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
March 31, 1996 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 May 1, 1996 there were 6,717,062 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 Months Ended March 31, 1996 and 1995 .............. 3
Consolidated Balance Sheets as of March 31, 1996 and
December 31, 1995 ....................................... 4-5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995.............. 6
Notes to Consolidated Financial Statements................ 7-10
Item 2:
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 11-13
PART II. OTHER INFORMATION................................. 14
Signatures................................................ 15
Exhibit Index............................................. 16
3
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Dollars In Thousands, Except Per Share Amounts)
(UNAUDITED)
Three Months Ended
March 31,
------------------
1996 1995
-------- --------
NET SALES $26,823 $27,464
COST OF GOODS SOLD 18,410 19,222
------- -------
GROSS MARGIN 8,413 8,242
OTHER EXPENSES AND INCOME:
Selling, general and administrative expenses 5,388 6,298
Amortization of goodwill 208 203
Interest expense, net 1,181 1,032
------ -------
Other expenses and income, net 6,777 7,533
------ -------
INCOME BEFORE INCOME TAXES 1,636 709
INCOME TAX PROVISION 718 471
------ -------
NET INCOME $ 918 $ 238
====== =======
EARNINGS PER SHARE $ .13 $ .04
====== =======
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 6,815 6,677
====== =======
Note: No dividends were paid or declared during the three months ended March
31, 1996 and 1995.
See accompanying Notes to Consolidated Financial Statements.
3
4
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
(Dollars In Thousands)
ASSETS March 31, December 31,
- ------ 1996 1995
-------- --------
(UNAUDITED)
CURRENT ASSETS:
Cash and Cash Equivalents $ 1,992 $ 943
Receivables:
Trade receivables, less allowance
for doubtful accounts of $1,882 and $2,086,
respectively:
Related Parties 1,071 1,014
Other 19,474 17,202
Current portion of notes receivable,
less allowance for doubtful accounts
of $99 and $199, respectively 1,386 1,153
Inventories (Note 4) 21,664 21,982
Refundable income taxes 261 - -
Deferred income taxes 1,803 1,746
Prepaid expenses and other 860 547
-------- -------
Total Current Assets 48,511 44,587
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 4,972 4,950
Equipment 29,338 29,262
-------- -------
Total 34,310 34,212
Less accumulated depreciation (13,818) (13,095)
-------- -------
Property, Plant And Equipment, Net 20,492 21,117
OTHER ASSETS:
Notes receivable, less allowance for doubtful
accounts of $124 and $124, respectively 1,127 1,261
Goodwill, less accumulated amortization
of $1,380 and $1,209, respectively 29,114 29,194
Investment in joint venture 232 259
Deferred financing costs, less accumulated
amortization of $481 and $375, respectively 1,558 1,660
Other investment and assets 924 916
-------- --------
Total Other Assets 32,955 33,290
-------- --------
TOTAL ASSETS $101,958 $ 98,994
======== ========
See accompanying Notes to Consolidated Financial Statements.
4
5
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
(Dollars In Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, December 31,
- ------------------------------------ 1996 1995
-------- --------
(UNAUDITED)
CURRENT LIABILITIES:
Current portion of long-term debt (Note 5) $ 9,538 $ 7,897
Bazaar Purchase Price Adjustment 710 710
Trade Payables 13,499 12,512
Accrued payroll and benefits 1,800 1,967
Other accrued liabilities 1,216 900
Income taxes payable 624 543
Deferred taxes - 40
-------- --------
Total Current Liabilities 27,387 24,569
LONG-TERM DEBT (Note 5)
Related party 5,000 5,000
Other 33,641 34,586
-------- --------
Total Long-Term Debt 38,641 39,586
DEFERRED INCOME TAXES 2,730 2,594
DEFERRED INCOME 152 205
STOCKHOLDERS' EQUITY:
Common stock - $0.01 par value; 20,000,000
shares authorized; 6,733,309 and 6,753,309
shares outstanding, respectively 68 68
Additional paid-in capital 26,485 26,384
Retained earnings 6,443 5,525
Treasury stock (56,260 shares at cost) (189) (189)
Cumulative translation adjustment,
net of deferred income taxes 241 252
-------- -------
Total Stockholders' Equity 33,048 32,040
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $101,958 $98,994
======== =======
See accompanying Notes to Consolidated Financial Statements.
5
6
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Dollars In Thousands)
(UNAUDITED)
Three Months Ended
March 31,
----------------------
1996 1995
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 918 $ 238
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Payment on termination of Consulting Agreement - (1,000)
Depreciation and amortization 862 1,111
Provision for doubtful accounts (311) 151
Equity in (earnings) losses of joint ventures 84 (15)
Deferred income taxes (19) (390)
Other noncash expenses - net 62 733
Change in operating working capital items:
Trade receivables (2,300) (2,536)
Inventories 402 (791)
Trade payables 983 966
Other - net (343) 689
------- --------
Net cash provided by (used in) operating activities 338 (844)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (77) (1,577)
Payments received on notes receivable 184 286
Costs of acquisition of LSA - (274)
Investment in distributor - (117)
Acquisition of Reliable - (296)
Other (64) (21)
------- -------
Net cash used in investing activities 43 (1,999)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under Revolving Facility 2,039 4,253
Payments on Term Facility (757) (743)
Payments on other long-term debt (809) (697)
Costs on issuance of stock - (17)
Proceeds from issuance of long term debt 95 -
Proceeds from exercise of stock options 100 -
------- --------
Net cash provided by financing activities 668 2,796
Effect of currency of exchange rate changes on cash
of foreign subsidiaries - 15
------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,049 (32)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 943 2,116
--------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,992 $ 2,084
======= ========
Interest paid $ 1,091 $ 1,150
Income tax paid $ 864 $ 459
See accompanying Notes to Consolidated Financial Statements.
6
7
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of Stuart
Entertainment, Inc. and 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 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 months ended March 31, 1996
and 1995 are not necessarily indicative of the results that may be
expected for the full year ending December 31, 1996. These financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended December 31,
1995, filed with the Securities and Exchange Commission on the
Company's Annual Report on Form 10- K.
Certain reclassifications have been made to the 1995 financial
statements to conform to those classifications used in 1996.
2. PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the Company, 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.
3. EARNINGS PER SHARE:
The number of shares used in earnings per share calculations for the
three months ended March 31, 1996 and 1995 are based on the weighted
average number of shares of common stock outstanding and, if dilutive,
common stock equivalents (stock options and warrants) of the Company
using the treasury stock method.
4. INVENTORIES:
Inventories consisted of the following:
7
8
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
March 31, December 31,
(Dollars in thousands) 1996 1995
---------------------- --------- ----------
Raw Materials $ 3,466 $ 3,517
Work-In-Process 4,983 5,056
Finished Goods 13,215 13,409
------- --------
Total $21,664 $ 21,982
======= ========
5. LONG-TERM DEBT
Long-term debt consisted of the following:
March 31, December 31,
(Dollars in thousands) 1996 1995
---------------------- ------------ ------------
Borrowings under Credit Agreement:
Revolving Facility $23,008 $ 20,921
Term Facility 11,406 12,135
Subordinated note payable
to Mr. Stuart 5,000 5,000
Other term loans and
mortgages payable to banks 2,094 2,064
Obligations under capital leases 4,215 4,669
Notes payable to others 2,456 2,694
-------- --------
Total 48,179 47,483
Less current portion 9,538 7,897
-------- --------
Total long-term debt $ 38,641 $ 39,586
======== ========
BORROWINGS UNDER CREDIT AGREEMENT:
The Company's bank credit facility is for an aggregate principal amount of up
to $38,000,000, with a senior secured revolving line of credit of $23,000,000
(the "Revolving Facility") and a senior secured term loan facility of
$15,000,000 (the "Term Facility"). The Revolving Facility and Term Facility
are separated into U.S. and Canadian facilities, respectively. The maximum
available under the Revolving Facility was increased by $3,000,000 during 1995
to a total of $23,000,000 at December 31, 1995. Any amount outstanding under
this $3,000,000 additional amount shall be paid in full at December 31, 1996.
The Credit Agreement expires and all other remaining amounts outstanding are
due on December 12, 1999.
At March 31, 1996 and December 31, 1995, loans outstanding on the U.S.
Revolving Facility totaled $11,900,000 and $11,540,000 respectively, and
8
9
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
loans outstanding on the Canadian Revolving Facility totaled C$15,100,000
($11,109,000) and C$12,800,000 ($9,381,000), respectively. Weighted average
interest rates on the U.S. Revolving Facility and Canadian Revolving Facility
at March 31, 1996 and December 31, 1995 were 8.13% and 8.42% respectively. At
March 31, 1996 and December 31, 1995, loans outstanding on the U.S. Term
facility totaled $3,750,000 and $4,000,000, respectively, and loans outstanding
on the Canadian Term Facility totaled C$10,406,000 ($7,656,000) and
C$11,100,000($8,135,000) respectively. Weighted average interest rates on the
U.S. Term Facility and the Canadian Term Facility at March 31, 1996 and
December 31, 1995 were 8.12% and 8.44%, respectively.
The Credit Agreement contains various covenants with which the Company must
comply such as minimum net worth, fixed coverage ratio, leverage ratio and
restrictions on additional borrowings, cash dividends and capital expenditures.
In addition, the Company must complete a Borrowing Base Certificate on a
monthly basis beginning May 31, 1996. Amounts outstanding under revolving loans
in excess of the borrowing base must be repaid in specific time frames to be
determined.
OBLIGATIONS UNDER CAPITAL LEASES
In 1995, the Company completed a lease line of credit with its primary bank.
The facility provides lease financing on capitalized equipment purchased
through December 31, 1996. The maximum available under this facility is
$5,000,000. At March 31, 1996 $3,813,000 remained available under this
facility.
6. STUART LETTER OF INTENT TO ACQUIRE TRADE PRODUCTS, INCORPORATED
On April 18, 1996, the Company signed a letter of intent to acquire Trade
Products, Incorporated ("Trade"). The Company will purchase substantially all
the assets and assume certain liabilities of Trade, a privately held company
based in Seattle, the nation's largest maker and marketer of charitable gaming
tickets, for approximately $38 million in cash. The acquisition is expected to
be financed through either bank financing or the placement of senior or
subordinated debt or a combination, thereof. The transaction is subject to a
number of conditions and a definitive agreement is anticipated to be completed
no later than June 30, 1996.
7. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 123., Accounting for Stock-Based Compensation,
which is effective for the Company beginning January 1, 1996. SFAS No. 123
requires expanded disclosure of stock-based compensation arrangements with
employees and encourages (but does not require) compensation cost to be
measured based on the fair value of the equity instrument awarded. Companies
are permitted, however, to continue to apply Accounting Principles Board (APB)
Opinion No. 25, which recognizes
9
10
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
compensation cost based on the intrinsic value of the equity instrument
awarded. The Company will continue to apply APB No. 25 to its stock-based
compensation awards to employees and will disclose the required pro forma
effect on net income and earnings per share in the Annual Report on Form 10-K.
8. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCIAL INFORMATION
In connection with the acquisition of the Net Assets and the Presses from The
Reliable Corporation of America ("Reliable"), the Company i)assumed Reliable's
line of credit and term loan credit facility with a Michigan bank, which totaled
$1,237,000, ii)assumed another note payable of $250,000, iii)issued a note
payable to the shareholders' of Reliable for $780,000 and iv)issued 55,652
unregistered shares of the Company's common stock, which was valued at $320,000
($5.75 per share).
10
11
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1996 And March 31, 1995
Net Sales - Net sales in the first quarter of 1996 decreased $641,000 (2.3%) to
$26,823,000 from $27,464,000 in the first quarter of 1995. The decrease in
sales in the first quarter of 1996 was primarily attributable to shut down of
the Company's operations in England which accounted for approximately $338,000
of the total decrease. Excluding the effect of sales from Stuart Entertainment
England, comparable sales for the first quarter decreased $303,000, or 1.1%.
Sales of ink products decreased $609,000 (20.2%) due in part to the timing of
promotional activities. Sales of Video King increased $537,000 (15.9%) due to
a significant sale in the first quarter of 1996. Sales of bingo electrical
equipment and general merchandise decreased by $466,000 (16.8%) compared to the
first quarter 1995. Management currently expects sales of bingo electrical
equipment will trend down in 1996 due to increased competition and a more
mature market.
Bingo paper units decreased 9.1% in the three-month period ended March 31, 1996
as compared to the three-month period ended March 31, 1995. Break-open ticket
units increased 2.8% and ink products experienced unit decreases of 18.5% in
the three month period ended March 31, 1996 as compared to the same period in
1995.
The overall slight decline in the core business was primarily attributable to
the severe winter weather which adversely affected all retail sales. Overall
sale price levels increased for bingo paper while sale price levels for ink and
break-open ticket products decreased during the three-month period ended March
31, 1996 compared to the same period in 1995. Bingo paper sale price increased
approximately 10.7%. This increase largely reflected raw material price
increases, which the Company was not able to offset through other cost
reductions. Break-open ticket prices decreased 0.6% during the three month
period ending March 31, 1996 and ink product prices increased 2.0% due
primarily to a shift in the mix of ink products sold to higher priced products.
Cost of Goods Sold - Cost of goods sold, as a percentage of sales, decreased
from 70.0% for the three months ended March 31, 1995 to 68.6% for the three
months ended March 31, 1996. The decrease in the cost of goods sold percentage
is due to i)the application of purchase accounting to the finished goods of
Bingo Press and Specialty Limited ("Bazaar") which resulted in a one-time
charge of $489,000 in the first quarter of 1995 and ii)improvements in
manufacturing efficiencies. These improvements were partially offset by
increases in raw material, newsprint paper and general labor rates.
During 1995, the Company experienced significant increases in the price of
paper products purchased for the manufacturing of bingo paper and for
11
12
packaging. The Company initiated sales price increases on bingo paper during
this period however, because of competitive factors, the Company was not able
to pass along the full price increases to its customers. Management currently
expects the price of paper products to stabilize during 1996.
Selling, General and Administrative Expenses - Selling, general and
administrative ("SG&A") expenses decreased $910,000 from $6,298,000 for the
three months ended March 31, 1995 to $5,388,000 during the first three months
of 1996. SG&A expenses, as a percent of sales, decreased to 20.1% in the first
three months of 1996 from 22.9% during the same period of 1995. The decrease
in SG&A expenses was due primarily to three factors: i)the discontinued
operation of Stuart Entertainment England during 1995; ii)the consolidation
synergies related to the acquisition of Bazaar and Reliable; and iii)lower bad
debt expense due to an improved composition of accounts receivable aging.
Interest Expense, net - Interest expense (net of interest income) for the three
month period March 31, 1996 totaled $1,181,000 compared with $1,032,000 in the
same period in 1995. The increase of $149,000 was due to higher borrowing
levels for the period ended March 31, 1996 compared to March 31, 1995, which
was partially offset by lower interest rates for the same period.
Net Income - Net Income for the three month period ended March 31, 1996 was
$918,000 ($.13 per share) compared with net income of $238,000 ($.04 per share)
for the same period in 1995.
Results for the prior period include operations of Stuart Entertainment England
which recorded a loss of $390,000. The manufacturing operations of the
subsidiary were discontinued in 1995. In addition, results for the prior year
include a one-time charge of $489,000 to cost of goods sold related to the
application of purchase accounting to the finished goods of Bazaar that were
sold in the first quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's long-term debt at March 31, 1996, including the current portion
thereof, totaled $48,179,000 compared to $47,473,000 at December 31, 1995 (see
Note 5 to the Consolidated Financial Statements). Cash payments on long-term
debt during the first three months of 1996 totaled approximately $1,566,000
compared to $1,440,000 for the same period in 1995. There were no material
additions to long-term debt in 1996 other than additional borrowings under the
Revolving Facility to finance normal operations as described below.
As a result of losses recorded in Stuart Entertainment England, increased
working capital requirements and higher acquisition-related closing costs than
anticipated, the Company increased the maximum available under the Revolving
Facility by $3,000,000 during 1995 to $23,000,000 at March 31,1996. Any amount
outstanding under this $3,000,000 increase must be paid by December 31, 1996.
As of March 31, 1996 the Company had drawn all
12
13
amounts available under the Credit Agreement, of which approximately $520,000
was invested short-term and available for working capital purposes.
The Credit Agreement contains various covenants, such as minimum net worth,
fixed coverage ratio, leverage ratio and restrictions on additional borrowings,
cash dividends and capital expenditures. In addition, the Company must
complete a Borrowing Base Certificate on a monthly basis beginning May 31, 1996
with amounts outstanding in revolving loans in excess of the borrowing base
repaid in time frames to be determined.
Capital expenditures during the first three months of 1996 totaled $77,000. At
March 1996, $3,813,000 remained available under the Company's lease line of
credit facility. Capital expenditures for fiscal 1996 are projected to be
$3,000,000.
Management believes that under the current operating plan, its existing capital
resources and available financing alternatives will be sufficient to meet
operating expenses and capital expenditure requirements. However, the Company
currently anticipates that it may raise additional capital or refinance
existing debt in 1996 (see Subsequent Events). Management currently has no
commitments for such financing activities and there can be no assurance that
such funds will be available to the Company on favorable terms, if at all.
CHANGE IN BALANCE SHEET ACCOUNTS
Total trade receivables increased $2,125,000 from $20,302,000 at December 31,
1995 to $22,427,000 at March 31, 1996. The increase is due to normal seasonal
fluctuations, price increases and longer collection periods. During the three
months ended March 31, 1996, trade receivables totaling $183,000 were converted
to notes receivable from non-related parties. The conversions were made to
assist customers in resolving cash flow deficiencies and to aid customers in
accomplishing their long term growth plans.
Trade payables and accrued liabilities increased a combined $1,217,000 from
$16,632,000 at December 31, 1995 to $17,849,000 at March 31, 1996. The
increase was due to a higher working capital requirements largely related to
the seasonality of trade receivables.
SUBSEQUENT EVENTS
On April 18, 1996, the Company signed a letter of intent to acquire Trade
Products, Incorporated ("Trade"). The Company will purchase substantially all
the assets and assume certain liabilities of Trade, a privately held company
based in Seattle, the nation's largest maker and marketer of charitable gaming
tickets, for approximately $38 million in cash. The acquisition is expected to
be financed through either bank financing or the placement of senior or
subordinated debt or a combination, thereof. There can be no assurance that
such financing will be available to the Company on favorable terms, if at all.
The transaction is subject to a number of conditions and a definitive agreement
is anticipated to be completed no later than June 30, 1996.
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: May 14, 1996 /s/ Timothy R. Stuart
--------------------------
Timothy R. Stuart
President
Date: May 14, 1996 /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 Page
- ----------- ----------- ----
11 Statement Regarding Computation
of Per Share Earnings
27 Financial Data Schedule
16