2,521) $ 631 $ (5,058) $ 2,423
========= ========= ========= =========
Earnings (loss) per share $ (0.37) $ 0.09 $ (0.74) $ 0.35
========= ========= ========= =========
</TABLE>
(1) This represents total outstanding shares of common stock less treasury
shares.
See Notes to Consolidated Financial Statements.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT FORM
10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 13,233
<SECURITIES> 0
<RECEIVABLES> 28,800
<ALLOWANCES> 2,664
<INVENTORY> 24,733
<CURRENT-ASSETS> 72,126
<PP&E> 42,531
<DEPRECIATION> 16,962
<TOTAL-ASSETS> 149,085
<CURRENT-LIABILITIES> 21,325
<BONDS> 100,290
0
0
<COMMON> 69
<OTHER-SE> 25,046
<TOTAL-LIABILITY-AND-EQUITY> 149,085
<SALES> 30,482
<TOTAL-REVENUES> 30,482
<CGS> 21,460
<TOTAL-COSTS> 21,460
<OTHER-EXPENSES> 9,552
<LOSS-PROVISION> 188
<INTEREST-EXPENSE> 3,188
<INCOME-PRETAX> (3,906)
<INCOME-TAX> (1,385)
<INCOME-CONTINUING> (2,521)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,521)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
