<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, 1998 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 October 30, 1998 there were 6,942,914 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> <C>
PART I. FINANCIAL INFORMATION:
Item 1:
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1998 and 1997 ..........................3
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997 ................................................................4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 ....................................5
Notes to Consolidated Financial Statements........................................6-8
Item 2:
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................9-13
PART II. OTHER INFORMATION:.................................................................14
Signatures.........................................................................15
Exhibit Index......................................................................16
</TABLE>
2
<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, 1998 AND 1997
(Amounts in thousands, except per share data)
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
NET SALES $ 28,926 $ 29,553 $ 90,238 $ 92,307
COST OF GOODS SOLD 20,510 20,911 61,837 63,555
------------ ------------ ------------ ------------
GROSS MARGIN 8,416 8,642 28,401 28,752
OTHER EXPENSES
Selling, general and administrative expenses 8,993 9,360 26,890 27,264
Interest expense, net 3,492 3,188 9,790 9,396
------------ ------------ ------------ ------------
Other expenses, net 12,485 12,548 36,680 36,660
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (4,069) (3,906) (8,279) (7,908)
INCOME TAX BENEFIT (264) (1,385) (146) (2,850)
------------ ------------ ------------ ------------
NET LOSS $ (3,805) $ (2,521) $ (8,133) $ (5,058)
============ ============ ============ ============
NET LOSS PER COMMON SHARE:
Basic $ (0.55) $ (0.37) $ (1.17) $ (0.74)
============ ============ ============ ============
Diluted $ (0.55) $ (0.37) $ (1.17) $ (0.74)
============ ============ ============ ============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:
Basic 6,938 6,896 6,936 6,851
============ ============ ============ ============
Diluted 6,938 6,896 6,936 6,851
============ ============ ============ ============
</TABLE>
Note: No dividends were paid or declared during the nine months ended
September 30, 1998 and 1997.
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(Dollars in thousands)
- -------------------------------------------------------------------------------
September 30, December 31,
1998 1997
ASSETS (UNAUDITED)
CURRENT ASSETS: $ 3,877 $ 7,099
Cash and cash equivalents
Trade receivables, net of allowance
for doubtful accounts of $3,196
and $3,091 23,738 23,085
Current portion of notes receivable
less allowance for doubtful accounts
of $138 and $233 2,268 2,269
Inventories 23,535 20,929
Deferred income taxes 3,008 3,008
Prepaid expenses and other current
assets 1,477 1,111
----------- -----------
Total Current assets 57,903 57,501
PROPERTY, PLANT AND EQUIPMENT, net 27,412 26,471
GOODWILL, net of accumulated amortization
of $4,304 and $3,244 46,338 45,655
OTHER ASSETS, net 8,789 8,197
----------- -----------
$ 140,442 $ 137,824
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 117 $ 89
Trade payables 13,181 10,929
Accrued payroll and benefits 2,238 2,087
Other accrued liabilities 7,897 3,180
Restructuring charge reserve 437 2,841
Income taxes payable 378 797
----------- -----------
Total Current Liabilities 24,248 19,923
LONG-TERM DEBT 109,366 100,665
DEFERRED INCOME TAXES 673 721
DEFERRED INCOME 134 143
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock $.01 par value;
30,000,000 shares authorized;
6,938,627 and 6,920,140 shares outstanding 70 70
Additional paid-in capital 27,765 27,732
Retained Deficit (18,191) (10,059)
Treasury stock (56,260 shares at cost) (189) (189)
Accumulated other comprehensive income (3,434) (1,182)
----------- -----------
6,021 16,372
----------- -----------
Total Stockholders Equity $ 140,442 $ 137,824
=========== ===========
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Dollars in thousands)
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,133) $ (5,058)
Adjustments to reconcile net loss of net cash flows
from operating activities:
Depreciation and amortization 5,911 5,306
Provision for doubtful accounts 776 344
Payments on restructuring charge (2,404) (1,613)
Other non-cash expenses - net (910) (224)
Change in operating assets and liabilities:
Trade receivables (2,285) (346)
Inventories (2,514) 3,086
Trade payables (363) (392)
Other - net 4,078 436
-------- --------
Net cash flows from operating activities (5,844) 1,539
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant
and equipment (3,713) (3,290)
Capital expenditures for electronic bingo systems (2,308) (430)
Acquisitions, net of cash acquired (1,385) (1,200)
Payments received on notes receivable 1,278 1,026
Proceeds from disposals 164 2,839
Other (88) (142)
-------- --------
Net cash flows from investing activities (6,052) (1,197)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under credit facility 8,819 -
Issuance of common stock 10 -
Cost of debt financing (215) (505)
Payments on long-term debt (89) (357)
-------- --------
Net cash flows from financing activities 8,525 (862)
Effect of currency exchange rate changes on
cash of foreign subsidiaries 149 21
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,222) (499)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,099 13,732
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,877 $ 13,233
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 6,482 $ 6,508
Income taxes paid (refunded), net $ 501 $ (1,179)
</TABLE>
5
<PAGE> 6
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(COLUMNAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS - Stuart Entertainment, Inc. and its wholly owned
subsidiaries (collectively, the "Company") are primarily engaged in the
manufacture and distribution of a full line of bingo and bingo-related
products throughout the United States and Canada. Products include
disposable bingo paper, pulltab tickets, ink dabbers, bingo hall
equipment, electronic bingo systems, general merchandise and accessories.
2. BASIS OF PRESENTATION - The accompanying unaudited consolidated financial
statements of the Company have been prepared in accordance with generally
accepted accounting principles for interim financial statements and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for annual financial
statements.
In the opinion of the Company's management, the foregoing unaudited
consolidated financial statements reflect all adjustments necessary for a
fair presentation of the results of the Company for the periods shown.
Operating results for the three and nine months ended September 30, 1998
and 1997 are not necessarily indicative of the results that may be
expected for the full year ending December 31, 1998. These financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended December 31,
1997, filed with the Securities and Exchange Commission on the Company's
Annual Report on Form 10-K.
Certain reclassifications have been made to the 1997 financial statements
to conform to those classifications used in 1998.
3. EARNINGS PER SHARE - Earnings per share is calculated based on Statement
of Financial Accounting Standard Board No. 128, Earning Per Share ("SFAS
128"). Basic earnings (loss) per share is computed based upon net income
(loss) divided by the weighted average number of shares of the Company's
common stock, $.01 par value, (the "Common Stock") outstanding during the
period. Diluted earnings (loss) per share is computed based upon net
income (loss) divided by the weighted average number of shares of Common
Stock, outstanding during the period after giving effect to stock options
and warrants considered to be dilutive common stock equivalents.
4. REPORTING COMPREHENSIVE INCOME - The Company has adopted Statement of
Financial Accounting Standards No. 130 - Reporting Comprehensive Income
("SFAS 130") in the first quarter of 1998. This statement requires the
reporting of comprehensive income in addition to net income from
operations in annual statements of operations. Comprehensive income is a
more inclusive financial reporting methodology that includes disclosure of
certain financial information that historically has not been recognized in
the calculation of net income. Comprehensive loss for the nine months
ended September 30, 1998 and 1997 were $10.4 million and $5.2 million,
respectively.
6
<PAGE> 7
5. INVENTORIES - Inventories consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED)
<S> <C> <C>
Raw materials $ 5,801 $ 5,159
Work-in-process 2,292 2,038
Finished goods 15,442 13,732
------- -------
$23,535 $20,929
======= =======
</TABLE>
6. 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 five facilities and transferring operations to other
manufacturing facilities. The consolidation decision was made to improve
customer service, improve productivity and asset utilization and reduce
costs. The restructuring charge included approximately $1.5 million of
recognized severance and termination benefits for approximately 400
employees and $1.8 million of facility closure and consolidation costs.
In the fourth quarter of 1997, the Company recorded a restructuring charge
of $2.3 million for a program related to workforce reductions and to
complete the consolidation of United States consumables manufacturing
operations. The Company evaluated competitive market conditions in its
markets, reviewed future costs in line with anticipated levels of business
in 1998 and beyond, and determined that a restructuring charge was
required to cover the costs of reducing certain sectors of its workforce
to levels more appropriate to meet current business requirements, thereby
eliminating approximately 50 positions. As result, a charge of $1.2
million for severance costs and the buyout of certain employment contracts
was recorded. The Company also aggressively continued its plan to
consolidate its United States consumables manufacturing operations during
1997. Certain modifications to the original consolidations plan and
unanticipated costs resulted in costs that were not originally charged.
Management estimated that $1.0 million of such additional costs would be
incurred in the future and accordingly recorded an additional charge in
1997.
At September 30, 1998, $437,000 of restructuring charges remained in
accrued liabilities. The balance was comprised of $335,000 for severance,
termination benefits and contract buyout and $102,000 of facility closure
and consolidation costs to be completed in 1998. A summary of the
restructuring activity is presented below:
<TABLE>
<S> <C>
Balance at December 31, 1997 $ 2,841
Consolidation of U.S. Manufacturing Operations:
- Severance and termination costs (1,546)
- Facility closure and consolidation costs (858)
-------
Balance at September 30, 1998 $ 437
=======
</TABLE>
7
<PAGE> 8
7. LONG-TERM DEBT - In November 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 Notes). Interest on the
Notes is payable semi-annually on each May 15 and November 15.
In November 1997, the Company entered into a credit facility which
consists of two loan and security agreements, one between the Company and
Congress Financial Corporation (Central) (the "US Facility") and one
between Bingo Press & Specialty Limited, a wholly-owned subsidiary of the
Company (the "Canadian Borrower") and Congress Financial Corporation
(Canada) (the "Canadian Facility") (collectively, the "Credit Facility").
The Credit Facility provides for maximum borrowings of up to $30.0
million, of which up to $20.0 million may be borrowed under the US
Facility and up to US$10.0 million may be borrowed under the Canadian
Facility.
The Company and the Canadian Borrower are entitled to draw amounts under
the Credit Facility, subject to availability pursuant to a borrowing base
certificate. The borrowing base is based on the eligible accounts
receivable, eligible inventory and equipment value levels of the Company
and the Canadian Borrower, respectively. At September 30, 1998 and
December 31, 1997, $17.2 and $27.7 million, respectively, was available
for borrowing under the Credit Facility. At September 30, 1998 the Company
had borrowed $8.8 million while at December 31, 1997 the Company had not
drawn any amounts under the Credit Facility. The Company was not in
violation of any covenants at September 30, 1998.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED)
<S> <C> <C>
Senior Subordinated Notes $100,000 $100,000
Borrowings under Credit Facility 8,819 --
Notes payable to others 664 754
-------- --------
109,483 100,754
Less current portion 117 89
-------- --------
$109,366 $100,665
======== ========
</TABLE>
8. DELISTING FROM NASDAQ SMALLCAP MARKET - Effective July 28, 1998, the Common
Stock was delisted from the Nasdaq SmallCap Market due to the Company's
failure to satisfy the continuing listing requirements of the Nasdaq
SmallCap Market. Bid quotations for the Common Stock can be obtained from
and the Common Stock is traded on NASD's OTC electronic bulletin board.
8
<PAGE> 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The statements contained in this report that are not historical fact are
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995), which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates," or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks and
uncertainties. Management wishes to caution the reader that these
forward-looking statements such as the timing, costs and scope of its
acquisition of, or investments in, the bingo industry and new product
development, and other matters contained in this report or the documents
incorporated by reference regarding matters that are not historical facts, are
only predictions. No assurances can be given that the future results indicated,
whether expressed or implied, will be achieved. While sometimes presented with
numerical specificity, these projections and other forward-looking statements
are based upon a variety of assumptions relating to the business of the Company,
which, although considered reasonable by the Company, may not be realized.
Because of the number and range of the assumptions underlying the Company's
projections and forward-looking statements, many of which are subject to
significant uncertainties and contingencies that are beyond the reasonable
control of the Company, some of the assumptions inevitably will not materialize,
and unanticipated events and circumstances may occur subsequent to the date of
this report or the documents incorporated by reference. These forward-looking
statements are based on current expectations and the Company assumes no
obligation to update this information. Therefore, the actual experience of the
Company and results achieved during the period covered by any particular
projections or forward-looking statements may differ substantially from those
projected. Consequently, the inclusion of projections and other forward-looking
statements should not be regarded as a representation by the Company or any
other person that these estimates and projections will be realized, and actual
results may vary materially. There can be no assurance that any of these
expectations will be realized or that any of the forward-looking statements
contained herein will prove to be accurate.
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1998 and 1997
Net Sales - Net sales were $28.9 million for the three months ended September
30, 1998, a decrease of $0.6 million or 2.1% from $29.5 million for the three
months ended September 30, 1997. The sales decrease is primarily attributable to
lower sales volumes in the Canadian market offset in part by a slight increase
in the United States markets. Domestically, sales were higher primarily due to
an increase of sales generated from the installation of Power Bingo King(TM)
hand-held electronic bingo systems of $1.9 million in the third quarter of 1998
compared to $1.0 million the third quarter of 1997. In addition, bingo hall
equipment third quarter sales increased by $0.3 million as a result of the
rollout of the Gold Crown video enhanced pulltab ticket dispenser. In Canada,
sales decreased $1.1 million for the three months ended September 30, 1998
compared to the three months ended September 30, 1997 due to lower sales
experienced primarily in bingo paper, pulltab tickets, bingo hall equipment and
to a weakened Canadian dollar. Bingo paper sales in Canada were adversely
impacted by increased competition from manufacturing rivals as well as from
other forms of gaming. The Canadian pulltab ticket market continues to be
adversely influenced by an increase in governments takeout, thereby reducing the
prize payout levels. In addition, the weakening Canadian dollar negatively
impacted sales by approximately $0.8 million in the third quarter of 1998
compared to 1997.
Cost of Goods Sold - Cost of goods sold as a percentage of sales was 70.9% for
the three months ended September 30, 1998 compared to 70.8% for the three months
ended September 30, 1997. Domestically, as a percentage of sales, cost of goods
was 74.3% for the three months ended September 30, 1998 compared to 74.5% for
the same
9
<PAGE> 10
period last year. The decrease is attributable to the lower pulltab production
costs resulting from the consolidation of its manufacturing operations completed
in the second quarter of 1997 (the "Consolidation") and to the impact of
substantially higher sales volumes of higher margin Power Bingo King(TM)
hand-held electronic bingo systems. These decreases were partially offset as
result of continuing production inefficiencies resulting from the consolidation
of manufacturing operations at the Texas border facilities. In Canada, the
Company experienced a slight increase in cost of sales. Cost of goods sold, as a
percentage of sales was 62.6% for the three months ended September 30, 1998
compared to 62.5% for the three months ended September 30, 1997 primarily due to
higher production inefficiencies attributable to lower product demand.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses were $9.0 million for the three months ended September
30, 1998 compared to $9.4 million for the three months ended September 30, 1997,
a decrease of $0.4 million or 3.9%. The decrease is primarily attributable to i)
reductions in legal expenses relating to pending patent litigation, ii) to lower
salaries and benefits resulting from the workforce reduction program the Company
effected in the fourth quarter of 1997, iii) reductions in telecommunication
expenses, and iv) favorable foreign currency gains in the third quarter of 1998
compared to losses in the third quarter of 1997. These decreases were partially
offset by increases attributable to the impact of i) the acquisition of
distributor and marketing companies in Canada and ii) the development and
enhancement of electronic products.
Interest Expense, Net - Interest expense, net, was $3.5 million for the three
months ended September 30, 1998 compared to $3.2 million for the three months
ended September 30, 1997. Interest expense, net, as a percentage of sales, was
12.1% for the three months ended September 30, 1998 compared to 10.8% for the
three months ended September 30, 1997. The increase is primarily attributed to
accrued interest on the line of credit usage and to lower interest earned due to
higher utilization of cash to operate the business.
Income Tax Benefit - The income tax benefit was $264,000 for the three months
ended September 30, 1998 compared to $1,385,000 for the three months ended
September 30, 1997. The lower income tax benefit is primarily attributable to
the recognition of a valuation allowance due to the uncertainty regarding
realization of certain long-term future tax benefits. Realization of future tax
benefits related to the deferred tax assets is dependent on many factors,
including the Company's ability to generate taxable income in the United States
within the net operating loss carryforward periods.
Comparison of Nine Months Ended September 30, 1998 and 1997
Net Sales - Net sales were $90.2 million for the nine months ended September 30,
1998, a decrease of $2.1 million or 2.2% from the $92.3 million for the nine
months ended September 30, 1997. The sales decrease is attributable to lower
sales volumes in the United States and Canada. Domestically, sales decreased
$1.6 million for the nine months ended September 30, 1998 compared to the nine
months ended September 30, 1997. Sales of bingo paper, ink dabbers, pulltab
tickets, general merchandise, bingo hall equipment and System 12(TM) electronic
bingo systems decreased $5.4 million. These decreases were offset in part by an
increase of $3.8 million in sales generated from the installation of Power Bingo
King(TM) hand-held electronic bingo systems that are continuing at a high pace.
In Canada, the Company experienced lower sales year-to-date of $1.6 million
primarily in bingo paper and bingo hall equipment that was partially offset by
an increase in pulltab ticket sales occurring in the first quarter of 1998.
Sales on a consolidated basis denominated in U.S. dollars were negatively
impacted by approximately $1.8 million due to the weakening Canadian dollar.
10
<PAGE> 11
Cost of Goods Sold - Cost of goods sold, as a percentage of sales, was 68.5% for
the nine months ended September 30, 1998 compared to 68.9% for the nine months
ended September 30, 1997. Excluding the application of a $1.5 million purchase
accounting adjustment in the first quarter of 1997 pertaining to the finished
goods inventory of Trade Products, cost of goods sold, as a percentage of sales
was 67.3 % for the nine months ended September 30, 1997.
The Company experienced an increase, as a percentage of sales, in cost of goods
sold in the United States. As a percentage of sales, cost of goods sold was
71.7% for the nine months ended September 30, 1998 compared to 71.3% for the
nine months ended September 30, 1997. The increase is primarily attributable to
manufacturing inefficiencies relating to the consolidation of manufacturing
operations at the Texas border facilities and to a lesser extent to the
increased demand for higher cost products. These increases were partially offset
by lower pulltab production costs compared to last year arising from the
consolidation of its manufacturing operations completed in the second quarter of
1997 and to the impact of the acquisition of substantially all of the assets of
Power Bingo in July 1997. In terms of dollars, cost of sales decreased $0.5
million or 1.0%. In Canada, the cost of sales decreased $0.2 million or 1.1%.
However, due to higher unfavorable production variances resulting from the
decline in product demand and the sale of higher cost products, the Company
experienced higher product costs, as a percentage of sales of 61.1% year-to-date
1998 compared to 57.9% year-to-date 1997.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses were $26.9 million for the nine months ended September
30, 1998 compared to $27.3 million for the nine months ended September 30, 1997.
The decrease is primarily attributable to i) the benefit realized by the
workforce reduction program the Company implemented in the fourth quarter of
1997, ii) lower telecommunication expenses, iii) foreign currency gains in 1998
compared to losses in 1997, and iv) significantly lower legal expenses
pertaining to pending patent infringement litigation.
Interest Expense, Net - Interest expense, net, was $9.8 million for the nine
months ended September 30, 1998 compared to $9.4 million for the nine months
ended September 30, 1997. Interest expense, net, as a percentage of sales, was
10.8% for the nine months ended September 30, 1998 compared to 10.2% for the
nine months ended September 30, 1997. The increase is primarily attributable to
accrued interest on the line-of-credit usage commencing in the second quarter of
1998, lower interest income earned due to higher utilization of cash to operate
the business and to slightly higher amortization of deferred debt financing
costs.
Income Tax Benefit - The Company recorded an income tax benefit of $146,000 for
the nine months ended September 30, 1998 compared to $2,850,000 for the nine
months ended September 30, 1997. The effective tax rate was (1.8)% for the nine
months ended September 30, 1998 compared to (36.0)% for the nine months ended
September 30, 1997. The increase in the effective tax rate and the decrease in
the income tax benefit is primarily attributable to the recognition of a
valuation allowance due to the uncertainty regarding realization of certain
long-term future tax benefits. Realization of future tax benefits related to the
deferred tax assets is dependant on many factors, including the Company's
ability to generate taxable income in the United States within the net operating
loss carryforward periods.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
The Company's long-term debt at September 30, 1998, including the current
portion thereof, totaled $109.5 million compared to $100.8 million at December
31, 1997 (see Note 7 of Notes to Consolidated Financial Statements). Cash
payments on long-term debt for the first nine months ended September 30, 1998
totaled $89,000 compared to $357,000 for the nine months ended September 30,
1997.
In November 1997, the Company entered into the Credit Facility that provides for
maximum borrowings of up to $30.0 million, of which up to $20.0 million may be
borrowed under the US Facility and up to US$10.0 million may be borrowed under
the Canadian Facility. At September 30, 1998, the Company had borrowed $8.8
million while at December 31,1997 the Company had not yet drawn any amounts
under the Credit Facility. At September 30, 1998 and December 31, 1997, $17.2
and $27.7 million, respectively, was available for borrowing based on its
borrowing base certificates (see Note 7 to the Consolidated Statements).
The Company's capital expenditures for property, plant and equipment were $3.7
million during the first nine months of 1998 compared with $3.3 million during
the first nine months of 1997 The Company's 1998 capital expenditure program has
focused on the upgrading and development of management information systems and
the purchase of equipment to improve manufacturing efficiency. Capital
expenditures for electronic bingo systems consist of Power Bingo King(TM) and
System 12(TM) electronic bingo systems placed in the market on a lease or
revenue sharing basis. The Company's capital expenditures for electronic bingo
systems were $2.3 million in the first nine months of 1998 compared to $0.4
million in the first nine months of 1997, due to the acquisition of Power Bingo
in July 1997.
Cash flow from operations is not currently sufficient to cover the cash flow
requirements of the Company. However, the Company believes that with its current
operating plan, excess cash on hand, and availability under the Credit Facility,
it will have sufficient cash to meet its financial obligations. Further,
management is reviewing the Company's capital structure in order to increase
cash flow, to provide operating flexibility and to facilitate strategic
opportunities. As part of this review, the Company may seek to renegotiate the
Credit Facility and to restructure the Notes; this strategic review could also
include the possible conversion of debt to equity. The Company may retain an
investment banker and other professionals to facilitate its objectives. There
can be no assurance that the Company will be able to accomplish these goals.
The Company's business plan includes pursuing selective business acquisitions
and strategic alliances. The Company will continue to evaluate additional
opportunities and, as attractive opportunities develop, the Company will
consider additional acquisitions. However, there can be no assurance that the
Company will be successful in raising sufficient additional capital on terms
acceptable to the Company, if at all to pursue such opportunities. Moreover, the
Company is restricted in its ability to incur additional indebtedness pursuant
to the terms of the Indenture. The failure to raise and generate sufficient
funds may require the Company to delay or abandon some of its planned future
expansion, which could have a material adverse effect on the future growth of
the Company.
Management does not believe that inflation has had or is expected to have any
significant adverse impact on the Company's financial condition or results of
operations for the periods indicated.
12
<PAGE> 13
YEAR 2000 ISSUE
During 1998 the Company began working to fully determine that its computer
systems and related software would properly recognize the year 2000 and continue
to process data. The year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year. The
Company is aware of the issues associated with the programming code in its
existing computer systems in order for the systems to recognize date sensitive
information when the year changes to 2000. The Company has a year 2000 program
that consists of the following phases: awareness, assessment, re-mediation,
testing and contingency planning.
The Company is in the re-mediation and testing phases with regard to the
business information systems used by the Company and management believes these
systems are date compliant and that they will not pose a significant risk to the
Company's future business operations. However, certain financial and inventory
information systems of a recently acquired distributor have been determined to
be non-compliant. In 1999, this system will be upgraded or converted to the
business information systems that the Company is currently using. The cost to
bring this distributor's information systems compliant is not expected to be
material.
The Company currently believes that no material year 2000 issues exist with
respect to the hardware or software or embedded technology contained with the
Company's electronic product offerings. To the extent necessary the Company is
in the process of obtaining and installing current releases or upgrades from
software vendors at minimal cost to the Company. In certain instances other
upgrades are being developed and installed by existing employees and such costs
are not expected to be material.
The Company has upgraded substantially all of its telecommunications equipment
and is currently assessing the manufacturing equipment, point-of-sale cash
registers, environmental control systems, building security systems, etc. to
determine the extent of re-mediation necessary.
The Company has not fully determined the extent to which the systems of
customers and vendors with whom the Company has material relationship are year
2000 compliant. The Company will continue the process of assessing its year 2000
risks pertaining to such third parties via ongoing communication with its
critical suppliers and customers. As part of this process the Company will
request written assurances from these suppliers and customers that they have
year 2000 readiness programs in place, as well as an affirmation that they will
be compliant when necessary. There can be no assurance that the systems of
customers and suppliers will be successfully converted on a timely basis. The
Company, therefore, could be adversely impacted by such things as loss of
revenue, production delays, lack of third party readiness and other business
interruptions.
Accordingly, the Company has begun developing contingency plans to address
potential issues that include, among other actions, development of back-up
procedures, build-up of essential inventories and identification of alternate
suppliers. The ultimate effects of the Company, its suppliers or customers not
being fully year 2000 compliant is not reasonably estimable. As of the date of
this filing, the Company has not finalized a contingency plan to address the
failure of the Company, its suppliers or customers to be year 2000 compliant.
The historical and estimated costs relating to the resolution of the Company's
year 2000 issues cannot be fully determined at this time. Until the Company
substantially completes its year 2000 program, it is uncertain if there will be
any material effect on the Company's results of operations, liquidity or
financial condition.
13
<PAGE> 14
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:
Form 8-K dated July 28 1998 filed under Item 5
Form 8-K dated October 2, 1998 filed under Item 5
14
<PAGE> 15
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 16, 1998 /s/ Joseph Valandra
--------------------------------------
Joseph Valandra
Chairman and Chief Executive Officer
Date: November 16, 1998 /s/ Lawrence X. Taylor
--------------------------------------
Lawrence X. Taylor
Executive Vice President and
Chief Financial Officer
15
<PAGE> 16
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,
------------------ -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Shares of common stock outstanding at
beginning of period (1) 6,935 6,828 6,920 6,828
Weighted-average shares issued during the period 3 68 16 23
-------- -------- -------- --------
Actual weighted average share outstanding
for the period 6,938 6,896 6,936 6,851
Dilutive stock options and warrants using
average market price -- -- -- --
-------- -------- -------- --------
Dilutive shares outstanding 6,938 6,896 6,936 6,851
======== ======== ======== ========
Net loss $ (3,805) $ (2,521) $ (8,133) $ (5,058)
======== ======== ======== ========
Loss per share-basic and dilutive $ (0.55) $ (0.37) $ (1.17) $ (0.74)
======== ======== ======== ========
</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, 1998 AND THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998
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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,877
<SECURITIES> 0
<RECEIVABLES> 29,340
<ALLOWANCES> 3,334
<INVENTORY> 23,535
<CURRENT-ASSETS> 57,903
<PP&E> 49,006
<DEPRECIATION> 21,594
<TOTAL-ASSETS> 140,442
<CURRENT-LIABILITIES> 24,248
<BONDS> 109,366
0
0
<COMMON> 70
<OTHER-SE> 5,951
<TOTAL-LIABILITY-AND-EQUITY> 140,442
<SALES> 90,238
<TOTAL-REVENUES> 90,238
<CGS> 61,837
<TOTAL-COSTS> 61,837
<OTHER-EXPENSES> 26,268
<LOSS-PROVISION> 622
<INTEREST-EXPENSE> 9,790
<INCOME-PRETAX> (8,278)
<INCOME-TAX> (146)
<INCOME-CONTINUING> (8,133)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,133)
<EPS-PRIMARY> (1.17)
<EPS-DILUTED> (1.17)
</TABLE>
