<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED COMMISSION FILE NUMBER
MARCH 31, 1999 0-10737
STUART ENTERTAINMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-0402207
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3211 NEBRASKA AVENUE
COUNCIL BLUFFS, IOWA 51501
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (712) 323-1488
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of May 4, 1999 there were 6,946,211 shares of the registrant's common stock,
$.01 par value, outstanding.
1
<PAGE> 2
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1:
Consolidated Statements of Operations for the
Three Months Ended March 31, 1999 and 1998 ................. 3
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 .......................................... 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 ................. 5
Notes to Consolidated Financial Statements ................... 6-9
Item 2:
Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 10-16
Item 3:
Quantitative and Qualitative Disclosures about
Market Risk ................................................ 17
PART II. OTHER INFORMATION:
Item 6:
Exhibits and Reports on Form 8-K ............................. 18
SIGNATURES ............................................................ 19
EXHIBIT INDEX ......................................................... 20
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Amounts in thousands, except per share data)
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
NET SALES $ 30,345 $ 31,595
COST OF GOODS SOLD 20,814 20,919
-------- --------
GROSS MARGIN 9,531 10,676
OTHER EXPENSES:
Selling, general and administrative expenses 9,270 8,955
Interest expense, net 3,618 3,152
-------- --------
Other expenses 12,888 12,107
-------- --------
LOSS BEFORE INCOME TAXES (3,357) (1,431)
INCOME TAX PROVISION (BENEFIT) (241) 173
-------- --------
NET LOSS $ (3,116) $ (1,604)
======== ========
NET LOSS PER COMMON SHARE:
Basic $ (0.45) $ (0.23)
======== ========
Diluted $ (0.45) $ (0.23)
======== ========
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:
Basic 6,946 6,927
======== ========
Diluted 6,946 6,927
======== ========
</TABLE>
Note: No dividends were paid or declared during the three months ended March 31,
1999 and 1998.
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,787 $ 4,447
Trade receivables, net of allowance for doubtful accounts of $4,067
and $3,735 20,481 19,124
Current portion of notes receivable 1,445 1,587
Inventories 20,791 22,111
Deferred income taxes 2,886 2,886
Prepaid expenses and other current assets 1,703 1,005
--------- ---------
Total Current Assets 51,093 51,160
PROPERTY, PLANT AND EQUIPMENT, net 28,448 29,214
GOODWILL, net of accumulated amortization of $5,173 and $4,670 46,771 46,894
OTHER ASSETS, net 9,046 9,431
--------- ---------
$ 135,358 $ 136,699
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $ 470 $ 469
Trade payables 10,824 12,725
Accrued payroll and benefits 2,411 2,006
Other accrued liabilities 8,304 5,758
Income taxes payable 807 1,023
--------- ---------
Total Current Liabilities 22,816 21,981
LONG-TERM DEBT 119,976 119,288
DEFERRED INCOME TAXES 180 178
DEFERRED INCOME 217 143
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock $.01 par value; 30,000,000 shares authorized;
6,946,211 and 6,927,488 shares outstanding 70 70
Additional paid-in capital 27,768 27,767
Accumulated deficit (32,395) (29,280)
Treasury stock (56,260 shares at cost) (189) (189)
Accumulated other comprehensive loss (3,085) (3,259)
--------- ---------
Total Stockholders' Equity (Deficit) (7,831) (4,891)
--------- ---------
$ 135,358 $ 136,699
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Dollars in thousands)
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,116) $ (1,604)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization 2,349 1,896
Provision for doubtful accounts 230 202
Equity in earnings of joint ventures (7) (8)
Payments on restructuring charge (99) (852)
Other non-cash expenses -- net 49 (1,115)
Change in operating assets and liabilities:
Trade receivables (1,617) (3,815)
Inventories 1,314 (186)
Trade payables (1,901) 1,954
Other--net 2,135 5,992
--------- ---------
Net cash flows from operating activities (663) 2,464
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired -- (480)
Capital expenditures for electronic bingo systems (692) (312)
Capital expenditures for property, plant and equipment (169) (1,069)
Other (134) (38)
Payments received on notes receivable 328 542
--------- ---------
Net cash flows from investing activities (667) (1,357)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under credit facility 765 --
Proceeds from issuance of common stock under employee stock purchase plan 1 --
Cost of debt financing -- (41)
Payments on long-term debt (77) (15)
--------- ---------
Net cash flows from financing activities 689 (56)
Effect of currency exchange rate changes on cash of foreign subsidiaries (19) (27)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (660) 1,024
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,447 7,099
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,787 $ 8,123
========= =========
SUPPLEMENTAL CASHFLOW DISCLOSURES:
Interest paid $ 590 $ 19
Income taxes paid $ 367 $ --
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(COLUMNAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION - The accompanying unaudited consolidated financial
statements of Stuart Entertainment, Inc. and its wholly owned subsidiaries
(collectively, the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial statements
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for annual financial
statements.
In the opinion of the Company's management, the foregoing unaudited
consolidated financial statements reflect all adjustments necessary for a
fair presentation of the results of the Company for the periods shown.
Operating results for the three months ended March 31, 1999 and 1998 are
not necessarily indicative of the results that may be expected for the full
year ending December 31, 1999. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto for the year ended December 31, 1998, filed with the Securities and
Exchange Commission on the Company's Annual Report on Form 10-K.
Certain reclassifications have been made to the 1998 financial statements
to conform to those classifications used in 1999.
2. COMPREHENSIVE INCOME (LOSS) - Comprehensive income (loss) is comprised of
net earnings (losses) and net currency translation gains (losses). Total
comprehensive loss for the three months ended March 31, 1999 and 1998 were
$2,942,000 and $2,072,000, respectively.
3. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - In June 1998, the Financial
Accounting Standard Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which established accounting and
reporting standards for derivative instruments and for hedging activities.
It requires that entities recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair
value. This statement is effective for the Company in the first quarter of
the year 2000. Management is in the process of evaluating the impact, if
any, this accounting pronouncement will have on the Company's financial
statements.
4. INVENTORIES - Inventories consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
<S> <C> <C>
Raw materials .......................... $ 4,568 $ 4,858
Work-in-process ........................ 235 250
Finished goods ......................... 15,988 17,003
------- -------
$20,791 $22,111
======= =======
</TABLE>
6
<PAGE> 7
5. LONG-TERM DEBT - In November 1996, the Company completed a private
placement of $100 million aggregate principal amount of 12.5% Senior
Subordinated Notes due November 15, 2004 (the "Notes"). Interest on the
Notes is payable semi-annually on each May 15 and November 15. The Company
did not make the May 15 interest payment, however the indenture governing
the Notes (the "Indenture") provides for an additional period of 30 days
during which the interest payment may be made. Failure to make such payment
during such 30-day period will result in an "Event of Default" under terms
of the Indenture.
During February 1999, the Company's executive management determined that
the preliminary year-end financial results for the fiscal year 1998
indicated a level of operating cash flow that may be insufficient to
service the Company's current debt levels. Therefore, executive management
has been contemplating implementing an operational and financial
restructuring. Accordingly, the Company retained an investment banking firm
and other advisors to assist the Company in analyzing the Company's capital
structure and to review various financial restructuring alternatives.
In November 1997, the Company entered into a credit facility consisting of
two loan and security agreements, one between the Company and Congress
Financial Corporation (Central) ("Congress") (the "US Facility") and one
between Bingo Press & Specialty Limited, a wholly-owned subsidiary of the
Company ("Bazaar") and Congress Financial Corporation (Canada) (the
"Canadian Facility") (collectively, the "Credit Facility"). The Credit
Facility provides for maximum borrowings of up to $30 million, of which up
to $20.0 million may be borrowed under the US Facility and up to US$10.0
million may be borrowed under the Canadian Facility. The Credit Facility
provides for the three-year term and expires in November 2000.
The Credit Facility imposes certain covenants and other requirements on the
Company and Bazaar (sometimes referred to collectively herein as the
"Borrowers"). The Company expects that it may not comply with certain of
the covenants in the Credit Facility, including the requirement that the
Company maintain a certain minimum level of net worth. The Company and
Congress currently are in the process of negotiating the terms of a
Forbearance Agreement with respect to the Credit Facility, and it is
expected that the parties will enter into such a Forbearance Agreement in
the near future. However, there can be no assurance that a Forbearance
Agreement will be entered into in the near future, if at all, and the
failure to enter into such an agreement would have a material adverse
effect on the Company.
The Borrowers are entitled to draw amounts under the Credit Facility,
subject to availability pursuant to a borrowing base certificate. The
borrowing base is based on the eligible accounts receivable, eligible
inventory and equipment value levels of the Company and Bazaar,
respectively. At both March 31, 1999 and December 31, 1998, $5.1 million
was available for borrowing under the Credit Facility. At March 31, 1999
and December 31, 1998, the Borrowers had borrowed $18.5 million and $17.7
million, respectively, under the Credit Facility.
7
<PAGE> 8
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
<S> <C> <C>
Senior Subordinated Notes $100,000 $100,000
Borrowings Under Credit Facility 18,492 17,673
Notes payable to others 1,954 2,084
-------- --------
120,446 119,757
Less current portion 470 469
-------- --------
$119,976 $119,288
======== ========
</TABLE>
6. BUSINESS OPERATIONS AND SEGMENTS - The Company is primarily engaged in the
manufacture and distribution of a full line of bingo-related products. The
Company's products are sold primarily in the United States and Canada to
distributors, who resell them to non-profit organizations which use such
products for fund-raising purposes and to commercial entities such as
Indian gaming enterprises, casinos and government sponsored entities which
operate bingo games for profit.
The Company reorganized its business on a global product line basis and
accordingly has determined there are three reportable segments:
Consumable Bingo Products: This segment consists of the manufacture
and distribution of disposable bingo paper and ink dabbers, and the
purchase for resale of bingo accessories, equipment and supplies.
Pulltab and Lottery Products: This segment consists of the
manufacture and distribution of pulltab tickets sold primarily to
charities for fundraising and sold to third party retail locations.
The Company also manufacturers and distributes scratch off tickets
for promotions by customers and pulltab tickets used by governmental
jurisdictions as instant lottery ticket sales.
Electronic Bingo Products: This segment includes the manufacture and
distribution of fixed-base and hand-held electronic bingo gaming
systems and electronic bingo hall equipment.
The Company evaluates the performance of its operating segments based on
fully absorbed product line gross margins. For the three months ended March
31, 1999 and 1998, the Company did not allocate Selling, General and
Administrative, Depreciation and Amortization, Interest Expense and
Non-operating Expense or Income, or Income Taxes to its individual
operating segments. The Company is, therefore, unable to reasonably
determine the breakout of these items by reportable segment. In addition,
as of March 31, 1999 and December 31, 1998, the Company did not measure
return on investment by reportable segment and accordingly is not able to
report the allocation of assets by reportable segment.
8
<PAGE> 9
SUMMARY BY BUSINESS SEGMENTS:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
<S> <C> <C>
NET SALES:
Consumable Bingo Products $15,632 $16,887
Pulltab and Lottery Products 10,047 11,803
Electronic Bingo Products 4,666 2,905
------- -------
30,345 31,595
------- -------
GROSS MARGIN
Consumable Bingo Products 3,955 5,287
Pulltab and Lottery Products 4,012 4,186
Electronic Bingo Products 1,564 1,203
------- -------
9,531 10,676
------- -------
Selling, general and administrative expenses 9,270 8,955
------- -------
Operating income $ 261 $ 1,721
======= =======
</TABLE>
9
<PAGE> 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this report that are not historical fact are
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995), which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates," or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks and
uncertainties. Management wishes to caution the reader that these
forward-looking statements such as the timing, costs and scope of its
acquisition of, or investments in, the bingo industry and new product
development, the implementation of any form of restructuring transaction, year
2000 matters and other matters contained in this report or the documents
incorporated by reference regarding matters that are not historical facts, are
only predictions. No assurances can be given that the future results indicated,
whether expressed or implied, will be achieved. While sometimes presented with
numerical specificity, these projections and other forward-looking statements
are based upon a variety of assumptions relating to the business of the Company,
which, although considered reasonable by the Company, may not be realized.
Because of the number and range of the assumptions underlying the Company's
projections and forward-looking statements, many of which are subject to
significant uncertainties and contingencies that are beyond the reasonable
control of the Company, some of the assumptions inevitably will not materialize,
and unanticipated events and circumstances may occur subsequent to the date of
this report or the documents incorporated by reference. These forward-looking
statements are based on current expectations and the Company assumes no
obligation to update this information. Therefore, the actual experience of the
Company and results achieved during the period covered by any particular
projections or forward-looking statements may differ substantially from those
projected. Consequently, the inclusion of projections and other forward-looking
statements should not be regarded as a representation by the Company or any
other person that these estimates and projections will be realized, and actual
results may vary materially. There can be no assurance that any of these
expectations will be realized or that any of the forward-looking statements
contained herein will prove to be accurate.
GENERAL
The Company incurred a net loss of $3,116,000 for the first quarter ended March
31, 1999 compared to a net loss of $1,604,000 for the first quarter ended March
31, 1998. Management believes that the Company's operations continue to be
adversely impacted by increased competition, including competition from
companies offering new forms of gaming that are outside the traditional
consumable bingo and pulltab markets. The Company has attempted to offset the
increase in competition by developing electronic bingo and pulltab systems and
by consolidating manufacturing operations. Additionally, the Company has been
pursuing an aggressive acquisition program in an effort to quickly broaden its
product offerings. These actions have not offset the effects of declining
margins caused by increased competition and the apparent decline in the
popularity of traditional forms of bingo and pulltabs.
The Company competes in markets that includes a narrow customer base. The
markets for the Company's products are intensely competitive and are subject to
continuous, rapid technological change, short product life cycles and aggressive
pricing. The Company competes primarily on the basis of technology, product
availability, performance, quality, price, reliability, distribution and
customer service.
10
<PAGE> 11
RESULTS OF OPERATIONS
The following data sets forth operating data from the Company's Consolidated
Statements of Operations, stated as a percentage of net sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998
----- -----
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 68.6 66.2
----- -----
Gross margin 31.4 33.8
Selling, general and administrative expenses 30.6 28.3
----- -----
Income from operations 0.8 5.5
Interest expense 11.9 10.0
----- -----
Loss before income tax provision (benefit) (11.1) (4.5)
Income tax provision (benefit) (0.8) 0.6
----- -----
Net loss (10.3%) (5.1%)
===== =====
</TABLE>
Comparison of Three Months Ended March 31, 1999 and 1998
Net Sales - Net sales were $30.3 million for the three months ended March 31,
1999, a decrease of $1.3 million or 4.0% from $31.6 million for the quarter
ended March 31, 1998.
In Canada, sales decreased $1.5 million or 15.6% for the first quarter ended
March 31, 1999 compared to the first quarter ended March 31, 1998. Two of the
Company's business segments experienced lower sales volumes in Canada in 1999
compared to 1998 with consumable bingo products decreasing $.2 million or 3.7%
and pulltab and lottery products decreasing $1.3 million or 33.1%. Electronic
bingo products were flat for the first quarter of 1999 compared to the first
quarter of 1998. Consumable bingo products sales in Canada were adversely
impacted by increased competition from manufacturing rivals, as well as from an
increase in other forms of gaming. The decrease in Canadian pulltab and lottery
products is attributable in part to higher than normal first quarter 1998 sales
due to customers replenishing inventories with new pulltab products after the
Company was awarded a five year contract from the Ontario Gaming Commission in
November 1997. The decrease is also partially due to the continued adverse
impact on the Canadian pulltab and lottery ticket market due to the increase in
government fees that reduced the prize payout levels. In addition, the weakening
Canadian dollar negatively impacted sales by approximately $.5 million or 5.3%.
Domestically, the Company experienced a slight increase of $0.3 million or 1.3%
for the first quarter ended March 31, 1999 compared to the first quarter ended
March 31, 1998. Specifically, electronic bingo products increased $1.8 million
or 67.3% attributable to the increase of $1.1 million in sales generated from
the installation of Power Bingo King(TM) hand-held electronic bingo systems, by
a $0.2 million increase in electronic hall equipment and a $0.4 million increase
in fixed based electronic bingo systems. This increase was offset in part by a
decrease of $1.1 million or 9.2% in consumable bingo products and by a decrease
of $0.4 million or 5.4% in pulltab and lottery products. The sales of consumable
bingo products and pulltab and lottery products has been adversely impacted by
increased competition from manufacturing rivals and an apparent decline in the
popularity of traditional bingo and pulltabs due to the increase in other forms
of gaming and entertainment.
11
<PAGE> 12
The Company expects the general decline in the industry to continue in 1999 due
to competitive pressures from other sources of gaming and entertainment.
However, the Company expects sales from the Power Bingo King(TM) hand-held
electronic bingo systems to continue to increase, which the Company expects will
partially offset the decline in sales in the consumable bingo products and
pulltab and lottery product segments.
Cost of Goods Sold - Cost of goods sold as a percentage of sales was 68.6% for
the first quarter of 1999, an increase of 2.4 percentage points from 66.2% for
the first quarter of 1998. In terms of dollars, cost of goods sold was $20.8
million for the first quarter of 1999 compared to $20.9 million for the first
quarter ended 1998.
In Canada, cost of sales decreased $0.8 million or 13.1% in the first quarter of
1999 compared to 1998. The decrease is primarily attributable to lower sales of
pulltab and lottery products of $0.9 million or 32.2%. This decrease was
partially offset by a slight increase in the cost of sales for consumable bingo
products of $0.1 million or 4.1% due to higher sales volumes of general
merchandise.
Domestically, cost of sales increased $0.7 million or 4.5% in the first quarter
of 1999 compared to 1998. The increase is due in part to an increase in
electronic bingo products cost of sales of $1.4 million or 94.6% primarily due
to the impact of the increase in installation of Power Bingo King(TM) electronic
hand-held bingo systems and by an increase in sales volume of electronic bingo
hall equipment and electronic fixed base systems. This increase was partially
offset by continued production efficiencies in pulltab and lottery product
segments of $0.7 million or 14.3%.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses were $9.3 million for the three months ended March 31,
1999 compared to $9.0 million for the three months ended March 31, 1998 an
increase of $0.3 million or 3.5%. Selling, general and administrative expense,
as a percentage of sales, was 30.6% for the three months ended March 31, 1999
compared to 28.3% for the period ended March 31, 1998. The increase is primarily
due to the impact of (i) the acquisition of Bingo System and Supply, Inc. in the
fourth quarter of 1998, (ii) the acquisition of the distribution business of
Alberta Bingo Supply, Inc. in the third quarter of 1998, (iii) higher rent for
administrative offices at the Texas border facilities, (iv) higher than normal
travel expenses incurred in connection with exploring alternatives and examining
the restructuring of the Company's business and (v) higher sales promotion
expenses. These increases were partially offset by decreases in contract
services and research and development expenses.
Interest Expenses, Net - Interest expense, net of interest income, was $3.6
million for the three months ended March 31, 1999 compared to $3.2 million for
the three months ended March 31, 1998, an increase of $0.5 million or 14.7%.
Interest expense, as a percentage of sales, was 11.9% for the first quarter of
1999 compared to 10.0% for the first quarter of 1998. The increase is primarily
attributable to accrued interest on the Credit Facility borrowings and to debt
incurred to finance acquisitions in 1998.
Income Tax Provision (Benefit) - The Company recorded an income tax benefit of
$241,000 for three months ended March 31, 1999 compared to an income tax
provision of $173,000 pertaining to income generated in Canada for the three
months ended March 31, 1998. The effective tax rate was (7.2%) for the three
months ended March 31, 1999 compared to 12.1% for the three months ended March
31, 1998. The decrease in the effective tax rate is primarily attributable to
the recognition of a valuation allowance due to the uncertainty regarding
realization of certain long-term future tax benefits. Realization of future tax
benefits related to the deferred tax assets is dependent on many factors,
including the Company's ability to generate taxable income in the United States
and Canada within the net operating loss carryforward periods.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal uses of cash are for the purchase, manufacturing and
carrying of inventory, the carrying of accounts receivable and notes receivable,
the purchase of fixed assets and for normal operating expenses. The primary
amounts and ratios relating to liquidity and capital resources for the first
quarter ended March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
--------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Working capital $ 28,277 $ 35,493
Current ratio 2.2 2.3
Total long-term debt $ 120,446 $100,739
Stockholders' equity (deficit) $ (7,831) $ 14,324
Total capitalization $ 112,615 $115,063
Debt to capitalization ratio 107.0% 87.6%
Capital expenditures for property, plant and equipment $ 169 $ 1,069
Capital expenditures for electronic bingo systems $ 692 $ 312
</TABLE>
FINANCING ACTIVITIES
The Company's long-term debt at March 31, 1999, including the current portion
thereof totaled $120.4 million compared to $119.8 million at December 31, 1998
(see Note 5 of Notes to Consolidated Financial Statements). Cash payments on
long-term debt for the first three months ended March 31, 1999 totaled $77,000
compared to $15,000 for the three months ended March 31, 1998.
In November 1997, the Company entered into a Credit Facility for a three-year
term expiring in November 2000. The Credit Facility, as amended, provides for
maximum borrowings of up to $30.0 million of which up to $20.0 million may be
borrowed under the U.S. Facility and up to $10.0 million may be borrowed under
the Canadian Facility. At March 31, 1999, the Company had borrowed $18,492,000
at a weighted-average interest rate of 8.05% of which $14,250,000 was borrowed
on the U.S. Facility and $4,242,000 was borrowed on the Canadian Facility. At
December 31, 1998, the Company had borrowed $17,673,000 at a weighted-average
interest rate of 8.09% of which $13,850,000 was borrowed on the U.S. Facility
and $3,823,000 was borrowed on the Canadian Facility. The Company and Bazaar
also had $1.2 and $0.2 million, respectively, in stand-by letters of credit
secured by the Credit Facility. The letters of credit are considered advances
and reduce the availability of the borrowing base.
The Borrowers are entitled to draw amounts under the Credit Facility, subject to
availability pursuant to a borrowing base certificate. The borrowing base is
based on the eligible accounts receivable, eligible inventory and equipment
value levels of the Company and the Canadian Borrower, respectively. At both
March 31, 1999 and December 31, 1998, $5.1 was available for borrowing under the
Credit Facility.
The Credit Facility generally provides for interest on the US Facility at the
prime rate plus 1/4% to 3/4% or at a Eurodollar rate plus 2-1/4% to 2-3/4%, at
the option of the Company. The Canadian Facility generally provides for interest
at the Canadian prime rate plus 1-1/4 % to 1-3/4%.
The Credit Facility imposes certain covenants and other requirements on the
Borrowers. In general, the affirmative covenants provide for mandatory reporting
by the Borrowers of financial and other information to
13
<PAGE> 14
the lenders and notice of certain events. The Credit Facility also contains
certain negative covenants and restrictions on actions by the Borrowers that,
among other things, restrict (i) the incurrence and existence of indebtedness or
contingent obligations, (ii) consolidations, mergers and sale of assets, (iii)
the incurrence and existence of liens, (iv) the sales of disposition of assets,
(v) investments, loans and advances, (vi) the payment of dividends and the
repurchases of the Company's common stock (the "Common Stock") and (vii)
acquisitions by the Borrowers. In addition under certain circumstances, the
Borrowers must meet a minimum level of net worth when the Excessive Availability
based on the current borrowing base certificate is less than $5.0 million. The
Credit Facility further contains customary events of default including
non-payment of principal, interest or fees and violations of covenants.
Interest on the 12.5% Senior Subordinated Notes is payable semi-annually on each
May 15 and November 15. The Company did not make the May 15 interest payment,
however the Indenture provides for an additional period of 30 days during which
the interest payment may be made. Failure to make such payment during such
30-day period will result in an "Event of Default" under terms of the Indenture.
The Indenture 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 Indenture also provides that upon the occurrence of a Change of Control (as
defined in the Indenture), each holder of Notes will have the right to require
the Company to purchase all or a portion of such holder's Notes at a purchase
price equal to 101% of the principal amount plus accrued interest to the date of
purchase. In such event, there can be no assurance that the Company will have
available funds sufficient to pay the Change of Control purchase price for all
of the Notes, and the Company expects that it would seek third party financing
to the extent it does not have available funds to meet its purchase obligations.
There can be no assurance that the Company would be able to obtain such
financing.
POTENTIAL RESTRUCTURING
During February 1999, the Company's executive management determined that the
preliminary year-end financial results for the fiscal year 1998 indicated a
level of operating cash flow that may be insufficient to service the Company's
current debt levels. Accordingly, the Company retained an investment banking
firm and other advisors to assist the Company in analyzing the Company's capital
structure and to review various financial restructuring alternatives. The
restructuring will likely include the conversion of existing debt of the Company
into equity. Such conversion could result in a substantial or complete dilution
of current stockholders.
In March 1999, the Company was informed that a group of holders of the Notes
formed an ad hoc committee to act on their behalf and to explore alternatives
for restructuring the Company's current debt. The Company is continuing its
discussions with the ad hoc committee concerning the restructuring of its
current debt and equity securities. There can be no assurance that the Company
will be able to reach an agreement on a consensual restructuring of its current
debt and equity with such ad hoc committee.
Management believes that under any restructuring alternative, the current
holders of the Company's common stock will be subject to substantial or
complete dilution as a result of a potential conversion of the Notes to equity.
There can be no assurance as to what value, if any, would be ascribed to the
common stock in a restructuring. In addition, the Company's Notes would be
substantially impaired in a restructuring. Due to the significant number of
uncertainties associated with any restructuring plan, there can be no assurance
that the Company will be able to consummate any form of operational or
financial restructuring.
While there is no assurance that funding will be available to execute any
restructuring plan, the Company is continuing to explore alternatives that
include finding strategic investors, utilizing lenders and/or other business
partners, selling substantial Company assets, and terminating lease obligations
on operating facilities and equipment identified as unnecessary. There can be
no assurance that management's efforts in this regard will be successful.
Amounts available under the Company's credit facilities are not expected to be
sufficient to fund the Company's cash needs after May 31, 1999, and the Company
may not have adequate funds to operate its business. There can be no assurance
that additional funds can be obtained or that any restructuring alternative
will be successfully initiated or implemented by May 31, 1999, in which case
the Company may be compelled to pursue a bankruptcy filing. The Company would
be required to obtain additional waivers under its credit arrangements for
periods subsequent to May 31, 1999 and the lenders are under no obligation to
grant such waivers.
Management believes that, despite the financial uncertainties in the near
future, it has developed a business plan that, if successfully funded and
executed as part of the restructuring can improve its operating results. The
continuing support of the Company's vendors, customers, lenders, stockholders
and employees during any restructuring will be the key to the Company's
success.
14
<PAGE> 15
CAPITAL EXPENDITURES
The Company's capital expenditures for property, plant and equipment were $0.2
million during the first quarter of 1999 compared with $1.1 million during the
first quarter of 1998. During 1999, the Company's capital expenditure program
will focus on (i) the upgrading and development of management information
systems, (ii) the purchase of equipment designed to improve manufacturing
efficiency and (iii) the consolidation of United States manufacturing
operations.
Capital expenditures for electronic bingo systems consist of Power Bingo
King(TM) and System 12(TM) electronic bingo systems that are placed in the
market and immediately generate revenue on a lease or revenue sharing basis. The
Company's $0.4 million increase for electronic bingo systems is primarily due to
the manufacture and placement of Power Bingo King(TM) hand-held electronic
bingo units. The Company began placing the units following the July 1997
acquisition of substantially all of the assets of Power Bingo Corporation.
INFLATION
Management does not believe that inflation has had or is expected to have any
significant adverse impact on the Company's financial condition or results of
operations for the periods indicated.
YEAR 2000 ISSUE
During 1998, the Company began working to fully determine whether its computer
systems and related software would properly recognize the year 2000 and continue
to process data. The year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year. The
Company is aware of the issues associated with the programming code in its
existing computer systems in order for the systems to recognize date sensitive
information when the year changes to 2000. The Company has a year 2000 program
to address (i) central business systems, (ii) site operations, (iii) products
and (iv) major
15
<PAGE> 16
suppliers. The program consists of the following phases: awareness, assessment,
remediation, testing and contingency planning.
The Company is in the process of remediation and testing with regard to the
central business systems used by the Company. The process includes either hard
testing of the systems and subsystems, vendor declaration and certification, or
both. Currently, management believes those systems to be date compliant such
that they will not pose a significant risk to the Company's future business
operations. However, certain information systems pertaining to a recently
acquired distributor have been determined to be non-compliant. A conversion to
the Company's current information systems is scheduled for completion in the
fourth quarter of 1999. The cost to bring this distributor's information systems
compliant is not expected to be material.
Teams have been established at each of the Company's principal locations
throughout the United States, Canada and Mexico and are charged with assessing
the state of compliance for all facility systems and equipment, and developing
remediation plans where necessary. A majority of the site assessments have been
completed, and the Company expects to complete the evaluation of remediation
plans by the end of the second quarter of 1999. In the site locations where the
assessments are complete, management currently believes the facilities systems
and equipment to be year 2000 compliant such that they will not pose a
significant risk to the Company's future business operations.
The Company produces and markets a wide array of products, many of which do not
have year 2000 or date/time issues. Most products that the Company has
identified to have year 2000 issues have been declared year 2000 compliant.
Other products are either in various phases of testing software upgrades or have
final solutions available for implementation. Currently, there is no indication
that any of the identified issues will have a material adverse impact on the
operation of these products other than through the recording of date and time
for reporting purposes.
Currently, an assessment of major suppliers is being performed with substantial
completion expected during the second quarter of 1999. As part of this process
the Company will request written assurances from these suppliers that they have
year 2000 readiness programs in place, as well as an affirmation that they will
be compliant when necessary. However, the Company can not assure that the
systems of suppliers will be successfully converted on a timely basis.
Therefore, the Company could be adversely impacted by such things as loss of
revenue, production delays, lack of third party readiness and other business
interruptions.
Accordingly, the Company has begun developing contingency plans to address
potential issues, which include, among other actions, development of emergency
back up and recovery procedures, build-up of essential inventories and
identification of alternate suppliers. The ultimate effect of the Company or its
suppliers not being fully year 2000 compliant is not reasonably determinable. As
of the date of this filing, the Company has not finalized a contingency plan to
address the failure of the Company or its suppliers to be year 2000 compliant.
The total amount of costs to be incurred by the Company to address year 2000
issues cannot be reasonably estimated at this time. To date, the Company has not
incurred any material costs directly associated with its compliance efforts,
except for compensation expenses associated with employees who have devoted some
of their time to the Company's year 2000 program. The Company does not expect
the total cost of the year 2000 issue to be material to its business, results of
operations, liquidity or financial condition.
16
<PAGE> 17
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks (i.e., the risk of loss arising from adverse changes
in market prices and rates) to which the Company is exposed are:
- Interest rates on notes receivables.
- Commodity prices, affecting the cost of certain raw materials.
- Interest rates on the Company's debt.
- Foreign exchange rates and other international market risks.
The Company is exposed to market risk from changes in interest rates. The
Company's notes receivable consist primarily of fixed rate interest bearing
securities. The total notes receivable at March 31, 1999 was $2.9 million, which
approximates 2% of the total assets. Management believes the exposure will be
minimal as the Company plans to hold the notes to maturity and the life of the
notes is less than 2 years.
Raw materials used by the Company are exposed to the impact of changing
commodity prices, particularly newsprint, because its ability to recover
increased costs through higher pricing may be limited by the competitive
environment the Company operates in. The Company does not enter into commodity
future and option contacts to manage fluctuations in prices on anticipated
purchases of these raw materials. The Company will study and may develop a
Board-approved policy to use such derivative financial instruments only to the
extent necessary to manage these exposures.
The Company's interest sensitive liabilities are its debt instruments consisting
of a floating rate U.S. Credit Facility based on the prime rate plus 1/4% to
3/4% or at Eurodollar rate plus 2-1/4% to 2-3/4% and a Canadian Credit Facility
at Canadian prime rate plus 1-1/4% to 1-3/4%.
Because the interest rate on the Credit Facility is variable, the Company's cash
flow may be affected by increases in interest rates, in that the Company would
be required to pay more interest in the event that both the prime (U.S. and
Canadian) and Eurodollar interest rates increase. Management does not, however,
believe that any risk inherent in the variable rate nature of the loan is likely
to have a material effect on the Company's interest or available cash.
A 10% proportionate increase in interest rates in 1999 as compared to the
average level of interest notes in 1998 would result in an increase to pretax
loss of approximately $0.15 million. This increase to the pretax loss is caused
by the Company's variable rate Credit Facility. Conversely, a corresponding
decrease in interest rates would result in a comparable improvement to the
pretax loss.
The Company has significant operations in Canada and Mexico. All Canadian
activities are recorded in their functional currency and translated to U.S.
dollars at current exchange rates while Mexican activities are maintained in
pesos and are remeasured into U.S. dollars at current exchange rates. Operating
in international markets involves exposure to movements in currency exchange
rates. The Company does not enter into forward foreign exchange currency
contacts to hedge the exposure on the activities of the operating units
functional currency to minimize the volatility of reported earnings because the
Company does not believe it is justified by the exposure or cost.
The Company estimates that a 10% decrease in Canadian foreign exchange rate
would result in $2.5 million loss in net sales. Management intends to study
whether the management of foreign currency market risk through the use of a
variety of financial and derivative instruments would be advantageous.
17
<PAGE> 18
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:
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: May 17, 1999 /s/ Joseph M. Valandra
----------------------------------------------------
Joseph M. Valandra, Chairman of the Board,
Chief Executive Officer and President
Date: May 17, 1999 /s/ Lawrence X. Taylor, III
----------------------------------------------------
Lawrence X. Taylor, III
Executive Vice President and Chief Financial Officer
19
<PAGE> 20
EXHIBIT INDEX
The following Exhibits are filed herewith.
Exhibit No. Description
- ----------- -----------
11 Statements Regarding Computation of Per Share Earnings
27 Financial Data Schedule
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
March 31,
--------------------
1999 1998
<S> <C> <C>
Shares of common stock outstanding at
beginning of period (1) 6,943 6,920
Weighted-average shares issued during the period 3 7
------- -------
Actual weighted average share outstanding
for the period 6,946 6,927
Dilutive stock options and warrants using
average market price -- --
------- -------
Dilutive shares outstanding 6,946 6,927
======= =======
Net loss $(3,116) $(1,604)
======= =======
Loss per share - basic and dilutive $ (0.45) $ (0.23)
======= =======
</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 THREE MONTHS ENDED
MARCH 31, 1999 AND THE CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,787
<SECURITIES> 0
<RECEIVABLES> 25,993
<ALLOWANCES> 4,067
<INVENTORY> 20,791
<CURRENT-ASSETS> 51,093
<PP&E> 53,659
<DEPRECIATION> 25,211
<TOTAL-ASSETS> 135,358
<CURRENT-LIABILITIES> 22,816
<BONDS> 119,976
0
0
<COMMON> 70
<OTHER-SE> (7,901)
<TOTAL-LIABILITY-AND-EQUITY> 135,358
<SALES> 30,345
<TOTAL-REVENUES> 30,345
<CGS> 20,814
<TOTAL-COSTS> 20,814
<OTHER-EXPENSES> 9,040
<LOSS-PROVISION> 230
<INTEREST-EXPENSE> 3,618
<INCOME-PRETAX> (3,357)
<INCOME-TAX> (241)
<INCOME-CONTINUING> (3,116)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,116)
<EPS-PRIMARY> (.45)
<EPS-DILUTED> (.45)
</TABLE>
