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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No.
December 31, 1995 0-10737
STUART ENTERTAINMENT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 84-0402207
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
3211 Nebraska Avenue
Council Bluffs, Iowa 51501
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(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
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(Title of Class)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
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Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 22, 1996 was $9,474,877.50.
The number of shares outstanding of the Registrants $.01 par value common
stock as of March 22, 1996 was 6,717,062.
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PART I
ITEM 1. BUSINESS
GENERAL
Stuart Entertainment, Inc., a Delaware corporation (the "Company")
manufactures and distributes a complete line of bingo cards, break-open
tickets, ink markers, electronic equipment, supplies and accessories in the
United States and Canada. The Company's products are sold primarily to
distributors, who resell them to fraternal, charitable, religious and social
organizations, lodges, hospitals, nursing homes, PTA groups, military clubs and
other similar organizations, primarily non-profit, which use such products to
raise money and provide entertainment. To a lesser extent the Company's
products are also sold to charitable and commercial bingo halls and to
governmental lottery agencies through Company-owned retail stores located in
Canada, mail order catalogs and promotional flyers. The Company is also
engaged in the manufacture and distribution of electronic gaming equipment.
See "--Video King Gaming Systems, Inc."
CERTAIN RECENT DEVELOPMENTS
ACQUISITION OF BINGO PRESS AND SPECIALTY LIMITED. In December 1994,
the Company completed the acquisition (the "Acquisition") of Len Stuart &
Associates Limited, an Ontario, Canada corporation ("LSA"). LSA's major asset
was Bingo Press & Specialty Limited, an Ontario, Canada corporation ("Bazaar"),
a major manufacturer of bingo supplies and related products in Canada. The
Acquisition was completed pursuant to the terms of a Stock Purchase Agreement
(the "LSA Agreement") entered into by and among the Company, 1089350 Ontario
Inc., an Ontario, Canada corporation and a wholly owned subsidiary of the
Company (the "Subsidiary"), Leonard A. Stuart and LSA. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
To facilitate the financing of the Acquisition, the Company entered
into a Securities Purchase Agreement (the "MLGA Agreement") with MLGA Fund II,
L.P. and Bingo Holdings Inc. ("Bingo Holdings"). On December 13, 1994,
pursuant to the MLGA Agreement, Bingo Holdings purchased 3,130,435 newly issued
shares of Common Stock and warrants to purchase 775,000 shares of Common Stock
at an exercise price of $5.75 per share, for an aggregate purchase price of
$18,000,000 (the "Equity Financing").
ACQUISITION OF THE ASSETS OF THE RELIABLE CORPORATION OF AMERICA. In
January 1995, the Company acquired selected assets and liabilities of The
Reliable Corporation Of America, Inc. ("Reliable") and two Didde Presses owned
by Anthony Maniaci and Warren Reynolds, individuals and owners of all of the
outstanding capital stock of Reliable. The purchase price was $1,300,000. A
condition of the agreement was that Mr. Maniaci enter into an employment
agreement with the Company, which employment agreement was subsequently
terminated by
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mutual consent; the Company and Messrs. Maniaci and Reynolds also entered into
non-competition agreements. See "Note 2 to Notes to the Consolidated Financial
Statements."
PLAYPRINT LIMITED. In 1993 the Company and Bazaar formed Stuart
Entertainment Limited, an English corporation and wholly owned subsidiary of
the Company ("Stuart Entertainment England"). The Company and Bazaar
introduced a number of bingo products for sale in the United Kingdom and Europe
through Stuart Entertainment England and in October 1994, Stuart Entertainment
England commenced manufacturing operations.
In July 1995, Stuart Entertainment England signed a licensing and
marketing agreement with Playprint Limited, headquartered in Dublin, Ireland.
Pursuant to the agreement, Playprint Limited pays royalties to Stuart
Entertainment England for use of certain of the Company's trademark,
technologies and equipment in the production of bingo paper and ink markers.
As a result of this agreement, the Company redeployed its assets in the United
Kingdom and shut down its manufacturing operations. The Company recorded a
one-time pre-tax charge of $819,000 in 1995 related to the costs to shutdown
the manufacturing facility in the United Kingdom.
VIDEO KING GAMING SYSTEMS, INC.
Video King Gaming Systems, Inc., a wholly owned subsidiary of the
Company ("Video King"), was formed in 1992 to develop a line of electronic
gaming equipment, primarily for the Company's bingo markets. Video King began
manufacturing selected products during the first quarter of 1993 and shipped
its first product in the second quarter of 1993. While Video King has focused
its sales efforts within the Company's established bingo markets, it also
intends to address the domestic and international for-profit gaming markets.
STUART ENTERTAINMENT MEXICO
Stuart Entertainment, S.A. de C.V., a Mexican corporation and a wholly
owned subsidiary of the Company ("Stuart Entertainment Mexico") was formed in
1991 by the Company and Bazaar for the purpose of printing and finishing bingo
paper primarily for their respective needs. A number of bingo presses and
other manufacturing equipment have been placed in service in Mexico. During
1995, 1994 and 1993 all of the bingo paper manufactured by Stuart Entertainment
Mexico was sold to the Company or Bazaar.
BINGO PRESS & SPECIALTY LIMITED
Bazaar operates under the tradename Bazaar & Novelty. The businesses
of Bazaar are similar to those of the Company. Bazaar manufactures and
distributes a complete line of bingo cards, break-open tickets, ink markers,
supplies and accessories. Bazaar's products are sold primarily to
distributors, who resell them to fraternal, charitable, religious and social
organizations, lodges, hospitals, nursing homes, PTA groups, legions and other
similar not for profit organizations which use such products to raise money and
provide entertainment. To a lesser extent, Bazaar's products are sold to
charitable and commercial bingo halls,
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governmental lottery agencies and through Bazaar owned retail stores. See
"--Products."
PRODUCTS
BINGO SHEETS AND CARDS. The Company sells a complete line of bingo
sheets and cards, both disposable and reusable. With disposable bingo sheets,
the players mark the sheet with ink markers or crayons or push out a tab and
discard the sheet after each game. Disposable sheets are supplied in a variety
of styles and colors. They generally are supplied as loose sheets, with from
one to forty-eight "faces," or in padded form, with from one to eighteen
"faces" or game cards per sheet using the traditional 75-number game. The
Company continues to add specialty bingo games such as "Bonus Line(R),"*
"Bonanza Bingo(R)," a 90-number bingo game, "Double Action," "Wildcard,"
"Winfall(R),"* "Triangle Bingo" and other specialty bingo games which can be
played as alternatives to or concurrently with the standard 75-number bingo
game. The Company also sells a reusable line of shutter bingo cards, with
transparent colored plastic slides that can be pulled over the numbers and then
pushed back at the end of the game, and reusable cardboard cards that can be
played using transparent colored plastic chips.
BREAK-OPEN TICKETS. The Company manufactures and sells products known
as "break-open tickets." Break-open tickets are similar to instant lottery and
raffle tickets. They generally are sold at bingo games to provide additional
entertainment to the players and supplement the sponsoring organization's
fund-raising effort. To a lesser extent, break-open tickets in Canada are also
sold to charitable organizations for distribution through commercial
establishments. Break-open tickets are produced in over 300 different designs
and denominations and consist of two thin sheets of opaque cardboard printed
with colorful designs and laminated together. The player pulls open up to five
"windows" to reveal hidden combinations of symbols (for example, bells,
cherries, gold bars and shamrocks) to determine whether the card is a winner
and, if it is a winner, the amount of the prize. Each set of tickets sold
contains a predetermined number of winning tickets for prizes of different
denominations, thus providing the sponsoring organization with an assured gross
profit on the sale of a full set of tickets.
BINGO EQUIPMENT, SUPPLIES AND ACCESSORIES. The Company manufactures
and sells an extensive line of electronic equipment traditionally used in bingo
establishments. The electronic bingo equipment line includes: (i) electronic
blowers which select numbers for bingo games by ejecting numbered balls one at
a time, (ii) electronic flashboards, measuring up to 5 feet high and 18 feet
wide, which display to the audience the numbers selected from the electronic
blowers or ball cages, (iii) electronic systems that allow instantaneous
verification of valid winning bingo cards, (iv) manually operated ball
selection cages and (v) new software (90 TRAK) developed to support the South
American and European style bingo. The Company also manufactures and sells,
or distributes, other electronic equipment used as gaming equipment or for
promotional purposes in gaming, entertainment and other industries.
__________________________________
*Bonus Line is a registered trademark licensed to the Company by Bonus Games,
Inc.
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The Company manufactures ink markers for bingo sheets and refills for
such markers. An ink marker is used to place ink impressions on disposable
bingo paper to identify called numbers. The Company sells a varied line of ink
colors and bottle sizes.
The Company distributes other supplies and equipment needed for bingo
games, such as tables, chairs and public address systems, bingo-related
accessories and novelty items such as tote-bags, t-shirts, buttons and key
chains and custom advertising products such as mugs. The Company also sells
party supplies, flags, balloons and bar and concession equipment for use at
such fund-raising events as bazaars and carnivals.
ELECTRONIC GAMING EQUIPMENT. Video King designs and manufactures a
variety of electronic bingo systems, video lottery terminal machines ("VLTs"),
video slot machines and electronic table games, as well as a comprehensive
modular management information system designed for gaming facilities, which
includes point-of-sale terminals, vault management, player tracking, inventory
control, direct mail and audit functions. To date, Video King has not had any
significant revenues from sales of VLTs or video slot machines.
The electronic bingo systems, marketed under the name System 12(TM),
provide bingo players the opportunity to play a bingo game electronically on
touch-screen or conventional terminals while other players play the same game
in the traditional manner on paper, all in a cashless environment. Where
regulations permit, System 12(TM) provides the player access to a stand-alone
parimutuel bingo game and to other games such as video keno, video poker or
video 8-line reel games.
The VLTs and video slot machines offer a player the ability to select
from a variety of games including draw poker, keno, 8-line reel games,
break-opens or bingo. These products utilize multi-color, high resolution
graphics and are offered with either touch screen and/or button capability.
The design of Video King's electronic gaming equipment stresses security and
the flexibility to meet varying regulatory requirements.
The electronic table games include Vertical or Horse Race Bingo, 52
Card Keno, Chip Up or Flash Bingo and Sic-Bo. A single operator oversees the
"casino style" wagering for each of these games.
SALES INFORMATION BY PRODUCT LINE
The following table shows the percentage of revenues contributed by
major product lines of the Company during the past three years.
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<TABLE>
<CAPTION>
1995 1994 1993
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<S> <C> <C> <C>
Bingo sheets and cards, break-open tickets and other 78% 70% 71%
printed materials
Bingo equipment, electronic gaming equipment, ink markers, 22 30 29
supplies and accessories
</TABLE>
Revenues contributed by bingo sheets and cards, break-open tickets,
and other printed materials increased during 1995 due to the Acquisition.
Revenue from the sale and leasing of electronic gaming equipment
totaled $2.1 million, $2.3 million and $1.4 million in 1995, 1994 and 1993,
respectively.
MARKETING AND SALES
The Company's bingo products are marketed principally through over 200
distributors. These distributors consist of firms and individuals who solicit
orders from user organizations which sponsor bingo games. The Company sells to
distributors primarily through an employee sales force.
The Company's bingo products are also marketed directly to sponsoring
organizations and commercial bingo halls in locations where there is little or
no distributor coverage or where the Company's products do not have high market
penetration. Retail sales are solicited by means of direct mail catalogs,
fliers, telemarketing and personal contact by sales personnel in selected
branches and directly through retail stores in Canada.
The following table shows the percentage of total sales contributed by
the Company's wholesale and retail sales activities during the past three
years.
<TABLE>
<CAPTION>
1995 1994 1993
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<S> <C> <C> <C>
Sales to distributors 65% 97% 96%
Retail sales 35% 3 4
</TABLE>
The increase in retail sales in 1995 was primarily due to the
Acquisition of Bazaar and its company-owned retail stores.
During 1995, the Company continued to direct its marketing efforts
toward strengthening relations with its existing distributors and adding new
distributors. The Company plans to focus marketing efforts during 1996 on
further developing its distributor network, with minor emphasis placed on
attempting to generate additional retail sales, primarily through direct
mailings of catalogs and fliers. The Company has also sponsored group seminars
designed to assist distributors and other customers in developing and refining
sales and marketing programs and
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to introduce new products. The Company believes the seminars have been well
received by its distributor network and have been successful in enhancing
customer relations and generating incremental sales. Company sales personnel
also conduct seminars with individual distributors designed to assist these
individuals in developing sales and marketing programs, to educate distributors
in ways of improving the success of their customers' fund-raising efforts and
to provide management assistance to certain distributors. The Company makes
available to distributors catalogs of the Company's full product line on which
distributors may imprint their names and which they may give to their
customers.
Video King markets its electronic gaming equipment through the
Company's bingo distributor network, by submitting proposals to bid tenders by
governmental entities, principally in the United States and Canada, and by
soliciting for-profit gaming markets and by submitting proposals directly to
Native American gaming facilities. Solicitation of charitable and for-profit
gaming markets is performed primarily by the Company's existing sales staff.
Video King also markets its equipment by displaying such equipment at selected
trade shows and exhibitions.
Bazaar's bingo products are marketed principally through company-owned
locations, independent distributors and government agencies. The independent
distributors are located in the Provinces of Alberta, British Columbia,
Newfoundland, Ontario, Quebec and Saskatchewan. The government agencies
distribute bingo paper products exclusively in the Provinces of British
Columbia and Manitoba. Bazaar-owned retail stores operate in the Provinces of
Manitoba, New Brunswick, Nova Scotia, Ontario and Prince Edward Island.
FOREIGN AND EXPORT SALES
To date the Company has not had a significant volume of export sales;
however, the Company has begun to devote greater resources to the
identification and exploration of international bingo and gaming markets. The
Company added an International Sales Manager in 1995 to coordinate these
efforts.
During 1995, approximately 58% of sales were to the United States, 39%
to Canada, 1% to the United Kingdom with the balance representing sales to
other foreign countries. During 1994, approximately 91% of sales were to the
United States. The amount and percentage of Canadian sales increased
substantially in 1995 due to the Acquisition. Sales in the United Kingdom will
decrease significantly in 1996 due to the discontinuance of manufacturing
operations in the United Kingdom and the signing of the agreement with
Playprint Limited. See "Recent Developments." For further information
regarding foreign and domestic operations and export sales, see "Note 15 to
Notes to Consolidated Financial Statements."
The Company had no single customer that accounted for more than 10% of
its gross revenues during 1995, 1994, and 1993.
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SEASONALITY
The Company's business is somewhat seasonal as its sales are stronger
during the first half of the year than during the second half of the year.
BACKLOG
As of December 31, 1995, and 1994, the dollar amount of backlog orders
believed to be firm amounted to $3,513,000 and $3,550,000, respectively.
MANUFACTURING AND SUPPLIERS
The Company manufactures bingo cards on a number of high-speed web
presses capable of printing a variety of different game cards in configurations
of 24, 30, 36 and 48 cards per sheet. The bingo cards are produced for
inventory and then sold unfinished or are cut and packaged to meet customer
needs. The existing production capacity is expected to be sufficient to meet
the Company's 1996 projected bingo paper sales.
In manufacturing break-open tickets the Company utilizes a number of
high-speed, multi-color, offset presses and a variety of other equipment,
including a laminator, a die-cutter and serial numbering machinery. In recent
years the Company has incurred substantial capital expenditures, including the
acquisition of a die-cutter, a laminator and an additional printing press
designed to improve break-open ticket productivity and product quality. The
Company is currently operating at approximately 80% of its break-open ticket
production capacity. The Company estimates it has sufficient production
capacity to enable it to meet its expected break-open ticket sales demand for
the next 12 months. Prior to 1995, the Company outsourced the printing and
die-cutting of break-open tickets in its Canadian operation. During 1995 the
Company purchased a five-color press and a two-color press for the in-house
printing of break-open tickets and a die-cutter to enable the Company to
manufacture the product internally for its Canadian operations.
The Company manufactures ink markers and refills through automated
liquid filling lines. A number of ink formulas have been developed
specifically for use in the bingo industry, but the ink can also be sold to a
variety of other markets. The Company believes that current manufacturing
capacity is sufficient to meet the projected ink sales demand for 1996.
The components for the Company's bingo equipment, and the paper and
other materials used in printing bingo sheets and break-open tickets, generally
are available from various suppliers at competitive prices and, as a result,
the Company is generally not dependent on any single supplier. The Company has
experienced significant price increases in raw newsprint during 1995 and prices
are expected to stabilize or experience modest increases during 1996. The
equipment, accessories and supplies which the Company distributes generally are
standard items and are available from other manufacturers.
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The Company continually monitors technological advances in the
printing industry in an effort to ensure a timely assimilation of these
advances into current manufacturing processes. Additional attention is
directed toward the early recognition and investigation of new technologies
that might be implemented as cost effective complements to technology currently
employed.
RESEARCH AND DEVELOPMENT ACTIVITIES
The Company maintains a continuing product development program
intended to enhance the Company's product lines and increase the Company's
market penetration. Efforts in the bingo paper and break-open ticket product
lines are directed toward new product development as well as improvement of the
graphic design of its current lines. The market for break-open tickets, in
particular, is an ever-changing one requiring the continual introduction of new
break-open tickets in response to changing consumer preferences of design and
colors.
The Company continually updates and redesigns its bingo equipment in
an effort to maximize the utility, ease of use and reliability of these
products. A significant effort is being devoted to the diversification of
products within the electrical equipment product line in response to the trend
within the bingo and gaming industries toward the adaptation of electrical and
mechanical devices to use in those industries.
Video King has substantially completed the design of its principal
products and will maintain a reduced R&D program to develop new products and to
ensure that the technology employed in Video King's product line is
state-of-the-art and that the features offered in its gaming products are as
comprehensive as any found in the market place.
During 1995, 1994 and 1993, total research and development expenses
totaled approximately $745,000, $784,000, and $685,000, respectively, of which
$682,000, $727,000, and $673,000, respectively, represented research and
development expenses related to Video King. Total research and development
expenses for 1996 are currently expected to decrease due to the completion of
the design of Video King's principal products.
GOVERNMENT REGULATION
The sale and use of many of the Company's products are governed by
federal, state and local gaming laws. The significant growth of charitable and
commercial gaming in recent years has resulted in a proliferation of
legislation directed toward gaming activities which has been accompanied by a
more intensive, sophisticated regulatory approach at all governmental levels.
This has resulted in more comprehensive licensing, reporting and operating
requirements which generally have been implemented by the Company, where
appropriate, and which are being monitored on an on-going basis in an effort to
comply in all material respects with applicable laws, regulations, directives
and standards recommended by the National Association of Fundraising Ticket
Manufacturers and the North American Gaming Regulators Association. In
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addition, the sale and use of many of Bazaar's products are governed by
federal, provincial and municipal laws in Canada.
While the Company believes that its manufacturing, warehousing,
shipping and sales operations are generally in compliance with applicable laws,
the Company is not in a position to determine the legality or illegality of the
use of its products, since the legality of use often depends on the status and
locations of the Company's customers and the ultimate consumers of the product.
The state and local laws in the United States and provincial and
municipal laws in Canada which govern the sale and use of gaming products are
widely disparate and continually changing due to legislative and administrative
actions and court interpretations. If any changes occur in gaming laws through
statutory enactment or amendment, court interpretation or administrative action
so as to restrict the manufacture, distribution or use of some or all of the
Company's products, the Company could experience declines in sales and
earnings.
At present, the states of Alaska, Colorado, Illinois, Indiana, Iowa,
Kansas, Kentucky, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri,
Nebraska, New Hampshire, New York, North Dakota, Oklahoma, Pennsylvania, South
Dakota, Texas, Vermont, Washington, West Virginia and Wisconsin require bingo
and/or charitable gaming manufacturers and/or suppliers to be licensed or
registered. The Company currently is licensed or registered in each of these
jurisdictions, except for Maine. The Company has not applied for a license in
Maine and does not conduct activities which it believes to be subject to
licensing in that state. The Company, however, is permitted to and does ship
products to licensed distributors in Maine. The Company is also registered in
the Province of Ontario, Canada. Bazaar is registered in the provinces of
Ontario, New Brunswick and Nova Scotia, Canada.
The manufacture and distribution of electronic gaming equipment is
also subject to extensive federal, state and local regulations which vary
significantly by jurisdiction. Video King has submitted applications for
licenses in several states where it expects to conduct business. Video King
has received a license to sell electronic gaming equipment in Colorado and
Mississippi and anticipates that it will receive license approval from other
states during 1996. Further, Video King intends to submit license applications
to a number of other state and local jurisdictions during 1996. Video King
does not anticipate encountering any significant problems in obtaining these
licenses.
The Company anticipates that Video King will sell its machines to
casinos operated by Native Americans. Under the National Indian Gaming
Regulatory Act ("IGRA"), certain types of gaming activities are classified as
Class I, Class II or Class III. Only Class I and Class II gaming may be
conducted by a Native American casino without the necessity of a written
compact with the state in which the casino is located. In the event a gaming
activity is classified as Class III under IGRA, a tribe may not conduct such
activity in the absence of a compact. Video King's business will be impacted
based upon whether its products are ultimately classified
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as Class II or Class III, which classification will affect the size of the
potential markets for those products.
The loss of a license in a particular state may prohibit the Company
from selling into that state during the period that it does not have such a
license. Loss of one or more licenses for an extended period of time may have
an adverse effect on the Company's business.
Not all of the Company's products are eligible for sale in every
locality where the Company ships products. The Company routinely contacts
responsible state agencies to determine the existence and nature of any state
and local restrictions applicable to its products and attempts to comply with
such restrictions. In addition, the Company and Bazaar each maintain a
licensing and regulatory department that monitors regulatory and licensing
requirements to which the Company and Bazaar, respectively, are subject.
COMPETITION
BINGO SUPPLIES AND BINGO EQUIPMENT. The Company and Video King
experience competition from a number of privately owned businesses, most of
which the Company believes are smaller than the Company. However, no
comprehensive industry statistics are available. The Company experiences
competition in all areas of its business. The Company's major competitor in
North America is Arrow International, Cleveland, Ohio ("Arrow"), which sells a
complete line of bingo products. Since bingo products generally are similar,
the principal competitive factors in the industry are service and price. The
Company believes that it is competitive in both areas. See "Marketing and
Sales." Bazaar experiences competition in all areas of its business from a
number of privately owned businesses, most of which Bazaar believes to be
smaller than Bazaar. However, no comprehensive industry statistics are
available. Bazaar's major competitors in Canada are the Canadian branch of
Arrow and Specialty Print with respect to break-open tickets.
ELECTRONIC GAMING EQUIPMENT. Video King competes with a number of
manufacturers of gaming equipment, many of which have substantially greater
resources than the Company. The significant competitive factors include price,
product design, reliability and security.
The Company believes that it has an advantage in marketing its
electronic bingo systems because of the uniqueness of Video King's design of
its products and because of the Company's comprehensive knowledge of the bingo
industry, extensive distributor network within the industry and established
supplier relationships with many United States and Canadian governmental
entities.
The VLT/video slot market is more mature than the market for
electronic bingo systems and more competitive. Video King believes that the
technology incorporated into its VLTs and video slots is state-of-the-art and
compares favorably with any existing products and that the Company's reputation
as a quality manufacturer of electronic products for bingo games will
facilitate entry into the VLT/video slot market. However, to date Video King
has not had any
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significant revenues from the sale of VLTs or video slot machines and there is
no assurance that Video King will be able to successfully penetrate the
electronic gaming market, given the highly competitive nature of this market.
TRADEMARKS
The Company believes that the trademarks Bingo King and Bazaar &
Novelty have considerable value in the industry, based upon their extensive use
for more than 30 years. The Company's trademark, Bingo King, the name,
combination of the mark and name with a crown logo, and numerous other product
names which it uses are registered with the United States Patent and Trademark
Office.
EMPLOYEES
As of December 31, 1995, the Company had 1,429 full-time employees in
the United States, Canada, Mexico and the U.K., 134 of which are members of a
union subject to a collective bargaining agreement. The collective bargaining
agreement does not place any significant financial or operational burdens on
the Company. The Company considers its relations with its employees to be
good.
ADDITIONAL INFORMATION
Compliance with federal, state and local law in the United States and
federal, provincial and municipal laws in Canada regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment has not had, and is not expected by the Company to have, any
adverse effect upon capital expenditures, earnings or the competitive position
of the Company. The Company is not presently a party to any litigation or
administrative proceeding with respect to its compliance with such
environmental standards. In addition, the Company does not anticipate being
required to expend any material amount of funds in the near future for
environmental protection in connection with its operations.
ITEM 2. PROPERTIES
The operations of the Company are conducted principally from
facilities located in Council Bluffs, Iowa; Littleton, Colorado; St.
Catharines, Ontario; and Reynosa, Mexico and Muskegon, Michigan.
The operations in Council Bluffs, Iowa are conducted from four
buildings. Two buildings, comprising approximately 155,000 square feet, are
owned by the Company and used primarily to print, finish and warehouse bingo
paper and break-open tickets. The Company also leases two additional buildings
in Council Bluffs, Iowa. One of these buildings, comprising approximately
27,000 square feet, is used primarily to manufacture and warehouse ink markers
and refills. The lease on this building expires in September 1996 and the
Company has the option of renewing the lease for an additional one year period.
The second building, comprising
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approximately 34,500 square feet, is used primarily to warehouse paper, general
merchandise, and break-open tickets. The lease on this building expires in
December 1997 and the Company has the option of renewing the lease for two
additional one year periods.
The Company leases 30,000 square feet of space in Littleton, Colorado
pursuant to a lease which expires in August 1996. It houses the Company's
facilities for assembling electronic bingo equipment and electronic gaming
products manufactured by the Company. The Company has the option of renewing
this lease for two five-year periods. The renewal of the lease is currently
under consideration by the Company.
Bazaar leases a 158,000 square foot facility in St. Catharines,
Ontario, Canada which is used primarily to print, finish, and warehouse bingo
paper and break-open tickets. The lease was originally scheduled to expire on
August 31, 1995, but has been extended to August 31, 2000 with two five-year
options. In 1995 an additional 24,057 square foot facility adjacent to the
main premises was leased. This second lease expires on August 31, 2000 with one
five-year option. This facility is used to warehouse general products for
Bazaar.
Stuart Entertainment Mexico leases approximately 81,600 square feet in
Reynosa, Mexico pursuant to leases which expire on August 15, 1998 and December
31, 1998, respectively. The lease that was to expire January 14, 1996 was
extended to August 15, 1998 with the addition of 13,600 square feet. The space
houses Stuart Entertainment Mexico's administrative offices and facilities for
printing and finishing bingo paper.
Substantially all of the Company's property and equipment is subject
to liens to secure borrowings by the Company under its bank and other financing
agreements.
In general, the Company's properties and equipment are in good
condition and are considered to be adequate for their present use.
ITEM 3. LEGAL PROCEEDINGS
The Company has been sued for patent infringement in the United States
District Court for the District of Nevada by Fortunet, Inc. ("Fortunet") The
suit consists of two counts. The first count concerns a device known as the
Bingo Card Minder that was marketed by the Company and manufactured by Bingo
Card Minder Corp., who is co-defendant for the first count. The Company no
longer markets the Bingo Card Minder. The second count is against the Company
and alleges that the System 12TM electronic bingo system manufactured by Video
King infringes three patents owned by Fortunet. The Company does not believe
that System 12TM infringes any of the patents and that the three patents are
invalid. The Company has requested that the United States Patent and Trademark
Office ("PTO") re-examine the three patents. The PTO has granted the Company's
request as to two patents; the PTO agreed that a substantial new question of
patentability exists as to such patents. The PTO has not acted on the request
for the reexamination of the third patent, which was filed approximately four
months after the request for re-examination of the first two patents. The
Company believes that it will be successful in defending the suit on both
counts.
12
<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of the stockholders of the Company (the "Meeting")
was held on October 5, 1995. The following table sets forth each of the
proposals that the stockholders were asked to vote upon and the results of the
Meeting.
<TABLE>
<CAPTION>
Proposal Results
-------- -------
<S> <C> <C>
1. A proposal to elect six directors to the
Board of Directors:
Leonard A. Stuart Grant Authority 5,944,042
Withhold Authority 35,759
Albert F. Barber Grant Authority 5,946,867
Withhold Authority 32,934
Timothy R. Stuart Grant Authority 5,944,317
Withhold Authority 35,484
Sangwoo Ahn Grant Authority 5,947,867
Withhold Authority 31,934
Perry J. Lewis Grant Authority 5,947,867
Withhold Authority 31,934
Ira Starr Grant Authority 5,947,867
Withhold Authority 31,934
2. A proposal to ratify the selection of For 5,952,689
Deloitte & Touche LLP as independent auditors Against 13,391
for the fiscal year ended December 31, 1995 Abstain 13,721
</TABLE>
13
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on The Nasdaq Stock Market under
the symbol "STUA."
The following table shows the high and low closing sales prices for
the Common Stock during each calendar quarter within the past two years, as
reported by The Nasdaq Stock Market.
<TABLE>
<CAPTION>
1995: High Low
---- ---- ---
<S> <C> <C>
First Quarter $5 1/2 $4 5/8
Second Quarter $4 7/8 $2 1/4
Third Quarter $5 1/4 $3
Fourth Quarter $8 1/4 $4
1994:
----
First Quarter $6 $4 1/2
Second Quarter $5 1/2 $3 3/4
Third Quarter $6 $4 1/2
Fourth Quarter $5 1/2 $3 7/8
</TABLE>
At March 22, 1996, the Common Stock was held by 1765 stockholders of
record.
The Company has not paid any cash dividends on its Common Stock during
the past two years. The Board of Directors expects to follow a policy during
the foreseeable future of retaining earnings for use in the Company's business;
further, the payment of cash dividends is restricted by the Company's credit
agreements.
14
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The financial data presented below are derived from the consolidated
financial statements of the Company. The selected financial data for each of
the years in the three-year period ended December 31, 1995 are derived from the
consolidated financial statements of the Company which have been audited and
reported upon by Deloitte & Touche LLP, independent accountants. The selected
financial information set forth in the table below is not necessarily
indicative of the results of future operations of the Company and should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements,
related notes and independent auditors' report, contained herein.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands, except per-share data)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net sales $109,882 $59,158 $53,937 $52,519 $40,886
Gross margin 35,160 16,171 13,770 14,542 11,829
Income (loss) before cumulative effect 786 (1,608) 512 1,720 1,868
of change in accounting principle
Net income (loss) 786 (1,608) 699 1,720 1,868
Earnings (loss) per share before cumulative
effect of change in accounting principle-primary .12 (.45) .15 .49 .55
Earnings (loss) per share before cumulative
effect of change in accounting principle-fully .11 (.45) .15 .49 .55
dilutive
Earnings (loss) per share-primary .12 (.45) .20 .49 .55
Earnings (loss) per share-fully dilutive .11 (.45) .20 .49 .55
Average common and common equivalent
shares outstanding-primary 6,706 3,561 3,524 3,519 3,415
Average common and common equivalent
shares outstanding-fully dilutive 7,053 3,561 3,524 3,519 3,415
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION:
Working capital $20,018 $14,454 $3,742 $3,461 $3,947
Current ratio 1.8 1.7 1.2 1.3 1.4
Total assets 98,994 88,977 37,301 33,764 28,001
Long-term debt 39,586 34,146 3,949 4,748 4,433
Stockholders' equity 32,040 30,153 15,140 14,168 12,206
</TABLE>
15
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
INTRODUCTION
In December 1994, the Company completed the Acquisition of LSA. LSA was the
holding company for (i) Bazaar, and (ii) Niagara Bazaar and Novelty Limited,
an Ontario, Canada corporation and a retailer of bingo supplies and related
products. In addition, effective January 1, 1995, the Company acquired
(i) substantially all the assets and assumed substantially all of the existing
liabilities (the "Net Assets") of Reliable and (ii) two presses owned by
Reliable's shareholders (collectively, the "Reliable Acquisition"). The
results of operations of Bazaar and Reliable have been consolidated since the
date of the LSA Acquisition and the Reliable Acquisition, respectively.
1995 COMPARED WITH 1994
CONSOLIDATED RESULTS
Results for the current year include two one-time charges, including (i) a
charge of $489,000 to cost of goods sold related to the application of purchase
accounting to the finished goods of Bazaar that were sold in the first quarter
of 1995 (see Note 2 to the Consolidated Financial Statements) and (ii) a charge
of $819,000 related to the costs to shutdown the manufacturing facility in the
United Kingdom.
Stuart Entertainment England has recorded losses in 1995 in the amount of
$2,161,000, including the $819,000 one-time charge described above. The
manufacturing operations of this subsidiary have been discontinued in
conjunction with a licensing and marketing agreement with Playprint Limited of
Dublin, Ireland and no further losses are anticipated (see Note 8 to the
Consolidated Financial Statements).
On a pro forma basis (see below), 1995 net earnings for the Company's "Core
Business" increased to $3,673,000 ($0.55 per share) from $2,164,000 ($0.33 per
share) in 1994.
16
<PAGE> 18
<TABLE>
<CAPTION>
Actual Pro Forma
(Dollars in thousands) Fiscal Year 1995 Fiscal Year 1994
- --------------------- ---------------- ----------------
<S> <C> <C>
Net sales
"Core Business" $ 106,842 $ 91,338
Video King 1,712 2,322
England 1,328 1,128
----------- -----------
Total $ 109,882 $ 94,788
=========== ===========
Net earnings (loss)
"Core Business" $ 3,673 $ 2,164
Video King (726) (2,052)
England (2,161) (919)
----------- -----------
Total $ 786 $ (807)
=========== ===========
Earnings per share - primary
"Core Business" $ 0.55 $ 0.33
Video King (0.11) (0.31)
England (0.32) (0.14)
----------- -----------
Total $ 0.12 $ (0.12)
=========== ===========
Average Common and Common
Equivalent Shares
Outstanding - primary 6,705,904 6,537,000
=========== ===========
EBITDA
"Core Business" $ 14,114 $ 10,473
Video King (869) (3,018)
England (1,970) (882)
----------- -----------
Total $ 11,275 $ 6,573
=========== ===========
</TABLE>
"Core Business" includes all operations of the Company, excluding Video King
and Stuart Entertainment England. Core Business sales in actual 1995 and pro
forma 1994 include sales for Reliable, acquired in January 1995, of $6,300,000
and $0, respectively.
"EBITDA" is defined as earnings before interest, taxes, depreciation and
amortization.
Results for the prior year included several transactions and adjustments that
negatively impacted earnings. See "Note 16 to Notes to the Consolidated
Financial Statements."
17
<PAGE> 19
NET SALES. Net sales in 1995 increased 86% to $109,882,000 from $59,158,000
in 1994. The sales growth in 1995 was attributable to the inclusion of Bazaar
operations for the entire year in 1995 versus only the period from the
acquisition date of December 13 to December 31, 1994 in the prior period,
which represented $38,600,000 or 65% of the increase; the inclusion of
Reliable's operations which represented $6,300,000 or 11% of the increase; and
the inclusion of sales from Stuart Entertainment England in 1995, which
represented $1,300,000 or 2% of the increase. The remaining $4,400,000 or 7%
increase in sales is primarily attributable to increased paper sales of
$4,900,000 (10%), increases in tab and ink sales of $1,000,000 (1%), offset by
decreases in general merchandise and electrical sales of $1,500,000 (3%).
Excluding the effect of acquisitions, bingo paper unit sales increased 3.4%
from 1994 to 1995 while break-open ticket and ink product unit sales decreased
4.1% and increased 5.1%, from 1994 to 1995, respectively.
Paper and break-open sales prices increased approximately 13% and 6%,
respectively, from 1994 to 1995. The increase largely reflected raw material
price increases which the Company was not able to offset through other cost
reductions. Ink sales prices were down slightly from 1994 due primarily to a
shift in the mix of ink products sold to lower priced products.
COST OF GOODS SOLD. Cost of goods sold as a percentage of sales decreased from
72.7% in 1994 to 68.0% in 1995. The decrease is primarily attributable to i) a
lower cost of goods sold percentage for Bazaar sales versus the historical
percentage for the Company, ii) cost savings associated with the movement
of more production to Mexico during 1995, resulting in labor cost savings,
iii) overall productivity improvements, and iv) cost savings associated with
performing certain break-open ticket manufacturing operations in-house versus
outsourcing them. These improvements were partially offset by increases in
raw materials, newsprint paper and general labor rates.
During 1994 and 1995, the Company experienced significant increases in the
price of paper products purchased for the manufacturing of bingo paper and
break-open tickets and for packaging. As noted above, the Company initiated
sales price increases on bingo paper and break-open tickets during this period
to the extent that it was not able to offset these increases through other
cost savings. Management currently expects the price of paper products to
stabilize or experience modest increases during 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") increased approximately $12,258,000 to
$26,581,000 in 1995 compared with $14,323,000 in 1994. SG&A expenses as a
percent of sales remained flat at 24.2%. Approximately $12,800,000 of the
increase in SG&A was due to the inclusion of the operations of Bazaar and
Reliable in fiscal 1995 results. The increase in SG&A was offset by lower bad
debt expense, due to a $1.1 million increase to the allowance for doubtful
accounts recorded in 1994 related to the financial condition of two customers.
SG&A expenses also increased as a result of higher salaries, fringe benefits
and related costs, amortization of goodwill for the twelve-month period,
corporate expenses related to the consolidation of the acquired companies, and
higher sales promotion activities. The increase in 1995 compared to 1994 in
salaries and fringe benefits was due largely to the inclusion of Albert F.
Barber as Chief Executive Officer for the full year and an increase in the
number of employees and salary levels related in part to
18
<PAGE> 20
the consolidation of the acquired companies. However, the Company initiated a
cost reduction program which was implemented in 1995 and early 1996 which is
anticipated to result in SG&A expense savings.
EQUITY IN (EARNINGS) LOSSES OF JOINT VENTURES. Equity in (earnings) losses of
joint ventures totalled $(129,000) for the year ended December 31, 1995
compared with $980,000 for the year ended December 31, 1994. Prior to December
13, 1994, the earnings or loss for Stuart Entertainment Mexico was allocated to
the Company based on the percentage of total production that was sold to the
Company. The equity in (earnings) losses for Stuart Entertainment England
represented 50% of the net operating loss for the period January 1, 1994
through December 13, 1994. With the Acquisition, Stuart Entertainment England
and Stuart Entertainment Mexico became, in effect, wholly-owned subsidiaries
of the Company. For the year ended December 31, 1995, equity in earnings
related to British Bazaar.
INTEREST EXPENSE, NET. Interest expense, net of interest income, totalled
$4,448,000 for the year ended December 31, 1995 compared with $1,045,000 for
the year ended December 31, 1994. Approximately $2,145,000 of the increase
was due to the consolidation of Bazaar and Reliable in fiscal 1995 results.
The remainder of the increase in interest expense was due primarily to higher
interest rates in 1995 and significantly higher borrowing levels in 1995
compared with 1994 largely related to the LSA and Reliable Acquisitions and
higher working capital requirements.
UNITED KINGDOM CHARGE. During the second quarter of 1995, the Company signed a
licensing and marketing agreement with Playprint Limited, headquartered in
Dublin, Ireland. This agreement gave the Company the opportunity to redeploy
its assets in the United Kingdom, and discontinue its manufacturing operation.
Under the agreement, Playprint Limited pays royalties to Stuart Entertainment
England for use of certain of the Company's trademark, technologies and
equipment for the production of bingo paper and ink markers. The Company
recorded a one-time pre-tax charge of $819,000 in 1995 related to the costs to
shutdown the manufacturing facility in the United Kingdom and consolidate its
activities with Playprint Limited.
1994 COMPARED WITH 1993
NET SALES. Net sales in 1994 increased 9.7% to $59,158,000 from $53,937,000 in
1993. The sales growth in 1994 was attributable to the inclusion of Bazaar
operations from December 14, 1994 through the end of 1994, which represented
$1,800,000 or 3.4% of the 9.7% increase in net sales; increases in sales of
bingo paper of $1,600,000 or 5.8%; increases in sales of break-open tickets of
$800,000 or 7.5%, and increases in sales of ink products of $1,300,000 or
24.5%. Bingo paper units increased slightly from 1993 to 1994 while break-open
tickets and ink products experienced unit increases of 5.9% and 18.4%
respectively. The Company also experienced gains in sales of electrical bingo
equipment and electronic gaming equipment; however, these gains were offset by
decreases in sales of general merchandise. The decrease in sales of general
merchandise is primarily attributable to the sale of two wholly owned
subsidiaries during 1993.
Overall sales price levels increased for all major product lines during 1994
compared to 1993. Bingo paper prices increased approximately 3.9%, which the
Company passed on to its customers. This increase was the result of raw
material price increases on news print paper stock. Break-open ticket prices
increased slightly during 1994 while ink products increased approximately 3.0%.
Ink product prices increased primarily due to a shift in the mix of ink
products sold to a higher priced ink product from a lower priced ink product.
19
<PAGE> 21
COST OF GOODS SOLD. Cost of goods sold as a percentage of sales decreased from
74.5% in 1993 to 72.7% in 1994. The decrease in the cost of goods sold
percentage is due to the increase in unit sales prices discussed above and
improvements in manufacturing efficiencies. These decreases were offset by
increases in the prices paid by the Company for raw material, news print paper
stock and general labor. Additionally in 1994, the Company recorded an
adjustment to cost of goods sold of $381,000 or 0.6% to record the effect of
the inventory of Bazaar which was sold during the period of December 14, 1994
through December 31, 1994, and the Company recorded a $300,000 reserve for
obsolete inventory for Video King.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased approximately $2,853,000 to
$14,323,000 in 1994 as compared to $11,470,000 in 1993. SG&A expenses as a
percent of sales increased to 24.2% in 1994 from 21.3% in 1993. The increase
in SG&A expenses was due to several factors. Approximately $607,000 of the
increase in SG&A was due to the consolidation of Bazaar's operations with the
Company for the period from December 14, 1994 through December 31, 1994. Bad
debt expense increased by $890,000 due primarily to an increase of $1,050,000
in the allowance for doubtful accounts related to the financial condition of
two customers at December 31, 1994. An additional $677,000 of the increase in
SG&A resulted from the expansion of the operation of Video King primarily in
research and development and sales and marketing. Finally, salaries and
related costs increased $651,000 due to a consulting agreement with Albert F.
Barber for the period of June 1994 through December 13, 1994, prior to his
appointment as Chief Executive Officer of the Company, a slight increase in the
number of employees and general salary increases. Professional fees increased
$486,000 due primarily to executive placement fees incurred in connection with
the employment of Mr. Barber and additional audit and legal costs relating to
the ongoing business of the Company.
These increases were offset in part by decreases in data processing supplies
and small equipment, decreases in costs to develop break-open tickets, and
other general decreases.
EQUITY LOSSES OF JOINT VENTURES. Equity in losses of joint ventures totalled
$980,000 for the year ended December 31, 1994 compared with $705,000 for the
year ended December 31, 1993. During 1994 the Company recorded losses of
$570,000 and $415,000 for Stuart Entertainment Mexico and for Stuart
Entertainment England, respectively, compared to losses of $555,000 and
$150,000, respectively, in 1993. See "Footnote 8 to Notes to Consolidated
Financial Statements". The equity loss for Stuart Entertainment Mexico is
primarily SG&A expenses for Stuart Entertainment Mexico. The equity loss for
Stuart Entertainment England represents 50% of the net operating loss of Stuart
Entertainment England for the period January 1, 1994 through December 13, 1994
and includes income of $5,000 for British Bazaar Company Limited. See "Note 8
of Notes To Consolidated Financial Statement."
INTEREST EXPENSE, NET. Interest expense, net of interest income, totaled
$1,045,000 in 1994 as compared to $775,000 in 1993. The increase of $270,000
was due to the inclusion of Bazaar's interest expenses of $95,000 for the period
of December 14, 1994 through December 31, 1994 and higher interest rates
experienced in 1994 as compared to 1993. Upon the closing of the Acquisition,
the Company has significantly higher borrowing levels as compared to December
31, 1993.
20
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
The company's principal uses of cash are for the purchase and carrying of
inventory, the carrying of accounts receivable, normal operating expenses and
for the purchase of fixed assets. The primary amounts and ratios relating to
liquidity and capital resources for the past two years are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994
- ---------------------- ------- -------
<S> <C> <C>
Working capital $20,018 $14,454
Current ratio 1.8 1.7
Total long-term debt $39,586 $34,416
Shareholders' equity $32,040 $30,153
Total capitalization $79,523 $71,051
Debt to capitalization ratio 59.7% 57.6%
Capital expenditures $ 3,409 $ 2,182
</TABLE>
FINANCING ACTIVITIES
The Company has a credit agreement (the "Credit Agreement") with two
national banks with a senior secured revolving line of credit of $23,000,000
(the "Revolving Facility") and a senior secured loan facility of $15,000,000
(the "Term Facility") (See "Note 5 to Notes to Consolidated Financial
Statements"). The Credit Agreement expires and all other remaining amounts
outstanding (with the exception of the $3,000,000 increase to the Revolving
Facility described below) are due on December 12, 1999. At December 31, 1995,
the Company had outstanding balances under the Revolving Facility and Term
Facility of $20,921,000 and $12,135,000, respectively, compared with
outstanding balances at December 31, 1994 of $12,601,000 and $14,840,000,
respectively.
The Credit Agreement requires quarterly principal payments of $250,000
under the U.S. Term Facility and C$694,000 ($492,000) under the Canadian Term
Facility until maturity. Interest payments are due (a) monthly on Base Rate
Loans or (b) at the end of an Offshore Loan period, which can be from one day
to 90 days.
The $2,161,000 in losses recorded by the Company's United Kingdom
subsidiary in 1995, the settlement of a consulting agreement (see "Note 10 to
Notes to Financial Statements"), higher working capital requirements and higher
acquisition-related closing costs not anticipated when the Credit Agreement was
completed in December 1994 have resulted in the Company increasing the maximum
available under The Revolving Facility from $20,000,000 at December 31, 1994 to
$23,000,000 at December 31, 1995. Any amount outstanding under this $3,000,000
increase shall be paid in full at December 31, 1996. As a result of the factors
stated above, the Company, subsequent to December 31, 1995, has drawn all
amounts available under the Credit Agreement, of which approximately $1,500,000
is invested short-term and is available for working capital purposes.
In the Reliable Acquisition, the Company assumed a line of credit and
term loan credit facility with a Michigan bank which had been the primary bank
for Reliable (See "Note 5 to Notes to Consolidated Financial Statements").
The Company's Core Business continued to be profitable with 1995 net
earnings of $3,673,000. Management believes the large losses in the United
Kingdom subsidiary have been eliminated beginning in the fourth quarter of 1995
(See "Note 8 to Notes to Consolidated Financial Statements") which Management
believes will improve the Company's cash flow position in 1996.
21
<PAGE> 23
Management believes that under the current operating plan, its
existing capital resources and available financing alternatives will be
sufficient to meet its operating expenses and capital expenditure
requirements. However, the Company currently anticipates that it may raise
additional capital or refinance existing debt in 1996. Management currently
has no commitments for such financing activities and there can be no assurance
that such funds will be available to the Company on favorable terms, if at all.
Additionally, as part of the Company's long term plan, it seeks to
build shareholder value through acquisitions. In order to implement its long
term plan, the Company may be required to obtain additional financing.
However, there can be no assurance that such financing will be available to the
Company on favorable terms, if at all.
CASH FLOW
The cash balance at December 31, 1995, 1994 and 1993 was $943,000,
$2,116,000 and $512,000, respectively. The changes in cash for the last three
years were:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
- --------------------- ---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 786 $ (1,608) $ 699
Non-cash charges 4,474 6,280 2,932
Working capital increases (7,050) (3,470) (4,143)
----------------------------------------
Total Operating Activities (1,790) 1,202 (512)
Investing activities (682) (30,396) (590)
Financing activities 1,300 30,798 945
----------------------------------------
Net change in cash $(1,172) $ 1,604 $ (157)
========================================
</TABLE>
Total trade receivables increased $3,703,000 from $16,599,000 at
December 31, 1994 to $20,302,000 at December 31, 1995. The increase is due
primarily to the acquisition of Reliable, price increases, overall sales
increases and longer collection periods. Total notes receivable (including
current and long-term portions) decreased slightly from a balance of
$2,749,000 at December 31, 1994 to $2,737,000 at December 31, 1995. During
1995, trade receivables totalling $1,426,000 were converted to notes
receivable from non-related parties. The conversions were made to assist
customers in resolving cash flow deficiencies and to aid customers in
accomplishing their long-term growth plans. In accordance with generally
accepted accounting principles, the Company has an allowance for doubtful
accounts related to its accounts and notes receivables. The Company
periodically reviews this allowance for reasonableness.
Inventories increased $5,879,000 from $16,103,000 at December 31, 1994
to $21,982,000 at December 31, 1995. The increase is due to the acquisition of
Reliable, increased cost of paper products used to manufacture bingo paper and
increased inventory quantities on hand. Inventory levels fluctuate on a
seasonal basis but are expected to stabilize or experience modest increases in
1996.
22
<PAGE> 24
Trade payables and accrued liabiliites increased a combined $1,461,000
from $15,171,000 at December 31, 1994 to $16,632,000 at December 31, 1995. The
increase was due to the acquisition of Reliable, higher inventory balances
related to increased cost of paper products and higher working capital
requirements, partially offset by a reduction on the Bazaar Purchase Price
Adjustment.
CAPITAL EXPENDITURES
The Company's capital expenditures were $3,409,000 during 1995
compared with $2,182,000 during 1994. The Company historically finances a
significant portion of its capital expenditures through lease financing. The
Company's capital expenditure program has focused in 1995 and 1994 on the
purchase of equipment designed to increase production capacity and improve
manufacturing efficiency. This trend will continue in 1996; however, the
Company expects a larger portion of its capital expenditure requirements in
1996, currently anticipated to be $4,000,000, will be allocated to the
upgrading and development of computerized hardware systems.
In October 1995, the Company completed a lease line of credit with its
primary bank. The facility provides lease financing on capitalized equipment
purchased through December 31, 1996. The maximum available under the facility
is $5,000,000. At December 31, 1995, $3,813,000 remained available under the
facility.
OTHER
PENDING ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," which
establishes methods for determining when an impairment of long-lived assets has
occurred and for measuring the impairment of long-lived assets. Implementation
of Statement No. 121 is not expected to have a material adverse effect on the
Company's results or financial condition.
The FASB also issued Statement No. 123, "Accounting for Stock-Based
Compensation," which encourages, but does not require, employers to adopt a
fair value method of accounting for employee stock-based compensation, and
which requires increased stock-based compensation disclosures in lieu of
expense recognition. The Company does not intend to elect expense recognition
for stock options and therefore, implementation of this Statement will have no
effect on the Company's operating results or financial condition.
INFLATION
Other than the increases in the cost of paper products described above,
inflation did not have a material effect on the Company's operations in 1995,
1994 and 1993.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related financial
information required to be filed are indexed on page F-1 and are incorporated
herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has had no disagreements with its independent public
accountants on accounting or financial disclosure.
23
<PAGE> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company and their ages:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Leonard A. Stuart 53 Chairman of the Board of Directors
Albert F. Barber 50 Vice Chairman of the Board of Directors and
Chief Executive Officer
Timothy R. Stuart 42 President, Chief Operating Officer and
Director
Perry J. Lewis 58 Director
Ira Starr 36 Director
Sangwoo Ahn 57 Director
Clement F. Chantiam 36 Executive Vice President
Roy L. Lister 38 Executive Vice President
Gary L. Loebig 48 Senior Vice President Market and Product
Development
Donald S. Kuzina 44 Vice President Operations - Electronic Gaming
Division
Paul C. Tunink 37 Vice President Finance, Treasurer, and Chief
Financial Officer
Robert P. McNeill 35 Vice President Manufacturing
Gary D. Phillips 41 Vice President Gaming Ticket Operations
Michael A. Schalk 48 Corporate Secretary
Douglas W. Rye 30 Assistant Corporate Secretary
</TABLE>
At each annual meeting of stockholders, the successors to the
directors whose terms then expire are elected to hold office for a term
expiring at the next succeeding annual meeting. Each director holds office
until his successor is elected and qualified. Officers serve at the discretion
of the board of directors and are elected at the first meeting of the board of
directors after each annual meeting of stockholders.
24
<PAGE> 26
Leonard A. Stuart, Chairman of the Board of Directors since prior to
1989; Chief Executive Officer of the Company from prior to 1989 to December 1994
and President from prior to 1989 to March 1989 and from January 1990 to July
1992. Mr. Stuart has served as President of Bazaar since prior to 1988.
Albert F. Barber, Vice Chairman of the Board of Directors and Chief
Executive Officer since December 1994; Consultant to the Company from June 1994
to December 1994; President of CNBC, an NBC cable affiliate, from 1990 to 1994;
Executive Vice President and Chief Financial Officer of NBC from 1987 to 1990.
Timothy R. Stuart, President and Chief Operating Officer since July
1992; Director since December 1994; Executive Vice President from October 1991
to July 1992; and Vice President Operations from March 1989 to October 1991.
Perry Lewis, Director since December 1994. Mr. Lewis has been a
General Partner of MLGAL Partners, L.P. since 1987 and a managing director of
Morgan Lewis Githens & Ahn, Inc., an investment banking firm since 1982. Mr.
Lewis also serves as a director of Quaker Fabric Corporation, Haynes
International, Inc., ITI Technologies, Inc., Tyler Corporation, Aon Corporation
and Evergreen Media Corporation.
Ira Starr, Director since December 1994. Mr. Starr has been a General
Partner of MLGAL Partners, L.P. since 1994. Mr. Starr also served as a vice
president of Morgan Lewis Githens & Ahn, Inc., an investment banking firm from
1988 to 1993 and has been a managing director since 1994. Mr. Starr also
serves as a director of Haynes International, Inc. and Quaker Fabric
Corporation.
Sangwoo Ahn, Director since December 1994. Mr. Ahn has been a General
Partner of MLGAL Partners, L.P. since 1987 and a managing director of Morgan
Lewis Githens & Ahn, Inc., an investment banking firm since 1982. Mr. Ahn also
serves as a director of ITI Technologies, Inc., Haynes International, Inc., PAR
Technology Corporation, Kaneb Services, Inc., Kaneb Pipe Line Partners, L.P.,
and Quaker Fabric Corporation.
Clement F. Chantiam, Executive Vice President since November 1992 and
Vice President Manufacturing from March 1989 to November 1992.
Roy L. Lister, Executive Vice President since December 1994; and Vice
President of Operations from 1990 to 1992. Mr. Lister has been an Executive
Vice President of Bazaar since 1992.
Gary L. Loebig, Senior Vice President Market and Product Development
since January 1995; Vice President Marketing and Regulatory Compliance from
October 1991 to January 1995; and Director of Marketing and Regulatory
Compliance from January 1990 to October 1991.
25
<PAGE> 27
Donald S. Kuzina, Vice President since October 1991; and Director of
Branch Operations from March 1989 to October 1991.
Paul C. Tunink, Vice President Finance, Treasurer and Chief Financial
Officer since April 1995; Divisional Vice President Finance of Younkers, Inc.
from May 1992 to April 1995 and Director of Corporate Accounting of Commtran
Corporation from prior to 1991 to April 1992.
Robert P. McNeill, Vice President Manufacturing since January 1995;
and Director of Manufacturing for Bazaar from 1990 to January 1995.
Gary D. Phillips, Vice President Gaming Ticket Operations since
January 1995; and Manufacturing Manager from September 1988 to January 1995.
Michael A. Schalk, Corporate Secretary since January 1991. Associate,
Frumkin, Shralow and Cerullo, P.C., and its predecessors from prior to 1989 to
November 1990, when he joined the Company.
Douglas W. Rye, Assistant Corporate Secretary since October 1995;
General Manager of Operations for Bazaar from October 1995 to present; Director
of Bazaar from October 1995 to present; Controller of Bazaar from June 1991 to
September 1995; and Specialist in Advisory Services at KPMG Peat Marwick
Thorne, Chartered Accountants prior to June 1991.
Leonard A. Stuart, Chairman of the Board, and Timothy R. Stuart,
President, are brothers. There are no other family relationships between any
of the directors and executive officers of the Company.
The current members of the Board of Directors were selected as
directors pursuant to the terms of a Securityholders' Agreement (the
"Securityholders' Agreement") entered into in connection with the Acquisition.
The Securityholders' Agreement provides that the board of directors of the
Company will be comprised of up to nine members, three of whom Mr. Stuart may,
but shall not be required to designate for nomination, which in his sole
discretion may include himself, four of whom Bingo Holdings may, but shall not
be required to designate for nomination, and two of whom may, but shall not be
required to be designated jointly by both Mr. Stuart and Bingo Holdings. The
Securityholders' Agreement also imposes certain transfer restrictions on the
parties to the Securityholders' Agreement and their affiliated transferees
("Holders") and provides Holders with demand and incidental registration rights
with respect to the Common Stock.
REPORTS UNDER SECTION 16(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, and
the rules thereunder require the Company's officers and directors, and persons
who own more than ten
26
<PAGE> 28
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and with the NASDAQ and to furnish the Company with copies.
Based solely on its review of the copies of the Section 16(a) forms
received by it, or written representations from certain reporting persons, the
Company believes that, during the last fiscal year, all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten-percent
beneficial owners were complied with, except that three sales of stock
occurring in a two-month period inadvertently were not timely reported by Mr.
Loebig. A Form 4 has since been filed to correct this oversight.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information for each of the
last three fiscal years concerning compensation paid by the Company to the
Chief Executive Officer and any other executive officer whose total annual
salary and bonus exceeded $100,000 for the last fiscal year:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------------- ----------------------------------
(A) (B) (C) (D) (G) (I)
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS/SARS (#) ($) (1)
--------------------------- ---- ---------- --------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Leonard A. Stuart, 1995 200,000 0 0 0
Chairman of the Board(3) 1994 195,833 0 0 0
1993 175,833 0 0 0
Albert F. Barber(2) 1995 300,000 0
Chief Executive Officer 1994 9,231 75,000 900,000 204,677(4)
Timothy R. Stuart, 1995 170,000 250,000
President 1994 116,200 0 0 2,304
1993 107,762 0 15,000 2,153
Clement F. Chantiam, 1995 130,000 80,000
Executive Vice President 1994 116,100 0 0 2,304
1993 108,837 0 15,000 2,153
Roy L. Lister, 1995 130,000 0 80,000 1,858
Executive Vice President(5) 1994 2,500 0 0 0
</TABLE>
__________________
(1) The stated amounts are Company contributions to a defined contribution
pension plan available to all Company employees.
(2) Mr. Barber has been Chief Executive Officer of the Company since December
1994.
(3) Mr. Stuart served as Chief Executive Officer of the Company until December
1994.
(4) Represents amounts paid to Mr. Barber while serving as a consultant to the
Company during 1994.
(5) Mr. Lister has been an Executive Vice President of the Company since
December 1994.
27
<PAGE> 29
The foregoing compensation tables do not include certain fringe
benefits made available on a nondiscriminatory basis to all Company employees
such as group health insurance, dental insurance, long-term disability
insurance, vacation and sick leave. In addition, the Company makes available
certain non-monetary benefits to its executive officers with a view to acquiring
and retaining qualified personnel and facilitating job performance. The Company
considers such benefits to be ordinary and incidental business costs and
expenses. The aggregate value of such benefits in the case of each executive
officer and of the group listed in the above table, which cannot be precisely
ascertained but which is less than the lesser of (a) ten percent of the cash
compensation paid to each such executive officer or to the group, respectively,
or (b) $50,000 or $50,000 times the number of individuals in the group, as the
case may be, is not included in such table.
OPTION GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT ASSUMED
ANNUAL RATES OF STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM(1)
- --------------------------------------------------------------------------------------- --------------------------------------
(A) (B) (C) (D) (E) (F) (G) (H)
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED TO
OPTIONS EMPLOYEES IN FISCAL EXERCISE OR BASE EXPIRATION
NAME GRANTED (#) YEAR(2) PRICE ($/SH) DATE 5% ($) 10% ($) 0% ($)
--------------------- ----------- ------------------- ---------------- ---------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Leonard A. Stuart 0 - - - - -
Albert F. Barber 0 - - - - -
Timothy R. Stuart 50,000 6% 5.00 1/17/08 147,000 382,500 0
100,000 12 10.00 1/17/08 0 265,000 0
100,000 12 15.00 1/17/08 0 0 0
Clement F. Chantiam 40,000 5 5.00 1/17/05 117,700 306,000 0
40,000 5 10.00 1/17/05 0 106,000 0
Roy L. Lister 40,000 5 5.00 1/17/05 0 106,000 0
40,000 5 10.00 1/17/05 0 106,000 0
</TABLE>
- -----------------
(1) Potential realizable value is based on an assumption that the stock
price of the common stock appreciates at the annual rate shown
(compounded annually) from the date of grant until the end of the
five-year option term for the non-qualified stock options and until
the end of the ten-year option term for the incentive stock options.
These numbers are calculated based on the requirements promulgated by
the Securities and Exchange Commission and do not reflect the
Company's estimate of future stock price growth.
(2) Options granted to employees during fiscal 1995 totaled 825,400.
28
<PAGE> 30
OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, AND FISCAL YEAR END OPTION VALUES
(A) (B) (C) (D) (E)
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
AT FY-END (1) AT FY-END ($)(1)
SHARES ACQUIRED VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
---- --------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Leonard A. Stuart 0 0 0 0
Albert F. Barber 0 0 900,000/0 337,500/0
Timothy R. Stuart 23,000 56,125 262,500/2,500 131,250/5,625
Clement F. Chantiam 18,500 21,625 52,500/42,500 63,750/50,625
Roy L. Lister 0 0 40,000/40,000 45,000/45,000
</TABLE>
- ----------------
(1) The closing sale price of the Common Stock on December 29, 1995 ($7.25)
was used to calculate option value.
EMPLOYMENT AGREEMENTS
On December 13, 1994 the Company entered into an employment agreement
(the "Stuart Agreement"), with Leonard A. Stuart, the Chairman of the Board.
Pursuant to the Stuart Agreement, Mr. Stuart will be employed for a period of
five years beginning December 13, 1994 and after expiration of the initial
employment term (the "Expiration"), Mr. Stuart's employment will be
automatically renewed on an annual basis, subject to termination as described
below. Mr. Stuart will be paid an annual salary of $200,000 ("Annual Salary").
In addition, the Company is required to reimburse him for 80% of the following
expenses related to the operation of an office in Fort Lauderdale, Florida:
rent for such office; salary and benefits for one administrative assistant;
telephone; stationery; postage and similar items. He also is entitled to
participate in customary employee benefits programs maintained by the Company,
including health, life, and disability insurance to the extent provided to
other senior executives of the Company.
The Company may terminate the Stuart Agreement at any time for cause
and in such event, all of Mr. Stuart's rights to compensation would cease upon
his termination. If the termination is without cause, the Company will pay to
Mr. Stuart in addition to the amounts accrued in the respective periods prior
to the termination, severance pay in an amount equal to the Annual Salary until
the later of the Expiration or for one year after the termination of the Stuart
Agreement. Mr. Stuart may also terminate the Stuart Agreement for "Good
Reason," as defined in the Stuart Agreement. If Mr. Stuart terminates the
Stuart Agreement for Good Reason, the Company will pay Mr. Stuart his Annual
Salary and any benefits until the later of the Expiration or for one year after
termination of the Stuart Agreement.
29
<PAGE> 31
The Company also has an employment agreement, dated June 1, 1994, with
Albert F. Barber, the Chief Executive Officer and Vice Chairman of the Board
(the "Barber Agreement"). Pursuant to the Barber Agreement, Mr. Barber will be
employed until December 31, 1996 and subsequent to December 31, 1996, Mr.
Barber's employment shall be automatically extended indefinitely until either
the Company or Mr. Barber terminates the Barber Agreement, at which time the
Barber Agreement will terminate six months after such notice.
For 1995, Mr. Barber received an annual base salary (the "Base
Salary") of $300,000 which was increased to $330,000 beginning in 1996. In
addition, Mr. Barber is eligible to receive a cash bonus (the "Bonus") for
services rendered during each calendar year covered by the Barber Agreement
pursuant to the following terms. Mr. Barber will be paid a bonus equal to 50%
of the Base Salary when the Company's earnings before interest and income taxes
("EBIT") exceed the EBIT targeted amount (the "Targeted Amount"), as approved
by the Board of Directors each year, and an additional increase of 10% of Base
Salary to the extent EBIT equals or exceeds 105% of the EBIT Targeted Amount
and an additional 2% to 4% of the Base Salary when the Company's EBIT exceeds
105% of the Targeted Amount by a specific percentage.
In addition, Mr. Barber was granted options to purchase 900,000 shares
of Common Stock subject to various provisions relating to vesting and exercise
price. The Company is required to reimburse Mr. Barber for all reasonable
out-of-pocket expenses incurred by him in performing his duties and is also
entitled to participate in customary employee benefit programs maintained by
the Company.
The Company may terminate Mr. Barber's employment at any time for
cause and in such event, all of Mr. Barber's rights to compensation would cease
upon his termination. If the termination is without cause, or as a result of a
disability or death, the Company will pay Mr. Barber, in addition to amounts
accrued in respective periods prior to the termination, his Base Salary for the
greater of the period through December 31, 1996 or one year from the date of
termination (or, in the case of death, the proceeds of a life insurance policy
to be obtained by the Company on Mr. Barber's behalf), and the Bonus, prorated
to the time of termination, in a lump sum to be payable at the time the Bonus
for such calendar year would normally be paid. In the event Mr. Barber
terminates his employment within 90 days of a change of control of the Company,
Mr. Barber will continue to receive his Base Salary for two years from the date
of such termination and the applicable Bonus prorated and paid as described
above.
COMPENSATION PURSUANT TO PLANS
STOCK OPTION PLANS. The Company had three stock option plans under
which options can be granted: the 1985 Non-qualified Stock Option Plan, the
1992 Non-qualified Stock Option Plan and the 1994 Performance Stock Option
Plan. Options to purchase 609,850 shares of Common Stock were granted to
directors and officers under the 1994 Performance Stock Plan in 1995.
30
<PAGE> 32
EMPLOYEE BENEFIT PLANS. The Company maintains a defined contribution
pension plan covering substantially all of its employees, including all
executive officers. Eligible employees may contribute up to 15% of their
salaries, not to exceed a government established maximum. Company
contributions are the sum of the Company's match of the first 2% of the
employee's elective contribution and a discretionary contribution of up to 2%
of the salaries of all employees eligible under the plan. Company
contributions vest over a five-year period. During 1995 the Company's
contribution to the 401(k) Plan was $157,000.
The Company maintains a voluntary defined contribution plan covering
substantially all of its employees in Canada (the "Canadian Plan"). Eligible
employees may contribute up to 2-1/2% of their wages eligible under the
Canadian plan and the Company will match the contribution up to 2-1/2%.
Eligible employees may contribute additional amounts in excess of the 2-1/2%,
but they are not matched by the Company. During 1995, the Company's
contribution to the Canadian Plan was $140,000.
COMPENSATION OF DIRECTORS
The Company does not currently pay any directors fees; however, all
directors are reimbursed travel expenses relating to the attendance of each
meeting.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
There are no "interlocks," as defined by the Securities and Exchange
Commission with respect to any member of the Compensation Committee. The
following non-employee directors served on the Compensation Committee during
fiscal 1995: Perry J. Lewis, Sangwoo Ahn and Ira Starr.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding
beneficial ownership of outstanding shares of Common Stock as of March 22,
1996, by (i) each person who is known by the Company to own beneficially five
percent or more of the outstanding shares of Common Stock, (ii) the Company's
directors, Chief Executive Officer and executive officers whose total
compensation exceeded $100,000 for the last fiscal year and (iii) all directors
and executive officers as a group.
31
<PAGE> 33
<TABLE>
<CAPTION>
Shares
Beneficially Percent
Name Owned(1) of Class
---- ----- --------
<S> <C> <C>
Leonard A. Stuart 1,341,887 20%
c/o Stuart Entertainment, Inc.
3211 Nebraska Avenue
Council Bluffs, Iowa 51501
Albert F. Barber 900,000 12%
c/o Stuart Entertainment, Inc.
3211 Nebraska Avenue
Council Bluffs, Iowa 51501
Timothy R. Stuart 295,500 4%
Clement F. Chantiam 107,500 2%
Perry Lewis(2) 3,915,435 52%
c/o MLGA Fund II, L.P.
Two Greenwich Plaza
Greenwich, Connecticut 06830
Ira Starr(2) 3,907,935 52%
c/o MLGA Fund II, L.P.
Two Greenwich Plaza
Greenwich, Connecticut 06830
Sangwoo Ahn(2)(3) 3,940,435 53%
c/o MLGA Fund II, L.P.
Two Greenwich Plaza
Greenwich, Connecticut 06830
52%
Bingo Holdings, Inc. 3,905,435
Two Greenwich Plaza
Greenwich, Connecticut 06830
All executive officers and directors as 6,927,822 76%
a group (15 persons)
</TABLE>
32
<PAGE> 34
-----------------
*Less than one percent.
(1) Shares are considered beneficially owned, for purposes of this table,
only if held by the person indicated, or if such person, directly or
indirectly, through any contract, arrangement, understanding, relationship
or otherwise has or shares the power to vote, to direct the voting of
and/or to dispose of or to direct the disposition of, such security, or if
the person has the right to acquire beneficial ownership within 60 days,
unless otherwise indicated. The foregoing share amounts include the
following number of shares which may be acquired pursuant to stock options
or warrants exercisable within 60 days of March 22, 1996: Mr. Barber,
900,000 shares, Mr. Leonard A. Stuart, 100,000 shares; Mr. Timothy R.
Stuart, 272,500 shares; Mr. Chantiam, 82,500 shares; Mr. Lewis 775,000
shares; Mr. Ahn, 775,000 shares; Mr. Starr 775,000 shares; Bingo Holdings,
Inc., 775,000 shares; and all executive officers and directors as a group,
2,427,400 shares.
(2) Includes 3,130,435 shares owned by Bingo Holdings, Inc. and 775,000
shares owned by Bingo Holdings, Inc. pursuant to a currently exercisable
warrant. The Shareholders of Bingo Holdings, Inc., are MLGA Fund II,
L.P. and MLGAL Partners, L.P. The general partner of MLGA Fund II, L.P.
is MLGAL Partners, L.P. Messrs. Lewis, Starr and Ahn are general partners
of MLGAL Partners, L.P. and may be deemed to beneficially own these
shares. Messrs. Lewis, Starr and Ahn disclaim any beneficial interest in
all shares owed by Bingo Holdings, Inc.
(3) Includes 15,000 shares owned by Mr. Ahn's children and 10,000 shares
owned by a family limited partnership. Mr. Ahn disclaims any beneficial
interest in all shares owned by his children and the family limited
partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ACQUISITION OF BINGO PRESS & SPECIALTY LIMITED
Pursuant to the LSA Agreement, the Subsidiary acquired 116 Class B
shares (the "Class B Shares") of LSA for $30,000,000. Immediately thereafter,
LSA purchased from Mr. Stuart 136 Class A shares (the "Class A Shares") of LSA
for cancellation at which time the Class B Shares were the only shares of
capital stock of LSA outstanding. In exchange for the Class A Shares, LSA paid
Mr. Stuart $35,000,000, subject to adjustment, as follows: (i) $30,000,000 in
immediately available funds; and (ii) a subordinated note of LSA in the
principal amount of $5,000,000 (the "LSA Note"). Following the purchase of the
Class A Shares and pursuant to a put agreement executed by the Company and Mr.
Stuart, Mr. Stuart exchanged the LSA Note for (i) a senior subordinated note of
the Company in the principal amount of $5,000,000, which bears interest at 10%
and matures on March 31, 2000 (the "SEI Note") and (ii) warrants to purchase
100,000 shares of the Company's $.01 par value common stock at an exercise
price of $5.75 per share. Subsequent to the Acquisition, and pursuant to the
results of a post-closing audit, the Company was obligated to pay Mr. Stuart an
additional $1,642,000 as a purchase price adjustment. The net balance due Mr.
Stuart at December 31, 1995 is $458,000 which will accrue interest at 2 1/4%
over the prime rate shown in The Wall Street Journal. The Company received a
fairness opinion to the effect that the consideration paid to Mr. Stuart was
fair, from a financial point of view to the Company.
KENNETH STUART
Kenneth Stuart ("K. Stuart") is the brother of Leonard Stuart. K.
Stuart is retained by the Company as an independent consultant for sales,
marketing and development of ink products. During 1995, K. Stuart earned
commissions totaling approximately $221,000.
33
<PAGE> 35
BINGO SYSTEMS AND SUPPLY, INC.
Effective January 1, 1993, the Company sold its investment in 49% of
the outstanding common stock of Bingo Systems and Supply, Inc. ("Bingo
Systems") to Bingo Systems in exchange for a promissory note ("Bingo Systems
Note") in the principal amount of $225,000. The Bingo Systems Note is payable
over a five-year period and bears interest at a rate of one percent above the
Company's borrowing rate on its short-term line of credit. The Company's
investment in the Bingo Systems stock totaled $150,000. The Bingo Systems Note
is secured by: (i) a subordinated security interest in all of the assets of
Bingo Systems; (ii) a personal guaranty by the owner of all of the outstanding
common stock of Bingo Systems; and (iii) a pledge of all the outstanding common
stock of Bingo Systems. The balance of the Bingo Systems Note at December 31,
1995 was $106,000. Sales to Bingo Systems in 1995 totalled approximately
$2,750,000.
The Company has an inventory purchase agreement with a bank to support
Bingo Systems in its bank financing. The agreement provides that in the event
that the bank obtains title to the inventory of Bingo Systems through
foreclosure, the Company would be required to repurchase up to $450,000 of
selected inventory previously sold by the Company to Bingo Systems. The
purchase price would be the price that Bingo Systems had paid to the Company
for such inventory. The Company would have a right of first refusal if the
bank receives a bona fide written offer from a third party to purchase the
foreclosed inventory. This agreement superseded similar prior agreements
between the Company and the bank.
CREDIT AGREEMENT
In connection with the Company entering into the Fourth Amendment to
Credit Agreement with its two major banks, which increased the maximum amount
available under the Revolving Facility from $20,000,000 to $23,000,000, Mr.
Stuart and MLGAL Partners, Limited Partnership, of which Messrs. Lewis, Ahn and
Starr are general partners, guaranteed the payment of all amounts under the
Revolving Facility in excess of $20,000,000.
OTHER TRANSACTIONS
In October 1992, the Company sold the assets of its retail branch in
Hollywood, Florida to Bingo Video Entertainment, Inc. ("Bingo Video"), a
company owned by a brother-in-law of Mr. Stuart. In exchange for assets sold,
the Company received a promissory note ("Bingo Video Note") totaling $262,000.
The Bingo Video Note bears interest at a rate of one percent above the
Company's borrowing rate on its short-term line of credit, is collateralized by
the assets of Bingo Video and is guaranteed by Mr. Stuart's brother-in-law and
Len Stuart & Associates, Inc., a U.S. company owned by Mr. Stuart. The
principal balance of the Bingo Video Note at December 31, 1995 was $173,000.
Sales to Bingo Video in 1995 totaled approximately $912,000.
Sales to Bingo Video were made at prices generally charged to the
Company's largest customers.
34
<PAGE> 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) The following documents are filed as part of this Report:
1. FINANCIAL STATEMENTS. See Index to Financial Statements on
page F-1 of this Report.
2. FINANCIAL STATEMENT SCHEDULES. See Index to Financial
Statements on page F-1 of this Report. All other schedules
are omitted since they are not required, are inapplicable, or
the required information is included in the financial
statements or notes thereto.
3. EXHIBITS. See the Index to Exhibits appearing at the end of
this Report.
(b) Reports on Form 8-K
1. No reports on Form 8-K were filed during the last
quarter of the period covered by this report.
35
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
STUART ENTERTAINMENT, INC.
Dated: March 25, 1996 By /s/ Timothy R. Stuart
--------------------------
Timothy R. Stuart, President
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following person on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Leonard A. Stuart Chairman of the Board March 27, 1996
----------------------------------
Leonard A. Stuart
/s/ Albert F. Barber Vice Chairman of the Board and March 27, 1996
---------------------------------- Chief Executive Officer
Albert F. Barber
/s/ Timothy R. Stuart President, Chief Operating March 25, 1996
---------------------------------- Officer and Director
Timothy R. Stuart
/s/ Paul C. Tunink Vice President Finance, March 25, 1996
---------------------------------- Treasurer and
Paul C. Tunink Chief Financial Officer
</TABLE>
36
<PAGE> 38
<TABLE>
<S> <C> <C>
/s/ Perry J. Lewis Director March 27, 1996
----------------------------------
Perry J. Lewis
/s/ Sangwoo Ahn Director March 27, 1996
----------------------------------
Sangwoo Ahn
/s/ Ira Starr Director March 27, 1996
----------------------------------
Ira Starr
</TABLE>
37
<PAGE> 39
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
AS OF AND FOR YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
PAGE
----
Independent Auditors' Report F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1994 and 1993 F-3
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-4 to F-5
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1994 and 1993 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 F-7
Notes to Consolidated Financial Statements F-8 to F-34
Financial Statement Schedules: F-35
Schedule II Valuation and Qualifying accounts
F-1
<PAGE> 40
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Stuart Entertainment, Inc.
Council Bluffs, Iowa
We have audited the accompanying consolidated balance sheets of Stuart
Entertainment, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. Our
audits also included the financial statement schedule listed in the Index at
Item 14. These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Stuart Entertainment, Inc. and
subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for income taxes in January 1993.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 25, 1996
F-2
<PAGE> 41
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR YEARS ENDED DECEMBER 31, 1995, 1994 AND
1993 (Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES $ 109,882 $ 59,158 $ 53,937
COST OF GOODS SOLD 74,722 42,987 40,167
---------- ---------- ----------
GROSS MARGIN 35,160 16,171 13,770
OTHER EXPENSES AND INCOME:
Selling, general and administrative expenses 26,581 14,323 11,470
Amortization of goodwill 878 96 61
Equity in (earnings) losses of joint ventures (Note 8) (129) 980 705
Termination of Consulting Agreement (Note 10) -- 2,000 --
Interest expense, net 4,448 1,045 775
United Kingdom charge (Note 8) 819 -- --
---------- ---------- ----------
Other Expenses and Income - Net 32,597 18,444 13,011
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 2,563 (2,273) 759
INCOME TAX PROVISION (BENEFIT) (Note 6) 1,777 (665) 247
---------- ---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 786 (1,608) 512
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (Note 1) -- -- 187
---------- ---------- ----------
NET INCOME (LOSS) $ 786 $ (1,608) $ 699
========== ========== ==========
EARNINGS (LOSS) PER SHARE: (NOTE 1)
Income (loss) before cumulative effect of change
in accounting principle - primary $ 0.12 $ (0.45) $ .15
Cumulative effect of change in accounting principle -- -- .05
Earnings (loss) per share - primary $ 0.12 $ (0.45) $ .20
========== ========== ==========
Average Common and Common
Equivalent Shares Outstanding-primary 6,705,904 3,560,848 3,524,112
========== ========== ==========
Income (loss) before cumulative effect of change
in accounting principle - fully dilutive $ 0.11 $ (0.45) $ .15
Cumulative effect of change in accounting principle -- -- .05
---------- ----------- ----------
Earnings (loss) per share - fully dilutive $ 0.11 $ (0.45) $ .20
========== =========== ==========
Average Common and Common
Equivalent Shares Outstanding-fully dilutive 7,053,222 3,560,848 3,524,112
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 42
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS 1995 1994
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 943 $ 2,116
Receivables:
Trade receivables, less allowance for doubtful
accounts of $2,086 and $1,598, respectively:
Related parties 1,014 838
Other 17,202 14,163
Current portion of notes receivable, less allowance
for doubtful accounts of $199 and $199, respectively:
Related parties 30 30
Other 1,123 731
Inventories (Note 3) 21,982 16,103
Refundable income taxes -- 225
Deferred income taxes (Note 6) 1,746 1,665
Prepaid expenses and other 547 388
-------- --------
Total Current Assets 44,587 36,259
PROPERTY, PLANT AND EQUIPMENT (Note 5):
Land and buildings 4,950 4,710
Equipment 29,262 24,520
-------- --------
Total 34,212 29,230
Less accumulated depreciation (13,095) (9,387)
-------- --------
Property, Plant and Equipment - Net 21,117 19,843
OTHER ASSETS:
Notes receivable, less allowance for doubtful
accounts of $124 and $423, respectively:
Related parties 143 172
Other 1,118 1,194
Goodwill, less accumulated amortization of
$1,209 and $426, respectively (Note 2) 29,194 28,958
Investment in joint ventures (Note 8) 56 155
Deferred financing costs, net of accumulated
amortization of $375 and $16, respectively 1,660 1,613
Other investments and assets 1,119 783
-------- --------
Total Other Assets 33,290 32,875
-------- --------
TOTAL ASSETS $ 98,994 $ 88,977
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 43
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
------- -------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt (Note 5) $ 7,897 $ 6,482
Bazaar Purchase Price Adjustment (Note 2) 710 1,642
Trade payables:
Related parties -- 276
Other 12,512 10,180
Accrued payroll and benefits 1,967 1,597
Other accrued liabilities 900 1,476
Income taxes payable 543 --
Deferred taxes (Note 6) 40 152
------- -------
Total Currrent Liabilities 24,569 21,805
LONG-TERM DEBT: (Note 5)
Related parties 5,000 5,000
Other 34,586 29,416
------- -------
Total Long-Term Debt 39,586 34,416
DEFERRED INCOME TAXES (Note 6) 2,594 2,270
DEFERRED INCOME (Note 11) 205 333
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY: (Notes 1, 2, 5 and 7 )
Common stock - $.01 par value; 20,000,000 shares authorized;
6,753,309 and 6,595,048 shares outstanding, respectively 68 66
Additional paid-in capital 26,384 25,776
Retained earnings 5,525 4,739
Treasury stock (56,260 shares at cost) (189) (189)
Cumulative translation adjustment, net of deferred income taxes 252 (239)
------- -------
Total Stockholders' Equity 32,040 30,153
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $98,994 $88,977
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 44
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in thousands)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON PAID-IN RETAINED TREASURY TRANSLATION
STOCK CAPITAL EARNINGS STOCK ADJUSTMENT TOTAL
-------- ---------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993 $ 34 $ 8,675 $ 5,648 $ (189) -- $ 14,168
Net income -- -- 699 -- -- 699
Issuance of 37,810 shares 1 118 -- -- -- 119
Paid-in capital from non-qualified
stock options issued (Note 7) -- 99 -- -- -- 99
Income tax benefit on stock
options exercised (Note 7) -- 55 -- -- -- 55
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1993 35 8,947 6,347 (189) -- 15,140
Net loss -- -- (1,608) -- -- (1,608)
Issuance of 3,000 shares from
exercise of stock options -- 9 -- -- -- 9
Issuance of 3,130,435 shares, and
warrants on 775,000 shares, net
of issuance costs of $1,344 31 16,625 -- -- -- 16,656
Issuance of warrants on 100,000
shares to Mr. Stuart -- 144 -- -- -- 144
Translation adjustment, net of
deferred taxes of $134 (Note 1) -- -- -- -- $ (239) (239)
Paid-in capital from non-qualified
stock options issued (Note 7) -- 51 -- -- -- 51
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1994 66 25,776 4,739 (189) (239) 30,153
Net Income -- -- 786 -- -- 786
Issuance of 102,609 shares from
exercise of stock options 1 251 -- -- -- 252
Income tax benefit on stock options
exercised (Note 7) -- 25 -- -- -- 25
Translation adjustment, net of
deferred taxes of $276 (Note 1) -- -- -- -- 491 491
Issuance of 55,652 shares in
connection with the acquisition
of Reliable Corporation, net of
issuance costs of $6 1 313 -- -- -- 314
Paid-in capital from non-qualified
stock options issued (Note 7) -- 19 -- -- -- 19
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1995 $ 68 $ 26,384 $ 5,525 $ (189) $ 252 $ 32,040
======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 45
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 786 $ (1,608) $ 699
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Cumulative effect of change in accounting principle -- -- (187)
Payment on Termination Agreement (1,200) -- --
Depreciation and amortization 4,617 1,935 1,593
Amortization of debt financing fees 356 -- --
Provision for doubtful accounts 543 1,287 397
Termination of Consulting Agreement (Note 10) -- 2,000 --
Equity in (earnings) losses of joint ventures (129) 980 705
Deferred income taxes (221) (1,250) 220
Other non-cash expenses - net 508 1,234 204
Change in operating working capital items, net of
amounts from acquisitions (Note 14) (7,050) (3,470) (4,143)
------- -------- --------
Net cash provided by (used in) operating activities (1,790) 1,202 (512)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Bazaar (Note 2):
Payment to Mr. Stuart for stock of LSA -- (30,000) --
Cash balance of Bazaar at date of Acquisition -- 1,026 --
Costs of acquisition paid -- (609) (246)
Capital expenditures (1,317) (818) (254)
Proceeds from disposals 138 43 12
Payments received on notes receivable 1,261 1,052 1,031
Investment in joint ventures prior to Acquisition -- (856) (1,028)
Cost of acquisition of LSA (274) -- --
Investment in distributor (116) -- (100)
Acquisition of Reliable (295) -- --
Other (79) (234) (5)
------- -------- --------
Net cash used in investing activities (682) (30,396) (590)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on old lines of credit -- (9,651) 2,815
Borrowings under Revolving Facilities 8,052 12,728 --
Costs of debt financing (375) (1,644) --
Proceeds from additions to long-term debt -- 15,000 90
Payments on term facility (3,023) -- --
Payments on long-term debt (3,081) (2,276) (2,059)
Payments on LSA Purchase Price Adjustment
Proceeds from sale of common stock (Note 2) (932) 18,000 --
Proceeds from issuance of long-term debt 348 -- --
Proceeds from exercise of stock options 277 -- --
Costs of stock issuance paid (6) (1,344) --
Proceeds from other issuances of common stock -- 9 99
------- -------- --------
Net cash provided by financing activities 1,260 30,822 945
Effect of currency exchange rate changes on cash of
foreign subsidiaries 39 (24) --
------- -------- --------
NET INCREASE (DECREASE) IN CASH 1,173 1,604 (157)
CASH AT BEGINNING OF YEAR 2,116 512 669
------- -------- --------
CASH AT END OF YEAR $ 943 $ 2,116 $ 512
======= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 46
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. SUMMARY OF ACCOUNTING POLICIES:
NATURE OF OPERATIONS - Stuart Entertainment, Inc. and its subsidiaries
(collectively, the "Company") are primarily engaged in manufacturing and
distributing a complete line of bingo cards, break-open tickets, ink markers,
electronic equipment, supplies, and accessories. The Company's products are sold
primarily in the United States and Canada to distributors, who resell them to
fraternal, charitable, religious and social organizations, lodges, hospitals,
nursing homes, PTA groups, military clubs and other similar organizations,
primarily non-profit, which use such products to raise money and provide
entertainment. To a lesser extent the Company's products are also sold to
charitable and commercial bingo halls and to governmental lottery agencies
through company-owned retail locations located in Canada, mail order catalogs
and promotional flyers. The Company is also engaged in the manufacture and
distribution of electronic gaming equipment, primarily for the Company's bingo
markets.
CONSOLIDATION - The consolidated financial statements include the Company, its
wholly-owned subsidiaries and its indirectly wholly-owned subsidiaries (from the
date they became indirectly wholly-owned). All significant intercompany
transactions and balances have been eliminated in consolidation.
EARNINGS PER SHARE - The number of shares used in the computation of primary and
fully diluted earnings per share for the years ended December 31, 1995, 1994 and
1993 is based upon the weighted average number of shares outstanding and, if
dilutive, common stock equivalents (stock options and warrants) of the Company
using the treasury stock method.
FOREIGN CURRENCY TRANSLATION AND REMEASUREMENT - The financial statements and
transactions of Bingo Press & Specialty Limited and Stuart Entertainment Limited
are maintained in their functional currency [Canadian dollars (C$) and British
pounds ((pound)), respectively] and translated into U.S. dollars in accordance
with Statement of Financial Accounting Standards No. 52 ("SFAS 52"). Assets and
liabilities are translated at current exchange rates in effect at the balance
sheet date and stockholders' equity is translated at historical exchange rates.
Revenues and expenses are translated at the average exchange rate for each
period. Translation adjustments, which result from the process of translating
Canadian dollar and British pound financial statements into U.S. dollars, are
accumulated in a separate component of stockholders' equity in accordance with
SFAS 52.
The financial statements and transactions of Stuart Entertainment S.A. de C.V.
(recorded in Mexican pesos) have been remeasured into U.S. dollars in accordance
with SFAS 52. Assets and liabilities are remeasured at the end of period
exchange rates, except for inventory, property and stockholders' equity which
are remeasured at historical exchange rates. The statement of operations has
been remeasured at average exchange rates for the period, except for cost of
sales and depreciation which have
F-8
<PAGE> 47
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF ACCOUNTING POLICIES: (CONTINUED)
FOREIGN CURRENCY TRANSLATION AND REMEASUREMENT: (CONTINUED)
been remeasured at historical exchange rates. Gains and losses from
remeasurement are recognized currently in operations. For the years ended
December 31, 1995 and 1994, the Company recognized a remeasurement loss of
$547,000 and $18,000, respectively.
INVENTORIES - Inventories are stated at the lower of cost (first-in, first-out)
or market.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment used in operations
are stated at cost and are depreciated over the estimated useful lives (two to
thirty years) using the straight-line method.
INVESTMENTS - Investments in the common stock of certain affiliated companies
are accounted for using the equity method unless application of the cost method
provides substantially similar results. In those circumstances, the cost method
is used.
DEFERRED FINANCING FEES - Costs incurred relating to the Credit Agreement (see
Note 5) are being amortized to interest expense using the straight-line method
over the five-year term of the Credit Agreement.
GOODWILL - Goodwill from the acquisition of Bingo Press & Specialty Limited is
amortized on a straight-line basis over a forty year period (see Note 2).
Goodwill from other transactions is amortized on a straight-line basis over
periods ranging from ten years to forty years.
The Company periodically reviews goodwill to assess recoverability, and
impairments would be recognized in operating results if a permanent diminution
in value were to occur. The Company recognized an impairment of goodwill in
1995, included in a one-time pre-tax charge, relating to the discontinuation of
its manufacturing operations in the United Kingdom (see Note 8).
INCOME TAXES - Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes". The adoption of SFAS 109 changed the Company's method for accounting for
income taxes from the deferred method (under APB No. 11) to an asset and
liability approach. The asset and liability method requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between tax bases and financial reporting bases of certain
assets and liabilities.
F-9
<PAGE> 48
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES: (CONTINUED)
In adopting SFAS No. 109, the Company did not restate the financial statements
of prior years, but recorded a positive cumulative effect on net income from
this change in accounting principle of $187,000 as of January 1, 1993.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs ("R&D costs")
are charged to expense when incurred. During the years ended December 31, 1995,
1994 and 1993, R&D costs totalling approximately $745,000 , $784,000, and
$685,000, respectively, were charged to expense.
USE OF ESTIMATES - The consolidated financial statements of the Company include
estimates and assumptions related to certain assets, liabilities, revenues and
expenses and the disclosure of certain contingent assets and liabilities. Actual
future results may differ from such estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - The Financial Accounting Standards
Board (FASB) issued SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets to Be Disposed Of," which establishes methods for determining when an
impairment of long-lived assets has occurred and for measuring the impairment of
long-lived assets. The FASB also issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which encourages, but does not require, employers to
adopt a fair value method of accounting for employee stock-based compensation,
and which requires increased stock-based compensation disclosures. The Company
does not intend to elect expense recognition for stock options. Both statements
are effective for the Company on January 1, 1996. Implementation of these
Statements is not expected to have a material adverse effect on the Company's
results of operations or financial condition.
RECLASSIFICATIONS - Certain reclassifications were made to the 1993 and 1994
financial statements to conform to the 1995 presentations. All amounts shown are
in U.S. dollars, unless otherwise noted.
F-10
<PAGE> 49
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS:
BINGO PRESS & SPECIALTY LIMITED:
On December 13, 1994, the Company completed the acquisition (the "Acquisition")
of Len Stuart & Associates Limited ("LSA") pursuant to a Stock Purchase
Agreement (the "LSA Agreement") with LSA and Mr. Leonard A. Stuart, the sole
shareholder of LSA and the Chairman and former Chief Executive Officer of the
Company. LSA was the holding company for i) Bingo Press & Specialty Limited, an
Ontario, Canada corporation and a major manufacturer of bingo supplies and
related products in Canada, which operates under the trade name Bazaar & Novelty
("Bazaar"), and ii) Niagara Bazaar & Novelty Limited, an Ontario, Canada
corporation and a retailer of bingo supplies and related products ("Niagara").
The total purchase price was $36,786,000, consisting of the following: i)
payment of $30,000,000 cash at closing, ii) issuance of a senior subordinated
note for $5,000,000 (see Note 5), iii) issuance of warrants to purchase 100,000
shares of the Company's common stock at an exercise price of $5.75 per share
(valued by the Company at $144,000) and iv) the Bazaar Purchase Price Adjustment
(as defined below). In connection with the Acquisition, the Company incurred
$1,129,000 of transaction costs.
The LSA Agreement required an adjustment to the purchase price ("Bazaar Purchase
Price Adjustment") to the extent that the Consolidated Net Book Value (as
defined in the LSA Agreement) of LSA and its subsidiaries on September 30, 1994
was more or less, respectively, than the Consolidated Net Book Value of LSA and
its subsidiaries on December 31, 1993. The Bazaar Purchase Price Adjustment was
determined to be $1,642,000.
To partially finance the Acquisition, the Company entered into an agreement with
MLGA Fund II, L.P. and Bingo Holdings Inc., affiliates of the investment banking
firm of Morgan Lewis Githens & Ahn, Inc. ("MLGA, Inc."), whereby Bingo Holdings
Inc. purchased i) 3,130,435 newly issued shares of the Company's common stock
for $5.75 per share and ii) received warrants to acquire 775,000 shares of the
Company's common stock at an exercise price of $5.75 per share, for an aggregate
purchase price of $18,000,000 (the "Equity Financing"). With the net proceeds
from the Equity Financing and amounts borrowed under the Credit Agreement (see
Note 5), the Company acquired LSA.
The Acquisition was accounted for using the purchase method of accounting. The
purchase price was allocated to the fair value of the acquired assets and
liabilities, resulting in the recording of goodwill of $27,316,000.
The results of operations of Bazaar have been consolidated since the date of the
Acquisition.
F-11
<PAGE> 50
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS: (CONTINUED)
BINGO PRESS & SPECIALTY LIMITED: (CONTINUED)
The following pro forma condensed consolidated statements of operations for the
years ended December 31, 1994 and 1993 give effect to the Acquisition and the
Equity and Debt Financing as if such transactions had occurred as of the
beginning of each period presented. The pro forma condensed consolidated
statements of income do not purport to represent what the Company's results of
operations would have been if such transactions had in fact occurred on such
dates and should not be viewed as predictive of the Company's financial results
in the future.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Year Ended Year Ended
December 31, December 31,
(Dollars in thousands, except per share data) 1994 1993
- --------------------------------------------- ----------- ------------
<S> <C> <C>
Net Sales: $ 94,788 $ 90,933
Net Earnings (Loss): $ (807) $ 1,259
Earnings per Share: $ (0.12) $ 0.18
Average Common and Common Equivalent
Shares Outstanding 6,537,000 7,016,000
</TABLE>
F-12
<PAGE> 51
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS: (CONTINUED)
BINGO PRESS & SPECIALTY LIMITED: (CONTINUED)
The pro forma results above do not include the following non-recurring charges
that were included in the results of operations after the date of the
Acquisition:
i) In accordance with the application of purchase accounting to the assets
of Bazaar, the finished goods of Bazaar were recorded at sales value
less costs to sell and a reasonable margin on the costs to sell. This
resulted in the write-up of finished goods inventory of Bazaar by
approximately $879,000, which was included in cost of goods sold in
1994 and 1995 as the finished goods were sold during those periods.
ii) The Company incurred and expensed approximately $329,000 in employment
costs related to new executives of the Company during the year ended
December 31, 1994. These costs are not expected to be recurring costs
of the Company.
The Company and Bazaar sold merchandise to each other prior to the Acquisition.
The Company's sales to and purchases from Bazaar were as follows:
<TABLE>
<CAPTION>
Period from
January 1 to Year Ended
December 13, December 31,
(Dollars in thousands) 1994 1993
---------------------- ------------ ------------
<S> <C> <C>
Sales $1,521 $1,316
Purchases $ 713 $ 212
</TABLE>
THE RELIABLE CORPORATION OF AMERICA, INC.:
On January 10, 1995, the Company acquired i) substantially all of the assets and
assumed substantially all existing liabilities (the "Net Assets") from The
Reliable Corporation of America, Inc. ("Reliable") and ii) two presses owned by
one of Reliable's shareholders (the "Presses").
The total purchase price paid for the Net Assets and the Presses was $1,300,000,
subject to adjustment. The purchase price was paid as follows: i) $200,000 paid
in cash, ii) $320,000 paid through the issuance of 55,652 shares of the
Company's common stock valued at $5.75 per share, and iii) $780,000 in the form
of a promissory note with equal principal payments over 90 months plus accrued
interest at a rate of 1% over national prime. The balance on the promissory note
was $684,667 with an interest rate of 9.75% at December 31, 1995.
F-13
<PAGE> 52
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS: (CONTINUED)
THE RELIABLE CORPORATION OF AMERICA, INC.: (CONTINUED)
The Company entered into non-competition agreements with the shareholders of
Reliable. Under these agreements, the Company will make monthly payments of
approximately $5,000 for 90 months to the Reliable shareholders. The present
value of these payments at December 31, 1995 (using a 9% discount factor) is
$270,000. The Company also entered into an employment agreement with the
President of Reliable which was subsequently terminated by mutual consent.
The pro forma condensed consolidated statements of operations for the years
ended December 31, 1994 and 1993 giving effect to the acquisition of Bazaar and
Reliable is substantially the same as the pro forma statements presented earlier
for the acquisition of Bazaar alone.
OTHER ACQUISITIONS:
During 1993, the Company acquired 49% of the outstanding stock of a distributor
of bingo and other fund raising supplies. The total consideration given for the
stock of this company was $322,000, which included a promissory note in the
amount of $222,000 and cash consideration of $100,000.
3. INVENTORIES:
Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994
-------------------- ----------- ---------
<S> <C> <C>
Raw materials $ 3,517 $ 4,380
Work-in-process 5,056 2,418
Finished goods 13,409 9,305
----------- ---------
Total $ 21,982 $ 16,103
=========== =========
</TABLE>
4. NOTES PAYABLE TO BANK:
The Company had a loan agreement with a regional bank dated August 25, 1993
under which it had a short-term line of credit and could borrow up to
$6,650,000, with the actual borrowing limit determined as a percentage of
eligible receivables and inventories. Amounts advanced under this line of credit
bore interest at the bank's prime rate plus 1/2%. During 1994, the amount
available under this short-term line of credit was increased to $7,500,000 and
the maturity was extended to January 30, 1995. All amounts outstanding on this
line of credit, which totalled $7,289,000, were repaid on December 13, 1994 upon
obtaining new financing under the Credit Agreement described below.
F-14
<PAGE> 53
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE TO BANK: (CONTINUED)
At the date of the Acquisition, Bazaar had a loan agreement with a Canadian bank
under which it had an operating loan, which bore interest at the bank's prime
rate plus 1/2%, and a term loan for the payment of income taxes, which bore
interest at the bank's prime rate plus 1%. All amounts outstanding on the
operating loan and the term loan, which totalled C$5,300,000 ($3,820,000), were
repaid on December 13, 1994 upon obtaining the new financing under the Credit
Agreement described below.
5. LONG-TERM DEBT:
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994
-------------------- ------- -------
<S> <C> <C>
Borrowings under Credit Agreement:
Revolving Facility $20,921 $12,601
Term Facility 12,135 14,840
Subordinated note payable to Mr. Stuart 5,000 5,000
Other term loans and mortgages
payable to banks 2,064 1,208
Obligations under capital leases 4,669 4,211
Notes payable to others 2,694 3,038
------- -------
Total 47,483 40,898
Less current portion 7,897 6,482
------- -------
Total long-term debt $39,586 $34,416
======= =======
</TABLE>
BORROWINGS UNDER CREDIT AGREEMENT:
The Company's bank credit facility is for an aggregate principal amount of up to
$38,000,000, with a senior secured revolving line of credit of $23,000,000 (the
"Revolving Facility") and a senior secured term loan facility of $15,000,000
(the "Term Facility"). The Revolving Facility and Term Facility are separated
into U.S. and Canadian facilities, respectively. The Company increased the
maximum available under the Revolving Facility from $20,000,000 at December 31,
1994 to $23,000,000 at December 31, 1995. Any amount outstanding under this
$3,000,000 additional amount shall be paid in full at December 31, 1996. The
Credit Agreement expires and all other remaining amounts outstanding are due on
December 12, 1999.
F-15
<PAGE> 54
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT: (CONTINUED):
BORROWINGS UNDER CREDIT AGREEMENT: (CONTINUED):
Loans under the U.S. Revolving Facility and the U.S. Term Facility can, at the
option of the Company, be priced either as i) a Base Rate Loan (at the bank's
prime rate plus 1 1/4%) or ii) an Offshore loan (at LIBOR rates plus 2 1/2%).
Loans under the Canadian Revolving Facility and the Canadian Term Facility can,
at the option of the Company, be priced either as i) a Base Rate Loan (at the
bank's Canadian prime rate plus 1 1/4%) or ii) an Offshore Loan (at Bankers
Acceptance Rates plus 2 1/2%). Interest payments are due i) monthly on Base Rate
Loans or ii) at the end of an Offshore Loan period, which could be from 1 day to
180 days. In addition, the Company pays an unused facility fee of 1/2 of 1% for
the portion of the U.S. and Canadian Revolving Facilities that are not used
during a particular quarter and a yearly administrative fee of $35,000.
The Credit Agreement requires quarterly principal payments on the Term Facility
of $250,000 under the U.S. Term Facility and C$694,000 ($492,000) under the
Canadian Term Facility until maturity. No principal payments are required on the
Revolving Facility until maturity.
At December 31, 1995 and 1994, loans outstanding on the U.S. Revolving Facility
totalled $11,540,000 and $4,800,000, respectively, and loans outstanding on the
Canadian Revolving Facility totalled C$12,800,000 ($9,381,000) and C$11,000,000
($7,801,000), respectively. Weighted average year-end interest rates on the U.S.
Revolving Facility and Canadian Revolving Facility at December 31, 1995 were
8.42% and 8.55%, respectively. At December 31, 1995 and 1994, loans outstanding
on the U.S. Term Facility totalled $4,000,000 and $5,000,000, respectively, and
loans outstanding on the Canadian Term Facility totalled C$11,100,000
($8,135,000) and C$13,875,000 ($9,840,000), respectively. Interest rates on the
U.S. Term Facility and Canadian Term Facility at December 31, 1995 were 8.44%
and 8.55%, respectively.
Amounts outstanding under the Credit Agreement are secured by a perfected first
and sole priority lien and perfected security interest in i) a pledge of all of
the issued and outstanding stock of the subsidiaries of the Company now owned or
hereafter acquired, and ii) all of the real and personal assets of the Company
and its subsidiaries except for those assets previously encumbered under
existing notes payable and capital lease obligations.
The Credit Agreement contains various covenants for the Company to comply with,
such as minimum net worth, fixed coverage ratio, leverage ratio and restrictions
on additional borrowings, cash dividends and capital expenditures.
In connection with the Credit Agreement, the Company incurred $375,000 and
$1,644,000 of costs for the years ended December 31, 1995 and 1994,
respectively.
F-16
<PAGE> 55
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT: (CONTINUED):
SUBORDINATED NOTE PAYABLE TO MR. STUART:
In connection with the Acquisition (Note 2), the Company issued a $5,000,000
senior subordinated note to Mr. Stuart. The note bears interest at 10% (payable
quarterly) and matures on March 31, 2000. The note does not require scheduled
principal payments. The note is subordinated to the debt under the Credit
Agreement.
OTHER TERM LOANS AND MORTGAGES PAYABLE TO BANKS:
On April 30, 1991, the Company executed a $1,200,000 term loan with a local bank
to finance the acquisition of a building the Company had been leasing in Council
Bluffs, Iowa and the construction of an addition to the building. The note, as
renegotiated in 1993, is secured by a mortgage on the building and requires
monthly principal and interest payments of $16,000 through October 15, 1998,
when the remaining principal balance is due. The note bears interest at a rate
of 8.25%. The balance outstanding at December 31, 1995 and 1994 was $790,000 and
$901,000, respectively.
Bazaar has several notes payable to banks for mortgages on properties located in
the Maritime provinces of Canada. These notes, with a total balance outstanding
of $287,000 at December 31, 1995, bear interest at rates ranging from 8.13% to
11.25% and require monthly principal and interest payments of $7,000. The notes
have five-year terms (with amortization based on a 25-year schedule) that mature
between May 1996 and September 1996. The Company, as is customary in Canada,
will continue to renew these notes on a five-year basis until they are paid in
full.
OBLIGATIONS UNDER CAPITAL LEASES:
Obligations under capital leases are payable to a number of financial
institutions and lenders. Under the terms of the lease agreements, financing for
equipment has been provided with lease terms of three to six years. Lease
payments are determined based upon simple interest equivalent rate, which range
from 7.9% to 15.2%. Ownership of the equipment passes to the Company at the end
of the lease term upon payment of a nominal purchase price. During 1995 and
1994, the Company financed the acquisition of property, plant and equipment
totalling $2,092,000 and $923,000, respectively, through the assumption of
obligations under capital leases. At December 31, 1995, the total cost of assets
under capital leases were $6,287,165, net of accumulated depreciation of
$2,498,574.
In October 1995, the Company completed a lease line of credit with its primary
bank. The facility provides lease financing on capitalized equipment purchased
through December 31, 1996.
The maximum available under this facility is $5,000,000. At December 31, 1995
$3,813,000 remained available under this facility.
F-17
<PAGE> 56
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT: (CONTINUED):
OBLIGATIONS UNDER CAPITAL LEASES: (CONTINUED):
Future minimum lease payments under capital leases in effect at December 31,
1995 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
--------------------
<S> <C>
1996 $ 2,085
1997 1,548
1998 818
1999 854
2000 222
--------
Total 5,527
Less amount representing interest 858
--------
Present value of net minimum lease payments $ 4,669
========
</TABLE>
NOTES PAYABLE TO OTHERS:
Notes payable to others consist primarily of i) obligations to former owners of
companies and/or assets that were acquired by the Company and ii) installment
notes relating to the purchase of property, plant and equipment. Remaining
payment terms at December 31, 1995 range from approximately one year to four
years. At December 31, 1995, these notes bear interest at fixed and variable
rates ranging from 6% to 13.5%.
FUTURE PAYMENTS:
Long-term debt, exclusive of obligations under capital leases, matures as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
----------------------
<S> <C>
1996 $ 6,200
1997 4,137
1998 4,060
1999 22,808
2000 5,201
Thereafter 408
--------
Total $ 42,814
========
</TABLE>
F-18
<PAGE> 57
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT: (CONTINUED):
DISCLOSURE ON FAIR VALUE OF LONG-TERM DEBT:
Based on the interest rates and provisions of the Company's long-term debt, the
carrying value of the debt approximates its current value.
6. INCOME TAX PROVISION (BENEFIT):
Income (loss) before income tax provision (benefit) is as follows for the years
ended December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
---------------------- ------- ------- -------
<S> <C> <C> <C>
Domestic $ 2,952 $(1,890) $ 759
Foreign (389) (383) --
------- ------- -------
Total $ 2,563 $(2,273) $ 759
======= ======= =======
</TABLE>
The income tax provision (benefit) is as follows for the years
ended December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
---------------------- ------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 1,139 $ 475 $ 19
Foreign 755 47 --
State 104 63 8
------- ------- -------
Total 1,998 585 27
------- ------- -------
Deferred:
Domestic (155) (1,025) 220
Foreign (66) (225) --
------- ------- -------
Total (221) (1,250) 220
------- ------- -------
Total Provision(Benefit) $ 1,777 $ (665) $ 247
======= ======= =======
</TABLE>
F-19
<PAGE> 58
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAX PROVISION (BENEFIT): (CONTINUED):
A reconciliation of the United States statutory income tax rate to the effective
income tax rate is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
----- ------ ------
<S> <C> <C> <C>
Statutory tax rate 34.0% (34.0%) 34.0%
State income taxes (net
of federal benefit) 2.3 (2.0) 2.3
Foreign tax rates in excess
of U.S. federal rates 4.5 (.8) --
Valuation reserve for excess
losses of U.K. venture 17.0 7.4 --
Goodwill amortization 10.1 1.5 3.0
Research and development credits -- (2.1) (7.5)
Other 1.4 .7 .8
----- ------ -----
Effective tax rate 69.3% (29.3%) 32.6%
===== ====== =====
</TABLE>
Deferred tax assets and (liabilities) are comprised of the following at December
31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994
- ---------------------- -------- --------
<S> <C> <C>
Current Deferred Income Tax Assets:
Allowance for doubtful accounts $ 458 $ 571
Inventory reserves and adjustments 436 327
Non-deductible accrued liabilities 803 767
Other 49 --
-------- --------
$ 1,746 $ 1,665
======== ========
Current Deferred Income Tax Liability:
Write-up of Canadian inventory
(from purchase accounting) $ (40) $ (152)
======== ========
Non-Current Deferred Income Tax Liabilities:
Difference in basis of property and
equipment $ (2,495) $ (2,429)
Other 43 25
Cumulative translation adjustment (142) 134
Excess losses of U.K. venture 758 322
Valuation reserve (758) (322)
-------- --------
Total $ (2,594) $ (2,270)
======== ========
</TABLE>
F-20
<PAGE> 59
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAX PROVISION (BENEFIT): (CONTINUED):
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $920,000 at December 31, 1995. Those earnings are considered to be
indefinitely reinvested and, accordingly, no amount for U.S. federal and state
income taxes has been provided thereon. Upon distribution of those earnings in
the form of dividends, the Company would be subject to both U.S. income taxes
(subject to an adjustment for foreign tax credit) and withholding taxes payable
to the foreign countries. Determination of the amount of unrecognized deferred
U.S. income tax liability is not practicable because of the complexities
associated with its hypothetical calculation.
7. STOCK OPTION PLANS:
The Company had four inactive plans and one active stock option plan during
1995: the 1981 Incentive Stock Option Plan, the 1992 Incentive Stock Option
Plan, the 1985 Non-Qualified Stock Option Plan, the 1992 Non-Qualified Stock
Option Plan and the 1994 Performance Plan.
The Company adopted the 1981 Incentive Stock Option Plan ("1981 ISO Plan") and
the 1992 Incentive Stock Option Plan ("1992 ISO Plan") in order to grant options
to certain directors, executive officers and employees, reserving 250,000 and
200,000 shares, respectively, of its common stock for issuance. Options were
granted at 100% of market value at the date of grant and became exercisable for
up to a ten-year period from the date of grant. The 1981 ISO Plan was terminated
on August 18, 1991 and, effective June 3, 1995, options are no longer
exercisable. Options are no longer granted under the 1992 ISO Plan.
The Company adopted the 1985 Non-Qualified Stock Option Plan ("1985 NQSO Plan")
and the 1992 Non-Qualified Stock Option Plan ("1992 NQSO Plan") for certain
directors, executive officers and employees, reserving 200,000 and 100,000
shares, respectively, of its common stock for issuance. Options granted under
the 1985 NQSO Plan were exercisable for periods from five to ten years from the
date of grant while options granted under the 1992 NQSO Plan were exercisable
for a ten-year period from the date of grant. Options under both plans were
granted at prices which exceeded or were less than the fair market value of the
shares on the date of grant, but were not less than par value. Options are no
longer granted under either of these plans.
The 1994 Performance Plan was adopted December 13, 1994 for certain directors,
executive officers, employees and consultants. The Company has reserved
2,000,000 shares of its common stock for issuance. Options granted under this
plan may be either incentive stock options or non-qualified stock options.
Incentive stock options granted are exercisable for up to a ten-year period and
at a exercise price equal to the fair market value of the shares on the date of
grant. Non-qualified stock options granted are exercisable at prices and over
time periods determined by the Stock Option Committee of the Board of Directors.
All options granted under this Plan in 1994 and 1995 were non-qualified options.
At December 31, 1995 there were 278,600 shares available for grant.
F-21
<PAGE> 60
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTION PLANS: (CONTINUED):
A summary of stock option activity during the three years ended December 31 is
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Outstanding at beginning of year 1,280,250 396,717 194,625
Options granted 824,400 900,000 244,800
Options exercised (102,609) (3,000) (35,008)
Options cancelled (119,875) (13,467) (7,700)
---------- ---------- ----------
Outstanding at end of year 1,882,166 1,280,250 396,717
========== ========== ==========
Range of option prices per share outstanding $2.25 - $20.00 $2.25 - $20.00 $2.25 - $7.625
============== ============== ==============
</TABLE>
At December 31, 1995, options for 1,577,667 shares were exercisable. The
remaining options become exercisable as follows: 1996 - 159,833 shares; 1997 -
144,666 shares.
During 1995, 1994 and 1993, the Company recognized tax benefits of $25,000,
$0 and $55,000, respectively, related to compensation expense recognized for
tax purposes on non-qualified stock options exercised during 1995, 1994 and
1993. No related compensation expense for these non-qualified stock options were
recorded for financial statement purposes. The amount of the income tax benefit
was recorded as additional paid-in capital.
During 1993, the Company granted non-qualified stock options under the 1985 NQSO
Plan and the 1992 NQSO Plan where the exercise price at the date of grant was
less than the market value of those shares on that date. During 1995, 1994 and
1993, the Company recognized compensation expense and additional paid-in capital
for financial statement purposes of $19,000, $51,000 and $55,000, respectively,
based on the dates the options were exercisable.
F-22
<PAGE> 61
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENTS IN JOINT VENTURES:
STUART ENTERTAINMENT MEXICO:
In November 1991, the Company and Bazaar formed a Mexican corporate joint
venture named Stuart Entertainment S.A. de C.V. ("Stuart Entertainment Mexico")
for the purpose of printing and finishing bingo paper for its owners. During
1995, 1994, and 1993, 100%, 99%, and 98%, respectively, of the bingo paper
manufactured by Stuart Entertainment Mexico was sold to the Company.
Up to the date of the Acquisition (see Note 2), the Company's investment in
Stuart Entertainment Mexico was accounted for using the equity method. Under the
joint venture agreement, the income or loss for Stuart Entertainment Mexico is
allocated to the Company based on the percentage of total production that is
sold to the Company. During the period from January 1, 1994 to December 13,
1994 and for the year ended December 31, 1993, the Company recognized losses
related to its investment in Stuart Entertainment Mexico of $570,000, and
$555,000, respectively.
Stuart Entertainment Mexico is included in the consolidated statements of
operations for the period from December 14, 1994 to December 31, 1994, and for
the year ended December 31, 1995, and in the consolidated balance sheets as of
December 31, 1994 and December 31, 1995.
Summarized results of operations for Stuart Entertainment Mexico (on a
stand-alone basis) is as follows for the years ended December 31:
<TABLE>
<Captiion>
(Dollars in thousands) 1994 1993
---------------------- ------ ------
<S> <C> <C>
Total revenues $2,244 $2,086
Gross margin 641 783
Net income (loss) (591) (583)
</TABLE>
STUART ENTERTAINMENT LIMITED:
During 1993, the Company and Bazaar formed a United Kingdom corporate joint
venture named Stuart Entertainment Limited ("Stuart Entertainment Limited") for
the purpose of selling bingo supplies to the English and European markets.
Up to the date of the Acquisition (see Note 2), the Company's investment in
Stuart Entertainment Limited was accounted for using the equity method. During
the period from January 1, 1994 to December 13, 1994 and for the year ended
December 31, 1993, the Company recognized losses related to its investment in
Stuart Entertainment Limited of $415,000 and $150,000, respectively. Operations
of Stuart Entertainment Limited is included in the consolidated statements of
operations for the period from December 14, 1994 to December 31, 1994 and for
the year ended December 31, 1995, and in the consolidated balance sheets as of
December 31, 1994 and December 31, 1995.
For the period from January 1, 1994 to December 13, 1994, the Company's sales to
Stuart Entertainment Limited were $298,000 and Bazaar's sales to Stuart
Entertainment Limited were $685,000.
During the second quarter of 1995, the Company signed a licensing and marketing
agreement with Playprint Limited, headquartered in Dublin, Ireland. This
relationship permitted the Company to discontinue its manufacturing operation in
the United Kingdom. Under the agreement, Playprint Limited pays royalties to the
Company for use of certain of the Company's trademark, technologies and
equipment for the production of bingo paper and ink markers. The Company
recorded a
F-23
<PAGE> 62
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENTS IN JOINT VENTURES: (CONTINUED)
STUART ENTERTAINMENT LIMITED: (CONTINUED):
one-time pre-tax charge of $819,000 in 1995 related to the costs to shutdown the
manufacturing facility in the United Kingdom.
Summarized results of operations for Stuart Entertainment Limited (on a
stand-alone basis) is as follows for the years ended December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993
---------------------- ------ ------
<S> <C> <C>
Total revenues $1,128 $ 169
Gross margin (119) (22)
Net income (loss) (919) (324)
</TABLE>
BRITISH BAZAAR COMPANY LIMITED:
The Company owns 50% of the common shares of British Bazaar Company Limited
("British Bazaar"). British Bazaar manufactures bingo paper and break-open
tickets in the Atlantic provinces of Canada. The Company's investment in British
Bazaar is accounted for using the equity method. The Company's investment in
British Bazaar at December 31, 1995 and 1994 was $259,000 and $155,000,
respectively. For the year ended December 31, 1995, and the period from December
14, 1994 to December 31, 1994, the Company recorded equity in earnings of
$98,000 and $5,000, respectively, on its investment and had sales of $1,777,000
and $93,000, respectively, to British Bazaar.
The Company guaranteed British Bazaar's operating line of credit at December 31,
1995 and 1994 in the amount of C$350,000 ($248,000) and C$350,000 ($248,000),
respectively.
F-24
<PAGE> 63
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS:
S. LACHMAN & SONS, INC.:
An individual who was employed by the Company through June 30, 1993 owns S.
Lachman & Sons, Inc. ("Lachman"), a distributorship which purchases a
significant amount of product from the Company. Sales to Lachman for the years
ended December 31, 1995, 1994, and 1993 were $2,541,000, $2,047,000, and
$1,991,000, respectively. Effective January 1, 1993, the Company entered into an
agreement with Lachman whereby the Company granted Lachman the use of a paper
printing press owned by the Company. Under the agreement, which has no minimum
term but can be terminated by either party upon 30 days written notice, Lachman
bears all expenses of operating and maintaining the press and pays the Company a
royalty for all the paper printed by the press. Paper printed by Lachman may not
be sold in competition with the Company. During the years ended December 31,
1995, 1994 and 1993, the Company recognized royalty income from Lachman of
$248,000, $268,000 and $208,000, respectively.
MR. STUART:
In December 1993, Mr. Stuart pledged 100,000 shares of common stock of the
Company (which he personally owns) as security for a portion of the bank debt of
one of the Company's customers.
At December 31, 1995, Mr. Stuart owed the Company approximately $256,000 for
items relating to the Acquisition for amounts paid by the Company or Bazaar on
behalf of Mr. Stuart.
KEN STUART:
Ken Stuart, a brother of Mr. Stuart, is retained by the Company as an
independent contractor selling ink products. For the years ended December 31,
1995, 1994 and 1993, Ken Stuart earned commissions of $221,000, $292,000 and
$156,000, respectively.
F-25
<PAGE> 64
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS: (CONTINUED)
BINGO SYSTEMS AND SUPPLY, INC.:
Effective January 1, 1993, the Company sold its investment in 49% of the
outstanding common stock of Bingo Systems and Supply, Inc. ("Bingo Systems") in
exchange for a promissory note totalling $225,000. The note is payable over a
five-year period and bears interest at a rate of one percent above the Company's
borrowing rate on its short-term line of credit. The principal balance of the
note at December 31, 1995 and 1994 was $106,000, with $44,000 of the balance
classified as current. The Company's investment in the common stock of Bingo
Systems totalled $150,000. The gain of $75,000 on the sale of stock is being
recorded using the straight-line method over the five-year term of the note.
The Company has an inventory repurchase agreement with a bank to support Bingo
Systems in its bank financing. The agreement provides that in the event the bank
obtains title to Bingo Systems' inventory through foreclosure, the Company would
be required to repurchase up to $450,000 of selected inventory previously sold
by the Company to Bingo Systems. The purchase price would be that price paid by
Bingo Systems to the Company for such inventory. The Company would have a right
of first refusal in the event the bank received a bona fide written offer from a
third party to purchase the foreclosed inventory.
During the years ended December 31, 1995, 1994, and 1993, sales to Bingo Systems
totalled $2,750,000, $2,791,000, and $2,453,000, respectively.
BINGO VIDEO ENTERTAINMENT, INC.:
In October 1992, the Company sold the assets of its retail branch in Hollywood,
Florida to Bingo Video Entertainment, Inc. ("Bingo Video"), a company owned by a
brother-in-law of Mr. Stuart. In exchange for the assets sold, the Company
received a promissory note totalling $262,000. The note bears interest at a rate
of one percent above the Company's rate on its short-term line of credit and
requires monthly principal and interest payments of $4,000. The note is
collateralized by the assets of Bingo Video and guaranteed by Mr. Stuart's
brother-in-law and by Len Stuart & Associates, Inc., a company owned by Mr.
Stuart. The principal balance of the note at December 31, 1995 was $173,000 ,
with $30,000 of the balance classified as current.
During the years ended December 31, 1995, 1994 and 1993, sales to Bingo Video
totalled $912,000, $572,000, and $610,000, respectively.
F-26
<PAGE> 65
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS: (CONTINUED)
OTHER:
In December 1995, the Company amended its credit agreement ("Fourth Amendment to
Credit Agreement") with its two major banks which increased the maximum
available under the Revolving Facility from $20,000,000 to $23,000,000. Mr.
Stuart and MLGAL Partners, Limited Partnership, the Company's major
shareholders, are Guarantors under this agreement. The Guarantors are liable to
the extent the Company's aggregate principal amount of all outstanding Revolving
Loans and the aggregate undrawn face amount of all letters of credit exceed
$20,000,000.
10. TERMINATION OF CONSULTING AGREEMENT:
In March 1993, Video King Gaming Systems, Inc., a wholly-owned subsidiary of the
Company ("Video King"), entered into an agreement with Video Gaming Systems of
America, Inc. ("VGSA"), whereby VGSA would provide consulting services to Video
King relating to the development, improvement, marketing and sales of products
to be manufactured by Video King (the "Consulting Agreement"). Under the
Consulting Agreement, Video King would pay VGSA $4,000 per month until the
cumulative pre-tax income of Video King earned subsequent to December 31, 1992
equals or exceeds ($200,000). At such time, Video King would begin to pay VGSA a
sum equal to 20% of the net pre-tax income on sales of Video King products.
On July 29, 1994, the Company, Video King and VGSA amended the Consulting
Agreement to provide that the Consulting Agreement would terminate upon the
payment of $2,000,000 (the "Option Payment") by the Company to VGSA. On December
7, 1994, the parties signed an agreement to terminate the Consulting Agreement
upon the payment of the Option Payment as follows: i) $1,000,000 was paid at
closing on January 6, 1995 and ii) $1,000,000 in the form of a promissory note
from the Company. The note matures on January 6, 2000, bears interest at 1% over
the prime rate stated in The Wall Street Journal (adjusted quarterly) (9.5% at
December 31, 1995) and requires quarterly payments of $50,000 principal plus
accrued interest. The principal balance of the note at December 31, 1995 and
1994 was $800,000 and $1,000,000, respectively.
11. SALE-LEASEBACK OF LITTLETON FACILITY:
On August 14, 1986, the Company entered into a sale-leaseback agreement for its
facility in Littleton, Colorado. Under the terms of the agreements, the Company
is obligated for minimum operating lease payments of approximately $203,000 per
year plus certain operating costs through August 1996. The excess of the net
sales proceeds over the net book value of the facility at the date of sale was
deferred and is being recognized over the period of the lease.
F-27
<PAGE> 66
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLANS:
The Company maintains a defined contribution plan under Section 401(k) of the
Internal Revenue Code covering substantially all of its employees in the United
States (the "U.S. Plan"). Eligible employees may contribute up to 15% of their
wages, not to exceed a government established maximum. The Company's
contribution is the sum of the Company's match of the first 2% of the employee's
elective contribution and a discretionary contribution of up to 2% of the wages
of all employees eligible under the U.S. Plan. During 1995, 1994 and 1993, the
Company's contributions were $157,000, $165,000, and $151,000, respectively.
The Company maintains a voluntary defined contribution plan covering
substantially all of its employees in Canada (the "Canadian Plan"). Eligible
employees may contribute up to 2.50% of their wages eligible under the Canadian
plan and the Company will match the contribution up to 2.50%. Eligible employees
may contribute an additional amount in excess of the 2.50%, but they are not
matched by the Company. For the period from December 14, 1994 to December 31,
1994, and for the year ending December 31, 1995, the Company's contributions
were $5,000 and $101,000, respectively.
13. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES:
The Company leases certain property and equipment under operating leases with
remaining terms ranging from one to five years.
Future minimum lease payments under operating leases in effect at December 31,
1995 are approximately as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
----------------------
<S> <C>
1996 $1,958
1997 972
1998 811
1999 483
2000 483
------
Total $4,707
======
</TABLE>
Rental expense for the years ended December 31, 1995, 1994 and 1993 was
$1,072,000, $841,000, and $736,000, respectively.
F-28
<PAGE> 67
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
SALES OF RECEIVABLES:
The Company sells to a finance company certain installment receivables primarily
related to the sale of bingo equipment. The proceeds of such sales totalled $0,
$216,000, and $88,000 in 1995, 1994 and 1993, respectively. The finance company
has recourse to the Company in the event of default on the installment contract
by the purchaser of the equipment. The installment receivables are
collateralized by the equipment sold and are guaranteed by the distributor who
arranged the sale of the equipment. At December 31, 1995, the Company's
potential recourse obligation totalled $150,000.
CONCENTRATION OF ACCOUNTS AND NOTES RECEIVABLE:
The Company's trade receivables and notes receivable are generally due from
companies engaged in the distribution of bingo supplies and related products. At
December 31, 1995 and 1994, the Company had aggregate trade receivables and
notes receivable from significant customers as follows:
<TABLE>
<CAPTION>
Number of Aggregate Range of
(Dollars in thousands) Customers Receivables Individual Balances
- ---------------------- --------- ----------- -------------------
<S> <C> <C> <C>
December 31, 1995:
United States 6 $3,475 $314 - $ 827
Canada 6 $3,064 $156 - $1,005
December 31, 1994:
United States 6 $4,049 $312 - $1,387
Canada 4 $1,979 $413 - $ 639
</TABLE>
INVENTORY REPURCHASE AGREEMENTS:
The Company has inventory repurchase agreements with several banks to support
certain distributors in their bank financing. The agreement provides that in the
event one of the banks obtains title to the distributor's inventory through
foreclosure, the Company would be required to repurchase the Company's own
inventory up to i) $450,000 under one agreement and ii) C$305,000 ($216,000)
under two other agreements of selected inventory previously sold by the Company
to the distributor. The purchase price would be that price paid by the
distributor to the Company for such inventory. The Company would have a right of
first refusal in the event the bank received a bona fide written offer from a
third party to purchase the foreclosed inventory.
F-29
<PAGE> 68
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SUPPLEMENTAL CASH FLOW INFORMATION:
OTHER CASH PAYMENTS AND RECEIPTS:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
(Dollars in thousands) 1995 1994 1993
- ---------------------- ------ ------ ------
<S> <C> <C> <C>
Cash payment for interest $3,551 $1,087 $ 908
Cash payment for income taxes 1,651 1,155 628
Income tax refunds received 474 417 --
</TABLE>
CHANGES IN OPERATING WORKING CAPITAL ITEMS:
Changes in operating working capital items, net of amounts obtained in the
acquisition of Bazaar and Reliable and from the consolidation of the Company's
joint ventures, is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
(Dollars in thousands) 1995 1994 1993
- ---------------------- -------- -------- --------
<S> <C> <C> <C>
Trade receivables $ (3,960) $ (462) $ (2,059)
Inventories (4,905) (2,660) (1,316)
Recoverable income taxes 225 (365) (628)
Prepaid expenses (133) 49 (46)
Trade payables 1,268 (940) (404)
Accrued liabilities (88) 908 310
Income Taxes Payable 543 -- --
-------- -------- --------
Total Changes in Operating Capital Items $ (7,050) $ (3,470) $ (4,143)
======== ======== ========
</TABLE>
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
During the years ended December 31, 1995, 1994 and 1993, the Company financed
the acquisition of equipment totalling $2,092,000, $923,000, and $956,000,
respectively, through the assumption of obligations under capital leases.
In connection with the acquisition in 1994, the Company i) issued warrants to
Mr. Stuart to acquire 100,000 shares of the Company's common stock at an
exercise price of $5.75 per share, which were valued at $144,000, ii) issued a
subordinated note payable to Mr. Stuart for $5,000,000, and iii)
F-30
<PAGE> 69
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NON-CASH INVESTING AND FINANCING TRANSACTIONS: (CONTINUED):
reflected payables of $1,642,000 for the Bazaar Purchase Price Adjustment and
$274,000 for other costs of the Acquisition.
In connection with the Reliable Acquisition, the Company i) assumed Reliable's
line of credit and term loan credit facility with a Michigan bank, which
totalled $1,237,000, ii) assumed another note payable of $250,000, iii) issued a
note payable to the shareholders of Reliable for $780,000 and iv) issued 55,652
shares of the Company's common stock, which was valued at $320,000 or $5.75 per
share.
During 1993, the Company i) purchased a 49% interest in a distributor for
$100,000 in cash and a promissory note payable of $222,000, ii) issued a
promissory note payable of $150,000 in exchange for assets, iii) sold its
investment in a distributor for a note receivable of $225,000, and iv) sold
certain accounts receivable, inventory and its investment in a subsidiary in
exchange for notes receivable of $389,000.
F-31
<PAGE> 70
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. GEOGRAPHIC FINANCIAL INFORMATION:
The Company operates in one principal industry segment: the manufacturing and
selling of supplies and equipment for bingo games and related fund raising
activities. The Company's products are sold primarily to distributors for resale
to others, which are primarily non-profit organizations.
Geographic financial information for the years ended December 31, 1995 and 1994
are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994
- ---------------------- --------- ---------
<S> <C> <C>
NET SALES:
United States: Domestic Customers $ 64,112 $ 53,734
Foreign Customers 1,398 3,611
Canada 43,110 1,742
United Kingdom 1,262 71
--------- ---------
Total $ 109,882 $ 59,158
========= =========
INCOME (LOSS) BEFORE INCOME TAXES:
United States $ 2,952 $ (1,890)
Canada 1,773 (301)
United Kingdom (2,162) (82)
--------- ---------
Income (Loss) before Income Taxes $ 2,563 $ (2,273)
========= =========
IDENTIFIABLE ASSETS:
United States $ 45,437 $ 39,299
Canada 48,912 44,667
United Kingdom 1,731 2,387
Mexico 2,914 2,624
--------- ---------
Total $ 98,994 $ 88,977
========= =========
CAPITAL EXPENDITURES:
United States $ 706 $ 748
Canada 611 70
United Kingdom -- --
Total $ 1,317 $ 818
========= =========
DEPRECIATION AND AMORTIZATION:
United States $ 2,980 $ 1,873
Canada 1,405 58
United Kingdom 232 4
--------- ---------
Total $ 4,617 $ 1,935
========= =========
</TABLE>
F-32
<PAGE> 71
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. GEOGRAPHIC FINANCIAL INFORMATION: (CONTINUED)
Information provided on Canada and United Kingdom in 1994 reflects operations
from December 14, 1994 to December 31, 1994. Geographic information on Mexico is
included within amounts for the United States in all categories (except
Identifiable Assets) as substantially all of the production of Stuart
Entertainment Mexico is sold to customers in the United States and Stuart
Entertainment Mexico is not licensed to sell to customers in Mexico. Information
for prior years is not included as it all pertained to the United States alone.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following is a summary of the quarterly results of operations for the years
ended December 31, 1995, and 1994 (amounts in thousands, except per share
amounts):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1995:
Net sales $ 27,464 $ 29,421 $ 27,031 $ 25,966 $ 109,882
Gross margin 8,242 9,326 9,206 8,386 35,160
Income before
income taxes 709 20 1,164 670 2,563
Net income (loss) 238 (521) 519 550 786
Earnings (loss) per share:
Primary .04 (.08) .08 .08 .12
Fully dilutive .04 (.08) .08 .07 .11
1994:
Net sales $ 15,428 $ 14,851 $ 13,660 $ 15,219 $ 59,158
Gross margin 4,349 4,301 3,804 3,717 16,171
Income (losses) before
income taxes 840 726 337 (4,176) (2,273)
Net income (loss) 529 466 211 (2,814) (1,608)
Earnings (loss) per share:
Primary .15 .13 .06 (.70) (.45)
Fully dilutive .15 .13 .06 (.70) (.45)
</TABLE>
F-33
<PAGE> 72
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED): (CONTINUED)
THREE MONTHS ENDED DECEMBER 31, 1994:
During the three months ended December 31, 1994, the Company had several
transactions and adjustments that negatively impacted earnings for the quarter.
The pre-tax earnings were impacted by the i) termination of the Consulting
Agreement (see Note 10), ii) the $1,050,000 addition to the allowance for
doubtful accounts (described in Management's Discussion and Analysis), iii) the
operations of Bazaar, which reflected a pre-tax loss of $301,000 due to the
impact of purchase accounting (goodwill amortization and gross margin on sales
of products in finished goods inventory at the date of the Acquisition), iv)
approximately $329,000 of employment costs expensed related to new executives of
the Company, v) a valuation reserve established against electronic gaming
products in inventory at December 31, 1994 and vi) higher than expected losses
for the Company's operations in the United Kingdom.
F-34
<PAGE> 73
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Net Balance at
Beginning Costs and Changes from Net End of
of Year Expenses Acquisitions Charge-Offs Year
---------- ---------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Allowance for Doubtful Accounts:
Accounts Receivable $ 1,598 $ 643 - $ (155)* $ 2,086
Notes Receivable:
Current Portion 199 199
Non-Current Portion 423 (100) - (199)* 124
-------- -------- ------ ------- -------
Total $ 2,220 $ 543 - $ (354) $ 2,409
======== ======== ======= =======
Valuation Reserve for Non-
Current Deferred Income Taxes $ 322 $ 436 - - $ 758
======== ======== ====== ======= =======
YEAR ENDED DECEMBER 31, 1994:
Allowance for Doubtful Accounts:
Accounts Receivable $ 608 $ 665 $ 632 $ (307)* $ 1,598
Notes Receivable:
Current Portion - 199 - - 199
Non-Current Portion - 423 - - 423
-------- -------- ------ ------- -------
Total $ 608 $ 1,287 $ 632 $ (307) $ 2,220
======== ======== ====== ======= =======
Valuation Reserve for Non-Current
Deferred Income Taxes $ - $ 161 $ 161 $ - $ 322
======== ======== ====== ======= =======
YEAR ENDED DECEMBER 31, 1993:
Allowance for Doubtful Accounts $ 522 $ 397 $ - $ (311)* $ 608
======== ======== ====== ======= =======
</TABLE>
* For the years ended December 31, 1995, 1994 and 1993, "Net Charge-Offs"
consists of write-offs of trade and notes receivable, net of subsequent
collections.
F-35
<PAGE> 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.
<TABLE>
<CAPTION>
Exhibit No. Description Page
----------- ----------- ----
<S> <C> <C>
3.1 Certificate of Incorporation of the Company, as amended.(7)
3.2 Amended and Restated Bylaws of the Company.(7)
4.1 Form of Common Stock Certificate.(6)
4.2 Securityholders' Agreement, dated December 13, 1994, between Leonard A.
Stuart, Bingo Holdings, Inc. and the Company.(7)
+10.1 Incentive Stock Option Plan of the Company.(1)
+10.2 Non-Qualified Stock Option Plan of the Company.(2)
10.3 Lease, dated August 14, 1986, between William E. Osband, Jr. and the
Company.(3)
10.4 Lease, dated February 5, 1993, between Fraccionadora Industrial Del Norte, S.A.
de C.V. and Stuart Entertainment, S.A. de C.V.(4)
+10.5 1992 Non-Qualified Stock Option Plan of Stuart Entertainment, Inc.(4)
+10.6 1992 Incentive Stock Option Plan of Stuart Entertainment, Inc.(4)
+10.7 1994 Performance Stock Option Plan of Stuart Entertainment, Inc.(6)
10.8 Agency Agreement, dated March 14, 1993, between Gala Leisure Limited, Mitre
Printing Company Limited, Bingo Press & Specialty Limited and the Company.(5)
10.9 Consulting Agreement, dated April 4, 1993, between John Douville, Video Gaming
Systems of America, Inc. and Video King Gaming Systems, Inc. (the "Consulting
Agreement") (5)
</TABLE>
<PAGE> 75
<TABLE>
<CAPTION>
Exhibit No. Description Page
----------- ----------- ----
<S> <C> <C>
+10.10 Employment Agreement, dated December 13, 1994, between Leonard A. Stuart and
the Company.(7)
+10.11 Employment Agreement, dated June 1, 1994, between Albert F. Barber and the
Company.(7)
10.12 Credit Agreement, dated December 13, 1994, between the Company, 1089350
Ontario, Inc., Bank of America National Trust and Savings Association, as U.S.
Agent and Bank of America Canada, as Canadian Agent and certain other financial
institutions.(7)
10.13 Warrant Certificate, dated December 13, 1994, issued by the Company to Leonard
A. Stuart.(7)
10.14 Warrant Certificate, dated December 13, 1994, issued by the Company to Bingo
Holdings, Inc.(7)
10.15 Subordinated Note, dated December 13, 1994, in the amount of $5,000,000 issued
by the Company to Leonard A. Stuart.(7)
10.16 Agreement, dated December 7, 1994, between the Company, Video King Gaming
Systems, Gaming USA, Inc., Video Gaming Systems of America, Inc. and John
Douville terminating the Consulting Agreement.(7)
10.17 Waiver and First Amendment to Credit Agreement, dated as of April 14, 1995.(8)
10.18 Waiver and Second Amendment to Credit Agreement, dated as of August 31,
1995.(9)
10.19 Third Amendment to Credit Agreement, dated as of August 31, 1995.(9)
10.20 Assignment and Assumption Agreement, dated as of August 31, 1995 between Stuart
Entertainment, Inc., Bank of America Illinois, The Chase Manhattan Bank
(National Association) and Bank of America Canada, as agent.(9)
</TABLE>
<PAGE> 76
<TABLE>
<CAPTION>
Exhibit No. Description Page
----------- ----------- ----
<S> <C> <C>
10.21 Assignment and Assumption Agreement dated August 31, 1995 between Bingo Press &
Specialty Limited, Bank of America Canada, The Chase Manhattan Bank of Canada
and Bank of America Canada, as agent.(9)
10.22 Fourth Amendment to Credit Agreement, dated as of December 18, 1995.*
10.23 Guarantee Agreement executed by MLGAL Partners, Limited Partnership, and
Leonard A. Stuart.*
11 Statement regarding Computation of Per Share Earnings.*
21 Subsidiaries of the Registrant.*
23 Consent of Deloitte & Touche LLP*
27 Financial Data Schedule.*
</TABLE>
____________________
* Filed herewith.
+ Constitutes a compensatory plan or arrangement required to be filed as an
exhibit to this form.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, File No. 73746, filed August 20, 1981.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1985, File No. 0-10737.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1989, File No. 0-10737.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992, File No. 0-10737.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993, File No. 0-10737.
(6) Incorporated by reference to the Company's Registration Statement on Form
S-8, File No. 33-89962.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994, file No. 0-10737.
(8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995, file No. 0-10737.
(9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995, file No. 0-10737.
<PAGE> 1
EXHIBIT 10.22
FOURTH AMENDMENT TO CREDIT AGREEMENT
This Fourth Amendment to Credit Agreement, dated as of December 18,
1995 (the "Agreement") is among Stuart Entertainment, Inc., a Delaware
corporation (the "U.S. Company"), Bingo Press & Specialty Limited (formerly
known as 1089350 Ontario Inc.), an Ontario corporation (the "Canadian
Company"), Bank of America National Trust and Savings Association, as U.S.
Agent, Bank of America Illinois, as a U.S. Lender, The Chase Manhattan Bank,
National Association, as a U.S. Lender, Bank of America Canada, as Canadian
Agent and a Canadian Lender, and The Chase Manhattan Bank of Canada, as a
Canadian Lender.
W I T N E S S E T H:
WHEREAS, the U.S. Company, the Canadian Company, the U.S. Agent, the
U.S. Lenders, the Canadian Agent and the Canadian Lenders are parties to that
certain Credit Agreement dated as of December 13, 1994 (as amended, the "Credit
Agreement") and to certain other documents executed in connection with the
Credit Agreement;
WHEREAS, the U.S. Company and the Canadian Company have requested
certain amendments to the Credit Agreement, and the Agents and Lenders have
agreed to such amendments as provided herein.
NOW, THEREFORE, the parties hereto agree as follows:
Section 1. DEFINITIONS. Capitalized terms used and not otherwise
defined herein shall have the meanings given to such terms in the Credit
Agreement.
Section 2. AMENDMENTS TO THE CREDIT AGREEMENT. Subject to the
satisfaction of the conditions precedent set forth in Section 3 below, the
Credit Agreement is hereby amended as follows:
(a) A new defined term "Aggregate Additional Amount" is
added to Section 1.01 of the Credit Agreement as follows:
"Aggregate Additional Amount" means the sum of the
Canadian Additional Amount (with the Canadian Additional
Amount expressed in U.S. Dollars at the Closing Date Exchange
Rate) and the U.S. Additional Amount; provided that the
Aggregate Additional Amount shall be permanently reduced to
U.S. $0 as of December 31, 1996.
(b) The definition of "Aggregate Revolving Commitment"
set forth in Section 1.01 of the Credit Agreement is amended and
restated in its entirety as follows:
"Aggregate Revolving Commitment" means the combined
Revolving Commitments of the Lenders (with the amounts of the
Commitments of the
1
<PAGE> 2
Canadian Lenders expressed in U.S. Dollars at the Closing Date
Exchange Rate), which equals the sum of the amount of Twenty
Million U.S. Dollars (U.S. $20,000,000) plus the Aggregate
Additional Amount, as such sum may be reduced from time to
time pursuant to this Agreement.
(c) A new defined term "Borrowing Base" is added to
Section 1.01 of the Credit Agreement as follows:
"Borrowing Base" means the amount calculated for the
Companies, with all Canadian Dollar values expressed in U.S.
Dollars at the Closing Date Exchange Rate, based upon a
formula set forth in a letter delivered by Agents and Lenders
on or before February 28, 1996 as more fully described in
Section 2.18, less such reserves as Agents and Lenders may
create from time to time in their reasonable judgment. Until
the Borrowing Base is established, the Borrowing Base shall be
deemed to equal the Aggregate Revolving Commitment of the
Lenders.
(d) A new defined term "Borrowing Base Certificate" is
added to Section 1.01 of the Credit Agreement as follows:
"Borrowing Base Certificate" means a certificate duly
completed and executed by an authorized officer of each
Company, in form and substance acceptable to Agents and
Lenders.
(e) A new defined term "Canadian Additional Amount" is
added to Section 1.01 of the Credit Agreement as follows:
"Canadian Additional Amount" means the Canadian
Dollar equivalent of One Million U.S. Dollars (U.S.
$1,000,000) (with such Canadian Dollar equivalent calculated
using the Closing Date Exchange Rate) plus any additional
amount designated by the Canadian Company in writing to the
Agents as a Canadian Additional Amount in accordance with
Section 2.17, provided that the Canadian Additional Amount
shall be permanently reduced to U.S. $0 as of December 31,
1996.
(f) The defined term "Leverage Reserve" set forth in
Section 1.01 is hereby deleted.
(g) A new defined term "Loan Parties" is added to Section
1.01 of the Credit Agreement as follows:
"Loan Parties" means, collectively, Morgan, Stuart
and each Significant Subsidiary, and the term "Loan Party"
shall refer to any one of them; provided,
2
<PAGE> 3
that neither Morgan nor Stuart shall be deemed to be a Loan
Party at such time that the Morgan and Stuart Guaranty has
been terminated.
(h) A new defined term "Morgan" is added to Section 1.01
of the Credit Agreement as follows:
"Morgan" means MLGAL Partners, Limited Partnership, a
Connecticut limited partnership.
(i) A new defined term "Morgan and Stuart Guaranty" is
added to Section 1.01 of the Credit Agreement as follows:
"Morgan and Stuart Guaranty" means that certain
Guaranty dated December 18, 1995 made jointly and severally by
Morgan and Stuart in favor of Agents and Lenders.
(j) A new defined term "Non-Use Fee Revolving Commitment
Amount" is added to Section 1.01 of the Credit Agreement as follows:
"Non-Use Fee Revolving Commitment Amount" means the
amount by which Twenty-Five Million U.S. Dollars (U.S.
$25,000,000) exceeds the Aggregate Revolving Commitment;
provided that the Non-Use Fee Revolving Commitment Amount
shall be permanently reduced to U.S. $0 as of December 31,
1996.
(k) The definition of "Revolving Commitment" set forth in
Section 1.01 of the Credit Agreement is amended and restated in its
entirety as follows:
"Revolving Commitment" means, (i) with respect to a
U.S. Lender, the amount set forth as such Lender's Revolving
Commitment in that certain Assignment and Assumption Agreement
dated August 31, 1995 between Bank of America Illinois and The
Chase Manhattan Bank, National Association, plus such Lender's
Commitment Percentage of the U.S. Additional Amount, as such
amounts may be reduced pursuant to Section 2.05 or as a result
of additional assignments pursuant to Section 10.08, and (ii)
with respect to a Canadian Lender, the amount set forth as
such Lender's Revolving Commitment in that certain Assignment
and Assumption Agreement dated August 31, 1995 between Bank of
America Canada and The Chase Manhattan Bank of Canada, plus
such Lender's Commitment Percentage of the Canadian Additional
Amount, as such amounts may be reduced pursuant to Section
2.05 or as a result of additional assignments pursuant to
Section 10.08.
(l) A new defined term "U.S. Additional Amount" is added
to Section 1.01 of the Credit Agreement as follows:
3
<PAGE> 4
"U.S. Additional Amount" means Two Million U.S.
Dollars (U.S. $2,000,000) plus any additional amount
designated by the U.S. Company in writing to the Agents as a
U.S. Additional Amount in accordance with Section 2.17,
provided that the U.S. Additional Amount shall be permanently
reduced to U.S. $0 as of December 31, 1996.
(m) Section 2.01(b) is amended and restated in its
entirety as follows:
(b) The Revolving Credit. Subject to the terms
and conditions hereafter set forth, Loans (each such Loan, a
"Revolving Loan") will be made to each Company by each of its
Applicable Lenders and Letters of Credit will be issued to
each Company by its Applicable Issuer (in which Letters of
Credit each of such Company's Applicable Lenders will
participate pursuant to Section 2.15) from time to time on any
Business Day during the period from the Closing Date to the
Revolving Termination Date, in an aggregate amount of such
Loans and participations not to exceed at any time outstanding
such Applicable Lender's Revolving Commitment; provided,
however, that, after giving effect to any Borrowing of
Revolving Loans or issuance of any Letters of Credit, the
aggregate principal amount of all outstanding Revolving Loans
and the aggregate undrawn face amount of all Letters of Credit
(with the amounts of the Revolving Loans to the Canadian
Company and Letters of Credit issued for the account of the
Canadian Company expressed in U.S. Dollars at the Closing Date
Exchange Rate) shall not exceed the lesser of (i) the
Borrowing Base and (ii) Aggregate Revolving Commitment. Each
Company may borrow under this subsection 2.01(b), prepay
pursuant to Section 2.06 and reborrow pursuant to this
subsection 2.01(b), within the limits of the Revolving
Commitments of such Company's Applicable Lenders and subject
to the other terms and conditions hereof. The obligations of
each Lender under this subsection 2.01(b) are several and not
joint and the failure of any Lender to fulfill its obligations
hereunder shall not result in any liability to any other
Lenders. The Revolving Loans to the Canadian Company will be
made, and the Letters of Credit for the account of the
Canadian Company will be issued, in Canadian Dollars, and the
Revolving Loans to the U.S. Company will be made, and the
Letters of Credit for the account of the U.S. Company will be
issued, in U.S. Dollars.
(n) Section 2.07(c) of the Credit Agreement is amended
and restated as follows:
(c) Revolving Loans in Excess of the Aggregate
Revolving Commitment or Borrowing Base. If at any time, the
aggregate principal amount of all outstanding Revolving Loans
and the aggregate undrawn face amount of all Letters of Credit
(with the amounts of the Revolving Loans to the Canadian
Company and Letters of Credit issued for the account of the
Canadian Company expressed in U.S. Dollars at the Closing Date
Exchange Rate) exceeds the
4
<PAGE> 5
Aggregate Revolving Commitment, the U.S. Company shall, within
20 days after written notice from the U.S. Agent, make a
prepayment of the Revolving Loans owing by the U.S. Company in
an aggregate amount equal to such excess, unless doing such
20-day period such excess is otherwise reduced to zero. If,
at any time after February 28, 1996, the aggregate principal
amount of all outstanding Revolving Loans and the aggregate
undrawn face amount of all Letters of Credit (with the amounts
of the Revolving Loans to the Canadian Company and Letters of
Credit issued for the account of the Canadian Company
expressed in U.S. Dollars at the Closing Date Exchange Rate)
exceeds the Borrowing Base, the Companies shall immediately
repay such excess; provided, that if such excess exists before
April 30, 1996, the Companies shall repay such excess in full
by making consecutive equal monthly installments each in the
amount of one-ninth of such excess, commencing on April 30,
1996 and continuing on the last day of each calendar month
thereafter until the earlier of December 31, 1996 or the date
the Companies are in compliance with the Borrowing Base.
(o) Section 2.10(b) is amended and restated in its
entirety as follows:
(b) Non-Use Fees. The Canadian Company shall pay
to the Canadian Agent for the account of each of its Canadian
Lenders a non-use fee on the average daily unused portion of
such Lender's Revolving Commitment, computed on a quarterly
basis in arrears on the last Business Day of each calendar
quarter based upon the daily utilization for that quarter as
calculated by the Canadian Agent, equal to the Applicable
Margin for Non-Use Fees then in effect. The U.S. Company
shall pay to the U.S. Agent for the account of each of its
U.S. Lenders a non-use fee on the average daily unused portion
of the sum of (i) such Lender's Revolving Commitment, plus
(ii) an amount equal to the Non-Use Fee Revolving Commitment
Amount multiplied by such Lender's Commitment Percentage,
computed on a quarterly basis in arrears on the last Business
Day of each calendar quarter based upon the daily utilization
for that quarter as calculated by the U.S. Agent, equal to the
Applicable Margin for Non-Use Fees then in effect. Such
non-use fees shall accrue from the Closing Date to the
Revolving Termination Date and shall be due and payable
quarterly in arrears on the last Business Day of each calendar
quarter commencing on March 31, 1995 through the Revolving
Termination Date, with the final payment to be made on the
Revolving Termination Date; provided, that, in connection with
any termination of Commitments pursuant to Section 2.05, the
accrued non-use fee calculated for the period ending on such
date shall also be paid on the date of such termination.
(p) A new Section 2.17 is added to the Loan Agreement as
follows:
Section 2.17. Additional Amounts. At any time after
the Borrowing Base has been established, upon five (5)
Business Days' prior written notice to the
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<PAGE> 6
Agents, the U.S. Company may elect to increase the U.S.
Additional Amount and the Canadian Company may elect to
increase the Canadian Additional Amount in increments of One
Million U.S. Dollars (U.S. $1,000,000), provided that (i) no
Event of Default then exists, (ii) the Aggregate Additional
Amount shall not exceed Five Million U.S. Dollars (U.S.
$5,000,000) at any time, and (iii) the "Maximum Amount" (as
defined in the Morgan and Stuart Guaranty) shall equal or
exceed the Aggregate Additional Amount at all times. Prior to
the effectiveness of such increase, each Company shall execute
such Revolving Notes, amendments to mortgages and other
documents as its Applicable Agent and Lenders deem necessary.
(q) A new Section 2.18 is added to the Loan Agreement as
follows:
Section 2.18. Borrowing Base. On or before February
28, 1996, Agents and Lenders shall deliver to Companies a
letter that sets forth the Borrowing Base for the Companies
determined with respect to the accounts receivable and
inventory of the Companies, against which Revolving Loans and
Letters of Credit issued for the account of the Companies will
be predicated. In connection therewith, the Agents and
Lenders will reasonably determine the eligibility criteria and
advance rates pertaining to such borrowing base. Without
limiting Agents' and Lenders' reasonable discretion to
establish such borrowing base, (i) contra accounts, disputed
accounts, accounts past invoice and/or due date by a certain
number of days to be determined by Agents and Lenders,
affiliated accounts, non-creditworthy accounts, accounts
exceeding a cross-age percentage to be determined by Agents
and Lenders and accounts not subject to an enforceable first
priority Lien in favor of Agents shall not be eligible, (ii)
obsolete inventory, slow-moving inventory, consignment
inventory, unsaleable inventory and inventory not subject to
an enforceable first priority Lien in favor of Agents shall
not be eligible, (iii) the advance rate with respect to
accounts of a Company shall take into account such Company's
dilution experience and the general creditworthiness of its
account debtors and (iv) the advance rate with respect to the
inventory of a Company shall take into account the turnover of
such inventory and the liquidation value of such inventory.
Agents may, in their discretion, create reserves against the
availability under the Borrowing Base as they deem necessary
in their reasonable judgment. The Companies shall execute
such documents, if any, as Agents deem necessary to
incorporate the Borrowing Base into this Agreement and the
other Loan Documents at such time as such Borrowing Base is
finally determined by Agents and Lenders.
(r) A new subsection (f) is added to Section 6.01 of the
Credit Agreement as follows:
(f) As soon as available, but in any event no
later than 30 days after the end of each month commencing with
the month ending February 28, 1996,
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<PAGE> 7
a Borrowing Base Certificate calculating the Borrowing Base as
of the last day of such month.
(s) Section 8.01(e) of the Credit Agreement is amended
and restated as follows:
(e) Cross-Default. A Company or any Loan Party (i) fails
to make any payment in respect of any Indebtedness or Contingent
Obligation having an aggregate principal amount (including undrawn
committed or available amounts and including amounts owing to all
creditors under any combined or syndicated credit arrangement) of more
than One Million Canadian Dollars (Cdn $1,000,000) in the case of the
Canadian Company or any Loan Party (other than Morgan or Stuart), or
One Million U.S. Dollars (U.S. $1,000,000) in the case of the U.S.
Company or any Loan Party (other than Morgan, Stuart or the U.S.
Company's Subsidiaries organized under the laws of Canada or any
province thereof), or Two Million U.S. Dollars (U.S. $2,000,000) in
the case of Morgan or Stuart when due (whether by scheduled maturity,
required prepayment, acceleration, demand or otherwise) and such
failure continues after the applicable grace or notice period, if any,
specified in the document relating thereto on the date of such
failure; or (ii) fails to perform or observe any other condition or
covenant, or any other event shall occur or condition exist, under any
agreement or instrument relating to any such Indebtedness or
Contingent Obligation, and such failure continues after the applicable
grace or notice period, if any, specified in the document relating
thereto on the date of such failure if the effect of such failure,
event or condition is to cause, or to permit the holder or holders of
such Indebtedness or beneficiary or beneficiaries of such Indebtedness
(or a trustee or agent on behalf of such holder or holders or
beneficiary or beneficiaries) to cause such Indebtedness to be
declared to be due and payable prior to its stated maturity, or such
Contingent Obligation to become payable or cash collateral in respect
thereof to be demanded; or
(t) Section 8.01(f) of the Credit Agreement is amended
and restated as follows:
(f) Insolvency Voluntary Proceedings. A Company
or any Loan Party (i) generally fails to pay its debts as they
become due, subject to applicable grace periods, if any,
whether at stated maturity or otherwise; (ii) voluntarily
ceases to conduct its business in the ordinary course; (iii)
commences any Insolvency Proceeding with respect to itself; or
(iv) takes any action to effectuate or authorize any of the
foregoing; or
(u) Section 8.01(g) of the Credit Agreement is amended
and restated as follows:
(g) Involuntary Proceedings. (i) Any involuntary
Insolvency Proceeding is commenced or filed against a Company
or any Loan Party, or any
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<PAGE> 8
writ, judgment, warrant of attachment, execution or similar
process, is issued or levied against a substantial part of a
Company's or any Loan Party's Property, and any such
proceeding or petition shall not be dismissed, or such writ,
judgment, warrant of attachment, execution or similar process
shall not be released, vacated or fully bonded within 60 days
after commencement, filing or levy; (ii) a Company or any Loan
Party admits the material allegations of a petition against it
in any Insolvency Proceeding, or an order for relief (or
similar order under non-U.S. law) is ordered in any Insolvency
Proceeding; or (iii) a Company or any Loan Party acquiesces in
the appointment of a receiver, trustee, custodian,
conservator, liquidator, mortgagee in possession (or agent
therefor), or other similar Person for itself or a substantial
portion of its Property or business;
(v) Section 8.01(h) of the Credit Agreement is amended
and restated as follows:
(h) Monetary Judgments. One or more judgments,
non-interlocutory orders, decrees or arbitration awards shall
be entered against a Company or any Loan Party involving in
the aggregate a liability (not covered by independent third
party insurance) as to any single or related series of
transactions, incidents or conditions, of One Million Canadian
Dollars (Cdn $1,000,000) or more in the case of the Canadian
Company or any Loan Party (other than Morgan or Stuart), or
One Million U.S. Dollars (U.S. $1,000,000) or more in the case
of the U.S. Company or any Loan Party (other than Morgan,
Stuart or the U.S. Company's Subsidiaries organized under the
laws of Canada or any province thereof) or Two Million U.S.
Dollars (U.S. $2,000,000) in the case of Morgan or Stuart, and
the same shall remain unsatisfied, unvacated and unstayed
pending appeal for a period of 30 days after the entry
thereof; or
(w) Section 8.01(i) of the Credit Agreement is amended
and restated as follows:
(i) Non-Monetary Judgments. Any non-monetary
judgment, order or decree shall be rendered against a Company
or any Loan Party which does or could reasonably be expected
to have a Material Adverse Effect, and there shall be any
period of 30 consecutive days during which a stay of
enforcement of such judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect; or
(x) A new Section 8.01(n) is added to the Credit
Agreement as follows:
(n) Morgan or Stuart Defaults. If either Morgan
or Stuart shall fail in any respect to perform or observe any
term, covenant or agreement in the Morgan and Stuart Guaranty;
or the Morgan and Stuart Guaranty shall for any
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<PAGE> 9
reason be partially (including with respect to future
advances) or wholly revoked or invalidated, or otherwise cease
to be in full force and effect except in accordance with its
terms, or either Morgan or Stuart shall contest in any manner
the validity or enforceability thereof;
Section 3. CONDITIONS TO EFFECTIVENESS. This Agreement,
including the amendments and other terms set forth herein, shall become
effective as of the date of this Agreement upon the payment of the fees and
expenses set forth in Section 4 below which are due and payable on the date of
this Amendment and the satisfaction of all of the following conditions
precedent, all of which must be satisfactory to each Agent and Lender in each
of their sole discretion:
(a) Revolving Notes. Each Lender shall have received the
originally executed Revolving Note payable to such Lender which
reflects the increased Revolving Commitment, if any, to such Lender.
(b) Guaranty. U.S. Agent and Canadian Agent shall have
each received an originally executed joint and several guaranty from
MLGAL Partners, Limited Partnership, a Connecticut limited partnership
("Morgan"), and Leonard A. Stuart ("Stuart").
(c) Amendment to Mortgage. U.S. Agent shall have
received a First Amendment to Leasehold Mortgage pertaining to 3319
Nebraska Avenue, Council Bluffs, Iowa, a First Amendment to Junior
Mortgage pertaining to Council Bluffs, Iowa, a Second Amendment to
Leasehold Mortgage pertaining to 3215 Nebraska Avenue, Council Bluffs,
Iowa and a First Amendment to Leasehold Deed of Trust and Assignment
of Rents pertaining to Littleton, Colorado.
(d) Opinions of Counsel. U.S. Agent shall have received
the Opinion of counsel to Morgan and the Opinion of counsel to Stuart.
(e) Resolutions. U.S. Agent shall have received the
resolutions of the board of directors, or the authorization of the
partnership, as applicable, of each of Morgan, U.S. Company and
Canadian Company as to the documents entered into by each company.
(f) Financial Statements. U.S. Agent shall have received
the (i) audited December 31, 1994 financial statements of Morgan, and
(ii) financial statements of Stuart, certified as true and accurate by
Stuart.
Section 4. FEES AND EXPENSES; DATE DOWN ENDORSEMENTS.
(a) Amendment Fee. The U.S. Company and Canadian Company
shall pay to U.S. Agent, for the account of U.S. Lenders, an amendment
fee of Ninety Thousand U.S. Dollars (U.S. $90,000), which fee shall be
fully earned and payable as of the date
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<PAGE> 10
hereof. The U.S. Company and Canadian Company also shall pay to U.S.
Agent, for the account of U.S. Lenders, an amendment fee, which shall
be fully earned and payable on each date on which there is an increase
in the Aggregate Additional Amount, equal to three percent (3.0%) of
the amount of such increase.
(b) Audit Fees. The U.S. Company and Canadian Company
agree to pay U.S. Agent for all audit fees incurred by U S. Agent in
connection with the establishment of a borrowing base as contemplated
by Section 2.17 of the Credit Agreement.
(c) Costs, Expenses and Taxes. Each Company affirms and
acknowledges that Section 10.04 of the Credit Agreement applies to
this Agreement and the transactions and agreements and documents
contemplated hereunder.
(d) Date Down Endorsements. Within 60 days following the
date hereof, the U.S. Company shall cause to be delivered to the U.S.
Agent date down title endorsements, in form and substance satisfactory
to the U.S. Agent, with respect to the amendments described in Section
3(c) above.
Section 5. REPRESENTATIONS AND WARRANTIES. To induce Lenders to
enter into this Agreement, each Company represents and warrants to Lenders that
the execution, delivery and performance by such Company of this Agreement are
within its corporate powers, have been duly authorized by all necessary
corporate action (including, without limitation, shareholder approval), have
received all necessary governmental approval (if any shall be required), and do
not and will not contravene or conflict with any provision of law applicable to
such Company, the Organization Documents of such Company, or any order,
judgment or decree of any court or other agency of government or any
Contractual Obligation binding upon such Company; and the Credit Agreement as
amended as of the date hereof is the legal, valid and binding obligation of
such Company enforceable against such Company in accordance with its terms.
Section 6. MISCELLANEOUS.
(a) Captions. Section captions used in this Agreement
are for convenience only, and shall not affect the construction of
this Agreement.
(b) Governing Law. This Agreement shall be a contract
made under and governed by the laws of the State of Illinois, without
regard to conflict of laws principles. Whenever possible each
provision of this Agreement shall be interpreted in such manner as to
be effective and valid under applicable law, but if any provision of
this Agreement shall be prohibited by or invalid under such law, such
provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or
the remaining provisions of this Agreement.
(c) Counterparts. This Agreement may be executed in any
number of counterparts and by the different parties on separate
counterparts, and each such
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<PAGE> 11
counterpart shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same Agreement.
(d) Successors and Assigns. This Agreement shall be
binding upon the Companies, Agents and Lenders and their respective
successors and assigns, and shall inure to the sole benefit of the
Companies, Agents and Lenders and the successors and assigns of the
Companies, Agents and Lenders.
(e) References. Any reference to the Credit Agreement
contained in any notice, request, certificate, or other document
executed concurrently with or after the execution and delivery of this
Agreement shall be deemed to include this Agreement unless the context
shall otherwise require.
(f) Continued Effectiveness. Notwithstanding anything
contained herein, the terms of this Agreement are not intended to and
do not serve to effect a novation as to the Credit Agreement. The
parties hereby expressly do not intend to extinguish the Credit
Agreement. Instead, it is the express intention of the parties hereto
to reaffirm the indebtedness created under the Credit Agreement and
secured by the Collateral. The Credit Agreement is amended hereby and
each of the Loan Documents remain in full force and effect.
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<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first above written.
<TABLE>
<S> <C>
STUART ENTERTAINMENT, INC. BINGO PRESS & SPECIALTY LIMITED
By By
------------------------------------------------ ----------------------------------------------------------
Title: Title:
--------------------------------------------- -------------------------------------------------------
BANK OF AMERICA NATIONAL TRUST BANK OF AMERICA CANADA, as
AND SAVINGS ASSOCIATION, as U.S. Canadian Agent
Agent
By By
------------------------------------------------ ----------------------------------------------------------
Title: Title:
--------------------------------------------- -------------------------------------------------------
BANK OF AMERICA ILLINOIS, as a U.S. BANK OF AMERICA CANADA, as a
Lender Canadian Lender
By By
------------------------------------------------ -----------------------------------------------------------
Title: Title:
--------------------------------------------- --------------------------------------------------------
THE CHASE MANHATTAN BANK, THE CHASE MANHATTAN BANK OF
NATIONAL ASSOCIATION, as a U.S. CANADA, as a Canadian Lender
Lender
By By
------------------------------------------------ ----------------------------------------------------------
Title: Title:
--------------------------------------------- -------------------------------------------------------
</TABLE>
12
<PAGE> 1
EXHIBIT 10.23
GUARANTY
RECITALS
Reference is made to that certain Credit Agreement dated as of
December 13, 1994 (as the same may be amended, modified or supplemented from
time to time, the "Credit Agreement") among Stuart Entertainment, Inc., a
Delaware corporation and Bingo Press & Specialty Limited (formerly known as
1089350 Ontario Inc.), an Ontario Corporation (collectively, "Borrowers"), the
various financial institutions as are, or may from time to time become, parties
thereto ("Lenders"), Bank of America National Trust and Savings Association, a
national banking association, as U.S. Agent ("U.S. Agent") and Bank of America
Canada, as Canadian Agent ("Canadian Agent"). As one of the conditions to
providing certain additional financial accommodations to Borrowers under the
Credit Agreement, Agents and Lenders have required that each of the
undersigned, MLGAL Partners, Limited Partnership, a Connecticut limited
partnership ("Morgan") and Leonard A. Stuart, an individual ("Stuart") jointly
and severally guaranty certain of the obligations of each Borrower to Agent and
Lenders as set forth herein. U.S. Agent and Canadian Agent are collectively
referred to herein as "Agents" and each individually as an "Agent," and Morgan
and Smart are collectively referred to herein as "Guarantors" and each
individually as a "Guarantor." Unless otherwise defined herein, capitalized
terms used herein shall have the meanings ascribed to such terms in the Credit
Agreement.
GUARANTY
Therefore, for value received, and in consideration of any loan,
advance or financial accommodation of any kind whatsoever heretofore, now or
hereafter made, given or granted to either Borrower by Agents and/or Lenders,
each Guarantor hereby jointly and severally unconditionally guarantees the full
and prompt payment when due, whether at maturity or earlier, by reason of
acceleration or otherwise, and at all times thereafter, of all indebtedness,
liabilities and obligations of every kind and nature of each Borrower to Agents
and/or Lenders, howsoever created, arising or evidenced, whether direct or
indirect, absolute or contingent, joint or several, now or hereafter existing
or due or to become due, and howsoever owned, held or acquired by Agents and/or
Lenders, whether through discount, overdraft, purchase, direct loan or as
collateral or otherwise, arising under or relating to the Credit Agreement,
including without limitation any interest accruing after the commencement of
Insolvency Proceedings with respect to either Borrower, regardless of whether
such interest is allowed as a claim by the court having jurisdiction over such
proceedings (all such indebtedness, liabilities and obligations being
hereinafter referred to as "Borrowers' Obligations"). Each Guarantor further
agrees to pay all costs and expenses including without limitation, all court
costs and reasonable Attorney Costs paid or incurred by Agents and/or Lenders
in endeavoring to collect all or any part of Borrowers' Obligations from, or in
prosecuting any action against, either Guarantor of all or any part of
Borrowers' Obligations.
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<PAGE> 2
Each Guarantor hereby agrees that its obligations under this Guaranty
shall be unconditional, irrespective of (a) the validity or enforceability of
Borrowers' Obligations or any part thereof, or of any Loan Documents, (b) the
absence of any attempt to collect Borrowers' Obligations from either Borrower
or any other guarantor or other action to enforce the same, (c) the waiver or
consent by Agents or Lenders with respect to any provision of any Loan
Document, (d) the failure by an Agent to take any steps to perfect and maintain
its Lien on, or to preserve its rights to, any security or collateral for
Borrowers' Obligations, (e) either Agent's election, in any proceeding
instituted under Chapter 11 of Title 11 of the United States Code (11 U.S.C.
Section 101 et seq.), as amended (the "Bankruptcy Code") of the application of
Section 1111(b)(2) of the Bankruptcy Code, (f) any borrowing or grant of a Lien
by either Borrower as debtor-in-possession, under Section 364 of the Bankruptcy
Code, (g) the disallowance, under Section 502 of the Bankruptcy Code, of all or
any portion of an Agent's or any Lender's claim(s) for repayment of Borrowers'
Obligations, or (h) any other circumstance which might otherwise constitute a
legal or equitable discharge or defense of either Borrower or a Guarantor.
Notwithstanding any provision of this Guaranty to the contrary, the
liability of the Guarantors under this Guaranty shall not exceed the lesser of
(a) Three Million U.S. Dollars (U.S. $3,000,000) (the "Maximum Amount") and (b)
the Highest Amount (as defined below), plus all costs and expenses (including,
without limitation, attorney's fees and legal expenses) incurred by Agents
and/or Lenders in the enforcement of this Guaranty. "Highest Amount" means the
greatest amount by which the aggregate principal amount of all outstanding
Revolving Loans and the aggregate undrawn face amount of all Letters of Credit
(with the amounts of the Revolving Loans to the Canadian Company and the
Letters of Credit issued for the account of the Canadian Company expressed in
U.S. Dollars at the Closing Date Exchange Rate) exceeds Twenty Million U.S.
Dollars (US $20,000,000) at any time during the period commencing on the
occurrence of any Event of Default and ending on the date of the enforcement of
this Guaranty.
Notwithstanding any provision of this Guaranty to the contrary,
neither Agent nor any Lender shall take any action to enforce this Guaranty
until sixty (60) days after the earlier to occur of (a) the date on which an
Agent commences the exercise of any of its remedies under the Loan Documents
and (b) the occurrence of an Event of Default under Section 8.01(f) or Section
8.01(g) of the Credit Agreement.
This Guaranty shall terminate when Guarantors have provided Agents and
Lenders with written notice that each of the following conditions have been
satisfied and Agents and Lenders have each agreed in writing that each of the
following conditions have been satisfied: (a) no Default or Event of Default is
in existence, (b) the aggregate Revolving Commitments of the U.S. Lenders will
be equal to or less than U.S. $10,000,000 after giving effect to such
termination, (c) the aggregate Revolving Commitments of the Canadian Lenders
(with the amounts of the Commitments of the Canadian Lenders expressed in U.S.
Dollars at the Closing Date Exchange Rate) will be equal or less than U.S.
$10,000,000 after giving effect to such termination, and (d) the Aggregate
Revolving Commitment exceeds the aggregate principal amount of all outstanding
Revolving Loans and the aggregate undrawn face amount of all Letters
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<PAGE> 3
of Credit (with the amount of the Revolving Loans to the Canadian Company and
Letters of Credit issued for the account of the Canadian Company expressed in
U.S. Dollars at the Closing Date Exchange Rate) by at least U.S. $2,000,000 at
such time and has exceeded such amount by U.S. $2,000,000 at all times during
the 30-day period prior to such termination. In addition, in the event MLGA
and its Affiliates desire to sell all or a portion of the capital stock of the
U.S. Company held by them and such sale, if consummated, would cause an Event
of Default under Section 8.01(k)(i) of the Credit Agreement, this Guaranty
shall terminate if (i) all of the Lenders agree to waive such Event of Default
under Section 8.01(k)(i) of the Credit Agreement and consent to such sale and
(ii) such sale is consummated. Notwithstanding the foregoing, the termination
of the Guaranty pursuant to this paragraph shall not relieve either Guarantor
from the payment of amounts for which demand has been made by either Agent
prior to the effective date of termination.
No payment made by or for the account or benefit of either Guarantor
(including without limitation, (a) a payment made by either Borrower in respect
of Borrowers' Obligations, (b) a payment made by any Person under any other
guaranty of Borrowers' Obligations or (c) a payment made by means of set-off or
other application of funds by either Agent or any Lender) pursuant to this
Guaranty shall entitle either Guarantor, by subrogation or otherwise, to any
payment by Borrower or from or out of any property of a Borrower, and neither
Guarantor shall exercise any right or remedy against a Borrower or any property
of a Borrower including, without limitation, any right of contribution or
reimbursement by reason of any performance by either Guarantor under this
Guaranty, until the Borrower's Obligations have been paid in full.
Each Guarantor hereby waives diligence, presentment, demand of
payment, filing of claims with a court in the event of Insolvency Proceedings
of either Borrower, protest or notice with respect to Borrowers' Obligations
and all demands whatsoever, and covenants that this Guaranty will not be
discharged, except by complete and irrevocable payment and performance of the
obligations and liabilities contained herein or as otherwise set forth herein.
No notice to either Guarantor or any other party shall be required for either
Agent, on behalf of itself and Lenders, to make demand hereunder. Such demand
shall constitute a mature and liquidated claim against each Guarantor. Upon
the occurrence and during the continuance of any Event of Default, either Agent
may, at its sole election, proceed directly and at once, without notice,
against either Guarantor to collect and recover the full amount or any portion
of Borrowers' Obligations, without first proceeding against either Borrower,
any other Person, or any security or collateral for Borrowers' Obligations.
Each Agent shall have the exclusive right to determine the application of
payments and credits, if any, from either Guarantor, either Borrower, any other
Person, or any security or collateral for Borrowers' Obligations, on account of
Borrowers' Obligations or of any other liability of either Guarantor to Agents
and Lenders arising hereunder.
Agents and Lenders are hereby authorized, without notice or demand to
either Guarantor and without affecting or impairing the liability of either
Guarantor hereunder, to, from time to time, (a) renew, extend, accelerate or
otherwise change the time for payment of, or other terms relating to,
Borrowers' Obligations or otherwise modify, amend or change the terms of any
Loan
3
<PAGE> 4
Document, (b) accept partial payments on Borrowers' Obligations, (c) take and
hold collateral for the payment of Borrowers' Obligations, or for the payment
of this Guaranty, or for the payment of any other guaranties of Borrowers'
Obligations or other liabilities of either Borrower, and exchange, enforce,
waive and release any such collateral, (d) apply such collateral and direct the
order or manner of sale thereof as in their sole discretion they may determine,
and (e) settle, release, compromise, collect or otherwise liquidate Borrowers'
Obligations and any collateral therefor in any manner.
Subject to the terms of the third and fourth paragraphs under the
heading "GUARANTY" of this Guaranty, at any time after maturity of Borrowers'
Obligations, Agents and Lenders may, in their sole discretion, without notice
to either Guarantor and regardless of the acceptance of any collateral for the
payment hereof, appropriate and apply toward payment of Borrowers' Obligations
(a) any indebtedness due or to become due from Agents or any of Lenders to
Guarantor and (b) any moneys, credits or other property belonging to Guarantor
at any time held by or coming into the possession of either Agent or any of
Lenders or any Affiliates thereof, whether for deposit or otherwise.
Each Guarantor hereby assumes responsibility for keeping itself or
himself informed of the financial condition of each Borrower, and any and all
endorsers and other guarantors of any Loan Document and of all other
circumstances being upon the risk of nonpayment of Borrowers' Obligations or
any part thereof that diligent inquiry would reveal, and each Guarantor hereby
agrees that neither Agents nor Lenders shall have any duty to advise each
Guarantor of information known to such Agents or Lenders regarding such
condition or any such circumstances. Each Guarantor hereby acknowledges
familiarity with each Borrower's financial condition and has not relied on any
statements by Agents or Lenders in obtaining such information. In the event an
Agent or any Lender, in its sole discretion, undertakes at any time or from
time to time to provide any such information to either Guarantor, neither Agent
nor any Lender shall be under any obligation (a) to undertake any investigation
with respect thereto, (b) to disclose any information which, pursuant to
accepted or reasonable commercial finance practices, either Agent or any Lender
wishes to maintain confidential or (c) to make any other or future disclosures
of such information, or any other information, to either Guarantor.
Each Guarantor consents and agrees that neither Agents nor Lenders
shall be under any obligation to marshal any assets in favor of either
Guarantor or against or in payment of any or all of Borrowers' Obligations.
Each Guarantor further agrees that, to the extent that either Borrower makes a
payment or payments to any Agent or Lender, or any Agent or Lender receives any
proceeds of Collateral, which payment or payments or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside
or required to be repaid to a Borrower, its estate, trustee, receiver or any
other party, including without limitation a Guarantor, under any bankruptcy
law, state or federal law, common law or equitable cause, then to the extent of
such payment or repayment, Borrowers' Obligations or the part thereof which has
been paid, reduced or satisfied by such amount shall be reinstated and
continued in full force and effect as of the date such initial payment,
reduction or satisfaction occurred, and
4
<PAGE> 5
this Guaranty shall continue to be in existence and in full force and effect,
irrespective of whether any evidence of indebtedness has been surrendered or
canceled.
Each Guarantor also waives all set-offs and counterclaims and all
presentments, demands for performance, notices of nonperformance, protests,
notices of protest, notices of dishonor, and notices of acceptance of this
Guaranty. Each Guarantor further waives all notices of the existence, creation
or incurring of new or additional indebtedness, arising either from additional
loans extended to either Borrower or otherwise, and also waives all notices
that the principal amount, or any portion thereof, or any interest on any Loan
Document is due, notices of any and all proceedings to collect from the maker,
any endorser or any other guarantor of all or any part of Borrowers'
Obligations, or from anyone else, and, to the extent permitted by law, notices
of exchange, sale, surrender or other handling of any security or collateral
given to either Agent to secure payment of Borrowers' Obligations.
If for the purpose of obtaining judgment in any court it is necessary
to convert a sum due hereunder in the currency in which it is due (the
"Original Currency") into another currency (the "Second Currency"), the rate of
exchange used shall be that at which the U.S Agent, in accordance with normal
banking procedures, could purchase the Original Currency with the Second
Currency in the New York foreign exchange market on the Business Day preceding
that on which final judgment is given. Such rate of exchange shall include any
premium and costs of exchange payable in connection with such purchase. The
obligation in the Original Currency shall, notwithstanding any judgment in the
Second Currency, be discharged only to the extent that on the Business Day
following receipt by the U.S. Agent of any sum adjudged to be so due in the
Second Currency, the U.S. Agent may, in accordance with normal banking
procedures, purchase the Original Currency with the Second Currency paid to the
U.S. Agent in the New York foreign exchange market. If the amount of the
Original Currency so purchased is less than the amount originally due in the
Original Currency, each Guarantor jointly and severally agrees, as a separate
obligation and notwithstanding any such judgment, to indemnify the Agents and
Lenders against such loss.
MISCELLANEOUS
No delay on the part of either Agent in the exercise of any right or
remedy shall operate as a waiver thereof, and no single or partial exercise by
either Agent of any right or remedy shall preclude any further exercise
thereof, nor shall any modification or waiver of any of the provisions of this
Guaranty be binding upon any Agent or Lender, except as expressly set forth in
a writing duly signed and delivered on such Agent's behalf by an authorized
officer or agent of such Agent. Any Agent's or Lender's failure at any time or
times hereafter to require strict performance by either Borrower or either
Guarantor of any of the provisions, warranties, terms and conditions contained
in any Loan Document shall not waive, affect or diminish any right of any Agent
or Lender at any time or times hereafter to demand strict performance thereof
and such right shall not be deemed to have been waived by any act or knowledge
of any Agent or Lender, or their respective agents, officers or employees,
unless such waiver is contained in an instrument in writing signed by an
officer or agent of such Agent, and directed to such Borrower
5
<PAGE> 6
or such Guarantor, as applicable, specifying such waiver. No waiver by any
Agent or Lender of any default shall operate as a waiver of any other default
or the same default on a future occasion, and no action by any Agent or Lender
permitted hereunder shall in any way affect or impair any Agent's or Lender's
rights or the obligations of either Guarantor under this Guaranty. Any
determination by a court of competent jurisdiction of the amount of any
principal or interest owing by a Borrower to any Agent or Lender shall be
conclusive and binding on each Guarantor irrespective of whether such Guarantor
was a party to the suit or action in which such determination was made.
This Guaranty shall be binding upon each Guarantor and upon the
successors and permitted assigns of each Guarantor and shall inure to the
benefit of each Agent's and Lender's respective successors and assigns; all
references herein to a Borrower shall be deemed to include its successors and
permitted assigns and all references herein to an Agent or a Lender shall be
deemed to include its respective successors and assigns. Each Borrower's
successors and permitted assigns shall include, without limitation, a receiver,
trustee or debtor in possession of or for such Borrower. All references to the
singular shall be deemed to include the plural, and vice versa, where the
context so requires.
Wherever possible each provision of this Guaranty shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Guaranty shall be prohibited by or invalid under such law,
such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Guaranty.
THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAW OF THE STATE OF ILLINOIS; PROVIDED, THAT EACH AGENT AND LENDER SHALL
RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.
ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS GUARANTY AND ANY
OTHER LOAN DOCUMENTS TO WHICH EITHER GUARANTOR IS A PARTY MAY BE BROUGHT IN THE
COURTS OF THE STATE OF ILLINOIS OR OF THE UNITED STATES FOR THE NORTHERN
DISTRICT OF ILLINOIS, AND BY EXECUTION AND DELIVERY OF THIS GUARANTY, EACH
GUARANTOR CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE
NONEXCLUSIVE JURISDICTION OF THOSE COURTS. EACH GUARANTOR IRREVOCABLY WAIVES
ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE
GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE
BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS
GUARANTY. EACH GUARANTOR WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR
OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY ILLINOIS LAW.
NOTWITHSTANDING THE FOREGOING, EACH AGENT AND LENDER SHALL HAVE
6
<PAGE> 7
THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST EITHER GUARANTOR OR ITS
PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION.
EACH GUARANTOR WAIVES ITS RIGHT TO A TRIAL BY JURY OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS GUARANTY, THE
OTHER LOAN DOCUMENTS TO WHICH SUCH GUARANTOR IS A PARTY OR THE TRANSACTIONS
CONTEMPLATED HEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE
BROUGHT AGAINST SUCH GUARANTOR UNDER THIS GUARANTY OR ANY OTHER LOAN DOCUMENT
TO WHICH SUCH GUARANTOR IS A PARTY, WHETHER WITH RESPECT TO CONTRACT CLAIMS,
TORT CLAIMS OR OTHERWISE. EACH GUARANTOR AGREES THAT ANY SUCH CLAIM OR CAUSE
OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE
FOREGOING, EACH GUARANTOR FURTHER AGREES THAT ITS RIGHT TO A TRIAL BY JURY IS
WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER
PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR
ENFORCEABILITY OF THIS GUARANTY AND ANY OTHER LOAN DOCUMENT TO WHICH SUCH
GUARANTOR IS A PARTY. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS GUARANTY AND ANY OTHER LOAN
DOCUMENT TO WHICH SUCH GUARANTOR IS A PARTY.
Morgan hereby certifies that it has all necessary corporate authority
to grant and execute this Guaranty.
This Guaranty may be executed in any number of counterparts and by
different parties on separate counterparts, and each such counterpart shall be
deemed to be an original, but all such counterparts shall together constitute
but one and the same Guaranty.
Morgan shall deliver its audited financial statements for the year
ending December 31, 1995 to U.S Agent on or before May 31, 1996 and Stuart
shall deliver his financial statements for the year ending December 31, 1995,
certified as true and accurate by Stuart, to U.S. Agent on or before May 31,
1996.
7
<PAGE> 8
IN WITNESS WHEREOF, this Guaranty has been duly executed by each
Guarantor this 18th day of December 1995.
MLGAL PARTNERS, LIMITED PARTNERSHIP
By ______________________________________
Sangwoo Ahn
Address: 2 Greenwich Plaza
Greenwich, Connecticut 06830
By _______________________________________
Leonard A. Stuart
Address: c/o 808 N.E. 20th Avenue
Fort Lauderdale, Florida 33304
8
<PAGE> 1
EXHIBIT 11
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Years Ended December 31,
--------------------------------------
1995 1994 1993
--------------------------------------
Shares of common stock outstanding at
beginning of year(1) 6,538,788 3,405,353 3,367,543
Weighted-average shares issued during
the year 115,270 155,495 25,541
Weighted-average shares assumed issued
under stock option plans and exercise
of warrants (using treasury stock
method) during the year under
primary(2) 51,846 - 131,028
--------- ----------- ---------
Average common and common equivalent
shares outstanding - primary 6,705,904 3,560,848 3,524,112
Weighted-average shares assumed issued
under stock option plans and exercise
of warrants (using treasury stock
method) during the year under fully
dilutive(2) 347,318 - -
--------- ----------- ---------
Average common and common equivalent
shares outstanding - fully dilutive 7,053,222 3,560,848 3,524,112
========= =========== =========
Net income (loss):
Income (loss) before cumulative effect
of change in accounting principle $ 786,000 $(1,608,000) $ 512,000
--------- ----------- ---------
Cumulative effect of change in
accounting principle - - 187,000
--------- ----------- ---------
Net income (loss) $ 786,000 $(1,608,000) $ 699,000
--------- ----------- ---------
Earnings (loss) per share - primary:
Income (loss) before cumulative effect
of change in accounting principle $0.12 $(0.45) $0.15
Cumulative effect of change in
accounting principle - - .05
--------- ----------- ---------
Earnings (loss) per share - primary $0.12 $(0.45) $0.20
--------- ----------- ---------
Earnings (loss) per share - fully
dilutive:
Income (loss) before cumulative
effect of change in accounting
principle $0.11 $(0.45) $0.15
Cumulative effect of change in
accounting principle - - .05
--------- ----------- ---------
Earnings (loss) per share - fully
dilutive $0.11 $(0.45) $0.20
========= =========== =========
(1) This represents total outstanding shares of common stock less treasury
shares. See Note 1 to the Consolidated Financial Statements and the
Consolidated Statement of Stockholders' Equity in Item 14 for additional
information.
(2) No amount is included in 1994, as it would make the calculation anti-
dilutive. If the calculation was not anti-dilutive, average common and
common equivalent shares would be increased by $3,602.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State or other
Jurisdiction of
Incorporation or Names under which
Organization Subsidiary does business
---------------- -------------------------
<S> <C> <C>
Bingo Press & Specialty Limited Ontario, Canada Bazaar & Novelty
Video King Gaming Systems, Inc. Colorado Video King
Stuart Entertainment, S.A. de C.V. Mexico
Stuart Entertainment, Ltd. U.K.
Stuart Entertainment do Brasil, Ltda. Brazil
S.E. Michigan, Inc. Michigan
S.E. International, Inc. Iowa
Stuart Manufacturing, Inc. Louisiana
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF DELOITTE & TOUCHE LLP
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement 33-89962
of Stuart Entertainment, Inc. on Form S-8 of our report dated March 25, 1996,
appearing in this Annual Report on Form 10-K of Stuart Entertainment, Inc. for
the year ended December 31, 1995.
DELOITTE & TOUCHE, LLP
Omaha, Nebraska
March 29, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1995 AND THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1995 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH YEAR END REPORT ON FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 943
<SECURITIES> 0
<RECEIVABLES> 21,654
<ALLOWANCES> 2,285
<INVENTORY> 21,982
<CURRENT-ASSETS> 44,587
<PP&E> 34,212
<DEPRECIATION> 13,095
<TOTAL-ASSETS> 98,994
<CURRENT-LIABILITIES> 24,569
<BONDS> 39,586
<COMMON> 68
0
0
<OTHER-SE> 31,972
<TOTAL-LIABILITY-AND-EQUITY> 98,994
<SALES> 109,882
<TOTAL-REVENUES> 109,882
<CGS> 74,722
<TOTAL-COSTS> 27,606
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 543
<INTEREST-EXPENSE> 4,448
<INCOME-PRETAX> 2,563
<INCOME-TAX> 1,777
<INCOME-CONTINUING> 786
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 786
<EPS-PRIMARY> .12
<EPS-DILUTED> .11
</TABLE>
