-----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, R8b5bmDARSBe37PLeS9T6uDe0V9VQSt6mxuVPpEddTnAImEV2kbwMDCQ6mwGMQp8 cfG9xvB0ZsAUzTS1ONOlNg== 0000950134-98-006998.txt : 19980817 0000950134-98-006998.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950134-98-006998 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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: 98690028 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 JUNE 30, 1998 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended Commission File Number June 30, 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 August 3, 1998 there were 6,938,627 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 Six Months Ended June 30, 1998 and 1997 ...............................3 Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997 ............................................................4 Consolidated Statements of Cash Flows for the Six Months Ended June 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
3 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL INFORMATION STUART ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (Dollars in thousands, except per share data) (UNAUDITED) - --------------------------------------------------------------------------------
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 1998 1997 1998 1997 -------- -------- -------- -------- NET SALES $ 29,717 $ 30,884 $ 61,312 $ 62,754 COST OF GOODS SOLD 20,408 20,132 41,327 42,644 -------- -------- -------- -------- GROSS MARGIN 9,309 10,752 19,985 20,110 OTHER EXPENSES: Selling, general and administrative expenses 8,942 9,312 17,897 17,904 Interest expense, net 3,146 3,098 6,298 6,208 -------- -------- -------- -------- Other expenses, net 12,088 12,410 24,195 24,112 -------- -------- -------- -------- LOSS BEFORE INCOME TAXES (2,779) (1,658) (4,210) (4,002) INCOME TAX PROVISION (BENEFIT) (55) (543) 118 (1,465) -------- -------- -------- -------- NET LOSS $ (2,724) $ (1,115) $ (4,328) $ (2,537) ======== ======== ======== ======== LOSS PER SHARE $ (0.39) $ (0.16) $ (0.62) $ (0.37) ======== ======== ======== ========
Note: No dividends were paid or declared during the six months ended June 30, 1998 and 1997. See Notes to Consolidated Financial Statements. 3 4 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1998 AND DECEMBER 31, 1997 (Dollars in thousands) - --------------------------------------------------------------------------------
JUNE 30, DECEMBER 31, ASSETS 1998 1997 (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents $ 4,383 $ 7,099 Trade receivables, net of allowance for doubtful accounts of $3,360 and $3,091 24,184 23,085 Current portion of notes receivable, less allowance for doubtful accounts of $144 and $233 2,423 2,269 Inventories 22,824 20,929 Deferred income taxes 3,008 3,008 Prepaid expenses and other current assets 1,612 1,111 -------- -------- Total Current Assets 58,434 57,501 PROPERTY, PLANT AND EQUIPMENT, net 27,120 26,471 GOODWILL, net of accumulated amortization of $3,952 and $3,244 44,765 45,655 OTHER ASSETS, net 8,572 8,197 -------- -------- $138,891 $137,824 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 120 $ 89 Trade payables 12,144 10,929 Accrued payroll and benefits 2,513 2,087 Other accrued liabilities 4,826 3,180 Restructuring charge reserve 1,083 2,841 Income taxes payable 606 797 -------- -------- Total Current Liabilities 21,292 19,923 LONG-TERM DEBT 106,083 100,665 DEFERRED INCOME TAXES 703 721 DEFERRED INCOME 129 143 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock $.01 par value; 30,000,000 shares authorized; 6,935,390 and 6,920,140 shares outstanding 70 70 Additional paid-in capital 27,756 27,732 Retained Deficit (14,387) (10,059) Treasury stock (56,260 shares at cost) (189) (189) Accumulated other comprehensive income (2,566) (1,182) --------- --------- Total Stockholders' Equity 10,684 16,372 --------- --------- $ 138,891 $ 137,824 ========= =========
See Notes to Consolidated Financial Statements. 4 5 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (Dollars in thousands) (UNAUDITED) - --------------------------------------------------------------------------------
1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (4,328) $ (2,537) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization 3,850 3,285 Provision for doubtful accounts 496 156 Payments on restructuring charge (1,758) (1,153) Other non-cash expenses - net (635) 981 Change in operating assets and liabilities: Trade receivables (2,280) (877) Inventories (1,533) 2,607 Trade payables 1,097 (1,678) Other - net 1,376 (1,464) -------- -------- Net cash flows from operating activities (3,715) (680) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for property, plant and equipment (3,275) (2,358) Capital expenditures for electronic bingo systems (1,290) -- Acquisitions, net of cash acquired (581) -- Payments received on notes receivable 893 855 Other (38) 92 -------- -------- Net cash flows from investing activities (4,291) (1,411) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings under credit facility 5,500 -- Cost of debt financing (207) (411) Payments on long-term debt (50) (145) -------- -------- Net cash flows from financing activities 5,243 (556) Effect of currency exchange rate changes on cash of foreign subsidiaries 47 22 -------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS (2,716) (2,625) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,099 13,732 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,383 $(11,107) ======== ======== SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid $ 6,288 $ 6,436 Income taxes paid $ 476 $ 262
See Notes to Consolidated Financial Statements. 5 6 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 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 six months ended June 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 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 the Company's common stock, $.01 par value (the "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 six months ended June 30, 1998 and 1997 were $5,712,000 and $2,729,000, respectively. 6 7 5. INVENTORIES - Inventories consisted of the following:
JUNE 30, DECEMBER 31, 1998 1997 (UNAUDITED) Raw materials $ 6,619 $ 5,159 Work-in-process 1,826 2,038 Finished goods 14,379 13,732 ------- ------- $22,824 $20,929 ======= =======
3. 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 $1,511,000 of recognized severance and termination benefits for approximately 400 employees and $1,769,000 of facility closure and consolidation costs. In the fourth quarter of 1997, the Company recorded a restructuring charge of $2,261,000 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 $1,229,000 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 $1,032,000 of such additional costs would be incurred in the future and accordingly recorded an additional charge in 1997. At June 30, 1998, $1,083,000 of restructuring charges remained in accrued liabilities. The balance was comprised of $816,000 for severance, termination benefits and contract buyout and $267,000 of facility closure and consolidation costs to be completed in 1998. A summary of the restructuring activity is presented below: Balance at December 31, 1997 $ 2,841 Consolidation of U.S. Manufacturing Operations: - Severance and termination costs (1,065) - Facility closure and consolidation costs (693) ------- Balance at June 30, 1998 $ 1,083 =======
7 8 3. 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 June 30, 1998 and December 31, 1997, $20.2 and $27.7 million, respectively, was available for borrowing under the Credit Facility. At June 30, 1998 the Company had borrowed $5.5 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 June 30, 1998. Long-term debt consisted of the following:
JUNE 30, DECEMBER 31, 1998 1997 (UNAUDITED) Senior Subordinated Notes $100,000 $100,000 Borrowings under Credit Facility 5,500 -- Notes payable to others 703 754 -------- -------- 106,203 100,754 Less current portion 120 89 -------- -------- $106,083 $100,665 ======== ========
8. DELISTING FROM NASDAQ SMALLCAP MARKET - Effective July 28, 1998, the Company's Common Stock was delisted from the Nasdaq SmallCap Market due to the Company's failure to satisfy the continued 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 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 June 30, 1998 and 1997 Net Sales - Net sales were $29.7 million for the three months ending June 30, 1998, a decrease of $1.2 million or 3.8% from $30.9 million for the three months ended June 30, 1997. The sales decrease is primarily attributable to lower sales volumes in the Canadian market as well as in United States markets. Domestically, lower sales were experienced primarily in bingo paper, ink dabbers and bingo hall equipment. These decreases were substantially offset by sales generated from the Power Bingo King(TM) hand-held electronic bingo systems. In Canada, lower sales were experienced primarily in bingo paper and pulltab tickets. The pulltab ticket market was 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 $0.4 million in the second quarter of 1998 compared to 1997. Cost of Goods Sold - Cost of goods sold as a percentage of sales was 68.7% for the three months ended June 30, 1998 compared to 65.2% for the three months ended June 30, 1997. Domestically, the Company experienced higher cost of goods sold primarily attributable to manufacturing inefficiencies and higher freight costs relating to the consolidation of manufacturing operations at the Texas 9 10 border facilities. These increases were partially offset by lower pulltab production costs resulting from the consolidation of its manufacturing operations completed in the second quarter of 1997 (the "Consolidation") and the impact of the acquisition of substantially all of the assets of Power Bingo Corp. ("Power Bingo") in July 1997. In Canada, the Company experienced an increase in cost of goods sold as a percentage of sales in the second quarter of 1998 compared to the second quarter of 1997 due primarily to higher manufacturing labor costs and an increase in the demand for higher cost products. U.S. pulltab production costs are expected to continue to decline throughout 1998 compared to 1997 as the Company more fully realizes the benefits of the Consolidation. However, bingo paper production inefficiencies are expected to unfavorably impact the third and possibly the fourth quarters of 1998 as a result of the continuing consolidation and start up of this operation at the Texas border facilities. Selling, General and Administrative Expenses - Selling, general and administrative expenses were $8.9 million for the three months ended June 30, 1998 compared to $9.3 million for the three months ended June 30, 1997, a decrease of $0.4 million or 4.0%. Selling, general and administrative expense, as a percentage of sales, was 30.1% for the three months ended June 30, 1998 compared to 30.2% for the three months ended June 30, 1997. This reflects the impact of previously announced cost reduction programs. Income Tax Provision (Benefit) - The income tax benefit was $55,000 for the three months ended June 30, 1998 compared to $543,000 for the three months ended June 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 Six Months Ended June 30, 1998 and 1997 Net Sales - Net sales were $61.3 million for the six months ended June 30, 1998, a decrease of $1.5 million or 2.3% from the $62.8 million for the six months ended June 30, 1997. The sales decrease is attributable to lower sales volumes in the United States. Domestically, the Company experienced lower sales primarily in bingo paper, pulltab tickets and to a lesser extent in ink dabbers and bingo hall equipment. These decreases were offset in part by 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 in bingo paper that was 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 $1.0 million due to the weakening Canadian dollar. The Company expects that consumable sales during the remainder of 1998 will be flat or trend downward due in part to the growth of electronics' competitive pressures. However, management believes that opportunities exist in certain jurisdictions where bingo paper is used in conjunction with electronic bingo systems, as well as in select overseas markets. Concurrently, the Company expects sales from its hand-held electronic bingo systems will continue to increase, which the Company expects will partially offset the decline in consumable products. Beginning in the second half of 1998, the Company may also benefit from new products, such as a new line of ink dabbers and its Gold Crown video enhanced pulltab ticket dispenser. The Company is licensed to manufacture and sell the dispenser in the state of Washington, a major market for pulltab ticket sales. The 10 11 Company expects to realize benefits thereafter from the deployment of several new electronics products in the spring of 1999. Cost of Goods Sold - Cost of goods sold, as a percentage of sales, was 67.4% for the six months ended June 30, 1998 compared to 68.0% for the six months ended June 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 65.6 % for the six months ended June 30, 1997. The Company experienced a slight increase in cost of goods sold in the United States which 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 Canada, the Company experienced higher product costs, as a percentage of sales, year-to-date 1998 compared to year-to-date 1997 primarily due to higher manufacturing labor costs and to the sale of higher cost products. The Company expects U.S. pulltab production costs to continue to decrease throughout 1998 as the Company continues to experience the benefits of the pulltab production consolidation. Management expects bingo paper production inefficiencies will continue to be unfavorable in the third and possibly the fourth quarters of 1998 as a result of the consolidation and start up of this operation at the Texas border facilities. However, management remains confident the consolidation will provide favorable future benefits for the Company as it focuses on being the low-cost, high-quality producer of bingo consumables. Selling, General and Administrative Expenses - Selling, general and administrative expenses were $17.9 million for both the six months ended June 30, 1998 and June 30, 1997. Income Tax Provision (Benefit) - The Company recorded an income tax provision of $118,000 pertaining to income generated in Canada for the six months ended June 30, 1998 compared to an income tax benefit reported on a consolidated basis of $1,465,000 for the six months ended June 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 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 12 LIQUIDITY AND CAPITAL RESOURCES The Company's long-term debt at June 30, 1998, including the current portion thereof, totaled $106.2 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 six months ended June 30, 1998 totaled $50,000 compared to $145,000 for the six months ended June 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 June 30, 1998, the Company had borrowed $5.5 million while at December 31,1997 the Company had not yet drawn any amounts under the Credit Facility. At June 30, 1998 and December 31, 1997, $20.2 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 $3.3 million during the first half of 1998 compared with $2.4 million during the first half of 1997. In 1997, a substantial portion of the Company's capital expenditures were allocated to the upgrading and development of management information systems and communication systems. During 1998, the Company's capital expenditure program will focus on i) the upgrading and development of management information systems, and ii) the purchase of equipment designed 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 $1.3 million in the first half of 1998 compared to no capital expenditures in the first half 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. 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. The Company expects to meet additional capital needs with the proceeds from sales or issuance of equity securities, the Credit Facility and other borrowings. There can be no assurance, however, that the Company will be successful in raising sufficient additional capital on terms acceptable to the Company, if at all. 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 13 YEAR 2000 ISSUE Like many other companies, the Company is aware of the problems associated with "The Year 2000 Issue." This issue centers on certain computer systems being unable to recognize the year 2000 as a valid date or that they may interpret a date in the format of "00" as the year 1900 rather than the year 2000. This system issue creates risk for the Company from unforeseen problems in its own computer systems and from third parties with which the Company deals. Such failures of the Company and/or third parties' computer systems could potentially have a material impact on the Company's ability to conduct its business. Based on interviews with and publications from those vendors supplying the Company's current business information systems, management believes those systems to be date compliant such that they will not pose a significant risk to the Company's future business operations. Future version upgrades to these systems and/or new acquisitions will be subject to Year 2000 date compliance as a selection, acceptance and installation criteria. During 1998, the Company will assess any impact the Year 2000 issue may have on other systems that support the Company's operation. These can include, but are not limited to; supplier systems, shipper systems, environmental control systems, manufacturing equipment, building security systems, etc. The Company will evaluate appropriate courses of corrective action if any are needed outside of routine maintenance or currently planned projects. Management has not yet fully assessed the Year 2000 compliance expense and related potential effect on the Company's earnings. However, the Company does not currently expect any expenditure required will have a material effect on its financial position or results of operations. 13 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: There were no reports on Form 8-K filed during the period covered by this report. 14 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: August 14, 1998 /s/ Timothy R. Stuart -------------------------------------- Timothy R. Stuart President and Chief Operating Officer Date: August 14, 1998 /s/ Paul C. Tunink -------------------------------------- Paul C. Tunink Vice President and Chief Financial Officer 15 16 EXHIBIT INDEX The following Exhibits are filed herewith.
Exhibit No. Description - ----------- ----------- 11 Statements Regarding Computation of Per Share Earnings 27 Financial Data Schedule
16 EX-11 2 STATEMENT RE: 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 Six Months Ended June 30, June 30, --------------------- --------------------- 1998 1997 1998 1997 ------- ------- ------- ------- Shares of common stock outstanding at beginning of period (1) 6,934 6,828 6,920 6,828 Weighted-average shares issued during the period 1 -- 12 -- ------- ------- ------- ------- Actual weighted average share outstanding for the period 6,935 6828 6,932 6,828 Dilutive stock options and warrants using average market price -- -- -- -- ------- ------- ------- ------- Dilutive shares outstanding 6,935 6,828 6,932 6,828 ======= ======= ======= ======= Net loss $(2,724) $(1,115) $(4,328) $(2,537) ======= ======= ======= ======= Loss per share - basic and dilutive $ (0.39) $ (0.16) $ (0.62) $ (0.37) ======= ======= ======= =======
(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 STATEMENETS OF OPERATIONS AND CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT FORM 10-Q. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 4,383 0 30,111 3,504 22,824 58,434 48,124 21,004 138,891 21,292 106,083 0 0 70 10,614 138,891 61,312 61,312 41,327 41,327 17,497 400 6,298 (4,210) 118 (4,328) 0 0 0 (4,328) (0.62) (0.62)
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