<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A-1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NO.
DECEMBER 31, 1996 0-10737
STUART ENTERTAINMENT, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-0402207
- -------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3211 NEBRASKA AVENUE
COUNCIL BLUFFS, IOWA 51501
- -------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (712) 323-1488
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
----------------------------
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
<PAGE> 2
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 22, 1997 was $9,474,877.50
The number of shares outstanding of the Registrants' $.01 par value common
stock as of March 22, 1997 was 6,717,062.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on May 20, 1997 are incorporated by reference
into Part III.
ITEM 3. LEGAL PROCEEDINGS
The Company has been sued for patent infringement in the United States
District Court for the District of Nevada by Fortunet, Inc. ("Fortunet") The
suit consists of two counts. The first count concerns a device known as the
Bingo Card Minder that was marketed by the Company and manufactured by Bingo
Card Minder Corp., who is co-defendant for the first count. The Company no
longer markets the Bingo Card Minder. The second count is against the Company
and alleges that the System 12(TM) electronic bingo system manufactured by Video
King infringes three patents owned by Fortunet. The Company does not believe
that System 12(TM) infringes any of the patents and that the three patents are
invalid. The Company has requested that the United States Patent and Trademark
Office ("PTO") re-examine the three patents. The PTO has granted the Company's
request as to two patents; the PTO agreed that a substantial new question of
patentability exists as to such patents. The PTO has not acted on the request
for the reexamination of the third patent, which was filed approximately four
months after the request for re-examination of the first two patents. The
Company intends to vigorously defend the suit on both counts.
In June 1996, the Company was sued by Arrow International ("Arrow") for a
declaratory judgment that Arrow was not infringing three patents held by the
Company. The Company had previously sent Arrow a cease and desist letter. Arrow
also claimed that the Company was infringing a patent that was issued in 1984
and reissued in 1993. The Company is defending such claim and has also
counterclaimed for damages for infringement on the three patents referred to
above.
In July 1996, the Company was sued by William G. Kellen in a suit filed 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 vigorously defend the suit.
2
<PAGE> 3
ITEM 6. SELECTED FINANCIAL DATA
The financial data presented below are derived from the consolidated
financial statements of the Company. The selected financial data for each of the
years in the three-year period ended December 31, 1996 are derived from the
consolidated financial statements of the Company which have been audited and
reported upon by Deloitte & Touche LLP, independent accountants. The selected
financial information set forth in the table below is not necessarily indicative
of the results of future operations of the Company and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements, related
notes and independent auditors' report, contained herein.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS: (1)
Net sales $ 110,636 $ 109,882 $ 59,158 $ 53,937 $ 52,519
Gross margin 32,873 35,160 16,171 13,770 14,542
Income (loss before extraordinary loss and
cumulative effect of change in accounting principle (1,298) 786 (1,608) 512 1,720
Net income (loss) (2,231) 786 (1,608) 699 1,720
Earnings (loss) per share before cumulative
effect of extraordinary loss and change in
accounting principle-primary (0.19) 0.12 (0.45) 0.15 0.49
Earnings (loss) per share before cumulative
accounting principle-fully dilutive (0.19) 0.11 (0.45) 0.15 0.49
Earnings (loss) per share-primary (0.32) 0.12 (0.45) 0.20 0.49
Earnings (loss) per share-fully dilutive (0.32) 0.11 (0.45) 0.20 0.49
Average common and common equivalent shares
outstanding-primary 6,886 6,706 3,561 3,524 3,519
Average common and common equivalent shares
outstanding-fully dilutive 6,886 7,053 3,561 3,524 3,519
FINANCIAL CONDITION:
Working Capital 54,025 20,018 14,454 3,742 34,961
Current ratio 3.5 1.8 1.7 1.2 1.3
Total Assets 154,595 98,994 88,977 37,301 33,764
Long-term debt 100,396 39,586 34,146 3,949 4,748
Stockholders' equity 30,358 32,040 30,153 15,140 14,168
OTHER FINANCIAL DATA:
EBITDA (2) $ 12,049 $ 12,117 $ 1,088 $ 3,127 $ 4,693
Net cash flows from operating activities 1,464 (1,790) 1,202 (512) 2,548
Net cash flows from investing activities (38,150) (682) (30,396) (590) (1,402)
Net cash flows from financing activities 49,464 1,260 30,822 945 (816)
</TABLE>
- -----------------------
(1) On December 13, 1994, Stuart completed the acquisition of Bazaar. On
November 13, 1996, the Company completed the acquisition of Trade. The
acquisitions have been accounted for using the purchase method of accounting
and, accordingly, the operating results of Bazaar and Trade have been included
with Stuart's since the date of acquisition. See Note 2 to Notes to Consolidated
Financial Statements of Stuart included herein.
3
<PAGE> 4
(2) EBITDA is defined as earnings before interest, taxes, depreciation,
amortization, purchase accounting adjustments, restructuring charge and
extraordinary item. EBITDA does not represent, and should not be considered as,
an alternative to net income or cash flows from operating activities each as
determined in accordance with generally accepted accounting principles ("GAAP").
Moreover, EBITDA does not necessarily indicate whether cash flow will be
sufficient for such items as working capital or capital expenditures, or to
react to changes in the Company's industry or to the economy generally. The
Company believes that EBITDA is a measure commonly used by lenders and certain
investors to evaluate a company's performance. The Company also believes that
EBITDA data may help to understand the Company's performance because such data
may reflect the Company's ability to generate cash flows, which is an indicator
of its ability to satisfy its debt service, capital expenditure and working
capital requirements. Because EBITDA is not calculated by all companies and
analysts in the same fashion, the EBITDA measures presented by the Company may
not be comparable to similarly-titled measures reported by other companies.
Therefore, in evaluating EBITDA data, investors should consider, among other
factors: the non-GAAP nature of EBITDA data; actual cash flows; the actual
availability of funds for debt service, capital expenditures and working
capital; and the comparability of the Company's EBITDA data to similarly-titled
measures reported by other companies.
4
<PAGE> 5
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
STUART ENTERTAINMENT, INC.
Dated: January 12, 1998 By /s/ Paul C. Tunink
------------------------------
Paul C. Tunink, Chief Financial
Officer
5
<PAGE> 6
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report F-2
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7 to F-24
Financial Statement Schedules: Schedule II - Valuation and Qualifying accounts F-25
</TABLE>
F-1
<PAGE> 7
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Stuart Entertainment, Inc.,
Council Bluffs, Iowa. We have audited the accompanying consolidated balance
sheets of Stuart Entertainment, Inc. and subsidiaries (the "Company") as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. Our audits also included the financial
statement schedule listed in the Index at Item 14. These financial statements
and the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits. We conducted
our audits in accordance with generally accepted auditing standards. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Stuart Entertainment, Inc. and subsidiaries
at December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 14, 1997
F-2
<PAGE> 8
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
NET SALES $ 110,636 $ 109,882 $ 59,158
COST OF GOODS SOLD 77,763 74,722 42,987
----------- ----------- -----------
GROSS MARGIN 32,873 35,160 16,171
OTHER EXPENSES AND INCOME:
Selling, general and administrative expenses 25,318 26,581 14,323
Restructuring charge 3,280 -- --
United Kingdom charge -- 819 --
Termination of Consulting Agreement -- -- 2,000
Amortization of goodwill 940 878 96
Equity in (earnings) losses of joint ventures 11 (129) 980
Interest expense, net 5,337 4,448 1,045
----------- ----------- -----------
Other Expenses and Income - Net 34,886 32,597 18,444
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (2,013) 2,563 (2,273)
INCOME TAX PROVISION (BENEFIT) (715) 1,777 (665)
----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (1,298) 786 (1,608)
EXTRAORDINARY ITEM - Loss on extinguishment of debt, net of taxes 933 -- --
----------- ----------- -----------
NET INCOME (LOSS) $ (2,231) $ 786 $ (1,608)
=========== =========== ===========
EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary loss - primary $ (0.19) $ 0.12 $ (0.45)
Extraordinary loss (0.13) -- --
----------- ----------- -----------
Earnings (loss) per share - primary $ (0.32) $ 0.12 $ (0.45)
=========== =========== ===========
Average Common and Common Equivalent Shares Outstanding - primary 6,885,884 6,705,904 3,560,848
=========== =========== ===========
Income (loss) before extraordinary loss - fully dilutive $ (0.19) $ 0.11 $ (0.45)
Extraordinary loss (0.13) -- --
----------- ----------- -----------
Earnings (loss) per share - fully dilutive $ (0.32) $ 0.11 $ (0.45)
=========== =========== ===========
Average common and common equivalent shares outstanding - fully dilutive 6,885,884 7,053,222 3,560,848
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 9
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 13,732 $ 943
Trade receivables, net of allowance for doubtful accounts of $2,230
and $2,086 25,998 18,216
Current portion of notes receivable, less allowance for doubtful
accounts of $99 and $199 1,296 1,153
Inventories 28,118 21,982
Income taxes recoverable 2,545 --
Deferred income taxes 2,581 1,746
Prepaid expenses and other current assets 989 547
--------- ---------
Total Current Assets 75,259 44,587
PROPERTY, PLANT AND EQUIPMENT, net 29,760 21,117
GOODWILL, net of accumulated amortization of $1,983 and $1,209 43,726 29,194
OTHER ASSETS, net 5,850 4,096
--------- ---------
$ 154,595 $ 98,994
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 370 $ 7,897
Trade payables 11,834 12,512
Accrued payroll and benefits 2,688 1,967
Other accrued liabilities 2,893 1,610
Restructuring charge reserve 3,280 --
Income taxes payable -- 543
Deferred income taxes 169 40
--------- ---------
Total Current Liabilities 21,234 24,569
LONG-TERM DEBT 100,396 39,586
DEFERRED INCOME TAXES 2,320 2,594
DEFERRED INCOME 287 205
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY:
Common stock $.01 par value; 30,000,000 and 20,000,000 shares
authorized; 6,884,376 and 6,753,309 shares outstanding 69 68
Additional paid-in capital 27,368 26,384
Retained earnings 3,294 5,525
Treasury stock (56,260 shares at cost) (189) (189)
Cumulative translation adjustment, net of deferred income taxes (184) 252
--------- ---------
Total Stockholders' Equity 30,358 32,040
--------- ---------
$ 154,595 $ 98,994
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 10
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON PAID-IN RETAINED TREASURY TRANSLATION
STOCK CAPITAL EARNINGS STOCK ADJUSTMENT TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $ 35 $ 8,947 $ 6,347 $ (189) $ -- $ 15,140
Net loss -- -- (1,608) -- -- (1,608)
Issuance of 3,000 shares from exercise of stock options -- 9 -- -- -- 9
Issuance of 3,130,435 shares, and warrants on 775,000
shares, net of issuance costs of $1,344 31 16,625 -- -- -- 16,656
Issuance of warrants on 100,000 shares to
Mr. Leonard Stuart -- 144 -- -- -- 144
Translation adjustment, net of deferred taxes of $134 -- -- -- -- (239) (239)
Paid-in capital from non-qualified stock options issued -- 51 -- -- -- 51
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1994 66 25,776 4,739 (189) (239) 30,153
Net income -- -- 786 -- -- 786
Issuance of 102,609 shares from exercise of stock
options 1 251 -- -- -- 252
Income tax benefit on stock options exercised -- 25 -- -- -- 25
Translation adjustment, net of deferred taxes of $276 -- -- -- -- 491 491
Issuance of 55,652 shares in connection with the
acquisition of Reliable Corporation, net of costs
of $6 1 313 -- -- -- 314
Paid-in capital from non-qualified stock options issued -- 19 -- -- -- 19
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1995 68 26,384 5,525 (189) 252 32,040
Net loss -- -- (2,231) -- -- (2,231)
Issuance of 111,067 shares from exercise of stock
options 1 412 -- -- -- 413
Issuance of 20,000 newly authorized shares -- 108 -- -- -- 108
Issuance of warrants on 330,000 shares in connection
with the acquisition of Trade Acquisition -- 330 -- -- -- 330
Income tax benefit on stock options exercised -- 127 -- -- -- 127
Translation adjustment, net of deferred taxes of $245 -- -- -- -- (436) (436)
Paid-in capital from non-qualified stock options issued -- 7 -- -- -- 7
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1996 $ 69 $ 27,368 $ 3,294 $ (189) $ (184) $ 30,358
======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 11
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,231) $ 786 $ (1,608)
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Extraordinary item, loss from extinguishment of debt 1,297 -- --
Payment on termination agreement -- (1,200) --
Depreciation and amortization 4,515 4,617 1,935
Amortization of debt financing fees 468 356 --
Provision for doubtful accounts (80) 543 1,287
Termination of consulting agreement -- -- 2,000
Equity in (earnings) losses of joint ventures 11 (129) 980
Restructuring charge 3,280 -- --
Deferred income taxes (587) (221) (1,250)
Other non-cash expenses - net (395) 508 1,328
Change in operating assets and liabilities, net of amounts from acquisitions (4,814) (7,050) (3,470)
--------- --------- ---------
Net cash flows from operating activities 1,464 (1,790) 1,202
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (36,764) (295) (28,974)
Costs of acquisitions paid (524) (274) (609)
Capital expenditures (2,654) (1,317) (818)
Proceeds from disposals 339 138 43
Payments received on notes receivable 1,453 1,261 1,052
Investment in joint ventures prior to acquisition -- -- (856)
Other -- (195) (234)
--------- --------- ---------
Net cash flows from investing activities (38,150) (682) (30,396)
CASH FLOWS FROM FINANCING ACTIVITIES:
Costs of debt financing (3,873) (375) (1,644)
Proceeds from borrowings under prior credit agreements -- 8,052 12,728
Payments on borrowings under prior credit agreements (20,917) -- (9,651)
Proceeds from additions to long-term debt -- -- 15,000
Payments on long-term debt (25,812) (6,104) (2,276)
Payments on LSA purchase price adjustment (455) -- --
Proceeds from sale of common stock -- (932) 18,000
Proceeds from issuance of long-term debt 100,000 348 --
Proceeds from exercise of stock options 413 277 --
Costs of stock issuance paid -- (6) (1,344)
Proceeds from other issuances of common stock 108 -- 9
--------- --------- ---------
Net cash flows from financing activities 49,464 1,260 30,822
Effect of currency exchange rate changes on cash of foreign subsidiaries 11 39 (24)
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 12,789 (1,173) 1,604
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 943 2,116 512
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,732 $ 943 $ 2,116
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 12
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(COLUMNAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
- -------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
NATURE OF OPERATIONS - Stuart Entertainment, Inc. and its subsidiaries
(collectively, the "Company") are primarily engaged in the manufacture
and distribution of a full line of bingo and bingo-related products,
including disposable bingo paper, pulltab tickets, ink dabbers,
electronic bingo systems and related equipment and supplies. The
Company's products are sold primarily in the United States and Canada
to distributors, who resell them to non-profit organizations which use
such products for fund-raising purposes and to commercial entities such
as Indian gaming enterprises, casinos and government sponsored entities
which operate bingo games for profit. The Company is also engaged in
the manufacture and distribution of electronic gaming equipment,
primarily for the Company's bingo markets. The Company does not believe
there are any significant concentrations of credit risk.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the Company, its wholly-owned subsidiaries and its indirectly
wholly-owned subsidiaries (from the date they became indirectly
wholly-owned). All significant intercompany transactions and balances
have been eliminated in consolidation.
USE OF ESTIMATES - The preparation of consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS - The carrying values of certain identified notes
receivable and long-term debt are deemed to be reasonable estimates of
their fair values. Interest rates that are currently available to the
Company for the reissuance of debt with similar terms and remaining
maturities are used to estimate fair values of the notes receivable and
long-term debt.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
financial instruments purchased with a maturity of three months or less
to be cash equivalents. The Company utilizes a cash management system
that includes zero balance accounts. Negative cash balances for such
accounts, resulting from outstanding checks, are reclassified to
accounts payable in the consolidated financial statements.
EARNINGS PER SHARE - The number of shares used in the computation of
primary and fully dilutive earnings per share for the years ended
December 31, 1996, 1995 and 1994 is based upon the weighted average
number of shares outstanding and, if dilutive, common stock equivalents
(stock options and warrants) of the Company using the treasury stock
method.
F-7
<PAGE> 13
FOREIGN CURRENCY TRANSLATION AND REMEASUREMENT - The financial
statements and transactions of Bingo Press & Specialty Limited and
Stuart Entertainment Limited are maintained in their functional
currency, Canadian dollars and British pounds, respectively. Assets and
liabilities are translated at current exchange rates at the balance
sheet date and stockholders' equity is translated at historical
exchange rates. Revenues and expenses are translated at the average
exchange rate for each period. Translation adjustments, which result
from the process of translating Canadian dollar and British pound
financial statements into U.S. dollar financial statements, are
accumulated as a separate component of stockholders' equity.
The financial statements and transactions of Stuart Entertainment S.A.
de C.V. (Stuart Entertainment Mexico) are maintained in Mexican pesos
and have been remeasured into U.S. dollars. Assets and liabilities are
remeasured at the end of period exchange rates, except for property and
stockholders' equity which are remeasured at historical exchange rates.
The statements of operations have been remeasured at average exchange
rates for the periods, except for depreciation which has been
remeasured at historical exchange rates. Gains and losses from
remeasurement are recognized currently in operations. For the years
ended December 31, 1996, 1995 and 1994, the Company recognized a
remeasurement (gain) loss of $(12,000), $547,000 and $18,000,
respectively.
INVENTORIES - Inventories are stated at the lower of cost or market,
with cost determined using the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
carried at cost, less accumulated depreciation. Depreciation is
generally provided on the straight-line method over the estimated
useful lives of the respective assets, as follows:
Buildings and improvements 10-20 years
Equipment 3-10 years
INVESTMENTS - Investments in the common stock of certain affiliated
companies are accounted for using the equity method if the Company has
the ability to exercise significant influence over the investee's
operations and financial policies. Otherwise, the cost method is used.
DEFERRED FINANCING FEES - Deferred financing fees are being amortized
to interest expense using the straight-line method over the respective
terms of the credit agreements; five years for the New Credit Agreement
and eight years for the Senior Subordinated Notes.
GOODWILL - Goodwill represents the excess of the purchase price over
the fair value of the net identifiable assets acquired in business
combinations. The Company reviews its intangible assets for impairment
at least annually or whenever events or changes in circumstances
indicate that the carrying amount of such asset may not be recoverable.
In such cases, the expected future cash flows (undiscounted and without
interest charges) resulting from the use of the asset are estimated and
an impairment loss recognized if the sum of such cash flows is less
than the carrying amount of the asset. Should such an assessment
indicate that the value of the intangible asset may be impaired, an
impairment loss is recognized for the difference between the carrying
value of the asset and its estimated fair value. Goodwill is amortized
on a straight-line basis over periods ranging from ten to forty years.
In 1995, the Company recognized an
F-8
<PAGE> 14
impairment of goodwill, as a result of a one-time pre-tax charge
related to the discontinuation of its manufacturing operations in the
United Kingdom (see Note 9).
INCOME TAXES - The Company uses the balance sheet approach of
accounting for income taxes, whereby deferred assets and liabilities
are recorded at the tax rate currently enacted. The Company's future
results may be affected by changes in the corporate income tax rate.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs are
charged to expense as incurred. For the years ended December 31, 1996,
1995 and 1994, costs of approximately $143,000, $745,000 and $784,000,
respectively, were charged to expense.
REVENUE RECOGNITION - The Company records revenue as products are
shipped.
RECLASSIFICATIONS - Certain reclassifications have been made to the
1994 and 1995 financial statements and supporting footnote disclosures
in order to present them in conformity with the 1996 financial
statement presentation.
2. ACQUISITIONS
TRADE PRODUCTS, INC.:
On November 13, 1996, the Company acquired substantially all of the
assets and assumed certain liabilities of Trade Products, Inc.
("Trade") (the "Trade Acquisition") for a purchase price of $37.2
million, subject to certain post-closing adjustments, plus the issuance
of warrants to acquire 300,000 shares of the Company's common stock,
with an exercise price of $7.75 per share.
The Trade Acquisition has been accounted for using the purchase method
of accounting. The purchase price has been allocated to the fair value
of the acquired assets and liabilities, resulting in the recording of
goodwill of $15.5 million. The results of operations of Trade have been
consolidated since the date of the Trade Acquisition.
The pro forma results presented below give effect to the Trade
Acquisition, as if such transaction occurred as of the beginning of
each period presented. The unaudited pro forma information does not
purport to represent the Company's results of operations if such
transaction had, in fact, occurred on such dates and should not be
viewed as predictive of the Company's financial results in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995
<S> <C> <C>
Net sales $ 143,112 $ 146,477
Loss before extraordinary loss $ (2,587) $ (1,587)
Net loss $ (3,520) $ (1,587)
Loss per share, before extraordinary loss $ (0.38) $ (0.24)
Loss per share $ (0.51) $ (0.24)
Average common and common equivalent shares outstanding 6,886,000 6,706,000
</TABLE>
F-9
<PAGE> 15
BINGO PRESS & SPECIALTY LIMITED:
On December 13, 1994, the Company completed the acquisition of Len
Stuart & Associates Limited ("LSA") (the "Bazaar Acquisition") pursuant
to a Stock Purchase Agreement with LSA and Mr. Leonard A. Stuart, the
sole shareholder of LSA and the Chairman and former Chief Executive
Officer of the Company. LSA was the holding company for (i) Bingo Press
& Specialty Limited, an Ontario, Canada corporation and a major
manufacturer of bingo supplies and related products in Canada, which
operates under the trade name Bazaar & Novelty ("Bazaar"), and ii)
Niagara Bazaar & Novelty Limited, an Ontario, Canada corporation and a
retailer of bingo supplies and related products.
The Bazaar Acquisition was accounted for using the purchase method of
accounting. The purchase price was allocated to the fair value of the
acquired assets and liabilities, resulting in the recording of goodwill
of $27.3 million. The results of operations of Bazaar have been
consolidated since the date of the Bazaar Acquisition.
The pro forma results presented below give effect to the Bazaar
Acquisition and the related financing as if such events occurred as of
January 1, 1994. The unaudited pro forma information does not purport
to represent what the Company's results of operations would have been
if such events had, in fact, occurred on such date and should not be
viewed as predictive of the Company's financial results in the future.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
<S> <C>
Net sales $ 94,788
Net loss $ (807)
Loss per share $ (0.12)
Average common and common equivalent shares outstanding 6,537,000
</TABLE>
THE RELIABLE CORPORATION OF AMERICA, INC.:
On January 10, 1995, the Company acquired substantially all of the
assets and assumed substantially all existing liabilities of The
Reliable Corporation of America, Inc. ("Reliable") and two presses
owned by one of Reliable's shareholders for a purchase price of $1.3
million, subject to adjustment. The purchase price was paid as follows:
i) $200,000 paid in cash, ii) $320,000 paid through the issuance of
55,652 shares of the Company's common stock valued at $5.75 per share,
and iii) $780,000 in the form of a promissory note with equal principal
payments over 90 months plus accrued interest at a rate of 1% over
national prime. The note was paid in November, 1996.
The Company entered into non-compete agreements with the shareholders
of Reliable. Under these agreements, the Company will make monthly
payments of approximately $5,000 for 90 months to the Reliable
shareholders. The present value of the remaining payments at December
31, 1996 (using a 9% discount factor) is $238,000. The Company also
entered into an employment agreement with the President of Reliable
which was subsequently terminated by mutual consent.
F-10
<PAGE> 16
The pro forma results of operations for the year ended December 31,
1994 giving effect to the acquisition of Bazaar and Reliable is
substantially the same as the pro forma statements presented earlier
for the acquisition of Bazaar alone.
3. INVENTORIES
Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Raw materials $ 3,975 $ 3,517
Work-in-process 4,316 5,056
Finished goods 19,827 13,409
--------- --------
$ 28,118 $ 21,982
========= ========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December
31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land and buildings $ 5,739 $ 4,950
Equipment 39,759 29,262
--------- ---------
45,498 34,212
Less accumulated depreciation 15,738 13,095
--------- ---------
$ 29,760 $ 21,117
========= =========
</TABLE>
5. OTHER ASSETS
Other assets consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred financing costs, net of accumulated amortization of
$104 and $375 $ 3,768 $ 1,660
Notes receivable, net of allowance for doubtful accounts of 919 1,261
$124
Other investments and assets 916 1,119
Investments in joint ventures 247 56
------- -------
$ 5,850 $ 4,096
======= =======
</TABLE>
6. LONG-TERM DEBT
On November 13, 1996, the Company completed a private placement in
reliance on Rule 144A of the Securities Act of 1933, as amended, of
$100 million aggregate principal amount of 12.5% Senior Subordinated
Notes due November 15, 2004 (the Notes). Interest on the Notes will be
payable semi-annually on each May 15 and November 15, commencing May
15, 1997. The indenture governing the Notes imposes certain limitations
on the Company's ability to, among
F-11
<PAGE> 17
other things, incur additional indebtedness, pay dividends or make
certain other restricted payments and consummate certain asset sales.
The Company used the proceeds of the private placement to finance the
Trade Acquisition, to repay certain existing indebtedness and for
general corporate purposes. The Company recorded an extraordinary loss
in the fourth quarter of 1996 of $933,000, net of taxes of $571,000, to
write-off the unamortized debt issuance costs in the prior credit
agreement.
On November 13, 1996, the Company amended and restated its credit
agreement (the "New Credit Agreement"). The New Credit Agreement
consists of a revolving credit facility in the aggregate principal
amount of $30 million, bearing interest with reference to the base rate
or the LIBOR rate, at the Company's option, plus the applicable
interest margin, as defined in the New Credit Agreement. The New Credit
Agreement also charges a quarterly non-use fee on any unborrowed funds.
The Company may draw amounts under the New Credit Agreement, subject to
availability pursuant to a borrowing base requirement, in order to meet
its working capital requirements, including issuing letters of credit.
The loans are secured by substantially all of the Company's otherwise
unencumbered assets, including a pledge of the stock the Company holds
in its subsidiaries, except as specifically excluded under the New
Credit Agreement.
The New Credit Agreement imposes certain covenants and other
requirements on the Company that, among other things, restricts i) the
incurrence and existence of indebtedness or contingent obligations;
(ii) consolidations, mergers and sales of assets; (iii) the incurrence
and existence of liens; (iv) the sale or disposition of assets; (v)
investments, loans and advances; (vi) capital expenditures; (vii) the
payment of dividends and repurchase of common stock; and (viii)
acquisitions of the Company. The Company is also required to meet
certain consolidated financial tests, including minimum level of net
worth, minimum level of consolidated interest coverage, maximum
consolidated leverage ratio and minimum consolidated fixed charge
coverage ratio. As a result of the restructuring charge, the Company
was not in compliance with certain covenants at December 31, 1996.
In March, 1997, the Company entered into a First Amendment to the New
Credit Agreement which amended certain definitions and reporting
requirements and sets forth certain conditions which the Company must
meet before drawing any amounts under the New Agreement. As a result of
the First Amendment, the Company was in compliance with the covenants
at December 31, 1996. At December 31, 1996, the Company had not yet
drawn any amounts under the New Credit Agreement.
F-12
<PAGE> 18
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Senior Subordinated Notes $100,000 $ --
Borrowings under Credit Agreement -- 33,056
Subordinated note payable to Mr. Stuart -- 5,000
Notes payable to others 766 4,758
Obligations under capital leases -- 4,669
-------- --------
100,766 47,483
Less current portion 370 7,897
-------- --------
$100,396 $ 39,586
======== ========
</TABLE>
NOTES PAYABLE TO OTHERS:
The Company has notes payable related to i) obligations to former
owners of companies and/or assets that were acquired by the Company;
ii) mortgages; and iii) installment notes relating to the purchase of
property, plant and equipment. Remaining payment terms at December 31,
1996 range from approximately one year to five years. At December 31,
1996, these notes bear interest at fixed and variable rates ranging
from 6% to 11.25%.
FUTURE PAYMENTS:
Long-term debt matures as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 370
1998 118
1999 69
2000 76
2001 83
Thereafter 100,050
---------
$ 100,766
=========
</TABLE>
7. INCOME TAX PROVISION (BENEFIT)
Income (loss) before income tax provision (benefit) is as follows for
the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Domestic $ (3,766) $ 2,952 $ (1,890)
Foreign 1,753 (389) (383)
-------- ------- --------
$ (2,013) $ 2,563 $ (2,273)
======== ======= ========
</TABLE>
F-13
<PAGE> 19
The income tax provision (benefit) is as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $ (467) $ 1,139 $ 475
Foreign 371 755 47
State (32) 104 63
------ ------- ------
(128) 1,998 585
------ ------- ------
Deferred:
Domestic (669) (155) (1,025)
Foreign 82 (66) (225)
------ ------- ------
(587) (221) (1,250)
------ ------- ------
$ (715) $ 1,777 $ (665)
====== ======= ======
</TABLE>
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>
1996 1995 1994
<S> <C> <C> <C>
Statutory tax rate (34.0)% 34.0 % (34.0)%
State income taxes (net of federal benefit) (5.4) 2.3 (2.0)
Foreign tax rates in excess of U.S. federal rates 3.3 4.5 (0.8)
Tax impact of losses from U.K. venture (11.9) 17.0 7.4
Goodwill amortization 12.5 10.1 1.5
Research and development credits -- -- (2.1)
Other -- 1.4 0.7
------ ------ -------
(35.5)% 69.3 % (29.3)%
====== ====== =======
</TABLE>
F-14
<PAGE> 20
Deferred tax assets and (liabilities) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred Tax Assets:
Restructuring charge $ 1,202 $ --
Allowance for doubtful accounts 355 458
Inventory reserves and adjustments 366 436
Non-deductible accrued liabilities 397 803
Merger reserves 261 --
Other -- 49
------- -------
$ 2,581 $ 1,746
======= =======
Deferred Income Tax Liabilities:
Difference in basis of property and equipment $(2,346) $(2,495)
Canadian inventory absorption (169) (40)
Other (77) 43
Cumulative translation adjustment 103 (142)
Excess losses of U.K. venture 518 758
Valuation reserve (518) (758)
------- -------
$(2,489) $(2,634)
======= =======
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries amounted
to approximately $7,960,000 at December 31, 1996. Those earnings are
considered to be indefinitely reinvested and, accordingly, no amount
for U.S. federal and state income taxes has been provided thereon. Upon
distribution of those earnings in the form of dividends, the Company
would be subject to both U.S. income taxes (subject to an adjustment
for foreign tax credit) and withholding taxes payable to the foreign
countries. Determination of the amount of unrecognized deferred U.S.
income tax liability is not practicable because of the complexities
associated with its hypothetical calculation.
8. STOCK OPTION PLANS
The Company accounts for its stock-based compensation under the
provisions of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, which utilizes the intrinsic value
method.
The Company had four inactive plans and one active stock option plan
during 1996: the 1981 Incentive Stock Option Plan ("1981 ISO Plan"),
the 1992 Incentive Stock Option Plan ("1992 ISO Plan"), the 1985
Non-Qualified Stock Option Plan ("1985 NQSO Plan"), the 1992
Non-Qualified Stock Option Plan ("1992 NQSO Plan") and the 1994
Performance Plan.
F-15
<PAGE> 21
The Company adopted the 1981 ISO Plan and the 1992 ISO Plan in order to
grant options to certain directors, executive officers and employees,
reserving 250,000 and 200,000 shares, respectively, of its common stock
for issuance. Options were granted at 100% of market value at the date
of grant and became exercisable for up to a ten-year period from the
date of grant. The 1981 ISO Plan was terminated on August 18, 1991 and,
effective June 3, 1995, options are no longer exercisable. Options are
no longer granted under the 1992 ISO Plan.
The Company adopted the 1985 NQSO Plan and the 1992 NQSO Plan for
certain directors, executive officers and employees, reserving 200,000
and 100,000 shares, respectively, of its common stock for issuance.
Options granted under the 1985 NQSO Plan were exercisable for periods
from five to ten years from the date of grant while options granted
under the 1992 NQSO Plan were exercisable for a ten-year period from
the date of grant. Options under both plans were granted at prices
which exceeded or were less than the fair market value of the shares on
the date of grant but were not less than par value. Options are no
longer granted under either of these plans.
The 1994 Performance Plan was adopted December 13, 1994 for certain
directors, executive officers, employees and consultants. The Company
has reserved 2,500,000 shares of its common stock for issuance. Options
granted under this plan may be either incentive stock options or
non-qualified stock options. Incentive stock options granted are
exercisable for up to a ten-year period and at an exercise price equal
to the fair market value of the shares on the date of grant.
Non-qualified stock options granted are exercisable at prices and over
time periods determined by the Stock Option Committee of the Board of
Directors. All options granted under this Plan in 1996, 1995 and 1994
were non-qualified options. At December 31, 1996 there were 497,917
shares available for grant.
If compensation cost for the Company's stock-based compensation plan
had been determined based on the fair value at the grant dates for
awards under the plan consistent with the method of SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net income
(loss) and earnings (loss) per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C> <C>
Net income (loss) As reported $ (2,231) $ 786
Pro forma $ (3,346) $ 240
Primary earnings (loss) per share As reported $ (0.32) $ 0.12
Pro forma $ (0.48) $ 0.03
Fully diluted earnings (loss) per share As reported $ (0.32) $ 0.12
Pro forma $ (0.48) $ 0.03
</TABLE>
The fair market value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995: dividend
yield of 0.0%, expected volatility of 40.0%, risk-free interest rates
of 6.3%, and expected lives of 7.5 years for all the years presented.
F-16
<PAGE> 22
A summary of stock option activity is as follows during the three years
ended December 31:
<TABLE>
<CAPTION>
FIXED OPTIONS 1996 1995 1994
<S> <C> <C> <C>
Outstanding at beginning of year 1,882,166 1,280,250 396,717
Options granted 573,400 824,400 900,000
Options exercised (111,067) (102,609) (3,000)
Options cancelled (342,416) (119,875) (13,467)
---------- ---------- ----------
Outstanding at end of year 2,002,083 1,882,166 1,280,250
========== ========== ==========
Options exercisable at year end 1,739,837 1,577,667
========== ==========
Weighted-average fair value of options
granted during the year $ 3.22 $ 2.00
========== ==========
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES 1996 LIFE PRICE
<S> <C> <C> <C>
$4.00 - $6.99 1,173,950 8.6 years $ 5.19
$7.00 - $9.99 38,133 6.0 years 7.47
$10.00 - $12.99 440,000 8.0 years 10.00
$13.00 - $15.99 350,000 8.0 years 15.00
---------- ---------- ------
2,002,083 7.1 years 8.01
========== ========== ======
</TABLE>
At December 31, 1996, options for 1,739,837 shares were exercisable.
The remaining options become exercisable as follows: 1997 - 195,165
shares; 1998 - 67,081 shares.
During 1996, 1995 and 1994, the Company recognized tax benefits of
$127,000, $25,000 and $0, respectively, related to compensation expense
recognized for tax purposes on non-qualified stock options exercised.
No related compensation expense for these non-qualified stock options
were recorded for financial statement purposes. The amount of the
income tax benefit was recorded as additional paid-in capital.
During 1993, the Company granted non-qualified stock options under the
1985 NQSO Plan and the 1992 NQSO Plan where the exercise price at the
date of grant was less than the market value of those shares on that
date. During 1996, 1995 and 1994, the Company recognized compensation
expense and additional paid-in capital for financial statement purposes
of $7,000, $19,000 and $51,000, respectively, based on the dates the
options were exercisable.
F-17
<PAGE> 23
9. INVESTMENTS IN JOINT VENTURES
Prior to the Bazaar Acquisition, the Company and Bazaar formed two
corporate joint ventures: Stuart Entertainment Mexico and Stuart
Entertainment Limited. Stuart Entertainment Mexico was formed for the
purpose of printing and finishing bingo paper for its owners. Stuart
Entertainment Limited was formed for the purpose of selling bingo
supplies to the European markets.
Up to the date of the Bazaar Acquisition, the company accounted for
each of the investments using the equity method. During the period from
January 1, 1994 to December 13, 1994, the Company recognized losses
related to its investments in Stuart Entertainment Mexico and Stuart
Entertainment Limited of $570,000 and $415,000, respectively.
Stuart Entertainment Mexico is included in the consolidated statements
of operations for the period from December 14, 1994 to December 31,
1994, and for the years ended December 31, 1995 and 1996, and in the
consolidated balance sheets as of December 31, 1995 and 1996.
Summarized results of operations for Stuart Entertainment Mexico and
Stuart Entertainment Limited (each on a stand-alone basis) is as
follows for the year ended December 31, 1994:
<TABLE>
<CAPTION>
STUART STUART
ENTERTAINMENT ENTERTAINMENT
MEXICO LIMITED
<S> <C> <C>
Total revenues $ 2,244 $ 1,128
Gross margin 641 (119)
Net (591) (119)
</TABLE>
During the second quarter of 1995, the Company signed a licensing and
marketing agreement with Playprint Limited, headquartered in Dublin,
Ireland. This relationship permitted the Company to discontinue its
manufacturing operation in the United Kingdom. Under the agreement,
Playprint Limited pays royalties to the Company for use of certain of
the Company's trademark, technologies and equipment for the production
of bingo paper and ink dabbers. The Company recorded a one-time pre-tax
charge of $819,000 in 1995 related to the costs to shutdown the
manufacturing facility in the United Kingdom.
BRITISH BAZAAR COMPANY LIMITED:
The Company owns 50% of the common shares of British Bazaar Company
Limited ("British Bazaar"). British Bazaar manufactures bingo paper and
pull tab tickets in the Atlantic provinces of Canada. The Company's
investment in British Bazaar is accounted for using the equity method.
The Company's investment in British Bazaar at December 31, 1996 and
1995 was $248,000 and $259,000, respectively. For the years ended
December 31, 1996 and 1995, and the period from December 14, 1994 to
December 31, 1994, the Company recorded equity in earnings (loss) of
$(11,000), $98,000 and $5,000, respectively, on its investment and had
sales of $1,142,000 $1,777,000 and $93,000, respectively, to British
Bazaar.
The Company guaranteed British Bazaar's operating line of credit at
December 31, 1996 and 1995 in the amount of C$350,000 ($255,000) and
C$350,000 ($248,000), respectively.
F-18
<PAGE> 24
10. RELATED PARTY TRANSACTIONS
S. LACHMAN & SONS, INC.:
An individual who was employed by the Company through June 30, 1993
owns S. Lachman & Sons, Inc. ("Lachman"), a distributorship which
purchases a significant amount of product from the Company. Sales to
Lachman for the years ended December 31, 1996, 1995 and 1994 were
$2,211,000, $2,541,000 and $2,047,000, respectively. Effective January
1, 1993, the Company entered into an agreement with Lachman whereby the
Company granted Lachman the use of a paper printing press owned by the
Company. Under the agreement, which has no minimum term but can be
terminated by either party upon 30 days written notice, Lachman bears
all expenses of operating and maintaining the press and pays the
Company a royalty for all the paper printed by the press. Paper printed
by Lachman may not be sold in competition with the Company. During the
years ended December 31, 1996, 1995 and 1994, the Company recognized
royalty income from Lachman of $262,000 $248,000 and $268,000,
respectively.
LEONARD A. STUART:
The Company is a party to a consulting agreement (the "BMG Agreement")
dated July 1, 1995 with Bazaar Management Group, Inc. ("BMG"), of which
Leonard A. Stuart is the sole shareholder. Under the BMG Agreement, BMG
provides consulting services to the Company with respect to the
Company's business (the "Division") of placing pulltab tickets in
convenience stores, retail locations and bingo halls in Ontario,
Canada. The net income monthly of the Division is payable as follows:
(a) 50% is applied to reduce outstanding bank loans of the Division,
(b) 50% of the remaining net income is retained by the Company, and (c)
50% of the remaining net income is paid to BMG. During 1996 and 1995,
the Company paid BMG $159,000 and $115,000, respectively. The Company
believes that the terms of the BMG Agreement are comparable to those
which would have been obtainable from unaffiliated third parties.
KEN STUART:
Ken Stuart, a brother of Leonard A. Stuart, is retained by the Company
as an independent contractor selling ink products. For the years ended
December 31, 1996, 1995 and 1994, Ken Stuart earned commissions of
$189,000, $221,000 and $292,000, respectively.
LEASE AGREEMENT:
In connection with the Acquisition of Trade, the Company entered into a
Lease Agreement with Partnership Leasing, L.L.C., a Washington limited
liability company, of which Harry Poll and Ronald G. Rudy, directors of
the Company, are the sole members. The term of the lease is for ten
years with one ten-year option and covers two buildings in Lynnwood,
Washington with a total of 165,000 square feet. The rent is $924,000
per year, which is the current market price for the facility as
determined by a qualified independent commercial real estate brokerage
firm in an opinion of rental value delivered to the Company.
F-19
<PAGE> 25
BINGO VIDEO ENTERTAINMENT, INC.:
In October 1992, the Company sold the assets of its retail branch in
Hollywood, Florida to Bingo Video Entertainment, Inc. ("Bingo Video"),
a company owned by a brother-in-law of Leonard Stuart. In exchange for
the assets sold, the Company received a promissory note totaling
$262,000. The note bears interest at a rate of one percent above the
Company's rate on its short-term line of credit and requires monthly
principal and interest payments of $4,000. The note is collateralized
by the assets of Bingo Video and guaranteed by Leonard Stuart's
brother-in-law and by Len Stuart & Associates, Inc., a company owned by
Leonard Stuart. The principal balance of the note at December 31, 1996
was $140,000.
During the years ended December 31, 1996, 1995 and 1994, sales to Bingo
Video totaled $828,000, $912,000 and $572,000, respectively.
11. TERMINATION OF CONSULTING AGREEMENT
On December 7, 1994, the Company, Video King Gaming Systems, Inc., a
wholly-owned subsidiary of the Company and Video Gaming Systems of
America, Inc. ("VGSA") terminated their consulting agreement for
$2,000,000 to be paid by the Company to VGSA as follows: i) $1,000,000
was paid at closing on January 6, 1995 and ii) $1,000,000 in the form
of a promissory note from the Company. The note was paid in full by the
Company in November, 1996.
12. EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution plan under Section 401(k)
of the Internal Revenue Code covering substantially all of its
employees in the United States (the "U.S. Plan"). Eligible employees
may contribute up to 15% of their wages, not to exceed a government
established maximum. The Company's contribution is the sum of the
Company's match of the first 2% of the employee's elective contribution
and a discretionary contribution of up to 2% of the wages of all
employees eligible under the U.S. Plan. For the years ended December
31, 1996, 1995 and 1994, the Company's contributions were $163,000,
$157,000, and $165,000, respectively.
The Company maintains a voluntary defined contribution plan covering
substantially all of its employees in Canada (the "Canadian Plan").
Eligible employees may contribute up to 2.5% of their wages eligible
under the Canadian plan and the Company will match the contribution up
to 2.5%. Eligible employees may contribute an additional amount in
excess of the 2.5%, but they are not matched by the Company. For the
years ended December 31, 1996 and 1995 and for the period from December
14, 1994 to December 31, 1994, the Company's contributions were
$112,000, $101,000 and $5,000, respectively.
F-20
<PAGE> 26
13. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES:
The Company leases certain property and equipment under operating
leases with remaining terms ranging from one to five years. Future
minimum lease payments under operating leases in effect at December 31,
1996 are approximately as follows:
<TABLE>
<C> <C>
1997 $ 2,847
1998 2,379
1999 1,822
2000 1,564
2001 1,166
</TABLE>
Rental expense for the years ended December 31, 1996, 1995 and 1994 was
$2,268,000, $2,039,000 and $841,000, respectively.
INVENTORY REPURCHASE AGREEMENTS:
The Company has inventory repurchase agreements with several banks to
support certain distributors in their bank financing. The agreements
provide that in the event one of the banks obtains title to the
distributor's inventory through foreclosure, the Company would be
required to repurchase the Company's own inventory up to i) $450,000
under one agreement and ii) C$305,000 ($223,000) under two other
agreements of selected inventory previously sold by the Company to the
distributor. The purchase price would be that price paid by the
distributor to the Company for such inventory. The Company would have a
right of first refusal in the event the bank received a bona fide
written offer from a third party to purchase the foreclosed inventory.
14. RESTRUCTURING CHARGE
During the fourth quarter of 1996, management authorized and committed
the Company to undertake consolidation of its United States
manufacturing operations producing pulltab tickets, bingo paper and ink
dabbers. This restructuring plan involves closing or substantially
closing four facilities and transferring operations to other
manufacturing facilities. This consolidation decision was made to
improve customer service, improve productivity and asset utilization
and reduce costs.
As a result of these actions, the Company recorded a restructuring
charge of $3,280,000 in 1996. The restructuring charge includes
approximately $1,511,000 of recognized severance and termination
benefits for approximately 400 employees and $1,769,000 of facility
shutdown and relocation costs. At December 31, 1996, no costs have been
charged against these restructuring charges.
F-21
<PAGE> 27
15. SUPPLEMENTAL CASH FLOW INFORMATION
OTHER CASH PAYMENTS AND RECEIPTS:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Cash paid for interest $ 3,510 $ 3,551 $ 1,087
Cash paid for income taxes 2,495 1,651 1,155
Income tax refunds received 224 474 417
</TABLE>
CHANGES IN OPERATING WORKING CAPITAL ITEMS:
Changes in operating working capital items, net of amounts obtained in
the acquisitions of Trade, Bazaar and Reliable and from the
consolidation of the Company's joint ventures, is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Trade receivables $(2,064) $(3,960) $ (462)
Inventories 1,706 (4,905) (2,660)
Income taxes recoverable (2,545) 225 (365)
Prepaid expenses 39 (133) 49
Trade payables (2,261) 1,268 (940)
Accrued liabilities 853 (88) 908
Income taxes payable (542) 543 --
------- ------- -------
Total Changes in Operating Capital Items $(4,814) $(7,050) $(3,470)
======= ======= =======
</TABLE>
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
During the years ended December 31, 1996, 1995 and 1994, the Company
financed the acquisition of equipment totaling $118,000, $2,092,000 and
$923,000, respectively, through the assumption of obligations under
capital leases.
In connection with the Trade Acquisition in 1996, the Company i) issued
warrants to acquire 300,000 shares of the Company's common stock at an
exercise price of $7.75 per share, which were valued at $330,000.
In connection with the Reliable Acquisition in 1995, the Company i)
assumed Reliable's line of credit and term loan credit facility with a
Michigan bank, which totaled $1,237,000, ii) assumed another note
payable of $250,000, iii) issued a note payable to the shareholders of
Reliable for $780,000 and iv) issued 55,652 shares of the Company's
common stock, which was valued at $320,000 or $5.75 per share.
In connection with the Bazaar Acquisition in 1994, the Company i)
issued warrants to Mr. Stuart to acquire 100,000 shares of the
Company's common stock at an exercise price of $5.75 per share, which
were valued at $144,000, ii) issued a subordinated note payable to Mr.
Stuart for $5,000,000, and iii) reflected payables of $1,642,000 for
the Bazaar Purchase Price Adjustment and $274,000 for other costs of
the Acquisition.
F-22
<PAGE> 28
16. GEOGRAPHIC FINANCIAL INFORMATION
The Company operates in one principal industry segment: the
manufacturing and selling of supplies and equipment for bingo games and
related fund raising activities. The Company's products are sold
primarily to distributors for resale to others, which are primarily
non-profit organizations.
Geographic financial information for the years ended December 31, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
NET SALES:
United States:
Domestic Customers $ 68,548 $ 64,112 $ 53,734
Foreign Customers 688 1,398 3,611
Canada 41,400 43,110 1,742
United Kingdom -- 1,262 71
--------- --------- ---------
Total $ 110,636 $ 109,882 $ 59,158
========= ========= =========
INCOME (LOSS) BEFORE INCOME TAXES:
United States $ (3,766) $ 2,952 $ (1,890)
Canada (392) 1,773 (301)
United Kingdom 2,145 (2,162) (82)
--------- --------- ---------
Income (Loss) before Income Taxes $ (2,013) $ 2,563 $ (2,273)
========= ========= =========
ASSETS:
United States $ 101,930 $ 45,437 $ 39,299
Canada 49,990 48,912 44,667
United Kingdom -- 1,731 2,387
Mexico 2,675 2,914 2,624
--------- --------- ---------
Total $ 154,595 $ 98,994 $ 88,977
========= ========= =========
CAPITAL EXPENDITURES:
United States $ 2,072 $ 706 $ 748
Canada 582 611 70
United Kingdom -- -- --
--------- --------- ---------
Total $ 2,654 $ 1,317 $ 818
========= ========= =========
DEPRECIATION AND AMORTIZATION:
United States $ 2,820 $ 2,980 $ 1,873
Canada 1,551 1,405 58
United Kingdom 144 232 4
--------- --------- ---------
Total $ 4,515 $ 4,617 $ 1,935
========= ========= =========
</TABLE>
F-23
<PAGE> 29
Information provided on the United States in 1996 reflects operations
of Trade Products from November 13, 1996 to December 31, 1996 and
Canada and United Kingdom in 1994 reflects operations from December 14,
1994 to December 31, 1994, respectively. Geographic information on
Mexico is included within amounts for the United States in all
categories (except identifiable assets) as substantially all of the
production of Stuart Entertainment Mexico is sold to customers in the
United States as Stuart Entertainment Mexico is not licensed to sell to
customers in Mexico.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for
the years ended December 31, 1996, and 1995 (amounts in thousands,
except per share amounts):
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
QUARTER* QUARTER QUARTER QUARTER TOTAL
<S> <C> <C> <C> <C> <C>
1996:
Net sales $ 29,304 $ 27,149 $ 27,360 $ 26,823 $ 110,636
Gross margin 7,507 8,502 8,451 8,413 32,873
Income (loss) before income taxes (5,770) 1,033 1,088 1,636 (2,013)
Income (loss) before extraordinary
item (3,721) 631 874 918 (1,298)
Net income (loss) (4,654) 631 874 918 (2,231)
Earnings (loss) per share before
extraordinary loss:
Primary (0.54) 0.09 0.13 0.13 (0.19)
Fully dilutive (0.54) 0.09 0.13 0.13 (0.19)
Earnings (loss) per share:
Primary (0.67) 0.09 0.13 0.13 (0.32)
Fully dilutive (0.67) 0.09 0.13 0.13 (0.32)
1995:
Net sales $ 25,966 $ 27,031 $ 29,421 $ 27,464 $ 109,882
Gross margin 8,386 9,206 9,326 8,242 35,160
Income before income taxes 670 1,164 20 709 2,563
Net income (loss) 550 519 (521) 238 786
Earnings (loss) per share:
Primary 0.08 0.08 (0.08) 0.04 0.12
Fully dilutive 0.07 0.08 (0.08) 0.04 0.11
</TABLE>
* The 1996 fourth quarter results of operations were largely influenced
by the $3.3 million restructuring charge related to the consolidation
of manufacturing operations, the extraordinary loss of $933,000, net of
income taxes, to write-off unamortized debt issuance costs and a charge
of $1.1 million to cost of sales related to the application of purchase
accounting to the finished goods of Trade Products.
F-24
<PAGE> 30
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET
BALANCE AT CHARGED TO CHANGES NET BALANCE
BEGINNING COSTS AND FROM CHARGE- AT END
OF YEAR EXPENSES ACQUISITIONS OFFS* OF YEAR
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Allowance for Doubtful Accounts:
Accounts Receivable $ 2,086 $ 20 $ 800 $ (676) $ 2,230
Notes Receivable:
Current Portion 199 (100) -- -- 99
Non-Current Portion 124 -- -- -- 124
------- ------- ------- ------- -------
$ 2,409 $ (80) $ 800 $ (676) $ 2,453
======= ======= ======= ======= =======
Valuation Reserve for Non-
Current Deferred Income Taxes $ 758 $ (240) $ -- $ -- $ 518
======= ======= ======= ======= =======
YEAR ENDED DECEMBER 31, 1995:
Allowance for Doubtful Accounts:
Accounts Receivable $ 1,598 $ 643 $ -- $ (155) $ 2,086
Notes Receivable:
Current Portion 199 199
Non-Current Portion 423 (100) -- (199) 124
------- ------- ------- ------- -------
$ 2,220 $ 543 $ -- $ (354) $ 2,409
======= ======= ======= ======= =======
Valuation Reserve for Non-Current
Deferred Income Taxes $ 322 $ 436 $ -- $ -- $ 758
======= ======= ======= ======= =======
YEAR ENDED DECEMBER 31, 1994:
Allowance for Doubtful Accounts:
Accounts Receivable $ 608 $ 665 $ 632 $ (307) $ 1,598
Notes Receivable:
Current Portion -- 199 -- -- 199
Non-Current Portion -- 423 -- -- 423
------- ------- ------- ------- -------
$ 608 $ 1,287 $ 632 $ (307) $ 2,220
======= ======= ======= ======= =======
Valuation Reserve for Non-Current
Deferred Income Taxes $ -- $ 161 $ 161 $ -- $ 322
======= ======= ======= ======= =======
</TABLE>
* For the years ended December 31, 1996, 1995 and 1994, "Net Charge-Offs"
consists of write-offs of trade and notes receivable, net of subsequent
F-25
<PAGE> 31
EXHIBIT INDEX
Certain of the following exhibits, designated with an asterisk (*), are
filed herewith. The exhibits not so designated have been filed previously and
are incorporated herein by reference to the documents indicated in brackets
following the descriptions of such exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.01 Asset Purchase Agreement, dated as of August 6, 1996, among
Stuart Entertainment, Inc., a Delaware corporation, Trade
Products, Inc., a Washington corporation, and the Stockholders
of Trade Products, Inc. (1)
2.02 First Amendment to the Asset Purchase Agreement dated October
10, 1996. (2)
3.01 Amended and Restated Certificate of Incorporation. (12)
3.02 Amended and Restated Bylaws of the Company. (3)
4.01 Form of Common Stock Certificate. (4)
4.02 Securityholders' Agreement, dated December 13, 1994, between
Leonard A. Stuart, Bingo Holdings, Inc. and the Company. (3)
4.03 Warrant to Purchase 300,000 Shares of Common Stock of the
Company dated November 13, 1996. (2)
10.01 Incentive Stock Option Plan of the Company. (5)
10.02 Non-Qualified Stock Option plan of the Company. (6)
10.03 Lease, dated August 14, 1986, between William E. Osband, Jr.
and the Company. (7)
10.04 Lease, dated February 5, 1993, between Fraccionadora
Industrial De Norte, S.A. de C.V. and Stuart Entertainment,
S.A. de C.V. (8)
10.05 1992 Non-Qualified Stock Option Plan of Stuart Entertainment,
Inc. (8)
10.06 1992 Incentive Stock Option Plan of Stuart Entertainment, Inc.
(8)
10.07 Amended and Restated Performance Stock Option Plan of Stuart
Entertainment, Inc. (12)
</TABLE>
1
<PAGE> 32
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.08 Agency Agreement, dated March 14, 1993, between Gala Leisure
Limited. Mitre Printing Company, 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 Assigned and Assumption Agreement dated 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 Stuart Entertainment, Inc., Bank of America Illinois,
The Chase Manhattan Bank of Canada and Bank of America Canada,
as agent. (10)
10.15 Guarantee Agreement executed by MLGAL Partners, Limited
Partnership, and Leonard A. Stuart. (11)
10.16 Employment Agreement, dated November 13, 1996, by and between
the Company and Ronald G. Rudy. (1)
10.17 Amended and Restated Credit Agreement, dated November 13,
1996, by and among Stuart Entertainment, Inc., Bingo Press &
Specialty Limited, Bank of America Canada and Chase Manhattan
Bank of Canada. (12)
10.18 Agreement dated April 4, 1996 by and between Power Bingo
Corporation and the Company. (12)
10.19 Management consulting agreement dated February 1, 1996 by and
between the Company and Len Stuart & Associates, Ltd. (12)
10.20 Lease between the Company and Partnership Leasing L.L.C. (12)
</TABLE>
2
<PAGE> 33
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.21 First Amendment to Amended and Restated Credit Agreement dated
March 24, 1997.**
11 Statement regarding Computation of Per Share Earnings.*
21 Subsidiaries of the Registrant.**
23 Consent of Deloitte & Touche LLP.**
27 Financial Data Schedule.**
</TABLE>
- ---------------------
* Filed herewith.
** Previously filed.
(1) Incorporated by reference to the Company's Current Report on Form 8-K dated
August 6, 1996, File No. 0-10737.
(2) Incorporated by reference to the Company's Current Report on form 8-K dated
November 13, 1996, File No. 0-10737.
(3) Incorporated by reference to the Company's Annual Report on form 10-K for
the year ended December 31, 1994, File No. 0-10737.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-8, File No. 33-89962.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-1, File No. 73746, filed August 20, 1981.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1985, File No. 0-10737.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1989, File No. 0-10737.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992, File No. 0-10737.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993, File No. 0-10737.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995, File No. 0-10737.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, File No. 0-10737.
(12) Incorporated by reference to the Company's Registration Statement on Form
S-4, File No. 333-18779.
3
<PAGE> 1
EXHIBIT 11
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Shares of common stock outstanding at beginning of year(1) 6,697,049 6,538,788 3,405,353
Weighted-average shares issued during the year 82,958 115,270 155,495
Weighted-average shares assumed issued under stock option
plans and exercise of warrants (using treasury
stock method) during the year under primary(2) 53,757 51,486 --
----------- ----------- -----------
Average common and common equivalent shares outstanding 6,833,764 6,705,904 3,506,848
- - primary
Weighted-average shares assumed issued under stock option
plans and exercise of warrants (using treasury
stock method) during the year under fully dilutive(2) 53 347,318 --
=========== =========== ===========
Average common and common equivalent shares outstanding
- - fully dilutive 6,833,817 7,053,222 3,560,848
=========== =========== ===========
Net income (loss):
Income (loss) before extraordinary item $(1,298,000) $ 786,000 $(1,608,000)
Extraordinary item - Loss on extinguishment of debt,
net of taxes 933,000 -- --
----------- ----------- -----------
Net income (loss) $(2,231,000) $ 786,000 $(1,608,000)
=========== =========== ===========
Earnings (loss) per share - primary:
Income (loss) before extraordinary item $ (0.19) $ 0.12 $ (0.45)
Extraordinary item $ (0.13) -- --
----------- -----------
Earnings (loss) per share - primary $ (0.32) $ 0.12 $ (0.45)
=========== =========== ===========
Earnings (loss) per share - fully dilutive:
Income (loss) before extraordinary item $ (0.19) $ 0.11 $ (0.45)
Extraordinary item $ (0.13) $ -- $ --
=========== =========== ===========
Earnings (loss) per share - fully dilutive $ (0.32) $ 0.11 $ (0.45)
=========== =========== ===========
</TABLE>
- ---------------
(1) This represents total outstanding shares of common stock less treasury
shares. See Note 1 to the Consolidated Financial Statements and the Consolidated
Statement of Stockholders' Equity in Item 14 for additional information.
(2) No amount is included in 1994, as it would make the calculation
anti-dilutive. If the calculation was not anti-dilutive, average common and
common equivalent shares would be increased by $3,602.
