-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lmr9fNY0B0J+a4yTsgZ/NMcQt7uTAr2WgnkUbVYCBkeTSqGpL2Tme4nosdIPVJjR FUTDaIGlblamwXYx/PkTiQ== 0000950134-97-008626.txt : 19971117 0000950134-97-008626.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950134-97-008626 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: STUART ENTERTAINMENT INC CENTRAL INDEX KEY: 0000355142 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 840402207 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-10737 FILM NUMBER: 97722064 BUSINESS ADDRESS: STREET 1: 3211 NEBRASKA AVE CITY: COUNCIL BLUFFS STATE: IA ZIP: 51501 BUSINESS PHONE: 7123231488 MAIL ADDRESS: STREET 1: 3211 NEBRASKA AVENUE CITY: COUNCIL BLUFFS STATE: IA ZIP: 51501 FORMER COMPANY: FORMER CONFORMED NAME: BINGO KING CO INC DATE OF NAME CHANGE: 19910725 10-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1997 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. - -------------------------------------------------------------------------------- (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 November 10, 1997 there were 6,920,140 shares of the Registrant's common stock, $.01 par value, outstanding. 2 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES INDEX
Page No. -------- 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
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) - --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 ---------- ---------- ---------- ---------- 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 ========== ========== ========== ==========
Note: No dividends were paid or declared during the nine months ended September 30, 1997 and 1996. See Notes to Consolidated Financial Statements. 3 4 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 (Amounts in thousands) - --------------------------------------------------------------------------------
September 30, December 31, ASSETS 1997 1996 (UNAUDITED) CURRENT ASSETS: 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 =========== ===========
See Notes to Consolidated Financial Statements. 4 5 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (Amounts in thousands) (UNAUDITED) - --------------------------------------------------------------------------------
1997 1996 --------- --------- 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
See Notes to Consolidated Financial Statements. 5 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) - -------------------------------------------------------------------------------- 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 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: Buildings and improvements 10-20 years Equipment 3-10 years
INVESTMENTS - Investments in the common stock of certain affiliated companies are accounted for using the equity method if the Company has the ability to exercise significant influence over the investee's operations and financial policies. Otherwise, the cost method is used. 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 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.
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------ 1997 1996 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
8 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:
SEPTEMBER 30, DECEMBER 31, 1997 1996 Raw materials $ 3,352 $ 3,975 Work-in-process 4,102 4,316 Finished goods 17,279 19,827 --------- --------- $ 24,733 $ 28,118 ========= =========
4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following:
SEPTEMBER 30, DECEMBER 31, 1997 1996 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 ========= =========
5. OTHER ASSETS Other assets consisted of the following:
September 30, December 31, 1997 1996 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 ========= =========
9 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:
SEPTEMBER 30, DECEMBER 31, 1997 1996 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 =========== ===========
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 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:
SEPTEMBER 30, DECEMBER 31, 1997 1996 Severance and termination benefits for approximately 400 employees $ 507 $ 1,511 Facility shutdown and relocation costs 1,160 1,769 --------- --------- $ 1,667 $ 3,280 ========= =========
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 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 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 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 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 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 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 18 EXHIBIT INDEX The following Exhibits are filed herewith.
Exhibit No. Description - ----------- ----------- 11 Statements Regarding Computation of Per Share Earnings 27 Financial Data Schedule
EX-11 2 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT NO. 11 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES STATEMENTS REGARDING COMPUTATION OF PER SHARE EARNINGS (Amounts In Thousands, Except Per Share Amounts) (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 --------- --------- --------- --------- 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 ========= ========= ========= =========
(1) This represents total outstanding shares of common stock less treasury shares. See Notes to Consolidated Financial Statements. EX-27 3 FINANCIAL DATA SCHEDULE
5 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. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 13,233 0 28,800 2,664 24,733 72,126 42,531 16,962 149,085 21,325 100,290 0 0 69 25,046 149,085 30,482 30,482 21,460 21,460 9,552 188 3,188 (3,906) (1,385) (2,521) 0 0 0 (2,521) (0.37) (0.37)
-----END PRIVACY-ENHANCED MESSAGE-----