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