-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ls96KpKvCt9f4bfZBWlG+6dPxo0VzzSo9Z6giqWTqQfqqnWhvZ2RbbcI54q3t//n fbMY4rIS4Sxffn4DFxGLMg== 0000950134-96-001168.txt : 19960402 0000950134-96-001168.hdr.sgml : 19960402 ACCESSION NUMBER: 0000950134-96-001168 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: STUART ENTERTAINMENT INC CENTRAL INDEX KEY: 0000355142 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 840402207 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10737 FILM NUMBER: 96543302 BUSINESS ADDRESS: STREET 1: 3211 NEBRASKA AVENUE CITY: COUNCIL BLUFFS STATE: IA ZIP: 51501 BUSINESS PHONE: 7123231488 MAIL ADDRESS: STREET 1: 3211 NEBRASKA AVENUE CITY: COUNCIL BLUFFS STATE: IA ZIP: 51501 FORMER COMPANY: FORMER CONFORMED NAME: BINGO KING CO INC DATE OF NAME CHANGE: 19910725 10-K 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1995 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission File No. December 31, 1995 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 checkmark 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 checkmark 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. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 22, 1996 was $9,474,877.50. The number of shares outstanding of the Registrants $.01 par value common stock as of March 22, 1996 was 6,717,062. 2 PART I ITEM 1. BUSINESS GENERAL Stuart Entertainment, Inc., a Delaware corporation (the "Company") manufactures and distributes a complete line of bingo cards, break-open tickets, ink markers, electronic equipment, supplies and accessories in the United States and Canada. The Company's products are sold primarily 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 stores located in Canada, mail order catalogs and promotional flyers. The Company is also engaged in the manufacture and distribution of electronic gaming equipment. See "--Video King Gaming Systems, Inc." CERTAIN RECENT DEVELOPMENTS ACQUISITION OF BINGO PRESS AND SPECIALTY LIMITED. In December 1994, the Company completed the acquisition (the "Acquisition") of Len Stuart & Associates Limited, an Ontario, Canada corporation ("LSA"). LSA's major asset was Bingo Press & Specialty Limited, an Ontario, Canada corporation ("Bazaar"), a major manufacturer of bingo supplies and related products in Canada. The Acquisition was completed pursuant to the terms of a Stock Purchase Agreement (the "LSA Agreement") entered into by and among the Company, 1089350 Ontario Inc., an Ontario, Canada corporation and a wholly owned subsidiary of the Company (the "Subsidiary"), Leonard A. Stuart and LSA. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." To facilitate the financing of the Acquisition, the Company entered into a Securities Purchase Agreement (the "MLGA Agreement") with MLGA Fund II, L.P. and Bingo Holdings Inc. ("Bingo Holdings"). On December 13, 1994, pursuant to the MLGA Agreement, Bingo Holdings purchased 3,130,435 newly issued shares of Common Stock and warrants to purchase 775,000 shares of Common Stock at an exercise price of $5.75 per share, for an aggregate purchase price of $18,000,000 (the "Equity Financing"). ACQUISITION OF THE ASSETS OF THE RELIABLE CORPORATION OF AMERICA. In January 1995, the Company acquired selected assets and liabilities of The Reliable Corporation Of America, Inc. ("Reliable") and two Didde Presses owned by Anthony Maniaci and Warren Reynolds, individuals and owners of all of the outstanding capital stock of Reliable. The purchase price was $1,300,000. A condition of the agreement was that Mr. Maniaci enter into an employment agreement with the Company, which employment agreement was subsequently terminated by 1 3 mutual consent; the Company and Messrs. Maniaci and Reynolds also entered into non-competition agreements. See "Note 2 to Notes to the Consolidated Financial Statements." PLAYPRINT LIMITED. In 1993 the Company and Bazaar formed Stuart Entertainment Limited, an English corporation and wholly owned subsidiary of the Company ("Stuart Entertainment England"). The Company and Bazaar introduced a number of bingo products for sale in the United Kingdom and Europe through Stuart Entertainment England and in October 1994, Stuart Entertainment England commenced manufacturing operations. In July 1995, Stuart Entertainment England signed a licensing and marketing agreement with Playprint Limited, headquartered in Dublin, Ireland. Pursuant to the agreement, Playprint Limited pays royalties to Stuart Entertainment England for use of certain of the Company's trademark, technologies and equipment in the production of bingo paper and ink markers. As a result of this agreement, the Company redeployed its assets in the United Kingdom and shut down its manufacturing operations. 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. VIDEO KING GAMING SYSTEMS, INC. Video King Gaming Systems, Inc., a wholly owned subsidiary of the Company ("Video King"), was formed in 1992 to develop a line of electronic gaming equipment, primarily for the Company's bingo markets. Video King began manufacturing selected products during the first quarter of 1993 and shipped its first product in the second quarter of 1993. While Video King has focused its sales efforts within the Company's established bingo markets, it also intends to address the domestic and international for-profit gaming markets. STUART ENTERTAINMENT MEXICO Stuart Entertainment, S.A. de C.V., a Mexican corporation and a wholly owned subsidiary of the Company ("Stuart Entertainment Mexico") was formed in 1991 by the Company and Bazaar for the purpose of printing and finishing bingo paper primarily for their respective needs. A number of bingo presses and other manufacturing equipment have been placed in service in Mexico. During 1995, 1994 and 1993 all of the bingo paper manufactured by Stuart Entertainment Mexico was sold to the Company or Bazaar. BINGO PRESS & SPECIALTY LIMITED Bazaar operates under the tradename Bazaar & Novelty. The businesses of Bazaar are similar to those of the Company. Bazaar manufactures and distributes a complete line of bingo cards, break-open tickets, ink markers, supplies and accessories. Bazaar's products are sold primarily to distributors, who resell them to fraternal, charitable, religious and social organizations, lodges, hospitals, nursing homes, PTA groups, legions and other similar not for profit organizations which use such products to raise money and provide entertainment. To a lesser extent, Bazaar's products are sold to charitable and commercial bingo halls, 2 4 governmental lottery agencies and through Bazaar owned retail stores. See "--Products." PRODUCTS BINGO SHEETS AND CARDS. The Company sells a complete line of bingo sheets and cards, both disposable and reusable. With disposable bingo sheets, the players mark the sheet with ink markers or crayons or push out a tab and discard the sheet after each game. Disposable sheets are supplied in a variety of styles and colors. They generally are supplied as loose sheets, with from one to forty-eight "faces," or in padded form, with from one to eighteen "faces" or game cards per sheet using the traditional 75-number game. The Company continues to add specialty bingo games such as "Bonus Line(R),"* "Bonanza Bingo(R)," a 90-number bingo game, "Double Action," "Wildcard," "Winfall(R),"* "Triangle Bingo" and other specialty bingo games which can be played as alternatives to or concurrently with the standard 75-number bingo game. The Company also sells a reusable line of shutter bingo cards, with transparent colored plastic slides that can be pulled over the numbers and then pushed back at the end of the game, and reusable cardboard cards that can be played using transparent colored plastic chips. BREAK-OPEN TICKETS. The Company manufactures and sells products known as "break-open tickets." Break-open tickets are similar to instant lottery and raffle tickets. They generally are sold at bingo games to provide additional entertainment to the players and supplement the sponsoring organization's fund-raising effort. To a lesser extent, break-open tickets in Canada are also sold to charitable organizations for distribution through commercial establishments. Break-open tickets are produced in over 300 different designs and denominations and consist of two thin sheets of opaque cardboard printed with colorful designs and laminated together. The player pulls open up to five "windows" to reveal hidden combinations of symbols (for example, bells, cherries, gold bars and shamrocks) to determine whether the card is a winner and, if it is a winner, the amount of the prize. Each set of tickets sold contains a predetermined number of winning tickets for prizes of different denominations, thus providing the sponsoring organization with an assured gross profit on the sale of a full set of tickets. BINGO EQUIPMENT, SUPPLIES AND ACCESSORIES. The Company manufactures and sells an extensive line of electronic equipment traditionally used in bingo establishments. The electronic bingo equipment line includes: (i) electronic blowers which select numbers for bingo games by ejecting numbered balls one at a time, (ii) electronic flashboards, measuring up to 5 feet high and 18 feet wide, which display to the audience the numbers selected from the electronic blowers or ball cages, (iii) electronic systems that allow instantaneous verification of valid winning bingo cards, (iv) manually operated ball selection cages and (v) new software (90 TRAK) developed to support the South American and European style bingo. The Company also manufactures and sells, or distributes, other electronic equipment used as gaming equipment or for promotional purposes in gaming, entertainment and other industries. __________________________________ *Bonus Line is a registered trademark licensed to the Company by Bonus Games, Inc. 3 5 The Company manufactures ink markers for bingo sheets and refills for such markers. An ink marker is used to place ink impressions on disposable bingo paper to identify called numbers. The Company sells a varied line of ink colors and bottle sizes. The Company distributes other supplies and equipment needed for bingo games, such as tables, chairs and public address systems, bingo-related accessories and novelty items such as tote-bags, t-shirts, buttons and key chains and custom advertising products such as mugs. The Company also sells party supplies, flags, balloons and bar and concession equipment for use at such fund-raising events as bazaars and carnivals. ELECTRONIC GAMING EQUIPMENT. Video King designs and manufactures a variety of electronic bingo systems, video lottery terminal machines ("VLTs"), video slot machines and electronic table games, as well as a comprehensive modular management information system designed for gaming facilities, which includes point-of-sale terminals, vault management, player tracking, inventory control, direct mail and audit functions. To date, Video King has not had any significant revenues from sales of VLTs or video slot machines. The electronic bingo systems, marketed under the name System 12(TM), provide bingo players the opportunity to play a bingo game electronically on touch-screen or conventional terminals while other players play the same game in the traditional manner on paper, all in a cashless environment. Where regulations permit, System 12(TM) provides the player access to a stand-alone parimutuel bingo game and to other games such as video keno, video poker or video 8-line reel games. The VLTs and video slot machines offer a player the ability to select from a variety of games including draw poker, keno, 8-line reel games, break-opens or bingo. These products utilize multi-color, high resolution graphics and are offered with either touch screen and/or button capability. The design of Video King's electronic gaming equipment stresses security and the flexibility to meet varying regulatory requirements. The electronic table games include Vertical or Horse Race Bingo, 52 Card Keno, Chip Up or Flash Bingo and Sic-Bo. A single operator oversees the "casino style" wagering for each of these games. SALES INFORMATION BY PRODUCT LINE The following table shows the percentage of revenues contributed by major product lines of the Company during the past three years. 4 6
1995 1994 1993 ---- ---- ---- Bingo sheets and cards, break-open tickets and other 78% 70% 71% printed materials Bingo equipment, electronic gaming equipment, ink markers, 22 30 29 supplies and accessories
Revenues contributed by bingo sheets and cards, break-open tickets, and other printed materials increased during 1995 due to the Acquisition. Revenue from the sale and leasing of electronic gaming equipment totaled $2.1 million, $2.3 million and $1.4 million in 1995, 1994 and 1993, respectively. MARKETING AND SALES The Company's bingo products are marketed principally through over 200 distributors. These distributors consist of firms and individuals who solicit orders from user organizations which sponsor bingo games. The Company sells to distributors primarily through an employee sales force. The Company's bingo products are also marketed directly to sponsoring organizations and commercial bingo halls in locations where there is little or no distributor coverage or where the Company's products do not have high market penetration. Retail sales are solicited by means of direct mail catalogs, fliers, telemarketing and personal contact by sales personnel in selected branches and directly through retail stores in Canada. The following table shows the percentage of total sales contributed by the Company's wholesale and retail sales activities during the past three years.
1995 1994 1993 ---- ---- ---- Sales to distributors 65% 97% 96% Retail sales 35% 3 4
The increase in retail sales in 1995 was primarily due to the Acquisition of Bazaar and its company-owned retail stores. During 1995, the Company continued to direct its marketing efforts toward strengthening relations with its existing distributors and adding new distributors. The Company plans to focus marketing efforts during 1996 on further developing its distributor network, with minor emphasis placed on attempting to generate additional retail sales, primarily through direct mailings of catalogs and fliers. The Company has also sponsored group seminars designed to assist distributors and other customers in developing and refining sales and marketing programs and 5 7 to introduce new products. The Company believes the seminars have been well received by its distributor network and have been successful in enhancing customer relations and generating incremental sales. Company sales personnel also conduct seminars with individual distributors designed to assist these individuals in developing sales and marketing programs, to educate distributors in ways of improving the success of their customers' fund-raising efforts and to provide management assistance to certain distributors. The Company makes available to distributors catalogs of the Company's full product line on which distributors may imprint their names and which they may give to their customers. Video King markets its electronic gaming equipment through the Company's bingo distributor network, by submitting proposals to bid tenders by governmental entities, principally in the United States and Canada, and by soliciting for-profit gaming markets and by submitting proposals directly to Native American gaming facilities. Solicitation of charitable and for-profit gaming markets is performed primarily by the Company's existing sales staff. Video King also markets its equipment by displaying such equipment at selected trade shows and exhibitions. Bazaar's bingo products are marketed principally through company-owned locations, independent distributors and government agencies. The independent distributors are located in the Provinces of Alberta, British Columbia, Newfoundland, Ontario, Quebec and Saskatchewan. The government agencies distribute bingo paper products exclusively in the Provinces of British Columbia and Manitoba. Bazaar-owned retail stores operate in the Provinces of Manitoba, New Brunswick, Nova Scotia, Ontario and Prince Edward Island. FOREIGN AND EXPORT SALES To date the Company has not had a significant volume of export sales; however, the Company has begun to devote greater resources to the identification and exploration of international bingo and gaming markets. The Company added an International Sales Manager in 1995 to coordinate these efforts. During 1995, approximately 58% of sales were to the United States, 39% to Canada, 1% to the United Kingdom with the balance representing sales to other foreign countries. During 1994, approximately 91% of sales were to the United States. The amount and percentage of Canadian sales increased substantially in 1995 due to the Acquisition. Sales in the United Kingdom will decrease significantly in 1996 due to the discontinuance of manufacturing operations in the United Kingdom and the signing of the agreement with Playprint Limited. See "Recent Developments." For further information regarding foreign and domestic operations and export sales, see "Note 15 to Notes to Consolidated Financial Statements." The Company had no single customer that accounted for more than 10% of its gross revenues during 1995, 1994, and 1993. 6 8 SEASONALITY The Company's business is somewhat seasonal as its sales are stronger during the first half of the year than during the second half of the year. BACKLOG As of December 31, 1995, and 1994, the dollar amount of backlog orders believed to be firm amounted to $3,513,000 and $3,550,000, respectively. MANUFACTURING AND SUPPLIERS The Company manufactures bingo cards on a number of high-speed web presses capable of printing a variety of different game cards in configurations of 24, 30, 36 and 48 cards per sheet. The bingo cards are produced for inventory and then sold unfinished or are cut and packaged to meet customer needs. The existing production capacity is expected to be sufficient to meet the Company's 1996 projected bingo paper sales. In manufacturing break-open tickets the Company utilizes a number of high-speed, multi-color, offset presses and a variety of other equipment, including a laminator, a die-cutter and serial numbering machinery. In recent years the Company has incurred substantial capital expenditures, including the acquisition of a die-cutter, a laminator and an additional printing press designed to improve break-open ticket productivity and product quality. The Company is currently operating at approximately 80% of its break-open ticket production capacity. The Company estimates it has sufficient production capacity to enable it to meet its expected break-open ticket sales demand for the next 12 months. Prior to 1995, the Company outsourced the printing and die-cutting of break-open tickets in its Canadian operation. During 1995 the Company purchased a five-color press and a two-color press for the in-house printing of break-open tickets and a die-cutter to enable the Company to manufacture the product internally for its Canadian operations. The Company manufactures ink markers and refills through automated liquid filling lines. 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. The Company believes that current manufacturing capacity is sufficient to meet the projected ink sales demand for 1996. The components for the Company's bingo equipment, and the paper and other materials used in printing bingo sheets and break-open tickets, generally are available from various suppliers at competitive prices and, as a result, the Company is generally not dependent on any single supplier. The Company has experienced significant price increases in raw newsprint during 1995 and prices are expected to stabilize or experience modest increases during 1996. The equipment, accessories and supplies which the Company distributes generally are standard items and are available from other manufacturers. 7 9 The Company continually monitors technological advances in the printing industry in an effort to ensure a timely assimilation of these advances into current manufacturing processes. Additional attention is directed toward the early recognition and investigation of new technologies that might be implemented as cost effective complements to technology currently employed. RESEARCH AND DEVELOPMENT ACTIVITIES The Company maintains a continuing product development program intended to enhance the Company's product lines and increase the Company's market penetration. Efforts in the bingo paper and break-open ticket product lines are directed toward new product development as well as improvement of the graphic design of its current lines. The market for break-open tickets, in particular, is an ever-changing one requiring the continual introduction of new break-open tickets in response to changing consumer preferences of design and colors. The Company continually updates and redesigns its bingo equipment in an effort to maximize the utility, ease of use and reliability of these products. A significant effort is being devoted to the diversification of products within the electrical equipment product line in response to the trend within the bingo and gaming industries toward the adaptation of electrical and mechanical devices to use in those industries. Video King has substantially completed the design of its principal products and will maintain a reduced R&D program to develop new products and to ensure that the technology employed in Video King's product line is state-of-the-art and that the features offered in its gaming products are as comprehensive as any found in the market place. During 1995, 1994 and 1993, total research and development expenses totaled approximately $745,000, $784,000, and $685,000, respectively, of which $682,000, $727,000, and $673,000, respectively, represented research and development expenses related to Video King. Total research and development expenses for 1996 are currently expected to decrease due to the completion of the design of Video King's principal products. GOVERNMENT REGULATION The sale and use of many of the Company's products are governed by federal, state and local gaming laws. The significant growth of charitable and commercial gaming in recent years has resulted in a proliferation of legislation directed toward gaming activities which has been accompanied by a more intensive, sophisticated regulatory approach at all governmental levels. This has resulted in more comprehensive licensing, reporting and operating requirements which generally have been implemented by the Company, where appropriate, and which are being monitored on an on-going basis in an effort to comply in all material respects with applicable laws, regulations, directives and standards recommended by the National Association of Fundraising Ticket Manufacturers and the North American Gaming Regulators Association. In 8 10 addition, the sale and use of many of Bazaar's products are governed by federal, provincial and municipal laws in Canada. While the Company believes that its manufacturing, warehousing, shipping and sales operations are generally in compliance with applicable laws, the Company is not in a position to determine the legality or illegality of the use of its products, since the legality of use often depends on the status and locations of the Company's customers and the ultimate consumers of the product. The state and local laws in the United States and provincial and municipal 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. If any changes occur 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, the Company could experience declines in sales and earnings. At present, the states of Alaska, Colorado, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Hampshire, New York, North Dakota, Oklahoma, Pennsylvania, South Dakota, Texas, Vermont, Washington, West Virginia and Wisconsin require bingo and/or charitable gaming manufacturers and/or suppliers to be licensed or registered. The Company currently is licensed or registered 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 to be subject to licensing in that state. The Company, however, is permitted to and does ship products to licensed distributors in Maine. The Company is also registered in the Province of Ontario, Canada. Bazaar is registered in the provinces of Ontario, New Brunswick and Nova Scotia, Canada. The manufacture and distribution of electronic gaming equipment is also subject to extensive federal, state and local regulations which vary significantly by jurisdiction. Video King has submitted applications for licenses in several states where it expects to conduct business. Video King has received a license to sell electronic gaming equipment in Colorado and Mississippi and anticipates that it will receive license approval from other states during 1996. Further, Video King intends to submit license applications to a number of other state and local jurisdictions during 1996. Video King does not anticipate encountering any significant problems in obtaining these licenses. The Company anticipates that Video King will sell its machines to casinos operated by Native Americans. Under the National Indian Gaming Regulatory Act ("IGRA"), certain types of gaming activities are classified as Class I, Class II or Class III. Only Class I and Class II gaming may be conducted by a Native American casino without the necessity of a written compact with the state in which the casino is located. In the event a gaming activity is classified as Class III under IGRA, a tribe may not conduct such activity in the absence of a compact. Video King's business will be impacted based upon whether its products are ultimately classified 9 11 as Class II or Class III, which classification will affect the size of the potential markets for those products. The loss of a license in a particular state may prohibit the Company from selling into that state during the period that it does not have such a license. Loss of one or more licenses for an extended period of time may have an adverse effect on the Company's business. Not all of the Company's products are eligible for sale in every locality where 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 and attempts to comply with such restrictions. In addition, the Company and Bazaar each maintain a licensing and regulatory department that monitors regulatory and licensing requirements to which the Company and Bazaar, respectively, are subject. COMPETITION BINGO SUPPLIES AND BINGO EQUIPMENT. The Company and Video King experience competition from a number of privately owned businesses, most of which the Company believes are smaller than the Company. However, no comprehensive industry statistics are available. The Company experiences competition in all areas of its business. The Company's major competitor in North America is Arrow International, Cleveland, Ohio ("Arrow"), which sells a complete line of bingo products. Since bingo products generally are similar, the principal competitive factors in the industry are service and price. The Company believes that it is competitive in both areas. See "Marketing and Sales." Bazaar experiences competition in all areas of its business from a number of privately owned businesses, most of which Bazaar believes to be smaller than Bazaar. However, no comprehensive industry statistics are available. Bazaar's major competitors in Canada are the Canadian branch of Arrow and Specialty Print with respect to break-open tickets. ELECTRONIC GAMING EQUIPMENT. Video King competes with a number of manufacturers of gaming equipment, many of which have substantially greater resources than the Company. The significant competitive factors include price, product design, reliability and security. The Company believes that it has an advantage in marketing its electronic bingo systems because of the uniqueness of Video King's design of its products and because of the Company's comprehensive knowledge of the bingo industry, extensive distributor network within the industry and established supplier relationships with many United States and Canadian governmental entities. The VLT/video slot market is more mature than the market for electronic bingo systems and more competitive. Video King believes that the technology incorporated into its VLTs and video slots is state-of-the-art and compares favorably with any existing products and that the Company's reputation as a quality manufacturer of electronic products for bingo games will facilitate entry into the VLT/video slot market. However, to date Video King has not had any 10 12 significant revenues from the sale of VLTs or video slot machines and there is no assurance that Video King will be able to successfully penetrate the electronic gaming market, given the highly competitive nature of this market. TRADEMARKS The Company believes that the trademarks Bingo King and Bazaar & Novelty have considerable value in the industry, based upon their extensive use for more than 30 years. The Company's trademark, Bingo King, the name, combination of the mark and name with a crown logo, and numerous other product names which it uses are registered with the United States Patent and Trademark Office. EMPLOYEES As of December 31, 1995, the Company had 1,429 full-time employees in the United States, Canada, Mexico and the U.K., 134 of which 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. ADDITIONAL INFORMATION Compliance with federal, state and local law in the United States and federal, provincial and municipal laws in Canada regulating the discharge of materials into the environment or otherwise relating to the protection of the environment has not had, and is not expected by the Company to have, any adverse effect upon capital expenditures, earnings or the competitive position of the Company. The Company is not presently a party to any litigation or administrative proceeding with respect to its compliance with such environmental standards. In addition, the Company does not anticipate being required to expend any material amount of funds in the near future for environmental protection in connection with its operations. ITEM 2. PROPERTIES The operations of the Company are conducted principally from facilities located in Council Bluffs, Iowa; Littleton, Colorado; St. Catharines, Ontario; and Reynosa, Mexico and Muskegon, Michigan. The operations in Council Bluffs, Iowa are conducted from four buildings. Two buildings, comprising approximately 155,000 square feet, are owned by the Company and used primarily to print, finish and warehouse bingo paper and break-open tickets. The Company also leases two additional buildings in Council Bluffs, Iowa. One of these buildings, comprising approximately 27,000 square feet, is used primarily to manufacture and warehouse ink markers and refills. The lease on this building expires in September 1996 and the Company has the option of renewing the lease for an additional one year period. The second building, comprising 11 13 approximately 34,500 square feet, is used primarily to warehouse paper, general merchandise, and break-open tickets. The lease on this building expires in December 1997 and the Company has the option of renewing the lease for two additional one year periods. The Company leases 30,000 square feet of space in Littleton, Colorado pursuant to a lease which expires in August 1996. It houses the Company's facilities for assembling electronic bingo equipment and electronic gaming products manufactured by the Company. The Company has the option of renewing this lease for two five-year periods. The renewal of the lease is currently under consideration by the Company. Bazaar leases a 158,000 square foot facility in St. Catharines, Ontario, Canada which is used primarily to print, finish, and warehouse bingo paper and break-open tickets. The lease was originally scheduled to expire on August 31, 1995, but has been extended to August 31, 2000 with two five-year options. In 1995 an additional 24,057 square foot facility adjacent to the main premises was leased. This second lease expires on August 31, 2000 with one five-year option. This facility is used to warehouse general products for Bazaar. Stuart Entertainment Mexico leases approximately 81,600 square feet in Reynosa, Mexico pursuant to leases which expire on August 15, 1998 and December 31, 1998, respectively. The lease that was to expire January 14, 1996 was extended to August 15, 1998 with the addition of 13,600 square feet. The space houses Stuart Entertainment Mexico's administrative offices and facilities for printing and finishing bingo paper. 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. ITEM 3. LEGAL PROCEEDINGS The Company has been sued for patent infringement in the United States District Court for the District of Nevada by Fortunet, Inc. ("Fortunet") The suit consists of two counts. The first count concerns a device known as the Bingo Card Minder that was marketed by the Company and manufactured by Bingo Card Minder Corp., who is co-defendant for the first count. The Company no longer markets the Bingo Card Minder. The second count is against the Company and alleges that the System 12TM electronic bingo system manufactured by Video King infringes three patents owned by Fortunet. The Company does not believe that System 12TM infringes any of the patents and that the three patents are invalid. The Company has requested that the United States Patent and Trademark Office ("PTO") re-examine the three patents. The PTO has granted the Company's request as to two patents; the PTO agreed that a substantial new question of patentability exists as to such patents. The PTO has not acted on the request for the reexamination of the third patent, which was filed approximately four months after the request for re-examination of the first two patents. The Company believes that it will be successful in defending the suit on both counts. 12 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS An annual meeting of the stockholders of the Company (the "Meeting") was held on October 5, 1995. The following table sets forth each of the proposals that the stockholders were asked to vote upon and the results of the Meeting.
Proposal Results -------- ------- 1. A proposal to elect six directors to the Board of Directors: Leonard A. Stuart Grant Authority 5,944,042 Withhold Authority 35,759 Albert F. Barber Grant Authority 5,946,867 Withhold Authority 32,934 Timothy R. Stuart Grant Authority 5,944,317 Withhold Authority 35,484 Sangwoo Ahn Grant Authority 5,947,867 Withhold Authority 31,934 Perry J. Lewis Grant Authority 5,947,867 Withhold Authority 31,934 Ira Starr Grant Authority 5,947,867 Withhold Authority 31,934 2. A proposal to ratify the selection of For 5,952,689 Deloitte & Touche LLP as independent auditors Against 13,391 for the fiscal year ended December 31, 1995 Abstain 13,721
13 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on The Nasdaq Stock Market under the symbol "STUA." The following table shows the high and low closing sales prices for the Common Stock during each calendar quarter within the past two years, as reported by The Nasdaq Stock Market.
1995: High Low ---- ---- --- First Quarter $5 1/2 $4 5/8 Second Quarter $4 7/8 $2 1/4 Third Quarter $5 1/4 $3 Fourth Quarter $8 1/4 $4 1994: ---- First Quarter $6 $4 1/2 Second Quarter $5 1/2 $3 3/4 Third Quarter $6 $4 1/2 Fourth Quarter $5 1/2 $3 7/8
At March 22, 1996, the Common Stock was held by 1765 stockholders of record. The Company has not paid any cash dividends on its Common Stock during the past two years. The Board of Directors expects to follow a policy during the foreseeable future of retaining earnings for use in the Company's business; further, the payment of cash dividends is restricted by the Company's credit agreements. 14 16 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, 1995 are derived from the consolidated financial statements of the Company which have been audited and reported upon by Deloitte & Touche LLP, independent accountants. The selected financial information set forth in the table below is not necessarily indicative of the results of future operations of the Company and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements, related notes and independent auditors' report, contained herein.
Years Ended December 31, -------------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (In thousands, except per-share data) SUMMARY OF OPERATIONS: Net sales $109,882 $59,158 $53,937 $52,519 $40,886 Gross margin 35,160 16,171 13,770 14,542 11,829 Income (loss) before cumulative effect 786 (1,608) 512 1,720 1,868 of change in accounting principle Net income (loss) 786 (1,608) 699 1,720 1,868 Earnings (loss) per share before cumulative effect of change in accounting principle-primary .12 (.45) .15 .49 .55 Earnings (loss) per share before cumulative effect of change in accounting principle-fully .11 (.45) .15 .49 .55 dilutive Earnings (loss) per share-primary .12 (.45) .20 .49 .55 Earnings (loss) per share-fully dilutive .11 (.45) .20 .49 .55 Average common and common equivalent shares outstanding-primary 6,706 3,561 3,524 3,519 3,415 Average common and common equivalent shares outstanding-fully dilutive 7,053 3,561 3,524 3,519 3,415
December 31, -------------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (Dollars in thousands) FINANCIAL CONDITION: Working capital $20,018 $14,454 $3,742 $3,461 $3,947 Current ratio 1.8 1.7 1.2 1.3 1.4 Total assets 98,994 88,977 37,301 33,764 28,001 Long-term debt 39,586 34,146 3,949 4,748 4,433 Stockholders' equity 32,040 30,153 15,140 14,168 12,206
15 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS INTRODUCTION In December 1994, the Company completed the Acquisition of LSA. LSA was the holding company for (i) Bazaar, and (ii) Niagara Bazaar and Novelty Limited, an Ontario, Canada corporation and a retailer of bingo supplies and related products. In addition, effective January 1, 1995, the Company acquired (i) substantially all the assets and assumed substantially all of the existing liabilities (the "Net Assets") of Reliable and (ii) two presses owned by Reliable's shareholders (collectively, the "Reliable Acquisition"). The results of operations of Bazaar and Reliable have been consolidated since the date of the LSA Acquisition and the Reliable Acquisition, respectively. 1995 COMPARED WITH 1994 CONSOLIDATED RESULTS Results for the current year include two one-time charges, including (i) 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 (see Note 2 to the Consolidated Financial Statements) and (ii) a charge of $819,000 related to the costs to shutdown the manufacturing facility in the United Kingdom. Stuart Entertainment England has recorded losses in 1995 in the amount of $2,161,000, including the $819,000 one-time charge described above. The manufacturing operations of this subsidiary have been discontinued in conjunction with a licensing and marketing agreement with Playprint Limited of Dublin, Ireland and no further losses are anticipated (see Note 8 to the Consolidated Financial Statements). On a pro forma basis (see below), 1995 net earnings for the Company's "Core Business" increased to $3,673,000 ($0.55 per share) from $2,164,000 ($0.33 per share) in 1994. 16 18
Actual Pro Forma (Dollars in thousands) Fiscal Year 1995 Fiscal Year 1994 - --------------------- ---------------- ---------------- Net sales "Core Business" $ 106,842 $ 91,338 Video King 1,712 2,322 England 1,328 1,128 ----------- ----------- Total $ 109,882 $ 94,788 =========== =========== Net earnings (loss) "Core Business" $ 3,673 $ 2,164 Video King (726) (2,052) England (2,161) (919) ----------- ----------- Total $ 786 $ (807) =========== =========== Earnings per share - primary "Core Business" $ 0.55 $ 0.33 Video King (0.11) (0.31) England (0.32) (0.14) ----------- ----------- Total $ 0.12 $ (0.12) =========== =========== Average Common and Common Equivalent Shares Outstanding - primary 6,705,904 6,537,000 =========== =========== EBITDA "Core Business" $ 14,114 $ 10,473 Video King (869) (3,018) England (1,970) (882) ----------- ----------- Total $ 11,275 $ 6,573 =========== ===========
"Core Business" includes all operations of the Company, excluding Video King and Stuart Entertainment England. Core Business sales in actual 1995 and pro forma 1994 include sales for Reliable, acquired in January 1995, of $6,300,000 and $0, respectively. "EBITDA" is defined as earnings before interest, taxes, depreciation and amortization. Results for the prior year included several transactions and adjustments that negatively impacted earnings. See "Note 16 to Notes to the Consolidated Financial Statements." 17 19 NET SALES. Net sales in 1995 increased 86% to $109,882,000 from $59,158,000 in 1994. The sales growth in 1995 was attributable to the inclusion of Bazaar operations for the entire year in 1995 versus only the period from the acquisition date of December 13 to December 31, 1994 in the prior period, which represented $38,600,000 or 65% of the increase; the inclusion of Reliable's operations which represented $6,300,000 or 11% of the increase; and the inclusion of sales from Stuart Entertainment England in 1995, which represented $1,300,000 or 2% of the increase. The remaining $4,400,000 or 7% increase in sales is primarily attributable to increased paper sales of $4,900,000 (10%), increases in tab and ink sales of $1,000,000 (1%), offset by decreases in general merchandise and electrical sales of $1,500,000 (3%). Excluding the effect of acquisitions, bingo paper unit sales increased 3.4% from 1994 to 1995 while break-open ticket and ink product unit sales decreased 4.1% and increased 5.1%, from 1994 to 1995, respectively. Paper and break-open sales prices increased approximately 13% and 6%, respectively, from 1994 to 1995. The increase largely reflected raw material price increases which the Company was not able to offset through other cost reductions. Ink sales prices were down slightly from 1994 due primarily to a shift in the mix of ink products sold to lower priced products. COST OF GOODS SOLD. Cost of goods sold as a percentage of sales decreased from 72.7% in 1994 to 68.0% in 1995. The decrease is primarily attributable to i) a lower cost of goods sold percentage for Bazaar sales versus the historical percentage for the Company, ii) cost savings associated with the movement of more production to Mexico during 1995, resulting in labor cost savings, iii) overall productivity improvements, and iv) cost savings associated with performing certain break-open ticket manufacturing operations in-house versus outsourcing them. These improvements were partially offset by increases in raw materials, newsprint paper and general labor rates. During 1994 and 1995, the Company experienced significant increases in the price of paper products purchased for the manufacturing of bingo paper and break-open tickets and for packaging. As noted above, the Company initiated sales price increases on bingo paper and break-open tickets during this period to the extent that it was not able to offset these increases through other cost savings. Management currently expects the price of paper products to stabilize or experience modest increases during 1996. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses ("SG&A") increased approximately $12,258,000 to $26,581,000 in 1995 compared with $14,323,000 in 1994. SG&A expenses as a percent of sales remained flat at 24.2%. Approximately $12,800,000 of the increase in SG&A was due to the inclusion of the operations of Bazaar and Reliable in fiscal 1995 results. The increase in SG&A was offset by lower bad debt expense, due to a $1.1 million increase to the allowance for doubtful accounts recorded in 1994 related to the financial condition of two customers. SG&A expenses also increased as a result of higher salaries, fringe benefits and related costs, amortization of goodwill for the twelve-month period, corporate expenses related to the consolidation of the acquired companies, and higher sales promotion activities. The increase in 1995 compared to 1994 in salaries and fringe benefits was due largely to the inclusion of Albert F. Barber as Chief Executive Officer for the full year and an increase in the number of employees and salary levels related in part to 18 20 the consolidation of the acquired companies. However, the Company initiated a cost reduction program which was implemented in 1995 and early 1996 which is anticipated to result in SG&A expense savings. 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 with $980,000 for the year ended December 31, 1994. Prior to December 13, 1994, the earnings or loss for Stuart Entertainment Mexico was allocated to the Company based on the percentage of total production that was sold to the Company. The equity in (earnings) losses for Stuart Entertainment England represented 50% of the net operating loss for the period January 1, 1994 through December 13, 1994. With the Acquisition, Stuart Entertainment England and Stuart Entertainment Mexico became, in effect, wholly-owned subsidiaries of the Company. For the year ended December 31, 1995, equity in earnings related to British Bazaar. INTEREST EXPENSE, NET. Interest expense, net of interest income, totalled $4,448,000 for the year ended December 31, 1995 compared with $1,045,000 for the year ended December 31, 1994. Approximately $2,145,000 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 in 1995 compared with 1994 largely related to the LSA and Reliable Acquisitions and higher working capital requirements. UNITED KINGDOM CHARGE. During the second quarter of 1995, the Company signed a licensing and marketing agreement with Playprint Limited, headquartered in Dublin, Ireland. This agreement gave the Company the opportunity to redeploy its assets in the United Kingdom, and discontinue its manufacturing operation. Under the agreement, Playprint Limited pays royalties to Stuart Entertainment England 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 $819,000 in 1995 related to the costs to shutdown the manufacturing facility in the United Kingdom and consolidate its activities with Playprint Limited. 1994 COMPARED WITH 1993 NET SALES. Net sales in 1994 increased 9.7% to $59,158,000 from $53,937,000 in 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 $1,800,000 or 3.4% of the 9.7% increase in net sales; increases in sales of bingo paper of $1,600,000 or 5.8%; increases in sales of break-open tickets of $800,000 or 7.5%, and increases in sales of ink products of $1,300,000 or 24.5%. Bingo paper units increased slightly from 1993 to 1994 while break-open tickets and ink products experienced unit increases of 5.9% and 18.4% respectively. The Company 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 the Company passed on to its customers. This increase was the result of raw material price increases on news print paper stock. Break-open ticket prices increased slightly during 1994 while ink products increased approximately 3.0%. Ink product prices increased primarily due to a shift in the mix of ink products sold to a higher priced ink product from a lower priced ink product. 19 21 COST OF GOODS SOLD. Cost of goods sold as a percentage of sales decreased from 74.5% in 1993 to 72.7% in 1994. 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 the Company for raw material, news print paper stock and general labor. Additionally in 1994, the Company 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 the Company recorded a $300,000 reserve for obsolete inventory for Video King. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative ("SG&A") expenses increased approximately $2,853,000 to $14,323,000 in 1994 as compared to $11,470,000 in 1993. SG&A expenses as a percent of sales increased to 24.2% in 1994 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 the Company for the period from December 14, 1994 through December 31, 1994. Bad debt expense increased by $890,000 due primarily to an increase of $1,050,000 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 Albert F. Barber for the period of June 1994 through December 13, 1994, prior to his appointment as Chief Executive Officer of the Company, 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 Mr. Barber and additional audit and legal costs relating to the ongoing business of the Company. These increases were offset in part by decreases in data processing supplies and small equipment, decreases in costs to develop break-open tickets, and other general decreases. EQUITY LOSSES OF JOINT VENTURES. Equity in losses of joint ventures totalled $980,000 for the year ended December 31, 1994 compared with $705,000 for the year ended December 31, 1993. During 1994 the Company 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 "Footnote 8 to Notes to Consolidated Financial Statements". 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% 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 Company Limited. See "Note 8 of Notes To Consolidated Financial Statement." INTEREST EXPENSE, NET. Interest expense, net of interest income, totaled $1,045,000 in 1994 as compared to $775,000 in 1993. The increase of $270,000 was due to the inclusion of Bazaar's interest expenses 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 the closing of the Acquisition, the Company has significantly higher borrowing levels as compared to December 31, 1993. 20 22 LIQUIDITY AND CAPITAL RESOURCES The company's principal uses of cash are for the purchase and carrying of inventory, the carrying of accounts receivable, normal operating expenses and for the purchase of fixed assets. The primary amounts and ratios relating to liquidity and capital resources for the past two years are as follows:
(Dollars in thousands) 1995 1994 - ---------------------- ------- ------- Working capital $20,018 $14,454 Current ratio 1.8 1.7 Total long-term debt $39,586 $34,416 Shareholders' equity $32,040 $30,153 Total capitalization $79,523 $71,051 Debt to capitalization ratio 59.7% 57.6% Capital expenditures $ 3,409 $ 2,182
FINANCING ACTIVITIES The Company has a credit agreement (the "Credit Agreement") with two national banks with a senior secured revolving line of credit of $23,000,000 (the "Revolving Facility") and a senior secured loan facility of $15,000,000 (the "Term Facility") (See "Note 5 to Notes to Consolidated Financial Statements"). The Credit Agreement expires and all other remaining amounts outstanding (with the exception of the $3,000,000 increase to the Revolving Facility described below) are due on December 12, 1999. At December 31, 1995, the Company had outstanding balances under the Revolving Facility and Term Facility of $20,921,000 and $12,135,000, respectively, compared with outstanding balances at December 31, 1994 of $12,601,000 and $14,840,000, respectively. The Credit Agreement requires quarterly principal payments of $250,000 under the U.S. Term Facility and C$694,000 ($492,000) under the Canadian Term Facility until maturity. Interest payments are due (a) monthly on Base Rate Loans or (b) at the end of an Offshore Loan period, which can be from one day to 90 days. The $2,161,000 in losses recorded by the Company's United Kingdom subsidiary in 1995, the settlement of a consulting agreement (see "Note 10 to Notes to Financial Statements"), higher working capital requirements and higher acquisition-related closing costs not anticipated when the Credit Agreement was completed in December 1994 have resulted in the Company increasing 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 increase shall be paid in full at December 31, 1996. As a result of the factors stated above, the Company, subsequent to December 31, 1995, has drawn all amounts available under the Credit Agreement, of which approximately $1,500,000 is invested short-term and is available for working capital purposes. In the Reliable Acquisition, the Company assumed a line of credit and term loan credit facility with a Michigan bank which had been the primary bank for Reliable (See "Note 5 to Notes to Consolidated Financial Statements"). The Company's Core Business continued to be profitable with 1995 net earnings of $3,673,000. Management believes the large losses in the United Kingdom subsidiary have been eliminated beginning in the fourth quarter of 1995 (See "Note 8 to Notes to Consolidated Financial Statements") which Management believes will improve the Company's cash flow position in 1996. 21 23 Management believes that under the current operating plan, its existing capital resources and available financing alternatives will be sufficient to meet its operating expenses and capital expenditure requirements. However, the Company currently anticipates that it may raise additional capital or refinance existing debt in 1996. Management currently has no commitments for such financing activities and there can be no assurance that such funds will be available to the Company on favorable terms, if at all. Additionally, as part of the Company's long term plan, it seeks to build shareholder value through acquisitions. In order to implement its long term plan, 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. CASH FLOW 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:
(Dollars in thousands) 1995 1994 1993 - --------------------- ---- ---- ---- Operating activities: Net income (loss) $ 786 $ (1,608) $ 699 Non-cash charges 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 1,300 30,798 945 ---------------------------------------- Net change in cash $(1,172) $ 1,604 $ (157) ========================================
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 receivable from non-related parties. The conversions were made to assist customers in resolving cash flow deficiencies and to aid customers in accomplishing their long-term growth plans. 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 increased inventory quantities on hand. Inventory levels fluctuate on a seasonal basis but are expected to stabilize or experience modest increases in 1996. 22 24 Trade payables and accrued liabiliites 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 increased cost of paper products and higher working capital requirements, partially offset by a reduction on the Bazaar Purchase Price Adjustment. CAPITAL EXPENDITURES The Company's capital expenditures were $3,409,000 during 1995 compared with $2,182,000 during 1994. The Company historically finances a significant portion of its capital expenditures through lease financing. The Company's capital expenditure program has focused in 1995 and 1994 on the purchase of equipment designed to increase production capacity and improve manufacturing efficiency. This trend will continue in 1996; however, the Company expects a larger portion of its capital expenditure requirements in 1996, currently anticipated to be $4,000,000, will be allocated to the upgrading and development of computerized hardware systems. 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 the facility is $5,000,000. At December 31, 1995, $3,813,000 remained available under the facility. OTHER 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. Implementation of Statement No. 121 is not expected to have a material adverse effect on the Company's results 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 this Statement will have no effect on the Company's operating results or financial condition. INFLATION Other than the increases in the cost of paper products described above, inflation did not have a material effect on the Company's operations in 1995, 1994 and 1993. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and related financial information required to be filed are indexed on page F-1 and are incorporated herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company has had no disagreements with its independent public accountants on accounting or financial disclosure. 23 25 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of the Company and their ages:
NAME AGE POSITION ---- --- -------- 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 42 President, Chief Operating Officer and Director Perry J. Lewis 58 Director Ira Starr 36 Director Sangwoo Ahn 57 Director Clement F. Chantiam 36 Executive Vice President Roy L. Lister 38 Executive Vice President Gary L. Loebig 48 Senior Vice President Market and Product Development Donald S. Kuzina 44 Vice President Operations - Electronic Gaming Division Paul C. Tunink 37 Vice President Finance, Treasurer, and Chief Financial Officer Robert P. McNeill 35 Vice President Manufacturing Gary D. Phillips 41 Vice President Gaming Ticket Operations Michael A. Schalk 48 Corporate Secretary Douglas W. Rye 30 Assistant Corporate Secretary
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. 24 26 Leonard A. Stuart, Chairman of the Board of Directors since prior to 1989; Chief Executive Officer of the Company from prior to 1989 to December 1994 and President from prior to 1989 to March 1989 and from January 1990 to July 1992. Mr. Stuart has served as President of Bazaar since prior to 1988. Albert F. Barber, Vice Chairman of the Board of Directors and Chief Executive Officer since December 1994; Consultant to the Company from June 1994 to December 1994; President of CNBC, an NBC cable affiliate, from 1990 to 1994; Executive Vice President and Chief Financial Officer of NBC from 1987 to 1990. Timothy R. Stuart, President and Chief Operating Officer since July 1992; Director since December 1994; Executive Vice President from October 1991 to July 1992; and Vice President Operations from March 1989 to October 1991. Perry Lewis, Director since December 1994. Mr. Lewis has been a General Partner of MLGAL Partners, L.P. since 1987 and a managing director of Morgan Lewis Githens & Ahn, Inc., an investment banking firm since 1982. Mr. Lewis also serves as a director of Quaker Fabric Corporation, Haynes International, Inc., ITI Technologies, Inc., Tyler Corporation, Aon Corporation and Evergreen Media Corporation. Ira Starr, Director since December 1994. Mr. Starr has been a General Partner of MLGAL Partners, L.P. since 1994. Mr. Starr also served as a vice president of Morgan Lewis Githens & Ahn, Inc., an investment banking firm from 1988 to 1993 and has been a managing director since 1994. Mr. Starr also serves as a director of Haynes International, Inc. and Quaker Fabric Corporation. Sangwoo Ahn, Director since December 1994. Mr. Ahn has been a General Partner of MLGAL Partners, L.P. since 1987 and a managing director of Morgan Lewis Githens & Ahn, Inc., an investment banking firm since 1982. Mr. Ahn also serves as a director of ITI Technologies, Inc., Haynes International, Inc., PAR Technology Corporation, Kaneb Services, Inc., Kaneb Pipe Line Partners, L.P., and Quaker Fabric Corporation. Clement F. Chantiam, Executive Vice President since November 1992 and Vice President Manufacturing from March 1989 to November 1992. Roy L. Lister, Executive Vice President since December 1994; and Vice President of Operations from 1990 to 1992. Mr. Lister has been an Executive Vice President of Bazaar since 1992. Gary L. Loebig, Senior Vice President Market and Product Development since January 1995; Vice President Marketing and Regulatory Compliance from October 1991 to January 1995; and Director of Marketing and Regulatory Compliance from January 1990 to October 1991. 25 27 Donald S. Kuzina, Vice President since October 1991; and Director of Branch Operations from March 1989 to October 1991. Paul C. Tunink, Vice President Finance, Treasurer and Chief Financial Officer since April 1995; Divisional Vice President Finance of Younkers, Inc. from May 1992 to April 1995 and Director of Corporate Accounting of Commtran Corporation from prior to 1991 to April 1992. Robert P. McNeill, Vice President Manufacturing since January 1995; and Director of Manufacturing for Bazaar from 1990 to January 1995. Gary D. Phillips, Vice President Gaming Ticket Operations since January 1995; and Manufacturing Manager from September 1988 to January 1995. Michael A. Schalk, Corporate Secretary since January 1991. Associate, Frumkin, Shralow and Cerullo, P.C., and its predecessors from prior to 1989 to November 1990, when he joined the Company. Douglas W. Rye, Assistant Corporate Secretary since October 1995; General Manager of Operations for Bazaar from October 1995 to present; Director of Bazaar from October 1995 to present; Controller of Bazaar from June 1991 to September 1995; and Specialist in Advisory Services at KPMG Peat Marwick Thorne, Chartered Accountants prior to June 1991. Leonard A. Stuart, Chairman of the Board, and Timothy R. Stuart, President, are brothers. There are no other family relationships between any of the directors and executive officers of the Company. The current members of the Board of Directors were selected as directors pursuant to the terms of a Securityholders' Agreement (the "Securityholders' Agreement") entered into in connection with the Acquisition. The Securityholders' Agreement provides that the board of directors of the Company will be comprised of up to nine members, three of whom Mr. Stuart may, but shall not be required to designate for nomination, which in his sole discretion may include himself, four of whom Bingo Holdings 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. Stuart and Bingo Holdings. The Securityholders' Agreement also imposes certain transfer restrictions on the parties to the Securityholders' Agreement and their affiliated transferees ("Holders") and provides Holders with demand and incidental registration rights with respect to the Common Stock. REPORTS UNDER SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended, and the rules thereunder require the Company's officers and directors, and persons who own more than ten 26 28 percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and with the NASDAQ and to furnish the Company with copies. Based solely on its review of the copies of the Section 16(a) forms received by it, or written representations from certain reporting persons, the Company believes that, during the last fiscal year, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten-percent beneficial owners were complied with, except that three sales of stock occurring in a two-month period inadvertently were not timely reported by Mr. Loebig. A Form 4 has since been filed to correct this oversight. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information for each of the last three fiscal years concerning compensation paid by the Company to the Chief Executive Officer and any other executive officer whose total annual salary and bonus exceeded $100,000 for the last fiscal year:
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION LONG-TERM COMPENSATION -------------------------------------- ---------------------------------- (A) (B) (C) (D) (G) (I) SECURITIES ALL OTHER UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS/SARS (#) ($) (1) --------------------------- ---- ---------- --------- ---------------- ------------ Leonard A. Stuart, 1995 200,000 0 0 0 Chairman of the Board(3) 1994 195,833 0 0 0 1993 175,833 0 0 0 Albert F. Barber(2) 1995 300,000 0 Chief Executive Officer 1994 9,231 75,000 900,000 204,677(4) Timothy R. Stuart, 1995 170,000 250,000 President 1994 116,200 0 0 2,304 1993 107,762 0 15,000 2,153 Clement F. Chantiam, 1995 130,000 80,000 Executive Vice President 1994 116,100 0 0 2,304 1993 108,837 0 15,000 2,153 Roy L. Lister, 1995 130,000 0 80,000 1,858 Executive Vice President(5) 1994 2,500 0 0 0
__________________ (1) The stated amounts are Company contributions to a defined contribution pension plan available to all Company employees. (2) Mr. Barber has been Chief Executive Officer of the Company since December 1994. (3) Mr. Stuart served as Chief Executive Officer of the Company until 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. 27 29 The foregoing compensation tables do 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 and of the group listed in the above table, which cannot be precisely ascertained but which is less than the lesser of (a) ten percent of the cash compensation paid to each such executive officer or to the group, respectively, or (b) $50,000 or $50,000 times the number of individuals in the group, as the case may be, is not included in such table. OPTION GRANTS IN THE LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM(1) - --------------------------------------------------------------------------------------- -------------------------------------- (A) (B) (C) (D) (E) (F) (G) (H) NUMBER OF SECURITIES PERCENT OF TOTAL UNDERLYING OPTIONS GRANTED TO OPTIONS EMPLOYEES IN FISCAL EXERCISE OR BASE EXPIRATION NAME GRANTED (#) YEAR(2) PRICE ($/SH) DATE 5% ($) 10% ($) 0% ($) --------------------- ----------- ------------------- ---------------- ---------- ------- ------ ------ Leonard A. Stuart 0 - - - - - Albert F. Barber 0 - - - - - Timothy R. Stuart 50,000 6% 5.00 1/17/08 147,000 382,500 0 100,000 12 10.00 1/17/08 0 265,000 0 100,000 12 15.00 1/17/08 0 0 0 Clement F. Chantiam 40,000 5 5.00 1/17/05 117,700 306,000 0 40,000 5 10.00 1/17/05 0 106,000 0 Roy L. Lister 40,000 5 5.00 1/17/05 0 106,000 0 40,000 5 10.00 1/17/05 0 106,000 0
- ----------------- (1) Potential realizable value is based on an assumption that the stock price of the common stock appreciates at the annual rate shown (compounded annually) from the date of grant until the end of the five-year option term for the non-qualified stock options and until the end of the ten-year option term for the incentive stock options. These numbers are calculated based on the requirements promulgated by the Securities and Exchange Commission and do not reflect the Company's estimate of future stock price growth. (2) Options granted to employees during fiscal 1995 totaled 825,400. 28 30 OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, AND FISCAL YEAR END OPTION VALUES (A) (B) (C) (D) (E) NUMBER OF UNEXERCISED VALUE OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT FY-END (1) AT FY-END ($)(1) SHARES ACQUIRED VALUE REALIZED EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE ---- --------------- -------------- ------------- ------------- Leonard A. Stuart 0 0 0 0 Albert F. Barber 0 0 900,000/0 337,500/0 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 0 0 40,000/40,000 45,000/45,000
- ---------------- (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 13, 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 will be employed for a period of five years beginning December 13, 1994 and after expiration of the initial employment term (the "Expiration"), Mr. Stuart's employment will be automatically renewed on an annual basis, subject to termination as described below. Mr. Stuart will be paid an annual salary of $200,000 ("Annual Salary"). In addition, the Company is 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 also is entitled to participate in customary employee benefits programs maintained by the Company, including health, life, and disability insurance to the extent provided to other senior executives of the Company. The Company may terminate the Stuart Agreement at any time for cause and in such event, all of Mr. Stuart's rights to compensation would cease upon his termination. If the termination is without cause, the Company will pay to Mr. Stuart in addition to the amounts accrued in the respective periods prior to the termination, severance pay in an amount equal to the Annual Salary until the later of the Expiration or for one year after the termination of the Stuart Agreement. Mr. Stuart may also terminate the Stuart Agreement for "Good Reason," as defined in the Stuart Agreement. If Mr. Stuart terminates the Stuart Agreement for Good Reason, the Company will pay Mr. Stuart his Annual Salary and any benefits until the later of the Expiration or for one year after termination of the Stuart Agreement. 29 31 The Company also has an employment agreement, dated June 1, 1994, with Albert F. Barber, the Chief Executive Officer and Vice Chairman of the Board (the "Barber Agreement"). Pursuant to the Barber Agreement, Mr. Barber will be employed until December 31, 1996 and subsequent to December 31, 1996, Mr. Barber's employment shall be 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 1995, Mr. Barber received an annual base salary (the "Base Salary") of $300,000 which was increased to $330,000 beginning in 1996. 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 EBIT 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 EBIT Targeted Amount and an additional 2% to 4% of the Base Salary when the Company's EBIT exceeds 105% of the Targeted Amount by a specific percentage. In addition, Mr. Barber was granted options to purchase 900,000 shares of Common Stock subject to various provisions relating to vesting and exercise price. The Company is required to reimburse Mr. Barber for all reasonable out-of-pocket expenses incurred by him in performing his duties and is also entitled to participate in customary employee benefit programs maintained by the Company. 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. COMPENSATION PURSUANT TO PLANS STOCK OPTION PLANS. The Company had three stock option plans under which options can 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. 30 32 EMPLOYEE BENEFIT PLANS. The Company maintains a defined contribution pension plan covering 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 2-1/2% of their wages eligible under the Canadian plan and the Company will match the contribution up to 2-1/2%. Eligible employees may contribute additional amounts in excess of the 2-1/2%, but they are not matched by the Company. During 1995, the Company's contribution to the Canadian Plan was $140,000. COMPENSATION OF DIRECTORS The Company does not currently pay any directors fees; however, all directors are reimbursed travel expenses relating to the attendance of each meeting. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION There are no "interlocks," as defined by the Securities and Exchange Commission with respect to any member of the Compensation Committee. The following non-employee directors served on the Compensation Committee during fiscal 1995: Perry J. Lewis, Sangwoo Ahn and Ira Starr. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of outstanding shares of Common Stock as of March 22, 1996, by (i) each person who is known by the Company to own beneficially five percent or more of the outstanding shares of Common Stock, (ii) the Company's directors, Chief Executive Officer and executive officers whose total compensation exceeded $100,000 for the last fiscal year and (iii) all directors and executive officers as a group. 31 33
Shares Beneficially Percent Name Owned(1) of Class ---- ----- -------- Leonard A. Stuart 1,341,887 20% c/o Stuart Entertainment, Inc. 3211 Nebraska Avenue Council Bluffs, Iowa 51501 Albert F. Barber 900,000 12% c/o Stuart Entertainment, Inc. 3211 Nebraska Avenue Council Bluffs, Iowa 51501 Timothy R. Stuart 295,500 4% Clement F. Chantiam 107,500 2% Perry Lewis(2) 3,915,435 52% c/o MLGA Fund II, L.P. Two Greenwich Plaza Greenwich, Connecticut 06830 Ira Starr(2) 3,907,935 52% c/o MLGA Fund II, L.P. Two Greenwich Plaza Greenwich, Connecticut 06830 Sangwoo Ahn(2)(3) 3,940,435 53% c/o MLGA Fund II, L.P. Two Greenwich Plaza Greenwich, Connecticut 06830 52% Bingo Holdings, Inc. 3,905,435 Two Greenwich Plaza Greenwich, Connecticut 06830 All executive officers and directors as 6,927,822 76% a group (15 persons)
32 34 ----------------- *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 March 22, 1996: Mr. Barber, 900,000 shares, Mr. Leonard A. Stuart, 100,000 shares; Mr. Timothy R. Stuart, 272,500 shares; Mr. Chantiam, 82,500 shares; Mr. Lewis 775,000 shares; Mr. Ahn, 775,000 shares; Mr. Starr 775,000 shares; Bingo Holdings, Inc., 775,000 shares; and all executive officers and directors as a group, 2,427,400 shares. (2) Includes 3,130,435 shares owned by Bingo Holdings, Inc. and 775,000 shares owned by Bingo Holdings, Inc. pursuant to a currently exercisable warrant. The Shareholders of Bingo Holdings, Inc., are MLGA Fund II, L.P. and MLGAL Partners, L.P. 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 Bingo Holdings, Inc. (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. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ACQUISITION OF BINGO PRESS & SPECIALTY LIMITED Pursuant to the LSA Agreement, the Subsidiary acquired 116 Class B shares (the "Class B Shares") of LSA for $30,000,000. Immediately thereafter, LSA purchased from Mr. Stuart 136 Class A shares (the "Class A Shares") of LSA for cancellation at which time the Class B Shares were the only shares of capital stock of LSA outstanding. In exchange for the Class A Shares, LSA paid Mr. Stuart $35,000,000, subject to adjustment, as follows: (i) $30,000,000 in immediately available funds; and (ii) a subordinated note of LSA in the principal amount of $5,000,000 (the "LSA Note"). Following the purchase of the Class A Shares and pursuant to a put agreement executed by the Company and Mr. Stuart, Mr. Stuart exchanged the LSA Note for (i) a senior subordinated note of the Company in the principal amount of $5,000,000, which bears interest at 10% and matures on March 31, 2000 (the "SEI Note") and (ii) warrants to purchase 100,000 shares of the Company's $.01 par value common stock at an exercise price of $5.75 per share. Subsequent to the Acquisition, and pursuant to the results of a post-closing audit, the Company was obligated to pay Mr. Stuart an additional $1,642,000 as a purchase price adjustment. The net balance due Mr. Stuart at December 31, 1995 is $458,000 which will accrue interest at 2 1/4% over the prime rate shown in The Wall Street Journal. The Company received a fairness opinion to the effect that the consideration paid to Mr. Stuart was fair, from a financial point of view to the Company. KENNETH STUART Kenneth Stuart ("K. Stuart") is the brother of Leonard Stuart. K. Stuart is retained by the Company as an independent consultant for sales, marketing and development of ink products. During 1995, K. Stuart earned commissions totaling approximately $221,000. 33 35 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") to Bingo Systems in exchange for a promissory note ("Bingo Systems Note") in the principal amount of $225,000. The Bingo Systems 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 Company's investment in the Bingo Systems stock totaled $150,000. The Bingo Systems Note is secured by: (i) a subordinated security interest in all of the assets of Bingo Systems; (ii) a personal guaranty by the owner of all of the outstanding common stock of Bingo Systems; and (iii) a pledge of all the outstanding common stock of Bingo Systems. The balance of the Bingo Systems Note at December 31, 1995 was $106,000. Sales to Bingo Systems in 1995 totalled approximately $2,750,000. The Company has an inventory purchase agreement with a bank to support Bingo Systems in its bank financing. The agreement provides that in the event that the bank obtains title to the inventory of Bingo Systems 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 the price that Bingo Systems had paid to the Company for such inventory. The Company would have a right of first refusal if the bank receives a bona fide written offer from a third party to purchase the foreclosed inventory. This agreement superseded similar prior agreements between the Company and the bank. CREDIT AGREEMENT In connection with the Company entering into the Fourth Amendment to Credit Agreement with its two major banks, which increased the maximum amount available under the Revolving Facility from $20,000,000 to $23,000,000, Mr. Stuart and MLGAL Partners, Limited Partnership, of which Messrs. Lewis, Ahn and Starr are general partners, guaranteed the payment of all amounts under the Revolving Facility in excess of $20,000,000. OTHER TRANSACTIONS 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 assets sold, the Company received a promissory note ("Bingo Video Note") totaling $262,000. The Bingo Video Note bears interest at a rate of one percent 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 & Associates, Inc., a U.S. company owned by Mr. Stuart. The principal balance of the Bingo Video Note at December 31, 1995 was $173,000. Sales to Bingo Video in 1995 totaled approximately $912,000. Sales to Bingo Video were made at prices generally charged to the Company's largest customers. 34 36 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this Report: 1. FINANCIAL STATEMENTS. See Index to Financial Statements on page F-1 of this Report. 2. FINANCIAL STATEMENT SCHEDULES. See Index to Financial Statements on page F-1 of this Report. All other schedules are omitted since they are not required, are inapplicable, or the required information is included in the financial statements or notes thereto. 3. EXHIBITS. See the Index to Exhibits appearing at the end of this Report. (b) Reports on Form 8-K 1. No reports on Form 8-K were filed during the last quarter of the period covered by this report. 35 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STUART ENTERTAINMENT, INC. Dated: March 25, 1996 By /s/ Timothy R. Stuart -------------------------- Timothy R. Stuart, President Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Leonard A. Stuart Chairman of the Board March 27, 1996 ---------------------------------- Leonard A. Stuart /s/ Albert F. Barber Vice Chairman of the Board and March 27, 1996 ---------------------------------- Chief Executive Officer Albert F. Barber /s/ Timothy R. Stuart President, Chief Operating March 25, 1996 ---------------------------------- Officer and Director Timothy R. Stuart /s/ Paul C. Tunink Vice President Finance, March 25, 1996 ---------------------------------- Treasurer and Paul C. Tunink Chief Financial Officer
36 38 /s/ Perry J. Lewis Director March 27, 1996 ---------------------------------- Perry J. Lewis /s/ Sangwoo Ahn Director March 27, 1996 ---------------------------------- Sangwoo Ahn /s/ Ira Starr Director March 27, 1996 ---------------------------------- Ira Starr
37 39 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AS OF AND FOR YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 PAGE ---- Independent Auditors' Report F-2 Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993 F-3 Consolidated Balance Sheets as of December 31, 1995 and 1994 F-4 to F-5 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 F-7 Notes to Consolidated Financial Statements F-8 to F-34 Financial Statement Schedules: F-35 Schedule II Valuation and Qualifying accounts F-1 40 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 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, 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. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Omaha, Nebraska March 25, 1996 F-2 41 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Dollars in thousands, except per share data)
1995 1994 1993 ---------- ---------- ---------- NET SALES $ 109,882 $ 59,158 $ 53,937 COST OF GOODS SOLD 74,722 42,987 40,167 ---------- ---------- ---------- GROSS MARGIN 35,160 16,171 13,770 OTHER EXPENSES AND INCOME: Selling, general and administrative expenses 26,581 14,323 11,470 Amortization of goodwill 878 96 61 Equity in (earnings) losses of joint ventures (Note 8) (129) 980 705 Termination of Consulting Agreement (Note 10) -- 2,000 -- Interest expense, net 4,448 1,045 775 United Kingdom charge (Note 8) 819 -- -- ---------- ---------- ---------- Other Expenses and Income - Net 32,597 18,444 13,011 ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES 2,563 (2,273) 759 INCOME TAX PROVISION (BENEFIT) (Note 6) 1,777 (665) 247 ---------- ---------- ---------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 786 (1,608) 512 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (Note 1) -- -- 187 ---------- ---------- ---------- NET INCOME (LOSS) $ 786 $ (1,608) $ 699 ========== ========== ========== EARNINGS (LOSS) PER SHARE: (NOTE 1) Income (loss) before cumulative effect of change in accounting principle - primary $ 0.12 $ (0.45) $ .15 Cumulative effect of change in accounting principle -- -- .05 Earnings (loss) per share - primary $ 0.12 $ (0.45) $ .20 ========== ========== ========== Average Common and Common Equivalent Shares Outstanding-primary 6,705,904 3,560,848 3,524,112 ========== ========== ========== Income (loss) before cumulative effect of change in accounting principle - fully dilutive $ 0.11 $ (0.45) $ .15 Cumulative effect of change in accounting principle -- -- .05 ---------- ----------- ---------- Earnings (loss) per share - fully dilutive $ 0.11 $ (0.45) $ .20 ========== =========== ========== Average Common and Common Equivalent Shares Outstanding-fully dilutive 7,053,222 3,560,848 3,524,112 ========== ========== ==========
See Notes to Consolidated Financial Statements. F-3 42 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1994 (Dollars in thousands)
ASSETS 1995 1994 -------- -------- CURRENT ASSETS: Cash $ 943 $ 2,116 Receivables: Trade receivables, less allowance for doubtful accounts of $2,086 and $1,598, respectively: Related parties 1,014 838 Other 17,202 14,163 Current portion of notes receivable, less allowance for doubtful accounts of $199 and $199, respectively: Related parties 30 30 Other 1,123 731 Inventories (Note 3) 21,982 16,103 Refundable income taxes -- 225 Deferred income taxes (Note 6) 1,746 1,665 Prepaid expenses and other 547 388 -------- -------- Total Current Assets 44,587 36,259 PROPERTY, PLANT AND EQUIPMENT (Note 5): Land and buildings 4,950 4,710 Equipment 29,262 24,520 -------- -------- Total 34,212 29,230 Less accumulated depreciation (13,095) (9,387) -------- -------- Property, Plant and Equipment - Net 21,117 19,843 OTHER ASSETS: Notes receivable, less allowance for doubtful accounts of $124 and $423, respectively: Related parties 143 172 Other 1,118 1,194 Goodwill, less accumulated amortization of $1,209 and $426, respectively (Note 2) 29,194 28,958 Investment in joint ventures (Note 8) 56 155 Deferred financing costs, net of accumulated amortization of $375 and $16, respectively 1,660 1,613 Other investments and assets 1,119 783 -------- -------- Total Other Assets 33,290 32,875 -------- -------- TOTAL ASSETS $ 98,994 $ 88,977 ======== ========
See Notes to Consolidated Financial Statements. F-4 43 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1994 (Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994 ------- ------- CURRENT LIABILITIES: Current portion of long-term debt (Note 5) $ 7,897 $ 6,482 Bazaar Purchase Price Adjustment (Note 2) 710 1,642 Trade payables: Related parties -- 276 Other 12,512 10,180 Accrued payroll and benefits 1,967 1,597 Other accrued liabilities 900 1,476 Income taxes payable 543 -- Deferred taxes (Note 6) 40 152 ------- ------- Total Currrent Liabilities 24,569 21,805 LONG-TERM DEBT: (Note 5) Related parties 5,000 5,000 Other 34,586 29,416 ------- ------- Total Long-Term Debt 39,586 34,416 DEFERRED INCOME TAXES (Note 6) 2,594 2,270 DEFERRED INCOME (Note 11) 205 333 COMMITMENTS AND CONTINGENCIES (Note 13) STOCKHOLDERS' EQUITY: (Notes 1, 2, 5 and 7 ) Common stock - $.01 par value; 20,000,000 shares authorized; 6,753,309 and 6,595,048 shares outstanding, respectively 68 66 Additional paid-in capital 26,384 25,776 Retained earnings 5,525 4,739 Treasury stock (56,260 shares at cost) (189) (189) Cumulative translation adjustment, net of deferred income taxes 252 (239) ------- ------- Total Stockholders' Equity 32,040 30,153 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $98,994 $88,977 ======= =======
See Notes to Consolidated Financial Statements. F-5 44 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Dollars in thousands)
ADDITIONAL CUMULATIVE COMMON PAID-IN RETAINED TREASURY TRANSLATION STOCK CAPITAL EARNINGS STOCK ADJUSTMENT TOTAL -------- ---------- ---------- -------- ----------- -------- 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 ======== ======== ======== ======== ======== ========
See Notes to Consolidated Financial Statements. F-6 45 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Dollars in thousands)
1995 1994 1993 ------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 786 $ (1,608) $ 699 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 4,617 1,935 1,593 Amortization of debt financing fees 356 -- -- Provision for doubtful accounts 543 1,287 397 Termination of Consulting Agreement (Note 10) -- 2,000 -- Equity in (earnings) losses of joint ventures (129) 980 705 Deferred income taxes (221) (1,250) 220 Other non-cash expenses - net 508 1,234 204 Change in operating working capital items, net of amounts from acquisitions (Note 14) (7,050) (3,470) (4,143) ------- -------- -------- Net cash provided by (used in) operating activities (1,790) 1,202 (512) 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 -- (609) (246) Capital expenditures (1,317) (818) (254) Proceeds from disposals 138 43 12 Payments received on notes receivable 1,261 1,052 1,031 Investment in joint ventures prior to Acquisition -- (856) (1,028) Cost of acquisition of LSA (274) -- -- Investment in distributor (116) -- (100) Acquisition of Reliable (295) -- -- Other (79) (234) (5) ------- -------- -------- Net cash used in investing activities (682) (30,396) (590) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (payments) on old lines of credit -- (9,651) 2,815 Borrowings under Revolving Facilities 8,052 12,728 -- Costs of debt financing (375) (1,644) -- Proceeds from additions to long-term debt -- 15,000 90 Payments on term facility (3,023) -- -- Payments on long-term debt (3,081) (2,276) (2,059) Payments on LSA Purchase Price Adjustment Proceeds from sale of common stock (Note 2) (932) 18,000 -- Proceeds from issuance of long-term debt 348 -- -- Proceeds from exercise of stock options 277 -- -- Costs of stock issuance paid (6) (1,344) -- Proceeds from other issuances of common stock -- 9 99 ------- -------- -------- Net cash provided by financing activities 1,260 30,822 945 Effect of currency exchange rate changes on cash of foreign subsidiaries 39 (24) -- ------- -------- -------- NET INCREASE (DECREASE) IN CASH 1,173 1,604 (157) CASH AT BEGINNING OF YEAR 2,116 512 669 ------- -------- -------- CASH AT END OF YEAR $ 943 $ 2,116 $ 512 ======= ======== ========
See Notes to Consolidated Financial Statements. F-7 46 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 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 markers, 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, 1995, 1994 and 1993 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 F-8 47 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF ACCOUNTING POLICIES: (CONTINUED) FOREIGN CURRENCY TRANSLATION AND REMEASUREMENT: (CONTINUED) been remeasured at historical exchange rates. Gains and losses from remeasurement are recognized currently in operations. For the years ended December 31, 1995 and 1994, the Company recognized a remeasurement loss of $547,000 and $18,000, 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. 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. F-9 48 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF ACCOUNTING POLICIES: (CONTINUED) INCOME TAXES: (CONTINUED) 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 principle 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, 1995, 1994 and 1993, R&D costs totalling approximately $745,000 , $784,000, and $685,000, 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. F-10 49 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 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 ("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 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. F-11 50 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS: (CONTINUED) BINGO PRESS & SPECIALTY LIMITED: (CONTINUED) 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.
Pro Forma Pro Forma Year Ended Year Ended December 31, December 31, (Dollars in thousands, except per share data) 1994 1993 - --------------------------------------------- ----------- ------------ Net Sales: $ 94,788 $ 90,933 Net Earnings (Loss): $ (807) $ 1,259 Earnings per Share: $ (0.12) $ 0.18 Average Common and Common Equivalent Shares Outstanding 6,537,000 7,016,000
F-12 51 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS: (CONTINUED) BINGO PRESS & SPECIALTY LIMITED: (CONTINUED) 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. 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:
Period from January 1 to Year Ended December 13, December 31, (Dollars in thousands) 1994 1993 ---------------------- ------------ ------------ Sales $1,521 $1,316 Purchases $ 713 $ 212
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 shareholders (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. F-13 52 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS: (CONTINUED) THE RELIABLE CORPORATION OF AMERICA, INC.: (CONTINUED) The Company entered into non-competition 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 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:
(Dollars in thousands) 1995 1994 -------------------- ----------- --------- Raw materials $ 3,517 $ 4,380 Work-in-process 5,056 2,418 Finished goods 13,409 9,305 ----------- --------- Total $ 21,982 $ 16,103 =========== =========
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. F-14 53 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. NOTES PAYABLE TO BANK: (CONTINUED) 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:
(Dollars in thousands) 1995 1994 -------------------- ------- ------- Borrowings under Credit Agreement: Revolving Facility $20,921 $12,601 Term Facility 12,135 14,840 Subordinated note payable to Mr. Stuart 5,000 5,000 Other term loans and mortgages payable to banks 2,064 1,208 Obligations under capital leases 4,669 4,211 Notes payable to others 2,694 3,038 ------- ------- Total 47,483 40,898 Less current portion 7,897 6,482 ------- ------- Total long-term debt $39,586 $34,416 ======= =======
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. F-15 54 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. LONG-TERM DEBT: (CONTINUED): BORROWINGS UNDER CREDIT AGREEMENT: (CONTINUED): 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 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, 1995 and 1994, loans outstanding on the U.S. Revolving Facility totalled $11,540,000 and $4,800,000, respectively, and loans outstanding on the Canadian Revolving Facility totalled C$12,800,000 ($9,381,000) and C$11,000,000 ($7,801,000), 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, 1995 and 1994, loans outstanding on the U.S. Term Facility totalled $4,000,000 and $5,000,000, respectively, and loans outstanding on the Canadian Term Facility totalled C$11,100,000 ($8,135,000) and C$13,875,000 ($9,840,000), 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 $375,000 and $1,644,000 of costs for the years ended December 31, 1995 and 1994, respectively. F-16 55 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. LONG-TERM DEBT: (CONTINUED): SUBORDINATED NOTE PAYABLE TO MR. STUART: 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, 1995 and 1994 was $790,000 and $901,000, 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. 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 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 1995 and 1994, the Company financed the acquisition of property, plant and equipment totalling $2,092,000 and $923,000, 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. F-17 56 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. LONG-TERM DEBT: (CONTINUED): OBLIGATIONS UNDER CAPITAL LEASES: (CONTINUED): Future minimum lease payments under capital leases in effect at December 31, 1995 are as follows:
(Dollars in thousands) -------------------- 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 ========
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%. FUTURE PAYMENTS: Long-term debt, exclusive of obligations under capital leases, matures as follows:
(Dollars in thousands) ---------------------- 1996 $ 6,200 1997 4,137 1998 4,060 1999 22,808 2000 5,201 Thereafter 408 -------- Total $ 42,814 ========
F-18 57 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. LONG-TERM DEBT: (CONTINUED): 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:
(Dollars in thousands) 1995 1994 1993 ---------------------- ------- ------- ------- Domestic $ 2,952 $(1,890) $ 759 Foreign (389) (383) -- ------- ------- ------- Total $ 2,563 $(2,273) $ 759 ======= ======= =======
The income tax provision (benefit) is as follows for the years ended December 31:
(Dollars in thousands) 1995 1994 1993 ---------------------- ------- ------- ------- Current: Federal $ 1,139 $ 475 $ 19 Foreign 755 47 -- State 104 63 8 ------- ------- ------- Total 1,998 585 27 ------- ------- ------- Deferred: Domestic (155) (1,025) 220 Foreign (66) (225) -- ------- ------- ------- Total (221) (1,250) 220 ------- ------- ------- Total Provision(Benefit) $ 1,777 $ (665) $ 247 ======= ======= =======
F-19 58 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. INCOME TAX PROVISION (BENEFIT): (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:
1995 1994 1993 ----- ------ ------ 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 4.5 (.8) -- Valuation reserve for excess losses of U.K. venture 17.0 7.4 -- Goodwill amortization 10.1 1.5 3.0 Research and development credits -- (2.1) (7.5) Other 1.4 .7 .8 ----- ------ ----- Effective tax rate 69.3% (29.3%) 32.6% ===== ====== =====
Deferred tax assets and (liabilities) are comprised of the following at December 31:
(Dollars in thousands) 1995 1994 - ---------------------- -------- -------- Current Deferred Income Tax Assets: Allowance for doubtful accounts $ 458 $ 571 Inventory reserves and adjustments 436 327 Non-deductible accrued liabilities 803 767 Other 49 -- -------- -------- $ 1,746 $ 1,665 ======== ======== Current Deferred Income Tax Liability: Write-up of Canadian inventory (from purchase accounting) $ (40) $ (152) ======== ======== Non-Current Deferred Income Tax Liabilities: Difference in basis of property and equipment $ (2,495) $ (2,429) Other 43 25 Cumulative translation adjustment (142) 134 Excess losses of U.K. venture 758 322 Valuation reserve (758) (322) -------- -------- Total $ (2,594) $ (2,270) ======== ========
F-20 59 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. INCOME TAX PROVISION (BENEFIT): (CONTINUED): 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. 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. F-21 60 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. STOCK OPTION PLANS: (CONTINUED): A summary of stock option activity during the three years ended December 31 is as follows:
1995 1994 1993 ---------- ---------- ---------- Outstanding at beginning of year 1,280,250 396,717 194,625 Options granted 824,400 900,000 244,800 Options exercised (102,609) (3,000) (35,008) Options cancelled (119,875) (13,467) (7,700) ---------- ---------- ---------- Outstanding at end of year 1,882,166 1,280,250 396,717 ========== ========== ========== Range of option prices per share outstanding $2.25 - $20.00 $2.25 - $20.00 $2.25 - $7.625 ============== ============== ==============
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 1995, 1994 and 1993, the Company recognized tax benefits of $25,000, $0 and $55,000, respectively, related to compensation expense recognized for tax purposes on non-qualified stock options exercised during 1995, 1994 and 1993. 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 1995, 1994 and 1993, the Company recognized compensation expense and additional paid-in capital for financial statement purposes of $19,000, $51,000 and $55,000, respectively, based on the dates the options were exercisable. F-22 61 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 1995, 1994, and 1993, 100%, 99%, and 98%, 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. During the period from January 1, 1994 to December 13, 1994 and for the year ended December 31, 1993, the Company recognized losses related to its investment in Stuart Entertainment Mexico of $570,000, and $555,000, 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: (Dollars in thousands) 1994 1993 ---------------------- ------ ------ Total revenues $2,244 $2,086 Gross margin 641 783 Net income (loss) (591) (583)
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. During the period from January 1, 1994 to December 13, 1994 and for the year ended December 31, 1993, the Company recognized losses related to its investment in Stuart Entertainment Limited of $415,000 and $150,000, 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. 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 markers. The Company recorded a F-23 62 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INVESTMENTS IN JOINT VENTURES: (CONTINUED) STUART ENTERTAINMENT LIMITED: (CONTINUED): 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:
(Dollars in thousands) 1994 1993 ---------------------- ------ ------ Total revenues $1,128 $ 169 Gross margin (119) (22) Net income (loss) (919) (324)
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, 1995 and 1994 was $259,000 and $155,000, respectively. For the year ended December 31, 1995, and the period from December 14, 1994 to December 31, 1994, the Company recorded equity in earnings of $98,000 and $5,000, respectively, on its investment and had sales of $1,777,000 and $93,000, respectively, to British Bazaar. The Company guaranteed British Bazaar's operating line of credit at December 31, 1995 and 1994 in the amount of C$350,000 ($248,000) and C$350,000 ($248,000), respectively. F-24 63 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 1995, 1994, and 1993 were $2,541,000, $2,047,000, and $1,991,000, 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, 1995, 1994 and 1993, the Company recognized royalty income from Lachman of $248,000, $268,000 and $208,000, 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. 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, 1995, 1994 and 1993, Ken Stuart earned commissions of $221,000, $292,000 and $156,000, respectively. F-25 64 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. RELATED PARTY TRANSACTIONS: (CONTINUED) 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, 1995 and 1994 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, 1995, 1994, and 1993, sales to Bingo Systems totalled $2,750,000, $2,791,000, and $2,453,000, 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, 1995, 1994 and 1993, sales to Bingo Video totalled $912,000, $572,000, and $610,000, respectively. F-26 65 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. RELATED PARTY TRANSACTIONS: (CONTINUED) 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 shareholders, 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. 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, 1995 and 1994 was $800,000 and $1,000,000, 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. F-27 66 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 1995, 1994 and 1993, the Company's contributions were $157,000, $165,000, and $151,000, 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. Future minimum lease payments under operating leases in effect at December 31, 1995 are approximately as follows:
(Dollars in thousands) ---------------------- 1996 $1,958 1997 972 1998 811 1999 483 2000 483 ------ Total $4,707 ======
Rental expense for the years ended December 31, 1995, 1994 and 1993 was $1,072,000, $841,000, and $736,000, respectively. F-28 67 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. COMMITMENTS AND CONTINGENCIES: (CONTINUED) 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 $0, $216,000, and $88,000 in 1995, 1994 and 1993, 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, 1995 and 1994, the Company had aggregate trade receivables and notes receivable from significant customers as follows:
Number of Aggregate Range of (Dollars in thousands) Customers Receivables Individual Balances - ---------------------- --------- ----------- ------------------- December 31, 1995: United States 6 $3,475 $314 - $ 827 Canada 6 $3,064 $156 - $1,005 December 31, 1994: United States 6 $4,049 $312 - $1,387 Canada 4 $1,979 $413 - $ 639
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-29 68 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. SUPPLEMENTAL CASH FLOW INFORMATION: OTHER CASH PAYMENTS AND RECEIPTS:
Years Ended December 31, ------------------------------- (Dollars in thousands) 1995 1994 1993 - ---------------------- ------ ------ ------ Cash payment for interest $3,551 $1,087 $ 908 Cash payment for income taxes 1,651 1,155 628 Income tax refunds received 474 417 --
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:
Years Ended December 31, ------------------------------------------ (Dollars in thousands) 1995 1994 1993 - ---------------------- -------- -------- -------- Trade receivables $ (3,960) $ (462) $ (2,059) Inventories (4,905) (2,660) (1,316) Recoverable income taxes 225 (365) (628) Prepaid expenses (133) 49 (46) Trade payables 1,268 (940) (404) Accrued liabilities (88) 908 310 Income Taxes Payable 543 -- -- -------- -------- -------- Total Changes in Operating Capital Items $ (7,050) $ (3,470) $ (4,143) ======== ======== ========
NON-CASH INVESTING AND FINANCING TRANSACTIONS: During the years ended December 31, 1995, 1994 and 1993, the Company financed the acquisition of equipment totalling $2,092,000, $923,000, and $956,000, 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) F-30 69 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NON-CASH INVESTING AND FINANCING TRANSACTIONS: (CONTINUED): 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 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. 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-31 70 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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, 1995 and 1994 are as follows:
(Dollars in thousands) 1995 1994 - ---------------------- --------- --------- NET SALES: United States: Domestic Customers $ 64,112 $ 53,734 Foreign Customers 1,398 3,611 Canada 43,110 1,742 United Kingdom 1,262 71 --------- --------- Total $ 109,882 $ 59,158 ========= ========= INCOME (LOSS) BEFORE INCOME TAXES: United States $ 2,952 $ (1,890) Canada 1,773 (301) United Kingdom (2,162) (82) --------- --------- Income (Loss) before Income Taxes $ 2,563 $ (2,273) ========= ========= IDENTIFIABLE ASSETS: United States $ 45,437 $ 39,299 Canada 48,912 44,667 United Kingdom 1,731 2,387 Mexico 2,914 2,624 --------- --------- Total $ 98,994 $ 88,977 ========= ========= CAPITAL EXPENDITURES: United States $ 706 $ 748 Canada 611 70 United Kingdom -- -- Total $ 1,317 $ 818 ========= ========= DEPRECIATION AND AMORTIZATION: United States $ 2,980 $ 1,873 Canada 1,405 58 United Kingdom 232 4 --------- --------- Total $ 4,617 $ 1,935 ========= =========
F-32 71 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. GEOGRAPHIC FINANCIAL INFORMATION: (CONTINUED) 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 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, 1995, and 1994 (amounts in thousands, except per share amounts):
First Second Third Fourth Quarter Quarter Quarter Quarter Total --------- --------- --------- --------- --------- 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 .04 (.08) .08 .08 .12 Fully dilutive .04 (.08) .08 .07 .11 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 .15 .13 .06 (.70) (.45) Fully dilutive .15 .13 .06 (.70) (.45)
F-33 72 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED): (CONTINUED) 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-34 73 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Dollars in thousands)
Balance at Charged to Net Balance at Beginning Costs and Changes from Net End of of Year Expenses Acquisitions Charge-Offs Year ---------- ---------- ------------ ----------- ------- 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 ======== ======== ====== ======= ======= 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, 1993: Allowance for Doubtful Accounts $ 522 $ 397 $ - $ (311)* $ 608 ======== ======== ====== ======= =======
* For the years ended December 31, 1995, 1994 and 1993, "Net Charge-Offs" consists of write-offs of trade and notes receivable, net of subsequent collections. F-35 74 EXHIBIT INDEX Certain of the following exhibits, designated with an asterisk (*), are filed herewith. The exhibits not so designated have been filed previously and are incorporated herein by reference to the documents indicated in brackets following the descriptions of such exhibits.
Exhibit No. Description Page ----------- ----------- ---- 3.1 Certificate of Incorporation of the Company, as amended.(7) 3.2 Amended and Restated Bylaws of the Company.(7) 4.1 Form of Common Stock Certificate.(6) 4.2 Securityholders' Agreement, dated December 13, 1994, between Leonard A. Stuart, Bingo Holdings, Inc. and the Company.(7) +10.1 Incentive Stock Option Plan of the Company.(1) +10.2 Non-Qualified Stock Option Plan of the Company.(2) 10.3 Lease, dated August 14, 1986, between William E. Osband, Jr. and the Company.(3) 10.4 Lease, dated February 5, 1993, between Fraccionadora Industrial Del Norte, S.A. de C.V. and Stuart Entertainment, S.A. de C.V.(4) +10.5 1992 Non-Qualified Stock Option Plan of Stuart Entertainment, Inc.(4) +10.6 1992 Incentive Stock Option Plan of Stuart Entertainment, Inc.(4) +10.7 1994 Performance Stock Option Plan of Stuart Entertainment, Inc.(6) 10.8 Agency Agreement, dated March 14, 1993, between Gala Leisure Limited, Mitre Printing Company Limited, Bingo Press & Specialty Limited and the Company.(5) 10.9 Consulting Agreement, dated April 4, 1993, between John Douville, Video Gaming Systems of America, Inc. and Video King Gaming Systems, Inc. (the "Consulting Agreement") (5)
75
Exhibit No. Description Page ----------- ----------- ---- +10.10 Employment Agreement, dated December 13, 1994, between Leonard A. Stuart and the Company.(7) +10.11 Employment Agreement, dated June 1, 1994, between Albert F. Barber and the Company.(7) 10.12 Credit Agreement, dated December 13, 1994, between the Company, 1089350 Ontario, Inc., Bank of America National Trust and Savings Association, as U.S. Agent and Bank of America Canada, as Canadian Agent and certain other financial institutions.(7) 10.13 Warrant Certificate, dated December 13, 1994, issued by the Company to Leonard A. Stuart.(7) 10.14 Warrant Certificate, dated December 13, 1994, issued by the Company to Bingo Holdings, Inc.(7) 10.15 Subordinated Note, dated December 13, 1994, in the amount of $5,000,000 issued by the Company to Leonard A. Stuart.(7) 10.16 Agreement, dated December 7, 1994, between the Company, Video King Gaming Systems, Gaming USA, Inc., Video Gaming Systems of America, Inc. and John Douville terminating the Consulting Agreement.(7) 10.17 Waiver and First Amendment to Credit Agreement, dated as of April 14, 1995.(8) 10.18 Waiver and Second Amendment to Credit Agreement, dated as of August 31, 1995.(9) 10.19 Third Amendment to Credit Agreement, dated as of August 31, 1995.(9) 10.20 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.(9)
76
Exhibit No. Description Page ----------- ----------- ---- 10.21 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.(9) 10.22 Fourth Amendment to Credit Agreement, dated as of December 18, 1995.* 10.23 Guarantee Agreement executed by MLGAL Partners, Limited Partnership, and Leonard A. Stuart.* 11 Statement regarding Computation of Per Share Earnings.* 21 Subsidiaries of the Registrant.* 23 Consent of Deloitte & Touche LLP* 27 Financial Data Schedule.*
____________________ * Filed herewith. + Constitutes a compensatory plan or arrangement required to be filed as an exhibit to this form. (1) Incorporated by reference to the Company's Registration Statement on Form S-1, File No. 73746, filed August 20, 1981. (2) 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. (3) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, File No. 0-10737. (4) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 0-10737. (5) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 0-10737. (6) Incorporated by reference to the Company's Registration Statement on Form S-8, File No. 33-89962. (7) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, file No. 0-10737. (8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, file No. 0-10737. (9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, file No. 0-10737. EX-10.22 2 4TH AMENDMENT TO CREDIT AGREEMENT 1 EXHIBIT 10.22 FOURTH AMENDMENT TO CREDIT AGREEMENT This Fourth Amendment to Credit Agreement, dated as of December 18, 1995 (the "Agreement") is among Stuart Entertainment, Inc., a Delaware corporation (the "U.S. Company"), Bingo Press & Specialty Limited (formerly known as 1089350 Ontario Inc.), an Ontario corporation (the "Canadian Company"), Bank of America National Trust and Savings Association, as U.S. Agent, Bank of America Illinois, as a U.S. Lender, The Chase Manhattan Bank, National Association, as a U.S. Lender, Bank of America Canada, as Canadian Agent and a Canadian Lender, and The Chase Manhattan Bank of Canada, as a Canadian Lender. W I T N E S S E T H: WHEREAS, the U.S. Company, the Canadian Company, the U.S. Agent, the U.S. Lenders, the Canadian Agent and the Canadian Lenders are parties to that certain Credit Agreement dated as of December 13, 1994 (as amended, the "Credit Agreement") and to certain other documents executed in connection with the Credit Agreement; WHEREAS, the U.S. Company and the Canadian Company have requested certain amendments to the Credit Agreement, and the Agents and Lenders have agreed to such amendments as provided herein. NOW, THEREFORE, the parties hereto agree as follows: Section 1. DEFINITIONS. Capitalized terms used and not otherwise defined herein shall have the meanings given to such terms in the Credit Agreement. Section 2. AMENDMENTS TO THE CREDIT AGREEMENT. Subject to the satisfaction of the conditions precedent set forth in Section 3 below, the Credit Agreement is hereby amended as follows: (a) A new defined term "Aggregate Additional Amount" is added to Section 1.01 of the Credit Agreement as follows: "Aggregate Additional Amount" means the sum of the Canadian Additional Amount (with the Canadian Additional Amount expressed in U.S. Dollars at the Closing Date Exchange Rate) and the U.S. Additional Amount; provided that the Aggregate Additional Amount shall be permanently reduced to U.S. $0 as of December 31, 1996. (b) The definition of "Aggregate Revolving Commitment" set forth in Section 1.01 of the Credit Agreement is amended and restated in its entirety as follows: "Aggregate Revolving Commitment" means the combined Revolving Commitments of the Lenders (with the amounts of the Commitments of the 1 2 Canadian Lenders expressed in U.S. Dollars at the Closing Date Exchange Rate), which equals the sum of the amount of Twenty Million U.S. Dollars (U.S. $20,000,000) plus the Aggregate Additional Amount, as such sum may be reduced from time to time pursuant to this Agreement. (c) A new defined term "Borrowing Base" is added to Section 1.01 of the Credit Agreement as follows: "Borrowing Base" means the amount calculated for the Companies, with all Canadian Dollar values expressed in U.S. Dollars at the Closing Date Exchange Rate, based upon a formula set forth in a letter delivered by Agents and Lenders on or before February 28, 1996 as more fully described in Section 2.18, less such reserves as Agents and Lenders may create from time to time in their reasonable judgment. Until the Borrowing Base is established, the Borrowing Base shall be deemed to equal the Aggregate Revolving Commitment of the Lenders. (d) A new defined term "Borrowing Base Certificate" is added to Section 1.01 of the Credit Agreement as follows: "Borrowing Base Certificate" means a certificate duly completed and executed by an authorized officer of each Company, in form and substance acceptable to Agents and Lenders. (e) A new defined term "Canadian Additional Amount" is added to Section 1.01 of the Credit Agreement as follows: "Canadian Additional Amount" means the Canadian Dollar equivalent of One Million U.S. Dollars (U.S. $1,000,000) (with such Canadian Dollar equivalent calculated using the Closing Date Exchange Rate) plus any additional amount designated by the Canadian Company in writing to the Agents as a Canadian Additional Amount in accordance with Section 2.17, provided that the Canadian Additional Amount shall be permanently reduced to U.S. $0 as of December 31, 1996. (f) The defined term "Leverage Reserve" set forth in Section 1.01 is hereby deleted. (g) A new defined term "Loan Parties" is added to Section 1.01 of the Credit Agreement as follows: "Loan Parties" means, collectively, Morgan, Stuart and each Significant Subsidiary, and the term "Loan Party" shall refer to any one of them; provided, 2 3 that neither Morgan nor Stuart shall be deemed to be a Loan Party at such time that the Morgan and Stuart Guaranty has been terminated. (h) A new defined term "Morgan" is added to Section 1.01 of the Credit Agreement as follows: "Morgan" means MLGAL Partners, Limited Partnership, a Connecticut limited partnership. (i) A new defined term "Morgan and Stuart Guaranty" is added to Section 1.01 of the Credit Agreement as follows: "Morgan and Stuart Guaranty" means that certain Guaranty dated December 18, 1995 made jointly and severally by Morgan and Stuart in favor of Agents and Lenders. (j) A new defined term "Non-Use Fee Revolving Commitment Amount" is added to Section 1.01 of the Credit Agreement as follows: "Non-Use Fee Revolving Commitment Amount" means the amount by which Twenty-Five Million U.S. Dollars (U.S. $25,000,000) exceeds the Aggregate Revolving Commitment; provided that the Non-Use Fee Revolving Commitment Amount shall be permanently reduced to U.S. $0 as of December 31, 1996. (k) The definition of "Revolving Commitment" set forth in Section 1.01 of the Credit Agreement is amended and restated in its entirety as follows: "Revolving Commitment" means, (i) with respect to a U.S. Lender, the amount set forth as such Lender's Revolving Commitment in that certain Assignment and Assumption Agreement dated August 31, 1995 between Bank of America Illinois and The Chase Manhattan Bank, National Association, plus such Lender's Commitment Percentage of the U.S. Additional Amount, as such amounts may be reduced pursuant to Section 2.05 or as a result of additional assignments pursuant to Section 10.08, and (ii) with respect to a Canadian Lender, the amount set forth as such Lender's Revolving Commitment in that certain Assignment and Assumption Agreement dated August 31, 1995 between Bank of America Canada and The Chase Manhattan Bank of Canada, plus such Lender's Commitment Percentage of the Canadian Additional Amount, as such amounts may be reduced pursuant to Section 2.05 or as a result of additional assignments pursuant to Section 10.08. (l) A new defined term "U.S. Additional Amount" is added to Section 1.01 of the Credit Agreement as follows: 3 4 "U.S. Additional Amount" means Two Million U.S. Dollars (U.S. $2,000,000) plus any additional amount designated by the U.S. Company in writing to the Agents as a U.S. Additional Amount in accordance with Section 2.17, provided that the U.S. Additional Amount shall be permanently reduced to U.S. $0 as of December 31, 1996. (m) Section 2.01(b) is amended and restated in its entirety as follows: (b) The Revolving Credit. Subject to the terms and conditions hereafter set forth, Loans (each such Loan, a "Revolving Loan") will be made to each Company by each of its Applicable Lenders and Letters of Credit will be issued to each Company by its Applicable Issuer (in which Letters of Credit each of such Company's Applicable Lenders will participate pursuant to Section 2.15) from time to time on any Business Day during the period from the Closing Date to the Revolving Termination Date, in an aggregate amount of such Loans and participations not to exceed at any time outstanding such Applicable Lender's Revolving Commitment; provided, however, that, after giving effect to any Borrowing of Revolving Loans or issuance of any Letters of Credit, the aggregate principal amount of all outstanding Revolving Loans and the aggregate undrawn face amount of all Letters of Credit (with the amounts of the Revolving Loans to the Canadian Company and Letters of Credit issued for the account of the Canadian Company expressed in U.S. Dollars at the Closing Date Exchange Rate) shall not exceed the lesser of (i) the Borrowing Base and (ii) Aggregate Revolving Commitment. Each Company may borrow under this subsection 2.01(b), prepay pursuant to Section 2.06 and reborrow pursuant to this subsection 2.01(b), within the limits of the Revolving Commitments of such Company's Applicable Lenders and subject to the other terms and conditions hereof. The obligations of each Lender under this subsection 2.01(b) are several and not joint and the failure of any Lender to fulfill its obligations hereunder shall not result in any liability to any other Lenders. The Revolving Loans to the Canadian Company will be made, and the Letters of Credit for the account of the Canadian Company will be issued, in Canadian Dollars, and the Revolving Loans to the U.S. Company will be made, and the Letters of Credit for the account of the U.S. Company will be issued, in U.S. Dollars. (n) Section 2.07(c) of the Credit Agreement is amended and restated as follows: (c) Revolving Loans in Excess of the Aggregate Revolving Commitment or Borrowing Base. If at any time, the aggregate principal amount of all outstanding Revolving Loans and the aggregate undrawn face amount of all Letters of Credit (with the amounts of the Revolving Loans to the Canadian Company and Letters of Credit issued for the account of the Canadian Company expressed in U.S. Dollars at the Closing Date Exchange Rate) exceeds the 4 5 Aggregate Revolving Commitment, the U.S. Company shall, within 20 days after written notice from the U.S. Agent, make a prepayment of the Revolving Loans owing by the U.S. Company in an aggregate amount equal to such excess, unless doing such 20-day period such excess is otherwise reduced to zero. If, at any time after February 28, 1996, the aggregate principal amount of all outstanding Revolving Loans and the aggregate undrawn face amount of all Letters of Credit (with the amounts of the Revolving Loans to the Canadian Company and Letters of Credit issued for the account of the Canadian Company expressed in U.S. Dollars at the Closing Date Exchange Rate) exceeds the Borrowing Base, the Companies shall immediately repay such excess; provided, that if such excess exists before April 30, 1996, the Companies shall repay such excess in full by making consecutive equal monthly installments each in the amount of one-ninth of such excess, commencing on April 30, 1996 and continuing on the last day of each calendar month thereafter until the earlier of December 31, 1996 or the date the Companies are in compliance with the Borrowing Base. (o) Section 2.10(b) is amended and restated in its entirety as follows: (b) Non-Use Fees. The Canadian Company shall pay to the Canadian Agent for the account of each of its Canadian Lenders a non-use fee on the average daily unused portion of such Lender's Revolving Commitment, computed on a quarterly basis in arrears on the last Business Day of each calendar quarter based upon the daily utilization for that quarter as calculated by the Canadian Agent, equal to the Applicable Margin for Non-Use Fees then in effect. The U.S. Company shall pay to the U.S. Agent for the account of each of its U.S. Lenders a non-use fee on the average daily unused portion of the sum of (i) such Lender's Revolving Commitment, plus (ii) an amount equal to the Non-Use Fee Revolving Commitment Amount multiplied by such Lender's Commitment Percentage, computed on a quarterly basis in arrears on the last Business Day of each calendar quarter based upon the daily utilization for that quarter as calculated by the U.S. Agent, equal to the Applicable Margin for Non-Use Fees then in effect. Such non-use fees shall accrue from the Closing Date to the Revolving Termination Date and shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter commencing on March 31, 1995 through the Revolving Termination Date, with the final payment to be made on the Revolving Termination Date; provided, that, in connection with any termination of Commitments pursuant to Section 2.05, the accrued non-use fee calculated for the period ending on such date shall also be paid on the date of such termination. (p) A new Section 2.17 is added to the Loan Agreement as follows: Section 2.17. Additional Amounts. At any time after the Borrowing Base has been established, upon five (5) Business Days' prior written notice to the 5 6 Agents, the U.S. Company may elect to increase the U.S. Additional Amount and the Canadian Company may elect to increase the Canadian Additional Amount in increments of One Million U.S. Dollars (U.S. $1,000,000), provided that (i) no Event of Default then exists, (ii) the Aggregate Additional Amount shall not exceed Five Million U.S. Dollars (U.S. $5,000,000) at any time, and (iii) the "Maximum Amount" (as defined in the Morgan and Stuart Guaranty) shall equal or exceed the Aggregate Additional Amount at all times. Prior to the effectiveness of such increase, each Company shall execute such Revolving Notes, amendments to mortgages and other documents as its Applicable Agent and Lenders deem necessary. (q) A new Section 2.18 is added to the Loan Agreement as follows: Section 2.18. Borrowing Base. On or before February 28, 1996, Agents and Lenders shall deliver to Companies a letter that sets forth the Borrowing Base for the Companies determined with respect to the accounts receivable and inventory of the Companies, against which Revolving Loans and Letters of Credit issued for the account of the Companies will be predicated. In connection therewith, the Agents and Lenders will reasonably determine the eligibility criteria and advance rates pertaining to such borrowing base. Without limiting Agents' and Lenders' reasonable discretion to establish such borrowing base, (i) contra accounts, disputed accounts, accounts past invoice and/or due date by a certain number of days to be determined by Agents and Lenders, affiliated accounts, non-creditworthy accounts, accounts exceeding a cross-age percentage to be determined by Agents and Lenders and accounts not subject to an enforceable first priority Lien in favor of Agents shall not be eligible, (ii) obsolete inventory, slow-moving inventory, consignment inventory, unsaleable inventory and inventory not subject to an enforceable first priority Lien in favor of Agents shall not be eligible, (iii) the advance rate with respect to accounts of a Company shall take into account such Company's dilution experience and the general creditworthiness of its account debtors and (iv) the advance rate with respect to the inventory of a Company shall take into account the turnover of such inventory and the liquidation value of such inventory. Agents may, in their discretion, create reserves against the availability under the Borrowing Base as they deem necessary in their reasonable judgment. The Companies shall execute such documents, if any, as Agents deem necessary to incorporate the Borrowing Base into this Agreement and the other Loan Documents at such time as such Borrowing Base is finally determined by Agents and Lenders. (r) A new subsection (f) is added to Section 6.01 of the Credit Agreement as follows: (f) As soon as available, but in any event no later than 30 days after the end of each month commencing with the month ending February 28, 1996, 6 7 a Borrowing Base Certificate calculating the Borrowing Base as of the last day of such month. (s) Section 8.01(e) of the Credit Agreement is amended and restated as follows: (e) Cross-Default. A Company or any Loan Party (i) fails to make any payment in respect of any Indebtedness or Contingent Obligation having an aggregate principal amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than One Million Canadian Dollars (Cdn $1,000,000) in the case of the Canadian Company or any Loan Party (other than Morgan or Stuart), or One Million U.S. Dollars (U.S. $1,000,000) in the case of the U.S. Company or any Loan Party (other than Morgan, Stuart or the U.S. Company's Subsidiaries organized under the laws of Canada or any province thereof), or Two Million U.S. Dollars (U.S. $2,000,000) in the case of Morgan or Stuart when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure continues after the applicable grace or notice period, if any, specified in the document relating thereto on the date of such failure; or (ii) fails to perform or observe any other condition or covenant, or any other event shall occur or condition exist, under any agreement or instrument relating to any such Indebtedness or Contingent Obligation, and such failure continues after the applicable grace or notice period, if any, specified in the document relating thereto on the date of such failure if the effect of such failure, event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Indebtedness (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause such Indebtedness to be declared to be due and payable prior to its stated maturity, or such Contingent Obligation to become payable or cash collateral in respect thereof to be demanded; or (t) Section 8.01(f) of the Credit Agreement is amended and restated as follows: (f) Insolvency Voluntary Proceedings. A Company or any Loan Party (i) generally fails to pay its debts as they become due, subject to applicable grace periods, if any, whether at stated maturity or otherwise; (ii) voluntarily ceases to conduct its business in the ordinary course; (iii) commences any Insolvency Proceeding with respect to itself; or (iv) takes any action to effectuate or authorize any of the foregoing; or (u) Section 8.01(g) of the Credit Agreement is amended and restated as follows: (g) Involuntary Proceedings. (i) Any involuntary Insolvency Proceeding is commenced or filed against a Company or any Loan Party, or any 7 8 writ, judgment, warrant of attachment, execution or similar process, is issued or levied against a substantial part of a Company's or any Loan Party's Property, and any such proceeding or petition shall not be dismissed, or such writ, judgment, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded within 60 days after commencement, filing or levy; (ii) a Company or any Loan Party admits the material allegations of a petition against it in any Insolvency Proceeding, or an order for relief (or similar order under non-U.S. law) is ordered in any Insolvency Proceeding; or (iii) a Company or any Loan Party acquiesces in the appointment of a receiver, trustee, custodian, conservator, liquidator, mortgagee in possession (or agent therefor), or other similar Person for itself or a substantial portion of its Property or business; (v) Section 8.01(h) of the Credit Agreement is amended and restated as follows: (h) Monetary Judgments. One or more judgments, non-interlocutory orders, decrees or arbitration awards shall be entered against a Company or any Loan Party involving in the aggregate a liability (not covered by independent third party insurance) as to any single or related series of transactions, incidents or conditions, of One Million Canadian Dollars (Cdn $1,000,000) or more in the case of the Canadian Company or any Loan Party (other than Morgan or Stuart), or One Million U.S. Dollars (U.S. $1,000,000) or more in the case of the U.S. Company or any Loan Party (other than Morgan, Stuart or the U.S. Company's Subsidiaries organized under the laws of Canada or any province thereof) or Two Million U.S. Dollars (U.S. $2,000,000) in the case of Morgan or Stuart, and the same shall remain unsatisfied, unvacated and unstayed pending appeal for a period of 30 days after the entry thereof; or (w) Section 8.01(i) of the Credit Agreement is amended and restated as follows: (i) Non-Monetary Judgments. Any non-monetary judgment, order or decree shall be rendered against a Company or any Loan Party which does or could reasonably be expected to have a Material Adverse Effect, and there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (x) A new Section 8.01(n) is added to the Credit Agreement as follows: (n) Morgan or Stuart Defaults. If either Morgan or Stuart shall fail in any respect to perform or observe any term, covenant or agreement in the Morgan and Stuart Guaranty; or the Morgan and Stuart Guaranty shall for any 8 9 reason be partially (including with respect to future advances) or wholly revoked or invalidated, or otherwise cease to be in full force and effect except in accordance with its terms, or either Morgan or Stuart shall contest in any manner the validity or enforceability thereof; Section 3. CONDITIONS TO EFFECTIVENESS. This Agreement, including the amendments and other terms set forth herein, shall become effective as of the date of this Agreement upon the payment of the fees and expenses set forth in Section 4 below which are due and payable on the date of this Amendment and the satisfaction of all of the following conditions precedent, all of which must be satisfactory to each Agent and Lender in each of their sole discretion: (a) Revolving Notes. Each Lender shall have received the originally executed Revolving Note payable to such Lender which reflects the increased Revolving Commitment, if any, to such Lender. (b) Guaranty. U.S. Agent and Canadian Agent shall have each received an originally executed joint and several guaranty from MLGAL Partners, Limited Partnership, a Connecticut limited partnership ("Morgan"), and Leonard A. Stuart ("Stuart"). (c) Amendment to Mortgage. U.S. Agent shall have received a First Amendment to Leasehold Mortgage pertaining to 3319 Nebraska Avenue, Council Bluffs, Iowa, a First Amendment to Junior Mortgage pertaining to Council Bluffs, Iowa, a Second Amendment to Leasehold Mortgage pertaining to 3215 Nebraska Avenue, Council Bluffs, Iowa and a First Amendment to Leasehold Deed of Trust and Assignment of Rents pertaining to Littleton, Colorado. (d) Opinions of Counsel. U.S. Agent shall have received the Opinion of counsel to Morgan and the Opinion of counsel to Stuart. (e) Resolutions. U.S. Agent shall have received the resolutions of the board of directors, or the authorization of the partnership, as applicable, of each of Morgan, U.S. Company and Canadian Company as to the documents entered into by each company. (f) Financial Statements. U.S. Agent shall have received the (i) audited December 31, 1994 financial statements of Morgan, and (ii) financial statements of Stuart, certified as true and accurate by Stuart. Section 4. FEES AND EXPENSES; DATE DOWN ENDORSEMENTS. (a) Amendment Fee. The U.S. Company and Canadian Company shall pay to U.S. Agent, for the account of U.S. Lenders, an amendment fee of Ninety Thousand U.S. Dollars (U.S. $90,000), which fee shall be fully earned and payable as of the date 9 10 hereof. The U.S. Company and Canadian Company also shall pay to U.S. Agent, for the account of U.S. Lenders, an amendment fee, which shall be fully earned and payable on each date on which there is an increase in the Aggregate Additional Amount, equal to three percent (3.0%) of the amount of such increase. (b) Audit Fees. The U.S. Company and Canadian Company agree to pay U.S. Agent for all audit fees incurred by U S. Agent in connection with the establishment of a borrowing base as contemplated by Section 2.17 of the Credit Agreement. (c) Costs, Expenses and Taxes. Each Company affirms and acknowledges that Section 10.04 of the Credit Agreement applies to this Agreement and the transactions and agreements and documents contemplated hereunder. (d) Date Down Endorsements. Within 60 days following the date hereof, the U.S. Company shall cause to be delivered to the U.S. Agent date down title endorsements, in form and substance satisfactory to the U.S. Agent, with respect to the amendments described in Section 3(c) above. Section 5. REPRESENTATIONS AND WARRANTIES. To induce Lenders to enter into this Agreement, each Company represents and warrants to Lenders that the execution, delivery and performance by such Company of this Agreement are within its corporate powers, have been duly authorized by all necessary corporate action (including, without limitation, shareholder approval), have received all necessary governmental approval (if any shall be required), and do not and will not contravene or conflict with any provision of law applicable to such Company, the Organization Documents of such Company, or any order, judgment or decree of any court or other agency of government or any Contractual Obligation binding upon such Company; and the Credit Agreement as amended as of the date hereof is the legal, valid and binding obligation of such Company enforceable against such Company in accordance with its terms. Section 6. MISCELLANEOUS. (a) Captions. Section captions used in this Agreement are for convenience only, and shall not affect the construction of this Agreement. (b) Governing Law. This Agreement shall be a contract made under and governed by the laws of the State of Illinois, without regard to conflict of laws principles. Whenever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. (c) Counterparts. This Agreement may be executed in any number of counterparts and by the different parties on separate counterparts, and each such 10 11 counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement. (d) Successors and Assigns. This Agreement shall be binding upon the Companies, Agents and Lenders and their respective successors and assigns, and shall inure to the sole benefit of the Companies, Agents and Lenders and the successors and assigns of the Companies, Agents and Lenders. (e) References. Any reference to the Credit Agreement contained in any notice, request, certificate, or other document executed concurrently with or after the execution and delivery of this Agreement shall be deemed to include this Agreement unless the context shall otherwise require. (f) Continued Effectiveness. Notwithstanding anything contained herein, the terms of this Agreement are not intended to and do not serve to effect a novation as to the Credit Agreement. The parties hereby expressly do not intend to extinguish the Credit Agreement. Instead, it is the express intention of the parties hereto to reaffirm the indebtedness created under the Credit Agreement and secured by the Collateral. The Credit Agreement is amended hereby and each of the Loan Documents remain in full force and effect. 11 12 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. STUART ENTERTAINMENT, INC. BINGO PRESS & SPECIALTY LIMITED By By ------------------------------------------------ ---------------------------------------------------------- Title: Title: --------------------------------------------- ------------------------------------------------------- BANK OF AMERICA NATIONAL TRUST BANK OF AMERICA CANADA, as AND SAVINGS ASSOCIATION, as U.S. Canadian Agent Agent By By ------------------------------------------------ ---------------------------------------------------------- Title: Title: --------------------------------------------- ------------------------------------------------------- BANK OF AMERICA ILLINOIS, as a U.S. BANK OF AMERICA CANADA, as a Lender Canadian Lender By By ------------------------------------------------ ----------------------------------------------------------- Title: Title: --------------------------------------------- -------------------------------------------------------- THE CHASE MANHATTAN BANK, THE CHASE MANHATTAN BANK OF NATIONAL ASSOCIATION, as a U.S. CANADA, as a Canadian Lender Lender By By ------------------------------------------------ ---------------------------------------------------------- Title: Title: --------------------------------------------- -------------------------------------------------------
12 EX-10.23 3 GUARANTEE AGREEMENT 1 EXHIBIT 10.23 GUARANTY RECITALS Reference is made to that certain Credit Agreement dated as of December 13, 1994 (as the same may be amended, modified or supplemented from time to time, the "Credit Agreement") among Stuart Entertainment, Inc., a Delaware corporation and Bingo Press & Specialty Limited (formerly known as 1089350 Ontario Inc.), an Ontario Corporation (collectively, "Borrowers"), the various financial institutions as are, or may from time to time become, parties thereto ("Lenders"), Bank of America National Trust and Savings Association, a national banking association, as U.S. Agent ("U.S. Agent") and Bank of America Canada, as Canadian Agent ("Canadian Agent"). As one of the conditions to providing certain additional financial accommodations to Borrowers under the Credit Agreement, Agents and Lenders have required that each of the undersigned, MLGAL Partners, Limited Partnership, a Connecticut limited partnership ("Morgan") and Leonard A. Stuart, an individual ("Stuart") jointly and severally guaranty certain of the obligations of each Borrower to Agent and Lenders as set forth herein. U.S. Agent and Canadian Agent are collectively referred to herein as "Agents" and each individually as an "Agent," and Morgan and Smart are collectively referred to herein as "Guarantors" and each individually as a "Guarantor." Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Credit Agreement. GUARANTY Therefore, for value received, and in consideration of any loan, advance or financial accommodation of any kind whatsoever heretofore, now or hereafter made, given or granted to either Borrower by Agents and/or Lenders, each Guarantor hereby jointly and severally unconditionally guarantees the full and prompt payment when due, whether at maturity or earlier, by reason of acceleration or otherwise, and at all times thereafter, of all indebtedness, liabilities and obligations of every kind and nature of each Borrower to Agents and/or Lenders, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, joint or several, now or hereafter existing or due or to become due, and howsoever owned, held or acquired by Agents and/or Lenders, whether through discount, overdraft, purchase, direct loan or as collateral or otherwise, arising under or relating to the Credit Agreement, including without limitation any interest accruing after the commencement of Insolvency Proceedings with respect to either Borrower, regardless of whether such interest is allowed as a claim by the court having jurisdiction over such proceedings (all such indebtedness, liabilities and obligations being hereinafter referred to as "Borrowers' Obligations"). Each Guarantor further agrees to pay all costs and expenses including without limitation, all court costs and reasonable Attorney Costs paid or incurred by Agents and/or Lenders in endeavoring to collect all or any part of Borrowers' Obligations from, or in prosecuting any action against, either Guarantor of all or any part of Borrowers' Obligations. 1 2 Each Guarantor hereby agrees that its obligations under this Guaranty shall be unconditional, irrespective of (a) the validity or enforceability of Borrowers' Obligations or any part thereof, or of any Loan Documents, (b) the absence of any attempt to collect Borrowers' Obligations from either Borrower or any other guarantor or other action to enforce the same, (c) the waiver or consent by Agents or Lenders with respect to any provision of any Loan Document, (d) the failure by an Agent to take any steps to perfect and maintain its Lien on, or to preserve its rights to, any security or collateral for Borrowers' Obligations, (e) either Agent's election, in any proceeding instituted under Chapter 11 of Title 11 of the United States Code (11 U.S.C. Section 101 et seq.), as amended (the "Bankruptcy Code") of the application of Section 1111(b)(2) of the Bankruptcy Code, (f) any borrowing or grant of a Lien by either Borrower as debtor-in-possession, under Section 364 of the Bankruptcy Code, (g) the disallowance, under Section 502 of the Bankruptcy Code, of all or any portion of an Agent's or any Lender's claim(s) for repayment of Borrowers' Obligations, or (h) any other circumstance which might otherwise constitute a legal or equitable discharge or defense of either Borrower or a Guarantor. Notwithstanding any provision of this Guaranty to the contrary, the liability of the Guarantors under this Guaranty shall not exceed the lesser of (a) Three Million U.S. Dollars (U.S. $3,000,000) (the "Maximum Amount") and (b) the Highest Amount (as defined below), plus all costs and expenses (including, without limitation, attorney's fees and legal expenses) incurred by Agents and/or Lenders in the enforcement of this Guaranty. "Highest Amount" means the greatest amount by which the aggregate principal amount of all outstanding Revolving Loans and the aggregate undrawn face amount of all Letters of Credit (with the amounts of the Revolving Loans to the Canadian Company and the Letters of Credit issued for the account of the Canadian Company expressed in U.S. Dollars at the Closing Date Exchange Rate) exceeds Twenty Million U.S. Dollars (US $20,000,000) at any time during the period commencing on the occurrence of any Event of Default and ending on the date of the enforcement of this Guaranty. Notwithstanding any provision of this Guaranty to the contrary, neither Agent nor any Lender shall take any action to enforce this Guaranty until sixty (60) days after the earlier to occur of (a) the date on which an Agent commences the exercise of any of its remedies under the Loan Documents and (b) the occurrence of an Event of Default under Section 8.01(f) or Section 8.01(g) of the Credit Agreement. This Guaranty shall terminate when Guarantors have provided Agents and Lenders with written notice that each of the following conditions have been satisfied and Agents and Lenders have each agreed in writing that each of the following conditions have been satisfied: (a) no Default or Event of Default is in existence, (b) the aggregate Revolving Commitments of the U.S. Lenders will be equal to or less than U.S. $10,000,000 after giving effect to such termination, (c) the aggregate Revolving Commitments of the Canadian Lenders (with the amounts of the Commitments of the Canadian Lenders expressed in U.S. Dollars at the Closing Date Exchange Rate) will be equal or less than U.S. $10,000,000 after giving effect to such termination, and (d) the Aggregate Revolving Commitment exceeds the aggregate principal amount of all outstanding Revolving Loans and the aggregate undrawn face amount of all Letters 2 3 of Credit (with the amount of the Revolving Loans to the Canadian Company and Letters of Credit issued for the account of the Canadian Company expressed in U.S. Dollars at the Closing Date Exchange Rate) by at least U.S. $2,000,000 at such time and has exceeded such amount by U.S. $2,000,000 at all times during the 30-day period prior to such termination. In addition, in the event MLGA and its Affiliates desire to sell all or a portion of the capital stock of the U.S. Company held by them and such sale, if consummated, would cause an Event of Default under Section 8.01(k)(i) of the Credit Agreement, this Guaranty shall terminate if (i) all of the Lenders agree to waive such Event of Default under Section 8.01(k)(i) of the Credit Agreement and consent to such sale and (ii) such sale is consummated. Notwithstanding the foregoing, the termination of the Guaranty pursuant to this paragraph shall not relieve either Guarantor from the payment of amounts for which demand has been made by either Agent prior to the effective date of termination. No payment made by or for the account or benefit of either Guarantor (including without limitation, (a) a payment made by either Borrower in respect of Borrowers' Obligations, (b) a payment made by any Person under any other guaranty of Borrowers' Obligations or (c) a payment made by means of set-off or other application of funds by either Agent or any Lender) pursuant to this Guaranty shall entitle either Guarantor, by subrogation or otherwise, to any payment by Borrower or from or out of any property of a Borrower, and neither Guarantor shall exercise any right or remedy against a Borrower or any property of a Borrower including, without limitation, any right of contribution or reimbursement by reason of any performance by either Guarantor under this Guaranty, until the Borrower's Obligations have been paid in full. Each Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of Insolvency Proceedings of either Borrower, protest or notice with respect to Borrowers' Obligations and all demands whatsoever, and covenants that this Guaranty will not be discharged, except by complete and irrevocable payment and performance of the obligations and liabilities contained herein or as otherwise set forth herein. No notice to either Guarantor or any other party shall be required for either Agent, on behalf of itself and Lenders, to make demand hereunder. Such demand shall constitute a mature and liquidated claim against each Guarantor. Upon the occurrence and during the continuance of any Event of Default, either Agent may, at its sole election, proceed directly and at once, without notice, against either Guarantor to collect and recover the full amount or any portion of Borrowers' Obligations, without first proceeding against either Borrower, any other Person, or any security or collateral for Borrowers' Obligations. Each Agent shall have the exclusive right to determine the application of payments and credits, if any, from either Guarantor, either Borrower, any other Person, or any security or collateral for Borrowers' Obligations, on account of Borrowers' Obligations or of any other liability of either Guarantor to Agents and Lenders arising hereunder. Agents and Lenders are hereby authorized, without notice or demand to either Guarantor and without affecting or impairing the liability of either Guarantor hereunder, to, from time to time, (a) renew, extend, accelerate or otherwise change the time for payment of, or other terms relating to, Borrowers' Obligations or otherwise modify, amend or change the terms of any Loan 3 4 Document, (b) accept partial payments on Borrowers' Obligations, (c) take and hold collateral for the payment of Borrowers' Obligations, or for the payment of this Guaranty, or for the payment of any other guaranties of Borrowers' Obligations or other liabilities of either Borrower, and exchange, enforce, waive and release any such collateral, (d) apply such collateral and direct the order or manner of sale thereof as in their sole discretion they may determine, and (e) settle, release, compromise, collect or otherwise liquidate Borrowers' Obligations and any collateral therefor in any manner. Subject to the terms of the third and fourth paragraphs under the heading "GUARANTY" of this Guaranty, at any time after maturity of Borrowers' Obligations, Agents and Lenders may, in their sole discretion, without notice to either Guarantor and regardless of the acceptance of any collateral for the payment hereof, appropriate and apply toward payment of Borrowers' Obligations (a) any indebtedness due or to become due from Agents or any of Lenders to Guarantor and (b) any moneys, credits or other property belonging to Guarantor at any time held by or coming into the possession of either Agent or any of Lenders or any Affiliates thereof, whether for deposit or otherwise. Each Guarantor hereby assumes responsibility for keeping itself or himself informed of the financial condition of each Borrower, and any and all endorsers and other guarantors of any Loan Document and of all other circumstances being upon the risk of nonpayment of Borrowers' Obligations or any part thereof that diligent inquiry would reveal, and each Guarantor hereby agrees that neither Agents nor Lenders shall have any duty to advise each Guarantor of information known to such Agents or Lenders regarding such condition or any such circumstances. Each Guarantor hereby acknowledges familiarity with each Borrower's financial condition and has not relied on any statements by Agents or Lenders in obtaining such information. In the event an Agent or any Lender, in its sole discretion, undertakes at any time or from time to time to provide any such information to either Guarantor, neither Agent nor any Lender shall be under any obligation (a) to undertake any investigation with respect thereto, (b) to disclose any information which, pursuant to accepted or reasonable commercial finance practices, either Agent or any Lender wishes to maintain confidential or (c) to make any other or future disclosures of such information, or any other information, to either Guarantor. Each Guarantor consents and agrees that neither Agents nor Lenders shall be under any obligation to marshal any assets in favor of either Guarantor or against or in payment of any or all of Borrowers' Obligations. Each Guarantor further agrees that, to the extent that either Borrower makes a payment or payments to any Agent or Lender, or any Agent or Lender receives any proceeds of Collateral, which payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a Borrower, its estate, trustee, receiver or any other party, including without limitation a Guarantor, under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such payment or repayment, Borrowers' Obligations or the part thereof which has been paid, reduced or satisfied by such amount shall be reinstated and continued in full force and effect as of the date such initial payment, reduction or satisfaction occurred, and 4 5 this Guaranty shall continue to be in existence and in full force and effect, irrespective of whether any evidence of indebtedness has been surrendered or canceled. Each Guarantor also waives all set-offs and counterclaims and all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance of this Guaranty. Each Guarantor further waives all notices of the existence, creation or incurring of new or additional indebtedness, arising either from additional loans extended to either Borrower or otherwise, and also waives all notices that the principal amount, or any portion thereof, or any interest on any Loan Document is due, notices of any and all proceedings to collect from the maker, any endorser or any other guarantor of all or any part of Borrowers' Obligations, or from anyone else, and, to the extent permitted by law, notices of exchange, sale, surrender or other handling of any security or collateral given to either Agent to secure payment of Borrowers' Obligations. If for the purpose of obtaining judgment in any court it is necessary to convert a sum due hereunder in the currency in which it is due (the "Original Currency") into another currency (the "Second Currency"), the rate of exchange used shall be that at which the U.S Agent, in accordance with normal banking procedures, could purchase the Original Currency with the Second Currency in the New York foreign exchange market on the Business Day preceding that on which final judgment is given. Such rate of exchange shall include any premium and costs of exchange payable in connection with such purchase. The obligation in the Original Currency shall, notwithstanding any judgment in the Second Currency, be discharged only to the extent that on the Business Day following receipt by the U.S. Agent of any sum adjudged to be so due in the Second Currency, the U.S. Agent may, in accordance with normal banking procedures, purchase the Original Currency with the Second Currency paid to the U.S. Agent in the New York foreign exchange market. If the amount of the Original Currency so purchased is less than the amount originally due in the Original Currency, each Guarantor jointly and severally agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the Agents and Lenders against such loss. MISCELLANEOUS No delay on the part of either Agent in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by either Agent of any right or remedy shall preclude any further exercise thereof, nor shall any modification or waiver of any of the provisions of this Guaranty be binding upon any Agent or Lender, except as expressly set forth in a writing duly signed and delivered on such Agent's behalf by an authorized officer or agent of such Agent. Any Agent's or Lender's failure at any time or times hereafter to require strict performance by either Borrower or either Guarantor of any of the provisions, warranties, terms and conditions contained in any Loan Document shall not waive, affect or diminish any right of any Agent or Lender at any time or times hereafter to demand strict performance thereof and such right shall not be deemed to have been waived by any act or knowledge of any Agent or Lender, or their respective agents, officers or employees, unless such waiver is contained in an instrument in writing signed by an officer or agent of such Agent, and directed to such Borrower 5 6 or such Guarantor, as applicable, specifying such waiver. No waiver by any Agent or Lender of any default shall operate as a waiver of any other default or the same default on a future occasion, and no action by any Agent or Lender permitted hereunder shall in any way affect or impair any Agent's or Lender's rights or the obligations of either Guarantor under this Guaranty. Any determination by a court of competent jurisdiction of the amount of any principal or interest owing by a Borrower to any Agent or Lender shall be conclusive and binding on each Guarantor irrespective of whether such Guarantor was a party to the suit or action in which such determination was made. This Guaranty shall be binding upon each Guarantor and upon the successors and permitted assigns of each Guarantor and shall inure to the benefit of each Agent's and Lender's respective successors and assigns; all references herein to a Borrower shall be deemed to include its successors and permitted assigns and all references herein to an Agent or a Lender shall be deemed to include its respective successors and assigns. Each Borrower's successors and permitted assigns shall include, without limitation, a receiver, trustee or debtor in possession of or for such Borrower. All references to the singular shall be deemed to include the plural, and vice versa, where the context so requires. Wherever possible each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Guaranty. THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF ILLINOIS; PROVIDED, THAT EACH AGENT AND LENDER SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS GUARANTY AND ANY OTHER LOAN DOCUMENTS TO WHICH EITHER GUARANTOR IS A PARTY MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF ILLINOIS, AND BY EXECUTION AND DELIVERY OF THIS GUARANTY, EACH GUARANTOR CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF THOSE COURTS. EACH GUARANTOR IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS GUARANTY. EACH GUARANTOR WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY ILLINOIS LAW. NOTWITHSTANDING THE FOREGOING, EACH AGENT AND LENDER SHALL HAVE 6 7 THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST EITHER GUARANTOR OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. EACH GUARANTOR WAIVES ITS RIGHT TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS GUARANTY, THE OTHER LOAN DOCUMENTS TO WHICH SUCH GUARANTOR IS A PARTY OR THE TRANSACTIONS CONTEMPLATED HEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT AGAINST SUCH GUARANTOR UNDER THIS GUARANTY OR ANY OTHER LOAN DOCUMENT TO WHICH SUCH GUARANTOR IS A PARTY, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS OR OTHERWISE. EACH GUARANTOR AGREES THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, EACH GUARANTOR FURTHER AGREES THAT ITS RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS GUARANTY AND ANY OTHER LOAN DOCUMENT TO WHICH SUCH GUARANTOR IS A PARTY. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS GUARANTY AND ANY OTHER LOAN DOCUMENT TO WHICH SUCH GUARANTOR IS A PARTY. Morgan hereby certifies that it has all necessary corporate authority to grant and execute this Guaranty. This Guaranty may be executed in any number of counterparts and by different parties on separate counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Guaranty. Morgan shall deliver its audited financial statements for the year ending December 31, 1995 to U.S Agent on or before May 31, 1996 and Stuart shall deliver his financial statements for the year ending December 31, 1995, certified as true and accurate by Stuart, to U.S. Agent on or before May 31, 1996. 7 8 IN WITNESS WHEREOF, this Guaranty has been duly executed by each Guarantor this 18th day of December 1995. MLGAL PARTNERS, LIMITED PARTNERSHIP By ______________________________________ Sangwoo Ahn Address: 2 Greenwich Plaza Greenwich, Connecticut 06830 By _______________________________________ Leonard A. Stuart Address: c/o 808 N.E. 20th Avenue Fort Lauderdale, Florida 33304 8 EX-11 4 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS Years Ended December 31, -------------------------------------- 1995 1994 1993 -------------------------------------- Shares of common stock outstanding at beginning of year(1) 6,538,788 3,405,353 3,367,543 Weighted-average shares issued during the year 115,270 155,495 25,541 Weighted-average shares assumed issued under stock option plans and exercise of warrants (using treasury stock method) during the year under primary(2) 51,846 - 131,028 --------- ----------- --------- Average common and common equivalent shares outstanding - primary 6,705,904 3,560,848 3,524,112 Weighted-average shares assumed issued under stock option plans and exercise of warrants (using treasury stock method) during the year under fully dilutive(2) 347,318 - - --------- ----------- --------- Average common and common equivalent shares outstanding - fully dilutive 7,053,222 3,560,848 3,524,112 ========= =========== ========= Net income (loss): Income (loss) before cumulative effect of change in accounting principle $ 786,000 $(1,608,000) $ 512,000 --------- ----------- --------- Cumulative effect of change in accounting principle - - 187,000 --------- ----------- --------- Net income (loss) $ 786,000 $(1,608,000) $ 699,000 --------- ----------- --------- Earnings (loss) per share - primary: Income (loss) before cumulative effect of change in accounting principle $0.12 $(0.45) $0.15 Cumulative effect of change in accounting principle - - .05 --------- ----------- --------- Earnings (loss) per share - primary $0.12 $(0.45) $0.20 --------- ----------- --------- Earnings (loss) per share - fully dilutive: Income (loss) before cumulative effect of change in accounting principle $0.11 $(0.45) $0.15 Cumulative effect of change in accounting principle - - .05 --------- ----------- --------- Earnings (loss) per share - fully dilutive $0.11 $(0.45) $0.20 ========= =========== ========= (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. EX-21 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
State or other Jurisdiction of Incorporation or Names under which Organization Subsidiary does business ---------------- ------------------------- Bingo Press & Specialty Limited Ontario, Canada Bazaar & Novelty Video King Gaming Systems, Inc. Colorado Video King Stuart Entertainment, S.A. de C.V. Mexico Stuart Entertainment, Ltd. U.K. Stuart Entertainment do Brasil, Ltda. Brazil S.E. Michigan, Inc. Michigan S.E. International, Inc. Iowa Stuart Manufacturing, Inc. Louisiana
EX-23 6 CONSENT OF DELOITTE & TOUCHE 1 EXHIBIT 23 CONSENT OF DELOITTE & TOUCHE LLP INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement 33-89962 of Stuart Entertainment, Inc. on Form S-8 of our report dated March 25, 1996, appearing in this Annual Report on Form 10-K of Stuart Entertainment, Inc. for the year ended December 31, 1995. DELOITTE & TOUCHE, LLP Omaha, Nebraska March 29, 1996 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 AND THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH YEAR END REPORT ON FORM 10-K. 1,000 YEAR DEC-31-1995 DEC-31-1995 943 0 21,654 2,285 21,982 44,587 34,212 13,095 98,994 24,569 39,586 68 0 0 31,972 98,994 109,882 109,882 74,722 27,606 0 543 4,448 2,563 1,777 786 0 0 0 786 .12 .11
-----END PRIVACY-ENHANCED MESSAGE-----