-----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, LnnL4P2PX4cxP4RRcaDONhw4hmzuqLqzup7t/Dr0DJy56EhpmKMjSow8lS841H60 oqCjtpqrXyH4tcknasZWVA== 0000950153-99-000486.txt : 19990416 0000950153-99-000486.hdr.sgml : 19990416 ACCESSION NUMBER: 0000950153-99-000486 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 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-K405 SEC ACT: SEC FILE NUMBER: 000-10737 FILM NUMBER: 99594823 BUSINESS ADDRESS: STREET 1: 3211 NEBRASKA AVE 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-K405 1 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NO. DECEMBER 31, 1998 0-10737 STUART ENTERTAINMENT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 84-0402207 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 3211 NEBRASKA AVENUE COUNCIL BLUFFS, IOWA 51501 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (712) 323-1488 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes __ No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by (non-affiliates) of the Registrant as of March 31, 1999 was $1,063,236. The number of shares outstanding of the Registrants' $.01 par value common stock as of March 31, 1999 was 6,946,211. DOCUMENTS INCORPORATED BY REFERENCE. None. 2 The statements contained in this report that are not historical fact are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates," or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. Management wishes to caution the reader that these forward-looking statements such as the timing, costs and scope of its acquisition of, or investments in, the bingo industry and new product development, the implementation of any form of restructuring transaction, year 2000 matters and other matters contained in this report or the documents incorporated by reference regarding matters that are not historical facts, are only predictions. No assurances can be given that the future results indicated, whether expressed or implied, will be achieved. While sometimes presented with numerical specificity, these projections and other forward-looking statements are based upon a variety of assumptions relating to the business of the Company, which, although considered reasonable by the Company, may not be realized. Because of the number and range of the assumptions underlying the Company's projections and forward-looking statements, many of which are subject to significant uncertainties and contingencies that are beyond the reasonable control of the Company, some of the assumptions inevitably will not materialize, and unanticipated events and circumstances may occur subsequent to the date of this report or the documents incorporated by reference. These forward-looking statements are based on current expectations and the Company assumes no obligation to update this information. Therefore, the actual experience of the Company and results achieved during the period covered by any particular projections or forward-looking statements may differ substantially from those projected. Consequently, the inclusion of projections and other forward-looking statements should not be regarded as a representation by the Company or any other person that these estimates and projections will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate. PART I ITEM 1. BUSINESS GENERAL Stuart Entertainment, Inc. (the "Company"), formerly known as Bingo King Company, Inc. and doing business as Bingo King, is a leading manufacturer of a full line of bingo and bingo-related products, including disposable bingo paper, pulltab tickets, ink dabbers, electronic bingo systems and related equipment and supplies. The Company enjoys a broad reputation for innovation and new product development and has been a leader in the bingo industry for approximately 50 years, having helped to popularize many important breakthroughs in bingo, such as disposable bingo paper and electronic bingo systems. Bingo is one of North America's most popular forms of gaming and entertainment. Many nonprofit organizations sponsor bingo games for fundraising purposes, while commercial entities, Indian gaming enterprises, casinos and government sponsored entities operate bingo games for profit. The Company sells or leases its products to this diverse group of end-users through more than 300 distributors, its direct sales force and Company-owned distribution outlets. The Company believes that it derives a competitive advantage in the bingo industry by offering a wider array of bingo and bingo-related products than its competitors. The Company supplies bingo halls with all the products and equipment necessary to operate a bingo game of any size, including bingo paper, fixed-base or hand-held electronic bingo systems, ink dabbers, pulltab tickets, bingo ball blowers, public address systems, television monitors, multi-media flashboards, computerized verification systems, tables, chairs, concession equipment and party supplies. The Company was reincorporated in Delaware in 1986, and is a successor, by merger effective as of January 21, 1987, to a business formed in 1948. The Company's principal executive office is located at 3211 Nebraska Avenue, Council Bluffs, Iowa 51501 and its telephone number is (712) 323-1488. CERTAIN RECENT DEVELOPMENTS POTENTIAL RESTRUCTURING During February 1999, the Company's new management team determined that the financial results for the prior year indicated that the Company's cash flow was not going to be sufficient to service its debt. Therefore, management has been contemplating implementing an operational and financial restructuring. In connection with these efforts, the Company has retained an investment banking firm and certain other advisors to assist it in analyzing its various restructuring alternatives. In November 1997, the Company entered into a credit facility consisting of two loan and security agreements, one between the Company and Congress Financial Corporation ("Congress") (Central) (the "US Facility") and one between Bingo Press & Specialty Limited, a wholly-owned subsidiary of the Company ("Bazaar") and Congress Financial Corporation (Canada) (the "Canadian Facility") (collectively, the "Credit Facility"). The Credit Facility provides for maximum borrowings of up to $30 million. The Credit Facility imposes certain covenants and other requirements on the Company and Bazaar. The Company expects that it may not comply with certain of the covenants in the Credit Facility, including the requirement that the Company maintain a certain minimum level of net worth. The Company and Congress currently are in the process of negotiating the terms of a Forbearance Agreement with respect to the Credit Facility, and it is expected that the parties will enter into such a 1 3 Forbearance Agreement in the near future. However, there can be no assurance that a Forbearance Agreement will be entered into in the near future, if at all, and the failure to enter into such an agreement would have a material adverse effect on the Company. The Company has $100 million 12 1/2% Senior Subordinated Notes Due 2004 (the "Notes) outstanding, and an interest payment with respect to the Notes is due May 15, 1999. The Company is considering its various alternatives with respect to this payment. In light of the potential restructuring, an ad hoc committee of the holders of the Notes was formed and has retained its own counsel. The Company is in the process of negotiating the terms of a consensual restructuring with the ad hoc committee. Under any restructuring alternative, it is likely that the Notes will be converted into equity, and that the Company's common stock will be subject to substantial dilution or complete elimination as a result of such conversion. However, there can be no assurance that such a consensual restructuring will be consummated, and absent a consensual arrangement, the Company will consider filing for reorganization under Chapter 11 of the Bankruptcy Code to effect a restructuring. Management believes that, despite the financial uncertainties in the near future, it has under development a business plan that, if successfully funded and executed as part of the restructuring can improve its operating results. The continuing support of the Company's vendors, customers, lenders, stockholders and employees during any restructuring will be the key to the Company's success. ACQUISITION OF BINGO SYSTEMS & SUPPLY, INC. On November 1, 1998, the Company completed the acquisition (the "Acquisition") of all of the outstanding stock of Bingo Systems & Supply, Inc. ("Bingo Systems") for $2,200,000 consisting of $1,000,000 in cash and a $1,200,000 promissory note. Bingo Systems is engaged in the business of finishing and distribution of bingo paper and distribution of ink markers, bingo equipment and pulltab tickets. ACQUISITION OF ALBERTA BINGO SUPPLY, INC. On June 1, 1998, Bazaar purchased certain assets related to the bingo business formerly conducted by one of its distributors, Alberta Bingo Supply, Inc. ("ABS"). Under the terms of the agreement, Bazaar paid C$1,000,000 for the goodwill of the acquired business and C$410,000 for certain equipment and fixtures. Bazaar agreed to sell the ABS existing inventory relating to their bingo business, as an agent for ABS, for a period of six months ending December 1, 1998. Bazaar agreed to pay to ABS the difference between C$1,404,113 and the amount of such inventory (valued at cost) sold during the six-month period. As of December 31, 1998, Bazaar paid or has been credited C$1,354,113 for the inventory and has withheld C$50,000 pending a minor dispute concerning inventory valuation. ACQUISITION OF POWER BINGO CORP. On July 1, 1997, the Company completed the acquisition of substantially all of the assets of Power Bingo Corp., a market leader in hand-held electronic bingo units for a purchase price of $1.2 million, consisting of $1.1 million in cash and forgiveness of a note receivable plus future payments of approximately $2.7 million that was based on the market performance of the hand-held electronic bingo units. As of December 31, 1998, approximately $1.2 million remained to be paid. 2 4 DELISTING FROM NASDAQ SMALLCAP MARKET; DISCLOSURE RELATING TO LOW PRICED STOCKS On February 26, 1998, the Company was notified by Nasdaq that the Company was not in compliance with the new net tangible assets/market capitalization/net income maintenance requirements which became effective on February 23, 1998. On July 20, 1998, the Company was notified by Nasdaq that effective July 28, 1998 the Common Stock was scheduled for delisting from the Nasdaq SmallCap Market. On July 28, 1998, the Common Stock was delisted from the Nasdaq SmallCap Market and currently trades on the OTC Bulletin Board. As a result, an investor may now find it more difficult to dispose of, and to obtain accurate quotations as to the value of, the Common Stock. If the trading price of the Common Stock is less than $5.00 per share at a time when the net tangible assets of the Company are less than $5,000,000, trading in the Common Stock will also be subject to the requirements of Rule 15g-9 promulgated under the Securities Exchange Act of 1934, as amended. Under such rule, broker/dealers who recommend such low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser's written consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure in connection with any trades involving a stock defined as a penny stock (generally, according to recent regulations adopted by the Securities and Exchange Commission, any equity security not traded on an exchange or quoted on the Nasdaq SmallCap Market that has a market price of less than $5.00 per share, subject to certain exceptions), including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith. Such requirements could have the effect of severely limiting the market liquidity of the Common Stock. THE INDUSTRY BINGO INDUSTRY The National Association of Fundraising Ticket Manufacturers' 1996 Charity Gaming in North America Report (the "NAFTM Report") estimated that over 60,000 organizations have licenses to operate bingo games in the United States and Canada. According to industry reports compiled by the Bingo Bugle, which is a series of regional newspapers aimed at bingo players, bingo players visit bingo halls in the United States and Canada an estimated 1.2 billion times a year. The Company believes that significant amounts are wagered on bingo in the United States and Canada, and that electronic bingo systems maybe a positive factor in encouraging additional players to visit bingo halls. Over each of the last few years, more states have begun to permit electronic bingo and the Company is finding increased player acceptance of electronic bingo systems, as the product is introduced into different markets. Regulations governing traditional paper bingo and electronic bingo systems vary by jurisdiction. In the United States, traditional paper bingo is legal in all states except Arkansas, Hawaii, Tennessee and Utah. Electronic bingo systems are currently legal in 29 states in some form and in Indian gaming halls in compliance with the Indian Gaming Regulatory Act ("IGRA"). In Canada, traditional paper bingo is legal in all ten provinces and two territories. Fixed-base electronic bingo systems, however, may only be used in halls owned or authorized by the provincial governments. Currently, fixed-base electronic gaming systems are permitted only in British Columbia and Manitoba, while hand-held electronic bingo systems are legal only in Ontario and must be used in conjunction with bingo paper. The bingo industry in the United States is highly fragmented among numerous bingo game operators. The majority of bingo games in the United States are operated by small nonprofit organizations for fundraising purposes. Such organizations include religious, fraternal, social, military and civic 3 5 organizations. A smaller percentage of bingo games in the United States are operated for profit in large bingo halls by casinos, Indian gaming enterprises and commercial operators. For example, Foxwoods Resort and Casino in Connecticut, the Seminole Indian Casino in Florida, the Potawatomi Bingo Casino in Wisconsin and Win River Casino Bingo in California all feature large-scale modern bingo halls with seating capacities ranging in size from approximately 1,000 to 3,000 seats. In Canada, bingo is generally highly centralized under the administration of government-sponsored entities or licensed commercial operators, which own and operate large bingo halls, with average session attendance in excess of 175 players. These government sponsored entities and commercial operators run games on behalf of various charitable organizations, often playing several sessions per day. Satellite-linked bingo games have been introduced in recent years in the Canadian Provinces of Alberta, British Columbia, Quebec and Ontario. The British Columbia, Quebec and Ontario satellite bingo systems are government operated. These satellite-linked bingo games pool the prize money available among commercial bingo halls thus offering higher jackpots. Satellite-linked games have been approved in the state of Washington, but have not been introduced. PULLTAB INDUSTRY In the United States and Canada, pulltab tickets generally are sold at charitable bingo halls as an additional source of fundraising. In several states and the Province of Ontario, pulltab tickets are approved for sale in third party retail locations, including bars and taverns. Eleven states also use pulltab tickets, in addition to scratch-off tickets, in their instant lottery ticket sales. The Company believes that significant amounts of money are wagered on pulltab tickets in the United States and Canada, and that these amounts may increase if additional jurisdictions permit the sale of pulltab tickets and if jurisdictions which currently permit the use of pulltab tickets expand the permitted point of sale locations to include third party retail locations. In the United States, pulltab tickets are currently legal in 41 states. Each state has developed specific regulations that affect the style of play in its market by regulating the point of sale, price per ticket, game themes and payouts. In Canada, seven provincial lotteries use pulltab tickets in their instant lottery ticket sales. Ontario allows the sales of pulltab tickets at charitable bingo halls and under charity license at third party retail locations such as bars, restaurants, concessionaires, gas stations, hotels, mall kiosks, supermarkets, convenience stores and bowling alleys. Currently there are approximately 9,500 such third party retail locations in Ontario. In November 1997, the Company was awarded a five-year contract by the Ontario Gaming Control Commission to be the sole supplier of pulltab tickets to all charity licensed retail locations in the Province of Ontario (see "Government Regulations"). The Company's position in Ontario, according to the 1997 NAFTM Report, North America's largest charity marketplace has been solidified with the five-year contract with possible extensions. In September 1997, the Ontario Gaming Control Commission ("OGC") announced the list of the final proponents for operation and ownership of the 44 charity gaming clubs that were to replace the system of roving Monte Carlo casinos. In 1998, the OGC withdrew its approval of such clubs and assumed ownership and operation of the five clubs then operating. The OGC also authorized the use of slot machines at seventeen racetracks in Ontario. The Company is currently unable to anticipate whether the clubs or slot machines will have a material impact on the bingo and pulltab markets in the Province of Ontario. 4 6 SIGNIFICANT SUBSIDIARIES VIDEO KING GAMING SYSTEMS, INC. Video King Gaming Systems, Inc., a wholly owned subsidiary of the Company ("Video King"), was formed in 1992 to develop a line of electronic gaming equipment, primarily for the Company's bingo markets. Video King began manufacturing and shipping selected products in 1993. Video King continues to focus its sales efforts within the Company's established bingo markets. The traditional domestic and international for profit gaming markets may be a future market, but Video King has no current plans for such 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. During 1998, 1997 and 1996 all of the bingo paper manufactured by Stuart Entertainment Mexico was sold to the Company. BINGO PRESS & SPECIALTY LIMITED Bingo Press & Specialty Limited operates under the trade name Bazaar & Novelty and was acquired by the Company in December 1994. Bazaar manufactures and distributes a complete line of bingo cards, pulltab tickets, ink dabbers, supplies and accessories in Canada. Bazaar's products are sold primarily to distributors, who resell them to fraternal, charitable, religious and social organizations, lodges, hospitals, nursing homes, PTA groups, legions and other similar not-for-profit organizations which use such products to raise money and provide entertainment. To a lesser extent, Bazaar's products are sold to charitable and commercial bingo halls, governmental lottery agencies and through Company-owned distribution outlets. BINGO SYSTEMS AND SUPPLY, INC. As a result of the Acquisition, Bingo Systems became a wholly-owned subsidiary of the Company. Bingo Systems finishes bingo paper manufactured by the Company and distributes bingo paper, ink dabbers, bingo equipment, pulltabs tickets and other related products to fraternal, charitable, religious and social organizations, lodges, nursing homes, legions and other similar not-for-profit organizations which use such products to raise money and provide entertainment. PRODUCTS OVERVIEW. The Company offers a wide array of bingo and bingo-related products. The Company is capable of supplying a bingo hall with all the products and equipment necessary to operate a bingo game of any size, including bingo paper, fixed-base or hand-held electronic bingo systems, ink dabbers, pulltab tickets, bingo ball blowers, public address systems, television monitors, multi-media flashboards, computerized verification systems, tables, chairs, concession equipment and party supplies. The Company is organized on a global product line basis under three reportable segments. CONSUMABLE BINGO PRODUCTS BINGO PAPER. The Company sells a complete line of bingo paper, which is generally sold in booklet form and is available in a variety of sizes, styles and colors, The Company's bingo paper line includes a number of specialty bingo games under proprietary trademarks or licenses such as Bonanza Bingo(R), Bonus Line(R), Double Action(TM), Wildcard Bingo(TM), Triangle Bingo(TM), three styles of 90-number 5 7 bingo games and other specialty bingo games which can be played as variations on or concurrently with the standard 75-number bingo game. The Company also sells a line of disposable cards designed for play on tour buses, cruise ships and other environments with limited space for play. The Company's bingo card configurations are developed in-house by a mathematician using sophisticated algorithmic models, which are validated through computer simulation in which in excess of 1,000,000 simulated games are played on a given pattern in order to determine the probability of a winner occurring when a specific number of cards are in play and a specific number of balls are called. The Company has a number of unique series of cards. These different series types range in size from a series of 9,000 unique cards to a series in excess of 3,000,000 unique cards. These card series are stored electronically in the Company's verification system, which allows the sponsoring organization to verify and display winning cards electronically. The Company believes that this seamless integration of several paper bingo card series and electronic verification is matched by only one other competitor in the industry. INK DABBERS. The Company manufactures ink dabbers, used to mark called numbers on paper bingo sheets, and ink refills for such dabbers. The Company sells a varied line of ink colors, bottle styles and sizes, including its successful line of gift packs, which are 3, 4, or 5 bottles packaged together in a decorative gift box using different themes such as movies, comedy and seasonal holidays. The Company pioneered the use of decorative and innovative labels on ink dabbers, for seasonal items like Christmas and Halloween and for customized labels for bingo halls and distributors. The Company also developed a labeling process that allows distributors to directly customize labels on-site for their bingo halls. The Company launched its new 3 and 4 ounce ergonomically designed bottles in 1998. The Company has applied for a utility patent relating to this new marker. The Company has been sued by a competitor, alleging that the maker infringes that competitor's patent. (See "Legal Proceedings"). The Company believes the new bottle may have a positive impact on sales of its ink dabbers. GENERAL MERCHANDISE. The Company distributes other supplies and equipment used by bingo hall operators, such as tables, chairs, public address systems and concession supplies. The Company purchases for resale bingo accessories such as key chains, lighters, marker holders, coffee mugs and other advertising products, many of which can be customized. Party supplies, flags, balloons and bar and concession equipment for use at fundraising events and bazaars are also sold by the Company both through Company owned distribution outlets in Canada and through the Company's distributor network. PULLTAB AND LOTTERY PRODUCTS PULLTAB TICKETS. The Company manufactures and sells pulltab tickets, which are also referred to as break open tickets, lucky seven tickets, instant bingo and Nevada tickets. The Company also manufactures scratch off tickets and instant lottery tickets. The Company currently has a library of over 800 different designs and denominations for pulltab tickets. The Company has contracted to provide pulltab lottery tickets in four states and five Canadian provinces. A typical pulltab ticket consists of two thin sheets of cardboard, one of which is opaque, printed with colorful designs and laminated together. The player pulls open from one to five perforated windows to reveal hidden combinations of symbols to determine whether the card is a winner, and if so, the amount of the prize. Each set of tickets sold contains a predetermined number of winning tickets. A typical pulltab ticket has a prize structure that varies from approximately 60% to 85% of the gross receipts being paid out as prizes to the players. The remaining percentage of the gross receipts is used to cover the cost of the product and expenses and to provide fundraising dollars or revenue to the sponsoring organization. ELECTRONIC BINGO PRODUCTS 6 8 ELECTRONIC BINGO SYSTEMS. The Company believes that electronic bingo systems will be the next major evolutionary step in the industry, and that it is well positioned to capitalize on the opportunity provided by electronic bingo. The popularity of electronic bingo systems is growing rapidly because electronic bingo systems provide the player with additional entertainment value and permit simultaneous play on many more cards than is possible in a typical paper game. The ability to play more cards leads to greater sums wagered per player and, thus, higher profits per bingo session for the bingo hall operator. The Company's strategy is to be a leading producer of electronic bingo systems. As part of this strategy, Company currently manufactures two electronic bingo systems: (i) System 12(TM) and (ii) Power Bingo King(TM). (i) System 12(TM). System 12(TM) is a fixed-base cashless electronic bingo and multi-game system that integrates computer technology with player interactive touch-screen terminals and live bingo. System 12(TM) is based on a local area network in which terminals for bingo players are connected to a host computer. The host computer allows players to play up to 255 electronic cards per game. Bingo players also have the opportunity to play a bingo game electronically on touch-screen terminals while simultaneously playing traditional paper bingo with other players. System 12(TM) provides the player access to a stand-alone bingo game and to other games such as video keno, video poker, video slots and video pulltab tickets, where permitted by law. System 12(TM) enables hall management to control all game functions, track player trends and generate sales reports. The Company had more than 2,300 System 12(TM) fixed-base units in place at December 31, 1998 which includes systems sold in prior years (ii) Power Bingo King(TM). Power Bingo King(TM), a hand-held electronic bingo system, allows players to play up to 200 electronic bingo cards simultaneously per game. Each Power Bingo King(TM) unit is completely portable and has the capability to show the electronic bingo card closest to winning at any given point in time. The system also automatically notifies a player of a winning card. The Company derived revenues from more than 31,000 Power Bingo King(TM) hand-held units at December 31, 1998. BINGO HALL EQUIPMENT. The Company manufactures and sells an extensive line of electronic bingo hall equipment traditionally used in bingo establishments. The electronic bingo hall equipment line includes: (a) electronic blowers that select numbers for bingo games by ejecting numbered balls one at a time; (b) electronic flash boards, measuring up to five feet high and 22 feet wide, which display to the bingo players the numbers selected from the electronic blowers; (c) electronic systems that allow quicker verification of winning bingo cards and (d) electronic pulltab ticket dispensing machines. GEOGRAPHIC BUSINESS OPERATIONS The Company has operations primarily throughout North America. A geographic summary of revenues, net income (loss), identifiable assets, capital expenditures and depreciation and amortization is set forth in Note 16, in the Notes to Consolidated Financial Statements. SALES INFORMATION BY PRODUCT LINE The following table shows the revenues contributed by major product lines of the Company during the past three years. 7 9
(DOLLARS IN THOUSANDS) 1998 1997 1996 ---- ---- ---- Bingo Paper $ 50,737 $ 55,567 $ 56,547 Ink Dabbers 8,576 9,087 9,874 General Merchandise 3,510 3,794 4,463 -------- -------- -------- Total Consumable Bingo Products 62,823 68,448 70,884 -------- -------- -------- Total Pulltab and Lottery Products 41,546 42,995 27,327 -------- -------- -------- Bingo Hall Equipment 5,895 6,581 6,286 Power Bingo King(TM) 7,501 2,461 60 System 12(TM) 877 1,093 4,148 -------- -------- -------- Total Electronic Bingo Products 14,273 10,135 10,494 -------- -------- -------- Net Sales $118,642 $121,578 $108,705 ======== ======== ========
MARKETING AND SALES The Company sells its bingo and bingo-related products to a diverse set of end-user groups through more than 300 independent distributors, eleven Company-owned distribution outlets in Canada, the Company's direct sales force and mail order catalogs. The Company believes that its ability to act as a full-service provider of bingo and bingo-related products and services and its sale of well-known brand names provide it with a significant marketing advantage. The Company maintains strong relationships with its distributors, many of whom received assistance from the Company in the development of their businesses. Distributors are supported by Company-sponsored seminars designed to assist the distributors in developing and refining sales and marketing programs and to introduce new products. The Company believes that the seminars have enhanced customer relations and generated incremental sales. Relationships with distributors are important because the distributors maintain close contact with bingo halls and are attuned to changing preferences among bingo players. These relationships have resulted in new product ideas and opportunities for the Company. The Company has historically been able to capitalize on these opportunities through utilizing its existing distributor network. Catalogs represent another form of marketing for the Company. The Company utilizes catalogs to support distributors, some of which are customized with the distributor's name. Catalogs are also used in direct mail campaigns to end-users. Additionally, customers can order product support information through an automated ordering system. The Company also markets its products through advertising in gaming publications and through participation in national, regional and local gaming tradeshows and in distributor tradeshows. For example, in 1998 the Company was a prominent exhibitor and seminar participant at the Bingo World Expo and at the World Gaming Congress and Exposition, large trade shows that have attracted over 20,000 participants. 8 10 The following table shows the percentage of total sales contributed by the Company's wholesale and retail sales activities during the past three years.
1998 1997 1996 ---- ---- ---- Sales to distributors 76% 73% 70% Retail sales 24% 27% 30%
During 1998, 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 1999 on further developing its distributor network with an emphasis on its electronic bingo products. The Company has also sponsored group seminars designed to assist distributors and other customers in developing and refining sales and marketing programs and to introduce new products. The Company believes the seminars have been well received by its distributor network and have been successful in enhancing customer relations and generating incremental sales. Company sales personnel also conduct seminars with individual distributors designed to assist them in developing sales and marketing programs, to educate distributors in ways of improving the success of their customers' fund-raising efforts and to provide management assistance to certain distributors. The Company makes available to distributors catalogs of the Company's full product line on which distributors may imprint their names and which they may give to their customers. The Company markets the bingo hall equipment, as well as the fixed-base and hand-held electronic bingo systems through the Company's distributor network, by submitting proposals to bid tenders by governmental entities, principally in the United States and Canada, 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. The Company also markets its 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 British Columbia, Newfoundland, Ontario, Quebec and Saskatchewan. Government agencies distribute bingo paper products exclusively in the Provinces of British Columbia and Manitoba. Company-owned distribution outlets operate in the Provinces of Alberta, Manitoba, New Brunswick, Nova Scotia and Ontario. FOREIGN AND EXPORT SALES To date, the Company has not had a significant volume of export sales. During 1998, approximately 69% of sales were to the United States, 30% to Canada, with the balance representing sales to other foreign countries. For further information regarding foreign and domestic operations and export sales (see "Note 16 to Notes to Consolidated Financial Statements"). No single customer accounted for more than 10% of the Company's gross revenues during 1998, 1997 or 1996. SEASONALITY The Company's business is somewhat seasonal as its sales are traditionally stronger during the first half of the year than during the second half of the year. 9 11 BACKLOG As of December 31, 1998 and 1997, the dollar amount of backlog orders believed to be firm amounted to $2,924,000 and $1,425,000, respectively. MANUFACTURING PROCESS The Company utilizes technologically advanced equipment to manufacture its products. Manufacturing personnel take an active part in the research and development process to ensure that continual improvements in cost control, quality and technology are achieved. The Company has undertaken a project to implement perpetual inventory and material resource planning programs at all manufacturing locations via networking on a main frame computer. The Company has implemented this project at certain of its locations and plans to implement the project at all principal locations by the end of 1999. On November 13, 1996, the Company acquired substantially all of the assets and assumed certain liabilities of Trade Products, Inc. ("Trade") (the "Trade Acquisition"). The Company's domestic pulltab ticket production is consolidated at Trade's manufacturing facility in Lynnwood, Washington. The Company began to consolidate the Company's domestic production of bingo paper and ink dabbers is consolidated at its Texas border facilities. The Company has recently engaged an independent consulting firm to determine if other consolidation efforts would be beneficial to the Company. BINGO PAPER. The Company manufactures bingo cards on a number of specialized high-speed web presses capable of printing a variety of different game cards in configurations of 24, 30, 36 and 48 cards per sheet. The bingo cards are produced for inventory and then sold unfinished or are cut and packaged to meet customer specifications. The introduction of a new sophisticated laser printer in fiscal year 1997 has enabled the Company to manufacture in excess of 3,000,000 unique bingo cards for use primarily in satellite and high stakes games. The Company as a result, is actively servicing those markets. INK DABBERS. The Company fills ink dabbers and refills through automated liquid filling lines. The Company has the ability to customize ink dabbers by applying unique and distinct labels. A number of ink formulas have been developed specifically for use in the bingo industry, but the ink markers have also been sold to a variety of other markets. PULLTAB TICKETS. In manufacturing pulltab tickets, the Company utilizes a number of high speed, multicolor offset presses and a variety of other equipment, including laminators, collators, die-cutters and serial numbering machinery. SUPPLIERS The components for the Company's bingo equipment and the paper and other materials used in printing bingo sheets and pulltab tickets, are generally available from various suppliers at competitive prices. As a result, the Company is generally not dependent on any single supplier. The Company experienced stable prices in paper products during 1997. During 1998, the price of paper products increased slightly. The equipment, accessories and supplies which the Company distributes are standard items and are available from other manufacturers. 10 12 RESEARCH AND DEVELOPMENT ACTIVITIES The Company maintains a continuous product development program intended to enhance the Company's product lines and, thus, increase the Company's market penetration. Product development efforts in the bingo paper and pulltab ticket product lines are directed toward new product development, as well as, improvement of the graphic design of its current lines. The market for pulltab tickets, in particular, is ever-changing, requiring the continual introduction of new pulltab tickets in response to changing consumer preferences of design and color. The Company has substantially increased its commitment to the growing importance of electronic bingo systems in the Company's overall product mix by increasing the resources for development of its electronic bingo products. The Company believes that as a result of this increased commitment, the Company's electronic bingo systems have innovations unique in the industry and that the features offered in its electronic bingo systems are as comprehensive as any found in the market place. The Company is currently developing the next generation of the Company's fixed-based and hand-held electronic bingo products. These products were introduced at the Bingo World Expo in the first quarter of 1999. The Company expects to have initial sales of these products in the second quarter of 1999. The Company continually updates and redesigns its bingo hall equipment products 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. In particular, in 1998 the Company introduced a new PC-based bingo blower and desk that offers increased video capabilities and a touch screen user interface during the fourth quarter of 1998. GOVERNMENT REGULATIONS OVERVIEW. The Company is subject to regulation in most jurisdictions in which its bingo, bingo-related products (including pulltabs) and electronic gaming systems are sold or used by persons or entities licensed to conduct gaming activities. The gaming regulatory requirements vary from jurisdiction to jurisdiction and licensing, other approval or finding of suitability processes with respect to the Company, its personnel and its products, can be lengthy and expensive. Many jurisdictions have comprehensive licensing, reporting and operating requirements with respect to the sale and manufacture of bingo and bingo-related products, including bingo paper, pulltab tickets and electronic bingo equipment. These licensing requirements have a direct impact on the conduct of the day-to-day operations of the Company. Generally, gaming regulatory authorities may deny applications for licenses, other approvals or findings of suitability for any cause they may deem reasonable. There can be no assurance that the Company, its products or its personnel will receive or be able to maintain any necessary gaming licenses, other approvals or findings of suitability. The loss of a license in a particular jurisdiction will prohibit the Company from selling products in that jurisdiction and may prohibit the Company from selling its products in other jurisdictions. The loss of one or more licenses held by the Company could have an adverse effect on the Company's business. NATIVE AMERICAN GAMING. Gaming on Native American lands, including the terms and conditions under which gaming equipment can be sold or leased to Native American tribes, is or may be subject to regulation under the laws of the tribes, the laws of the host state and the IGRA. Under the IGRA, gaming activities are classified as Class I, II or III. Class II gaming includes bingo, and, if played at the same location as bingo, pulltab tickets. Class III gaming includes slot machines, video lottery terminals and casino style games. Native American tribes may conduct Class II gaming under the IGRA without having entered into a written compact with the state in which gaming is conducted if such state permits Class II 11 13 gaming, but must enter into a separate written compact with the state in which they are located in order to conduct Class III gaming activities. Tribal-state compacts vary from state to state. Many compacts require that equipment suppliers meet ongoing registration and licensing requirements of the state and/or the tribe, some establish equipment standards that may limit or prohibit the placement of electronic gaming systems on Indian lands, and some impose background check requirements on the officers, directors and shareholders of gaming equipment suppliers. Under the IGRA, tribes are required to regulate all gaming under ordinances approved by the Chairman of the National Indian Gaming Commission ("NIGC"). Such ordinances may impose standards and technical requirements on gaming hardware and software, and may impose registration, licensing and background check requirements on gaming equipment suppliers and their officers, directors and shareholders. REGULATION OF TRADITIONAL BINGO PRODUCTS AND PULLTAB TICKETS. Traditional paper bingo is legal in all states in the United States except Arkansas, Hawaii, Tennessee and Utah, and is legal in all provinces and territories in Canada. Pulltab tickets currently are legal for sale in 41 states. Each state has developed regulations that impact the style of play for its market. In several states, including Alaska, Minnesota, Nebraska, North Dakota, Ohio and Washington, it is legal for bars and taverns to sell pulltab tickets on their premises. In Minnesota, Ohio and North Dakota, pulltab tickets are sold by licensed nonprofit organizations in taverns, while in Alaska and Nebraska, taverns sell pulltab tickets as sales agents of licensed nonprofit organizations. In Washington, taverns sell pulltab tickets directly to their customers. At present, the states of Alaska, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Hampshire, New Jersey, New York, North Dakota, Oklahoma, Pennsylvania, South Carolina, South Dakota, Texas, Vermont, Virginia, Washington, West Virginia and Wisconsin require bingo and/or charitable gaming manufacturers and/or suppliers to be licensed. The Company is currently licensed in each of these jurisdictions, except for Maine. The Company has not applied for a license in Maine and does not conduct activities which it believes are subject to licensing in that state. The Company is permitted to and does ship products to licensed distributors in Maine. The Company also holds a Bingo Suppliers License in Los Angeles, California and in Anne Arundel County, Maryland and licenses from several Native American tribes that require licensing through their own tribal gaming commissions. The Company is registered in the Provinces of Ontario, Manitoba, New Brunswick and Nova Scotia which require the registration of manufacturers. In Canada, the Canadian National Gaming Law gives Provincial Governments the ultimate authority to conduct and manage all lottery schemes, including pulltabs and bingo. Ontario allows the sale of pulltab tickets at third-party retail locations under charity license. In November 1997, the Company was awarded a five-year provincial contract by the Ontario Gaming Control Commission to be the sole supplier of pulltab tickets to charity licensed retail locations in the Province of Ontario. The Provinces of British Columbia and Manitoba also have contracts with manufacturers to supply pulltab tickets and bingo paper. There is nothing to prevent any of the other Provinces from issuing requests for proposals for bingo paper, pulltab tickets or any other device utilized in legalized gaming. There can be no assurance the Company would be successful if additional contracts were tendered for these types of products. Because not all of the Company's products are legally allowed to be sold in every locality to which the Company ships products, the Company routinely contacts state agencies to determine the existence and nature of any state and local restrictions applicable to its products in order to comply with such restrictions. REGULATION OF ELECTRONIC GAMING SYSTEMS. The Company's electronic products, including System 12(TM) and Power Bingo King(TM), are more heavily regulated than traditional paper bingo, and federal, state, provincial, tribal and local regulations vary by jurisdiction. 12 14 IGRA defines Class II gaming to include "the game of chance commonly known as bingo, whether or not electronic, computer or other technologic aids are used in connection therewith," and defines Class III gaming to include "electronic or electromechanical facsimiles of any game of chance or slot machines of any kind." The Company believes that both its System 12(TM) and Power Bingo King(TM) are Class II games. In the event that either System 12(TM) or Power Bingo King(TM) is classified as a Class III device, such a designation would either (a) reduce the potential market for the devices, because only Indian gaming halls that had entered into a Tribal-State Compact that permits Class III electronic gaming systems would be permitted to use the device, or (b) require the Company to modify System 12(TM) or Power Bingo King(TM) to have it reclassified as a Class II game. If programmed to play video poker, video keno, video bingo, video slots or video pulltab tickets, System 12(TM) is properly classified as a Class III gaming system subject to the full range of regulations applicable to such systems. Electronic bingo is less widely permitted than paper bingo. Electronic bingo is currently operated at locations in over 25 states. Because many state laws and regulations are silent with respect to electronic bingo, changes in regulatory and enforcement policies could impact the continued operation of electronic bingo in these states. Some jurisdictions require the inspection, approval or modification of electronic bingo systems before sale in those states. In February 1998, the Company announced that the Texas Lottery Commission had approved the Company's application to enter the Texas market with its fixed-base product System 12(TM). The Company has submitted System 12(TM) for approval in Mississippi but has not yet submitted, nor received, approval for System 12(TM) in any other charitable gaming jurisdiction in the United States (other than various tribal locations). The Company is licensed by the Colorado Limited Gaming Commission to manufacture and sell slot machines in Colorado. This license will permit the Company to market System 12(TM) in Colorado once the system is tested and approved by the Commission. Though Canadian federal law prohibits the playing of games of chance on or through slot machines, computer or video devices, this law excepts playing such games in halls operated or authorized by the provincial governments. The Manitoba Lottery Corporation has installed System 12(TM) in its government-owned bingo halls. The Company is currently marketing System 12(TM) to the other provincial governments. Ontario is currently the only province that permits the use of hand-held bingo systems, and such systems are only permitted to be used in conjunction with paper bingo. GENERAL REGULATION OF STOCKHOLDERS AND OTHER SECURITYHOLDERS OF PUBLICLY TRADED CORPORATIONS. In certain jurisdictions, any beneficial owner of the Common Stock may be subject on a discretionary basis to being required to file applications with gaming regulatory authorities, to being investigated and found suitable or to being qualified. The gaming laws and regulations of some jurisdictions provide that beneficial owners of more than 5% of the Common Stock and, potentially, holders of the debt securities of the Company may be subject to certain reporting procedures and may be required to be investigated and licensed, qualified or found suitable. The Company's Certificate of Incorporation authorizes the Company under certain circumstances to redeem, at the lesser of the holder's original investment in the Company or the current market price, the Common Stock held by any person whose status as a shareholder may jeopardize the Company's gaming licenses or approvals. FEDERAL REGULATION. The Federal Gambling Devices Act of 1962 (the "Federal Act") makes it unlawful for a person to transport in interstate or foreign commerce or receive from interstate or foreign commerce any gambling device or component thereof, unless the person is registered with the Attorney General of the United States. The Company has registered and must renew its registration annually. In addition, various record keeping and equipment identification requirements are imposed by the Federal Act. 13 15 Violation of the Federal Act is a criminal act and penalties may include seizure and forfeiture of the equipment as well as other penalties. APPLICATION OF FUTURE OR ADDITIONAL REGULATORY REQUIREMENTS. In the future, the Company intends to seek the necessary licenses, approvals and findings of suitability for the Company, its products and its personnel in all jurisdictions throughout the world where significant sales are anticipated to be made. However, there can be no assurance that such licenses, approvals or findings of suitability will be obtained, that they will not be revoked, suspended or conditioned or that they will be obtained in a timely manner. If a license, approval or finding of suitability is required by a regulatory authority and the Company fails to seek, does not receive the necessary approved license or finding of suitability, or the necessary license approval or finding of suitability is revoked, the Company may be prohibited from selling its products for use in the respective jurisdiction or may be required to sell its products through other licensed entities at a reduced profit to the Company. COMPETITION The markets in which the Company's products compete are extremely competitive. The principal competitive factors in the bingo paper and pulltab ticket markets are quality, service and price. The Company's major competitor in the bingo paper and pulltab markets is Arrow International. The Company's electronic bingo systems, System 12(TM) and Power Bingo King(TM), compete with a number of other manufacturers of electronic bingo systems, none of whom manufacture a full line of bingo and bingo-related products. The Company also competes with other forms of entertainment such as lotteries, on-line gaming products and the continued expansion of the legalization by the United States, Canada and other foreign jurisdictions of casino gaming. While there can be no assurances that the Company will continue to remain competitive in these or other areas, the Company believes that through its strong distribution network, manufacturing facilities and technology it will be able to maintain its unique position as a manufacturer of a full line of both consumable and electronic bingo and bingo-related products. TRADEMARKS The Company believes that the trademarks Bingo King and Bazaar & Novelty have considerable value in the industry, based upon their extensive use for more than 30 years. The Company's trademark, Bingo King, the name, combination of the mark and name with a crown logo, and numerous other product names which it uses are registered with the United States Patent and Trademark Office. EMPLOYEES As of December 31, 1998, the Company had 1,740 full-time employees in the United States, Canada and Mexico. Approximately 250 employees of Stuart Entertainment Mexico are members of a union subject to a collective bargaining agreement. The collective bargaining agreement does not place any significant financial or operational burdens on the Company. The Company considers relations with its employees to be good. 14 16 ENVIRONMENTAL LAW COMPLIANCE Compliance with federal, state and local law in the United States and federal, provincial and municipal laws in Canada regulating the discharge of materials into the environment or otherwise relating to the protection of the environment has not had, and is not expected by the Company to have, any adverse effect upon capital expenditures, earnings or the competitive position of the Company. The Company is not presently a party to any litigation or administrative proceeding with respect to its compliance with such environmental standards. In addition, the Company does not anticipate being required to expend any material amount of funds in the near future for environmental protection in connection with its operations. ITEM 2. PROPERTIES FACILITIES The Company's corporate offices are located in Council Bluffs, Iowa. The following table sets forth the principal properties of the Company as of December 31, 1998.
OWNED OR EXPIRATION SQUARE LOCATION BUSINESS SEGMENT LEASED DATE FEET -------- ---------------- ------ ---- ---- Council Bluffs, Iowa Corporate Office Leased 12/31/1999(1) 25,000 McAllen, Texas Bingo paper Leased 03/31/2008(2) 157,600 Ink dabbers General Merchandise Reynosa, Mexico Bingo paper Leased 08/15/2005(2) 130,132 St. Catharines, Ontario Bingo paper Leased 08/31/2000(3) 158,000 Pulltab tickets Ink dabbers St. Catharines, Ontario General merchandise Leased 08/31/2000(3) 24,057 Littleton, Colorado Video King gaming systems Leased 08/31/2001(3) 20,000 Bingo hall equipment Lynnwood, Washington Pulltab tickets Leased 11/13/2006(4) 165,000 Bingo paper
- --------- (1) The Company amended the lease agreement on June 30, 1998. Pursuant to this amendment, the Company has the option to renew the lease for one additional nine month period. (2) The Company has the option to renew this lease for one additional five-year period. (3) The Company has the option to renew this lease for two additional five-year periods. (4) The Company has the option to renew this lease for one additional ten-year period. Substantially all of the Company's property and equipment are subject to liens to secure borrowings by the Company under the Credit Facility (or 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 In July 1995, the Company was sued by Fortunet, Inc. ("Fortunet") for alleged patent infringement in the United States District Court for the District of Nevada. Fortunet seeks an injunction and monetary 15 17 damages. The Company's involvement in the suit has two aspects. The first aspect involves a competitor's product, which the Company marketed for a brief period of time. The second aspect involves two of the Company's electronic gaming products, the System 12(TM) gaming system and the Power Bingo King(TM) portable hand-held bingo system, which are alleged to infringe on one or more of three of its patents. The Company believes that its products do not infringe the patents and furthermore that the patents are invalid. The Company is defending the suit on those bases. As to the first issue, that of infringement, the District Court has ruled on summary judgement (i) that System 12(TM) gaming system infringes two of the three patents (the Company will appeal that ruling at the appropriate time), and (ii) that neither the Power Bingo King(TM) hand-held system nor the competitor's product infringes either of those two patents. Action on the remaining patent has been stayed pending the outcome of reexamination proceedings in the U.S. Patent and Trademark Office. The district court recently denied Fortunet's motion for a permanent injunction against the Company's sales of the System 12(TM) gaming system, on grounds that the issue of the validity of the patents has not yet been decided. Trial may occur during the second half of 1999. If necessary, the Company intends to appeal the district courts ruling that the System 12(TM) gaming system infringes on two of the three patents at issue. In July, 1998, the Company was sued by Clarence J. Venne, Inc. ("Venne") in the United States District Court for the Eastern District of Pennsylvania. Venne seeks unspecified monetary damages, treble damages and injunctive relief. Venne asserts patent infringement claims and trademark infringement claims. The Company counterclaimed for trademark infringement. The plaintiff's claims are all in connection with bingo marker bottles introduced by the Company in 1998, which Venne alleges infringes on a certain utility pattern. Venne also alleges that the Company's "Dab Ez"(SM) service mark infringes one of Venne's trademarks. The Company has asserted defenses to the claims. Discovery is proceeding and settlement discussions are scheduled. In June 1996, the Company was sued by Arrow International in the United States District Court for the Northern District of Ohio. The suit related to patent infringement claims. The suit was settled by the parties on October 16, 1998. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of security holders during the fourth quarter of the period covered by this Report. 16 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock is traded on The Nasdaq OTC Bulletin Board 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. Prior to August 22, 1997, the Common Stock was traded on the Nasdaq National Market and between August 23, 1997 and July 28, 1998, the Company Stock was traded on the Nasdaq SmallCap Market (see "Business -- Certain Recent Developments -- Delisting from Nasdaq SmallCap Market; Disclosure Relating to Low Priced Stock").
1997: HIGH LOW - ----- ---- --- First Quarter $5 3/4 $3 7/8 Second Quarter $4 3/8 $2 5/8 Third Quarter $3 1/4 $2 Fourth Quarter $3 $1 5/16 1998: HIGH LOW - ----- ---- --- First Quarter $2 9/16 $1 10/16 Second Quarter $2 $1 1/8 Third Quarter $1 11/16 $ 33/64 Fourth Quarter $ 13/16 $ 1/8
At March 31, 1999, the Common Stock was held by 1,515 stockholders of record. The Company has not paid any cash dividends on its Common Stock during the past two years. The payment of cash dividends is restricted by the Credit Facility and the indenture for the Notes. 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 fiscal years in the five-year period ended December 31, 1998 are derived from the consolidated financial statements of the Company which have been audited 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. 17 19
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- SUMMARY OF OPERATIONS:(1) Net sales $ 118,642 $ 121,578 $ 108,705 $ 107,989 $ 57,915 Gross margin 33,446 36,324 32,659 33,267 14,928 Income (loss) before extraordinary item (2) (19,221) (13,145) (1,298) 786 (1,608) Net income (loss) (2) (19,221) (13,353) (2,231) 786 (1,608) Earnings (loss) per share before extraordinary item - basic (2.77) (1.91) (0.19) 0.12 (0.45) Earnings (loss) per share before extraordinary item - diluted (2.77) (1.91) (0.19) 0.12 (0.45) Earnings (loss) per share-basic (2.77) (1.94) (0.33) 0.12 (0.45) Earnings (loss) per share-basic (2.77) (1.94) (0.33) 0.12 (0.45) FINANCIAL CONDITION: Working Capital 29,179 37,578 54,025 20,018 14,454 Current ratio 2.3 2.9 3.5 1.8 1.7 Total Assets 136,699 137,824 154,595 98,994 88,977 Long-term debt 119,757 100,665 100,396 39,586 34,146 Stockholders' equity (accumulated deficit) (4,891) 16,732 30,358 32,040 30,153 OTHER FINANCIAL DATA: EBITDA adjusted (2) (3) $ 2,040 $ 7,872 $ 12,049 $ 12,117 $ 1,088 Net cash flows from operating activities (2) (11,846) (113) 1,464 (1,790) 1,202 Net cash flows from investing activities (8,168) (5,965) (38,150) (682) (30,396) Net cash flows from financing activities 17,226 (661) 49,464 1,260 30,822
- ----------------------- (1) On December 13, 1994, the Company completed the acquisition of Bazaar. On November 13, 1996, the Company completed the acquisition of Trade. On June 1, 1998, the Company completed the acquisition of ABS. On November 1, 1998 the Company completed the acquisition of Bingo Systems & Supply, Inc. The acquisitions have been accounted for using the purchase method of accounting and, accordingly, the operating results of Bazaar, Trade, ABS and Bingo Systems have been included with the Company's since the date of acquisition. See Note 3 to Notes to Consolidated Financial Statements of Stuart included herein. (2) Income (loss) before extraordinary item, net income, EBITDA and net cash flows from operating activities for 1998 were reduced by $5,833 of unusual charges for inventory reserves, bad debt reserves, executive severance's and other nonrecurring costs. 1997 amounts were reduced by $2,514 of nonrecurring charges related to consolidation activities and unusual legal and bad debt reserve charges. (See Management's Discussion and Analysis of Financial Condition and Results of Operations"). Excluding these charges, EBITDA on a normalized basis for 1998 and 1997 was $7,873 and $10,386, respectively. (3) EBITDA is defined as earnings before interest, taxes, depreciation, amortization, purchase accounting adjustments, restructuring charge and extraordinary item. EBITDA does not represent, and should not be considered as, an alternative to net income or cash flows from operating activities each as determined in accordance with generally accepted accounting principles ("GAAP"). Moreover, EBITDA does not necessarily indicate whether cash flow will be sufficient for such items as working capital or capital expenditures, or to react to changes in the Company's industry or to the economy generally. The Company believes that EBITDA is a measure commonly used by lenders and certain investors to evaluate a company's performance. EBITDA should not be considered by investors as an indicator of the Company's liquidity or ability to meet its cash requirements. The Company believes that EBITDA data may help to understand the Company's performance because such data may reflect the Company's ability to generate cash flow, which is an indicator of its ability to satisfy its debt service, capital expenditure and working capital requirements. 18 20 Because EBITDA is not calculated by all companies and analysts in the same fashion, the EBITDA measures presented by the Company may not be comparable to similarly-titled measures reported by other companies. Therefore, in evaluating EBITDA data, investors should consider, among other factors: the non-GAAP nature of EBITDA data; actual cash flow; the actual availability of funds for debt service, capital expenditures and working capital; and the comparability of the Company's EBITDA data to similarly-titled measures reported by other companies. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained in this report that are not historical fact are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates," or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. Management wishes to caution the reader that these forward-looking statements such as the timing, costs and scope of its acquisition of, or investments in, the bingo industry and new product development, the implementation of any form of restructuring transaction, year 2000 matters and other matters contained in this report or the documents incorporated by reference regarding matters that are not historical facts, are only predictions. No assurances can be given that the future results indicated, whether expressed or implied, will be achieved. While sometimes presented with numerical specificity, these projections and other forward-looking statements are based upon a variety of assumptions relating to the business of the Company, which, although considered reasonable by the Company, may not be realized. Because of the number and range of the assumptions underlying the Company's projections and forward-looking statements, many of which are subject to significant uncertainties and contingencies that are beyond the reasonable control of the Company, some of the assumptions inevitably will not materialize, and unanticipated events and circumstances may occur subsequent to the date of this report or the documents incorporated by reference. These forward-looking statements are based on current expectations and the Company assumes no obligation to update this information. Therefore, the actual experience of the Company and results achieved during the period covered by any particular projections or forward-looking statements may differ substantially from those projected. Consequently, the inclusion of projections and other forward-looking statements should not be regarded as a representation by the Company or any other person that these estimates and projections will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate. GENERAL The Company has incurred net losses of $19,221,000, $13,353,000 and $2,231,000 in 1998, 1997 and 1996, respectively. Management believes that the Company's operations have been adversely impacted by increased competition, including competition from companies which have quickly introduced new forms of gaming. The Company has attempted to offset the increase in competition by developing electronic bingo and pulltab systems and by consolidating manufacturing operations. Additionally, the Company has been pursuing an aggressive acquisition program in an effort to broaden its product offerings quickly. These actions have not yet offset the effects of declining margins caused by increased competition and the apparent decline in the popularity of traditional forms of bingo and pulltabs. The markets for the Company's products are intensely competitive and are subject to continuous, rapid technological change, short product life cycles and aggressive pricing. The Company competes in markets that includes a narrow customer base. The Company competes primarily on the basis of technology, product availability, performance, quality, price, reliability, distribution and customer service. 19 21 Results for the year ended December 31, 1998 included unusual charges for (i) a charge in the fourth quarter for executive severance of $0.7 million, (ii) a charge of $2.1 million recorded in the fourth quarter for the diminution in the value of inventory due to obsolescence, (iii) a $2.6 million charge to increase the allowance for bad debts for trade accounts and notes receivable in default of recovery and (iv) a $0.5 million charge for other nonrecurring costs. Results for the year ended December 31, 1997 include several unusual charges as the Company began the transition to complete the consolidation of its U.S. manufacturing operations, with pulltab operations completed in the fourth quarter of 1997 and the consolidation of paper and ink operations completed in the fourth quarter of 1998. These charges include (i) a restructuring charge recorded in the fourth quarter of 1997 of $2.3 million related to workforce reductions and an additional charge to complete the consolidation of U.S. manufacturing operations (see "Note 14 to Notes to Consolidated Financial Statements"), (ii) an extraordinary loss recorded in the fourth quarter of 1997 of $208,000, net of income taxes, to write off unamortized debt issuance costs related to early extinguishment of debt under a prior credit agreement (see "Note 7 to Notes to Consolidated Financial Statements"), (iii) a charge of $1.5 million recorded in the first quarter of 1997 related to the application of purchase accounting to the finished goods of Trade that were sold during the first quarter of 1997, (iv) a charge of $1.4 million recorded in the fourth quarter related to inventory levels of the product lines being consolidated, (v) a $0.4 million charge to bring a long term patent infringement lawsuit to trial in 1998 and (vi) a $0.7 million bad debt expense attributable to regulatory actions in the State of Washington and the likely consolidation of distributors in certain markets. Results for the year ended December 31, 1996 include unusual charges for (i) a restructuring charge of $3.3 million related to the planned consolidation of manufacturing operations (see "Note 14 to Notes to Consolidated Financial Statements"), (ii) a charge of $1.1 million to cost of goods sold related to the application of purchase accounting to the finished goods of Trade that were sold during the period November 13, 1996 through December 31, 1996 and (iii) an extraordinary loss recorded in the fourth quarter of 1996 of $933,000, net of income taxes, to write off unamortized debt issuance costs related to the repayment of debt under a prior credit agreement. MANAGEMENT CHANGES A new executive management team was employed in the fourth quarter of 1998 to make operational and strategic changes necessary to realize future growth opportunities and attempt to return the Company to profitability. In this regard, the Company announced the following new officers: Joeseph M. Valandra was named Chairman and Chief Executive Officer. Mr. Valandra, formerly Vice President with Grand Casinos, Inc., brings extensive experience in the gaming industry and excellent leadership ability. Ernie Marchand, formerly Director of Special Projects with Greg Thompson Production, was elected Executive Vice President and Chief Operating Officer. Mr. Marchand has an extensive background in marketing and operations. Lawrence X. Taylor, III was named Executive Vice President and Chief Financial Officer. Mr. Taylor, formerly Director of Financial Planning & Analysis and Director of Investor Relations with Grand Casinos, Inc., brings extensive experience in financial matters, investor relations and gaming industry background. 20 22 RESULTS OF OPERATIONS The following data sets forth operating data from the Company's Consolidated Statements of Operations, stated as a percentage of net sales.
YEARS ENDED DECEMBER 31, 1998 1997 1996 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Cost of goods sold 71.8 70.1 70.0 ----- ----- ----- Gross margin 28.2 29.9 30.0 Selling, general and administrative expenses 33.3 29.8 24.0 Restructuring charge -- 1.8 3.0 Legal expenses - unusual patent lawsuits -- 1.0 -- ----- ----- ----- Income (loss) from operations (5.1) (2.7) 3.0 Interest expense 11.3 10.3 4.9 ----- ----- ----- Loss before income tax benefit (16.4) (13.0) (1.9) Income tax benefit 0.2 2.2 0.7 ----- ----- ----- Loss before extraordinary item (16.2) (10.8) (1.2) Extraordinary item -- 0.2 0.9 ----- ----- ----- Net loss (16.2%) (11.0%) (2.1%) ===== ===== =====
During 1998, the Company determined that certain shipping charges previously accounted for as cost of goods sold and selling, general and administrative expenses should be accounted for as a reduction of net sales. The financial results for fiscal years 1997 and 1996 have been restated to conform to the 1998 financial statement presentation. The effect of this restatement was to lower net sales by $3.5 million, cost of goods sold by $2.0 million and selling, general and administrative expenses by $1.5 million, respectively, in 1997 and to lower net sales by $1.9 million, cost of goods by $1.7 million and selling, general and administrative expenses by $0.2 million respectively, in 1996. Years Ended December 31, 1998 and 1997 Net Sales. Net sales were $118.6 million for the year ended December 31, 1998, a decrease of $2.9 million or 2.4% from $121.6 million for the year ended December 31, 1997. In Canada, sales decreased $2.6 million or 6.9% for the year ended December 31, 1998 compared to the year ended December 31, 1997. Each of the Company's business segments experienced lower sales volumes in Canada in 1998 compared to 1997 with consumable bingo products decreasing $1.2 million or 5.2%, pulltab and lottery products decreasing $0.8 million or 6.4% and electronic bingo products decreasing $0.5 million or 43.8%. Consumable bingo products sales in Canada were adversely impacted by increased competition from manufacturing rivals, as well as from an increase in other forms of gaming. The Canadian pulltab and lottery ticket market continues to be adversely influenced by an increase in government fees, thereby reducing the prize payout levels. In addition, the weakening Canadian dollar negatively impacted sales by approximately $2.5 million or 6.6%. Domestically, the Company experienced a slight decrease of $0.3 million or 0.4% for the year ended December 31, 1998 compared to the year ended December 31, 1997. Specifically, consumable bingo products decreased $4.4 million or 9.8%, pulltab and lottery products decreased $0.6 million or 2.0%. 21 23 Partially offsetting these decreases was an increase in electronic bingo products of $4.7 million or 52.8% attributable to the increase of $5.0 million in sales generated from the installation of Power Bingo King(TM) hand-held electronic bingo systems. The sales of consumable bingo products and pulltab and lottery products has been adversely impacted by increased competition from manufacturing rivals and a decline in the popularity of traditional bingo and pulltabs due to the increase in other forms of gaming and entertainment. The Company expects the softness in the industry to continue in 1999 due to competitive pressures from other sources of gaming and entertainment. However, the Company expects sales from the Power Bingo King(TM) hand-held electronic bingo systems to continue to increase, which the Company expects will partially offset the softness in consumable bingo products and pulltab and lottery product segments. Cost of Goods Sold. Cost of goods sold, as a percentage of sales, was 71.8% for the year ended December 31, 1998, an increase of 1.7 percentage points from 70.1% for the year ended December 31, 1997. In terms of dollars, cost of goods sold was $85.2 million for the year ended December 31, 1998 compared to $85.3 million for the year ended December 31, 1997. The increase is primarily attributable to (i) a $2.1 million charge to operations in the fourth quarter of 1998 for unsaleable consumable bingo products and pulltab and lottery products, (ii) production inefficiencies relating to the consolidation of manufacturing operations at the Texas border facilities and (iii) lower demand for the Company's higher margin products. These increases were partially offset by lower pulltab production costs in 1998 compared to 1997 arising from the consolidation of manufacturing operations completed in the second quarter of 1997. In Canada, cost of sales decreased $0.1 million or 0.6% in 1998 compared to 1997 primarily attributable to lower sales of electronic bingo products. This decrease was partially offset by a slight increase in the cost of sales for consumable bingo products of $0.1 million or 1.1% due to higher unfavorable production variances. Domestically, electronic bingo products cost of sales increased $3.0 million or 51.4% primarily due to the impact of the increase in installation of Power Bingo King(TM) electronic hand-held bingo systems and by an increase of $0.8 million or 2.3% in consumable bingo products due in part to the write down of certain unsaleable inventory and in part to production inefficiencies at the Texas border facilities. These increases in the domestic cost of goods sold were offset by a reduction in the cost of sales for pulltab and lottery products as compared to 1997 arising from consolidating manufacturing. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $39.4 million for the year ended December 31, 1998, an increase of $3.3 million or 9.1%, compared to $36.2 million for the year ended December 31, 1997. The increase is primarily due to (i) executive severance of $0.7 million associated with the contracts of the prior executive management, (ii) increase in bad debt expense of $1.5 million resulting from write-offs of uncollectible accounts and notes receivable, (iii) increase in travel expenses incurred to integrate and reorganize the businesses and (iv) increase in research and development expenses of new and upgraded electronic products. These increases were offset partly by lower telecommunications expenses and the benefit realized by the workforce reduction program the Company implemented in the fourth quarter of 1997. Interest Expenses, Net. Interest expense, net of interest income, was $13.4 million for the year ended December 31, 1998, an increase of $0.9 million or 7.3% from $12.5 million for the year ended December 31, 1997. Interest expense, net, as a percentage of sales was 11.3% for the year ended December 31, 1998 compared to 10.3% for the year ended December 31, 1997. The increase is primarily attributable to accrued interest on the Credit Facility borrowings commencing in the second quarter of 1998, lower 22 24 interest income earned due to higher utilization of cash to operate the business and to slightly higher amortization of deferred debt financing costs. Income Tax Benefit. The Company recorded an income tax benefit of $211,000 for the year ended December 31, 1998, compared to $2,637,000 for the year ended December 31, 1997. The effective tax rate was (1.1%) for the year ended December 31, 1998 compared to (16.7%) for the year ended December 31, 1997. The increase in the effective tax rate and the decrease in the income tax benefit is primarily attributable to the increase in the valuation allowance due to the uncertainty regarding realization of certain long-term future tax benefits. Realization of future tax benefits related to the deferred tax assets is dependant on many factors, including the Company's ability to generate taxable income in the United States and Canada within net operating loss carryforward periods. Net loss. The net loss was $19.2 million for the year ended December 31, 1998, an increase of $5.8 million or 43.9%, from $13.4 million for the year ended December 31, 1997. In 1998, competition had a negative impact on profit margins of the consumable bingo products and pulltab and lottery products segments. In addition, the Company continued to experience production inefficiencies as a result of consolidating the U.S. bingo paper production at the Texas border facilities although this was offset in part by improved pulltab production operating efficiencies. Also, gross margins were negatively impacted by a $2.1 million charge for the write down of obsolete inventory. The Company also incurred higher bad debt expense resulting from a $2.4 million charge in the fourth quarter of 1998 for trade accounts and notes receivable in risk of default, and the Company incurred a $0.7 million charge in the fourth quarter of 1998 for executive severance. Years Ended December 31, 1997 and 1996 Net Sales. Net sales were $121.6 million for the year ended December 31, 1997, an increase of $12.9 million or 11.8% from $108.7 million for the year ended December 31, 1996. The Company experienced mixed results in each reportable segment in 1997 compared to 1996. Sales of consumable bingo products decreased $2.4 million or 3.4% due to a continuing decrease in sales in the charitable gaming industry, chiefly in domestic markets due to competitive pricing pressures particularly from smaller suppliers and alternative forms of gaming and entertainment. In addition, the consumable bingo products segment was negatively impacted by the Company's ongoing consolidation and relocation of bingo paper and ink dabber manufacturing operations to the Texas border facilities. The increase in net sales of $15.7 million in the pulltab and lottery products segments was primarily attributable to the consolidation of Trade which was acquired in the fourth quarter of 1996. Conversely, the Company experienced an adverse effect on pulltab revenues in Ontario, Canada in the third and fourth quarter of 1997 due to uncertainty of the pulltab contract renewal by the Ontario Gaming Commission that partially offset the increase in the sales of pulltab and lottery products in the United States. Electronic bingo products resulted in a $0.4 million or 3.8% decrease in 1997 compared to 1996. The decrease is attributable to sales of the System 12(TM) electronic fixed-base gaming systems in 1996 that were not repeated in 1997. The decrease was offset in part by an increase of $2.4 million in sales of Power Bingo King(TM) hand-held electronic bingo systems which was acquired in the third quarter of 1997 and by a $0.3 million or 4.7% increase in bingo hall equipment. Cost of Goods Sold. Cost of goods sold, as a percentage of sales was 70.1% for the year ended December 31, 1997 compared to 70.0% for the year ended December 31, 1996. Excluding the application of purchase accounting adjustments recorded in the first quarter of 1997 and the fourth quarter of 1996 to the finished goods inventory of Trade and excluding the impact of Power Bingo King since the acquisition 23 25 in the third quarter of 1997, cost of goods sold, as a percentage of sales was 69.2% for the year ended December 31, 1997 compared to 69.0% for the year ended December 31, 1996. In terms of dollars, cost of goods sold were $85.3 million for the year ended December 31, 1997, an increase of $9.2 million or 12.1% from $76.0 million for the year ended December 31, 1996. The increase in cost of sales, as a percentage of sales, is attributable to a charge of $1.4 million in the fourth quarter of 1997 related to inventory write downs resulting from consolidating consumable bingo products, pulltab and lottery products and electronic bingo products; to production inefficiencies resulting from the consolidation of bingo paper manufacturing operations primarily in Iowa and Texas; ink dabber production inefficiencies in Iowa attributable to high inventory levels and lower product demand; production inefficiencies resulting from the consolidation of pulltab manufacturing in the first half of 1997 from Iowa to Washington; pulltab ticket production inefficiencies in the third and fourth quarter of 1997 in Ontario, Canada due to lagging product sales attributable the uncertainty of the pulltab contract renewal by the Ontario Gaming Commission; and by the effect of the cost of System 12(TM) electronic fixed-base gaming sales in 1996 that did not occur in 1997. These increases were partially offset by the lower raw material newsprint prices in 1997 compared to 1996 and in part to lower pulltab production costs beginning in the second half of 1997 attributable to the consolidation completed in the second quarter of 1997. Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses were $36.2 million for the year ended December 31, 1997, an increase of $10.1 million or 38.9% from $26.1 million for the year ended December 31, 1996. The increase is primarily attributable to the consolidation of Trade that added SG&A expenses of $6.2 million. Excluding the effect of the consolidation of Trade, the Company's SG&A expenses increased $3.9 million or 15.8%. This increase is primarily due to increases in (i) travel costs incurred to integrate and operate the new businesses, (ii) bad debt expense attributable to regulatory actions in the state of Washington, which adversely affected certain customers' ability to comply with more restrictive repayment terms and the likely consolidation of distributors in certain markets, (iii) salaries and fringe benefits and (iv) unfavorable foreign currency exchange rates. Restructuring Charge. The Company, in the fourth quarter of 1997, recorded a restructuring charge of $2,261,000 related to workforce reductions and charges to complete the consolidation of its U.S. manufacturing operations. The restructuring charge includes (i) $1,229,000 for severance costs and the buyout of certain employment contracts in order to reduce certain sectors of its U.S. and Canadian workforce to levels more appropriate for the expected adverse impact that the continuing competitive business conditions will have on 1998 and subsequent year's operations, (ii) $1,032,000 for modifications to the manufacturing consolidation plan and (iii) additional costs to complete consolidation of its U.S. manufacturing operations. Legal Expenses - unusual patent lawsuit. Legal expenses of $1.2 million were incurred in the year ended December 31, 1997 to litigate a long standing patent infringement lawsuit filed by a competitor, including $400,000 to bring the case to trial in 1998. The trial has been delayed and may occur during the second half of 1999. Interest Expense, Net. Interest expense, net of interest income, was $12.5 million for the year ended December 31, 1997, an increase of $7.2 million from $5.3 million for the year ended December 31, 1997. The increase is attributable to interest on the Notes as the private placement (the "Offering") was completed in November 1996. 24 26 Income Tax Benefit. The income tax benefit increased $1.9 million to $2.6 million for the year ended December 31, 1997. The increase is due to the increase in the loss before income tax benefit of $15.8 million for the year ended December 31, 1997 compared to a loss before income tax benefit of $2.0 million for the year ended December 31, 1996. The effective tax rate was (16.7%) for the year ended December 31, 1997 compared to (35.5%) for the year ended December 31, 1996. The decrease in the effective tax rate is primarily attributable to the recognition of a valuation allowance due to the uncertainty regarding realization of certain long-term future tax benefits. Realization of future tax benefits related to the deferred tax assets is dependent on many factors, including the Company's ability to generate taxable income within the net operating loss carryforward periods. Net loss. The net loss was $13.4 million for the year ended December 31, 1997, an increase of $11.2 million from $2.2 million for the year ended December 31, 1996. The increase in net loss is attributed partially to deteriorating margins due to increased competitive pricing pressures that negatively impacted consumable bingo products and pulltab and lottery products. In addition, the Company's manufacturing operations encountered escalating costs resulting from production inefficiencies due to the consolidation of its U.S. manufacturing operations, as well as a $1.4 million charge in the fourth quarter of 1997 to write down the value of certain inventory for product lines being consolidated. The Company also incurred higher selling, general and administrative expenses to operate the combined businesses as well as additional legal expenses to litigate a patent infringement matter. Interest expense was significantly higher and the increase of $7.2 million is attributable to the interest on the Notes. LIQUIDITY AND CAPITAL RESOURCES The Company's principal uses of cash are for the purchase and carrying of inventory, the carrying of accounts receivable and notes receivable, the purchase of fixed assets and for normal operating expenses. The primary amounts and ratios relating to liquidity and capital resources for the past two years are as follows:
1998 1997 ---- ---- (DOLLARS IN THOUSANDS) Working capital $ 29,179 $ 37,578 Current ratio 2.3 2.9 Total long-term debt $ 119,757 $ 100,754 Stockholders' equity (deficit) $ (4,891) $ 16,372 Total capitalization $ 114,866 $ 117,126 Debt to capitalization ratio 104.3% 86.0% Capital expenditures for property, plant and equipment $ 3,726 $ 3,525 Capital expenditures for electronic bingo systems $ 4,324 $ 1,587
FINANCING ACTIVITIES In November 1997, the Company entered into the Credit Facility for a three-year term expiring in November 2000. The Credit Facility, as amended, provides for maximum borrowings of up to $30.0 million of which up to $20.0 million may be borrowed under the U.S. Facility and up to $10.0 million may be borrowed under the Canadian Facility. At December 31, 1998, the Company had borrowed $17,673,000 at a weighted-average interest rate of 8.09% of which $13,850,000 was borrowed on the U.S. Facility and $3,823,000 was borrowed on the Canadian Facility. At December 31, 1997 the Company had not yet drawn any amounts under the Credit Facility. The Company and Bazaar also had $1.2 and $0.2 million, respectively, in stand-by letters of credit secured by the Credit Facility. The 25 27 letters of credit are considered advances and reduce the availability of the borrowing base. (See "Business - Certain Recent Developments - Credit Facility"). The Borrowers are entitled to draw amounts under the Credit Facility, subject to availability pursuant to a borrowing base certificate. The borrowing base is based on the eligible accounts receivable, eligible inventory and equipment value levels of the Company and the Canadian Borrower, respectively. At December 31, 1998, and 1997, $5.1 and $27.7 million, respectively, were available for borrowing under the Credit Facility. The Credit Facility generally provides for interest on the US Facility at the prime rate plus 1/4% to 3/4% or at a Eurodollar rate plus 2-1/4% to 2-3/4%, at the option of the Company. The Canadian Facility generally provides for interest at the Canadian prime rate plus 1-1/4% to 1-3/4%. The Credit Facility imposes certain covenants and other requirements on the Borrowers. In general, the affirmative covenants provide for mandatory reporting by the Borrowers of financial and other information to the lenders and notice of certain events. The Credit Facility also contains certain negative covenants and restrictions on actions by the Borrowers that, among other things, restrict (i) the incurrence and existence of indebtedness or contingent obligations, (ii) consolidations, mergers and sale of assets, (iii) the incurrence and existence of liens, (iv) the sales of disposition of assets, (v) investments, loans and advances, (vi) the payment of dividends and the repurchases of the Company's common stock (the "Common Stock") and (vii) acquisitions by the Borrowers. In addition under certain circumstances, the Borrowers must meet a minimum level of net worth when the Excessive Availability based on the current borrowing base certificate is less than $5.0 million. The Credit Facility further contains customary events of default including non-payment of principal, interest or fees and violations of covenants. Interest on the Notes is payable semi-annually on each May 15 and November 15. The indenture governing the Notes imposes certain limitations on the Company's ability to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments and consummate certain asset sales. The Indenture also provides that upon the occurrence of a Change of Control (as defined in the Indenture), each holder of Notes will have the right to require the Company to purchase all or a portion of such holder's Notes at a purchase price equal to 101% of the principal amount plus accrued interest to the date of purchase. In such event, there can be no assurance that the Company will have available funds sufficient to pay the Change of Control purchase price for all of the Notes, and the Company expects that it would seek third party financing to the extent it does not have available funds to meet its purchase obligations. There can be no assurance that the Company would be able to obtain such financing. POTENTIAL RESTRUCTURING During February 1999, the Company's new management team determined that the financial results for the prior year indicated that the Company's cash flow was not going to be sufficient to service its debt. Therefore, management has been contemplating implementing an operational and financial restructuring. In connection with these efforts, the Company has retained an investment banking firm and certain other advisors to assist it in analyzing its various restructuring alternatives. 26 28 The Credit Facility provides for maximum borrowings of up to $30 million. The Credit Facility imposes certain covenants and other requirements on the Company and Bazaar. The Company expects that it may not comply with certain of the covenants in the Credit Facility, including the requirement that the Company maintain a certain minimum level of net worth. The Company and Congress currently are in the process of negotiating the terms of a Forbearance Agreement with respect to the Credit Facility, and it is expected that the parties will enter into such a Forbearance Agreement in the near future. However, there can be no assurance that a Forbearance Agreement will be entered into in the near future, if at all, and the failure to enter into such an agreement would have a material adverse effect on the Company. The Company has $100 million in Notes outstanding, and an interest payment with respect to the Notes is due May 15, 1999. The Company is considering its various alternatives with respect to this payment. In light of the potential restructuring, an ad hoc committee of the holders of the Notes was formed and has retained its own counsel. The Company is in the process of negotiating the terms of a consensual restructuring with the ad hoc committee. Under any restructuring alternative, it is likely that the Notes will be converted into equity, and that the Company's common stock will be subject to substantial dilution or complete elimination as a result of such conversion. However, there can be no assurance that such a consensual restructuring will be consummated, and absent a consensual arrangement, the Company will consider filing for reorganization under Chapter 11 of the Bankruptcy Code to effect a restructuring. Management believes that any contemplated restructuring transaction will be structured to provide the Company with sufficient liquidity during the restructuring period. Management believes that, despite the financial uncertainties in the near future, it has under development a business plan that, if successfully funded and executed as part of the restructuring can improve its operating results. The continuing support of the Company's vendors, customers, lenders, stockholders and employees during any restructuring will be the key to the Company's success. CASH FLOWS The cash balances at December 31, 1998, 1997 and 1996 were $4.4 million, $7.1 million and $13.7 million, respectively. The changes in cash for the last three years were:
(DOLLARS IN THE THOUSANDS) 1998 1997 1996 ---- ---- ---- Operating Activities: Net loss $(19,221) $(13,353) $ (2,231) Other operating activities 5,669 6,173 8,509 Working capital resources 1,706 7,067 (4,814) -------- -------- -------- Total Operating Activities (11,846) (113) 1,464 Investing Activities (8,168) (5,965) (38,150) Financing Activities 17,362 (555) 49,475 -------- -------- -------- Net change in cash and cash activities $ (2,652) $ (6,633) $ 12,789 ======== ======== ========
Trade receivables decreased $4.0 million from $23.1 at December 31, 1997 to $19.1 million at December 31, 1998. The decrease was due in part to the charge off of uncollectible accounts and in part to the increase in the allowance for doubtful accounts in the current year. Current and long-term notes receivables decreased from $3.8 million at December 31, 1997 to $3.1 million at December 31, 1998. The decrease was primarily due to the increase in the allowance for doubtful accounts. 27 29 The Company is subject to credit risk through trade receivables and note receivables. Although a substantial portion of the Company's customers ability to pay is dependent upon the bingo, gaming and overall entertainment industries, management believes that credit risk is mitigated due to a large customer base, geographic dispersion and its long standing relationships with many of its customers. Inventories increased $1.2 million from $20.9 million at December 31, 1997 to $22.1 million at December 31, 1998. The increase is due primarily to $2.8 million increase in electrical bingo systems, specifically pertaining to the Gold Crown video enhanced pulltab ticket dispenser the company introduced in the third quarter of 1998 and to a lesser extent to a $0.4 million increase in consumable bingo products. This increase was partially offset by a decrease in pulltab and lottery products of $2.0 million due in part to an increase in the reserve for obsolesce and to a planned reduction in product held to meet the anticipated lower product demand. CAPITAL EXPENDITURES The Company's capital expenditures for property, plant and equipment were $3.7 million during 1998 compared with $3.5 million during 1997. The Company's capital expenditure program has historically focused on the purchase of equipment designed to increase production capacity and improve manufacturing efficiencies. During 1998, the Company's capital expenditure program focused on the consolidation of United States manufacturing operations, the purchase of equipment designed to improve manufacturing efficiency and the upgrading and development of management information systems. Capital expenditures for electronic bingo systems consist of System 12(TM) and Power Bingo King(TM) electronic bingo systems that are placed in the market and immediately generate revenue on a lease or revenue sharing basis. The Company's $2.7 million increase for electronic bingo systems is primarily due to the manufacture and placement of Power Bingo King(TM) hand-held electronic bingo units. The Company began placing the units following the July, 1997 acquisition of substantially all the assets of Power Bingo Corporation. INFLATION Management does not believe that inflation has had or is expected to have any significant adverse impact on the Company's financial condition or results of operations for the periods indicated. YEAR 2000 ISSUE During 1998, the Company began working to fully determine whether its computer systems and related software would properly recognize the year 2000 and continue to process data. The year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The Company is aware of the issues associated with the programming code in its existing computer systems in order for the systems to recognize date sensitive information when the year changes to 2000. The Company has a year 2000 program address (i) central business systems, (ii) site operations, (iii) products and (iv) major suppliers. The program consists of the following phases awareness, assessment, remediation, testing and contingency planning. The Company is in the process of remediation and testing with regard to the central business systems used by the Company. The process includes either hard testing of the systems and subsystems, vendor declaration and certification, or both. Currently, management believes those systems to be date compliant such that they will not pose a significant risk to the Company's future business operations. However, certain information systems pertaining to a recently acquired distributor have been determined to 28 30 be non compliant. A conversion to the Company's current information systems is scheduled for completion in the fourth quarter of 1999. The cost to bring this distributor's information systems compliant is not expected to be material. Teams have been established at each of the Company's principal locations throughout the United States, Canada and Mexico and are charged with assessing the state of compliance for all facility systems and equipment, and developing remediation plans where necessary. A majority of the site assessments have been completed, and the Company expects to complete the evaluation of remediation plans by the end of the second quarter of 1999. In the site locations where the assessments are complete, management currently believes the facilities systems and equipment to be year 2000 compliant such that they will not pose a significant risk to the Company's future business operations. The Company produces and markets a wide array of products, many of which do not have year 2000 or date/time issues. A large portion of products that the Company has identified to have year 2000 issues have been declared year 2000 compliant. Other products are either in various phases of testing software upgrades or have final solutions available for implementation. Currently, there is no indication that any of the identified issues will have a material adverse impact on the operation of these products other than through the recording of date and time for reporting purposes. Currently, an assessment of major suppliers is being performed with substantial completion expected during the second quarter of 1999. As part of this process the Company will request written assurances from these suppliers that they have year 2000 readiness programs in place, as well as an affirmation that they will be compliant when necessary. There can be no assurance that the systems of suppliers will be successfully converted on a timely basis. The Company, therefore, could be adversely impacted by such things as loss of revenue, production delays, lack of third party readiness and other business interruptions. Accordingly, the Company has begun developing contingency plans to address potential issues, which include, among other actions, development of emergency back up and recovery procedures, build-up of essential inventories and identification of alternate suppliers. The ultimate effect of the Company or its suppliers not being fully year 2000 compliant is not reasonably determinable. As of the date of this filing, the Company has not finalized a contingency plan to address the failure of the Company or its suppliers to be year 2000 compliant. The total amount of costs to be incurred by the Company to address year 2000 issues cannot be reasonably estimated at this time. To date, the Company has not incurred any material costs directly associated with its compliance efforts, except for compensation expenses associated with employees who have devoted some of their time to the Company's year 2000 program. The Company does not expect the total cost of the year 2000 issue to be material to its business, results of operations, liquidity or financial condition. In addition to the other information contained in this Report, the Company cautions stockholders and potential investors that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results of and could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by on or on-behalf of, the Company. The following information is not intended to limit in any way the characterization of other statements or information under other captions as cautionary statements for such purpose: 29 31 - - The Company has incurred a significant amount of indebtedness and a substantial portion of the Company's cash flow from operations must be dedicated to debt service and will not be available for other purposes. - - Due to the current indebtedness, the Company's ability to obtain additional financing in the future and the Company's flexibility in reacting to changes in the industry and economic conditions generally may be limited. - - The Credit Facility is subject to variable rates of interest and a substantial increase in interest rates could adversely affect the Company's ability to service the debt obligations under the Credit Facility. - - The ability to meet the financial ratios and tests related to the Company's indebtedness. - - The continued popularity of bingo as a leisure activity and means of charitable fundraising. - - The Company's ability to remain competitive in the bingo paper, pulltab tickets and electronic bingo markets. - - The Company's ability to maintain relationships with distributors. - - The ability to attract and return highly qualified management and product development personnel. - - Changes in laws or regulatory requirements impacting the conduct of gaming activities and the sale and manufacture of bingo related products including bingo paper, ink dabbers and electronic bingo equipment. - - Fluctuation in the price of paper. - - The Company's ability to effectively protect its technology from competitors and the costs related thereto. - - The Company's ability to anticipate changing technology and products and to efficiently develop, introduce or obtain the rights to technological advancements and new products that will gain customer acceptance. 30 32 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities at fair value. It is effective for financial statements for fiscal years beginning after June 15, 1999. The Company has not evaluated the impact of SFAS 133 on the Company's future earnings and financial position, but does not expect it to be material. The principal market risks (i.e., the risk of loss arising from adverse changes in market prices and rates) to which the Company is exposed are: - Interest rates on notes receivables. - Commodity prices, affecting the cost of certain raw materials. - Interest rates on the Company's debt. - Foreign exchange rates and other international market risks. The Company is exposed to market risk from changes in interest rates. The Company's notes receivable consist primarily of fixed rate interest bearing securities. The total notes receivable at December 31, 1998 was $3.1 million, which approximates 2% of the total assets. Management believes the exposure will be minimal as the Company plans to hold the notes to maturity and the life of the notes is less than two years. Raw materials used by the Company are exposed to the impact of changing commodity prices, particularly newsprint, because its ability to recover increased costs through higher pricing may be limited by the competitive environment the Company operates in. The Company does not enter into commodity future and option contacts to manage fluctuations in prices on anticipated purchases of these raw materials. The Company may develop a policy to use such derivative financial instruments only to the extent necessary to manage these exposures. The Company's interest sensitive liabilities are its debt instruments consisting of a floating rate U.S. Credit Facility based on the prime rate plus 1/4% to 3/4% or at Eurodollar rate plus 2-1/4% to 2-3/4% and a Canadian Credit Facility at Canadian prime rate plus 1-1/4% to 1-3/4%. Because the interest rate on the Credit Facility is variable, the Company's cash flow may be affected by increases in interest rates, in that the Company would be required to pay more interest in the event that both the prime (U.S. and Canadian) and Eurodollar interest rates increase. Management does not, however, believe that any risk inherent in the variable rate nature of the loan is likely to have a material effect on the Company's interest or available cash. A 10% proportionate increase in interest rates in 1999 as compared to the average level of interest notes in 1998, would result in an increase to pretax loss of approximately $0.15 million. This increase to the pretax loss is caused by the Company's variable rate Credit Facility. Conversely, a corresponding decrease in interest rates would result in a comparable improvement to the pretax loss. 31 33 The Company has significant operations in Canada and Mexico. All Canadian activities are recorded in their functional currency and translated to U.S. dollars at current exchange rates, while Mexican activities are maintained in pesos and are translated into U.S. dollars at current exchange rates. Operating in international markets involves exposure to fluctuations in currency exchange rates. The Company does not enter into forward foreign exchange currency contacts to hedge the exposure on the activities of the operating units functional currency to minimize the volatility of reported earnings because the Company does not believe it is justified by the exposure or cost. The Company estimates that a 10% decrease in Canadian foreign exchange rate would result in $2.5 million loss in net sales. Management intends to consider whether the management of foreign currency market risk through the use of a variety of financial and derivative instruments would be advantageous. 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. 32 34 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS The following table sets forth the name and age of each director of the Company, his principal occupation and business experience during the past five years, and the year of commencement of his term as a director of the Company.
PRINCIPAL OCCUPATION OR EMPLOYMENT DURING DIRECTOR NAME AND AGE THE PAST FIVE YEARS; OTHER DIRECTORSHIPS SINCE ------------ ---------------------------------------- ----- Sangwoo Ahn General partner of MLGAL Partners, L.P. since 1987 and a 1994 (60) managing director of Morgan, Lewis, Githens & Ahn, an investment banking firm, since 1982. Mr. Ahn also serves as a director of ITI Technologies, Inc., PAR Technology Corp., Kaneb Services, Inc., Kaneb PipeLine Partners, L.P., Gradall Industries, Inc. and Quaker Fabric Corporation. Perry J. Lewis General partner of MLGAL Partners, L.P. since 1987 and a 1994 (61) managing director of Morgan, Lewis, Githens & Ahn, an investment banking firm, since 1982. Mr. Lewis also serves as a director of ITI Technologies, Inc., Gradall Industries, Inc., Aon Corporation and Chancellor Media Corporation. Jock Patton Private investor since 1997, Mr. Patton also served as president 1999 (53) of StockVal, Inc. from November 1993 to June 1997. Mr. Patton also serves as a director of Hypercom Corporation and JDA Software Group, Inc. and is a trustee of the Pilgrim Mutual Funds, a group of eight mutual funds. Mr. Patton was appointed to the board of directors effective February 3, 1999. Ira Starr Managing Director of Long Point Capital, Inc. since January 1994 (39) 1998; vice president of Morgan, Lewis, Githens & Ahn, an investment banking firm, from 1988 to 1993 and a managing director from 1994 to December 1997. Joseph M. Valandra Chairman of the Board, Chief Executive Officer and President 1998 (43) since October 1998. Vice President of Grand Casinos, Inc. from November 1993 to October 1998.
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. Messrs. Ahn, Lewis and Starr were selected as directors pursuant to the terms of a Securityholders' Agreement (the "Securityholders' Agreement") dated as of October 3, 1994 by and 33 35 among the Company, Bingo Holdings, Inc. and Leonard A. Stuart. The Securityholders' Agreement was amended in connection with the Company's acquisition (the "Trade Acquisition") of Trade Products, Inc. in November 1996 and currently provides that the Board of Directors (the "Board") will be comprised of up to ten members, four of whom an affiliate of Morgan Lewis Githens & Ahn, Inc. (the "MLGA Affiliate") may, but shall not be required to designate for nomination. The MLGA Affiliate has designated as its nominees Messrs. Ahn, Lewis and Starr. The Securityholders' Agreement also imposes certain transfer restrictions on the parties to the Securityholders' Agreement and their affiliated transferees and provides such parties and transferees with demand and incidental registration rights with respect to the Shares. COMPENSATION OF DIRECTORS Effective beginning fiscal year 1999 the Company has agreed to pay its independents directors a $20,000, initial payment plus $2,000 for each board or committee meeting attended up to an annual maximum of $35,000. All directors are reimbursed travel expenses relating to attendance at each meeting. EXECUTIVE OFFICERS Information is set forth below regarding the executive officers of the Company, including their age, principal occupation during the last five years and the date each first became an executive officer of the Company.
EXECUTIVE OFFICER OF NAME AND AGE PRESENT EXECUTIVE OFFICERS REGISTRANT SINCE ------------ -------------------------- ---------------- Joseph M. Valandra Chairman of the Board, Chief Executive Officer and President 1998 (43) since October 1998. Vice President of Grand Casinos, Inc. from November 1993 to October 1998. Ernie Marchand Executive Vice President and Chief Operating Officer since 1998 (41) November 1998; Director of Special Projects for Greg Thompson Production from April 1993 to November 1998. Lawrence X. Taylor, III Executive Vice President and Chief Financial Officer since 1998 (34) October 1998; Director of Financial Planning & Analysis for Grand Casinos, Inc. from June 1998 to October 1998; Director of Investor Relations for Grand Casinos., Inc. from 1996 to June 1998; Regional Manager - Financial Planning & Analysis for Grand Casinos Resorts, Inc. from 1994-1996. Paul Curtin Senior Vice President - Compliance and Regulatory Affairs 1999 (40) since February 1999. General Manager - Texas/Mexico from February 1998 to February 1999; General Manager - Mexico since prior to April 1994 to February 1998.
34 36
Dave Facciani Senior Vice President - Electronic Division since February 1999 (55) 1999; President of NPB Investments (formerly Power Bingo Corp.) since 1995; President of Power Bingo, Inc. from prior to April 1994 to April 1995. Jimmy D. Helton Senior Vice President - Strategic Planning since February 1999 (50) 1999. Director of Strategic Planning & Analysis from October 1998 to February 1999; Construction Controller at Grand Casinos Resorts, Inc. from prior to April 1994 to April 1998. Clement F. Chantiam Senior Vice President - New Business & Special Projects since 1989 (39) February 1999. Executive Vice President from November 1992 to February 1999, and Vice President - Manufacturing from March 1989 to November 1992. Leslie A. Lombardi Senior Vice President - Information Systems since February 1999 (44) 1999; Vice President Information Systems from July 1997 to February 1999; Manager of Information Technology at Ohmed, Inc. from September 1986 to July 1997. Lori McLaughlin Senior Vice President - Bingo Paper, Ink and General 1999 (44) Merchandise since February 1999. Divisional Vice President - Tabs Manufacturing November 1996 to February 1999; Vice President Manufacturing for Trade Products, Inc. from prior to April 1994 to November 1996. Douglas W. Rye Senior Vice President - Gaming Ticket Division since February 1999 (33) 1999; Division Vice President - Canadian Sales from November 1996 to February 1999; General Manager of Operations of Bazaar & Novelty from October 1995 to November 1996; Controller of Bazaar & Novelty from June 1991 to October 1995. Michael A. Schalk Senior Vice President, General Counsel and Corporate 1999 (51) Secretary since February 1999; Corporate Secretary and Resident Counsel from January 1991 to February 1999.
Officers serve at the discretion of the Board and are elected at the first meeting of the Board after each annual meeting of stockholders. 35 37 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 and the rules thereunder require the Company's officers and directors, and persons who own more then ten percent (10%) 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 to furnish the Company with copies. Based 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 (10%) beneficial owners were complied with. 36 38 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information concerning compensation paid by the Company to (i) the Chief Executive Officer ("CEO") and (ii) the Company's other four most highly compensated executive officers whose total annual salary and bonus exceeded $100,000 for the last fiscal year (the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION COMPENSATION --------------------------- ------------------------- SECURITIES ALL OTHER UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITIONS YEAR SALARY($) BONUS($) OPTIONS# $(1) - ---------------------------- ---- --------- -------- ---------- ------------ Joseph M. Valandra,(2) 1998 54,743 100,000(3) 500,000 -- Chairman of the Board, 1997 -- -- -- -- Chief Executive Officer and President 1996 -- -- -- -- Albert F. Barber,(2) 1998 636,610(4) -- 250,000(5) 10,661(6) Chairman of the Board and 1997 350,000 115,000 250,000 7,251(6) Chief Executive Officer 1996 330,298 50,000 100,000 5,472(6) Timothy R. Stuart, 1998 401,489(7) -- 92,000(5) 4,866 President and Chief 1997 185,000 35,000 92,000 42,480 Operations Officer 1996 172,000 20,000 27,000 38,650 Clement F. Chantiam, 1998 154,720 -- 89,500 4,598 Executive Vice President 1997 150,000 20,000 68,500 3,408 1996 132,236 15,000 13,500 2,950 Roy L. Lister, 1998 147,073 -- 62,500 3,750 Executive Vice President 1997 150,000 20,000 53,000 3,842 1996 132,500 8,000 13,500 2,580 Paul C. Tunink, 1998 220,590(8) -- 20,200(5) 2,388 Executive Vice President 1997 120,000 20,000 22,800 2,680 and Chief Financial Officer 1996 132,000 8,000 7,800 2,400
37 39 (1) The stated amounts are Company contributions to a defined contribution pension plan available to all Company employees, except as otherwise noted. (2) Mr. Valandra was named Chairman of the Board, Chief Executive Officer and President of the Company in October 1998. Mr. Barber served as Chairman of the Board of the Company from March 1998 to October 1998 and as Chief Executive Officer from December 1994 to October 1998. Mr. Barber resigned from such positions effective October 2, 1998. (3) Represents amounts paid to Mr. Valandra as a signing bonus per employment agreement. (4) Includes $317,563 paid for severance per Mr. Barber's employment agreement. (5) Represents the options granted and does not include any grants surrendered at date of termination. (6) Represents amounts paid for Mr. Barber by the Company for term life insurance premium. (7) Includes $245,000 paid for severance per Mr. Stuart's severance agreement. Mr. Stuart resigned from such positions November 16, 1998. (8) Includes $125,302 paid for severance per Mr. Tunink's severance agreement. Mr. Tunink resigned from such positions effective October 16, 1998 The foregoing compensation table does not include certain fringe benefits made available on a nondiscriminatory basis to all Company employees such as group health insurance, dental insurance, long-term disability insurance, vacation and sick leave. In addition, the Company makes available certain non-monetary benefits to its executive officers with a view to acquiring and retaining qualified personnel and facilitating job performance. The Company considers such benefits to be ordinary and incidental business costs and expenses. The aggregate value of such benefits in the case of each executive officer listed in the above table, which cannot be precisely ascertained but which is less than 10% of the cash compensation paid to each such executive officer, is not included in such table. OPTION GRANTS TABLE The following table provides information relating to the grant of stock options to the CEO and the Named Executive Officers during the year ended December 31, 1998. OPTION GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS --------------------------------------------------
POTENTIAL REALIZABLE NUMBER OF PERCENT OF VALUE AT ASSUMED SECURITIES TOTAL OPTIONS EXERCISE ANNUAL RATES OF STOCK UNDERLYING GRANTED TO OR BASE PRICE APPRECIATION FOR OPTIONS EMPLOYEES IN PRICE EXPIRATION OPTION TERM(1) NAME GRANTED(#) FISCAL YEAR ($/Sh) DATE 5%($) 10%($) - ---- ---------- ------------- -------- ---------- -------- ------- Joseph M. Valandra 200,000 20.5% $1.00 10/5/08 (17,581) 87,147 300,000 30.7% $1.00 10/5/08 (26,371) 130,720 Albert F. Barber 250,000 25.6% $3.00 10/2/99 (553,038)(2) (543,441)(2) Timothy R. Stuart 92,000 9.4% $3.00 11/16/99 (226,721)(2) (224,348)(2)
38 40
Clement F. Chantiam 21,000 2.2% $2.25 3/1/08 25,391 68,200 Roy L. Lister 9,000 0.9% $2.25 3/1/08 10,882 29,228 Paul C. Tunink 20,200 2.1% $3.00 10/16/99 (28,880)(2) (28,091)(2)
- --------------- (1) Potential realizable value is based on the assumption that the stock price of the common stock appreciates at the annual rate shown (compounded annually) from the date of grant until the end of the ten-year option term. The numbers are calculated based on the requirements promulgated by the Securities and Exchange Commission and do not reflect the Company's estimate of future stock price growth. (2) Potential realizable value was calculated for Messrs. Barber, Stuart and Tunink's options from the date of grant until the end of the one-year option term. (See "Executive Compensation -- Employment Agreements"). AGGREGATED OPTION EXERCISE AND FISCAL YEAR-END OPTION TABLE The following table provides information relating to the exercise of stock options during the year ended December 31, 1998 by the CEO and each of the Named Executive Officers and the 1998 fiscal year end value of unexercised options. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND F-Y END OPTION VALUES
Number of Unexercised Options FY-End(#)(1) Name Exercisable/Unexercisable ---- ------------------------- Joseph M. Valandra 200,000/300,000 Albert F. Barber -250,000/-(2) Timothy R. Stuart -92,000/-(2) Clement F. Chantiam 75,500/14,000 Roy L. Lister 56,500/6,000 Paul C. Tunink -20,200/-(2)
39 41 (1) The closing sale price of the Common Stock on December 31, 1998 ($.3906) was used to calculate option value. (2) Represents the options date of granted under severance agreements. (See "Executive Compensation -- Employment Agreements"). EMPLOYMENT AGREEMENTS The Company entered into an employment agreement as of April 8, 1999 with Joseph M. Valandra, pursuant to which Mr. Valandra serves as the Company's Chief Executive Officer and Chairman of the Board until December 31, 2001. The agreement may be extended upon the mutual written agreement of Mr. Valandra and the Company. Mr. Valandra's annual base compensation is $250,000 and is subject to any increase approved by the Board of Directors of the Company. Additionally, Mr. Valandra is eligible to participate in such bonus or other incentive compensation programs as the Company may adopt from time to time. Mr. Valandra also is entitled to a restructuring bonus of thirty percent (30%) of his base salary and an aggregate of one and eight-tenths (1.8%) of the equity in the entity resulting from a Conversion Event. "Conversion Event" means (i) the successful consummation of an exchange offer in which the Notes are exchanged for equity interests in the Company, or (ii) the entry of a final and non-appealable order confirming a plan of reorganization for the Company under Title 11, Chapter 11 of the United States Code involving the restructuring of the Company's debt. If the employment of Mr. Valandra is terminated by reason of death or disability, by the Company for "cause", by Mr. Valandra without "good reason", or if at the end of the term of his agreement the Company decides to extend the term, but Mr. Valandra decides not to continue in the employ of the Company, the Company will pay Mr. Valandra his accrued base salary, accrued reimbursable expenses, accrued benefits, and accrued bonus, and the Company will allow Mr. Valandra the right to exercise all vested, unexercised stock options. If Mr. Valandra's employment is terminated upon the expiration of the term of his agreement and the Company does not extend the term, in addition to the above mention obligations, the Company will pay Mr. Valandra, a cash lump sum payment in an amount equal to his base salary (as in effect at the time of such termination) for a period equal to 12 months. If Mr. Valandra's employment is terminated by the Company without "cause" or by Mr. Valandra for "good reason", the Company will pay Mr. Valandra his accrued base salary, accrued reimbursable expenses, accrued benefits, and accrued bonus. The Company will also pay Mr. Valandra a cash lump sum in an amount determined as follows: (A) prior to any Conversion Event, an amount equal to his base salary (as in effect at the time of such termination) for a period of 36 months; and (B) from and after any Conversion Event, an amount equal to his base salary (as in effect at the time of such termination) for a period equal to the greater of 12 months or the number of months remaining until the expiration of the term of his agreement. Further, Mr. Valandra will have the right to exercise in full all outstanding vested stock options and restricted stock awards for a period of 12 months following termination and, if Mr. Valandra then holds stock options and/or restricted stock awards not fully vested or exercisable, all such options and restricted stock awards will immediately vest in full and become exercisable in accordance with their terms for a period of 12 months following termination. The Company entered into substantially similar employment agreements with Lawrence X. Taylor, Executive Vice President and Chief Financial Officer, Ernie Marchand, Executive Vice President and Chief Operating Officer, Jimmy D. Helton, Senior Vice President -- Strategic Planning, Clement F. Chantiam, Senior Vice President -- New Business & Special Projects, and Michael A. Schalk, Senior Vice President, General Counsel and Corporate Secretary, except Mr. Taylor's annual base compensation is $165,000 and he is entitled to a restructuring bonus of thirty percent (30%) of his base salary and an 40 42 aggregate of fifty-eight hundredths of a percent (.58%) of the equity in the entity resulting from a Conversion Event; Mr. Marchand's annual base compensation is $150,000 and he is entitled to a restructuring bonus of thirty percent (30%) of his base salary and an aggregate of sixty-four hundredths of a percent (.64%) of the equity in the entity resulting from a Conversion Event; Mr. Helton's annual base compensation is $140,000 and he is entitled to a restructuring bonus of thirty percent (30%) of his base salary and an aggregate of fifty-eight hundredths of a percent (.58%) of the equity in the entity resulting from a Conversion Event; Mr. Chantiam's annual base compensation is $160,000 and he is entitled to a restructuring bonus of thirty percent (30%) of his base salary and an aggregate of two-tenths of a percent (.2%) of the equity in the entity resulting from a Conversion Event; and Mr. Schalk's annual base compensation is $125,000 and he is entitled to a restructuring bonus of thirty percent (30%) of his base salary and an aggregate of two-tenths of a percent (.2%) of the equity in the entity resulting from a Conversion Event. By an agreement dated October 2, 1998, Albert F. Barber resigned his position as Chairman and Chief Executive Officer of the Company and as a director of the Company. Under the terms of the Agreement, Mr. Barber remained a salaried employee of the Company until October 31, 1998. Mr. Barber was paid a lump sum of $375,000, less normal withholdings for taxes and ongoing benefits. The Company agreed to continue to pay premiums for two life insurance policies then in effect and continue coverage with similar limits to the life insurance normally available to Company employees for the succeeding year. The Company agreed to provide Mr. Barber with office space until December 31, 1999 and the use of a Company vehicle until June 30, 1999. At the time of his resignation, Mr. Barber had vested stock options to purchase 250,000 shares of the Company's common stock with an exercise price of $3.00 per share. The Company and Mr. Barber agreed to cancel those options, and the Company granted Mr. Barber a non-qualified stock option to purchase 250,000 shares of the Company's common stock with an exercise price of $3.00 per share. The option will expire October 2, 1999. By an agreement dated October 16, 1998, Paul C. Tunink resigned his position as Vice President Finance and Chief Financial Officer of the Company. Mr. Tunink received a lump sum severance payment of $128,000, less normal withholdings for taxes and ongoing benefits. In addition, the Company agreed to provide Mr. Tunink with medical and dental benefits under the Company's health plans and to pay him $12,000 in monthly installments for a period equal to the lesser of 12 months or until he was employed by another entity. The Company also provided Mr. Tunink with outplacement counseling and services. At the time of his resignation, Mr. Tunink had vested stock options to purchase 20,200 shares of the Company's common stock with an exercise price of $3.00 per share. The Company and Mr. Tunink agreed to cancel those options, and the Company granted Mr. Tunink a non-qualified stock option to purchase 20,200 shares of the Company's common stock with an exercise price of $3.00 per share. The option will expire October 16, 1999. By an agreement dated November 16, 1998, Timothy R. Stuart relinquished his position as President, Chief Operating Officer and director of the Company. Mr. Stuart agreed to be available until December 31, 1998 in an advisory nature to provide information to the management of the Company. In accordance with the terms of the agreement, Mr. Stuart received a lump sum payment of $245,000, less normal withholdings for taxes and ongoing benefits. The Company agreed to pay Mr. Stuart's premiums under the Company's health plan pursuant to the Comprehensive Omnibus Budget reconciliation Act of 1995 (commonly known as "COBRA") until the first to occur of (a) December 1, 1999, or (b) the first date that Mr. Stuart is eligible for health insurance coverage by a succeeding employer offering such coverage. At the time of his resignation, Mr. Stuart had vested stock options to purchase 92,000 shares of the Company's common stock with an exercise price of $3.00 per share. Mr. Stuart and the Company agreed to cancel those options, and the Company granted Mr. Stuart a non-qualified stock option to purchase 92,000 shares of the Company's common stock with an exercise price of $3.00 per share. The option will expire December 1, 1999. 41 43 COMPENSATION PURSUANT TO PLANS THE 1994 PERFORMANCE STOCK OPTION PLAN. Options to purchase 1,212,400 shares of the Company's common stock were granted directors and officers in 1998. Options to purchase 450,117 shares are available to be granted as of March 31, 1999. EMPLOYEE STOCK PURCHASE PLAN. The Company maintains an employee stock purchase plan (the "ESPP") which provides eligible employees the opportunity to purchase shares of the Company's common stock through authorized payroll deductions at 85% of the average market price on the last day of each quarter. All employees who have completed six months of employment of 20 hours per week or greater are eligible to participate in the ESPP. The ESPP qualifies as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The total number of shares available for purchase under the ESPP is 287,090. During 1998 the total number of shares purchased under the ESPP was 11,684. EMPLOYEE BENEFIT PLANS. The Company maintains a defined contribution pension plan covering substantially all of its employees, including all executive officers (the "US Plan"). 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 3% of the eligible employee's first 6% of the employee's elective contribution. Company contributions vest over a five-year period During 1998 the Company's contribution to the US Plan was $256,000. 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 1998, the Company's contribution to the Canadian Plan was $161,000. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of outstanding shares as of April 9, 1999, 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, CEO, and other Named Executive Officers, and (iii) all directors and executive officers as a group. 42 44
Shares Beneficially Owned(1) --------------------- Percent Name Number of Class - ---- ------ -------- Leonard A. Stuart ............................................... 1,235,542 17.5% c/o Stuart Entertainment, Inc. 3211 Nebraska Avenue Council Bluffs, Iowa 51501 MLGA Fund II, L.P. .............................................. 3,690,053 48.1% Two Greenwich Plaza Greenwich, Connecticut 06830 Wynnefield Partners SmallCap Value, L.P. ........................ 669,500 9.6% One Penn Plaza - Suite 4720 New York, New York 10019 Sangwoo Ahn(2)(3) ............................................... 3,782,359 49.18% Ira Starr ....................................................... 9,961 .11% Perry Lewis(2) .................................................. 3,805,359 49.5% c/o MLGA Fund II, L.P. Two Greenwich Plaza Greenwich, Connecticut 06830 Albert F. Barber ................................................ 250,000 3.5% c/o Stuart Entertainment, Inc. 3211 Nebraska Avenue Council Bluffs, Iowa 51501 Joseph M. Valandra .............................................. 200,000 2.8% Timothy R. Stuart ............................................... 115,000 1.6% Clement F. Chantiam ............................................. 82,500 1.2% Roy L. Lister ................................................... 82,500 1.2% Paul C. Tunink .................................................. 20,200 0.3% All executive officers and directors as a group (15 persons) .... 4,776,546 56.30%
(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 43 45 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 31, 1999: Mr. Barber, 250,000 shares, Mr. Leonard A. Stuart, 100,000 shares; Mr. Chantiam, 82,500 shares; Mr. Lister 59,500 shares; Mr. Lewis, 744,226 shares; Mr. Ahn, 744,226 shares; MLGA Fund II, L.P., 732,259 shares, Mr. Tunink, 20,200 shares; Mr. Stuart, 92,000 shares; Mr. Starr, 1,282 shares; Mr. Valandra 200,000 shares; and all executive officers and directors as a group, 1,578,625 shares. (2) Includes 2,957,794 shares owned by MLGA Fund II, L.P. and 732,259 shares owned by MLGA Fund II, L.P. pursuant to a currently exercisable warrant. The two stockholders of Bingo Holdings, Inc. were 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 and Ahn are general partners of MLGAL Partners, L.P. and may be deemed to beneficially own these shares. Messrs. Lewis and Ahn disclaim any beneficial interest in all shares owed by MLGA Fund II, L.P. The business address of Messrs. Lewis and Ahn is c/o MLGA Fund II, L.P., Two Greenwich Plaza, Greenwich, Connecticut 06830. (3) Includes 15,000 shares owned by Mr. Ahn's children and 10,000 shares owned by a family limited partnership. Mr. Ahn disclaims any beneficial interest in all shares owned by his children and the family limited partnership. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS LEASE AGREEMENT In connection with the Trade Acquisition in November 1996, the Company entered into a lease agreement with Partnership Leasing, L.L.C., a Washington limited liability company, of which Ronald G. Rudy, a former director of the Company, is a member. The term of the lease is for ten years with one ten-year option and covers two buildings in Lynnwood, Washington with a total of 165,000 square feet. The rent is $924,000 per year. MANAGEMENT CONSULTING AGREEMENT Effective February 1, 1996, the Company entered into a Management Consulting Agreement (the "Management Consulting Agreement") with Len Stuart & Associates, Ltd., a Cayman Islands corporation (the "Consultant"). The original term of the Management Consulting Agreement was through December 12, 1999. Under the terms of the Management Consulting Agreement, the Consultant was entitled to receive an annual base fee of $200,000. During the term of the Management Consulting Agreement, the Consultant was also be entitled to receive reimbursement from the Company of all reasonable expenses incurred by it in maintaining its offices including reasonable rent, phone, heating, air conditioning, electric and stationery expenses and salary for an administrative assistant of the Consultant's choice on a basis consistent with past and present practices. In December 1997, the parties entered into an agreement to terminate the Management Consulting Agreement (the "Termination Agreement"). Pursuant to the Termination Agreement, the Company paid Mr. Stuart $55,101 upon execution and is also required to pay Mr. Stuart $300,000 with interest, in eight consecutive monthly payments of $38,553 commencing January 13, 1998. In addition, the Consultant had agreed to act as an advisor to the Company until December 1999 for an annual retainer of $30,000 and reasonable expenses incurred in connection with its duties. Effective December 12, 1998, Mr. Stuart terminated his consulting arrangement. Mr. Stuart is President of Len Stuart & Associates, Ltd. and was Chairman of the Board of the Company until August, 1997. 44 46 BAZAAR MANAGEMENT GROUP Bazaar is a party to a consulting agreement (the "BMG Agreement") dated July 1, 1995 with Bazaar Management Group, Inc. ("BMG"), of which Mr. Stuart is the sole stockholder. Under the BMG Agreement, BMG provides consulting services to Bazaar with respect to Bazaar's business (the "Division") of placing pulltab tickets in convenience stores, retail locations and bingo halls in Ontario, Canada. The net monthly income of the Division is payable as follows: (a) 50% is applied to reduce outstanding bank loans of the Division, (b) 50% of the remaining net income is retained by Bazaar, and (c) 50% of the remaining net income is paid to BMG. During 1998, Bazaar paid BMG $245,000. Bazaar believes that the terms of the BMG Agreement are comparable to those which would have been obtained from unaffiliated third parties. 45 47 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS 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. The Company filed a Current Report on Form 8-K on October 13, 1998 under Item 5. 46 48 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: April 15, 1999 By /s/ Joseph M. Valandra __________________________________ Joseph M. Valandra, Chairman of the Board, Chief Executive Officer and President /s/ Sangwoo Ahn Director April 15, 1999 ____________________________ Sangwoo Ahn /s/ Perry J. Lewis Director April 15, 1999 ____________________________ Perry J. Lewis /s/ Jock Patton Director April 15, 1999 ____________________________ Jock Patton /s/ Ira Starr Director April 15, 1999 ____________________________ Ira Starr /s/ Joseph M. Valandra Chairman of the Board, Chief April 15, 1999 ____________________________ Executive Officer and President Joseph M. Valandra /s/ Lawrence X. Taylor, III Executive Vice President and April 15, 1999 ____________________________ Chief Financial Officer Lawrence X. Taylor, III
47 49 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 - --------------------------------------------------------------------------------
PAGE ---- Independent Auditors' Report F-2 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 F-3 Consolidated Balance Sheets as of December 31, 1998 and 1997 F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1998, 1997 and 1996 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 F-6 Notes to Consolidated Financial Statements F-7 to F-24 Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts F-25
50 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Stuart Entertainment, Inc. Council Bluffs, Iowa We have audited the accompanying consolidated balance sheets of Stuart Entertainment, Inc. and subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1998. 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 as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 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. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company's recurring losses from operations and stockholders' deficit raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Omaha, Nebraska March 30, 1999 F-2 51 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- ---------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 NET SALES $ 118,642 $ 121,578 $ 108,705 COST OF GOODS SOLD 85,196 85,254 76,046 --------- --------- --------- GROSS MARGIN 33,446 36,324 32,659 OTHER EXPENSES: Selling, general and administrative expenses 39,478 36,179 26,055 Restructuring charge -- 2,261 3,280 Legal expenses, unusual patent lawsuit -- 1,173 -- Interest expense, net 13,400 12,493 5,337 --------- --------- --------- Other Expenses 52,878 52,106 34,672 --------- --------- --------- LOSS BEFORE INCOME TAXES (19,432) (15,782) (2,013) INCOME TAX BENEFIT 211 2,637 715 --------- --------- --------- LOSS BEFORE EXTRAORDINARY ITEM (19,221) (13,145) (1,298) EXTRAORDINARY ITEM - Loss on extinguishment of debt, net of taxes -- (208) (933) --------- --------- --------- NET LOSS $ (19,221) $ (13,353) $ (2,231) ========= ========= ========= NET LOSS PER COMMON SHARE: basic and diluted Loss before extraordinary loss $ (2.77) $ (1.91) $ (0.19) Extraordinary loss -- (0.03) (0.14) --------- --------- --------- Loss per share $ (2.77) $ (1.94) $ (0.33) ========= ========= ========= WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING: Basic 6,936 6,868 6,775 ========= ========= ========= Diluted 6,936 6,868 6,775 ========= ========= =========
See Notes to Consolidated Financial Statements. F-3 52 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 (DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------- ASSETS 1998 1997 CURRENT ASSETS: Cash and cash equivalents $ 4,447 $ 7,099 Trade receivables, net of allowance for doubtful accounts of $3,735 and $3,091 19,124 23,085 Current portion of notes receivable, less allowance for doubtful accounts of $0 and $233 1,587 2,269 Inventories 22,111 20,929 Deferred income taxes 2,886 3,008 Prepaid expenses and other current assets 1,005 1,111 --------- --------- Total Current Assets 51,160 57,501 PROPERTY, PLANT AND EQUIPMENT, net 29,214 26,471 GOODWILL, net of accumulated amortization of $4,670 and $3,244 46,894 45,655 OTHER ASSETS, net 9,431 8,197 --------- --------- $ 136,699 $ 137,824 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current portion of long-term debt $ 469 $ 89 Trade payables 12,725 10,929 Accrued payroll and benefits 2,006 2,087 Other accrued liabilities 5,527 3,180 Restructuring charge reserve 231 2,841 Income taxes payable 1,023 797 --------- --------- Total Current Liabilities 21,981 19,923 LONG-TERM DEBT 119,288 100,665 DEFERRED INCOME TAXES 178 721 DEFERRED INCOME 143 143 COMMITMENTS AND CONTINGENCIES (Notes 2 and 13) STOCKHOLDERS' EQUITY (DEFICIT): Common stock $.01 par value; 30,000,000 shares authorized; 6,942,914 and 6,920,140 shares outstanding 70 70 Additional paid-in capital 27,767 27,732 Accumulated deficit (29,280) (10,059) Treasury stock (56,260 shares at cost) (189) (189) Accumulated other comprehensive loss (3,259) (1,182) --------- --------- Total Stockholders' Equity (Deficit) (4,891) 16,372 --------- --------- $ 136,699 $ 137,824 ========= =========
See Notes to Consolidated Financial Statements. F-4 53 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------- RETAINED ADDITIONAL EARNINGS COMMON PAID-IN (ACCUMULATED STOCK CAPITAL DEFICIT) BALANCE, JANUARY 1, 1996 $ 68 $ 26,384 $ 5,525 Comprehensive income (loss): Net loss -- -- (2,231) Translation adjustment, net of deferred taxes of $245 -- -- -- Total comprehensive loss -- -- -- Issuance of 111,067 shares from exercise of stock options 1 412 -- Issuance of 20,000 newly authorized shares -- 108 -- Issuance of warrants on 300,000 shares in connection with the acquisition of Trade Products -- 330 -- Income tax benefit on stock options exercised -- 127 -- Paid-in capital from non-qualified stock options issued -- 7 -- -------- -------- -------- BALANCE, DECEMBER 31, 1996 69 27,368 3,294 Comprehensive income (loss): Net loss -- -- (13,353) Translation adjustment, net of deferred taxes of $415 -- -- -- Total comprehensive loss -- -- -- Issuance of 90,800 shares in connection with acquisition of Peninsula Sports 1 362 -- Issuance of 1,226 shares sold to Employee Purchase Plan -- 2 -- -------- -------- -------- BALANCE, DECEMBER 31, 1997 70 27,732 (10,059) Comprehensive income (loss): Net loss -- -- (19,221) Translation adjustment, net of deferred taxes of $840 -- -- -- Total comprehensive loss -- -- -- Issuance of 11,090 shares in connection with acquisition of Sault Ste Marie -- 23 -- Issuance of 11,684 shares sold to Employee Purchase Plan -- 12 -- -------- -------- -------- BALANCE, DECEMBER 31, 1998 $ 70 $ 27,767 $(29,280) ======== ======== ========
ACCUMULATED OTHER TREASURY COMPREHENSIVE STOCK INCOME (LOSS ) TOTAL BALANCE, JANUARY 1, 1996 $ (189) $ 252 $ 32,040 Comprehensive income (loss): Net loss -- -- (2,231) Translation adjustment, net of deferred taxes of $245 -- (436) (436) -------- Total comprehensive loss -- -- (2,667) Issuance of 111,067 shares from exercise of stock options -- -- 413 Issuance of 20,000 newly authorized shares -- -- 108 Issuance of warrants on 300,000 shares in connection with the acquisition of Trade Products -- -- 330 Income tax benefit on stock options exercised -- -- 127 Paid-in capital from non-qualified stock options issued -- -- 7 -------- -------- -------- BALANCE, DECEMBER 31, 1996 (189) (184) 30,358 Comprehensive income (loss): Net loss -- -- (13,353) Translation adjustment, net of deferred taxes of $415 -- (998) (998) -------- Total comprehensive loss -- -- (14,351) Issuance of 90,800 shares in connection with acquisition of Peninsula Sports -- -- 363 Issuance of 1,226 shares sold to Employee Purchase Plan -- -- 2 -------- -------- -------- BALANCE, DECEMBER 31, 1997 (189) (1,182) 16,372 Comprehensive income (loss): Net loss -- -- (19,221) Translation adjustment, net of deferred taxes of $840 -- (2,077) (2,077) -------- Total comprehensive loss -- -- (21,298) Issuance of 11,090 shares in connection with acquisition of Sault Ste -- -- 23 Marie Issuance of 11,684 shares sold to Employee Purchase Plan -- -- 12 -------- -------- -------- BALANCE, DECEMBER 31, 1998 $ (189) $ (3,259) $ (4,891) ======== ======== ========
See Notes to Consolidated Financial Statements. F-5 54 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (19,221) $ (13,353) $ (2,231) Adjustments to reconcile net loss to net cash flows from operating activities: Extraordinary item, loss from extinguishment of debt -- 328 1,297 Depreciation and amortization 8,072 7,443 4,515 Amortization of debt financing fees 644 520 468 Provision for doubtful accounts 3,290 1,578 (80) Equity in (earnings) losses of joint ventures 5 (5) 11 Restructuring charge -- 2,261 3,280 Payments on restructuring charge (2,610) (2,700) -- Deferred income taxes (513) (2,462) (587) Other non-cash expenses - net (3,219) (790) (395) Change in operating assets and liabilities, net of amounts from acquisitions 1,706 7,067 (4,814) --------- --------- --------- Net cash flows from operating activities (11,846) (113) 1,464 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired (2,846) (4,563) (37,288) Capital expenditures for property, plant and equipment (3,726) (3,525) (2,609) Capital expenditures for electronic bingo systems (4,324) (1,587) (45) Proceeds from disposals 132 3,106 339 Payments received on notes receivable 2,596 1,373 1,453 Other -- (769) -- --------- --------- --------- Net cash flows from investing activities (8,168) (5,965) (38,150) CASH FLOWS FROM FINANCING ACTIVITIES: Costs of debt financing (374) (651) (3,873) Payments on borrowings under prior credit agreements -- -- (20,917) Payments on long-term debt (85) (12) (25,812) Payments on LSA purchase price adjustment -- -- (455) Proceeds from issuance of long-term debt -- -- 100,000 Proceeds from Credit Facility borrowing 17,673 -- -- Proceeds from exercise of stock options -- -- 413 Proceeds from sale and other issuances of common stock 12 2 108 --------- --------- --------- Net cash flows from financing activities 17,226 (661) 49,464 Effect of currency exchange rate changes on cash of foreign subsidiaries 136 106 11 --------- --------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS (2,652) (6,633) 12,789 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,099 13,732 943 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,447 $ 7,099 $ 13,732 ========= ========= =========
See Notes to Consolidated Financial Statements. F-6 55 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (COLUMNAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The consolidated financial statements of Stuart Entertainment, Inc. include its wholly owned subsidiaries and its indirectly wholly-owned subsidiaries (from the date they became indirectly wholly owned) ("the Company"). All significant inter-company transactions and balances have been eliminated in consolidation. USE OF ESTIMATES - The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FINANCIAL INSTRUMENTS - The carrying values of certain identified notes receivable are deemed to be reasonable estimates of their fair values. Interest rates that are currently available to the Company for the reissuance of debt with similar terms and remaining maturities are used to estimate fair values of the notes receivable. Based on quoted market prices, the Company's 12.5% Senior Subordinated Notes' approximate current market value of $25,000,000 is substantially less than the $100,000,000 carrying value of these securities. See Note 2 to the Notes to Consolidated Financial Statements for a detailed discussion. CASH AND CASH EQUIVALENTS - The Company considers all highly liquid financial instruments purchased with a maturity of three months or less to be cash equivalents. The Company utilizes a cash management system that includes zero balance accounts. Negative cash balances for such accounts, resulting from outstanding checks, are reclassified to accounts payable in the consolidated financial statements. EARNINGS PER SHARE - Basic earnings per share data are based on the weighted average outstanding common shares during the period. Diluted earnings per share data are based on the weighted average outstanding common shares and the effect of all dilutive potential common shares, including stock options and warrants. FOREIGN CURRENCY TRANSLATION AND REMEASUREMENT - The financial statements and transactions of Bingo Press & Specialty Limited ("Bazaar") are maintained in their functional currency of Canadian dollars. Assets and liabilities are translated at current exchange rates at the balance sheet date and stockholders' equity is translated at historical exchange rates. Revenues and expenses are translated at the average exchange rate for each period. Translation adjustments, which result from the process of translating Canadian dollar financial statements into U.S. dollars, are reported as Accumulated Other Comprehensive Income (Loss). The financial statements and transactions of Stuart Entertainment S.A. de C.V. (Stuart Entertainment Mexico) are maintained in Mexican pesos and have been remeasured into U.S. dollars. Assets and liabilities are remeasured at the end of period exchange rates, except for property and stockholders' equity which are remeasured at historical exchange rates. Revenues and expenses have been remeasured at average exchange rates for the periods, except for depreciation, which has been remeasured at historical exchange rates. Gains and losses from remeasurement are recognized currently in operations. For the years ended December 31, 1998, 1997 and 1996, the Company recognized a remeasurement (gain) loss of $169,000, ($50,000) and ($12,000), respectively. F-7 56 INVENTORIES - Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out method. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are carried at cost, less accumulated depreciation. Depreciation is generally provided on the straight-line method over the estimated useful lives of the respective assets, as follows: Buildings and improvements 2-20 years Equipment 3-20 years Electronic bingo systems 2-3 years INVESTMENTS - Investments in the common stock of certain affiliated companies are accounted for using the equity method if the Company has the ability to exercise significant influence over the investee's operations and financial policies. Otherwise, the cost method is used. DEFERRED FINANCING FEES - Deferred financing fees are being amortized to interest expense using the straight-line method over the respective terms of the credit agreements; three years for the Credit Facility (as defined in Note 2 to the Notes to the Consolidated Financial Statements) and eight years for the Senior Subordinated Notes. GOODWILL - Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in business combinations. The Company reviews its intangible assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of such asset may not be recoverable. In such cases, the expected future cash flows (undiscounted and without interest charges) resulting from the use of the asset are estimated and an impairment loss recognized if the sum of such cash flows is less than the carrying amount of the asset. Should such an assessment indicate that the value of the intangible asset might be impaired, an impairment loss is recognized for the difference between the carrying value of the asset and its estimated fair value. Goodwill is amortized on a straight-line basis over periods ranging from ten to forty years. See Note 2 to the Notes to Consolidated Financial Statements for further discussion. INCOME TAXES - The Company uses the balance sheet approach of accounting for income taxes, whereby deferred assets and liabilities are recorded at the tax rate currently enacted. The Company's future results may be affected by changes in the corporate income tax rate. RESEARCH AND DEVELOPMENT COSTS - Research and development costs are charged to expense as incurred. For the years ended December 31, 1998, 1997 and 1996, costs of approximately $584,000, $260,000 and $143,000, respectively, were charged to expense. REVENUE RECOGNITION - The Company records revenue as products are shipped. COMPREHENSIVE INCOME - The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", on January 1, 1998. As permitted by the Statement, the Company displays comprehensive income in the Consolidated Statements of Stockholders' Equity (Deficit) and Accumulated Other Comprehensive Income (Loss) separately from retained earnings (deficit) and additional paid-in capital in the Consolidated Balance Sheets and Statements of Stockholders' Equity (Deficit). Foreign currency translation is the only item the Company considers as other comprehensive income (loss). Prior year's financial statements have been reclassified to conform to the requirements of SFAS 130. RECLASSIFICATIONS - Certain reclassifications have been made to the 1997 and 1996 financial statements and supporting footnote disclosures in order to present them in conformity with the 1998 financial statement presentation. NEW ACCOUNTING PRONOUNCEMENT - In June 1998, the Financial Accounting Standard Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which established accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as F-8 57 either assets or liabilities in the balance sheet and measure those instruments at fair value. This statement is effective for the Company in the first quarter of the year 2000. Management is in the process of evaluating the impact, if any, this accounting pronouncement will have on the Company's financial statements. 2. FINANCIAL RESULTS AND LIQUIDITY The Company has incurred net losses of $19,221,000, $13,353,000 and $2,231,000 in 1998, 1997 and 1996, respectively. Management believes that the Company's operations have been adversely impacted by increased competition, including competition from companies which have quickly introduced new forms of gaming. The Company has attempted to offset the increase in competition by developing electronic bingo and pulltab systems and by consolidating manufacturing operations. Additionally, the Company has been pursuing an aggressive acquisition program in an effort to broaden its product offerings quickly. These actions have not yet offset the effects of declining margins caused by increased competition and the apparent decline in the popularity of traditional forms of bingo and pulltabs. During February 1999, the Company's new management team determined that the financial results for the prior year indicated that the Company's cash flow was not going to be sufficient to service its debt. Therefore, management has been contemplating implementing an operational and financial restructuring. In connection with these efforts, the Company has retained an investment banking firm and certain other advisors to assist it in analyzing its various restructuring alternatives. In November 1997, the Company entered into a credit facility consisting of two loan and security agreements, one between the Company and Congress Financial Corporation ("Congress") (Central) (the "US Facility") and one between Bazaar and Congress Financial Corporation (Canada) (the "Canadian Facility") (collectively, the "Credit Facility"). The Credit Facility provides for maximum borrowings of up to $30 million. The Credit Facility imposes certain covenants and other requirements on the Company and Bazaar. The Company expects that it may not comply with certain of the covenants in the Credit Facility, including the requirement that the Company maintain a certain minimum level of net worth. The Company and Congress currently are in the process of negotiating the terms of a Forbearance Agreement with respect to the Credit Facility, and it is expected that the parties will enter into such a Forbearance Agreement in the near future. However, there can be no assurance that a Forbearance Agreement will be entered into in the near future, if at all, and the failure to enter into such an agreement would have a material adverse effect on the Company. The Company has $100 million 12 1/2% Senior Subordinated Notes Due 2004 (the "Notes) outstanding, and an interest payment with respect to the Notes is due May 15, 1999. The Company is considering its various alternatives with respect to this payment. In light of the potential restructuring, an ad hoc committee of the holders of the Notes was formed and has retained its own counsel. The Company is in the process of negotiating the terms of a consensual restructuring with the ad hoc committee. Under any restructuring alternative, it is likely that the Notes will be converted into equity, and that the Company's common stock will be subject to substantial dilution or complete elimination as a result of such conversion. However, there can be no assurance that such a consensual restructuring will be consummated, and absent a consensual arrangement, the Company will consider filing for reorganization under Chapter 11 of the Bankruptcy Code to effect a restructuring. Management believes that any contemplated restructuring transaction will be structured to provide the Company with sufficient liquidity during the restructuring period. The Company's independent accountants have included a "going concern" emphasis paragraph in their audit report accompanying the 1998 financial statements. This paragraph indicates that the Company's recurring losses from operations and stockholders' capital deficiency raise substantial doubts about the Company's ability to continue as a going concern and cautions that the financial statements do not include adjustments that might result from the outcome of this uncertainty. Management believes that, despite the financial uncertainties in the near future, it has under development a business plan that, if successfully funded and executed as part of the restructuring, can improve its operating results. The F-9 58 continuing support of the Company's vendors, customers, lenders, stockholders and employees during any restructuring will be the key to the Company's success. 3. ACQUISITIONS BINGO SYSTEMS & SUPPLY, INC.: On November 1, 1998, the Company acquired all of the outstanding common stock of Bingo Systems & Supply, Inc. for a purchase price of $1,000,000 in cash plus $1,200,000 in the form of a 7% promissory note requiring twelve equal quarterly principal and interest payments through July, 2001. TRADE PRODUCTS, INC.: On November 13, 1996, the Company acquired substantially all of the assets and assumed certain liabilities of Trade Products, Inc. ("Trade" or "Trade Products") ("Trade Acquisition") for a purchase price of $38.1 million, plus the issuance of warrants to acquire 300,000 shares of the Company's common stock, with an exercise price of $7.75 per share. The Trade Acquisition has been accounted for using the purchase method of accounting. The purchase price has been allocated to the fair value of the acquired assets and liabilities, resulting in the recording of goodwill of $16.7 million. The results of operations of Trade have been consolidated since the date of the Trade Acquisition. 4. INVENTORIES Inventories consisted of the following at December 31:
1998 1997 Raw materials $ 4,858 $ 5,159 Work-in-process 2,038 250 Finished goods 17,003 13,732 ------- ------- $22,111 $20,929 ======= =======
5. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment consisted of the following at December 31:
1998 1997 Land and buildings $ 3,288 $ 1,857 Electronic bingo systems 7,268 2,740 Equipment 41,975 40,654 ------- ------- 52,531 45,251 Less accumulated depreciation 23,317 18,780 ------- ------- $29,214 $26,471 ======= =======
F-10 59 6. OTHER ASSETS, NET Other assets consisted of the following at December 31:
1998 1997 ---- ---- Deferred financing costs, net of accumulated amortization of $1,201 and $557 $3,299 $3,571 Deferred income taxes 2,576 1,714 Notes receivable, net of allowance for doubtful accounts of $539 and $115 1,562 1,515 Other investments and assets 1,747 1,145 Investments in joint ventures 247 252 ------ ------ $9,431 $8,197 ====== ======
7. LONG-TERM DEBT In November 1996, the Company completed a private placement of $100 million aggregate principal amount of 12.5% Senior Subordinated Notes due November 15, 2004. Interest on the Notes is payable semi-annually on each May 15 and November 15. The indenture governing the Notes imposes certain limitations on the Company's ability to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments and consummate certain asset sales. The Company used the proceeds of the private placement to finance the Trade Acquisition, to repay certain existing indebtedness and for general corporate purposes. In November 1997, the Company entered into the Credit Facility which provides for maximum borrowings of up to $30.0 million, of which up to $20.0 million may be borrowed under the US Facility and up to US$10.0 million may be borrowed under the Canadian Facility. The Company recorded an extraordinary loss in the fourth quarter of 1997 of $208,000, net of taxes, to write-off the unamortized debt issuance costs of the prior credit agreement. The Credit Facility provides for the three-year term and expires in November 2000. The Company, and Bazaar (sometimes referred to collectively herein as the "Borrowers") are entitled to draw amounts under the Credit Facility, subject to availability pursuant to a borrowing base certificate. The borrowing base is based on the eligible accounts receivable, eligible inventory and equipment value levels of the Company and Bazaar, respectively. At December 31, 1998, and 1997, $5.1 and $27.7 million, respectively, were available for borrowing under the Credit Facility. The Credit Facility generally provides for interest on the US Facility at the prime rate plus 1/4% to 3/4% or at a Eurodollar rate plus 2-1/4% to 2-3/4%, at the option of the Company. The Canadian Facility generally provides for interest at the Canadian prime rate plus 1-1/4 % to 1-3/4%. The Credit Facility imposes certain covenants and other requirements on the Company that among other things, restricts (i) the incurrence and existence of indebtedness or contingent obligations; (ii) consolidations, mergers and sales of assets; (iii) the incurrence and existence of liens; (iv) the sales or disposition of assets; (v) investments, loans and advances; (vi) capital expenditures; (vii) the payment of dividends and repurchase of common stock; and (viii) acquisitions of the Company. The Company is also required to meet a minimum Net Worth requirement, when the Excessive Availability based on the current borrowing base certificate is less than $5.0 million. At December 31, 1998, the Company had borrowed $17,673,000 of which $13,850,000 was borrowed on the U.S. Facility at a weighted-average rate of 8.04% and $3,823,000 was borrowed on the Canadian Facility at a weighted-average rate of 8.25%. The weighted-average interest rate on Credit Facility borrowings outstanding at December 31, 1998 was 8.09%. At December 31, 1997, the Company had not yet drawn any amounts under the Credit Facility. F-11 60 Long-term debt consisted of the following at December 31:
1998 1997 Senior Subordinated Notes $100,000 $100,000 Borrowings Under Credit Facility 17,673 -- Notes payable to others 2,084 754 -------- -------- 119,757 100,754 Less current portion 469 89 -------- -------- $119,288 $100,665 ======== ========
NOTES PAYABLE TO OTHERS: The Company has notes payable related to i) obligations to former owners of companies and/or assets that were acquired by the Company; ii) mortgages; and iii) installment notes relating to the purchase of property, plant and equipment. Remaining payment terms at December 31, 1998 range from approximately one year to ten years. At December 31, 1998, these notes bear interest at fixed and variable rates ranging from 2.9% to 12.0%. FUTURE PAYMENTS: Long-term debt matures as follows: 1999 $ 469 2000 18,266 2001 475 2002 110 2003 62 Thereafter 100,375 --------- $ 119,757 =========
8. INCOME TAX PROVISION (BENEFIT) Income (loss) before income tax provision (benefit) is as follows for the years ended December 31:
1998 1997 1996 Domestic $(15,750) $(13,832) $ (3,766) Foreign (3,682) (1,950) 1,753 -------- -------- -------- $(19,432) $(15,782) $ (2,013) ======== ======== ========
F-12 61 The income tax provision (benefit) is as follows for the years ended December 31:
1998 1997 1996 Current: Federal $ -- $ (358) $ (467) Foreign 302 240 371 State -- (57) (32) ------- ------- ------- 302 (175) (128) ------- ------- ------- Deferred: Domestic -- (2,478) (669) Foreign (513) 16 82 ------- ------- ------- (513) (2,462) (587) ------- ------- ------- $ (211) $(2,637) $ (715) ======= ======= =======
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:
1998 1997 1996 Statutory tax rate (34.0)% (34.0)% (34.0)% State income taxes (net of federal benefit) -- -- (5.4) Foreign tax rates in excess of U.S. federal rates (0.2) 2.0 3.3 Tax asset valuation reserve 30.3 11.3 (11.9) Goodwill amortization 1.3 1.6 12.5 Non-resident interest withholding 1.9 2.4 -- Other (0.4) -- -- ------ ------ ------ (1.1)% (16.7)% (35.5)% ====== ====== ======
Deferred tax assets and (liabilities) are comprised of the following at December 31: Allowance for doubtful accounts 1,172 992 Restructuring charge 57 874 Inventory reserves and adjustments 1,096 822 Cumulative translation adjustment 1,358 518 Deferred financing fees 125 393 Employee benefits 367 290 Tax credits 154 180 Other 287 72 Valuation reserve (7,698) (1,778) ------- ------- $ 8,539 $ 6,911 ======= =======
F-13 62 Deferred Income Tax Liabilities: Difference in basis of property and equipment $(2,659) $(2,563) Difference in amortization periods of goodwill (516) (262) Other (80) (86) ------- ------- $(3,255) $(2,911) ======= =======
Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $3,834,000 at December 31, 1998. 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. The Company has a net operating loss carryforward of approximately $30,793,000, of which $13,569,000 expires in 2012 and $17,224,000 expires in 2018, and Alternative Minimum Tax Credits of approximately $105,000 which have no expiration date. Due to the non-recurring charges incurred by the Company in the fourth quarter of 1997 and continued losses, the Company has provided a valuation allowance against a portion of the deferred tax assets recorded. The Internal Revenue Service is currently examining the tax returns of the U.S. Company for 1994 and 1995. The Company believes that it has appropriately provided for amounts potentially due as a result of such examination, and that its ultimate resolution will not have a material adverse effect on the Company's consolidated financial statements. 9. STOCK OPTION AND PURCHASE PLANS The Company accounts for its stock-based compensation plans under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, which utilizes the intrinsic value method. The 1994 Performance Plan (the "Plan") was adopted December 13, 1994 for certain directors, executive officers, employees and consultants. The Company has reserved 2,500,000 shares of its common stock for issuance. Options granted under this plan may be either incentive stock options or non-qualified stock options. Incentive stock options granted are exercisable for up to a ten-year period and at an exercise price equal to the fair market value of the common stock 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 1998, 1997 and 1996 were non-qualified options. At December 31, 1998 there were 450,717 shares available for grant. F-14 63 If compensation cost for the Company's stock-based compensation plan had been determined based on the fair value of the options at the grant dates for awards under the plan consistent with the method of SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net loss and loss per share would have been increased to the pro forma amounts indicated below:
1998 1997 1996 Net loss As reported $ (19,221) $ (13,353) $ (2,231) Pro forma $ (19,471) $ (13,374) $ (3,346) Loss per share - basic and diluted As reported $ (2.77) $ (1.94) $ (0.33) Pro forma $ (2.81) $ (1.95) $ (0.48)
The weighted average fair value of options granted during the year was $1.75, $2.36 and $3.32 per option for 1998, 1997 and 1996, respectively. The fair value of options granted under the Plan was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:
1998 1997 1996 Risk-free interest rate 4.9% 5.6% 6.3% Dividend yield 0.00% 0.00% 0.00% Expected volatility 49.1% 41.0% 40.0% Expected life (years) 7.0 7.5 7.5
A summary of stock option activity is as follows during the three years ended December 31:
FIXED OPTIONS 1998 1997 1996 Outstanding at beginning of year 1,005,066 2,002,083 1,882,166 Options granted 1,394,500 965,916 573,400 Options exercised -- -- (111,067) Options cancelled (471,400) (1,962,933) (342,416) ---------- ---------- ---------- Outstanding at end of year 1,928,166 1,005,066 2,002,083 ========== ========== ========== Options exercisable at year end 1,289,833 935,317 1,739,837 ========== ========== ==========
The following table summarizes information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING -------------------------------------------------------- WEIGHTED- NUMBER AVERAGE WEIGHTED- OUTSTANDING AT REMAINING AVERAGE DECEMBER 31, CONTRACTUAL EXERCISE RANGE OF EXERCISE PRICES 1998 LIFE PRICE $0 - $2.99 1,016,300 9.6 years 1.30 $3 - $5.99 955,666 4.4 years 3.00 $6 - $8.99 10,000 7.5 years 6.60 --------- --------- ---- 1,928,166 7.0 years 2.16 ========= ========= ====
F-15 64 At December 31, 1998, options for 1,289,833 shares were exercisable. The remaining options become exercisable as follows: 1999 - 235,833 shares; 2000 - 235,833 and 2001 - 166,667. During 1998, 1997 and 1996, the Company recognized tax benefits of $0, $0 and $127,000, respectively, related to compensation expense recognized for tax purposes on non-qualified stock options exercised. No related compensation expense for these non-qualified stock options were recorded for financial statement purposes. The amount of the income tax benefit was recorded as additional paid-in capital. During 1993, the Company granted non-qualified stock options under the 1985 Non-Qualified Stock Option Plan and the 1992 Non-Qualified Stock Option Plan where the exercise price at the date of grant was less than the market value of those shares on that date. During 1998, 1997 and 1996, the Company recognized compensation expense and additional paid-in capital for financial statement purposes of $0, $0 and $7,000, respectively, based on the dates the options were exercisable. The Company maintains an employee stock purchase plan (the "ESPP") which provides eligible employees the opportunity to purchase shares of the Company's common stock through authorized payroll deductions at 85% of the average market price on the last day of each quarter. All employees who have completed six months of employment of 20 hours per week or greater are eligible to participate in the ESPP. The ESPP qualifies as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The total number of shares available for purchase under the ESPP at December 31, 1998 is 287,090. 10. 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 1998, 1997 and 1996, all of the bingo paper manufactured by Stuart Entertainment Mexico was sold to the Company. Stuart Entertainment Mexico is included in the consolidated statements of operations for the years ended December 31, 1998, 1997 and 1996, and in the consolidated balance sheets as of December 31, 1998 and 1997. BRITISH BAZAAR COMPANY LIMITED: The Company has a 50% interest in British Bazaar Company Limited ("British Bazaar"). British Bazaar manufactures bingo paper and pulltab 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, 1998 and 1997 was $247,000 and $252,000, respectively. For the years ended December 31, 1998, 1997 and 1996, the Company recorded equity in earnings (loss) of $12,000, $15,000 and $(11,000), respectively, on its investment and had sales of $327,000, $416,000 and $1,142,000, respectively, to British Bazaar. The Company has indirectly guaranteed British Bazaar's operating line of credit at December 31, 1998 and 1997 in the amount of C$200,000 ($131,000) and C$350,000 ($245,000), respectively. 11. RELATED PARTY TRANSACTIONS MANAGEMENT CONSULTING AGREEMENT: Effective February 1, 1996, the Company entered into a Management Consulting Agreement (the "Management Consulting Agreement") with Len Stuart & Associates, Ltd., a Cayman Islands corporation (the "Consultant"). In December 1997, the parties entered into an agreement to terminate the Management Consulting Agreement (the "Termination Agreement"). Pursuant to the Termination Agreement, the Company paid the Consultant $355,101. Mr. F-16 65 Leonard A. Stuart is a brother of Timothy R. Stuart, who resigned as President of the Company in November 1998. Leonard A. Stuart is President of the Consultant and was Chairman of the Board of the Company until August 1997. BAZAAR MANAGEMENT GROUP: The Company is a party to a consulting agreement (the "BMG Agreement") dated July 1, 1995 with Bazaar Management Group, Inc. ("BMG"), of which Leonard A. Stuart is the sole shareholder. Under the BMG Agreement, BMG provides consulting services to the Company with respect to the Company's business (the "Division") of placing pulltab tickets in convenience stores, retail locations and bingo halls in Ontario, Canada. The monthly net income of the Division is payable as follows: (a) 50% is applied to reduce outstanding bank loans of the Division, (b) 50% of the remaining net income is retained by the Company, and (c) 50% of the remaining net income is paid to BMG. During 1998, 1997 and 1996 the Company paid BMG $245,000, $218,000 and $159,000, respectively. The Company believes that the terms of the BMG Agreement are comparable to those which would have been obtainable from unaffiliated third parties. KEN STUART CONSULTING AGREEMENT: In January 1995, the Company entered into a consulting agreement with Ken Stuart, a brother of Timothy R. Stuart, who resigned as President of the Company in December 1998. For the years ended December 31, 1997 and 1996, Ken Stuart earned commissions of $189,000 and $189,000, respectively. The agreement was terminated in 1997. In consideration for terminating such agreement, the company paid $236,250. LEASE AGREEMENT: In connection with the Acquisition of Trade, the Company entered into a Lease Agreement with Partnership Leasing, L.L.C., a Washington limited liability company, of which Ronald G. Rudy, a director of the Company, is a member. Mr. Rudy resigned from the Board of Directors of the Company effective March 29, 1999. The term of the lease is for ten years with one ten-year option and covers two buildings in Lynnwood, Washington with a total of 165,000 square feet. The rent is $924,000 per year, which is the current market price for the facility as determined by a qualified independent commercial real estate brokerage firm in an opinion of rental value delivered to the Company. BINGO VIDEO ENTERTAINMENT, INC.: In October 1992, the Company sold the assets of its retail branch in Hollywood, Florida to Bingo Video Entertainment, Inc. ("Bingo Video"), a company owned by a brother-in-law of Leonard Stuart. In exchange for the assets sold, the Company received a promissory note totaling $262,000. The note bears interest at a rate of one percent above the Company's borrowing rate on its short-term line of credit and requires monthly principal and interest payments of $4,000. The note is collateralized by the assets of Bingo Video and guaranteed by Leonard Stuart's brother-in-law and by Len Stuart & Associates, Inc., a company owned by Leonard Stuart. The principal balance of the note at December 31, 1998 was $62,000. During the years ended December 31, 1998, 1997 and 1996, sales to Bingo Video totaled $1,742,000, $866,000 and $828,000, respectively. 12. EMPLOYEE BENEFIT PLANS Effective January 1, 1998, the Company combined the U.S. Plan and the Trade Plan into one defined contribution plan (the "New Plan"). Under the New Plan (defined below), eligible employees may contribute up to 15% of their wages not to exceed a government established maximum. The Company's match is 50% of the eligible employee's first 6% elective contribution. For the year ended December 31, 1998, the Company's contributions were $256,000. For the years ended December 31, 1997 and 1996, the Company (Stuart and Trade Products) maintained two defined contribution plans under Section 401(k) of the Internal Revenue Code covering substantially all of its employees in the United States (the "U.S. Plan" and the "Trade Plan"). For the U.S. Plan, eligible employees F-17 66 contributed up to 15% of their wages, not to exceed a government established maximum. Stuart's contribution was the sum of the Company's match of the first 2% of the employee's elective contribution and a discretionary contribution of up to 2% of the wages of all employees eligible under the U.S. Plan. For the Trade Plan, eligible Trade Products employees contributed up to 20% of their wage, not to exceed a government established maximum. Trade Products match was 25% of the eligible employee's first 10% elective contribution. For the years ended December 31, 1997 and 1996, the Company's contributions were $238,000 and $174,000, respectively. The Company maintains a voluntary defined contribution plan covering substantially all of its employees in Canada (the "Canadian Plan"). Eligible employees may contribute up to 2.5% of their wages eligible under the Canadian plan and the Company will match the contribution up to 2.5%. Eligible employees may contribute an additional amount in excess of the 2.5%, but they are not matched by the Company. For the years ended December 31, 1998, 1997 and 1996 the Company's contributions were $161,000, $140,000 and $112,000, 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, 1998 are approximately as follows: 1999 $4,375 2000 3,683 2001 3,070 2002 2,773 2003 2,828
Rental expense for the years ended December 31, 1998, 1997 and 1996 was $4,633,000, $3,436,000 and $2,268,0000, respectively. LITIGATION: The Company is subject to lawsuits and claims which arise out of the normal course of business. The Company and certain of its subsidiaries are defendants in various litigation matters in the ordinary course of business, some of which involve claims for damages that are substantial in amount. The Company believes, the disposition of claims currently pending will not have a material adverse effect on Company's financial position or results of operations. INVENTORY REPURCHASE AGREEMENTS: The Company has inventory repurchase agreements with a bank to support a certain distributor in its bank financing. The agreements provide that in the event the bank obtains title to the distributor's inventory through foreclosure, the Company would be required to repurchase up to C$180,000 ($118,000) of selected inventory previously sold by the Company to the distributor. The purchase price would be that price paid by the distributor to the Company for such inventory. The Company would have a right of first refusal in the event the bank received a bona fide written offer from a third party to purchase the foreclosed inventory. 14. RESTRUCTURING CHARGE During the fourth quarter of 1996, management authorized and committed the Company to undertake consolidation of its United States manufacturing operations producing pulltab tickets, bingo paper and ink dabbers. This restructuring plan involved closing or substantially closing five facilities and transferring operations to other manufacturing facilities. This consolidation decision was made to improve customer service, improve productivity and asset utilization and reduce costs. As a result of these actions, the Company recorded a restructuring charge of F-18 67 $3,280,000 in 1996. The restructuring charge included approximately $1,511,000 of recognized severance and termination benefits for approximately 400 employees and $1,769,000 of facility closure and consolidation costs. In the fourth quarter of 1997, the Company recorded a restructuring charge of $2,261,000 for a program related to workforce reductions and to complete the consolidation of United States consumables manufacturing operations. The Company performed an evaluation of the competitive conditions in the markets in which it competes, looked at future costs in line with anticipated levels of business in 1998 and beyond, and determined that a restructuring charge was required to cover the costs of reducing certain sectors of its workforce to levels more appropriate to meet current business requirements. The major component of the restructuring charge related to the Company's elimination of approximately 50 positions. As a result, a charge of $1,229,000 for severance costs and the buyout of certain employment contracts, was recorded. The Company also aggressively continued its plan to consolidate its United States consumables manufacturing operations during 1998. Modifications to the original consolidation plan and unanticipated costs resulted in costs that were not originally charged. Management estimated that, consistent with the original 1997 consolidation plan, $1,032,000 of such additional costs would be incurred in the future. At December 31, 1998, $231,000 of restructuring charges remained in accrued liabilities. The balance was comprised of severance and termination benefits and contract buyout to be finalized in 1999. A summary of the restructuring activity is presented below:
1998 1997 Balance at January 1 $ 2,841 $ 3,280 Consolidation of U.S. Manufacturing Operations: - Severance and termination costs (1,650) (1,336) - Facility closure and consolidation costs (960) (1,364) - Additional provision to complete consolidation -- 1,032 - Severance related to workforce reduction -- 1,229 ------- ------- Balance at December 31 $ 231 $ 2,841 ======= =======
15. SUPPLEMENTAL CASH FLOW INFORMATION OTHER CASH PAYMENTS AND RECEIPTS:
1998 1997 1996 Cash paid for interest $12,918 $12,795 $ 3,510 Cash paid for income taxes 594 772 2,495 Income tax refunds received 520 3,129 224
F-19 68 CHANGES IN OPERATING ASSETS AND LIABILITIES: Changes in operating working capital items, net of amounts obtained in the acquisitions of Trade, Bazaar and from the consolidation of the Company's joint ventures, is as follows:
1998 1997 1996 Trade receivables $(1,460) $(1,177) $(2,064) Inventories 586 6,353 1,706 Income taxes recoverable -- 2,545 (2,545) Prepaid expenses 106 (99) 39 Trade payables (15) (1,037) (2,261) Accrued liabilities 2,262 (315) 853 Income taxes payable 227 797 (542) ------- ------- ------- Total Changes in Operating Assets and Liabilities $ 1,706 $ 7,067 $(4,814) ======= ======= =======
NON-CASH INVESTING AND FINANCING TRANSACTIONS: During the years ended December 31, 1998, 1997 and 1996, the Company financed the acquisition of equipment totaling $0, $0 and $118,000, respectively, through the assumption of obligations under capital leases. In connection with the Trade Acquisition in 1996, the Company issued warrants to acquire 300,000 shares of the Company's common stock at an exercise price of $7.75 per share, which were valued at $330,000. The amount of outstanding checks reclassified to accounts payable were $3,213,000 and $2,970,000 at December 31, 1998 and 1997, respectively. 16. BUSINESS OPERATIONS AND SEGMENTS The Company adopted SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Disclosures", in 1998. This accounting pronouncement changes the way the Company reports information about its operating segments and, accordingly, the 1997 and 1996 information has been restated to conform to the 1998 presentation. Stuart Entertainment, Inc. and its subsidiaries are primarily engaged in the manufacture and distribution of a full line of bingo-related products. The Company's products are sold primarily in the United States and Canada to distributors, who resell them to non-profit organizations which use such products for fund-raising purposes and to commercial entities such as Indian gaming enterprises, casinos and government sponsored entities which operate bingo games for profit. The Company reorganized its business on a global product line basis and accordingly has determined there are three reportable segments: Consumable Bingo Products: This segment consists of the manufacture and distribution of disposable bingo paper and ink dabbers, and the purchase for resale of bingo accessories, equipment and supplies. Pulltab and Lottery Products: This segment consists of the manufacture and distribution of pulltab tickets sold primarily to charities for fundraising and sold to third party retail locations. The Company also manufacturers and distributes scratch off tickets for promotions by customers and pulltab tickets used by governmental jurisdictions as instant lottery ticket sales. Electronic Bingo Products: This segment includes the manufacture and distribution of fixed-base and hand-held electronic bingo gaming systems and electronic bingo hall equipment. F-20 69 The accounting policies of the reportable segments are the same as those described in Note 1 of the "Notes to Consolidated Financial Statements". Since 1997, the Company evaluates the performance of its operating segments based on fully absorbed product line gross margins. Prior to 1997, the Company did not provide product line gross margin on a fully absorbed basis. For the years ended December 31, 1998, 1997 and 1996, the Company did not allocate Selling, General and Administrative, Depreciation and Amortization, Interest Expense and Non-operating Expense or Income, or Income Taxes to its individual operating segments. The Company is, therefore, unable to reasonably determine the breakout of these items by reportable segment. SUMMARY BY BUSINESS SEGMENTS:
1998 1997 1996(1) NET SALES: Consumable Bingo Products $ 62,823 $ 68,448 $ 70,884 Pulltab and Lottery Products 41,546 42,995 27,327 Electronic Bingo Products 14,273 10,135 10,494 --------- --------- --------- $ 118,642 $ 121,578 $ 108,705 ========= ========= ========= GROSS MARGIN Consumable Bingo Products $ 14,720 $ 21,264 $ -- Pulltab and Lottery Products 13,707 11,533 -- Electronic Bingo Products 5,019 3,527 -- --------- --------- --------- Gross Margin 33,446 36,324 32,659 --------- --------- --------- Selling, General and Administrative Expenses, Restructuring Charge and Legal Expenses $ 39,478 $ 39,613 $ 29,335 --------- --------- --------- Operating Income (Loss) $ (6,032) $ (3,289) $ 3,324 ========= ========= =========
(1) Prior to 1997, product line gross margin financial information was not provided on a fully absorbed basis and therefore deemed not utilized by the chief executive officer. For the years ended December 31, 1998 and 1997, the Company did not measure return on investment by reportable segment and accordingly is not able to report the allocation of assets by reportable segment. F-21 70 SUMMARY BY GEOGRAPHICAL:
1998 1997 1996(1) NET SALES: United States: Domestic Customers $ 81,734 $ 82,517 $ 67,203 Foreign Customers 1,415 957 688 Canada 35,493 38,104 40,814 --------- --------- --------- Total $ 118,642 $ 121,578 $ 108,705 ========= ========= ========= INCOME (LOSS) BEFORE INCOME TAXES: United States $ (15,750) $ (13,832) $ (3,766) Canada (3,682) (1,950) (392) United Kingdom -- -- 2,145 --------- --------- --------- Loss before Income Taxes $ (19,432) $ (15,782) $ (2,013) ========= ========= ========= ASSETS: United States $ 86,540 $ 84,963 $ 101,930 Canada 46,260 49,605 49,990 Mexico 3,899 3,256 2,675 --------- --------- --------- Total $ 136,699 $ 137,824 $ 154,595 ========= ========= ========= CAPITAL EXPENDITURES: United States $ 6,536 $ 3,459 $ 2,072 Canada 1,514 1,653 582 --------- --------- --------- Total $ 8,050 $ 5,112 $ 2,654 ========= ========= ========= DEPRECIATION AND AMORTIZATION: United States $ 6,030 $ 5,379 $ 2,820 Canada 2,042 2,064 1,551 United Kingdom -- -- 144 --------- --------- --------- Total $ 8,072 $ 7,443 $ 4,515 ========= ========= =========
(1) Information provided on the United States in 1996 reflects operations of Trade Products from November 13, 1996 to December 31, 1996. Geographic information on Mexico is included within amounts for the United States in all categories (except identifiable assets) as substantially all of the production of Stuart Entertainment Mexico is sold to customers in the United States as Stuart Entertainment Mexico is not licensed to sell to customers in Mexico. F-22 71 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended December 31, 1998 and 1997 (amounts in thousands, except per share amounts):
FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER TOTAL 1998:(1) Net sales $ 28,404 $ 28,926 $ 29,717 $ 31,595 $ 118,642 Gross margin 5,045 8,416 9,309 10,676 33,446 Loss before income tax benefit (11,126) (4,096) (2,779) (1,431) (19,432) Net loss (11,088) (3,805) (2,724) (1,604) (19,221) Loss per share - basic and diluted: Loss per share $ (1.60) $ (0.55) $ (0.39) $ (0.23) $ (2.77) ========= ========= ========= ========= ========= 1997:(2) Net sales $ 29,271 $ 29,553 $ 30,884 $ 31,870 $ 121,578 Gross margin 7,572 8,642 10,752 9,358 36,324 Loss before income tax benefit (7,874) (3,906) (1,658) (2,344) (15,782) Loss before extraordinary item (8,087) (2,521) (1,115) (1,422) (13,145) Net loss (8,295) (2,521) (1,115) (1,422) (13,353) Loss per share - basic and diluted: Loss before extraordinary item $ (1.17) $ (0.37) $ (0.16) $ (0.21) $ (1.91) Extraordinary item (0.03) -- -- -- (0.03) --------- --------- --------- --------- --------- Loss per share $ (1.20) $ (0.37) $ (0.16) $ (0.21) $ (1.94) ========= ========= ========= ========= =========
(1) The 1998 fourth quarter results of operations were adversely impacted by a $2.1 million charge to cost of goods sold attributable to a write down of unsaleable inventory. Additionally, the Company also charged fourth quarter selling, general and administrative expenses for $0.7 million for executive severance and $3.2 million for bad debt expense for trade accounts and notes receivable in risk of default. The third and fourth quarters of 1998 were adversely impacted by higher net interest expense attributable to interest incurred on Credit Facility borrowings and to lower interest earned due to higher utilization of cash to operate the business. (2) Cost of goods sold in the first quarter of 1997 was unfavorably impacted by a charge of $1.5 million pertaining to the application of purchase accounting to the finished goods inventory of Trade Products. The 1997 fourth quarter results of operations was unfavorably impacted as a result of a restructuring charge of $2.3 million related to a workforce reduction and an additional charge to complete the consolidation of U.S. manufacturing operations; a $1.4 million charge to consolidate product lines; a $0.4 million charge to bring a long term patent infringement lawsuit to trial in 1998; and a $0.7 million bad debt expense attributable to regulatory actions in the state of Washington and the likely consolidation of distributors in certain markets. F-23 72 18. EARNING PER SHARE The following table provides a reconciliation between basic and diluted earnings per share:
INCOME SHARES AMOUNT 1998: Basic EPS Net Loss $(19,221,000) 6,935,566 $ (2.77) Effect of Dilutive Securities Stock Option and Warrants -- -- -- ------------ ------------ ------------- DILUTED EPS $(19,221,000) 6,935,566 $ (2.77) ============ ============ ============= 1997: Basic EPS Net Loss $(13,353,000) 6,868,483 $ (1.94) Effect of Dilutive Securities Stock Option and Warrants -- -- -- ------------ ------------ ------------- DILUTED EPS $(13,353,000) 6,868,483 $ (1.94) ============ ============ ============= 1996: Basic EPS Net Loss $ (2,231,000) 6,774,974 $ (0.33) Effect of Dilutive Securities Stock Option and Warrants -- -- -- ------------ ------------ ------------- DILUTED EPS $ (2,231,000) 6,774,974 $ (0.33) ============ ============ =============
F-24 73 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------- NET BALANCE AT CHARGED TO CHANGES NET BALANCE BEGINNING COSTS AND FROM CHARGE- AT END OF YEAR EXPENSES ACQUISITIONS OFFS* OF YEAR YEAR ENDED DECEMBER 31, 1998: Allowance for Doubtful Accounts: Accounts Receivable $ 3,091 $ 2,911 $ -- $(2,267) $ 3,735 Notes Receivable: Current Portion 233 (116) -- (117) -- Non-Current Portion 115 495 -- (71) 539 ------- ------- -------- ------- ------- $ 3,439 $ 3,290 $ -- $(2,455) $ 4,274 ======= ======= ======== ======= ======= Valuation Reserve for Non- Current Deferred Income Taxes $ 1,778 $ 5,920 $ -- $ -- $ 7,698 ======= ======= ======== ======= ======= YEAR ENDED DECEMBER 31, 1997: Allowance for Doubtful Accounts: Accounts Receivable $ 2,230 $ 1,444 $ -- $ (583) $ 3,091 Notes Receivable: Current Portion 99 134 -- -- 233 Non-Current Portion 124 -- -- (9) 115 ------- ------- -------- ------- ------- $ 2,453 $ 1,578 $ -- $ (592) $ 3,439 ======= ======= ======== ======= ======= Valuation Reserve for Non- Current Deferred Income Taxes $ 518 $ 1,260 $ -- $ -- $ 1,778 ======= ======= ======== ======= ======= YEAR ENDED DECEMBER 31, 1996: Allowance for Doubtful Accounts: Accounts Receivable $ 2,086 $ 20 $ 800 $ (676) $ 2,230 Notes Receivable: Current Portion 199 (100) -- -- 99 Non-Current Portion 124 -- -- -- 124 ------- ------- -------- ------- ------- $ 2,409 $ (80) $ 800 $ (676) $ 2,453 ======= ======= ======== ======= ======= Valuation Reserve for Non- Current Deferred Income Taxes $ 758 $ (240) $ -- $ -- $ 518 ======= ======= ======== ======= =======
* For the years ended December 31, 1998, 1997 and 1996, "Net Charge-Offs" consists of write-offs of trade and notes receivable, net of subsequent collections. F-25 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 - ----------- ----------- 3.01 Amended and Restated Certificate of Incorporation.(1) 3.02 Amended and Restated Bylaws of the Company.(2) 4.01 Form of Common Stock Certificate.(3) 4.02 Securityholders' Agreement, dated December 13, 1994, between Leonard A. Stuart, Bingo Holdings, Inc. and the Company.(2) 4.03 Warrant to Purchase 300,000 Shares of Common Stock of the Company dated November 13, 1996.(4) 4.04 Indenture between the Company and Marine Midland Bank as Trustee, dated as of November 13, 1996.(1) 10.01 Incentive Stock Option Plan of the Company.(5) 10.02 Non-Qualified Stock Option Plan of the Company.(6) 10.03 Lease, dated August 14, 1986, between William E. Osband, Jr. and the Company.(7) 10.04 Lease, dated February 5, 1993, between Fraccionadora Industrial De Norte, S.A. de C.V. and Stuart Entertainment, S.A. de C.V.(8) 10.05 1992 Non-Qualified Stock Option Plan of Stuart Entertainment, Inc.(8) 10.06 1992 Incentive Stock Option Plan of Stuart Entertainment, Inc.(8) 10.07 Amended and Restated Performance Stock Option Plan of Stuart Entertainment, Inc.(1) 10.08 1997 Employee Stock Purchase Plan.(9) 10.09 Agency Agreement, dated March 14, 1993, between Gala Leisure Limited, Mitre Printing Company, Bingo Press & Specialty Limited and the Company.(10) 10.10 Employment Agreement, dated June 1, 1994, between Albert F. Barber and the Company.(2)
75 Exhibit No. Description - ---------- ----------- 10.11 Warrant Certificate, dated December 13, 1994, issued by the Company to Leonard A. Stuart.(2) 10.12 Warrant Certificate, dated December 13, 1994, issued by the Company to Bingo Holdings, Inc.(2) 10.13 Employment Agreement, dated November 13, 1996, by and between the Company and Ronald G. Rudy.(4) 10.14 Agreement dated April 4, 1996 by and between Power Bingo Corporation and the Company.(1) 10.15 Management consulting agreement dated February 1, 1996 by and between the Company and Len Stuart & Associates, Ltd.(1) 10.16 Lease between the Company and Partnership Leasing L.L.C.(1) 10.17 Loan and Security Agreement, dated November 20, 1997, by and between the Company and Congress Financial Corporation (Central).(11) 10.18 Loan Agreement, dated November 20, 1997, by and between Bingo Press & Specialty Limited and Congress Financial Corporation (Canada).(11) 10.19 Agreement dated December 13, 1997, by and between the Company, Len Stuart, & Associates, Ltd. and Leonard A. Stuart.(11) 10.20 Letter Agreement dated December 5, 1995, between the Company and Paul C. Tunink, as amended.(11) 10.21 Consulting Agreement and Termination of Employment Agreement dated November 12, 1997, between the Company and Ronald G. Rudy.(11) 10.22 Lease Agreement dated June 16, 1997 between SCI Development Services, Incorporated and the Company.(11) 10.23 Contract dated October 13, 1998 between Bazaar and the Ontario Gaming Control Commission.* 10.24 Amendment No. 1 to Loan and Security Agreement, dated December 7, 1998, by and between the Company.* 10.25 Amendment No. 2 to Loan and Security Agreement, dated January 2, 1999, by and between the Company.* 10.26 Amendment No. 3 to Loan and Security Agreement, dated March 1, 1999, by and between the Company.* 10.27 Agreement dated October 2, 1998 between Albert F. Barber and the Company.* 76
Exhibit No. Description - ----------- ----------- 10.28 Agreement dated October 16, 1998 between Paul C. Tunink and the Company.* 10.29 Agreement dated November 16, 1998 between Timothy R. Stuart and the Company.* 10.30 Amended and Restated Employment Agreement dated April 8, 1999, between Joseph M. Valandra and the Company.* 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. (1) Incorporated by reference to the Company's Registration Statement on Form S-4, File No. 333-18779. (2) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, File No. 0-10737. (3) Incorporated by reference to the Company's Registration Statement on Form S-8, File No. 33-89962. (4) Incorporated by reference to the Company's Current Report on Form 8-K dated November 13, 1996, File No. 0-10737. (5) Incorporated by reference to the Company's Registration Statement on Form S-1, File No. 33-73746. (6) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1985, File No. 0-10737. (7) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, File No. 0-10737. (8) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 0-10737. (9) Incorporated by reference to the Company's Registration Statement on Form S-8, File No. 333-30535. (10) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 0-10737. (11) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 0-10737. EX-10.23 2 EX-10.23 1 Exhibit 10.23 This Agreement made in duplicate the 13th day of October, 1998. BETWEEN: The Registrar of Alcohol and Gaming ("the Registrar") appointed under the Alcohol and Gaming Regulation and Public Protection Act, 1996 - and - Bingo Press and Specialty Limited ("Bingo Press") Recitals 1. The Gaming Control Commission issued a "Request for Proposal for the Printing and Distribution of Break Open Tickets", August 6, 1997. 2. Bingo Press was selected to provide certain gaming goods and services as a result of its response, dated September 19, 1997 (the "Response") to the Request for Proposal. 3, Bingo Press and the Registrar consider it expedient and appropriate to enter into this Agreement with respect to the manufacture, including printing, production and supply of break open tickets. 4. The terms, conditions and statements contained in the Request for Proposal and in Bingo Press's submission to the Request for Proposal (with the exception of section 5 "Break Open Ticket Warehousing and Distribution") continue to apply to the extent that the provisions have not been altered by this Agreement or by any statute, regulation, term of registration, standard, requirement, term and condition of a license and the Request for Proposal and Bingo Press's submission to the Request for Proposal are appended as Appendix A and Appendix B respectively and are included in and form part of this Agreement. NOW, THEREFORE, in consideration of the respective covenants, agreements, representations, indemnities and other consideration of the parties contained in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged by each of the parties, the Registrar and Bingo Press agree as follows: Purposes of the Agreement: 1.0 The purposes of this Agreement are to provide for: a) the manufacture, including printing, production and supply of break open tickets by Bingo Press, as set out in this Agreement; 2 Agreement October 13, 1998 Page 2 b) the collection and remittance of any fees or other charges with respect to the break open tickets manufactured or supplied by Bingo Press established: i) by the Registrar, ii) by Order-in-Council, iii) under the Alcohol and Gaming Regulation and Public Protection Act, 1996, or iv) by some other means; c) the development of break open ticket lottery schemes and products with the view to improving the enforcement and efficiency of the province's break open ticket sector and enhancing the level of proceeds obtained by licensees from break open ticket lottery schemes; d) the use by Bingo Press of any intellectual property of the Registrar, the Alcohol and Gaming Commission of Ontario, the board of the Alcohol and Gaming Commission of Ontario or of any other ministry, agency, board or commission of the Government of Ontario; e) other ancillary and incidental matters. 1.1 Interpretation The Registrar and Bingo Press acknowledge that in applying and interpreting this Agreement, specific provisions that address a matter have priority over general provisions. Unless otherwise specifically provided in this Agreement, any reference in this Agreement to any law, by-law, rule, regulation, order, act or statute of any government, governmental body or other regulatory body shall be construed as a reference to those as amended or re-enacted from time to time or as a reference to any successor to those. 2.0 Definitions "Act" means the Gaming Control Act, 1992, S.O, 1992, chapter 24, as amended by S.O. 1993, chapter 25, sections 25-43, S.O. 1996, chapter 26, section 4 and as it may be amended. "Agreement" means this Agreement and all appendices and schedules attached to this Agreement, in each case as they may be supplemented or amended from time to time, and the expressions "hereof", "herein", hereto", "under", "hereby", and similar expressions refer to this 3 Agreement October 13, 1998 Page 3 Agreement and unless otherwise indicated, references to articles and sections are to articles and sections of this Agreement. "Force Majeure" means an act of God, civil commotion or war. "Governmental authority" means any government, legislature, regulatory authority, agency, commission, board, court or instrumentality of Canada, the Province of Ontario and a municipality having jurisdiction over Bingo Press or its business activities; "Governmental consent" means any licence, right, permit, franchise, privilege, registration, direction, decree, consent, order, permission, approval or authority to be issued or provided by a Governmental authority; "Intellectual property" means all trade names, brand names, trade marks, trade mark registrations and applications, works, copyrights, copyright registrations and applications, inventions, patents and patent applications, industrial designs, industrial design registrations and applications, trade secrets, know-how, policies, equipment and parts lists and descriptions, instruction manuals, inventions, inventors' notes, research data, unpatented blueprints, drawings and design, formulae, processes, technology, software and all source and object code versions thereof and all related documentations, all data bases, flow charts, service or manufacturer manuals and any enhancements, modifications or substitutions thereof, and other intellectual property, together with all rights under licenses, technology transfer agreements, and other agreements or licenses or instruments relating to any of the foregoing. "Interested person" and similar phrases, including "person interested in" have the same meaning as provided for in section 8 of the Act. "Licensee" means a charitable or religious organization or a board of a fair or exhibition licensed pursuant to section 207 of the Criminal Code. 3.0 Term of Agreement The term of this Agreement shall commence on November 3, 1997 and shall expire at 11:59 p.m., Eastern Standard Time, on November 2, 2002 unless this Agreement is otherwise terminated or extended. 3.1 Extension of Term of Agreement The term of this Agreement may be extended for up to one year or, through one or more renewal terms, for such other time as agreed upon by mutual consent but not for a period of more than five years. The term of this Agreement, including with any extension, shall not extend beyond 4 Agreement October 13, 1998 Page 4 November 2, 2007. If either party does not wish to extend the term of this Agreement at the conclusion of the term, or any renewal term, that party shall provide the other party with written notice of such intention not less than 180 days before the last day of the term, or any renewal term. If no notice is delivered by the date indicated, the parties shall be deemed to have agreed to extend the term of this Agreement for a period of one year. 4.0 Covenants of Bingo Press Bingo Press covenants that it shall during the term of this Agreement: a) maintain and keep its corporate existence in full force and effect and power; b) maintain and keep its registration as a gaming supplier under the Act in full force and effect and maintain and keep any other Governmental consents required by a Governmental authority in full force and effect; c) manufacture, produce and supply break open tickets in accordance with the Act, its regulations, terms of registration, terms and conditions of licenses, standards or requirements established by the Registrar and the business plan or plans approved by the Registrar; d) make available and supply unimprinted break open tickets to all registered gaming suppliers in Ontario whose accounts are in good standing on terms and conditions no less favourable than the terms and conditions used for the supply of unimprinted break open tickets to a division of Bingo Press or any business entity that is associated or affiliated with or is a subsidiary or parent of Bingo Press; e) report to the Registrar such reports and in such fashion as are requested or required with respect to the financial affairs, business operations, product development or other related matters and within such time period as specified by the Registrar; f) submit to the Registrar within such time period as specified by the Registrar a business plan or plans in such fashion as requested for the approval of the Registrar. The contents of a business plan are anticipated by the parties to include the information set out in Appendix "C". Bingo Press acknowledges that the Registrar, as part of a process with respect to a decision to approve or not to approve of a business plan or plans may consult with stakeholders in the break open ticket sector, including Licensees, gaming suppliers and Governmental authorities, and obtain such professional and technical advice or expertise as the Registrar considers appropriate; 5 Agreement October 13, 1998 Page 5 g) act in accordance with the business plan approved of by the Registrar or any amendments that have been approved by the Registrar; h) collect and remit to the Registrar, within the time periods specified by the Registrar and in accordance with the directions provided by the Registrar from time to time, any fees or other charges, with respect to break open tickets manufactured or supplied by Bingo Press, that are or may be established and to do so, if appointed by the Registrar as agent, as agent for the Registrar. Bingo Press shall, in collecting any such fees, take such efforts that are no less diligent than it uses or would use to collect any funds owed to it by a Licensee, a registered gaming supplier or another person. Bingo Press shall monitor the status of accounts and report to the Registrar in a timely fashion any delinquent accounts and may discuss with the Registrar what efforts would be appropriate to fulfill this covenant. i) provide to the Registrar within the time period specified by the Registrar the following information on an annual basis or as required by the Registrar; i) audited consolidated financial statements for Stuart Entertainment Inc., supplementary financial information which will disclose the unaudited balance sheet and earnings of Bingo Press, and sufficient information to enable the financial information provided in the supplementary financial information to be traced to the audited consolidated financial statements for Stuart Entertainment Inc.; ii) reports prepared in accordance with section 5815 of the CICA Handbook, or the applicable provisions of the CICA Handbook, by an independent auditor approved by the Registrar of its compliance with this Agreement, the terms and conditions of licenses, the Act and its regulations, the terms of registration, standards, requirements, system of internal controls, and the approved business plan or plan. j) provide a list of any subcontractors it intends to use that are not otherwise identified in the business plans and approved by the Registrar; k) implement and comply with a system of internal controls that is in compliance with the Registrar's policies on internal controls. 6 Agreement October 13, 1998 Page 6 5.0 Covenants of the Registrar The Registrar: a) shall authorize or cause to be authorized Bingo Press to be the exclusive manufacturer of break open tickets for the following market in Ontario: i) Licensees who sell the break open tickets at premises operated by persons registered as break open ticket sellers; ii) Licensees who conduct and manage lottery schemes pursuant to a license issued by the Registrar and that are known as "P-Licences", other than bingo sponsors associations; iii) registered gaming suppliers supplying break open tickets to Licensees provided for in (i) or (ii). b) may authorize or cause to be authorized Bingo Press to use and incorporate on each break open ticket manufactured by it a unique identifier or logo of the Alcohol and Gaming Commission of Ontario that is the Intellectual property of the Alcohol and Gaming Commission of Ontario; and c) may appoint Bingo Press as the Registrar's agent for purposes of the collection and remittance of any fees or other charges. 6.0 Representations and Warranties Bingo Press represents and warrants, and acknowledges that the Registrar is relying on such representations and warranties in connection with the transactions contemplated by this Agreement, the following: a) Bingo Press is a corporation duly incorporated and organized under the laws of Ontario; b) The officers, directors and shareholders of Bingo Press are as follows: Officers: Albert F. Barber, Chairman and Chief Executive Officer Timothy Stuart, President and Chief Operating Officer Roy L. Lister, Executive Vice President 7 Agreement October 13, 1998 Page 7 Michael A. Schalk, Secretary Douglas W. Rye, Assistant Secretary Paul C. Tunink, Vice President of Finance Directors: Albert F. Barber Douglas W. Rye Shareholders: Stuart Entertainment Inc. - 100% of issued shares of all classes and that no other person or persons have any interest in the corporation such that that person is an Interested person; c) The officers, directors and shareholders of Bingo Press set out in paragraph (b) shall not be changed without the prior written approval of the Registrar; d) Bingo Press has all the necessary corporate capacity, power and authority to enter into and to carry out the provisions of this Agreement. This Agreement has been duly authorized by Bingo Press and constitutes a valid and binding obligation of Bingo Press, enforceable against Bingo Press in accordance with its terms; e) Neither the execution and delivery of this Agreement nor the fulfilment of or compliance of its terms and conditions: i) conflicts with any of the terms, conditions or provisions of or constitutes a default under the corporate charter and bylaws of Bingo Press; or ii) conflicts in a material respect with or results in a material breach of any of the terms, conditions or provisions of or constitutes a material default under any material agreement, licence or other instrument to which Bingo Press is a party or by which it is bound; f) To its knowledge after due inquiry, there are not actions, suits or proceedings pending or threatened against Bingo Press which could reasonably be expected to affect materially adversely its ability to perform its obligations under this Agreement; 8 Agreement October 13, 1998 Page 8 g) Bingo Press shall provide the goods and services contemplated in a professional and workmanlike manner and in a manner to permit the Registrar to have the full benefit of Bingo Press's qualifications; h) Bingo Press shall ensure that all personnel providing the goods and services contemplated possess the necessary qualifications, skills, training and experience to provide the goods and services and that its facilities are a safe, secure and suitable location; i) Bingo Press shall provide the goods and services in accordance with this Agreement and in a timely manner. These representations and warranties contained in this Agreement are given as of the date of the Agreement and shall survive the execution and delivery of this Agreement for the term. 7.0 Insurance Bingo Press shall maintain and keep in full effect and force for the duration of the Agreement an insurance policy or policies that, at minimum, meet the requirements set out in the Request for Proposal and in the Response. 8.0 Indemnification Bingo Press shall indemnify and save harmless Her Majesty the Queen in Right of Ontario, the Ministry of Consumer and Commercial Relations, the Alcohol and Gaming Commission of Ontario, the Registrar of Alcohol and Gaming, the board of the Alcohol and Gaming Commission of Ontario and their officers, directors, employees and agents from and against all claims, demands, costs, losses, damages, actions, suits or other proceedings arising out of the actual or alleged errors, omissions or negligence of Bingo Press, its officers, directors, partners, subsidiaries, affiliated or associated business entities, and their employees or agents in connection with the goods and services, including, without limitation: a) any claims by third parties, caused by errors, omissions, negligence, willful conduct, recklessness or fraud, b) all reasonable legal fees, costs and expenses which may be sustained or incurred in regard to such claims. The benefit of this covenant, to the extent that it runs to someone nor a party to this Agreement, shall be held by the Registrar in trust for such person and may be enforced by the Registrar for 9 Agreement October 13, 1998 Page 9 the benefit of such person. Bingo Press acknowledges that it has received separate and sufficient consideration for this covenant of indemnity. 9.0 Assignment The Registrar may assign, transfer or otherwise dispose of this Agreement, in whole or in part, or any rights, title or interests in the Agreement, without the permission of Bingo Press and any such assignment, transfer or other disposal shall permit the assignee, transferee or disposee to assign, transfer or otherwise dispose of this Agreement, in whole or in part, or any rights, title or interests in the Agreement without the permission of Bingo Press. Bingo Press may assign, transfer or otherwise dispose of this Agreement, in whole or in part or any rights, title or interest in the Agreement only with the prior written permission of the Registrar. 10.0 Conflict of Interest Bingo Press, any of its subcontractors and any of their respective officers, directors, employees and agents shall not engage in any activity or provide any goods or services to the Registrar where such activity or provision of such goods or services creates a conflict of interest (actually or potentially in the sole opinion of the Registrar) with the provision of the goods and services pursuant to this Agreement. Bingo Press acknowledges and agrees that it shall be a conflict of interest for it to use confidential information of the Crown relevant to the goods or services where the Registrar has not specifically authorized such use. 10.1 Bingo Press shall disclose to the Registrar without delay any actual or potential situation that may be reasonably interpreted as either a conflict of interest or a potential conflict of interest. 10.2 Bingo Press covenants and agrees that it will not hire or retain the services of any employee or previous employee of the Ontario Public Service where to do so constitutes a breach by such employee or previous employee of any Government of Ontario directive that may, from time to time, apply to such employee or previous employee. 10.3 A breach of section 10.0, 10.1 or 10.2 by Bingo Press shall entitle the Registrar to terminate this Agreement, in addition to any other remedies that the Registrar has in the Agreement, in law or in equity. The Registrar may, in his or her sole discretion, provide Bingo Press with an opportunity to rectify any such conflict of interest within such time period and under such terms as the Registrar may determine. 10 Agreement October 13, 1998 Page 10 10.4 The Registrar understands that Bingo Press carries on business in jurisdictions other than Ontario and provides other goods and services in Ontario and that these facts alone do not give rise to a conflict of interest. 11.0 Confidentiality of Information and Materials The parties acknowledge and agree that all information and materials received from or provided by the other shall be considered confidential and that, subject to the provisions of the Freedom of Information and Protection of Privacy Act and as otherwise required by this Agreement, shall not be disclosed to any third parties without the prior agreement of the other party. Bingo Press acknowledges and consents to the Registrar releasing information and materials received from Bingo Press where, in the Registrar's opinion, the release is necessary and appropriate: a) for law enforcement purposes; b) to enforce this Agreement; c) for government purposes, including but not limited to informing and advising the government and its agencies with respect to matters contemplated in this Agreement; d) to carry out the consultations contemplated in section 4.0(f). 11.1 Bingo Press shall maintain confidential all confidential information or materials received from or provided by the Registrar and use such information or materials only for the purposes for which it was received from or provided by the Registrar. Bingo Press shall return, at the request of the Registrar, any and all such information and materials. Section 11.0 and 11.1 shall survive termination of this Agreement for any reason. 12.0 Notices Any notice, demand, request, consent, agreement or approval which may or is required to be given pursuant to this Agreement shall be in writing and shall be sufficiently given or made if served personally upon the party for whom it is intended, or mailed by registered mail, return receipt requested or sent by facsimile in the case of: 11 Agreement October 13, 1998 Page 11 a) Bingo Press Bingo Press and Specialty Limited 301 Louth Street St. Catharines, Ontario L2S 3V6 Attention: Les Pregitzer (905) 984-6377 (Facsimile) b) Registrar Registrar of Alcohol and Gaming Alcohol and Gaming Commission of Ontario 10th Floor 20 Dundas Street West Toronto, Ontario M5G 2N6 (416) 326-8054 (Facsimile) or such other address or in care of such other officers or persons as a party may from time to time advise to the other party by notice in writing. The date of receipt of any such notice, demand, request, consent, agreement or approval if served personally or by facsimile shall be deemed to be the date of delivery thereof (if such day is a business day and if not, the next following business day), or if mailed as aforesaid, the date of delivery by a postal authority. 13.0 No Partnership, Joint Venture or Agency Relationship Nothing contained in this Agreement shall be construed to be or to create a partnership, joint venture or agency relationship between the Registrar, his or her successors or assigns, on the one part, and Bingo Press its successors or assigns, on the other part, other than the agency relationship contemplated with respect to the collection and remittance of fees and other charges. 14.0 Modification and Changes No change to this Agreement shall be deemed to have been agreed to unless such change is in writing and is signed by the party against whom the change to this Agreement is alleged. 12 Agreement October 13, 1998 Page 12 15.0 Understandings and Agreements This Agreement constitutes all of the understandings and agreements of whatsoever nature or kind existing between the parties with respect to the manufacture of break open tickets. Bingo Press acknowledges and agrees that nothing in this Agreement restricts or should be construed as restricting the Lieutenant Governor in Council, the Registrar or other Governmental authorities from establishing, modifying, changing or directing that changes be made pursuant to regulation, terms of registration, terms and conditions of licences, standards, requirements, policies or otherwise. 16.0 Enforceability In the event that any provision of this Agreement is determined to be invalid, illegal or unenforceable as written by a court or other lawful authority of competent jurisdiction, this Agreement shall continue in full force and effect with respect to the enforceable provisions, and all rights and remedies accrued under the enforceable provision shall survive any such determination. 17.0 Time of Essence, Extensions or Abridgements of Time Time shall in all respects be of the essence hereof. The time for doing or completing any matter provided for herein may be extended or abridged by an agreement in writing signed by the Registrar and Bingo Press, or by their respective counsel who are hereby expressly appointed in that regard. 18.0 Governing Law This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and each party irrevocably and unconditionally submits to the nonexclusive jurisdiction of the courts of Ontario and all courts competent to hear appeals therefrom. 19.0 Survival of Covenants Any covenant, term or provision of this Agreement which, in order to be effective must survive the termination of this Agreement, shall survive any such termination. 20.0 Third Parties None of the rights or obligations hereunder of any party shall enure to the benefit of or be enforceable by or against any party other than the parties to this Agreement and their respective successors and permitted assigns and as provided for in the covenant of indemnification. 13 Agreement October 13, 1998 Page 13 21.0 Waivers Failure by the Registrar or Bingo Press to insist upon strict performance of any covenant, agreement, term or condition of this Agreement, or to exercise any right or remedy consequent upon the breach thereof, shall not constitute a waiver of my such breach or any subsequent breach of such covenant, agreement, term or condition. No covenant, agreement, term or condition of this Agreement and no breach thereof shall be waived, altered or modified except by written instrument. No waiver of any breach shall affect or alter this Agreement, but each and every covenant, agreement, term and condition of this Agreement shall continue in full force and effect with respect to any other then existing or subsequent breach thereof. 22.0 Force Majeure Notwithstanding any other provision of this Agreement, if, by reason of Force Majeure a party is unable to perform in whole or in part its obligations under this Agreement, then in such event and only during such period of inability to perform, such party shall be relieved of those obligations to the extent it is so unable to perform and such inability to perform, so caused, shall not make such party liable to the other, and any time period in which such obligation is to be performed shall be extended for such period of inability to perform. 22.1 Bingo Press acknowledges and agrees that the Registrar may arrange for the manufacture, including printing, production or supply of break open tickets by another person on such terms and conditions as the Registrar considers appropriate where Bingo Press is unable or unwilling to do so. 22.2 Bingo Press and the Registrar acknowledge that Bingo Press has a disaster recovery plan, as set out in its Response and that that disaster recovery plan is intended to ensure an adequate supply of product. 23.0 Termination Subject to section 24.0, the parties acknowledge and agree that the Registrar may, in addition to or in modification of the terms set out in the Request for Proposal, terminate this Agreement prior to the expiry date if: a) Bingo Press or any of its officers, directors, shareholders or interested persons is charged, convicted or found guilty of an offence under Part VII of the Criminal Code of Canada or the Act; 14 Agreement October 13, 1998 Page 14 b) Bingo Press is subject to an Order of Immediate Suspension of Registration, a Notice of Proposed Order to Suspend Registration, a Notice of Proposed Order to Revoke Registration, an Order of Suspension, an Order of Revocation, or any similar order or proposed order, under the Act; c) Bingo Press is adjudged bankrupt, makes a general assignment for the benefit of its creditors, or a receiver is appointed, on account of Bingo Press's insolvency; d) Bingo Press fails to collect or remit, within the time period specified by the Registrar or in accordance with the directions provided by the Registrar, to the Registrar any fees or other charges; e) there is a change in officers, directors or shareholders that has not been approved by the Registrar; f) Bingo Press fails to act in accordance with the law (including the regulations, terms of registration, the terms and conditions of licences and any agreements that are required or flow from such term or term and condition) or fails to comply with the requirements and standards; g) Bingo Press fails to act in accordance with the approved business plan or plans; h) Bingo Press is otherwise in default of this Agreement. 23.1 The Registrar may, in lieu of terminating this Agreement, assess the amount of damages caused by any failure or default by Bingo Press and Bingo Press agrees to pay the damages assessed as liquidated damages within the time period specified by the Registrar. 23.2 Bingo Press may terminate this Agreement prior to the expiry date upon six months written notice to the Registrar and Bingo Press's obligation to manufacture, produce and supply break open tickets shall cease on termination of this Agreement pursuant to section 23.2. 15 Agreement October 13, 1998 Page 15 23.3 If the Agreement is terminated for any reason, Bingo Press shall cooperate fully with the Registrar to ensure that any potential disruption to the supply of break open tickets is minimized and to ensure that the winding down of any matters under this Agreement is done so in an orderly and businesslike manner. The Registrar may, as part of the winding down of this Agreement, authorize Bingo Press to sell its inventory to Licensees or to registered gaming suppliers, if requested to do so by Bingo Press, provided that the inventory levels are reasonable in the circumstances. 24.0 Dispute Resolution The following dispute resolution process shall be used prior to the Registrar terminating this Agreement or assessing any damages referred to in sections 23.0 and 23.1: a) the Registrar shall advise Bingo Press in writing of any purported failure or default, b) if Bingo Press has not cured the failure or default to the satisfaction of the Registrar, the Registrar or designate and Bingo Press shall meet within 15 days of the date of the Registrar advising Bingo Press in writing of any purported failure or default to review the purported failure or default and to discuss an appropriate course of action and appropriate assessment of damages, c) if the discussions do not resolve the purported failure or default within 30 days of the meeting, the Registrar or Bingo Press may refer matters that are of a business nature that are in dispute to an advisory committee for a nonbinding recommended resolution. Any advisory committee shall be appointed and shall carry out its functions in accordance with Appendix "D". The parties acknowledge and agree that the Arbitration Act, S.O. 1991, c. 17 shall not apply to the advisory committee, or its recommendations. 25.0 Appendices The parties acknowledge and agree that the following appendices form put of this Agreement to the extent that they have not otherwise been modified by this Agreement: a) Appendix A - Request for Proposal, August 6, 1997 b) Appendix B - Bingo Press's submission in response to the Request for Proposal, September 22, 1997 c) Appendix C - Business Plan 16 Agreement October 13, 1998 Page 16 d) Appendix D - Business Dispute Resolution Advisory Committee 26.0 Recitals The Parties acknowledge and agree that the Recitals are accurate and form part of this Agreement. IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed by their respective duly authorized signing officers. Dated at St. Catherines this 13th day of October, 1998. Signed, sealed and delivered For Bingo Press and Specialty Limited Per: /s/ Dove Rye -------------------------------------- For the Registrar /s/ [illegible] -------------------------------------- 17 Appendix C Business Plan It is expected that a Business Plan submitted to the Registrar shall include, at a minimum, the following matters: 1) proposed products for development and manufacture, 2) expected impact of the proposed product on the objectives to improve enforcement and efficiency of the province's break open ticket sector and to enhance the level of proceeds obtained by licensees from break open ticket lottery schemes, 3) pricing of the proposed product and any breakdown of the pricing of the proposed product requested by the Registrar, 4) timing for the development and manufacture of the proposed product, 5) marketing plan for the proposed product, including identification of proposed market to be served and how that market fits into the broader market for break open tickets. 6) details with respect to the production, manufacture, including printing, and supply of break open tickets. including functions or activities to be carried out by persons other than Bingo Press by contract, subcontract or otherwise, and 7) process for monitoring sales levels, assessing Licensee and player satisfaction with the product and determining if the product is meeting its objectives and for any amendments to the approved Business Plan, 8) such other information as the Registrar may require. 18 Appendix D Business Dispute Resolution Advisory Committee The purpose of the Advisory Committee is to provide recommendations to the parties to resolve disputes that are of a business nature that arise out of the Agreement and to attempt to resolve the dispute by conciliation or otherwise. The following matters may be referred to the Committee: o the reasonableness of the course of action proposed by Bingo Press to resolve any purported failure or default identified by the Registrar; o the reasonableness of the course of action proposed by the Registrar to resolve any purported failure or default identified by the Registrar; and o the amount of damages assessed by the Registrar in lieu of termination of the Agreement. The Advisory Committee shall be comprised of three persons. The Registrar and Bingo Press shall each nominate one person within 5 days of the matter being referred to the Advisory Committee. The third person shall be selected by the two nominees within 5 days of the nomination of the other two members of the Advisory Committee. The Advisory Committee shall meet within 5 days of its appointment. The Advisory Committee shall review the information and materials provided to it by the Registrar and by Bingo Press. The Advisory Committee and its members shall maintain all information and materials confidential and use such information and materials solely for purposes of resolving the dispute referred to it. The Advisory Committee and its members shall return all information and materials to either the Registrar or Bingo Press, from whom the information and materials were received. The Advisory Committee may, in its discretion, make such further inquiries and request such further information or materials as it considers necessary and the Registrar or Bingo Press may provide such further information or materials to the Advisory Committee as it considers necessary to assist the Advisory Committee. The Advisory Committee shall make such inquiries or request such information or materials within 10 days of its appointment. The Advisory Committee may attempt to resolve the dispute by conciliation or otherwise. If the dispute is not resolved within 15 days of its appointment, the Advisory Committee shall provide its recommendations in writing to the Registrar and to Bingo Press within 20 days of its appointment. The recommendations of the Advisory Committee do not have to be unanimous. If the Advisory Committee cannot carry out its functions within the times provided, it may request and the Registrar and Bingo Press may consent to an extension of time. Any extension of time must be mutually consented to by the Registrar and Bingo Press. 19 The Advisory Committee may establish its own procedures that are not inconsistent with this Appendix, where it considers such procedures to be necessary and appropriate to carry out its functions. EX-10.24 3 EX-10.24 1 Exhibit 10.24 AMENDMENT NO. 1 TO LOAN AGREEMENT December 7, 1998 Congress Financial Corporation (Canada) 141 Adelaide Street West Suite 1508 Toronto, Canada, M5H 3L9 Ladies and Gentlemen: Congress Financial Corporation (Canada) ("Lender") and Bingo Press & Specialty Limited ("Borrower") have entered into certain financing arrangements pursuant to the Loan Agreement, dated November 20, 1997, by and between Lender and Borrower (the "Loan Agreement") and all other Financing Agreements at any time executed and/or delivered in connection therewith or related thereto. All capitalized terms used herein shall have the meanings ascribed to them in the Loan Agreement, unless otherwise defined herein. Borrower has requested that, in connection with Borrower's request to increase the Maximum Credit pursuant to and in accordance with the terms and conditions of Section 2.4 of the Loan Agreement, Lender agree to amend certain provisions of the Loan Agreement relating to funds received in or deposited to the Blocked Accounts, and Lender is willing to agree to the foregoing, on and subject to the terms and conditions contained in this Amendment No. 1 to Loan and Security Agreement (this "Amendment"). In consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties hereto hereby agree as follows: 1. Amendment to Maximum Credit. Borrower and Lender acknowledge and agree that, (a) (i) pursuant to Section 2.4 of the Loan Agreement, by notice dated November 9, 1998, Borrower requested that Lender increase the Maximum Credit from the Canadian Dollar Equivalent of US $6,666,667 to the Canadian Dollar Equivalent of US $10,000,000, and (ii) US Borrower, contemporaneously therewith, requested that Congress (Central) increase the Maximum Credit under, and as defined in, the US Loan Agreement, from US $13,333,333 to US $20,000,000, and (b) effective as of November 16, 1998, Section 1.49 of the Loan Agreement is deleted and the following is hereby substituted therefor: "1.49 "Maximum Credit" shall mean, at any time, the Canadian Dollar Equivalent at such time of US $10,000,000." 2. Temporary Amendment of Section 6.3(a)(v). Notwithstanding the existing provisions of Section 6.3(a)(v) of the Loan Agreement, solely during the period from and after the date on which this Amendment becomes effective through and including December 2 31, 1998, Lender shall only have the right under Section 6.3(a)(v) of the Loan Agreement to instruct the depository banks at which the Blocked Accounts are maintained to transfer all funds received or deposited into the Blocked Accounts to the Payment Account if the US Dollar Equivalent of the aggregate principal amount of Loans and Letter of Credit Accommodations, plus the aggregate outstanding principal amount of Loans and Letter of Credit Accommodations under, and as such terms are defined in, the US Loan Agreement, shall equal or exceed US $20,000,000. After December 31, 1998, the provisions of Section 6.3(a)(v), shall be deemed automatically reinstated as they existed prior to the effectiveness of this Amendment and the US $15,000,000 threshold contained in Section 6.3(a)(v), as temporarily increased to US $20,000,000 in this Section 2, shall automatically revert to US $15,000,000. 3. Fee. Borrower acknowledges and agrees that on the effective date of this Amendment, in accordance with Section 2.4(d) of the Loan Agreement, Lender shall charge directly to Borrower's Revolving Loan account a fee equal to the Canadian Dollar Equivalent on November 16, 1998 of US $25,000 in consideration of the increase in the Maximum Credit to Borrower as set forth in Section 1 of this Amendment. 4. Representations, Warranties and Covenants. In addition to the continuing representations, warranties and covenants heretofore or hereafter made by Borrower to Lender pursuant to the Loan Agreement and the other Financing Agreements, Borrower hereby represents, warrants and covenants with and to Lender as follows, which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof and shall be incorporated into and made a part of the Financing Agreements: (a) No event of default exists on the date of this Amendment after giving effect to the amendments to the Loan Agreement made by this Amendment; and (b) This Amendment has been duly executed and delivered by Borrower and the undersigned consenting Guarantors, and is in full force and effect as of the date hereof, and the agreements and obligations of Borrower contained herein constitute its legal, valid and binding obligations enforceable against Borrower in accordance with their respective terms. 5. Conditions Precedent. This Amendment shall not become effective unless all of the following conditions precedent have been satisfied in full, as determined by Lender: (a) the receipt by Lender of an original of this Amendment, duly authorized, executed and delivered by Borrower and the undersigned Guarantors; (b) Lender shall have received, in form and substance satisfactory to Lender, a copy of a fully executed copy of an amendment to the US Loan Agreement entered into between US Borrower and Congress (Central), pursuant to which, among other things, the Maximum Credit under, and as defined in, the US Loan Agreement, shall be increased to US $20,000,000, and Section 6.3(a)(v) of the US Loan Agreement shall be amended 2 3 temporarily in the same manner and to the same extent as Section 6.3(a)(v) of the Loan Agreement has been amended pursuant to Section 2 of this Amendment; and (c) as of the date of this Amendment, no Event of Default shall have occurred and be continuing and no event shall have occurred and be continuing or condition be existing which, with notice or passage of time, or both, would constitute an Event of Default. 6. Effect of this Amendment. Except as modified pursuant hereto, no other changes or modifications to the Loan Agreement and the other Financing Agreements are intended or implied and in all other respects the Loan Agreement and the other Financing Agreements are hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent of any conflict between the terms of this Amendment and any of the Financing Agreements, the terms of this Amendment shall control. The Loan Agreement and this Amendment shall be read and be construed as one agreement. 7. Further Assurances. At Lender's request, Borrower shall execute and deliver such additional documents and take such additional actions as Lender reasonably requests to effectuate the provisions and purposes of this Amendment. 8. Governing Law. The validity, interpretation and enforcement of this Amendment and any dispute arising out of the relationship between the parties hereto, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the State of Illinois (without giving effect to principles of conflicts of law). 9. Binding Effect. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. 10. Counterparts. This Amendment may be executed in any number of counterparts, but all of such counterparts when executed shall together constitute but one and the same agreement. In making proof of this Amendment, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto. Very truly yours, BINGO PRESS & SPECIALTY LIMITED By: /s/ LAWRENCE X. TAYLOR III ---------------------------- Title: Exec VP, CFO & Treasurer ---------------------------- [SIGNATURES CONTINUED ON NEXT PAGE] 3 4 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] AGREED: CONGRESS FINANCIAL CORPORATION (CANADA) By: [illegible] -------------------------------- Title: -------------------------------- CONSENTED TO: STUART ENTERTAINMENT, INC. By: /s/ LAWRENCE X. TAYLOR III -------------------------------- Title: Exec VP, CFO & Treasurer -------------------------------- VIDEO KING GAMING SYSTEMS, INC. By: /s/ Lawrence X. Taylor III -------------------------------- Title: Corp. Secy. -------------------------------- BINGO SYSTEMS & SUPPLY, INC. By: /s/ Michael A. Schalk -------------------------------- Title: Vice President -------------------------------- 4 EX-10.25 4 EX-10.25 1 Exhibit 10.25 AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT As of January 2, 1999 Congress Financial Corporation (Central) 150 South Wacker Drive Suite 2200 Chicago, Illinois 60606 Ladies and Gentlemen: Congress Financial Corporation (Central) ("Lender") and Stuart Entertainment, Inc. ("Borrower") have entered into certain financing arrangements pursuant to the Loan and Security Agreement, dated November 20, 1997, by and between Lender and Borrower (the "Loan Agreement"), as amended by Amendment No. 1 to Loan and Security Agreement, dated December 1, 1998 ("Amendment No. 1") and all other Financing Agreements at any time executed and/or delivered in connection therewith or related thereto. All capitalized terms used herein shall have the meanings ascribed to them in the Loan Agreement, unless otherwise defined herein. Borrower has requested that Lender agree to amend certain provisions of the Loan Agreement relating to funds received in or deposited to the Blocked Accounts, and Lender is willing to agree to the foregoing, on and subject to the terms and conditions contained in this Amendment No. 2 to Loan and Security Agreement (this "Amendment"). In consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties hereto hereby agree as follows: 1. Temporary Amendment of Section 6.3(a)(v). Notwithstanding the existing provisions of Section 6.3(a)(v) of the Loan Agreement, solely during the period from and after the date on which this Amendment becomes effective through and including February 28, 1999, Lender shall only have the right under Section 6.3(a)(v) of the Loan Agreement to instruct the depository banks at which the Blocked Accounts are maintained to transfer all funds received or deposited into the Blocked Accounts to the Payment Account if the aggregate principal amount of Loans and Letter of Credit Accommodations, plus the U.S. Dollar Equivalent of the aggregate outstanding principal amount of Loans and Letter of Credit Accommodations under, and as such terms are defined in, the Canadian Loan Agreement, shall equal or exceed $20,000,000. After February 28, 1999, the provisions of Section 6.3(a)(v) shall be deemed automatically reinstated as they existed prior to the effectiveness of Amendment No. 1 and the $15,000,000 threshold contained in Section 6.3(a)(v) as temporarily increased to $20,000,000 in this Section 1, shall automatically revert to $15,000,000. 2 2. Representations, Warranties and Covenants. In addition to the continuing representations, warranties and covenants heretofore or hereafter made by Borrower to Lender pursuant to the Loan Agreement and the other Financing Agreements, Borrower hereby represents, warrants and covenants with and to Lender as follows, which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof and shall be incorporated into and made a part of the Financing Agreements: (a) No event of default exists on the date of this Amendment after giving effect to the amendments to the Loan Agreement made by this Amendment; and (b) This Amendment has been duly executed and delivered by Borrower and the undersigned consenting Guarantors, and is in full force and effect as of the date hereof, and the agreements and obligations of Borrower contained herein constitute its legal, valid and binding obligations enforceable against Borrower in accordance with their respective terms. 3. Conditions Precedent. This Amendment shall not become effective unless all of the following conditions precedent have been satisfied in full, as determined by Lender: (a) the receipt by Lender of an original of this Amendment, duly authorized, executed and delivered by Borrower and the undersigned Guarantors; (b) Lender shall have received, in form and substance satisfactory to Lender, a copy of a fully executed copy of an amendment to the Canadian Loan Agreement entered into between Canadian Borrower and Congress (Canada), pursuant to which, among other things, Section 6.3(a)(v) of the Canadian Loan Agreement shall be amended temporarily in the same manner and to the same extent as Section 6.3(a)(v) of the Loan Agreement has been amended pursuant to Section 1 of this Amendment; and (c) as of the date of this Amendment, no Event of Default shall have occurred and be continuing and no event shall have occurred and be continuing or condition be existing which, with notice or passage of time, or both, would constitute an Event of Default. 4. Effect of this Amendment. Except as modified pursuant hereto, no other changes or modifications to the Loan Agreement and the other Financing Agreements are intended or implied and in all other respects the Loan Agreement and the other Financing Agreements are hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent of any conflict between the terms of this Amendment and any of the Financing Agreements, the terms of this Amendment shall control. The Loan Agreement and this Amendment shall be read and be construed as one agreement. 5. Further Assurances. At Lender's request, Borrower shall execute and deliver such additional documents and take such additional actions as Lender reasonably requests to effectuate the provisions and purposes of this Amendment. 2 3 6. Governing Law. The validity, interpretation and enforcement of this Amendment and any dispute arising out of the relationship between the parties hereto, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the State of Illinois (without giving effect to principles of conflicts of law). 7. Binding Effect. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. 8. Counterparts. This Amendment may be executed in any number of counterparts, but all of such counterparts when executed shall together constitute but one and the same agreement. In making proof of this Amendment, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto. Very truly yours, STUART ENTERTAINMENT, INC. By: /s/ LAWRENCE X. TAYLOR III -------------------------------- Title: EXEC VP & CFO -------------------------------- AGREED: CONGRESS FINANCIAL CORPORATION (CENTRAL) By: /s/ VICKY GERST ----------------------------- Title: AVP ----------------------------- CONSENTED TO: VIDEO KING GAMING SYSTEMS, INC. By /s/ LAWRENCE X. TAYLOR III ------------------------------ Title: VICE PRES ------------------------------ [SIGNATURES CONTINUED ON NEXT PAGE] 3 4 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] BINGO SYSTEMS & SUPPLY, INC. By: /s/ Michael A. Schalk --------------------------- Title: VICE PRES --------------------------- 4 EX-10.26 5 EX-10.26 1 Exhibit 10.26 AMENDMENT NO. 3 TO LOAN AND SECURITY AGREEMENT As of March 1, 1999 Congress Financial Corporation (Central) 150 South Wacker Drive Suite 2200 Chicago, Illinois 60606 Ladies and Gentlemen: Congress Financial Corporation (Central) ("Lender") and Stuart Entertainment, Inc. ("Borrower") have entered into certain financing arrangements pursuant to the Loan and Security Agreement, dated November 20, 1997, by and between Lender and Borrower (the "Loan Agreement"), as amended by Amendment No. 1 to Loan and Security Agreement, dated December 1, 1998 ("Amendment No. 1"), and Amendment No. 2 to Loan and Security Agreement, dated as of January 3, 1999, and all other Financing Agreements at any time executed and/or delivered in connection therewith or related thereto. All capitalized terms used herein shall have the meanings ascribed to them in the Loan Agreement, unless otherwise defined herein. Borrower has requested that Lender agree to amend certain provisions of the Loan Agreement relating to funds received in or deposited to the Blocked Accounts, and Lender is willing to agree to the foregoing, on and subject to the terms and conditions contained in this Amendment No. 3 to Loan and Security Agreement (this "Amendment"). In consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties hereto hereby agree as follows: 1. Temporary Amendment of Section 6.3(a)(v). Notwithstanding the existing provisions of Section 6.3(a)(v) of the Loan Agreement, solely during the period from and after the date on which this Amendment becomes effective through and including March 31, 1999, Lender shall only have the right under Section 6.3(a)(v) of the Loan Agreement to instruct the depository banks at which the Blocked Accounts are maintained to transfer all funds received or deposited into the Blocked Accounts to the Payment Account if the aggregate principal amount of Loans and Letter of Credit Accommodations, plus the U.S. Dollar Equivalent of the aggregate outstanding principal amount of Loans and Letter of Credit Accommodations under, and as such terms are defined in, the Canadian Loan Agreement, shall equal or exceed $20,000,000. After March 31, 1999, the provisions of Section 6.3(a)(v) shall be deemed automatically reinstated as they existed prior to the effectiveness of Amendment No. 1 and the $15,000,000 threshold contained in Section 6.3(a)(v) as temporarily increased to $20,000,000 in this Section 1, shall automatically revert to $15,000,000. 2 2. Representations, Warranties and Covenants. In addition to the continuing representations, warranties and covenants heretofore or hereafter made by Borrower to Lender pursuant to the Loan Agreement and the other Financing Agreements, Borrower hereby represents, -wan-ants and covenants with and to Lender as follows, which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof and shall be incorporated into and made a part of the Financing Agreements: (a) No event of default exists on the date of this Amendment after giving effect to the amendments to the Loan Agreement made by this Amendment; and (b) This Amendment has been duly executed and delivered by Borrower and the undersigned consenting Guarantors, and is in full force and effect as of the date hereof, and the agreements and obligations of Borrower contained herein constitute its legal, valid and binding obligations enforceable against Borrower in accordance with their respective terms. 3. Conditions Precedent. This Amendment shall not become effective unless all of the following conditions precedent have been satisfied in full, as determined by Lender (a) the receipt by Lender of an original of this Amendment, duly authorized, executed and delivered by Borrower and the undersigned Guarantors; (b) Lender shall have received, in form and substance satisfactory to Lender, a copy of a fully executed copy of an amendment to the Canadian Loan Agreement entered into between Canadian Borrower and Congress (Canada), pursuant to which, among other things, Section 6.3(a)(v) of the Canadian Loan Agreement shall be amended temporarily in the same manner and to the same extent as Section 6.3(a)(v) of the Loan Agreement has been amended pursuant to Section I of this Amendment; and (c) as of the date of this Amendment no Event of Default shall have occurred and be continuing and no event shall have occurred and be continuing or condition be existing which, with notice or passage of time, or both, would constitute an Event of Default 4. Effect of this Amendment. Except as modified pursuant hereto, no other changes or modifications to the Loan Agreement and the other Financing Agreements are intended or implied and in all other respects the Loan Agreement and the other Financing Agreements are hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof To the extent of any conflict between the terms of this Amendment and any of the Financing Agreements, the terms of this Amendment shall control. The Loan Agreement and this Amendment shall be read and be construed as one agreement 5. Further Assurances. At Lender's request, Borrower shall execute and deliver such additional documents and take such additional actions as Lender reasonably requests to effectuate the provisions and purposes of this Amendment. 2 3 6. Governing Law. The validity, interpretation and enforcement of this Amendment and any dispute arising out of the relationship between the parties hereto, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the State of Illinois (without giving effect to principles of conflicts of law). 7. Binding Effect. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. 8. Counterparts. This Amendment may be executed in any number of counterparts, but all of such counterparts when executed shall together constitute but one and the same agreement. In making proof of this Amendment, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto. Very truly yours, STUART ENTERTAINMENT, INC. By: /S/ Lawrence X. Taylor III --------------------------- Title: SR. VICE PRES --------------------------- AGREED: CONGRESS FINANCIAL CORPORATION (CENTRAL) By: /S/ [ILLEGIBLE] ------------------------------- Title: AVP ------------------------------- CONSENTED TO: VIDEO KING GAMING SYSTEMS, INC. By: /S/ Lawrence X. Taylor III -------------------------------- Title: CORP SECY. -------------------------------- [SIGNATURES CONTINUED ON NEXT PAGE] 3 4 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] BINGO SYSTEMS,& SUPPLY, INC. By: /S/ Michael A. Schalk --------------------------------- Title: VICE PRES --------------------------------- 4 EX-10.27 6 EX-10.27 1 Exhibit 10.27 AGREEMENT This Agreement is entered into this 2nd day of October, 1998, by and between Stuart Entertainment, Inc., a Delaware corporation (the "Company"), with its principal place of business at 3211 Nebraska Avenue, Council Bluffs, Iowa 51501, and Albert F. Barber, an individual (the "Employee"), with his address at 2 Stamford Landing, Suite 100, Stamford, Connecticut 06902 WHEREAS, Employee desires to resign from his position as an officer and director of the Company. WHEREAS, the Company and Employee desire to enter into this Agreement to set forth the terms of such resignation. NOW, THEREFORE, in consideration of the covenants undertaken, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. Resignation. Employee's employment with the Company as its Chief Executive Officer will terminate effective October 2, 1998 (the "Resignation Date"). Effective on the Resignation Date, Employee will relinquish all positions as a director or officer of the Company, as well as its subsidiaries and affiliates. Employee acknowledges that upon receipt of the Employee's final salary payment for the period ended October 2, 1998 that the Company will have paid him for all work performed on or prior to the Resignation Date based on Employee's base annual salary of Three Hundred Seventy-Five Thousand Dollars ($375,000) ("Base Salary"), and has provided Employee with all benefits to which he was entitled through the Resignation Date. Employee hereby waives any right to claim reinstatement as an officer and/or director of the Company following the Resignation Date. 2. Final Termination Date. The Company shall employ Employee as a salaried employee of the Company reporting to the Company's current Chief Executive Officer to assist the Company in all matters relating to the winding- up of pending work and the orderly transition of work to other employees from the Resignation Date through October 31, 1998, at which time Employee's employment with the Company will terminate ("Final Termination Date"). The Company shall pay Employee his salary based on his Base Salary, and provide Employee with benefits on substantially the same conditions and terms as previously provided to Employee from the Resignation Date through the Final Termination Date. Employee hereby waives any right to claim reinstatement as an employee of the Company or its subsidiaries and affiliates after the Final Termination Date. This Agreement terminates and supersedes all prior employment and severance agreements between Employee and Company. Except for the payments described herein, Employee will not receive or be entitled to receive any other salary, benefits or payments. 3. Effective Date. The provisions of this Agreement, however, only become effective on the eighth day following Employee's execution of this Agreement ("Effective Date"), provided that Employee does not revoke the Agreement in the seven days preceding the foregoing Effective Date. 4. Severance. The Company shall provide Employee with: a) Severance Payments. The cash equivalent of eleven (11) months of Employee's Base Salary, Three Hundred Forty-Three Thousand Seven Hundred Fifty Dollars ($343,750.00), either (i) in a lump-sum payment within ten (10) days of the Effective Date, discounted on a present value basis at 10% interest ($327,340) (the "Lump Sum Payment"), or (ii) in the form of salary continuation in accordance with the Company's normal payroll procedures, whichever Employee chooses in his sole discretion ("Severance Payment"). The Company shall deduct all applicable tax withholdings for state and federal income taxes, FICA and other deductions required by law and/or 1 2 authorized by Employee from the Severance Payment, whether provided in a Lump-Sum Payment or through salary continuation. b) Severance Benefits. Health insurance coverage on the same terms as the Company provided to Employee prior to the Resignation Date for a period of eleven months from the Final Termination Date. In the event that Employee elects to have the Company pay the Severance Payments in a Lump-Sum Payment, Employee agrees that at the Company's discretion, the Company may withhold up to Eleven Thousand Dollars ($11,000) of the Lump Sum Payment and pay such amount in eleven (11) equal monthly installments in accordance with the Company's normal payroll procedures. In addition, the Company will pay up to Five Thousand Five Hundred Dollars ($5,500.00), to enable Employee to secure additional life and disability insurance for the eleven months following the Final Termination Date and pay the premium payment for the 1999 premium year for Employee's existing term life and split-dollar life insurance policies. The benefits provided for in this Section 4(b) shall constitute all of the Severance Benefits provided by the Company to Employee after the Final Termination Date. The Company will use its best efforts to cause such Severance Benefits to be effective on or before the Final Termination Date. Employee acknowledges that except as provided for in this Agreement, Employee shall not otherwise be entitled to any other payments or benefits from the Company. 5. Vacation. In exchange for the Severance Payments and Severance Benefits provided for in Section 4, and the use of the Company Car and Office provided for in Sections 6 and 7 respectively, Employee waives any right to payment for all previously accrued yet unused vacation, if any, remaining as of the Final Termination Date. 6. Company Car. The Company shall provide Employee with the use of the car to which Employee had use prior to the Resignation Date (the "Company Car") from the Resignation Date through June 30, 1999. During Employee's use of the Company Car pursuant to the terms of this Agreement, the Company shall pay the monthly lease payments, maintenance and insurance coverage for the Company Car. Employee shall be responsible for all payment of gasoline and any fine or ticket in connection with Employee's use of the Company Car. Employee shall make the Company Car, keys, security devices, all registration or licensing documents or other materials supplied to Employee in connection with Employee's use of the Company Car available for pick-up by the Company promptly on June 30, 1999. Employee shall be solely responsible for all expenses incurred if Employee does not make the Company Car available for pick-up by the Company by June 30, 1999. 7. Office Space. The Company shall allow Employee to use its office space, equipment and facilities at the Company's office at Two Stamford Landing, Office No. 127 in Stamford, Connecticut from the Resignation Date through December 31, 1998. The Company will pay all normal and reasonable costs for the Stamford, Connecticut office space in accordance with prior practices and the Company's policies. Employee shall vacate and remove all personal belongings from the Company's existing office space at Stamford, Connecticut promptly on December 31, 1998. Employee shall vacate and remove all personal belongings from the Company's offices in Council Bluff, Iowa as soon as reasonable. 8. Stock Options. Employee has vested stock options to acquire 250,000 shares of the Company's common stock (the "Options"), with an exercise price of $3.00 per share. Employee and Company agree that the Company will cancel the Options and grant to Employee non-qualified stock options for 250,000 shares of common stock with an exercise price of $3.00 per share, which must be exercised within one year from the Resignation Date. Employee acknowledges that he has no other stock options or ownership interests in the Company. 9. Company Property. Employee represents that with the exception of the Company Car, he will turn over to the Company all files, memoranda, records, other documents and all other physical property which Employee received from Company and which are the property of the 2 3 Company by the Final Termination Date, or sooner if requested by the Company. Employee shall return to the Company all Company credit cards and calling cards promptly upon request. 10. Tax Liability. Employee agrees that Employee is exclusively liable for the payment of any federal, state, city or other taxes which may be due as a result of any consideration received by Employee as provided by this Agreement; provided, however, that Company shall pay all federal, state and local amounts withheld from payments to Employee and all other employment taxes of the type normally paid by Company on employee salaries in connection with the consideration payable to Employee pursuant to Section 4 of this Agreement. 11. Non-Competition. a) Employee acknowledges and recognizes the highly competitive nature of the businesses of the Company and its affiliates and subsidiaries, and accordingly agrees as follows: i) For one year following the Resignation Date, Employee will not directly or indirectly, for himself or as agent of, or on behalf of, or in conjunction with, any person, firm, corporation or association, enter into competitive endeavors and will not undertake any commercial activity which is contrary to the best interests of the Company or its affiliates, including becoming an employee, owner (except for passive investments of not more than one percent of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in an over-the-counter securities exchange or in an over-the-counter securities market), officer, agent or director of any firm, person, corporation, association or other entity in any geographic area in which the Company conducts its business which either directly competes with a line or lines of business of the Company accounting for ten percent (10%) or more of the Company's gross sales, revenues of earnings before taxes or derives ten percent (10%) or more of such firm's or person's gross sales, revenues or earnings before taxes from a line or lines of business which directly compete with the company as of the Final Termination Date. B) The Employee will not directly or indirectly induce any employee of the Company or its affiliates or subsidiaries to engage in any activity in which the Employee is prohibited from engaging by Paragraph (a) above or to terminate his employment with the company or its affiliates or subsidiaries, and will not directly or indirectly employ or offer employment to any person who was employed by the Company or its affiliates or subsidiaries unless such person shall have ceased to be employed by such entity or any of its affiliates for a period of at least 12 months. It is expressly understood and agreed that although the Employee and the Company consider the restrictions contained in this Section 11 to be reasonable, if a final judicial determination is made by a court of 3 4 competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against the Employee, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein. 1. Releases by Employee. Except for obligations created by this Agreement, Employee hereby covenants not to sue and fully releases Company and its subsidiaries and affiliates, past and present, and each of them, as well as their directors, partners, officers, agents, attorneys, insurers, employees, stockholders, representatives, assigns and successors, past and present, and each of them (hereinafter together and collectively referred to as "Releasees") with respect to and from all actions, and claims of any kind, known or unknown, suspected or unsuspected, which Employee may now have or has ever had against any of the Releasees, including all claims arising from Employee's employment as a chief executive officer and/or in any other capacity as an officer and/or director of the Company, and arising out of the termination of his employment as the chief executive officer and/or in any other capacity as an officer and/or director of the Company as of the Resignation Date (and specifically including any and all claims related to prior promises or contracts of employment and any and all claims for wages, benefits, vacation pay, and wrongful termination or discrimination whether based on age, race, sex, disability or otherwise including specifically and without limitation claims under the Federal Age Discrimination in Employment Act, Americans with Disabilities Act, and any state or local statute or law). Employee warrants and represents that Employee has not assigned or transferred to any person or entity any of the claims released by this Agreement and Employee agrees to defend, by counsel of Company's choosing, and indemnify and hold harmless any of the Releasees from and against any claims based on or in connection with or arising out of any such assignment or transfer made. 2. Releases by Company. Except for obligations created by this Agreement, Company hereby covenants not to sue and fully releases Employee and his successors and assigns (the "Employee Releasees"), with respect to and from all actions, and claims of any kind, known or unknown, suspected or unsuspected, which Company may now have or has ever had against any of the Employee Releasees, including all claims arising from Employee's position as a chief executive officer, officer and/or director of the Company and the termination of that relationship (and specifically including any and all claims related to prior promises or contracts of employment) provided, however, the Company does not release the Employee Releases with respect to claims arising out of or relating to the fraud, gross negligence or willful misconduct of the Employee. The Company warrants and represents that Company has not assigned or transferred to any person or entity any of the claims released by this Agreement and Company agrees to defend, by counsel of Employee's choosing, and indemnify and hold harmless any of the Employee Releasees from and against any claims based on or in connection with or arising out of any such assignment or transfer made. 3. Indemnification and Defense by Company. Company shall indemnify and defend Employee in any threatened, pending, or contemplated action, suit or proceeding, whether civil or criminal, administrative or investigative, or whether formal or informal which arises by reason of the fact that Employee was a chief executive officer, other officer and/or director of the Company prior to the Resignation Date, against expenses, including attorney's fees, judgments, penalties, fines and amounts to be paid in settlement in connection with such action, suit or proceeding if it is determined by Company that Employee conducted himself in good faith and that Employee reasonably believed (i) in the case of conduct in his official capacity with the Company, that his conduct was in the Company's best interests, or (ii) in all other cases (except criminal cases), that his conduct was at least not opposed to the Company's 4 5 best interests, or (iii) in the case of any criminal proceeding, that he had no reasonable cause to believe that his conduct was unlawful ("Indemnified Claims"). The Company shall have the sole and exclusive right to select legal counsel to represent the Company and Employee, and to control the defense and/or settlement of any Indemnified Claims. Employee agrees to cooperate with the Company in the defense of any Indemnified Claims, and make available to the Company any and all documents in his possession and/or control that may be necessary or useful to such defense and/or settlement. No indemnification shall be made to Employee under this Section 14 with respect to any claim, issue or matter in connection with a proceeding by or on behalf of the Company or any other entity in which Employee's actions giving rise to the action, suit, proceeding or claim constituted fraud, gross negligence and/or willful misconduct on the part of the Employee. 15. Confidentiality. a) Employer will not at any time, disclose or use for his own benefit or purposes of any other person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise other than the Company or its affiliates and subsidiaries, any trade secrets, information, data, or other confidential information relating to customers, development programs, costs, marketing, trading, investment, sales activities, promotion, credit and financial data, manufacturing processes, financing methods, plans, or the business and affairs of the Company or its affiliates and/or subsidiaries ("Proprietary Information"). The term Proprietary Information shall not include information which is not unique to the Company, its affiliates or subsidiaries, or which is generally known to the industry or the public other than as a result of the Employee's breach of this covenant. The Employee agrees that all materials or articles of information of any kind furnished to the Employee by the Company or developed by the Employee in the course of his employment are and shall remain the sole property of the Company and that by the Final Termination Date, Employee will return to the Company, all memoranda, books, papers, plans, information, letters and other data, and all copies thereof, in any way relating to the business of the Company and its affiliates or subsidiaries, except that Employee may retain personal notes, notebooks and diaries. The Employee further agrees that he will not retain or use for his account at any time any trade names, trademark or other proprietary business designation used or owned in connection with the business of the Company or its affiliates or subsidiaries. The Employee agrees that all Proprietary Information shall be the sole property of the Company and its assigns, and the Company and its assigns shall be the sole owner of all licenses and other rights in connection with such Proprietary Information. b) Employee acknowledges that the Company from time to time receives from third parties confidential or proprietary information subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes ("Third Party Information"). Employee agrees to hold Third Party Information in the strictest confidence and will not disclose or use Third Party Information except as permitted by any agreement between the Company and such third party. c) Employee acknowledges that the Company's customers and suppliers constitute a valuable and unique asset of the Company. Employee will not at any time (i) disclose such list of customers and/or suppliers or any part thereof to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, (ii) assist in obtaining customers for any other similar business, or (iii) encourage any customer or supplier to terminate their relationship with the Company. 5 6 d) Employee agrees to assign to the Company, without further consideration, his entire right, title, and interest (throughout the United States and in all foreign countries), free and clear of all liens and encumbrances, in and to all Inventions. The Inventions shall be the sole property of the Company, whether or not copyrightable or patentable. In addition, Employee agrees to maintain adequate and current written records on the development of all Inventions, which shall also remain the sole property of the Company. Employee understands that "Inventions" means all ideas, processes, inventions, technology, designs, formulas, discoveries, patents, copyrights, and trademarks, and all improvements, rights, and claims related to the foregoing, that are conceived, developed, or reduced to practice by Employee alone or with others using confidential and/or proprietary information of the Company. If, in the course of Employee's employment, with the Company, Employee incorporated into Company property an invention owned by Employee or in which Employee has an interest, the Company is granted a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license to make, modify, use and sell Employee's invention as part of and in connection with the Company property. 16. Cooperation. Employee agrees to fully cooperate with Company in all matters relating to the winding up of pending work on behalf of Company and the orderly transfer of work to other employees of the Company following the Final Termination Date and thereafter. Employee shall also cooperate in the resolution of any dispute, including litigation of any action, involving the Company that relates in any way to Employee's activities while employed by Company. In the event that Employee performs services at the Company's request under this Section 16, Company shall pay Employee for his services at an hourly rate of $200.00 per hour, and shall pay Employee's out of pocket expenses incurred in connection with his services. Unless otherwise agreed to by the parties, Employee's services to the Company under this Section 16 shall not exceed a total of forty (40) hours. The terms and conditions of this Section 16 shall not apply to the Company's defense and/or indemnification of Employee with respect to the Indemnified Claims under Section 14 of this Agreement. 17. Nondisruption. Employee agrees not to make any negative, disparaging, disruptive or damaging statements, comments or remarks to any third party concerning Company or its business, parents, subsidiaries, affiliates, owners, partners, employees, or management. Company agrees to inform the current members of its Board of Directors, executive officers and its newly appointed Chief Executive Officer not to make any negative, disparaging disruptive or damaging statements, comments or remarks to any third party concerning the Employee. However, the Employee agrees that the Company is not responsible or liable for comments made by other employees of the Company. In response to inquiries about Employee from individuals outside of Company, Company's official response shall be: Employee chose to resign for personal and family reasons. In addition, the Company may refer inquiries about Employee to the Company's official press release regarding Employee's resignation, a copy of which is attached hereto as Exhibit A. 18. Nonadmission of Violation. This Agreement is not, and shall not be construed as, an admission by Company of any violation of its policies or procedures, or of any local, state or federal law or regulation. 19. Complete Agreement. This Agreement constitutes the full and entire agreement and understanding of the parties. This Agreement supersedes and replaces all prior negotiations and all agreements, proposed or otherwise, between the parties, whether written or oral, concerning the subject matters hereof. This Agreement also supersedes, replaces and terminates as null and void all prior employment and severance agreements between Employee and the Company. All such prior negotiations and agreements are merged into this Agreement. This Agreement does not, however, affect or limit the parties' past or ongoing respective rights and responsibilities under any applicable stock option agreement which provides for disposition of stock which Employee may hold in the Company. The terms and 6 7 conditions contained herein shall inure to the benefit of, and be binding upon, the heirs, representatives, assigns and successors-in-interest of the parties. This is an integrated document. 20. Severability of Invalid Provisions. If any provision or portion of this Agreement or the application thereof is held by a court of competent jurisdiction or arbitrator to be invalid, unlawful or unenforceable, the remaining provisions or portions of provisions of this Agreement shall remain in full force and effect. Such invalidity shall not affect other provisions or applications of the Agreement which can be given effect without the invalid provisions or applications and to this end the provisions of this Agreement are declared severable. 21. Choice of Law. Except for claims relating to trade secrets, any dispute between the parties relating in any way to Employee's employment, the termination of that employment or this Agreement, including, without limitation, the formation, implementation, or termination thereof shall be resolved by arbitration before a single arbitrator in New York, New York, according to the commercial rules of the American Arbitration Association. The parties also agree that prior to commencing any arbitration proceedings, as provided above, the parties shall first attempt to resolve any dispute between or among them through mediation with the assistance of a mediator selected by or agreeable to the parties to the dispute. The costs and expense of arbitration and mediation shall be shared equally by the parties to the arbitration and/or mediation, regardless of which party prevails. The rights and obligations of the parties hereunder, including any agreement to arbitrate and the law to be applied in the arbitration shall be construed and enforced in accordance with and governed by the law of the United States to the extent applicable and otherwise the laws of the State of Delaware, without giving effect to principles of conflicts of law. 22. Joint Preparation of Agreement. This Agreement is deemed to have been drafted jointly by the parties. Hence, in any construction to be made of this Agreement, the provisions of the Agreement shall not be construed against any party on the basis that the party was the drafter. 23. Waiver of Breach. No waiver, amendment or modification of this Agreement shall be effective unless in writing and signed by the party against whom the waiver, amendment or modification is sought to be enforced. No waiver of any term, condition, breach or default of this Agreement shall be construed as a waiver of any other term, condition, breach or default. Failure to enforce any breach or default of this agreement shall not be a waiver of that breach or default or any other breach or default of this Agreement. 24. Further Executions. All parties agree to cooperate fully and to execute any and all supplementary documents and to take all additional actions that may be necessary or appropriate to give full force to the basic terms and intent of this Agreement and which are not inconsistent with its terms. 25. Headings. The use of headings in this Agreement is only for ease of reference and the headings have no effect and are not to be considered a part or term of this Agreement. 26. Each Party to Bear Own Costs. Except as provided herein, the parties agree that each party shall be responsible for the payment of its own costs, attorneys' fees, and all other expense in connection with the negotiation of this Agreement. 27. Counterparts. This Agreement may be executed in counterparts, provided, however, that this Agreement shall not be binding or effective to or against any party hereto until the Effective date. 28. Further Acknowledgments. Employee further acknowledges that: (a) Employee has read this Agreement; (b) Employee has been provided a full and ample opportunity to study it; (c) Employee hereby is advised in writing to consult with an attorney prior to signing this Agreement; (d) Employee has been advised that Employee has twenty-one (21) days from the date 7 8 this Agreement is presented to Employee in which to consider this Agreement and whether Employee will enter into it, although Employee may, in the exercise of Employee's discretion, sign or reject this Agreement at any time before the twenty-one (21) day period expires; (e) Employee has seven (7) days following execution of this Agreement to revoke the Agreement by delivering timely notice of Employee's revocation to the President of Company; (f) this Agreement shall not become effective or enforceable and no funds shall be exchanged until the seven (7) day revocation period has expired; (g) Employee enters into this agreement based upon Employee's own knowledge and judgment and not in reliance on any representations or promises of Company other than those contained in this Agreement; (h) Employee understands that if any facts or matters upon which Employee has relied in entering into this Agreement shall hereinafter prove to be otherwise, this Agreement shall nevertheless remain in full force and effect; and (j) Employee is signing this Agreement voluntarily, without coercion, and with full knowledge that it is intended, to the maximum extent permitted by law, as a complete and final release and waiver of any and all claims. In Witness Whereof, the parties have duly executed this Agreement as of the date first written above. Stuart Entertainment, Inc.. Employee By: /s/ Timothy R. Stuart By: /s/ Albert F. Barber Timothy R. Stuart, President Albert F. Barber 8 EX-10.28 7 EX-10.28 1 Exhibit 10.28 AGREEMENT This Agreement is entered into this 16th day of October, 1998 by and between Stuart Entertainment, Inc., a Delaware corporation (the "Company"), with its principal place of business at 3211 Nebraska Avenue, Council Bluffs, Iowa 51501, and Paul C. Tunink, an individual (the "Employee"), with his address at 4228 N. 139th Avenue, Omaha, Nebraska 68164. The Company and Employee are sometimes referred to herein individually as a "Party" and collectively as the "Parties." WHEREAS, Employee desires to resign from his position as an officer and employee of the Company. WHEREAS, the Company and Employee desire to enter into this Agreement to set forth the terms of such resignation. NOW, THEREFORE, in consideration of the covenants undertaken, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Parties hereto agree as follows: 1. Resignation. Employee's employment with the Company as its Chief Financial Officer will terminate effective October 16, 1998 (the "Resignation Date"). Effective on the Resignation Date, Employee will relinquish all positions as an officer and/or employee of the Company, as well as its subsidiaries and affiliates. Employee acknowledges that upon receipt of the Employee's final salary payment for the period ending October 16, 1998, that the Company will have paid him for all work performed on or prior to the Resignation Date based on Employee's base annual salary of One Hundred Twenty-Eight Thousand Dollars ($128,000) ("Base Salary"). Employee further acknowledges that the Company has provided Employee with all benefits to which he was entitled through the Resignation Date. Employee hereby waives any right to claim reinstatement as an officer and/or employee of the Company following the Resignation Date. 2. Severance. a) Severance Payment. The Company shall provide Employee with the cash equivalent of twelve (12) months of Employee's Base Salary minus Twelve Thousand Dollars ($12,000) to facilitate the Company's provision of severance benefits as provided for in Section 2(b), for a total of One Hundred Sixteen Thousand Dollars ($116,000) (the "Severance Payment"). Employee will receive the Severance Payment in a lump-sum payment within five (5) days of the Resignation Date. The Company shall deduct all applicable tax withholdings for state and federal income taxes, FICA and other deductions required by law and/or authorized by Employee from the Severance Payment. 1 2 b) Severance Benefits. The Company shall provide Employee with medical and dental insurance coverage on the same terms and conditions as the Company provided to Employee prior to the Resignation Date for a period of twelve (12) months from the Resignation Date (the "Severance Period"). In addition, in order to facilitate the Company's providing medical and dental benefits, the Company shall pay Employee Twelve Thousand Dollars ($12,000) in twelve equal monthly installments in accordance with the Company's normal payroll procedures during the Severance Period, provided Employee does not become employed by any entity, organization, company and/or employer, other than the Company, during the Severance Period. In the event that Employee becomes employed by any entity, company, organization and/or employer, other than the Company, at any time during the Severance Period, the Company's obligation to provide medical and/or dental insurance coverage shall cease on the date that Employee becomes eligible to participate in the health, medical and/or dental programs of such other employer. Thereafter, Employee shall not be entitled to participate in the Company's medical and/or dental insurance plans, and the Company's sole obligation to Employee shall be to pay Employee the remainder, if any, of the Twelve Thousand Dollars in a lump sum, less all applicable tax withholdings for state and federal income taxes, FICA and other deductions required by law and/or authorized by Employee. (c) Outplacement Services. The Company shall pay up to a total of Eight Thousand Dollars ($8,000.00) for Employee to receive reasonable outplacement counseling and services by an entity of Employee's choosing for up to six months following the Resignation Date. All invoices for such counseling and services shall be sent to the attention of: Joseph M. Valandra, Chairman and Chief Executive Officer at the Company for his approval and direct payment to the outplacement company. Payment for any outplacement or counseling services which exceed Eight Thousand Dollars ($8,000.00) shall be the sole responsibility of Employee. The Severance Payment described in Section 2(a) and the benefits described in Sections 2(b) and 2(c) shall constitute the complete Severance Payment and Severance Benefits provided to Employee. Employee acknowledges that except as provided for in this Agreement, Employee shall not otherwise be entitled to any other payments or benefits from the Company. 3. Vacation. The Company shall pay Employee the total sum of $9,302.16 on the Resignation Date. This sum represents the cash equivalent, less all applicable tax withholdings for state and federal income taxes, FICA and other deductions required by law and/or authorized by Employee, for all previously accrued yet 2 3 unused vacation remaining as of the Resignation Date. Employee acknowledges that he is entitled to compensation for no other vacation. 4. Stock Options. Employee has vested stock options to acquire 20,200 shares of the Company's common stock (the "Options"), with an exercise price of $3.00 per share. Employee and Company agree that the Company will cancel the Options and grant to Employee non-qualified stock options for 20,200 shares of common stock with an exercise price of $3.00 per share, which must be exercised within twelve (12) months of the Resignation Date. Employee acknowledges that he has no other stock options or ownership interests in the Company. 5. Company Property. Employee represents that he will turn over to the Company all files, memoranda, records, other documents and all other physical property which Employee received from Company and which are the property of the Company by the Resignation Date, or sooner if requested by the Company. 6. Tax Liability. Employee agrees that Employee is exclusively liable for the payment of any federal, state, city or other taxes which may be due as a result of any consideration received by Employee as provided by this Agreement; provided, however, that Company shall pay all federal, state and local amounts withheld from payments to Employee and all other employment taxes of the type normally paid by Company on employee salaries in connection with the consideration payable to Employee pursuant to Sections 2 and 3 of this Agreement. 7. Releases by Employee. Except for obligations created by this Agreement, Employee hereby covenants not to sue and fully releases Company and its subsidiaries and affiliates, past and present, and each of them, as well as their directors, partners, officers, agents, attorneys, insurers, employees, stockholders, representatives, assigns and successors, past and present, and each of them (hereinafter together and collectively referred to as "Releasees") with respect to and from all actions, and claims of any kind, known or unknown, suspected or unsuspected, which Employee may now have or has ever had against any of the Releasees, including all claims arising from Employee's employment as a chief financial officer and/or in any other capacity as an officer and/or employee of the Company Releasees (defined below), and arising out of the termination of his employment as the chief financial officer and/or in any other capacity as an officer and/or employee of the Company Releasees (defined below) as of the Resignation Date (and specifically including any and all claims related to prior promises or contracts of employment and any and all claims for wages, benefits, vacation pay, and wrongful termination or discrimination whether based on age, race, sex, disability or otherwise including specifically and without limitation claims under the Federal Age Discrimination in Employment Act, Americans with Disabilities Act, and any state or local statute or law). Employee warrants and represents that Employee has not assigned or transferred to any person or entity any of the claims released by this Agreement and Employee agrees to defend, by counsel of Company's choosing, and indemnify and hold harmless any of the Releasees from and against any claims based on or in connection with or arising out of any such assignment or transfer made. 3 4 8. Releases by Company. Except for obligations created by this Agreement, the Company, its subsidiaries and affiliates (collectively the "Company Releasees") hereby covenant not to sue and fully release Employee and his successors and assigns (the "Employee Releasees"), with respect to and from all actions, and claims of any kind, known or unknown, suspected or unsuspected, which the Company Releasees may now have or have ever had against any of the Employee Releasees, including all claims arising from Employee's position as the chief financial officer, an officer and/or employee of the Company Releasees and the termination of that relationship (and specifically including any and all claims related to prior promises or contracts of employment) provided, however, the Company Releasees do not release the Employee Releases with respect to claims arising out of or relating to the fraud, gross negligence or willful misconduct of the Employee. The Company Releasees warrant and represent that the Company Releasees have not assigned or transferred to any person or entity any of the claims released by this Agreement and the Company Releasees agree to defend, by counsel of Employee's choosing, and indemnify and hold harmless any of the Employee Releasees from and against any claims based on or in connection with or arising out of any such assignment or transfer made. 9. Indemnification and Defense by Company. The Company Releasees shall indemnify and defend Employee in any threatened, pending, or contemplated action, suit or proceeding, whether civil or criminal, administrative or investigative, or whether formal or informal which arises by reason of the fact that Employee was the chief financial officer, an employee and/or officer of the Company Releasees prior to the Resignation Date, against expenses, including attorney's fees, judgments, penalties, fines and amounts to be paid in settlement in connection with such action, suit or proceeding if it is determined by the Company Releasees that Employee conducted himself in good faith and that Employee reasonably believed (i) in the case of conduct in his official capacity with the Company Releasees, that his conduct was in the Company Releasees' best interests, or (ii) in all other cases (except criminal cases), that his conduct was at least not opposed to the Company Releasees' best interests, or (iii) in the case of any criminal proceeding, that he had no reasonable cause to believe that his conduct was unlawful ("Indemnified Claims"). The Company Releasees shall have the sole and exclusive right to select legal counsel to represent the Company Releasees and Employee, and to control the defense and/or settlement of any Indemnified Claims. Employee agrees to cooperate with the Company Releasees in the defense of any Indemnified Claims, and make available to the Company Releasees any and all documents in his possession and/or control that may be necessary or useful to such defense and/or settlement. No indemnification shall be made to Employee under this Section 9 with respect to any claim, issue or matter in connection with a proceeding by or on behalf of the Company or any other entity in which Employee's actions giving rise to the action, suit, proceeding or claim constituted fraud, gross negligence and/or willful misconduct on the part of the Employee. 1. Confidentiality. 4 5 a) Employee will not at any time, disclose or use for his own benefit or purposes of any other person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise other than the Company or its affiliates and subsidiaries, any trade secrets, information, data, or other confidential information relating to customers, development programs, costs, marketing, trading, investment, sales activities, promotion, credit and financial data, manufacturing processes, financing methods, plans, or the business and affairs of the Company or its affiliates and/or subsidiaries ("Proprietary Information"). The term Proprietary Information shall not include information which is not unique to the Company, its affiliates or subsidiaries, or which is generally known to the industry or the public other than as a result of the Employee's breach of this covenant. The Employee agrees that all materials or articles of information of any kind furnished to the Employee by the Company or developed by the Employee in the course of his employment are and shall remain the sole property of the Company and that by the Resignation Date, Employee will return to the Company, all Proprietary Information and all copies thereof, in any way relating to the business of the Company and its affiliates or subsidiaries, except that Employee may retain personal notes, notebooks and diaries. The Employee further agrees that he will not retain or use for his account at any time any trade names, trademark or other proprietary business designation used or owned in connection with the business of the Company or its affiliates or subsidiaries. The Employee agrees that all Proprietary Information shall be the sole property of the Company and its assigns, and the Company and its assigns shall be the sole owner of all licenses and other rights in connection with such Proprietary Information. b) Employee acknowledges that the Company from time to time received from third parties confidential or proprietary information subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes ("Third Party Information"). Employee agrees to hold Third Party Information in the strictest confidence and will not disclose or use Third Party Information except as permitted by any agreement between the Company and such third party. c) Employee acknowledges that the Company's customers and suppliers constitute a valuable and unique asset of the Company. Employee will not at any time (i) disclose such list of customers and/or suppliers or any part thereof to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, (ii) assist in obtaining customers for any other similar business, or (iii) encourage any customer or supplier to terminate their relationship with the Company. 5 6 d) Employee agrees to assign to the Company, without further consideration, his entire right, title, and interest (throughout the United States and in all foreign countries), free and clear of all liens and encumbrances, in and to all Inventions. The Inventions shall be the sole property of the Company, whether or not copyrightable or patentable. In addition, Employee agrees to maintain adequate and current written records on the development of all Inventions, which shall also remain the sole property of the Company. Employee understands that "Inventions" means all ideas, processes, inventions, technology, designs, formulas, discoveries, patents, copyrights, and trademarks, and all improvements, rights, and claims related to the foregoing, that are conceived, developed, or reduced to practice by Employee alone or with others using confidential and/or proprietary information of the Company. If, in the course of Employee's employment, with the Company, Employee incorporated into Company property an invention owned by Employee or in which Employee has an interest, the Company is granted a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license to make, modify, use and sell Employee's invention as part of and in connection with the Company property. 2. Cooperation. Employee agrees to fully cooperate with Company in all matters relating to the winding up of pending work on behalf of Company and the orderly transfer of work to other employees of the Company following the Resignation Date and thereafter. Employee shall also cooperate in the resolution of any dispute, including litigation of any action, involving the Company that relates in any way to Employee's activities while employed by Company. In the event that Employee performs services at the Company's request under this Section 11, Company shall pay Employee for his services at an hourly rate of Sixty-Five ($65.00) per hour, and shall pay Employee's out of pocket expenses incurred in connection with his services. Unless otherwise agreed by the Parties, Employee's services to the Company under this Section 11 shall not exceed a total of forty (40) hours. The terms and conditions of this Section 11 shall not apply to the Company's defense and/or indemnification of Employee with respect to the Indemnified Claims under Section 9 of this Agreement. 3. Nondisruption. Employee agrees not to make any negative, disparaging, disruptive or damaging statements, comments or remarks to any third party concerning Company or its business, parents, subsidiaries, affiliates, owners, partners, employees, or management. Company agrees to inform its current executive officers not to make any negative, disparaging disruptive or damaging statements, comments or remarks to any third party concerning the Employee. However, the Employee agrees that the Company is not responsible or liable for comments made by other employees of the Company. In response to inquiries about Employee from individuals outside of Company, the Company's official response shall be: Employee chose to resign to pursue other opportunities. 6 7 4. Nonadmission of Violation. This Agreement is not, and shall not be construed as, an admission by Company of any violation of its policies or procedures, or of any local, state or federal law or regulation. 5. Legal Fees. In the event a dispute arises out of this Agreement, the Employee shall have the right to select counsel, provided however that such counsel must be reasonably acceptable to the Company, and the Company shall pay all reasonable legal fees and expenses incurred by Employee in connection with the dispute. 6. Complete Agreement. This Agreement constitutes the full and entire agreement and understanding of the Parties. This Agreement supersedes and replaces all prior negotiations and all agreements, proposed or otherwise, between the Parties, whether written or oral, concerning the subject matters hereof. This Agreement also supersedes, replaces and terminates as null and void all prior employment and severance agreements between Employee and the Company. All such prior negotiations and agreements are merged into this Agreement. This Agreement does not, however, affect or limit the Parties' past or ongoing respective rights and responsibilities under any applicable stock option agreement which provides for disposition of stock which Employee may hold in the Company. The terms and conditions contained herein shall inure to the benefit of, and be binding upon, the heirs, representatives, assigns and successors-in-interest of the Parties. This is an integrated document. 7. Severability of Invalid Provisions. If any provision or portion of this Agreement or the application thereof is held by a court of competent jurisdiction or arbitrator to be invalid, unlawful or unenforceable, the remaining provisions or portions of provisions of this Agreement shall remain in full force and effect. Such invalidity shall not affect other provisions or applications of the Agreement which can be given effect without the invalid provisions or applications and to this end the provisions of this Agreement are declared severable. 8. Choice of Law. Except for claims relating to trade secrets, any dispute between the Parties relating in any way to Employee's employment, the termination of that employment or this Agreement, including, without limitation, the formation, implementation, or termination thereof shall be resolved by arbitration before a single arbitrator in Council Bluffs, Iowa according to the commercial rules of the American Arbitration Association. The Parties also agree that prior to commencing any arbitration proceedings, as provided above, the Parties shall first attempt to resolve any dispute between or among them through mediation with the assistance of a mediator selected by or agreeable to the Parties to the dispute. The costs and expense of arbitration and mediation shall be paid by the Company. The rights and obligations of the Parties hereunder, including any agreement to arbitrate and the law to be applied in the arbitration shall be construed and enforced in accordance with and governed by the law of the United States to the extent applicable and otherwise the laws of the State of Delaware, without giving effect to principles of conflicts of law. 9. Joint Preparation of Agreement. This Agreement is deemed to have been drafted jointly by the Parties. Hence, in any construction to be made of this 7 8 Agreement, the provisions of the Agreement shall not be construed against any Party on the basis that the Party was the drafter. 10. Waiver of Breach. No waiver, amendment or modification of this Agreement shall be effective unless in writing and signed by the Party against whom the waiver, amendment or modification is sought to be enforced. No waiver of any term, condition, breach or default of this Agreement shall be construed as a waiver of any other term, condition, breach or default. Failure to enforce any breach or default of this agreement shall not be a waiver of that breach or default or any other breach or default of this Agreement. 11. Further Executions. All Parties agree to cooperate fully and to execute any and all supplementary documents and to take all additional actions that may be necessary or appropriate to give full force to the basic terms and intent of this Agreement and which are not inconsistent with its terms. 12. Headings. The use of headings in this Agreement is only for ease of reference and the headings have no effect and are not to be considered a part or term of this Agreement. 13. Each Party to Bear Own Costs. Except as provided herein, the Parties agree that each Party shall be responsible for the payment of its own costs, attorneys' fees, and all other expense in connection with the negotiation of this Agreement. 14. Counterparts. This Agreement may be executed in counterparts, provided, however, that this Agreement shall not be binding or effective to or against any Party hereto until the date first written above. 15. Further Acknowledgments. Employee further acknowledges that: (a) Employee has read this agreement; (b) Employee has been provided a full and ample opportunity to study it; (c) Employee hereby is advised in writing to consult with an attorney prior to signing this Agreement; (d) Employee enters into this Agreement based upon Employee's own knowledge and judgment and not in reliance on any representations or promises of Company other than those contained in this Agreement; (e) Employee understands that if any facts or matters upon which employee has relied in entering into this Agreement shall hereinafter prove to be otherwise, this Agreement shall nevertheless remain in full force and effect; and (f) Employee is signing this agreement voluntarily, without coercion, and with full knowledge that it is intended, to the maximum extent permitted by law, as a complete and final release and waiver of any and all claims. In Witness Whereof, the Parties have duly executed this Agreement as of the date first written above. Stuart Entertainment, Inc. Employee By: /s/ Joseph M. Valandra By: /s/ Paul C. Tunink Joseph M. Valandra, Chairman Paul C. Tunink and Chief Executive Officer 8 EX-10.29 8 EX-10.29 1 Exhibit 10.29 AGREEMENT This Agreement is entered into this 16th day of November, 1998, by and between Stuart Entertainment, Inc., a Delaware corporation (the "Company"), with its principal place of business at 3211 Nebraska Avenue, Council Bluffs, Iowa 51501, and Timothy R. Stuart an individual (the "Employee"), with his address at 3211 Nebraska Avenue, Council Bluffs, Iowa 51501. NOW, THEREFORE in consideration of the covenants undertaken, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. Termination. Effective as of November 16, 1998, (the "Termination Date") Employee will relinquish all positions as a director or officer of the Company, as well its subsidiaries and affiliates. Employee hereby waives any right to claim reinstatement as an officer and/or director of the Company following the Termination Date. 2. Duties. From the Termination Date until December 31, 1998, Employee agrees to provide information of an advisory nature to assist the Company in all matters relating to the orderly transition of his previously assigned work to other employees. Employee agrees to make himself available to give this information by telephone or letter to the employees of the Company at all reasonable times. 3. Severance. The Company shall provide Employee with: a) Severance Payment. The lump sum payment in the amount of Two Hundred Forty Five Thousand Dollars ($245,000) payable seven (7) days after execution of this Agreement ("Severance Payment"). b) Severance Benefits. If Employee elects continued coverage under the Company's health plan pursuant to the Comprehensive Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), then the Company shall pay the premium for Employee's continued coverage under the Company's health plan until the first to occur of (1) December 31, 1999; or (2) the first date that Employee is employed by a third party offering health insurance coverage for which Employee is eligible to participate. 4. Office Space. Employee shall vacate and remove all personal belongings from the Company's office space in Council Bluffs, Iowa within seven (7) days after execution of this Agreement. 5. Stock Options. Employee has vested stock options to acquire 92,000 of the Company's common stock (the "Options"), with an exercise price of $3.00 per share. Employee and Company agree that the Company will cancel the Options and grant to Employee non-qualified stock options for 92,000 shares of common stock with an exercise price of $3.00 per share, which must be exercised by December 31, 1999. 2 6. Company Property. Employee represents that he will turn over to the Company all files, memoranda, records, other documents and all other physical property which Employee received from Company and which are the property of the Company. Employee shall return to the Company all Company credit cards and calling cards promptly upon request. 7. Tax Liability. Employee agrees that Employee is exclusively liable for the payment of any federal, State, city or other taxes which may be due as a result of any consideration received by Employee as provided by this Agreement; provided, however, that Company shall pay all federal, state and local amounts withheld from payments to Employee and all other employment taxes of the type normally paid by Company in connection with the consideration payable to Employee pursuant to Section 3 of this Agreement. 8. Releases by Employee. Except for obligations created by this Agreement, Employee hereby covenants not to sue and fully releases Company and its subsidiaries and affiliates, past and present, and each of them, as well as their directors, partners, officers, agents, attorneys, insurers, employees, stockholders, representatives, assigns and successors, past and present, and each of them (hereinafter together and collectively referred to as "Releasees") with respect to and from all actions, and claims of any kind, or unknown, suspected or unsuspected, which Employee may now have or has ever had against any of the Releasees, including all claims arising from Employee's employment as president and/or in any other capacity as an officer and/or director of the Company, and arising out of the termination of his employment as president and/or in any other capacity as an officer and/or director of the Company as of the Termination Date and specifically including any and all claims related to prior promises or contracts of employment and any and all claims for wages, benefits, vacation pay, and wrongful termination or discrimination whether based an age, race, sex, disability or otherwise including specifically and without limitation claims under the Federal Age Discrimination in Employment Act, Americans with Disabilities Act, and any state or statute or law). Employee warrants and represents that Employee has not assigned transferred to any person or entity any of the claims released by this Agreement and Employee agrees to defend, by counsel of Company's choosing, and indemnify and hold harmless any of the Releasees from and against any claims based on or in connection arising out of any such assignment or transfer made. 9. Releases by Company. Except for obligations created by this Agreement, Company hereby covenants not to sue and fully releases Employee and his successors and assigns (the "Employee Releasees"), with respect to and from all actions, and claims of any kind, known or unknown, suspected or unsuspected, which Company may now have or has ever had against any of the Employee Releasees, including all claims arising from Employee's position as president, officer and/or director of the Company and the termination of that relationship as of the Termination Date (and specifically including any and a claims related to prior promises or contracts of employment) provided, however, the Company does not release the Employee Releasees with respect to claims arising out of or relating to the fraud, gross negligence or willful misconduct of the Employee. The Company warrants and represents that Company has not assigned or transferred to any person or entity any of the claims released by this Agreement and Company agrees to defend, by counsel of Employee's choosing which counsel shall be reasonably acceptable to the Company, and indemnify and hold harmless any of the Employee -2- 3 Releasees from and against any claims based on or in connection with or arising out of any such assignment or transfer made. 10. Indemnification and Defense by Company. Company shall indemnify and defend Employee in any threatened, pending, or contemplated action, suit or proceeding, whether civil or criminal, administrative or investigative, or whether formal or informal which arises by reason of the fact that Employee was president, other officer and/or director of the Company prior to the Termination Date, against expenses, including attorney's fees, judgments, penalties, fines and amounts to be paid in settlement in connection with such action, suit or proceeding if it is reasonably determined by Company that Employee conducted himself in good faith and that Employee reasonably believed (i) in the case of conduct in his official capacity with the Company, that his conduct was in the Company's best interests, or (ii) in all other cases (except criminal cases), that his conduct was at least not opposed to the Company's best interests, or (iii) in the case of any criminal proceeding, that he had no reasonable cause to believe that his conduct was unlawful ("Indemnified Claims"). The Company shall have the sole and exclusive right to select legal counsel to represent the Company and Employee, and to control the defense and/or settlement of any Indemnified Claims. Employee agrees to cooperate with the Company in the defense of any Indemnified Claims, and make available to the Company any and all documents in his possession and/or control that may be necessary or useful to such defense and/or settlement. No indemnification shall be made to Employee under this Section 10 with respect to any claim, issue or matter in connection with a proceeding by or on behalf of the Company or any other entity in which Employee's actions giving rise to the action, suit, proceeding or claim constituted fraud, gross negligence and/or willful misconduct on the part of the Employee. 11. Confidentiality. The Company acknowledges and agrees that Employee may enter into endeavors or activities which are competitive with the Company and nothing in this paragraph 12 is intended or shall be construed to restrict or limit such endeavors or activities provided the Employee otherwise complies with (i) his obligations under this paragraph 12, (ii) all obligations under this agreement and (iii) applicable law. a) Employer will not at any time, disclose or use for his own benefit or purposes of any other person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise other than the Company or its affiliates and subsidiaries, any trade secrets or confidential information and data relating to, customers, suppliers, development programs, costs, marketing, trading, investment, sales activities, promotion, credit and financial data, manufacturing processes, financing methods, plans, or the business and affairs of the Company or its affiliates and/or subsidiaries ("Proprietary Information"). The term Proprietary Information shall not include information which is not unique to the Company, its affiliates or subsidiaries, or which is generally known to the industry or the public other than as a result of the Employee's breech of this covenant. The Employee agrees that all materials or articles of information of any kind furnished to the Employee by the Company or developed by the Employee in the course of his employment are and shall remain the sole property of the Company and that Employee will return to the Company, all memoranda, books, papers, plans, information, letters and other data, and all copies thereof; in any way relating to the business of -3- 4 the Company and its affiliates or subsidiaries, except that Employee may retain personal notes, notebooks and diaries. The Employee further agrees that he will not retain or use for his account at any time any trade names, trademark or other proprietary business designation used or owned in connection with the business of the Company or its affiliates or subsidiaries. The Employee agrees that a Proprietary Information shall be the sole property of the Company and its assigns, and the Company and its assigns shall be the sole owner of all licenses and other rights in connection with such Proprietary Information. b) Employee acknowledges that the Company from time to time receives from third parties confidential or Proprietary information subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes ("Third Party Information"). Employee agrees to hold Third Party Information in the strictest confidence and will not disclose or use Third Party Information except as permitted by any agreement between the Company and such third party. c) Employee agrees to assign to the Company, without further consideration, his entire right, title, and interest (throughout the United States and in all foreign countries), free and clear of all liens and encumbrances, in and to all Inventions. The Inventions shall be the sole property of the Company, whether or not copyrightable or patentable. In addition, Employee agrees to maintain adequate and current written records on the development of all Inventions, which shall also remain the sole property of the Company. Employee understands that "Inventions" means all inventions of a technical or product nature which includes ideas, processes, inventions, technology, designs, formulas, discoveries, patents, copyrights, and trademarks, and all improvements, rights, and claims related to the foregoing, that are conceived, developed, or reduced to practice by Employee alone or with others using confidential and/or proprietary information of the Company. If, in the course of Employee's employment, with the Company, Employee incorporated into Company property an invention owned by Employee or in which Employee has an interest, the Company is granted a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license to make, modify, use and sell Employee's invention as part of and in connection with the Company property. 12. Non-Solicitation. Company agrees to waive paragraph 7.1(b) of the Management Consulting Agreement effective as of February 1, 1996, between Len Stuart Associates, Ltd. and the Company, only with respect to any offer of employment to Employee by Len Stuart & Associates. 13. Nondisruption. Employee agrees not to make any negative, disparaging, disruptive or damaging statements, comments or remarks to any third party concerning Company or its business, parents, subsidiaries, affiliates, owners, partners, employees, or management. Company agrees to inform the current members of its Board of Directors and its executive officers not to make any negative, disparaging disruptive or damaging statements, comments or remarks to any third party concerning the Employee. 14. Nonadmission of Violation. This Agreement is not, and shall not be construed as, an admission by Company of any violation of its policies or procedures, or of any local, state or federal law or regulation. -4- 5 15. Complete Agreement. This Agreement constitutes the full and entire agreement and understanding of the parties. This Agreement supersedes and replaces all prior negotiations and all agreements, proposed or otherwise, between the parties, whether written or oral, concerning the subject matters hereof. This Agreement also supersedes, replaces and terminates as null and void all prior employment and severance agreements between Employee and the Company. All such prior negotiations and agreements are merged into this Agreement. This Agreement does not, however, affect or limit the parties' past or ongoing respective rights and responsibilities under any applicable stock option agreement which provides for disposition of stock which Employee may hold in the Company. The terms and conditions contained herein shall inure to the benefit of, and be binding upon, the heirs, representatives, assigns and successors-in-interest of the parties. This is an integrated document 16. Severability of Invalid Provisions. If any provision or portion of this Agreement or the application thereof is held by a court of competent jurisdiction or arbitrator to be invalid, unlawful or unenforceable, the remaining provisions or portions of provisions of this Agreement shall remain in full force and effect. Such invalidity shall not affect other provisions or applications of the Agreement which can be given without the invalid provisions or applications and to this end the provisions of this Agreement are declared severable. 17. Dispute Resolution and Choice of Law. Except for claims relating to Proprietary Information, any dispute between the parties relating in any way to Employee's employment, the termination of that employment or this Agreement, including, without limitation, the formation, implementation, or termination thereof shall be resolved by arbitration before a single arbitrator in Council Bluffs, Iowa, according to commercial rules of the American Arbitration Association. The parties also agree that prior to commencing any arbitration proceedings, as provided above, the parties shall first attempt to resolve any dispute between or among them through mediation with the assistance of a mediator selected by or agreeable to the parties to the dispute. The costs and expense of arbitration and remediation shall be shared equally by the parties to the arbitration and/or mediation, regardless of which party prevails. The rights and obligations of the parties hereunder, including any agreement to arbitrate and the law to be applied in the arbitration shall be construed and enforced in accordance with and governed by the law of the United States to the extent applicable and otherwise the laws State of Delaware, without giving effect to principles of conflicts of law. 18. Joint Preparation of Agreement. This Agreement is deemed to have been drafted jointly by the parties. Hence, in any construction to be made of this Agreement, the provisions of the Agreement shall not be construed against any party on the basis that the party was the drafter. 19. Waiver of Breach. No waiver, amendment or modification of this Agreement shall be effective unless in writing and signed by the against whom the amendment or modification is sought to be enforced. No waiver of any term, condition, breach or default of this Agreement shall be construed as a waiver of any other term, condition, breach or default. Failure to enforce any breach or default of this Agreement shall not be a waiver of that breach or default or any other breach or default of Agreement. -5- 6 20. Further Executions. All parties agree to cooperate fully and to execute any and all supplementary documents and to take all additional actions that may be necessary or appropriate to give full force to the basic terms and intent of this Agreement which are not inconsistent with its terms. 21. Headings. The use of headings in this Agreement is only for ease of reference and the headings have no effect and are not to be considered a part or term of this Agreement. 22. Each Party to Bear Own Costs. Except as provided herein, the parties agree that each party shall be responsible for the payment of its own costs, attorneys' fee all other expense in connection with the negotiation of this Agreement. 23. Counterparts. This Agreement may be executed in counterparts. 24. Further Acknowledgments. Employee further acknowledges that: (a) Employee has read this Agreement; (b) Employee has been provided a full and ample opportunity to study it; (c) Employee hereby is advised in writing to consult a attorney prior to signing this Agreement; (d) Employee has been advised that Employee has twenty-one (21) days from the date this Agreement is presented Employee in which to consider this Agreement and whether Employee will enter into it, although Employee may, in the exercise of Employee's discretion, sign or reject this Agreement at any time before the twenty-one (21) day period expires; Employee has seven (7) days following execution of this Agreement to revoke the Agreement by delivering timely notice of Employee's revocation to the Chairman and Chief Executive Officer of Company; (f) this Agreement shall not become effective or enforceable and no funds shall be exchanged until the seven (7) day revocation period had expired; (g) Employee enters into this Agreement based upon Employee's own knowledge and judgment and not in reliance on any representations or promises of Company other than those contained in this Agreement; (h) Employee understands that if any facts or matters upon which Employee has relied in entering into this Agreement shall hereinafter prove to be otherwise, this Agreement shall nevertheless remain in full force and effect; and (j) Employee is signing this Agreement voluntarily, without coercion, and with full knowledge that it is intended, to the maximum extent permitted by law, as a complete and final release and waiver of any and all claims. In Witness Whereof, the parties have duly executed this Agreement as of the date first above written above. Stuart Entertainment, Inc, Employee By: /s/ Joseph M. Valandra By: /s/ Timothy R. Stuart --------------------------------- ----------------------- Joseph M. Valandra, Chairman Timothy R. Stuart and Chief Executive Officer -6- EX-10.30 9 EX-10.30 1 Exhibit 10.30 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of April 8, 1999, between STUART ENTERTAINMENT, INC., a Delaware corporation (the "Company"), and JOSEPH M. VALANDRA (the "Executive"). RECITALS A. The Company and the Executive have previously entered into that certain Personal Services Agreement, dated October 5, 1998 (the "Prior Agreement"), pursuant to which the Company has agreed to employ the Executive, and the Executive has agreed to serve, as the Company's Chief Executive Officer. B. The Company and the Executive desire to amend and restate the Prior Agreement to thereby modify certain terms and conditions relating to the employment of the Executive by the Company as its Chief Executive Officer and Chairman of the Board. C. The Company and the Executive intend that this Agreement shall supersede all prior agreements, whether oral or written, relating to the terms and conditions of the Executive's employment, including without limitation the Prior Agreement. NOW, THEREFORE, in consideration of their mutual covenants and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE 1 DEFINITIONS For purposes of this Agreement, the following terms shall have the following meanings: 1.1 "Cause" shall mean a termination of the Executive's employment during the Term which is a result of any of the following: (i) the Executive shall be convicted of, or plead guilty to, a felony; (ii) the Executive shall commit theft or embezzlement of property of the Company or any affiliate of the Company or any act involving moral turpitude or the use or possession of illegal drugs; (iii) the board of directors of the Company shall determine that the Executive has materially failed in the performance of his employment duties to the Company, which failure is not cured within 30 days (or if such cure is commenced within such 30 day period and thereafter diligently pursued, such longer period as is reasonably required to cure such failure) after written notice describing such failure in reasonable detail is provided to the Executive by the Company's board of directors; (iv) any gaming license issued to the Company or any affiliate thereof by any governmental entity shall be revoked or suspended, or shall not be renewed, as a result of any act or omission committed by the Executive; (v) the Executive shall commit any act or omission which, in the reasonable judgment of the board of directors of the Company, could reasonably be expected to result in the revocation or suspension of, or prevent the renewal of, any gaming 2 license of the Company or any affiliate thereof; or (vi) the Executive shall be habitually under the influence of drugs or alcohol which shall materially and adversely affect the performance of the Executive's duties. 1.2 "Code" shall mean the Internal Revenue Code of 1986, as amended, and any successor provisions thereto. 1.3 "Conversion Event" shall mean (i) the successful consummation of an exchange offer in which the Company's existing 12-1/2% Senior Subordinated Notes are exchanged for equity interests in the Company, or (ii) the entry of a final and non-appealable order confirming a plan of reorganization for the Company under Title 11, Chapter 11 of the United States Code involving the restructuring of the Company's debt. 1.4 "Common Stock" shall mean shares of the voting common stock of the Company. 1.5 "Disability" shall mean (i) the Executive's incapacity due to physical or mental illness which causes him to be absent from the full-time performance of his duties with the Company for three (3) consecutive months or for ninety (90) days or more in any twelve (12) month period, and (ii) the Executive's failure to return to full-time performance of his duties for the Company within thirty (30) days after written Notice of Termination due to Disability is provided by the Company to the Executive. Any question as to the existence of the Executive's Disability upon which he and the Company cannot agree shall be determined by a qualified independent physician selected by the Executive (or, if the Executive is unable to make such selection, such selection shall be made by any adult member of the Executive's immediate family), and approved by the Company. The determination of such physician made in writing to the Company and to the Executive shall be final and conclusive for all purposes of this Agreement. 1.6 "Good Reason" shall mean a resignation of the Executive's employment during the Term as a result of any of the following: (a) A meaningful and detrimental alteration by the Company of the Executive's office, function, duties or responsibilities (including the Executive's reporting responsibilities) to a scope less than that associated with the Executive's most significant position with the Company during the ninety (90) day period immediately following such alteration; (b) A reduction by the Company in the Executive's annual Base Salary as set forth herein or as the same may be increased from time to time thereafter; (c) The failure by the Company to continue in effect any compensation plan in which the Executive participates unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan or the failure by the Company to continue the Executive's participation therein on at least as favorable a basis, both in 2 3 terms of the amount of benefits provided and the level of the Executive's participation relative to other participants; (d) The failure by the Company to continue to provide the Executive with fringe benefits and arrangements (including, without limitation, life insurance, health, medical, dental, accident and disability plans and programs, income tax services, car allowances and other fringe benefits) at least as favorable in the aggregate to those fringe benefits and arrangements that the Executive previously enjoyed, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy previously in effect; (e) Except in connection with or as a result of any Conversion Event, any person (as defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) shall become the "beneficial owner" (as defined in Rule 13d-3 promulgated pursuant to the Securities Exchange Act of 1934), directly or indirectly, of 25% or more of the combined voting power of the Company's then outstanding Common Stock; (f) Except in connection with or as a result of any Conversion Event, the occurrence within any twelve (12) month period of a change in the membership of the Company's board of directors such that the Incumbent Members do not constitute a majority of the members of such Board of Directors; or (g) A material breach by the Company of the provisions of this Agreement (provided, however, that any event described in clauses (a) through (e) above shall not constitute Good Reason unless it is communicated by the Executive to the Company in writing and is not corrected by the Company in a manner which is reasonably satisfactory to the Executive, including full retroactive correction with respect to any monetary matter, within ten (10) days of the Company's receipt of such written notice from the Executive). 1.7 "Retirement" shall mean normal retirement at age 65 or in accordance with retirement rules generally applicable to the Company's senior executives. ARTICLE 2 DUTIES AND TERM 2.1 Employment. (a) The Executive shall have such duties and responsibilities as shall be assigned to the Executive from time to time by the Board of Directors of the Company (the "Board") in the Executive's capacity as the Chief Executive Officer and the Chairman of the Board of the Company and as is consistent with the Bylaws of the Company. (b) During the period of his employment hereunder, the Executive shall devote substantially all of his business time, attention, skill and efforts to the faithful 3 4 performance of his duties hereunder; provided, however, that the Executive may serve or continue to serve on the board of directors or hold other offices or positions in companies or organizations if they involve no conflict of interest with the interests of the Company and may engage in customary professional activities which in the judgment of the Board will not materially affect the performance by the Executive of his duties hereunder. 2.2 Term. The term of this Agreement shall commence on the date first written above and shall continue, unless sooner terminated, until December 31, 2001 (the "Initial Term"). Thereafter, the term of this Agreement may be extended upon the mutual written agreement of the Executive and the Company (any such extensions are referred to herein as "Renewal Terms"). The Initial Term and any Renewal Terms of this Agreement shall be collectively referred to as the "Term." ARTICLE 3 COMPENSATION 3.1 Base Salary. Subject to the further provisions of this Agreement, the Company shall pay the Executive during the Term of this Agreement a base salary at an annual rate of not less than $250,000 (as such amount may be increased from time to time, the "Base Salary"). The Base Salary shall be reviewed at least annually by the Board and the Board may, in its discretion, increase the Base Salary. The Base Salary of the Executive shall not be decreased at any time during the term of this Agreement from the amount of Base Salary then in effect, except in connection with across-the-board salary reductions similarly affecting all senior executives of the Company. Participation in deferred compensation, discretionary bonus, retirement, stock option and other employee benefit plans and in fringe benefits shall not reduce the Base Salary payable to the Executive under this Section 3.1. The Base Salary under this Section 3.1 shall be payable by the Company to the Executive not less frequently than monthly. 3.2 Initial Compensation. The Company and the Executive acknowledge that, pursuant to Section 3 of the Prior Agreement, the Company has previously paid to the Executive the following compensation: (a) a lump sum of $100,000, paid upon the effective date of the Prior Agreement; (b) fully vested options to purchase 200,000 shares of Common Stock at an exercise price of One Dollar ($1.00) per share on the effective date of the Prior Agreement, such options to be issued under the Company's existing stock option plan; (c) options to purchase 300,000 shares of Common Stock at an exercise price of One Dollar ($1.00) per share on the effective date of the Prior Agreement, such options to vest in three (3) equal groups of 100,000 shares each on the anniversary of the effective date of the Prior Agreement and to be issued under the Company's existing stock option plan. 4 5 The parties acknowledge and agree that such amounts were paid as initial compensation to retain the services of the Executive under the Prior Agreement and that the Executive became indefeasibly entitled to receive such amounts upon the effective date of the Prior Agreement. 3.3 Incentive Compensation. Subject to the further provisions of this Agreement, during the Term of this Agreement the Executive shall be entitled to participate in an equitable manner with all other senior executives of the Company in such bonus or other incentive compensation programs as the Company may adopt from time to time, including, but not limited to, bonuses or other compensation provided pursuant to any performance-based management incentive plans that the Company may adopt from time to time. Nothing in this section shall be deemed to limit the ability of the Executive to be paid and receive discretionary bonuses from the Company, based solely on the Executive's performance, without regard to the payment of discretionary bonuses to any other officers of the Company. 3.4 Participation in Retirement and Employee Benefit Plans: Fringe Benefits. The Executive shall be entitled to participate in all plans of the Company relating to stock options, stock purchases, pension, thrift, profit sharing, life insurance, hospitalization and medical coverage, disability, travel or accident insurance, education or other retirement or employee benefits that the Company has adopted or may adopt for the benefit of its senior executives. In addition, the Executive shall be entitled to participate in any other fringe benefits, such as club dues and fees of professional organizations and associations, which are now or may become applicable to the Company's senior executives, and any other benefits which are commensurate with the duties and responsibilities to be performed by the Executive under this Agreement. The Executive shall, during the Term of his employment hereunder, continue to be provided with benefits at a level which shall in no event be less in any material respect than the benefits available to the Executive as of the date of this Agreement. Notwithstanding the foregoing, the Company may terminate or reduce benefits under any benefit plans and programs to the extent such reductions apply uniformly to all senior executives enabled to participate therein, and the Executive's benefits shall be reduced or terminated accordingly. 3.5 Vacation. The Executive shall be entitled to a vacation during each year of the employment term, without diminution of his salary in accordance with the Company's vacation policy as in effect from time to time. 3.6 Costs and Expenses. The Company and the Executive acknowledge that the Executive will incur cash out-of-pocket expenses while traveling on business for the Company and performing the Executive's duties under this Agreement, and that it would be inefficient for both the Company and the Executive to provide for the Company to reimburse the Executive for such expenses that are not paid directly by the Company. Accordingly, the Company shall pay to the Executive during each calendar month (or portion thereof) or during the term of this Agreement a monthly out-of-pocket travel expense fee in the amount of $750, which travel expense fee shall be full and complete payment to the Executive for all such out-of-pocket travel expenses. The Company and the Executive acknowledge that the actual amount of such expenses incurred by the Executive during any given month may be more or less than the amount 5 6 of such travel expense fee. The amount of such travel expense fee will be evaluated periodically and adjusted if necessary. 3.7 Restructuring Bonus. The Executive will receive a bonus ("Restructuring Bonus") payable in cash upon the occurrence of a Conversion Event consisting of (A) a lump sum payment of cash in an amount equal to thirty percent (30%) of the Executive's Base Salary in effect at such time, and (B) an aggregate of one and eight-tenths (1.8%) of the equity in the entity resulting from such Conversion Event (calculated on a fully diluted basis as of the effective date of such Conversion Event), in the form of restricted stock grants or warrants with a nominal exercise price (the specific terms and conditions of which shall be set forth in a separate agreement to be entered into between the Company and the Executive at such time). The Executive shall not be entitled to receive a Restructuring Bonus if his employment is terminated prior to the occurrence of a Conversion Event either (i) by the Company with Cause, or (ii) by the Executive (regardless of cause or reason). It is understood and agreed that for income tax purposes, the Restructuring Bonus shall not be deemed to be income of the Executive until actually received by the Executive. ARTICLE 4 TERMINATION OF EMPLOYMENT 4.1 Death or Retirement of Executive. This Agreement shall automatically terminate upon the death or Retirement of the Executive. 4.2 By the Executive. The Executive shall be entitled to terminate this Agreement by giving written notice to the Company: (a) for Good Reason; and (b) at any time without Good Reason. 4.3 By the Company. The Company shall be entitled to terminate this Agreement by giving written notice to the Executive: (a) in the event of the Executive's Disability; (b) for Cause; and (c) at any time without Cause. 4.4 Date of Termination. Any termination of the Executive's employment by the Company or by the Executive during the Term shall be communicated by a notice of termination to the other party hereto (the "Notice of Termination"). The Notice of Termination shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of his employment under the provision so indicated. The date of termination of employment with the Company and 6 7 its subsidiaries (the "Date of Termination") shall be determined as follows: (i) if the Executive's employment is terminated for Disability, thirty (30) days after such notice is given (provided that the Executive shall not have returned to the full-time performance of duties during such thirty (30) day period), (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, five (5) days after the date such notice is received by the Executive, (iii) if the Executive's employment is terminated by the Company for Cause, the later of the date specified in such notice or ten (10) days following the date such notice is received by the Executive, (iv) if the Executive's employment is terminated by the Executive for Good Reason, ten (10) days after the date such notice is received by the Company, and (v) if the Executive's employment is terminated by the Executive other than for Good Reason, the date set forth in such notice, which shall be no earlier than twenty (20) days after the date such notice is received by the Company. ARTICLE 5 COMPENSATION UPON TERMINATION OF EMPLOYMENT 5.1 Upon Termination for Death, by the Company for Cause, by the Executive Without Good Reason, or at Expiration of Term and Refusal of Employment by the Executive. If the Executive's employment is terminated by reason of the Executive's death or Disability, by the Company for Cause, by the Executive without Good Reason, or if at the end of the Term of this Agreement the Company decides to extend the Term, but the Executive decides not to continue in the employ of the Company, the Company shall: (a) pay the executive (or his estate or beneficiaries), upon the later of ten (10) business days after such termination date or the effective date of standard termination and release documents to be executed by the Executive, any Base Salary which has accrued but which has not been paid as of the termination date (the "Accrued Base Salary"); (b) reimburse the Executive (or his estate or beneficiaries), within five (5) days of such termination, for expenses incurred by him prior to the date of termination which are subject to reimbursement pursuant to applicable Company policies then in effect (the "Accrued Reimbursable Expenses"); (c) provide to the Executive (or his estate or beneficiaries) any accrued and vested benefits required to be provided by the terms of any Company-sponsored benefit plans or programs (the "Accrued Benefits"), together with any benefits required to be paid or provided in the event of the Executive's death or Disability under applicable law; (d) pay the Executive (or his estate or beneficiaries), upon the later of ten (10) business days after such termination date or the effective date of standard termination and release documents to be executed by the Executive, any discretionary bonus with respect to a prior fiscal year which has accrued and been earned but has not been paid, and pay the Executive (or his estate or beneficiaries) as soon as practicable any incentive compensation earned by the Executive as of the Termination Date which (i) is determined by objective measurements standards under the Company's incentive compensation programs applicable to senior 7 8 executives, and (ii) would have been paid to Executive had the Executive been continuously employed through the end of such measurement period (collectively, the "Accrued Bonus"); and (e) allow the Executive (or his estate or beneficiaries) to exercise all vested, unexercised stock options outstanding at the termination date in accordance with the terms of the plans and agreements pursuant to which such options were issued. 5.2 Upon Termination at Expiration of Term and the Company's Failure to Extend. If the Executive's employment is terminated upon the expiration of the Term of this Agreement and the Company does not extend the Term of this Agreement, the Company shall: (a) pay the Executive, upon the later of ten (10) business days after such termination date or the effective date of standard termination and release documents to be executed by the Executive, the Accrued Base Salary; (b) pay the Executive, within five (5) days of such termination, the Accrued Reimbursable Expenses; (c) pay the Executive the Accrued Benefits; (d) pay the Executive, upon the later of ten (10) business days after such termination date or the effective date of standard termination and release documents to be executed by the Executive (or as soon as practicable thereafter), the Accrued Bonus; (e) allow the Executive the right to exercise all vested, unexercised stock options in accordance with Section 5.1(e); and (f) pay the Executive, upon the later of ten (10) business days after such termination date or the effective date of standard termination and release documents to be executed by the Executive, a cash lump sum payment in an amount equal to his Base Salary (as in effect at the time of such termination) for a period equal to twelve (12) months. 5.3 Upon Termination by the Company Without Cause or by the Executive for Good Reason. If the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason, the Company shall: (a) pay the Executive, upon the later of ten (10) business days after such termination date or the effective date of standard termination and release documents to be executed by the Executive, the Accrued Base Salary; (b) pay the Executive, within five (5) days of such termination, the Accrued Reimbursable Expenses; (c) pay the Executive the Accrued Benefits; 8 9 (d) pay the Executive, upon the later of ten (10) business days after such termination date or the effective date of standard termination and release documents to be executed by the Executive (or as soon as practicable therafter), the Accrued Bonus; (e) pay the Executive, upon the later of ten (10) business days after such termination date or the effective date of standard termination and release documents to be executed by the Executive, a cash lump sum in an amount determined as follows: (A) prior to the effective date of any Conversion Event, an amount equal to his Base Salary (as in effect at the time of such termination) for a period of thirty-six (36) months; and (B) from and after the effective date of any Conversion Event, an amount equal to his Base Salary (as in effect at the time of such termination) for a period equal to the greater of twelve (12) months or the number of months remaining until the expiration of the Term; provided, however, that in any case such amount shall not exceed 2.99 times the Executive's "base amount," as such term is defined in Section 28OG of the Code and the regulations promulgated thereunder; (f) maintain in full force and effect, for the continued benefit of the Executive and his eligible beneficiaries, until the first to occur of (i) his attainment of, and qualification to receive, comparable benefits upon alternative employment or (ii) twelve (12) months following the Termination Date, the employee benefits pursuant to Company-sponsored benefit plans, programs or other arrangements in which the Executive was entitled to participate immediately prior to such termination (provided, that in the event that the Executive's participation or the participation of such eligible beneficiaries in any such plans or arrangements is prohibited by the terms thereof, the Company shall provide, at the Company's expense, the Executive and/or such eligible beneficiaries with benefits for such period substantially similar to those that the Executive and/or such eligible beneficiaries were entitled to receive under such plans as of the Termination Date); and (g) allow the Executive the right to exercise in full all outstanding vested stock options and restricted stock awards for a period of twelve (12) months following the Termination Date and, if the Executive then holds stock options and/or restricted stock awards not fully vested or exercisable, all such options and restricted stock awards will immediately vest in full and become exercisable in accordance with their terms for a period of twelve (12) months following the Termination Date. ARTICLE 6 DISABILITY If the Executive's employment is terminated by reason of the Executive's Disability, the Executive shall be entitled to receive such disability payments and other benefits as are provided under any disability programs for senior executives of the Company as shall be in effect at the time of such Disability. ARTICLE 7 RESTRICTIVE COVENANTS 9 10 7.1 Competition. (a) The Executive agrees that during his employment with the Company and for a period of two (2) years following the date of termination or expiration of his employment hereunder (the "Non-Competition Period"), for any reason except if the termination is due to the Company's failure to extend the Term of this Agreement (whether such termination shall be voluntary or involuntary), the Executive shall not: (i) directly or indirectly, for himself or as agent of, or on behalf of, or in conjunction with, any person, firm, corporation or association, entering into competitive endeavors and undertaking any commercial activity which is contrary to the best interest of the Company or its affiliates or subsidiaries, including becoming an employee, owner (except for passive investments of not more than one percent of the outstanding shares of, or any other equity interest in, any company or entity listed or traded on a national securities exchange or in the over-the-counter securities market), officer, agent or director of any firm, person, corporation, association or other entity in any geographic area in which the Company conducts its business which either directly competes with a line or lines of business of the Company accounting for ten percent (10%) or more of the Company's gross sales, revenues of earnings before taxes or derives ten percent (10%) or more of such firm's or person's gross sales, revenues or earnings before taxes from a line or lines of business which directly compete with the Company; or (ii) directly or indirectly solicit for employment, endeavor to entice away from the Company otherwise interfere with the Company's relationship with any person who is employed by or otherwise engaged to perform services for the Company, whether for the Executive's own account or for the account of any other individual, partnership, firm, corporation or other entity. (b) The Executive expressly agrees and acknowledges that: (i) this covenant not to compete is reasonably necessary for the protection of the interests of the Company and is reasonable as to time and geographical area and does not place any unreasonable burden upon him; (ii) the general public will not be harmed as a result of enforcement of this covenant not to compete; (iii) his personal legal counsel has reviewed this covenant not to compete; (iv) he understands and hereby agrees to each and every term and condition of this covenant not to compete; and (v) notwithstanding any provision of this Agreement to the contrary, the Company shall not, from and after any breach by Executive of the provisions of this Article 7, have any further obligations to make payments to Executive under this Agreement. 10 11 (c) If the Executive's employment is terminated upon the expiration of the Term of this Agreement due to the Company's failure to extend the Term, the Non-Competition Period will be for one (1) year. 7.2 Proprietary Information. (a) Executive will not at any time, whether during or after Executive's employment with the Company, disclose or use for his own benefit or purpose of any other person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise other than the Company or its affiliates and subsidiaries, any trade secrets, information, data, or other confidential information relating to customers, development programs, costs, marketing, trading, investment, sales activities, promotion, credit and financial data, manufacturing processes, financing methods, plans, or the business and affairs of the Company or its affiliates and/or subsidiaries ("Proprietary Information"). The term Proprietary Information shall not include information which is not unique to the Company, its affiliates or subsidiaries, or which is generally known to the industry or the public other than as a result of the Executive's breach of this covenant. The Executive agrees that all materials or articles of information of any kind furnished to the Executive by the Company or developed by the Executive in the course of his employment are and shall remain the sole property of the Company and, upon termination of Executive's employment with the Company, Executive will return to the Company immediately all memoranda, books, papers, plans, information, letters and other data, and all copies thereof, in any way relating to the business of the Company and its affiliates or subsidiaries, except that Executive may retain personal notes, notebooks and diaries. The Executive further agrees that he will not retain or use for his account at any time any trade names, trademark or other proprietary business designation used or owned in connection with the business of the Company or its affiliates or subsidiaries. The Executive agrees that all Proprietary Information shall be the sole property of the Company and its assigns, and the Company and its assigns shall be the sole owner of all licenses and other rights in connection with such Proprietary Information. (b) The Company from time to time receives from third parties confidential or proprietary information subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes ("Third Party Information"). During Executive's employment with the Company and thereafter, Executive will hold Third Party Information in the strictest confidence and will not disclose or use Third Party Information except as permitted by any agreement between the Company and such third party. (c) Executive acknowledges that the Company's customers and suppliers constitute a valuable and unique asset of the Company. Executive will not at any time, whether during or after his employment with the Company, (i) disclose such list of customers and/or suppliers or any part thereof to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, (ii) assist in obtaining customers for any other similar business, or (iii) encourage any customer or supplier to terminate their relationship with the Company. 11 12 (d) Executive agrees to assign to the Company, without further consideration, his entire right, title and interest (throughout the United States and in all foreign countries), free and clear of all liens and encumbrances, in and to all Inventions (as defined below). Notwithstanding the foregoing, the Company may, in its discretion, agree to provide consideration for certain Inventions through a written agreement between the Company and the undersigned which specifically provides for such consideration; in all other cases, no consideration shall be paid. The Inventions shall be the sole property of the Company, whether or not copyrightable or patentable. In addition, Executive agrees to maintain adequate and current written records on the development of all Inventions, which shall also remain the sole property of the Company. Executive understands that "Inventions" means all ideas, processes, inventions, technology, designs, formulas, discoveries, patents, copyrights and trademarks, and all improvements, rights and claims related to the foregoing, that are conceived, developed, or reduced to practice by Executive alone or with others. If, in the course of Executive's employment, with the Company, Executive incorporates into Company property an invention owned by Executive or in which Executive has an interest, the Company is granted a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license to make, modify, use and sell Executive's invention as part of an in connection with the Company's property. 7.3 Remedies. The Executive expressly agrees and acknowledges that the covenant not to compete set forth in Section 7.1 is necessary for the Company's and its affiliates' protection because of the nature and scope of their business and his position with the Company. Further, the Executive acknowledges that, in the event of his breach of his covenant not to compete, money damages will not sufficiently compensate the Company for its injury caused thereby, and he accordingly agrees that in addition to such money damages he may be restrained and enjoined from any continuing breach of the covenant not to compete without any bond or other security being required. The Executive acknowledges that any breach of the covenant not to compete would result in irreparable damage to the Company. The Executive acknowledges that the remedy at law for any breach or threatened breach of Sections 7.1 and 7.2 will be inadequate and, accordingly, that the Company shall, in addition to all other available remedies (including without limitation, seeking such damages as it can show it has sustained by reason of such breach), be entitled to injunctive relief or specific performance. If the scope of the Executive's agreement under this Article VII is determined by any court of competent jurisdiction to be too broad to permit the enforcement of all of the provisions of this Article VII to their fullest extent, then the provision of this Article VII shall be construed (and each of the parties hereto hereby confirms that its intent is that such provisions be so construed) to be enforceable to the fullest extent permitted by applicable law. To the maximum extent permitted by applicable law, the Executive hereby consents in any proceeding brought to enforce such provisions to the judicial modification of the provisions of this Article VII in such a manner that renders such provisions enforceable to the maximum extent permitted by applicable law. 12 13 ARTICLE 8 MISCELLANEOUS 8.1 Assignment and Delegation. (a) This Agreement is personal to each of the parties hereto. No party may assign or delegate any rights or obligations hereunder without first obtaining the written consent of the other parry hereto, except that this Agreement shall be binding upon and inure to the benefit of any successor corporation to the Company. (b) The Company shall use reasonable efforts to require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as defined herein and any successor to its business and/or assets which assumes this Agreement by operation of law or otherwise. (c) This Agreement shall inure to the benefit of and be enforceable by the Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If the Executive should die while any amount would still be payable to him hereunder had he continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legates or other designee, or if there is no such designee, to his estate. 8.2 Notice. For the purpose of this Agreement, notices and a other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other addresses as either party may have furnished to the other in writing in accordance herewith, except that notice of a change of address shall be effective only upon actual receipt: To the Company: Stuart Entertainment, Inc. 3211 Nebraska Avenue Council Bluffs, IA 51501 Attn: General Counsel To the Executive: Joseph M. Valandra 29 Park Lane Minneapolis, MN 55416 13 14 Any notice of termination pursuant to Section 4.4 of this Agreement shall specify the specific termination provision relied upon by the party giving notice and shall state the effective date of such termination. 8.3 Amendments or Additions; Prior Agreements. No amendments or additions to this Agreement shall be binding unless in writing and signed by each of the parties hereto. This Agreement shall supersede all prior agreements, whether oral or written, relating to the terms and conditions of the Executive's employment, including without limitation the Prior Agreement, other than any stock option or stock purchase agreements (which shall remain unaffected by this Agreement, except to the extent any vesting or exercise period may be modified hereby). 8.4 Section Headings. The section headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 8.5 Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. If, in any judicial proceedings, a court shall refuse to enforce one or more of the covenants or agreements contained herein because the duration thereof is too long, or the scope thereof is too broad, it is expressly agreed between the parties hereto that such scope or duration shall be deemed reduced to the extent necessary to permit the enforcement of such covenants or agreements. 8.6 Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 8.7 No Mitigation or Offset. The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer or by pension benefits paid by the Company or another employer after the date of termination or otherwise except that on the date that the Executive and his dependents are eligible and elect coverage under the plans of a subsequent employer which provide substantially equivalent or greater benefits to the Executive and his dependents. 8.8 Enforcement Expenses. The Company intends that Executive should not be required to incur the expenses associated with the enforcement of his rights under this Agreement because the such expenses would substantially detract from the benefits intended to be extended to him under this Agreement, nor be bound to negotiate any settlement of his rights under this Agreement under threat of incurring all of such expenses. Accordingly, if the Company fails to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, the Company must indemnify Executive for all legal costs and fees (including without limitation, attorneys' 14 15 fees, retainers, arbitration costs, charges for transcripts, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage and delivery service fees, and all other disbursements or out-of-pocket expenses) that Executive incurs by asserting or defending his rights under this Agreement. The Company will be obligated to reimburse Executive for the fees and expenses of his chosen counsel on a regular, periodic basis upon presentment by him of a statement or statements prepared by such counsel in accordance with its customary practices, but in no event later than 45 days after such presentment. If such fees and expenses are not reimbursed within 45 days of presentment, the Company must pay Executive interest running from the date of such presentment at the applicable federal rate provided for in Section 1274(d) of the Code, or any successor provision thereof, for an obligation with a term equal to the length of such delay. 8.9 Modifications and Waiver. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer of the Company as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 8.10 Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware without regard to its conflicts of law principles. 8.11 Taxes. Any payments provided for hereunder shall be paid net of any applicable employment taxes required under federal, state or local law, subject however to any mandatory withholding. 8.12 Survival. The obligations of the Company under Article V hereof and the obligations of the Executive under Article VII hereof shall survive the expiration of this Agreement. [remainder of page intentionally left blank] 15 16 IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the date first indicated above. STUART ENTERTAINMENT, INC., a Delaware corporation By /s/ Lawrence Taylor ---------------------------------------- Its Executive Vice President & Chief Financial Officer -------------------------------------- "COMPANY" /s/ Joseph M. Valandra ------------------------------------------ JOSEPH M. VALANDRA "EXECUTIVE" 16 EX-11 10 EX-11 1 EXHIBIT 11 STUART ENTERTAINMENT, INC. AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
YEARS ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ---- ---- ---- Shares of common stock outstanding at beginning of year(1) 6,920,140 6,828,129 6,697,062 Weighted-average shares issued during the year 15,426 40,354 77,912 ------------ ------------ ----------- Average common and common equivalent shares outstanding - primary 6,935,566 6,868,483 6,774,974 ------------ ------------ ----------- Weighted-average shares assumed issued under stock option plans and exercise of warrants (using treasury stock method) during the year under diluted -- -- -- ------------ ------------ ----------- Average common and common equivalent shares outstanding - fully dilutive 6,935,566 6,868,483 6,774,974 ============ ============ =========== Net loss: Loss before extraordinary item $(19,221,000) $(13,145,000) $(1,298,000) Extraordinary item - Loss on extinguishment of debt, net of taxes -- (208,000) (933,000) ------------ ------------ ----------- Net loss $(19,221,000) $(13,353,000) $(2,231,000) ============ ============ =========== Loss per share - primary: Loss before extraordinary item $ (2.77) $ (1.91) $ (0.19) Extraordinary item -- (0.03) (0.14) ------------ ------------ ----------- Loss per share - basic and diluted $ (2.77) $ (1.94) $ (0.33) ============ ============ ===========
(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 (Deficit) in Item 14 for additional information. EX-21 11 EX-21 1 EXHIBIT 21 Subsidiaries of the Registrant
STATE OR OTHER JURISDICTION OF NAMES UNDER WHICH SUBSIDIARY INCORPORATION OR 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. UK S.E. International, Inc. Iowa Bingo Systems & Supply, Inc. Missouri
EX-23 12 EX-23 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements 33-89962, 333-20151 and 333-30235 of Stuart Entertainment, Inc. on Form S-8 of our report dated March 30, 1999, appearing in this Annual Report on Form 10-K of Stuart Entertainment, Inc. for the year ended December 31, 1998. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Omaha, Nebraska April 13, 1999 EX-27 13 EX-27
5 This schedule contains summary financial information extracted from the consolidated statements of operations and cashflows for the year ended December 31, 1998 and the consolidated balance sheet as of December 31 1998 and is qualified in its entirety by reference to such annual report Form 10-K. 1,000 US DOLLARS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 4,447 0 24,446 3,735 22,111 51,160 52,531 23,317 136,699 21,981 119,288 0 0 70 (4,961) 136,699 118,642 118,642 85,196 85,196 36,188 3,390 13,400 (19,432) (211) (19,521) 0 0 0 (19,221) (2.77) (2.77)
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