<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 6, 1997
REGISTRATION NO. 333-18779
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
PRE-EFFECTIVE AMENDMENT
NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
STUART ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2752 84-0402207
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Number) Identification No.)
3211 NEBRASKA AVENUE MICHAEL A. SCHALK
COUNCIL BLUFFS, IOWA 51501 3211 NEBRASKA AVENUE
(712) 323-1488 COUNCIL BLUFFS, IOWA 51501
(Address, including zip code, and telephone (712) 323-1488
number, including area code, of registrant's (Name, address, including zip code, and
principal executive offices) telephone number, including area code, of
agent for service)
</TABLE>
With copies sent to:
WARREN L. TROUPE, ESQ.
BRIAN V. CAID, ESQ.
DEBORAH A. SCHULTZ
KUTAK ROCK
717 17TH STREET, SUITE 2900
DENVER, COLORADO 80202
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this registration statement becomes effective.
---------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
STUART ENTERTAINMENT, INC.
CROSS REFERENCE SHEET
Furnished pursuant to Item 1 of Form S-4 and Item 501(B) of regulation S-K
<TABLE>
<CAPTION>
ITEM OF S-4 LOCATION IN PROSPECTUS
----------- ----------------------
<S> <C> <C> <C>
A. Information about the Transaction
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus.... Front Cover Page of the Registration Statement;
Outside Front Cover Page of the Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Inside Front Cover Page of the Prospectus;
Outside Back Cover Page of the Prospectus
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information............. Prospectus Summary; Risk Factors; Selected
Historical Consolidated Financial Information
4. Terms of the Transaction.................. Prospectus Summary; Risk Factors; The Exchange
Offer; Description of Exchange Notes; Exchange
Offer and Registration Rights
5. Pro Forma Financial Information........... Unaudited Pro Forma Financial Data
6. Material Contracts with the Company Being
Acquired.................................. *
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters........................ *
8. Interest of Named Experts and Counsel..... *
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... *
B. Information about the Registrant
10. Information with Respect to S-3
Registrants............................... *
11. Incorporation of Certain Information by
Reference................................. Information Incorporated by Reference
12. Information with Respect to S-2 or S-3
Registrants...............................
13. Incorporation of Certain Information by
Reference................................. *
14. Information with Respect to Registrants
Other than S-3 or S-2 Registrants......... Prospectus Summary; Risk Factors;
Capitalization; Selected Historical Consolidated
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business; Management; Financial
Statements
C. Information about the Company Being Acquired
15. Information with Respect to S-3
Companies................................. *
16. Information with Respect to S-2 or S-3
Companies................................. *
17. Information with Respect to Companies
other than S-3 or S-2 Companies........... *
D. Voting and Management Information
18. Information if Proxies, Consents or
Authorizations are to be Solicited........ *
19. Information if Proxies, Consents or
Authorizations are not to be solicited or
in an Exchange Offer...................... Management; The Exchange Offer; Certain
Transactions
</TABLE>
- ---------------
* Item is omitted because response is negative or item is inapplicable.
<PAGE> 3
SUBJECT TO COMPLETION
OFFER TO EXCHANGE
ALL OUTSTANDING
12 1/2% SENIOR SUBORDINATED NOTES DUE 2004
($100,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR
SERIES B 12 1/2% SENIOR SUBORDINATED NOTES DUE 2004
($100,000,000 PRINCIPAL AMOUNT)
OF
STUART ENTERTAINMENT, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1997, UNLESS EXTENDED.
Stuart Entertainment, Inc., a Delaware corporation (the "Company"), hereby
offers (the "Exchange Offer"), upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter of Transmittal (the "Letter
of Transmittal"), to exchange up to an aggregate principal amount of
$100,000,000 of its Series B 12 1/2% Senior Subordinated Notes due 2004 (the
"Exchange Notes") for an equal principal amount of its outstanding 12 1/2%
Senior Subordinated Notes due 2004 (the "Notes"), in integral multiples of
$1,000. The Exchange Notes will be senior subordinated unsecured obligations of
the Company and are substantially identical (including principal amount,
interest rate, maturity and redemption rights) to the Notes for which they may
be exchanged pursuant to this offer, except that (a) the offering and sale of
the Exchange Notes will have been registered under the Securities Act of 1933,
as amended (the "Securities Act"), and (b) holders of Exchange Notes will not be
entitled to certain rights of holders under an Exchange and Registration Rights
Agreement of the Company dated as of November 13, 1996 (the "Registration Rights
Agreement"). The Notes have been, and the Exchange Notes will be, issued under
the indenture (the "Indenture") dated as of November 13, 1996, between the
Company and Marine Midland Bank, as trustee (the "Trustee"). See "Description of
Exchange Notes." There will be no proceeds to the Company from this offering;
however, pursuant to the Registration Rights Agreement, the Company will bear
certain offering expenses.
The Exchange Notes will be general, unsecured obligations of the Company,
will be subordinated to all existing and future Senior Indebtedness (as defined
herein) of the Company, will rank pari passu with any future senior subordinated
indebtedness of the Company and will rank senior in right of payment to all
future subordinated indebtedness, if any, of the Company. The claims of holders
of the Exchange Notes will be effectively subordinated to the Senior
Indebtedness of the Company which, as of September 30, 1996, was $787,000, and
such claims will be effectively subordinated to all indebtedness and other
liabilities of the subsidiaries of the Company. The Company's pro forma ratio of
debt to total capitalization at September 30, 1996 was approximately 75%. See
"Capitalization." The Notes are not currently, and the Exchange Notes upon
issuance are not expected to be, senior in priority to any outstanding
indebtedness of the Company or its subsidiaries. The Company has no current plan
or intention to incur any indebtedness to which the Notes or the Exchange Notes
would be senior in priority. The Notes and the Exchange Notes rank pari passu
with one another.
---------------------
SEE "RISK FACTORS," BEGINNING ON PAGE 13, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER NOTES IN THE EXCHANGE
OFFER.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE> 4
The Company will accept for exchange any and all validly tendered Notes on
or prior to 5:00 p.m. New York City time, on , 1997, unless the
Exchange Offer is extended (the "Expiration Date"). Tenders of Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date; otherwise such tenders are irrevocable. Marine Midland Bank will act as
Exchange Agent (in such capacity, the "Exchange Agent") in connection with the
Exchange Offer. The Exchange Offer is not conditioned upon any minimum principal
amount of Notes being tendered for exchange, but is otherwise subject to certain
customary conditions.
The Notes were sold by the Company on November 13, 1996 (the "Note
Offering") in transactions not registered under the Securities Act in reliance
upon the exemption provided in Section 4(2) of the Securities Act. The Notes
were subsequently resold to qualified institutional buyers in reliance upon Rule
144A under the Securities Act and to a limited number of institutional
accredited investors in a manner exempt from registration under the Securities
Act. Accordingly, the Notes may not be reoffered, resold or otherwise
transferred unless registered under the Securities Act or unless an applicable
exemption from the registration requirements of the Securities Act is available.
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company under the Registration Rights Agreement. See "The
Exchange Offer."
The Exchange Notes will bear interest from November 13, 1996, the date of
issuance of the Notes that are tendered in exchange for the Exchange Notes (or
the most recent Interest Payment Date (as defined herein) to which interest on
such Notes has been paid), at a rate equal to 12 1/2% per annum. Interest on the
Exchange Notes will be payable semiannually on May 15 and November 15 of each
year, commencing May 15, 1997. The Exchange Notes are redeemable at the option
of the Company in whole at any time or in part from time to time on or after
November 15, 2001, at the redemption prices set forth herein, plus accrued and
unpaid interest, if any, to the date of redemption. In addition, at any time or
from time to time prior to November 15, 1999, the Company may, at its option,
use the net proceeds from one or more Public Equity Offerings (as defined
herein) to redeem up to $35.0 million aggregate principal amount of the Notes at
the redemption prices set forth herein, plus accrued and unpaid interest, if
any, thereon to the date of redemption; provided, that at least 65% of the
principal amount of the Notes originally issued remains outstanding immediately
after giving effect to any such redemption. See "Prospectus Summary -- Summary
of Terms of Exchange Notes."
Upon the occurrence of a Change of Control (as defined herein), each holder
of Exchange Notes will have the right to require the Company to repurchase such
holder's Exchange Notes at 101% of their principal amount, together with accrued
and unpaid interest, if any, to the date of repurchase. In addition, subject to
certain conditions, the Company will be obligated to offer to repurchase the
Exchange Notes at 100% of their principal amount, plus accrued and unpaid
interest to the date of repurchase in the event of certain asset sales. See
"Risk Factors -- Change of Control" and "Description of Exchange Notes."
The Exchange Offer is being made in reliance on certain no-action positions
that have been published by the staff of the United States Securities and
Exchange Commission (the "Commission") which require each tendering noteholder
to represent that it is acquiring the Exchange Notes in the ordinary course of
its business and that such holder does not intend to participate and has no
arrangement or understanding with any person to participate in a distribution of
the Exchange Notes. Each broker-dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with the resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Notes where such Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities. See "Prospectus
Summary -- The Exchange Offer."
There has not previously been any public market for the Exchange Notes. The
Company does not intend to list the Exchange Notes on any securities exchange or
to seek approval for quotation through any automated quotation system. There can
be no assurance that an active market for the Exchange Notes will develop. To
the extent that an active market for the Exchange Notes does develop, the market
value of the Exchange Notes will depend on market conditions (such as yields on
alternative investments), general economic
i
<PAGE> 5
conditions, the Company's financial condition, and other factors. Such
conditions might cause the Exchange Notes, to the extent that they are actively
traded, to trade at a significant discount from face value. See "Risk
Factors -- Lack of Public Market for the Exchange Notes."
ANY NOTES NOT TENDERED AND ACCEPTED IN THE EXCHANGE OFFER WILL REMAIN
OUTSTANDING. TO THE EXTENT ANY NOTES ARE TENDERED AND ACCEPTED IN THE EXCHANGE
OFFER, A HOLDER'S ABILITY TO SELL UNTENDERED NOTES COULD BE ADVERSELY AFFECTED.
FOLLOWING CONSUMMATION OF THE EXCHANGE OFFER, THE HOLDERS OF NOTES WILL CONTINUE
TO BE SUBJECT TO THE EXISTING RESTRICTIONS UPON TRANSFER THEREOF AND THE COMPANY
WILL HAVE FULFILLED ONE OF ITS OBLIGATIONS UNDER THE REGISTRATION RIGHTS
AGREEMENT. HOLDERS OF NOTES WHO DO NOT TENDER THEIR NOTES GENERALLY WILL NOT
HAVE ANY FURTHER REGISTRATION RIGHTS UNDER THE REGISTRATION RIGHTS AGREEMENT OR
OTHERWISE. SEE "THE EXCHANGE OFFER -- CONSEQUENCES OF FAILURE TO EXCHANGE."
The Exchange Notes issued pursuant to this Exchange Offer generally will be
issued in the form of Global Exchange Notes (as defined herein), which will be
deposited with, or on behalf of, The Depository Trust Company ("DTC") and
registered in its name or in the name of Cede & Co., its nominee. Beneficial
interests in the Global Exchange Notes representing the Exchange Notes will be
shown on, and transfers thereof will be effected through, records maintained by
DTC and its participants. Notwithstanding the foregoing, Notes held in
certificated form will be exchanged solely for the Exchange Notes in
certificated form. After the initial issuance of the Global Exchange Notes,
Exchange Notes in certificated form will be issued in exchange for the Global
Exchange Notes only on the terms set forth in the Indenture. See "Book-Entry;
Delivery and Form."
---------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE EXCHANGE NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE EXCHANGE NOTES TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
UNTIL , 1997 (90 DAYS AFTER COMMENCEMENT OF THE EXCHANGE
OFFER), ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
ii
<PAGE> 6
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. The Company has filed with the Commission a Registration Statement
on Form S-4 under the Securities Act for the registration of the Exchange Notes
offered hereby (the "Registration Statement"). This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain items of which are
contained in exhibits and schedules to the Registration Statement as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company or the Exchange Notes offered hereby, reference is made
to the Registration Statement, including the exhibits and financial statement
schedules thereto, which may be inspected without charge at the public reference
facility maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of which may be obtained from the Commission at
prescribed rates. Statements made in this Prospectus concerning the contents of
any document referred to herein are not necessarily complete. With respect to
each such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved.
Such documents and other information filed by the Company can be inspected
and copied at the public reference facilities of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 and the regional offices of the Commission
located at 7 World Trade Center, New York, New York 10048 and 500 West Madison
Street, 14th Floor, Chicago, Illinois 60661. Copies of such materials may be
obtained from the Public Reference Section of the Commission, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at its public reference
facilities in New York, New York and Chicago, Illinois at prescribed rates. The
Company makes its filings with the Commission electronically. The Commission
maintains a website that contains reports, proxy and information statements and
other information regarding registrants that file electronically, which
information can be accessed at http://www.sec.gov.
So long as the Company is subject to the periodic reporting requirements of
the Exchange Act, it is required to furnish the information required to be filed
with the Commission to the Trustee and the holders of the Notes and the Exchange
Notes. The Company has agreed that, even if it is not required under the
Exchange Act to furnish such information to the Commission, it will nonetheless
continue to furnish information that would be required to be furnished by the
Company by Section 13 of the Exchange Act to the Trustee and the holders of the
Notes or Exchange Notes as if it were subject to such periodic reporting
requirements.
---------------------
THIS PROSPECTUS INCLUDES REFERENCES TO THE FUTURE PERFORMANCE, PLANS AND
EXPECTATIONS OF THE COMPANY WHICH ARE FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A(i)(1) OF THE SECURITIES ACT, INCLUDING WITHOUT LIMITATION
STATEMENTS MADE UNDER THE HEADINGS "PROSPECTUS SUMMARY," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"BUSINESS." SUCH STATEMENTS ARE BASED ON NUMEROUS VARIABLES AND ASSUMPTIONS THAT
ARE INHERENTLY UNCERTAIN. ACCORDINGLY, ACTUAL FUTURE RESULTS OR VALUES MAY BE
SIGNIFICANTLY MORE OR LESS FAVORABLE THAN PROVIDED BY SUCH REFERENCES.
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. As used in
this Prospectus, unless otherwise stated, "Stuart" refers to Stuart
Entertainment, Inc. and its subsidiaries prior to the acquisition of Trade
Products, Inc., a Washington corporation, on November 13, 1996 (the "Trade
Acquisition"), "Trade Products" refers to Trade Products, Inc. prior to the
Trade Acquisition, and the "Company" refers to Stuart Entertainment, Inc. and
its subsidiaries pro forma for the Trade Acquisition. This Prospectus contains
forward-looking statements which involve risks and other uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
OVERVIEW
The Company believes that it is North America's leading manufacturer 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 enjoys a worldwide reputation for innovation and new
product development and has been a leader in the bingo industry for over 60
years, having popularized many important breakthroughs in bingo, such as
disposable bingo paper and electronic bingo systems.
Bingo is one of North America's most popular forms of gaming and
entertainment. Many nonprofit organizations sponsor bingo games for fundraising
purposes, while commercial entities, Indian gaming enterprises, casinos and
government sponsored entities 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 believes that it derives a competitive advantage in the bingo
industry by offering a wider array of bingo and bingo-related products than any
of its competitors. 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.
In the Trade Acquisition, which was completed on November 13, 1996, Stuart
acquired substantially all of the assets and assumed certain specified
liabilities of Trade Products for a total purchase price of approximately $37.2
million, subject to adjustment, plus warrants to purchase 300,000 shares of
Stuart's common stock. The Company believes that Trade Products is the leading
and most innovative manufacturer 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 North America's leading manufacturer of a full line
of bingo and bingo-related products, it is also North America's leading
manufacturer of pulltab tickets. On a pro forma basis for the Trade Acquisition,
the Company had net sales of $144.7 million and EBITDA (as defined) of $19.8
million for the 12-month period ended September 30, 1996.
COMPETITIVE STRENGTHS
The Company plans to enhance its position as North America's leading
manufacturer of a full line of bingo and bingo-related products by capitalizing
on the following competitive strengths:
Strong Brand Names. The Company believes that it has the leading market
position in North America for bingo and bingo-related products. In the United
States, the Company utilizes the brand names Bingo King(R)
2
<PAGE> 8
and Trade Products(R), which are recognized as the leaders in the bingo and
pulltab ticket industries, respectively. In Canada, the Company utilizes the
brand name Bazaar & Novelty(R), which is recognized as the leader in both the
bingo and the pulltab ticket industries.
Well Established Relationships with Distributors. The Company maintains
strong relationships with key distributors, many of whom received assistance
from the Company in the development of their businesses. The Company has the
most extensive distribution system for bingo and bingo-related products in North
America and is continually enhancing its international distribution network. The
Company's products are sold through more than 300 distributors. These
distributors sell the Company's products to nonprofit organizations, such as
religious, fraternal social, military and civic organizations, and to commercial
bingo halls, Indian gaming enterprises, casinos and government sponsored
entities.
Tradition of New Product Development and Introductions. The Company
maintains an ongoing product development program focused on enhancing existing
product lines, creating product line extensions and developing new products.
Recent new product developments and introductions include: (i) System 12(TM) a
fixed base system of touch-screen video bingo and multi-game terminals, which is
currently in use in several large-scale bingo halls, such as the Manitoba
Lotteries Corporation's Club Regent and Foxwoods Resort and Casino; (ii) Power
Bingo King(TM), a hand-held electronic bingo system; and (iii) a new multi-media
electronic bingo flashboard, which utilizes a laser-projected video screen with
advertising and promotional capabilities.
Consistent Low-Cost Production. The Company believes that its superior
market position and manufacturing economies of scale allow it to manufacture
products at a lower cost than its competitors. With respect to bingo paper and
pulltab tickets, the Company believes it is the leading manufacturer in North
America, having manufactured more than 47.5 billion bingo cards and more than
5.0 billion pulltab tickets in 1995. As a result of its substantial production
volume, the Company is able to lower its costs by obtaining discounts and
improving manufacturing efficiencies through longer production runs.
Both Stuart and Trade Products produce bingo paper, ink products and
pulltab tickets. Stuart is the more efficient producer of bingo paper and ink
products and Trade Products is the more efficient producer of pulltab tickets.
The Company therefore expects to further reduce manufacturing costs through the
utilization of the best manufacturing practices of Stuart and Trade Products and
selective consolidation of manufacturing facilities.
Experienced Management Team. The Company believes that its management team
is one of the most experienced in the bingo industry, with an average of over 15
years of industry experience. The management team has extensive knowledge of the
industry and its evolution, and has long-term, well established relationships
with distributors and other customers. Management's worldwide reputation for
industry expertise has positioned the Company to attract and develop extensive
new business opportunities.
GROWTH STRATEGY
The Company plans to increase sales and cash flow by pursuing the following
growth strategy:
Developing and Introducing New Products. The Company has been a leader in
the bingo industry for over 60 years, having popularized many important
breakthroughs in bingo. The Company has taken full advantage of growth
opportunities by utilizing its existing distribution system to introduce
evolutionary products, such as disposable bingo paper, and to create product
line extensions, such as pulltab tickets and ink dabbers.
The Company believes that electronic bingo systems will be the next major
evolutionary step in the industry and that it is well-positioned to capitalize
on this opportunity. The popularity of electronic bingo systems is growing
rapidly because they provide the player with additional entertainment value and
permit simultaneous play on many more cards than would be possible in a typical
paper bingo game. As part of the Company's strategy to be a leading producer of
electronic bingo systems, the Company offers two electronic bingo systems: (i)
System 12(TM), a fixed base system of electronic touch-screen video bingo and
multi-game terminals and (ii) Power Bingo King(TM), a hand-held electronic bingo
system.
3
<PAGE> 9
Pursuing Acquisitions and Strategic Alliances. The Company plans to
actively pursue acquisition opportunities and strategic alliances with a focus
on creating product line extensions, new products, new markets or new
manufacturing technologies. Historically, Stuart has successfully integrated
acquisitions and strategic alliances into its growth strategy, such as the
acquisition of Bingo Press & Specialty Limited ("Bazaar") in 1994, which
broadened its Canadian customer base. In 1995, Stuart acquired The Reliable
Corporation of America ("Reliable") in order to further expand its customer base
and to acquire the rights to Reliable's patented manufacturing technology. The
Trade Acquisition extends the Company's pulltab ticket product line and increase
its pulltab ticket market share in the United States.
Penetrating New Markets. The Company is expanding its marketing efforts
outside of North America, with a particular emphasis in South America, which the
Company believes offers significant near-term opportunities. To date, the
Company has made initial sales of bingo products or pulltab tickets into Brazil,
Peru, Argentina, Colombia, Ecuador, Chile and Venezuela. The Company has
supplied bingo hall equipment and bingo paper to bingo halls in Venezuela, Peru
and Columbia.
The Company was originally formed in Colorado and reincorporated in
Delaware in October 1986. The Company's principal executive offices are located
at 3211 Nebraska Avenue, Council Bluffs, Iowa 51501. The general telephone
number for the Company is (712) 323-1488.
THE NOTE OFFERING
THE NOTES.................. The Notes were sold by the Company in the Note
Offering on November 13, 1996, and were
subsequently resold to qualified institutional
buyers pursuant to Rule 144A under the Securities
Act and to institutional investors that are
accredited investors in a manner exempt from
registration under the Securities Act.
REGISTRATION RIGHTS
AGREEMENT.................. In connection with the Note Offering, the Company
entered into the Registration Rights Agreement,
which grants holders ("Holders") of the Notes
certain exchange and registration rights. The
Exchange Offer is intended to satisfy such exchange
and registration rights, which generally terminate
upon the consummation of the Exchange Offer.
PROCEEDS FROM THE NOTE
OFFERING................. Approximately $37.4 million of the net proceeds
from the Note Offering were used to pay the
purchase price of the Trade Acquisition, and
approximately $50.0 million was used to repay in
full all existing revolving credit and term
facilities, at which time such facilities were
cancelled, and certain other outstanding debt
instruments and to pay estimated underwriting
commissions, bank facility fees and offering
expenses. Approximately $12.6 million of the net
proceeds from the Note Offering is for working
capital. Concurrently with the closing of the Note
Offering, the Company entered into a new $30.0
million revolving credit facility (the "New Credit
Agreement"). The New Credit Agreement, the Note
Offering and the Trade Acquisition are sometimes
referred to collectively herein as the
"Transactions."
THE EXCHANGE OFFER
SECURITIES OFFERED......... $100,000,000 aggregate principal amount of Series B
12 1/2% Senior Subordinated Notes due November 15,
2004.
THE EXCHANGE OFFER......... $1,000 principal amount of the Exchange Notes in
exchange for each $1,000 principal amount of Notes.
As of the date hereof, $100,000,000 aggregate
principal amount of Notes are outstanding. The
Company will issue the Exchange Notes to Holders on
or promptly after the Expiration Date.
4
<PAGE> 10
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer in
exchange for Notes may be offered for resale,
resold and otherwise transferred by any holder
thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) without
compliance with the registration and prospectus
delivery provisions of the Securities Act, provided
that such Exchange Notes are acquired in the
ordinary course of such holder's business and that
such holder does not intend to participate and has
no arrangement or understanding with any person to
participate in the distribution of such Exchange
Notes.
Each broker-dealer that receives Exchange Notes for
its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales
of Exchange Notes received in exchange for Notes
where such Notes were acquired by such
broker-dealer as a result of market-making
activities or other trading activities. The Company
has agreed that for a period of 90 days after the
Expiration Date, it will make this Prospectus
available to any broker-dealer for use in
connection with any such resale.
Any Holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose of
participating, in a distribution of the Exchange
Notes could not rely on the position of the staff
of the SEC enunciated in Exxon Capital Holdings
Corporation (available April 13, 1989), Morgan
Stanley & Co., Inc. (available June 5, 1991) or
similar no-action letters and, in the absence of an
exemption therefrom, must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with the resale
of the Exchange Notes. Failure to comply with such
requirements in such instance may result in such
Holder incurring liability under the Securities Act
for which the Holder is not indemnified by the
Company.
In any State where the Exchange Offer does not fall
under a statutory exemption to such State's Blue
Sky laws, the Company has filed the appropriate
registrations and notices, and has made the
appropriate requests, to permit the Exchange Offer
to be made in such State.
EXPIRATION DATE............ 5:00 p.m., New York City time, on ,
1997, unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer is
extended.
INTEREST ON THE EXCHANGE
NOTES AND THE NOTES...... The Exchange Notes will bear interest from November
13, 1996, the date of issuance of the Notes that
are tendered in exchange for the Exchange Notes (or
the most recent Interest Payment Date (as defined
below in the Summary of Terms of Exchange Notes) to
which interest on such Notes has been paid).
Accordingly, Holders of Notes that are accepted for
exchange will not receive interest on the Notes
that is
5
<PAGE> 11
accrued but unpaid at the time of tender, but such
interest will be payable on the first Interest
Payment Date after the Expiration Date.
CONDITIONS TO THE
EXCHANGE OFFER........... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See
"The Exchange Offer -- Conditions."
PROCEDURES FOR
TENDERING NOTES.......... Each Holder of Notes wishing to accept the Exchange
Offer must complete, sign and date the accompanying
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver the
Letter of Transmittal, or such facsimile, together
with the Notes and any other required documentation
to the Exchange Agent at the address set forth in
the Letter of Transmittal. By executing the Letter
of Transmittal, each Holder will represent to the
Company that, among other things, the Holder or the
person receiving such Exchange Notes, whether or
not such person is the Holder, is acquiring the
Exchange Notes in the ordinary course of business
and that neither the Holder nor any such other
person has any arrangement or understanding with
any person to participate in the distribution of
such Exchange Notes. In lieu of physical delivery
of the certificates representing Notes, tendering
Holders may transfer Notes pursuant to the
procedure for book-entry transfer as set forth
under "The Exchange Offer -- Procedures for
Tendering."
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS........ Any beneficial owner whose Notes are registered in
the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered Holder
promptly and instruct such registered Holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to completing
and executing the Letter of Transmittal and
delivering its Notes, either make appropriate
arrangements to register ownership of the Notes in
such owner's name or obtain a properly completed
bond power from the registered Holder. The transfer
of registered ownership may take considerable time.
GUARANTEED DELIVERY
PROCEDURES............... Holders of Notes who wish to tender their Notes and
whose Notes are not immediately available or who
cannot deliver their Notes, the Letter of
Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent (or
comply with the procedures for book-entry transfer)
prior to the Expiration Date must tender their
Notes according to the guaranteed delivery
procedures set forth in "The Exchange
Offer -- Guaranteed Delivery Procedures."
WITHDRAWAL RIGHTS.......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date
pursuant to the procedures described under "The
Exchange Offer -- Withdrawals of Tenders."
ACCEPTANCE OF NOTES AND
DELIVERY OF EXCHANGE
NOTES.................... The Company will accept for exchange any and all
Notes that are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City time, on
the Expiration Date. The Exchange Notes issued
pursuant
6
<PAGE> 12
to the Exchange Offer will be delivered promptly
following the Expiration Date. See "The Exchange
Offer -- Terms of the Exchange Offer."
FEDERAL INCOME TAX
CONSEQUENCES............. The issuance of the Exchange Notes to Holders of
the Notes pursuant to the terms set forth in this
Prospectus will not constitute an exchange for
federal income tax purposes. Consequently, no gain
or loss would be recognized by Holders of the Notes
upon receipt of the Exchange Notes. See "Certain
Federal Income Tax Consequences of the Exchange
Offer."
EFFECT ON HOLDERS OF
NOTES...................... As a result of the making of this Exchange Offer,
the Company will have fulfilled certain of its
obligations under the Registration Rights
Agreement, and Holders of Notes who do not tender
their Notes will generally not have any further
registration rights under the Registration Rights
Agreement or otherwise. Such Holders will continue
to hold the untendered Notes and will be entitled
to all the rights and subject to all the
limitations applicable thereto under the Indenture,
except to the extent such rights or limitations, by
their terms, terminate or cease to have further
effectiveness as a result of the Exchange Offer.
All untendered Notes will continue to be subject to
certain restrictions on transfer. Accordingly, if
any Notes are tendered and accepted in the Exchange
Offer, the trading market for the untendered Notes
could be adversely affected.
EXCHANGE AGENT............. Marine Midland Bank.
SUMMARY OF TERMS OF EXCHANGE NOTES
The form and terms of the Exchange Notes are the same as the form and terms
of the Notes (which they replace) except that (a) the Exchange Notes have been
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof and (b) the holders of Exchange Notes generally
will not be entitled to further registration rights under the Registration
Rights Agreement, which rights generally will be satisfied when the Exchange
Offer is consummated. The Exchange Notes will evidence the same debt as the
Notes and will be entitled to the benefits of the Indenture. See "Description of
Exchange Notes."
SECURITIES OFFERED......... $100,000,000 aggregate principal amount of Series B
12 1/2% Senior Subordinated Notes due 2004.
ISSUER..................... Stuart Entertainment, Inc.
MATURITY DATE.............. November 15, 2004.
INTEREST PAYMENT DATES..... Interest on the Exchange Notes will accrue from
November 13, 1996 (the "Issue Date") and is payable
semiannually on each of May 15 and November 15 of
each year, commencing May 15, 1997.
RANKING.................... The Exchange Notes will be general unsecured
obligations of the Company and will be subordinated
in right of payment to all existing and future
Senior Indebtedness (as defined) of the Company,
including the Company's obligations under the New
Credit Agreement. The Exchange Notes will rank pari
passu with any future senior subordinated
indebtedness of the Company and will rank senior to
all other subordinated indebtedness, if any, of the
Company. As of September 30, 1996, on a pro forma
basis after giving effect to the Trade Acquisition,
there was $787,000 of Senior Indebtedness
outstanding.
7
<PAGE> 13
OPTIONAL REDEMPTION........ The Exchange Notes are redeemable, in whole or in
part, at the Company's option, on or after November
15, 2001, at the redemption prices set forth
herein, plus accrued interest, if any, to the date
of redemption. In addition, at any time before
November 15, 1999, the Company may, at its option,
redeem up to $35.0 million principal amount of the
Notes originally issued with the net cash proceeds
of one or more Public Equity Offerings (as
defined), at the redemption prices set forth
herein, plus accrued and unpaid interest, if any,
to the date of redemption; provided, that at least
65% of the aggregate principal amount of the Notes
originally issued remains outstanding immediately
after giving effect to any such redemption. See
"Description of Exchange Notes -- Optional
Redemption."
CHANGE OF CONTROL.......... Upon a Change of Control (as defined), each holder
will have the right to require the Company to offer
to repurchase such holder's Exchange Notes at a
price equal to 101% of the principal amount thereof
plus accrued interest to the date of repurchase.
See "Description of Exchange Notes -- Change of
Control."
CERTAIN COVENANTS.......... The Indenture governing the Exchange Notes (the
"Indenture") contains certain covenants that limit
the ability of the Company and its subsidiaries to,
among other things, incur additional indebtedness,
pay dividends or make certain other restricted
payments, consummate certain asset sales, enter
into certain transactions with affiliates, incur
indebtedness that is subordinated in right of
payment to any Senior Indebtedness and senior in
right of payment to the Exchange Notes, incur
liens, in the case of a subsidiary, to pay
dividends or make certain payments to the Company
and its subsidiaries, merge or consolidate with any
other person or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially
all of the assets of the Company or its Restricted
Subsidiaries. Such covenants are subject to certain
limitations and exceptions.
EXCHANGE OFFER;
REGISTRATION RIGHTS........ In the event that applicable law or interpretations
of the staff of the Commission do not permit the
Company to effect the Exchange Offer, or if certain
holders of the Notes are not permitted to
participate in, or do not receive the benefit of,
the Exchange Offer, the Registration Rights
Agreement provides that the Company will use all
reasonable efforts to cause to become effective a
shelf registration statement with respect to the
resale of the Notes and to keep such shelf
registration statement effective until three years
from the date the shelf registration statement is
declared effective by the Commission, or such
shorter period ending when all the Notes have been
sold thereunder. The interest rate on the Notes is
subject to increase under certain circumstances if
the Company is not in compliance with their
obligations under the Registration Rights
Agreement. See "Exchange Offer and Registration
Rights."
For additional information regarding the Exchange
Notes, see "Description of Exchange Notes."
RISK FACTORS
See "Risk Factors," beginning on page 13, for a discussion of certain
factors that should be considered by prospective investors in evaluating an
investment in the Exchange Notes.
8
<PAGE> 14
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
STUART ENTERTAINMENT, INC. AND TRADE PRODUCTS, INC.
The summary unaudited pro forma financial data set forth below gives pro
forma effect to the Transactions in the manner described under "Unaudited Pro
Forma Financial Data" and the notes thereto, as if they had occurred on January
1, 1995 in the case of Income Statement Data, and as if they had occurred on
September 30, 1996 in the case of Balance Sheet and Other Data. The Income
Statement Data does not purport to represent what the Company's results of
operations actually would have been if the Transactions had actually occurred as
of such dates or what such results will be for any future periods. The
information contained in this table should be read in conjunction with "Selected
Historical Consolidated Financial Data -- Stuart Entertainment, Inc.," "Selected
Historical Financial Data -- Trade Products, Inc." "Unaudited Pro Forma
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the accompanying Financial Statements of Stuart
and Trade Products and related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
PRO FORMA NINE MONTHS ENDED LATEST
YEAR ENDED SEPTEMBER 30, TWELVE MONTHS ENDED
DECEMBER 31, ------------------- SEPTEMBER 30,
1995 1995 1996 1996
------------ -------- -------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Income Statement Data
Net sales............................................... $146,477 $111,678 $109,876 $144,675
Cost of goods sold...................................... 97,399 74,456 73,586 96,529
-------- -------- -------- --------
Gross profit.......................................... 49,078 37,222 36,290 46,146
Selling, general and administrative expenses............ 38,177 28,231 26,245 36,191
United Kingdom charge................................... 819 800 -- 19
-------- -------- -------- --------
Income from operations................................ 10,082 8,191 10,045 11,936
Interest expense, net................................... 11,178 8,491 8,371 11,058
-------- -------- -------- --------
Income (loss) before income taxes..................... (1,096) (300) 1,674 878
Income tax provision.................................... 491 890 614 215
-------- -------- -------- --------
Net income (loss)....................................... $ (1,587) $ (1,190) $ 1,060 $ 663
======== ======== ======== ========
Net income (loss) per share -- primary.................. $ (0.24) $ (0.18) $ 0.15 $ 0.10
Net income (loss) per share -- fully diluted............ (0.23) (0.18) 0.15 0.10
Weighted average shares outstanding -- primary.......... 6,706 6,682 6,890 6,844
Weighted average shares outstanding -- fully diluted.... 7,053 6,682 6,890 6,931
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
Balance Sheet Data
Cash and cash equivalents................................. $ 13,534
Working capital........................................... 56,931
Total assets.............................................. 156,263
Long-term debt (including current portion)................ 100,787
Stockholders' equity...................................... 34,387
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
PRO FORMA NINE MONTHS ENDED LATEST
YEAR ENDED SEPTEMBER 30, TWELVE MONTHS ENDED
DECEMBER 31, ------------------- SEPTEMBER 30,
1995 1995 1996 1996
------------ -------- -------- -------------------
<S> <C> <C> <C> <C>
Other Data
EBITDA(1)............................................... $ 17,873 $ 13,742 $ 15,214 $ 19,345
Ratio of net long-term debt to EBITDA................... 4.5x
Ratio of EBITDA to net cash interest expense(3)......... 1.9x
Ratio of earnings to fixed charges(4)................... 0.90x 0.96x 1.20x 1.08x
Depreciation and amortization........................... $ 7,302 $ 5,062 $ 5,169 $ 7,409
Purchase accounting adjustments(2)...................... 489 489 -- --
Capital expenditures.................................... 4,961 3,678 2,682 3,965
</TABLE>
- ---------------
(1) "EBITDA" is defined herein as earnings before interest, taxes, depreciation,
amortization and purchase accounting adjustments. EBITDA is presented
because it is a measure of an issuer's ability to service its indebtedness
commonly used by certain investors. However, items excluded from EBITDA,
such as depreciation and amortization, are significant components in
understanding and assessing financial performance, and 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 financial
activities, see the Statements of Cash Flows in the accompanying Financial
Statements of Stuart and Trade Products included elsewhere in this
Prospectus. EBITDA measures presented herein may not be comparable to other
similarly titled measures of other companies.
(2) In accordance with the application of the purchase method of accounting to
the assets of Bazaar, the finished goods of Bazaar were recorded at fair
value. This resulted in the write-up of finished goods inventory of Bazaar
which was included in costs of goods sold in the first quarter of 1995 as
finished goods were sold during this period. The amount charged to cost of
goods sold in 1995 was $489,000.
(3) 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.
(4) 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. A ratio
equal to less than 1:1 indicates that "earnings" are inadequate to cover the
fixed charges. Pro forma "earnings" for the year ended December 31, 1995 and
the nine months ended September 30, 1995 are deficient by $1,096,000 and
$300,000, respectively.
9
<PAGE> 15
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
STUART ENTERTAINMENT, INC.
The summary historical consolidated financial data set forth below for each
of the years ended December 31, 1993, 1994 and 1995 have been derived from, and
are qualified by reference to, the audited Consolidated Financial Statements of
Stuart, included elsewhere in this Prospectus. The summary historical
consolidated financial data for the years ended December 31, 1991 and 1992 has
been derived from the audited Consolidated Financial Statements of Stuart that
have not been included herein. The summary historical consolidated unaudited
financial data set forth below for the nine-month periods ended September 30,
1995 and 1996 have been derived from, and are qualified by reference to,
Stuart's unaudited Consolidated Financial Statements included elsewhere herein
and include all adjustments, consisting only of normal recurring adjustments,
which management considers necessary for a fair presentation of the results of
Stuart for such periods. Results for the interim periods are not necessarily
indicative of the results for the full year. The summary historical consolidated
financial data set forth below should be read in conjunction with, and are
qualified by reference to, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the accompanying Consolidated Financial
Statements of Stuart and related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1)
Net sales............................... $40,886 $52,519 $53,937 $59,158 $109,882 $83,916 $81,332
Cost of goods sold(2)................... 29,057 37,977 40,167 42,987 74,722 57,142 55,966
------- ------- ------- ------- -------- ------- -------
Gross profit...................... 11,829 14,542 13,770 16,171 35,160 26,774 25,366
Selling, general and administrative
expenses.............................. 8,551 11,139 12,175 15,303 26,452 20,086 17,647
Amortization of goodwill................ -- -- 61 96 878 630 676
Termination and discontinuance
charges(3)............................ -- -- -- 2,000 819 800 --
------- ------- ------- ------- -------- ------- -------
Income (loss) from operations..... 3,278 3,403 1,534 (1,228) 7,011 5,258 7,043
Interest expense, net................... 395 646 775 1,045 4,448 3,365 3,286
------- ------- ------- ------- -------- ------- -------
Income (loss) before income taxes..... 2,883 2,757 759 (2,273) 2,563 1,893 3,757
Income tax provision (benefit).......... 1,015 1,037 247 (665) 1,777 1,657 1,334
------- ------- ------- ------- -------- ------- -------
Net income (loss)....................... $ 1,868 $ 1,720 $ 699(4) $(1,608) $ 786 $ 236 $ 2,423
======= ======= ======= ======= ======== ======= =======
Net income (loss) per share --primary... $ 0.55 $ 0.49 $ 0.20 $ (0.45) $ 0.12 $ 0.04 $ 0.35
Net income (loss) per share -- fully
diluted............................... 0.55 0.49 0.20 (0.45) 0.11 0.04 0.35
Weighted average shares outstanding --
primary............................... 3,415 3,519 3,524 3,561 6,706 6,682 6,890
Weighted average shares
outstanding -- fully diluted.......... 3,415 3,519 3,524 3,561 7,053 6,682 6,890
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
---------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents............... $ 339 $ 669 $ 512 $ 2,116 $ 943 $ 859
Working capital......................... 3,947 3,461 3,742 14,454 20,018 22,019
Total assets............................ 28,001 33,764 37,301 88,977 98,994 99,328
Long-term debt (including current
portion).............................. 8,837 9,645 11,807 40,898 47,483 44,970
Stockholders' equity.................... 12,206 14,168 15,140 30,153 32,040 35,033
</TABLE>
10
<PAGE> 16
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA
EBITDA(5)............................... $ 4,386 $ 4,693 $ 3,127 $ 1,088 $ 12,117 $ 8,902 $10,203
Ratio of earnings to fixed charges(6)... 8.30x 5.27x 1.98x (1.18)x 1.58x 1.56x 2.14x
Depreciation and amortization........... $ 1,108 $ 1,290 $ 1,593 $ 1,935 $ 4,617 $ 3,155 $ 3,160
Purchase accounting adjustments(2)...... -- -- -- 381 489 489 --
Capital expenditures.................... 4,600 3,600 1,420 2,182 3,409 2,815 950
</TABLE>
- ---------------
(1) On December 13, 1994, Stuart completed the acquisition of Bazaar. The
acquisition has been accounted for using the purchase method of accounting
and, accordingly, the operating results of Bazaar have been included with
Stuart's since the date of acquisition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 2 to
Notes to Consolidated Financial Statements of Stuart included herein.
(2) In accordance with the application of the purchase method of accounting to
the assets of Bazaar, the finished goods of Bazaar were recorded at fair
value. This resulted in the write-up of finished goods inventory of Bazaar
which was included in costs of goods sold in 1994 and 1995 as finished goods
were sold during those periods. The amount charged to cost of goods sold in
1994 was $381,000 and in 1995 was $489,000.
(3) During 1994, Stuart paid $2.0 million to terminate a consulting agreement
related to the development of System 12 , and, during 1995, Stuart recorded
a one-time pre-tax charge of $819,000 related to costs to shut down its
manufacturing facility in the United Kingdom, of which $800,000 was taken in
the first nine months of 1995. See Note 8 and Note 10 to Notes to
Consolidated Financial Statements of Stuart for the year ended December 31,
1995 contained herein.
(4) Includes $187,000 positive cumulative effect on net income from a change in
accounting principle. See Note 1 to Notes to Consolidated Financial
Statements of Stuart contained herein.
(5) "EBITDA" is defined herein as earnings before interest, taxes, depreciation,
amortization and purchase accounting adjustments. EBITDA is presented
because it is a measure of an issuer's ability to service its indebtedness
commonly used by certain investors. However, items excluded from EBITDA,
such as depreciation and amortization, are significant components in
understanding and assessing financial performance, and 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 Consolidated Statements of Cash Flows in the
accompanying Financial Statements of Stuart included elsewhere in this
Prospectus. EBITDA measures presented herein may not be comparable to other
similarly titled measures of other companies.
(6) For purposes of computing historical ratios of earnings to fixed charges,
earnings are divided by 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. A ratio equal to less than 1:1
indicates that "earnings" are inadequate to cover the fixed charges.
"Earnings" for the year ended December 31, 1994 are deficient by $2,273,000.
11
<PAGE> 17
SUMMARY HISTORICAL FINANCIAL DATA
TRADE PRODUCTS, INC.
The summary historical financial data set forth below for each of the years
ended December 31, 1993, 1994 and 1995 were derived from, and are qualified by
reference to, the audited Financial Statements of Trade Products, included
elsewhere in this Prospectus. The summary historical financial data for the
years ended December 31, 1991 and 1992 has been derived from the audited
financial statements of Trade Products that have not been included herein. Set
forth below is summary historical unaudited financial data for the nine-month
periods ended September 30, 1995 and 1996 that were derived from the unaudited
financial statements of Trade Products and include all adjustments, consisting
only of normal recurring adjustments, which management considers necessary for a
fair presentation of the results of Trade Products for such periods. Results for
the interim periods are not necessarily indicative of results for the full year.
The summary historical consolidated financial data set forth below should be
read in conjunction with, and are qualified by reference to, the accompanying
Financial Statements of Trade Products and related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data
Net sales...................................... $26,467 $30,738 $31,457 $32,494 $36,595 $27,762 $28,544
Cost of goods sold........................... 15,657 17,078 17,814 19,632 22,807 17,461 17,287
------- ------- ------- ------- ------- ------- -------
Gross profit................................. 10,810 13,660 13,643 12,862 13,788 10,301 11,257
Selling, general and administrative expenses... 8,268 8,978 9,110 9,743 10,749 7,550 7,856
Other (income) expense, net.................... (10) (179) 169 209 (69) (161) (67)
Equipment development expenditures(1).......... -- -- 2,067 358 903 75 185
------- ------- ------- ------- ------- ------- -------
Income from operations......................... 2,552 4,861 2,297 2,552 2,205 2,837 3,283
Income from settlement of lawsuit.............. -- -- -- -- -- -- 2,000
Interest expense............................... 438 228 379 520 730 553 568
------- ------- ------- ------- ------- ------- -------
Net income(2)............................ $ 2,114 $ 4,633 $ 1,918 $ 2,032 $ 1,475 $ 2,284 $ 4,715
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
----------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Cash and cash equivalents...................... $ 137 $ 787 $ 689 $ 1,184 $ 759 $ 1,996
Working capital................................ 4,045 4,521 6,422 6,869 8,030 11,372
Total assets................................... 14,003 16,950 18,776 20,424 20,219 23,001
Long-term debt (including current portion)..... 4,172 5,221 6,725 8,092 8,522 9,018
Stockholders' equity........................... 7,263 9,056 8,577 8,406 8,251 11,070
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Other Data
EBITDA(3)...................................... $ 3,765 $ 6,202 $ 3,944 $ 4,405 $ 4,168 $ 4,202 $ 4,750
Adjusted EBITDA(4)............................. $ 3,765 $ 6,202 $ 6,011 $ 4,763 $ 5,071 $ 4,277 $ 4,935
Depreciation and amortization.................. $ 1,213 $ 1,341 $ 1,647 $ 1,853 $ 1,963 $ 1,365 $ 1,467
Capital expenditures........................... 1,423 3,350 839 2,922 1,552 863 1,732
</TABLE>
- ---------------
(1) Trade Products recorded expenses related to the development of a new type of
manufacturing equipment, which the management of Trade Products determined
would result in no future benefit to Trade Products. This asset was not
acquired by Stuart in the Trade Acquisition.
(2) Trade Products is an S corporation, and, accordingly, has not been subject
to corporate income tax.
(3) "EBITDA" is defined herein as earnings before interest, taxes, depreciation,
amortization and income from settlement of lawsuit. EBITDA is presented
because it is a measure of an issuer'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, and 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 Cash Flows in the accompanying Financial Statements of
Trade Products included elsewhere in this Prospectus. EBITDA measures
presented herein may not be comparable to other similarly titled measures of
other companies.
(4) "Adjusted EBITDA" is defined as EBITDA plus equipment development
expenditures, which asset is not acquired by the Company in the Trade
Acquisition.
12
<PAGE> 18
RISK FACTORS
Prospective investors should carefully consider the following factors in
addition to the other information set forth in this Prospectus before making an
investment in the Exchange Notes offered hereby.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE AND REFINANCE DEBT
In connection with the Transactions, the Company incurred a significant
amount of indebtedness. As of September 30, 1996, after giving pro forma effect
to the Transactions, the Company's indebtedness would have been approximately
$100.8 million and its stockholders' equity would have been $34.4 million. In
addition, subject to the restrictions in the New Credit Agreement and the
Indenture, the Company may incur additional indebtedness from time to time to
finance acquisitions or capital expenditures or for other purposes.
The level of the Company's indebtedness could have important consequences
to holders of the Exchange Notes, including: (a) a substantial portion of the
Company's cash flow from operations must be dedicated to debt service and will
not be available for other purposes; (b) the Company's ability to obtain
additional debt financing in the future for working capital, capital
expenditures or acquisitions may be limited; and (c) the Company's level of
indebtedness could limit its flexibility in reacting to changes in the industry
and economic conditions generally. Moreover, since the indebtedness under the
New Credit Agreement is subject to variable rates of interest, a substantial
increase in interest rates could adversely affect the Company's ability to
service its debt obligations. See "Description of New Credit Agreement."
The Company's ability to pay interest on the Exchange Notes and to satisfy
its other debt obligations will depend upon its future operating performance,
which will be affected by prevailing economic conditions and financial, business
and other factors, certain of which are beyond its control. The Company believes
that cash flow from operations, together with its other available sources of
liquidity, will be adequate to make required payments of principal and interest
on its indebtedness, to fund anticipated capital expenditures and to meet
working capital requirements, although there is no assurance that this will be
the case. To the extent that cash flow from operations is insufficient to
satisfy the Company's cash requirements, the Company may obtain funds from
additional borrowings (which may qualify as Senior Indebtedness), raise
additional equity capital or acquire other businesses that would provide
additional cash (in all such cases to the extent permitted by the New Credit
Agreement and the Indenture). No assurance can be given that any of the above
actions could be accomplished on terms favorable to the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SUBORDINATION
The Exchange Notes will be unsecured and subordinated in right of payment
to all Senior Indebtedness of the Company, including indebtedness under the New
Credit Agreement. In the event of a bankruptcy, liquidation or reorganization of
the Company, its assets will be available to pay obligations on the Exchange
Notes only after all Senior Indebtedness has been paid in full. There may not be
sufficient assets remaining to pay amounts due on some or all of the Exchange
Notes then outstanding. In addition, under certain circumstances, the Company
may not pay principal of, premium, if any, interest on, or any other amounts
owing in respect of, the Exchange Notes, or purchase, redeem or otherwise retire
the Exchange Notes, if a payment default or a non-payment defaults exists with
respect to certain Senior Indebtedness and, in the case of a non-payment
default, a payment blockage notice has been received by the Trustee (as
defined). The Exchange Notes will be general unsecured obligations of the
Company and will be subordinated in right of payment to all existing and future
Senior Indebtedness of the Company, including the Company's obligations under
the New Credit Agreement and to all indebtedness and other obligations of the
Company's subsidiaries. As of September 30, 1996, on a pro forma basis after
giving effect to the Transactions, the Company would have had approximately
$787,000 of Senior Indebtedness, substantially all of which will be secured by
the assets of the Company and certain of its subsidiaries. Any indebtedness
permitted to be incurred under the Indenture may be Senior Indebtedness. See
"Description of Exchange Notes" and "Description of New Credit Agreement."
13
<PAGE> 19
The New Credit Agreement permits the Company to pay interest on the
Exchange Notes, subject to the subordination provisions of the Indenture, so
long as no event of default has occurred under the New Credit Agreement.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indenture restricts the ability of the Company and its subsidiaries to,
among other things, incur additional indebtedness, incur liens, pay dividends or
make certain other restricted payments or investments, consummate certain asset
sales, enter into certain transactions with affiliates, incur indebtedness that
is subordinate in right of payment to any Senior Indebtedness and senior in
right of payment to the Exchange Notes, imposes restrictions on the ability of a
subsidiary to pay dividends or make certain payments to the Company or any of
its subsidiaries, merge or consolidate with any other person or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of the
assets of the Company. The Company's ability to meet such financial ratios and
tests may be affected by events beyond its control. There can be no assurance
that the Company will meet such tests. A breach of any of these covenants could
result in an event of default under the New Credit Agreement. If such an event
of default occurs, the lenders could elect to declare all amounts borrowed under
the New Credit Agreement, together with accrued interest, to be immediately due
and payable and to terminate all commitments under the revolving credit
facility. If the Company were unable to repay all amounts declared due and
payable, the lenders could proceed against the collateral granted to them to
satisfy the indebtedness and other obligations due and payable. Substantially
all of the assets of the Company will be pledged as security under the New
Credit Agreement. If the New Credit Agreement indebtedness were to be
accelerated, there can be no assurance that such assets would be sufficient to
repay in full such indebtedness and the other indebtedness of the Company,
including the Exchange Notes. See "Description of Exchange Notes -- Certain
Covenants" and "Description of New Credit Agreement."
RELIANCE ON BINGO INDUSTRY
The continued profitability and growth of the Company's business is
substantially dependent upon factors beyond the Company's control, including,
among others, the continued popularity of bingo as a leisure activity and as a
means of charitable fundraising. The bingo industry is a mature industry and
there can be no assurance that it will not decline in the future due to an
increase in competing forms of entertainment such as lotteries, on-line gaming
products and the continued expansion of the legalization by the United States
and foreign jurisdictions of casino gaming. In addition, the growth of the use
of electronic bingo products could encroach upon the use of bingo paper and ink
products, which represent the Company's core business. There can be no assurance
that the Company will be able successfully to adapt its core business to such a
change in the bingo industry. As a result of such factors, no assurance can be
given of the Company's continued growth or profitability. See "The Industry."
COMPETITION
The markets in which the Company's products compete are extremely
competitive. The principal competitive factors in the bingo paper and pulltab
ticket markets are quality, service and price. There can be no assurances that
the Company will continue to remain competitive in these or other areas. See
"Business -- Competition."
RELATIONSHIPS WITH DISTRIBUTORS
The Company has enjoyed a history of cooperative relationships with most
distributors of its products. The failure to maintain these relationships on a
widespread basis may have a material adverse effect on the business of the
Company.
DEPENDENCE ON KEY PERSONNEL
The operations of the Company depend to a great extent on the management
efforts of its officers and other key personnel and on the ability to attract
new key personnel and retain existing key personnel in the
14
<PAGE> 20
future. In particular, competition is intense for highly skilled product
development employees, and there can be no assurance that the Company will be
successful in attracting and retaining such personnel, or that it will not incur
increased costs in order to do so. The Company's failure to attract additional
qualified employees or to retain the services of key personnel could have a
material adverse effect on the business of the Company. See "Management."
The Company has entered into an employment agreement with Mr. Barber and a
consulting agreement with Len Stuart & Associates, Ltd., pursuant to which Mr.
Stuart will provide consulting services to the Company. For a more detailed
description of these agreements, see "Management -- Executive Compensation."
TRADE ACQUISITION
Prior to the Trade Acquisition, which was completed on November 13, 1996,
Stuart and Trade Products were under separate ownership and management, and
their businesses were conducted separately. There can be no assurance that
Stuart will be able to successfully integrate the management, staffs, operations
and accounting and management information systems of Trade Products with its
own. There can also be no assurance that the Company will realize enhanced
product development, manufacturing, marketing, distribution or management
capabilities as a result of the Trade Acquisition.
GOVERNMENT REGULATION
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, ink dabbers and electronic bingo hall 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. The loss of one or more licenses held by the Company could have an
adverse effect on the Company's business. Loss of one or more licenses for an
extended period may have an adverse effect on the Company's business, and the
loss of one license could result in the loss of other licenses by the Company.
The Indian Gaming Regulatory Act of 1988 ("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 devices to include "electronic or
electromechanical facsimiles of any game of chance or slot machines of any
kind." The Company believes that Power Bingo King(TM) and System 12(TM), which
are designed to be played in conjunction with traditional paper bingo products,
should properly be classified as Class II games. The Company has applied for an
advisory opinion from the National Indian Gaming Commission (the "NIGC") that
System 12(TM) is a Class II game, as defined by IGRA, but has not yet received
such designation. The Company has not applied for or received any advisory
opinion by the NIGC that Power Bingo King(TM) is a Class II game. It is possible
that one or more regulatory authorities could take the position that Power Bingo
King(TM) or System 12(TM) should be classified as Class III devices. If either
of the Company's electronic gaming systems were classified as Class III devices,
these products could not be sold to Indian casinos that did not meet the
requirements of IGRA and their host state for carrying Class III devices. Such a
result would have a material adverse effect on the Company's sale of its
electronic bingo products. Sales of System 12(TM) to Indian casinos represented
approximately 1% and 2% of total Company sales in 1995 and the nine months ended
September 30, 1996, respectively.
15
<PAGE> 21
Additionally, state and local laws in the United States, and provincial
laws in Canada, which govern the sale and use of gaming products, are widely
disparate and continually changing due to legislative and administrative actions
and court interpretations. Changes in gaming laws through statutory enactment or
amendment, court interpretation or administrative action, so as to restrict the
manufacture, distribution or use of some or all of the Company's products could
have a material adverse effect on the Company's business. See
"Business -- Government Regulation."
EXPOSURE TO FLUCTUATIONS IN PAPER COSTS; RELIANCE ON SUPPLIERS
The principal raw material used in the Company's business is paper, which
is subject to pricing cycles. The cyclical nature of paper pricing may have a
material adverse effect on the Company's business.
For certain of its electronic products, the Company is dependent on
suppliers to provide the Company with pans and components in adequate amounts
and on a timely basis. The failure of one or more suppliers to meet the
Company's performance specifications, quality standards or delivery schedules
could have a material adverse effect on the Company's operations.
INTELLECTUAL PROPERTY RIGHTS; LITIGATION
The Company regards its products as proprietary and relies on a combination
of trademark, copyright and trade secret laws and employee and third-party
nondisclosure agreements to protect its proprietary rights. Defense of
intellectual property rights can be difficult and costly, and there can be no
assurance that the Company will be able effectively to protect its technology
from competitors. In addition, the protections offered by trademark, copyright
and trade secret laws may not prevent a competitor from designing games having
an appearance and function that closely resemble the Company's games.
As the number of electronic gaming products in the industry increases, and
the uses and functions of these products further overlap, electronic gaming
developers may increasingly become subject to infringement claims. The Company
may also become subject to infringement claims. Any such claims or litigation
could be costly and could result in a diversion of management's attention, which
could have a material adverse effect on the Company's business and financial
condition. Any settlement of such claims or adverse determinations in such
litigation could also have a material adverse effect on the Company's business
and financial condition. See "Business -- Intellectual Property" and "-- Legal
Proceedings."
NEW PRODUCT DEVELOPMENT; RISK OF OBSOLESCENCE
The market for certain of the Company's products, particularly for its
electronic bingo hall equipment and Video King Gaming Systems products, is
characterized by changing technology, new legislation, evolving industry
standards and product innovations and enhancements. The introduction of products
embodying new technology, the adoption of new legislation, or the emergence of
new industry standards could render existing products obsolete or unmarketable.
The Company's continued ability to anticipate such changes and to develop and
introduce or obtain the rights to technological advancements and new products
that will gain customer acceptance may be a significant factor in the Company's
ability to expand, remain competitive or attract and retain customers. The
Company's business may be adversely affected if the Company incurs delays in
developing new products or enhancements or if such products or enhancements do
not gain market acceptance. In addition, there can be no assurance that products
or technologies developed by others will not render the Company's products or
technologies noncompetitive or obsolete.
CONCENTRATION OF OWNERSHIP
Morgan Lewis Githens & Ahn, Inc., an investment banking firm ("MLGA"), and
its affiliates own approximately 46.5% of the Company's outstanding common stock
(the "Common Stock"). In addition, Leonard A. Stuart, Albert F. Barber and
Timothy R. Stuart collectively own approximately 18.4% of the outstanding Common
Stock. Therefore, MLGA and management of the Company have effective control of
all matters submitted to the stockholders of the Company, including the election
of the Board of Directors of the Company. See "Security Ownership of Certain
Beneficial Owners and Management."
16
<PAGE> 22
REGULATORY REDEMPTION
If the ownership of any of the Exchange Notes by any person or entity will
preclude, interfere with, threaten or delay the issuance, maintenance, existence
or reinstatement of any gaming license, permit or approval, or result in the
imposition of burdensome terms or conditions on such license, permit or
approval, as determined by any governmental authority or the Board of Directors
of the Company, such holder shall be required to dispose of such Exchange Notes
within a specified time and, if the holder of the Exchange Notes fails to
dispose of them within such time, the Company shall have the right to redeem the
Exchange Notes at a price, without accrued interest, if any, equal to the lowest
of the holder's cost, the principal amount of such Exchange Notes or the average
of the current market prices of such Exchange Notes. See "Description of
Exchange Notes -- Mandatory Disposition or Redemption Pursuant to Gaming Laws."
FRAUDULENT TRANSFER STATUTES
The obligations of the Company under the Exchange Notes may be subject to
review under state or federal fraudulent transfer laws in the event of the
bankruptcy or other financial difficulty of the Company. Under those laws, if a
court in a lawsuit brought by an unpaid creditor or representative of creditors
of the Company, such as a trustee in a bankruptcy or the Company as
debtor-in-possession, were to find that at the time the Company issued the
Exchange Notes, it either (a) was insolvent, (b) was rendered insolvent, (c) was
engaged in a business or transaction for which its remaining unencumbered assets
constituted unreasonably small capital, or (d) intended to incur or believed
that it would incur debts beyond its ability to pay as such debts matured, such
court could avoid the Exchange Notes and the Company's obligations thereunder,
and direct the return of any amounts paid thereunder to the Company or to a fund
for the benefit of its creditors. Moreover, regardless of the factors identified
in any of clauses (a) through (d), the court could avoid the Exchange Notes and
direct such repayment if it found that the Exchange Notes were incurred with
actual intent to hinder, delay or defraud the Company's creditors.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction being applied. Generally, however, an entity
would be considered insolvent if the sum of its debts (including contingent or
unliquidated debts) is greater than all of its property at a fair valuation or
if the present fair salable value of its assets is less than the amount that
will be required to pay its probable liability on its existing debts as they
become absolute and matured.
CHANGE OF CONTROL
A Change of Control (as defined in the Indenture) could require the Company
to refinance substantial amounts of indebtedness. Upon the occurrence of a
Change of Control, the holders of the Exchange Notes would be entitled to
require the Company to repurchase the Exchange Notes at a purchase price equal
to 101% of the principal amount of such Exchange Notes, plus accrued and unpaid
interest, if any, to the date of purchase. The source of funds for any such
repurchase will be the Company's available cash or cash generated from operating
or other sources, including borrowing, sales of equity or funds provided by a
new controlling person. However, there can be no assurance that sufficient funds
will be available at the time of any Change of Control to make any required
repurchases of Notes tendered, or that restrictions in the New Credit Agreement
will allow the Company to make such required repurchases. The effect of such
requirements may make it more difficult or delay attempts by others to obtain
control the Company. See "Description of Exchange Notes -- Change in Control."
LACK OF A PUBLIC MARKET FOR THE EXCHANGE NOTES
There is no public market for the Exchange Notes and the Company does not
intend to apply for listing of the Exchange Notes on any national securities
exchange or for quotation of the Exchange Notes through the Nasdaq National
Market System. The Company has been advised by the Initial Purchasers that,
following the completion of the Exchange Offer, the Initial Purchasers presently
intend to make a market in the Exchange Notes; however, they are under no
obligation to do so and may discontinue any market-making activities at any time
without notice. In addition, such market making activity will be subject to the
limitations imposed by
17
<PAGE> 23
the Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). No assurance can be given as to the liquidity of any markets
that may develop for the Exchange Notes, the ability of holders of the Exchange
Notes to sell their Exchange Notes, or the price at which holders would be able
to sell their Exchange Notes. Future trading prices of the Exchange Notes will
depend on many factors, including among other things, prevailing interest rates,
the Company's operating results and the market for similar securities.
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Exchange Agent of
such Notes, a properly completed and duly executed Letter of Transmittal and all
other required documents. Therefore, Holders of the Notes desiring to tender
such Notes in exchange for Exchange Notes should allow sufficient time to ensure
timely delivery. The Company is under no duty to give notification of defects or
irregularities with respect to the tenders of Notes for exchange. Notes that are
not tendered or are tendered but not accepted will, following the consummation
of the Exchange Offer, continue to be subject to the existing restrictions upon
transfer thereof and, upon consummation of the Exchange Offer, the registration
rights under the Registration Rights Agreement generally will terminate. In
addition, any Holder of Notes who tenders in the Exchange Offer for the purpose
of participating in a distribution of the Exchange Notes may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale. Each broker-dealer that receives Exchange Notes for
its own account in exchange for Notes, where such Notes were acquired by such
broker-dealer as a result of market-making activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
To the extent that Notes are tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted Notes could be
adversely affected. See "The Exchange Offer."
RESTRICTIONS ON TRANSFER
The Notes were offered and sold by the Company in a private offering exempt
from registration pursuant to the Securities Act and have been resold pursuant
to Rule 144A under the Securities Act and to a limited number of other
institutional "accredited investors" (as defined in Rule 501(a) (1), (2), (3) or
(7) under the Securities Act). As a result, the Notes may not be reoffered or
resold by purchasers except pursuant to an effective registration statement
under the Securities Act, or pursuant to an applicable exemption from such
registration, and the Notes are legended to restrict transfer as aforesaid. Each
Holder (other than any Holder who is an affiliate or promoter of the Company)
who duly exchanges Notes for Exchange Notes in the Exchange Offer will receive
Exchange Notes that are freely transferable under the Securities Act. Holders of
Notes who participate in the Exchange Offer should be aware, however, that if
they accept the Exchange Offer for the purpose of engaging in a distribution,
the Exchange Notes may not be publicly reoffered or resold without complying
with the registration and prospectus delivery requirements of the Securities
Act. As a result, each Holder of Notes accepting the Exchange Offer will be
deemed to have represented, by its acceptance of the Exchange Offer, that it
acquired the Exchange Notes in the ordinary course of business and that it is
not engaged in, and does not intend to engage in, a distribution of the Exchange
Notes. If existing Commission interpretations permitting free transferability of
the Exchange Notes following the Exchange Offer are changed prior to
consummation of the Exchange Offer, the Company will use its best efforts to
register the Notes for resale under the Securities Act. See "Prospectus
Summary -- The Exchange Offer" and "Exchange Offer and Registration Rights."
The Notes currently may be sold pursuant to the restrictions set forth in
Rule 144A under the Securities Act or pursuant to another available exemption
under the Securities Act without registration under the Securities Act. To the
extent that Notes are tendered and accepted in the Exchange Offer, the trading
market for the untendered and tendered but unaccepted Notes could be adversely
affected.
18
<PAGE> 24
THE EXCHANGE OFFER
The following discussion sets forth or summarizes what the Company believes
to be the material terms of the Exchange Offer, including those set forth in the
Letter of Transmittal distributed with this Prospectus. This summary is
qualified in its entirety by reference to the full text of the documents
underlying the Exchange Offer, copies of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part, and are incorporated
herein by reference.
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Notes were sold by the Company on November 13, 1996 (the "Issue Date"),
and were subsequently resold to qualified institutional buyers pursuant to Rule
144A under the Securities Act and to institutional investors that are accredited
investors in a manner exempt from registration under the Securities Act. In
connection with the Note Offering, the Company entered into the Registration
Rights Agreement, which requires, among other things, that not later than 45
days following the Issue Date the Company (i) file with the Commission a
registration statement under the Securities Act with respect to an issue of new
notes of the Company identical in all material respects (other than transfer
restrictions) to the Notes (which obligation has been satisfied by the filing of
the Registration Statement of which this Prospectus is a part), (ii) use its
best efforts to cause such registration statement to become effective under the
Securities Act within 135 days after the Issue date, and (iii) upon the
effectiveness of that registration statement, offer to the Holders of the Notes
the opportunity to exchange their Notes for a like principal amount of Exchange
Notes, which would be issued without a restrictive legend and may be reoffered
and resold by the holder without restrictions or limitations under the
Securities Act (other than any such holder that is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act). A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The term "Holder" with respect to
the Exchange Offer means any person in whose name the Notes are registered on
the books of the Company or any other person who has obtained a properly
completed bond power from the registered holder.
Any Notes tendered and exchanged in the Exchange Offer will reduce the
principal amount of Notes outstanding. Following the consummation of the
Exchange Offer, Holders of the Notes who did not tender their Notes generally
will not have any further registration rights under the Registration Rights
Agreement, and such Notes will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for such Notes could be
adversely affected. The Notes are currently eligible for sale pursuant to Rule
144A through the PORTAL System of the National Association of Securities
Dealers, Inc. Because the Company anticipates that most Holders of Notes will
elect to exchange such Notes for Exchange Notes due to the absence of
restrictions on the resale of Exchange Notes under the Securities Act, the
Company anticipates that the liquidity of the market for any Notes remaining
after the consummation of the Exchange Offer may be substantially limited.
TERMS OF THE EXCHANGE
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Notes
validly tendered and not withdrawn prior to 5:00 p.m. New York City time on the
Expiration Date. The Company will issue $1,000 principal amount of Exchange
Notes in exchange for each $1,000 principal amount of outstanding Notes accepted
in the Exchange Offer. Holders may tender some or all of their Notes pursuant to
the Exchange Offer. However, Notes may be tendered only in integral multiples of
$1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Notes except that (i) the Exchange Notes have been registered under the
Securities Act and hence will not bear legends restricting the transfer thereof,
and (ii) the holders of the Exchange Notes generally will not be entitled to
certain rights under the Registration Rights Agreement, which rights generally
will terminate upon consummation of the Exchange Offer. The Exchange Notes will
evidence the same debt as the Notes and will be entitled to the benefits of the
Indenture.
19
<PAGE> 25
Holders of Notes do not have any appraisal or dissenters' rights under the
Indenture in connection with the Exchange Offer. The Company intends to conduct
the Exchange Offer in accordance with the applicable requirements of the
Exchange Act and the rules and regulations of the Commission thereunder,
including Rule 14e-1 thereunder.
The Company shall be deemed to have accepted validly tendered Notes when,
as and if the Company has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering Holders for the
purpose of receiving the Exchange Notes from the Company.
If any tendered Notes are not accepted for exchange because of an invalid
tender, the occurrence of certain other events set forth herein or otherwise,
the certificates for any such unaccepted Notes will be returned, without
expense, to the tendering Holder thereof as promptly as practicable after the
Expiration Date.
Holders who tender Notes in the Exchange Offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of Notes pursuant to
the Exchange Offer. The Company will pay all charges and expenses, other than
transfer taxes in certain circumstances, in connection with the Exchange Offer.
See " -- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1997, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
To extend the Exchange Offer, the Company will notify the Exchange Agent of
any extension by oral or written notice, followed by a public announcement
thereof no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date.
The Company reserves the right, in its reasonable judgment, (i) to delay
accepting any Notes, to extend the Exchange Offer or to terminate the Exchange
Offer if any of the conditions set forth below under " -- Conditions" shall not
have been satisfied, by giving oral or written notice of such delay, extension
or termination to the Exchange Agent, or (ii) to amend the terms of the Exchange
Offer in any manner. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by a public announcement
thereof. If the Exchange Offer is amended in a manner determined by the Company
to constitute a material change, the Company will promptly disclose such
amendment by means of a prospectus supplement that will be distributed to the
registered Holders, and, depending upon the significance of the amendment and
the manner of disclosure to the registered Holders, the Company will extend the
Exchange Offer for a period of five to ten business days if the Exchange Offer
would otherwise expire during such five to ten business day period.
If the Company does not consummate the Exchange Offer, or, in lieu thereof,
the Company does not file and cause to become effective a resale shelf
registration for the Notes within the time periods set forth herein, liquidated
damages will accrue and be payable on the Notes. See "Exchange Offer and
Registration Rights."
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
INTEREST ON EXCHANGE NOTES
The Exchange Notes will bear interest from November 13, 1996, the date of
issuance of the Notes that are tendered in exchange for the Exchange Notes (or
the most recent Interest Payment Date to which interest on such Notes has been
paid). Accordingly, holders of Notes that are accepted for exchange will not
receive interest that is accrued but unpaid on the Notes at the time of tender,
but such interest will be payable on the
20
<PAGE> 26
first Interest Payment Date after the Expiration Date. Interest on the Exchange
Notes will be payable semiannually on each May 15 and November 15, commencing on
May 15, 1997.
PROCEDURES FOR TENDERING
Only a Holder of Notes may tender such Notes in the Exchange Offer. To
tender in the Exchange Offer, a Holder must complete, sign and date the Letter
of Transmittal, or a facsimile thereof, have the signatures thereon guaranteed
if required by the Letter of Transmittal and mail or otherwise deliver such
Letter of Transmittal or such facsimile, together with the Notes and any other
required documents, to the Exchange Agent so as to be received by the Exchange
Agent at the address set forth below prior to 5:00 p.m., New York City time, on
the Expiration Date. Delivery of the Notes may be made by book-entry transfer in
accordance with the procedures described below. Confirmation of such book-entry
transfer must be received by the Exchange Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each Holder will make to the
Company the representation set forth below in the second paragraph under the
heading " -- Resale of Exchange Notes."
The tender by a Holder and the acceptance thereof by the Company will
constitute an agreement between such Holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact the registered Holder promptly and instruct such registered
Holder to tender on such beneficial owner's behalf.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Notes tendered pursuant thereto are tendered (i) by a registered
Holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office in
the United States or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Notes listed therein, such Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered Holder
as such registered Holder's name appears on such Notes with the signature
thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Notes at the DTC for the purpose of facilitating the
21
<PAGE> 27
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the DTC may make book-entry delivery of the
Notes by causing the DTC to transfer such Notes into the Exchange Agent's
account with respect to the Notes in accordance with the DTC's procedures for
such transfer. Although delivery of the Notes may be effected through book-entry
transfer into the Exchange Agent's account at the DTC, a Letter of Transmittal
properly completed and duly executed with any required signature guarantee and
all other required documents must in each case be transmitted to and received or
confirmed by the Exchange Agent at its address set forth below on or prior to
the Expiration Date, or, if the guaranteed delivery procedures described below
are complied with, within the time period provided under such procedures.
Delivery of documents to the DTC does not constitute delivery to the Exchange
Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Notes and withdrawal of tendered Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Notes not properly tendered or any Notes the Company's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Notes. The Company's interpretation of the terms and conditions
of the Exchange Offer (including the instructions in the Letter of Transmittal)
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Notes must be cured within such
time as the Company shall determine. Although the Company intends to notify
Holders of defects or irregularities with respect to tenders of Notes, none of
the Company, the Exchange Agent or any other person shall incur any liability
for failure to give such notification. Tenders of Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Notes received by the Exchange Agent that are not properly tendered and as
to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering Holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Notes and (i) whose Notes are not
immediately available, (ii) who cannot deliver their Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent, or (iii) who
cannot complete the procedures for book-entry transfer, prior to the Expiration
Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Notes and the principal amount of Notes tendered, stating that the
tender is being made thereby and guaranteeing that, within three New York
Stock Exchange trading days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof), together with the certificate(s)
representing the Notes (or a confirmation of book-entry transfer of such
Notes into the Exchange Agent's account at the DTC) and any other documents
required by the Letter of Transmittal, will be deposited by the Eligible
Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Notes in proper form for transfer (or a confirmation of book-entry transfer
of such Notes into the Exchange Agent's account at the DTC) and all other
documents required by the Letter of Transmittal, are received by the
Exchange Agent within three New York Stock Exchange trading days after the
Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Notes according to the guaranteed
delivery procedures set forth above.
22
<PAGE> 28
WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Notes in the Exchange Offer, a written or facsimile
transmission notice of withdrawal must be received by the Exchange Agent at the
address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Notes to be withdrawn (the "Depositor"), (ii)
identify the Notes to be withdrawn (including the certificate number(s) and
principal amount of such Notes, or, in the case of notes transferred by
book-entry transfer, the name and number of the account at the DTC to be
credited), (iii) be signed by the Holder in the same manner as the original
signature on the Letter of Transmittal by which such Notes were tendered
(including any required signature guarantees) or be accompanied by documents of
transfer sufficient to have the Trustee register the transfer of such Notes into
the name of the person withdrawing the tender, and (iv) specify the name in
which any such Notes are to be registered, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time or receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Notes so withdrawn
will be deemed not to have been validly tendered for purposes of the Exchange
Offer and no Exchange Notes will be issued with respect thereto unless the Notes
so withdrawn are validly retendered. Any Notes which have been tendered but
which are not accepted for exchange will be returned to the Holder thereof
without cost to such Holder as soon as practicable after withdrawal, rejection
of tender or termination of the Exchange Offer. Properly withdrawn Notes may be
retendered by following one of the procedures described above under
"-- Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or to exchange Exchange Notes for, any
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Notes, if:
(a) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted, which, in the reasonable
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(b) any governmental approval has not been obtained, which approval
the Company shall, in its reasonable judgment, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable judgment that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Notes and
return all tendered Notes to the tendering Holders, (ii) extend the Exchange
Offer and retain all Notes tendered prior to the expiration of the Exchange
Offer, subject, however, to the rights of Holders to withdraw such Notes (see
"-- Withdrawals of Tenders"), or (iii) waive such unsatisfied conditions with
respect to the Exchange Offer and accept all properly tendered Notes which have
not been withdrawn. If such waiver constitutes a material change to the Exchange
Offer, the Company will promptly disclose such waiver by means of a prospectus
supplement that will be distributed to the registered Holders, and, depending
upon the significance of the waiver and the manner of disclosure to the
registered Holders, the Company will extend the Exchange Offer for a period of
five to ten business days if the Exchange Offer would otherwise expire during
such five to ten business-day period.
EXCHANGE AGENT
Marine Midland Bank will act as Exchange Agent for the Exchange Offer with
respect to the Notes.
23
<PAGE> 29
Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal for the Notes and requests for
copies of Notice of Guaranteed Delivery should be directed to the Exchange
Agent, addressed as follows:
By Registered or Certified Mail, Overnight Mail or Courier Service or in
Person by Hand:
Marine Midland Bank
140 Broadway-A Level
Corporate Trust Department
New York, New York 10005-1180
By Facsimile:
(212) 658-6425
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telephone, facsimile or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith and pay
other registration expenses, including fees and expenses of the Trustee, filing
fees, blue sky fees and printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Notes pursuant to the Exchange Offer. If, however, certificates
representing the Exchange Notes or the Notes for principal amounts not tendered
or accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered Holder of the Notes tendered, or if
tendered Notes are registered in the name of any person other than the person
signing the Letter of Transmittal, or if a transfer tax is imposed for any
reason other than the exchange of the Notes pursuant to the Exchange Offer, then
the amount of any such transfer taxes (whether imposed on the registered Holder
or any other person) will be payable by the tendering Holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Notes, which is the aggregate principal amount of the Notes, as reflected in the
Company's accounting records on the date of exchange. Accordingly, no gain or
loss for accounting purposes will be recognized in connection with the Exchange
Offer. The expenses of the Exchange Offer will be amortized over the term of the
Exchange Notes.
RESALE OF EXCHANGE NOTES
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer in exchange for Notes may be offered
for resale, resold and otherwise transferred by any holder of such Exchange
Notes (other than any such holder which is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such Exchange Notes are acquired in the ordinary course of such holder's
business and such holder does not intend to participate, and has no arrangement
or understanding with any person to participate, in the distribution of such
Exchange Notes. Any holder who tenders in the Exchange Offer with the intention
to participate, or for the purpose of participating, in a distribution of the
Exchange Notes may not rely on the position of the staff of the SEC enunciated
in Exxon Capital Holdings Corporation (available April 13, 1989) and Morgan
Stanley & Co., Incorporated (available June 5, 1991), or similar no-action
letters, but rather must comply with the registration and prospectus delivery
requirements of the Securities
24
<PAGE> 30
Act in connection with any resale transaction. In addition, any such resale
transaction should be covered by an effective registration statement containing
the selling security holders information required by Item 507 of Regulation S-K
of the Securities Act. Each broker-dealer that receives Exchange Notes for its
own account in exchange for Notes, where such Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, may be a statutory underwriter and must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes.
By tendering in the Exchange Offer, each Holder will represent to the
Company that, among other things, (i) the Exchange Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of the
person receiving such Exchange Notes, whether or not such person is the
registered Holder, (ii) neither the Holder nor any such other person has an
arrangement or understanding with any person to participate in the distribution
of such Exchange Notes, and (iii) the Holder and such other person acknowledge
that if they participate in the Exchange Offer for the purpose of distributing
the Exchange Notes (a) they must, in the absence of an exemption therefrom,
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale of the Exchange Notes and cannot
rely on the no-action letters referenced above and (b) failure to comply with
such requirements in such instance could result in such Holder or such other
person incurring liability under the Securities Act for which such Holder or
such other person is not indemnified by the Company. Further, by tendering in
the Exchange Offer, each Holder and such other person that may be deemed an
"affiliate" (as defined under Rule 405 of the Securities Act) of the Company
will represent to the Company that such Holder and such other person understand
and acknowledge that the Exchange Notes may not be offered for resale, resold or
otherwise transferred by that Holder or such other person without registration
under the Securities Act or an exemption therefrom.
CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of the making of this Exchange Offer, the Company will have
fulfilled one of its obligations under the Registration Rights Agreement, and
Holders of Notes who do not tender their Notes generally will not have any
further registration rights under the Registration Rights Agreement or
otherwise. Accordingly, any Holder of Notes that does not exchange that Holder's
Notes for Exchange Notes will continue to hold the untendered Notes and will be
entitled to all the rights and limitations applicable thereto under the
Indenture, except to the extent that such rights or limitations, by their terms,
terminate or cease to have further effectiveness as a result of the Exchange
Offer.
The Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Notes may be
resold only (i) to the Company (upon redemption thereof or otherwise), (ii)
pursuant to an effective registration statement under the Securities Act, (iii)
so long as the Notes are eligible for resale pursuant to Rule 144A under the
Securities Act, to a qualified institutional buyer within the meaning of Rule
144A under the Securities Act in a transaction meeting the requirements of Rule
144A, (iv) outside the United States to a foreign person pursuant to the
exemption from the registration requirements of the Securities Act provided by
Regulation S thereunder, (v) pursuant to an exemption from registration under
the Securities Act provided by Rule 144 thereunder (if available) or (vi) to an
institutional accredited investor in a transaction exempt from the registration
requirements of the Securities Act, in each case in accordance with any
applicable securities laws of any State or other jurisdiction. See "Risk
Factors -- Restrictions on Transfer."
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Notes are urged to consult
their financial and tax advisors in making their own decision on what action to
take.
The Company may in the future seek to acquire untendered Notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. The Company has no present plans to acquire any Notes that are not
tendered in the Exchange Offer or to file a registration statement to permit
resales of any untendered Notes.
25
<PAGE> 31
In any state where the Exchange Offer does not fall under a statutory
exemption to the blue sky rules, the Company has filed the appropriate
registrations and notices, and has made the appropriate requests, to permit the
Exchange Offer to be made in such State.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended, applicable Treasury regulations, judicial
authority and administrative rulings and practice. There can be no assurance
that the Internal Revenue Service (the "IRS") will not take a contrary view, and
no ruling from the IRS has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conditions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to Holders. Certain Holders of the Notes (including insurance
companies, tax-exempt organizations, financial institutions, broker-dealers,
foreign corporations and persons who are not citizens or residents of the United
States) may be subject to special rules not discussed below. Each Holder of a
Note should consult his, her or its own tax advisor as to the particular tax
consequences of exchanging such Holder's Notes for Exchange Notes, including the
applicability and effect of any state, local or foreign tax laws.
The issuance of the Exchange Notes to Holders of the Notes pursuant to the
terms set forth in this Prospectus will not constitute an exchange for federal
income tax purposes. Consequently, no gain or loss would be recognized by
Holders of the Notes upon receipt of the Exchange Notes, and ownership of the
Exchange Notes will be considered a continuation of ownership of the Notes. For
purposes of determining gain or loss upon the subsequent sale or exchange of the
Exchange Notes, a Holder's basis in the Exchange Notes should be the same as
such Holder's basis in the Notes exchanged therefor. A Holder's holding period
for the Exchange Notes should include the Holder's holding period for the Notes
exchanged therefor. The issue price, original issue discount inclusion and other
tax characteristics of the Exchange Notes should be identical to the issue
price, original issue discount inclusion and other tax characteristics of the
Notes exchanged therefor.
See also "Certain Income Tax Considerations."
26
<PAGE> 32
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996, pro forma as of such date to give effect to the
Transactions. This table should be read in conjunction with "Selected Historical
Consolidated Financial Data -- Stuart Entertainment," "Selected Historical
Financial Data -- Trade Products," "Unaudited Pro Forma Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements of Stuart and Trade Products and
related notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current portion):(1)
Existing Bank Credit Agreement:(2)
Revolving Facility..................................... $22,987 $ --
Term Facility.......................................... 9,872 --
New Credit Agreement(3)................................... -- --
Other debt................................................ 12,111 787
Senior Subordinated Notes due 2004........................ -- 100,000
------- --------
Total debt........................................ 44,970 100,787
Stockholders' equity(4)..................................... 35,033 34,387
------- --------
Total capitalization.............................. $80,003 $135,174
======= ========
</TABLE>
- ---------------
(1) See Note 5 to Notes to Consolidated Financial Statements of Stuart and Note
6 to Notes to Financial Statements of Trade Products for a description of
the Company's long-term indebtedness.
(2) In conjunction with the closing of the Trade Acquisition and Note Offering,
the Company repaid all existing bank revolving and term facilities and
certain other debt instruments.
(3) The Company amended and restated its credit agreement (the New Credit
Agreement). See "Description of New Credit Agreement."
(4) Adjusted to reflect the decrease in stockholders' equity due to the
write-off of existing deferred financing costs, net of income taxes, and the
increase in stockholders' equity to reflect the value of the warrants being
issued in the Trade Acquisition.
27
<PAGE> 33
UNAUDITED PRO FORMA FINANCIAL DATA
STUART ENTERTAINMENT, INC. AND TRADE PRODUCTS, INC.
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. The unaudited pro forma financial statements and the
related notes should be read in conjunction with the Financial Statements and
the Notes thereto of Stuart and Trade Products included elsewhere in this
Prospectus and with "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
28
<PAGE> 34
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 17,287 130 (e) 73,586
203 (a)
------- ------- ------- --------
Gross profit................................... 25,366 11,257 (333) 36,290
Selling, general, and administrative
expenses.................................... 18,323 7,974 (52)(a) 26,245
------- ------- ------- --------
Income from operations......................... 7,043 3,283 (281) 10,045
Income from settlement of lawsuit.............. -- 2,000 (2,000)(i) --
Interest expense, net.......................... 3,286 568 4,517 (b) 8,371
------- ------- ------- --------
Income before income taxes..................... 3,757 4,715 (6,798) 1,674
Income tax provision........................... 1,334 -- (720)(c) 614
------- ------- ------- --------
Net income..................................... $ 2,423 $ 4,715 $(6,078) $ 1,060
======= ======= ======= ========
Net income per share -- primary.................. $ 0.35 $ 0.15
Net income per share -- fully diluted............ 0.35 0.15
Weighted average shares outstanding -- primary... 6,890 6,890
Weighted average shares outstanding -- fully
diluted........................................ 6,890 6,890
OTHER DATA
EBITDA......................................... $ 15,214
Ratio of EBITDA to net cash interest
expense(d).................................. 2.0x
Ratio of earnings to fixed charges(h).......... 2.14x 1.20x
Depreciation and amortization.................. $ 5,169
Purchase accounting adjustments................ --
Capital expenditures........................... 2,682
Net sales -- product line
Bingo paper................................. $42,860 $ 4,498 $ -- $ 47,358
Pulltab tickets............................. 18,726 20,302 -- 39,028
Ink dabbers................................. 7,547 599 -- 8,146
Bingo hall equipment........................ 5,155 752 -- 5,907
General merchandise......................... 3,071 -- -- 3,071
Video King gaming systems................... 3,973 -- -- 3,973
Promotional marketing....................... -- 2,393 -- 2,393
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
29
<PAGE> 35
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 (350)(e) 74,456
203 (a)
------- ------- ------- --------
Gross profit.......................... 26,774 10,301 147 37,222
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 96 8,191
Interest expense, net................. 3,365 553 4,573 (b) 8,491
------- ------- ------- --------
Income (loss) before income taxes..... 1,893 2,284 (4,477) (300)
Income tax provision.................. 1,657 -- (767)(c) 890
------- ------- ------- --------
Net income (loss)..................... $ 236 $ 2,284 $(3,710) $ (1,190)
======= ======= ======= ========
Net income (loss) per share --primary... $ 0.04 $ (0.18)
Net income (loss) per share -- fully
diluted............................... 0.04 (0.18)
Weighted average shares
outstanding -- primary................ 6,682 6,682
Weighted average shares
outstanding -- fully diluted.......... 6,682 6,682
OTHER DATA
EBITDA................................ $ 13,742
Ratio of EBITDA to net cash interest
expense(d)......................... 1.9x
Ratio of earnings to fixed
charges(h)......................... 1.56x 0.96x
Depreciation and amortization......... $ 5,062
Purchase accounting adjustments....... 489
Capital expenditures.................. 3,678
Net sales -- product line
Bingo paper........................ $44,274 $ 3,758 $ -- $ 48,032
Pulltab tickets.................... 19,786 20,383 -- 40,169
Ink dabbers........................ 9,299 415 -- 9,714
Bingo hall equipment............... 5,393 626 -- 6,019
General merchandise................ 3,747 -- -- 3,747
Video King gaming systems.......... 1,417 -- -- 1,417
Promotional marketing.............. -- 2,580 -- 2,580
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
30
<PAGE> 36
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)(e) 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 6,000(b) 11,178
-------- ------- ------- --------
Income (loss) before income taxes..... 2,563 1,475 (5,134) (1,096)
Income tax provision.................. 1,777 -- (1,286)(c) 491
-------- ------- ------- --------
Net income (loss)..................... $ 786 $ 1,475 $(3,848) $ (1,587)
======== ======= ======= ========
Net income (loss) per
share -- primary................... $ 0.12 $ (0.24)
Net income (loss) per share -- fully
diluted............................ 0.11 (0.23)
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)......................... 1.8x
Ratio of earnings to fixed
charges(h)......................... 1.58x 0.90x
Depreciation and amortization......... $ 7,302
Purchase accounting adjustments....... 489
Capital expenditures.................. 4,961
Net sales -- product line
Bingo paper........................ $ 58,522 $ 5,237 $ -- $ 63,759
Pulltab tickets.................... 26,916 26,790 -- 53,706
Ink dabbers........................ 12,014 583 -- 12,597
Bingo hall equipment............... 5,757 796 -- 6,553
General merchandise................ 4,988 -- -- 4,988
Video King gaming systems.......... 1,685 -- -- 1,685
Promotional marketing.............. -- 3,189 -- 3,189
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
31
<PAGE> 37
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)(f) $(36,502) $100,000 (g) $ 13,534
(2,000)(f)(i) (49,964)(g)
Trade and notes receivables,
net.......................... 21,345 7,998 (149)(f) 29,194 -- 29,194
Inventories..................... 22,252 5,103 2,551 (f) 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 (f) 28,834 28,834
Intangible assets................. 29,940 -- 15,414 (f) 45,354 (1,348)(g) 49,156
5,150 (g)
Other assets...................... 2,227 704 (151)(f) 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)(f) $ 8,795 $ (8,401)(g) $ 394
Bazaar purchase price
adjustment................... 454 -- -- 454 (454)(g) --
Trade payables.................. 12,790 1,270 -- 14,060 -- 14,060
Accrued and other liabilities... 3,160 1,543 (46)(f) 4,657 (549)(g) 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)(g) --
Other........................... 31,175 8,010 (8,010)(f) 31,175 (30,782)(g) 100,393
100,000 (g)
------- ------- -------- -------- -------- --------
Total long-term debt.... 36,175 8,010 (8,010) 36,175 64,218 100,393
Other long-term liabilities....... -- 100 (100)(f) -- -- --
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)(f) 69 -- 69
Additional paid-in capital...... 26,909 257 (257)(f) 27,239 -- 27,239
330 (f)
Retained earnings............... 8,244 10,805 (10,805)(f) 8,244 (976)(g) 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.
32
<PAGE> 38
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 Note Offering 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. The
incremental change in based upon the portion of the proceeds of the Note
Offering which were used to pay the purchase price of the Trade
Acquisition, and to repay in full all existing revolving credit and term
facilities and certain outstanding debt instruments ($87,321,000) at
12 1/2% for the applicable periods, plus interest charged on the $787,000
of existing debt retained by the Company and the incremental amortization
expense related to the deferred financing costs associated with the
transactions. (See Note g 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.
33
<PAGE> 39
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
STUART ENTERTAINMENT, INC. AND TRADE PRODUCTS, INC.
(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.
(e) To reflect Trade Products' inventory on a FIFO
(first-in-first-out) basis versus the historical LIFO (last-in-first-out)
basis.
(f) 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 including cash of $2,000,000
and property, plant and equipment of $235,000 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.
(g) 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. At September 30, 1996, no amounts were assumed
outstanding under the New Credit Agreement.
(h) 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. Earnings available for fixed charges were insufficient to cover
fixed charges by $2,273,000 for the year ended December 31, 1994, and
$1,096,000 and $300,000 for the pro forma year ended December 31, 1995 and
the pro forma nine months ended September 30, 1995, respectively.
(i) 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.
34
<PAGE> 40
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
STUART ENTERTAINMENT, INC.
The selected historical consolidated financial data set forth below for
each of the years ended December 31, 1993, 1994 and 1995 have been derived from,
and are qualified by reference to, the audited Consolidated Financial Statements
of Stuart, included elsewhere in this Prospectus. The selected historical
consolidated financial data for the years ended December 31, 1991 and 1992 have
been derived from the audited Consolidated Financial Statements of Stuart that
have not been included herein. The selected historical consolidated unaudited
financial data set forth below for the nine-month periods ended September 30,
1995 and 1996 have been derived from, and are qualified by reference to,
Stuart's unaudited Consolidated Financial Statements included elsewhere herein
and include all adjustments, consisting only of normal recurring adjustments,
which management considers necessary for a fair presentation of the results of
Stuart for such periods. Results for the interim periods are not necessarily
indicative of the results for the full year. The selected historical
consolidated financial data set forth below should be read in conjunction with,
and are qualified by reference to, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the accompanying Consolidated
Financial Statements of Stuart and related notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1)
Net Sales................................... $40,886 $52,519 $53,937 $59,158 $109,882 $83,916 $81,332
Cost of Goods Sold(2)....................... 29,057 37,977 40,167 42,987 74,722 57,142 55,966
------- ------- ------- ------- -------- ------- -------
Gross Profit.............................. 11,829 14,542 13,770 16,171 35,160 26,774 25,366
Selling, General and Administrative
Expenses.................................. 8,551 11,139 11,470 14,323 26,581 19,786 17,615
Amortization of Goodwill.................... -- -- 61 96 878 630 676
Termination of Consulting Agreement(3)...... -- -- -- 2,000 -- -- --
United Kingdom Charge(4).................... -- -- -- -- 819 800 --
Equity in (Earnings) Losses of Joint
Ventures.................................. -- -- 705 980 (129) 300 32
------- ------- ------- ------- -------- ------- -------
Income (Loss) from Operations............. 3,278 3,403 1,534 (1,228) 7,011 5,258 7,043
Interest Expense, Net....................... 395 646 775 1,045 4,448 3,365 3,286
------- ------- ------- ------- -------- ------- -------
Income (Loss) before Income Taxes......... 2,883 2,757 759 (2,273) 2,563 1,893 3,757
Income Tax Provisions (Benefit)............. 1,015 1,037 247 (665) 1,777 1,657 1,334
------- ------- ------- ------- -------- ------- -------
Net Income (Loss)........................... $ 1,868 $ 1,720 $ 699(5) $(1,608) $ 786 $ 236 $ 2,423
======= ======= ======= ======= ======== ======= =======
Net income (loss) per share -- primary........ $ 0.55 $ 0.49 $ 0.20 $ (0.45) $ 0.12 $ 0.04 $ 0.35
Net income (loss) per share -- fully
diluted..................................... 0.55 0.49 0.20 (0.45) 0.11 0.04 0.35
Weighted average shares
outstanding -- primary...................... 3,415 3,519 3,524 3,561 6,706 6,682 6,890
Weighted average shares outstanding -- fully
diluted..................................... 3,415 3,519 3,524 3,561 7,053 6,682 6,890
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
----------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and Cash Equivalents.......................... $ 339 $ 669 $ 512 $ 2,116 $ 943 $ 859
Working Capital.................................... 3,947 3,461 3,742 14,454 20,018 22,019
Total Assets....................................... 28,001 33,764 37,301 88,977 98,994 99,328
Long-Term Debt (Including Current Portion)......... 8,837 9,645 11,807 40,898 47,483 44,970
Stockholders' Equity............................... 12,206 14,168 15,140 30,153 32,040 35,033
</TABLE>
35
<PAGE> 41
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA
EBITDA(6)..................................... $ 4,386 $ 4,693 $ 3,127 $ 1,088 $12,117 $ 8,902 $10,203
Ratio of earnings to fixed charges(7)......... 8.30x 5.27x 1.98x (1.18)x 1.58x 1.56x 2.14x
Depreciation and Amortization................. $ 1,108 $ 1,290 $ 1,593 $ 1,935 $ 4,617 $ 3,155 $ 3,160
Purchase Accounting Adjustments(2)............ -- -- -- 381 489 489 --
Capital Expenditures.......................... 4,600 3,600 1,420 2,182 3,409 2,815 950
Net Sales -- Product Line:
Bingo Paper................................. $23,883 $28,755 $27,822 $29,632 $58,522 $44,274 $42,860
Pulltab Tickets............................. 6,998 10,188 10,806 12,039 26,916 19,786 18,726
Ink Dabbers................................. 1,982 4,171 5,508 6,884 12,014 9,299 7,547
Bingo Hall Equipment........................ 6,147 7,116 6,533 6,655 5,757 5,393 5,155
General Merchandise......................... 1,876 2,248 1,828 1,560 4,988 3,747 3,071
Video King Gaming Systems................... -- 41 1,440 2,388 1,685 1,417 3,973
Net Sales -- Geographic(8):
United States............................... $40,886 $52,519 $53,937 $57,345 $65,510 $50,894 $49,193
Canada/Other International.................. -- -- -- 1,813 44,372 33,022 32,139
</TABLE>
- ---------------
(1) On December 13, 1994, Stuart completed the acquisition of Bazaar. The
acquisition has been accounted for using the purchase method of accounting,
and, accordingly, the operating results of Bazaar have been included with
Stuart's since the date of acquisition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 2 to
Notes to Consolidated Financial Statements of Stuart included herein.
(2) In accordance with the application of the purchase method of accounting to
the assets of Bazaar, the finished goods of Bazaar were recorded at fair
value. This resulted in the write-up of finished goods inventory of Bazaar
which was included in cost of goods sold in 1994 and 1995 as finished goods
were sold during those periods. The amount charged to cost of goods sold in
1994 was $381,000 and in 1995 was $489,000.
(3) During 1994, Stuart paid $2.0 million to terminate a consulting agreement
related to the development of System 12 . See Note 10 to Notes to
Consolidated Financial Statements of Stuart contained herein.
(4) During 1995, Stuart recorded a one-time pre-tax charge of $819,000 related
to costs to shut down its manufacturing facility in the United Kingdom, of
which $800,000 was taken in the first nine months of 1995. See Note 8 to
Notes to Consolidated Financial Statements of Stuart for the year ended
December 31, 1995 contained herein.
(5) Includes $187,000 positive cumulative effect on net income from a change in
accounting principles. See Note 1 to Notes to Consolidated Financial
Statements of Stuart contained herein.
(6) "EBITDA" is defined herein as earnings before interest, taxes, depreciation,
amortization and purchase accounting adjustments. EBITDA is presented
because it is a measure of an issuer's ability to service its indebtedness
commonly used by certain investors. However, items excluded from EBITDA,
such as depreciation and amortization, are significant components in
understanding and assessing financial performance, and 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 Consolidated Statements of Cash Flows in the
accompanying Financial Statements of Stuart included elsewhere in this
Prospectus. EBITDA measures presented herein may not be comparable to other
similarly titled measures of other companies.
(7) For purposes of computing historical ratios of earnings to fixed charges,
earnings are divided by 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. A ratio equal to less than 1:1
indicates that "earnings" are inadequate to cover the fixed charges.
"Earnings" for the year ended December 31, 1994 are deficient by $2,273,000.
(8) Geographic classification of sales is determined by the point of origin. As
a result international sales are not necessarily reflective of all
international distribution.
36
<PAGE> 42
SELECTED HISTORICAL FINANCIAL DATA
TRADE PRODUCTS, INC.
The selected historical financial data set forth below for each of the
years ended December 31, 1993, 1994 and 1995 were derived from, and are
qualified by reference to, the audited Financial Statements of Trade Products,
included elsewhere in this Prospectus. The selected historical financial data
for the years ended December 31, 1991 and 1992 has been derived from the audited
financial statements of Trade Products that have not been included herein. Set
forth below is selected historical unaudited financial data for the nine-month
periods ended September 30, 1995 and 1996 that were derived from the unaudited
financial statements of Trade Products and include all adjustments, consisting
only of normal recurring adjustments, which management considers necessary for a
fair presentation of the results of Trade Products for such periods. Results for
the interim periods are not necessarily indicative of results for the full year.
The selected historical consolidated financial data set forth below should be
read in conjunction with, and are qualified by reference to, the accompanying
Financial Statements of Trade Products and related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales...................................... $26,467 $30,738 $31,457 $32,494 $36,595 $27,762 $28,544
Cost of goods sold............................. 15,657 17,078 17,814 19,632 22,807 17,461 17,287
------- ------- ------- ------- ------- ------- -------
Gross profit............................. 10,810 13,660 13,643 12,862 13,788 10,301 11,257
Selling, general and administrative expenses... 8,268 8,978 9,110 9,743 10,749 7,550 7,856
Other (income) expense, net.................... (10) (179) 169 209 (69) (161) (67)
Equipment development expenditures(1).......... -- -- 2,067 358 903 75 185
------- ------- ------- ------- ------- ------- -------
Income from operations................... 2,552 4,861 2,297 2,552 2,205 2,837 3,283
Income from settlement of lawsuit(5)........... -- -- -- -- -- -- 2,000
Interest expense............................... (438) (228) (379) (520) (730) (553) (568)
------- ------- ------- ------- ------- ------- -------
Net income(2).................................. $ 2,114 $ 4,633 $ 1,918 $ 2,032 $ 1,475 $ 2,284 $ 4,715
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AS OF
----------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents............................... $ 137 $ 787 $ 689 $ 1,184 $ 759 $ 1,996
Working capital......................................... 4,045 4,521 6,422 6,869 8,030 11,372
Total assets............................................ 14,003 16,950 18,776 20,424 20,219 23,001
Long-term debt (including current portion).............. 4,172 5,221 6,725 8,092 8,522 9,018
Stockholders' equity.................................... 7,263 9,056 8,577 8,406 8,251 11,070
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA
EBITDA(3)...................................... $ 3,765 $ 6,202 $ 3,944 $ 4,405 $ 4,168 $ 4,202 $ 4,750
Adjusted EBITDA(4)............................. 3,765 6,202 6,011 4,763 5,071 4,277 4,935
Depreciation and amortization.................. $ 1,213 $ 1,341 $ 1,647 $ 1,853 $ 1,963 $ 1,365 $ 1,467
Capital expenditures........................... 1,423 3,350 839 2,922 1,552 863 1,732
Net Sales-Product Line:
Pulltab tickets.............................. $22,107 $29,956 $25,651 $25,149 $26,790 $20,383 $20,302
Bingo paper.................................. 1,228 1,730 2,541 2,954 5,237 3,758 4,498
Promotional marketing........................ 3,132 3,052 2,719 3,703 3,189 2,580 2,393
Bingo hall equipment......................... -- -- 546 688 796 626 752
Ink dabbers.................................. -- -- -- -- 583 415 599
</TABLE>
37
<PAGE> 43
- ---------------
(1) Trade Products recorded expenses related to the development of a new type of
manufacturing equipment, which the management of Trade Products determined
would result in no future benefit to Trade Products. This asset was not
acquired by Stuart in the Trade Acquisition.
(2) Trade Products is an S corporation, and, accordingly, has not been subject
to corporate income tax.
(3) "EBITDA" is defined herein as earnings before interest, taxes, depreciation,
amortization and income from settlement of lawsuit. EBITDA is presented
because it is a measure of an issuer'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, and 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 Cash Flows in the accompanying Financial Statements of
Trade Products included elsewhere in this Prospectus. EBITDA measures
presented herein may not be comparable to other similarly titled measures of
other companies.
(4) "Adjusted EBITDA" is defined as EBITDA plus equipment development
expenditures, which asset is not acquired by the Company in the Trade
Acquisition.
(5) Trade Products 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.
38
<PAGE> 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus 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 Prospectus. 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, Stuart has successfully integrated
acquisitions and strategic alliances into its growth strategy, such as the
acquisition of Bazaar in 1994 (the "Bazaar Acquisition") which broadened its
Canadian customer base. In 1995, Stuart acquired Reliable (the "Reliable
Acquisition") in order to expand its customer base and to acquire the rights to
Reliable's patented manufacturing technology. The Trade Acquisition is expected
to expand Stuart's pulltab ticket product line and increase its pulltab ticket
market share in the United States. The results of operations of Bazaar and
Reliable have been consolidated since the date of the Bazaar Acquisition and the
Reliable Acquisition, respectively. See "Business -- History of Stuart."
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 Stuart and Bazaar to
manufacture products in the United Kingdom. In 1995, Stuart Entertainment
England recorded losses of $2.1 million which included the one-time pre-tax
charge of $819,000 (see "Note 8 to Notes to Consolidated Financial Statements of
Stuart").
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 10 to
Notes to Consolidated Financial Statements of Stuart"). In addition, Stuart had
several transactions and adjustments in the fourth quarter of 1994 that
negatively impacted earnings for the year ended December 31, 1994 (see "Note 16
to Notes to Consolidated Financial Statements of Stuart").
The Company will incur a one-time non-cash charge to cost of goods sold in
the first four months after the completion of the Note Offering of approximately
$2.6 million. The non-cash charge to cost of goods sold relates to the
application of purchase accounting to the finished goods inventory of Trade
Products that will be sold by the Company after the completion of the Note
Offering.
In connection with the Note Offering, the Company expects to record an
extraordinary loss in the fourth quarter of 1996 of approximately $1.0 million,
net of income taxes, to write off unamortized debt issuance costs on the Prior
Credit Agreement (see "Note h to Notes to Unaudited Pro Forma Condensed Combined
Financial Statements").
ACQUISITION OF TRADE PRODUCTS, INC.
On November 13, 1996, Stuart acquired substantially all of the assets and
assumed certain specified liabilities of Trade Products, the leading
manufacturer of pulltab tickets in the United States and a manufacturer of other
gaming products. The purchase price was $37.2 million plus the issuance of ten
year warrants to acquire 300,000 shares of Common Stock with an exercise price
of $7.75 per share. In addition,
39
<PAGE> 45
the purchase price is subject to adjustment to the extent Trade Products' total
stockholders' equity, as reflected on its audited financial statements as of the
closing date of the Trade Acquisition, is greater or less than Trade Products'
total stockholders' equity as reflected on its financial statements as of
September 30, 1996.
Concurrently with the consummation of the Trade Acquisition, Stuart 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 be appointed to the
Board of Directors of the Company. See "Management." The various agreements
between Stuart and Trade Products also contain non-competition provisions
whereby Messrs. Poll, Rudy and Harry Wirth, representing all of the stockholders
of Trade Products, will not compete with the Company for seven years.
The following data sets forth operating data from Stuart's Consolidated
Statements of Operations and the Unaudited Pro Forma Condensed Combined Income
Statements stated as a percentage of net sales.
<TABLE>
<CAPTION>
PRO FORMA
NINE
HISTORICAL MONTHS
YEARS ENDED PRO FORMA ENDED PRO FORMA LATEST
DECEMBER 31, YEAR ENDED SEPTEMBER 30, 12 MONTHS ENDED
--------------------- DECEMBER 31, ------------- SEPTEMBER 30,
1993 1994 1995 1995 1995 1996 1996
----- ----- ----- ------------ ----- ----- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.......................... 74.5 72.7 68.0 66.5 66.7 67.0 66.7
----- ----- ----- ----- ----- ----- -----
Gross profit................................ 25.5 27.3 32.0 33.5 33.3 33.0 33.3
Selling, general and administrative
expenses.................................. 21.3 24.2 24.2 25.3 24.4 22.8 24.0
Amortization of goodwill.................... 0.1 0.1 0.8 0.9 0.8 0.9 0.9
Equity in (earnings) losses of joint
ventures.................................. 1.3 1.7 (0.1) (0.1) 0.1 0.1 0.1
Termination of consulting agreement......... -- 3.4 -- -- -- -- --
United Kingdom charge....................... -- -- 0.7 0.5 0.7 -- --
----- ----- ----- ----- ----- ----- -----
Income (loss) from operations............... 2.8% (2.1)% 6.4% 6.9% 7.3% 9.2% 8.3%
===== ===== ===== ===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996 and 1995
Actual Pre-Trade Acquisition and Pro Forma with Trade Acquisition
Net Sales. Net sales were $81.3 million for the nine months ended September
30, 1996, a decrease of $2.6 million or 3.1% from $83.9 million for the nine
months ended September 30, 1995. The decrease was attributable to a combination
of the following: (i) a decrease in sales of $1.2 million related to the
shutdown of Stuart Entertainment England; (ii) a decrease in sales of consumable
products of $3.9 million due to a slight downturn in sales of consumable
products primarily in the United States; and (iii) an increase in electronics
and electrical equipment sales of $2.5 million, primarily due to a $2.4 million
sale of System 12(TM) electronic bingo and gaming units.
On a pro forma basis, net sales were $109.9 million for the nine months
ended September 30, 1996, a decrease of $1.8 million or 1.6% from approximately
$111.7 million for the nine months ended September 30, 1995. Excluding sales of
Stuart Entertainment England, on a pro forma basis, net sales for the nine month
period ended September 30, 1995 decreased $987,000 or 0.8%.
Cost of Goods Sold. Cost of goods sold, as a percentage of sales, was 68.8%
for the nine months ended September 30, 1996, an increase of 0.7% from 68.1% for
the nine months ended September 30, 1995. Excluding the application of a
purchase accounting adjustment recorded in the first quarter of 1995 to the
finished goods inventory of Bingo Press and Specialty Limited, cost of goods
sold for the nine months ended September 30, 1996 increased to 68.8% from 67.5%,
partially related to production variances.
On a pro forma basis, cost of goods sold, as a percentage of sales, was
67.0% for the nine months ended September 30, 1996, an increase of 0.3% from
66.7% for the nine months ended September 30, 1995. Excluding the application of
purchase accounting to the finished goods inventory of Bazaar, cost of goods
sold for the nine months ended September 30, 1996 increased to 67.0% from 66.2%.
Stuart currently anticipates
40
<PAGE> 46
cost of goods sold, as a percentage of sales, will decline in the future as a
result of the Trade Acquisition. While both Stuart and Trade Products produce
bingo paper, ink products and pulltab tickets, Stuart is a more efficient
producer of bingo paper and ink products and Trade Products is a more efficient
producer of pulltab tickets. Costs are expected to decline as certain
manufacturing operations are consolidated. In addition, the Company is
considering various alternatives to enhance its position as a low cost producer,
including shifting a greater volume of its bingo paper products to its Mexican
facility, thereby taking advantage of lower production costs.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses were $17.6 million for the nine months ended
September 30, 1996, a decrease of $2.5 million or 12.1% from $20.1 million for
the nine months ended September 30, 1995. SG&A expenses, as a percent of sales,
were 21.7% for the nine months ended September 30, 1996, a decrease of 2.2% from
23.9% for the nine months ended September 30, 1995. The decrease in SG&A
expenses was due primarily 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.
On a pro forma basis, SG&A expenses, excluding amortization of goodwill,
were $25.6 million for the nine months ended September 30, 1996, a decrease of
$2.0 million or 7.2% from $27.6 million for the nine months ended September 30,
1995. SG&A expenses, as a percent of sales, were 22.8% for the nine months ended
September 30, 1996, a decrease of 1.6%, from 24.4% for the nine months ended
September 30, 1995.
The Company currently anticipates that SG&A expenses, on a consolidated
basis, will decline somewhat, as a percentage of sales, in the future through
the elimination of duplicate corporate overhead expenses, functions and
facilities.
United Kingdom Charge. During the second quarter of 1995, Stuart signed a
licensing and marketing agreement with Playprint Limited ("Playprint"). This
agreement gave Stuart the opportunity to redeploy its assets in the United
Kingdom, and discontinue its United Kingdom manufacturing operation. Stuart
recorded a one-time pre-tax charge of $800,000 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. During the first six months of
1995, Stuart Entertainment England recorded losses of $1.7 million, which
included the one-time pre-tax charge of $800,000.
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
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 1995 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 unit 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 Stuart was not able to offset through other cost
reductions. Ink sales prices were down slightly from 1994 due primarily to a
shift to the use of lower priced products in the mix of ink products sold.
41
<PAGE> 47
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% 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 Stuart, (b) cost savings associated with the movement of more production to
Mexico 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 (see "Note 16 to Notes to Consolidated Financial Statements of
Stuart").
During 1994 and 1995, Stuart 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, Stuart 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 other 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 (see "Note 16 to Notes to Consolidated Financial Statements of
Stuart"). The expense reductions were partially offset by higher salaries,
fringe benefits and related costs, amortization of goodwill for the 12-month
period, corporate expenses related to the consolidation of the acquired
companies and higher sales promotion activities. The increase in salaries 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. See "Management."
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's Mexican subsidiary, Stuart
Entertainment, S.A. de C.V. ("Stuart Entertainment Mexico") was allocated to
Stuart based on the percentage of total production that was sold to Stuart. 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 Stuart. For
the year ended December 31, 1995, equity in earnings related solely to British
Bazaar Company Limited ("British Bazaar"), which is 50% owned by Stuart (see
"Note 8 to Notes to Consolidated Financial Statements of Stuart.").
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 higher borrowing levels were
largely related to the Bazaar Acquisition, the Reliable Acquisition and higher
working capital requirements.
United Kingdom Charge. During the second quarter of 1995, Stuart signed a
licensing and marketing agreement with Playprint. This agreement gave Stuart the
opportunity to redeploy its assets in the United Kingdom, and discontinue its
United Kingdom manufacturing operation. Stuart 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.
42
<PAGE> 48
Years Ended December 31, 1994 and 1993
Net Sales. Net sales were $59.2 million for the year ended December 31,
1994, an increase of $5.3 million or 9.7% from $53.9 million for the year ended
December 31, 1993. The sales growth in 1994 was attributable to the inclusion of
Bazaar operations from December 14, 1994 through the end of 1994, which
represented $1.8 million of the increase in net sales; increases in sales of
bingo paper of $1.6 million or 5.8%: increases in sales of pulltab tickets of
$800,000 or 7.5%, and increases in sales of ink products of $1.3 million or
24.5%. Bingo paper units increased slightly from 1993 to 1994 while pulltab
tickets and ink products experienced unit increases of 5.9% and 18.4%
respectively. Stuart also experienced gains in sales of electrical bingo
equipment and electronic gaming equipment; however, these gains were offset by
decreases in sales of general merchandise. The decrease in sales of general
merchandise is primarily attributable to the sale of two wholly owned
subsidiaries during 1993.
Overall sales price levels increased for all major product lines during
1994 compared to 1993. Bingo paper prices increased approximately 3.9%, which
Stuart passed on to its customers. This increase was the result of raw material
price increases on newsprint paper stock. Pulltab ticket prices increased
slightly during 1994 while ink products increased approximately 3.0%. Ink
product prices increased primarily due to a shift to the use of a higher priced
ink product in the mix of ink products sold.
Cost of Goods Sold. Cost of goods sold as a percentage of sales, was 72.7%
for the year ended December 31, 1994, a decrease of 1.8% from 74.5% for the year
ended December 31, 1993. The decrease in the cost of goods sold percentage is
due to the increase in unit sales prices discussed above and improvements in
manufacturing efficiencies. These decreases were offset by increases in the
prices paid by Stuart for raw material, newsprint paper stock and general labor.
Additionally for the year ended December 31, 1994, Stuart recorded an adjustment
to cost of goods sold of $381,000 or 0.6% to record the effect of the inventory
of Bazaar which was sold during the period of December 14, 1994 through December
31, 1994. and Stuart recorded a $300,000 charge for obsolete inventory for Video
King.
Selling, General and Administrative Expenses. SG&A expenses were $14.3
million for the year ended December 31, 1994, an increase of approximately $2.8
million or 24.3% from $11.5 million for the year ended December 31, 1993. SG&A
expenses as a percent of sales were 24.2% in 1994, an increase of 2.9% from 21
3% in 1993. The increase in SG&A expenses was due to several factors.
Approximately $607,000 of the increase in SG&A was due to the consolidation of
Bazaar's operations with Stuart for the period from December 14, 1994 through
December 31, 1994. Bad debt expense increased by $890,000, due primarily to an
increase of $1.0 million in the allowance for doubtful accounts related to the
financial condition of two customers at December 31, 1994. An additional
$677,000 of the increase in SG&A resulted from the expansion of the operation of
Video King, primarily in research and development and sales and marketing.
Finally, salaries and related costs increased $651.000 due to a consulting
agreement with the current Chief Executive Officer of Stuart, a slight increase
in the number of employees and general salary increases. Professional fees
increased $486.000, due primarily to executive placement fees incurred in
connection with the employment of the current Chief Executive Officer and
additional audit and legal costs relating to the ongoing business of Stuart.
Equity in (Earnings) Losses of Joint Ventures. Equity in (earnings) losses
of joint ventures for the year ended December 31, 1994 totalled $980,000
compared to $705.000 for the year ended December 31, 1993. During 1994 Stuart
recorded losses of $570,000 and $415,000 for Stuart Entertainment Mexico and for
Stuart Entertainment England, respectively, compared to losses of $555,000 and
$150,000, respectively, in 1993 (see "Note 8 to Notes to Consolidated Financial
Statements of Stuart.") The equity loss for Stuart Entertainment Mexico is
primarily SG&A expenses for Stuart Entertainment Mexico. The equity loss for
Stuart Entertainment England represents 50.0% of the net operating loss of
Stuart Entertainment England for the period January 1, 1994 through December 13,
1994 and includes income of $5,000 for British Bazaar (see "Note 8 of Notes to
Consolidated Financial Statements of Stuart").
Interest Expense, Net. Interest expense, net of interest income, was $1.0
million for the year ended December 31, 1994, an increase of $270,000 or 34.8%
from $775,000 for the year ended December 31, 1993. The increase was due to the
inclusion of Bazaar's interest expense of $95,000 for the period of December 14,
1994 through December 31, 1994 and higher interest rates experienced in 1994 as
compared to 1993. Upon
43
<PAGE> 49
the closing of the Bazaar Acquisition. Stuart had significantly higher borrowing
levels as compared to December 31, 1993.
LIQUIDITY AND CAPITAL RESOURCES
Financing Activities
Prior to the Note Offering, Stuart 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 million and a
senior secured loan facility of $15.0 million, which included a U.S. facility
and a Canadian facility. Stuart repaid all outstanding balances under the Prior
Credit Agreement with the proceeds from the Note Offering. The Prior Credit
Agreement was terminated and the Company entered into the New Credit Agreement.
See "Description of New Credit Agreement." In conjunction with the closing of
the New Credit Agreement, the Company expects to record an extraordinary loss of
approximately $1.0 million, 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 (no amounts
assumed outstanding on pro forma basis at September 30, 1996), and the excess
cash of approximately $12.7 million available from the net proceeds of the Note
Offering 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 raise
capital through equity offerings. In addition, the Company may be required to
obtain additional financing. However, there can be no assurance that such
financing will be available to the Company on favorable terms, if at all.
The Indenture governing the Exchange 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 and senior in right
of payment to the Exchange Notes. Such covenants are subject to certain
limitations and exceptions. See "Description of Exchange Notes -- Certain
Covenants."
The Indenture also provides that upon the occurrence of a Change of
Control, each holder of Exchange Notes will have the right to require the
Company to purchase all or a portion of such holder's Exchange 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 Exchange 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. See "Description of Exchange
Notes -- Change of Control."
44
<PAGE> 50
Cash Flows
The cash balance at December 31, 1995, 1994 and 1993 was $943,000,
$2,116,000 and $512,000, respectively. The changes in cash for the last three
years were:
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net Income (loss)..................... $ 786 $ (1,608) $ 699
Other operating activities............ 4,474 6,280 2,932
Working capital increases............. (7,050) (3,470) (4,143)
------- -------- ------
Total Operating Activities.... (1,790) 1,202 (512)
Investing activities.................... (682) (30,396) (590)
Financing activities.................... 1,299 30,798 945
------- -------- ------
Net change in cash...................... (1,173) 1,604 (157)
======= ======== ======
</TABLE>
Total trade receivables increased $3,703,000 from $16,599,000 at December
31, 1994 to $20,302,000 at December 31, 1995. The increase is due primarily to
the acquisition of Reliable, price increases, overall sales increases and longer
collection periods. Total notes receivable (including current and long-term
portions decreased slightly from a balance of $2,749,000 at December 31, 1994 to
$2,737,000 at December 31, 1995. During 1995, trade receivables totalling
$1,426,000 were converted to notes receivables from non-related parties. The
conversions were made to assist customers in resolving cash flow deficiencies
and to aide 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 receivables.
The Company periodically reviews this allowance for reasonableness.
Inventories increased $5,879,000 from $16,103,000 at December 31, 1994 to
$21,982,000 at December 31, 1995. The increase is due to the acquisition of
Reliable, increased cost of paper products used to manufacture bingo paper and
increase inventory quantities on hand. Inventory levels fluctuate on a seasonal
basis but are not expected to stabilize or experience modest increases in 1996.
Trade payables and accrued liabilities increased a combined $1,461,000 from
$15,171,000 at December 31, 1994 to $16,632,000 at December 31, 1995. The
increase was due to the acquisition of Reliable, higher inventory balances
related to increase costs of paper products and higher working capital
requirements, partially offset by a reduction on the Bazaar Purchase Price
Adjustment.
Cash Expenditures
Capital expenditures during the first nine months of 1996 and for the year
ended December 31, 1995 totaled $999,000 and $3.4 million, respectively. Capital
expenditures for fiscal 1996 are currently projected to be $2.0 million. In 1996
and 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 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.
PENDING ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed of," which
establishes methods for determining when an impairment of long-lived assets has
occurred and for measuring the impairment of long-lived assets.
45
<PAGE> 51
Implementation of Statement No. 121 is not expected to have a material adverse
effect on the Company's results of operations or financial condition.
The FASB also issued Statement No. 123, "Accounting for Stock-Based
Compensation," which encourages, but does not require, employers to adopt a fair
value method of accounting for employee stock-based compensation, and which
requires increased stock-based compensation disclosures in lieu of expense
recognition. The Company does not intend to elect expense recognition for stock
options and therefore, implementation of Statement No. 123 will have no effect
on the Company's results of operations or financial condition.
THE INDUSTRY
BINGO INDUSTRY
The National Association of Fundraising Ticket Manufacturers' 1995 Charity
Gaming in North America Report (the "NAFTM Report") estimates that over 60,000
organizations have licenses to operate bingo games in the United States and
Canada. According to industry reports compiled by the Bingo Bugle, which is a
series of regional newspapers aimed at bingo players, bingo players visit bingo
halls in the United States and Canada an estimated 1.2 billion times a year. The
Company believes that significant amounts are wagered on bingo in the United
States and Canada, and that these amounts will increase as electronic bingo
systems further penetrate the United States and Canadian markets.
Although there are no comprehensive industry statistics available,
according to the NAFTM Report, which only includes data from certain reporting
jurisdictions, the gross wager on bingo in 1995 was approximately $2.4 billion
in the United States and $1.6 billion in Canada, representing per capita wagers
of $18.20 and $57.72, respectively. The NAFTM Report does not include data from
19 of the 46 states where bingo is legal in the United States, Indian gaming
enterprises, two Canadian provinces and two Canadian territories.
Regulations governing traditional paper bingo and electronic bingo systems
vary by jurisdiction. In the United States, traditional paper bingo is legal in
all states except Arkansas, Hawaii, Tennessee and Utah. Electronic bingo systems
are regulated differently than traditional paper bingo, with electronic bingo
systems currently being permitted by 22 states in some form and in Indian gaming
halls in compliance with IGRA. In Canada, traditional paper bingo is legal in
all ten provinces and two territories: however, fixed base electronic bingo
systems may only be used in halls owned or authorized by the provincial
governments. Currently, fixed base electronic gaming systems are permitted in
British Columbia, Manitoba and Ontario, while hand-held electronic bingo systems
are legal only in Ontario and must be used in conjunction with bingo paper.
The bingo industry in the United States is highly fragmented among numerous
bingo game operators. The majority of bingo games in the United States are
operated by small nonprofit organizations for fundraising purposes. Such
organizations include religious, fraternal, social, military and civic
organizations. A smaller percentage of bingo games in the United States are
operated for profit in large bingo halls by casinos, Indian gaming enterprises
and commercial operators. For example, Foxwoods Resort and Casino in
Connecticut, the Scininole Indian Casino in Florida, the Potawatomi Bingo Casino
in Wisconsin and Win River Casino Bingo in California all feature large-scale
modern bingo halls with seating capacities ranging in size from approximately
1,000 to 3,000 seats. Additionally, Las Vegas casinos have developed a renewed
interest in bingo, with the number of casinos with large bingo halls increasing
from 18 to 26 during the past twelve months.
In Canada, bingo is generally highly centralized under the administration
of government sponsored entities or licensed commercial operators, which own and
operate large bingo halls, with average session attendance in excess of 175
players. These government sponsored entities and commercial operators run games
on behalf of various charitable organizations, often playing several sessions
per day.
In 1995, satellite-linked bingo games were introduced in the Province of
Alberta and currently link over 80 halls. These satellite-linked bingo games
pool the prize money available among commercial bingo halls
46
<PAGE> 52
thus offering higher jackpots. In addition, the Ontario Gaming Commission has
announced the introduction of a satellite-linked bingo game, which is expected
to connect over 200 commercial bingo halls, subject to final approval by the
Ministry of Economic Development and Trade.
PULLTAB INDUSTRY
In the United States and Canada, pulltab tickets generally are sold at
charitable bingo hails as an additional source of fundraising. In several states
and the province of Ontario, pulltab tickets are approved for sale in third
party retail locations, including bars and taverns. Eleven states also use
pulltab tickets, in addition to scratch-off tickets, in their instant lottery
ticket sales. The Company believes that significant amounts of money are wagered
on pulltab tickets in the United States and Canada, and that these amounts will
increase as additional jurisdictions permit the sale of pulltab tickets and as
jurisdictions which currently permit the use of pulltab tickets expand the
permitted point of sale locations to include third party retail locations.
Although there are no comprehensive industry statistics available,
according to the NAFTM Report, which only includes data from certain reporting
jurisdictions, the gross wager on pulltab tickets in 1995 was approximately $3.9
billion in the United States and approximately $867.0 million in Canada,
representing per capita wagers of $42.12 in the United States and $51.93 in
Canada. The NAFTM Report does not include data from 20 of 38 states where
pulltab tickets are legal in the United States, Indian gaming enterprises, two
Canadian provinces and two Canadian territories. According to the NAFTM Report,
per capita wagers are significantly higher in those states that have also
approved the sale of pulltab tickets in bars and taverns, such as Minnesota
($273.83 per capita) and Washington ($93.72 per capita).
In the United States, pulltab tickets are currently legal in 38 states.
Each state has developed specific regulations that affect the style of play in
its market by regulating the point of sale, price per ticket, game themes and
payouts.
In Canada, six provincial lotteries use pulltab tickets in their instant
lottery ticket sales. Ontario allows the sale of pulltab tickets at charitable
bingo halls and under charity license at third party retail locations such as
bars, restaurants, concessionaires, gas stations, hotels, mall kiosks,
supermarkets, convenience stores and bowling alleys. Currently there are
approximately 9,500 such third party retail locations in Ontario.
47
<PAGE> 53
BUSINESS
OVERVIEW
The Company believes that it is North America's leading manufacturer 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 enjoys a worldwide reputation for innovation and new
product development and has been a leader in the bingo industry for over 60
years, having popularized many important breakthroughs in bingo, such as
disposable bingo paper and electronic bingo systems.
Bingo is one of North America's most popular forms of gaming and
entertainment. Many nonprofit organizations sponsor bingo games for fundraising
purposes, while commercial entities, Indian gaming enterprises, casinos and
government sponsored entities 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 believes that it derives a competitive advantage in the bingo
industry by offering a wider array of bingo and bingo-related products than any
of its competitors. 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.
In the Trade Acquisition, which was completed on November 13, 1996, Stuart
acquired substantially all of the assets and assumed certain specified
liabilities of Trade Products for a total purchase price of approximately $37.2
million, subject to adjustment, plus warrants to purchase 300,000 shares of
Common Stock. The Company believes that Trade Products is the leading and most
innovative manufacturer 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 North America's leading manufacturer of a full line
of bingo and bingo-related products, it is also be North America's leading
manufacturer of pulltab tickets. On a pro forma basis for the Trade Acquisition,
the Company had net sales of $144.7 million and EBITDA (as defined) of $19.8
million for the 12-month period ended September 30, 1996.
COMPETITIVE STRENGTHS
The Company plans to enhance its position as North America's leading
manufacturer of a full line of bingo and bingo-related products by capitalizing
on its competitive strengths. The Company's competitive strengths are its: (a)
strong brand names; (b) well established relationships with distributors; (c)
tradition of new product development and introductions; (d) consistent low-cost
production; and (e) experienced management team.
Strong Brand Names. The Company believes that it has the leading market
position in North America for bingo and bingo-related products. In the United
States, the Company utilizes the brand names Bingo King(R) and Trade Products(R)
which are recognized as the leaders in the bingo and pulltab ticket industries,
respectively. In Canada, the Company utilizes the brand name Bazaar &
Novelty(R), which is recognized as the leader in both the bingo and pulltab
ticket industries. The brand name Bazaar & Novelty(R) has been used since 1936,
Bingo King(R) has been used since 1948, and Trade Products(R) has been used
since 1974. The Company believes that the reputation and use of these
well-recognized brand names will continue to give the Company a distinct
competitive advantage in the industry by perpetuating product brand name
recognition and enhancing customer brand name loyalty.
Well Established Relationships with Distributors. The Company maintains
strong relationships with key distributors, many of whom received assistance
from the Company in the development of their businesses. The
48
<PAGE> 54
Company has the most extensive distribution system for bingo and bingo-related
products in North America and is continually enhancing its international
distribution network. The Company's products are sold through more than 300
distributors. These distributors sell the Company's products to nonprofit
organizations, such as religious, fraternal, social, military and civic
organizations, and to commercial bingo halls, Indian gaming enterprises, casinos
and government sponsored entities. The Company has been able to expand its
business by introducing new products through its existing distribution system,
including a full line of ink dabber products in 1991 and hand-held electronic
bingo systems in 1996.
Tradition of New Product Development and Introductions. The Company
maintains an ongoing product development program. The Company has devoted
significant resources toward the creation of product development teams headed by
product development managers and supported by other staff members. These product
development teams initiate dialogues with distributors and bingo hall operators
concerning customer satisfaction and the enhancement of the entertainment
experience provided at bingo halls. Based upon this dialogue and management's
industry experience, the Company regularly updates and redesigns existing
product lines, creates product line extensions and develops new products.
The Company continually seeks to develop new technological advances in the
bingo marketplace, both by updating and redesigning its electronic bingo hall
equipment and by adapting the game of bingo for play using computer touch-screen
technology. The Company has developed and introduced System 12(TM), a fixed base
system of touch-screen video bingo and multi-game terminals, which is currently
in use in 14 large-scale bingo halls, such as the Manitoba Lotteries
Corporation's Club Regent and Foxwoods Resort and Casino. The Company recently
began marketing a new multi-media electronic flashboard, which incorporates a
laser-projected video screen with advertising and promotional capabilities into
a conventional electronic flashboard.
The Company also introduces and markets products brought to it by
distributors and other third parties. The Company continually seeks
opportunities to introduce innovative products developed by others, by entering
into either joint ventures or licensing agreements. In 1996, the Company began
marketing Power Bingo King(TM), a hand-held electronic bingo system, through a
strategic alliance with Power Bingo Corporation. The Company believes that its
extensive distribution system and brand name recognition will allow it to expand
the market penetration of the Power Bingo King(TM) system.
Consistent Low-Cost Production. The Company believes that its superior
market position and manufacturing economies of scale allow it to manufacture
products at a lower cost than its competitors. With respect to bingo paper and
pulltab tickets, the Company believes it is the leading manufacturer in North
America, having manufactured more than 47.5 billion bingo cards and more than
5.0 billion pulltab tickets in 1995. As a result of its substantial volume, the
Company is able to lower its costs through purchasing discounts and increasing
manufacturing efficiencies through longer production runs.
Both Stuart and Trade Products produce bingo paper, ink products and
pulltab tickets. Stuart is the more efficient producer of bingo paper and ink
products and Trade Products is the more efficient producer of pulltab tickets.
The acquisition of Trade Products therefore allows the Company to further reduce
manufacturing costs through the utilization of the best manufacturing practices
of both companies and the selective consolidation of manufacturing facilities.
The Company also plans to shift a greater volume of its bingo paper production
to its Mexican facility, thereby taking advantage of lower production costs in a
proven high quality environment. In addition, the Company designs and assembles
its own specialized high-speed web presses at a cost less than half the price of
commercially available presses, thereby reducing capital expenditures.
Experienced Management Team. The Company believes that its management team
is one of the most experienced in the bingo industry with an average of over 15
years of industry experience. The management team has extensive knowledge of the
industry and its evolution, and has long-term, well established relationships
with distributors and other customers. Management's experience has positioned
the Company for extensive business development opportunities due to its
worldwide reputation for industry expertise. During the past two years, the
Company has considerably strengthened its management team with the addition of
Albert Barber as Chief Executive Officer, Paul Tunink as Chief Financial
Officer, and Dan Free as Vice President of the Company's electronic gaming
subsidiary. In addition, the acquisition of Bazaar & Novelty resulted in the
addition of Roy Lister as an Executive Vice President and the acquisition of
Trade Products
49
<PAGE> 55
resulted in Harry Poll becoming a member of the Board of Directors and Ronald G.
Rudy becoming a member of the Board of Directors and Executive Vice President of
the Company.
GROWTH STRATEGY
The Company plans to increase sales and cash flow by: (a) developing and
introducing new products; (b) pursuing acquisitions and strategic alliances; and
(c) penetrating new markets.
Developing and Introducing New Products. The Company has been a leader in
the bingo industry for over 60 years, having popularized many important
breakthroughs in bingo. The Company has taken full advantage of growth
opportunities by utilizing its existing distribution system to introduce
evolutionary products, such as disposable bingo paper, and to create product
line extensions, such as pulltab tickets and ink dabbers.
The Company believes that electronic bingo systems will be the next major
evolutionary step in the industry and that it is well-positioned to capitalize
on this opportunity. Electronic bingo systems are computer-based platforms which
enable a player to play 200 or more bingo cards per game. As part of the
Company's strategy to be a leader in the electronic bingo system industry, the
Company offers two electronic bingo systems: (a) System 12(TM), a fixed base
system of electronic touch-screen video bingo and multi-game terminals; and (b)
Power Bingo King(TM), a hand-held electronic bingo system. The popularity of
electronic bingo systems is growing rapidly because they provide additional
entertainment value and permit simultaneous play on many more cards than would
be possible in a typical paper bingo game.
System 12(TM) was designed by the Company specifically for the large bingo
hall environment, such as Foxwoods Resort and Casino. System 12(TM) is a fixed
base cashless system of electronic touch-screen video bingo and multi-game
terminals connected by a local area network. Players are able to play up to 256
cards per game electronically while playing a traditional game on paper
simultaneously with other players. Where regulations permit, System 12(TM)
provides the player access to a stand-alone bingo game and to other games such
as video keno, video poker, video slots and video pulltab tickets.
Since the Company began selling System 12(TM) terminals in 1994, it has
sold or leased 2,017 terminals and installed them in 14 different locations,
including the Manitoba Lotteries Corporation's Club Regent and Foxwoods Resort
and Casino. In addition, the Company has received orders for 32 additional
terminals.
Power Bingo King(TM) is a hand-held electronic bingo system, which because
of its portability and low per unit cost, is especially well suited for the
small bingo hall environment, which characterizes the vast majority of the
United States bingo market. The Company estimates that there are approximately
15,000 portable bingo systems installed in the United States, of which 8,000 are
the predecessor of the Power Bingo King(TM) system. In 1996, the Company entered
into an exclusive marketing and manufacturing agreement with Power Bingo
Corporation, which developed the predecessor of the Power Bingo King(TM) system.
The Company has recently begun marketing the Power Bingo King(TM) system to
charitable organizations and Indian gaming enterprises through its distribution
network. The Company is also exploring opportunities to market Power Bingo
King(TM) in the commercial bingo hall market and the military bingo market, as
well as in new and evolving markets ranging from cruise lines and the emerging
international bingo market. In Canada, Power Bingo King(TM) is legal in Ontario
when played in conjunction with a traditional paper bingo game. The Company
believes the Ontario market offers strong growth potential for Power Bingo
King(TM) as there are approximately 210 commercial halls in Ontario which
average over 175 players per session.
The Company's most recently developed electronic product is a multi-media
electronic flashboard. This product upgrades standard bingo flashboard
technology into a multi-media entertainment center for bingo halls. This
multimedia flashboard includes a laser-projected video screen which can display
videos or live action, a ticker tape message board and advertising panels with
photo-image technology which can be used to display paid advertisements.
Pursuing Acquisitions and Strategic Alliances. The Company plans to
actively pursue acquisition opportunities and strategic alliances with a focus
on creating product line extensions, new products, new markets or new
manufacturing technologies. Historically, Stuart has successfully integrated
acquisitions and
50
<PAGE> 56
strategic alliances into its growth strategy, such as the acquisition of Bazaar
in 1994 which broadened its Canadian customer base. In 1995, Stuart acquired
Reliable in order to expand its customer base and to acquire the rights to
utilize Reliable's patented manufacturing technology. The Trade Acquisition
extends the Company's pulltab ticket product line and increase its pulltab
ticket market share in the United States.
Penetrating New Markets. The Company is expanding its marketing efforts
outside of North America, with a particular emphasis in South America which the
Company believes offers significant near-term opportunities. To date, the
Company has made initial sales of bingo products or pulltab tickets into Brazil,
Peru, Argentina, Colombia, Ecuador, Chile and Venezuela. The Company has
supplied bingo halls with bingo hall equipment and bingo paper in Venezuela,
Peru and Colombia.
The Company expects to penetrate the South American market through the
establishment of joint ventures to manufacture and distribute its products. The
Company has recently hired an international sales manager and a business
development manager to develop these relationships. In addition, it is currently
exploring a joint venture in Brazil through which the Company would establish a
local printing facility.
The Company expects that the establishment of a manufacturing facility in
the South American market, utilizing the Company's printing technology, will
allow it to be among the market's low-cost producers. The Company believes that
it can be a low-cost producer because the price of its North American-produced
bingo and pulltab ticket products, including significant freight and duty
charges, is currently competitive with locally produced products in the South
American market.
HISTORY OF STUART
Historically, Stuart has focused its efforts on becoming North America's
leading manufacturer of a full line of bingo and bingo-related products. As part
of this process, Stuart has acquired businesses engaged in similar lines of
business and has entered into various forms of strategic alliances.
In December 1994, Stuart acquired Bazaar. At the time of the acquisition,
Bazaar had annual gross revenues of approximately $36.6 million, which the
Company believed made Bazaar the largest manufacturer and distributor of bingo
and bingo-related products and pulltab tickets in Canada. The combined
operations of Stuart and Bazaar made Stuart the largest manufacturer and
distributor of bingo and bingo-related products in North America. Bazaar was
owned by Leonard A. Stuart, the Chairman of the Board of Directors of the
Company. See "Certain Transactions."
In connection with the Bazaar Acquisition, an affiliate of MLGA, an
investment banking firm, invested capital in the Company in exchange for Common
Stock and warrants and is now the Company's largest stockholder. The Company's
affiliation with MLGA has enhanced the financial position of the Company and
increased its ability to pursue acquisitions and enter into strategic alliances.
In January 1995, Stuart acquired the assets of Reliable in order to expand
Stuart's customer base and acquire the rights to a patented technology for a
specialized collating press used in the manufacture of bingo paper.
In April 1996, as part of its efforts to expand its electronic gaming
system operations, the Company entered into a marketing and manufacturing
agreement with Power Bingo Corporation, the current market leader in hand-held
electronic bingo systems. This agreement provides the Company with exclusive
marketing and manufacturing rights in North America, with certain exceptions.
The Company plans to market the systems to Indian gaming enterprises through its
direct sales force and to charitable organizations through its distributor
network.
In November 1996, Stuart acquired Trade Products, which the Company
believes makes it North America's leading manufacturer of pulltab tickets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Acquisition of Trade Products."
51
<PAGE> 57
PRODUCTS
Overview. The Company derives a competitive advantage in the bingo industry
by offering a wider array of bingo and bingo-related products than any of its
competitors. 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 hails
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 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, Pickle Cards, 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.
The Company has recently 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.
52
<PAGE> 58
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 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.
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 the 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 AND MARKETING
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
their distributors to develop and refine 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.
In 1995, the Company printed over 120,000 copies of their bingo and bingo-
related product catalogs, and over 100,000 copies of their 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 featured the products of over 600
companies, and attracted nearly 20,000 participants from over 80 countries
around the world.
53
<PAGE> 59
CONTRACTS
The Company's business includes contracts to supply bingo paper and pulltab
tickets to various government agencies. Currently, the Company has exclusive
contracts to supply bingo paper to the British Columbia Lottery Corporation, an
agency of the government of British Columbia and the Manitoba Lotteries
Corporation, an agency of the government of Manitoba, British Bazaar, the
Company's 50% owned subsidiary, has an exclusive contract to supply pulltab
tickets to the Atlantic Lottery Corporation, an agency of the Maritime provinces
of Canada.
Prior to the Trade Acquisition, Trade Products had exclusive contracts to
provide pulltab tickets to the Rhode Island Lottery Commission, the Michigan
Lottery and the Connecticut Lottery. Trade Products also had a non-exclusive
lottery contract to provide pulltab tickets to the Massachusetts State Lottery
Commission. These lottery contracts were assigned to the Company upon the
consummation of the Trade Acquisition. While the Company feels that these
contracts are an important part of the overall business of the Company, a loss
of one or more of these contracts is not anticipated to have a material adverse
effect on the business of the Company.
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.
Both Stuart and Trade Products produce bingo paper, ink products and
pulltab tickets. Stuart is the more efficient producer of bingo paper and ink
products and Trade Products is the more efficient producer of pulltab tickets.
It is anticipated that the Trade Acquisition will allow the Company to reduce
manufacturing costs through utilizing the best manufacturing practices of both
companies and selective consolidation of manufacturing facilities. In addition,
the Company plans to shift a greater volume of its bingo paper production to its
Mexican facility, 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 Company
designs and assembles these presses at a cost less than half the price of
commercially available presses. The bingo cards are produced for inventory and
then sold unfinished or are cut and packaged to meet customer specifications.
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, die-cutters and serial numbering machinery. In
recent years the Company has increased its efficiency through the acquisition of
a die-cutter, a laminator and an additional printing press designed to improve
pulltab ticket productivity and product quality.
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 the
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.
54
<PAGE> 60
INTELLECTUAL PROPERTY
The Company relies on a combination of trade secrets, copyrights and
trademarks to protect its intellectual property. The Company currently has five
United States patents and 14 registered trademarks. In addition, the Company
holds certain patent rights, as an exclusive licensee of such patents. The
Company has several trademarks that are well known in the industry and have
significant value including, but not limited to, Bingo King(R), Bazaar &
Novelty(R), Trade Products(R), TPI(R) and Video King(R). The Company also has
trademarks with respect to specific product lines, including Rip-It(R) for
pulltab tickets, Florida Gold(R) for ink dabbers, System 12(TM) for electronic
bingo systems and Bonanza Bingo(R) for bingo paper.
In addition, the Company has developed several proprietary source codes and
software programs for its Video King electronic bingo system. The Company
believes that this software is unique and adds certain features to the Company's
electronic video bingo systems that are attractive both to game operators and
players.
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.
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
February 5, 1997.
<TABLE>
<CAPTION>
OWNED EXPIRATION SQUARE
LOCATION BUSINESS SEGMENT OR LEASED OF LEASE FEET
-------- ---------------- --------- ---------- -------
<S> <C> <C> <C> <C>
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 systems Leased 08/31/2001(4) 20,000
Bingo hall equipment
Lynnwood, Washington.......... Pulltab tickets Leased 2006(5) 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
</TABLE>
- ---------------
(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.
(5) In connection with the Transactions, the Company entered into a ten-year
lease for this facility beginning on the date of the closing of the
Transactions. The Company has the option to renew the lease for one
additional ten-year period.
55
<PAGE> 61
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.
In general, the Company's properties and equipment are in good condition
and are considered to be adequate for their present use.
EMPLOYEES
As of February 5, 1997, the Company had 1,739 full-time employees in the
United States, Canada, and Mexico, of which 130 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.
ENVIRONMENTAL MATTERS
The manufacturing processes of the Company are such that relatively little
hazardous waste is generated at its manufacturing locations. The Company
believes that it has all necessary federal, state and provincial registrations
and licenses necessary to conduct its manufacturing processes. The Company does
not treat or dispose of hazardous waste on-site. The small quantities of waste
generated are picked up and disposed of by licensed waste recyclers. The
majority of the Company's ink products are water-soluble and non-toxic.
GOVERNMENT REGULATIONS
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 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 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.
56
<PAGE> 62
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 responsible state agencies to determine the existence and
nature 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 in bars and taverns. 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 Class II. 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 Class II. It is difficult to speculate as to
what modifications may be 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 arc silent with respect to electronic bingo, changes in regulatory
and enforcement personnel could impact the continued operation of electronic
bingo in these states.
57
<PAGE> 63
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, however, the Company has not yet sold any System 12(TM) terminals
pursuant to this license.
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)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.
In connection with the closings of the Transactions, the Company filed
applications for certain new or amended gaming licenses. While the Company does
not expect to experience any material difficulty in acquiring such new or
amended licenses, there can be no assurance that the Company will be able to
obtain such licenses on a timely basis or at all even though it has been
previously licensed in such jurisdictions.
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
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.
LEGAL PROCEEDINGS
From time to time, the Company is a party to litigation which arises in the
ordinary course of business. In addition, the Company is involved in the
following suits.
The Company was sued by Fortunet, Inc. ("Fortunet") in the Federal District
Court for the District of Nevada in January 1995. The suit consisted of two
counts. The first count involved a device manufactured by Bingo Card Minder
Corp., a co-defendant, and marketed by the Company. Fortunet alleged that the
device
58
<PAGE> 64
infringed upon two patents held by Fortunet. The Company no longer markets the
Bingo Card Minder device and believes any exposure to this count will be
minimal. The second count of the suit involved the Company's System 12(TM)
electronic bingo system. Fortunet alleged that System 12(TM) infringes the same
two patents and a third patent held by Fortunet. The Company has defended the
claim asserting a non-infringement defense and also requested re-examination of
the first two patents by the United States Patent and Trademark Office (the
"PTO"). The Company later requested re-examination of the third patent. The PTO
granted all three re-examination requests, indicating that a substantial new
question of patentability existed as to all three patents. The court then stayed
the litigation. The Company believes that the PTO's initial action on the first
two patents had the legal effect of restricting the scope of the two patents and
refuting Fortunet's infringement contentions. The Company is awaiting PTO action
on the third patent. The Company believes that it is not infringing any of the
patents, particularly in light of the action by the PTO. The Company believes
that it will prevail in this action. However, if System 12(TM) were to be found
to infringe one or more of the patents, the Company may have to pay damages and
may have to modify System 12(TM) so as not to infringe the patents.
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.
The Company does not believe that any of these suits will result in
material adverse consequences to the Company in the event the Company does not
prevail in such suits.
59
<PAGE> 65
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following sets forth certain information with respect to the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Leonard A. Stuart.................. 53 Chairman of the Board of Directors
Albert F. Barber................... 50 Vice Chairman of the Board of Directors and
Chief Executive Officer
Timothy R. Stuart.................. 43 President, Chief Operating Officer and
Director
Ronald G. Rudy..................... 47 Director and Executive Vice President
Harry Poll......................... 64 Director
Perry J. Lewis..................... 58 Director
Ira Starr.......................... 37 Director
Sangwoo Ahn........................ 57 Director
Stanley M. Taube................... 59 Director
Richard D. Spizzirri............... 63 Director
Clement F. Chantiam................ 37 Executive Vice President
Roy L. Lister...................... 38 Executive Vice President
Gary L. Loebig..................... 48 Senior Vice President -- Market and Product
Development
Paul C. Tunink..................... 37 Vice President -- Finance, Treasurer, and
Chief Financial Officer
</TABLE>
Leonard A. Stuart has served as Chairman of the Board of Directors of the
Company since 1985, as Chief Executive Officer from December 1986 until December
1994, and as President from December 1986 until March 1989 and from January 1990
until July 1992. Mr. Stuart formed Bazaar in 1971 and served as its President
from 1971 to 1994.
Albert F. Barber has served as Vice Chairman of the Board of Directors and
Chief Executive Officer of the Company since December 1994. He served as
consultant from June 1994 to December 1994. He served as President of CNBC, an
NBC cable affiliate, from 1990 to 1994 and as Executive Vice President and Chief
Financial Officer of NBC from 1987 to 1990.
Timothy R. Stuart has served as President and Chief Operating Officer of
the Company since July 1992 and as director since December 1994. He served as
Executive Vice President from October 1991 to July 1992, and as Vice President
Operations from March 1989 to October 1991. He has been employed by the Company
since 1985. Mr. Stuart was employed by Bazaar from 1979 to 1985.
Ronald G. Rudy has served as director and Executive Vice President of the
Company since November, 1996, and served as President of Trade Products from
1980 to November 1996. Mr. Rudy served as an Assistant Vice President of Rainier
National Bank from 1976 to 1980.
Harry Poll has served as director of the Company since November, 1996, and
served as Chairman of the Board and Chief Executive Officer of Trade Products
from 1974 to November 1996.
Perry J. Lewis has served as director of the Company since December 1994.
Mr. Lewis has been a general partner of MLGAL Partners, L.P. ("MLGAL") since
1987 and a managing director of MLGA since 1982. Mr. Lewis also serves as a
director of Quaker Fabric Corporation, Haynes International, Inc., ITI
Technologies, Inc., Gradall Industries, Inc., Aon Corporation and Evergreen
Media Corporation.
Ira Starr has served as director of the Company since December 1994. Mr.
Starr has been a general partner of MLGAL since 1994. Mr. Starr also served as a
Vice President of MLGA from 1988 to 1993 and
60
<PAGE> 66
has been a managing director since 1994. Mr. Starr also serves as a director of
Haynes International, Inc. and Quaker Fabric Corporation.
Sangwoo Ahn has served as director of the Company since December 1994. Mr.
Ahn has been a general partner of MLGAL since 1987 and a managing director of
MLGA since 1982. Mr. Ahn also serves as a director of ITI Technologies, Inc.,
Haynes International, Inc., PAR Technology Corp., Kaneb Services, Inc., Kaneb
Pipe Line Partners, L.P., Gradall Industries, Inc. and Quaker Fabric
Corporation.
Stanley M. Taube has served as director of the Company since July 1996. Mr.
Taube has been an Executive Vice President and a director of Grand Casinos, Inc.
since November, 1992. Mr. Taube served as President of S.M. Taube & Co., Inc.
from 1986 to 1992. Mr. Taube also serves as a director of Innovative Gaming
Corporation of America, New Horizons Kids Quest, Inc. and Stratosphere
Corporation.
Richard D. Spizzirri has served as director of the Company since July 1996.
Mr. Spizzirri has been Senior Counsel to the law firm of Davis Polk & Wardwell
since 1995. Mr. Spizzirri was a partner at Davis Polk & Wardwell from 1967
through 1995. Mr. Spizzirri is a member of the American Bar Association and the
Bar Association of the City of New York. Mr. Spizzirri also serves as a director
of Centocor, Inc. and Sugen, Inc.
Clement F. Chantiam has served as Executive Vice President of the Company
since November 1992 and as Vice President -- Manufacturing from March 1989 to
November 1992. Mr. Chantiam has been with the Company since 1986, and was with
Bazaar from 1977 to 1986.
Roy L. Lister has served as Executive Vice President of the Company since
December 1994, and was Vice President of Operations from 1991 to 1992. Mr.
Lister served as Executive Vice President of Bazaar since 1992. Mr. Lister was
with Bazaar from 1982 to 1984 and with the Company from 1984 to 1992.
Gary L. Loebig has served as Senior Vice President -- Market and Product
Development of the Company since January 1995, as Vice President -- Marketing
and Regulatory Compliance from October 1991 to January 1995, and as Director of
Marketing and Regulatory Compliance from January 1990 to October 1991. Mr.
Loebig has been with the Company since 1984.
Paul C. Tunink has served as Vice President -- Finance, Treasurer and Chief
Financial Officer of the Company since April 1995. He was Divisional Vice
President -- Finance of Younkers, Inc. from May 1992 to April 1995 and Director
of Corporate Accounting of Commtron Corporation from prior to 1991 to April
1992. Mr. Tunink is a certified public accountant.
Leonard A. Stuart, Chairman of the Board of the Company, and Timothy R.
Stuart, President of the Company, are brothers. There are no other family
relationships between any of the directors and executive officers of the
Company.
At each annual meeting of stockholders, the successors to the directors
whose terms then expire are elected to hold office for a term expiring at the
next succeeding annual meeting. Each director holds office until his successor
is elected and qualified. Officers serve at the discretion of the Board of
Directors and are elected at the first meeting of the Board of Directors after
each annual meeting of stockholders.
The current members of the Board of Directors of the Company were selected
as directors pursuant to the terms of a Securityholders' Agreement (the
"Securityholders' Agreement") entered into in connection with the Bazaar
Acquisition. The Securityholders' Agreement provides that the Board of Directors
will be comprised of up to nine members, three of whom Mr. Leonard Stuart may,
but shall not be required to, designate for nomination, which in his sole
discretion may include himself, four of whom an affiliate of MLGA (the "MLGA
Affiliate") may, but shall not be required to designate for nomination, and two
of whom may, but shall not be required to, be designated jointly by both Mr.
Leonard Stuart and the MLGA Affiliate. Mr. Stuart has designated, as his
nominees, himself and Timothy R. Stuart, and the MLGA Affiliate has designated,
as its nominees, Messrs. Ahn, Lewis, Spizzirri and Starr. Mr. Stuart and the
MLGA Affiliate have jointly designated Messrs. Barber and Taube. The
Securityholders' Agreement also imposes certain transfer restrictions on the
panics to the Securityholders' Agreement and their affiliated transferees and
provides such
61
<PAGE> 67
parties and transferees with demand and incidental registration rights with
respect to the Common Stock. The Securityholders' Agreement will be amended in
connection with the Trade Acquisition.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning compensation
paid by the Company to the Chief Executive Officer ("CEO") and the four other
most highly compensated executives of the Company for the last fiscal year (the
"Named Executive Officers"):
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------- ---------------------------
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS (#) ($)(1)
--------------------------- ---- --------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Leonard A. Stuart(2).................. 1995 200,000 -- -- --
Chairman of the Board 1994 195,833 -- -- --
1993 175,833 -- -- --
Albert F. Barber(3)................... 1995 300,000 -- -- --
Chief Executive Officer 1994 9,231 75,000 900,000 204,677(4)
Timothy R. Stuart..................... 1995 170,000 -- 250,000 3,379
President 1994 116,200 -- -- 2,304
1993 107,762 -- 15,000 2,153
Clement F. Chantiam................... 1995 130,000 -- 80,000 2,595
Executive Vice President 1994 116,100 -- -- 2,304
1993 108,837 -- 15,000 2,153
Roy L. Lister(5)...................... 1995 130,000 -- 80,000 1,858
Executive Vice President 1994 2,500 -- -- --
</TABLE>
- ---------------
(1) The stated amounts are Company contributions to a defined contribution
pension plan available to all Company employees, except as otherwise noted.
(2) Mr. Stuart served as Chief Executive Officer of the Company until December
1994.
(3) Mr. Barber has been Chief Executive Officer of the Company since December
1994.
(4) Represents amounts paid to Mr. Barber while serving as a consultant to the
Company during 1994.
(5) Mr. Lister has been an Executive Vice President of the Company since
December 1994.
The foregoing compensation table does not include certain fringe benefits
made available on a nondiscriminatory basis to all Company employees such as
group health insurance, dental insurance, long-term disability insurance,
vacation and sick leave. In addition, the Company makes available certain non-
monetary benefits to its executive officers with a view to acquiring and
retaining qualified personnel and facilitating job performance. The Company
considers such benefits to be ordinary and incidental business costs and
expenses. The aggregate value of such benefits in the case of each executive
officer listed in the above table, which cannot be precisely ascertained, but
which is less than 10% of the cash compensation paid to each such executive
officer, is not included in such table.
62
<PAGE> 68
OPTION GRANTS TABLE
The following table provides information relating to the grant of stock
options to the CEO and the Named Executive Officers during the year ended
December 31, 1995.
OPTION GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(1)
-------------------------------------------------- ---------------------------
%
OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE
OPTIONS IN FISCAL OR BASE EXPIRATION
NAME GRANTED(#) YEAR(2) PRICE($/SH) DATE 5%$ 10%($) 0%($)
---- ---------- ---------- ----------- ---------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Leonard A. Stuart.................. -- -- -- -- -- -- --
Albert F. Barber................... -- -- -- -- -- -- --
Timothy R. Stuart.................. 50,000 6 5.00 1/17/08 147,000 382,500 --
100,000 12 10.00 1/17/08 -- 265,000 --
100,000 12 15.00 1/17/08 -- -- --
Clement F. Chantiam................ 40,000 5 5.00 1/17/05 117,700 306,000 --
40,000 5 10.00 1/17/05 -- 106,000 --
Roy L. Lister...................... 40,000 5 5.00 1/17/05 117,700 306,000 --
40,000 5 10.00 1/17/05 -- 106,000 --
</TABLE>
- ---------------
(1) Potential realizable value is based on an assumption that the stock price of
the Shares appreciates at the annual rate shown (compounded annually) from
the date of grant until the end of the five-year option term for the
non-qualified stock options and until the end of the 10-year option term for
the incentive stock options. These numbers are calculated based on the
requirements promulgated by the Securities and Exchange Commission and do
not reflect the Company's estimate of future stock price growth.
(2) Options granted to employees during fiscal 1995 totaled 825,400.
63
<PAGE> 69
AGGREGATED OPTION EXERCISE AND FISCAL YEAR-END OPTION TABLE
The following table provides information relating to the exercise of stock
options during the year ended December 31, 1996 by the CEO and each of the Named
Executive Officers and the 1995 fiscal year-end value of unexercised options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS OPTIONS
ACQUIRED ON VALUE AT FY-END AT FY-END
NAME EXERCISE(#) REALIZED($) (#)(1) ($)(1)
---- ----------- ----------- -------------- --------------
EXERCISABLE/ EXERCISABLE/
UNEXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Leonard A. Stuart..................... -- -- -- --
Albert F. Barber...................... -- -- 900,000/ -- 337,500/ --
Timothy R. Stuart..................... 23,000 56,125 262,500/2,500 131,250/5,625
Clement F. Chantiam................... 18,500 21,625 52,500/42,500 63,750/50,625
Roy L. Lister......................... -- -- 40,000/40,000 45,000/45,000
</TABLE>
- ---------------
(1) The closing sale price of the Common Stock on December 29, 1995 ($7.25 was
used to calculate option value).
Employment Agreements. On December 12, 1994, the Company entered into an
employment agreement (the "Stuart Agreement"), with Leonard A. Stuart, the
Chairman of the Board. Pursuant to the Stuart Agreement, Mr. Stuart was to be
employed for a period of five years beginning December 13, 1994. Under the terms
of the Stuart Agreement, Mr. Stuart received an annual salary of $200,000
("Annual Salary"). In addition, the Company was required to reimburse him for
80% of the following expenses related to the operation of an office in Fort
Lauderdale, Florida: rent for such office; salary and benefits for one
administrative assistant; telephone; stationery; postage and similar items. He
was also entitled to participate in customary benefits programs maintained by
the Company, including health, life and disability insurance, to the extent
provided to other senior executives of the Company. Effective as of February 1,
1996, the Stuart Agreement was superseded by the Management Consulting Agreement
between the Company and Len Stuart & Associates, Ltd., a Cayman Islands
corporation, pursuant to which Mr. Stuart will provide consulting services to
the Company. The terms of the Management Consulting Agreement are substantially
similar to the terms of the Stuart Agreement. See "Certain Transactions."
The Company also has an employment agreement, dated June 1, 1994, with
Albert F. Barber, the CEO and Vice Chairman of the Board (the "Barber
Agreement"). The Barber Agreement was amended on December 17, 1996, to extend
its term to December 31, 1998. The Barber Agreement is automatically extended
indefinitely until either the Company or Mr. Barber terminates the Barber
Agreement, at which time the Barber Agreement will terminate six months after
such notice.
For 1996, Mr. Barber received an annual base salary (the "Base Salary") of
$330,000 which was increased to $350,000 for 1997. The Base Salary will be
increased to $375,000 for 1998. In addition, Mr. Barber is eligible to receive a
cash bonus (the "Bonus") for services rendered during each calendar year covered
by the Barber Agreement pursuant to the following terms. Mr. Barber will be paid
a bonus equal to 50% of the Base Salary when the Company's earnings before
interest and income taxes ("EBIT") exceed the targeted amount (the "Targeted
Amount"), as approved by the Board of Directors each year, and an additional
increase of 10% of Base Salary to the extent EBIT equals or exceeds 105% of the
Targeted Amount and an additional 2% to 4% of the Base Salary when EBIT exceeds
105% of the Targeted Amount by a specific percentage.
64
<PAGE> 70
The Company may terminate Mr. Barber's employment at any time for cause,
and in such event, all of Mr. Barber's rights to compensation would cease upon
his termination. If the termination is without cause, or as a result of a
disability or death, the Company will pay Mr. Barber, in addition to amounts
accrued in respective periods prior to the termination, his Base Salary for the
greater of the period through December 31, 1996 or one year from the date of
termination (or, in the case of death, the proceeds of a life insurance policy
to be obtained by the Company on Mr. Barber's behalf), and the Bonus, prorated
to the time of termination, in a lump sum to be payable at the time the Bonus
for such calendar year would normally be paid. In the event Mr. Barber
terminates his employment within 90 days of a change of control of the Company,
Mr. Barber will continue to receive his Base Salary for two years from the date
of such termination and the applicable Bonus prorated and paid as described
above.
On November 13, 1996, the Company entered into a consulting agreement with
Mr. Poll, Chairman of the Board and Chief Executive Officer of Trade Products
(the "Poll Agreement") and an employment agreement with Mr. Rudy, President of
Trade Products (the "Rudy Agreement") as follows: (a) Mr. Poll will be retained
as a consultant for a period of seven years and will be paid $500 per month
during the seven year period. The Poll Agreement may be terminated at any time
for cause, and in such event, all of Mr. Poll's rights to compensation will
cease. In the event that termination is without cause or as a result of death,
the Company will be required to continue to pay Mr. Poll his compensation from
the date of termination through the remainder of the Poll Agreement; and (b) the
Rudy Agreement has a term of three years and provides for a base salary of
$200,000, $210,000 and $220,000, respectively. In addition, Mr. Rudy will be
eligible for a performance based bonus of $50,000 and will be granted stock
options under the Company's 1994 Performance Stock Option Plan as follows:
50,000 shares with an exercise price of $5.00, 100,000 shares with an exercise
price of $10.00 per share and 106,000 shares at $15.00 per share. The Rudy
Agreement may be terminated at any time for cause, and in such event, all of Mr.
Rudy's rights to compensation will cease. In the event that termination is
without cause or as a result of death, the Company will be required to continue
to pay Mr. Rudy the greater of the following: (i) the base salary through the
end of the term at the rate in effect on the date of termination; or (ii) for a
period of one year from the date of termination, at the rate in effect on the
date of termination. The Company's obligation to pay Mr. Rudy automatically
terminates upon a breach by Mr. Rudy of the noncompetition provisions of the
Rudy Agreement.
Compensation Pursuant to Plans
Stock Option Plans.The Company has three stock option plans under which
options have been or may be granted: the 1985 Non-Qualified Stock Option Plan,
the 1992 Non-Qualified Stock Option Plan and the 1994 Performance Stock Option
Plan. Options to purchase 609,850 shares of Common Stock were granted to
directors and officers under the 1994 Performance Stock Plan in 1995. Although
the 1985 Non-Qualified Stock Option Plan and the 1992 Non-Qualified Plan have
been terminated, the rights and options previously granted thereunder have not
been altered or impaired in any way.
Employee Benefit Plans.The Company maintains a defined contribution pension
plan coveting substantially all of its employees, including all executive
officers. Eligible employees may contribute up to 15% of their salaries, not to
exceed a government-established maximum. Company contributions are 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 salaries of all employees
eligible under the plan. Company contributions vest over a five-year period.
During 1995, the Company's contribution to the 401(k) Plan was $157,000.
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 additional amounts in excess of the 2.5%, but they are not
matched by the Company. During 1995, the Company's contribution to the Canadian
Plan was $140,000.
65
<PAGE> 71
COMPENSATION OF DIRECTORS
The Company does not currently pay any director's fees; however, all
directors are reimbursed travel expenses relating to the attendance of meetings
of the Board of Directors or any committee thereof.
CERTAIN TRANSACTIONS
On December 13, 1994, the Company acquired Len Stuart and Associates
Limited ("LSA"), the holding company for Bazaar and Niagara Bazaar & Novelty
Limited, pursuant to a Stock Purchase Agreement (the "LSA Agreement") among the
Company, LSA and Mr. Leonard Stuart. Pursuant to the LSA Agreement, Mr. Stuart
received $35.0 million, subject to adjustment, as follows: (a) $30.0 million in
immediately available funds; (b) a senior subordinated note from the Company in
the initial principal amount of $5.0 million, which bears interest at 10% and
matures on March 31, 2000; and (c) warrants to purchase 100.000 shares of the
Common Stock at an exercise price of $5.75 per share. Subsequent to the
acquisition of LSA, and pursuant to the results of a post-closing audit, the
Company paid Mr. Stuart an additional $1.6 million as a purchase price
adjustment. The Company received a fairness opinion to the effect that the
consideration paid to Mr. Stuart was fair to the Company from a financial point
of view (see "Note 2 to Notes to Consolidated Financial Statements of Stuart").
In connection with the Company entering into the fourth amendment to the
Credit Agreement, which increased the maximum amount available under the
Revolving Facility from $20.0 million to $23.0 million, Mr. Leonard A. Stuart
and MLGAL Partners L.P., of which Messrs. Lewis, Ahn and Starr are general
partners, guaranteed the payment of all amounts under the Revolving Facility in
excess of $20.0 million. These guarantees were released on November 13, 1996, in
connection with the New Credit Agreement.
Stuart 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 Stuart with respect to Stuart'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 1995, Stuart paid BMG $115,000. The
Company believes that the terms of the BMG Agreement are comparable to those
which would have been obtainable from unaffiliated third parties.
In January 1995, the Company entered into a consulting agreement with Ken
Stuart, a brother of Leonard A. Stuart, the Chairman of the Company. Under the
agreement, Ken Stuart provides consulting and advisory services with respect to
the manufacture, marketing, sale and distribution of ink dabbers and is paid the
greater of (a) $189,000 or (b) 6.5% of the gross profit of sales of ink dabbers
by Stuart and its subsidiaries, up to a maximum of $250,000 per year. The
consulting agreement further provides that if Stuart exceeds its EBIT target, as
set by the Board of Directors, the maximum of $250,000 will be increased by the
same percentage that Stuart exceeds the EBIT target. The consulting agreement is
terminable at will by either party; provided, however, if Ken Stuart is
terminated with or without cause, he is entitled to receive compensation. The
consulting agreement also contains certain non-competition provisions. In 1995,
Ken Stuart was paid commissions totaling approximately $221,000. The Company
believes that the terms of the consulting agreement are comparable to those
which would have been obtainable from unaffiliated third parties.
In October 1992, Stuart 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 A. Stuart for $262,000 payable in the form of a
promissory note (the "Bingo Video Note"). The Bingo Video Note bears interest at
a rate of 1% above the Company's borrowing rate on its short-term line of
credit, is collateralized by the assets of Bingo Video and is guaranteed by Mr.
Stuart's brother-in-law and Len Stuart and Associates, Inc., a Florida
corporation wholly owned by Mr. Stuart. The principal balance of the Bingo Video
Note at
66
<PAGE> 72
September 30, 1996 was $148,738. Sales to Bingo Video at September 30, 1996
totaled approximately $648,623. Sales to Bingo Video were made at prices
generally charged to the Company's largest customers.
In connection with the Trade Acquisition, the Company entered into a Lease
Agreement with Partnership Leasing L.L.C., a Washington limited liability
company, of which Harry Poll and Ronald Rudy 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 will be
$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.
Effective February 1, 1996, the Company entered into a Management
Consulting Agreement (the "Management Consulting Agreement") with Len Stuart &
Associates, Ltd., a Cayman Islands corporation (the "Consultant"). The term of
the Management Consulting Agreement commenced on February 1, 1996 and ends on
December 12, 1999 (the "Expiration Date"), unless sooner terminated as provided
therein. Beginning on the Expiration Date, and on each anniversary thereafter of
the Expiration Date, the Management Consulting Agreement will automatically be
renewed for a term of one (1) year commencing on the first day immediately
following the Expiration Date, unless such renewal is rescinded by either party.
Under the terms of the Management Consulting Agreement, the Consultant is
entitled to receive an annual base fee of $200,000, which may be increased, but
not decreased, at the discretion of the Board of Directors. During the term of
the Management Consulting Agreement, the Consultant shall also be entitled to
receive reimbursement from the Company of all reasonable expenses including
travel and entertainment incurred by Consultant's employees in performing
services thereunder. In addition, the Consultant shall be entitled to
reimbursement from the Company of 80% of the reasonable expenses incurred by it
in maintaining its offices including reasonable rent, phone, heating, air
conditioning, electric and stationery expenses and salary for an administrative
assistant of the Consultant's choice on a basis consistent with past and present
practices. Mr. Leonard Stuart is President of Len Stuart & Associates, Ltd. and
Chairman of the Board of the Company. The Company believes that the terms of the
Management Consulting Agreement are comparable to those which would have been
obtainable from unaffiliated third parties.
67
<PAGE> 73
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of outstanding shares of Common Stock as of February 5, 1997, by (a)
each person known by the Company to own beneficially five percent or more of the
outstanding shares of Common Stock, (b) the Company's directors, Chief Executive
Officer and the Named Executive Officers, and (c) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
----------------------
NUMBER PERCENT
--------- -------
<S> <C> <C>
Leonard A. Stuart........................................... 1,331,887 19.2%
c/o Stuart Entertainment, Inc.
3211 Nebraska Avenue
Council Bluffs, Iowa 51501
MLGA Fund II, L.P........................................... 3,690,053 48.8
Two Greenwich Plaza
Greenwich, Connecticut 06830
Sangwoo Ahn(2)(3)........................................... 3,785,359 50.0
Ira Starr(2)................................................ 3,699,014 48.9
Perry Lewis(2).............................................. 3,770,359 49.8
Albert F. Barber............................................ 700,000 11.0
c/o Stuart Entertainment, Inc.
3211 Nebraska Avenue
Council Bluffs, Iowa 51501
Timothy R. Stuart........................................... 315,000 4.4
Clement F. Chantiam......................................... 124,500 1.8
Roy Lister.................................................. 107,500 1.6
Ronald R. Rudy(4)........................................... 350,000 4.9
Harry Poll(4)............................................... 100,000 1.4
Richard D. Spizzirri........................................ 20,000 *
Stanley M. Taube............................................ 20,000 *
All executive officers and directors as a group(17
persons).................................................. 7,041,180 74.9
</TABLE>
- ---------------
* Less than one percent.
(1) Shares are considered beneficially owned, for purposes of this table, only
if held by the person indicated, or if such person, directly or indirectly,
through any contract, arrangement, understanding, relationship or otherwise
has or shares the power to vote, to direct the voting of and/or to dispose
of or to direct the disposition of, such security, or if the person has the
right to acquire beneficial ownership within 60 days, unless otherwise
indicated. The foregoing share amounts include the following number of
shares which may be acquired pursuant to stock options or warrants
exercisable within 60 days of February 5, 1997: Mr. Barber, 700,000 shares,
Mr. Leonard A. Stuart, 100,000 shares; Mr. Timothy R. Stuart, 292,000
shares; Mr. Chantiam; 99,500 shares; Mr. Lister, 84,500 shares; Mr. Lewis,
744,226 shares; Mr. Ahn, 744,226 shares; Mr. Starr, 733,541 shares; MLGA
Fund II, L.P., 732,259 shares; Mr. Rudy, 350,000 shares, Mr. Poll, 100,000
shares, Mr. Taube 20,000 shares, and all executive officers and directors as
a group, 2,576,824 shares.
(2) Includes 3,059,651 shares owned by MLGA Fund II, L.P. and 732,259 shares
owned by MLGA Fund II L.P. pursuant to a currently exercisable warrant. The
general partner of MLGA Fund II, L.P. is MLGAL Partners, L.P. Messrs. Lewis,
Starr and Ahn are general partners of MLGAL Partners, L.P. and may be deemed
to beneficially own these shares, Messrs. Lewis, Starr and Ahn disclaim any
beneficial Interest in all shares owed by MLGA Fund II, L.P. The business
address of Messrs. Lewis, Starr and Ahn is c/o MLGA Fund II, L.P., Two
Greenwich Plaza, Greenwich, Connecticut 06830.
(3) Includes 15,000 shares owned by Mr. Ahn's children and 10,000 shares owned
by a family limited partnership. Mr. Ahn disclaims any beneficial interest
in all shares owned by his children and the family limited partnership.
(4) Includes 100,000 shares owned by Trade Products, Inc. pursuant to a
currently exercisable warrant. Messrs. Poll and Rudy own approximately 66%
and 28%, respectively, of the outstanding common stock of Trade Products,
Inc.
68
<PAGE> 74
DESCRIPTION OF NEW CREDIT AGREEMENT
GENERAL
In connection with the Transactions, Stuart (the "U.S. Borrower") and
Bazaar (the "Canadian Borrower" and, together with the U.S. Borrower, the
"Borrowers") entered into the New Credit Agreement with Bank of America National
Trust and Savings Association, as U.S. Agent and Bank of America Canada, as
Canadian Agent (collectively, the "Agents"), the Chase Manhattan Bank, as
Co-Agent and the Chase Manhattan Bank of Canada, as Canadian Co-Agent. The New
Credit Agreement consists of a revolving credit facility in an aggregate
principal amount of $30.0 million (the "Loans").
The Loans are secured by a first priority security interest in all the
assets of the U.S. Borrower (including the acquired assets of Trade Products)
and the Canadian Borrower, but excluding real estate and certain other specific
assets owned by the Borrowers. The U.S. Borrower guaranteed the obligations of
the Canadian Borrower under the New Credit Agreement.
REVOLVING CREDIT FACILITY
The New Credit Agreement consists of a revolving credit facility in an
aggregate principal amount of $30.0 million, of which up to $20.0 million is
available to the U.S. Borrower (the "U.S. Revolver") and up to $10.0 million is
available to the Canadian Borrower (the "Canadian Revolver"). The Borrowers are
entitled to draw amounts under the New Credit Agreement, subject to availability
pursuant to a borrowing base requirement, in order to meet the Company's working
capital requirements, including issuing letters of credit. The U.S. Revolver and
the Canadian Revolver will each be governed by a borrowing base that is based on
the eligible accounts receivable and eligible inventory levels of the U.S.
Borrower and the Canadian Borrower, respectively.
INTEREST RATES
The New Credit Agreement provides that the U.S. Revolver shall bear
interest with reference to either the Base Rate (the "Base Rate") or the LIBOR
rate (the "LIBOR Rate"), at the U.S. Borrower's option, plus the applicable
interest margin. The Base Rate is defined as, on any date, the greater of (a)
the Reference Rate in effect on such date, and (b) the Federal Funds Rate in
effect on such date plus 1/2 of 1%. The applicable interest margin with respect
to loans made under the U.S. Revolver will fluctuate from time to time depending
on the leverage ratio of the U.S. Borrower between 0.25% and 1.75% per annum
with respect to loans that accrue interest at the Base Rate between 1.25% and
2.75% with respect to loans that accrue interest at the LIBOR Rate. As used
herein, "Reference Rate" means, at any time, the rate of interest then most
recently announced by Bank of America in San Francisco, California as its
reference rate for U.S. Dollars loaned in the United States; such rate being set
by Bank of America based upon various factors including its costs and desired
return, general economic conditions and other factors, and used as a reference
point for pricing some loans, which may be priced at, above or below such
announced rate.
The New Credit Agreement provides that the Canadian Revolver shall bear
interest with reference to either the Canadian Base Rate (the "Canadian Base
Rate") or the BA Rate (the "BA Rate"), at the Canadian Borrower's option, plus
the applicable interest margin. The Canadian Base Rate is defined as, on any
date, the rate of interest per annum equal to the greater of (a) the rate which
is publicly announced from time to time by Bank of America Canada in Toronto,
Ontario, as its "prime rate"; and which is its reference rate of interest for
loans in Canadian dollars to Canadian borrowers, and (b) the average rate for
Canadian dollars banker's acceptances having a term of one month that appears on
the Reuters Screen CDOR Page at 10:00 a.m. Toronto time plus 0.75% adjusted
automatically with each quoted, published or displayed change in such rate. The
BA Rate is defined as, for any interest period, an interest rate per annum
(rounded upward to the nearest 1/100th of 1%) equal to the market bid rate
determined by the Bank of America Canada for banker's acceptances (with a tenor
comparable to such interest period and in an amount comparable to the applicable
borrowing) accepted by Bank of America Canada on the first day of such interest
period. The applicable interest margin with respect to loans made under the
Canadian Revolver will fluctuate from time to time
69
<PAGE> 75
depending on the leverage ratio of the Canadian Borrower between 0.25% and 1.75%
per annum with respect to loans that accrue interest at the Canadian Base Rate
and between 1.25% and 2.75% with respect to loans that accrue interest at the BA
Rate.
MANDATORY AND OPTIONAL PREPAYMENTS
The New Credit Agreement does not contain any mandatory prepayment
provisions as long as the aggregate amount of the Loans does not exceed the
level of availability under the New Credit Agreement. The New Credit Agreement
provides that the Borrowers may make optional prepayments of the Loans without
penalty.
COVENANTS
The New Credit Agreement imposes certain covenants and other requirements
on the Company and its subsidiaries. In general, the affirmative covenants
provide for mandatory reporting by the Borrowers of financial and other
information to the Agents and notice by the Company to the Agents upon the
occurrence of certain events. The affirmative covenants are expected to also
include standard covenants requiring the Company to operate its business in an
orderly manner and consistent with past practices.
The New Credit Agreement also contains certain negative covenants and
restrictions on actions by the Company and its subsidiaries that, among other
things, restrict (a) the incurrence and existence of indebtedness or contingent
obligations; (b) consolidations, mergers and sales of assets; (c) the incurrence
and existence of liens; (d) the sale or disposition of assets; (e) investments,
loans and advances; (f) capital expenditures; (g) the payment of dividends and
repurchases of common stock; and (h) acquisitions by the Company. The New Credit
Agreement requires the Company 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.
EVENTS OF DEFAULT
The New Credit Agreement specifies certain customary events of default
including non-payment of principal, interest or fees, violation of covenants,
inaccuracy of representations and warranties in any material respect, cross
default to certain other indebtedness and agreements, bankruptcy and insolvency
events, material judgments and liabilities, change of control and
unenforceability of certain documents under the New Credit Agreement.
The description of the New Credit Agreement set forth above does not
purport to be complete and is qualified in its entirety by reference to the
complete text of the documents entered into therewith.
70
<PAGE> 76
DESCRIPTION OF EXCHANGE NOTES
The Exchange Notes will be issued under the same Indenture, dated November
13, 1996, between the Company and Marine Midland Bank, as Trustee (the
"Trustee"), under which the Notes were issued. The following summary of certain
provisions of the Indenture and Exchange Notes does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the Trust
Indenture Act of 1939, as amended (the "TIA"), and to all provisions of the
Indenture (a copy of which is filed as an exhibit to the Registration Statement
of which this Prospectus is a part, and is incorporated by reference herein),
including the definitions of certain terms therein, and to the terms made a part
of the Indenture by the TIA as in effect on the date of the Indenture. The
definitions of certain capitalized terms used in the following summary are set
forth below under "Certain Definitions."
The Exchange Notes will be issued in fully registered form only, without
coupons, in denominations of $1,000 and integral multiples thereof. Initially,
the Trustee will act as Paying Agent and Registrar for the Notes. The Notes may
be presented for registration of transfer and exchange at the offices of the
Registrar, which initially will be the Trustee's corporate trust office. The
Company may change any Paying Agent and Registrar without notice to registered
holders of the Notes (the "Holders"). The Company will pay principal of and
premium, if any, on the Notes at the Trustee's corporate office in New York, New
York. At the Company's option, interest may be paid at the Trustee's corporate
trust office or by check mailed to the registered address of Holders. Any Notes
that remain outstanding after the completion of the Exchange Offer, together
with the Exchange Notes issued in connection with the Exchange Offer, will be
treated as a single class of securities under the Indenture.
As of the date of the Indenture, none of the Company's Subsidiaries will be
Unrestricted Subsidiaries. Under certain circumstances, however, the Company
will be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Exchange Notes are limited in aggregate principal amount to
$100,000,000 and will mature on November 15, 2004. Interest on the Exchange
Notes will accrue at the rate of 12 1/2% per annum and will be payable
semiannually in cash on each May 15 and November 15, commencing on May 15, 1997,
to the persons who are Holders at the close of business on May 1 and November 1
immediately preceding the applicable interest payment date. Interest on the
Exchange Notes will accrue from the most recent date to which interest has been
paid or, if no interest has been paid, from and including the date of issuance.
The Exchange Notes will not be entitled to the benefit of any mandatory
sinking fund.
REDEMPTION
Optional Redemption. The Exchange Notes will be redeemable, at the
Company's option, in whole at any time or in part from time to time, on and
after November 15, 2001, upon not less than 30 nor more than 60 days' notice, at
the following redemption prices (expressed as percentages of the principal
amount thereof) if redeemed during the 12-month period commencing on November 15
of the year set forth below, plus, in each case, accrued and unpaid interest
thereon, if any, to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001.............................................. 106.250%
2002.............................................. 103.125
2003 and thereafter............................... 100.000
</TABLE>
Optional Redemption upon Public Equity Offerings. Notwithstanding the
foregoing, at any time, or from time to time, prior to November 15, 1999, the
Company, at its option, may use the net cash proceeds of one or more Public
Equity Offerings (as defined below) to redeem up to 35% of the original
principal amount of the Exchange Notes; provided that at least 65% of the
principal amount of Exchange Notes originally issued
71
<PAGE> 77
remains outstanding immediately after any such redemption, at the following
redemption prices (expressed as percentages of the principal amount thereof) if
redeemed during the 12-month period commencing on November 15 of the year set
forth below, plus, in each case, accrued and unpaid interest thereon, if any, to
the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
1996.............................................. 112.500%
1997.............................................. 112.500%
1998.............................................. 112.500%
</TABLE>
In order to effect the foregoing redemption with the proceeds of any Public
Equity Offering, the Company shall make such redemption not more than 120 days
after the consummation of any such Public Equity Offering. As used in the
preceding paragraph, "Public Equity Offering" means an underwritten public
offering of Qualified Capital Stock of the Company pursuant to a registration
statement filed with the Commission in accordance with the Securities Act.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Exchange Notes are to be redeemed at
any time, selection of such Exchange Notes for redemption will be made by the
Trustee in compliance with the requirements of the principal national securities
exchange, if any, on which such Exchange Notes are listed or, if such Exchange
Notes are not then listed on a national securities exchange, on a pro rata
basis, by lot or by such method as the Trustee shall deem fair and appropriate;
provided, however, that (a) no Exchange Note of a principal amount of $1,000 or
less shall be redeemed in part and (b) if a partial redemption is made with the
proceeds of a Public Equity Offering, selection of the Exchange Notes or
portions thereof for redemption shall be made by the Trustee only on a pro rata
basis or on as nearly a pro rata basis as is practicable (subject to DTC
procedures), unless such method is otherwise prohibited. Notice of redemption
shall be mailed by first-class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Exchange Notes to be redeemed at its
registered address. If any Exchange Note is to be redeemed in part only, the
notice of redemption that relates to such Exchange Note shall state the portion
of the principal amount thereof to be redeemed. A new Exchange Note in a
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Exchange Note. On
and after the redemption date, interest will cease to accrue on Exchange Notes
or portions thereof called for redemption as long as the Company has deposited
with the Paying Agent funds in satisfaction of the applicable redemption price
pursuant to the Indenture.
SUBORDINATION
The payment of the principal of, premium, if any, and interest on the
Exchange Notes will be subordinated in right of payment, as set forth in the
Indenture, to the prior payment in full of all Obligations with respect to
Senior Indebtedness, whether outstanding on the Issue Date or thereafter
incurred.
Upon any distribution of assets of the Company of any kind or character,
whether in cash, property or securities upon any dissolution, winding up, total
or partial liquidation or reorganization of the Company (including without
limitation in bankruptcy, insolvency or receivership proceedings or upon any
assignment for the benefit of creditors or any other marshalling of the
Company's assets and liabilities), the holders of Senior Indebtedness shall
first be entitled to receive payment in full of all amounts payable under Senior
Indebtedness (including without limitation interest after the commencement of
any such proceeding at the rate specified in the applicable Senior Indebtedness
whether or not interest is an allowed claim enforceable against the Company in
any such proceeding) before the Holders will be entitled to receive any payment
with respect to the Exchange Notes, and until all Obligations with respect to
Senior Indebtedness are paid in full, any distribution to which the Holders
would be entitled shall be made to the holders of Senior Indebtedness.
No direct or indirect payment by or on behalf of the Company of principal
of, premium, if any, or interest on the Exchange Notes, whether pursuant to the
terms of the Exchange Notes or upon acceleration or
72
<PAGE> 78
otherwise, shall be made if, at the time of such payment, there exists a default
in the payment of all or any portion of principal of, premium, if any, or
interest on, any Senior Indebtedness with a principal amount in excess of $5.0
million, and such default shall not have been cured or waived or the benefits of
this sentence waived by or on behalf of the holders of Senior Indebtedness. In
addition, during the continuance of any other event of default with respect to
any Designated Senior Indebtedness pursuant to which the maturity thereof may be
accelerated, upon the occurrence of (a) receipt by the Trustee of written notice
from the holders of a majority of the outstanding principal amount of the
Designated Senior Indebtedness or their representative or (b) the date of
acceleration of the Notes if such event of default results from the acceleration
of the Exchange Notes, no such payment may be made by the Company on or in
respect of the Exchange Notes for a period (a "Payment Blockage Period")
commencing on the earlier of the date of receipt of such notice or the date of
such acceleration and ending 179 days thereafter (unless such Payment Blockage
Period shall be terminated by written notice to the Trustee from the holders of
a majority of the outstanding principal amount of such Designated Senior
Indebtedness or their representative who delivered such notice). Notwithstanding
anything herein to the contrary, in no event will a Payment Blockage Period
extend beyond 179 days from the date on which such Payment Blockage Period was
commenced. Not more than one Payment Blockage Period may be commenced with
respect to the Exchange Notes during any period of 360 consecutive days. No
event of default that existed or was continuing on the date of the commencement
of any Payment Blockage Period with respect to the Designated Senior
Indebtedness initiating such Payment Blockage Period shall be, or be made, the
basis for the commencement of a second Payment Blockage Period by the holders of
such Designated Senior Indebtedness or their representative, whether or not
within a period of 360 consecutive days, unless such event of default shall have
been cured or waived for a period of not less than 90 consecutive days.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets or securities of the Company of any kind or character,
whether in cash, property or securities, shall be received by the Trustee, any
Holder or the Paying Agent (or, if the Company is acting as its own Paying
Agent, money for any such payment or distribution shall be segregated or held in
trust) on account of principal of, premium, if any, or interest on the Exchange
Notes before all Senior Indebtedness is paid in full, such payment or
distribution shall be received and held in trust by the Trustee, such Holder or
the Paying Agent for the benefit of the holders of the Senior Indebtedness, or
their respective representative, ratably according to the respective amounts of
Senior Indebtedness held or represented by each, and shall be paid over or
delivered to the holders of the Senior Indebtedness remaining unpaid to the
extent necessary to make payment in full of all Senior Indebtedness remaining
unpaid after giving effect to all concurrent payments and distributions to or
for the holders of such Senior Indebtedness.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders may recover less ratably than creditors
of the Company who are holders of Senior Indebtedness or trade creditors. The
Indenture will limit, subject to certain financial tests, the amount of
additional Indebtedness, including Senior Indebtedness, that the Company and its
Subsidiaries can incur. See "Certain Covenants--Limitation on Incurrence of
Additional Indebtedness."
CHANGE OF CONTROL
The Indenture will provide that, upon the occurrence of a Change of
Control, each Holder will have the right to require the Company to purchase all
or a portion of such Holder's Exchange Notes pursuant to the offer described
below (the "Change of Control Offer"), at a purchase price equal to 101% of the
principal amount thereof plus accrued interest to the date of purchase.
Within 30 days following the date upon which the Change of Control
occurred, the Company will send, by first class mail, a notice to each Holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 45 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). Holders electing to have an Exchange Note purchased pursuant to
a Change of Control Offer will be required to surrender the Exchange Note, with
the form entitled "Option of Holder to Elect Purchase" on the reverse of the
Exchange Note completed, to the Paying Agent at
73
<PAGE> 79
the address specified in the notice prior to the close of business on the third
business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Exchange Notes that might be delivered by Holders
seeking to accept the Change of Control Offer. In the event the Company is
required to purchase outstanding Exchange Notes pursuant to a Change of Control
Offer, 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.
The New Credit Agreement contains provisions that would require the Company
to repay all amounts outstanding under the New Credit Agreement upon the
occurrence of a Change of Control, and future Indebtedness of the Company may
contain similar provisions. The Company's obligation under the New Credit
Agreement and any other Senior Indebtedness to effect such a redemption or
repurchase upon the occurrence of a Change of Control would be senior in right
of payment to the Company's obligation to purchase Exchange Notes upon a Change
of Control. Moreover, the exercise by the holders of the Exchange Notes of their
right to require the Company to purchase the Notes could cause a default under
the New Credit Agreement and any other Senior Indebtedness, even if the Change
in Control itself does not, due to the financial effect of such purchase on the
Company.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company and
the Restricted Subsidiaries to incur additional Indebtedness, to grant liens on
their property, to make Restricted Payments and to make Asset Sales also may
make more difficult or discourage a takeover of the Company, whether favored or
opposed by the management of the Company. Consummation of any such transaction
in certain circumstances may require redemption or repurchase of the Exchange
Notes, and there can be no assurance that the Company or the acquiring party
will have sufficient financial resources to effect such redemption or
repurchase. Such restrictions and the restrictions on transactions with
Affiliates, in certain circumstances, may make more difficult or discourage any
leveraged buyout of the Company or any of its Subsidiaries by the management of
the Company. While such restrictions cover a wide variety of arrangements that
traditionally have been used to effect highly leveraged transactions, the
Indenture may not afford the Holders of Exchange Notes protection in all
circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Exchange Notes pursuant to a Change of Control Offer. To the
extent that the provisions of any securities laws or regulations conflict with
the Change of Control provisions of the Indenture, the Company will comply with
the applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the Change of Control provisions of the Indenture
by virtue thereof.
The applicability of the Change of Control provisions of the Indenture are
not limited in any way in the event of a leveraged buyout initiated or supported
by the Company, management of the Company, or any affiliate of either party.
MANDATORY DISPOSITION OR REDEMPTION PURSUANT TO GAMING LAWS
If a Holder or beneficial owner of an Exchange Note is required to be
licensed, qualified or found suitable under applicable Gaming Laws and is not so
licensed, qualified or found suitable within any time period specified by the
applicable Gaming Authority, the Holder shall be obliged, at the request of the
Company, to dispose of such Holder's Exchange Notes within a time period
prescribed by the Company or such other time period prescribed by such Gaming
Authority (in which event the Company's obligation to pay any interest after the
Holder's receipt of such request shall be limited as provided in such Gaming
Laws), and thereafter the Company shall have the right to redeem, on the date
fixed by the Company for the redemption of such Exchange Notes, such Holder's
Exchange Notes at a redemption price equal to the lesser of (a) the lowest
closing sale price of the Notes on any trading day during the 120-day period
ending on the date upon which
74
<PAGE> 80
the Company shall have received notice from a Gaming Authority of such Holder's
disqualification or (b) the price at which such Holder or beneficial owner
acquired the Exchange Notes, unless a different redemption price is required by
such Gaming Authority, in which event such required price shall be the
redemption price. The Company will not be required to pay or reimburse any
Holder or beneficial owner of an Exchange Note for the costs of licensure or
investigation for such licensure, qualification or finding of suitability. Any
Holder or beneficial owner of an Exchange Note required to be licensed,
qualified or found suitable under applicable Gaming Laws will pay all
investigative fees and cost imposed by any Gaming Authority in connection with
such qualification or application therefor.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness.
(a) The Company will not, and will not permit any of the Restricted
Subsidiaries to, directly or indirectly, create, incur, assume, guarantee,
acquire, become liable, contingently or otherwise, with respect to or
otherwise become responsible for payment of (collectively, "incur") any
Indebtedness (other than Permitted Indebtedness).
(b) Notwithstanding the foregoing, if no Default or Event of Default
shall have occurred and be continuing at the time of or as a consequence of
the incurrence of any such Indebtedness, the Company may Incur Indebtedness
(including without limitation Acquired Indebtedness), other than Prohibited
Acquisition Indebtedness, and any Restricted Subsidiary may incur Acquired
Indebtedness, in each case if on the date of the incurrence of such
Indebtedness, after giving effect to the incurrence thereof, the
Consolidated Fixed Charge Coverage Ratio of the Company is greater than (i)
2.00 to 1.00 if such Indebtedness is incurred on or prior to November 15,
1998 or (ii) 2.25 to 1.00 if such Indebtedness is incurred after November
15, 1998.
(c) The Company will not in any event incur, directly or indirectly,
any Indebtedness that by its terms (or by the terms of any agreement
governing such Indebtedness) is subordinated to any Senior Indebtedness of
the Company and senior in any respect in right of payment to the Exchange
Notes.
Limitation on Restricted Payments. The Company will not, and will not cause
or permit any of the Restricted Subsidiaries to, directly or indirectly, (a)
declare or pay any dividend or make any distribution (other than dividends or
distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Capital Stock of the Company or any of its Restricted
Subsidiaries to holders of such Capital Stock (other than any such dividend or
distribution to the Company or a Wholly Owned Restricted Subsidiary of the
Company), (b) purchase, redeem or otherwise acquire or retire for value any
shares of Capital Stock of the Company or any Subsidiary of the Company or any
warrants, rights or options to purchase or acquire shares of any class of any
such Capital Stock, (c) make any principal payment on, purchase, defease,
redeem, prepay, decrease or otherwise acquire or retire for value, prior to any
scheduled final maturity, scheduled repayment or scheduled sinking fund payment,
any Indebtedness of the Company that is subordinate or junior in right of
payment to the Exchange Notes, or (d) make any Investment other than Permitted
Investments (each of the foregoing actions set forth in clauses (a), (b), (c)
and (d) being referred to as a "Restricted Payment"), if at the time of such
Restricted Payment or immediately after giving effect thereto: (i) a Default or
an Event of Default shall have occurred and be continuing or would result
therefrom; (ii) the Company is not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the covenant
described in paragraph (b) under "Limitation on Incurrence of Additional
Indebtedness"; or (iii) the aggregate amount of Restricted Payments (including
such proposed Restricted Payment) made subsequent to the Issue Date (the amount
expended for such purposes, if other than in cash, being the fair market value
of such property as determined reasonably and in good faith by the Board of
Directors of the Company) shall exceed the sum of: (x) 50% of the cumulative
Consolidated Net Income (or if cumulative Consolidated Net Income shall be a
loss, minus 100% of such loss) of the Company earned subsequent to the Issue
Date and on or prior to the date the Restricted Payment occurs (the "Reference
Date"), treating such
75
<PAGE> 81
period as a single accounting period; plus (y) 100% of the aggregate net cash
proceeds received by the Company from any Person (other than a Subsidiary of the
Company) from the issuance and sale subsequent to the Issue Date and on or prior
to the Reference Date of Qualified Capital Stock of the Company (excluding any
Qualified Capital Stock of the Company (A) with respect to which the purchase
price thereof has been financed directly or indirectly using funds (1) borrowed
from the Company or any of its Subsidiaries or (2) contributed, extended,
guaranteed or advanced by the Company or any of its subsidiaries (including
without limitation in respect of any employee stock ownership or benefit plan)
and (B) the net proceeds of which are intended to be or were used to redeem
Exchange Notes as described under "Redemption -- Optional Redemption upon Public
Equity Offerings").
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (a) the payment of any dividend within 60
days after the date of declaration of such dividend if the dividend would have
been permitted on the date of declaration; (b) if no Default or Event of Default
shall have occurred and be continuing, the acquisition of any shares of Capital
Stock of the Company, either (i) solely in exchange for shares of Qualified
Capital Stock of the Company or (ii) through the application of net proceeds of
a substantially concurrent sale for cash (other than to a Subsidiary of the
Company) of shares of Qualified Capital Stock of the Company (excluding any
Qualified Capital Stock of the Company with respect to which the purchase price
thereof has been financed directly or indirectly using funds (A) borrowed from
the Company or any of its Subsidiaries or (B) contributed, extended, guaranteed
or advanced by the Company or any of its subsidiaries (including without
limitation in respect of any employee stock ownership or benefit plan); and (c)
if no Default or Event of Default shall have occurred and be continuing, the
acquisition of any Indebtedness of the Company that is subordinate or junior in
right of payment to the Exchange Notes, either (i) solely in exchange for shares
of Qualified Capital Stock of the Company or (ii) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a Subsidiary
of the Company) of (A) shares of Qualified Capital Stock of the Company
(excluding any Qualified Capital Stock of the Company with respect to which the
purchase price thereof has been financed directly or indirectly using funds (1)
borrowed from the Company or any of its Subsidiaries or (2) contributed,
extended, guaranteed or advanced by the Company or any of its subsidiaries
(including without limitation in respect of any employee stock ownership or
benefit plan) or (B) Refinancing Indebtedness. In determining the aggregate
amount of Restricted Payments made subsequent to the Issue Date in accordance
with clause (iii) of the immediately preceding paragraph, amounts expended
pursuant to clause (a) shall be included in such calculation.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment complies with the Indenture and setting forth in reasonable detail the
basis upon which the required calculations were computed, which calculations may
be based upon the Company's latest available internal quarterly financial
statements.
Limitation on Asset Sales. The Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless: (a) the Company
or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors); (b) at least 80% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents and is received
at the time of such disposition: and (c) upon the consummation of an Asset Sale,
the Company shall apply, or cause such Restricted Subsidiary to apply, the Net
Cash Proceeds relating to such Asset Sale within 365 days of receipt thereof
either (i) to prepay any Senior Indebtedness and, in the case of any such Senior
Indebtedness under any revolving credit facility, to effect a permanent
reduction in the availability under such revolving credit facility, (ii) to make
an investment in properties and assets that replace the properties and assets
that were the subject of such Asset Sale or in properties and assets that will
be used in the business of the Company and the Restricted Subsidiaries as
existing on the Issue Date or in businesses reasonably related thereto
("Replacement Assets") or (iii) a combination of prepayment and investment
permitted by the foregoing clauses (c)(i) and (c)(ii). On the 366th day after an
Asset Sale or such earlier date, if any, as the Board of Directors of the
Company or of such Restricted Subsidiary determines not to apply the Net Cash
Proceeds relating to such Asset Sale as set forth in clauses (c)(i), (c)(ii) and
(c)(iii) of the next preceding sentence (each, a
76
<PAGE> 82
"Net Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds
that have not been applied on or before such Net Proceeds Offer Trigger Date as
permitted in clauses (c)(i), (c)(ii) and (c)(iii) of the next preceding sentence
(each a "Net Proceeds Offer Amount") shall be applied by the Company or such
Restricted Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on
a date (the "Net Proceeds Offer Payment Date") not less than 30 nor more than 45
days following the applicable Net Proceeds Offer Trigger Date, from all Holders
on a pro rata basis, that amount of Exchange Notes equal to the Net Proceeds
Offer Amount at a price equal to 100% of the principal amount of the Exchange
Notes to be purchased, plus accrued and unpaid interest thereon, if any, to the
date of purchase; provided, however, that if at any time any non-cash
consideration received by the Company or any Restricted Subsidiary, as the case
may be, in connection with any Asset Sale is convened into or sold or otherwise
disposed of for cash (other than interest received with respect to any such
non-cash consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this covenant. The Company may defer the Net Proceeds
Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to
or in excess of $2.0 million resulting from one or more Asset Sales (at which
time, the entire unutilized Net Proceeds Offer Amount, and not just the amount
in excess of $2.0 million, shall be applied as required pursuant to this
paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and the Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "Merger, Consolidation and
Sale of Assets." the successor corporation shall be deemed to have sold the
properties and assets of the Company and the Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or the Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Each Net Proceeds Offer will be mailed to the Holders as shown on the
register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Exchange Notes in whole or in part in integral multiples
of $1,000 in exchange for cash. To the extent Holders properly tender Exchange
Notes in an amount exceeding the Net Proceeds Offer Amount. Exchange Notes of
tendering Holders will be purchased on a pro rata basis (based on amounts
tendered). A Net Proceeds Offer shall remain open for a period of 20 business
days or such longer period as may be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the Asset Sale
provisions of the Indenture, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the Asset Sale provisions of the Indenture by virtue thereof.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not cause or permit any of the
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions on or in respect of its Capital Stock; (b) make loans or advances
or to pay any Indebtedness or other obligation owed to the Company or any other
Restricted Subsidiary of the Company; or (c) transfer any of its property or
assets to the Company or any other Restricted Subsidiary of the Company, except
for such encumbrances or restrictions existing under or by reason of: (i)
applicable law; (ii) the Indenture; (iii) customary non-assignment provisions of
any lease governing a leasehold interest of any Restricted Subsidiary; (iv) any
instrument governing Acquired Indebtedness incurred in accordance with paragraph
(b) of the covenant "Limitation on Incurrence of Additional Indebtedness,"
provided that such encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person or the
properties or assets of the Person so acquired (including without limitation
such Person's direct and indirect Subsidiaries); (v) agreements existing on the
Issue Date to the extent and in the manner such agreements are in effect on the
Issue Date; or
77
<PAGE> 83
(vi) an agreement governing Indebtedness incurred to Refinance the Indebtedness
issued, assumed or incurred pursuant to an agreement referred to in clause (ii),
(iv) or (v) above; provided that the provisions relating to such encumbrance or
restriction contained in any such Indebtedness are no less favorable to the
Company in any material respect as determined by the Board of Directors of the
Company in their reasonable and good faith judgment than the provisions relating
to such encumbrance or restriction contained in agreements referred to in such
clause (ii), (iv) or (v).
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any of the Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly Owned Restricted Subsidiary of the
Company) or permit any Person (other than the Company or a Wholly Owned
Restricted Subsidiary of the Company) to own any Preferred Stock of any
Restricted Subsidiary.
Limitation on Liens. The Company will not, and will not cause or permit any
of the Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or permit or suffer to exist any Lien of any kind against or upon any property
or assets of the Company or any of the Restricted Subsidiaries whether owned on
the Issue Date or acquired after the Issue Date, or any proceeds therefrom, or
assign or otherwise convey any right to receive income or profits therefrom
unless (a) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the Exchange Notes, the Exchange
Notes are secured by a Lien on such property, assets or proceeds that is senior
in priority to such Liens and (b) in all other cases, the Exchange Notes are
equally and ratably secured, except for: (i) Liens existing as of the Issue Date
to the extent and in the manner such Liens are in effect on the Issue Date; (ii)
Liens securing Senior Indebtedness; (iii) Liens securing the Notes; (iv) Liens
in favor of the Company on assets of any Restricted Subsidiary of the Company;
(v) Liens securing Refinancing Indebtedness which is incurred to Refinance any
Indebtedness that has been secured by a Lien permitted under the Indenture and
that has been incurred in accordance with the provisions of the Indenture;
provided, however, that such Liens (A) are no less favorable to the Holders and
are not more favorable to the lienholders with respect to such Liens than the
Liens in respect of the Indebtedness being Refinanced and (B) do not extend to
or cover any property or assets of the Company or any of the Restricted
Subsidiaries not securing the Indebtedness so Refinanced; and (vi) Permitted
Liens.
Merger, Consolidation and Sale of Assets. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or into
any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or
cause or permit any Restricted Subsidiary to sell, assign, transfer, lease,
convey or otherwise dispose of) all or substantially all of the Company's assets
(determined on a consolidated basis for the Company and the Restricted
Subsidiaries) whether as an entirety or substantially as an entirety to any
Person unless: (a) either (i) the Company shall be the surviving or continuing
corporation or (ii) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which acquires
by sale, assignment, transfer, lease, conveyance or other disposition the
properties and assets of the Company and of the Restricted Subsidiaries
substantially as an entirety (the "Surviving Entity") (A) shall be a corporation
organized and validly existing under the laws of the United States or any State
thereof or the District of Columbia and (B) shall expressly assume, by
supplemental indenture (in form and substance satisfactory to the Trustee),
executed and delivered to the Trustee, the due and punctual payment of the
principal of, premium, if any, and interest on the Exchange Notes and the
performance of every covenant of the Exchange Notes, the Indenture and the
Registration Rights Agreement on the part of the Company to be performed or
observed; (b) immediately after giving effect to such transaction and the
assumption contemplated by clause (a)(ii)(B) above (including giving effect to
any Indebtedness and Acquired Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction), the Company or
such Surviving Entity, as the case may be, (i) shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction and (ii) shall be able to incur at least
$1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to
the covenant described under paragraph (b) under "Limitation on Incurrence of
Additional Indebtedness"; (c) immediately before and immediately after giving
effect to such transaction and the assumption contemplated by clause (a)(ii)(B)
above (including without limitation giving effect to any Indebtedness and
Acquired Indebtedness incurred or anticipated to be incurred and any Lien
granted in connection with or in respect of the transaction), no Default or
Event of Default shall have occurred or be
78
<PAGE> 84
continuing; and (d) the Company or the Surviving Entity shall have delivered to
the Trustee an officers' certificate and an opinion of counsel, each stating
that such consolidation, merger, sale, assignment, transfer, lease, conveyance
or other disposition and, if a supplemental indenture is required in connection
with such transaction, such supplemental indenture comply with the applicable
provisions of the Indenture and that all conditions precedent in the Indenture
relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more of the Company's
Restricted Subsidiaries, the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
The Indenture will provide that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the Company
in accordance with the foregoing in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the Exchange Notes with the same effect as
if such Surviving Entity had been named as such.
The Indenture does not define or quantify the term "all or substantially
all" as it relates to the disposition of properties or assets. The question of
what constitutes a disposition of "all or substantially all" of the Company's
properties or assets, and thus what constitutes a Change of Control, will depend
on the facts and circumstances at the time the transaction occurs.
Limitations on Transactions with Affiliates.
(a) The Company will not, and will not permit any of the Restricted
Subsidiaries to, directly or indirectly, enter into or permit to exist any
transaction or series of related transactions (including without limitation
the purchase, sale, lease or exchange of any property or the rendering of
any service) with, or for the benefit of, any of its Affiliates (each an
"Affiliate Transaction"), other than (i) Affiliate Transactions permitted
under paragraph (b) below and (ii) Affiliate Transactions on terms that are
no less favorable than those that might reasonably have been obtained in a
comparable transaction at such time on an arm's-length basis from a Person
that is not an Affiliate of the Company or such Restricted Subsidiary. All
Affiliate Transactions (and each series of related Affiliate Transactions
that are similar or part of a common plan) involving aggregate payments or
other property with a fair market value in excess of $1.0 million shall be
approved by the Board of Directors of the Company or such Restricted
Subsidiary, as the case may be, such approval to be evidenced by a Board
Resolution stating that such Board of Directors has determined that such
transaction complies with the foregoing provisions. If the Company or any
Restricted Subsidiary enters into an Affiliate Transaction (or a series of
related affiliate Transactions related to a common plan) that involves an
aggregate fair market value of more than $5.0 million, the Company or such
Restricted Subsidiary, as the case may be, prior to the consummation
thereof, will obtain an opinion stating that such transaction or series of
related transactions are fair to the Company or the relevant Restricted
Subsidiary, as the case may be, from a financial point of view, from an
Independent Financial Advisor and file the same with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to: (i)
the transactions described in the first, third and fourth paragraphs under
"Certain Transactions"; (ii) reasonable fees and compensation, consistent
with past practice, paid to and indemnity provided on behalf of, officers,
directors and employees of the Company or any Restricted Subsidiary as
determined in good faith by the disinterested members of the Company's
Board of Directors; (iii) transactions exclusively between or among the
Company and any of its Wholly Owned Restricted Subsidiaries or exclusively
between or among such Wholly Owned Restricted Subsidiaries, provided such
transactions are not otherwise prohibited by the Indenture; and (iv)
Restricted Payments permitted by the Indenture.
Limitations on Guarantees. The Indenture will provide that the Company will
not permit any of its Restricted Subsidiaries, directly or indirectly, to
guarantee or secure through the granting of Liens (other than
79
<PAGE> 85
Liens permitted under "Certain Covenants Limitations on Liens") any Indebtedness
unless the Company causes each such Restricted Subsidiary to execute and deliver
to the Trustee, prior to or concurrently with the issuance of such guarantee, a
supplemental indenture, in form satisfactory to the Trustee, pursuant to which
such Subsidiary unconditionally guarantees on a senior subordinated basis the
payment of principal of, premium, if any, and interest on the Exchange Notes.
Reports to Holders. The Company will deliver to the Trustee, within 15 days
after the filing of the same with the Commission, copies of the quarterly and
annual reports and of the information, documents and other reports, if any,
which the Company is required to file with the Commission pursuant to Section 13
or 15(d) of the Exchange Act. The Indenture further provides that,
notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company will file
with the Commission, to the extent permitted, and provide the Trustee and
Holders with, such annual reports and such information, documents and other
reports specified in Sections 13 and 15(d) of the Exchange Act. The Company also
will comply with the other provisions of TIA sec. 314(a).
Limitation on Designations of Unrestricted Subsidiaries. The Company may
designate any Subsidiary of the Company (other than a Subsidiary of the Company
which owns Capital Stock or Indebtedness of, or holds a Lien on assets of, a
Restricted Subsidiary of the Company) as an "Unrestricted Subsidiary" under the
Indenture (a "Designation") only if: (a) no Default shall have occurred and be
continuing at the time of or after giving effect to such Designation; (b) the
Company would be permitted under the Indenture to make an Investment at the time
of Designation (assuming the effectiveness of such Designation) in an amount
(the "Designation Amount") equal to the sum of (i) fair market value of the
Capital Stock of such Subsidiary owned by the Company and the Restricted
Subsidiaries on such date and (ii) the aggregate amount of other Investments of
the Company and the Restricted Subsidiaries in such Subsidiary on such date; and
(c) the Company would be permitted to incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to the covenant described in
paragraph (b) under "Limitation on Incurrence of Additional Indebtedness" at the
time of Designation (assuming the effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described under "Limitation on Restricted Payments" for all purposes of the
Indenture in the Designation Amount. The Indenture further will provide that the
Company will not, and will not permit any Restricted Subsidiary to, at any time
(a) provide direct or indirect credit support for or a guarantee of any
Indebtedness of any Unrestricted Subsidiary (including without limitation of any
undertaking, agreement or instrument evidencing such Indebtedness), (b) be
directly or indirectly liable for any Indebtedness of any Unrestricted
Subsidiary or (c) be directly or indirectly liable for any Indebtedness which
provides that the holder thereof upon notice, lapse of time or both may declare
a default thereon or cause the payment thereof to be accelerated or payable
prior to its final scheduled maturity upon the occurrence of a default with
respect to any Indebtedness of any Unrestricted Subsidiary (including any right
to take enforcement action against such Unrestricted Subsidiary), except, in the
case of clause (a) or (b), to the extent permitted under the covenant described
under "Limitation on Restricted Payments."
The Indenture further will provide that the Company may revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation"),
whereupon such Subsidiary shall then constitute a Restricted Subsidiary, if: (a)
no Default shall have occurred and be continuing at the time of and after giving
effect to such Revocation; and (b) all Liens and Indebtedness of such
Unrestricted Subsidiary outstanding immediately following such Revocation would,
if incurred at such time, have been permitted to be incurred for all purposes of
the Indenture.
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Trustee certifying compliance with the foregoing
provisions.
80
<PAGE> 86
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(a) the failure to pay interest on any Exchange Note when the same
becomes due and payable and the default continues for a period of 30 days
(whether or not such payment shall be prohibited by the subordination
provisions of the Indenture);
(b) the failure to pay the principal on any Exchange Note, when such
principal becomes due and payable, at maturity, upon redemption or
otherwise, including the failure to make a payment to purchase Exchange
Notes tendered pursuant to a Change of Control Offer or a Net Proceeds
Offer (whether or not such payment shall be prohibited by the subordination
provisions of the Indenture);
(c) a default in the observance or performance of any other covenant
or agreement contained in the Indenture, which default continues for a
period of 30 days after the Company receives written notice specifying the
default (and demanding that such default be remedied) from the Trustee or
the Holders of at least 25% of the outstanding principal amount of the
Exchange Notes (except in the case of a default with respect to the
covenant described under "Certain Covenants Merger, Consolidation and Sale
of Assets," which will constitute an Event of Default with such notice
requirement but without such passage of time requirement);
(d) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness of the Company or any of its Subsidiaries, or the
acceleration of the final stated maturity of any such Indebtedness, if the
aggregate principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness in default for failure to
pay principal at final maturity or which has been accelerated, aggregates
$5.0 million or more at any time;
(e) one or more judgments in an aggregate amount in excess of $5.0
million shall have been rendered against the Company or any of the
Restricted Subsidiaries and such judgments remain undischarged, unpaid or
unstayed for a period of 60 days after such judgment or judgments become
final and non-appealable; or
(f) certain events of bankruptcy affecting the Company or any of its
Subsidiaries.
If an Event of Default (other than an Event of Default specified in clause
(f) above) shall occur and be continuing, the Trustee or the Holders of at least
25% in principal amount of outstanding Exchange Notes may declare the principal
of and accrued interest on all the Notes to be due and payable by notice in
writing to the Company and the Trustee specifying the respective Event of
Default, and the same shall become immediately due and payable. If an Event of
Default specified in clause (f) above occurs and is continuing, then all unpaid
principal of, and premium, if any, and accrued and unpaid interest on all of the
outstanding Notes shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any Holder.
The Indenture will provide that, at any time after a declaration of
acceleration with respect to the Exchange Notes as described in the preceding
paragraph, the Holders of a majority in principal amount of the Exchange Notes
may rescind and cancel such declaration and its consequences (a) if the
rescission would not conflict with any judgment or decree, (b) if all existing
Events of Default have been cured or waived except nonpayment of principal or
interest that has become due solely because of the acceleration, (c) to the
extent the payment of such interest is lawful, interest on overdue installments
of interest and overdue principal, which has become due otherwise than by such
declaration of acceleration, has been paid, (d) if the Company has paid the
Trustee its reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (e) in the event of the cure or waiver of an
Event of Default of the type described in clause (f) of the description above of
Events of Default, the Trustee shall have received an officers' certificate and
an opinion of counsel that such Event of Default has been cured or waived. No
such rescission shall affect any subsequent Default or impair any right
consequent thereto.
81
<PAGE> 87
The Holders of a majority in principal amount of the Exchange Notes may
waive any existing Default or Event of Default under the Indenture, and its
consequences, except a default in the payment of the principal of, premium, if
any, or interest on any Exchange Notes.
Holders of the Exchange Notes may not enforce the Indenture or the Exchange
Notes except as provided in the Indenture and under the TIA. Subject to the
provisions of the Indenture relating to the duties of the Trustee, the Trustee
is under no obligation to exercise any of its rights or powers under the
Indenture at the request, order or direction of any of the Holders, unless such
Holders have offered to the Trustee reasonable indemnity. Subject to all
provisions of the Indenture and applicable law, the Holders of a majority in
aggregate principal amount of the then outstanding Exchange Notes have the right
to direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company, at its option and at any time, may elect to have its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by the outstanding
Exchange Notes, except for (a) the rights of Holders to receive payments in
respect of the principal of, premium, if any, and interest on the Exchange Notes
when such payments are due, (b) the Company's obligations with respect to the
Exchange Notes concerning issuing temporary Exchange Notes, registration of
transfer of Exchange Notes, replacement of mutilated, destroyed, lost or stolen
Exchange Notes and the maintenance of an office or agency for payments, (c) the
rights, powers, trust, duties and immunities of the Trustee and the Company's
obligations in connection therewith and (d) the Legal Defeasance provisions of
the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, reorganization and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Exchange Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance: (a)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders cash in U.S. dollars, non-callable U.S. government obligations,
or a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the Exchange Notes on the stated
date for payment thereof or on the applicable redemption date, as the case may
be; (b) in the case of Legal Defeasance, the Company shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable to the
Trustee confirming that (i) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (ii) since the date of
the Indenture, there has been a change in the applicable federal income tax law,
in either case to the effect that, and based thereon such opinion of counsel
shall confirm that, the Holders will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (c) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (d) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit or insofar as Events of
Default from bankruptcy or insolvency events are concerned, at any time in the
period
82
<PAGE> 88
ending on the 91st day after the date of deposit; (e) such Legal Defeasance or
Covenant Defeasance shall not result in a breach or violation of, or constitute
a default under the Indenture or any other material agreement or instrument to
which the Company or any of its Subsidiaries is a party or by which the Company
or any of its Subsidiaries is bound; (f) the Company shall have delivered to the
Trustee an officers' certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders over any other creditors of
the Company or with the intent of defeating, hindering, delaying or defrauding
any other creditors of the Company or others; (g) the Company shall have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that all conditions precedent provided for or relating to the Legal
Defeasance or the Covenant Defeasance have been complied with; (h) the Company
shall have delivered to the Trustee an opinion of counsel to the effect that
after the 91st day following the deposit, the trust funds will not be subject to
the effect of any applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally; and (i) certain other customary
conditions precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Exchange Notes, as expressly provided for in the Indenture) as to all
outstanding Exchange Notes when: (a) either (i) all the Exchange Notes
theretofore authenticated and delivered (except lost, stolen or destroyed
Exchange Notes that have been replaced or paid and Exchange Notes for whose
payment money has theretofore been deposited in trust or segregated and held in
trust by the Company and thereafter repaid to the Company or discharged from
such trust) have been delivered to the Trustee for cancellation or (ii) all
Exchange Notes not theretofore delivered to the Trustee for cancellation have
become due and payable and the Company has irrevocably deposited or caused to be
deposited with the Trustee funds in an amount sufficient to pay and discharge
the entire Indebtedness on the Exchange Notes not theretofore delivered to the
Trustee for cancellation, for principal of, premium, if any, and interest on the
Exchange Notes to the date of deposit together with irrevocable instructions
from the Company directing the Trustee to apply such funds to the payment
thereof at maturity or redemption, as the case may be; (b) the Company has paid
all other sums payable under the Indenture by the Company; and (c) the Company
has delivered to the Trustee an officers' certificate and an opinion of counsel
stating that all conditions precedent under the Indenture relating to the
satisfaction and discharge of the Indenture have been complied with.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, without the consent of the
Holders, may amend the Indenture for certain specified purposes, including
curing ambiguities, defects or inconsistencies, so long as such change does not,
in the opinion of the Trustee, adversely affect the rights of any Holder in any
material respect. In formulating its opinion on such matters, the Trustee will
be entitled to rely on such evidence as it deems appropriate, including without
limitation an opinion of counsel. Other modifications and amendments of the
Indenture may be made with the consent of the Holders of a majority in principal
amount of the then outstanding Exchange Notes, except that, without the consent
of each Holder affected thereby, no amendment may: (a) reduce the amount of
Notes whose Holders must consent to an amendment; (b) reduce the rate of or
change or have the effect of changing the time for payment of interest,
including defaulted interest, on any Exchange Notes; (c) reduce the principal of
or change or have the effect of changing the fixed maturity of any Notes, or
change the date on which any Notes may be subject to redemption or repurchase,
or reduce the redemption or repurchase price therefor; (d) make any Exchange
Notes payable in money other than that stated in the Notes; (e) make any change
in provisions of the Indenture protecting the right of each Holder to receive
payment of principal of, premium, if any, and interest on such Exchange Note on
or after the due date thereof or to bring suit to enforce such payment, or
permitting Holders of a majority in principal amount of Exchange Notes to waive
Defaults or Events of Default; (f) amend, change or modify in any material
respect the obligation of the Company to make and consummate a Change of Control
Offer in the event of a Change of Control or make and consummate a Net Proceeds
Offer with respect to any Asset Sale that has been consummated or modify any of
the provisions or definitions with respect thereto; or (g) modify or change any
provision of the Indenture or the related definitions affecting the
subordination or ranking of the Notes in a manner which adversely affects the
Holders.
83
<PAGE> 89
GOVERNING LAW
The Indenture will provide that it and the Exchange Notes will be governed
by, and construed in accordance with, the laws of the State of New York but
without giving effect to applicable principles of conflicts of law to the extent
that the application of the law of another jurisdiction would be required
thereby.
THE TRUSTEE
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same degree of care and skill in its exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; provided that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary or
at the time it merges or consolidates with the Company or any of the Restricted
Subsidiaries or assumed in connection with the acquisition of assets from such
Person and in each case not incurred by such Person in connection with, or in
anticipation or contemplation of, such Person becoming a Restricted Subsidiary
or such acquisition, merger or consolidation.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"Affiliate Transaction" has the meaning set forth under "Certain Covenants
Limitation on Transactions with Affiliates."
"Asset Acquisition" means (a) an Investment by the Company or any
Restricted Subsidiary in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged with or into the Company or
any Restricted Subsidiary; or (b) the acquisition by the Company or any
Restricted Subsidiary of the assets of any Person (other than a Restricted
Subsidiary) which constitute all or substantially all of the assets of such
Person or comprises any division or line of business of such Person or any other
properties or assets of such Person other than in the ordinary course of
business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
the Restricted Subsidiaries (including by way of any Sale and Leaseback
Transaction) to any Person other than the Company or a Wholly Owned Restricted
Subsidiary of the Company of (a) any Capital Stock of any Restricted Subsidiary;
or (b) any other property or assets of the Company or any Restricted Subsidiary
other than in the ordinary course of business; provided, however, that Asset
Sales shall not include (i) a transaction or series of related transactions for
which the Company or the Restricted Subsidiaries receive aggregate consideration
of less than $1.0 million, (ii) the sale, lease, conveyance, disposition or
other transfer
84
<PAGE> 90
of all or substantially all of the assets of the Company as permitted under
"Certain Covenants Merger, Consolidation and Sale of Assets," (iii) disposals or
replacements of obsolete equipment in the ordinary course of business and (iv)
the sale, lease, conveyance, disposition or other transfer by the Company or any
Restricted Subsidiary of assets or property to the Company or one or more
Restricted Subsidiaries.
"Bazaar" means Bingo Press & Specialty Limited, doing business as Bazaar &
Novelty.
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means (a) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (b) with respect to any
Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"Cash Equivalents" means: (a) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (b)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P")or Moody's Investors
Service, Inc. ("Moody's"); (c) commercial paper maturing no more than 270 days
from the date of creation thereof and, at the time of acquisition, having a
rating of at least A-1 from S&P or at least P-1 from Moody's; (d) certificates
of deposit or bankers' acceptances maturing within one year from the date of
acquisition thereof issued by any bank organized under the laws of the United
States of America or any state thereof or the District of Columbia or any U.S.
branch of a foreign bank having at the date of acquisition thereof combined
capital and surplus of not less than $250.0 million; (e) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clause (a) above entered into with any bank meeting the
qualifications specified in clause (d) above; and (f) investments in money
market funds which invest substantially all their assets in securities of the
types described in clauses (a) through (e) above.
"Change of Control" means the occurrence of one or more of the following
events: (a) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act (a "Group"), together with any Affiliates thereof (whether
or not otherwise in compliance with the provisions of the Indenture); (b) the
approval by the holders of Capital Stock of the Company of any plan or proposal
for the liquidation or dissolution of the Company (whether or not otherwise in
compliance with the provisions of the Indenture); (c) any Person or Group (other
than Affiliates of MLGA) shall become the owner, directly or indirectly,
beneficially or of record, of shares representing more than 50% of the aggregate
ordinary voting power represented by the issued and outstanding Capital Stock of
the Company; or (d) the replacement of a majority of the Board of Directors of
the Company over a two-year period from the directors who constituted the Board
of Directors of the Company at the beginning of such period, and such
replacement shall not have been approved by a vote of at least a majority of the
Board of Directors of the Company then still in office who either were members
of such Board of Directors at the beginning of such period or whose election as
a member of such Board of Directors was previously so approved.
"Change of Control Offer" has the meaning set forth under "Change of
Control."
85
<PAGE> 91
"Change of Control Payment Date" has the meaning set forth under "Change of
Control."
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Company" means Stuart Entertainment, Inc.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the sum (without duplication) of (a) Consolidated Net Income and (b) to the
extent Consolidated Net Income has been reduced thereby, (i) all income taxes of
such Person and its Restricted Subsidiaries paid or accrued in accordance with
GAAP for such period (other than income taxes attributable to extraordinary,
unusual or nonrecurring gains or losses or taxes attributable to sales or
dispositions of assets outside the ordinary course of business), (ii)
Consolidated Interest Expense and (iii) Consolidated Non-cash Charges, less any
non-cash items increasing Consolidated Net Income for such period, all as
determined on a consolidated basis for such Person and its Restricted
Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA during the four full fiscal quarters
(the "Four Quarter Period") ending on or prior to the date of the transaction
giving rise to the need to calculate the Consolidated Fixed Charge Coverage
Ratio (the "Transaction Date") to Consolidated Fixed Charges for the Four
Quarter Period. In addition to and without limitation of the foregoing, for
purposes of this definition "Consolidated EBITDA and "Consolidated Fixed
Charges" shall be calculated after giving effect on a pro forma basis for the
period of such calculation to: (a) the incurrence or repayment of any
Indebtedness of such Person or any of its Restricted Subsidiaries (and the
application of the proceeds thereof) giving rise to the need to make such
calculation and any incurrence or repayment of other Indebtedness (and the
application of the proceeds thereof), occurring during the Four Quarter Period
or at any time subsequent to the last day of the Four Quarter Period and on or
prior to the Transaction Date, as if such incurrence or repayment, as the case
may be (and the application of the proceeds thereof), occurred on the first day
of the Four Quarter Period; and (b) any Asset Sales or Asset Acquisitions
(including without limitation any Asset Acquisition giving rise to the need to
make such calculation as a result of such Person or one of its Restricted
Subsidiaries (including any Person who becomes a Restricted Subsidiary as a
result of the Asset Acquisition) incurring, assuming or otherwise being liable
for Acquired Indebtedness and also including any Consolidated EBITDA
attributable to the assets that are the subject of the Asset Acquisition or
Asset Sale during the Four Quarter Period) occurring during the Four Quarter
Period or at any time subsequent to the last day of the Four Quarter Period and
on or prior to the Transaction Date, as if such Asset Sale or Asset Acquisition
(including the incurrence, assumption or liability for any such Acquired
Indebtedness) occurred on the first day of the Four Quarter Period; provided
that the Consolidated EBITDA of any Person acquired shall be included only to
the extent includable pursuant to the definition of "Consolidated Net Income."
If such Person or any of its Restricted Subsidiaries directly or indirectly
guarantees Indebtedness of a third Person, the preceding sentence shall give
effect to the incurrence of such guaranteed Indebtedness as if such Person or
any of such Restricted Subsidiary had directly incurred or otherwise assumed
such guaranteed Indebtedness. Furthermore, in calculating "Consolidated Fixed
Charges" for purposes of determining the denominator (but not the numerator) of
the "Consolidated Fixed Charge Coverage Ratio": (i) interest on outstanding
Indebtedness determined on a fluctuating basis as of the Transaction Date and
which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; (ii) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during the
Four Quarter Period; and (iii) notwithstanding clause (a) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.
86
<PAGE> 92
"Consolidated Fixed Charges" means, with respect to any Person, for any
period, the sum, without duplication, of (a) Consolidated Interest Expense, plus
(b) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of such Person (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(y) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local tax
rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person, for any
period, the sum of, without duplication: (a) the aggregate of the interest
expense (without deduction of interest income) of such Person and its Restricted
Subsidiaries for such period determined on a consolidated basis in accordance
with GAAP, including without limitation (i) any amortization or write-off of
debt discount or deferred financing costs (other than the write-off of up to
$1.4 million of deferred financing costs associated with the repayment of
indebtedness existing on the Issue Date with a portion of the net proceeds of
the sale of the Notes), (ii) the net costs under Interest Swap Obligations,
(iii) all capitalized interest and (iv) the interest portion of any deferred
payment obligation; and (b) the interest component of Capitalized Lease
Obligations paid, accrued or scheduled to be paid or accrued by such Person and
its Restricted Subsidiaries during such period as determined on a consolidated
basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom (a) after-tax gains
or losses from Asset Sales or abandonments or reserves relating thereto, (b)
after-tax items classified as extraordinary or nonrecurring gains (or losses),
(c) the net income (or loss) of any Person acquired in a "pooling of interests"
transaction accrued prior to the date it becomes a Restricted Subsidiary of the
referent Person or is merged or consolidated with the referent Person or any
Restricted Subsidiary of the referent Person, (d) the net income (but not loss)
of any Restricted Subsidiary to the extent that the declaration of dividends or
similar distributions by that Restricted Subsidiary of that income is restricted
by a contract, operation of law or otherwise, (e) the net income of any Person,
other than a Restricted Subsidiary of that Person, except to the extent of cash
dividends or distributions paid to the referent Person or to any of its
Restricted Subsidiaries by such Person, (f) income or loss attributable to
discontinued operations (including without limitation operations disposed of
during such period whether or not such operations were classified as
discontinued) and (g) in the case of a successor to the Company by consolidation
or merger or as a transferee of the Company's assets, any net income of the
successor corporation prior to such consolidation, merger or transfer of assets.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person and its consolidated Restricted Subsidiaries, determined
on a consolidated basis in accordance with GAAP, less (without duplication)
amounts attributable to (a) Disqualified Capital Stock of such Person and (b)
Investments described in clause (c) of the definition of Permitted Investments.
"Consolidated Non-cash Charges" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Restricted Subsidiaries reducing Consolidated Net Income of
such Person for such period, determined on a consolidated basis in accordance
with GAAP (excluding any such charges constituting an extraordinary item or loss
or any such charge that requires an accrual of or a reserve for cash charges for
any future period).
"Covenant Defeasance" has the meaning set forth under "Legal Defeasance and
Covenant Defeasance."
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect any
Person against fluctuations in currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Designated Senior Indebtedness" means (a) Indebtedness under or in respect
of the New Credit Agreement and (b) any other Indebtedness constituting Senior
Indebtedness which, at the time of determination, has an aggregate principal
amount of at least $25 million and is specifically designated in the instrument
evidencing such Senior Indebtedness as "Designated Senior Indebtedness" by the
Company.
87
<PAGE> 93
"Designation" has the meaning set forth under "Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries."
"Designation Amount" has the meaning set forth under "Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries."
"Disqualified Capital Stock" means that portion of any Capital Stock that,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof on or prior to the final
maturity date of the Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"fair market value" means, with respect to any asset or property, the price
that could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"Gaming Authority" means any United States federal, state or local agency
(including without limitation any agency established by a federally recognized
Indian tribe to regulate gaming on such tribe's reservation) and any Canadian
federal, provincial, territorial or local agency, or any other foreign agency
that has, or at any time after the date of the Indenture may have, jurisdiction
over the gaming activities of the Company or any of its Subsidiaries or any
successor to such authority.
"Gaming Laws" means any law, rule, regulation or ordinance governing gaming
activities, any administrative rules or regulations promulgated thereunder and
any of the corresponding statutes, rules and regulations developed by any Gaming
Authority to which the Company or any of its Subsidiaries is, or at any time
after the date of the Indenture may be, subject.
"incur" has the meaning set forth under "Certain Covenants in Limitation on
Incurrence of Additional Indebtedness."
"Indebtedness" means, with respect to any Person, without duplication: (a)
all obligations of such Person for borrowed money, (b) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (c)
all Capitalized Lease Obligations of such Person, (d) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale Obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue by 90 days or
more or are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted), (e) all Obligations for the reimbursement
of any obligor on any letter of credit, banker's acceptance or similar credit
transaction, (f) guarantees and other contingent Obligations (including without
limitation repurchase Obligations) in respect of Indebtedness of any other
Person, (g) all Obligations of any other Person that are secured by any lien on
any property or asset of such Person, the amount of such Obligation being deemed
to be the lesser of the fair market value of such property or asset or the
amount of the Obligation so secured, (h) all Obligations under currency
agreements and interest swap agreements of such Person and (i) all Disqualified
Capital Stock issued by such Person with the amount of Indebtedness represented
by such Disqualified Capital Stock being equal to the greater of its voluntary
or involuntary liquidation preference and its maximum fixed repurchase price.
For purposes hereof, the "maximum fixed repurchase price" of any Disqualified
Capital Stock that does not have a fixed repurchase price shall be calculated in
accordance with the terms of such Disqualified Capital
88
<PAGE> 94
Stock as if such Disqualified Capital Stock were purchased on any date on which
Indebtedness shall be required to be determined pursuant to the Indenture, and
if such price is based upon, or measured by, the fair market value of such
Disqualified Capital Stock, such fair market value shall be determined
reasonably and in good faith by the Board of Directors of the Company.
"Independent Financial Advisor" means an investment banking firm (a) which
does not, and whose directors, officers and employees or Affiliates do not, have
a direct or indirect financial interest in the Company and (b) which, in the
judgment of the Board of Directors of the Company, is otherwise independent and
qualified to perform the task for which it is to be engaged.
"Initial Purchasers" means BT Securities Corporation, BA Securities, Inc.
and Oppenheimer & Co., Inc.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include without limitation interest rate swaps, caps, floors, collars and
similar agreements.
"Investment" means, with respect to any Person, any direct or indirect: (a)
loan or other extension of credit (including without limitation a guarantee) or
capital contribution to (by means of any transfer of cash or other property
(valued at the fair market value thereof) to others or any payment for property
or services for the account or use of others); (b) purchase or acquisition of
Capital Stock, bonds, notes, debentures or other securities or evidences of
Indebtedness issued by any other Person; (c) guarantees or assumptions of
Indebtedness or any other Obligation of any other Person (except for an
assumption of Indebtedness for which the assuming Person receives consideration
at the time of such assumption in the form of property or assets with a fair
market value at least equal to the principal amount of the Indebtedness
assumed); and (d) all other items that would be classified as investments
(including without limitation purchases of assets outside the ordinary course of
business) on a balance sheet of such Person prepared in accordance with GAAP. If
such Person or any of its Restricted Subsidiaries sells or otherwise disposes of
any Common Stock of any direct or indirect Wholly Owned Restricted Subsidiary
such that, after giving effect to any such sale or disposition, it ceases to be
a Wholly Owned Restricted Subsidiary of such Person, such Person shall be deemed
to have made an Investment on the date of any such sale or disposition equal to
the fair market value of the Common Stock of such Restricted Subsidiary not sold
or disposed of.
"Issue Date" means the date of original issuance of the Notes.
"Joint Venture" means a joint venture, partnership, corporation or other
entity that is engaged in the same general business as the Company, and with
respect to which the Company and its Restricted Subsidiaries own less than a
majority of the aggregate voting power of all classes of the Capital Stock.
"Legal Defeasance" has the meaning set forth under "Defeasance."
"Lien" means, with respect to any Person, any lien, mortgage, deed of
trust, pledge, security interest, easement, restriction, adverse claim, charge
or encumbrance of any kind affecting title or resulting in an encumbrance
against real or personal property of such Person, or a security interest of any
kind (including any conditional sale or other title retention agreement, any
lease in the nature thereof, any option, right of first refusal or other similar
agreement to sell, and any agreement to give any security interest).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
the Company or any of the Restricted Subsidiaries from such Asset Sale net of
(a) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including without limitation legal, accounting and investment banking fees and
sales commissions), (b) taxes paid or payable after taking into account any
reduction in consolidated tax liability due to available tax credits or
deductions and any tax sharing arrangements, and (c) appropriate amounts to be
provided by the Company or any Restricted Subsidiary, as the case may be, as
89
<PAGE> 95
a reserve, in accordance with GAAP, against any liabilities associated with such
Asset Sale and retained by the Company or any Restricted Subsidiary, as the case
may be, after such Asset Sale, including without limitation pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale.
"New Credit Agreement" means the Amended and Restated Credit Agreement
dated as of November 13, 1996, among Stuart, Bazaar, Bank of America National
Trust and Savings Association, as Agent, Bank of America of Canada, as Canadian
Agent, the Chase Manhattan Bank as Co-Agent, and the Chase Manhattan Bank of
Canada, as Co-Agent, together with the related documents thereto (including
without limitation any security documents and the guarantee by the Company of
the Indebtedness of Bazaar thereunder, to the extent such Indebtedness was
incurred in compliance with the provisions of the Indenture), in each case as
such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreement extending the maturity or refinancing, replacing or otherwise
restructuring including increasing the amount of available borrowings thereunder
(provided that such increase in borrowings is permitted by the covenant
described in paragraph (b) under "Certain Covenants Limitation on Incurrence of
Additional Indebtedness") or adding Subsidiaries as additional borrowers
thereunder) all or any portion of the Indebtedness under such agreement or any
successor or replacement agreement and whether by the same or any other agent,
lender or group of lenders.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Payment Blockage Period" has the meaning set forth under "Subordination."
"Permitted Indebtedness" means, without duplication, each of the following:
(a) Indebtedness under the Notes and the Indenture;
(b) Indebtedness, other than Prohibited Acquisition Indebtedness,
incurred by the Company and Bazaar pursuant to the New Credit Agreement
(and the guarantee thereof by any Restricted Subsidiary of the Company
incurred in compliance with the provisions of the Indenture) in an
aggregate principal amount at any time outstanding not to exceed the
greater of (x) $30.0 million (of which no more than $20.0 million may be
incurred by Stuart and no more than $10.0 million may be incurred by
Bazaar) and (y) (i) 80% of the net book value of the accounts receivable of
the Company and its Restricted Subsidiaries and (ii) 50% of the net book
value of the inventory of the Company and its Restricted Subsidiaries, of
which no more than one-third may be incurred by Bazaar, less in either case
any required permanent repayments under the New Credit Agreement;
(c) other Indebtedness (including Capitalized Lease Obligations) of
the Company and the Restricted Subsidiaries outstanding on the Issue Date
reduced by the amount of any scheduled amortization payments or mandatory
prepayments or permanent reductions thereon;
(d) Interest Swap Obligations of the Company covering Indebtedness of
the Company or any of the Restricted Subsidiaries and Interest Swap
Obligations of any Restricted Subsidiary covering Indebtedness of such
Restricted Subsidiary; provided, however, that such Interest Swap
Obligations are entered into to protect the Company and the Restricted
Subsidiaries from fluctuations in interest rates on Indebtedness incurred
in accordance with the Indenture to the extent the notional principal
amount of such Interest Swap Obligation does not exceed the principal
amount of the Indebtedness to which such Interest Swap Obligation relates;
(e) Indebtedness under Currency Agreements; provided that in the case
of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and the
Restricted Subsidiaries outstanding other than as a result of fluctuations
in foreign currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;
(f) intercompany Indebtedness owed by any Restricted Subsidiary of the
Company to the Company or a Wholly Owned Restricted Subsidiary of the
Company, in each case subject to no Lien held by a Person other than the
Company or a Wholly Owned Restricted Subsidiary of the Company; provided
that
90
<PAGE> 96
if as of any date any Person other than the Company or a Wholly Owned
Restricted Subsidiary owns or holds any such Indebtedness or holds a Lien
in respect of such Indebtedness, such date shall be deemed the incurrence
of Indebtedness not constituting Permitted Indebtedness by the issuer of
such Indebtedness;
(g) intercompany Indebtedness owed by the Company to any Wholly Owned
Restricted Subsidiary of the Company for so long as such Indebtedness is
held by a Wholly Owned Restricted Subsidiary, in each case subject to no
Lien; provided that (i) any Indebtedness of the Company to any Wholly Owned
Restricted Subsidiary is unsecured and subordinated, pursuant to a written
agreement, to the Company's obligations under the Indenture and the Notes
and (ii) if as of any date any Person other than a Wholly Owned Restricted
Subsidiary owns or holds any such Indebtedness or any Person holds a Lien
in respect of such Indebtedness, such date shall be deemed the incurrence
of Indebtedness not constituting Permitted Indebtedness by the Company;
(h) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within two business days of incurrence:
(i) Indebtedness of the Company or any of the Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with
self-insurance or similar requirements in the ordinary course of business;
and Indebtedness of the Company or any of its Restricted Subsidiaries, not
to exceed $3.0 million at any time, attributable to performance bonds
obtained in the ordinary course of business consistent with past practice;
(j) Refinancing Indebtedness; and
(k) additional Indebtedness of the Company in an aggregate principal
amount not to exceed $5.0 million at any one the outstanding.
"Permitted Investments" means each of the following:
(a) Investments by the Company or any Restricted Subsidiary in any
Person that is or immediately after such Investment will become a
Restricted Subsidiary or will merge or consolidate into the Company or a
Restricted Subsidiary;
(b) Investments in the Company by any Restricted Subsidiary; provided
that any Indebtedness evidencing such Investment by any Restricted
Subsidiary other than a Wholly Owned Restricted Subsidiary is unsecured and
subordinated, pursuant to a written agreement, to the Company's obligations
under the Notes and the Indenture;
(c) Investments in Unrestricted Subsidiaries and Joint Ventures,
provided that: (i) after giving effect to any such Investment, the
aggregate amount of Investments made pursuant to the provisions of this
clause (c) does not exceed $7.5 million; and (ii) at the time any such
Investment is made no Default or Event of Default shall have occurred or be
continuing.
(d) Investments in cash and Cash Equivalents;
(e) loans and advances to employees and officers of the Company and
the Restricted Subsidiaries in the ordinary course of business for bona
fide business purposes not in excess of $1.0 million in the aggregate at
any one time outstanding;
(f) Currency Agreements and Interest Swap Obligations entered into in
the ordinary course of the Company's or a Restricted Subsidiary's
businesses and otherwise in compliance with the Indenture; and
(g) Investments made by the Company or the Restricted Subsidiaries as
a result of consideration received in connection with an Asset Sale made in
compliance with the covenant described under "Certain Covenants Limitation
on Asset Sales."
91
<PAGE> 97
"Permitted Liens" means the following types of Liens:
(a) Liens on assets or property of the Company that secure Senior
Indebtedness of the Company and Liens on assets or property of a Restricted
Subsidiary that secure Senior Indebtedness of such Restricted Subsidiary,
in each case to the extent such Senior Indebtedness is permitted under
paragraph (b) of the covenant described under "Certain Covenants
Limitations on Incurrence of Additional Indebtedness;"
(b) Liens for taxes, assessments or governmental charges or claims
either (i) not delinquent or (ii) contested in good faith by appropriate
proceedings and as to which the Company or the Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(c) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(d) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
(exclusive of Obligations for the payment of borrowed money);
(e) judgment Liens not giving rise to an Event of Default;
(f) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
or any of the Restricted Subsidiaries;
(g) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligation;
(h) purchase money Liens to finance property or assets of the Company
or any Restricted Subsidiary acquired after the Issue Date; provided,
however, that (i) the related purchase money Indebtedness shall not exceed
the cost of such property or assets and shall not be secured by any
property or assets of the Company or any Restricted Subsidiary other than
the property and assets so acquired and (ii) the Lien securing such
Indebtedness shall be created within 90 days of such acquisition;
(i) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of the Restricted Subsidiaries, including rights of offset and
set-off;
(j) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(k) Liens securing Indebtedness under Currency Agreements; and
(l) Liens securing Acquired Indebtedness incurred in accordance with
the covenant described in paragraph (b) under "Certain
Covenants -- Limitation on Incurrence of Additional Indebtedness"; provided
that (i) such Liens secured such Acquired Indebtedness at the time of and
prior to the incurrence of such Acquired Indebtedness by the Company or a
Restricted Subsidiary and were not granted in connection with, or in
anticipation of, the incurrence of such Acquired Indebtedness by the
Company or a Restricted Subsidiary and (ii) such Liens do not extend to or
cover any property or assets of the Company or of any of the Restricted
Subsidiaries other than the property or assets that secured the Acquired
Indebtedness prior to the time such Indebtedness became Acquired
Indebtedness of the Company or a Restricted Subsidiary and are no more
favorable to the lienholders than those securing the
92
<PAGE> 98
Acquired Indebtedness prior to the incurrence of such Acquired Indebtedness
by the Company or a Restricted Subsidiary.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Prohibited Acquisition Indebtedness" means any Indebtedness, the proceeds
of which are used to make an Acquisition (as defined below) if, giving effect to
the Incurrence of such Prohibited Acquisition Indebtedness on a pro forma basis,
the ratio of (a) the aggregate amount of all Indebtedness, less (if the
outstanding principal balance of all Revolving Loans (as defined in the New
Credit Agreement) is zero on the Acquisition Date (as defined below)) the
aggregate amount of Cash Equivalents in excess of $5.0 million, of the Company
and its Restricted Subsidiaries on the date on which such Prohibited Acquisition
Indebtedness is Incurred (the "Acquisition Date") to (b) Consolidated EBITDA
during the Four Quarter Period ending on or most recently prior to the
Acquisition Date, equals or exceeds 5.75 to 1 if such Prohibited Acquisition
Indebtedness is Incurred at any time on or prior to September 30, 1998 or 5.50
to 1 if such Prohibited Acquisition Indebtedness is incurred at any time after
September 30, 1998. For purposes of this definition, (i) "Four Quarter Period"
has the meaning set forth in the definition of "Consolidated Fixed Charge
Coverage Ratio," (ii) Consolidated EBITDA shall be determined on a pro forma
basis in accordance with the principles set forth in the definition of
"Consolidated Fixed Charge Coverage Ratio" (including, for purposes of
determining Consolidated Interest Expense, the principles set forth in the last
sentence thereof) and the definitions referenced therein, and (iii)
"Acquisition" means (A) an Asset Acquisition or (B) any Investment by the
Company or any Restricted Subsidiary in any other Person, whether or not such
other Person shall become a Restricted Subsidiary or an Unrestricted Subsidiary
or shall be merged with or into a Restricted Subsidiary or an Unrestricted
Subsidiary upon such Investment, provided that "Acquisition" shall not include
any Investment in a Restricted Subsidiary that is not part of the transaction or
series of related transactions pursuant to which such Subsidiary was acquired by
the Company or any Restricted Subsidiary.
"Public Equity Offering" has the meaning set forth under "Redemption
Optional Redemption Upon Public Equity Offerings."
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock. "Reference Date" has the meaning set forth under "Certain
Covenants -- Limitation on Restricted Payments."
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of Indebtedness incurred in accordance with the covenant
described in paragraph (b) under "Certain Covenants Limitation on Incurrence of
Additional Indebtedness" (other than pursuant to clause (b), (d), (e), (f), (g),
(h), (i) or (k) of the definition of Permitted Indebtedness), in each case that
does not (a) result in an increase in the aggregate principal amount of
Indebtedness of such Person as of the date of such proposed Refinancing (plus
the amount of any premium required to be paid under the terms of the instrument
governing such Indebtedness and plus the amount of reasonable expenses incurred
by the Company or any Restricted Subsidiary in connection with such Refinancing)
or (b) create Indebtedness with (i) a Weighted Average Life to Maturity that is
less than the Weighted Average Life to Maturity of the Indebtedness being
Refinanced or (ii) a final maturity earlier than the final maturity of the
Indebtedness being Refinanced; provided that (A) if such Indebtedness being
Refinanced is Indebtedness of the Company or a Restricted Subsidiary, then such
Refinancing Indebtedness shall be Indebtedness solely of the Company or a
Restricted Subsidiary and (B) if such Indebtedness being Refinanced is
subordinate or junior to the Notes, then such Refinancing Indebtedness shall be
subordinate to the Notes at least to the same extent and in the same manner as
the Indebtedness being Refinanced.
93
<PAGE> 99
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of the Issue Date among the Company and the Initial Purchasers.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a Board Resolution
delivered to the Trustee, as an Unrestricted Subsidiary pursuant to and in
compliance with the covenant described under "Certain Covenants -- Limitation on
Designations of Unrestricted Subsidiaries." Any such Designation may be revoked
by a Board Resolution of the Company delivered to the Trustee, subject to the
provisions of such covenant.
"Revocation" has the meaning set forth under "Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries."
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
"Senior Indebtedness" means the principal of, premium, if any and interest
on, and all other Obligations with respect to, any Indebtedness of the Company,
whether outstanding on the Issue Date or thereafter incurred, unless, in the
case of any particular Indebtedness, the instrument creating or evidencing the
same or pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the Notes.
Notwithstanding the foregoing, "Senior Indebtedness" shall not include (a)
Indebtedness evidenced by the Notes, (b) Indebtedness that is expressly
subordinate or junior in right of payment to any Indebtedness of the Company,
(c) Indebtedness that is represented by Disqualified Capital Stock, (d)
Obligations for goods, materials or services purchased in the ordinary course of
business or Obligations consisting of trade payables, (e) Indebtedness of or
amounts owed by the Company for compensation to employees or for services
rendered to the Company, (f) any liability for federal, state, local or other
taxes owed or owing by the Company, (g) Indebtedness of the Company to a
Subsidiary of the Company or any other Affiliate of the Company, and (h) that
portion of any Indebtedness that is incurred by the Company in violation of the
Indenture.
"Subsidiary," with respect to any Person, means (a) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (b) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Surviving Entity" has the meaning set forth under "Certain
Covenants -- Merger, Consolidation and Sale of Assets."
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
such pursuant to and in compliance with the covenant described under "Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries." Any such
designation may be revoked by a Board Resolution of the Company delivered to the
Trustee, subject to the provisions of such covenant.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which all the outstanding voting securities (other than in the case of a foreign
Restricted Subsidiary, directors' qualifying shares or an immaterial amount of
shares required to be owned by other Persons pursuant to applicable law) are
owned by the Company or another Wholly Owned Restricted Subsidiary.
94
<PAGE> 100
DESCRIPTION OF NOTES
The Notes evidence the same indebtedness as that which will be evidenced by
the Exchange Notes and are entitled to the benefits of the Indenture. The form
and terms of the Notes are the same as the form and terms of the Exchange Notes
(which replace the Notes) except that none of the Notes was registered under the
Securities Act. Therefore, the Notes may not be offered or sold except pursuant
to an exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act. Accordingly, the Notes bear legends
restricting the transfer thereof. In addition, with certain exceptions, the
Notes may not be sold or transferred to, or acquired on behalf of, any pension
or welfare plan (as described in Section 3 of the Employee Retirement Income
Security Act of 1974). For a description of the terms of the Exchange Notes, see
"Description of Exchange Notes."
EXCHANGE OFFER AND REGISTRATION RIGHTS
The Company and the Initial Purchasers entered into the Registration Rights
Agreement on November 13, 1996, pursuant to which the Company agreed, for the
benefit of the Holders, that it would, at its own cost (i) within 45 days after
the Issue Date (December 28, 1996), file a registration statement under the
Securities Act with the Commission with respect to the Exchange Notes (which
obligation has been satisfied by the filing of the Registration Statement of
which this Prospectus is a part), and (ii) use its best efforts to cause such
registration statement to be declared effective under the Securities Act within
135 days after the Issue Date (March 28, 1997). Upon the Registration Statement
being declared effective, the Company will offer the Exchange Notes in exchange
for surrender of the Notes. The Company will keep the Exchange Offer open for
not less than 20 days (or longer if required by applicable law) after the date
notice of the Exchange Offer is mailed to the Holders of the Notes. For each of
the Notes surrendered pursuant to the Exchange Offer, the Holder who has
surrendered such Note will receive an Exchange Note having a principal amount
equal to that of the surrendered Note. Interest on each Exchange Note will
accrue from the last interest payment date on which interest was paid on the
Note surrendered in exchange therefor or, if no interest has been paid on such
Note, from the original issue date of the Note. Under existing Commission
interpretations, the Exchange Notes would be freely transferable by Holders
thereof, other than affiliates of the Company, after the Exchange Offer, without
further registration under the Securities Act, if the Holder of the Exchange
Notes represents that it is acquiring the Exchange Notes in the ordinary course
of business, that it has no arrangement or understanding with any person to
participate in the distribution of the Exchange Notes and that it is not an
affiliate of any of the Company, as such terms are interpreted by the
Commission; provided that broker-dealers ("Participating Broker-Dealers")
receiving Exchange Notes in the Exchange Offer will have a prospectus delivery
requirement with respect to resales of such Exchange Notes. The Commission has
taken the position that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to the Exchange Notes (other than
a resale of an unsold allotment from the original sale of the Notes) with the
prospectus contained in the Registration Statement. The Company has agreed for a
period of 90 days after consummation of the Exchange Offer (or such longer
period as may be required under the Securities Act) to make available a
prospectus meeting requirements of the Securities Act to Participating Broker-
Dealers for use in connection with any resale of such Exchange Notes.
Each Holder who wishes to exchange its Notes for Exchange Notes in the
Exchange Offer will be required to represent that any Exchange Notes to be
received by it will be acquired in the ordinary course of its business and that
at the time of the commencement of the Exchange Offer it has no arrangement or
understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes and that it is not an
affiliate of the Company.
If the Holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
applicable Exchange Notes. If the Holder is a broker-dealer that will receive
Exchange Notes for its own account in exchange for Notes that were acquired as a
result of market-making activities or other trading activities, it will be
required to acknowledge that it will deliver a prospectus in connection with any
resale of such Exchange Notes.
95
<PAGE> 101
In the event that applicable interpretations of the staff of the Commission
do not permit the Company to effect such an Exchange Offer, or if for any other
reason the Exchange Offer is not consummated within 180 days after the original
issue date of the Notes (May 12, 1997), or, under certain circumstances, if the
Initial Purchasers shall so request, the Company will (a) as promptly as
practicable, file a shelf registration statement covering resales of the Notes
(a "Shelf Registration Statement"), (b) use its best efforts to cause such Shelf
Registration Statement to be declared effective under the Securities Act, and
(c) use its best efforts to keep effective such Shelf Registration Statement
until the earlier of three years from the date the Shelf Registration Statement
is declared effective by the Commission and such time as all of the applicable
Notes have been sold thereunder. The Company will, in the event of the filing of
a Shelf Registration Statement, provide to each Holder of the Notes copies of
the prospectus which is a part of such Shelf Registration Statement, notify each
such Holder when the Shelf Registration Statement has become effective and take
certain other actions as are required to permit unrestricted resales of the
Notes. A Holder that sells its Notes pursuant to a Shelf Registration Statement
generally will be required to be named as a selling securityholder in the
related prospectus and to deliver a prospectus to purchasers, will be subject to
certain of the civil liability provisions under the Securities Act in connection
with such sales and will be bound by the provisions of the Registration Rights
Agreement which are applicable to such Holder (including certain indemnification
obligations).
Although the Company has filed the registration statement described above,
there can be no assurance that such registration statement will become
effective. If the Company fails to comply with the above provisions or if such
registration statement fails to become effective, then the Company shall pay, as
liquidated damages, additional interest ("Liquidated Damages"), to the Holders
of the Notes as follows:
(i) if the Registration Statement or Shelf Registration Statement is
not filed within 45 days following the Issue Date (which requirement has
been satisfied by the filing with the Commission of the Registration
Statement of which this Prospectus is a part), Liquidated Damages shall
accrue at a rate of 0.50% per annum of the principal amount of the Notes
for the first 90 days commencing on the 46th day after the Issue Date, such
Liquidated Damages rate increasing by an additional 0.50% per annum of the
principal amount of the Notes at the beginning of each subsequent 90-day
period;
(ii) if the Registration Statement or Shelf Registration Statement is
not declared effective within 135 days following the Issue Date, then,
commencing on the 136th day after the Issue Date, Liquidated Damages shall
accrue at a rate of 0.50% per annum of the principal amount of the Notes
for the first 90 days immediately following the 136th day after the Issue
Date, such Liquidated Damages rate increasing by an additional 0.50% per
annum of the principal amount of the Notes at the beginning of each
subsequent 90-day period; or
(iii) if (A) the Company has not exchanged all Notes validly tendered
in accordance with the terms of the Exchange Offer on or prior to 180 days
after the Issue Date or (B) the Registration Statement ceases to be
effective at any time prior to the time that the Exchange Offer is
consummated or (C) if applicable, the Shelf Registration Statement has been
declared effective and such Shelf Registration Statement ceases to be
effective at any time prior to the third anniversary of the Issue Date
(unless all the Notes have been sold thereunder), then Liquidated Damages
shall accrue at a rate of 0.50% per annum of the principal amount of the
Notes for the first 90 days commencing on (x) the 181st day after the Issue
Date with respect to the Notes validly tendered and not exchanged by the
Company, in the case of (A) above, or (y) the day the Registration
Statement ceases to be effective or usable for its intended purpose in the
case of (B) above, or (z) the day such Shelf Registration Statement ceases
to be effective in the case of (C) above, such Liquidated Damages rate
increasing by an additional 0.50% per annum of the principal amount of the
Notes at the beginning of each subsequent 90-day period;
provided, however, that the Liquidated Damages rate may not exceed in the
aggregate 1.0% per annum of the principal amount of the Notes; and provided,
further, that (1) upon the filing of the Registration Statement or Shelf
Registration Statement (in the case of clause (i) above), (2) upon the
effectiveness of the Registration Statement or Shelf Registration Statement (in
the case of (ii) above), or (3) upon the exchange of Notes for
96
<PAGE> 102
all Notes tendered (in the case of clause (iii)(A) above), or upon the
effectiveness of the Registration Statement which had ceased to remain effective
(in the case of clause (iii)(B) above), or upon the effectiveness of the Shelf
Registration Statement which had ceased to remain effective (in the case of
clause (iii)(C) above), Liquidated Damages as a result of such clause (or the
relevant subclause thereof), as the case may be, shall cease to accrue.
The amount of Liquidated Damages will be determined by multiplying the
applicable Liquidated Damages rate by the principal amount of the Notes
multiplied by a fraction, the numerator of which is the number of days such
Liquidated Damages rate was applicable during such period (determined on the
basis of a 360-day year comprised of twelve 30-day months), and the denominator
of which is 360.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the Registration Rights Agreement, a copy
of which will be available upon request to the Company.
97
<PAGE> 103
CERTAIN INCOME TAX CONSIDERATIONS
THE DISCUSSION BELOW IS INTENDED TO BE A GENERAL DESCRIPTION OF THE TAX
CONSIDERATIONS MATERIAL TO AN INVESTMENT IN THE EXCHANGE NOTES AND THE NOTES. IT
DOES NOT TAKE INTO ACCOUNT THE INDIVIDUAL CIRCUMSTANCES OF ANY PARTICULAR
INVESTOR. THEREFORE, PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS
WITH RESPECT TO THE TAX CONSEQUENCES OF AN INVESTMENT IN THE EXCHANGE NOTES.
FOR INFORMATION WITH RESPECT TO THE TAX CONSEQUENCES OF THE EXCHANGE OFFER,
SEE "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER."
The following is a summary of the material federal income tax consequences
of the acquisition, ownership and disposition of the Notes or the Exchange Notes
by a Holder. This summary deals only with Holders that will hold the Notes or
the Exchange Notes as capital assets. The discussion does not cover all aspects
of federal taxation that may be relevant to, or the actual tax effect that any
of the matters described herein will have on, the acquisition, ownership or
disposition of the Notes or the Exchange Notes by particular investors, and does
not address state, local, foreign or other tax laws. In particular, this summary
does not discuss all of the tax considerations that may be relevant to certain
types of investors subject to special treatment under the federal income tax
laws (such as banks, insurance companies, investors liable for the alternative
minimum tax, individual retirement accounts and other tax-deferred accounts,
tax-exempt organizations, dealers in securities or currencies, investors that
will hold the Notes or the Exchange Notes as part of straddles, hedging
transactions or conversion transactions for federal tax purposes or investors
whose functional currency is not the United States Dollars).
The following discussion assumes that the payment of Liquidated Damages are
remote contingencies, which the Company believes to be the case. The summary is
based on the Internal Revenue Code of 1986, as amended (the "Code"), existing
and proposed regulations thereunder, published rulings and court decisions, all
as currently in effect and all subject to change at any time, perhaps with
retroactive effect.
INTEREST
Interest (including any Liquidated Damages) paid on a Note or an Exchange
Note will be taxable to a Holder as ordinary income at the time it is received
or accrued, depending on the holder's method of accounting for tax purposes.
Prospective investors should consult their tax advisers concerning the
applicability of the source of income rules to income attributable to the Notes
or the Exchange Notes.
ACQUISITION PREMIUM
If a Holder acquires an Exchange Note or has acquired a Note, in each case,
for an amount more than its redemption price, the Holder may elect to amortize
such bond premium on a yield to maturity basis.
PURCHASE, SALE, EXCHANGE, RETIREMENT AND REDEMPTION OF THE EXCHANGE NOTES
In general, a Holder's tax basis in an Exchange Note will equal the price
paid for the Note for which such Exchange Note was exchanged pursuant to the
Exchange Offer. A Holder generally will recognize gain or loss on the sale,
exchange, retirement, redemption or other disposition of a Note or an Exchange
Note (or portion thereof) equal to the difference between the amount realized on
such disposition and the Holder's tax basis in the Note or the Exchange Note (or
portion thereof). Except to the extent attributable to accrued but unpaid
interest, gain or loss recognized on such disposition of a Note or an Exchange
Note will be capital gain or loss and will be long-term capital gain or loss if
such Note or Exchange Note was held for more than one year. Any such gain will
generally be United States source gain.
A purchase of an Exchange Note or Note in a subsequent resale may be
affected by the market discount provisions of the Code. These rules generally
provide that subject to a statutorily defined de minimis exception, if a Holder
purchases an Exchange Note (or purchased a Note) at a "market discount," as
defined
98
<PAGE> 104
below, and thereafter recognizes gain upon a disposition of the Exchange Note
(including dispositions by gift or redemption), the lesser of such gain (or
appreciation, in the case of gift) or the portion of the market discount that
has accrued ("accrued market discount") while the Exchange Note (and its
predecessor Note, if any) was held by such Holder will be treated as ordinary
interest income at the time of disposition rather than as capital gain. For an
Exchange Note or a Note, "market discount" is the excess of the stated
redemption price at maturity over the tax basis immediately after its
acquisition by a Holder. Market discount generally will accrue ratably during
the period from the date of acquisition to the maturity date of the Exchange
Note, unless the Holder elects to accrue such discount on the basis of the
constant yield method.
In lieu of including the accrued market discount in income at the time of
disposition, a Holder of an Exchange Note acquired at a market discount (or
acquired in exchange for a Note acquired at a market discount) may elect to
include the accrued market discount in income currently either ratably or using
the constant yield method. Once made, such an election applies to all other
obligations that the Holder purchases at a market discount during the taxable
year for which the election is made and in all subsequent taxable years of the
Holder, unless the Internal Revenue Service consents to a revocation of the
election. If an election is made to include accrued market discount in income
currently, the basis of an Exchange Note in the hands of the Holder will be
increased by the accrued market discount thereon as it is includable in income.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Payments of interest (including any Liquidated Damages) and principal on,
and the proceeds of sale or other disposition of the Notes or the Exchange Notes
payable to a Holder may be subject to information reporting requirements, and
backup withholding at a rate of 31% will apply to such payments if the Holder
fails to provide an accurate taxpayer identification number or to report all
interest and dividends required to be shown on its federal income tax returns.
Certain Holders (including, among others, corporations) are not subject to
backup withholding. Holders should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
BOOK-ENTRY; DELIVERY AND FORM
The Exchange Notes issued in exchange for the Notes (and the related
guarantees) initially will be represented by a single permanent global
certificate in definitive, fully registered form (the "Global Exchange Note").
Notwithstanding the foregoing, Notes held in certificated form, if any, will be
exchanged solely for Exchange Notes in certificated form. As of the date of this
Prospectus, no Notes were held in certificated form. The Global Exchange Note
will be deposited upon issuance with, or on behalf of, the Depository Trust
Company, New York, New York and registered in the name of a nominee of DTC. The
Global Exchange Note will be subject to certain restrictions on transfer set
forth therein.
The Global Exchange Note. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Exchange Note, DTC or its
custodian will credit, on its internal system, the principal amount of Exchange
Notes of the individual beneficial interests represented by such Global Exchange
Note to the respective accounts of persons who have accounts with such
depositary and (ii) ownership of beneficial interests in the Global Exchange
Note will be shown on, and the transfer of such ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of the
Exchange Notes, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Exchange Notes represented by such Global Exchange
Note for all purposes under the Indenture. No beneficial owner of an interest in
the Global Exchange Note will be able to transfer that interest except in
accordance with DTC's procedures, in addition to those provided for under the
Indenture with respect to the Exchange Notes.
Payments of the principal of, premium, if any, interest and Liquidated
Damages, if any, on the Global Exchange Note will be made to DTC or its nominee,
as the case may be, as the registered owner thereof. None of the Company, the
Trustee or any Paying Agent will have any responsibility or liability for any
aspect
99
<PAGE> 105
of the records relating to or payments made on account of beneficial ownership
interests in the Global Exchange Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, interest or Liquidated Damages, if any, in respect
of the Global Exchange Note, will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of the Global Exchange Note as shown on the records of DTC or its
nominee. The Company also expects that payments by participants to owners of
beneficial interests in the Global Exchange Note held through such participants
will be governed by standing instructions and customary practice, as is now the
case with securities held for the accounts of customers registered in the names
of nominees for such customers. Such payments will be the responsibility of such
participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same-day funds. If a holder requires physical delivery in definitive
form of a security for any reason, including to sell Exchange Notes to persons
in states which require physical delivery of the Exchange Notes, or to pledge
such securities, such holder must transfer its interest in the Global Exchange
Note, in accordance with the normal procedures of DTC and with the procedures
set forth in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Exchange Notes (including the presentation of Exchange
Notes for exchange as described below) only at the direction of one or more
participants to whose account the DTC interests in the Global Exchange Note are
credited and only in respect of such portion of the aggregate principal amount
of Exchange Notes as to which such participant has or participants have given
such direction. However, if there is an Event of Default under the Indenture,
DTC will exchange the Global Exchange Note for Certificated Securities, which it
will distribute to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Exchange Notes among participants of DTC,
it is under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Exchange Note and a successor depositary
is not appointed by the Company within 90 days, certificated securities will be
issued in exchange for the Global Exchange Note.
100
<PAGE> 106
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Notes where such Notes were acquired as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 90 days after the Expiration Date, it will make this Prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale. In addition, until , 1997, all dealers
effecting transactions in the Exchange Notes may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Notes by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells the Exchange Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal state that, by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
Holders of the Notes), other than commissions or concessions of any brokers or
dealers, and will indemnify the Holders of the Notes (including any broker-
dealers) against certain liabilities, including liabilities under the Securities
Act.
By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer agrees that,
upon receipt of notice from the Company of the happening of any event which
makes any statement in the Prospectus untrue in any material respect or which
requires the making of any changes in the Prospectus in order to make the
statements therein not misleading (which notice the Company agrees to deliver
promptly to such broker-dealer), such broker-dealer will suspend use of the
Prospectus until the Company has amended or supplemented the Prospectus to
correct such misstatement or omission and has furnished copies of the amended or
supplemental Prospectus to such broker-dealer.
LEGAL MATTERS
Certain legal matters relating to the validity of the Exchange Notes will
be passed upon for the Company by Kutak Rock, 717 Seventeenth Street, Denver,
Colorado 80202.
101
<PAGE> 107
EXPERTS
The consolidated financial statements of Stuart Entertainment, Inc. as of
December 31, 1994 and 1995 and for each of the three years in the period ended
December 31, 1995, included in this Prospectus, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report thereon appearing
herein, and have been included in reliance upon such report of such firm given
upon their authority as experts in accounting and auditing.
The balance sheets as of December 31, 1995 and 1994 and the statements of
income and cash flows for each of the three years in the period ended December
31, 1995 of Trade Products, Inc. included in this Prospectus, have been included
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
102
<PAGE> 108
INDEX TO FINANCIAL STATEMENTS
AS OF AND FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Statements of Operations for Years Ended
December 31, 1993, 1994 and 1995.......................... F-3
Consolidated Balance Sheets as of December 31, 1994 and
1995...................................................... F-4 to F-5
Consolidated Statements of Stockholders' Equity for Years
Ended December 31, 1993, 1994 and 1995.................... F-6
Consolidated Statements of Cash Flows for Years Ended
December 31, 1993, 1994 and 1995.......................... F-7
Notes to Consolidated Financial Statements.................. F-8 to F-25
Financial Statement Schedules:
Schedule II Valuation and Qualifying Accounts............. F-26
Consolidated Statements of Operations for Nine Months Ended
September 30, 1995 and 1996 (unaudited)................... F-27
Consolidated Balance Sheets at December 31, 1995 and
September 30, 996 (unaudited)............................. F-28
Consolidated Statements of Cash Flows for Nine Months Ended
September 30, 1995 and 1996 (unaudited)................... F-29
Notes to Consolidated Financial Statements (unaudited)...... F-30 to F-32
</TABLE>
TRADE PRODUCTS, INC.
<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
Report of Independent Accountants........................... F-33
Balance Sheets as of December 31, 1994 and 1995............. F-34
Statements of Income for the Years Ended December 31, 1993,
1994 and 1995............................................. F-35
Statement of Cash Flows for the Years Ended December 31,
1993, 1994 and 1995....................................... F-36
Notes to Financial Statements............................... F-37 to F-42
Balance Sheets as of December 31, 1995 and September 30,
1996 (unaudited).......................................... F-43
Statements of Income for the Nine Months Ended September 30,
1995 and 1996 (unaudited)................................. F-44
Statements of Cash Flows for the Nine Months Ended September
30, 1995 and 1996 (unaudited)............................. F-45
Notes to Financial Statements (unaudited)................... F-46 to F-47
</TABLE>
F-1
<PAGE> 109
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 as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. Our
audits also included the financial statement schedule listed in the Index at
page F-1. 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, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 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.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in January 1993.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 25, 1996
F-2
<PAGE> 110
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
NET SALES.............................................. $ 53,937 $ 59,158 $ 109,882
COST OF GOODS SOLD..................................... 40,167 42,987 74,722
---------- ---------- ----------
GROSS MARGIN........................................... 13,770 16,171 35,160
OTHER EXPENSES AND INCOME:
Selling, general and administrative expenses......... 11,470 14,323 26,581
Amortization of goodwill............................. 61 96 878
Equity in (earnings) losses of joint ventures (Note
8)................................................ 705 980 (129)
Termination of Consulting Agreement (Note 10)........ -- 2,000 --
Interest expense, net................................ 775 1,045 4,448
United Kingdom charge (Note 8)....................... -- -- 819
---------- ---------- ----------
Other Expenses and Income -- Net.................. 13,011 18,444 32,597
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES...................... 759 (2,273) 2,563
INCOME TAX PROVISION (BENEFIT) (Note 6)................ 247 (665) 1,777
---------- ---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE................................. 512 (1,608) 786
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
(Note 1)............................................. 187 -- --
---------- ---------- ----------
NET INCOME (LOSS)...................................... $ 699 $ (1,608) $ 786
========== ========== ==========
EARNINGS (LOSS) PER SHARE: (Note 1)
Income (loss) before cumulative effect of change in
accounting principle -- primary................... $ .15 $ (0.45) $ 0.12
Cumulative effect of change in accounting principle.... .05 -- --
---------- ---------- ----------
Earnings (loss) per share -- primary................... $ .20 $ (0.45) $ 0.12
========== ========== ==========
Average Common and Common
Equivalent Shares Outstanding -- primary............. 3,524,112 3,560,848 6,705,904
========== ========== ==========
Income (loss) before cumulative effect of change in
accounting principle -- fully dilutive............... $ .15 $ (0.45) $ 0.11
Cumulative effect of change in accounting principle.... .05 -- --
---------- ---------- ----------
Earnings (loss) per share -- fully dilutive............ $ .20 $ (0.45) $ 0.11
========== ========== ==========
Average Common and Common Equivalent Shares
Outstanding -- fully dilutive........................ 3,524,112 3,560,848 7,053,222
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 111
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 2,116 $ 943
Receivables:
Trade receivables, less allowance for doubtful accounts
of $1,598 and $2,086, respectively:
Related parties........................................ 838 1,014
Other.................................................. 14,163 17,202
Current portion of notes receivable, less allowance for
doubtful accounts of $199 and $199, respectively:
Related parties........................................ 30 30
Other.................................................. 731 1,123
Inventories (Note 3)...................................... 16,103 21,982
Refundable income taxes................................... 225 --
Deferred income taxes (Note 6)............................ 1,665 1,746
Prepaid expenses and other................................ 388 547
-------- --------
Total Current Assets................................. 36,259 44,587
PROPERTY, PLANT AND EQUIPMENT (Note 5):
Land and buildings........................................ 4,710 4,950
Equipment................................................. 24,520 29,262
-------- --------
Total................................................ 29,230 34,212
Less accumulated depreciation............................. (9,387) (13,095)
-------- --------
Property, Plant and Equipment -- net................. 19,843 21,117
OTHER ASSETS:
Notes receivable, less allowance for doubtful accounts of
$423 and $124, respectively:
Related parties........................................ 172 143
Other.................................................. 1,194 1,118
Goodwill, less accumulated amortization of $426 and
$1,209, respectively (Note 2).......................... 28,958 29,194
Investment in joint ventures (Note 8)..................... 155 56
Deferred financing costs, net of accumulated amortization
of $16 and $375, respectively.......................... 1,613 1,660
Other investments and assets.............................. 783 1,119
-------- --------
Total Other Assets................................... 32,875 33,290
-------- --------
TOTAL ASSETS...................................... $ 88,977 $ 98,994
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 112
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 5)................ $ 6,482 $ 7,897
Bazaar Purchase Price Adjustment (Note 2)................. 1,642 710
Trade payables:
Related parties........................................ 276 --
Other.................................................. 10,180 12,512
Accrued payroll and benefits.............................. 1,597 1,967
Other accrued liabilities................................. 1,476 900
Income taxes payable...................................... -- 543
Deferred taxes (Note 6)................................... 152 40
-------- --------
Total Current Liabilities............................ 21,805 24,569
LONG-TERM DEBT: (Note 5)
Related parties........................................... 5,000 5,000
Other..................................................... 29,416 34,586
-------- --------
Total Long-Term Debt................................. 34,416 39,586
DEFERRED INCOME TAXES (Note 6).............................. 2,270 2,594
DEFERRED INCOME (Note 11)................................... 333 205
COMMITMENTS AND CONTINGENCIES (Notes 5,9,11 and 13)
STOCKHOLDERS' EQUITY: (Notes 1, 2, 5 and 7)
Common stock -- $.01 par value; 20,000,000
shares authorized; 6,595,048 and 6,753,309
shares outstanding, respectively.......................... 66 68
Additional paid-in-capital................................ 25,776 26,384
Retained earnings......................................... 4,739 5,525
Treasury stock (56,260 shares at cost).................... (189) (189)
Cumulative translation adjustment, net of
deferred income taxes.................................. (239) 252
-------- --------
Total Stockholders' Equity........................... 30,153 32,040
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 88,977 $ 98,994
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 113
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON PAID-IN RETAINED TREASURY TRANSLATION
STOCK CAPITAL EARNINGS STOCK ADJUSTMENT TOTAL
------ ---------- -------- -------- ----------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993................ $34 $ 8,675 $ 5,648 $(189) $ -- $14,168
Net income.............................. -- -- 699 -- -- 699
Issuance of 37,810 shares............... 1 118 -- -- -- 119
Paid-in capital from non-qualified
stock options issued (Note 7)......... -- 99 -- -- -- 99
Income tax benefit on stock
options exercised (Note 7)............ -- 55 -- -- -- 55
--- ------- ------- ----- ----- -------
BALANCE, DECEMBER 31, 1993.............. 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. Stuart.................. -- 144 -- -- -- 144
Translation adjustment, net of
deferred taxes of $134 (Note 1)....... -- -- -- -- (239) (239)
Paid-in capital from non-qualified
stock options issued (Note 7)......... -- 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 (Note 7).................... -- 25 -- -- -- 25
Translation adjustment, net of
deferred taxes of $276 (Note 1)....... -- -- -- -- 491 491
Issuance of 55,652 shares in
connection with the acquisition
of Reliable Corporation, net of
issuance costs of $6.................. 1 313 -- -- -- 314
Paid-in capital from non-qualified
stock options issued (Note 7)......... -- 19 -- -- -- 19
--- ------- ------- ----- ----- -------
BALANCE, DECEMBER 31, 1995.............. $68 $26,384 $ 5,525 $(189) $ 252 $32,040
=== ======= ======= ===== ===== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 114
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 699 $ (1,608) $ 786
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Cumulative effect of change in accounting principle....... (187) -- --
Payment on Termination Agreement.......................... -- -- (1,200)
Depreciation and amortization............................. 1,593 1,935 4,617
Amortization of debt financing fees....................... -- -- 356
Provision for doubtful accounts........................... 397 1,287 543
Termination of Consulting Agreement (Note 10)............. -- 2,000 --
Equity in (earnings) losses of joint ventures............. 705 980 (129)
Deferred income taxes..................................... 220 (1,250) (221)
Other noncash expenses -- net............................. 204 1,328 508
Change in operating working capital items, net of amounts
from acquisitions (Note 14)............................ (4,143) (3,470) (7,050)
------- -------- -------
Net cash provided by (used in) operating
activities..................................... (512) 1,202 (1,790)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Bazaar (Note 2): Payment to Mr. Stuart for
stock of LSA........................................... -- (30,000) --
Cash balance of Bazaar at date of Acquisition............. -- 1,026 --
Costs of acquisition paid................................. (246) (609) --
Capital expenditures...................................... (254) (818) (1,317)
Proceeds from disposals................................... 12 43 138
Payments received on notes receivable..................... 1,031 1,052 1,261
Investment in joint ventures prior to Acquisition......... (1,028) (856) --
Cost of acquisition of LSA................................ -- -- (274)
Investment in distributor................................. (100) -- (116)
Acquisition of Reliable................................... -- -- (295)
Other..................................................... (5) (234) (79)
------- -------- -------
Net cash used in investing activities............. (590) (30,396) (682)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on old lines of credit.......... 2,815 (9,651) --
Borrowings under Revolving Facilities..................... -- 12,728 8,052
Costs of debt financing................................... -- (1,644) (375)
Proceeds from additions to long term debt................. 90 15,000 --
Payments on term facility................................. -- -- (3,023)
Payments on long-term debt................................ (2,059) (2,276) (3,081)
Payments on LSA Purchase Price Adjustment
Proceeds from sale of common stock (Note 2)............... -- 18,000 (932)
Proceeds from issuance of long-term debt.................. -- -- 348
Proceeds from exercise of stock options................... -- -- 277
Costs of stock issuance paid.............................. -- (1,344) (6)
Proceeds from other issuances of common stock............. 99 9 --
------- -------- -------
Net cash provided by financing activities......... 945 30,822 1,260
Effect of currency exchange rate changes on cash of
foreign subsidiaries................................... -- (24) 39
------- -------- -------
NET INCREASE (DECREASE) IN CASH............................. (157) 1,604 (1,173)
CASH AT BEGINNING OF YEAR................................... 669 512 2,116
------- -------- -------
CASH AT END OF YEAR......................................... $ 512 $ 2,116 $ 943
======= ======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 115
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1. SUMMARY OF ACCOUNTING POLICIES
NATURE OF OPERATIONS -- Stuart Entertainment, Inc. and its subsidiaries
(collectively, the "Company") are primarily engaged in manufacturing and
distributing a complete line of bingo cards, break-open tickets, ink dabbers,
electronic equipment, supplies, and accessories. The Company's products are sold
primarily in the United States and Canada to distributors, who resell them to
fraternal, charitable, religious and social organizations, lodges, hospitals,
nursing homes, PTA groups, military clubs and other similar organizations,
primarily non-profit, which use such products to raise money and provide
entertainment. To a lesser extent the Company's products are also sold to
charitable and commercial bingo halls and to governmental lottery agencies
through company-owned retail locations located in Canada, mail order catalogs
and promotional flyers. The Company is also engaged in the manufacture and
distribution of electronic gaming equipment, primarily for the Company's bingo
markets.
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.
EARNINGS PER SHARE -- The number of shares used in the computation of
primary and fully diluted earnings per share for the years ended December 31,
1993, 1994 and 1995 is based upon the weighted average number of shares
outstanding and, if dilutive, common stock equivalents (stock options and
warrants) of the Company using the treasury stock method.
FOREIGN CURRENCY TRANSLATION AND REMEASUREMENT -- The financial statements
and transactions of Bingo Press & Specialty Limited and Stuart Entertainment
Limited are maintained in their functional currency (Canadian dollars (C$) and
British pounds (pound), respectively) and translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards No. 52 ("SFAS 52").
Assets and liabilities are translated at current exchange rates in effect 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.
dollars, are accumulated in a separate component of stockholders' equity in
accordance with SFAS 52.
The financial statements and transactions of Stuart Entertainment S.A. de
C.V. (recorded in Mexican pesos) have been remeasured into U.S. dollars in
accordance with SFAS 52. Assets and liabilities are remeasured at the end of
period exchange rates, except for inventory, property and stockholders' equity
which are remeasured at historical exchange rates. The statement of operations
has been remeasured at average exchange rates for the period, except for cost of
sales and depreciation which have been remeasured at historical exchange rates.
Gains and losses from remeasurement are recognized currently in operations. For
the years ended December 31, 1994 and 1995, the Company recognized a
remeasurement loss of $18,000 and $547,000, respectively.
INVENTORIES -- Inventories are stated at the lower of cost (first-in,
first-out) or market.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment used in
operations are stated at cost and are depreciated over the estimated useful
lives (two to thirty years) using the straight-line method.
INVESTMENTS -- Investments in the common stock of certain affiliated
companies are accounted for using the equity method unless application of the
cost method provides substantially similar results. In those circumstances, the
cost method is used.
DEFERRED FINANCING FEES -- Costs incurred relating to the Credit Agreement
(see Note 5) are being amortized to interest expense using the straight-line
method over the five-year term of the Credit Agreement.
F-8
<PAGE> 116
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 -- (CONTINUED)
GOODWILL -- Goodwill from the acquisition of Bingo Press & Specialty
Limited is amortized on a straight-line basis over a forty year period (see Note
2). Goodwill from other transactions is amortized on a straight-line basis over
periods ranging from ten years to forty years.
The Company periodically reviews goodwill to assess recoverability, and
impairments would be recognized in operating results if a permanent diminution
in value were to occur. The Company recognized an impairment of goodwill in
1995, included in a one-time pre-tax charge, relating to the discontinuation of
its manufacturing operations in the United Kingdom (see Note 8).
INCOME TAXES -- Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." The adoption of SFAS 109 changed the Company's method for accounting for
income taxes from the deferred method (under APB No. 11) to an asset and
liability approach. The asset and liability method requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between tax bases and financial reporting bases of certain
assets and liabilities. In adopting SFAS No. 109, the Company did not restate
the financial statements of prior years, but recorded a positive cumulative
effect on net income from this change in accounting principles of $187,000 as of
January 1, 1993.
RESEARCH AND DEVELOPMENT COSTS -- Research and development costs ("R&D
costs") are charged to expense when incurred. During the years ended December
31, 1993, 1994 and 1995, R&D costs totalling approximately $685,000, $784,000,
and $745,000, respectively, were charged to expense.
USE OF ESTIMATES -- The consolidated financial statements of the Company
include estimates and assumptions related to certain assets, liabilities,
revenues and expenses and the disclosure of certain contingent assets and
liabilities. Actual future results may differ from such estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- The Financial Accounting
Standards Board (FASB) issued SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets to Be Disposed Of," which establishes methods for determining
when an impairment of long-lived assets has occurred and for measuring the
impairment of long-lived assets. The FASB also issued SFAS No. 123, "Accounting
for Stock-Based Compensation," which encourages, but does not require, employers
to adopt a fair value method of accounting for employee stock-based
compensation, and which requires increased stock-based compensation disclosures.
The Company does not intend to elect expense recognition for stock options. Both
statements are effective for the Company on January 1, 1996. Implementation of
these Statements is not expected to have a material adverse effect on the
Company's results of operations or financial condition.
RECLASSIFICATIONS -- Certain reclassifications were made to the 1993 and
1994 financial statements to conform to the 1995 presentations. All amounts
shown are in U.S. dollars, unless otherwise noted.
2. ACQUISITIONS
Bingo Press & Specialty Limited:
On December 13, 1994, the Company completed the acquisition (the
"Acquisition") of Len Stuart & Associates Limited ("LSA") pursuant to a Stock
Purchase Agreement (the "LSA Agreement") with LSA and Mr. Leonard A. Stuart, the
sole stockholder 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 ("Niagara").
The total purchase price was $36,786,000, consisting of the following: i)
payment of $30,000,000 cash at closing, ii) issuance of a senior subordinated
note for $5,000,000 (see Note 5), iii) issuance of warrants to
F-9
<PAGE> 117
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 -- (CONTINUED)
purchase 100,000 shares of the Company's common stock at an exercise price of
$5.75 per share (valued by the Company at $144,000) and iv) the Bazaar Purchase
Price Adjustment (as defined below). In connection with the Acquisition, the
Company incurred $1,129,000 of transaction costs.
The LSA Agreement required an adjustment to the purchase price ("Bazaar
Purchase Price Adjustment") to the extent that the Consolidated Net Book Value
(as defined in the LSA Agreement) of LSA and its subsidiaries on September 30,
1994 was more or less, respectively, than the Consolidated Net Book Value of LSA
and its subsidiaries on December 31, 1993. The Bazaar Purchase Price Adjustment
was determined to be $1,642,000.
To partially finance the Acquisition, the Company entered into an agreement
with MLGA Fund II, L.P. and Bingo Holdings Inc., affiliates of the investment
banking firm of Morgan Lewis Githens & Ahn, Inc. ("MLGA, Inc."), whereby Bingo
Holdings Inc. purchased i) 3,130,435 newly issued shares of the Company's common
stock for $5.75 per share and ii) received warrants to acquire 775,000 shares of
the Company's common stock at an exercise price of $5.75 per share, for an
aggregate purchase price of $18,000,000 (the "Equity Financing"). With the net
proceeds from the Equity Financing and amounts borrowed under the Credit
Agreement (see Note 5), the Company acquired LSA.
The 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 $27,316,000.
The results of operations of Bazaar have been consolidated since the date
of the Acquisition.
The following pro forma condensed consolidated statements of operations for
the years ended December 31, 1994 and 1993 give effect to the Acquisition and
the Equity and Debt Financing as if such transactions had occurred as of the
beginning of each period presented. The pro forma condensed consolidated
statements of income do not purport to represent what the Company's results of
operations would have been if such transactions had in fact occurred on such
dates and should not be viewed as predictive of the Company's financial results
in the future.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1993 1994
-------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net Sales:............................................... $ 90,933 $ 94,788
Net Earnings (Loss):..................................... $ 1,259 $ (807)
Earnings per Share:...................................... $ 0.18 $ (0.12)
Average Common and Common Equivalent Shares
Outstanding............................................ 7,016,000 6,537,000
</TABLE>
The pro forma results above do not include the following non-recurring
charges that were included in the results of operations after the date of the
Acquisition:
i) In accordance with the application of purchase accounting to the assets
of Bazaar, the finished goods of Bazaar were recorded at sales value
less costs to sell and a reasonable margin on the costs to sell. This
resulted in the write-up of finished goods inventory of Bazaar by
approximately $879,000, which was included in cost of goods sold in 1994
and 1995 as the finished goods were sold during those periods.
ii) The Company incurred and expensed approximately $329,000 in employment
costs related to new executives of the Company during the year ended
December 31, 1994. These costs are not expected to be recurring costs
of the Company.
F-10
<PAGE> 118
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 -- (CONTINUED)
The Company and Bazaar sold merchandise to each other prior to the
Acquisition. The Company's sales to and purchases from Bazaar were as follows:
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1 TO
DECEMBER 31, DECEMBER 13,
1993 1994
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Sales.................................................... $1,316 $1,521
Purchases................................................ $ 212 $ 713
</TABLE>
The Reliable Corporation of America, Inc.:
On January 10, 1995, the Company acquired i) substantially all of the
assets and assumed substantially all existing liabilities (the "Net Assets")
from The Reliable Corporation of America, Inc. ("Reliable") and ii) two presses
owned by one of Reliable's stockholders (the "Presses").
The total purchase price paid for the Net Assets and the Presses was
$1,300,000, 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 balance on the
promissory note was $684,667 with an interest rate of 9.75% at December 31,
1995.
The Company entered into non-competition agreements with the stockholders
of Reliable. Under these agreements, the Company will make monthly payments of
approximately $5,000 for 90 months to the Reliable stockholders. The present
value of these payments at December 31, 1995 (using a 9% discount factor) is
$270,000. The Company also entered into an employment agreement with the
President of Reliable which was subsequently terminated by mutual consent.
The pro forma condensed consolidated statements of operations for the years
ended December 31, 1994 and 1993 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.
Other Acquisitions:
During 1993, the Company acquired 49% of the outstanding stock of a
distributor of bingo and other fund raising supplies. The total consideration
given for the stock of this company was $322,000, which included a promissory
note in the amount of $222,000 and cash consideration of $100,000.
3. INVENTORIES
Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Raw materials............................................... $ 4,380 $ 3,517
Work-in-process............................................. 2,418 5,056
Finished goods.............................................. 9,305 13,409
------- -------
Total....................................................... $16,103 $21,982
======= =======
</TABLE>
F-11
<PAGE> 119
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 -- (CONTINUED)
4. NOTES PAYABLE TO BANK
The Company had a loan agreement with a regional bank dated August 25, 1993
under which it had a short-term line of credit and could borrow up to
$6,650,000, with the actual borrowing limit determined as a percentage of
eligible receivables and inventories. Amounts advanced under this line of credit
bore interest at the bank's prime rate plus 1/2%. During 1994, the amount
available under this short-term line of credit was increased to $7,500,000 and
the maturity was extended to January 30, 1995. All amounts outstanding on this
line of credit, which totalled $7,289,000, were repaid on December 13, 1994 upon
obtaining new financing under the Credit Agreement described below.
At the date of the Acquisition, Bazaar had a loan agreement with a Canadian
bank under which it had an operating loan, which bore interest at the bank's
prime rate plus 1/2%, and a term loan for the payment of income taxes, which
bore interest at the bank's prime rate plus 1%. All amounts outstanding on the
operating loan and the term loan, which totalled C$5,300,000 ($3,820,000), were
repaid on December 13, 1994 upon obtaining the new financing under the Credit
Agreement described below.
5. LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Borrowings under Credit Agreement:
Revolving Facility........................................ $12,601 $20,921
Term Facility............................................. 14,840 12,135
Subordinated note payable to Mr. Stuart..................... 5,000 5,000
Other term loans and mortgages payable to banks............. 1,208 2,064
Obligations under capital leases............................ 4,211 4,669
Notes payable to others..................................... 3,038 2,694
------- -------
Total.................................................. 40,898 47,483
Less current portion................................... 6,482 7,897
------- -------
Total long-term debt................................... $34,416 $39,586
======= =======
</TABLE>
Borrowings Under Credit Agreement:
The Company's bank credit facility is for an aggregate principal amount of
up to $38,000,000, with a senior secured revolving line of credit of $23,000,000
(the "Revolving Facility") and a senior secured term loan facility of
$15,000,000 (the "Term Facility"). The Revolving Facility and Term Facility are
separated into U.S. and Canadian facilities, respectively. The Company increased
the maximum available under the Revolving Facility from $20,000,000 at December
31, 1994 to $23,000,000 at December 31, 1995. Any amount outstanding under this
$3,000,000 additional amount shall be paid in full at December 31, 1996. The
Credit Agreement expires and all other remaining amounts outstanding are due on
December 12, 1999.
Loans under the U.S. Revolving Facility and the U.S. Term Facility can, at
the option of the Company, be priced either as i) a Base Rate Loan (at the
bank's prime rate plus 1 1/4%) or ii) an Offshore loan (at LIBOR rates plus
2 1/2%). Loans under the Canadian Revolving Facility and the Canadian Term
Facility can, at the option of the Company, be priced either as i) a Base Rate
Loan (at the bank's Canadian prime rate plus 1 1/4%) or ii) an Offshore Loan (at
Bankers Acceptance Rates plus 2 1/2%). Interest payments are due i) monthly on
Base Rate Loans or ii) at the end of an Offshore Loan period, which could be
from 1 day to 180
F-12
<PAGE> 120
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 -- (CONTINUED)
days. In addition, the Company pays an unused facility fee of 1/2 of 1% for the
portion of the U.S. and Canadian Revolving Facilities that are not used during a
particular quarter and a yearly administrative fee of $35,000.
The Credit Agreement requires quarterly principal payments on the Term
Facility of $250,000 under the U.S. Term Facility and C$694,000 ($492,000) under
the Canadian Term Facility until maturity. No principal payments are required on
the Revolving Facility until maturity.
At December 31, 1994 and 1995, loans outstanding on the U.S. Revolving
Facility totalled $4,800,000 and $11,540,000, respectively, and loans
outstanding on the Canadian Revolving Facility totalled C$11,000,000
($7,801,000) and C$12,800,000 ($9,381,000), respectively. Weighted average
year-end interest rates on the U.S. Revolving Facility and Canadian Revolving
Facility at December 31, 1995 were 8.42% and 8.55%, respectively. At December
31, 1994 and 1995, loans outstanding on the U.S. Term Facility totalled
$5,000,000 and $4,000,000, respectively, and loans outstanding on the Canadian
Term Facility totalled C$13,875,000 ($9,840,000) and C$11,100,000 ($8,135,000),
respectively. Interest rates on the U.S. Term Facility and Canadian Term
Facility at December 31, 1995 were 8.44% and 8.55%, respectively.
Amounts outstanding under the Credit Agreement are secured by a perfected
first and sole priority lien and perfected security interest in i) a pledge of
all of the issued and outstanding stock of the subsidiaries of the Company now
owned or hereafter acquired, and ii) all of the real and personal assets of the
Company and its subsidiaries except for those assets previously encumbered under
existing notes payable and capital lease obligations.
The Credit Agreement contains various covenants for the Company to comply
with, such as minimum net worth, fixed coverage ratio, leverage ratio and
restrictions on additional borrowings, cash dividends and capital expenditures.
In connection with the Credit Agreement, the Company incurred $1,644,000
and $375,000 of costs for the years ended December 31, 1994 and 1995,
respectively.
In connection with the Acquisition (Note 2), the Company issued a
$5,000,000 senior subordinated note to Mr. Stuart. The note bears interest at
10% (payable quarterly) and matures on March 31, 2000. The note does not require
scheduled principal payments. The note is subordinated to the debt under the
Credit Agreement.
Other Term Loans and Mortgages Payable to Banks:
On April 30, 1991, the Company executed a $1,200,000 term loan with a local
bank to finance the acquisition of a building the Company had been leasing in
Council Bluffs, Iowa and the construction of an addition to the building. The
note, as renegotiated in 1993, is secured by a mortgage on the building and
requires monthly principal and interest payments of $16,000 through October 15,
1998, when the remaining principal balance is due. The note bears interest at a
rate of 8.25%. The balance outstanding at December 31, 1994 and 1995 was
$901,000 and $790,000, respectively.
Bazaar has several notes payable to banks for mortgages on properties
located in the Maritime provinces of Canada. These notes, with a total balance
outstanding of $287,000 at December 31, 1995, bear interest at rates ranging
from 8.13% to 11.25% and require monthly principal and interest payments of
$7,000. The notes have five-year terms (with amortization based on a 25-year
schedule) that mature between May 1996 and September 1996. The Company, as is
customary in Canada, will continue to renew these notes on a five-year basis
until they are paid in full.
F-13
<PAGE> 121
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 -- (CONTINUED)
Obligations Under Capital Leases:
Obligations under capital leases are payable to a number of financial
institutions and lenders. Under the terms of the lease agreements, financing for
equipment has been provided with lease terms of three to six years. Lease
payments are determined based upon a simple interest equivalent rate, which
range from 7.9% to 15.2%. Ownership of the equipment passes to the Company at
the end of the lease term upon payment of a nominal purchase price. During 1994
and 1995, the Company financed the acquisition of property, plant and equipment
totalling $923,000 and $2,092,000, respectively, through the assumption of
obligations under capital leases. At December 31, 1995, the total cost of assets
under capital leases were $6,287,165, net of accumulated depreciation of
$2,498,574.
In October 1995, the Company completed a lease line of credit with its
primary bank. The facility provides lease financing on capitalized equipment
purchased through December 31, 1996.
The maximum available under this facility is $5,000,000. At December 31,
1995 $3,813,000 remained available under this facility.
Future minimum lease payments under capital leases in effect at December
31, 1995 are as follows:
<TABLE>
<CAPTION>
(DOLLARS
IN THOUSANDS)
-------------
<S> <C>
1996........................................................ $2,085
1997........................................................ 1,548
1998........................................................ 818
1999........................................................ 854
2000........................................................ 222
------
Total....................................................... 5,527
Less amount representing interest........................... 858
------
Present value of net minimum lease payments................. $4,669
======
</TABLE>
Notes Payable to Others:
Notes payable to others consist primarily of i) obligations to former
owners of companies and/or assets that were acquired by the Company and ii)
installment notes relating to the purchase of property, plant and equipment.
Remaining payment terms at December 31, 1995 range from approximately one year
to four years. At December 31, 1995, these notes bear interest at fixed and
variable rates ranging from 6% to 13.5%.
F-14
<PAGE> 122
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 -- (CONTINUED)
Future Payments:
Long-term debt, exclusive of obligations under capital leases, matures as
follows:
<TABLE>
<CAPTION>
(DOLLARS
IN THOUSANDS)
-------------
<S> <C>
1996........................................................ $ 6,200
1997........................................................ 4,137
1998........................................................ 4,060
1999........................................................ 22,808
2000........................................................ 5,201
Thereafter.................................................. 408
-------
Total..................................................... $42,814
=======
</TABLE>
Disclosure on Fair Value of Long-Term Debt:
Based on the interest rates and provisions of the Company's long-term debt,
the carrying value of the debt approximates its current value.
6. INCOME TAX PROVISION (BENEFIT)
Income (loss) before income tax provision (benefit) is as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1993 1994 1995
---- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Domestic.................................................. $759 $(1,890) $2,952
Foreign................................................... -- (383) (389)
---- ------- ------
Total................................................... $759 $(2,273) $2,563
==== ======= ======
</TABLE>
The income tax provision (benefit) is as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1993 1994 1995
---- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................. $ 19 $ 475 $1,139
Foreign................................................. -- 47 755
State................................................... 8 63 104
---- ------- ------
Total................................................ 27 585 1,998
---- ------- ------
Deferred:
Domestic................................................ 220 (1,025) (155)
Foreign................................................. -- (225) (66)
---- ------- ------
Total................................................ 220 (1,250) (221)
---- ------- ------
Total Provision (Benefit)................................. $247 $ (665) $1,777
==== ======= ======
</TABLE>
F-15
<PAGE> 123
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 -- (CONTINUED)
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:
<TABLE>
<CAPTION>
1993 1994 1995
---- ----- ----
<S> <C> <C> <C>
Statutory tax rate.......................................... 34.0% (34.0)% 34.0%
State income taxes (net of federal benefit)................. 2.3 (2.0) 2.3
Foreign tax rates in excess of U.S. federal rates........... -- (.8) 4.5
Valuation reserve for excess losses of U.K. venture......... -- 7.4 17.0
Goodwill amortization....................................... 3.0 1.5 10.1
Research and development credits............................ (7.5) (2.1) --
Other....................................................... .8 .7 1.4
---- ----- ----
Effective tax rate.......................................... 32.6% (29.3)% 69.3%
==== ===== ====
</TABLE>
Deferred tax assets and (liabilities) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current Deferred Income Tax Assets:
Allowance for doubtful accounts........................... $ 571 $ 458
Inventory reserves and adjustments........................ 327 436
Non-deductible accrued liabilities........................ 767 803
Other..................................................... -- 49
------- -------
$ 1,665 $ 1,746
======= =======
Current Deferred Income Tax Liability:
Write-up of Canadian inventory (from purchase
accounting)............................................ $ (152) $ (40)
======= =======
Non-Current Deferred Income Tax Liabilities:
Difference in basis of property and equipment............. $(2,429) $(2,495)
Other..................................................... 25 43
Cumulative translation adjustment......................... 134 (142)
Excess losses of U.K. venture............................. 322 758
Valuation reserve........................................... (322) (758)
------- -------
Total............................................. $(2,270) $(2,594)
======= =======
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $920,000 at December 31, 1995. 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.
F-16
<PAGE> 124
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 -- (CONTINUED)
7. STOCK OPTION PLANS
The Company had four inactive plans and one active stock option plan during
1995: the 1981 Incentive Stock Option Plan, the 1992 Incentive Stock Option
Plan, the 1985 Non-Qualified Stock Option Plan, the 1992 Non-Qualified Stock
Option Plan and the 1994 Performance Plan.
The Company adopted the 1981 Incentive Stock Option Plan ("1981 ISO Plan")
and the 1992 Incentive Stock Option Plan ("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 Non-Qualified Stock Option Plan ("1985 NQSO
Plan") and the 1992 Non-Qualified Stock Option Plan ("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 2,000,000 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 a 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 1994 and 1995 were
non-qualified options. At December 31, 1995 there were 278,600 shares available
for grant.
A summary of stock option activity during the three years ended December 31
is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
Outstanding at beginning of year............. 194,625 396,717 1,280,250
Options granted.............................. 244,800 900,000 824,400
Options exercised............................ (35,008) (3,000) (102,609)
Options cancelled............................ (7,700) (13,467) (119,875)
------------- ------------- -------------
Outstanding at end of year................... 396,717 1,280,250 1,882,166
------------- ------------- -------------
Range of option prices per share
outstanding................................ $2.25 - 7.625 $2.25 - 20.00 $2.25 - 20.00
============= ============= =============
</TABLE>
At December 31, 1995, options for 1,577,667 shares were exercisable. The
remaining options become exercisable as follows: 1996 -- 159,833 shares;
1997 -- 144,666 shares.
During 1993, 1994 and 1995, the Company recognized tax benefits of $55,000,
$0 and $25,000, respectively, related to compensation expense recognized for tax
purposes on non-qualified stock options exercised during 1993, 1994 and 1995. 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.
F-17
<PAGE> 125
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 -- (CONTINUED)
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 1993, 1994
and 1995, the Company recognized compensation expense and additional paid-in
capital for financial statement purposes of $55,000, $51,000 and $19,000,
respectively, based on the dates the options were exercisable.
8. INVESTMENTS IN JOINT VENTURES
Stuart Entertainment Mexico:
In November 1991, the Company and Bazaar formed a Mexican corporate joint
venture named Stuart Entertainment S.A. de C.V. ("Stuart Entertainment Mexico")
for the purpose of printing and finishing bingo paper for its owners. During
1993, 1994, and 1995, 98%, 99%, and 100%, respectively, of the bingo paper
manufactured by Stuart Entertainment Mexico was sold to the Company.
Up to the date of the Acquisition (see Note 2), the Company's investment in
Stuart Entertainment Mexico was accounted for using the equity method. Under the
joint venture agreement, the income or loss for Stuart Entertainment Mexico is
allocated to the Company based on the percentage of total production that is
sold to the Company. For the year ended December 31, 1993 and during the period
from January 1, 1994 to December 13, 1994, the Company recognized losses related
to its investment in Stuart Entertainment Mexico of $555,000, and $570,000,
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 year ended December 31, 1995, and in the consolidated balance sheets as of
December 31, 1994 and December 31, 1995.
Summarized results of operations for Stuart Entertainment Mexico (on a
stand-alone basis) is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total revenues.............................................. $2,086 $2,244
Gross margin................................................ 783 641
Net income (loss)........................................... (583) (591)
</TABLE>
Stuart Entertainment Limited:
During 1993, the Company and Bazaar formed a United Kingdom corporate joint
venture named Stuart Entertainment Limited ("Stuart Entertainment Limited") for
the purpose of selling bingo supplies to the English and European markets.
Up to the date of the Acquisition (see Note 2), the Company's investment in
Stuart Entertainment Limited was accounted for using the equity method. For the
year ended December 31, 1993 and during the period from January 1, 1994 to
December 13, 1994, the Company recognized losses related to its investment in
Stuart Entertainment Limited of $150,000, and $415,000 respectively. Operations
of Stuart Entertainment Limited is included in the consolidated statements of
operations for the period from December 14, 1994 to December 31, 1994 and for
the year ended December 31, 1995, and in the consolidated balance sheets as of
December 31, 1994 and December 31, 1995.
For the period from January 1, 1994 to December 13, 1994, the Company's
sales to Stuart Entertainment Limited were $298,000 and Bazaar's sales to Stuart
Entertainment Limited were $685,000.
F-18
<PAGE> 126
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 -- (CONTINUED)
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.
Summarized results of operations for Stuart Entertainment Limited (on a
stand-alone basis) is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1993 1994
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total revenues.............................................. $ 169 $1,128
Gross margin................................................ (22) (119)
Net income (loss)........................................... (324) (919)
</TABLE>
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 break-open
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, 1994 and 1995 was $155,000 and $259,000,
respectively. For the period from December 14, 1994 to December 31, 1994 and the
year ended December 31, 1995, the Company recorded equity in earnings of $5,000
and $98,000, respectively, on its investment and had sales of $93,000 and
$1,777,000, respectively, to British Bazaar.
The Company guaranteed British Bazaar's operating line of credit at
December 31, 1994 and 1995 in the amount of C$350,000 ($248,000) and C$350,000
($248,000), respectively.
9. 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, 1993, 1994, and 1995 were $1,991,000, $2,047,000, and
$2,541,000, 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,
1993, 1994 and 1995, the Company recognized royalty income from Lachman of
$208,000, $268,000 and $248,000, respectively.
Mr. Stuart:
In December 1993, Mr. Stuart pledged 100,000 shares of common stock of the
Company (which he personally owns) as security for a portion of the bank debt of
one of the Company's customers.
At December 31, 1995, Mr. Stuart owed the Company approximately $256,000
for items relating to the Acquisition for amounts paid by the Company or Bazaar
on behalf of Mr. Stuart.
F-19
<PAGE> 127
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 -- (CONTINUED)
Ken Stuart:
Ken Stuart, a brother of Mr. Stuart, is retained by the Company as an
independent contractor selling ink products. For the years ended December 31,
1993, 1994 and 1995, Ken Stuart earned commissions of $156,000, $292,000 and
$221,000, respectively.
Bingo Systems and Supply, Inc.:
Effective January 1, 1993, the Company sold its investment in 49% of the
outstanding common stock of Bingo Systems and Supply, Inc. ("Bingo Systems") in
exchange for a promissory note totalling $225,000. The note is payable over a
five-year period and bears interest at a rate of one percent above the Company's
borrowing rate on its short-term line of credit. The principal balance of the
note at December 31, 1994 and 1995 was $106,000, with $44,000 of the balance
classified as current. The Company's investment in the common stock of Bingo
Systems totalled $150,000. The gain of $75,000 on the sale of stock is being
recorded using the straight-line method over the five-year term of the note.
The Company has an inventory repurchase agreement with a bank to support
Bingo Systems in its bank financing. The agreement provides that in the event
the bank obtains title to Bingo Systems' inventory through foreclosure, the
Company would be required to repurchase up to $450,000 of selected inventory
previously sold by the Company to Bingo Systems. The purchase price would be
that price paid by Bingo Systems 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.
During the years ended December 31, 1993, 1994, and 1995, sales to Bingo
Systems totalled $2,453,000, $2,791,000, and $2,750,000, respectively.
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 Mr. Stuart. In 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 Mr. Stuart's
brother-in-law and by Len Stuart & Associates, Inc., a company owned by Mr.
Stuart. The principal balance of the note at December 31, 1995 was $173,000,
with $30,000 of the balance classified as current.
During the years ended December 31, 1993, 1994 and 1995, sales to Bingo
Video totalled $610,000, $572,000, and $912,000, respectively.
Other:
In December 1995, the Company amended its credit agreement ("Fourth
Amendment to Credit Agreement") with its two major banks which increased the
maximum available under the Revolving Facility from $20,000,000 to $23,000,000.
Mr. Stuart and MLGAL Partners, Limited Partnership, the Company's major
stockholders, are Guarantors under this agreement. The Guarantors are liable to
the extent the Company's aggregate principal amount of all outstanding Revolving
Loans and the aggregate undrawn face amount of all letters of credit exceed
$20,000,000.
F-20
<PAGE> 128
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 -- (CONTINUED)
10. TERMINATION OF CONSULTING AGREEMENT
In March 1993, Video King Gaming Systems, Inc., a wholly owned subsidiary
of the Company ("Video King"), entered into an agreement with Video Gaming
Systems of America, Inc. ("VGSA"), whereby VGSA would provide consulting
services to Video King relating to the development, improvement, marketing and
sales of products to be manufactured by Video King (the "Consulting Agreement").
Under the Consulting Agreement, Video King would pay VGSA $4,000 per month until
the cumulative pre-tax income of Video King earned subsequent to December 31,
1992 equals or exceeds ($200,000). At such time, Video King would begin to pay
VGSA a sum equal to 20% of the net pre-tax income on sales of Video King
products.
On July 29, 1994, the Company, Video King and VGSA amended the Consulting
Agreement to provide that the Consulting Agreement would terminate upon the
payment of $2,000,000 (the "Option Payment") by the Company to VGSA. On December
7, 1994, the parties signed an agreement to terminate the Consulting Agreement
upon the payment of the Option Payment 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 matures on January 6, 2000, bears interest at 1% over
the prime rate stated in The Wall Street Journal (adjusted quarterly) (9.5% at
December 31, 1995) and requires quarterly payments of $50,000 principal plus
accrued interest. The principal balance of the note at December 31, 1994 and
1995 was $1,000,000 and $800,000, respectively.
11. SALE-LEASEBACK OF LITTLETON FACILITY
On August 14, 1986, the Company entered into a sale-leaseback agreement for
its facility in Littleton, Colorado. Under the terms of the agreements, the
Company is obligated for minimum operating lease payments of approximately
$203,000 per year plus certain operating costs through August 1996. The excess
of the net sales proceeds over the net book value of the facility at the date of
sale was deferred and is being recognized over the period of the lease.
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. During 1993, 1994 and 1995, the
Company's contributions were $151,000, $165,000, and $157,000, 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 2.50% of their wages eligible under the Canadian
plan and the Company will match the contribution up to 2.50%. Eligible employees
may contribute an additional amount in excess of the 2.50%, but they are not
matched by the Company. For the period from December 14, 1994 to December 31,
1994, and for the year ending December 31, 1995, the Company's contributions
were $5,000 and $101,000, 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.
F-21
<PAGE> 129
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 -- (CONTINUED)
Future minimum lease payments under operating leases in effect at December
31, 1995 are approximately as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C>
1996........................................................ $1,958
1997........................................................ 972
1998........................................................ 811
1999........................................................ 483
2000........................................................ 483
-------
Total............................................. $4,707
=======
</TABLE>
Rental expense for the years ended December 31, 1993, 1994 and 1995 was
$736,000, $841,000, and $1,072,000, respectively.
Sales of Receivables:
The Company sells to a finance company certain installment receivables
primarily related to the sale of bingo equipment. The proceeds of such sales
totalled $88,000, $216,000, and $0 in 1993, 1994 and 1995, respectively. The
finance company has recourse to the Company in the event of default on the
installment contract by the purchaser of the equipment. The installment
receivables are collateralized by the equipment sold and are guaranteed by the
distributor who arranged the sale of the equipment. At December 31, 1995, the
Company's potential recourse obligation totalled $150,000.
Concentration of Accounts and Notes Receivable:
The Company's trade receivables and notes receivable are generally due from
companies engaged in the distribution of bingo supplies and related products. At
December 31, 1994 and 1995, the Company had aggregate trade receivables and
notes receivable from significant customers as follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE RANGE OF
CUSTOMERS RECEIVABLE INDIVIDUAL BALANCE
--------- ---------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
December 31, 1994:
United States.............................. 6 $4,049 $312 - $1,387
Canada..................................... 4 1,979 $413 - $ 639
December 31, 1995:
United States.............................. 6 $3,475 $314 - $ 827
Canada..................................... 6 3,064 $156 - $1,005
</TABLE>
Inventory Repurchase Agreements:
The Company has inventory repurchase agreements with several banks to
support certain distributors in their bank financing. The agreement provides
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 ($216,000)
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.
F-22
<PAGE> 130
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 -- (CONTINUED)
14. SUPPLEMENTAL CASH FLOW INFORMATION
Other Cash Payments and Receipts:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1993 1994 1995
---- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash payment for interest.................................. $908 $1,087 $3,551
Cash payment for income taxes.............................. 628 1,155 1,651
Income tax refunds received................................ -- 417 474
</TABLE>
Changes in Operating Working Capital Items:
Changes in operating working capital items, net of amounts obtained in the
acquisition of Bazaar and Reliable and from the consolidation of the Company's
joint ventures, is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Trade receivables..................................... $(2,059) $ (462) $(3,960)
Inventories........................................... (1,316) (2,660) (4,905)
Recoverable income taxes.............................. (628) (365) 225
Prepaid expenses...................................... (46) 49 (133)
Trade payables........................................ (404) (940) 1,268
Accrued liabilities................................... 310 908 (88)
Income Taxes Payable.................................. -- -- 543
------- ------- -------
Total Changes in Operating Capital Items.... $(4,143) $(3,470) $(7,050)
======= ======= =======
</TABLE>
Non-Cash Investing and Financing Transactions:
During the years ended December 31, 1993, 1994 and 1995, the Company
financed the acquisition of equipment totalling $956,000, $923,000, and
$2,092,000, respectively, through the assumption of obligations under capital
leases.
In connection with the 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.
In connection with the Reliable Acquisition, 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 stockholders 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.
During 1993, the Company i) purchased a 49% interest in a distributor for
$100,000 in cash and a promissory note payable of $222,000, ii) issued a
promissory note payable of $150,000 in exchange for assets, iii) sold its
investment in a distributor for a note receivable of $225,000, and iv) sold
certain accounts receivable, inventory and its investment in a subsidiary in
exchange for notes receivable of $389,000.
F-23
<PAGE> 131
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 -- (CONTINUED)
15. 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.
Geographic financial information for the years ended December 31, 1994 and
1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
NET SALES:
United States: Domestic Customers......................... $53,734 $ 64,112
Foreign Customers......................................... 3,611 1,398
Canada.................................................... 1,742 43,110
United Kingdom............................................ 71 1,262
------- --------
Total............................................. $59,158 $109,882
======= ========
INCOME (LOSS) BEFORE INCOME TAXES:
United States............................................. $(1,890) $ 2,952
Canada.................................................... (301) 1,773
United Kingdom............................................ (82) (2,162)
------- --------
Income (Loss) before Income Taxes................. $(2,273) $ 2,563
======= ========
IDENTIFIABLE ASSETS:
United States............................................. $39,299 $ 45,437
Canada.................................................... 44,667 48,912
United Kingdom............................................ 2,387 1,731
Mexico.................................................... 2,624 2,914
------- --------
Total............................................. $88,977 $ 98,994
======= ========
CAPITAL EXPENDITURES:
United States............................................. $ 748 $ 706
Canada.................................................... 70 611
United Kingdom............................................ -- --
------- --------
Total............................................. $ 818 $ 1,317
======= ========
DEPRECIATION AND AMORTIZATION:
United States............................................. $ 1,873 $ 2,980
Canada.................................................... 58 1,405
United Kingdom............................................ 4 232
------- --------
Total............................................. $ 1,935 $ 4,617
======= ========
</TABLE>
Information provided on Canada and United Kingdom in 1994 reflects
operations from December 14, 1994 to December 31, 1994. Geographic information
on Mexico is included within amounts for the United
F-24
<PAGE> 132
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 -- (CONTINUED)
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 and Stuart Entertainment Mexico is not licensed to sell to customers in
Mexico. Information for prior years is not included as it all pertained to the
United States alone.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1994, and 1995 (amounts in thousands, except per share
amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
1994:
Net sales............................... $15,428 $14,851 $13,660 $15,219 $ 59,158
Gross margin............................ 4,349 4,301 3,804 3,717 16,171
Income (losses) before income taxes..... 840 726 337 (4,176) (2,273)
Net income (loss)....................... 529 466 211 (2,814) (1,608)
Earnings (loss) per share:
Primary............................... 0.15 0.13 0.06 (0.70) (0.45)
Fully dilutive........................ 0.15 0.13 0.06 (0.70) (0.45)
1995:
Net sales............................... $27,464 $29,421 $27,031 $25,966 $109,882
Gross margin............................ 8,242 9,326 9,206 8,386 35,160
Income before income taxes.............. 709 20 1,164 670 2,563
Net income (loss)....................... 238 (521) 519 550 786
Earnings (loss) per share:
Primary............................... 0.04 (0.08) 0.08 0.08 0.12
Fully dilutive........................ 0.04 (0.08) 0.08 0.07 0.11
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1994:
During the three months ended December 31, 1994, the Company had several
transactions and adjustments that negatively impacted earnings for the quarter.
The pre-tax earnings were impacted by the i) termination of the Consulting
Agreement (see Note 10), ii) the $1,050,000 addition to the allowance for
doubtful accounts (described in Management's Discussion and Analysis), iii) the
operations of Bazaar, which reflected a pre-tax loss of $301,000 due to the
impact of purchase accounting (goodwill amortization and gross margin on sales
of products in finished goods inventory at the date of the Acquisition), iv)
approximately $329,000 of employment costs expensed related to new executives of
the Company, v) a valuation reserve established against electronic gaming
products in inventory at December 31, 1994 and vi) higher than expected losses
for the Company's operations in the United Kingdom.
F-25
<PAGE> 133
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO NET BALANCE
BEGINNING COSTS AND CHANGES FROM AT NET END OF
OF YEAR EXPENSES ACQUISITIONS CHARGE-OFFS YEAR
---------- ---------- ------------ ----------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1993:
Allowance for Doubtful Accounts............ $ 522 $ 397 $ -- $(311)* $ 608
====== ====== ==== ===== ======
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
------ ------ ---- ----- ------
Total............................ $ 608 $1,287 $632 $(307) $2,220
====== ====== ==== ===== ======
Valuation Reserve for Non-Current Deferred
Income Taxes............................. $ -- $ 161 $161 $ -- $ 322
====== ====== ==== ===== ======
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
------ ------ ---- ----- ------
Total............................ $2,220 $ 543 -- $(354) $2,409
====== ====== ==== ===== ======
Valuation Reserve for Non-Current Deferred
Income Taxes............................. $ 322 $ 436 -- -- $ 758
====== ====== ==== ===== ======
</TABLE>
- ---------------
* For the years ended December 31, 1993, 1994 and 1995, "Net Charge-Offs"
consists of write-offs of trade and notes receivable, net of subsequent
collections.
F-26
<PAGE> 134
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1995 1996
------- -------
<S> <C> <C>
NET SALES................................................... $83,916 $81,332
COST OF GOODS SOLD.......................................... 57,142 55,966
------- -------
GROSS MARGIN................................................ 26,774 25,366
OTHER EXPENSES:
Selling, general and administrative expenses.............. 20,086 17,647
Amortization of goodwill.................................. 630 676
Interest expense, net..................................... 3,365 3,286
United Kingdom charge..................................... 800 --
------- -------
Other expenses, net......................................... 24,881 21,609
------- -------
INCOME BEFORE INCOME TAXES.................................. 1,893 3,757
INCOME TAX PROVISION........................................ 1,657 1,334
------- -------
NET INCOME.................................................. $ 236 $ 2,423
======= =======
EARNINGS PER SHARE (Note 3)................................. $ 0.04 $ 0.35
======= =======
EBITDA (Note 3)............................................. $ 8,902 $10,203
======= =======
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING............................................... 6,682 6,890
======= =======
</TABLE>
Note: No dividends were paid or declared during the nine months ended September
30, 1995 and 1996. See accompanying Notes to Consolidated Financial Statements.
F-27
<PAGE> 135
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 943 $ 859
Trade and notes receivables, less allowance for doubtful
accounts of $2,285 and $1,826:
Related Parties......................................... 1,014 889
Other................................................... 18,355 20,456
Inventories (Note 4)...................................... 21,982 22,252
Refundable income taxes................................... -- 276
Deferred income taxes..................................... 1,746 1,702
Prepaid expenses and other................................ 547 784
-------- --------
Total Current Assets...................................... 44,587 47,218
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings........................................ 4,950 5,009
Equipment................................................. 29,262 29,797
-------- --------
34,212 34,806
Less accumulated depreciation............................. (13,095) (14,863)
-------- --------
Total Property, Plant and Equipment -- Net................ 21,117 19,943
OTHER ASSETS:
Goodwill, net of accumulated amortization of $1,209 and
$1,757.................................................. 29,194 28,592
Deferred financing costs, net of accumulated amortization
of $375 and $687........................................ 1,660 1,348
Notes receivable, less allowance for doubtful accounts of
$124.................................................... 1,261 759
Other assets.............................................. 1,175 1,468
-------- --------
Total Other Assets........................................ 33,290 32,167
-------- --------
TOTAL ASSETS................................................ $ 98,994 $ 99,328
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 5)................ $ 7,897 $ 8,795
Bazaar purchase price adjustment.......................... 710 454
Trade payables............................................ 12,512 12,790
Accrued payroll and other liabilities..................... 2,867 2,832
Income taxes payable...................................... 543 328
Deferred income taxes..................................... 40 --
-------- --------
Total Current Liabilities................................. 24,569 25,199
LONG-TERM DEBT (Note 5)
Related party............................................. 5,000 5,000
Other..................................................... 34,586 31,175
-------- --------
Total Long-Term Debt, net of current portion.............. 39,586 36,175
DEFERRED INCOME TAXES....................................... 2,594 2,642
COMMITMENTS AND CONTINGENCIES
DEFERRED INCOME............................................. 205 279
STOCKHOLDERS' EQUITY:
Common stock -- $0.01 par value; 20,000,000 and 30,000,000
shares authorized; 6,753,309 and 6,884,374 shares
outstanding............................................. 68 69
Additional paid-in capital................................ 26,384 26,909
Retained earnings......................................... 5,525 7,949
Treasury stock (56,260 shares at cost).................... (189) (189)
Cumulative translation adjustment, net of deferred
taxes................................................... 252 295
-------- --------
Total Stockholders' Equity................................ 32,040 35,033
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 98,994 $ 99,328
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-28
<PAGE> 136
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1995 1996
------- -------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income................................................ $ 236 $ 2,423
Adjustments to reconcile net income to net cash flows from
operating activities:
Payment on termination of consulting agreement......... (1,150) --
Depreciation and amortization.......................... 3,155 3,160
Amortization of debt financing fees.................... 273 312
Provision for doubtful accounts........................ 432 (198)
Deferred income taxes.................................. (550) 93
Other noncash expenses -- net.......................... 959 (28)
Change in operating assets and liabilities, net:
Trade receivables.................................... (3,372) (2,712)
Inventories.......................................... (4,379) (856)
Trade payables....................................... 1,523 278
Other -- net......................................... 2,918 (763)
------- -------
Net cash flows from operating activities............... 45 1,709
Cash Flows From Investing Activities:
Capital expenditures, net................................. (2,815) (950)
Payments received on notes receivable..................... 711 1,179
Investment in joint ventures.............................. (128) --
Acquisition of LSA........................................ (324) --
Investment in distributor................................. (116) --
Acquisition of Reliable................................... (295) --
------- -------
Net cash flows from investing activities.................. (2,967) 229
Cash Flows From Financing Activities:
Net borrowings under Revolving Facility................... 6,169 2,049
Payments on Term Facility................................. (2,261) (2,278)
Payments on other long-term debt.......................... (2,189) (2,316)
Payments on LSA Purchase Price Adjustment................. (929) --
Proceeds from issuance of long-term debt.................. 1,140 --
Cost of debt financing.................................... (200) --
Proceeds from issuance of stock and exercise of stock
options................................................ 238 521
Costs on issuance of stock................................ (17) --
------- -------
Net cash flows from financing activities............... 1,951 (2,024)
Effect of currency exchange rate changes on cash of
foreign subsidiaries................................... 33 2
------- -------
Net Change in Cash and Cash Equivalents..................... (938) (84)
Cash and Cash Equivalents at Beginning of Period............ 2,116 943
------- -------
Cash and Cash Equivalents at End of Period.................. $ 1,178 $ 859
======= =======
Interest paid............................................. $ 3,486 $ 3,107
Income taxes paid......................................... $ 1,377 $ 1,805
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-29
<PAGE> 137
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of Stuart
Entertainment, Inc. and subsidiaries (collectively, the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for annual financial
statements.
In the opinion of the Company's management, the foregoing unaudited
consolidated financial statements reflect all adjustments considered necessary
for a fair presentation of the results of the Company for the periods shown.
Operating results for the three and nine months ended September 30, 1995 and
1996 are not necessarily indicative of the results that may be expected for the
full year ending December 31, 1996. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the year ended December 31, 1995, filed with the Securities and Exchange
Commission on the Company's Annual Report on Form 10-K.
Certain reclassifications have been made to the 1995 financial statements
to conform to those classifications used in 1996. The consolidated financial
statements of the Company include estimates and assumptions related to certain
assets, liabilities, revenues and expenses and the disclosure of certain
contingent assets and liabilities. Actual future results may differ from such
estimates.
2. PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the Company, its wholly-owned
subsidiaries and its indirectly wholly-owned subsidiaries (from the date they
became indirectly wholly-owned). All significant intercompany transactions and
balances have been eliminated in consolidation.
3. EARNINGS PER SHARE AND EBITDA:
The number of shares used in earnings per share calculations for the three
month and nine month periods ended September 30, 1995 and 1996 are based on the
weighted average number of shares of common stock outstanding and, if dilutive,
common stock equivalents (stock options and warrants) of the Company using the
treasury stock method.
EBITDA is defined as earnings before interest, taxes, depreciation,
amortization and purchase accounting adjustments. EBITDA is presented because it
is a measure of an issuer's ability to service its indebtedness commonly used by
investors. However, EBITDA should not be considered as an alterative to net
income as a measure of operating results or to cash flows or as a substitute for
measurers of performance in accordance with generally accepted accounting
principles.
4. INVENTORIES:
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(AMOUNTS IN THE THOUSANDS)
<S> <C> <C>
Raw Materials............................................ $ 3,517 $ 3,612
Work-In-Process.......................................... 5,056 5,123
Finished Goods........................................... 13,409 13,517
------- -------
Total.................................................... $21,982 $22,252
======= =======
</TABLE>
F-30
<PAGE> 138
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
STUART ENTERTAINMENT, INC. AND TRADE PRODUCTS, INC.
5. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(AMOUNTS IN THE THOUSANDS)
<S> <C> <C>
Borrowings under Credit Agreement:
Revolving Facility..................................... $20,921 $22,987
Term Facility.......................................... 12,135 9,872
Subordinated note payable to Mr. Stuart.................. 5,000 5,000
Notes payable to others.................................. 4,758 3,754
Obligations under capital leases......................... 4,669 3,357
------- -------
47,483 44,970
Less current portion..................................... 7,897 8,795
------- -------
Total long-term debt..................................... $39,586 $36,175
======= =======
</TABLE>
Borrowings Under Credit Agreement:
The Company's bank credit facility is for an aggregate principal amount of up to
$38,000,000, with a senior secured revolving line of credit of $23,000,000 (the
Revolving Facility) and a senior secured term loan facility of $15,000,000 (the
Term Facility). The Revolving Facility and Term Facility are separated into U.S.
and Canadian facilities. The maximum available under the Revolving Facility was
increased by $3,000,000 during 1995 to a total of $23,000,000 at December 31,
1995. Any amount outstanding under this $3,000,000 additional amount shall be
paid in full at December 31, 1996. The Credit Agreement expires and all other
remaining amounts outstanding are due on December 12, 1999.
At December 31, 1995 and September 30, 1996, loans outstanding on the U.S.
Revolving Facility totaled $11,540,000 and $11,900,000, respectively, and loans
outstanding on the Canadian Revolving Facility totaled C$12,800,000 ($9,381,000)
and C$15,100,000 ($11,087,000), respectively. Weighted average interest rates on
the U.S. Revolving Facility and Canadian Revolving Facility at September 30,
1996 were 8.20% and 7.29%, respectively. At December 31, 1995 and September 30,
1996, loans outstanding on the U.S. Term Facility totaled $4,000,000 and
$3,250,000, respectively, and loans outstanding on the Canadian Term Facility
totaled C$11,100,000 ($8,135,000) and C$9,019,000 ($6,622,000) respectively.
Weighted average interest rates on the U.S. Term Facility and the Canadian Term
Facility at September 30, 1996 were 8.20% and 7.27%, respectively.
Obligations Under Capital Leases
The Company completed a lease line of credit with its primary bank. The
facility provides lease financing on capitalized equipment purchased through
December 31, 1996. The maximum available under this facility is $5,000,000. At
September 30, 1996, $3,813,000 remained available under this facility.
6. UNITED KINGDOM CHARGE
In 1995, the Company signed a licensing and marketing agreement with
Playprint Limited, a company headquartered in Dublin, Ireland. This agreement
gave the Company the opportunity to redeploy its assets and 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
markers. The Company recorded a one-time pre-tax charge of $800,000
F-31
<PAGE> 139
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
STUART ENTERTAINMENT, INC. AND TRADE PRODUCTS, INC.
in the second quarter of 1995 related to the estimated costs to shutdown the
manufacturing facility in the United Kingdom and consolidate its activities with
Playprint Limited.
7. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based
Compensation, which is effective for the Company beginning January 1, 1996. SFAS
123 requires expanded disclosure of stock-based compensation arrangements with
employees and encourages (but does not require) compensation cost to be measured
based on the fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply Accounting Principles Board Opinion No.
25 (APB 25), which recognizes compensation cost based on the intrinsic value of
the equity instrument awarded. The Company will continue to apply APB 25 to its
stock-based compensation awards to employees and will disclose the required pro
forma effect on net income and earnings per share in Form 10-K for its current
year.
8. PURCHASE AGREEMENT
On August 6, 1996, the Company signed a definitive agreement, as amended on
October 10, 1996, to purchase the assets and assume certain liabilities of Trade
Products, Inc.
9. SUBSEQUENT EVENTS
On November 13, 1996, the Company completed the acquisition of Trade
Products, Inc. (See Note 8) 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 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 acquisition of Trade Products,
Inc., 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 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 by 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. 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 a first priority security interest in all of the Company's assets
(including the acquired assets of Trade Products, Inc.), but excluding real
estate and certain other specific assets of the Company.
F-32
<PAGE> 140
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
F-33
<PAGE> 141
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.
F-34
<PAGE> 142
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.
F-35
<PAGE> 143
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.
F-36
<PAGE> 144
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.
F-37
<PAGE> 145
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.
F-38
<PAGE> 146
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.
F-39
<PAGE> 147
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,
F-40
<PAGE> 148
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
F-41
<PAGE> 149
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.
F-42
<PAGE> 150
TRADE PRODUCTS, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
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.
F-43
<PAGE> 151
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.
F-44
<PAGE> 152
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.
F-45
<PAGE> 153
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
------------ -------------
(UNAUDITED)
<S> <C> <C>
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.
F-46
<PAGE> 154
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
------------ -------------
(UNAUDITED)
<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.................... $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.
F-47
<PAGE> 155
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY STUART ENTERTAINMENT, INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANY SECURITY OTHER THAN
THOSE TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE
SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF STUART
ENTERTAINMENT, INC. SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 1
Prospectus Summary.................... 2
Risk Factors.......................... 13
The Exchange Offer.................... 19
Capitalization........................ 27
Unaudited Pro Forma Financial Data.... 28
Selected Historical Consolidated
Financial Data -- Stuart
Entertainment, Inc.................. 35
Selected Historical Consolidated
Financial Data -- Trade Products,
Inc................................. 37
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 39
Industry.............................. 46
Business.............................. 48
Management............................ 60
Certain Transactions.................. 66
Security Ownership of Certain
Beneficial Owners and Management.... 68
Description of New Credit Agreement... 69
Description of Exchange Notes......... 71
Description of Notes.................. 95
Exchange Offer and Registration
Rights.............................. 95
Certain Income Tax Considerations..... 98
Book-Entry; Delivery and Form......... 99
Plan of Distribution.................. 101
Legal Matters......................... 101
Experts............................... 102
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
--------------------
PROSPECTUS
--------------------
[STUART LOGO]
STUART
ENTERTAINMENT,
INC.
OFFER TO EXCHANGE
$100,000,000
12 1/2% SENIOR SUBORDINATED NOTES DUE 2004
FOR
SERIES B 12 1/2% SENIOR SUBORDINATED NOTES
DUE 2004
, 1997
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 156
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides generally and
in pertinent part that a Delaware corporation may indemnify its directors and
officers against expenses, judgements, fines and settlements actually and
reasonably incurred by them in connection with any civil suit or action, except
actions by or in the right of the corporation, or any administrative or
investigative proceeding if, in connection with the matters in issue, they acted
in good faith and in a manner they reasonably believed to be in, or not opposed
to, the best interests of the corporation, and in connection with any criminal
suit or proceeding, if in connection with the matters in issue, they had no
reasonable cause to believe their conduct was unlawful. Section 145 further
provides that in connection with the defense or settlement of any action by or
in the right of the corporation, a Delaware corporation may indemnify its
directors and officers against expenses actually and reasonably believed to be
in, or not opposed to, the best interests of the corporation. Section 145
permits a Delaware corporation to grant its directors and officers additional
rights of indemnification through bylaw provisions and otherwise and to purchase
indemnity insurance on behalf of its directors and officers.
Article Eight of the Certificate of Incorporation of the registrant
requires the registrant to indemnify, to the fullest extent permitted by Section
145 of the Delaware General Corporation Law, all directors and officers of the
registrant, which it has the power to indemnify, from and against any and all
expenses, liabilities or other matters referred to in Section 145.
The registrant's Certificate of Incorporation also provides in Article
Seven that directors shall not be personally liable to the registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (a) for any breach of a director's duty of loyalty to the
registrant or its stockholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or knowing violations of law, (c) under
Section 174 of the Delaware General Corporation Law or (d) for any transaction
from which the director derived an improper personal benefit.
Article III, Section 16 of the registrant's by-laws provides, in general,
that the registrant shall indemnify its directors and officers to the fullest
extent permitted by the Delaware General Corporation Law.
The registrant maintains liability insurance coverage for its directors and
officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits. The following is a complete list of exhibits filed as part of
the Registration Statement. Exhibit numbers correspond to the numbers in the
Exhibit Table of Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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.**
3.02 -- Amended and Restated Bylaws of the Company(3)
4.01 -- Form of Common Stock Certificate.(4)
4.02 -- Security holders' 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)
</TABLE>
II-1
<PAGE> 157
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
4.04 -- Indenture between the Company and Marine Midland Bank, as
Trustee, dated as of November 13, 1996.*
5 -- Opinion of Kutak Rock regarding Validity of Notes.***
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.**
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.(2)
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.***
10.18 -- Agreement dated April 4, 1996 by and between Power Bingo
Corporation and the Company.***
10.19 -- Management Consulting Agreement dated February 1, 1996 by
and between the Company and Len Stuart & Associates,
Ltd.***
11 -- Statement Regarding Computation of Per Share
Earnings.(11)
12 -- Statement Regarding Computation of Ratio of Earnings to
Fixed Charges.*
21 -- Subsidiaries of the Registrant.(11)
23.01 -- Consent of Deloitte & Touche LLP.*
</TABLE>
II-2
<PAGE> 158
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
23.02 -- Consent of Coopers & Lybrand L.L.P.*
23.03 -- Consent of Kutak Rock (included in Exhibit 5).***
24 -- Power of Attorney (included on page II-6 of the
Registration Statement).
25 -- Statement of Eligibility of Trustee on Form T-1.**
99.01 -- Form of Letter of Transmittal.**
99.02 -- Form of Notice of Guaranteed Delivery.**
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
*** To be filed by amendment.
(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.
(b) Financial Statement Schedules. The following financial statement
schedule information is furnished as part of this Registration Statement.
Financial Statement Schedules of Stuart Entertainment, Inc. and Subsidiaries
<TABLE>
<CAPTION>
SCHEDULES DESCRIPTION
--------- -----------
<S> <C>
II Valuation and Qualifying Accounts for Years
Ended December 31, 1993, 1994 and 1995
</TABLE>
II-3
<PAGE> 159
ITEM 22. UNDERTAKINGS.
A. The company hereby undertakes the following:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(b) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(c) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
B. (1) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The undersigned Registrant undertakes that every prospectus (i)
that is filed pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Securities Act
of 1933 and is used in connection with an offering of securities subject to
Rule 415, will be filed as part until such amendment is effective, and
that, for purposes of determining any liability under the Securities Act of
1933, each such post effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
C. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise,the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expense incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, office or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
D. The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this registration statement through
the date of responding to the request.
E. The undersigned Registrant hereby undertakes to supply the means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE> 160
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Pre-Effective Amendment No. 1 to the Form S-4 Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Council Bluffs, State of Iowa, on February 6, 1997.
STUART ENTERTAINMENT, INC.
By /s/ Timothy R. Stuart
-----------------------------------
Timothy R. Stuart, President
Dated: February 6, 1997
II-5
<PAGE> 161
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to the Form S-4 Registration Statement has been
signed by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
** Chairman of the Board February 6, 1997
- -----------------------------------------------------
Leonard A. Stuart
** Vice Chairman of the Board and February 6, 1997
- ----------------------------------------------------- Chief Executive Officer
Albert F. Barber
/s/ TIMOTHY R. STUART President, Chief Operating Officer February 6, 1997
- ----------------------------------------------------- and Director
Timothy R. Stuart
** Director February 6, 1997
- -----------------------------------------------------
Perry J. Lewis
** Director February 6, 1997
- -----------------------------------------------------
Ira Starr
** Director February 6, 1997
- -----------------------------------------------------
Sangwoo Ahn
** Director February 6, 1997
- -----------------------------------------------------
Stanley M. Taube
** Director February 6, 1997
- -----------------------------------------------------
Richard D. Spizzirri
** Vice President -- Finance, February 6, 1997
- ----------------------------------------------------- Treasurer and Chief Financial
Paul C. Tunink Officer
** Director and Executive Vice February 6, 1997
- ----------------------------------------------------- President
Ronald G. Rudy
** Director February 6, 1997
- -----------------------------------------------------
Harry Poll
**By: /s/ TIMOTHY R. STUART
------------------------------------------------
Timothy R. Stuart, as attorney-in-fact
</TABLE>
II-6
<PAGE> 162
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
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.**
3.02 -- Amended and Restated Bylaws of the Company(3)
4.01 -- Form of Common Stock Certificate.(4)
4.02 -- Security holders' 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)
4.04 -- Indenture between the Company and Marine Midland Bank, as
Trustee, dated as of November 13, 1996.*
5 -- Opinion of Kutak Rock regarding Validity of Notes.***
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.**
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)
</TABLE>
<PAGE> 163
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
10.16 -- Employment Agreement, dated November 13, 1996, by and
between the Company and Ronald G. Rudy.(2)
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.***
10.18 -- Agreement dated April 4, 1996 by and between Power Bingo
Corporation and the Company.***
10.19 -- Management Consulting Agreement dated February 1, 1996 by
and between the Company and Len Stuart & Associates,
Ltd.***
11 -- Statement Regarding Computation of Per Share
Earnings.(11)
12 -- Statement Regarding Computation of Ratio of Earnings to
Fixed Charges.*
21 -- Subsidiaries of the Registrant.(11)
23.01 -- Consent of Deloitte & Touche LLP.*
23.02 -- Consent of Coopers & Lybrand L.L.P.*
23.03 -- Consent of Kutak Rock (included in Exhibit 5).***
24 -- Power of Attorney (included on page II-6 of the
Registration Statement).
25 -- Statement of Eligibility of Trustee on Form T-1.**
99.01 -- Form of Letter of Transmittal.**
99.02 -- Form of Notice of Guaranteed Delivery.**
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
*** To be filed by amendment.
(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.
<PAGE> 1
STUART ENTERTAINMENT, INC.,
AS ISSUER
and
MARINE MIDLAND BANK,
AS TRUSTEE
------------------------------
INDENTURE
Dated as of November 13, 1996
------------------------------
$100,000,000
12-1/2% SENIOR SUBORDINATED NOTES DUE 2004
AND
SERIES B 12-1/2% SENIOR SUBORDINATED NOTES DUE 2004
<PAGE> 2
CROSS-REFERENCE TABLE
<TABLE>
<CAPTION>
TIA SECTION INDENTURE SECTION
----------- -----------------
<S> <C>
310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . 7.10
(a)(2) . . . . . . . . . . . . . . . . . . . . . . 7.10
(a)(3) . . . . . . . . . . . . . . . . . . . . . . N.A.
(a)(4) . . . . . . . . . . . . . . . . . . . . . . N.A.
(a)(5) . . . . . . . . . . . . . . . . . . . . . . 7.08; 7.10
(b) . . . . . . . . . . . . . . . . . . . . . . . 7.08; 7.10; 11.02
(c) . . . . . . . . . . . . . . . . . . . . . . . N.A.
311(a) . . . . . . . . . . . . . . . . . . . . . . . . 7.11
(b) . . . . . . . . . . . . . . . . . . . . . . . 7.11
(c) . . . . . . . . . . . . . . . . . . . . . . . N.A.
312(a) . . . . . . . . . . . . . . . . . . . . . . . . 2.05
(b) . . . . . . . . . . . . . . . . . . . . . . . 11.03
(c) . . . . . . . . . . . . . . . . . . . . . . . 11.03
313(a) . . . . . . . . . . . . . . . . . . . . . . . . 7.06
(b)(1) . . . . . . . . . . . . . . . . . . . . . . N.A.
(b)(2) . . . . . . . . . . . . . . . . . . . . . . 7.06
(c) . . . . . . . . . . . . . . . . . . . . . . . 7.06; 11.02
(d) . . . . . . . . . . . . . . . . . . . . . . . 7.06
314(a) . . . . . . . . . . . . . . . . . . . . . . . . 4.07; 4.08; 11.02
(b) . . . . . . . . . . . . . . . . . . . . . . . N.A.
(c)(1) . . . . . . . . . . . . . . . . . . . . . . 11.04
(c)(2) . . . . . . . . . . . . . . . . . . . . . . 11.04
(c)(3) . . . . . . . . . . . . . . . . . . . . . . N.A.
(d) . . . . . . . . . . . . . . . . . . . . . . . N.A.
(e) . . . . . . . . . . . . . . . . . . . . . . . 11.05
(f) . . . . . . . . . . . . . . . . . . . . . . . N.A.
315(a) . . . . . . . . . . . . . . . . . . . . . . . . 7.01(b)
(b) . . . . . . . . . . . . . . . . . . . . . . . 7.05; 11.02
(c) . . . . . . . . . . . . . . . . . . . . . . . 7.01(a)
(d) . . . . . . . . . . . . . . . . . . . . . . . 7.01(c)
(e) . . . . . . . . . . . . . . . . . . . . . . . 6.11
316(a) (last sentence) . . . . . . . . . . . . . . . . 2.09
(a)(1)(A) . . . . . . . . . . . . . . . . . . . . 6.05
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . 6.04
(a)(2) . . . . . . . . . . . . . . . . . . . . . . N.A.
(b) . . . . . . . . . . . . . . . . . . . . . . . 6.07
(c) . . . . . . . . . . . . . . . . . . . . . . . 9.05
317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . 6.08
(a)(2) . . . . . . . . . . . . . . . . . . . . . . 6.09
(b) . . . . . . . . . . . . . . . . . . . . . . . 2.04
318(a) . . . . . . . . . . . . . . . . . . . . . . . . 11.01
(c) . . . . . . . . . . . . . . . . . . . . . . . 11.01
</TABLE>
- --------------------
N.A. means Not Applicable
Note: This Cross-Reference Table shall not, for any purpose,
be deemed to be a part of the Indenture.
i
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.01. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.02. Incorporation by Reference of TIA. . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 1.03. Rules of Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE TWO THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 2.01. Form and Dating. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 2.02. Execution and Authentication; Aggregate Principal Amount. . . . . . . . . . . . 21
SECTION 2.03. Registrar and Paying Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 2.04. Paying Agent To Hold Assets in Trust. . . . . . . . . . . . . . . . . . . . . . 22
SECTION 2.05. Noteholder Lists. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 2.06. Transfer and Exchange. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 2.07. Replacement Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 2.08. Outstanding Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 2.09. Treasury Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 2.10. Temporary Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 2.11. Cancellation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 2.12. Defaulted Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 2.13. CUSIP Number. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 2.14. Deposit of Moneys. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 2.15. Restrictive Legends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 2.16. Book-Entry Provisions for Global Security. . . . . . . . . . . . . . . . . . . 27
SECTION 2.17. Special Transfer Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE THREE REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 3.01. Notices to Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 3.02. Selection of Notes To Be Redeemed. . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 3.03. Notice of Redemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 3.04. Effect of Notice of Redemption. . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 3.05. Deposit of Redemption Price. . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 3.06. Notes Redeemed in Part. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 3.07. Mandatory Disposition or Redemption Pursuant to Gaming Laws. . . . . . . . . . 33
ARTICLE FOUR COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 4.01. Payment of Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 4.02. Maintenance of Office or Agency. . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 4.03. Corporate Existence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 4.04. Payment of Taxes and Other Claims. . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 4.05. Maintenance of Properties and Insurance. . . . . . . . . . . . . . . . . . . . 34
SECTION 4.06. Compliance Certificate; Notice of Default. . . . . . . . . . . . . . . . . . . 35
SECTION 4.07. Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 4.08. SEC Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
SECTION 4.09. Waiver of Stay, Extension or Usury Laws. . . . . . . . . . . . . . . . . . . . 36
SECTION 4.10. Limitation on Restricted Payments. . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 4.11. Limitation on Transactions with Affiliates. . . . . . . . . . . . . . . . . . . 38
SECTION 4.12. Limitation on Incurrence of Additional Indebtedness. . . . . . . . . . . . . . 39
SECTION 4.13. Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries. . 39
SECTION 4.14. Change of Control. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 4.15. Limitation on Asset Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 4.16. Limitation on Preferred Stock of Subsidiaries. . . . . . . . . . . . . . . . . 44
SECTION 4.17. Limitation on Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 4.18. Limitation of Guarantees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 4.19. Limitation on Designations of Unrestricted Subsidiaries. . . . . . . . . . . . 45
ARTICLE FIVE SUCCESSOR CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 5.01. Merger, Consolidation and Sale of Assets. . . . . . . . . . . . . . . . . . . . 46
SECTION 5.02. Successor Corporation Substituted. . . . . . . . . . . . . . . . . . . . . . . 47
ARTICLE SIX DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 6.01. Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 6.02. Acceleration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 6.03. Other Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 6.04. Waiver of Past Defaults. . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 6.05. Control by Majority. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 6.06. Limitation on Suits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 6.07. Rights of Holders To Receive Payment. . . . . . . . . . . . . . . . . . . . . . 51
SECTION 6.08. Collection Suit by Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 6.09. Trustee May File Proofs of Claim. . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 6.10. Priorities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 6.11. Undertaking for Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
ARTICLE SEVEN TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 7.01. Duties of Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 7.02. Rights of Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 7.03. Individual Rights of Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 7.04. Trustee's Disclaimer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 7.05. Notice of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 7.06. Reports by Trustee to Holders. . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 7.07. Compensation and Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 7.08. Replacement of Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 7.09. Successor Trustee by Merger, Etc. . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 7.10. Eligibility; Disqualification. . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 7.11. Preferential Collection of Claims Against Company. . . . . . . . . . . . . . . 57
ARTICLE EIGHT DISCHARGE OF INDENTURE; DEFEASANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 8.01. Termination of the Company's Obligations. . . . . . . . . . . . . . . . . . . . 58
SECTION 8.02. Legal Defeasance and Covenant Defeasance. . . . . . . . . . . . . . . . . . . . 59
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C> <C>
SECTION 8.03. Conditions to Legal Defeasance or Covenant Defeasance. . . . . . . . . . . . . 60
SECTION 8.04. Application of Trust Money. . . . . . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 8.05. Repayment to the Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 8.06. Reinstatement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
ARTICLE NINE AMENDMENTS, SUPPLEMENTS AND WAIVERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 9.01. Without Consent of Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 9.02. With Consent of Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 9.03. Effect on Senior Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 9.04. Compliance with TIA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 9.05. Revocation and Effect of Consents. . . . . . . . . . . . . . . . . . . . . . . 65
SECTION 9.06. Notation on or Exchange of Notes. . . . . . . . . . . . . . . . . . . . . . . . 65
SECTION 9.07. Trustee To Sign Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . 65
ARTICLE TEN SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
SECTION 10.01. Notes Subordinated to Senior Indebtedness. . . . . . . . . . . . . . . . . . . 66
SECTION 10.02. No Payment on Notes in Certain Circumstances. . . . . . . . . . . . . . . . . . 66
SECTION 10.03. Payment Over of Proceeds upon Dissolution, Etc. . . . . . . . . . . . . . . . . 67
SECTION 10.04. Payments May Be Paid Prior to Dissolution. . . . . . . . . . . . . . . . . . . 68
SECTION 10.05. Subrogation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 10.06. Obligations of the Company Unconditional. . . . . . . . . . . . . . . . . . . . 69
SECTION 10.07. Notice to Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 10.08. Reliance on Judicial Order or Certificate of Liquidating Agent. . . . . . . . . 70
SECTION 10.09. Trustee's Relation to Senior Indebtedness. . . . . . . . . . . . . . . . . . . 70
SECTION 10.10. Subordination Rights Not Impaired by Acts or Omissions of
the Company or Holders of Senior Indebtedness . . . . . . . . . . . . . . . . . 70
SECTION 10.11. Noteholders Authorize Trustee To Effectuate Subordination of Notes. . . . . . 71
SECTION 10.12. This Article Ten Not To Prevent Events of Default. . . . . . . . . . . . . . . 71
SECTION 10.13. Trustee's Compensation Not Prejudiced. . . . . . . . . . . . . . . . . . . . . 72
ARTICLE ELEVEN MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 11.01. TIA Controls. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 11.02. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 11.03. Communications by Holders with Other Holders. . . . . . . . . . . . . . . . . . 73
SECTION 11.04. Certificate and Opinion as to Conditions Precedent. . . . . . . . . . . . . . . 73
SECTION 11.05. Statements Required in Certificate or Opinion. . . . . . . . . . . . . . . . . 73
SECTION 11.06. Rules by Trustee, Paying Agent, Registrar. . . . . . . . . . . . . . . . . . . 74
SECTION 11.07. Legal Holidays. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 11.08. Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 11.09. No Adverse Interpretation of Other Agreements. . . . . . . . . . . . . . . . . 74
SECTION 11.10. No Recourse Against Others. . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 11.11. Successors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 11.12. Duplicate Originals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 11.13. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
</TABLE>
iv
<PAGE> 6
<TABLE>
<S> <C> <C>
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Exhibit A - Form of Initial Note with Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Exhibit B - Form of Exchange Note with Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
Exhibit C - Form of Certificate To Be Delivered in Connection with Transfers to Non-QIB Accredited Investors. . . C-1
Exhibit D - Form of Certificate To Be Delivered in Connection with Transfers Pursuant to Regulation S . . . . . . D-1
</TABLE>
Note: This Table of Contents shall not, for any purpose, be deemed to be a
part of the Indenture.
v
<PAGE> 7
INDENTURE, dated as of November 13, 1996, by and between Stuart
Entertainment, Inc., a Delaware corporation (the "Company"), and Marine Midland
Bank, a New York banking corporation and trust company, as Trustee (the
"Trustee").
The Company has duly authorized the creation of an issue of 12-1/2%
Senior Subordinated Notes due 2004 (the "Initial Notes") and Series B 12-1/2%
Senior Subordinated Notes due 2004 (the "Exchange Notes," and together with the
Initial Notes, the "Notes") and, to provide therefor, the Company has duly
authorized the execution and delivery of this Indenture. All things necessary
to make the Notes, when duly issued and executed by the Company, and
authenticated and delivered hereunder, the valid obligations of the Company,
and to make this Indenture a valid and binding agreement of the Company, have
been done.
Each party hereto agrees as follows for the benefit of the other party
and for the equal and ratable benefit of the Holders of the Notes.
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions.
"Acceleration Notice" has the meaning provided in Section 6.02(a).
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary
or at the time it merges or consolidates with the Company or any of the
Restricted Subsidiaries or assumed in connection with the acquisition of assets
from such Person and in each case not incurred by such Person in connection
with, or in anticipation or contemplation of, such Person becoming a Restricted
Subsidiary or such acquisition, merger or consolidation.
"Affiliate" means with respect to any specified Person, any other
Person who, directly or indirectly, through one or more intermediaries
controls, or is controlled by, or is under common control with such specified
Person. The term "control" means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative of the foregoing.
"Affiliate Transaction" has the meaning provided in Section 4.11.
"Agent" means any Registrar, Paying Agent or co-Registrar.
"Agent Members" has the meaning provided in Section 2.16.
"all or substantially all" shall have the meaning given such phrase in
the Revised Model Business Corporation Act of 1984, as amended.
<PAGE> 8
"Asset Acquisition" means (a) an Investment by the Company or any
Restricted Subsidiary in any other Person pursuant to which such Person shall
become a Restricted Subsidiary, or shall be merged with or into the Company or
any Restricted Subsidiary, or (b) the acquisition by the Company or any
Restricted Subsidiary of the assets of any Person (other than a Restricted
Subsidiary) which constitute all or substantially all of the assets of such
Person or comprises any division or line of business of such Person or any
other properties or assets of such Person other than in the ordinary course of
business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary
course of business), assignment or other transfer for value by the Company or
any of the Restricted Subsidiaries (including any Sale and Leaseback
Transaction) to any Person other than the Company or a Wholly Owned Restricted
Subsidiary of the Company of (a) any Capital Stock of any Restricted
Subsidiary; or (b) any other property or assets of the Company or any
Restricted Subsidiary other than in the ordinary course of business; provided,
however, that Asset Sales shall not include (i) a transaction or series of
related transactions for which the Company or any Restricted Subsidiary
receives aggregate consideration of less than $1.0 million, (ii) the sale,
lease, conveyance, disposition or other transfer of all or substantially all of
the assets of the Company as permitted under Section 5.01, (iii) disposals or
replacements of obsolete equipment in the ordinary course of business, or (iv)
the sale, lease, conveyance, disposition or other transfer by the Company or
any Restricted Subsidiary of assets or property to the Company or one or more
Restricted Subsidiaries.
"Authenticating Agent" has the meaning provided in Section 2.02.
"Bankruptcy Law" means Title 11, U.S. Code or any similar Federal,
state or foreign law for the relief of debtors.
"Bazaar" means Bingo Press & Specialty Limited, doing business as
Bazaar & Novelty or its successors.
"Board of Directors" means, as to any Person, the board of directors
of such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Business Day" means a day that is not a Legal Holiday.
"Capitalized Lease Obligation" means, as to any Person, the
obligations of such Person under a lease that are required to be classified and
accounted for as capital lease obligations under GAAP and, for purposes of this
definition, the amount of such obligations at any date shall be the capitalized
amount of such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means (i) with respect to any Person that is a
corporation, any and all shares, interests, participations or other equivalents
(however designated and whether or not
2
<PAGE> 9
voting) of corporate stock, including each class of common stock and preferred
stock of such Person and (ii) with respect to any Person that is not a
corporation, any and all partnership or other equity interests of such Person.
"Cash Equivalents" means (i) marketable direct obligations issued by,
or unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either S&P or Moody's; (iii) commercial paper maturing no more
than 270 days from the date of creation thereof and, at the time of
acquisition, having a rating of at least A-1 from S&P or at least P-1 from
Moody's; (iv) certificates of deposit or bankers' acceptances maturing within
one year from the date of acquisition thereof issued by any bank organized
under the laws of the United States of America or any state thereof or the
District of Columbia or any U.S. branch of a foreign bank having at the date of
acquisition thereof combined capital and surplus of not less than $250.0
million; (v) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (i) above entered into
with any bank meeting the qualifications specified in clause (iv) above; and
(vi) investments in money market funds which invest substantially all their
assets in securities of the types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of one or more of the
following events: (i) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or substantially all of
the assets of the Company, to any Person or group of related Persons for
purposes of Section 13(d) of the Exchange Act (a "Group"), together with any
Affiliates thereof (whether or not otherwise in compliance with the provisions
of this Indenture); (ii) the approval by the holders of Capital Stock of the
Company of any plan or proposal for the liquidation or dissolution of the
Company (whether or not otherwise in compliance with the provisions of this
Indenture); (iii) any Person or Group (other than affiliates of MLGA) shall
become the owner, directly or indirectly, beneficially or of record, of shares
representing more than 50% of the aggregate ordinary voting power represented
by the issued and outstanding Capital Stock of the Company; or (iv) the
replacement of a majority of the Board of Directors of the Company over a two-
year period from the directors who constituted such Board of Directors at the
beginning of such period, and such replacement shall not have been approved by
a vote of at least a majority of such Board of Directors then still in office
who either were members of such Board of Directors at the beginning of such
period or whose election as a member of such Board of Directors was previously
so approved.
"Change of Control Date" has the meaning provided in Section 4.14.
"Change of Control Offer" has the meaning provided in Section 4.14.
"Change of Control Payment Date" has the meaning provided in Section
4.14.
3
<PAGE> 10
"Company" means the party named as such in the preamble to this
Indenture until a successor replaces it pursuant to the applicable provisions
hereof and, thereafter, means such successor.
"Consolidated EBITDA" means, with respect to any Person, for any
period, the sum (without duplication) of (i) Consolidated Net Income and (ii)
to the extent Consolidated Net Income has been reduced thereby, (A) all income
taxes of such Person and its Restricted Subsidiaries paid or accrued in
accordance with GAAP for such period (other than income taxes attributable to
extraordinary, unusual or nonrecurring gains or losses or taxes attributable to
sales or dispositions of assets outside the ordinary course of business), (B)
Consolidated Interest Expense and (C) Consolidated Non-cash Charges, less any
non-cash items increasing Consolidated Net Income for such period, all as
determined on a consolidated basis for such Person and its Restricted
Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA during the four full fiscal quarters
(the "Four Quarter Period") ending on or prior to the date of the transaction
giving rise to the need to calculate the Consolidated Fixed Charge Coverage
Ratio (the "Transaction Date") to Consolidated Fixed Charges for the Four
Quarter Period. In addition to and without limitation of the foregoing, for
purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed
Charges" shall be calculated after giving effect on a pro forma basis for the
period of such calculation to: (i) the incurrence or repayment of any
Indebtedness of such Person or any of its Restricted Subsidiaries (and the
application of the proceeds thereof) giving rise to the need to make such
calculation and any incurrence or repayment of other Indebtedness (and the
application of the proceeds thereof) occurring during the Four Quarter Period
or at any time subsequent to the last day of the Four Quarter Period and on or
prior to the Transaction Date, as if such incurrence or repayment, as the case
may be (and the application of the proceeds thereof), occurred on the first day
of the Four Quarter Period and (ii) any Asset Sales or Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to the need
to make such calculation as a result of such Person or one of its Restricted
Subsidiaries (including any Person who becomes a Restricted Subsidiary as a
result of the Asset Acquisition) incurring, assuming or otherwise being liable
for Acquired Indebtedness and also including any Consolidated EBITDA
attributable to the assets which are the subject of the Asset Acquisition or
Asset Sale during the Four Quarter Period) occurring during the Four Quarter
Period or at any time subsequent to the last day of the Four Quarter Period and
on or prior to the Transaction Date, as if such Asset Sale or Asset Acquisition
(including the incurrence, assumption or liability for any such Indebtedness or
Acquired Indebtedness) occurred on the first day of the Four Quarter Period;
provided that the Consolidated EBITDA of any Person acquired shall be included
only to the extent includable pursuant to the definition of "Consolidated Net
Income." If such Person or any of its Restricted Subsidiaries directly or
indirectly guarantees Indebtedness of a third Person, the preceding sentence
shall give effect to the incurrence of such guaranteed Indebtedness as if such
Person or any Restricted Subsidiary of such Person had directly incurred or
otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating
"Consolidated Fixed Charges" for purposes of determining the denominator (but
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1)
interest on outstanding Indebtedness determined on a fluctuating basis as of
the Transaction Date and which will continue to be so determined thereafter
shall be deemed to
4
<PAGE> 11
have accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; (2) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate,
a eurocurrency interbank offered rate, or other rates, then the interest rate
in effect on the Transaction Date will be deemed to have been in effect during
the Four Quarter Period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense,
plus (ii) the product of (x) the amount of all dividend payments on any series
of preferred stock of such Person (other than dividends paid in Qualified
Capital Stock) paid, accrued or scheduled to be paid or accrued during such
period times (y) a fraction, the numerator of which is one and the denominator
of which is one minus the then current effective consolidated federal, state
and local tax rate of such Person expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for
any period, the sum of, without duplication, (i) the aggregate of the interest
expense (without deduction of interest income) of such Person and its
Restricted Subsidiaries for such period determined on a consolidated basis in
accordance with GAAP, including without limitation (a) any amortization or
write-off of debt discount or deferred financing costs (other than the write-
off of up to $1.4 million of deferred financing costs associated with the
repayment of Indebtedness existing on the Issue Date with a portion of the net
proceeds of the sale of the Notes), (b) the net costs under Interest Swap
Obligations, (c) all capitalized interest and (d) the interest portion of any
deferred payment obligation; and (ii) the interest component of Capitalized
Lease Obligations paid, accrued or scheduled to be paid or accrued by such
Person and its Restricted Subsidiaries during such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate net income (or loss) of such Person for such period on a
consolidated basis, determined in accordance with GAAP; provided that there
shall be excluded therefrom (i) after-tax gains and losses from Asset Sales or
abandonments or reserves relating thereto, (ii) after-tax items classified as
extraordinary nonrecurring gains (or losses), (iii) the net income (or loss) of
any Person acquired in a "pooling of interests" transaction accrued prior to
the date it becomes a Restricted Subsidiary of the referent Person or is merged
or consolidated with the referent Person or any Restricted Subsidiary, (iv) the
net income (but not loss) of any Restricted Subsidiary to the extent that the
declaration of dividends or similar distributions by that Restricted Subsidiary
of that income is restricted by contract, operation of law or otherwise, (v)
the net income of any Person, other than a Restricted Subsidiary of that
Person, except to the extent of cash dividends or distributions paid to the
referent Person or to any of its Restricted Subsidiaries by such Person, (vi)
income or loss attributable to discontinued operations (including without
limitation operations disposed of during such period whether or not such
operations were classified as discontinued) and (vii) in the case of a
successor to the Company by consolidation or merger or as a transferee
5
<PAGE> 12
of the Company's assets, any net income of the successor corporation prior to
such consolidation, merger or transfer of assets.
"Consolidated Net Worth" of any Person means the consolidated
stockholders' equity of such Person and its consolidated Restricted
Subsidiaries, determined on a consolidated basis in accordance with GAAP, less
(without duplication) amounts attributable to (i) Disqualified Capital Stock of
such Person and (ii) Investments described in clause (iii) of the definition of
Permitted Investments.
"Consolidated Non-Cash Charges" means, with respect to any Person for
any period, the aggregate depreciation, amortization and other non-cash
expenses of such Person and its Restricted Subsidiaries reducing Consolidated
Net Income of such Person for such period, determined on a consolidated basis
in accordance with GAAP (excluding any such charges constituting an
extraordinary item or loss or any such charge which requires an accrual of or a
reserve for cash charges for any future period).
"Covenant Defeasance" has the meaning set forth in Section 8.02.
"Currency Agreement" means any foreign exchange contract, currency
swap agreement or other similar agreement or arrangement designed to protect
any Person against fluctuations in currency values.
"Custodian" means any receiver, trustee, assignee, liquidator,
sequestrator or similar official under any Bankruptcy Law.
"Debt Refinancing" means the consummation of the transactions
contemplated by the New Credit Agreement by the Company and Bazaar and the
offering of the Notes by the Company.
"Default" means an event or condition the occurrence of which is, or
with the lapse of time or the giving of notice or both would be, an Event of
Default.
"Depository" means The Depository Trust Company, its nominees and
successors.
"Designated Senior Indebtedness" means (i) Indebtedness under or in
respect of the New Credit Agreement and (ii) any other Indebtedness
constituting Senior Indebtedness which, at the time of determination, has an
aggregate principal amount of at least $25 million and is specifically
designated in the instrument evidencing such Senior Indebtedness as "Designated
Senior Indebtedness" by the Company.
"Designation" has the meaning set forth in Section 4.19.
"Designation Amount" has the meaning set forth in Section 4.19.
"Disqualified Capital Stock" means that portion of any Capital Stock
that, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
6
<PAGE> 13
obligation or otherwise, or is redeemable at the sole option of the holder
thereof on or prior to the final maturity date of the Notes.
"Event of Default" has the meaning provided in Section 6.01.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute or statutes thereto.
"Exchange Notes" has the meaning provided in the preamble to this
Indenture.
"Exchange Offer" means the registration by the Company under the
Securities Act pursuant to a registration statement of the offer by the Company
to each Holder of the Initial Notes to exchange all the Initial Notes held by
such Holder for the Exchange Notes in an aggregate principal amount equal to
the aggregate principal amount of the Initial Notes held by such Holder, all in
accordance with the terms and conditions of the Registration Rights Agreement.
"fair market value" means, with respect to any asset or property, the
price that could be negotiated in an arm's-length, free market transaction, for
cash, between a willing seller and a willing and able buyer, neither of whom is
under undue pressure or compulsion to complete the transaction. Fair market
value shall be determined by the Board of Directors of the Company acting
reasonably and in good faith and shall be evidenced by a Board Resolution of
the Board of Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession
in the United States, which are in effect as of the Issue Date.
"Global Note" has the meaning provided in Section 2.01.
"Gaming Authority" means any United States federal, state or local
agency (including without limitation any agency established by a federally
recognized Indian tribe to regulate gaming on such tribe's reservation) and any
Canadian federal, provincial, territorial or local agency, or any other foreign
agency that has, or at any time after the date of the Indenture may have,
jurisdiction over the gaming activities of the Company or any of its
Subsidiaries or any successor to such authority.
"Gaming Laws" means any law, rule, regulation or ordinance governing
gaming activities, any administrative rules or regulations promulgated
thereunder and any of the corresponding statutes, rules and regulations
developed by any Gaming Authority to which the Company or any of its
Subsidiaries is, or at any time after the date of the Indenture may be,
subject.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
7
<PAGE> 14
"incur'' has the meaning provided in Section 4.12.
"Indebtedness" means with respect to any Person, without duplication,
(i) all obligations of such Person for borrowed money, (ii) all obligations of
such Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all Capitalized Lease Obligations of such Person, (iv) all Obligations of
such Person issued or assumed as the deferred purchase price of property, all
conditional sale Obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable arising in the ordinary course
of business that are not overdue by 90 days or more or are being contested in
good faith by appropriate proceedings promptly instituted and diligently
conducted), (v) all Obligations for the reimbursement of any obligor on any
letter of credit, banker's acceptance or similar credit transaction, (vi)
guarantees and other contingent Obligations (including without limitation
repurchase Obligations) in respect of Indebtedness of any other Person, (vii)
all Obligations of any other Person that are secured by any lien on any
property or asset of such Person, the amount of such Obligation being deemed to
be the lesser of the fair market value of such property or asset or the amount
of the Obligation so secured, (viii) all Obligations under currency agreements
and interest swap (including without limitation repurchase Obligations)
agreements of such Person and (ix) all Disqualified Capital Stock issued by
such Person with the amount of Indebtedness represented by such Disqualified
Capital Stock being equal to the greater of its voluntary or involuntary
liquidation preference and its maximum fixed repurchase price. For purposes
hereof, the "maximum fixed repurchase price" of any Disqualified Capital Stock
that does not have a fixed repurchase price shall be calculated in accordance
with the terms of such Disqualified Capital Stock as if such Disqualified
Capital Stock were purchased on any date on which Indebtedness shall be
required to be determined pursuant to this Indenture, and if such price is
based upon, or measured by, the fair market value of such Disqualified Capital
Stock, such fair market value shall be determined reasonably and in good faith
by the Board of Directors of the Company.
"Indenture" means this Indenture, as amended or supplemented from time
to time in accordance with the terms hereof.
"Initial Notes" has the meaning provided in the preamble to this
Indenture.
"Independent Financial Advisor" means an investment banking firm (i)
which does not, and whose directors, officers and employees or Affiliates do
not, have a direct or indirect financial interest in the Company and (ii)
which, in the judgment of the Board of Directors of the Company, is otherwise
independent and qualified to perform the task for which it is to be engaged.
"Initial Purchasers" means BT Securities Corporation, BA Securities,
Inc. and Oppenheimer & Co., Inc.
"Institutional Accredited Investor" means an institution that is an
"accredited investor" as that term is defined in Rule 501(a)(l), (2), (3) or
(7) under the Securities Act.
"Interest Payment Date" means the stated maturity of an installment of
interest on the Notes.
8
<PAGE> 15
"Interest Swap Obligations" means the obligations of any Person,
pursuant to any arrangement with any other Person, whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest
on a stated notional amount in exchange for periodic payments made by such
other Person calculated by applying a fixed or a floating rate of interest on
the same notional amount and shall include, without limitation, interest rate
swaps, caps, floors, collars and similar agreements.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended to the date hereof and from time to time hereafter.
"Investment" means, with respect to any Person, any direct or
indirect: (i) loan or other extension of credit (including without limitation a
guarantee) or capital contribution to (by means of any transfer of cash or
other property (valued at the fair market value thereof) to others or any
payment for property or services for the account or use of others); (ii)
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
securities or evidences of Indebtedness issued by any other Person; (iii)
guarantees or assumptions of Indebtedness or any other Obligation of any other
Person (except for an assumption of Indebtedness for which the assuming Person
receives consideration at the time of such assumption in the form of property
or assets with a fair market value at least equal to the principal amount of
the Indebtedness assumed); and (iv) all other items that would be classified as
investments (including without limitation purchases of assets outside the
ordinary course of business) on a balance sheet of such Person prepared in
accordance with GAAP. If such Person or any of its Restricted Subsidiaries
sells or otherwise disposes of any Common Stock of any direct or indirect
Wholly Owned Restricted Subsidiary such that, after giving effect to any such
sale or disposition, it ceases to be a Wholly Owned Restricted Subsidiary of
such Person, such Person shall be deemed to have made an Investment on the date
of any such sale or disposition equal to the fair market value of the Common
Stock of such Restricted Subsidiary not sold or disposed of.
"Issue Date" means the date of original issuance of the Initial Notes.
"Joint Venture" means a joint venture, partnership, corporation or
other entity that is engaged in the same general business as the Company, and
with respect to which the Company and its Restricted Subsidiaries own less than
a majority of the aggregate voting power of all classes of the Capital Stock.
"Legal Holiday" has the meaning provided in Section 11.07.
"Lien" means, with respect to any Person, any lien, mortgage, deed of
trust, pledge, security interest, easement, restriction, adverse claim, charge
or encumbrance of any kind affecting title or resulting in an encumbrance
against real or personal property of such Person, or a security interest of any
kind (including any conditional sale or other title retention agreement, any
lease in the nature thereof, any option, right of first refusal or other
similar agreement to sell and any agreement to give any security interest).
"Maturity Date" means November 15, 2004.
9
<PAGE> 16
"Moody's" means Moody's Investors Service, Inc. and its successors.
"MLGA" means Morgan, Lewis, Githens & Ahn, an investment banking firm,
and its successors.
"Net Cash Proceeds" means, with respect to any Asset Sale, the
proceeds in the form of cash or Cash Equivalents including payments in respect
of deferred payment obligations when received in the form of cash or Cash
Equivalents (other than the portion of any such deferred payment constituting
interest) received by the Company or any of the Restricted Subsidiaries from
such Asset Sale, net of (a) reasonable out-of-pocket expenses and fees relating
to such Asset Sale (including without limitation legal, accounting and
investment banking fees and sales commissions), (b) taxes paid or payable after
taking into account any reduction in consolidated tax liability due to
available tax credits or deductions and any tax sharing arrangements and (c)
appropriate amounts to be provided by the Company or any Restricted Subsidiary,
as the case may be, as a reserve, in accordance with GAAP, against any
liabilities associated with such Asset Sale and retained by the Company or any
Restricted Subsidiary, as the case may be, after such Asset Sale, including
without limitation pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale.
"Net Proceeds Offer" has the meaning provided in Section 4.15.
"Net Proceeds Offer Payment Date" has the meaning provided in Section
4.15.
"Net Proceeds Offer Trigger Date" has the meaning provided in Section
4.15.
"New Credit Agreement" means the Amended and Restated Credit Agreement
dated as of November 13, 1996 among the Company, Bazaar, Bank of America
National Trust and Savings Association as U.S. Agent, Bank of America Canada as
Canadian Agent, The Chase Manhattan Bank as Co-Agent and The Chase Manhattan
Bank of Canada as Canadian Co-Agent, together with the related documents
thereto (including, without limitation, any security documents and the
guarantee by the Company of the Indebtedness of Bazaar thereunder, to the
extent such Indebtedness was incurred in compliance with the provisions
hereof), in each case as such agreements may be amended (including any
amendment and restatement thereof), supplemented or otherwise modified from
time to time, including any agreement extending the maturity or refinancing,
replacing or otherwise restructuring (including increasing the amount of
available borrowings thereunder (provided that such increase in borrowings is
permitted by Section 4.12(b)) or adding Subsidiaries as additional borrowers
thereunder) all or any portion of the Indebtedness under such agreement or any
successor or replacement agreement and whether by the same or any other agent,
lender or group of lenders.
"Non-U.S. Person" means a Person who is not a U.S. person, as defined
in Regulation S.
"Notes" means the Initial Notes and the Exchange Notes treated as a
single class of securities, as amended or supplemented from time to time in
accordance with the terms hereof, that are issued pursuant to this Indenture.
10
<PAGE> 17
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing any Indebtedness.
"Offering Memorandum" means the Offering Memorandum dated November 7,
1996, pursuant to which the Initial Notes were offered, and any supplement
thereto.
"Officer" means, with respect to any Person, the Chairman of the
Board, the Chief Executive Officer, the President, any Vice President, the
Chief Financial Officer, the Treasurer, the Controller, or the Secretary of
such Person, or any other officer designated by the Board of Directors serving
in a similar capacity.
"Officers' Certificate" means, with respect to any Person, a
certificate signed by two Officers or by an Officer and either an Assistant
Treasurer or an Assistant Secretary of such Person and otherwise complying with
the requirements of Sections 11.04 and 11.05, as they relate to the making of
an Officers' Certificate.
"Offshore Physical Notes" has the meaning provided in Section 2.01.
"Opinion of Counsel" means a written opinion from legal counsel, who
may be counsel for the Company, and who is reasonably acceptable to the Trustee
complying with the requirements of Sections 11.04 and 11.05, as they relate to
the giving of an Opinion of Counsel.
"Paying Agent" has the meaning provided in Section 2.03.
"Payment Blockage Period" has the meaning provided in Section 10.02.
"Permitted Indebtedness" means, without duplication, each of the
following:
(i) Indebtedness under the Notes and the Indenture;
(ii) Indebtedness, other than Prohibited Acquisition
Indebtedness, incurred by the Company and Bazaar pursuant to the New
Credit Agreement (and the guarantee thereof by any Restricted
Subsidiary of the Company incurred in compliance with the provisions
of this Indenture) in an aggregate principal amount at any time
outstanding not to exceed the greater of (x) $30.0 million (of which
no more than $20.0 million may be incurred by the Company and no more
than $10.0 million may be incurred by Bazaar) and (y) (A) 80% of the
net book value of the accounts receivable of the Company and its
Restricted Subsidiaries and (B) 50% of the net book value of the
inventory of the Company and its Restricted Subsidiaries, of which no
more than one- third may be incurred by Bazaar, less in either case
any required permanent repayments under the New Credit Agreement;
(iii) other Indebtedness (including Capitalized Lease
Obligations) of the Company and the Restricted Subsidiaries
outstanding on the Issue Date reduced by the amount of any scheduled
amortization payments or mandatory prepayments or permanent reductions
thereon;
11
<PAGE> 18
(iv) Interest Swap Obligations of the Company covering
Indebtedness of the Company or any of the Restricted Subsidiaries and
Interest Swap Obligations of any Restricted Subsidiary covering
Indebtedness of such Restricted Subsidiary; provided, however, that
such Interest Swap Obligations are entered into to protect the Company
and the Restricted Subsidiaries from fluctuations in interest rates on
Indebtedness incurred in accordance with the Indenture to the extent
the notional principal amount of such Interest Swap Obligation does
not exceed the principal amount of the Indebtedness to which such
Interest Swap Obligation relates;
(v) Indebtedness under Currency Agreements; provided that
in the case of Currency Agreements which relate to Indebtedness, such
Currency Agreements do not increase the Indebtedness of the Company
and the Restricted Subsidiaries outstanding other than as a result of
fluctuations in foreign currency exchange rates or by reason of fees,
indemnities and compensation payable thereunder;
(vi) intercompany Indebtedness owed by any Restricted
Subsidiary of the Company to the Company or a Wholly Owned Restricted
Subsidiary of the Company, in each case subject to no Lien held by a
Person other than the Company or a Wholly Owned Restricted Subsidiary
of the Company; provided that if as of any date any Person other than
the Company or a Wholly Owned Restricted Subsidiary owns or holds any
such Indebtedness or holds a Lien in respect of such Indebtedness,
such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the issuer of such
Indebtedness;
(vii) intercompany Indebtedness owed by the Company to any
Wholly Owned Restricted Subsidiary of the Company for so long as such
Indebtedness is held by a Wholly Owned Restricted Subsidiary, in each
case subject to no Lien; provided that (a) any Indebtedness of the
Company to any Wholly owned Restricted Subsidiary is unsecured and
subordinated, pursuant to a written agreement, to the Company's
obligations under the Indenture and the Notes and (b) if as of any
date any Person other than a Wholly Owned Restricted Subsidiary owns
or holds any such Indebtedness or any Person holds a Lien in respect
of such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness by the Company;
(viii) Indebtedness arising from the honoring by a bank or
other financial institution of a check, draft or similar instrument
inadvertently (except in the case of daylight overdrafts) drawn
against insufficient funds in the ordinary course of business;
provided, however, that such Indebtedness is extinguished within two
business days of incurrence;
(ix) Indebtedness of the Company or any of the Restricted
Subsidiaries represented by letters of credit for the account of the
Company or such Restricted Subsidiary, as the case may be, in order to
provide security for workers' compensation claims, payment obligations
in connection with self-insurance or similar requirements in the
ordinary course of business; and Indebtedness of the Company or any of
its Restricted
12
<PAGE> 19
Subsidiaries, not to exceed $3.0 million at any time, attributable to
performance bonds obtained in the ordinary course of business
consistent with past practice;
(x) Refinancing Indebtedness; and
(xi) additional Indebtedness of the Company in an
aggregate principal amount not to exceed $5.0 million at any one time
outstanding.
"Permitted Investments" means each of the following:
(i) Investments by the Company or any Restricted
Subsidiary in any Person that is or immediately after such Investment
will become a Restricted Subsidiary or will merge or consolidate into
the Company or a Restricted Subsidiary;
(ii) Investments in the Company by any Restricted
Subsidiary; provided that any Indebtedness evidencing such Investment
by any Restricted Subsidiary other than a Wholly Owned Restricted
Subsidiary is unsecured and subordinated, pursuant to a written
agreement, to the Company's obligations under the Notes and the
Indenture;
(iii) Investments in Unrestricted Subsidiaries and Joint
Ventures, provided that: (a) after giving effect to any such
Investment, the aggregate amount of Investments made pursuant to the
provisions of this clause (iii) does not exceed $7.5 million; and (b)
at the time any such Investment is made no Default or Event of Default
shall have occurred or be continuing;
(iv) Investments in cash and Cash Equivalents;
(v) loans and advances to employees and officers of the
Company and the Restricted Subsidiaries in the ordinary course of
business for bona fide business purposes not in excess of $1.0 million
in the aggregate at any one time outstanding;
(vi) Currency Agreements and Interest Swap Obligations
entered into in the ordinary course of the Company's or a Restricted
Subsidiary's businesses and otherwise in compliance with the
Indenture; and
(vii) Investments made by the Company or the Restricted
Subsidiaries as a result of consideration received in connection with
an Asset Sale made in compliance with the covenant described in
Section 4.15.
"Permitted Liens" means the following types of Liens:
(i) Liens on assets or property of the Company that
secure Senior Indebtedness of the Company and Liens on assets or
property of a Restricted Subsidiary that secure Senior Indebtedness of
such Restricted Subsidiary, in each case to the extent such Senior
Indebtedness is permitted under Section 4.12(b);
13
<PAGE> 20
(ii) Liens for taxes, assessments or governmental charges
or claims either (a) not delinquent or (b) contested in good faith by
appropriate proceedings and as to which the Company or the Restricted
Subsidiaries shall have set aside on its books such reserves as may be
required pursuant to GAAP;
(iii) statutory Liens of landlords and Liens of carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen and other
Liens imposed by law incurred in the ordinary course of business for
sums not yet delinquent or being contested in good faith, if such
reserve or other appropriate provision, if any, as shall be required
by GAAP shall have been made in respect thereof;
(iv) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation,
unemployment insurance and other types of social security, including
any Lien securing letters of credit issued in the ordinary course of
business consistent with past practice in connection therewith, or to
secure the performance of tenders, statutory obligations, surety and
appeal bonds, bids, leases, government contracts, performance and
return-of money bonds and other similar obligations (exclusive of
Obligations for the payment of borrowed money);
(v) judgment Liens not giving rise to an Event of
Default;
(vi) easements, rights-of-way, zoning restrictions and
other similar charges or encumbrances in respect of real property not
interfering in any material respect with the ordinary conduct of the
business of the Company or any of the Restricted Subsidiaries;
(vii) any interest or title of a lessor under any
Capitalized Lease Obligation provided that such Liens do not extend to
any property or assets which is not leased property subject to such
Capitalized Lease Obligation;
(viii) purchase money Liens to finance property or assets of
the Company or any Restricted Subsidiary acquired after the Issue
Date; provided, however, that (A) the related purchase money
Indebtedness shall not exceed the cost of such property or assets and
shall not be secured by any property or assets of the Company or any
Restricted Subsidiary other than the property and assets so acquired
and (B) the Lien securing such Indebtedness shall be created within 90
days of such acquisition;
(ix) Liens encumbering deposits made to secure obligations
arising from statutory, regulatory, contractual or warranty
requirements of the Company or any of the Restricted Subsidiaries,
including rights of offset and set-off;
(x) Liens securing Interest Swap Obligations which
Interest Swap Obligations relate to Indebtedness that is otherwise
permitted under the Indenture;
(xi) Liens securing Indebtedness under Currency
Agreements; and
14
<PAGE> 21
(xii) Liens securing Acquired Indebtedness incurred in
accordance with Section 4.12(b); provided that (A) such Liens secured
such Acquired Indebtedness at the time of and prior to the incurrence
of such Acquired Indebtedness by the Company or a Restricted
Subsidiary and were not granted in connection with, or in anticipation
of, the incurrence of such Acquired Indebtedness by the Company or a
Restricted Subsidiary and (B) such Liens do not extend to or cover any
property or assets of the Company or of any of the Restricted
Subsidiaries other than the property or assets that secured the
Acquired Indebtedness prior to the time such Indebtedness became
Acquired Indebtedness of the Company or a Restricted Subsidiary and
are no more favorable to the lienholders than those securing the
Acquired Indebtedness prior to the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Physical Notes" has the meaning provided in Section 2.01.
"Plan of Liquidation" means, with respect to any Person, a plan that
provides for, contemplates or the effectuation of which is preceded or
accompanied by (whether or not substantially contemporaneously, in phases or
otherwise) (i) the sale, lease, conveyance or other disposition of all or
substantially all of the assets of such Person otherwise than as an entirety or
substantially as an entirety and (ii) the distribution of all or substantially
all of the proceeds of such sale, lease, conveyance or other disposition and
all or substantially all of the remaining assets of such Person to holders of
Capital Stock of such Person.
"Preferred Stock" of any Person means any Capital Stock of such Person
that has preferential rights to any other Capital Stock of such Person with
respect to dividends or redemptions or upon liquidation.
"principal" of any Indebtedness (including the Notes) means the
principal amount of such Indebtedness plus the premium, if any, on such
Indebtedness.
"Private Placement Legend" has the meaning set forth in Section 2.15.
"Proceeds Purchase Date" has the meaning provided in Section 4.15.
"pro forma" means, with respect to any calculation made or required to
be made pursuant to the terms of this Indenture, a calculation in accordance
with Article 11 of Regulation S-X under the Securities Act, as determined by
the Board of Directors of the Company in consultation with its independent
public accountants.
"Prohibited Acquisition Indebtedness" means any Indebtedness, the
proceeds of which are used to make an Acquisition (as defined below) if, giving
effect to the Incurrence of such Prohibited Acquisition Indebtedness on a pro
forma basis, the ratio of (i) the aggregate amount of all Indebtedness, less
(if the outstanding principal balance of all Revolving Loans (as defined in the
New Credit Agreement) is zero on the Acquisition Date (as defined below)) the
aggregate amount
15
<PAGE> 22
of Cash Equivalents in excess of $5.0 million, of the Company and its
Restricted Subsidiaries on the date on which such Prohibited Acquisition
Indebtedness is Incurred (the "Acquisition Date") to (ii) Consolidated EBITDA
during the Four Quarter Period ending on or most recently prior to the
Acquisition Date, equals or exceeds 5.75 to 1 if such Prohibited Acquisition
Indebtedness is Incurred at any time on or prior to September 30, 1998 or 5.50
to 1 if such Prohibited Acquisition Indebtedness is incurred at any time after
September 30, 1998. For purposes of this definition, (a) "Four Quarter Period"
has the meaning set forth in the definition of "Consolidated Fixed Charge
Coverage Ratio," (b) Consolidated EBITDA shall be determined on a pro forma
basis in accordance with the principles set forth in the definition of
"Consolidated Fixed Charge Coverage Ratio" (including, for purposes of
determining Consolidated Interest Expense, the principles set forth in the last
sentence thereof) and the definitions referenced therein, and (c) "Acquisition"
means (i) an Asset Acquisition or (ii) any Investment by the Company or any
Restricted Subsidiary in any other Person, whether or not such other Person
shall become a Restricted Subsidiary or an Unrestricted Subsidiary or shall be
merged with or into a Restricted Subsidiary or an Unrestricted Subsidiary upon
such Investment, provided that "Acquisition" shall not include any Investment
in a Restricted Subsidiary that is not part of the transaction or series of
related transactions pursuant to which such Subsidiary was acquired by the
Company or any Restricted Subsidiary.
"Public Equity Offering" has the meaning set forth in Section 3.07.
"Qualified Capital Stock" means any Capital Stock that is not
Disqualified Capital Stock.
"Qualified Institutional Buyer" or "QIB" shall have the meaning
specified in Rule 144A under the Securities Act.
"Record Date" means the Record Dates specified in the Notes, whether
or not a Legal Holiday.
"Redemption Date" when used with respect to any Note to be redeemed,
means the date fixed for such redemption pursuant to this Indenture and the
Notes.
"Redemption Price" when used with respect to any Note to be redeemed,
means the price fixed for such redemption pursuant to this Indenture and the
Notes.
"Reference Date" has the meaning provided in Section 4.10.
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of Indebtedness incurred in accordance with Section
4.12(b) (other than pursuant to clause (ii), (iv), (v), (vi), (vii), (viii),
(ix) or (xi) of the definition of Permitted Indebtedness), in each case that
does not (1) result in an increase in the aggregate principal amount of
Indebtedness of such Person as of the date of such proposed Refinancing (plus
the amount of any premium
16
<PAGE> 23
required to be paid under the terms of the instrument governing such
Indebtedness and plus the amount of reasonable expenses incurred by the Company
or any Restricted Subsidiary in connection with such Refinancing) or (2) create
Indebtedness with (A) a Weighted Average Life to Maturity that is less than the
Weighted Average Life to Maturity of the Indebtedness being Refinanced or (B) a
final maturity earlier than the final maturity of the Indebtedness being
Refinanced; provided that (x) if such Indebtedness being Refinanced is
Indebtedness of the Company or a Restricted Subsidiary, then such Refinancing
Indebtedness shall be Indebtedness solely of the Company or a Restricted
Subsidiary and (y) if such Indebtedness being Refinanced is subordinate or
junior to the Notes, then such Refinancing Indebtedness shall be subordinate to
the Notes at least to the same extent and in the same manner as the
Indebtedness being Refinanced.
"Registrar" has the meaning provided in Section 2.03.
"Registration Rights Agreement" means the Registration Rights
Agreement dated as of the Issue Date among the Company and the Initial
Purchasers.
"Regulation S" means Regulation S under the Securities Act.
"Representative" means the indenture trustee or other trustee, agent
or representative in respect of any Designated Senior Indebtedness; provided
that if, and for so long as, any Designated Senior Indebtedness lacks such a
representative, then the Representative for such Designated Senior Indebtedness
shall at all times constitute the holders of a majority in outstanding
principal amount of such Designated Senior Indebtedness in respect of any
Designated Senior Indebtedness.
"Restricted Payment" has the meaning provided in Section 4.10.
"Restricted Security" has the meaning assigned to such term in Rule
144(a)(3) under the Securities Act; provided that the Trustee shall be entitled
to request and conclusively rely on an Opinion of Counsel with respect to
whether any Note constitutes a Restricted Security.
"Restricted Subsidiary" means any Subsidiary of the Company that has
not been designated by the Board of Directors of the Company, by a Board
Resolution delivered to the Trustee, as an Unrestricted Subsidiary pursuant to
and in compliance with Section 4.19. Any such Designation may be revoked by a
Board Resolution of the Company delivered to the Trustee, subject to the
provisions of such covenant.
"Revocation" has the meaning set forth in Section 4.19.
"Rule 144A" means Rule 144A under the Securities Act.
"S&P" means Standard & Poor's Ratings Services and its successors.
"Sale and Leaseback Transaction" means any direct or indirect
arrangement with any Person or to which any such Person is a party, providing
for the leasing to the Company or a Restricted Subsidiary of any property,
whether owned by the Company or any Restricted Subsidiary at the Issue Date or
later acquired, which has been or is to be sold or transferred by the
17
<PAGE> 24
Company or such Restricted Subsidiary to such Person or to any other Person
from whom funds have been or are to be advanced by such Person on the security
of such Property.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means, the Securities Act of 1933, as amended, and
the rules and regulations of the SEC promulgated thereunder.
"Senior Indebtedness" means the principal of, premium, if any and
interest on and all other Obligations with respect to, any Indebtedness of the
Company, whether outstanding on the Issue Date or thereafter incurred, unless,
in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall not be senior in right of payment to the
Notes. Notwithstanding the foregoing, "Senior Indebtedness" shall not include
(a) Indebtedness evidenced by the Notes, (b) Indebtedness that is expressly
subordinate or junior in right of payment to any Indebtedness of the Company,
(c) Indebtedness that is represented by Disqualified Capital Stock, (d)
Obligations for goods, materials or services purchased in the ordinary course
of business or Obligations consisting of trade payables, (e) Indebtedness of or
amounts owned by the Company for compensation to employees or for services
rendered to the Company, (f) any liability for federal, state, local or other
taxes owed or owing by the Company, (g) Indebtedness of the Company to a
Subsidiary of the Company or any other Affiliate of the Company, and (h) that
portion of any Indebtedness that is incurred by the Company in violation of the
Indenture.
"Subsidiary", with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Surviving Entity" has the meaning set forth in Section 5.01.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections
7aaa-77bbbb), as amended, as in effect on the date of this Indenture, except as
otherwise provided in Section 9.04; provided that in the event the Trust
Indenture Act of 1939 is amended after such date, "TIA" means, to the extent
required by such amendment, the Trust Indenture Act of 1939, as amended.
"Trade Acquisition" means the acquisition by the Company of certain
assets of Trade Products, Inc.
"Transactions" means the Trade Acquisition and the Debt Refinancing.
"Trust Officer" means any officer of the Trustee assigned by the
Trustee to administer this Indenture, or in the case of a successor trustee, an
officer assigned to the department, division or group performing the corporate
trust work of such successor and assigned to administer this Indenture.
18
<PAGE> 25
"Trustee" means the party named as such in this Indenture until a
successor replaces it in accordance with the provisions of this Indenture and
thereafter means such successor.
"Unrestricted Subsidiary" means any Subsidiary of the Company
designated as such pursuant to and in compliance with Section 4.19. Any such
designation may be revoked by a Board Resolution of the Company delivered to
the Trustee, subject to the provisions of such covenant.
"U.S. Government Obligations" means direct obligations of, and
obligations guaranteed by, the United States of America for the payment of
which the full faith and credit of the United States of America is pledged.
"U.S. Legal Tender" means such coin or currency of the United States
of America as at the time of payment shall be legal tender for the payment of
public and private debts.
"U.S. Physical Notes" has the meaning provided in Section 2.01.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the then
outstanding aggregate principal amount of such Indebtedness into (b) the sum of
the total of the products obtained by multiplying (i) the amount of each then
remaining installment, sinking fund, serial maturity or other required payment
of principal, including payment at final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary
of which all the outstanding voting securities (other than in the case of a
foreign Restricted Subsidiary, directors' qualifying shares or an immaterial
amount of shares required to be owned by other Persons pursuant to applicable
law) are owned by the Company or another Wholly Owned Restricted Subsidiary.
SECTION 1.02. Incorporation by Reference of TIA.
Whenever this Indenture refers to a provision of the TIA, such
provision is incorporated by reference in, and made a part of, this Indenture.
The following TIA terms used in this Indenture have the following meanings:
"indenture securities" means the Notes.
"indenture security holder" means a Holder or a Noteholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company or any other
obligor on the Notes.
19
<PAGE> 26
All other TIA terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by SEC rule and not
otherwise defined herein have the meanings assigned to them therein.
SECTION 1.03. Rules of Construction.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the
meaning assigned to it in accordance with GAAP as in effect on the
date hereof;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and words
in the plural include the singular; and
(5) "herein," "hereof" and other words of similar import
refer to this Indenture as a whole and not to any particular Article,
Section or other subdivision.
ARTICLE TWO
THE NOTES
SECTION 2.01. Form and Dating.
The Initial Notes, and the Trustee's certificate of authentication
shall be substantially in the form of Exhibit A hereto. The Exchange Notes,
and the Trustee's certificate of authentication shall be substantially in the
form of Exhibit B hereto. The Notes may have notations, legends or
endorsements required by law, stock exchange rule or depository rule or usage.
The Company, and the Trustee shall approve the form of the Notes and any
notation, legend or endorsement on them. Each Note shall be dated the date of
its authentication.
The terms and provisions contained in the Notes, annexed hereto as
Exhibits A and B, shall constitute, and are hereby expressly made, a part of
this Indenture and, to the extent applicable, the Company and the Trustee, by
their execution and delivery of this Indenture, expressly agree to such terms
and provisions and to be bound thereby.
Notes offered and sold in reliance on Rule 144A shall be issued
initially in the form of one or more permanent global Notes in registered form,
substantially in the form set forth in Exhibit A (the "Global Note"), deposited
with the Trustee, as custodian for the Depository, duly executed by the Company
and authenticated by the Trustee as hereinafter provided. The aggregate
principal amount of the Global Note may from time to time be increased or
decreased by adjustments made on the records of the Trustee, as custodian for
the Depository, as hereinafter provided.
20
<PAGE> 27
Notes offered and sold in offshore transactions in reliance on
Regulation S shall be issued in the form of permanent certificated Notes in
registered form in substantially the form set forth in Exhibit A (the "Offshore
Physical Notes"). Notes offered and sold in reliance on any other exemption
from registration under the Securities Act other than as described in the
preceding paragraph shall be issued, and Notes offered and sold in reliance on
Rule 144A may be issued, in the form of permanent certificated Notes in
registered form, in substantially the form set forth in Exhibit A (the "U.S.
Physical Notes"). The Offshore Physical Notes and the U.S. Physical Notes are
sometimes collectively herein referred to as the "Physical Notes."
SECTION 2.02. Execution and Authentication; Aggregate
Principal Amount.
Two Officers, or an Officer and an Assistant Secretary, shall sign, or
one Officer shall sign and one Officer or an Assistant Secretary (each of whom
shall, in each case, have been duly authorized by all requisite corporate
actions) shall attest to, the Notes for the Company by manual or facsimile
signature. The Company's seal shall also be reproduced on the Notes.
If an Officer or Assistant Secretary whose signature is on a Note was
an Officer or Assistant Secretary at the time of such execution but no longer
holds that office or position at the time the Trustee authenticates the Note,
the Note shall nevertheless be valid.
A Note shall not be valid until an authorized signatory of the Trustee
manually signs the certificate of authentication on the Note. The signature
shall be conclusive evidence that the Note has been authenticated under this
Indenture.
The Trustee shall authenticate (i) Initial Notes for original issue in
the aggregate principal amount not to exceed $100,000,000, and (ii) Exchange
Notes from time to time for issue only in exchange for a like principal amount
of Initial Notes, in each case upon written orders of the Company in the form
of an Officers' Certificate. The Officers' Certificate shall specify the
amount of Notes to be authenticated, the date on which the Notes are to be
authenticated and the aggregate principal amount of Notes outstanding on the
date of authentication, whether the Notes are to be Initial Notes or Exchange
Notes, and shall further specify the amount of such Notes to be issued as the
Global Note, Offshore Physical Notes or U.S. Physical Notes. The aggregate
principal amount of Notes outstanding at any time may not exceed $100,000,000,
except as provided in Section 2.07.
The Trustee may appoint an authenticating agent (the "Authenticating
Agent") reasonably acceptable to the Company to authenticate Notes. Unless
otherwise provided in the appointment, an Authenticating Agent may authenticate
Notes whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such Authenticating
Agent. An Authenticating Agent has the same rights as an Agent to deal with
the Company and Affiliates of the Company.
The Notes shall be issuable in fully registered form only, without
coupons, in denominations of $1,000 and any integral multiple thereof.
21
<PAGE> 28
SECTION 2.03. Registrar and Paying Agent.
The Company shall maintain an office or agency (which shall be located
in the Borough of Manhattan in The City of New York, State of New York) where
(a) Notes may be presented or surrendered for registration of transfer or for
exchange (the "Registrar"), (b) Notes may be presented or surrendered for
payment (the "Paying Agent") and (c) notices and demands to or upon the Company
in respect of the Notes and this Indenture may be served. The Registrar shall
keep a register of the Notes and of their transfer and exchange. The Company,
upon prior written notice to the Trustee, may have one or more co-Registrars
and one or more additional paying agents reasonably acceptable to the Trustee.
The term "Paying Agent" includes any additional Paying Agent. Neither the
Company nor any Affiliate of the Company may act as Paying Agent.
The Company shall enter into an appropriate agency agreement with any
Agent not a party to this Indenture, which agreement shall incorporate the
provisions of the TIA and implement the provisions of this Indenture that
relate to such Agent. The Company shall notify the Trustee, in advance, of the
name and address of any such Agent. If the Company fails to maintain a
Registrar or Paying Agent, or fails to give the foregoing notice, the Trustee
shall act as such.
The Company initially appoints the Trustee as Registrar, Paying Agent
and agent for service of demands and notices in connection with the Notes,
until such time as the Trustee has resigned or a successor has been appointed.
SECTION 2.04. Paying Agent To Hold Assets in Trust.
The Company shall require each Paying Agent other than the Trustee to
agree in writing that each Paying Agent shall hold in trust for the benefit of
the Holders or the Trustee all assets held by the Paying Agent for the payment
of principal of, or premium or interest on, the Notes (whether such assets have
been distributed to it by the Company or any other obligor on the Notes), and
the Company and the Paying Agent shall notify the Trustee of any Default by the
Company (or any other obligor on the Notes) in making any such payment. The
Company at any time may require a Paying Agent to distribute all assets held by
it to the Trustee and account for any assets disbursed and the Trustee may at
any time during the continuance of any payment Default, upon written request to
a Paying Agent, require such Paying Agent to distribute all assets held by it
to the Trustee and to account for any assets distributed. Upon distribution to
the Trustee of all assets that shall have been delivered by the Company to the
Paying Agent, the Paying Agent shall have no further liability for such assets.
SECTION 2.05. Noteholder Lists.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
the Holders. If the Trustee is not the Registrar, the Company shall furnish or
cause the Registrar to furnish to the Trustee promptly following each Record
Date and at such other times as the Trustee may request in writing a list as of
such date and in such form as the Trustee may reasonably require of the names
and addresses of the Holders, which list may be conclusively relied upon by the
Trustee.
22
<PAGE> 29
SECTION 2.06. Transfer and Exchange.
Subject to the provisions of Sections 2.16 and 2.17, when Notes are
presented to the Registrar or a co-Registrar with a request to register the
transfer of such Notes or to exchange such Notes for an equal principal amount
of Notes of other authorized denominations, the Registrar or co-Registrar shall
register the transfer or make the exchange as requested if its requirements for
such transaction are met; provided, however, that the Notes presented or
surrendered for registration of transfer or exchange shall be duly endorsed or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Registrar or co-Registrar, duly executed by the Holder thereof
or its attorney duly authorized in writing. To permit registrations of
transfer and exchanges, the Company shall execute and the Trustee shall
authenticate Notes at the Registrar's or co-Registrar's request. No service
charge shall be made for any registration of transfer or exchange, but the
Company may require payment of a sum sufficient to cover any transfer tax or
similar governmental charge payable in connection therewith (other than any
such transfer taxes or similar governmental charge payable upon exchanges or
transfers pursuant to Sections 2.10, 3.06, 4.14, 4.15 or 9.06, in which event
the Company shall be responsible for the payment of such taxes).
The Registrar or co-Registrar shall not be required to register the
transfer of or exchange of any Note (i) during a period beginning at the
opening of business 15 days before the mailing of a notice of redemption of
Notes and ending at the close of business on the day of such mailing and (ii)
selected for redemption in whole or in part pursuant to Article Three, except
the unredeemed portion of any Note being redeemed in part.
Any Holder of the Global Note shall, by acceptance of such Global
Note, agree that transfers of beneficial interests in such Global Notes may be
effected only through a book entry system maintained by the Holder of such
Global Note (or its agent), and that ownership of a beneficial interest in the
Note shall be required to be reflected in a book entry.
SECTION 2.07. Replacement Notes.
If a mutilated Note is surrendered to the Trustee or if the Holder of
a Note claims that the Note has been lost, destroyed or wrongfully taken, the
Company shall issue and the Trustee shall authenticate a replacement Note if
the Trustee's requirements are met. If required by the Trustee or the Company,
such Holder must provide an affidavit of lost certificate and an indemnity bond
or other indemnity, sufficient in the judgment of both the Company and the
Trustee, to protect the Company, the Trustee or any Agent from any loss which
any of them may suffer if a Note is replaced. The Company may charge such
Holder for its reasonable, out-of-pocket expenses in replacing a Note,
including reasonable fees and expenses of counsel. Every replacement Note
shall constitute an additional obligation of the Company.
SECTION 2.08. Outstanding Notes.
Notes outstanding at any time are all the Notes that have been
authenticated by the Trustee except those canceled by it, those delivered to it
for cancellation and those described in
23
<PAGE> 30
this Section 2.08 as not outstanding. Subject to the provisions of Section
2.09, a Note does not cease to be outstanding because the Company or any of its
respective Affiliates holds the Note.
If a Note is replaced pursuant to Section 2.07 (other than a mutilated
Note surrendered for replacement), it ceases to be outstanding unless the
Trustee receives an Opinion of Counsel that the replaced Note is held by a bona
fide purchaser. A mutilated Note ceases to be outstanding upon surrender of
such Note and replacement thereof pursuant to Section 2.07.
If on a Redemption Date or the Maturity Date the Paying Agent holds
U.S. Legal Tender sufficient to pay all of the principal and interest due on
the Notes payable on that date and is not prohibited from paying such money to
the Holders thereof pursuant to the terms of this Indenture, then on and after
that date such Notes cease to be outstanding and interest on them ceases to
accrue.
SECTION 2.09. Treasury Notes.
In determining whether the Holders of the required principal amount of
Notes have concurred in any direction, waiver, consent or notice, Notes owned
by the Company, or any of its Affiliates shall be considered as though they are
not outstanding, except that for the purposes of determining whether the
Trustee shall be protected in relying on any such direction, waiver or consent,
only Notes which a Trust Officer of the Trustee actually knows are so owned
shall be so considered. The Company shall notify the Trustee, in writing, when
it or any of its Affiliates repurchases or otherwise acquires Notes, of the
aggregate principal amount of such Notes so repurchased or otherwise acquired.
SECTION 2.10. Temporary Notes.
Until definitive Notes are ready for delivery, the Company may prepare
and the Trustee shall authenticate temporary Notes upon receipt of a written
order of the Company in the form of an Officers' Certificate. The Officers'
Certificate shall specify the amount of temporary Notes to be authenticated and
the date on which the temporary Notes are to be authenticated. Temporary Notes
shall be substantially in the form of definitive Notes but may have variations
that the Company considers appropriate for temporary Notes. Without
unreasonable delay, the Company shall prepare and the Trustee shall
authenticate upon receipt of a written order of the Company pursuant to Section
2.02 definitive Notes in exchange for temporary Notes.
SECTION 2.11. Cancellation.
The Company at any time may deliver Notes to the Trustee for
cancellation. The Registrar and the Paying Agent shall forward to the Trustee
any Notes surrendered to them for registration of transfer, exchange or
payment. The Trustee, or at the direction of the Trustee, the Registrar or the
Paying Agent, and no one else, shall cancel and shall dispose of all Notes
surrendered for registration of transfer, exchange, payment or cancellation.
Subject to Section 2.07, the Company may not issue new Notes to replace Notes
that it has paid or delivered to the Trustee for cancellation. If the Company
shall acquire any of the Notes, such acquisition shall not
24
<PAGE> 31
operate as a redemption or satisfaction of the Indebtedness represented by such
Notes unless and until the same are surrendered to the Trustee for cancellation
pursuant to this Section 2.11.
The Trustee shall destroy all canceled Notes in accordance with its
usual procedures unless the Company by written directions shall otherwise
direct.
SECTION 2.12. Defaulted Interest.
If the Company defaults in a payment of interest on the Notes, it
shall pay the defaulted interest, plus (to the extent lawful) any interest
payable on the defaulted interest to the Persons who are Holders on a
subsequent special record date, which date shall be the fifteenth day next
preceding the date fixed by the Company for the payment of defaulted interest
or the next succeeding Business Day if such date is not a Business Day. At
least 15 days before the subsequent special record date, the Company shall mail
to each Holder, as of a recent date selected by the Company, with a copy to the
Trustee, a notice that states the subsequent special record date, the payment
date and the amount of defaulted interest, and interest payable on such
defaulted interest, if any, to be paid.
SECTION 2.13. CUSIP Number.
The Company in issuing the Notes may use a "CUSIP" number, and if so,
the Trustee shall use the CUSIP number in notices of redemption or exchange as
a convenience to Holders; provided that no representation is hereby deemed to
be made by the Trustee as to the correctness or accuracy of the CUSIP number
printed in the notice or on the Notes, and that reliance may be placed only on
the other identification numbers printed on the Notes. The Company shall
promptly notify the Trustee of any change in the CUSIP number.
SECTION 2.14. Deposit of Money.
Prior to 11:00 a.m. New York City time on each Interest Payment Date
and Maturity Date, the Company shall deposit with the Paying Agent in
immediately available funds money sufficient to make cash payments, if any, due
on such Interest Payment Date or Maturity Date, as the case may be, in a timely
manner which permits the Paying Agent to remit payment to the Holders on such
Interest Payment Date or Maturity Date, as the case may be.
SECTION 2.15. Restrictive Legends.
Each Global Note and Physical Note that constitutes a Restricted
Security shall bear the following legend (the "Private Placement Legend") on
the face thereof until November 13, 1999, unless otherwise agreed by the
Company and the Holder thereof:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION
HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED
25
<PAGE> 32
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES
ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED
IN RULE 501(A)(l), (2), (3) OR (7) UNDER THE SECURITIES ACT) (AN
"ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING
THIS SECURITY IN AN OFFSHORE TRANSACTION, (2) AGREES THAT IT WILL NOT
WITHIN THREE YEARS AFTER THE ORIGINAL ISSUANCE OF THIS SECURITY RESELL
OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE ISSUER OR ANY
SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED
INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES
ACT, (C) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED
INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES (OR HAS FURNISHED ON
ITS BEHALF BY A U.S. BROKER-DEALER) TO THE TRUSTEE A SIGNED LETTER
CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE
RESTRICTIONS ON TRANSFER OF THIS SECURITY (THE FORM OF WHICH LETTER
CAN BE OBTAINED FROM THE TRUSTEE OR REGISTRAR), (D) OUTSIDE THE UNITED
STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 OF
REGULATION S UNDER THE SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION
FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF
AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH
PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO
THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS
SECURITY WITHIN THREE YEARS AFTER THE ORIGINAL ISSUANCE OF THE
SECURITY, IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED
INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE
TRUSTEE AND THE ISSUER SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER
INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT
SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION,"
"UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY
REGULATION S UNDER THE SECURITIES ACT.
Each Global Note shall also bear the following legend on the face
thereof:
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR SECURITIES IN
DEFINITIVE FORM, THIS SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A
WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY, OR BY ANY SUCH
NOMINEE OF THE
26
<PAGE> 33
DEPOSITARY, OR BY THE DEPOSITARY OR NOMINEE OF SUCH SUCCESSOR
DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE
OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS CERTIFICATE IS PRESENTED BY
AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW
YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION
OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED
BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE
TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR
THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS
GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH
THE RESTRICTIONS SET FORTH IN SECTION 2.17 OF THE INDENTURE.
SECTION 2.16. Book-Entry Provisions for Global Security.
(a) The Global Note initially shall (i) be registered in the name
of the Depository or the nominee of such Depository, (ii) be delivered to the
Trustee as custodian for such Depository and (iii) bear legends as set forth in
Section 2.15.
Members of, or participants in, the Depository ("Agent Members") shall
have no rights under this Indenture with respect to any Global Note held on
their behalf by the Depository, or the Trustee as its custodian, or under the
Global Note, and the Depository may be treated by the Company, the Trustee and
any agent of the Company or the Trustee as the absolute owner of the Global
Note for all purposes whatsoever. Notwithstanding the foregoing, nothing
herein shall prevent the Company, the Trustee or any agent of the Company or
the Trustee from giving effect to any written certification, proxy or other
authorization furnished by the Depository or impair, as between the Depository
and its Agent Members, the operation of customary practices governing the
exercise of the rights of a Holder of any Note.
(b) Transfers of the Global Note shall be limited to transfers in
whole, but not in part, to the Depository, its successors or their respective
nominees. Interests of beneficial owners in the Global Note may be transferred
or exchanged for Physical Notes in accordance with the rules and procedures of
the Depository and the provisions of Section 2.17. In addition, Physical Notes
shall be transferred to all beneficial owners in exchange for their beneficial
interests in the Global Note if (i) the Depository notifies the Company that it
is unwilling or unable to continue as Depository for the Global Note and a
successor depositary is not appointed by the Company
27
<PAGE> 34
within 90 days of such notice or (ii) an Event of Default has occurred and is
continuing and the Registrar has received a written request from the Depository
to issue Physical Notes.
(c) In connection with any transfer or exchange of a portion of
the beneficial interest in the Global Note to beneficial owners pursuant to
Section 2.16(b), the Registrar shall (if one or more Physical Notes are to be
issued) reflect on its books and records the date and a decrease in the
principal amount of the Global Note in an amount equal to the principal amount
of the beneficial interest in the Global Note to be transferred, and the
Company shall execute, and the Trustee shall authenticate and deliver, one or
more Physical Notes of like tenor and amount.
(d) In connection with the transfer of the entire Global Note to
beneficial owners pursuant to Section 2.16(b), the Global Note shall be deemed
to be surrendered to the Trustee for cancellation, and the Company shall
execute, and the Trustee shall authenticate and deliver, to each beneficial
owner identified by the Depository in exchange for its beneficial interest in
the Global Note, an equal aggregate principal amount of Physical Notes of
authorized denominations.
(e) Any Physical Note constituting a Restricted Security delivered
in exchange for an interest in the Global Note pursuant to paragraph (b) or (c)
shall, except as otherwise provided by Section 2.17(a)(i)(x) and Section
2.17(c), bear the legend regarding transfer restrictions applicable to the
Physical Notes set forth in Section 2.15.
(f) The Holder of the Global Note may grant proxies and otherwise
authorize any Person, including Agent Members and Persons that may hold
interests through Agent Members, to take any action which a Holder is entitled
to take under this Indenture or the Notes.
SECTION 2.17. Special Transfer Provisions.
(a) Transfers to Non-QIB Institutional Accredited Investors and
Non-U.S. Persons. The following provisions shall apply with respect to the
registration of any proposed transfer of a Note constituting a Restricted
Security to any Institutional Accredited Investor which is not a QIB or to any
Non-U.S. Person:
(i) the Registrar shall register the transfer of any Note
constituting a Restricted Security, whether or not such Note bears the
Private Placement Legend, if (x) the requested transfer is after
November 13, 1999 or (y) (1) in the case of a transfer to an
Institutional Accredited Investor which is not a QIB (excluding
Non-U.S. Persons), the proposed transferee has delivered to the
Registrar a certificate substantially in the form of Exhibit C hereto
or (2) in the case of a transfer to a Non-U.S. Person, the proposed
transferor has delivered to the Registrar a certificate substantially
in the form of Exhibit D hereto; and
(ii) if the proposed transferor is an Agent Member holding
a beneficial interest in the Global Note, upon receipt by the
Registrar of (x) the certificate, if any, required by paragraph (i)
above and (y) instructions given in accordance with the Depository's
and the Registrar's procedures.
28
<PAGE> 35
Whereupon (a) the Registrar shall reflect on its books and records the date and
(if the transfer does not involve a transfer of outstanding Physical Notes) a
decrease in the principal amount of the Global Note in an amount equal to the
principal amount of the beneficial interest in the Global Note to be
transferred, and (b) the Company shall execute and the Trustee shall
authenticate and deliver one or more Physical Notes of like tenor and amount.
(b) Transfers to QIBs. The following provisions shall apply with
respect to the registration of any proposed transfer of a Note constituting a
Restricted Security to a QIB (excluding transfers to Non-U.S. Persons):
(i) the Registrar shall register the transfer if such
transfer is being made by a proposed transferor who has checked the
box provided for on the form of Note stating, or has otherwise advised
the Company and the Registrar in writing, that the sale has been made
in compliance with the provisions of Rule 144A to a transferee who has
signed the certification provided for on the form of Note stating, or
has otherwise advised the Company and the Registrar in writing, that
it is purchasing the Note for its own account or an account with
respect to which it exercises sole investment discretion and that it
and any such account is a QIB within the meaning of Rule 144A, and is
aware that the sale to it is being made in reliance on Rule 144A and
acknowledges that it has received such information regarding the
Company as it has requested pursuant to Rule 144A or has determined
not to request such information and that it is aware that the
transferor is relying upon its foregoing representations in order to
claim the exemption from registration provided by Rule 144A; and
(ii) if the proposed transferee is an Agent Member, and
the Notes to be transferred consist of Physical Notes which after
transfer are to be evidenced by an interest in the Global Note, upon
receipt by the Registrar of instructions given in accordance with the
Depository's and the Registrar's procedures, the Registrar shall
reflect on its books and records the date and an increase in the
principal amount of the Global Note in an amount equal to the
principal amount of the Physical Notes to be transferred, and the
Trustee shall cancel the Physical Notes so transferred.
(c) Private Placement Legend. Upon the registration of transfer,
exchange or replacement of Notes not bearing the Private Placement Legend, the
Registrar shall deliver Notes that do not bear the Private Placement Legend.
Upon the registration of transfer, exchange or replacement of Notes bearing the
Private Placement Legend, the Registrar shall deliver only Notes that bear the
Private Placement Legend unless (i) the circumstances contemplated by Section
2.17(a)(i)(x) exist or (ii) there is delivered to the Registrar an Opinion of
Counsel reasonably satisfactory to the Company and the Trustee to the effect
that neither such legend nor the related restrictions on transfer are required
in order to maintain compliance with the provisions of the Securities Act.
(d) General. By its acceptance of any Note bearing the Private
Placement Legend, each Holder of such a Note acknowledges the restrictions on
transfer of such Note set forth in
29
<PAGE> 36
this Indenture and in the Private Placement Legend and agrees that it will
transfer such Note only as provided in this Indenture.
The Registrar shall retain copies of all letters, notices and other
written communications received pursuant to Section 2.16 or this Section 2.17
in accordance with its usual procedures. The Company shall have the right to
inspect and make copies of all such letters, notices or other written
communications at any reasonable time upon the giving of reasonable written
notice to the Registrar.
ARTICLE THREE
REDEMPTION
SECTION 3.01. Notices to Trustee.
If the Company elects to redeem Notes pursuant to Section 3.07, it
shall notify the Trustee and the Paying Agent in writing of the Redemption Date
and the principal amount of the Notes to be redeemed.
The Company shall give each notice provided for in this Section 3.01
at least 60 days before the Redemption Date (unless a shorter notice period
shall be satisfactory to the Trustee, as evidenced in a writing signed on
behalf of the Trustee), together with an Officers' Certificate stating that
such redemption shall comply with the conditions contained herein and in the
Notes.
SECTION 3.02. Selection of Notes To Be Redeemed.
If fewer than all of the Notes are to be redeemed, the Trustee shall
select the Notes to be redeemed on a pro rata basis, by lot or in such other
fair and reasonable manner chosen at the discretion of the Trustee; provided,
however, that if a partial redemption is made with the proceeds of a Public
Equity Offering, selection of the Notes or portion thereof for redemption shall
be made by the Trustee only on a pro rata basis to the extent practicable,
unless such method is otherwise prohibited. The Trustee shall make the
selection from the Notes outstanding and not previously called for redemption
and shall promptly notify the Company in writing of the Notes selected for
redemption and, in the case of any Note selected for partial redemption, the
principal amount thereof to be redeemed. Notes in denominations of $1,000 may
be redeemed only in whole. The Trustee may select for redemption portions
(equal to $1,000 or any integral multiple thereof) of the principal of Notes
that have denominations larger than $1,000. Provisions of this Indenture that
apply to Notes called for redemption also apply to portions of Notes called for
redemption.
SECTION 3.03. Notice of Redemption.
At least 30 days but not more than 60 days before a Redemption Date,
the Company shall mail or cause to be mailed a notice of redemption by first
class mail, postage prepaid, to each Holder whose Notes are to be redeemed,
with a copy to the Trustee and any Paying Agent. At the Company's written
request, the Trustee shall give the notice of redemption in the Company's name
and at the Company's expense.
30
<PAGE> 37
Each notice for redemption shall identify the Notes to be redeemed and
shall state:
(1) the Redemption Date;
(2) the Redemption Price and the amount of accrued
interest, if any, to be paid;
(3) the name and address of the Paying Agent;
(4) the subparagraph of the Notes pursuant to which such
redemption is being made;
(5) that Notes called for redemption must be surrendered
to the Paying Agent to collect the Redemption Price plus accrued
interest, if any;
(6) that, unless the Company defaults in making the
redemption payment, interest on Notes called for redemption ceases to
accrue on and after the Redemption Date, and the only remaining right
of the Holders of such Notes is to receive payment of the Redemption
Price plus accrued interest, if any, upon surrender to the Paying
Agent of the Notes redeemed;
(7) if any Note is being redeemed in part, the portion of
the principal amount of such Note to be redeemed and that, after the
Redemption Date, and upon surrender of such Note, a new Note or Notes
in the aggregate principal amount equal to the unredeemed portion
thereof will be issued; and
(8) if fewer than all the Notes are to be redeemed, the
identification of the particular Notes (or portion thereof) to be
redeemed, as well as the aggregate principal amount of Notes to be
redeemed and the aggregate principal amount of Notes to be outstanding
after such partial redemption.
SECTION 3.04. Effect of Notice of Redemption.
Once notice of redemption is mailed in accordance with Section 3.03,
Notes called for redemption become due and payable on the Redemption Date and
at the Redemption Price plus accrued interest, if any. Upon surrender to the
Trustee or Paying Agent, such Notes called for redemption shall be paid at the
Redemption Price (which shall include accrued interest thereon to the
Redemption Date), but installments of interest, the maturity of which is on or
prior to the Redemption Date, shall be payable to Holders of record at the
close of business on the relevant record dates referred to in the Notes.
SECTION 3.05. Deposit of Redemption Price.
Prior to 11:00 A.M., New York City time, on the Redemption Date, the
Company shall deposit with the Paying Agent U.S. Legal Tender sufficient to pay
the Redemption Price plus accrued interest, if any, of all Notes to be redeemed
on that date. The Paying Agent shall promptly return to the Company any U.S.
Legal Tender so deposited which is not required for
31
<PAGE> 38
that purpose, except with respect to amounts owed as obligations to the Trustee
pursuant to Article Seven.
If the Company complies with the preceding paragraph, then, unless the
Company defaults in the payment of such Redemption Price plus accrued interest,
if any, interest on the Notes to be redeemed will cease to accrue on and after
the applicable Redemption Date, whether or not such Notes are presented for
payment.
SECTION 3.06. Notes Redeemed in Part.
Upon surrender of a Note that is to be redeemed in part, the Trustee
shall authenticate for the Holder a new Note or Notes equal in principal amount
to the unredeemed portion of the Note surrendered.
SECTION 3.07. Redemption.
(a) Optional Redemption. The Notes will be redeemable, at the
Company's option, in whole at any time or in part from time to time, on and
after November 15, 2001, upon not less than 30 nor more than 60 days' notice to
the Holders of the Notes, at the following redemption prices (expressed as
percentages of the principal amount thereof) if redeemed during the twelve-
month period commencing on November 15 of the year set forth below, plus, in
each case, accrued and unpaid interest thereon, if any, to the date of
redemption:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106.250%
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.125%
2003 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . 100.000%
</TABLE>
(b) Optional Redemption Upon Public Equity Offerings.
Notwithstanding the foregoing, at any time, or from time to time, on or prior
to November 15, 1999, the Company may, at its option, use the net cash proceeds
of one or more Public Equity Offerings (as defined below) to redeem up to 35%
of the aggregate principal amount of Notes; provided that at least 65% of the
principal amount of Notes originally issued remains outstanding immediately
after any such redemption, at the following redemption prices (expressed as
percentages of the principal amount thereof) if redeemed during the twelve-
month period commencing on November 15 of the year set forth below, plus, in
each case, accrued interest to the date of redemption:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112.500%
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112.500%
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112.500%
</TABLE>
In order to effect the foregoing redemption with the proceeds of any
Public Equity Offering, the Company shall make such redemption not more than
120 days after the consummation of any such Public Equity Offering. As used in
the preceding paragraph, "Public Equity Offering" means an underwritten public
offering of Qualified Capital Stock of the
32
<PAGE> 39
Company pursuant to a registration statement filed with the SEC in accordance
with the Securities Act.
SECTION 3.08. Mandatory Disposition or Redemption Pursuant to
Gaming Laws.
If a Holder or beneficial owner of a Note is required to be licensed,
qualified or found suitable under applicable Gaming Laws and is not so
licensed, qualified or found suitable within any time period specified by the
applicable Gaming Authority, the Holder or beneficial owner shall be obliged,
at the request of the Company, to dispose of such Holder's or beneficial
owner's Notes within a time period prescribed by the Company or such other time
period prescribed by such Gaming Authority (in which event the Company's
obligation to pay any interest after the Holder's or beneficial owner's receipt
of such request shall be limited as provided in such Gaming Laws), and
thereafter the Company shall have the right to redeem, on the date fixed by the
Company for the redemption of such Notes, notice of which shall be furnished to
the Trustee, such Holder's or beneficial owner's Notes at a redemption price
equal to the lesser of (i) the lowest closing sale price of the Notes on any
trading day during the 120-day period ending on the date upon which the Company
shall have received notice from a Gaming Authority of such Holder's or
beneficial owner's disqualification or (ii) the price at which such Holder or
beneficial owner acquired the Notes, unless a different redemption price is
required by such Gaming Authority, in which event such required price shall be
the redemption price. The Company will not be required to pay or reimburse any
Holder or beneficial owner of a Note for the costs of licensure or
investigation for such licensure, qualification or finding of suitability. Any
Holder or beneficial owner of a Note required to be licensed, qualified or
found suitable under applicable Gaming Laws will pay all investigative fees and
costs imposed by any Gaming Authority in connection with such qualification or
application therefor.
ARTICLE FOUR
COVENANTS
SECTION 4.01. Payment of Notes.
The Company shall pay the principal of and interest on the Notes on
the dates and in the manner provided in the Notes and in this Indenture. An
installment of principal of or interest on the Notes shall be considered paid
on the date it is due if the Trustee or Paying Agent (other than the Company or
an Affiliate of the Company) holds, prior to 11:00 A.M. New York City time, on
that date U.S. Legal Tender designated for and sufficient to pay the
installment in full and is not prohibited from paying such money to the Holders
pursuant to the terms of this Indenture.
The Company shall pay, to the extent such payments are lawful,
interest on overdue principal and on overdue installments of interest (without
regard to any applicable grace periods) from time to time on demand at the rate
borne by the Notes plus 2% per annum. Interest will be computed on the basis
of a 360- day year comprised of twelve 30-day months.
33
<PAGE> 40
Notwithstanding anything to the contrary contained in this Indenture,
the Company may, to the extent it is required to do so by law, deduct or
withhold income or other similar taxes imposed by the United States of America
from principal or interest payments hereunder.
SECTION 4.02. Maintenance of Office or Agency.
The Company shall maintain the office or agency required under Section
2.03. The Company shall give prior written notice to the Trustee of the
location, and any change in the location, of such office or agency. If at any
time the Company shall fail to maintain any such required office or agency or
shall fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the address of the
Trustee set forth in Section 11.02.
SECTION 4.03. Corporate Existence.
Except as otherwise permitted by Article Five and Section 4.15, the
Company shall do or cause to be done, at its own cost and expense, all things
necessary to preserve and keep in full force and effect its corporate existence
and the corporate existence of each of its Restricted Subsidiaries in
accordance with the respective organizational documents of each such Restricted
Subsidiary and the material rights (charter and statutory) and franchises of
the Company and each such Restricted Subsidiary; provided, however, that the
Company shall not be required to preserve, with respect to itself, any material
right or franchise and, with respect to any of its Restricted Subsidiaries, any
such existence, material right or franchise, if the Board of Directors of the
Company shall determine in good faith that the preservation thereof is no
longer desirable in the conduct of the business of the Company and the
Restricted Subsidiaries, taken as a whole.
SECTION 4.04. Payment of Taxes and Other Claims.
The Company shall pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (i) all material taxes, assessments
and governmental charges (including withholding taxes and any penalties,
interest and additions to taxes) levied or imposed upon it or any of its
Subsidiaries or properties of it or any of its Subsidiaries and (ii) all lawful
claims for labor, materials and supplies that, if unpaid, might by law become a
Lien upon the property of it or any of its Subsidiaries; provided, however,
that the Company shall not be required to pay or discharge or cause to be paid
or discharged any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings properly instituted and diligently conducted for which adequate
reserves, to the extent required under GAAP, have been taken.
SECTION 4.05. Maintenance of Properties and Insurance.
(a) The Company shall, and shall cause each of its Restricted
Subsidiaries to, maintain its material properties in good working order and
condition (subject to ordinary wear and tear) and make all necessary repairs,
renewals, replacements, additions, betterments and improvements thereto and
actively conduct and carry on its business; provided, however, that nothing in
this Section 4.05 shall prevent the Company or any of its Restricted
Subsidiaries from discontinuing
34
<PAGE> 41
the operation and maintenance of any of its properties, if such discontinuance
is, in the good faith judgment of the Board of Directors of the Company or the
Restricted Subsidiary, as the case may be, desirable in the conduct of their
respective businesses and is not disadvantageous in any material respect to the
Holders.
(b) The Company shall provide or cause to be provided, for itself
and each of its Restricted Subsidiaries, insurance (including appropriate self-
insurance) against loss or damage of the kinds that, in the good faith judgment
of the Board of Directors of the Company, are adequate and appropriate for the
conduct of the business of the Company and such Restricted Subsidiaries in a
prudent manner, with reputable insurers or with the government of the United
States of America or an agency or instrumentality thereof, in such amounts,
with such deductibles, and by such methods as shall be customary, in the good
faith judgment of the Board of Directors of the Company, for companies
similarly situated in the industry.
SECTION 4.06. Compliance Certificate; Notice of Default.
(a) The Company shall deliver to the Trustee, within 90 days after
the end of the Company's fiscal year, an Officers' Certificate signed by the
chief executive officer, the chief financial officer or the chief accounting
officer of the Company stating that a review of its activities and the
activities of its Subsidiaries during the preceding fiscal year has been made
under the supervision of the signing Officers with a view to determining
whether each of the Company and its Subsidiaries has kept, observed, performed
and fulfilled its obligations under this Indenture and further stating, as to
each such Officer signing such certificate, that to the best of such Officer's
knowledge each of the Company and its Subsidiaries during such preceding fiscal
year has kept, observed, performed and fulfilled each and every such covenant
and no Default or Event of Default occurred during such year and at the date of
such certificate there is no Default or Event of Default that has occurred and
is continuing or, if such signers do know of such Default or Event of Default,
the certificate shall describe the Default or Event of Default and its status
with particularity. The Officers' Certificate shall also notify the Trustee
should the Company elect to change the manner in which it fixes its fiscal year
end.
(b) The annual financial statements delivered pursuant to Section
4.08 shall be accompanied by a written report of the Company's independent
accountants (who shall be a firm of established national reputation) that in
conducting their audit of such financial statements nothing has come to their
attention that would lead them to believe that the Company has violated any
provisions of Article Four, Five or Six of this Indenture insofar as they
relate to accounting matters or, if any such violation has occurred, specifying
the nature and period of existence thereof, it being understood that such
accountants shall not be liable directly or indirectly to any Person for any
failure to obtain knowledge of any such violation.
(c) (i) If any Default or Event of Default has occurred and is
continuing or (ii) if any Holder seeks to exercise any remedy hereunder with
respect to a claimed Default under this Indenture or the Notes, the Company
shall deliver to the Trustee, at its address set forth in Section 11.02, by
registered or certified mail or by telegram, telex or facsimile transmission
followed by hard copy by registered or certified mail an Officers' Certificate
specifying such event, notice or other action within five Business Days of its
becoming aware of such occurrence.
35
<PAGE> 42
SECTION 4.07. Compliance with Laws.
The Company shall comply, and shall cause each of its Subsidiaries to
comply, with all applicable statutes, rules, regulations, orders and
restrictions of the United States of America, all states and municipalities
thereof, and of any governmental department, commission, board, regulatory
authority, bureau, agency and instrumentality of the foregoing, in respect of
the conduct of their respective businesses and the ownership of their
respective properties, except for such noncompliances as are not in the
aggregate reasonably likely to have a material adverse effect on the financial
condition or results of operations of the Company and its Restricted
Subsidiaries, taken as a whole.
SECTION 4.08. SEC Reports.
(a) Upon consummation of the Exchange Offer and the issuance of
the Exchange Notes, the Company (at its own expense) shall file with the SEC
and shall file with the Trustee within 15 days after it files them with the SEC
copies of the quarterly and annual reports and of the information, documents,
and other reports (or copies of such portions of any of the foregoing as the
SEC may by rules and regulations prescribe) to be filed pursuant to Section 13
or 15(d) of the Exchange Act (without regard to whether the Company is subject
to the requirements of such Section 13 or 15(d) of the Exchange Act); provided
that prior to the consummation of the Exchange Offer and the issuance of the
Exchange Notes, the Company (at its own expense) will mail to the Trustee and
Holders in accordance with Section 4.08(b) substantially the same information
that would have been required by the foregoing documents within 15 days of when
any such document would otherwise have been required to be filed with the SEC.
Upon qualification of this Indenture under the TIA, the Company shall also
comply with the provisions of TIA Section 314(a).
(b) At the Company's expense, the Company shall cause an annual
report if furnished by it to stockholders generally and each quarterly or other
financial report if furnished by it to stockholders generally to be filed with
the Trustee and mailed to the Holders at their addresses appearing in the
register of Notes maintained by the Registrar at the time of such mailing or
furnishing to stockholders.
(c) The Company shall provide to any Holder any information
reasonably requested by such Holder concerning the Company (including financial
statements) necessary in order to permit such Holder to sell or transfer Notes
in compliance with Rule 144A under the Securities Act.
SECTION 4.09. Waiver of Stay, Extension or Usury Laws.
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, plead, or in any manner whatsoever claim
or take the benefit or advantage of, any stay or extension law or any usury law
or other law that would prohibit or forgive the Company from paying all or any
portion of the principal of or interest on the Notes as contemplated herein,
wherever enacted, now or at any time hereafter in force, or which may affect
the covenants or the performance of this Indenture; and (to the extent that it
may lawfully do so) the Company hereby expressly waives all benefit or
advantage of any such law, and covenants that
36
<PAGE> 43
it will not hinder, delay or impede the execution of any power herein granted
to the Trustee, but will suffer and permit the execution of every such power as
though no such law had been enacted.
SECTION 4.10. Limitation on Restricted Payments.
The Company shall not, and shall not cause or permit any of the
Restricted Subsidiaries to, directly or indirectly, (i) declare or pay any
dividend or make any distribution (other than dividends or distributions
payable in Qualified Capital Stock of the Company) on or in respect of shares
of the Capital Stock of the Company or any of its Restricted Subsidiaries to
holders of such Capital Stock (other than any such dividend or distribution to
the Company or a Wholly Owned Restricted Subsidiary), (ii) purchase, redeem or
otherwise acquire or retire for value any Capital Stock of the Company or any
Subsidiary of the Company or any warrants, rights or options to purchase or
acquire shares of any class of such Capital Stock, (iii) make any principal
payment on, purchase, defease, redeem, prepay, decrease or otherwise acquire or
retire for value, prior to any scheduled final maturity, scheduled repayment or
scheduled sinking fund payment, any Indebtedness of the Company that is
subordinate or junior in right of payment to the Notes, or (iv) make any
Investment other than Permitted Investments (each of the foregoing actions set
forth in clauses (i), (ii), (iii) and (iv) being referred to as a "Restricted
Payment"), if at the time of such Restricted Payment or immediately after
giving effect thereto, (a) a Default or an Event of Default shall have occurred
and be continuing or would result therefrom, (b) the Company is not able to
incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) in compliance with Section 4.12, or (c) the aggregate amount of
Restricted Payments (including such proposed Restricted Payment) made
subsequent to the Issue Date (the amount expended for such purposes, if other
than cash, being the fair market value of such property as determined
reasonably and in good faith by the Board of Directors of the Company) shall
exceed the sum of: (x) 50% of the cumulative Consolidated Net Income (or if
cumulative Consolidated Net Income shall be a loss, minus 100% of such loss) of
the Company earned subsequent to the Issue Date and on or prior to the date the
Restricted Payment occurs (the "Reference Date"), treating such period as a
single accounting period; plus (y) 100% of the aggregate net proceeds received
by the Company from any Person (other than a Subsidiary of the Company) from
the issuance and sale subsequent to the Issue Date and on or prior to the
Reference Date of Qualified Capital Stock of the Company (excluding any
Qualified Capital Stock of the Company (A) with respect to which the purchase
price thereof has been financed directly or indirectly using funds (1) borrowed
from the Company or any of its Subsidiaries or (2) contributed, extended,
guaranteed or advanced by the Company or any of its subsidiaries (including
without limitation in respect of any employee stock ownership or benefit plan)
and (B) the net proceeds of which are intended to be or were used to redeem
Notes as described in Section 3.07).
Notwithstanding the foregoing, the provisions set forth in the
immediately preceding paragraph do not prohibit: (i) the payment of any
dividend within 60 days after the date of declaration of such dividend if the
dividend would have been permitted on the date of declaration; (ii) if no Event
of Default shall have occurred and be continuing, the acquisition of any shares
of Capital Stock of the Company, either (A) solely in exchange for shares of
Qualified Capital Stock of the Company, or (B) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a
Subsidiary of the Company) of shares of Qualified Capital Stock of the Company
(excluding any Qualified Capital Stock of the Company with respect to which the
purchase price thereof has been financed directly or indirectly using funds (1)
borrowed from the Company or any of its Subsidiaries or (2) contributed,
extended, guaranteed or advanced by the Company or any of its subsidiaries
(including without limitation in respect of any employee stock ownership or
benefit plan); and (iii) if no Default or Event of Default shall have occurred
and be continuing, the acquisition of any Indebtedness of the Company that is
subordinate or junior in right of payment to the Notes, either (A) solely in
exchange for shares of Qualified Capital Stock of the Company or (B) through
the application of net proceeds of a substantially concurrent sale for cash
(other than to a Subsidiary of the Company) of (x) shares of Qualified Capital
Stock of the Company (excluding any Qualified Capital Stock of the Company with
respect to which the
37
<PAGE> 44
purchase price thereof has been financed directly or indirectly using funds (1)
borrowed from the Company or any of its Subsidiaries or (2) contributed,
extended, guaranteed or advanced by the Company or any of its Subsidiaries
(including without limitation in respect of any employee stock ownership or
benefit plan) or (y) Refinancing Indebtedness. In determining the aggregate
amount of Restricted Payments made subsequent to the Issue Date in accordance
with clause (c) of the immediately preceding paragraph, amounts expended
pursuant to clause (i) shall be included in such calculation.
Not later than the date of making any Restricted Payment, the Company
shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment complies with the Indenture and setting forth in reasonable
detail the basis upon which the required calculations were computed, which
calculations may be based upon the Company's latest available internal
quarterly financial statements.
SECTION 4.11. Limitation on Transactions with Affiliates.
(a) The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, enter into or permit to
exist any transaction or series of related transactions (including without
limitation the purchase, sale, lease or exchange of any property or the
rendering of any service) with, or for the benefit of, any of its Affiliates
(an "Affiliate Transaction"), other than (x) Affiliate Transactions permitted
under Section 4.11(b) and (y) Affiliate Transactions on terms that are no less
favorable than those that might reasonably have been obtained in a comparable
transaction at such time on an arm's-length basis from a Person that is not an
Affiliate of the Company or such Restricted Subsidiary. All Affiliate
Transactions (and each series of related Affiliate Transactions that are
similar or part of a common plan) involving aggregate payments or other
property with a fair market value in excess of $1.0 million shall be approved
by the Board of Directors of the Company or such Restricted Subsidiary, as the
case may be, such approval to be evidenced by a Board Resolution stating that
such Board of Directors has determined that such transaction complies with the
foregoing provisions. If the Company or any Restricted Subsidiary enters into
an Affiliate Transaction (or a series of related Affiliate Transactions related
to a common plan) that involves an aggregate fair market value of more than
$5.0 million, the Company or such Restricted Subsidiary, as the case may be,
prior to the consummation thereof, will obtain an opinion stating that such
transaction or series of related transactions are fair to the Company or the
relevant Restricted Subsidiary, as the case may be, from a financial point of
view, from an Independent Financial Advisor and file the same with the Trustee.
38
<PAGE> 45
(b) The restrictions set forth in Section 4.11(a) shall not apply
to: (i) the transactions described in the Offering Memorandum in the first,
third and fourth paragraphs under "Certain Transactions", (ii) reasonable fees
and compensation, consistent with past practice, paid to and indemnity provided
on behalf of, officers, directors and employees of the Company or any
Restricted Subsidiary as determined in good faith by the disinterested members
of the Company's Board of Directors; (iii) transactions exclusively between or
among the Company and any of its Wholly Owned Restricted Subsidiaries or
exclusively between or among such Wholly Owned Restricted Subsidiaries,
provided such transactions are not otherwise prohibited by the Indenture; and
(iv) Restricted Payments permitted by the Indenture.
SECTION 4.12. Limitation on Incurrence of Additional
Indebtedness.
(a) The Company will not, and will not permit any of the
Restricted Subsidiaries to, directly or indirectly, create, incur, assume,
guarantee, acquire, become liable, contingently or otherwise, with respect to
or otherwise become responsible for payment of (collectively, "incur") any
Indebtedness (other than Permitted Indebtedness).
(b) Notwithstanding the foregoing, if no Default or Event of
Default shall have occurred and be continuing at the time of or as a
consequence of the incurrence of any such Indebtedness, the Company may incur
Indebtedness (including without limitation Acquired Indebtedness) other than
Prohibited Acquisition Indebtedness and any Restricted Subsidiary may incur
Acquired Indebtedness, in each case if on the date of the incurrence of such
Indebtedness, after giving effect to the incurrence thereof, the Consolidated
Fixed Charge Coverage Ratio of the Company is greater than (i) 2.00 to 1.00 if
such Indebtedness is incurred on or prior to November 15, 1998 or (ii) 2.25 to
1.00 if such Indebtedness is incurred after November 15, 1998.
(c) The Company will not in any event incur, directly or
indirectly, any Indebtedness that by its terms (or by the terms of any
agreement governing such Indebtedness) is subordinated to any Senior
Indebtedness of the Company and senior in any respect in right of payment to
the Notes.
SECTION 4.13. Limitation on Dividend and Other Payment
Restrictions Affecting Subsidiaries.
The Company shall not, and shall not cause or permit any of the
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause
or permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (i) pay dividends or make any other
distributions on or in respect of its Capital Stock; (ii) make loans or
advances or to pay any Indebtedness or other obligation owed to the Company or
any other Restricted Subsidiary of the Company; or (iii) transfer any of its
property or assets to the Company or any other Restricted Subsidiary of the
Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) this Indenture; (3) customary non-assignment
provisions of any lease governing a leasehold interest of any Restricted
Subsidiary; (4) any instrument governing Acquired Indebtedness incurred in
accordance with Section 4.12(b), provided that such encumbrance or restriction
is not applicable to any Person, or the properties or assets of any Person,
other than the Person or the properties or assets of the Person so acquired
(including
39
<PAGE> 46
without limitation such Person's direct and indirect subsidiaries;
(5) agreements existing on the Issue Date to the extent and in the manner such
agreements are in effect on the Issue Date; or (6) an agreement governing
Indebtedness incurred to Refinance the Indebtedness issued, assumed or incurred
pursuant to an agreement referred to in clause (2), (4) or (5) above; provided,
that the provisions relating to such encumbrance or restriction contained in
any such Indebtedness are no less favorable to the Company in any material
respect as determined by the Board of Directors of the Company in its
reasonable and good faith judgment than the provisions relating to such
encumbrance or restriction contained in agreements referred to in such clause
(2), (4) or (5).
SECTION 4.14. Change of Control.
(a) Upon the occurrence of a Change of Control, the Company shall
make an offer to purchase all outstanding Notes pursuant to the offer described
in Section 4.14(b) (the "Change of Control Offer") at a purchase price equal to
101% of the principal amount thereof plus accrued interest, if any, to the date
of purchase. Prior to the mailing of the notice referred to below, but in any
event within 30 days following any Change of Control, the Company shall (i)
repay in full and terminate all commitments under Indebtedness under the New
Credit Agreement, and all other Senior Indebtedness the terms of which require
repayment upon a Change of Control, or offer to repay in full and terminate all
commitments under all Indebtedness under the New Credit Agreement and all other
such Senior Indebtedness and to repay the Indebtedness owed to each lender
which has accepted such offer, or (ii) obtain the requisite consents under the
New Credit Agreement and all other Senior Indebtedness to permit the repurchase
of the Notes as provided below. The Company shall first comply with the
covenant in the immediately preceding sentence before it shall be required to
repurchase Notes pursuant to the provisions described in this Section 4.14.
(b) Within 30 days following the date upon which the Change of
Control occurred (the "Change of Control Date"), the Company shall send, by
first class mail, a notice to each Holder, with a copy to the Trustee, which
notice shall govern the terms of the Change of Control Offer. The notice to
the Holders shall contain all instructions and materials necessary to enable
such Holders to tender Notes pursuant to the Change of Control Offer. Such
notice shall state:
(1) that the Change of Control Offer is being made
pursuant to this Section 4.14 and that all Notes tendered and not
withdrawn will be accepted for payment;
(2) the purchase price (including the amount of accrued
interest) and the purchase date (which shall be no earlier than 30
days nor later than 45 days from the date such notice is mailed, other
than as may be required by law) (the "Change of Control Payment
Date"); provided that the Change of Control Payment Date for the Notes
shall be a date subsequent to any payment dates for the purchase or
other repayment of Senior Indebtedness having similar provisions;
(3) that any Note not tendered will continue to accrue
interest;
40
<PAGE> 47
(4) that, unless the Company defaults in making payment
therefor, any Note accepted for payment pursuant to the Change of
Control Offer shall cease to accrue interest after the Change of
Control Payment Date;
(5) that Holders electing to have a Note purchased
pursuant to a Change of Control Offer will be required to surrender
the Note, with the form entitled "Option of Holder to Elect Purchase"
on the reverse of the Note completed, to the Paying Agent at the
address specified in the notice prior to the close of business on the
third Business Day prior to the Change of Control Payment Date;
(6) that Holders will be entitled to withdraw their
election if the Paying Agent receives, not later than five Business
Days prior to the Change of Control Payment Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder,
the principal amount of the Notes the Holder delivered for purchase
and a statement that such Holder is withdrawing his election to have
such Notes purchased;
(7) that Holders of Physical Notes whose Physical Notes
are purchased only in part will be issued new Notes in a principal
amount equal to the unpurchased portion of the Physical Notes
surrendered; provided that each Physical Note purchased and each new
Physical Note issued shall be in an original principal amount of
$1,000 or integral multiples thereof; and
(8) the circumstances and relevant facts regarding such
Change of Control.
On or before the Change of Control Payment Date, the Company shall (i)
accept for payment Notes or portions thereof tendered pursuant to the Change of
Control Offer, (ii) deposit with the Paying Agent U.S. Legal Tender sufficient
to pay the purchase price plus accrued interest, if any, of all Notes so
tendered and (iii) deliver to the Trustee Notes so accepted together with an
Officers' Certificate stating the Notes or portions thereof being purchased by
the Company. The Paying Agent shall promptly mail to the Holders of Notes so
accepted payment in an amount equal to the purchase price plus accrued
interest, if any, and the Trustee shall promptly authenticate and mail to such
Holders new Notes equal in principal amount to any unpurchased portion of the
Notes surrendered. Any Notes not so accepted shall be promptly mailed by the
Company to the Holder thereof. For purposes of this Section 4.14, the Trustee
shall act as the Paying Agent.
Any amounts remaining after the purchase of Notes pursuant to a Change
of Control Offer shall be returned by the Trustee to the Company.
The Company shall comply with the requirements of Rule 14e-l under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent the
provisions of any securities laws or regulations conflict with the provisions
under this Section 4.14, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under this Section 4.14 by virtue thereof.
41
<PAGE> 48
SECTION 4.15. Limitation on Asset Sales.
(a) The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company or
the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors); (ii) at least 80% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be cash or Cash Equivalents and is received at the time
of such disposition; and (iii) upon the consummation of an Asset Sale, the
Company shall apply, or cause such Restricted Subsidiary to apply, the Net Cash
Proceeds relating to such Asset Sale within 365 days of receipt thereof either
(A) to prepay any Senior Indebtedness and, in the case of any Senior
Indebtedness under any revolving credit facility, effect a permanent reduction
in the availability under such revolving credit facility, (B) to make an
investment in properties and assets that replace the properties and assets that
were the subject of such Asset Sale or in properties and assets that will be
used in the business of the Company and the Restricted Subsidiaries as existing
on the Issue Date or in businesses reasonably related thereto ("Replacement
Assets"), or (C) a combination of prepayment and investment permitted by the
foregoing clauses (iii)(A) and (iii)(B). On the 366th day after an Asset Sale
or such earlier date, if any, as the Board of Directors of the Company or of
such Restricted Subsidiary determines not to apply the Net Cash Proceeds
relating to such Asset Sale as set forth in clause (iii)(A), (iii)(B) or
(iii)(C) of the next preceding sentence (each, a "Net Proceeds Offer Trigger
Date"), such aggregate amount of Net Cash Proceeds which have not been applied
on or before such Net Proceeds Offer Trigger Date as permitted in clauses
(iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each, a "Net
Proceeds Offer Amount") shall be applied by the Company or such Restricted
Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on a date
(the "Net Proceeds Offer Payment Date") not less than 30 nor more than 45 days
following the applicable Net Proceeds Offer Trigger Date, from all Holders on a
pro rata basis that amount of Notes equal to the Net Proceeds Offer Amount at a
price equal to 100% of the principal amount of the Notes to be purchased, plus
accrued and unpaid interest thereon, if any, to the date of purchase; provided,
however, that if at any time any non-cash consideration received by the Company
or any Restricted Subsidiary of the Company, as the case may be, in connection
with any Asset Sale is converted into or sold or otherwise disposed of for cash
(other than interest received with respect to any such non-cash consideration),
then such conversion or disposition shall be deemed to constitute an Asset Sale
hereunder and the Net Cash Proceeds thereof shall be applied in accordance with
this covenant.
Notwithstanding the foregoing, the Company may defer the Net Proceeds
Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to
or in excess of $2.0 million resulting from one or more Asset Sales (at which
time, the entire unutilized Net Proceeds Offer Amount, and not just the amounts
in excess of $2.0 million shall be applied as required by the preceding
paragraph). The first date the aggregate of all such deferred Net Proceeds
Offer Amounts is equal to $2.0 million or more shall be deemed to be a "Net
Proceeds Offer Trigger Date".
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and the Restricted Subsidiaries as an
entirety to a Person in a transaction permitted
42
<PAGE> 49
under Section 5.01, the successor corporation shall be deemed to have sold the
properties and assets of the Company and the Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or the Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Each Net Proceeds Offer will be mailed to the record Holders as shown
on the register of Holders within 25 days following the Net Proceeds Offer
Trigger Date, with a copy to the Trustee, and shall comply with the procedures
set forth in this Indenture. Upon receiving notice of the Net Proceeds Offer,
Holders may elect to tender their Notes in whole or in part in integral
multiples of $1,000 in exchange for cash. To the extent Holders properly
tender Notes in an amount exceeding the Net Proceeds Offer Amount, Notes of
tendering Holders will be purchased on a pro rata basis (based on amounts
tendered). A Net Proceeds Offer shall remain open for a period of 20 business
days or such longer period as may be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of this Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under this Section 4.15 by virtue thereof.
(b) Subject to the deferral of the Net Proceeds Offer Trigger Date
contained in the second paragraph of Section 4.15(a), each notice of a Net
Proceeds Offer pursuant to this Section 4.15 shall be mailed or caused to be
mailed, by first class mail, by the Company not more than 25 days after the Net
Proceeds Offer Trigger Date to all Holders at their last registered addresses
as of a date within 15 days of the mailing of such notice, with a copy to the
Trustee. The notice shall contain all instructions and materials necessary to
enable such Holders to tender Notes pursuant to the Net Proceeds Offer and
shall state the following terms:
(1) that the Net Proceeds Offer is being made pursuant to
this Section 4.15 and that all Notes tendered will be accepted for
payment; provided, however, that if the aggregate principal amount of
Notes tendered in a Net Proceeds Offer plus accrued interest at the
expiration of such offer exceeds the aggregate amount of the Net
Proceeds Offer, the Company shall select the Notes to be purchased on
a pro rata basis (with such adjustments as may be deemed appropriate
by the Company so that only Notes in denominations of $1,000 or
multiples thereof shall be purchased);
(2) the purchase price (including the amount of accrued
interest) and the purchase date (which shall be 20 Business Days from
the date of mailing of notice of such Net Proceeds Offer, or such
longer period as required by law) (the "Proceeds Purchase Date");
provided that the Proceeds Purchase Date for the Notes shall be a date
subsequent to any payment dates for the purchase or other repayment of
Senior Indebtedness having similar provisions;
43
<PAGE> 50
(3) that any Note not tendered will continue to accrue
interest;
(4) that, unless the Company defaults in making payment
therefor, any Note accepted for payment pursuant to the Net Proceeds
Offer shall cease to accrue interest after the Proceeds Purchase Date;
(5) that Holders electing to have a Note purchased
pursuant to a Net Proceeds Offer will be required to surrender the
Note, with the form entitled "Option of Holder to Elect Purchase" on
the reverse of the Note completed, to the Paying Agent at the address
specified in the notice prior to the close of business on the third
Business Day prior to the Proceeds Purchase Date;
(6) that Holders will be entitled to withdraw their
election if the Paying Agent receives, not later than five Business
Days prior to the Proceeds Purchase Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holder, the
principal amount of the Notes the Holder delivered for purchase and a
statement that such Holder is withdrawing his election to have such
Note purchased; and
(7) that Holders whose Notes are purchased only in part
will be issued new Notes in a principal amount equal to the
unpurchased portion of the Notes surrendered; provided that each Note
purchased and each new Note issued shall be in an original principal
amount of $1,000 or integral multiples thereof;
On or before the Proceeds Purchase Date, the Company shall (i) accept
for payment Notes or portions thereof tendered pursuant to the Net Proceeds
Offer which are to be purchased in accordance with Section 4.15(b)(1), (ii)
deposit with the Paying Agent U.S. Legal Tender sufficient to pay the purchase
price plus accrued interest, if any, of all Notes to be purchased and (iii)
deliver to the Trustee Notes so accepted together with an Officers' Certificate
stating the Notes or portions thereof being purchased by the Company. The
Paying Agent shall promptly mail to the Holders of Notes so accepted payment in
an amount equal to the purchase price plus accrued interest, if any. For
purposes of this Section 4.15, the Trustee shall act as the Paying Agent.
Any amounts remaining after the purchase of Notes pursuant to a Net
Proceeds Offer shall be returned by the Trustee to the Company.
The Company shall comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the purchase
of Notes pursuant to a Net Proceeds Offer. To the extent the provisions of any
such rule conflict with the provisions of this Indenture relating to a Net
Proceeds Offer, the Company shall comply with the provisions of such rule and
be deemed not to have breached its obligations relating to such Net Proceeds
Offer by virtue thereof.
SECTION 4.16. Limitation on Preferred Stock of Subsidiaries.
The Company shall not permit any of its Restricted Subsidiaries to
issue any Preferred Stock (other than to the Company or to a Wholly Owned
Restricted Subsidiary of the Company)
44
<PAGE> 51
or permit any Person (other than the Company or a Wholly Owned Restricted
Subsidiary of the Company) to own any Preferred Stock of any Restricted
Subsidiary of the Company.
SECTION 4.17. Limitation on Liens.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly create, incur, assume or suffer to
exist any Lien of any kind against or upon any property or assets of the
Company or any of the Restricted Subsidiaries whether owned on the Issue Date
or acquired after the Issue Date, or any proceeds therefrom, or assign or
otherwise convey any right to receive income or profits therefrom unless (i) in
the case of Liens securing Indebtedness that is expressly subordinate or junior
in right of payment to the Notes, the Notes are secured by a Lien on such
property, assets or proceeds that is senior in priority to such Liens and (ii)
in all other cases, the Notes are equally and ratably secured, except for: (a)
Liens existing as of the Issue Date to the extent and in the manner such Liens
are in effect on the Issue Date; (b) Liens securing Senior Indebtedness; (c)
Liens securing the Notes; (d) Liens in favor of the Company on assets of any
Restricted Subsidiary of the Company; (e) Liens securing Refinancing
Indebtedness which is incurred to Refinance any Indebtedness which has been
secured by a Lien permitted under this Indenture and which has been incurred in
accordance with the provisions of this Indenture; provided, however, that such
Liens (A) are no less favorable to the Holders and are not more favorable to
the Lienholders with respect to such Liens than the Liens in respect of the
Indebtedness being Refinanced and (B) do not extend to or cover any property or
assets of the Company or any of its Restricted Subsidiaries not securing the
Indebtedness so refinanced; and (f) Permitted Liens.
SECTION 4.18. Limitation of Guarantees.
The Company shall not permit any of its Restricted Subsidiaries,
directly or indirectly, to guarantee or secure through the granting of Liens
(other than Liens permitted under Section 4.17) the payment of any Indebtedness
of any other Person, in each case unless such Restricted Subsidiary, the
Company and the Trustee execute and deliver, prior to or concurrently with the
issuance of such guarantee, a supplemental indenture, in form and substance
satisfactory to the Trustee, pursuant to which such Restricted Subsidiary shall
unconditionally guarantee the payment of principal of, premium, if any, and
interest on the Notes, such guarantee to be a senior subordinated unsecured
obligation of such Restricted Subsidiary. The Company shall not be required to
make a notation on the Notes to reflect any such subsequent guarantee. Nothing
in this Section 4.18 shall be construed to permit any Restricted Subsidiary of
the Company to incur Indebtedness otherwise prohibited by Section 4.12.
SECTION 4.19. Limitation on Designations of Unrestricted
Subsidiaries.
The Company may designate any Subsidiary of the Company (other than a
Subsidiary of the Company which owns Capital Stock or Indebtedness of' or holds
a Lien on assets of, a Restricted Subsidiary of the Company) as an
"Unrestricted Subsidiary" under this Indenture (a "Designation") only if: (i)
no Default shall have occurred and be continuing at the time of or after giving
effect to such Designation; (ii) the Company would be permitted under the
Indenture to make an Investment at the time of Designation (assuming the
effectiveness of such Designation) in
45
<PAGE> 52
an amount (the "Designation Amount") equal to the sum of (a) fair market value
of the Capital Stock of such Subsidiary owned by the Company and the Restricted
Subsidiaries on such date and (b) the aggregate amount of other Investments of
the Company and the Restricted Subsidiaries in such Subsidiary on such date;
and (iii) the Company would be permitted to incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to Section 4.12(b) at
the time of Designation (assuming the effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to
have made an Investment constituting a Restricted Payment pursuant to the
covenant described in Section 4.10 for all purposes of this Indenture in the
Designation Amount. The Company shall not, and shall not permit any Restricted
Subsidiary to, at any time (x) provide direct or indirect credit support for or
a guarantee of any Indebtedness of any Unrestricted Subsidiary (including
without limitation of any undertaking, agreement or instrument evidencing such
Indebtedness), (y) be directly or indirectly liable for any Indebtedness of any
Unrestricted Subsidiary or (z) be directly or indirectly liable for any
Indebtedness which provides that the holder thereof upon notice, lapse of time
or both may declare a default thereon or cause the payment thereof to be
accelerated or payable prior to its final scheduled maturity upon the
occurrence of a default with respect to any Indebtedness of any Unrestricted
Subsidiary (including any right to take enforcement action against such
Unrestricted Subsidiary), except, in the case of clause (x) or (y), to the
extent permitted in Section 4.10.
The Company may revoke any Designation of a Subsidiary as an
Unrestricted Subsidiary (a "Revocation"), whereupon such Subsidiary shall then
constitute a Restricted Subsidiary, if: (i) no Default shall have occurred and
be continuing at the time of and after giving effect to such Revocation; and
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately following such Revocation would, if incurred at such time, have
been permitted to be incurred for all purposes of the Indenture.
Each Designation and Revocation must be evidenced by a Board
Resolution of the Company delivered to the Trustee certifying compliance with
the foregoing provisions.
ARTICLE FIVE
SUCCESSOR CORPORATION
SECTION 5.01. Merger, Consolidation and Sale of Assets.
(a) The Company shall not, in a single transaction or a series of
related transactions, consolidate with or merge with or into, or sell, assign,
transfer, lease, convey or otherwise dispose of (or cause or permit any
Restricted Subsidiary to sell, assign, transfer, lease, convey or otherwise
dispose of) all or substantially all of the Company's (determined on a
consolidated basis for the Company and the Restricted Subsidiaries) assets,
whether as an entirety or substantially as an entirety, to any Person unless:
(i) either (A) the Company shall be the surviving or
continuing corporation or (B) the Person (if other than the Company)
formed by such consolidation or into which
46
<PAGE> 53
the Company is merged or the Person which acquires by sale,
assignment, transfer, lease, conveyance or other disposition the
properties and assets of the Company and of the Restricted
Subsidiaries substantially as an entirety (the "Surviving Entity") (x)
shall be a corporation organized and validly existing under the laws
of the United States or any State thereof or the District of Columbia
and (y) shall expressly assume, by supplemental indenture (in form and
substance satisfactory to the Trustee), executed and delivered to the
Trustee, the due and punctual payment of the principal of, premium, if
any, and interest on the Notes and the performance of every covenant
of the Notes, the Indenture and the Registration Rights Agreement on
the part of the Company to be performed or observed;
(ii) immediately after giving effect to such transaction
and the assumption contemplated by clause (i)(B)(y) above (including
giving effect to any Indebtedness or Acquired Indebtedness incurred or
anticipated to be incurred in connection with such transaction), the
Company or such surviving entity, as the case may be, (1) shall have a
Consolidated Net Worth equal to or greater than the Consolidated Net
Worth of the Company immediately prior to such transaction and (2)
shall be able to incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to Section 4.14(b);
(iii) immediately before and immediately after giving
effect to such transaction and the assumption contemplated by clause
(i)(B)(y) above (including without limitation giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be
incurred and any Lien granted in connection with or in respect of the
transaction), no Default or Event of Default shall have occurred or be
continuing; and
(iv) the Company or the Surviving Entity shall have
delivered to the Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that such consolidation, merger, sale,
assignment, transfer, lease, conveyance or other disposition and, if a
supplemental indenture is required in connection with such
transaction, such supplemental indenture comply with the applicable
provisions of the Indenture and that all conditions precedent in the
Indenture relating to such transaction have been satisfied.
(b) For purposes of the foregoing, the transfer (by lease,
assignment, sale or otherwise, in a single transaction or series of
transactions) of all or substantially all of the properties and assets of one
or more of the Company's Restricted Subsidiaries, the Capital Stock of which
constitutes all or substantially all of the properties and assets of the
Company, shall be deemed to be the transfer of all or substantially all of the
properties and assets of the Company.
SECTION 5.02. Successor Corporation Substituted.
Upon any consolidation, combination or merger or any transfer of all
or substantially all of the assets of the Company in accordance with the
foregoing, the Surviving Entity shall succeed to, and be substituted for, and
may exercise every right and power of, the Company under this Indenture and the
Notes with the same effect as if such Surviving Entity had been named as such;
provided that solely for purposes of computing amounts described in clause
(iii) of the first
47
<PAGE> 54
paragraph of Section 4.10, any such Surviving Entity to the Company shall only
be deemed to have succeeded to and be substituted for the Company with respect
to periods subsequent to the effective time of such merger, consolidation,
combination or transfer of assets.
ARTICLE SIX
DEFAULT AND REMEDIES
SECTION 6.01. Events of Default.
An "Event of Default" occurs if:
(1) the Company fails to pay interest on any Note when
the same becomes due and payable and the default continues for a
period of 30 days (whether or not such payment shall be prohibited by
Article Ten of this Indenture); or
(2) the Company fails to pay the principal on any Note,
when such principal becomes due and payable, at maturity, upon
redemption or otherwise, including the failure to make a payment to
purchase Notes tendered pursuant to a Change of Control Offer or a Net
Proceeds Offer (whether or not such payment shall be prohibited by
Article Ten); or
(3) the Company defaults in the observance or performance
of any other covenant or agreement contained in this Indenture and
which default continues for a period of 30 days after written notice
specifying the default (and demanding that such default be remedied)
is delivered to the Company by the Trustee or to the Company and the
Trustee by the Holders of at least 25% of the outstanding principal
amount of the Notes (except in the case of a default with respect to
Section 5.01, which will constitute an Event of Default with such
notice requirement but without such passage of time requirement; or
(4) the Company fails to pay at final stated maturity
(giving effect to any applicable grace periods and any extensions
thereof) the principal amount of any Indebtedness of the Company or
any of its Subsidiaries, or the acceleration of the final stated
maturity of any such Indebtedness, if the aggregate principal amount
of such Indebtedness, together with the principal amount of any other
such Indebtedness in default for failure to pay principal at final
stated maturity or which has been accelerated, aggregates $5.0 million
or more at any time; or
(5) one or more judgments in an aggregate amount in
excess of $5.0 million shall have been rendered against the Company or
any of the Restricted Subsidiaries and such judgments remain
undischarged, unpaid or unstayed for a period of 60 days after such
judgment or judgments become final and non-appealable; or
(6) the Company or any of its Subsidiaries (A) commences
a voluntary case or proceeding under any Bankruptcy Law with respect
to itself, (B) consents to the entry of a judgment, decree or order
for relief against it in an involuntary case or proceeding under any
Bankruptcy Law, (C) consents to the appointment of a Custodian of it
or for
48
<PAGE> 55
substantially all of its property, (D) consents to or acquiesces in
the institution of a bankruptcy or an insolvency proceeding against
it, (E) makes a general assignment for the benefit of its creditors,
or (F) takes any corporate action to authorize or effect any of the
foregoing; or
(7) a court of competent jurisdiction enters a judgment,
decree or order for relief in respect of the Company or any of its
Subsidiaries in an involuntary case or proceeding under any Bankruptcy
Law, which shall (A) approve as properly filed a petition seeking
reorganization, arrangement, adjustment or composition in respect of
the Company or any of its Subsidiaries, (B) appoint a Custodian of the
Company or any of its Subsidiaries or for substantially all of its
property or (C) order the winding-up or liquidation of its affairs;
and such judgment, decree or order shall remain unstayed and in effect
for a period of 60 consecutive days.
Any Event of Default shall not be deemed to have occurred under clause (4) or
(5) until the Trustee shall have received written notice from the Company or
any of the Holders or unless a Trust Officer shall have actual knowledge of
such Event of Default.
SECTION 6.02. Acceleration.
(a) If an Event of Default (other than an Event of Default
specified in Section 6.01(6) or (7) with respect to the Company) occurs and is
continuing and has not been waived pursuant to Section 6.04, then the Trustee
or the Holders of at least 25% in principal amount of outstanding Notes may
declare the principal of and accrued interest on all the Notes to be due and
payable by notice in writing to the Company and the Trustee specifying the
respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same shall become immediately due and payable.
(b) If an Event of Default specified in Section 6.01(6) or (7)
occurs with respect to the Company, all unpaid principal and accrued interest
on the Notes then outstanding shall ipso facto become and be immediately due
and payable without any declaration or other act on the part of the Trustee or
any Holder.
(c) At any time after a declaration of acceleration with respect
to the Notes in accordance with Section 6.02(a), the Holders of a majority in
principal amount of the Notes may rescind and cancel such declaration and its
consequences (i) if the rescission would not conflict with any judgment or
decree, (ii) if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of the
acceleration, (iii) to the extent the payment of such interest is lawful,
interest on overdue installments of interest and overdue principal, which has
become due otherwise than by such declaration of acceleration, has been paid,
(iv) if the Company has paid the Trustee its reasonable compensation and
reimbursed the Trustee for its expenses, disbursements and advances and (v) in
the event of the cure or waiver of an Event of Default of the type described in
Section 6.01(6) or (7), the Trustee shall have received an Officers'
Certificate and an Opinion of Counsel that such Event of Default has been cured
or waived. No such rescission shall affect any subsequent Default or Event of
Default or impair any right consequent thereto.
49
<PAGE> 56
SECTION 6.03. Other Remedies.
If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy by proceeding at law or in equity to collect the
payment of principal of or interest on the Notes or to enforce the performance
of any provision of the Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Notes or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Noteholder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative to the
extent permitted by law.
SECTION 6.04. Waiver of Past Defaults.
Subject to Sections 2.09, 6.07 and 9.02, the Holders of a majority in
principal amount of the outstanding Notes by notice to the Trustee may waive an
existing Default or Event of Default and its consequences, except a Default in
the payment of principal of or interest on any Note as specified in clauses (1)
and (2) of Section 6.01. When a Default or Event of Default is waived, it is
cured and ceases.
SECTION 6.05. Control by Majority.
Subject to Section 2.09, the Holders of a majority in principal amount
of the outstanding Notes may direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or exercising any trust
or power conferred on it, including, without limitation, any remedies provided
for in Section 6.03. Subject to Section 7.01, however, the Trustee may refuse
to follow any direction that the Trustee reasonably believes conflicts with any
law or this Indenture, that the Trustee determines may be unduly prejudicial to
the rights of another Noteholder, or that may involve the Trustee in personal
liability; provided that the Trustee may take any other action deemed proper by
the Trustee which is not inconsistent with such direction.
SECTION 6.06. Limitation on Suits.
A Noteholder may not pursue any remedy with respect to this Indenture
or the Notes unless:
(1) the Holder gives to the Trustee written notice of a
continuing Event of Default;
(2) Holders of at least 25% in principal amount of the
outstanding Notes make a written request to the Trustee to pursue the
remedy;
(3) such Holders offer to the Trustee indemnity
reasonably satisfactory to the Trustee against any loss, liability or
expense to be incurred in compliance with such request;
50
<PAGE> 57
(4) the Trustee does not comply with the request within
45 days after receipt of the request and the offer of satisfactory
indemnity; and
(5) during such 45-day period the Holders of a majority
in principal amount of the outstanding Notes do not give the Trustee a
direction which, in the opinion of the Trustee, is inconsistent with
the request.
A Noteholder may not use this Indenture to prejudice the rights of
another Noteholder or to obtain a preference or priority over such other
Noteholder.
SECTION 6.07. Rights of Holders To Receive Payment.
Notwithstanding any other provision of this Indenture, the right of
any Holder to receive payment of principal of and interest on a Note, on or
after the respective due dates expressed in such Note, or to bring suit for the
enforcement of any such payment on or after such respective dates, shall not be
impaired or affected without the consent of such Holder.
SECTION 6.08. Collection Suit by Trustee.
If an Event of Default in payment of principal or interest specified
in clause (1) or (2) of Section 6.01 occurs and is continuing, the Trustee may
recover judgment in its own name and as trustee of an express trust against the
Company or any other obligor on the Notes for the whole amount of principal and
accrued interest remaining unpaid, together with interest on overdue principal
and, to the extent that payment of such interest is lawful, interest on overdue
installments of interest at the rate set forth in Section 4.01 and such further
amount as shall be sufficient to cover the costs and expenses of collection,
including the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel.
SECTION 6.09. Trustee May File Proofs of Claim.
The Trustee may file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses, taxes,
disbursements and advances of the Trustee, its agents and counsel) and the
Noteholders allowed in any judicial proceedings relating to the Company or any
other obligor upon the Notes, any of their respective creditors or any of their
respective property and shall be entitled and empowered to collect and receive
any funds or other property payable or deliverable on any such claims and to
distribute the same, and any Custodian in any such judicial proceedings is
hereby authorized by each Noteholder to make such payments to the Trustee and,
in the event that the Trustee shall consent to the making of such payments
directly to the Noteholders, to pay to the Trustee any amount due to it for the
reasonable compensation, expenses, taxes, disbursements and advances of the
Trustee, its agent and counsel, and any other amounts due the Trustee under
Section 7.07. The Company's payment obligations under this Section 6.09 shall
be secured in accordance with the provisions of Section 7.07. Nothing herein
contained shall be deemed to authorize the Trustee to authorize or consent to
or accept or adopt on behalf of any Noteholder any plan of reorganization,
arrangement, adjustment or composition
51
<PAGE> 58
affecting the Notes or the rights of any Holder thereof, or to authorize the
Trustee to vote in respect of the claim of any Noteholder in any such
proceeding.
SECTION 6.10. Priorities.
If the Trustee collects any funds or property pursuant to this Article
Six, it shall pay out the funds in the following order:
First: to the Trustee for amounts due under Section 7.07;
Second: if the Holders are forced to proceed against the
Company directly without the Trustee, to Holders for their collection
costs;
Third: to Holders for amounts due and unpaid on the Notes for
principal and interest, ratably, without preference or priority of any
kind, according to the amounts due and payable on the Notes for
principal and interest, respectively; and
Fourth: to the Company or any other obligor on the Notes, as
their interests may appear, or as a court of competent jurisdiction
may direct.
The Trustee, upon prior notice to the Company, may fix a record date
and payment date for any payment to Noteholders pursuant to this Section 6.10.
SECTION 6.11. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder
pursuant to Section 6.07, or a suit by a Holder or Holders of more than 10% in
principal amount of the outstanding Notes.
SECTION 6.12. Restoration of Rights and Remedies
If the Trustee or any Holder of Notes has instituted any proceeding to
enforce any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, the Company, the
Trustee and the Holders shall, subject to any determination in such proceeding,
be restored severally and respectively to their former positions hereunder, and
thereafter all rights and remedies of the Trustee and the Holders shall
continue as though no such proceeding had been instituted.
52
<PAGE> 59
ARTICLE SEVEN
TRUSTEE
SECTION 7.01. Duties of Trustee.
(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture and use the same degree of care and skill in its exercise thereof as
a prudent person would exercise or use under the circumstances in the conduct
of his own affairs.
(b) Except during the continuance of an Event of Default:
(1) The Trustee need perform only those duties as are
specifically set forth in this Indenture and no covenants or
obligations shall be implied in this Indenture against the Trustee.
(2) In the absence of bad faith on its part, the Trustee
may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and confirming to the requirements
of this Indenture. However, the Trustee shall examine the
certificates and opinions to determine whether or not they conform to
the requirements of this Indenture.
(c) Notwithstanding anything to the contrary herein contained, the
Trustee may not be relieved from liability for its own negligent action, its
own negligent failure to act, or its own willful misconduct, except that:
(1) This paragraph does not limit the effect of Section
7.01(b).
(2) The Trustee shall not be liable for any error of
judgment made in good faith by a Trust Officer, unless it is proved
that the Trustee was negligent in ascertaining the pertinent facts.
(3) The Trustee shall not liable with respect to any
action it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.02, 6.04 or 6.05.
(d) No provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
(e) Every provision of this Indenture that in any way relates to
the Trustee is subject to this Article 7.
53
<PAGE> 60
(f) The Trustee shall not be liable for interest on any money or
assets received by it except as the Trustee may agree in writing with the
Company. Assets held in trust by the Trustee need not be segregated from other
assets except to the extent required by law.
SECTION 7.02. Rights of Trustee.
Subject to Section 7.01:
(a) The Trustee may rely and shall be fully protected in acting or
refraining from acting upon any document believed by it to be genuine and to
have been signed or presented by the proper Person. The Trustee need not
investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may
consult with counsel and may require an Officers' Certificate or an Opinion of
Counsel, which shall conform to Sections 11.04 and 11.05. The Trustee shall
not be liable for any action it takes or omits to take in good faith in
reliance on such Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through its attorneys and agents and shall
not be responsible for the misconduct or negligence of any agent appointed with
due care.
(d) The Trustee shall not be liable for any action that it takes
or omits to take in good faith which it reasonably believes to be authorized or
within its rights or powers.
(e) The Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, notice, request, direction, consent, order, bond,
debenture, or other paper or document, but the Trustee, in its discretion, may
make such further inquiry or investigation into such facts or matters as it may
see fit, and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled, upon reasonable notice to the Company, to
examine the books, records, and premises of the Company, personally or by agent
or attorney and to consult with the officers and representatives of the
Company, including the Company's accountants and attorneys.
(f) The Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Indenture at the request, order or
direction of any of the Holders pursuant to the provisions of this Indenture,
unless such Holders shall have offered to the Trustee security or indemnity
reasonably satisfactory to the Trustee against the costs, expenses and
liabilities which may be incurred by it in compliance with such request, order
or direction.
(g) The Trustee shall not be required to give any bond or surety
in respect of the performance of its powers and duties hereunder.
SECTION 7.03. Individual Rights of Trustee.
The Trustee in its individual or any other capacity may become the
owner or pledgee of Notes and may otherwise deal with the Company, any
Subsidiary of the Company, or their respective Affiliates with the same rights
it would have if it were not Trustee. Any Agent may do the same with like
rights. However, the Trustee must comply with Sections 7.10 and 7.11.
54
<PAGE> 61
SECTION 7.04. Trustee's Disclaimer.
The Trustee makes no representation as to the validity or adequacy of
this Indenture or the Notes, and it shall not be accountable for the Company's
use of the proceeds from the Notes, and it shall not be responsible for any
statement of the Company in this Indenture or the Notes other than the
Trustee's certificate of authentication.
SECTION 7.05. Notice of Default.
If a Default or an Event of Default occurs and is continuing and if it
is known to the Trustee, the Trustee shall mail to each Noteholder notice of
the uncured Default or Event of Default within 90 days after such Default or
Event of Default occurs. Except in the case of a Default or an Event of
Default in payment of principal of, or interest on, any Note, including an
accelerated payment and the failure to make payment on the Change of Control
Payment Date pursuant to a Change of Control Offer or on the Proceeds Purchase
Date pursuant to a Net Proceeds Offer and, except in the case of a failure to
comply with Article Five, the Trustee may withhold the notice if and so long as
its Board of Directors, the executive committee of its Board of Directors or a
committee of its directors and/or Trust Officers in good faith determines that
withholding the notice is in the interest of the Noteholders.
SECTION 7.06. Reports by Trustee to Holders.
Within 60 days after each May 15, the Trustee shall, to the extent
that any of the events described in TIA Section 313(a) occurred within the
previous twelve months, but not otherwise, mail to each Noteholder a brief
report dated as of such date that complies with TIA Section 313(a). The
Trustee also shall comply with TIA Sections 313(b), (c) and (d).
A copy of each report at the time of its mailing to Noteholders shall
be mailed to the Company and filed with the SEC and each stock exchange, if
any, on which the Notes are listed.
The Company shall promptly notify the Trustee if the Notes become
listed on any stock exchange and the Trustee shall comply with TIA Section
313(d).
SECTION 7.07. Compensation and Indemnity.
The Company shall pay to the Trustee from time to time reasonable
compensation for its services. The Trustee's compensation shall not be limited
by any law on compensation of a trustee of an express trust. The Company shall
reimburse the Trustee upon request for all reasonable out-of-pocket expenses
incurred or made by it in connection with the performance of its duties under
this Indenture. Such expenses shall include the reasonable fees and expenses
of the Trustee's agents and counsel.
The Company shall indemnify the Trustee and its agents, employees,
stockholders and directors and officers for, and hold them harmless against,
any loss, liability or expense incurred by them except for such actions to the
extent caused by any negligence, bad faith or willful misconduct on their part,
arising out of or in connection with the administration of this trust including
the reasonable costs and expenses of defending themselves against any claim or
liability
55
<PAGE> 62
in connection with the exercise or performance of any of their rights, powers
or duties hereunder. The Trustee shall notify the Company promptly of any
claim asserted against the Trustee for which it may seek indemnity. At the
Trustee's sole discretion, the Company shall defend the claim and the Trustee
shall cooperate and may participate in the defense; provided that any
settlement of a claim shall be approved in writing by the Trustee.
Alternatively, the Trustee may at its option have separate counsel of its own
choosing and the Company shall pay the reasonable fees and expenses of such
counsel; provided that the Company will not be required to pay such fees and
expenses if it assumes the Trustee's defense and there is no conflict of
interest between the Company and the Trustee in connection with such defense as
reasonably determined by the Trustee. The Company need not pay for any
settlement made without its written consent. The Company need not reimburse
any expense or indemnify against any loss or liability to the extent incurred
by the Trustee through its negligence, bad faith or willful misconduct.
To secure the Company's payment obligations in this Section 7.07, the
Trustee shall have a lien prior to the Notes on all assets or money held or
collected by the Trustee, in its capacity as Trustee, except assets or money
held in trust to pay principal of or interest on particular Notes. The
Trustee's right to receive payment of any amounts due under this Section 7.07
shall not be subordinate to any other liability or indebtedness of the Company
(even though the Notes may be subordinate to such other liability or
indebtedness).
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.01(6) or (7) occurs, such expenses and the
compensation for such services are intended to constitute expenses of
administration under any Bankruptcy Law.
The provisions of this Section 7.06 shall survive the resignation or
removal of the Trustee and the discharge or other termination of this
Indenture.
SECTION 7.08. Replacement of Trustee.
The Trustee may resign by so notifying the Company. The Holders of a
majority in principal amount of the outstanding Notes may remove the Trustee by
so notifying the Company and the Trustee and may appoint a successor Trustee.
The Company may remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes charge of
the Trustee or its property; or
(4) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall notify each Holder of such
event and shall promptly appoint a successor Trustee. Within one year after
the successor Trustee takes office, the Holders of a majority in principal
amount of the Notes may appoint a successor Trustee to replace the successor
Trustee appointed by the Company.
56
<PAGE> 63
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Immediately after
that, the retiring Trustee shall transfer all property held by it as Trustee to
the successor Trustee, subject to the lien provided in Section 7.07, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. A successor Trustee shall mail notice of its succession
to each Noteholder.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or
the Holders of at least 10% in principal amount of the outstanding Notes may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
If the Trustee fails to comply with Section 7.10, any Noteholder may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.
Notwithstanding replacement of the Trustee pursuant to this Section
7.08, the Company's obligations under Section 7.07 shall continue for the
benefit of the retiring Trustee.
SECTION 7.09. Successor Trustee by Merger, Etc.
If the Trustee consolidates with, merges or converts into, or
transfers all or substantially all of its corporate trust business to, another
corporation, the resulting, surviving or transferee corporation without any
further act shall, if such resulting, surviving or transferee corporation is
otherwise eligible hereunder, be the successor Trustee; provided that such
corporation shall be otherwise qualified and eligible under this Article Seven.
SECTION 7.10. Eligibility; Disqualification.
This Indenture shall always have a Trustee who satisfies the
requirement of TIA Sections 310(a)(l), (2) and (5). The Trustee (or, in the
case of a corporation included in a bank holding company system, the related
bank holding company) shall have a combined capital and surplus of at least $50
million as set forth in its most recent published annual report of condition.
In addition, if the Trustee is a corporation included in a bank holding company
system, the Trustee, independently of such bank holding company, shall meet the
capital requirements of TIA Section 310(a)(2). The Trustee shall comply with
TIA Section 310(b); provided, however, that there shall be excluded from the
operation of TIA Section 310(b)(1) any indenture or indentures under which
other securities, or certificates of interest or participation in other
securities, of the Company are outstanding, if the requirements for such
exclusion set forth in TIA Section 310(b)(1) are met. The provisions of TIA
Section 310 shall apply to the Company, as obligor of the Notes.
SECTION 7.11. Preferential Collection of Claims Against
Company.
The Trustee shall comply with TIA Section 311(a), excluding any
creditor relationship listed in TIA Section 311(b). A Trustee who has
resigned or been removed shall be subject to TIA Section 311(a) to the extent
indicated therein. The provisions of TIA Section 311 shall apply to the
Company, as obligor on the Notes.
57
<PAGE> 64
ARTICLE EIGHT
DISCHARGE OF INDENTURE; DEFEASANCE
SECTION 8.01. Termination of the Company's Obligations.
The Company may terminate its obligations under the Notes and this
Indenture, except those obligations referred to in the penultimate paragraph of
this Section 8.01, if all Notes previously authenticated and delivered (other
than destroyed, lost or stolen Notes which have been replaced or paid or Notes
for whose payment U.S. Legal Tender have theretofore been deposited with the
Trustee or the Paying Agent in trust or segregated and held in trust by the
Company and thereafter repaid to the Company, as provided in Section 8.05) have
been delivered to the Trustee for cancellation and the Company has paid all
sums payable by it hereunder, or if:
(a) either (i) pursuant to Article Three, the Company
shall have given notice to the Trustee and mailed a notice of
redemption to each Holder of the redemption of all of the Notes under
arrangements satisfactory to the Trustee for the giving of such notice
or (ii) all Notes have otherwise become due and payable hereunder;
(b) the Company shall have irrevocably deposited or
caused to be deposited with the Trustee or a trustee satisfactory to
the Trustee, under the terms of an irrevocable trust agreement in form
and substance satisfactory to the Trustee, as trust funds in trust
solely for the benefit of the Holders for that purpose, U.S. Legal
Tender in such amount as is sufficient without consideration of
reinvestment of such interest, to pay principal of, premium, if any,
and interest on the outstanding Notes to maturity or redemption;
provided that the Trustee shall have been irrevocably instructed to
apply such U.S. Legal Tender to the payment of said principal,
premium, if any, and interest with respect to the Notes and, provided,
further, that from and after the time of deposit, the money deposited
shall not be subject to the rights of holders of Senior Indebtedness
pursuant to the provisions of Article Ten;
(c) no Default or Event of Default with respect to this
Indenture or the Notes shall have occurred and be continuing on the
date of such deposit or shall occur as a result of such deposit and
such deposit will not result in a breach or violation of, or
constitute a default under, any other instrument to which the Company
is a party or by which it is bound;
(d) the Company shall have paid all other sums payable by
it hereunder; and
(e) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent providing for the termination of the Company's
obligations under the Notes and this Indenture have been complied
with. Such Opinion of Counsel shall also state that such satisfaction
and discharge does not result in a default under the New Credit
Agreement (if then in effect) or any other agreement or instrument
then known to such counsel that binds or affects the Company.
58
<PAGE> 65
Notwithstanding the foregoing paragraph, the Company's obligations in
Sections 2.05, 2.06, 2.07, 2.08, 4.01, 4.02, 7.07, 8.05 and 8.06 shall survive
until the Notes are no longer outstanding pursuant to the last paragraph of
Section 2.08. After the Notes are no longer outstanding, the Company's
obligations in Sections 7.07, 8.05 and 8.06 shall survive.
After such delivery or irrevocable deposit, the Trustee upon request
shall acknowledge in writing the discharge of the Company's obligations under
the Notes and this Indenture except for those surviving obligations specified
above.
SECTION 8.02. Legal Defeasance and Covenant Defeasance.
(a) The Company may, at its option by Board Resolution of the
Board of Directors of the Company, at any time, elect to have either Section
8.02(b) or Section 8.02(c) be applied to all outstanding Notes upon compliance
with the conditions set forth in Section 8.03.
(b) Upon the Company's exercise under Section 8.02(a) of the
option applicable to this Section 8.02(b), the Company shall, subject to the
satisfaction of the conditions set forth in Section 8.03, be deemed to have
been discharged from its obligations with respect to all outstanding Notes on
the date the conditions set forth below are satisfied (hereinafter, "Legal
Defeasance"). For this purpose, Legal Defeasance means that the Company shall
be deemed to have paid and discharged the entire Indebtedness represented by
the outstanding Notes, which shall thereafter be deemed to be "outstanding"
only for the purposes of Section 8.04 and the other Sections of this Indenture
referred to in (i) and (ii) below, and to have satisfied all its other
obligations under such Notes and this Indenture (and the Trustee, on demand of
and at the expense of the Company, shall execute proper instruments
acknowledging the same), and Holders of the Notes and any amounts deposited
under Section 8.03 shall cease to be subject to any obligations to, or the
rights of, any holder of Senior Indebtedness under Article Ten or otherwise,
except for the following provisions, which shall survive until otherwise
terminated or discharged hereunder: (i) the rights of Holders of outstanding
Notes to receive solely from the trust fund described in Section 8.04, and as
more fully set forth in Section 8.04, payments in respect of the principal of
and interest on such Notes when such payments are due, (ii) the Company's
obligations with respect to such Notes under Sections 2.03, 2.06 and 2.07 and
Section 4.02 hereof, (iii) the rights, powers, trusts, duties and immunities of
the Trustee hereunder and the Company's obligations in connection therewith and
(iv) this Article Eight. Subject to compliance with this Article Eight, the
Company may exercise its option under this Section 8.02(b) notwithstanding the
prior exercise of its option under Section 8.02(c).
(c) Upon the Company's exercise under Section 8.02(a) of the
option applicable to this Section 8.02(c), the Company shall, subject to the
satisfaction of the conditions set forth in Section 8.03, be released from its
obligations under the covenants contained in Sections 4.10 through 4.19 and
Article Five with respect to the outstanding Notes on and after the date the
conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"),
and the Notes shall thereafter be deemed not "outstanding" for the purposes of
any direction, waiver, consent or declaration or act of Holders (and the
consequences of any thereof) in connection with such covenants, but shall
continue to be deemed "outstanding" for all other purposes hereunder (it being
understood that such Notes shall not be deemed outstanding for accounting
purposes) and
59
<PAGE> 66
Holders of the Notes and any amounts deposited under Section 8.03 shall cease
to be subject to any obligations to, or the rights of, any holder of Senior
Indebtedness under Article Ten or otherwise. For this purpose, such Covenant
Defeasance means that, with respect to the outstanding Notes, the Company may
omit to comply with and shall have no liability in respect of any term,
condition or limitation set forth in any such covenant, whether directly or
indirectly, by reason of any reference elsewhere herein to any such covenant or
by reason of any reference in any such covenant to any other provision herein
or in any other document and such omission to comply shall not constitute a
Default or an Event or Default under Section 6.01(3), but, except as specified
above, the remainder of this Indenture and such Notes shall be unaffected
thereby. In addition, upon the Company's exercise under Section 8.02(a) of the
option applicable to this Section 8.02(c), subject to the satisfaction of the
conditions set forth in Section 8.03, Sections 6.01(3), 6.01(4) and 6.01(5)
shall not constitute Events of Default.
SECTION 8.03. Conditions to Legal Defeasance or Covenant
Defeasance.
The following shall be the conditions to the application of either
Section 8.02(b) or 8.02(c) to the outstanding Notes:
In order to exercise either Legal Defeasance or Covenant Defeasance:
(a) the Company must irrevocably deposit with the
Trustee, in trust, for the benefit of the Holders, U.S. Legal Tender
or U.S. Government Obligations, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the
principal of and interest on the Notes on the stated date for payment
thereof or on the applicable redemption date, as the case may be, of
such principal or installment of principal of or interest on the
Notes; provided that the Trustee shall have received an irrevocable
written order from the Company instructing the Trustee to apply such
U.S. Legal Tender or the proceeds of such U.S. Government Obligations
to said payments with respect to the Notes;
(b) in the case of an election under Section 8.02(b), the
Company shall have delivered to the Trustee an Opinion of Counsel in
the United States reasonably acceptable to the Trustee confirming that
(A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the date of this
Indenture, there has been a change in the applicable federal income
tax law, in either case to the effect that, and based thereon such
Opinion of Counsel shall confirm that, the Holders of the Notes will
not recognize income, gain or loss for federal income tax purposes as
a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not
occurred;
(c) in the case of an election under Section 8.02(c), the
Company shall have delivered to the Trustee an Opinion of Counsel in
the United States reasonably acceptable to the Trustee confirming that
the Holders of the Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance
and will be
60
<PAGE> 67
subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Covenant
Defeasance had not occurred;
(d) no Default or Event of Default or event which with
notice or lapse of time or both would become a Default or an Event of
Default with respect to the Notes shall have occurred and be
continuing on the date of such deposit (other than a Default or Event
of Default resulting from the incurrence of Indebtedness all or a
portion of the proceeds of which will be used to defease the Notes
pursuant to this Article Eight concurrently with such incurrence) or
insofar as Sections 6.01(6) and 6.01(7) are concerned, at any time in
the period ending on the 91st day after the date of such deposit;
(e) such Legal Defeasance or Covenant Defeasance shall
not result in a breach or violation of or constitute a default under
this Indenture or any other material agreement or instrument to which
the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound;
(f) the Company shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders over any other
creditors of the Company or with the intent of defeating, hindering,
delaying or defrauding any other creditors of the Company or others;
(g) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance have been complied with; and
(h) the Company shall have delivered to the Trustee an
Opinion of Counsel to the effect that (i) the trust funds will not be
subject to any rights of any holders of Indebtedness of the Company
other than the Notes, and (ii) assuming no intervening bankruptcy or
insolvency of the Company between the date of deposit and the 91st day
following the deposit and that no Holder is an insider of the Company,
after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable Bankruptcy Law.
SECTION 8.04. Application of Trust Money.
The Trustee or Paying Agent shall hold in trust U.S. Legal Tender or
U.S. Government Obligations deposited with it pursuant to Article Eight, and
shall apply the deposited U.S. Legal Tender and the money from U.S. Government
Obligations in accordance with this Indenture to the payment of principal of
and interest on the Notes. The Trustee shall be under no obligation to invest
said U.S. Legal Tender or U.S. Government Obligations except as it may agree in
writing with the Company.
The Company shall pay and indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against the U.S. Legal Tender or U.S.
Government Obligations deposited pursuant to Section 8.03 or the principal and
interest received in respect thereof other than any
61
<PAGE> 68
such tax, fee or other charge which by law is for the account of the Holders of
the outstanding Notes.
Anything in this Article Eight to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon the
Company's request any U.S. Legal Tender or U.S. Government Obligations held by
it as provided in Section 8.03 which, in the opinion of a nationally recognized
firm of independent public accountants expressed in a written certification
thereof delivered to the Trustee, are in excess of the amount thereof that
would then be required to be deposited to effect an equivalent Legal Defeasance
or Covenant Defeasance.
SECTION 8.05. Repayment to the Company.
Subject to Article Eight, the Trustee and the Paying Agent shall
promptly pay to the Company, upon request any excess U.S. Legal Tender or U.S.
Government Obligations held by them at any time and thereupon shall be relieved
from all liability with respect to such funds. The Trustee and the Paying
Agent shall pay to the Company, upon request all funds held by them for the
payment of principal or interest that remain unclaimed for two years; provided
that the Trustee or such Paying Agent, before being required to make any
payment, may at the expense of the Company cause to be published once in a
newspaper of general circulation in The City of New York or mail to each Holder
entitled to such money notice that such money remains unclaimed and that after
a date specified therein which shall be at least 30 days from the date of such
publication or mailing any unclaimed balance of such funds then remaining will
be repaid to the Company. After payment to the Company Noteholders entitled to
such funds must look to the Company for payment as general creditors unless an
applicable law designates another Person.
SECTION 8.06. Reinstatement.
If the Trustee or Paying Agent is unable to apply any U.S. Legal
Tender or U.S. Government Obligations in accordance with Article Eight by
reason of any legal proceeding or by reason of any order or judgment of any
court or governmental authority enjoining, restraining or otherwise prohibiting
such application, the Company's obligations under this Indenture and the Notes
shall be revived and reinstated as though no deposit had occurred pursuant to
Article Eight until such time as the Trustee or Paying Agent is permitted to
apply all such U.S. Legal Tender or U.S. Government Obligations in accordance
with Article Eight; provided that if the Company has made any payment of
interest on or principal of any Notes because of the reinstatement of its
obligations, the Company shall be subrogated to the rights of the Holders of
such Notes to receive such payment from the U.S. Legal Tender or U.S.
Government Obligations held by the Trustee or Paying Agent.
62
<PAGE> 69
ARTICLE NINE
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. Without Consent of Holders.
The Company, when authorized by a Board Resolution, and the Trustee,
together, may amend or supplement this Indenture or the Notes without notice to
or consent of any Noteholder:
(1) to cure any ambiguity, defect or inconsistency;
provided that such amendment or supplement does not, in the opinion of
the Trustee, adversely affect the rights of any Holder in any material
respect;
(2) to comply with Article Five and Section 4.18;
(3) to provide for uncertificated Notes in addition to or
in place of certificated Notes;
(4) to comply with any requirements of the SEC in order
to effect or maintain the qualification of this Indenture under the
TIA;
(5) to make any change that would provide any additional
benefit or rights to the Noteholders or that does not adversely affect
the rights of any Noteholder;
(6) to provide for issuance of the Exchange Notes, which
will have terms substantially identical in all material respects to
the Initial Notes (except that the transfer restrictions contained in
the Initial Notes will be modified or eliminated, as appropriate), and
which will be treated together with any outstanding Initial Notes, as
a single issue of securities; or
(7) to make any other change that does not, in the
opinion of the Trustee, adversely affect in any material respect the
rights of any Noteholders hereunder;
provided that the Company has delivered to the Trustee, in addition to the
documents required by Section 11.04, an Opinion of Counsel stating that such
amendment or supplement complies with the provisions of this Section 9.01.
SECTION 9.02. With Consent of Holders.
Subject to Section 6.07, the Company, when authorized by a Board
Resolution, and the Trustee, together, with the written consent of the Holder
or Holders of at least a majority in aggregate principal amount of then
outstanding Notes, may amend or supplement this Indenture or the Notes, without
notice to any other Noteholders. Subject to Section 6.07, the Holder or
Holders of a majority in aggregate principal amount of then outstanding Notes
may waive compliance by the Company with any provision of this Indenture or the
Notes without notice to any other Noteholder. No amendment, supplement or
waiver, including a waiver pursuant to Section 6.04, shall, without the consent
of each Holder of each Note affected thereby:
63
<PAGE> 70
(1) reduce the amount of Notes whose Holders must consent
to an amendment;
(2) reduce the rate of or change or have the effect of
changing the time for payment of interest, including defaulted
interest, on any Notes;
(3) reduce the principal of or change or have the effect
of changing the fixed maturity of any Notes, or change the date on
which any Notes may be subject to redemption or repurchase, or reduce
the redemption or repurchase price therefor;
(4) make any Notes payable in money other than that
stated in the Notes;
(5) make any change in provisions of this Indenture
protecting the right of each Holder to receive payment of principal
of, premium, if any, and interest on such Note on or after the due
date thereof or to bring suit to enforce such payment, permitting
holders of a majority in principal amount of Notes to waive Defaults
or Events of Default, other than ones with respect to the payment of
principal of or interest on the Notes, or relating to certain
amendments of this Indenture;
(6) amend, modify or change in any material respect the
obligation of the Company to make or consummate a Change of Control
Offer in the event of a Change of Control or make and consummate a Net
Proceeds Offer in respect of any Asset Sale that has been consummated
or modify any of the provisions or definitions with respect thereto;
or
(7) modify Article Ten or the definitions used in Article
Ten to adversely affect the Holders of the Notes in any material
respect.
It shall not be necessary for the consent of the Holders under this
Section 9.02 to approve the particular form of any proposed amendment,
supplement or waiver, but it shall be sufficient if such consent approves the
substance thereof.
After an amendment, supplement or waiver under this Section 9.02
becomes effective, the Company shall mail to the Holders affected thereby a
notice briefly describing the amendment, supplement or waiver. Any failure of
the Company to mail such notice, or any defect therein, shall not, however, in
any way impair or affect the validity of any such supplemental indenture.
SECTION 9.03. Effect on Senior Indebtedness.
No amendment of this Indenture shall adversely affect the rights of
any holder of Senior Indebtedness or under Article Ten of this Indenture,
without the consent of such holder.
SECTION 9.04. Compliance with TIA.
Every amendment, waiver or supplement of this Indenture or the Notes
shall comply with the TIA as then in effect.
64
<PAGE> 71
SECTION 9.05. Revocation and Effect of Consents.
Until an amendment, waiver or supplement becomes effective, a consent
to it by a Holder is a continuing consent by the Holder and every subsequent
Holder of a Note or portion of a Note that evidences the same debt as the
consenting Holder's Note, even if notation of the consent is not made on any
Note. Subject to the following paragraph, any such Holder or subsequent Holder
may revoke the consent as to such Holder's Note or portion of such Note by
notice to the Trustee or the Company received before the date on which the
Trustee receives an Officers' Certificate certifying that the Holders of the
requisite principal amount of Notes have consented (and not theretofore revoked
such consent) to the amendment, supplement or waiver.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Holders entitled to consent to any amendment,
supplement or waiver, which record date shall be at least 30 days prior to the
first solicitation of such consent. If a record date is fixed, then
notwithstanding the last sentence of the immediately preceding paragraph, those
Persons who were Holders at such record date (or their duly designated
proxies), and only those Persons, shall be entitled to revoke any consent
previously given, whether or not such Persons continue to be Holders after such
record date. No such consent shall be valid or effective for more than 90 days
after such record date.
After an amendment, supplement or waiver becomes effective, it shall
bind every Noteholder, unless it makes a change described in any of clauses (1)
through (7) of Section 9.02, in which case, the amendment, supplement or waiver
shall bind only each Holder of a Note who has consented to it and every
subsequent Holder of a Note or portion of a Note that evidences the same debt
as the consenting Holder's Note; provided that any such waiver shall not impair
or affect the right of any Holder to receive payment of principal of and
interest on a Note, on or after the respective due dates expressed in such
Note, or to bring suit for the enforcement of any such payment on or after such
respective dates without the consent of such Holder.
SECTION 9.06. Notation on or Exchange of Notes.
If an amendment, supplement or waiver changes the terms of a Note, the
Trustee may require the Holder of the Note to deliver it to the Trustee. The
Trustee may place an appropriate notation on the Note about the changed terms
and return it to the Holder. Alternatively, if the Company or the Trustee so
determines, the Company in exchange for the Note shall issue and the Trustee
shall authenticate a new Note that reflects the changed terms. Any such
notation or exchange shall be made at the sole cost and expense of the Company.
SECTION 9.07. Trustee To Sign Amendments, Etc.
The Trustee shall execute any amendment, supplement or waiver
authorized pursuant to this Article Nine; provided that the Trustee may, but
shall not be obligated to, execute any such amendment, supplement or waiver
which affects the Trustee's own rights, duties or immunities under this
Indenture. The Trustee shall be entitled to receive, and shall be fully
protected in relying upon, in addition to the documents required by Section
11.04, an Opinion of Counsel and an Officers' Certificate each stating that the
execution of any amendment, supplement or waiver
65
<PAGE> 72
authorized pursuant to this Article Nine is authorized or permitted by this
Indenture. Such Opinion of Counsel shall not be an expense of the Trustee.
ARTICLE TEN
SUBORDINATION
SECTION 10.01. Notes Subordinated to Senior Indebtedness.
The Company covenants and agrees, and the Trustee and each Holder of
the Notes, by its acceptance thereof, likewise covenants and agrees, that all
Notes shall be issued subject to the provisions of this Article Ten; and the
Trustee and each Person holding any Note, whether upon original issue or upon
transfer, assignment or exchange thereof, accepts and agrees that the payment
of all Obligations on the Notes by the Company shall, to the extent and in the
manner herein set forth, be subordinated and junior in right of payment to the
prior payment in full in cash or Cash Equivalents of all Obligations on the
Senior Indebtedness; that the subordination is for the benefit of, and shall be
enforceable directly by, the holders of Senior Indebtedness, and that each
holder of Senior Indebtedness whether now outstanding or hereafter created,
incurred, assumed or guaranteed shall be deemed to have acquired Senior
Indebtedness in reliance upon the covenants and provisions contained in this
Indenture and the Notes.
SECTION 10.02. No Payment on Notes in Certain Circumstances.
(a) No direct or indirect payment by or on behalf of the Company
of principal of, premium, if any, or interest on the Notes, whether pursuant to
the terms of the Notes or upon acceleration or otherwise, shall be made if, at
the time of such payment, there exists a default in the payment of all or any
portion of principal of, premium, if any, or interest on, any Senior
Indebtedness with a principal amount in excess of $5.0 million, and such
default shall not have been cured or waived or the benefits of this sentence
waived by or on behalf of the holders of Senior Indebtedness. In addition,
during the continuance of any other event of default with respect to any
Designated Senior Indebtedness pursuant to which the maturity thereof may be
accelerated, upon the occurrence of (i) receipt by the Trustee of written
notice from the holders of a majority of the outstanding principal amount of
the Designated Senior Indebtedness or their Representative or (ii) the date of
acceleration of the Notes if such event of default results from the
acceleration of the Notes, no such payment may be made by the Company on or in
respect of the Notes for a period (a "Payment Blockage Period") commencing on
the earlier of the date of receipt of such notice or the date of such
acceleration and ending 179 days thereafter (unless such Payment Blockage
Period shall be terminated by written notice to the Trustee from the holders of
a majority of the outstanding principal amount of such Designated Senior
Indebtedness or their Representative who delivered such notice).
Notwithstanding anything herein to the contrary, in no event will a Payment
Blockage Period extend beyond 179 days from the date on which such Payment
Blockage Period was commenced. Not more than one Payment Blockage Period may
be commenced with respect to the Notes during any period of 360 consecutive
days. No event of default that existed or was continuing on the date of the
commencement of any Payment Blockage Period with respect to the Designated
Senior Indebtedness initiating such Payment Blockage Period shall be, or be
made, the basis for the commencement of a second Payment Blockage
66
<PAGE> 73
Period by the holders of such Designated Senior Indebtedness or their
representative, whether or not within a period of 360 consecutive days, unless
such event of default shall have been cured or waived for a period of not less
than 90 consecutive days.
(b) In the event that, notwithstanding the foregoing, any payment
or distribution of assets or securities of the Company of any kind or
character, whether in cash, property or securities, shall be received by the
Trustee, any Holder or the Paying Agent (or, if the Company is acting as its
own Paying Agent, money for any such payment or distribution shall be
segregated or held in trust) on account of principal of, premium, if any, or
interest on the Notes before all Senior Indebtedness is paid in full, such
payment or distribution shall be received and held in trust by the Trustee,
such Holder or the Paying Agent for the benefit of the holders of the Senior
Indebtedness, or their respective Representatives, ratably according to the
respective amounts of Senior Indebtedness held or represented by each, and
shall be paid over or delivered to the holders of the Senior Indebtedness
remaining unpaid to the extent necessary to make payment in full of all Senior
Indebtedness remaining unpaid after giving effect to all concurrent payments
and distributions to or for the holders of such Senior Indebtedness.
Nothing contained in this Article Ten shall limit the right of the
Trustee or the Holders of Notes to take any action to accelerate the maturity
of the Notes pursuant to Section 6.02 or to pursue any rights or remedies
hereunder; provided that all Senior Indebtedness thereafter due or declared to
be due shall first be paid in full in cash or Cash Equivalents before the
Holders are entitled to receive any payment of any kind or character with
respect to Obligations on the Notes.
SECTION 10.03. Payment Over of Proceeds upon Dissolution, Etc.
(a) Upon any payment or distribution of assets of the Company of
any kind or character, whether in cash, property or securities, to creditors
upon any total or partial liquidation, dissolution, winding-up, reorganization,
assignment for the benefit of creditors or marshaling of assets of the Company
or in a bankruptcy, reorganization, insolvency, receivership or other similar
proceeding relating to the Company or its property, whether voluntary or
involuntary, all Obligations due or to become due upon all Senior Indebtedness
shall first be paid in full in cash or Cash Equivalents, or such payment duly
provided for to the satisfaction of the holders of Senior Indebtedness, before
any payment or distribution of any kind or character is made on account of any
Obligations on the Notes, or for the acquisition of any of the Notes for cash
or property or otherwise. Upon any such dissolution, winding-up, liquidation,
reorganization, receivership or similar proceeding, any payment or distribution
of assets of the Company of any kind or character, whether in cash, property or
securities, to which the Holders of the Notes or the Trustee under this
Indenture would be entitled, except for the provisions hereof, shall be paid by
the Company or by any receiver, trustee in bankruptcy, liquidating trustee,
agent or other Person making such payment or distribution, or by the Holders or
by the Trustee under this Indenture if received by them, directly to the
holders of Senior Indebtedness (pro rata to such holders on the basis of the
respective amounts of Senior Indebtedness held by such holders) or their
respective Representatives, or to the trustee or trustees under any indenture
pursuant to which any of such Senior Indebtedness may have been issued, as
their respective interests may appear, for application to the payment of Senior
Indebtedness remaining unpaid until all such Senior Indebtedness has been paid
in full in cash or Cash Equivalents after giving
67
<PAGE> 74
effect to any concurrent payment, distribution or provision therefor to or for
the holders of Senior Indebtedness.
(b) To the extent any payment of Senior Indebtedness (whether by
or on behalf of the Company, as proceeds of security or enforcement of any
right of setoff or otherwise) is declared to be fraudulent or preferential, set
aside or required to be paid to any receiver, trustee in bankruptcy,
liquidating trustee, agent or other similar Person under any bankruptcy,
insolvency, receivership, fraudulent conveyance or similar law, then, if such
payment is recovered by, or paid over to, such receiver, trustee in bankruptcy,
liquidating trustee, agent or other similar Person, the Senior Indebtedness or
part thereof originally intended to be satisfied shall be deemed to be
reinstated and outstanding as if such payment had not occurred.
(c) In the event that, notwithstanding the foregoing, any payment
or distribution of assets of the Company of any kind or character, whether in
cash, property or securities, shall be received by any Holder when such payment
or distribution is prohibited by Section 10.03(a), such payment or distribution
shall be held in trust for the benefit of, and shall be paid over or delivered
to, the holders of Senior Indebtedness (pro rata to such holders on the basis
of the respective amount of Senior Indebtedness held by such holders) or their
respective Representatives, or to the trustee or trustees under any indenture
pursuant to which any of such Senior Indebtedness may have been issued, as
their respective interests may appear, for application to the payment of Senior
Indebtedness remaining unpaid until all such Senior Indebtedness has been paid
in full in cash or Cash Equivalents, after giving effect to any concurrent
payment, distribution or provision therefor to or for the holders of such
Senior Indebtedness.
(d) The consolidation of the Company with, or the merger of the
Company with or into, another corporation or the liquidation or dissolution of
the Company following the conveyance or transfer of all or substantially all of
its assets, to another corporation upon the terms and conditions provided in
Article Five hereof and as long as permitted under the terms of the Senior
Indebtedness shall not be deemed a dissolution, winding-up, liquidation or
reorganization for the purposes of this Section if such other corporation
shall, as a part of such consolidation, merger, conveyance or transfer, assume
the Company's obligations hereunder in accordance with Article Five hereof.
SECTION 10.04. Payments May Be Paid Prior to Dissolution.
Nothing contained in this Article Ten or elsewhere in this Indenture
shall prevent (i) the Company, except under the conditions described in
Sections 10.02 and 10.03, from making payments at any time for the purpose of
making payments of principal of and interest on the Notes, or from depositing
with the Trustee any moneys for such payments, or (ii) in the absence of actual
knowledge by the Trustee that a given payment would be prohibited by Section
10.02 or 10.03, the application by the Trustee of any moneys deposited with it
for the purpose of making such payments of principal of, and interest on, the
Notes to the Holders entitled thereto unless at least two Business Days prior
to the date upon which such payment would otherwise become due and payable a
Trust Officer shall have actually received the written notice provided for in
the second sentence of Section 10.02(a) or in Section 10.07 (provided that,
notwithstanding the foregoing, such application shall otherwise be subject to
the provisions of the first sentence of
68
<PAGE> 75
Section 10.02(a) and Section 10.03). The Company shall give prompt written
notice to the Trustee of any dissolution, winding-up, liquidation or
reorganization of the Company.
SECTION 10.05. Subrogation.
Subject to the payment in full in cash or Cash Equivalents of all
Senior Indebtedness, the Holders of the Notes shall be subrogated to the rights
of the holders of Senior Indebtedness to receive payments or distributions of
cash, property or securities of the Company applicable to the Senior
Indebtedness until the Notes shall be paid in full; and, for the purposes of
such subrogation, no such payments or distributions to the holders of the
Senior Indebtedness by or on behalf of the Company or by or on behalf of the
Holders by virtue of this Article Ten which otherwise would have been made to
the Holders shall, as between the Company and the Holders of the Notes, be
deemed to be a payment by the Company to or on account of the Senior
Indebtedness, it being understood that the provisions of this Article Ten are
and are intended solely for the purpose of defining the relative rights of the
Holders of the Notes, on the one hand, and the holders of the Senior
Indebtedness, on the other hand.
SECTION 10.06. Obligations of the Company Unconditional.
Nothing contained in this Article Ten or elsewhere in this Indenture
or in the Notes is intended to or shall impair, as among the Company, its
creditors other than the holders of Senior Indebtedness, and the Holders, the
obligation of the Company, which is absolute and unconditional, to pay to the
Holders the principal of and any interest on the Notes as and when the same
shall become due and payable in accordance with their terms, or is intended to
or shall affect the relative rights of the Holders and creditors of the Company
other than the holders of the Senior Indebtedness, nor shall anything herein or
therein prevent the Holder of any Note or the Trustee on its behalf from
exercising all remedies otherwise permitted by applicable law upon default
under this Indenture, subject to the rights, if any, in respect of cash,
property or securities of the Company received upon the exercise of any such
remedy.
SECTION 10.07. Notice to Trustee.
The Company shall give prompt written notice to the Trustee of any
fact known to the Company which would prohibit the making of any payment to or
by the Trustee in respect of the Notes pursuant to the provisions of this
Article Ten. Regardless of anything to the contrary contained in this Article
Ten or elsewhere in this Indenture, the Trustee shall not be charged with
knowledge of the existence of any default or event of default with respect to
any Senior Indebtedness or of any other facts which would prohibit the making
of any payment to or by the Trustee unless and until the Trustee shall have
received notice in writing from the Company, or from a holder of Senior
Indebtedness or a Representative therefor, and, prior to the receipt of any
such written notice, the Trustee shall be entitled to assume (in the absence of
actual knowledge to the contrary) that no such facts exist.
In the event that the Trustee determines in good faith that any
evidence is required with respect to the right of any Person as a holder of
Senior Indebtedness to participate in any payment or distribution pursuant to
this Article Ten, the Trustee may request such Person to furnish
69
<PAGE> 76
evidence to the reasonable satisfaction of the Trustee as to the amounts of
Senior Indebtedness held by such Person, the extent to which such Person is
entitled to participate in such payment or distribution and any other facts
pertinent to the rights of such Person under this Article Ten, and if such
evidence is not furnished the Trustee may defer any payment to such Person
pending judicial determination as to the right of such person to receive such
payment.
SECTION 10.08. Reliance on Judicial Order or Certificate of
Liquidating Agent.
Upon any payment or distribution of assets of the Company referred to
in this Article Ten, the Trustee, subject to the provisions of Article Seven
hereof, and the Holders of the Notes shall be entitled to rely upon any order
or decree made by any court of competent jurisdiction in which bankruptcy,
dissolution, winding-up, liquidation or reorganization proceedings are pending,
or upon a certificate of the receiver, trustee in bankruptcy, liquidating
trustee, agent or other person making such payment or distribution, delivered
to the Trustee or the Holders of the Notes, for the purpose of ascertaining the
persons entitled to participate in such distribution, the holders of the Senior
Indebtedness and other Indebtedness of the Company, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all
other facts pertinent thereto or to this Article Ten.
SECTION 10.09. Trustee's Relation to Senior Indebtedness.
The Trustee and any agent of the Company or the Trustee shall be
entitled to all the rights set forth in this Article Ten with respect to any
Senior Indebtedness which may at any time be held by it in its individual or
any other capacity to the same extent as any other holder of Senior
Indebtedness and nothing in this Indenture shall deprive the Trustee or any
such agent of any of its rights as such holder.
With respect to the holders of Senior Indebtedness, the Trustee
undertakes to perform or to observe only such of its covenants and obligations
as are specifically set forth in this Article Ten, and no implied covenants or
obligations with respect to the holders of Senior Indebtedness shall be read
into this Indenture against the Trustee. The Trustee shall not be deemed to
owe any fiduciary duty to the holders of Senior Indebtedness.
Whenever a distribution is to be made or a notice given to holders or
owners of Senior Indebtedness, the distribution may be made and the notice may
be given to their Representative, if any.
SECTION 10.10. Subordination Rights Not Impaired by Acts or
Omissions of the Company or Holders of Senior
Indebtedness.
No right of any present or future holders of any Senior Indebtedness
to enforce subordination as provided herein shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act, in good faith, by any such holder, or by any
noncompliance by the Company with the terms of this Indenture, regardless of
any knowledge thereof which any such holder may have or otherwise be charged
with.
70
<PAGE> 77
Without in any way limiting the generality of the foregoing paragraph,
the holders of Senior Indebtedness may, at any time and from time to time,
without the consent of or notice to the Trustee, without incurring
responsibility to the Trustee or the Holders of the Notes and without impairing
or releasing the subordination provided in this Article Ten or the obligations
hereunder of the Holders of the Notes to the holders of the Senior
Indebtedness, do any one or more of the following: (i) change the manner,
place or terms of payment or extend the time of payment of, or renew or alter,
Senior Indebtedness, or otherwise amend or supplement in any manner Senior
Indebtedness, or any instrument evidencing the same or any agreement under
which Senior Indebtedness is outstanding; (ii) sell, exchange, release or
otherwise deal with any property pledged, mortgaged or otherwise securing
Senior Indebtedness; (iii) release any Person liable in any manner for the
payment or collection of Senior Indebtedness; and (iv) exercise or refrain from
exercising any rights against the Company and any other Person.
SECTION 10.11. Noteholders Authorize Trustee To Effectuate
Subordination of Notes.
Each Holder of Notes by its acceptance of them authorizes and
expressly directs the Trustee on its behalf to take such action as may be
necessary or appropriate to effectuate, as between the holders of Senior
Indebtedness and the Holders of Notes, the subordination provided in this
Article Ten, and appoints the Trustee its attorney-in-fact for such purposes,
including, in the event of any dissolution, winding-up, liquidation or
reorganization of the Company (whether in bankruptcy, insolvency, receivership,
reorganization or similar proceedings or upon an assignment for the benefit of
creditors or otherwise) tending towards liquidation of the business and assets
of the Company, the filing of a claim for the unpaid balance of its Notes and
accrued interest in the form required in those proceedings.
If the Trustee does not file a proper claim or proof of debt in the
form required in such proceeding prior to 30 days before the expiration of the
time to file such claim or claims, then the holders of the Senior Indebtedness
or their Representative are or is hereby authorized to have the right to file
and are or is hereby authorized to file an appropriate claim for and on behalf
of the Holders of said Notes. Nothing herein contained shall be deemed to
authorize the Trustee or the holders of Senior Indebtedness or their
Representative to authorize or consent to or accept or adopt on behalf of any
Holder any plan of reorganization, arrangement, adjustment or composition
affecting the Notes or the rights of any Holder thereof, or to authorize the
Trustee or the holders of Senior Indebtedness or their Representative to vote
in respect of the claim of any Holder in any such proceeding.
SECTION 10.12. This Article Ten Not To Prevent Events
of Default.
The failure to make a payment on account of principal of or interest
on the Notes by reason of any provision of this Article Ten will not be
construed as preventing the occurrence of an Event of Default.
71
<PAGE> 78
SECTION 10.13. Trustee's Compensation Not Prejudiced.
Nothing in this Article Ten will apply to amounts due to the Trustee
pursuant to other sections in this Indenture.
ARTICLE ELEVEN
MISCELLANEOUS
SECTION 11.01. TIA Controls.
If any provision of this Indenture limits, qualifies, or conflicts
with another provision which is required to be included in this Indenture by
the TIA, the required provision shall control.
SECTION 11.02. Notices.
Any notices or other communications required or permitted hereunder
shall be in writing, and shall be sufficiently given if made by hand delivery,
by telecopier or registered or certified mail, postage prepaid, return receipt
requested, addressed as follows:
if to the Company:
Stuart Entertainment, Inc.
3211 Nebraska Avenue
Council Bluffs, Iowa 51501
Attention: Chief Financial Officer
Telecopy: (712) 323-2315
if to the Trustee:
Marine Midland Bank
140 Broadway, 12th Floor
New York, NY 10005-1180
Attention: Corporate Trust Department
Telecopy: (212) 658-6425
Each of the Company and the Trustee by written notice to each other
such Person may designate additional or different addresses for notices to such
Person. Any notice or communication to the Company or the Trustee shall be
deemed to have been given or made as of the date so delivered if personally
delivered; when receipt is acknowledged, if faxed; and five calendar days after
mailing if sent by registered or certified mail, postage prepaid (except that a
notice of change of address shall not be deemed to have been given until
actually received by the addressee).
Any notice or communication mailed to a Noteholder shall be mailed to
him by first class mail or other equivalent means at his address as it appears
on the registration books of the Registrar and shall be sufficiently given to
him if so mailed within the time prescribed.
72
<PAGE> 79
Failure to mail a notice or communication to a Noteholder or any
defect in it shall not affect its sufficiency with respect to other
Noteholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.
SECTION 11.03. Communications by Holders with Other Holders.
Noteholders may communicate pursuant to TIA Section 312(b) with other
Noteholders with respect to their rights under this Indenture or the Notes.
The Company, the Trustee, the Registrar and any other Person shall have the
protection of TIA Section 312(c).
SECTION 11.04. Certificate and Opinion as to Conditions
Precedent.
Upon any request or application by the Company to the Trustee to take
any action under this Indenture, the Company shall furnish to the Trustee:
(1) an Officers' Certificate, in form and substance
satisfactory to the Trustee, stating that, in the opinion of the
signers, all conditions precedent to be performed by the Company, if
any, provided for in this Indenture relating to the proposed action
have been complied with; and
(2) an Opinion of Counsel stating that, in the opinion of
such counsel, all such conditions precedent to be performed by the
Company, if any, provided for in this Indenture relating to the
proposed action have been complied with.
SECTION 11.05. Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture, other than the Officers'
Certificate required by Section 4.06, shall include:
(1) a statement that the Person making such certificate
or opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such Person, he
has made such examination or investigation as is reasonably necessary
to enable him to express an informed opinion as to whether or not such
covenant or condition has been complied with; and
(4) a statement as to whether or not, in the opinion of
each such Person, such condition or covenant has been complied with.
73
<PAGE> 80
SECTION 11.06. Rules by Trustee, Paying Agent, Registrar.
The Trustee may make reasonable rules in accordance with the Trustee's
customary practices for action by or at a meeting of Noteholders. The Paying
Agent or Registrar may make reasonable rules for its functions.
SECTION 11.07. Legal Holidays.
A "Legal Holiday" used with respect to a particular place of payment
is a Saturday, a Sunday or a day on which banking institutions in New York, New
York or at such place of payment are not required to be open. If a payment
date is a Legal Holiday at such place, payment may be made at such place on the
next succeeding day that is not a Legal Holiday, and no interest shall accrue
for the intervening period.
SECTION 11.08. GOVERNING LAW.
THIS INDENTURE AND THE NOTES SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE
AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF
CONFLICT OF LAWS. EACH OF THE PARTIES HERETO AGREES TO SUBMIT TO THE
JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN ANY ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS INDENTURE.
SECTION 11.09. No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Company or any of its Subsidiaries. Any such indenture,
loan or debt agreement may not be used to interpret this Indenture.
SECTION 11.10. No Recourse Against Others.
A director, officer, employee, stockholder or incorporator, as such,
of the Company or of the Trustee shall not have any liability for any
obligations of the Company under the Notes or this Indenture or for any claim
based on, in respect of or by reason of such obligations or their creations.
Each Noteholder by accepting a Note waives and releases all such liability.
Such waiver and release are part of the consideration for the issuance of the
Notes.
SECTION 11.11. Successors.
All agreements of the Company in this Indenture and the Notes shall
bind its successors. All agreements of the Trustee in this Indenture shall
bind its successors.
SECTION 11.12. Duplicate Originals.
All parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together shall represent the
same agreement.
74
<PAGE> 81
SECTION 11.13. Severability.
In case any one or more of the provisions in this Indenture or in the
Notes shall be held invalid, illegal or unenforceable, in any respect for any
reason, the validity, legality and enforceability of any such provision in
every other respect and of the remaining provisions shall not in any way be
affected or impaired thereby, it being intended that all of the provisions
hereof shall be enforceable to the full extent permitted by law.
75
<PAGE> 82
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, all as of the date first written above.
Issuer:
STUART ENTERTAINMENT, INC.
By: /s/ TIM STUART
------------------------------
Name: Tim Stuart
Title: President
Trustee:
MARINE MIDLAND BANK
as Trustee
By:/s/ FRANK GODINO
-------------------------------
Name: FRANK GODINO
Title: ASSISTANT VICE PRESIDENT
<PAGE> 83
EXHIBIT A
CUSIP NO.:
------------
STUART ENTERTAINMENT, INC.
12 1/2% SENIOR SUBORDINATED NOTE DUE 2004
No. $
STUART ENTERTAINMENT, INC., a Delaware corporation (the "Company",
which term includes any successor entity), for value received promises to pay
to or registered assigns, the principal
sum of Dollars, on November 15, 2004.
Interest Payment Dates: May 15 and November 15.
Record Dates: May 1 and November 1.
Reference is made to the further provisions of this Note contained
herein, which will for all purposes have the same effect as if set forth at
this place.
IN WITNESS WHEREOF, the Company has caused this Note to be signed
manually or by facsimile by its duly authorized officers and a facsimile of its
corporate seal to be affixed hereto or imprinted hereon.
STUART ENTERTAINMENT, INC.
By:
----------------------------------
Name:
Title:
By:
----------------------------------
Name:
Dated: November 13, 1996 Title:
Certificate of Authentication
This is one of the 12 1/2% Senior Subordinated Notes due 2004 referred to in
the within-mentioned Indenture.
MARINE MIDLAND BANK, as Trustee
Dated: By:
------------------- ----------------------------
Authorized Signatory
A-1
<PAGE> 84
(REVERSE OF SECURITY)
12 1/2% SENIOR SUBORDINATED NOTE DUE 2004
1. Interest. STUART ENTERTAINMENT, INC., a Delaware corporation
(the "Company"), promises to pay interest on the principal amount of this Note
at the rate per annum shown above. Interest on the Notes will accrue from the
most recent date on which interest has been paid or, if no interest has been
paid, from November 13, 1996. The Company will pay interest semi-annually in
arrears on each Interest Payment Date, commencing May 15, 1997. Interest will
be computed on the basis of a 360-day year of twelve 30-day months.
2. Method of Payment. The Company shall pay interest on the Notes
(except defaulted interest) to the Persons who are the registered Holders at
the close of business on the Record Date immediately preceding the Interest
Payment Date even if the Notes are canceled upon registration of transfer or
registration of exchange after such Record Date. Holders must surrender Notes
to a Paying Agent to collect principal payments. The Company shall pay
principal and interest in money of the United States that at the time of
payment is legal tender for payment of public and private debts ("U.S. Legal
Tender"). However, the Company may pay principal and interest by its check
payable in such U.S. Legal Tender. The Company may deliver any such interest
payment to the Paying Agent or to a Holder at the Holder's registered address.
3. Paying Agent and Registrar. Initially, Marine Midland Bank, a
New York banking corporation and trust company (the "Trustee"), will act as
Paying Agent and Registrar. The Company may change any Paying Agent, Registrar
or co-Registrar without notice to the Holders.
4. Indenture. The Company issued the Notes under an indenture,
dated as of November 13, 1996 (the "Indenture") between the Company, and the
Trustee. This Note is one of a duly authorized issue of notes of the Company
designated as its 12 1/2% Senior Subordinated Notes due 2004 (the "Initial
Notes"). The Initial Notes are limited in aggregate principal amount to
$100,000,000. The Notes include the Initial Notes and the Exchange Notes, as
defined below, issued in exchange for the Initial Notes pursuant to the
Indenture. The Initial Notes and the Exchange Notes are treated as a single
class of securities under the Indenture. Capitalized terms herein are used as
defined in the Indenture unless otherwise defined herein. The terms of the
Notes include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code
Sections 77aaa-77bbbb) (the "TIA"), as in effect on the date of the Indenture,
except as otherwise provided in the Indenture. Notwithstanding anything to the
contrary herein, the Notes are subject to all such terms, and Holders of Notes
are referred to the Indenture and said Act for a statement of them. The Notes
are general unsecured obligations of the Company.
5. Subordination. The Notes are subordinated in right of payment,
in the manner and to the extent set forth in the Indenture, to the prior
payment in full in cash or Cash Equivalents of all Senior Indebtedness of the
Company, whether outstanding on the date of the Indenture or thereafter
created, incurred, assumed or guaranteed. Each Holder by his acceptance hereof
agrees to be bound by such provisions and authorizes and expressly directs the
Trustee, on his behalf, to
A-2
<PAGE> 85
take such action as may be necessary or appropriate to effectuate the
subordination provided for in the Indenture and appoints the Trustee his
attorney-in-fact for such purposes.
6. Redemption.
(a) Optional Redemption. The Notes will be redeemable, at the
Company's option, in whole at any time or in part from time to time, on and
after November 15, 2001, upon not less than 30 nor more than 60 days' notice,
at the following redemption prices (expressed as percentages of the principal
amount thereof) if redeemed during the twelve-month period commencing on
November 15 of the year set forth below, plus, in each case, accrued and unpaid
interest thereon, if any, to the date of redemption:
<TABLE>
<CAPTION>
Year Percentage
- ---- ----------
<S> <C>
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106.250%
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.125%
2003 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . 100.000%
</TABLE>
(b) Optional Redemption Upon Public Equity Offerings. Notwithstanding
the foregoing, at any time, or from time to time, on or prior to November 15,
1999, the Company may, at its option, use the net cash proceeds of one or more
Public Equity Offerings (as defined below) to redeem up to 35% of the aggregate
principal amount of Notes; provided that at least 65% of the principal amount
of Notes originally issued remains outstanding immediately after any such
redemption, at the following redemption prices (expressed as percentages of the
principal amount thereof) if redeemed during the twelve- month period
commencing on November 15 of the year set forth below, plus, in each case,
accrued interest to the date of redemption:
<TABLE>
<CAPTION>
Year Percentage
- ---- ----------
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112.500%
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112.500%
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112.500%
</TABLE>
In order to effect the foregoing redemption with the proceeds of any
Public Equity Offering, the Company shall make such redemption not more than
120 days after the consummation of any such Public Equity Offering. As used in
the preceding paragraph, "Public Equity Offering" means an underwritten public
offering of Qualified Capital Stock of the Company pursuant to a registration
statement filed with the Securities and Exchange (the "Commission") in
accordance with the Securities Act of 1933, as amended (the "Securities Act").
(c) Mandatory Disposition or Redemption Pursuant to Gaming Laws. If a
Holder or beneficial owner of a Note is required to be licensed, qualified or
found suitable under applicable Gaming Laws and is not so licensed, qualified
or found suitable within any time period specified by the applicable Gaming
Authority, the Holder or beneficial owner shall be obliged, at the request of
the Company, to dispose of such Holder's or beneficial owner's Notes within a
time period prescribed by the Company or such other time period prescribed by
such Gaming Authority (in which event the Company's obligation to pay any
interest after the Holder's or
A-3
<PAGE> 86
beneficial owner's receipt of such request shall be limited as provided in such
Gaming Laws), and thereafter the Company shall have the right to redeem, on the
date fixed by the Company for the redemption of such Notes, notice of which
shall be furnished to the Trustee, such Holder's or beneficial owner's Notes at
a redemption price equal to the lesser of (i) the lowest closing sale price of
the Notes on any trading day during the 120-day period ending on the date upon
which the Company shall have received notice from a Gaming Authority of such
Holder's or beneficial owner's disqualification or (ii) the price at which such
Holder or beneficial owner acquired the Notes, unless a different redemption
price is required by such Gaming Authority, in which event such required price
shall be the redemption price. The Company will not be required to pay or
reimburse any Holder or beneficial owner of a Note for the costs of licensure
or investigation for such licensure, qualification or finding of suitability.
Any Holder or beneficial owner of a Note required to be licensed, qualified or
found suitable under applicable Gaming Laws will pay all investigative fees and
costs imposed by any Gaming Authority in connection with such qualification or
application therefor.
7. Notice of Redemption. Notice of redemption will be mailed at
least 30 days but not more than 60 days before the Redemption Date to each
Holder of Notes to be redeemed at such Holder's registered address. Notes in
denominations larger than $1,000 may be redeemed in part.
Except as set forth in the Indenture, if monies for the redemption of
the Notes called for redemption shall have been deposited with the Paying Agent
for redemption on such Redemption Date, then, unless the Company defaults in
the payment of such Redemption Price plus accrued interest, if any, the Notes
called for redemption will cease to bear interest from and after such
Redemption Date and the only right of the Holders of such Notes will be to
receive payment of the Redemption Price plus accrued interest, if any.
8. Offers to Purchase. Sections 4.14 and 4.15 of the Indenture
provide that, after certain Asset Sales (as defined in the Indenture) and upon
the occurrence of a Change of Control (as defined in the Indenture), and
subject to further limitations contained therein, the Company will make an
offer to purchase certain amounts of the Notes in accordance with the
procedures set forth in the Indenture.
9. Registration Rights. Pursuant to the Registration Rights
Agreement among the Company and the Holders of the Initial Notes, the Company
will be obligated to consummate an exchange offer pursuant to which the Holder
of this Note shall have the right to exchange this Note for the Company's
Series B 12 1/2% Senior Subordinated Notes due 2004 (the "Exchange Notes"),
which have been registered under the Securities Act, in like principal amount
and having terms identical in all material respects to the Initial Notes. The
Holders of the Initial Notes shall be entitled to receive certain additional
interest payments in the event such exchange offer is not consummated and upon
certain other conditions, all pursuant to and in accordance with the terms of
the Registration Rights Agreement.
10. Denominations; Transfer; Exchange. The Notes are in registered
form, without coupons, in denominations of $1,000 and integral multiples of
$1,000. A Holder shall register the transfer of or exchange Notes in
accordance with the Indenture. The Registrar may require a
A-4
<PAGE> 87
Holder, among other things, to furnish appropriate endorsements and transfer
documents and to pay certain transfer taxes or similar governmental charges
payable in connection therewith as permitted by the Indenture. The Registrar
need not register the transfer of or exchange of any Notes or portions thereof
selected for redemption.
11. Persons Deemed Owners. The registered Holder of a Note shall be
treated as the owner of it for all purposes.
12. Unclaimed Money. If money for the payment of principal or
interest remains unclaimed for two years, the Trustee and the Paying Agent will
pay the money back to the Company. After that, all liability of the Trustee
and such Paying Agent with respect to such money shall cease.
13. Discharge Prior to Redemption or Maturity. If the Company at any
time deposits with the Trustee U.S. Legal Tender or U.S. Government Obligations
sufficient to pay the principal of and interest on the Notes to redemption or
maturity and complies with the other provisions of the Indenture relating
thereto, the Company will be discharged from certain provisions of the
Indenture and the Notes (including certain covenants, but excluding its
obligation to pay the principal of and interest on the Notes).
14. Amendment; Supplement; Waiver. Subject to certain exceptions,
the Indenture or the Notes may be amended or supplemented with the written
consent of the Holders of at least a majority in aggregate principal amount of
the Notes then outstanding, and any existing Default or Event of Default or
noncompliance with any provision may be waived with the written consent of the
Holders of a majority in aggregate principal amount of the Notes then
outstanding. Without notice to or consent of any Holder, the parties thereto
may amend or supplement the Indenture or the Notes to, among other things, cure
any ambiguity, defect or inconsistency, provide for uncertificated Notes in
addition to or in place of certificated Notes, or comply with Article Five of
the Indenture or make any other change that does not adversely affect in any
material respect the rights of any Holder of a Note.
15. Restrictive Covenants. The Indenture imposes certain limitations
on the ability of the Company and its Restricted Subsidiaries to, among other
things, incur additional Indebtedness, make payments in respect of its Capital
Stock or certain Indebtedness, enter into transactions with Affiliates, create
dividend or other payment restrictions affecting Restricted Subsidiaries, merge
or consolidate with any other Person, sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its assets or adopt a plan of
liquidation. Such limitations are subject to a number of important
qualifications and exceptions. The Company must annually report to the Trustee
on compliance with such limitations.
16. Successors. When a successor assumes, in accordance with the
Indenture, all the obligations of its predecessor under the Notes and the
Indenture, the predecessor will be released from those obligations.
17. Defaults and Remedies. If an Event of Default occurs and is
continuing, the Trustee or the Holders of at least 25% in aggregate principal
amount of Notes then outstanding
A-5
<PAGE> 88
may declare all the Notes to be due and payable in the manner, at the time and
with the effect provided in the Indenture. Holders of Notes may not enforce the
Indenture or the Notes except as provided in the Indenture. The Trustee is not
obligated to enforce the Indenture or the Notes unless it has received
indemnity reasonably satisfactory to it. The Indenture permits, subject to
certain limitations therein provided, Holders of a majority in aggregate
principal amount of the Notes then outstanding to direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of Notes
notice of any continuing Default or Event of Default (except a Default in
payment of principal or interest) if it determines that withholding notice is
in their interest.
18. Trustee Dealings with Company. The Trustee under the Indenture,
in its individual or any other capacity, may become the owner or pledgee of
Notes and may otherwise deal with the Company, its Subsidiaries or their
respective Affiliates as if it were not the Trustee.
19. No Recourse Against Others. No stockholder, director, officer,
employee or incorporator, as such, of the Company shall have any liability for
any obligation of the Company under the Notes or the Indenture or for any claim
based on, in respect of or by reason of, such obligations or their creation.
Each Holder of a Note by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the
issuance of the Notes.
20. Authentication. This Note shall not be valid until the Trustee
or Authenticating Agent manually signs the certificate of authentication on
this Note.
21. Governing Law. The Laws of the State of New York shall govern
this Note and the Indenture, without regard to principles of conflict of laws.
22. Abbreviations and Defined Terms. Customary abbreviations may be
used in the name of a Holder of a Note or an assignee, such as: TEN COM (=
tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint
tenants with right of survivorship and not as tenants in common), CUST (=
Custodian), and U1G1M1A (= Uniform Gifts to Minors Act).
23. CUSIP Numbers. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes as a convenience to the Holders of the
Notes. No representation is made as to the accuracy of such numbers as printed
on the Notes and reliance may be placed only on the other identification
numbers printed hereon.
24. Indenture. Each Holder, by accepting a Note, agrees to be bound
by all of the terms and provisions of the Indenture, as the same may be amended
from time to time.
The Company will furnish to any Holder of a Note upon written request
and without charge a copy of the Indenture, which has the text of this Note in
larger type. Requests may be made to: Stuart Entertainment, Inc., 3211
Nebraska Avenue, Council Bluffs, Iowa 51501 Attn: Chief Financial Officer.
A-6
<PAGE> 89
ASSIGNMENT FORM
If you the Holder want to assign this Note, fill in the form below and have
your signature guaranteed:
I or we assign and transfer this Note to:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type name, address and zip code and
social security or tax ID number of assignee)
and irrevocably appoint , agent to
--------------------------------------
transfer this Note on the books of the Company. The agent may substitute
another to act for him.
Date: Signed:
-------------------- -------------------------------------------
(Sign exactly as your name appears on the
other side of this Note)
Signature Guarantee:
----------------------------------
In connection with any transfer of this Note occurring prior to the date
which is the earlier of (i) the date of the declaration by the SEC of the
effectiveness of a registration statement under the Securities Act of 1933, as
amended (the "Securities Act") covering resales of this Note (which
effectiveness shall not have been suspended or terminated at the date of the
transfer) and (ii) November 15, 1999, the undersigned confirms that it has not
utilized any general solicitation or general advertising in connection with the
transfer and that this Note is being transferred:
A-7
<PAGE> 90
[Check One]
---------
(1) ___ to the Company or a subsidiary thereof; or
(2) ___ pursuant to and in compliance with Rule 144A under the Securities
Act; or
(3) ___ to an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act) that has
furnished to the Trustee a signed letter containing certain
representations and agreements (the form of which letter can be
obtained from the Trustee); or
(4) ___ outside the United States to a "foreign person" in compliance
with Rule 904 of Regulation S under the Securities Act; or
(5) ___ pursuant to the exemption from registration provided by Rule 144
under the Securities Act; or
(6) ___ pursuant to an effective registration statement under the
Securities Act; or
(7) ___ pursuant to another available exemption from the registration
requirements of the Securities Act.
Unless one of the boxes is checked, the Trustee will refuse to register any of
the Notes evidenced by this certificate in the name of any person other than
the registered Holder thereof; provided that if box (3), (4), (5) or (7) is
checked, the Company or the Trustee may require, prior to registering any such
transfer of the Notes, in its sole discretion, such legal opinions,
certifications (including an investment letter in the case of box (3) or (4))
and other information as the Trustee or the Company has reasonably requested to
confirm that such transfer is being made pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities
Act. If none of the foregoing boxes is checked, the Trustee or Registrar shall
not be obligated to register this Note in the name of any person other than the
Holder hereof unless and until the conditions to any such transfer of
registration set forth herein and in Section 2.17 of the Indenture shall have
been satisfied.
Date: Signed:
-------------------- -------------------------------------------
(Sign exactly as your name appears on the
other side of this Note)
Signature Guarantee:
------------------------------------------------------------
(Signature must be guaranteed by an eligible guarantor institution (bank,
stockbroker, savings and loan association or credit union with membership in an
approved signature guarantee medallion program) pursuant to Rule 17 Ad-15
promulgated under the Securities Exchange Act of 1934.)
A-8
<PAGE> 91
TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKED
The undersigned represents and warrants that it is purchasing this Note
for its own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act
and is aware that the sale to it is being made in reliance on Rule 144A and
acknowledges that it has received such information regarding the Company as the
undersigned has requested pursuant to Rule 144A or has determined not to
request such information and that it is aware that the transferor is relying
upon the undersigned's foregoing representations in order to claim the
exemption from registration provided by Rule 144A.
Dated:
-------------------- ----------------------------------
NOTICE: To be executed by an
executive officer
A-9
<PAGE> 92
[OPTION OF HOLDER TO ELECT PURCHASE]
If you want to elect to have this Note purchased by the Company pursuant
to Section 4.14 or Section 4.15 of the Indenture, check the appropriate box:
[ ] Section 4.14
[ ] Section 4.15
If you want to elect to have only part of this Note purchased by the
Company pursuant to Section 4.14 or Section 4.15 of the Indenture, state the
amount you elect to have purchased:
$
-------------------------------
Dated:
---------------------------------------------------------
NOTICE: The signature on this assignment must correspond with the name as it
appears upon the face of the within Note in every particular without alteration
or enlargement or any change whatsoever and be guaranteed by the endorser's
bank or broker.
Signature Guarantee:
---------------------------------------
(Signature must be guaranteed by an eligible guarantor institution (bank,
stockbroker, savings and loan association or credit union with membership in an
approved signature guarantee medallion program) pursuant to Rule 17 Ad-15
promulgated under the Securities Exchange Act of 1934.)
A-10
<PAGE> 93
EXHIBIT B
STUART ENTERTAINMENT, INC.
SERIES B 12 1/2% SENIOR SUBORDINATED NOTE DUE 2004
No. $
STUART ENTERTAINMENT, INC., a Delaware corporation (the "Company",
which term includes any successor entity), for value received promises to pay
to or registered assigns, the principal
sum of Dollars, on November 15, 2004.
Interest Payment Dates: May 15 and November 15.
Record Dates: May 1 and November 1.
Reference is made to the further provisions of this Note contained
herein, which will for all purposes have the same effect as if set forth at
this place.
IN WITNESS WHEREOF, the Company has caused this Note to be signed
manually or by facsimile by its duly authorized officers and a facsimile of its
corporate seal to be affixed hereto or imprinted hereon.
STUART ENTERTAINMENT, INC.
By:
-------------------------------------
Name:
Title:
By:
-------------------------------------
Name:
Dated: Title:
Certificate of Authentication
This is one of the Series B 12 1/2% Senior Subordinated Notes due 2004 referred
to in the within-mentioned Indenture.
MARINE MIDLAND BANK, as Trustee
Dated: By:
----------------------------
Authorized Signatory
B-1
<PAGE> 94
(REVERSE OF SECURITY)
SERIES B 12 1/2% SENIOR SUBORDINATED NOTE DUE 2004
1. Interest. STUART ENTERTAINMENT, INC., a Delaware corporation
(the "Company"), promises to pay interest on the principal amount of this Note
at the rate per annum shown above. Interest on the Notes will accrue from the
most recent date on which interest has been paid or, if no interest has been
paid, from November 13, 1996. The Company will pay interest semi-annually in
arrears on each Interest Payment Date, commencing May 15, 1997. Interest will
be computed on the basis of a 360-day year of twelve 30-day months.
2. Method of Payment. The Company shall pay interest on the Notes
(except defaulted interest) to the Persons who are the registered Holders at
the close of business on the Record Date immediately preceding the Interest
Payment Date even if the Notes are canceled upon registration of transfer or
registration of exchange after such Record Date. Holders must surrender Notes
to a Paying Agent to collect principal payments. The Company shall pay
principal and interest in money of the United States that at the time of
payment is legal tender for payment of public and private debts ("U.S. Legal
Tender"). However, the Company may pay principal and interest by its check
payable in such U.S. Legal Tender. The Company may deliver any such interest
payment to the Paying Agent or to a Holder at the Holder's registered address.
3. Paying Agent and Registrar. Initially, Marine Midland Bank, a
New York banking corporation and trust company (the "Trustee"), will act as
Paying Agent and Registrar. The Company may change any Paying Agent, Registrar
or co-Registrar without notice to the Holders.
4. Indenture. The Company issued the Notes under an indenture,
dated as of November 13, 1996 (the "Indenture") between the Company, and the
Trustee. This Note is one of a duly authorized issue of notes of the Company
designated as its Series B 12 1/2% Senior Subordinated Notes due 2004 (the
"Exchange Notes"). The Initial Notes are limited in aggregate principal amount
to $100,000,000. The Notes include the 12 1/2% Senior Subordinated Notes due
2004 (the "Initial Notes") and the Exchange Notes, as defined below, issued in
exchange for the Initial Notes pursuant to the Indenture. The Initial Notes
and the Exchange Notes are treated as a single class of securities under the
Indenture. Capitalized terms herein are used as defined in the Indenture
unless otherwise defined herein. The terms of the Notes include those stated
in the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbbb) (the "TIA"), as in
effect on the date of the Indenture, except as otherwise provided in the
Indenture. Notwithstanding anything to the contrary herein, the Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and said Act for a statement of them. The Notes are general unsecured
obligations of the Company.
5. Subordination. The Notes are subordinated in right of payment,
in the manner and to the extent set forth in the Indenture, to the prior
payment in full in cash or Cash Equivalents of all Senior Indebtedness of the
Company, whether outstanding on the date of the Indenture or thereafter
created, incurred, assumed or guaranteed. Each Holder by his acceptance hereof
agrees
B-2
<PAGE> 95
to be bound by such provisions and authorizes and expressly directs the
Trustee, on his behalf, to take such action as may be necessary or appropriate
to effectuate the subordination provided for in the Indenture and appoints the
Trustee his attorney-in-fact for such purposes.
6. Redemption.
(a) Optional Redemption. The Notes will be redeemable, at the
Company's option, in whole at any time or in part from time to time, on and
after November 15, 2001, upon not less than 30 nor more than 60 days' notice,
at the following redemption prices (expressed as percentages of the principal
amount thereof) if redeemed during the twelve-month period commencing on
November 15 of the year set forth below, plus, in each case, accrued and unpaid
interest thereon, if any, to the date of redemption:
<TABLE>
<CAPTION>
Year Percentage
- ---- ----------
<S> <C>
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106.250%
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.125%
2003 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . 100.000%
</TABLE>
(b) Optional Redemption Upon Public Equity Offerings.
Notwithstanding the foregoing, at any time, or from time to time, on or prior
to November 15, 1999, the Company may, at its option, use the net cash proceeds
of one or more Public Equity Offerings (as defined below) to redeem up to 35%
of the aggregate principal amount of Notes; provided that at least 65% of the
principal amount of Notes originally issued remains outstanding immediately
after any such redemption, at the following redemption prices (expressed as
percentages of the principal amount thereof) if redeemed during the twelve-
month period commencing on November 15 of the year set forth below, plus, in
each case, accrued interest to the date of redemption:
<TABLE>
<CAPTION>
Year Percentage
- ---- ----------
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112.500%
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112.500%
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112.500%
</TABLE>
In order to effect the foregoing redemption with the proceeds of any
Public Equity Offering, the Company shall make such redemption not more than
120 days after the consummation of any such Public Equity Offering. As used in
the preceding paragraph, "Public Equity Offering" means an underwritten public
offering of Qualified Capital Stock of the Company pursuant to a registration
statement filed with the Securities and Exchange (the "Commission") in
accordance with the Securities Act of 1933, as amended (the "Securities Act").
(c) Mandatory Disposition or Redemption Pursuant to Gaming Laws. If a
Holder or beneficial owner of a Note is required to be licensed, qualified or
found suitable under applicable Gaming Laws and is not so licensed, qualified
or found suitable within any time period specified by the applicable Gaming
Authority, the Holder or beneficial owner shall be obliged, at the request of
the Company, to dispose of such Holder's or beneficial owner's Notes within a
time period prescribed by the Company or such other time period prescribed by
such Gaming
B-3
<PAGE> 96
Authority (in which event the Company's obligation to pay any interest after
the Holder's or beneficial owner's receipt of such request shall be limited as
provided in such Gaming Laws), and thereafter the Company shall have the right
to redeem, on the date fixed by the Company for the redemption of such Notes,
notice of which shall be furnished to the Trustee, such Holder's or beneficial
owner's Notes at a redemption price equal to the lesser of (i) the lowest
closing sale price of the Notes on any trading day during the 120-day period
ending on the date upon which the Company shall have received notice from a
Gaming Authority of such Holder's or beneficial owner's disqualification or
(ii) the price at which such Holder or beneficial owner acquired the Notes,
unless a different redemption price is required by such Gaming Authority, in
which event such required price shall be the redemption price. The Company
will not be required to pay or reimburse any Holder or beneficial owner of a
Note for the costs of licensure or investigation for such licensure,
qualification or finding of suitability. Any Holder or beneficial owner of a
Note required to be licensed, qualified or found suitable under applicable
Gaming Laws will pay all investigative fees and costs imposed by any Gaming
Authority in connection with such qualification or application therefor.
7. Notice of Redemption. Notice of redemption will be mailed at
least 30 days but not more than 60 days before the Redemption Date to each
Holder of Notes to be redeemed at such Holder's registered address. Notes in
denominations larger than $1,000 may be redeemed in part.
Except as set forth in the Indenture, if monies for the redemption of
the Notes called for redemption shall have been deposited with the Paying Agent
for redemption on such Redemption Date, then, unless the Company defaults in
the payment of such Redemption Price plus accrued interest, if any, the Notes
called for redemption will cease to bear interest from and after such
Redemption Date and the only right of the Holders of such Notes will be to
receive payment of the Redemption Price plus accrued interest, if any.
8. Offers to Purchase. Sections 4.14 and 4.15 of the Indenture
provide that, after certain Asset Sales (as defined in the Indenture) and upon
the occurrence of a Change of Control (as defined in the Indenture), and
subject to further limitations contained therein, the Company will make an
offer to purchase certain amounts of the Notes in accordance with the
procedures set forth in the Indenture.
9. Registration Rights. Pursuant to the Registration Rights
Agreement among the Company and the Holders of the Initial Notes, the Company
will be obligated to consummate an exchange offer pursuant to which the Holder
of this Note shall have the right to exchange this Note for the Company's
Series B 12 1/2% Senior Subordinated Notes due 2004 (the "Exchange Notes"),
which have been registered under the Securities Act, in like principal amount
and having terms identical in all material respects to the Initial Notes. The
Holders of the Initial Notes shall be entitled to receive certain additional
interest payments in the event such exchange offer is not consummated and upon
certain other conditions, all pursuant to and in accordance with the terms of
the Registration Rights Agreement.
10. Denominations; Transfer; Exchange. The Notes are in registered
form, without coupons, in denominations of $1,000 and integral multiples of
$1,000. A Holder shall register the
B-4
<PAGE> 97
transfer of or exchange Notes in accordance with the Indenture. The Registrar
may require a Holder, among other things, to furnish appropriate endorsements
and transfer documents and to pay certain transfer taxes or similar
governmental charges payable in connection therewith as permitted by the
Indenture. The Registrar need not register the transfer of or exchange of any
Notes or portions thereof selected for redemption.
11. Persons Deemed Owners. The registered Holder of a Note shall be
treated as the owner of it for all purposes.
12. Unclaimed Money. If money for the payment of principal or
interest remains unclaimed for two years, the Trustee and the Paying Agent will
pay the money back to the Company. After that, all liability of the Trustee
and such Paying Agent with respect to such money shall cease.
13. Discharge Prior to Redemption or Maturity. If the Company at any
time deposits with the Trustee U.S. Legal Tender or U.S. Government Obligations
sufficient to pay the principal of and interest on the Notes to redemption or
maturity and complies with the other provisions of the Indenture relating
thereto, the Company will be discharged from certain provisions of the
Indenture and the Notes (including certain covenants, but excluding its
obligation to pay the principal of and interest on the Notes).
14. Amendment; Supplement; Waiver. Subject to certain exceptions,
the Indenture or the Notes may be amended or supplemented with the written
consent of the Holders of at least a majority in aggregate principal amount of
the Notes then outstanding, and any existing Default or Event of Default or
noncompliance with any provision may be waived with the written consent of the
Holders of a majority in aggregate principal amount of the Notes then
outstanding. Without notice to or consent of any Holder, the parties thereto
may amend or supplement the Indenture or the Notes to, among other things, cure
any ambiguity, defect or inconsistency, provide for uncertificated Notes in
addition to or in place of certificated Notes, or comply with Article Five of
the Indenture or make any other change that does not adversely affect in any
material respect the rights of any Holder of a Note.
15. Restrictive Covenants. The Indenture imposes certain limitations
on the ability of the Company and its Restricted Subsidiaries to, among other
things, incur additional Indebtedness, make payments in respect of its Capital
Stock or certain Indebtedness, enter into transactions with Affiliates, create
dividend or other payment restrictions affecting Restricted Subsidiaries, merge
or consolidate with any other Person, sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its assets or adopt a plan of
liquidation. Such limitations are subject to a number of important
qualifications and exceptions. The Company must annually report to the Trustee
on compliance with such limitations.
16. Successors. When a successor assumes, in accordance with the
Indenture, all the obligations of its predecessor under the Notes and the
Indenture, the predecessor will be released from those obligations.
B-5
<PAGE> 98
17. Defaults and Remedies. If an Event of Default occurs and is
continuing, the Trustee or the Holders of at least 25% in aggregate principal
amount of Notes then outstanding may declare all the Notes to be due and
payable in the manner, at the time and with the effect provided in the
Indenture. Holders of Notes may not enforce the Indenture or the Notes except
as provided in the Indenture. The Trustee is not obligated to enforce the
Indenture or the Notes unless it has received indemnity reasonably satisfactory
to it. The Indenture permits, subject to certain limitations therein provided,
Holders of a majority in aggregate principal amount of the Notes then
outstanding to direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Holders of Notes notice of any continuing Default or
Event of Default (except a Default in payment of principal or interest) if it
determines that withholding notice is in their interest.
18. Trustee Dealings with Company. The Trustee under the Indenture,
in its individual or any other capacity, may become the owner or pledgee of
Notes and may otherwise deal with the Company, its Subsidiaries or their
respective Affiliates as if it were not the Trustee.
19. No Recourse Against Others. No stockholder, director, officer,
employee or incorporator, as such, of the Company shall have any liability for
any obligation of the Company under the Notes or the Indenture or for any claim
based on, in respect of or by reason of, such obligations or their creation.
Each Holder of a Note by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the
issuance of the Notes.
20. Authentication. This Note shall not be valid until the Trustee
or Authenticating Agent manually signs the certificate of authentication on
this Note.
21. Governing Law. The Laws of the State of New York shall govern
this Note and the Indenture, without regard to principles of conflict of laws.
22. Abbreviations and Defined Terms. Customary abbreviations may be
used in the name of a Holder of a Note or an assignee, such as: TEN COM (=
tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint
tenants with right of survivorship and not as tenants in common), CUST (=
Custodian), and U1G1M1A (= Uniform Gifts to Minors Act).
23. CUSIP Numbers. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes as a convenience to the Holders of the
Notes. No representation is made as to the accuracy of such numbers as printed
on the Notes and reliance may be placed only on the other identification
numbers printed hereon.
24. Indenture. Each Holder, by accepting a Note, agrees to be bound
by all of the terms and provisions of the Indenture, as the same may be amended
from time to time.
The Company will furnish to any Holder of a Note upon written request
and without charge a copy of the Indenture, which has the text of this Note in
larger type. Requests may be made to: Stuart Entertainment, Inc., 3211
Nebraska Avenue, Council Bluffs, Iowa 51501 Attn: Chief Financial Officer.
B-6
<PAGE> 99
ASSIGNMENT FORM
If you the Holder want to assign this Note, fill in the form below and have
your signature guaranteed:
I or we assign and transfer this Note to:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type name, address and zip code and
social security or tax ID number of assignee)
and irrevocably appoint , agent to
--------------------------------------
transfer this Note on the books of the Company. The agent may substitute
another to act for him.
Date: Signed:
-------------------- -------------------------------------------
(Sign exactly as your name appears on the
other side of this Note)
Signature Guarantee:
----------------------------------
(Signature must be guaranteed by an eligible guarantor institution (bank,
stockbroker, savings and loan association or credit union with membership in an
approved signature guarantee medallion program) pursuant to Rule 17 Ad-15
promulgated under the Securities Exchange Act of 1934.)
B-7
<PAGE> 100
[OPTION OF HOLDER TO ELECT PURCHASE]
If you want to elect to have this Note purchased by the Company pursuant to
Section 4.14 or Section 4.15 of the Indenture, check the appropriate box:
[ ] Section 4.14
[ ] Section 4.15
If you want to elect to have only part of this Note purchased by the Company
pursuant to Section 4.14 or Section 4.15 of the Indenture, state the amount
you elect to have purchased:
$
-------------------------------
Dated:
-------------------------- ----------------------------------------------
NOTICE: The signature on this assignment
must correspond with the name as it appears
upon the face of the within Note in every
particular without alteration or enlargement
or any change whatsoever and be guaranteed by
the endorser's bank or broker.
Signature Guarantee: ______________________________________
(Signature must be guaranteed by an eligible guarantor institution (bank,
stockbroker, savings and loan association or credit union with membership in
an approved signature guarantee medallion program) pursuant to Rule 17 Ad-15
promulgated under the Securities Exchange Act of 1934.)
B-8
<PAGE> 101
EXHIBIT C
Form of Certificate To Be
Delivered in Connection with
Transfers to Non-QIB Accredited Investors
_____________________, _____
Marine Midland Bank
Corporate Trust Department
140 Broadway
New York, NY 10005
Re: Stuart Entertainment, Inc.
12 1/2% Senior Subordinated Notes due 2004
Ladies and Gentlemen:
In connection with our proposed purchase of 12 1/2% Senior Subordinated
Notes due 2004 (the "Notes") of Stuart Entertainment, Inc. (the "Company"), we
confirm that:
1. We have received a copy of the Offering Memorandum (the "Offering
Memorandum"), dated November 7, 1996 relating to the Notes and such other
information as we deem necessary in order to make our investment decision. We
acknowledge that we have read and agreed to the matters stated on pages (i)-
(ii) of the Offering Memorandum and in the section entitled "Transfer
Restrictions" of the Offering Memorandum, including the restrictions on
duplication and circulation of the Offering Memorandum.
2. We understand that any subsequent transfer of the Notes is
subject to certain restrictions and conditions set forth in the Indenture
relating to the Notes (as described in the Offering Memorandum) and the
undersigned agrees to be bound by, and not to resell, pledge or otherwise
transfer the Notes except in compliance with, such restrictions and conditions
and the Securities Act of 1933, as amended (the "Securities Act").
3. We understand that the offer and sale of the Notes have not been
registered under the Securities Act, and that the Notes may not be offered or
sold except as permitted in the following sentence. We agree, on our own
behalf and on behalf of any accounts for which we are acting as hereinafter
stated, that if we should sell or otherwise transfer any Notes prior to the
date which is three years after the original issuance of the Notes, we will do
so only (i) to the Company or any of its subsidiaries, (ii) inside the United
States in accordance with Rule 144A under the Securities Act to a "qualified
institutional buyer" (as defined in Rule 144A under the Securities Act), (iii)
inside the United States to an institutional "accredited investor" (as defined
below) that, prior to such transfer, furnishes (or has furnished on its behalf
by a U.S. broker-dealer) to the Trustee (as defined in the Indenture relating
to the Notes), a signed letter containing certain representations and
agreements relating to the restrictions on transfer of the Notes, (iv) outside
the United States in accordance with Rule 904 of Regulation S under the
Securities Act, (v)
C-1
<PAGE> 102
pursuant to the exemption from registration provided by Rule 144 under the
Securities Act (if available), or (vi) pursuant to an effective registration
statement under the Securities Act, and we further agree to provide to any
person purchasing any of the Notes from us a notice advising such purchaser
that resales of the Notes are restricted as stated herein.
4. We are not acquiring the Notes for or on behalf of, and will not
transfer the Notes to, any pension or welfare plan (as defined in Section 3 of
the Employee Retirement Income Security Act of 1974), except as permitted in
the section entitled "Transfer Restrictions" of the Offering Memorandum.
5. We understand that, on any proposed resale of any Notes, we will
be required to furnish to the Trustee and the Company such certification, legal
opinions and other information as the Trustee and the Company may reasonably
require to confirm that the proposed sale complies with the foregoing
restrictions. We further understand that the Notes purchased by us will bear a
legend to the foregoing effect.
6. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have
such knowledge and experience in financial and business matters as to be
capable of evaluating the merits and risks of our investment in the Notes, and
we and any accounts for which we are acting are each able to bear the economic
risk of our or their investment, as the case may be.
7. We are acquiring the Notes purchased by us for our account or for
one or more accounts (each of which is an institutional "accredited investor")
as to each of which we exercise sole investment discretion.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceeding or official inquiry
with respect to the matters covered hereby.
Very truly yours,
By:
----------------------------------
Name:
Title:
C-2
<PAGE> 103
Form of Certificate To Be Delivered
in Connection with Transfers
Pursuant to Regulation S
_______________________, ____
Marine Midland Bank
Attention: Corporate Trust Department
140 Broadway
New York, NY 10005
Re: Stuart Entertainment, Inc. (the "Company")
12 1/2% Senior Subordinated Notes due 2004 (the "Notes")
Ladies and Gentlemen:
In connection with our proposed sale of $100,000,000 aggregate principal
amount of the Notes, we confirm that such sale has been effected pursuant to
and in accordance with Regulation S under the U.S. Securities Act of 1933, as
amended (the "Securities Act"), and, accordingly, we represent that:
(1) the offer of the Notes was not made to a person in the
United States;
(2) either (a) at the time the buy offer was originated, the
transferee was outside the United States or we and any person acting on
our behalf reasonably believed that the transferee was outside the
United States, or (b) the transaction was executed in, on or through the
facilities of a designated off-shore securities market and neither we
nor any person acting on our behalf knows that the transaction has been
pre-arranged with a buyer in the United States;
(3) no directed selling efforts have been made in the United
States in contravention of the requirements of Rule 903(b) or Rule
904(b) of Regulation S, as applicable;
(4) the transaction is not part of a plan or scheme to evade
the registration requirements of the Securities Act; and
(5) we have advised the transferee of the transfer
restrictions applicable to the Notes.
You and the Company are entitled to rely upon this letter and are irrevocably
authorized to produce this letter or a copy hereof to any interested party in
any administrative or legal proceedings or official inquiry with respect to the
matters covered hereby. Terms used in this certificate have the meanings set
forth in Regulation S.
Very truly yours, [Name of Transferor]
By:__________________________
Authorized Signature
D-1
<PAGE> 1
EXHIBIT 12
STUART ENTERTAINMENT, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(amounts in thousands, except for ratio data)
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended September 30,
-------------------------------------------------- -------------------------------------- Pro Forma Latest
Pro Forma Pro Forma Pro Forma Twelve Months Ended
1991 1992 1993 1994 1995 1995 1995 1995 1996 1996 September 30, 1996
------ ------ ------ ------- ------ --------- ------ --------- ------ --------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(A) Earnings:
Income (loss)
before income
taxes $2,883 $2,757 $ 759 $(2,273) $2,563 $(1,096) $1,893 $ (300) $3,757 $ 1,674 $ 878
Add:
Fixed charges per
Item (B) below 395 646 775 1,045 4,448 11,178 3,365 8,491 3,286 8,371 11,058
------ ------ ------ ------- ------ ------- ------ ------ ------ ------- -------
$3,278 $3,403 $1,534 $(1,228) $7,011 $10,082 $5,258 $8,191 $7,043 $10,045 $11,936
====== ====== ====== ======= ====== ======= ====== ====== ====== ======= =======
(B) Fixed charges
Interest on
indebtedness, the
portion of rentals
considered to be
interest and
amortization of
deferred financing
and bank fees 395 646 775 1,045 4,448 11,178 3,365 8,491 3,286 8,371 11,058
------ ------ ------ ------- ------ ------- ------ ------ ------ ------- -------
$ 395 $ 646 $ 775 $ 1,045 $4,448 $11,178 $3,365 $8,491 $3,286 $ 8,371 $11,058
====== ====== ====== ======= ====== ======= ====== ====== ====== ======= =======
Ratios of earnings
in fixed charges(1) 8.30 5.27 1.98 (1.18) 1.58 0.90 1.56 0.96 2.14 1.20 1.08
====== ====== ====== ======= ====== ======= ====== ====== ====== ======= =======
</TABLE>
Earnings available for fixed charges were insufficient to cover fixed
charges by $2.3 million for the year ended December 31, 1994 and $1.1 million
and $.3 million for the pro forma year ended December 31, 1995 and the pro
forma nine months ended September 30, 1995, respectively.
<PAGE> 1
EXHIBIT 23.01
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Stuart
Entertainment, Inc. on Form S-4 of our report dated March 25, 1996, appearing
in the Prospectus, which is part of this Registration Statement. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
February 5, 1997
<PAGE> 1
EXHIBIT 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Pre-effective Amendment No. 1 to
the registration statement on Form S-4 of our report dated March 29, 1996,
except for the second paragraph of Note 13, as to which date is April 29, 1996,
on our audits of the financial statements of Trade Products, Inc. We also
consent to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Seattle, Washington
February 5, 1997
