<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 13, 1996
STUART ENTERTAINMENT, INC.
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 0-10737 84-0402207
------------ ----------- ----------------------
(State of (Commission (IRS Employer
Incorporation) File Number) Identification Number)
3211 Nebraska Avenue, Council Bluffs, Iowa 51501
-----------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (712) 323-1488
Not Applicable
-------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
Please see Attachment A.
(b) Pro Forma Financial Information.
Please see Attachment B.
(c) Exhibits.
None.
2
<PAGE> 3
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
STUART ENTERTAINMENT, INC.
Date: January 22, 1997 By: /s/ Paul C. Tunink
-----------------------------------
Paul C. Tunink, Vice President -
Finance, Treasurer and Chief Financial
Officer
<PAGE> 4
ATTACHMENT A
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Balance Sheets as of December 31, 1994 and 1995 . . . . . . . . . . . . . . . . . . . A-2
Statements of Income for the Years Ended December 31, 1993, 1994 and 1995 . . . . . . A-3
Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 . . . . . A-4
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-5
Balance Sheets as of December 31, 1995 and September 30, 1996 (unaudited) . . . . . . A-11
Statements of Income for the Nine Months Ended September 30, 1995 and 1996
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-12
Statements of Cash Flows for the Nine Months Ended September 30, 1995 and 1996
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-13
Notes to Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . . . . A-14
</TABLE>
<PAGE> 5
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Trade Products, Inc.
We have audited the accompanying balance sheets of Trade Products, Inc. as
of December 31, 1994 and 1995, and the related statements of income and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Trade Products, Inc. as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Seattle, Washington
March 29, 1996, except for the second paragraph of Note 13,
as to which the date is April 29, 1996
A-1
<PAGE> 6
TRADE PRODUCTS, INC.
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 1,183,757 $ 759,201
Accounts receivable, net of allowance for doubtful accounts of
$350,000 and $394,000 at December 31, 1994 and 1995,
respectively................................................. 5,163,404 6,100,651
Inventories..................................................... 4,571,269 5,277,212
Current portion of notes and other receivables.................. 227,272 62,868
Current portion of notes receivable from and advances to
officers and affiliates...................................... 186,229 49,464
Prepaid expenses................................................ 63,942 81,212
----------- -----------
Total current assets......................................... 11,395,873 12,330,608
----------- -----------
Notes and other receivables, net of current portion............... 5,001 --
Notes receivable from and advances to officers and affiliates, net
of current portion.............................................. 135,669 135,654
Assets held for sale.............................................. 156,000 100,000
Deposits.......................................................... 59,173 126,450
Self insurance deposit............................................ 344,000 344,000
Other assets, net................................................. 110,850 60,850
----------- -----------
810,693 766,954
----------- -----------
Property and equipment, net....................................... 8,217,091 7,121,506
----------- -----------
Total assets............................................ $20,423,657 $20,219,068
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 2,301,130 $ 1,978,820
Accrued expenses................................................ 1,045,818 1,097,685
Accrued profit sharing.......................................... 200,000 100,000
Current portion of long-term debt............................... 853,177 944,414
Customer deposits............................................... 126,914 53,665
Other liabilities............................................... -- 126,104
----------- -----------
Total current liabilities.................................... 4,527,039 4,300,688
----------- -----------
Long-term debt, net of current portion............................ 7,238,381 7,577,175
Other noncurrent liabilities...................................... 252,274 90,416
----------- -----------
7,490,655 7,667,591
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; 2,000,000 shares authorized;
756,250 shares issued and outstanding........................ 7,562 7,562
Additional paid-in capital...................................... 257,065 257,065
Retained earnings............................................... 8,141,336 7,986,162
----------- -----------
8,405,963 8,250,789
----------- -----------
Total liabilities and stockholders' equity.............. $20,423,657 $20,219,068
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-2
<PAGE> 7
TRADE PRODUCTS, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Sales............................................... $31,456,730 $32,493,995 $36,595,250
Cost of sales....................................... 17,814,149 19,632,387 22,806,656
----------- ----------- -----------
13,642,581 12,861,608 13,788,594
Selling, general and administrative expense......... 11,176,934 10,100,834 11,652,337
Interest expense.................................... 378,941 519,694 729,647
----------- ----------- -----------
2,086,706 2,241,080 1,406,610
Other income (expense), net......................... (168,970) (208,930) 68,007
----------- ----------- -----------
Net income........................................ $ 1,917,736 $ 2,032,150 $ 1,474,617
=========== =========== ===========
Net income per share.............................. $ 2.54 $ 2.69 $ 1.95
=========== =========== ===========
Weighted average shares outstanding............... 756,250 756,250 756,250
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-3
<PAGE> 8
TRADE PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
----------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 1,917,736 $ 2,032,150 $ 1,474,617
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 1,646,538 1,852,953 1,962,820
(Gain) loss on disposal of assets............. 176,663 247,896 (2,935)
Adjustment of construction in progress to net
realizable value............................ -- -- 806,896
Adjustment of asset held for resale to net
realizable value............................ 238,087 -- 56,000
Provision for doubtful accounts............... 40,000 77,374 616,209
Changes in assets and liabilities:
Accounts receivable......................... (1,407,453) (150,230) (1,531,083)
Inventories................................. (1,146,469) (417,534) (705,943)
Prepaid expenses............................ 5,835 3,015 (17,270)
Other assets and deposits................... (334,726) 46,103 (67,277)
Accounts payable............................ 237,024 618,322 (487,763)
Accrued expenses............................ 321,305 (64,188) 51,869
Accrued profit sharing...................... (50,000) (50,000) (100,000)
Customer deposits........................... 127,761 (33,027) (73,249)
Other liabilities........................... 163,988 (18,516) (35,754)
---------- ------------ -----------
Net cash provided by operating activities... 1,936,289 4,144,318 1,947,137
---------- ------------ -----------
Cash flows from investing activities:
Additions to property and equipment.............. (838,704) (2,921,916) (1,552,345)
Proceeds from sale of assets..................... 45,494 69,989 96,600
Notes receivable and other receivables........... (175,973) (282,869) --
Repayment on notes receivable and other
receivables................................... 90,865 232,502 147,032
Notes receivable from and advances to officers
and affiliates................................ (1,958,465) (722,096) (292,931)
Repayment on notes receivable and advances to
officers and affiliates....................... 1,787,756 811,869 429,711
Deposit for equipment............................ (92,538) -- --
---------- ------------ -----------
Net cash used in investing activities....... (1,141,565) (2,812,521) (1,171,933)
---------- ------------ -----------
Cash flows from financing activities:
Distribution to stockholders..................... (2,396,743) (2,203,545) (1,629,791)
Additions to long-term debt...................... 8,013,784 14,422,824 4,046,320
Reductions in long-term debt..................... (6,509,523) (13,056,067) (3,616,289)
---------- ------------ -----------
Net cash used in financing activities....... (892,482) (836,788) (1,199,760)
---------- ------------ -----------
Increase (decrease) in cash and cash equivalents... (97,758) 495,009 (424,556)
Cash and cash equivalents:
Beginning of year................................ 786,506 688,748 1,183,757
---------- ------------ -----------
End of year...................................... $ 688,748 $ 1,183,757 $ 759,201
========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-4
<PAGE> 9
TRADE PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Trade Products, Inc. (the "Company") is a gaming supply manufacturer,
producing an extensive line of ticket and bingo products used by charitable
fund-raising organizations and state lotteries. The Company also operates a
promotional marketing division, which produces a wide range of promotional
products and services including games, sweepstakes and contests. Products are
marketed internationally. The Company sells its products in many geographic
markets and does not believe there are any significant concentrations of credit
risk.
Significant Estimates:
The preparation of 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
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 value of cash and cash equivalents, trade accounts receivable,
trade accounts payable, accrued expenses, and accrued profit sharing approximate
fair value due to the short maturity of these items.
The carrying value of notes receivable approximates fair value as stated
interest rates approximate market rates for instruments with similar terms and
maturities.
Long term debt has a variable rate of interest and therefore the recorded
amount approximates fair value.
Revenue Recognition:
Revenue from product sales is recognized when a product is shipped. Revenue
from sales of services is recognized when services are performed.
Recent Pronouncements:
During March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of " (SFAS No. 121), which requires the Company
to review for impairment its long-lived assets and intangibles whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In certain situations, an impairment loss would be
recognized. SFAS No. 121 will become effective for the Company's 1996 fiscal
year.
During October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123), which establishes a fair value method
of accounting for stock-based compensation plans, and requires additional
disclosures for those companies which elect not to adopt the new method of
accounting. SFAS No. 123 will be effective for the Company's 1996 fiscal year.
The Company does not intend to adopt the fair value method of accounting for
stock-based compensation, and will provide the required additional disclosures
beginning in its fiscal year ending December 31, 1996.
Implementation of these Statements is not expected to be material to the
Company's financial position, results of operations or liquidity.
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.
A-5
<PAGE> 10
TRADE PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company places its temporary cash investments with one financial
institution. At times such cash investments may be in excess of the FDIC
insurance limits. The Company does not believe it is exposed to any significant
credit risk on cash and cash equivalents.
Property and Equipment:
Property and equipment are stated at cost. Expenditures for improvements
that significantly add to the productive capacity or extend the life of an asset
are capitalized. Expenditures for repairs and maintenance are charged to
expense. When property and equipment are retired or otherwise disposed, gains
and losses are reflected in operations.
Depreciation on property and equipment is computed by accelerated and
straight-line methods over the assets' estimated useful lives, which range from
three to twenty years. Leasehold improvements are amortized on a straight-line
basis over the shorter of the estimated life or the anticipated lease term
including renewals.
Income Taxes:
The Company has elected to have its income taxed pursuant to the provisions
of Subchapter S of the Internal Revenue Code. Under these provisions, the
stockholders of the Company are liable for Federal income taxes on their
respective shares of the Company's taxable income.
Other Assets:
Other assets includes $200,000, net of $100,000 and $150,000 accumulated
amortization at December 31, 1994 and 1995, respectively, related to a contract
for services which is being amortized over the four year service period.
Reclassifications:
Certain reclassifications have been made to the 1993 and 1994 financial
statements in order to conform to the 1995 presentation. Such reclassifications
had no effect on stockholders' equity or net income.
2. INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
using the last-in, first-out method.
Inventories are summarized as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Raw materials............................................... $ 816,269 $ 944,740
Work in process............................................. 1,014,542 1,285,756
Finished goods.............................................. 2,740,458 3,046,716
---------- ----------
$4,571,269 $5,277,212
========== ==========
</TABLE>
If the first-in, first-out method of inventory accounting had been used,
inventories would have been $712,646 and $1,113,123 higher at December 31, 1994
and 1995, respectively.
A-6
<PAGE> 11
TRADE PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
----------- ------------
<S> <C> <C>
Furniture, fixtures and equipment........................ $13,484,054 $ 14,089,939
Leasehold improvements................................... 1,077,471 925,288
Negatives................................................ 1,002,388 1,267,566
----------- ------------
15,563,913 16,282,793
Less accumulated depreciation............................ (8,277,091) (10,008,506)
Construction in progress................................. 930,269 847,219
----------- ------------
$ 8,217,091 $ 7,121,506
=========== ============
</TABLE>
During 1993 and 1994 the Company recorded expenses totaling $2,066,532 and
$357,840, respectively, related to the development of a new type of
manufacturing equipment, which was included in selling, general and
administrative expenses. At December 31, 1994, $801,498 remained in construction
in progress related to this equipment. During 1995, events occurred that
provided management evidence that this equipment under construction would result
in no future benefit. Accordingly, the Company recorded 1995 expenses of
approximately $807,000 in selling, general and administrative expense to write
off the remaining balance. The Company is involved in legal proceedings in an
attempt to recover these costs.
Depreciation expense for the years ended December 31, 1993, 1994 and 1995
was $1,594,953, $1,779,972 and $1,912,820, respectively.
4. ACCRUED EXPENSES
Accrued expenses consists of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Wages payable............................................... $ 456,217 $ 478,244
Vacation payable............................................ 183,915 186,903
Accrued payroll taxes....................................... 133,524 134,507
Accrued property taxes...................................... 75,736 75,849
Liability for worker's compensation self insurance.......... 62,379 61,971
Accrued interest............................................ 40,592 42,537
Other liabilities........................................... 93,455 117,674
---------- ----------
$1,045,818 $1,097,685
========== ==========
</TABLE>
5. AVAILABLE LINES OF CREDIT
At December 31, 1995, the Company had a $2,000,000 line of credit with a
commercial bank which bears interest at the bank's reference rate and expires on
June 30, 1996. The reference rate on this line of credit was 8.50% at December
31, 1995. Borrowings are based on percentages of and are collateralized by the
Company's accounts receivable and inventory. There were no amounts outstanding
against this line of credit at December 31, 1994 and 1995.
A-7
<PAGE> 12
TRADE PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Bank note payable in monthly installments of $63,417, plus
interest at the bank's reference rate collateralized by
equipment, maturing on October 8, 2004.................... $7,525,752 $6,722,191
Bank note payable, $1,500,000 equipment line of credit,
interest only at bank's reference rate until June 30,
1996. Beginning July 1, 1996 amounts including additional
borrowings will be converted to a term loan with monthly
installments payable over 10 years, plus interest at
bank's reference rate collateralized by equipment,
maturing on June 30, 2006................................. -- 904,052
Bank note payable, equipment line of credit, interest only
at bank's reference rate plus 0.25% until June 30, 1995.
On July 1, 1995, amounts including additional borrowings
were converted to a term loan with monthly installments
payable over 10 years, plus interest at bank's reference
rate, collateralized by equipment......................... 548,633 865,546
Note payable to officer in monthly installments of $2,483
and $1,431, respectively, plus accrued interest at the
bank's reference rate, uncollateralized. Due on demand.... 17,173 29,800
---------- ----------
8,091,558 8,521,589
Less current portion........................................ (853,177) (944,414)
---------- ----------
Long-term debt.................................... $7,238,381 $7,577,175
========== ==========
</TABLE>
The reference rate was 8.5% at December 31, 1994 and 1995.
Aggregate principal payments to be made by the Company on its long-term
debt for years ending December 31 are as follows:
<TABLE>
<S> <C>
1996............................................................. $ 944,414
1997............................................................. 1,002,114
1998............................................................. 1,002,114
1999............................................................. 1,002,114
2000............................................................. 1,002,114
Thereafter....................................................... 3,568,719
----------
$8,521,589
==========
</TABLE>
Certain debt agreements include restrictions relating to required levels of
working capital, tangible net worth, limits on capital acquisitions and
conditions precedent to incurring additional long-term debt.
7. LEASE COMMITMENT AND RELATED-PARTY TRANSACTIONS
The Company leases its manufacturing and office premises from a partnership
of which two of the Company's stockholders are partners. The lease provides for
monthly rentals of $40,000 and expires in 2001. In December 1993, the Company
leased additional manufacturing and warehouse premises from the partnership at a
monthly rental of $37,000, under a lease agreement expiring in November 1996. In
addition,
A-8
<PAGE> 13
TRADE PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the Company pays operating costs, taxes and insurance. In September 1992, the
Company leased additional parking space from the partnership at a monthly rental
of $1,500. Rental payments to the partnership were $498,000 for the year ended
December 31, 1993 and $942,000 for each of the years ended December 31, 1994 and
1995.
The Company rented office space in Los Angeles at a monthly rental of
$3,070, under a lease agreement which expired on April 30, 1994. The Company
entered into a new lease with a monthly payment of $4,750 per month, expiring in
April 1999. The lease provides that the Company pay operating costs.
The lease agreements provide renewal options for terms of up to ten
additional years.
Aggregate minimum rental payments to be made by the Company on its
operating leases for years ending December 31 are as follows:
<TABLE>
<S> <C>
1996............................................................. $ 944,000
1997............................................................. 537,000
1998............................................................. 537,000
1999............................................................. 499,000
2000............................................................. 480,000
Thereafter....................................................... 480,000
----------
$3,477,000
==========
</TABLE>
8. CHANGES IN RETAINED EARNINGS
Changes in retained earnings for the years ended December 31, 1993, 1994
and 1995 are summarized as follows:
<TABLE>
<S> <C>
Balance, January 1, 1993........................................ $ 8,791,738
Distribution to stockholders.................................. (2,396,743)
Net income.................................................... 1,917,736
-----------
Balance, January 1, 1994........................................ 8,312,731
Distribution to stockholders.................................. (2,203,545)
Net income.................................................... 2,032,150
-----------
Balance, January 1, 1995........................................ 8,141,336
Distribution to stockholders.................................. (1,629,791)
Net income.................................................... 1,474,617
-----------
Balance, December 31, 1995...................................... $ 7,986,162
===========
</TABLE>
9. BY PRODUCT REVENUE
During 1995 the Company began selling scrap paper, a by product, from its
operations. Revenues from scrap paper included in the sales line item in the
statement of income totaled $165,000 for the year ended December 31, 1995.
10. EMPLOYEE BENEFIT PLANS
Stock Appreciation Rights
In July 1986, the Company's Board of Directors adopted a Stock Appreciation
Rights ("SARS") Plan that will terminate no later than July 1, 1996. As more
fully described in the Plan document, up to 100,000
A-9
<PAGE> 14
TRADE PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SARS may be issued to key employees at the sole discretion of the Board of
Directors. The basis of the SARS is determined by calculating the net book value
per share, including outstanding SARS, at the end of the most recent fiscal
year. The value of the SARS is the difference in the basis at the time of
redemption as compared to the basis at the time they were granted. The reduction
in the basis of the SARS totaling $8,728, $6,514 and $1,145, is reflected each
year in the Statement of Income as a credit to compensation expense for 1993,
1994, and 1995, respectively. As of December 31, 1994 and 1995, $91,561 and
$90,416 are included in accrued expenses, respectively. The SARS are not capital
stock and have no rights pertaining to stockholders or creditors of the Company.
During 1993, 1,000 SARs were issued, however no SARs were issued during 1994 and
1995. No SARs were redeemed or retired during 1993, 1994 and 1995. At December
31, 1995, there were 12,000 SARS outstanding.
Profit-Sharing Plan:
The Company has a profit-sharing plan covering employees who meet minimum
age and service requirements. Annual contributions to the profit-sharing plan
are made at the discretion of the Board of Directors of the Company.
Profit-sharing expense for the years ended December 31, 1993, 1994 and 1995 was
$250,000, $200,000 and $100,000, respectively. The Company plans to terminate
this plan in 1996 and establish a 401(k) plan.
11. COMMITMENTS AND CONTINGENCIES
Self Insurance:
In October 1992, the Company became self insured for workers compensation
liabilities and was required to deposit $344,000 in an escrow account. The
Company has insurance for any claim over $250,000, per occurrence, subject to
certain stop loss limitations. The Company has accrued approximately $62,000 at
December 31, 1994 and 1995 related to this self insured liability.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Cash Payments:
Interest paid during the years ended December 31, 1993, 1994 and 1995 was
$363,802, $514,599 and $727,341, respectively.
Noncash Investing Activity:
Property and equipment purchased during the year included in accounts
payable at December 31, 1995 totaled $165,453.
13. SUBSEQUENT EVENTS
Subsequent to December 31, 1995, the Company distributed $680,000 to two
stockholders, $200,000 in cash and $480,000 in the form of a note payable.
Additionally $225,000 was advanced to one of the stockholders in exchange for a
note receivable. Both the note receivable and the note payable are due on
demand.
On April 18, 1996, the Company signed a letter of intent to sell its net
assets for approximately $29 million, subject to certain purchase price
adjustments.
A-10
<PAGE> 15
TRADE PRODUCTS, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
(UNAUDITED)
Current assets:
Cash and cash equivalents....................................... $ 759,201 $ 1,996,169
Accounts receivable, net of allowance for doubtful accounts of
$394,000 at December 31, 1995 and September 30, 1996......... 6,100,651 7,506,790
Inventories..................................................... 5,277,212 5,103,394
Current portion of notes and other receivables.................. 62,868 330,126
Current portion of notes receivable from and advances to
officers and affiliates...................................... 49,464 161,018
Prepaid expenses................................................ 81,212 96,582
----------- -----------
Total current assets......................................... 12,330,608 15,194,079
----------- -----------
Notes and other receivables, net of current portion............... -- 71,170
Notes receivable from and advances to officers and affiliates, net
of
current......................................................... 135,654 139,543
portion Assets held for sale...................................... 100,000 100,000
Deposits.......................................................... 126,450 --
Self insurance deposit............................................ 344,000 370,000
Other assets, net................................................. 60,850 23,350
----------- -----------
766,954 704,063
----------- -----------
Property and equipment, net....................................... 7,121,506 7,102,884
----------- -----------
Total assets................................................. $ 20,219,068 $ 23,001,026
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 1,978,820 $ 1,270,065
Accrued expenses................................................ 1,097,685 1,366,667
Accrued profit sharing.......................................... 100,000 --
Current portion of long-term debt............................... 944,414 1,008,211
Customer deposits............................................... 53,665 79,980
Other liabilities............................................... 126,104 96,714
----------- -----------
Total current liabilities.................................... 4,300,688 3,821,637
----------- -----------
Long-term debt, net of current portion............................ 7,577,175 8,009,745
Other noncurrent liabilities...................................... 90,416 99,945
----------- -----------
7,667,591 8,109,690
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; 2,000,000 shares authorized;
756,250 shares issued and outstanding........................ 7,562 7,562
Additional paid-in capital...................................... 257,065 257,065
Retained earnings............................................... 7,986,162 10,805,072
----------- -----------
8,250,789 11,069,699
----------- -----------
Total liabilities and stockholders' equity................... $ 20,219,068 $ 23,001,026
=========== ===========
</TABLE>
See accompanying notes to financial statements.
A-11
<PAGE> 16
TRADE PRODUCTS, INC.
STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30,
----------------------------
1995 1996
------------ -----------
<S> <C> <C>
Sales............................................................ $ 27,762,175 $28,543,577
Cost of sales.................................................... (17,460,706) (17,286,725)
----------- -----------
10,301,469 11,256,852
Selling, general and administrative expense...................... (7,625,384) (8,040,733)
Interest expense................................................. (552,896) (568,145)
----------- -----------
2,123,189 2,647,974
Income from settlement of lawsuit................................ -- 2,000,000
Other income, net................................................ 160,990 66,941
----------- -----------
Net income....................................................... $ 2,284,179 $ 4,714,915
=========== ===========
Net income per share............................................. $ 3.02 $ 6.23
=========== ===========
Weighted average shares outstanding.............................. 756,250 756,250
=========== ===========
</TABLE>
See accompanying notes to financial statements.
A-12
<PAGE> 17
TRADE PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
1995 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................ $ 2,284,179 $ 4,714,915
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................. 1,364,506 1,466,909
Loss on disposal of assets..................................... 10,690 40,889
Changes in assets and liabilities:
Accounts receivable.......................................... (1,224,762) (1,406,139)
Inventories.................................................. 60,072 173,818
Prepaid expenses............................................. (142,686) (15,370)
Other assets and deposits.................................... 24,010 37,500
Accounts payable and accrued expenses........................ (537,064) (276,657)
Accrued profit sharing....................................... (200,000) (100,000)
Customer deposits............................................ 45,372 26,315
Other liabilities............................................ (23,609) 9,529
------------ ------------
Net cash provided by operating activities................. 1,660,708 4,671,709
------------ ------------
Cash flows from investing activities:
Additions to property and equipment............................... (862,914) (1,731,783)
Proceeds from sale of assets...................................... 96,600 47,760
Notes receivable and other receivables............................ 2,373 (427,095)
Repayments on notes receivable and other receivables.............. 109,636 88,667
Notes receivable from and advances to officers and affiliates..... (143,283) (115,443)
Repayments on notes receivable and advances to officers and
affiliates..................................................... 232,490 --
Deposit on equipment.............................................. (203,812) 126,450
Self insurance deposit............................................ -- (26,000)
------------ ------------
Net cash used in investing activities..................... (768,910) (2,037,444)
------------ ------------
Cash flows from financing activities:
Distribution to stockholders...................................... (1,572,947) (1,896,005)
Additions to long-term debt....................................... 1,225,399 3,682,825
Reductions in long-term debt...................................... (1,153,261) (3,184,117)
------------ ------------
Net cash used in financing activities..................... (1,500,809) (1,397,297)
------------ ------------
Increase (decrease) in cash and cash equivalents.................. (609,011) 1,236,968
Cash and cash equivalents:
Beginning of period....................................... 1,183,757 759,201
------------ ------------
End of period.................................................. $ 574,746 $ 1,996,169
============ ============
</TABLE>
See accompanying notes to financial statements.
A-13
<PAGE> 18
TRADE PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Trade Products, Inc. (the "Company") is a gaming supply manufacturer,
producing an extensive line of ticket and bingo products used by charitable
fund-raising organizations and state lotteries. The Company also operates a
promotional marketing division, which produces a wide range of promotional
products and services including games, sweepstakes and contests. Products are
marketed internationally. The Company sells its products in many geographic
markets and does not believe there are any significant concentrations of credit
risk.
The financial statements for the nine month periods ended September 30,
1995 and 1996 are unaudited and do not contain all of the information required
by generally accepted accounting principles to be included in a full set of
financial statements. The annual financial statements of the Company include a
summary of significant accounting policies and should be read in conjunction
with these unaudited interim statements. In the opinion of management, all
material adjustments necessary to present fairly the results of operations for
such periods have been included. All such adjustments are of a normal and
recurring nature. The results of operations for any interim period are not
necessarily indicative of the results of operations for the entire year.
2. INVENTORIES:
Inventories are stated at the lower of cost or market with cost determined
using the last-in, first-out method. Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
(UNAUDITED)
Raw materials.............................................. $ 944,740 $ 302,743
Work in process............................................ 1,285,756 1,457,757
Finished goods............................................. 3,046,716 3,342,894
---------- ----------
$5,277,212 $ 5,103,394
========== ==========
</TABLE>
If the first-in, first-out method of inventory accounting had been used,
inventories would have been $1,113,123 and $983,526 higher at December 31, 1995
and September 30, 1996, respectively.
3. AVAILABLE LINES OF CREDIT:
At September 30, 1996, the Company had a $2,000,000 line of credit with a
commercial bank which bears interest at the bank's reference rate and expires
June 30, 1997. The reference rate on this line of credit was 8.25% at September
30, 1996. Borrowings are based on percentages of and are collateralized by the
Company's accounts receivable and inventory. No amounts were outstanding on this
line of credit at September 30, 1996.
A-14
<PAGE> 19
TRADE PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
4. LONG-TERM DEBT:
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
(UNAUDITED)
Bank note payable in monthly installments of $63,417, plus
interest at the bank's reference rate collateralized by
equipment, maturing on October 8, 2004.......................... $6,722,191 $ 6,151,438
Bank note payable, $2,077,577 equipment line of credit, interest
only at bank's reference rate until June 30, 1996. On July 1,
1996 amounts including additional borrowings were converted to a
term loan with monthly installments payable over 10 years, plus
interest at bank's reference rate collateralized by equipment,
maturing on July 1, 2006........................................ 904,052 2,060,004
Bank note payable, equipment line of credit, interest only at
bank's reference rate plus 0.25% until June 30, 1995. On July 1,
1995, amounts including additional borrowings were converted to
a term loan with monthly installments payable over 10 years,
plus interest at bank's reference rate, collateralized by
equipment....................................................... 865,546 797,214
Note payable to officer in monthly installments of $2,483 and
$1,431, respectively, plus accrued interest at the bank's
reference rate, uncollateralized. Due on demand................. 29,800 --
Bank note payable, equipment line of credit, interest only at
bank's reference rate until June 30, 1997. Collateralized by
equipment....................................................... -- 9,300
------------ -------------
8,521,589 9,017,956
Less current portion.............................................. (944,414) (1,008,211)
------------ -------------
Long-term debt.................................................. $7,577,175 $ 8,009,745
========== ==========
</TABLE>
The reference rate was 8.5% at December 31, 1995 and 8.25% at September 30,
1996.
5. SETTLEMENT OF LAWSUIT:
On September 26, 1996 the Company settled litigation resulting in the
recovery of $2,000,000 of previously expensed costs relating to the development
of a new type of manufacturing equipment. The settlement amount was distributed
to shareholders in October 1996.
6. SUBSEQUENT EVENTS:
On August 6, 1996 the Company signed a definitive agreement to sell
substantially all of its assets and assign certain liabilities to Stuart
Entertainment, Inc. ("Stuart") for a purchase price of $36,555,000, subject to
certain post-closing adjustments. During October 1996, the terms of the purchase
agreement were amended resulting in a purchase price of $37.2 million, subject
to certain post-closing adjustments, plus the issuance of warrants to acquire
300,000 shares of Stuart's common stock at $7.75 per share.
On November 13, 1996 the transaction closed upon the approval of financing,
regulatory gaming requirements being met and the issuance of $100,000,000
unsecured notes.
A-15
<PAGE> 20
ATTACHMENT B
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Pro Forma Condensed Combined Income Statement for the
Nine Months Ended September 30, 1996 . . . . . . . . . . . . . . . . . . . . . B-2
Unaudited Pro Forma Condensed Combined Income Statement for the
Nine Months Ended September 30, 1995 . . . . . . . . . . . . . . . . . . . . . B-3
Unaudited Pro Forma Condensed Combined Income Statement for the
Year Ended December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . B-4
Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30, 1996 . . . . B-5
Notes to Unaudited Pro Forma Condensed Combined Financial Statements . . . . . . . . . B-6
</TABLE>
<PAGE> 21
UNAUDITED PRO FORMA FINANCIAL DATA
STUART ENTERTAINMENT, INC. AND TRADE PRODUCTS, INC.
On November 13, 1996, the Company acquired certain assets and assumed
certain liabilities of Trade Products, Inc. ("Trade Products") 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.
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 Company used the proceeds of the private placement to finance the
acquisition of Trade Products, to repay certain existing indebtedness and for
general corporate purposes.
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 Trade Products acquisition, the debt refinancing and the New Credit
Agreement are collectively referred to as the "Transactions."
The following unaudited pro forma financial data are based on the
historical financial statements of Stuart and Trade Products for the year ended
December 31, 1995 and the nine-month periods ended September 30, 1995 and 1996.
The pro forma financial statements have been prepared to give effect to the
Transactions.
The accompanying Unaudited Condensed Combined Pro Forma Income Statements
for the year ended December 31, 1995 and for the nine-month periods ended
September 30, 1995 and 1996 have been presented on the assumption that the
Transactions occurred on January 1, 1995. The accompanying Unaudited Pro Forma
Condensed Combined Balance Sheet as of September 30, 1996 has been presented on
the assumption that the Transactions occurred as of September 30, 1996.
These unaudited pro forma financial statements are not necessarily
indicative of the results of operations that would have been reported if the
Transactions had occurred at the time presented and are not necessarily
indicative of the results that will be achieved for future periods as a result
of the Transactions.
B-1
<PAGE> 22
<PAGE> 23
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
STUART ENTERTAINMENT, INC. AND TRADE PRODUCTS, INC.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------ ------------------------
STUART TRADE PRODUCTS ADJUSTMENTS COMBINED
------- -------------- ----------- --------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales...................................... $81,332 $28,544 $ -- $109,876
Cost of goods sold............................. 55,966 17,287 203 (a) 73,456
------- ------- ------- --------
Gross profit................................... 25,366 11,257 (203) 36,420
Selling, general, and administrative
expenses.................................... 18,323 7,974 (52)(a) 26,245
------- ------- ------- --------
Income from operations......................... 7,043 3,283 (151) 10,175
Income from settlement of lawsuit.............. -- 2,000 (2,000)(j) --
Interest expense, net.......................... 3,286 568 5,206 (b) 9,060
------- ------- ------- --------
Income before income taxes..................... 3,757 4,715 (7,357) 1,115
Income tax provision........................... 1,334 -- (922)(c) 412
------- ------- ------- --------
Net income..................................... $ 2,423 $ 4,715 $(6,435) $ 703
======= ======= ======= ========
Net income per share -- primary.................. $ 0.35 $ 0.10
Net income per share -- fully diluted............ 0.35 0.10
Weighted average shares outstanding -- primary... 6,890 6,890
Weighted average shares outstanding -- fully
diluted........................................ 6,890 6,890
OTHER DATA
EBITDA......................................... $ 15,344
Ratio of EBITDA to net cash interest
expense(d).................................. 1.8x
Ratio of earnings to fixed charges(i).......... 2.04x 1.12x
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
B-2
<PAGE> 24
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
STUART ENTERTAINMENT, INC. AND TRADE PRODUCTS, INC.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------ ------------------------
STUART TRADE PRODUCTS ADJUSTMENTS COMBINED
------- -------------- ----------- --------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales...................................... $83,916 $27,762 $ -- $111,678
Cost of goods sold............................. 57,142 17,461 203 (a) 74,806
------- ------- ------- --------
Gross profit................................... 26,774 10,301 (203) 36,872
Selling, general, and administrative
expenses.................................... 20,716 7,464 51 (a) 28,231
United Kingdom charge.......................... 800 -- -- 800
------- ------- ------- --------
Income from operations......................... 5,258 2,837 (254) 7,841
Interest expense, net.......................... 3,365 553 5,262 (b) 9,180
------- ------- ------- --------
Income (loss) before income taxes and
extraordinary loss.......................... 1,893 2,284 (5,516) (1,339)
Income tax provision........................... 1,657 -- (1,141)(c) 516
------- ------- ------- --------
Income (loss) before extraordinary loss........ 236 2,284 (4,375) (1,855)
Extraordinary item -- loss on extinguishment of
debt, net of income taxes................... -- -- (1,047)(e) (1,047)
------- ------- ------- --------
Net income (loss).............................. $ 236 $ 2,284 $(5,422) $ (2,902)
======= ======= ======= ========
Net income (loss) per share -- primary........... $ 0.04 $ (0.43)
Net income (loss) per share -- fully diluted..... 0.04 (0.43)
Weighted average shares outstanding -- primary... 6,682 6,682
Weighted average shares outstanding -- fully
diluted........................................ 6,682 6,682
OTHER DATA
EBITDA......................................... $ 13,392
Ratio of EBITDA to net cash interest
expense(d).................................. 1.6x
Ratio of earnings to fixed charges(i).......... 1.52x 0.68x
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
B-3
<PAGE> 25
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
STUART ENTERTAINMENT, INC. AND TRADE PRODUCTS, INC.
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------------- -------------------------
STUART TRADE PRODUCTS ADJUSTMENTS COMBINED
-------- -------------- ----------- --------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales................................ $109,882 $36,595 $ -- $146,477
Cost of goods sold....................... 74,722 22,807 (400)(f) 97,399
270 (a)
-------- ------- ------- --------
Gross profit............................. 35,160 13,788 130 49,078
Selling, general, and administrative
expenses.............................. 27,330 11,583 (736)(a) 38,177
United Kingdom charge.................... 819 -- -- 819
-------- ------- ------- --------
Income from operations................... 7,011 2,205 866 10,082
Interest expense, net.................... 4,448 730 6,918 (b) 12,096
-------- ------- ------- --------
Income (loss) before income taxes and
extraordinary loss.................... 2,563 1,475 (6,052) (2,014)
Income tax provision..................... 1,777 -- (1,617)(c) 160
-------- ------- ------- --------
Income (loss) before extraordinary
loss.................................. 786 1,475 (4,435) (2,174)
Extraordinary item -- loss on
extinguishment of debt, net of income
taxes................................. -- -- (1,047)(e) (1,047)
-------- ------- ------- --------
Net income (loss)........................ $ 786 $ 1,475 $(5,482) $ (3,221)
======== ======= ======= ========
Net income (loss) per share -- primary... $ 0.12 $ (0.48)
Net income (loss) per share -- fully
diluted............................... 0.11 (0.46)
Weighted average shares outstanding --
primary............................... 6,706 6,706
Weighted average shares
outstanding -- fully diluted.......... 7,053 7,053
OTHER DATA
EBITDA................................... $ 17,873
Ratio of EBITDA to net cash interest
expense(d)............................ 1.6x
Ratio of earnings to fixed charges(i).... 1.53x 0.70x
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
B-4
<PAGE> 26
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
STUART ENTERTAINMENT, INC. AND TRADE PRODUCTS, INC.
AS OF SEPTEMBER 30, 1996
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL COMBINED PRIOR DEBT
------------------ PURCHASE TO NOTE OFFERING RECAPITALIZATION
TRADE PRO FORMA AND NEW CREDIT PRO FORMA PRO FORMA
STUART PRODUCTS ADJUSTMENTS AGREEMENT ADJUSTMENTS CONSOLIDATED
------- -------- ----------- ---------------- ---------------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents....... $ 859 $ 1,996 $ (37,357)(g) $(36,502) $100,000(h) $ 13,534
(2,000)(g) (49,964)(h)
Trade and notes receivables,
net.......................... 21,345 7,998 (149)(g) 29,194 -- 29,194
Inventories..................... 22,252 5,103 2,551(g) 29,906 -- 29,906
Other current assets............ 2,762 97 -- 2,859 -- 2,859
------- ------- -------- -------- -------- --------
Total current assets.... 47,218 15,194 (36,955) 25,457 50,036 75,493
Property, plant and equipment,
net............................. 19,943 7,103 1,788(g) 28,834 28,834
Intangible assets................. 29,940 -- 15,414(g) 45,354 (1,348)(h) 49,156
5,150(h)
Other assets...................... 2,227 704 (151)(g) 2,780 -- 2,780
------- ------- -------- -------- -------- --------
Total Assets............ $99,328 $23,001 $ (19,904) $102,425 $ 53,838 $156,263
======= ======= ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term
debt and other current
debt......................... $ 8,795 $ 1,008 $ (1,008)(g) $ 8,795 $ (8,401)(h) $ 394
Bazaar purchase price
adjustment................... 454 -- -- 454 (454)(h) --
Trade payables.................. 12,790 1,270 -- 14,060 -- 14,060
Accrued and other liabilities... 3,160 1,543 (46)(g) 4,657 (549)(h) 4,108
------- ------- -------- -------- -------- --------
Total current
liabilities........... 25,199 3,821 (1,054) 27,966 (9,404) 18,562
Long-Term Debt:
Related Party................... 5,000 -- -- 5,000 (5,000)(h) --
Other........................... 31,175 8,010 (8,010)(g) 31,175 (30,782)(h) 100,393
100,000 (h)
------- ------- -------- -------- -------- --------
Total long-term debt.... 36,175 8,010 (8,010) 36,175 64,218 100,393
Other long-term liabilities....... -- 100 (100)(g) -- -- --
Deferred income taxes............. 2,642 -- -- 2,642 -- 2,642
Deferred income................... 279 -- -- 279 -- 279
Stockholders' Equity:
Common stock -- $0.01 par
value........................ 69 8 (8)(g) 69 -- 69
Additional paid-in capital...... 26,909 257 (257)(g) 27,239 -- 27,239
330 (g)
Retained earnings............... 8,244 10,805 (10,805)(g) 8,244 (976)(h) 7,268
Treasury stock (56,260 shares at
cost)........................ (189) -- -- (189) -- (189)
------- ------- -------- -------- -------- --------
Total Stockholders'
Equity................ 35,033 11,070 (10,740) 35,363 (976) 34,387
------- ------- -------- -------- -------- --------
Total Liabilities and
Stockholders'
Equity................ $99,328 $23,001 $(19,904) $102,425 $ 53,838 $156,263
======= ======= ======== ======== ======== ========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
B-5
<PAGE> 27
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
STUART ENTERTAINMENT, INC. AND TRADE PRODUCTS, INC.
The accompanying unaudited pro forma condensed combined financial
statements reflect the following adjustments:
(a) To reflect the following adjustments to cost of goods sold and
selling, general and administrative expenses.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED -----------------
DECEMBER 31, 1995 1995 1996
----------------- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cost of Goods Sold(1) Additional depreciation
expense(2)................................... $ 270 $ 203 $ 203
===== ===== =====
Selling, General and Administrative Expenses,
Net Additional depreciation expense(2)....... $ 67 $ 50 $ 50
Decrease in salaries(3)...................... (294) (220) (213)
Elimination of costs of assets not
acquired(4)............................... (894) (68) (178)
Additional amortization on goodwill(5)....... 385 289 289
----- ----- -----
Total selling, general and administrative
expenses,
net....................................... $(736) $ 51 $ (52)
===== ===== =====
</TABLE>
- ---------------
(1) The Company anticipates incurring a one-time non-cash charge in the first
four months after the completion of the offering of the Company's 12 1/2%
Senior Subordinated Notes due 2004, issued on November 13, 1996, of
approximately $2,551,000 that is not reflected in these adjustments. This
charge is related to the application of the purchase method of accounting
to the finished goods inventory of Trade Products that will be sold by the
Company after the completion of the Note Offering.
(2) To reflect additional depreciation expenses on the write-up of property,
plant and equipment from historical cost to fair value ($2,023,000) with an
average life of six years (80% of which is manufacturing related and charged
to cost of goods sold).
(3) To reflect the decrease in the salaries of certain Trade Products officers,
which were $500,000 for the year ended December 31, 1995, and $375,000 for
the nine months ended September 30, 1995 and 1996, compared to salaries
after the Trade Acquisition of $206,000 for the year ended December 31,
1995, $154,500 for the nine months ended September 30, 1995 and $162,000 for
the nine months ended September 30, 1996.
(4) To reflect the elimination of costs, which includes the write-off of assets
and legal costs, associated with assets not acquired by the Company in the
Trade Acquisition.
(5) To reflect additional amortization expense on goodwill of $15,414,000 over a
40-year period.
(b) To reflect the incremental change to interest expense, including
amortization expense related to the deferred financing costs, associated
with the Transactions (see "Notes d and h to Notes to Unaudited Pro Forma
Condensed Combined Financial Statements").
(c) The pro forma adjustment reflects (i) Trade Products pre-tax income
subject to corporate income taxes at a marginal income tax rate of 36% for
the periods presented (Trade Products is an S corporation and, accordingly,
has not been subject to corporate income taxes), and (ii) income tax
expenses on the pro forma adjustments which affect taxable income.
(d) Net cash interest expense does not reflect amortization expense
related to the deferred financing costs on the new debt financing of
$100,000,000 Senior Subordinated Notes ($4,750,000), amortized over eight
years, and on the new $30,000,000 bank revolving facility ($400,000),
amortized over five years.
B-6
<PAGE> 28
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
STUART ENTERTAINMENT, INC. AND TRADE PRODUCTS, INC.
(e) To give effect to an extraordinary loss of $1,047,000, after
income taxes of $589,000, to write off unamortized debt issuance costs
related to repaying the Prior Credit Agreement before its maturity and to
record penalties on the early extinguishment of existing debt in
conjunction with the Note Offering.
(f) To reflect Trade Products' inventory on a FIFO
(first-in-first-out) basis versus the historical LIFO (last-in-first-out)
basis.
(g) To reflect the Trade Acquisition for a total purchase price of
$37,579,000 plus an amount equal to the increase in Trade Products'
stockholders' equity between September 30, 1996 and the closing date of the
Trade Acquisition (currently estimated at $108,000). The purchase price was
paid as follows: (i) $28,145,000 in cash to Trade Products; (ii) the amount
attributable to the increase if any, in Trade Products' stockholder equity
is expected to be paid in cash within 120 days after closing; (iii)
$9,104,000 to Trade Products' bank in payment of Trade Products' existing
debt; and (iv) issuance of warrants to acquire 300,000 shares of the
Company's common stock, par value $0.01 per share, with an exercise price
of $7.75 per share (valued at $330,000). Adjustments to reflect the
preliminary estimate of the fair value of net assets under purchase
accounting will result in an increase to property, plant and equipment of
$2,023,000, goodwill of $15,414,000 and inventory of $2,551,000. In
addition, Trade Products' historical stockholders' equity will be
eliminated and certain assets and liabilities will not be purchased.
The purchase price was allocated at the consummation of the Trade
Acquisition and might be revised for a period of up to one year.
Nevertheless, management believes the final impact on its results should
not be materially different from the amounts included in the Unaudited Pro
Forma Condensed Combined Financial Statements.
(h) To give effect to new debt financing of $100,000,000 Senior
Subordinated Notes to be used to repay the existing bank revolving and term
facilities ($32,859,000), obligations under capital leases ($3,357,000), a
subordinated note payable to Mr. Stuart ($5,000,000), notes payable to
others ($2,967,000) and Bazaar purchase price adjustment ($454,000), and to
pay estimated underwriting commissions, bank facility fees and offering
expenses ($5,150,000). The new debt financing of $100,000,000 Senior
Subordinated Notes and the creation of the new $30,000,000 bank revolving
facility will result in the extinguishment of deferred financing costs of
$1,348,000 ($863,000, net of income taxes) on the Prior Credit Agreement
(as defined) and establishment of estimated deferred financing costs on the
new debt financing of approximately $5,150,000. In addition, the Company
will reflect a charge of $113,000, after income taxes of $64,000, relating
to penalties on the early extinguishment of existing debt in conjunction
with the Note Offering.
(i) For purposes of computing pro forma ratios of earnings to fixed
charges, pro forma earnings are divided by pro forma fixed charges.
"Earnings" represent the aggregate of (a) the pre-tax income of the Company
and (b) fixed charges, less capitalized interest. "Fixed Charges" represent
interest (whether expensed or capitalized), amortization of deferred
financing and bank fees, and the portion of rentals considered to be
interest.
(j) To reflect the elimination of settled litigation resulting in the
recovery of previously expensed costs related to the development of a new
type of manufacturing equipment. These assets were not acquired by the
Company in the Trade Acquisition.
B-7
