1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NO.
DECEMBER 31, 1996 0-10737
STUART ENTERTAINMENT, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-0402207
-------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3211 NEBRASKA AVENUE
COUNCIL BLUFFS, IOWA 51501
----------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (712) 323-1488
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
----------------------------
(TITLE OF CLASS)
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.
X Yes No
----- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
2
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 22, 1996 was $9,474,877.50.
The number of shares outstanding of the Registrants $.01 par value
common stock as of March 22, 1996 was 6,717,062.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on May 20, 1997 are incorporated by
reference into Part III.
3
PART I
ITEM 1. BUSINESS
GENERAL
Stuart Entertainment, Inc., a Delaware corporation, together with its
subsidiaries (collectively, the "Company"), is a leading manufacturer in North
America 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 distributes its products to nonprofit
organizations which sponsor bingo games for fundraising purposes and commercial
entities such as Indian gaming enterprises, casinos and government sponsored
entities which operate bingo games for profit. The Company sells its products
to this diverse group of end users through more than 300 distributors, its
direct sales force and Company-owned distribution outlets.
The Company is capable of fully supplying a bingo hall with all the
products and equipment necessary to operate a bingo game of any size, including
bingo paper, fixed base or hand-held electronic bingo systems, ink dabbers,
pulltab tickets, bingo ball blowers, public address systems, television
monitors, multi-media flashboards, computerized verification systems, tables,
chairs, concession equipment and party supplies.
CERTAIN RECENT DEVELOPMENTS
NOTE OFFERING
On November 13, 1996, the Company completed a private placement (the
"Offering") in reliance on Rule 144A of the Securities Act of 1933, as amended,
of $100 million aggregate principal amount of its 12 1/2% Senior Subordinated
Notes due 2004 (the "Notes"). Interest on the Notes is payable semi-annually
on each of May 15 and November 15 commencing May 15, 1997. The indenture
governing the Notes (the "Indenture") imposes certain limitations on the
Company's ability to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments and consummate certain
asset sales. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The net proceeds from the Offering were used to
pay the purchase price for the Trade Acquisition (defined below), to repay
certain existing indebtedness of the Company and for general corporate
purposes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ACQUISITION OF TRADE PRODUCTS, INC.
On November 13, 1996, the Company acquired (the "Trade Acquisition")
substantially all of the assets and assumed certain specified liabilities of
Trade Products, Inc. ("Trade Products") for a total purchase price of
approximately $37.2 million, subject to adjustment, plus warrants to purchase
300,000 shares of the Company's common stock, $.01 par value per share
1
4
(the "Common Stock"). The Company believes that Trade Products is one of the
leading and most innovative manufacturers of pulltab tickets in the United
States. Trade Products is recognized in the industry as a low-cost,
technologically advanced manufacturer of pulltab tickets with a large game
library and as a leader in customer service. Trade Products also develops and
markets lottery products, promotional marketing games and services, and is an
emerging manufacturer in the bingo paper industry. As a result of the Trade
Acquisition, the Company believes that, in addition to being a leading
manufacturer of a full line of bingo and bingo-related products, it is now a
leading manufacturer of pulltab tickets in North America.
Concurrently with the consummation of the Trade Acquisition, the Company
entered into a consulting agreement with Harry Poll, Chairman and Chief
Executive Officer of Trade Products, and an employment agreement with Ronald G.
Rudy, President of Trade Products. Messrs. Poll and Rudy have also been
appointed to the Board of Directors of the Company.
NEW CREDIT AGREEMENT
On November 13, 1996, the Company amended and restated its credit
agreement (the "New Credit Agreement"). The New Credit Agreement consists of a
revolving credit facility in the aggregate principal amount of $30 million,
bearing interest with reference to the base rate of the LIBOR rate, at the
Company's option, plus the applicable interest margin, as defined in the New
Credit Agreement. The New Credit Agreement imposes certain covenants and other
requirements on the Company that among other things, restricts (i) the
incurrence and existence of indebtedness or contingent obligations; (ii)
consolidations, mergers and sales of assets; (iii) the incurrence and existence
of liens; (iv) capital expenditures; (vii) the payment of dividends and
repurchase of common stock; and (viii) acquisitions by the Company. The
Company is also required to meet certain consolidated interest coverage ratios,
maximum consolidated leverage ratios and minimum consolidated fixed charge
coverage ratios. The Company may draw amounts under the New Credit Agreement,
subject to availability pursuant to a borrowing base requirement, in order to
meet its working capital requirements, including issuing letters of credit.
The loans will be secured by a first priority security interest in all of the
Company's assets excluding real estate and certain other specific assets of the
Company. In March 1997, the Company entered into a First Amendment to the New
Credit Agreement. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SIGNIFICANT SUBSIDIARIES
VIDEO KING GAMING SYSTEMS, INC.
Video King Gaming Systems, Inc., a wholly owned subsidiary of the
Company ("Video King"), was formed in 1992 to develop a line of electronic
gaming equipment, primarily for the Company's bingo markets. Video King began
manufacturing selected products during the first quarter of 1993 and shipped
its first product in the second quarter of 1993. While Video King has focused
its sales efforts within the Company's established bingo markets, it also
intends to address the domestic and international for-profit gaming markets.
2
5
STUART ENTERTAINMENT MEXICO
Stuart Entertainment, S.A. de C.V., a Mexican corporation and a wholly
owned subsidiary of the Company ("Stuart Entertainment Mexico") was formed in
1991 by the Company and Bazaar (defined below) for the purpose of printing and
finishing bingo paper primarily for their respective needs. A number of bingo
presses and other manufacturing equipment have been placed in service in
Mexico. During 1996, 1995 and 1994 all of the bingo paper manufactured by
Stuart Entertainment Mexico was sold to the Company or Bazaar.
BINGO PRESS & SPECIALTY LIMITED
Bingo Press & Speciality Limited, a wholly owned subsidiary of the
Company ("Bazaar") operates under the tradename Bazaar & Novelty and was
acquired by the Company in December 1994 (the "Bazaar Acquisition"). Bazaar
manufactures and distributes a complete line of bingo cards, pulltab tickets,
ink markers, supplies and accessories in Canada. Bazaar's products are sold
primarily to distributors, who resell them to fraternal, charitable, religious
and social organizations, lodges, hospitals, nursing homes, PTA groups, legions
and other similar not for profit organizations which use such products to raise
money and provide entertainment. To a lesser extent, Bazaar's products are
sold to charitable and commercial bingo halls, governmental lottery agencies
and through Bazaar owned retail stores.
PRODUCTS
OVERVIEW. The Company offers a wide array of bingo and bingo-related
products. The Company is capable of fully supplying a bingo hall with all the
products and equipment necessary to operate a bingo game of any size, including
bingo paper, fixed base or hand-held electronic bingo systems, ink dabbers,
pulltab tickets, bingo ball blowers, public address systems, television
monitors, multi-media flashboards, computerized verification systems, tables,
chairs, concession equipment and party supplies.
BINGO PAPER. The Company sells a complete line of bingo paper, which is
generally sold in booklet form and is available in a variety of sizes, styles
and colors, The Company's bingo paper line includes a number of specialty bingo
games under proprietary trademarks or licenses such as Bonanza Bingo(R), Bonus
Line(R), Double Action(TM), Wildcard Bingo(TM), Triangle Bingo(TM), three
styles of 90-number bingo games and other specialty bingo games which can be
played as variations on or concurrently with the standard 75-number bingo game.
With over 50 different bingo card varieties available, the Company provides
bingo halls with the tools to be creative in structuring their bingo sessions.
The Company also sells a line of disposable cards designed for play on tour
buses, cruise ships and other environments with limited space for play.
The Company's bingo card configurations are developed in-house by its
mathematician using sophisticated algorithmic models, which are validated
through computer simulation in which in excess of 200,000 simulated games are
played on a given pattern in order to determine the probability of a winner
occurring when a specific number of cards are in play and a specific
3
6
number of balls are called. The Company has the largest number of unique
series types in the industry. These different series types range in size from
a series of 9,000 unique cards to a series in excess of 1.3 million unique
cards. These card series are stored electronically in the Company's
verification system, which allows the sponsoring organization to verify and
display winning cards electronically. This seamless integration of paper bingo
cards and electronic verification is matched by only one competitor in the
industry.
PULLTAB TICKETS. The Company manufactures and sells pulltab tickets,
which are also referred to as Break Open tickets, Lucky Seven tickets, Instant
Bingo and Nevada tickets. These tickets are similar to instant lottery and
scratch-off tickets. The Company currently has a library of over 800 different
designs and denominations for pulltab tickets. A typical pulltab ticket
consists of two thin sheets of opaque cardboard printed with colorful designs
and laminated together. The player pulls open from one to five perforated
windows to reveal hidden combinations of symbols to determine whether the card
is a winner, and if so, the amount of the prize. Each set of tickets sold
contains a predetermined number of winning tickets. A typical pulltab ticket
has a prize structure that varies from approximately 60% to 85% of the gross
receipts being paid out as prizes to the players. The remaining percentage of
the gross receipts is used to cover the cost of the product and expenses and to
provide fundraising dollars to the sponsoring organization.
During 1996, the Company entered into a manufacturing agreement with a
specialty and promotional marketing company to produce pulltab ticket cards
that contain marketing messages, motivational quotes, religious passages,
inspirational quotes and other customized messages. These pulltab ticket cards
are sold to customers at gift and card shops, and are inserted into retail
product packaging.
INK DABBERS. The Company manufactures ink dabbers, used to mark called
numbers on paper bingo sheets, and refills for such dabbers. The Company sells
a varied line of ink colors, bottle styles and sizes, including its successful
line of brilliant ink dabbers sold under the trademark Florida Gold(R). The
Company pioneered the use of decorative and innovative packaging for ink
dabbers, such as seasonal items for Christmas and Halloween and ink dabbers
customized with bingo hall names, which are targeted for commercial bingo
halls. Recently, the Company has developed and is test marketing a new
labeling process which will allow distributors and large bingo halls to custom
label ink dabbers on-site with their own imprint or to personalize the ink
dabber for a customer. The Company also sells Dabbers for Kids(TM), a coloring
kit designed for children, to large retail chains.
VIDEO KING GAMING SYSTEMS. System 12(TM) is a fixed base cashless
electronic bingo and multi-game system that integrates computer technology with
player interactive touch-screen terminals and live bingo. System 12(TM) is
based on a local area network in which terminals for bingo players are
connected to a host computer which allows players to play up to 256 cards per
game. This provides bingo players with the opportunity to play a bingo game
electronically on touch screen terminals while playing traditional paper bingo
simultaneously with other players. System 12(TM) provides the player access to
a stand alone bingo game and to other games such
4
7
as video keno, video poker, video slots and video pulltab tickets, where
regulations permit, System 12(TM) also enables hall management to control all
game functions, track player trends and generate sales reports.
Power Bingo King(TM), a hand-held electronic bingo system, allows
players to play up to 200 cards simultaneously per game. Each Power Bingo
King(TM) unit is completely portable and has the capability to show the bingo
card closest to winning at any given point in time. The system also
automatically notifies a player of a winning card. The Company markets Power
Bingo King(TM) through a marketing and manufacturing agreement with Power Bingo
Corporation.
The Company has entered into a letter of intent with Power Bingo
Corporation to purchase the assets of Power Bingo Corporation. The transaction
is subject to numerous conditions, including the execution of a definitive
agreement on terms acceptable to the parties.
BINGO HALL EQUIPMENT. The Company manufactures and sells an extensive
line of electronic bingo hall equipment traditionally used in bingo
establishments. The electronic bingo hall equipment line includes: (a)
electronic blowers which select numbers for bingo games by ejecting numbered
balls one at a time; (b) electronic flash boards, measuring up to five feet
high and 22 feet wide, which display to the bingo players the numbers selected
from the electronic blowers; (c) electronic systems that allow instantaneous
verification of winning bingo cards; (d) electronic pulltab ticket dispensing
machines; and (e) software developed to support North American, South American
and European styles of bingo.
GENERAL MERCHANDISE. The Company distributes other supplies and
equipment used by bingo hall operators, such as tables, chairs, public address
systems and concession supplies. The Company purchases for resale bingo
accessories such as key chains, lighters, marker holders, coffee mugs and other
custom advertising products. Party supplies, flags, balloons and bar and
concession equipment for use at fundraising events and bazaars are sold
individually or through the Company's distribution outlets in Canada and
through the Company's distributor network.
SALES INFORMATION BY PRODUCT LINE
The following table shows the percentage of revenues contributed by
major product lines of the Company during the past three years.
5
8
1996 1995 1994
---- ---- ----
Bingo Paper $57,552 $58,522 $29,632
Pulltab Tickets 27,873 26,916 12,039
Ink Dabbers 10,049 12,014 6,884
Bingo Hall Equipment 6,398 5,757 6,655
General Merchandise 4,542 4,988 1,560
Video King Gaming Systems 4,222 1,685 2,388
MARKETING AND SALES
The Company sells its bingo and bingo-related products to a diverse
set of end-user groups through more than 300 independent distributors, ten
Company-owned distribution outlets in Canada, the Company's direct sales force
and mail order catalogs. The Company believes that its role as a full-service
provider of bingo and bingo-related products and services and its use of its
well-known brand names provides it with a significant marketing advantage.
The Company maintains strong relationships with its distributors, many
of whom received assistance from the Company in the development of their
business. Distributors are supported by Company-sponsored seminars designed to
assist the distributors in developing and refining sales and marketing programs
and to introduce new products. The Company believes that the seminars have
enhanced customer relations and generated incremental sales.
Relationships with distributors are important because the distributors
maintain close contact with bingo halls and are attuned to changing preferences
among bingo players. This relationship has resulted in new product ideas and
opportunities for the Company. The Company has historically been able to
capitalize on these opportunities through utilizing its existing distributor
network.
Catalogs represent another form of marketing for the Company. The
Company utilizes catalogs to support distributors, some of which are customized
with the distributor's name Catalogs are also used in direct mail campaigns to
end-users. The Company printed over 120,000 copies of its 1996 bingo and
bingo-related product catalogs, and over 100,000 copies of its 1996 general
merchandise catalogs. Additionally, customers can order product support
information through an automated ordering system
The Company also markets its products through advertising in gaming
publications and through participation in national, regional and local gaming
tradeshows. For example, the Company was a prominent exhibitor at the World
Gaming Congress and Expo in 1996, which
6
9
featured the products of over 600 companies, and attracted nearly 20,000
participants from over 80 countries.
The following table shows the percentage of total sales contributed by
the Company's wholesale and retail sales activities during the past three
years.
1996 1995 1994
---- ---- ----
Sales to distributors 70% 65% 97%
Retail sales 30% 35% 3%
The increase in retail sales in 1996 and 1995 was primarily due to the
Bazaar Acquisition.
During 1996, the Company continued to direct its marketing efforts
toward strengthening relations with its existing distributors and adding new
distributors. The Company plans to focus marketing efforts during 1997 on
further developing its distributor network, with minor emphasis placed on
attempting to generate additional retail sales, primarily through direct
mailings of catalogs and fliers. The Company has also sponsored group seminars
designed to assist distributors and other customers in developing and refining
sales and marketing programs and to introduce new products. The Company
believes the seminars have been well received by its distributor network and
have been successful in enhancing customer relations and generating incremental
sales. Company sales personnel also conduct seminars with individual
distributors designed to assist them in developing sales and marketing
programs, to educate distributors in ways of improving the success of their
customers' fund-raising efforts and to provide management assistance to certain
distributors. The Company makes available to distributors catalogs of the
Company's full product line on which distributors may imprint their names and
which they may give to their customers.
Video King markets its electronic gaming equipment through the
Company's distributor network, by submitting proposals to bid tenders by
governmental entities, principally in the United States and Canada, and by
soliciting for-profit gaming markets and by submitting proposals directly to
Native American gaming facilities. Solicitation of charitable and for-profit
gaming markets is performed primarily by the Company's existing sales staff.
Video King also markets its equipment by displaying such equipment at selected
trade shows and exhibitions.
Bazaar's bingo products are marketed principally through company-owned
locations, independent distributors and government agencies. The independent
distributors are located in the Provinces of Alberta, British Columbia,
Newfoundland, Ontario, Quebec and Saskatchewan. The government agencies
distribute bingo paper products exclusively in the Provinces of British
Columbia and Manitoba. Bazaar-owned retail stores operate in the Provinces of
Manitoba, New Brunswick, Nova Scotia, Ontario and Prince Edward Island.
7
10
FOREIGN AND EXPORT SALES
To date the Company has not had a significant volume of export sales;
however, the Company has begun to devote greater resources to the
identification and exploration of international bingo and gaming markets.
During 1996, approximately 60% of sales were to the United States, 37%
to Canada, with the balance representing sales to other foreign countries. For
further information regarding foreign and domestic operations and export sales,
see "Note 16 to Notes to Consolidated Financial Statements."
The Company had no single customer that accounted for more than 10% of
its gross revenues during 1996, 1995, and 1994.
SEASONALITY
The Company's business is somewhat seasonal as its sales are stronger
during the first half of the year than during the second half of the year.
BACKLOG
As of December 31, 1996, and 1995, the dollar amount of backlog orders
believed to be firm amounted to $6,085,000 and $3,513,000, respectively.
MANUFACTURING PROCESS
The Company utilizes technologically advanced equipment to manufacture
its products, such as its patented process for printing and collating bingo
cards. Manufacturing personnel take an active part in the research and
development process to ensure that continual improvements in cost control,
quality and technology are achieved. The Company has begun a project to
implement perpetual inventory and material resource planning programs at all
manufacturing locations via networking on a main frame computer.
As a result of the Trade Acquisition the Company expects to reduce
manufacturing costs through the consolidation of the Company's domestic
production of pulltabs at Trade Products' manufacturing facility. In addition,
the Company plans to shift a greater volume of its bingo paper production to
its Texas border facilities, thereby taking advantage of lower production
costs.
BINGO PAPER. The Company manufactures bingo cards on a number of
specialized high-speed web presses capable of printing a variety of different
game cards in configurations of 24, 30, 36 and 48 cards per sheet. The bingo
cards are produced for inventory and then sold unfinished or are cut and
packaged to meet customer specifications.
8
11
PULLTAB TICKETS. In manufacturing pulltab tickets, the Company
utilizes a number of high speed, multicolor offset presses and a variety of
other equipment, including laminators, collators, die-cutters and serial
numbering machinery.
INK DABBERS. The Company manufactures ink dabbers and refills through
automated liquid filling lines and utilizes injection molding for the
manufacture of ink dabber bottles. The Company has the ability to customize
ink dabbers by applying unique and distinct labels. A number of ink formulas
have been developed specifically for use in the bingo industry, but the ink can
also be sold to a variety of other markets.
SUPPLIERS
The components for the Company's bingo equipment, and the paper and
other materials used in printing bingo sheets and pulltab tickets, are
generally available from various suppliers at competitive prices. As a result,
the Company is generally not dependent on any single supplier. The Company
experienced significant price increases in paper products during 1995. During
the first half of 1996, the price of paper products stabilized and the Company
has recently experienced modest decreases. The equipment, accessories and
supplies which the Company distributes are standard items and are available
from other manufacturers.
RESEARCH AND DEVELOPMENT ACTIVITIES
The Company maintains a continuous product development program
intended to enhance the Company's product lines and increase the Company's
market penetration. Product development efforts in the bingo paper and pulltab
ticket product lines are directed toward new product development as well as
improvement of the graphic design of its current lines. The market for pulltab
tickets, in particular, is an ever-changing one requiring the continual
introduction of new pulltab tickets in response to changing consumer
preferences of design and color.
The Company continually updates and redesigns its bingo equipment in
an effort to maximize the utility, ease of use and reliability of these
products. A significant effort is being devoted to the diversification of
products within the electrical equipment product line in response to the trend
within the bingo and gaming industries toward the adaptation of electrical and
mechanical devices to use in those industries.
Video King has substantially completed the design of its principal
products and will maintain a reduced research and development program to
develop new products and to ensure that the technology employed in Video King's
product line is state-of-the-art and that the features offered in its gaming
products are as comprehensive as any found in the market place.
During 1996, 1995 and 1994, total research and development expenses
totaled approximately $143,000, $745,000 and $784,000, respectively, of which
$66,000, $682,000 and $727,000, respectively, represented research and
development expenses related to Video King.
9
12
GOVERNMENT REGULATION
OVERVIEW. The Company is subject to regulation by authorities in most
jurisdictions in which its bingo, bingo-related products and electronic gaming
systems are sold or used by persons or entities licensed to conduct gaming
activities. The gaming regulatory requirements vary from jurisdiction to
jurisdiction, and licensing, other approval or finding of suitability processes
with respect to the Company, its personnel and its products can be lengthy and
expensive. Many jurisdictions have comprehensive licensing, reporting and
operating requirements with respect to the sale and manufacture of bingo and
bingo-related products, including bingo paper, pulltab tickets and electronic
bingo equipment. These licensing requirements have a direct impact on the
conduct of the day-to-day operations of the Company. Generally, gaming
regulatory authorities may deny applications for licenses, other approvals or
findings of suitability for any cause they may deem reasonable. There can be
no assurance that the Company, its products or its personnel will receive or be
able to maintain any necessary gaming licenses, other approvals or findings of
suitability. The loss of a license in a particular state will prohibit the
Company from selling products in that state and may prohibit the Company from
selling its products in other states. The loss of one or more licenses held by
the Company could have an adverse effect on the Company's business.
NATIVE AMERICAN GAMING. Gaming on Native American lands, including
the terms and conditions under which gaming equipment can be sold or leased to
Native American tribes, is or may be subject to regulation under the laws of
the tribes, the laws of the host state and the Indian Gaming Regulatory Act
("IGRA"). Under IGRA, gaming activities are classified as Class I, II or III.
Under IGRA, Class II gaming includes bingo, and, if played at the same location
as bingo, pulltab tickets, and Class III gaming includes slot machines, video
lottery terminals and casino style games, Native Americans may conduct Class II
gaming under IGRA without having entered into a written compact with their host
state if the host state permits Class II gaming, but must enter into a separate
written compact with the state in which they are located in order to conduct
Class III gaming activities. Tribal-state compacts vary from state to state.
Many require that equipment suppliers meet ongoing registration and licensing
requirements of the state or the tribe, some establish equipment standards that
may limit or prohibit the placement of electronic gaming systems on Indian
lands; and some impose background check requirements on the officers, directors
and shareholders of gaming equipment suppliers. Under IGRA, tribes are
required to regulate all gaming under ordinances approved by the Chairman of
the National Indian Gaming Commission ("NIGC"). Such ordinances may impose
standards and technical requirements on gaming hardware and software, and may
impose registration, licensing and background check requirements on gaming
equipment suppliers and their officers, directors and shareholders.
REGULATION OF TRADITIONAL BINGO PRODUCTS AND PULLTAB TICKETS.
Traditional paper bingo is legal in all states in the United States except
Arkansas, Hawaii, Tennessee and Utah, and is legal in each of the Canadian
provinces, and each of the two Canadian territories. Not all of the Company's
products are eligible for sale in every locality to which the Company ships
products. The Company routinely contacts state agencies to determine the
existence and nature
10
13
of any state and local restrictions applicable to its products in order to
comply with such restrictions.
Pulltab tickets currently are legal in 38 states, Each state has
developed regulations that impact the style of play for its market. In several
states, including Alaska, Minnesota, Nebraska, North Dakota and Washington, it
is legal for bars and taverns to sell pulltab tickets on their premises. In
Minnesota and North Dakota, pulltab tickets are sold by licensed nonprofit
organizations in taverns, while in Alaska and Nebraska, taverns sell pulltab
tickets as sales agents of licensed nonprofit organizations. In Washington,
taverns sell pulltab tickets directly to their customers. In addition, Ontario
allows the sale of pulltab tickets at third-party retail locations under
charity license.
At present, the states of Alaska, Colorado, Illinois, Idaho, Iowa,
Indiana, Kentucky, Kansas, Louisiana, Maine, Michigan, Minnesota, Missouri,
Mississippi, Nebraska, New Hampshire, New Jersey, New York North Dakota,
Oklahoma, Pennsylvania, South Dakota, Texas, Vermont, West Virginia, Washington
and Wisconsin require bingo and/or charitable gaming manufacturers and/or
suppliers to be licensed. The Company is currently licensed in each of these
jurisdictions, except for Maine. The Company has not applied for a license in
Maine and does not conduct activities which it believes are subject to
licensing in that state. The Company is permitted to and does ship products to
licensed distributors in Maine. The Company also holds a Bingo Suppliers
License in the City of Los Angeles, California and licenses from several Native
American tribes which require licensing through their own tribal gaming
commissions. The provinces of Ontario, New Brunswick and Nova Scotia all
require the registration of manufacturers. The Company is registered in
Ontario and New Brunswick and permitted to do business in Nova Scotia pending
completion of a background investigation.
REGULATION OF ELECTRONIC GAMING SYSTEMS. The Company's electronic
products, including System 12(TM) and Power Bingo King(TM), are more heavily
regulated than traditional paper bingo, and federal, state, provincial, tribal
and local regulations vary significantly by jurisdiction.
IGRA defines Class II gaming to include "the game of chance commonly
known as bingo, whether or not electronic, computer or other technologic aids
are used in connection therewith," and defines Class III gaming to include
"electronic or electromechanical facsimiles of any game of chance or slot
machines of any kind." The Company has applied for but has not yet received an
advisory opinion from the NIGC that its System 12(TM) electronic bingo system
is considered a Class II game under IGRA. The Company believes that both its
System 12(TM) and Power Bingo King(TM) are Class II games and has received a
written legal opinion that System 12(TM) would be classified as a Class II
game. In the event that either System 12(TM) or Power Bingo King(TM) is
classified as a Class III device, such a designation would either (a) reduce
the potential market for the devices, because only Indian gaming halls that had
entered into a Tribal-State Compact that permits Class III electronic gaming
systems would be permitted to use the device, or (b) require the Company to
modify System 12(TM) or Power Bingo King(TM) to have it reclassified as a Class
II game. It is difficult to speculate as to what modifications may be
11
14
required in the event of such a classification. If programmed to play video
poker, video keno, video bingo, video slots or video pulltab tickets, then
System 12(TM) is subject to the full range of regulations applicable to Class
III gaming systems.
Electronic bingo is less widely permitted than paper bingo, largely
because many states laws and regulations were written before electronic bingo
was introduced. Electronic bingo is currently operated in some locations in
Arizona, California, Florida, Illinois, Indiana, Kentucky, Louisiana, Maine,
Maryland, Nevada, New Hampshire, New York, New Mexico, North Dakota, Oregon,
Pennsylvania, South Dakota, Texas, Vermont and Washington. Because most state
laws and regulations are silent with respect to electronic bingo, changes in
regulatory and enforcement personnel could impact the continued operation of
electronic bingo in these states.
Some states require the inspection, approval or modification of
electronic bingo systems before sale in those states. The Company has
submitted System 12(TM) for approval in Mississippi but has not yet submitted,
nor received, approval for System 12(TM) in any other charitable gaming
jurisdiction in the United States. The Company is licensed by the Colorado
Limited Gaming Commission to manufacture and sell slot machines in Colorado.
This license will permit the Company to market System 12(TM) in Colorado once
the system is tested and approved.
Though Canadian Federal law prohibits the playing of games of chance
on or through slot machines, computer or video devices, this law excepts halls
operated or authorized by the provincial governments. The Manitoba Lottery
Commission has installed System 12(TM) in its government-owned bingo halls.
The Company is currently marketing System 12(TM) to the other provincial
governments. Ontario is currently the only province which permits the use of
hand-held bingo systems, and such systems must be used in conjunction with
paper bingo.
GENERAL REGULATION OF STOCKHOLDERS AND OTHER SECURITYHOLDERS OF
PUBLICLY TRADED CORPORATIONS. In most jurisdictions, any beneficial owner of
the Company's Common Stock is subject on a discretionary basis to being
required to file applications with gaming regulatory authorities, be
investigated and found suitable or qualified as such. The gaming laws and
regulations of some jurisdictions provide that beneficial owners of more than
5% of the Company's Common Stock and holders of the Company's Notes may be
subject to certain reporting procedures and may be required to be investigated
and licensed, qualified or found suitable as such. The Company's Certificate
of Incorporation authorizes the Company under certain circumstances to redeem
at the lesser of the holder's original investment in the Company or the current
market price of the Common Stock held by any person whose status as a
shareholder may jeopardize the Company's gaming licenses or approvals.
FEDERAL REGULATION. The Federal Gambling Devices Act of 1962 (the
"Federal Act") makes it unlawful for a person to transport in interstate or
foreign commerce or receive from interstate or foreign commerce any gambling
device or component thereof, unless the person is first registered with the
Attorney General of the United States. The Company has registered and must
renew its registration annually. In addition, various record keeping and
equipment
12
15
identification requirements are imposed by the Federal Act. Violation of the
Federal Act is a crime and may result in seizure and forfeiture of the
equipment, as well as other penalties.
APPLICATION OF FUTURE OR ADDITIONAL REGULATORY REQUIREMENTS. In the
future, the Company intends to seek the necessary licenses, approvals and
findings of suitability for the Company, its products and its personnel in
other jurisdictions throughout the world where significant sales are
anticipated to be made. However, there can be no assurance that such licenses,
approvals or findings of suitability will be obtained and will not be revoked,
suspended or conditioned or that the Company will be able to obtain the
necessary approvals for its future products as they are developed in a timely
manner, or at all, If a license, approval or finding of suitability is required
by a regulatory authority and the Company fails to seek or does not receive the
necessary license or finding of suitability, the Company may be prohibited from
selling its products for use in the respective jurisdiction or may be required
to sell its products through other licensed entities at a reduced profit to the
Company.
COMPETITION
The markets in which the Company's products compete are highly
competitive. The principal competitive factors in the bingo paper and pulltab
ticket markets are quality, service and price. The Company's electronic bingo
systems, System 12(TM) and Power Bingo King(TM), compete with a number of other
manufacturers of electronic bingo systems, none of whom manufacture a full line
of bingo or bingo-related products. The Company believes that through its
strong distribution network, manufacturing facilities and technology it will be
able to maintain its current position as North America's leading manufacturer
of a full line of bingo and bingo-related products.
TRADEMARKS
The Company believes that the trademarks Bingo King and Bazaar &
Novelty have considerable value in the industry, based upon their extensive use
for more than 30 years. The Company's trademark, Bingo King, the name,
combination of the mark and name with a crown logo, and numerous other product
names which it uses are registered with the United States Patent and Trademark
Office.
EMPLOYEES
As of December 31, 1996, the Company had 1,840 full-time employees in
the United States, Canada, and Mexico, of which 146 employees of Stuart
Entertainment Mexico are members of a union subject to a collective bargaining
agreement. The collective bargaining agreement does not place any significant
financial or operational burdens on the Company. The Company considers its
relations with its employees to be good.
13
16
ADDITIONAL INFORMATION
Compliance with federal, state and local law in the United States and
federal, provincial and municipal laws in Canada regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment has not had, and is not expected by the Company to have, any
adverse effect upon capital expenditures, earnings or the competitive position
of the Company. The Company is not presently a party to any litigation or
administrative proceeding with respect to its compliance with such
environmental standards. In addition, the Company does not anticipate being
required to expend any material amount of funds in the near future for
environmental protection in connection with its operations.
ITEM 2. PROPERTIES
FACILITIES
The Company's corporate offices are located in Council Bluffs, Iowa.
The following table sets forth the principal properties of the Company as of
December 31, 1996.
BUSINESS OWNED OR EXPIRATION SQUARE
LOCATION SEGMENT LEASED OF LEASE FEET
-------- ------- ------ -------- ----
Council Bluffs, Iowa Bingo paper Owned N/A 155,000
Pulltab tickets
Council Bluffs, Iowa Ink dabbers Leased 09/30/1997 27,000
Council Bluffs, Iowa Bingo paper Leased 12/31/1997(1) 34,500
Pulltab tickets
St. Catharines, Ontario Bingo paper Leased 08/31/2000(2) 158,000
Pulltab tickets
Ink dabbers
St. Catharines, Ontario General merchandise Leased 08/31/2000(3) 24,057
Littleton, Colorado Video King gaming Leased 08/31/2001(4) 20,000
systems
Bingo hall equipment
Lynnwood, Washington Pulltab tickets Leased 11/13/2006(4) 165,000
Bingo paper
Ink dabbers
Reynosa, Mexico Bingo paper Leased 08/15/1998(3) 26,900
Reynosa, Mexico Bingo paper Leased 12/31/1998(3) 55,600
_______________
(1) The Company has the option to renew this lease for two additional one-year
periods.
(2) The Company has the option to renew the lease for two additional five-year
periods.
(3) The Company has the option to renew the lease for one additional five-year
period.
(4) The Company has the option to renew the lease for one additional ten-year
period.
Substantially all of the Company's property and equipment is subject
to liens to secure borrowings by the Company under its bank and other financing
agreements.
14
17
In general, the Company's properties and equipment are in good
condition and are considered to be adequate for their present use.
ITEM 3. LEGAL PROCEEDINGS
The Company has been sued for patent infringement in the United States
District Court for the District of Nevada by Fortunet, Inc. ("Fortunet") The
suit consists of two counts. The first count concerns a device known as the
Bingo Card Minder that was marketed by the Company and manufactured by Bingo
Card Minder Corp., who is co-defendant for the first count. The Company no
longer markets the Bingo Card Minder. The second count is against the Company
and alleges that the System 12TM electronic bingo system manufactured by Video
King infringes three patents owned by Fortunet. The Company does not believe
that System 12(TM) infringes any of the patents and that the three patents are
invalid. The Company has requested that the United States Patent and Trademark
Office ("PTO") re-examine the three patents. The PTO has granted the Company's
request as to two patents; the PTO agreed that a substantial new question of
patentability exists as to such patents. The PTO has not acted on the request
for the reexamination of the third patent, which was filed approximately four
months after the request for re-examination of the first two patents. The
Company believes that it will be successful in defending the suit on both
counts.
In June 1996, the Company was sued by Arrow International ("Arrow")
for a declaratory judgment that Arrow was not infringing three patents held by
the Company. The Company had previously sent Arrow a cease and desist letter.
Arrow also claimed that the Company was infringing a patent that was issued in
1984 and reissued in 1993. The Company is defending such claim and has also
counterclaimed for damages for infringement on the three patents referred to
above.
In July 1996, the Company was sued by William G. Kellen in a suit
flied in Los Angeles Superior Court. The Company had previously entered into a
marketing and manufacturing agreement with Power Bingo Corporation. In the
suit the plaintiff has alleged that he had a preexisting exclusive distribution
agreement with Power Bingo Corporation for various geographic areas including
the State of Texas. The plaintiff has alleged that Power Bingo Corporation has
breached one or more contracts with him and that the Company interfered with
his alleged contract. The Company intends to defend the suit and believes the
claims against it are without merit.
15
18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during
the fourth quarter of the period covered by this Report.
16
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on The Nasdaq Stock Market under
the symbol "STUA."
The following table shows the high and low closing sales prices for
the Common Stock during each calendar quarter within the past two years, as
reported by The Nasdaq Stock Market.
1996: HIGH LOW
- ----- ---- ---
First Quarter $8 1/4 $4 1/8
Second Quarter $7 $4 1/2
Third Quarter $6 7/8 $5 5/8
Fourth Quarter $6 1/4 $4 1/4
1995: HIGH LOW
- ----- ---- ---
First Quarter $5 1/2 $4 5/8
Second Quarter $4 7/8 $2 1/4
Third Quarter $5 1/4 $3
Fourth Quarter $8 1/4 $4
At March 25, 1997, the Common Stock was held by 1,692 stockholders of
record.
The Company has not paid any cash dividends on its Common Stock during
the past two years. The Board of Directors expects to follow a policy during
the foreseeable future of retaining earnings for use in the Company's business;
further, the payment of cash dividends is restricted by the New Credit
Agreement and the indenture for the Notes.
17
20
ITEM 6. SELECTED FINANCIAL DATA
The financial data presented below are derived from the consolidated
financial statements of the Company. The selected financial data for each of
the years in the three-year period ended December 31, 1996 are derived from the
consolidated financial statements of the Company which have been audited and
reported upon by Deloitte & Touche LLP, independent accountants. The selected
financial information set forth in the table below is not necessarily
indicative of the results of future operations of the Company and should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements,
related notes and independent auditors' report, contained herein.
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
SUMMARY OF OPERATIONS:
Net sales $110,636 $109,882 $59,158 $53,937 $52,519
Gross margin 32,873 35,160 16,171 13,770 14,542
Income (loss) before extraordinary loss and
cumulative effect of change in accounting
principle (1,298) 786 (1,608) 512 1,720
Net income (loss) (2,231) 786 (1,608) 699 1,720
EBITDA 12,049 12,117 1,088 3,127 4,693
Earnings (loss) per share before cumulative
effect of extraordinary loss and change in
accounting principle-primary (.19) .12 (.45) .15 .49
Earnings (loss) per share before cumulative
effect of extraordinary loss and change in
accounting principle-fully (.19) .11 (.45) .15 .49
dilutive
Earnings (loss) per share-primary (.32) .12 (.45) .20 .49
Earnings (loss) per share-fully dilutive (.32) .11 (.45) .20 .49
Average common and common equivalent
shares outstanding-primary 6,886 6,706 3,561 3,524 3,519
Average common and common equivalent
shares outstanding-fully dilutive 6,886 7,053 3,561 3,524 3,519
DECEMBER 31,
------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
FINANCIAL CONDITION:
Working capital $ 54,025 $20,018 $14,454 $3,742 $3,461
Current ratio 3.5 1.8 1.7 1.2 1.3
Total assets 154,595 98,994 88,977 37,301 33,764
Long-term debt 100,396 39,586 34,146 3,949 4,748
Stockholders' equity 30,358 32,040 30,153 15,140 14,168
18
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This 10-K filing contains, in addition to historical information,
forward-looking statements that include risks and uncertainties. The Company's
actual results may differ materially from those anticipated in these forward-
looking statements. Factors that might cause such a difference include those
discussed below, as well as general economic and business conditions,
regulatory changes, competition, the acceptance of new product offerings and
other factors discussed elsewhere in this 10-K. The Company undertakes no
obligation to release publicly any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of anticipated or unanticipated events.
GENERAL
The Company's business strategy is to enhance its position as North
America's leading manufacturer of a full line of bingo and bingo-related
products. The Company maintains an ongoing product development program focused
on enhancing existing product lines, creating product line extensions and
developing new products. Historically, the Company has successfully integrated
acquisitions and strategic alliances into its growth strategy, such as the
Bazaar Acquisition which broadened its Canadian customer base. In 1995, the
Company acquired The Reliable Corporation of America ("Reliable") (the
"Reliable Acquisition") in order to expand its customer base and to acquire the
rights to Reliable's patented manufacturing technology. In 1996, the Company
completed the Trade Acquisition in order to expand the Company's pulltab ticket
product line and increase its pulltab market share in the United States. The
results of operations of Bazaar, Reliable and Trade Products have been
consolidated since the date of the Bazaar Acquisition, the Reliable Acquisition
and the Trade Acquisition, respectively.
Results for the year ended December 31, 1996 include two one-time
charges: (a) a restructuring charge of $3.3 million related to the
consolidation of manufacturing operations to occur in 1997 ( see "Note 14 to
Notes to Consolidated Financial Statements") and (b) a charge of $1.1 million
to cost of goods sold related to the application of purchase accounting to the
finished goods of Trade Products that were sold during the period November 13,
1996 through December 31, 1996. In addition, the Company recorded an
extraordinary loss in the fourth quarter of 1996 of $933,000, net of income
taxes, to write off unamortized debt issuance costs related to the repayment of
debt under its Prior Credit Agreement (as defined herein) (see "Note 6 to Notes
to Consolidated Financial Statements").
Results for the year ended December 31, 1995 include two one-time
charges: (a) a 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 and (b) a one-time pre-tax charge of $819,000
related to the discontinuance of operations of Stuart Entertainment Limited
("Stuart Entertainment England"), a joint venture between the Company and
Bazaar to manufacture products in the United Kingdom. In 1995, Stuart
Entertainment England recorded
19
22
losses of $2.1 million which included the one-time pre-tax charge of $819,000
(see "Note 9 to Notes to Consolidated Financial Statements").
Results for the year ended December 31, 1994 include two one-time
charges: (a) a charge of $381,000 to cost of goods sold related to the
application of purchase accounting to the finished goods of Bazaar that were
sold during the period of December 14, 1994 through December 31, 1994 and (b) a
$2.0 million charge relating to the termination of a consulting agreement (see
"Note 11 to Notes to Consolidated Financial Statements").
The Company will incur a one-time charge in the first quarter of 1997
of $1.5 million to complete the transaction to cost of goods sold related to
the application of purchase accounting to the finished goods of Trade Products
that are expected to be sold during that period.
The following data sets forth operating data from the Company's
Consolidated Statements of Operations stated as a percentage of net sales.
HISTORICAL
YEARS ENDED
DECEMBER 31,
---------------------------
1996 1995 1994
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 70.3 68.0 72.7
----- ----- -----
Gross profit 29.7 32.0 27.3
Selling, general and administrative expenses 22.9 24.2 24.2
Restructuring charge 3.0 -- --
United Kingdom charge -- 0.7 --
Termination of consulting agreement -- -- 3.4
Amortization of goodwill 0.9 0.8 0.1
Equity in (earnings) losses of joint ventures -- (0.1) 1.7
----- ----- -----
Income (loss) from operations 2.9% 6.4% 2.1%
===== ===== =====
RESULTS OF OPERATIONS
Years Ended December 31, 1996 and 1995
Net Sales. Net sales were $110.6 million for the year ended December
31, 1996, an increase of $754,000 or 0.7% from $109.9 million for the year
ended December 31, 1995. The increase was attributable to a combination of the
following: (i) an increase in sales of $3.3 million related to the acquisition
of Trade Products and (ii) an increase in electronics and bingo hall equipment
sales of $3.1 million, primarily due to a $2.4 million in sales of System
12(TM) electronic bingo and gaming units, which increases were partially offset
by (a) a decrease in sales of $1.3 million related to the shutdown of Stuart
Entertainment England; and (b) a decrease of sales of consumable products of
$3.8 million, primarily in the United States. The Company experienced
competitive pricing pressures during 1996 which are expected to continue in
1997.
20
23
Cost of Goods Sold. Cost of goods sold, as a percentage of sales, was
70.3% for the year ended December 31, 1996, an increase of 2.3 percentage points
from 68.0% for the year ended December 31, 1995. Excluding the application of
purchase accounting adjustments recorded in the fourth quarter of 1996 to the
finished goods inventory of Trade Products and in the first quarter of 1995 to
the finished goods inventory of Bazaar, cost of sales, as a percentage of sales,
for the years ended December 31, 1996 and 1995 was 69.3% and 67.6%,
respectively. The increase is primarily attributable to production
inefficiencies in the pulltab ticket and bingo hall equipment product lines and
a less favorable sales mix in consumable products. Costs are expected to decline
as certain manufacturing operations are consolidated and the Company begins
shifting a greater volume of its bingo paper products to its Texas border
facilities, thereby taking advantage of lower production costs.
Selling, General and Administrative Expenses. Selling, general and
administrative (SG&A) expenses were $25.3 million for the year ended December
31, 1996, a decrease of approximately $1.3 million or 4.8% from $26.6 million
for the year ended December 31, 1995, which includes a $1.1 million increase in
SG&A from the inclusion of the operations of Trade Products.
Excluding the effect of the inclusion of the operations of Trade
Products, the decrease in SG&A expenses of $2.4 million is primarily due to
four factors: (i) the discontinued operation of Stuart Entertainment England
in 1995; (ii) consolidated synergies related to the acquisitions of Bazaar and
Reliable; (iii) improved bad debt experience; and (iv) the continued impact of
a cost reduction program implemented in 1995. The Company currently
anticipates that SG&A expenses, on a consolidated basis, will decline, as a
percentage of sales, in the future through the elimination of duplicate
corporate overhead expenses, functions and facilities.
Interest Expense, Net. Interest expense, net of interest income, was
$5.3 million for the year ended December 31, 1996, an increase of $889,000 or
20.0% from $4.4 million for the year ended December 31, 1995. The increase is
primarily due to the Offering completed in November, 1996.
Restructuring Charge. The restructuring charge of $3.3 million in the
fourth quarter of 1996 was primarily due to the planned consolidation of
manufacturing operations during 1997. After the consolidation changes are
complete, the Company's U.S. bingo paper products operations will be
concentrated at its Texas border facilities and its U.S. pull tab ticket
business at its Seattle area facility. Manufacturing operations in St.
Catherines, Ontario will continue to serve the majority of the Canadian market.
Years Ended December 31, 1995 and 1994
Net Sales. Net sales were $109.9 million for the year ended December
31, 1995, an increase of $50.7 million or 86.0% from $59.2 million for the year
ended December 31, 1994. The sales growth in 1995 was attributable to the
inclusion of the operations of Bazaar for the entire year in 1995 versus only
the period from the acquisition date of December 13, 1994 to December 31, 1994
in the prior period, which represented $38.6 million of the increase; the
21
24
inclusion of Reliable's operations which represented $6.3 million of the
increase; and the inclusion of sales from Stuart Entertainment England in 1995,
which represented $1.3 million of the increase. The remaining $4.4 million
increase in sales is primarily attributable to increased paper sales of $4.9
million, increases in pulltab ticket and ink sales of $1.0 million, offset by
decreases in general merchandise and electrical sales of $1.5 million.
Excluding the effect of the Bazaar Acquisition and the Reliable Acquisition,
bingo paper unit sales increased 3.4% from 1994 to 1995 while pulltab ticket
and ink product sales decreased 4.1% and increased 5.1% from 1994 to 1995,
respectively.
Paper and pulltab ticket sales prices increased approximately 13% and
6%, respectively, from 1994 to 1995. The increase largely reflected raw
material price increases which the Company was not able to offset through other
cost reductions. Ink sales prices were down slightly from 1994 due primarily
to an increase in customer demand for lower priced products in the mix of ink
products sold.
Cost of Goods Sold. Cost of goods sold, as a percentage of sales, was
68.0% for the year ended December 31, 1995, a decrease of 4.7 percentage points
from 72.7% for the year ended December 31, 1994. The decrease is primarily
attributable to (a) a lower cost of goods sold percentage for Bazaar sales
versus the historical percentage for the Company, (b) cost savings associated
with the movement of more production to its Texas border facilities during 1995,
resulting in labor cost savings, (c) overall productivity improvements, and (d)
cost savings associated with performing certain pulltab ticket manufacturing
operations in-house versus outsourcing them. These improvements were partially
offset by increases in raw materials, newsprint paper and general labor rates.
In addition, the Company recorded certain other transactions and adjustments in
the fourth quarter of 1994 that increased cost of goods sold.
During 1994 and 1995, the Company experienced significant increases in
the price of paper products purchased for the manufacturing of bingo paper and
pulltab tickets and for packaging. As noted above, the Company initiated sales
price increases on bingo paper and pulltab tickets during this period to the
extent that it was not able to offset these increases through cost savings.
Selling, General and Administrative Expenses. SG&A expenses were
$26.6 million for the year ended December 31, 1995, an increase of
approximately $12.3 million or 86.0% from $14.3 million for the year ended
December 31, 1994. The inclusion of Bazaar and Reliable operations in fiscal
1995 results represent an increase of $12.8 million.
Excluding the effect of the inclusion of Bazaar and Reliable
operations, the approximate $542,000 decrease in SG&A is primarily due to lower
bad debt expense in 1995 due to a $1.1 million increase recorded in 1994 for the
allowance for doubtful accounts related to the financial condition of two
customers and certain other transactions and adjustments recorded in the fourth
quarter of 1994. The expense reductions were partially offset by increases in
employee compensation, fringe benefits and related costs, amortization of
goodwill for the 12-month period, corporate expenses related to the
consolidation of the
22
25
acquired companies and higher sales promotion activities. The increase in
employee compensation and fringe benefits in 1995 compared with 1994 was due
largely to a change in the structure of management compensation and to an
increase in the number of employees and salary levels related in part to the
consolidation of Bazaar and Reliable.
Equity in (Earnings) Losses of Joint Ventures. Equity in (earnings)
losses of joint ventures totalled ($129,000) for the year ended December 31,
1995, compared to $980,000 for the year ended December 31, 1994. Prior to
December 13, 1994, the earnings or loss for Stuart Entertainment Mexico was
allocated to the Company based on the percentage of total production that was
sold to the Company. The equity in (earnings) losses for Stuart Entertainment
England represented 50.0% of the net operating loss for the period January 1,
1994 through December 13, 1994. With the Bazaar Acquisition, Stuart
Entertainment England and Stuart Entertainment Mexico became, in effect, wholly
owned subsidiaries of the Company. For the year ended December 31, 1995,
equity in earnings related solely to British Bazaar Company Limited British
Bazaar, which is 50% owned by the Company (see "Note 9 to Notes to Consolidated
Financial Statements").
Interest Expense, Net. Interest expense, net of interest income, was
$4.4 million for the year ended December 31, 1995, an increase of $3.4 million
or 325.6% from $1.0 million for the year ended December 31, 1994.
Approximately $2.1 million of the increase was due to the consolidation of
Bazaar and Reliable in fiscal 1995 results. The remainder of the increase in
interest expense was due primarily to higher interest rates in 1995 and
significantly higher borrowing levels for the year ended December 31, 1995
compared to borrowing levels for the year ended December 31, 1994 which were
largely related to the Bazaar Acquisition, the Reliable Acquisition and higher
working capital requirements.
United Kingdom Charge. During the second quarter of 1995, the Company
signed a licensing and marketing agreement with Playprint. This agreement gave
the Company the opportunity to redeploy its assets in the United Kingdom, and
discontinue its United Kingdom manufacturing operation. The Company recorded a
one-time pre-tax charge of $819,000 in 1995 related to the costs incurred in
the shutdown of the manufacturing facility in the United Kingdom and to
consolidate its activities with Playprint.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal uses of cash are for the purchase and carrying
of inventory, the carrying of accounts receivable, the purchase of fixed assets
and for normal operating expenses. The primary amounts and ratios relating to
liquidity and capital resources for the past two years are as follows:
23
26
(Dollars in thousands) 1996 1995
---- ----
Working capital $54,025 $20,018
Current ratio 3.5 1.8
Total long-term debt 100,396 39,586
Shareholders' equity 30,358 32,040
Total capitalization 131,124 79,523
Debt to capitalization ratio 76.8% 59.7%
Capital expenditures 2,654 3,409
FINANCING ACTIVITIES
On November 13, 1996, the Company completed the Offering of $100 million
aggregate principal amount of its 12.5 percent Senior Subordinated Notes due
November 15, 2004. Interest on the Notes will be payable semi-annually on each
May 15 and November 15 commencing May 15, 1997.
The Indenture governing the Notes imposes certain covenants that limit the
ability of the Company and its subsidiaries to, among other things, (i) incur
additional indebtedness, (ii) pay dividends or make certain other restricted
payments, (iii) incur liens or (iv) incur indebtedness that is subordinated in
right of payment to any Senior Indebtedness (as defined in the Indenture) and
senior in right of payment to the Notes. Such covenants are subject to certain
limitations and exceptions.
The Indenture also provides that upon the occurrence of a Change of Control (as
defined in the Indenture), each holder of Notes will have the right to require
the Company to purchase all or a portion of such holder's Notes at a purchase
price equal to 101% of the principal amount thereof plus accrued interest to
the date of purchase. In such event, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all of the Notes, and the Company expects that it would seek
third party financing to the extent it does not have available funds to meet
its purchase obligations. There can be no assurance that the Company would be
able to obtain such financing.
In November 1996, the Company also entered into the New Credit Agreement which
consists of a revolving credit facility in the aggregate principal amount of
$30 million, bearing interest with reference of the base rate or the LIBOR
rate, at the Company's option, plus the applicable interest margin as defined
in the New Credit Agreement. At December 31, 1996, the Company had not yet
drawn any amounts under the New Credit Agreement. In March 1997, the Company
entered into a First Amendment to the New Credit Agreement which amended
certain definitions and reporting requirements and sets forth certain
conditions which the Company must meet before drawing any amounts under the New
Credit Agreement.
Prior to the Offering, the Company was party to a credit agreement (the "Prior
Credit Agreement") with Bank of America National Trust and Savings Association,
as U.S. Agent, the Chase Manhattan Bank (National Association), Bank of America
Canada, as Canadian Agent, and the Chase Manhattan Bank of Canada with a senior
secured revolving line of credit of $23.0
24
27
million and a senior secured loan facility of $15.0 million, which included a
U.S. facility and a Canadian facility. The Company repaid all outstanding
balances under the Prior Credit Agreement with the proceeds from the Offering.
The Prior Credit Agreement was terminated and the Company entered into the New
Credit Agreement. In conjunction with the closing of the New Credit Agreement,
the Company recorded an extraordinary loss of $ 933,000, after income taxes, to
write off unamortized debt issuance costs on the Prior Credit Agreement.
Management believes that under the Company's current operating plan, the cash
flow from operations, the New Credit Agreement of $30.0 million (of which no
amounts were outstanding at December 31, 1996) and excess cash on hand will be
sufficient to meet its financial obligations including interest on the Notes,
operating expenses, capital expenditures and working capital requirements.
Additionally, part of the Company's long-term plan includes business
acquisitions and strategic alliances. In order to implement its long-term
plan, the Company will utilize the sources of capital discussed above and may
also raise capital through equity or debt offerings. However, there can be no
assurance that such financing will be available to the Company on favorable
terms, if at all.
CASH FLOWS
The cash balances at December 31, 1996, 1995 and 1994 were $13.7 million,
$943,000 and $2.1 million, respectively. The changes in cash for the last
three years were:
(Dollars in thousands) 1996 1995 1994
---- ---- ----
Operating Activities:
Net income (loss) $(2,231) $ 786 $(1,608)
Other operating activities 8,359 4,474 6,280
Working capital resources (4,664) (7,050) (3,470)
------- ------- -------
Total Operating Activities 1,464 (1,790) 1,202
Investing Activities (38,150) (682) (30,396)
Financing Activities 49,475 1,299 30,798
-------- ------- -------
Net change in cash and cash equivalents $12,789 $(1,173) $ 1,604
======= ======= =======
Total trade receivables increased $7.8 million from $18.2 million at
December 31, 1995 to $26.0 million at December 31, 1996. The increase is due
primarily to the acquisition of Trade Products ($6.9 million), price increases,
overall sales increases and longer collection periods. Total notes receivable
(including current and long-term portions) decreased slightly from a balance of
$2.4 million at December 31, 1995 to $2.2 million at December 31, 1996. During
1996, trade receivables totaling $788,000 were converted to notes receivable
from non-related parties. The conversions were made to assist customers in
resolving cash flow
25
28
deficiencies and to aid customers in accomplishing their long-term growth
plans. In accordance with generally accepted accounting principles, the
Company has an allowance for doubtful accounts related to its accounts and
notes receivable. The Company periodically reviews these allowances for
reasonableness.
Inventories increased $6.1 million from $22.0 million at December 31,
1995 to $28.1 million at December 31, 1996. The increase is due primarily to
the acquisition of Trade Products ($6.6 million) partially offset by lower cost
of paper products used to manufacture bingo paper. Inventory levels fluctuate
on a seasonal basis and modest increases in the costs of paper products are
currently expected in 1997.
Trade payables and accrued liabilities increased a combined $4.1
million from $16.6 million at December 31, 1995 to $20.7 million at December
31, 1996. The increase is due primarily to the acquisition of Trade Products
($2.5 million) and the accrual for Restructuring Charges ($3.3 million)
recorded in the fourth quarter of 1996 (see "Note 14 to Notes to Consolidated
Financial Statements") partially offset by a reduction in trade payables.
CAPITAL EXPENDITURES
The Company's capital expenditures were $2.8 million during 1996
compared with $3.4 million during 1995. The Company's capital expenditure
program has historically focused on the purchase of equipment designed to
increase production capacity and improve manufacturing efficiencies, In 1996,
a greater portion of the Company's capital expenditures were allocated to the
upgrading and development of management information systems and telephone
systems. During 1997, the Company's capital expenditure program will focus on
the purchase of equipment designed to increase production capacity, improve
manufacturing efficiency and the upgrading and development of its management
information systems.
INFLATION
Management does not believe that inflation has had or is expected to
have any significant adverse impact on the Company's financial condition or
results of operations for the periods indicated.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related financial
information required to be filed are indexed on page F-1 and are incorporated
herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has had no disagreements with its independent public
accountants on accounting or financial disclosure.
26
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the Company's definitive proxy statement
for the Company's Annual Meeting of Shareholdes to be held May 20, 1997
regarding directors and officers of the Company and compliance with Section
16(a) of The Exchange Act is incorporated herein by reference in response to
this item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Company's definitive proxy statement
for the Company's Annual Meeting of Stockholders to be held on May 20, 1997
regarding executive compensation is incorporated herein by reference in
response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the Company's definitive proxy statement for the
Company's Annual Meeting of Stockholders scheduled to be held on May 20, 1997
regarding security ownership of certain beneficial owners and management is
incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the Company's definitive proxy statement for the
Company's Annual Meeting of Stockholders scheduled to be held on May 20, 1997
regarding certain relationships and related transactions is incorporated herein
by reference in response to this item.
27
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements. See Index to Financial Statements on
page F-1 of this Report.
2. Financial Statement Schedules. See Index to Financial
Statements on page F-1 of this Report. All other schedules
are omitted since they are not required, are inapplicable, or
the required information is included in the financial
statements or notes thereto.
3. Exhibits. See the Index to Exhibits appearing at the end of
this Report.
(b) Reports on Form 8-K
1. A Current Report on Form 8-K dated October 14, 1996 was filed
under Item 5.
2. A Current Report on Form 8-K dated November 13, 1996 was filed
under Item 2 and Item 5.
28
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 24, 1997 By /s/ Timothy R. Stuart
----------------------------------
Timothy R. Stuart, President
/s/ Sangwoo Ahn Director March 24, 1997
- ------------------------
Sangwoo Ahn
/s/ Albert F. Barber Vice Chairman of the Board March 24, 1997
- ------------------------ and Chief Executive Officer
Albert F. Barber
/s/ Perry J. Lewis Director March 24, 1997
- ------------------------
Perry J. Lewis
/s/ Harry Poll Director March 24, 1997
- ------------------------
Harry Poll
/s/ Ronald G. Rudy Director and Executive March 24, 1997
- ------------------------ Vice President
Ronald G. Rudy
/s/ Richard D. Spizzirri Director March 24, 1997
- ------------------------
Richard D. Spizzirri
/s/ Ira Starr Director March 24, 1997
- ------------------------
Ira Starr
/s/ Leonard A. Stuart Chairman of the Board March 24, 1997
- ------------------------
Leonard A. Stuart
/s/ Timothy R. Stuart President, Chief Operating March 24, 1997
- ------------------------ Officer and Director
Timothy R. Stuart
29
32
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Stanley M. Taube Director March 24, 1997
- ------------------------
Stanley M. Taube
/s/ Paul C. Tunink Vice President-Finance, March 24, 1997
- ------------------------ Treasurer and
Paul C. Tunink Chief Financial Officer
30
33
STUART ENTERTAINMENT, INC. AND SUBSIDIARES
INDEX TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
PAGE
Independent Auditors' Report F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7 to F-25
Financial Statement Schedules:
Schedule II - Valuation and Qualifying accounts F-26
34
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Stuart Entertainment, Inc.
Council Bluffs, Iowa
We have audited the accompanying consolidated balance sheets of Stuart
Entertainment, Inc. and subsidiaries (the "Company") as of December 31, 1996
and 1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. Our audits also included the financial statement schedule listed in
the Index at Item 14. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Stuart Entertainment, Inc. and
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 14, 1997
F-2
35
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
1996 1995 1994
NET SALES $ 110,636 $ 109,882 $ 59,158
COST OF GOODS SOLD 77,763 74,722 42,987
--------- --------- ---------
GROSS MARGIN 32,873 35,160 16,171
OTHER EXPENSES AND INCOME:
Selling, general and administrative expenses 25,318 26,581 14,323
Restructuring charge 3,280 - -
United Kingdom charge - 819 -
Termination of Consulting Agreement - - 2,000
Amortization of goodwill 940 878 96
Equity in (earnings) losses of joint ventures 11 (129) 980
Interest expense, net 5,337 4,448 1,045
--------- --------- ---------
Other Expenses and Income - Net 34,886 32,597 18,444
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (2,013) 2,563 (2,273)
INCOME TAX PROVISION (BENEFIT) (715) 1,777 (665)
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (1,298) 786 (1,608)
EXTRAORDINARY ITEM - Loss on extinguishment of debt, net of taxes 933 - -
--------- --------- ---------
NET INCOME (LOSS) $ (2,231) $ 786 $ (1,608)
========= ========= =========
EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary loss - primary $ (0.19) $ 0.12 $ (0.45)
Extraordinary loss (0.13) - -
--------- --------- ---------
Earnings (loss) per share - primary $ (0.32) $ 0.12 $ (0.45)
========= ========= =========
Average Common and Common Equivalent Shares Outstanding - primary 6,885,884 6,705,904 3,560,848
========= ========= =========
Income (loss) before extraordinary loss - fully dilutive $ (0.19) $ 0.11 $ (0.45)
Extraordinary loss (0.13) - -
--------- --------- ---------
Earnings (loss) per share - fully dilutive $ (0.32) $ 0.11 $ (0.45)
========== ========= =========
Average common and common equivalent shares outstanding - fully dilutive 6,885,884 7,053,222 3,560,848
========= ========= =========
EBITDA (Note 1) $ 12,049 $ 12,117 $ 1,088
See Notes to Consolidated Financial Statements.
F-3
36
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
ASSETS 1996 1995
CURRENT ASSETS:
Cash and cash equivalents $13,732 $ 943
Trade receivables, net of allowance for doubtful accounts of $2,230
and $2,086 25,998 18,216
Current portion of notes receivable, less allowance for doubtful
accounts of $99 and $199 1,296 1,153
Inventories 28,118 21,982
Income taxes recoverable 2,545 -
Deferred income taxes 2,581 1,746
Prepaid expenses and other current assets 989 547
-------- -------
Total Current Assets 75,259 44,587
PROPERTY, PLANT AND EQUIPMENT, net 29,760 21,117
GOODWILL, net of accumulated amortization of $1,983 and $1,209 43,726 29,194
OTHER ASSETS, net 5,850 4,096
-------- -------
$154,595 $98,994
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $370 $ 7,897
Trade payables 11,834 12,512
Accrued payroll and benefits 2,688 1,967
Other accrued liabilities 2,893 1,610
Restructuring charge reserve 3,280 -
Income taxes payable - 543
Deferred income taxes 169 40
-------- -------
Total Current Liabilities 21,234 24,569
LONG-TERM DEBT 100,396 39,586
DEFERRED INCOME TAXES 2,320 2,594
DEFERRED INCOME 287 205
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY:
Common stock $.01 par value; 30,000,000 and 20,000,000 shares
authorized; 6,884,376 and 6,753,309 shares outstanding 69 68
Additional paid-in capital 27,368 26,384
Retained earnings 3,294 5,525
Treasury stock (56,260 shares at cost) (189) (189)
Cumulative translation adjustment, net of deferred income taxes (184) 252
-------- -------
Total Stockholders' Equity 30,358 32,040
-------- -------
$154,595 $98,994
======== =======
See Notes to Consolidated Financial Statements.
F-4
37
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
ADDITIONAL CUMULATIVE
COMMON PAID-IN RETAINED TREASURY TRANSLATION
STOCK CAPITAL EARNINGS STOCK ADJUSTMENT TOTAL
BALANCE, JANUARY 1, 1994 $35 $ 8,947 $ 6,347 $(189) $ - $ 15,140
Net loss - - (1,608) - - (1,608)
Issuance of 3,000 shares from exercise of stock options - 9 - - - 9
Issuance of 3,130,435 shares, and warrants on 775,000
shares, net of issuance costs of $1,344 31 16,625 - - - 16,656
Issuance of warrants on 100,000 shares to
Mr. Leonard Stuart - 144 - - - 144
Translation adjustment, net of deferred taxes of $134 - - - - (239) (239)
Paid-in capital from non-qualified stock options issued - 51 - - - 51
--- -------- --------- ----- ------ --------
BALANCE, DECEMBER 31, 1994 66 25,776 4,739 (189) (239) 30,153
Net income - - 786 - - 786
Issuance of 102,609 shares from exercise of stock
options 1 251 - - - 252
Income tax benefit on stock options exercised - 25 - - - 25
Translation adjustment, net of deferred taxes of $276 - - - - 491 491
Issuance of 55,652 shares in connection with the
acquisition of Reliable Corporation, net of costs
of $6 1 313 - - - 314
Paid-in capital from non-qualified stock options issued - 19 - - - 19
--- -------- --------- ----- ------ --------
BALANCE, DECEMBER 31, 1995 68 26,384 5,525 (189) 252 32,040
Net loss - - (2,231) - - (2,231)
Issuance of 111,067 shares from exercise of stock
options 1 412 - - - 413
Issuance of 20,000 newly authorized shares - 108 - - - 108
Issuance of warrants on 330,000 shares in connection
with the acquisition of Trade Products - 330 - - - 330
Income tax benefit on stock options exercised - 127 - - - 127
Translation adjustment, net of deferred taxes of $245 - - - - (436) (436)
Paid-in capital from non-qualified stock options issued - 7 - - - 7
--- -------- --------- ----- ------ --------
BALANCE, DECEMBER 31, 1996 $69 $ 27,368 $ 3,294 $ (189) $ (184) $30,358
=== ======== ========= ====== ====== ========
See Notes to Consolidated Financial Statements.
F-5
38
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,231) $ 786 $ (1,608)
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Extraordinary item, loss from extinguishment of debt 1,297 - -
Payment on termination agreement - (1,200) -
Depreciation and amortization 4,515 4,617 1,935
Amortization of debt financing fees 468 356 -
Provision for doubtful accounts (80) 543 1,287
Termination of consulting agreement - - 2,000
Equity in (earnings) losses of joint ventures 11 (129) 980
Restructuring charge 3,280 - -
Deferred income taxes (587) (221) (1,250)
Other non-cash expenses - net (395) 508 1,328
Change in operating assets and liabilities, net of amounts from acquisitions (4,814) (7,050) (3,470)
-------- ------- --------
Net cash flows from operating activities 1,464 (1,790) 1,202
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (36,764) (295) (28,974)
Costs of acquisitions paid (524) (274) (609)
Capital expenditures (2,654) (1,317) (818)
Proceeds from disposals 339 138 43
Payments received on notes receivable 1,453 1,261 1,052
Investment in joint ventures prior to acquisition - - (856)
Other - (195) (234)
-------- ------- --------
Net cash flows from investing activities (38,150) (682) (30,396)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under prior credit agreements (20,917) 8,052 3,077
Costs of debt financing (3,873) (375) (1,644)
Proceeds from additions to long-term debt - - 15,000
Payments on long-term debt (25,812) (6,104) (2,276)
Payments on LSA purchase price adjustment (455) - -
Proceeds from sale of common stock - (932) 18,000
Proceeds from issuance of long-term debt 100,000 348 -
Proceeds from exercise of stock options 413 277 -
Costs of stock issuance paid - (6) (1,344)
Proceeds from other issuances of common stock 108 - 9
-------- ------- --------
Net cash flows from financing activities 49,464 1,260 30,822
Effect of currency exchange rate changes on cash of foreign subsidiaries 11 39 (24)
-------- ------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 12,789 (1,173) 1,604
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 943 2,116 512
-------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,732 $ 943 $ 2,116
======== ======= ========
See Notes to Consolidated Financial Statements.
F-6
39
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(COLUMNAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND 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 organziations 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.
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.
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 three 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.
EARNINGS PER SHARE - The number of shares used in the computation of primary
and fully dilutive earnings per share for the years ended December 31, 1996,
1995 and 1994 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.
F-7
40
EBITDA - EBITDA is defined herein as earnings before interest, taxes,
depreciation, amortiztion, purchase accounting adjustments, restructuring
charge and extraordinary item. EBITDA is presented because it is a measure
a company's ability to service its indebtedness commonly used by investors.
However, items excluded from EBITDA, such as depreciation and amortization,
are significant components in understanding and assessing financial
performance; EBITDA should not be considered as an alternative to net income
as a measure of operating results or to cash flows or as a substitute for
measures of performance in accordance with generally accepted accounting
principles. For more detailed information regarding cash flows from
operating, investing and financing activities, see the Statements of
Consolidated Cash Flows. EBITDA measures presented herein may not be
comparable to other similarly titled measures of other companies.
FOREIGN CURRENCY TRANSLATION AND REMEASUREMENT - The financial statements
and transactions of Bingo Press & Specialty Limited and Stuart Entertainment
Limited are maintained in their functional currency, Canadian dollars and
British pounds, respectively. Assets and liabilities are translated at
current exchange rates at the balance sheet date and stockholders' equity is
translated at historical exchange rates. Revenues and expenses are
translated at the average exchange rate for each period. Translation
adjustments, which result from the process of translating Canadian dollar
and British pound financial statements into U.S. dollar financial
statements, are accumulated as a separate component of stockholders' equity.
The financial statements and transactions of Stuart Entertainment S.A. de
C.V. (Stuart Entertainment Mexico) are maintained in Mexican pesos and have
been remeasured into U.S. dollars. Assets and liabilities are remeasured at
the end of period exchange rates, except for property and stockholders'
equity which are remeasured at historical exchange rates. The statements of
operations have been remeasured at average exchange rates for the periods,
except for depreciation which has been remeasured at historical exchange
rates. Gains and losses from remeasurement are recognized currently in
operations. For the years ended December 31, 1996, 1995 and 1994, the
Company recognized a remeasurement (gain) loss of $(12,000), $547,000 and
$18,000, respectively.
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 New Credit Agreement and eight
years for the Senior Subordinated Notes.
F-8
41
GOODWILL - Goodwill is amortized on a straight-line basis over periods
ranging from ten to forty years. The Company periodically assesses the
recoverability of its goodwill and, 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 (see
Note 9).
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. For the years ended December 31, 1996, 1995 and
1994, costs of approximately $143,000, $745,000 and $784,000, respectively,
were charged to expense.
REVENUE RECOGNITION - The Company records revenue as products are shipped.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1994 and
1995 financial statements and supporting footnote disclosures in order to
present them in conformity with the 1996 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 $37.2 million, subject to
certain post-closing adjustments, 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
$15.5 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.
YEAR ENDED DECEMBER 31,
1996 1995
Net sales $ 143,112 $ 146,477
Loss before extraordinary loss $ (2,587) $ (1,587)
Net loss $ (3,520) $ (1,587)
Loss per share, before extraordinary loss $ (0.38) $ (0.24)
Loss per share $ (0.51) $ (0.24)
Average common and common equivalent shares outstanding 6,886,000 6,706,000
F-9
42
BINGO PRESS & SPECIALTY LIMITED:
On December 13, 1994, the Company completed the acquisition of Len Stuart &
Associates Limited ("LSA") (the "Bazaar Acquisition") pursuant to a Stock
Purchase Agreement with LSA and Mr. Leonard A. Stuart, the sole shareholder
of LSA and the Chairman and former Chief Executive Officer of the Company.
LSA was the holding company for i) Bingo Press & Specialty Limited, an
Ontario, Canada corporation and a major manufacturer of bingo supplies and
related products in Canada, which operates under the trade name Bazaar &
Novelty ("Bazaar"), and ii) Niagara Bazaar & Novelty Limited, an Ontario,
Canada corporation and a retailer of bingo supplies and related products.
The Bazaar Acquisition was accounted for using the purchase method of
accounting. The purchase price was allocated to the fair value of the
acquired assets and liabilities, resulting in the recording of goodwill of
$27.3 million. The results of operations of Bazaar have been consolidated
since the date of the Bazaar Acquisition.
The pro forma results presented below give effect to the Bazaar Acquisition
and the related financing as if such events occurred as of January 1, 1994.
The unaudited pro forma information does not purport to represent what the
Company's results of operations would have been if such events had, in fact,
occurred on such date and should not be viewed as predictive of the
Company's financial results in the future.
YEAR ENDED
DECEMBER 31,
1994
Net sales $ 94,788
Net loss $ (807)
Loss per share $ (0.12)
Average common and common equivalent shares outstanding 6,537,000
THE RELIABLE CORPORATION OF AMERICA, INC.:
On January 10, 1995, the Company acquired substantially all of the assets
and assumed substantially all existing liabilities of The Reliable
Corporation of America, Inc. ("Reliable") and two presses owned by one of
Reliable's shareholders for a purchase price of $1.3 million, subject to
adjustment. The purchase price was paid as follows: i) $200,000 paid in
cash, ii) $320,000 paid through the issuance of 55,652 shares of the
Company's common stock valued at $5.75 per share, and iii) $780,000 in the
form of a promissory note with equal principal payments over 90 months plus
accrued interest at a rate of 1% over national prime. The note was paid in
November, 1996.
The Company entered into non-compete agreements with the shareholders of
Reliable. Under these agreements, the Company will make monthly payments of
approximately $5,000 for 90 months to the Reliable shareholders. The
present value of the remaining payments at December 31, 1996 (using a 9%
discount factor) is $238,000. The Company also entered into an employment
agreement with the President of Reliable which was subsequently terminated
by mutual consent.
F-10
43
The pro forma results of operations for the year ended December 31, 1994
giving effect to the acquisition of Bazaar and Reliable is substantially the
same as the pro forma statements presented earlier for the acquisition of
Bazaar alone.
3. INVENTORIES
Inventories consisted of the following at December 31:
1996 1995
Raw materials $ 3,975 $ 3,517
Work-in-process 4,316 5,056
Finished goods 19,827 13,409
---------- ----------
$ 28,118 $ 21,982
========== ==========
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31:
1996 1995
Land and buildings $ 5,739 $ 4,950
Equipment 39,759 29,262
---------- ----------
45,498 34,212
Less accumulated depreciation 15,738 13,095
---------- ----------
$ 29,760 $ 21,117
========== ==========
5. OTHER ASSETS
Other assets consisted of the following at December 31:
1996 1995
Deferred financing costs, net of accumulated
amortization of $104 and $375 $ 3,768 $ 1,660
Notes receivable, net of allowance for doubtful
accounts of $124 919 1,261
Other investments and assets 916 1,119
Investments in joint ventures 247 56
---------- -------
$ 5,850 $ 4,096
========== =======
F-11
44
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 Notes). Interest on the Notes will be payable semi-annually
on each May 15 and November 15, commencing May 15, 1997. 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. The Company recorded an extraordinary loss in the
fourth quarter of 1996 of $933,000, net of taxes of $571,000, to write-off
the unamortized debt issuance costs in the prior credit agreement.
On November 13, 1996, the Company amended and restated its credit agreement
(the "New Credit Agreement"). The New 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 New
Credit Agreement. The New Credit Agreement also charges a quarterly non-use
fee on any unborrowed funds.
The New Credit Agreement imposes certain covenants and other requirements on
the Company that, among other things, restricts i) the incurrence and
existence of indebtedness or contingent obligations; (ii) consolidations,
mergers and sales of assets; (iii) the incurrence and existence of liens;
(iv) the sale or disposition of assets; (v) investments, loans and advances;
(vi) capital expenditures; (vii) the payment of dividends and repurchase of
common stock; and (viii) acquisitions of the Company. The Company is also
required to meet certain consolidated financial tests, including minimum
level of net worth, minimum level of consolidated interest coverage, maximum
consolidated leverage ratio and minimum consolidated fixed charge coverage
ratio. As a result of the restructuring charge, the Company was not in
compliance with certain covenants at December 31, 1996. The Company has
subsequently received a waiver from the bank related to its non-compliance
of the covenants.
The Company may draw amounts under the New Credit Agreement, subject to
availability pursuant to a borrowing base requirement, in order to meet its
working capital requirements, including issuing letters of credit. The
loans are secured by substantially all of the Company's otherwise
unencumbered assets, including a pledge of the stock the Company holds in
its subsidiaries, except as specifically excluded under the New Credit
Agreement. At December 31, 1996, the Company had not yet drawn any amounts
under the New Credit Agreement.
In March, 1997, the Company entered into a First Amendment to the New Credit
Agreement which amended certain definitions and reporting requirements and
sets forth certain conditions which the Company must meet before drawing any
amounts under the New Agreement.
F-12
45
Long-term debt consisted of the following at December 31:
1996 1995
Senior Subordinated Notes $100,000 $ -
Borrowings under Credit Agreement - 33,056
Subordinated note payable to Mr. Stuart - 5,000
Notes payable to others 766 4,758
Obligations under capital leases - 4,669
-------- -------
100,766 47,483
Less current portion 370 7,897
-------- -------
$100,396 $39,586
======== =======
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 December 31, 1996 range from
approximately one year to five years. At December 31, 1996, these notes
bear interest at fixed and variable rates ranging from 6% to 11.25%.
FUTURE PAYMENTS:
Long-term debt matures as follows:
1997 $ 370
1998 118
1999 69
2000 76
2001 83
Thereafter 100,050
--------
$100,766
========
7. INCOME TAX PROVISION (BENEFIT)
Income (loss) before income tax provision (benefit) is as follows for the
years ended December 31:
1996 1995 1994
Domestic $(3,766) $ 2,952 $ (1,890)
Foreign 1,753 (389) (383)
-------- ------- ---------
$(2,013) $ 2,563 $ (2,273)
======== ======= =========
F-13
46
The income tax provision (benefit) is as follows for the years ended
December 31:
1996 1995 1994
Current:
Federal $ (467) $1,139 $ 475
Foreign 371 755 47
State (32) 104 63
------ ------ -------
(128) 1,998 585
------ ------ -------
Deferred:
Domestic (669) (155) (1,025)
Foreign 82 (66) (225)
------ ------ -------
(587) (221) (1,250)
------ ------ -------
$ (715) $1,777 $ (665)
====== ====== =======
A reconciliation of the United States statutory income tax rate to the
effective income tax rate is as follows for the years ended December 31:
1996 1995 1994
Statutory tax rate (34.0)% 34.0% (34.0)%
State income taxes (net of federal benefit) (5.4) 2.3 (2.0)
Foreign tax rates in excess of U.S. federal rates 3.3 4.5 (0.8)
Tax impact of losses from U.K. venture (11.9) 17.0 7.4
Goodwill amortization 12.5 10.1 1.5
Research and development credits - - (2.1)
Other - 1.4 0.7
----- ----- -----
(35.5)% 69.3% (29.3)%
===== ===== =====
F-14
47
Deferred tax assets and (liabilities) are comprised of the following at
December 31:
1996 1995
Deferred Tax Assets:
Restructuring charge $ 1,202 $ -
Allowance for doubtful accounts 355 458
Inventory reserves and adjustments 366 436
Non-deductible accrued liabilities 397 803
Merger reserves 261 -
Other - 49
------- --------
$ 2,581 $ 1,746
======= ========
Deferred Income Tax Liabilities:
Difference in basis of property and equipment $(2,346) $ (2,495)
Canadian inventory absorption (169) (40)
Other (77) 43
Cumulative translation adjustment 103 (142)
Excess losses of U.K. venture 518 758
Valuation reserve (518) (758)
------- --------
$(2,489) $ (2,634)
======= ========
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $7,960,000 at December 31, 1996. Those earnings are considered
to be indefinitely reinvested and, accordingly, no amount for U.S. federal
and state income taxes has been provided thereon. Upon distribution of
those earnings in the form of dividends, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credit)
and withholding taxes payable to the foreign countries. Determination of
the amount of unrecognized deferred U.S. income tax liability is not
practicable because of the complexities associated with its hypothetical
calculation.
8. STOCK OPTION PLANS
The Company accounts for its stock-based compensation under the provisions
of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees, which utilizes the intrinsic value method.
The Company had four inactive plans and one active stock option plan during
1996: the 1981 Incentive Stock Option Plan ("1981 ISO Plan"), the 1992
Incentive Stock Option Plan ("1992 ISO Plan"), the 1985 Non-Qualified Stock
Option Plan ("1985 NQSO Plan"), the 1992 Non-Qualified Stock Option Plan
("1992 NQSO Plan") and the 1994 Performance Plan.
F-15
48
The Company adopted the 1981 ISO Plan and the 1992 ISO Plan in order to
grant options to certain directors, executive officers and employees,
reserving 250,000 and 200,000 shares, respectively, of its common stock for
issuance. Options were granted at 100% of market value at the date of grant
and became exercisable for up to a ten-year period from the date of grant.
The 1981 ISO Plan was terminated on August 18, 1991 and, effective June 3,
1995, options are no longer exercisable. Options are no longer granted
under the 1992 ISO Plan.
The Company adopted the 1985 NQSO Plan and the 1992 NQSO Plan for certain
directors, executive officers and employees, reserving 200,000 and 100,000
shares, respectively, of its common stock for issuance. Options granted
under the 1985 NQSO Plan were exercisable for periods from five to ten years
from the date of grant while options granted under the 1992 NQSO Plan were
exercisable for a ten-year period from the date of grant. Options under
both plans were granted at prices which exceeded or were less than the fair
market value of the shares on the date of grant but were not less than par
value. Options are no longer granted under either of these plans.
The 1994 Performance Plan was adopted December 13, 1994 for certain
directors, executive officers, employees and consultants. The Company has
reserved 2,500,000 shares of its common stock for issuance. Options granted
under this plan may be either incentive stock options or non-qualified stock
options. Incentive stock options granted are exercisable for up to a
ten-year period and at an exercise price equal to the fair market value of
the shares on the date of grant. Non-qualified stock options granted are
exercisable at prices and over time periods determined by the Stock Option
Committee of the Board of Directors. All options granted under this Plan in
1996, 1995 and 1994 were non-qualified options. At December 31, 1996 there
were 497,917 shares available for grant.
If compensation cost for the Company's stock-based compensation plan had
been determined based on the fair value at the grant dates for awards under
the plan consistent with the method of SFAS No. 123, Accounting for
Stock-Based Compensation, the Company's net income (loss) and earnings
(loss) per share would have been reduced to the pro forma amounts indicated
below:
1996 1995
Net income (loss) As reported $(2,231) $ 786
Pro forma $(3,346) $ 240
Primary earnings (loss) per share As reported $ (0.32) $0.12
Pro forma $ (0.48) $0.03
Fully diluted earnings (loss) per share As reported $ (0.32) $0.12
Pro forma $ (0.48) $0.03
The fair market value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995: dividend
yield of 0.0%, expected volatility of 40.0%, risk-free interest rates of
6.3%, and expected lives of 7.5 years for all the years presented.
F-16
49
A summary of stock option activity is as follows during the three years
ended December 31:
FIXED OPTIONS 1996 1995 1994
Outstanding at beginning of year 1,882,166 1,280,250 396,717
Options granted 573,400 824,400 900,000
Options exercised (111,067) (102,609) (3,000)
Options cancelled (342,416) (119,875) (13,467)
----------- ----------- -----------
Outstanding at end of year 2,002,083 1,882,166 1,280,250
=========== =========== ===========
Options exercisable at year end 1,739,837 1,577,667
=========== ===========
Weighted-average fair value of options
granted during the year $ 3.22 $ 2.00
=========== ===========
The following table summarizes information about stock options outstanding
at December 31, 1996:
OPTIONS OUTSTANDING
----------------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES 1996 LIFE PRICE
$4.00 - $6.99 1,173,950 8.6 years $ 5.19
$7.00 - $9.99 38,133 6.0 years 7.47
$10.00 - $12.99 440,000 8.0 years 10.00
$13.00 - $15.99 350,000 8.0 years 15.00
---------
2,002,083 7.1 years 8.01
========= ========= =======
At December 31, 1996, options for 1,739,837 shares were exercisable. The
remaining options become exercisable as follows: 1997 - 195,165 shares; 1998
- 67,081 shares.
During 1996, 1995 and 1994, the Company recognized tax benefits of $127,000,
$25,000 and $0, respectively, related to compensation expense recognized for
tax purposes on non-qualified stock options exercised. No related
compensation expense for these non-qualified stock options were recorded for
financial statement purposes. The amount of the income tax benefit was
recorded as additional paid-in capital.
During 1993, the Company granted non-qualified stock options under the 1985
NQSO Plan and the 1992 NQSO Plan where the exercise price at the date of
grant was less than the market value of those shares on that date. During
1996, 1995 and 1994, the Company recognized compensation expense and
additional paid-in capital for financial statement purposes of $7,000,
$19,000 and $51,000, respectively, based on the dates the options were
exercisable.
F-17
50
9. INVESTMENTS IN JOINT VENTURES
Prior to the Bazaar Acquisition, the Company and Bazaar formed two corporate
joint ventures: Stuart Entertainment Mexico and Stuart Entertainment
Limited. Stuart Entertainment Mexico was formed for the purpose of printing
and finishing bingo paper for its owners. Stuart Entertainment Limited was
formed for the purpose of selling bingo supplies to the European markets.
Up to the date of the Bazaar Acquisition, the company accounted for each of
the investments using the equity method. During the period from January 1,
1994 to December 13, 1994, the Company recognized losses related to its
investments in Stuart Entertainment Mexico and Stuart Entertainment Limited
of $570,000 and $415,000, respectively.
Stuart Entertainment Mexico is included in the consolidated statements of
operations for the period from December 14, 1994 to December 31, 1994, and
for the years ended December 31, 1995 and 1996, and in the consolidated
balance sheets as of December 31, 1995 and 1996.
Summarized results of operations for Stuart Entertainment Mexico and Stuart
Entertainment Limited (each on a stand-alone basis) is as follows for the
year ended December 31, 1994:
STUART STUART
(DOLLARS IN THOUSANDS) ENTERTAINMENT ENTERTAINMENT
MEXICO LIMITED
Total revenues $ 2,244 $1,128
Gross margin 641 (119)
Net (591) (119)
During the second quarter of 1995, the Company signed a licensing and
marketing agreement with Playprint Limited, headquartered in Dublin,
Ireland. This relationship permitted the Company to discontinue its
manufacturing operation in the United Kingdom. Under the agreement,
Playprint Limited pays royalties to the Company for use of certain of the
Company's trademark, technologies and equipment for the production of bingo
paper and ink dabbers. The Company recorded a one-time pre-tax charge of
$819,000 in 1995 related to the costs to shutdown the manufacturing facility
in the United Kingdom.
BRITISH BAZAAR COMPANY LIMITED:
The Company owns 50% of the common shares of British Bazaar Company Limited
("British Bazaar"). British Bazaar manufactures bingo paper and pull tab
tickets in the Atlantic provinces of Canada. The Company's investment in
British Bazaar is accounted for using the equity method. The Company's
investment in British Bazaar at December 31, 1996 and 1995 was $248,000 and
$259,000, respectively. For the years ended December 31, 1996 and 1995, and
the period from December 14, 1994 to December 31, 1994, the Company recorded
equity in earnings (loss) of $(11,000), $98,000 and $5,000, respectively, on
its investment and had sales of $1,142,000 $1,777,000 and $93,000,
respectively, to British Bazaar.
The Company guaranteed British Bazaar's operating line of credit at December
31, 1996 and 1995 in the amount of C$350,000 ($255,000) and C$350,000
($248,000), respectively.
F-18
51
10. RELATED PARTY TRANSACTIONS
S. LACHMAN & SONS, INC.:
An individual who was employed by the Company through June 30, 1993 owns S.
Lachman & Sons, Inc. ("Lachman"), a distributorship which purchases a
significant amount of product from the Company. Sales to Lachman for the
years ended December 31, 1996, 1995 and 1994 were $2,211,000, $2,541,000 and
$2,047,000, respectively. Effective January 1, 1993, the Company entered
into an agreement with Lachman whereby the Company granted Lachman the use
of a paper printing press owned by the Company. Under the agreement, which
has no minimum term but can be terminated by either party upon 30 days
written notice, Lachman bears all expenses of operating and maintaining the
press and pays the Company a royalty for all the paper printed by the press.
Paper printed by Lachman may not be sold in competition with the Company.
During the years ended December 31, 1996, 1995 and 1994, the Company
recognized royalty income from Lachman of $262,000 $248,000 and $268,000,
respectively.
LEONARD A. STUART:
The Company is a party to a consulting agreement (the "BMG Agreement") dated
July 1, 1995 with Bazaar Management Group, Inc. ("BMG"), of which Leonard A.
Stuart is the sole shareholder. Under the BMG Agreement, BMG provides
consulting services to the Company with respect to the Company's business
(the "Division") of placing pulltab tickets in convenience stores, retail
locations and bingo halls in Ontario, Canada. The net income monthly of the
Division is payable as follows: (a) 50% is applied to reduce outstanding
bank loans of the Division, (b) 50% of the remaining net income is retained
by the Company, and (c) 50% of the remaining net income is paid to BMG.
During 1996 and 1995, the Company paid BMG $159,000 and $115,000,
respectively. The Company believes that the terms of the BMG Agreement are
comparable to those which would have been obtainable from unaffiliated third
parties.
KEN STUART:
Ken Stuart, a brother of Leonard A. Stuart, is retained by the Company as an
independent contractor selling ink products. For the years ended December
31, 1996, 1995 and 1994, Ken Stuart earned commissions of $189,000, $221,000
and $292,000, respectively.
LEASE AGREEMENT:
In connection with the Acquisition of Trade, the Company entered into a
Lease Agreement with Partnership Leasing, L.L.C., a Washington limited
liability company, of which Harry Poll and Ronald G. Rudy, directors of the
Company, are the sole members. The term of the lease is for ten years with
one ten-year option and covers two buildings in Lynnwood, Washington with a
total of 165,000 square feet. The rent is $924,000 per year, which is the
current market price for the facility as determined by a qualified
independent commercial real estate brokerage firm in an opinion of rental
value delivered to the Company.
BINGO VIDEO ENTERTAINMENT, INC.:
In October 1992, the Company sold the assets of its retail branch in
Hollywood, Florida to Bingo Video Entertainment, Inc. ("Bingo Video"), a
company owned by a brother-in-law of Leonard Stuart. In
F-19
52
exchange for the assets sold, the Company received a promissory note
totalling $262,000. The note bears interest at a rate of one percent above
the Company's rate on its short-term line of credit and requires monthly
principal and interest payments of $4,000. The note is collateralized by
the assets of Bingo Video and guaranteed by Leonard Stuart's brother-in-law
and by Len Stuart & Associates, Inc., a company owned by Leonard Stuart. The
principal balance of the note at December 31, 1996 was $140,000.
During the years ended December 31, 1996, 1995 and 1994, sales to Bingo
Video totalled $828,000, $912,000 and $572,000, respectively.
F-20
53
11. TERMINATION OF CONSULTING AGREEMENT
On December 7, 1994, the Company, Video King Gaming Systems, Inc., a
wholly-owned subsidiary of the Company and Video Gaming Systems of America,
Inc. ("VGSA") terminated their consulting agreement for $2,000,000 to be
paid by the Company to VGSA as follows: i) $1,000,000 was paid at closing
on January 6, 1995 and ii) $1,000,000 in the form of a promissory note from
the Company. The note was paid in full by the Company in November, 1996.
12. EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution plan under Section 401(k) of
the Internal Revenue Code covering substantially all of its employees in the
United States (the "U.S. Plan"). Eligible employees may contribute up to
15% of their wages, not to exceed a government established maximum. The
Company's contribution is the sum of the Company's match of the first 2% of
the employee's elective contribution and a discretionary contribution of up
to 2% of the wages of all employees eligible under the U.S. Plan. For the
years ended December 31, 1996, 1995 and 1994, the Company's contributions
were $163,000, $157,000, and $165,000, respectively.
The Company maintains a voluntary defined contribution plan covering
substantially all of its employees in Canada (the "Canadian Plan"). Eligible
employees may contribute up to 2.5% of their wages eligible under the
Canadian plan and the Company will match the contribution up to 2.5%.
Eligible employees may contribute an additional amount in excess of the
2.5%, but they are not matched by the Company. For the years ended December
31, 1996 and 1995 and for the period from December 14, 1994 to December 31,
1994, the Company's contributions were $112,000, $101,000 and $5,000,
respectively.
13. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES:
The Company leases certain property and equipment under operating leases
with remaining terms ranging from one to five years. Future minimum lease
payments under operating leases in effect at December 31, 1996 are
approximately as follows:
1997 $2,847
1998 2,379
1999 1,822
2000 1,564
2001 1,166
Rental expense for the years ended December 31, 1996, 1995 and 1994 was
$2,268,000, $2,039,000 and $841,000, respectively.
F-21
54
INVENTORY REPURCHASE AGREEMENTS:
The Company has inventory repurchase agreements with several banks to
support certain distributors in their bank financing. The agreements
provide that in the event one of the banks obtains title to the
distributor's inventory through foreclosure, the Company would be required
to repurchase the Company's own inventory up to i) $450,000 under one
agreement and ii) C$305,000 ($223,000) under two other agreements of
selected inventory previously sold by the Company to the distributor. The
purchase price would be that price paid by the distributor to the Company
for such inventory. The Company would have a right of first refusal in the
event the bank received a bona fide written offer from a third party to
purchase the foreclosed inventory.
14. RESTRUCTURING CHARGE
The Company recorded a restructuring charge of $3.3 million in the fourth
quarter of 1996 due to the consolidation of manufacturing operations in
1997. The consolidation of operations is essential and will allow the
Company to effectively respond to competitive pressures and maintain its
position as a low cost provider. Costs incurred in connection with the
restructuring charge have been charged to the results of operations for the
year ended December 31, 1996 and are summarized as follows (in thousands):
Severance $1,511
Relocation 1,087
Elimination of duplicate facilities and equipment 682
------
$3,280
======
15. SUPPLEMENTAL CASH FLOW INFORMATION
OTHER CASH PAYMENTS AND RECEIPTS:
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 1996 1995 1994
Cash paid for interest $3,510 $3,551 $1,087
Cash paid for income taxes 2,495 1,651 1,155
Income tax refunds received 224 474 417
F-22
55
CHANGES IN OPERATING WORKING CAPITAL ITEMS:
Changes in operating working capital items, net of amounts obtained in the
acquisitions of Trade, Bazaar and Reliable and from the consolidation of the
Company's joint ventures, is as follows:
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 1996 1995 1994
Trade receivables $ (2,064) $ (3,960) $ (462)
Inventories 1,706 (4,905) (2,660)
Income taxes recoverable (2,545) 225 (365)
Prepaid expenses 39 (133) 49
Trade payables (2,261) 1,268 (940)
Accrued liabilities 853 (88) 908
Income taxes payable (542) 543 -
-------- -------- --------
Total Changes in Operating Capital Items $ (4,814) $ (7,050) $ (3,470)
======== ======== ========
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
During the years ended December 31, 1996, 1995 and 1994, the Company
financed the acquisition of equipment totalling $118,000, $2,092,000 and
$923,000, respectively, through the assumption of obligations under capital
leases.
In connection with the Trade Acquisition in 1996, the Company i) issued
warrants to acquire 300,000 shares of the Company's common stock at an
exercise price of $7.75 per share, which were valued at $330,000.
In connection with the Reliable Acquisition in 1995, the Company i) assumed
Reliable's line of credit and term loan credit facility with a Michigan
bank, which totalled $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 shares of the Company's common stock, which
was valued at $320,000 or $5.75 per share.
In connection with the Bazaar Acquisition in 1994, the Company i) issued
warrants to Mr. Stuart to acquire 100,000 shares of the Company's common
stock at an exercise price of $5.75 per share, which were valued at
$144,000, ii) issued a subordinated note payable to Mr. Stuart for
$5,000,000, and iii) reflected payables of $1,642,000 for the Bazaar
Purchase Price Adjustment and $274,000 for other costs of the Acquisition.
16. GEOGRAPHIC FINANCIAL INFORMATION
The Company operates in one principal industry segment: the manufacturing
and selling of supplies and equipment for bingo games and related fund
raising activities. The Company's products are sold primarily to
distributors for resale to others, which are primarily non-profit
organizations.
F-23
56
Geographic financial information for the years ended December 31, 1996 and
1995 are as follows:
(DOLLARS IN THOUSANDS) 1996 1995 1994
NET SALES:
United States:
Domestic Customers $ 68,548 $ 64,112 $ 53,734
Foreign Customers 688 1,398 3,611
Canada 41,400 43,110 1,742
United Kingdom - 1,262 71
-------- -------- --------
Total $110,636 $109,882 $ 59,158
======== ======== ========
INCOME (LOSS) BEFORE INCOME TAXES:
United States $ (3,766) $ 2,952 $ (1,890)
Canada (392) 1,773 (301)
United Kingdom 2,145 (2,162) (82)
-------- -------- --------
Income (Loss) before Income Taxes $ (2,013) $ 2,563 $ (2,273)
======== ======== ========
ASSETS:
United States $101,930 $ 45,437 $ 39,299
Canada 49,990 48,912 44,667
United Kingdom - 1,731 2,387
Mexico 2,675 2,914 2,624
-------- -------- --------
Total $154,595 $ 98,994 $ 88,977
======== ======== ========
CAPITAL EXPENDITURES:
United States $ 2,072 $ 706 $ 748
Canada 582 611 70
United Kingdom - - -
-------- -------- --------
Total $ 2,654 $ 1,317 $ 818
======== ======== ========
DEPRECIATION AND AMORTIZATION:
United States $ 2,820 $ 2,980 $ 1,873
Canada 1,551 1,405 58
United Kingdom 144 232 4
-------- -------- --------
Total $ 4,515 $ 4,617 $ 1,935
======== ======== ========
Information provided on the United States in 1996 reflects operations of
Trade Products from November 13, 1996 to December 31, 1996 and Canada and
United Kingdom in 1994 reflects operations from December 14, 1994 to
December 31, 1994, respectively. Geographic information on Mexico is
included within amounts for the United States in all categories (except
identifiable assets) as substantially all of the production of Stuart
Entertainment Mexico is sold to customers in the United States as Stuart
Entertainment Mexico is not licensed to sell to customers in Mexico.
F-24
57
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1996, and 1995 (amounts in thousands, except per
share amounts):
FOURTH THIRD SECOND FIRST
QUARTER* QUARTER QUARTER QUARTER TOTAL
1996:
Net sales $29,304 $27,149 $27,360 $26,823 $110,636
Gross margin 7,507 8,502 8,451 8,413 32,873
Income (loss) before income taxes (5,770) 1,033 1,088 1,636 (2,013)
Income (loss) before extraordinary
item (3,721) 631 874 918 (1,298)
Net income (loss) (4,654) 631 874 918 (2,231)
Earnings (loss) per share before
extraordinary loss:
Primary (0.54) 0.09 0.13 0.13 (0.19)
Fully dilutive (0.54) 0.09 0.13 0.13 (0.19)
Earnings (loss) per share:
Primary (0.67) 0.09 0.13 0.13 (0.32)
Fully dilutive (0.67) 0.09 0.13 0.13 (0.32)
1995:
Net sales $25,966 $27,031 $29,421 $27,464 $109,882
Gross margin 8,386 9,206 9,326 8,242 35,160
Income before income taxes 670 1,164 20 709 2,563
Net income (loss) 550 519 (521) 238 786
Earnings (loss) per share:
Primary 0.08 0.08 (0.08) 0.04 0.12
Fully dilutive 0.07 0.08 (0.08) 0.04 0.11
* The 1996 fourth quarter results of operations were largely
influenced by the $3.3 million restructuring charge related to the
consolidation of manufacturing operations, the extraordinary loss of
$933,000, net of income taxes, to write-off unamortized debt issuance
costs and a charge of $1.1 million to cost of sales related to the
application of purchase accounting to the finished goods of Trade
Products.
F-25
58
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
NET
BALANCE AT CHARGED TO CHANGES NET BALANCE
BEGINNING COSTS AND FROM CHARGE- AT END
OF YEAR EXPENSES ACQUISITIONS OFFS * OF YEAR
YEAR ENDED DECEMBER 31, 1996:
Allowance for Doubtful Accounts:
Accounts Receivable $2,086 $ 20 $ 800 $ (676) $ 2,230
Notes Receivable:
Current Portion 199 (100) - - 99
Non-Current Portion 124 - - - 124
------ -------- ------ -------- --------
$2,409 $ (80) $ 800 $ (676) $ 2,453
====== ======== ====== ======== ========
Valuation Reserve for Non-
Current Deferred Income Taxes $758 $ (240) $ - $ - $ 518
====== ======== ====== ======== ========
YEAR ENDED DECEMBER 31, 1995:
Allowance for Doubtful Accounts:
Accounts Receivable $1,598 $ 643 $ - $ (155) $ 2,086
Notes Receivable:
Current Portion 199 199
Non-Current Portion 423 (100) - (199) 124
------ -------- ------ -------- --------
$2,220 $ 543 $ - $ (354) $ 2,409
====== ======== ====== ======== ========
Valuation Reserve for Non-Current
Deferred Income Taxes $ 322 $ 436 $ - $ - $ 758
====== ======== ====== ======== ========
YEAR ENDED DECEMBER 31, 1994:
Allowance for Doubtful Accounts:
Accounts Receivable $ 608 $ 665 $ 632 $ (307) $ 1,598
Notes Receivable:
Current Portion - 199 - - 199
Non-Current Portion - 423 - - 423
------ -------- ------ -------- --------
$ 608 $ 1,287 $ 632 $ (307) $ 2,220
====== ======== ====== ======== ========
Valuation Reserve for Non-Current
Deferred Income Taxes $ - $ 161 $ 161 $ - $ 322
====== ======== ====== ======== ========
* For the years ended December 31, 1996, 1995 and 1994, "Net Charge-Offs"
consists of write-offs of trade and notes receivable, net of subsequent
collections.
F-26
59
EXHIBIT INDEX
Certain of the following exhibits, designated with an asterisk (*),
are filed herewith. The exhibits not so designated have been filed previously
and are incorporated herein by reference to the documents indicated in brackets
following the descriptions of such exhibits.
Exhibit No. Description
- ----------- -----------
2.01 Asset Purchase Agreement, dated as of August 6, 1996, among
Stuart Entertainment, a Delaware corporation, Trade Products,
Inc., a Washington corporation, and the Stockholders of Trade
Products, Inc.(1)
2.02 First Amendment to the Asset Purchase Agreement dated October
10, 1996.(2)
3.01 Amended and Restated Certificate of Incorporation.(12)
3.02 Amended and Restated Bylaws of the Company(3)
4.01 Form of Common Stock Certificate.(4)
4.02 Securityholders' Agreement, dated December 13, 1994, between
Leonard A. Stuart, Bingo Holdings, Inc. and the Company.(3)
4.03 Warrant to Purchase 300,000 Shares of Common Stock of the
Company dated November 13, 1996.(2)
10.01 Incentive Stock Option Plan of the Company.(5)
10.02 Non-Qualified Stock Option Plan of the Company.(6)
10.03 Lease, dated August 14, 1986, between William E. Osband, Jr. and
the Company.(7)
10.04 Lease, dated February 5, 1993, between Fraccionadora Industrial
Del Norte, S.A. de C.V. and Stuart Entertainment, S.A. de
C.V.(8)
10.05 1992 Non-Qualified Stock Option Plan of Stuart Entertainment,
Inc.(8)
10.06 1992 Incentive Stock Option Plan of Stuart Entertainment,
Inc.(8)
10.07 Amended and Restated Performance Stock Option Plan of Stuart
Entertainment, Inc.(12)
60
Exhibit No. Description
- ----------- -----------
10.08 Agency Agreement, dated March 14, 1993, between Gala Leisure
Limited, Mitre Printing Company Limited, Bingo Press & Specialty
Limited and the Company.(9)
10.09 Employment Agreement, dated December 13, 1994, between Leonard
A. Stuart and the Company.(3)
10.10 Employment Agreement, dated June 1, 1994, between Albert F.
Barber and the Company.(3)
10.11 Warrant Certificate, dated December 13, 1994, issued by the
Company to Leonard A. Stuart.(3)
10.12 Warrant Certificate, dated December 13, 1994, issued by the
Company to Bingo Holdings, Inc.(3)
10.13 Assignment and Assumption Agreement, dated as of August 31, 1995
between Stuart Entertainment, Inc., Bank of America Illinois,
The Chase Manhattan Bank (National Association) and Bank of
America Canada, as agent.(10)
10.14 Assignment and Assumption Agreement dated August 31, 1995
between Bingo Press & Specialty Limited, Bank of America Canada,
The Chase Manhattan Bank of Canada and Bank of America Canada,
as agent.(10)
10.15 Guarantee Agreement executed by MLGAL Partners, Limited
Partnership, and Leonard A. Stuart.(11)
10.16 Employment Agreement, dated November 13, 1996, by and between
the Company and Ronald G. Rudy.(1)
10.17 Amended and Restated Credit Agreement, dated November 13, 1996,
by and among Stuart Entertainment, Inc., Bingo Press & Specialty
Limited, Bank of America Trust and Savings Association, Bank of
America Canada, Chase Manhattan Bank and Chase Manhattan Bank of
Canada.(12)
10.18 Agreement dated April 4, 1996 by and between Power Bingo
Corporation and the Company.(12)
10.19 Management Consulting Agreement dated February 1, 1996 by and
between the Company and Len Stuart & Associates, Ltd.(12)
10.20 Lease between the Company and Partnership Leasing L.L.C.(12)
61
Exhibit No. Description
- ----------- -----------
10.21 First Amendment to Amended and Restated Credit Agreement dated
March 24, 1997*
21 Subsidiaries of the Registrant.*
23 Consent of Deloitte & Touche LLP.*
27 Financial Data Schedule*
- --------------------
*Filed herewith.
(1) Incorporated by reference to the Company's Current Report on From 8-K
dated August 6, 1996, File No. 0-10737.
(2) Incorporated by reference to the Company's Current Report on Form 8-K
dated November 13, 1996, File No. 0-10737.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994, file No. 0-10737.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-8, File No. 33-89962.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-1, File No. 73746, filed August 20, 1981.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1985, File No. 0-10737.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1989, File No. 0-10737.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992, File No. 0-10737.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993, File No. 0-10737.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995, File No. 0-10737.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, File No. 0-10737
(12) Incorporated by reference to the Company's Resignation Statement on Form
S-4, File No. 333-18779.