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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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NO. 0-10737
STUART ENTERTAINMENT, INC.
(Exact Name of Registrant as Specified in its Charter)
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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. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 17, 1998 was $5,275,397.
The number of shares outstanding of the Registrants' $.01 par value common
stock as of March 17, 1998 was 6,933,689.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on May 20, 1998 are incorporated by reference
into Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
Stuart Entertainment, Inc. (the "Company") 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 worldwide reputation for innovation and new
product development and has been a leader in the bingo industry for
approximately 50 years, having popularized 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 any
of its competitors. The Company is capable of fully 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 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
New Credit Facility
On November 20, 1997, the Company entered into a new credit facility
consisting of two loan and security agreements, one between the Company and
Congress Financial Corporation (Central) (the "U.S. 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 $30.0 million, of which up to $20.0 million may be borrowed
under the US Facility and up to $10.0 million may be borrowed under the Canadian
Facility. 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,
under the U.S. Facility and the Canadian Facility, is based on eligible accounts
receivable, eligible inventory and equipment value levels of the Company and
Bazaar, respectively.
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
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minimum level of net worth. The Credit Facility further contains customary
events of default including non-payment of principal, interest or fees and
violations of covenants.
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, currently
estimated at $2.2 million to $2.7 million, based on the market performance of
the hand-held electronic bingo units.
Delisting from Nasdaq Smallcap Market; Disclosure Relating to Low Priced
Stocks
On August 22, 1997, the Company was notified that the Common Stock was
delisted from the Nasdaq National Market due to a failure to meet the net
tangible asset requirement and the Common Stock was subsequently admitted for
trading on the Nasdaq SmallCap Market. 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. Therefore, the Common Stock was scheduled
for delisting, effective with the close of business on March 16, 1998. On March
12, 1998, the Company requested a temporary exception to the new requirements
and requested an expedited written hearing. If the Company's request for a
temporary exception is denied, the Common Stock will begin trading on NASD's OTC
Electronic Bulletin Board effective as of the date of denial of the request for
review. 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 Common Stock is delisted from trading on the Nasdaq SmallCap Market
and 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") estimates 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 these amounts may increase as electronic bingo
systems further penetrate the United States and Canadian 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 regulated differently than traditional paper bingo, with electronic bingo
systems currently being permitted by 24 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
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territories: however, fixed-base electronic bingo systems may only be used in
halls owned or authorized by the provincial governments. Currently, fixed-base
electronic gaming systems are permitted 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
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. Additionally, a number of casinos in Las Vegas, Nevada
have opened large bingo halls in the last 2 years.
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.
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 as additional jurisdictions permit the sale of pulltab tickets and as
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, 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 announced the list of the final proponents for operation and
ownership of the 44 charity gaming clubs that will replace the current system of
roving Monte Carlo casinos. The Company expects some charity gaming clubs to
begin opening during the second half of 1998, but currently is unable to
anticipate the impact such gaming clubs will have on the bingo and pulltab
ticket 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. While Video King has
focused its sales efforts within the Company's established bingo markets, it may
also seek to address the domestic and international for-profit gaming markets.
Stuart Entertainment Mexico
Stuart Entertainment, S.A. de C.V., a Mexican corporation and a wholly
owned subsidiary of the Company ("Stuart Entertainment Mexico") was formed in
1991 by the Company and Bazaar for the purpose of printing and finishing bingo
paper primarily for their respective needs. During 1997, 1996 and 1995 all of
the bingo paper manufactured by Stuart Entertainment Mexico was sold to the
Company.
Bingo Press & Specialty Limited
Bazaar operates under the tradename 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 Bazaar owned retail
stores.
PRODUCTS
OVERVIEW. The Company offers a wide array of bingo and bingo-related
products. The Company is capable of fully 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.
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 bingo games and other specialty bingo games which can be played as
variations on or concurrently with the standard 75-number bingo game. With over
50 different bingo card varieties available, the Company provides bingo halls
with the tools to be creative in structuring their bingo sessions. 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 its
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 is in play and a specific number of
balls is called. The Company has the largest number of unique series types in
the industry. These different series types range in size from a series of 9,000
unique cards to a series in excess of 3.0 million 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. This seamless integration of paper bingo cards and electronic
verification is only matched by one other competitor in the industry.
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. These tickets are similar to instant lottery and scratch-off
tickets. The Company currently has a library of over 800 different designs and
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denominations for pulltab tickets, and is 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 to the sponsoring organization.
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 new
labeling process that allows distributors to directly customize labels on-site
for their bingo halls. The Company expects to launch new 3 and 4 ounce
ergonomically designed bottles by the third quarter of 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 which
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 instantaneous verification of winning bingo
cards; (d) electronic pulltab ticket dispensing machines; and (e) software
developed to support North American, South American and European styles of
bingo.
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 custom advertising
products. Party supplies, flags, balloons and bar and concession equipment for
use at fundraising events and bazaars are sold through the Company's
distribution outlets in Canada and through the Company's distributor network.
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 this opportunity. The popularity of electronic
bingo systems is growing rapidly because they provide the player with additional
entertainment value and permit simultaneous play on many more cards than would
be possible in a typical paper game. This leads to greater spend per player and
higher profits per bingo session for the bingo hall operator. As part of the
Company's strategy to be a leading producer of electronic bingo systems, the
Company offers 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 which allows players to play up to 255 electronic cards per game. This
provides bingo players with the opportunity to play a bingo game electronically
on touch screen terminals while playing traditional paper bingo simultaneously
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 regulations permit. System 12(TM) also enables hall
management to control all game functions, track player trends and generate sales
reports. The Company had more than 1,800 fixed-base units in place at December
31, 1997.
(ii) Power Bingo King. 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 derives revenues from more than 20,000 hand-held units at
December 31, 1997. The Company completed the acquisition of substantially
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all the assets of Power Bingo Corporation on July 1, 1997 (see
"Business -- Certain Recent Developments"). The Company previously marketed
Power Bingo King(TM) through a marketing and manufacturing agreement with Power
Bingo Corporation.
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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1997 1996 1995
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(DOLLARS IN THOUSANDS)
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Bingo Paper................................................ $ 57,669 $ 57,552 $ 58,522
Pulltab Tickets............................................ $ 44,290 $ 27,812 $ 26,916
Ink Dabbers................................................ $ 9,142 $ 10,049 $ 12,014
General Merchandise........................................ $ 3,802 $ 4,542 $ 4,988
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Total Consumables................................ $114,903 $ 99,955 $102,440
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Bingo Hall Equipment....................................... $ 6,605 $ 6,398 $ 5,757
Power Bingo King(TM)....................................... $ 2,521 $ 61 $ --
System 12(TM).............................................. $ 1,071 $ 4,222 $ 1,685
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Total Electronics................................ $ 10,197 $ 10,681 $ 7,442
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Net Sales........................................ $125,100 $110,636 $109,882
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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, ten
Company-owned distribution outlets in Canada, the Company's direct sales force
and mail order catalogs. The Company believes that its role as a full-service
provider of bingo and bingo-related products and services and its use of its
well-known brand names provides 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. The Company printed over 120,000 copies of its 1996 bingo and bingo-
related product catalogs, over 100,000 copies of its 1996 general merchandise
catalogs and over 63,000 copies in Canada of its 1997 seasonal and general
merchandise catalogs. 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 1997 the Company was a
prominent exhibitor and seminar participant at the Bingo World Expo and at the
World Gaming Congress and Exposition, which featured the products of over 600
companies, and attracted nearly 20,000 participants from over 80 countries.
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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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1997 1996 1995
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Sales to distributors....................................... 73% 70% 65%
Retail sales................................................ 27% 30% 35%
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During 1997, 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 1998 on
further developing its distributor network, with minor emphasis placed on
attempting to generate additional retail sales, primarily through direct
mailings of catalogs and fliers. The Company has also sponsored group seminars
designed to assist distributors and other customers in developing and refining
sales and marketing programs and 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 Alberta, British Columbia,
Newfoundland, Ontario, Quebec and Saskatchewan. The government agencies
distribute bingo paper products exclusively in the Provinces of British Columbia
and Manitoba. Bazaar-owned retail stores operate in the Provinces of Manitoba,
New Brunswick, Nova Scotia and Ontario.
FOREIGN AND EXPORT SALES
To date, the Company has not had a significant volume of export sales.
During 1997, approximately 67% of sales were to the United States, 31% to
Canada, with the balance representing sales to other foreign countries. For
further information regarding foreign and domestic operations and export sales
(see "Note 15 to Notes to Consolidated Financial Statements").
No single customer accounted for more than 10% of the Company's gross
revenues during 1997, 1996 and 1995.
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.
BACKLOG
As of December 31, 1997 and 1996, the dollar amount of backlog orders
believed to be firm amounted to $1,425,000 and $6,085,000, respectively.
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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.
On November 13, 1996, the Company acquired substantially all of the assets
and assumed certain liabilities of Trade Products, Inc. ("Trade") (the "Trade
Acquisition"). As a result of the Trade Acquisition, in 1997 the Company
consolidated all of the Company's domestic pulltab ticket production at Trade's
manufacturing facility in Lynnwood, Washington. This consolidation is expected
to reduce manufacturing costs and help improve quality. In addition, during 1997
the Company began to consolidate the Company's domestic production of bingo
paper and ink dabbers at its Texas border facilities, thereby taking advantage
of lower production costs and economies of scale. This consolidation is expected
to be completed during the second quarter of 1998.
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 recent introduction of a new sophisticated laser printer has enabled
the Company to manufacture in excess of 3.0 million unique bingo cards for use
primarily in satellite and high stakes games.
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.
INK DABBERS. The Company manufactures 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 can also
be sold to a variety of other markets.
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
modest price decreases in paper products during 1996. During 1997, the price of
paper products stabilized. The equipment, accessories and supplies which the
Company distributes are standard items and are available from other
manufacturers.
RESEARCH AND DEVELOPMENT ACTIVITIES
The Company maintains a continuous product development program intended to
enhance the Company's product lines and 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 an ever-changing one 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 expects that this increased commitment will ensure that the technology
employed in electronic bingo systems is state-of-the-art and that the features
offered in its gaming products
9
<PAGE> 10
are as comprehensive as any found in the market place. The Company is currently
developing the next generation of the Company's fixed-base and hand-held
electronic bingo products.
The Company continually updates and redesigns its bingo equipment in an
effort to maximize the utility, ease of use and reliability of these products. A
significant effort is being devoted to the diversification of products within
the electrical equipment product line in response to the trend within the bingo
and gaming industries toward the adaptation of electrical and mechanical devices
to use in those industries. In particular, a new PC-based bingo blower and desk
is being developed that will offer increased video capabilities and touch screen
user interface.
GOVERNMENT REGULATIONS
OVERVIEW. The Company is subject to regulation by authorities in most
jurisdictions in which its bingo, bingo-related products 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 state will prohibit the
Company from selling products in that state and may prohibit the Company from
selling its products in other states. 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 IGRA, gaming activities
are classified as Class I, II or III. Under IGRA, Class II gaming includes
bingo, and, if played at the same location as bingo, pulltab tickets, and Class
III gaming includes slot machines, video lottery terminals and casino style
games. Native Americans may conduct Class II gaming under IGRA without having
entered into a written compact with their host state if the host state permits
Class II 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 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 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 each of the Canadian provinces and each of
the two Canadian territories. Not all of the Company's products are eligible for
sale 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.
Pulltab tickets currently are legal 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
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<PAGE> 11
Nebraska, taverns sell pulltab tickets as sales agents of licensed nonprofit
organizations. In Washington, taverns sell pulltab tickets directly to their
customers. In addition, Ontario allows the sale of pulltab tickets at
third-party retail locations under charity license.
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 which require
licensing through their own tribal gaming commissions. The Company is registered
in the Provinces of Ontario, 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. 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.
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 significantly by jurisdiction.
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 has applied for but has not yet received an advisory opinion
from the NIGC that its System 12(TM) electronic bingo system is considered a
Class II game under IGRA. The Company believes that both its System 12(TM) and
Power Bingo King(TM) are Class II games and has received a written legal opinion
that System 12(TM) would be classified as a Class II game. 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. It is difficult to
speculate as to what modifications may be required in the event of such a
classification. If programmed to play video poker, video keno, video bingo,
video slots or video pulltab tickets, then System 12(TM) is subject to the full
range of regulations applicable to Class III gaming systems.
Electronic bingo is less widely permitted than paper bingo, largely because
many states laws and regulations were written before electronic bingo was
introduced. Electronic bingo is currently operated in some locations in Alabama,
Alaska, Arizona, California, Florida, Illinois, Indiana, Kentucky, Louisiana,
Maine, Maryland, Mississippi, Nebraska, Nevada, New Hampshire, New York, Ohio,
Oregon, Pennsylvania, South Dakota, Texas, Vermont, Virginia and Washington.
Because most state laws and regulations are silent with respect to electronic
bingo, changes in regulatory and enforcement personnel could impact the
continued operation of electronic bingo in these states.
Some states 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
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<PAGE> 12
System 12(TM) in any other charitable gaming jurisdiction in the United States.
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 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 which permits the use of
hand-held bingo systems, and such systems must be used in conjunction with paper
bingo.
GENERAL REGULATION OF STOCKHOLDERS AND OTHER SECURITYHOLDERS OF PUBLICLY
TRADED CORPORATIONS. In most jurisdictions, any beneficial owner of the Common
Stock is subject on a discretionary basis to being required to file applications
with gaming regulatory authorities, be investigated and found suitable or
qualified as such. The gaming laws and regulations of some jurisdictions provide
that beneficial owners of more than 5% of the Common Stock and holders of the
Notes may be subject to certain reporting procedures and may be required to be
investigated and licensed, qualified or found suitable as such. 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 of 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 first 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. Violation of the
Federal Act is a crime and may result in 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 other
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 and will not be revoked, suspended or
conditioned or that the Company will be able to obtain the necessary approvals
for its future products as they are developed in a timely manner, if at all. If
a license, approval or finding of suitability is required by a regulatory
authority and the Company fails to seek or does not receive the necessary
license or finding of suitability, 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 current
position as North America's leading manufacturer of a full line of bingo and
bingo-related products.
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<PAGE> 13
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, 1997, the Company had 1,597 full-time employees in the
United States, Canada and Mexico, of which 226 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.
ADDITIONAL INFORMATION
Compliance with federal, state and local law in the United States and
federal, provincial and municipal laws in Canada regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment has not had, and is not expected by the Company to have, any adverse
effect upon capital expenditures, earnings or the competitive position of the
Company. The Company is not presently a party to any litigation or
administrative proceeding with respect to its compliance with such environmental
standards. In addition, the Company does not anticipate being required to expend
any material amount of funds in the near future for environmental protection in
connection with its operations.
ITEM 2. PROPERTIES
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, 1997.
<TABLE>
<CAPTION>
OWNED OR EXPIRATION SQUARE
LOCATION BUSINESS SEGMENT LEASED DATE FEET
-------- ---------------- -------- ---------- ------
<S> <C> <C> <C> <C>
Council Bluffs, Iowa............. Bingo paper Leased 08/31/1998(1) 100,000
Council Bluffs, Iowa............. Corporate Office Leased 11/30/1998(2) 21,000
Council Bluffs, Iowa............. Ink dabbers Leased 04/30/1998 27,000
Council Bluffs, Iowa............. Bingo paper Leased 12/31/1997(3) 34,500
Pulltab tickets
Pharr, Texas..................... Bingo paper Leased 08/31/1998 66,265
Reynosa, Mexico.................. Bingo paper Leased 08/15/1998(4) 26,900
Reynosa, Mexico.................. Bingo paper Leased 12/31/1998(4) 55,600
St. Catharines, Ontario.......... Bingo paper Leased 08/31/2000(4) 158,000
Pulltab tickets
Ink dabbers
St. Catharines, Ontario.......... General merchandise Leased 08/31/2000(4) 24,057
Littleton, Colorado.............. Video King gaming systems Leased 08/31/2001(4) 20,000
Bingo hall equipment
Lynnwood, Washington............. Pulltab tickets Leased 11/13/2006(5) 165,000
Bingo paper
</TABLE>
- ---------------
(1) The Company sold the building on August 22, 1997 for $2,700,000 and leased
it back from the new owners. The Company has the option to renew this lease
for one additional one-year period.
(2) The Company has the option to renew this lease for an additional nine
months.
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<PAGE> 14
(3) The Company has the option to renew this lease for one additional one-year
period.
(4) The Company has the option to renew this for two additional five-year
periods.
(5) The Company has the option to renew the lease for one additional ten-year
period.
Substantially all of the Company's property and equipment is subject to
liens to secure borrowings by the Company under its financing agreements.
In general, the Company's properties and equipment are in good condition
and are considered to be adequate for their present use.
As of December 31, 1997 the Company is in the process of building a new
200,000 square foot facility in McAllen, Texas. The building, which will be
leased, is scheduled for completion in the second quarter of 1998. In addition,
the Company currently anticipates moving into a larger leased facility in
Reynosa, Mexico in the second half of 1998.
ITEM 3. LEGAL PROCEEDINGS
In July 1995, the Company was sued by Fortunet, Inc. ("Fortunet") for
patent infringement in the United States District Court for the District of
Nevada. The suit consists of two counts. The first count concerns a device known
as the Bingo Card Minder that was marketed by the Company and manufactured by
Bingo Card Minder Corp., who is co-defendant for the first count. The Company no
longer markets the Bingo Card Minder. The second count is against the Company
and alleges that the System 12(TM) electronic bingo system manufactured by Video
King infringes three patents owned by Fortunet. The Company does not believe
that System 12(TM) infringes any of Fortunet's patents and that Fortunet's three
patents are invalid. The Company has requested that the United States Patent and
Trademark Office ("PTO") re-examine the three patents. The PTO has granted the
Company's request as to two of the patents; the PTO agreed that a substantial
new question of patentability exists as to such patents. The PTO has not acted
on the request for the re-examination of the third patent, which was filed
approximately four months after the request for re-examination of the first two
patents. The Company is vigorously defending the suit.
In June 1996, the Company was sued by Arrow International ("Arrow") in the
United States District Court for the Northern District of Ohio. The suit
consists of three counts. In count one Arrow seeks a declaration of
non-infringement that Arrow was not infringing three patents held by the
Company. In the second count Arrow seeks a declaration of patent invalidity. In
the third count Arrow alleges that the Company has infringed a patent owned by
Arrow. The Company is vigorously defending the suit and has also counterclaimed
for damages for patent infringement.
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> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on The Nasdaq SmallCap Market under the symbol
"STUA."
The following table shows the high and low closing sales prices for the
Common Stock during each calendar quarter within the past two years. Prior to
August 22, 1977, the Common Stock was traded on the Nasdaq National Market (see
"Business -- Certain Recent Developments -- Delisting from Nasdaq SmallCap
Market; Disclosure Relating to Low Priced Stock").
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996:
First Quarter............................................. $8 1/4 $4 1/8
Second Quarter............................................ $7 $4 1/2
Third Quarter............................................. $6 7/8 $5 5/8
Fourth Quarter............................................ $6 1/4 $4 1/4
</TABLE>
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997:
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
</TABLE>
At March 17, 1998, the Common Stock was held by 1,640 stockholders of
record.
The Company has not paid any cash dividends on its Common Stock during the
past two years. The Board of Directors expects to follow a policy during the
foreseeable future of retaining earnings for use in the Company's business;
further, the payment of cash dividends is restricted by the Credit Facility and
the indenture for the 12 1/2% Senior Subordinated Notes (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
years in the three-year period ended December 31, 1997 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
15
<PAGE> 16
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements, related notes and
independent auditors' report, contained herein.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:(1)
Net sales............................ $125,100 $110,636 $109,882 $ 59,158 $53,937
Gross margin......................... 37,866 32,873 35,160 16,171 13,770
Income (loss) before extraordinary
loss and cumulative effect of
change in accounting principle.... (13,145)(2) (1,298) 786 (1,608) 512
Net income (loss).................... (13,353)(2) (2,231) 786 (1,608) 699
Earnings (loss) per share before
cumulative effect of extraordinary
loss and change in accounting
principle-
basic............................. (1.91) (0.19) 0.12 (0.45) 0.15
Earnings (loss) per share before
cumulative effect of extraordinary
loss and charge in accounting
principle-diluted................. (1.91) (0.19) 0.12 (0.45) 0.15
Earnings (loss) per share-basic...... (1.94) (0.33) 0.12 (0.45) 0.21
Earnings (loss) per share-diluted.... (1.94) (0.33) 0.12 (0.45) 0.20
FINANCIAL CONDITION:
Working Capital...................... 37,578 54,025 20,018 14,454 3,742
Current ratio........................ 2.9 3.5 1.8 1.7 1.2
Total Assets......................... 137,824 154,595 98,994 88,977 37,301
Long-term debt....................... 100,665 100,396 39,586 34,146 3,949
Stockholders' equity................. 16,732 30,358 32,040 30,153 15,140
OTHER FINANCIAL DATA:
EBITDA adjusted(3)................... 7,872(2) $ 12,049 $ 12,117 $ 1,088 $ 3,127
Net cash flows from operating
activities........................ (113)(2) 1,464 (1,790) 1,202 (512)
Net cash flows from investing
activities........................ (5,965) (38,150) (682) (30,396) (590)
Net cash flows from financing
activities........................ (661) 49,464 1,260 30,822 945
</TABLE>
- ---------------
(1) On December 13, 1994, Stuart completed the acquisition of Bazaar. On
November 13, 1996, the Company completed the acquisition of Trade. The
acquisitions have been accounted for using the purchase method of accounting
and, accordingly, the operating results of Bazaar and Trade have been
included with Stuart's since the date of acquisition. See Note 2 to Notes to
Consolidated Financial Statements of Stuart included herein.
(2) Income (loss) before extraordinary items, net income, EBITDA and net cash
flows from operating activities for 1997 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 1997 was $10,386.
(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
16
<PAGE> 17
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 flows, which is an indicator
of its ability to satisfy its debt service, capital expenditure and working
capital requirements. Because EBITDA is not calculated by all companies and
analysts in the same fashion, the EBITDA measures presented by the Company
may not be comparable to similarly-titled measures reported by other
companies. Therefore, in evaluating EBITDA data, investors should consider,
among other factors: the non-GAAP nature of EBITDA data; actual cash flows;
the actual availability of funds for debt service, capital expenditures and
working capital; and the comparability of the Company's EBITDA data to
similarly-titled measures reported by other companies.
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, 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's business strategy is to enhance its position as North
America's leading manufacturer of a full line of bingo and bingo-related
products. The Company maintains an ongoing product development program focused
on enhancing existing product lines, creating product line extensions and
developing new products. The Company plans to selectively pursue acquisition
opportunities and strategic alliances with a focus on creating product line
extensions, new markets, new manufacturing technologies and strengthening its
distribution network. Historically, the Company has used acquisitions and
strategic alliances as part of its growth strategy, such as the acquisition of
Bazaar in 1994, which broadened its Canadian customer base. In 1995, the Company
acquired The Reliable Corporation of America ("Reliable") (the "Reliable
Acquisition") in order to expand its customer base and to acquire the rights to
Reliable's patented manufacturing technology. In 1996, the Company completed the
Trade Acquisition in order to expand the Company's pulltab ticket product line
and increase its pulltab market share in the United States. The results of
operations of Bazaar, Reliable and Trade have been consolidated since the date
of their respective acquisitions.
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<PAGE> 18
In conjunction with the Trade Acquisition, in November 1996 the Company
completed a private placement (the "Offering") of $100 million aggregate
principal amount of 12.5% Senior Subordinated Notes (the "Notes") due November
15, 2004. Interest on the Notes is payable semiannually on each May 15 and
November 15. The Company used the proceeds to finance the Trade Acquisition, to
repay certain indebtedness and for general corporate purposes (See "Note 6 to
Notes to Consolidated Financial Statements").
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 competed in the second
quarter of 1997 and the consolidation of paper and ink operations expected to be
completed in the second quarter of 1998. These charges include (a) 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 13 to Notes to
Consolidated Financial Statements"), (b) 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
the Prior Credit Agreement (see "Note 6 to Notes to Consolidated Financial
Statements"), (c) 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, (d) a charge of $1.4 million
recorded in the fourth quarter related to inventory levels of the product lines
being consolidated, (e) a $0.4 million charge to bring a long term patent
infringement lawsuit to trial in 1998 and (f) 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:
(a) a restructuring charge of $3.3 million related to the planned consolidation
of manufacturing operations (see "Note 13 to Notes to Consolidated Financial
Statements"), (b) 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 (c) 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 the Prior Credit Agreement (see "Note 6 to Notes to
Consolidated Financial Statements").
Results for the year ended December 31, 1995 include unusual charges for:
(a) a charge of $489,000 to cost of goods sold related to the application of
purchase accounting to the finished goods of Bazaar that were sold in the first
quarter of 1995 and (b) a one-time pre-tax charge of $819,000 related to the
discontinuance of operations of Stuart Entertainment Limited ("Stuart
Entertainment England"), a joint venture between the Company and Bazaar to
manufacture products in the United Kingdom. In 1995, Stuart Entertainment
England recorded losses of $2.1 million which included the one-time pre-tax
charge of $819,000 (see "Note 9 to Notes to Consolidated Financial Statements").
YEAR 2000 ISSUE
Like many other companies, the Company is aware of the problems associated
with "The Year 2000 Issue." This issue centers on certain computer systems being
unable to recognize the year 2000 as a valid date or that they may interpret a
date in the format of "00" as the year 1900 rather than the year 2000. This
system issue creates risk for the Company from unforeseen problems in its own
computer systems and from third parties with which the Company deals. Such
failures of the Company and/or third parties' computer systems could potentially
have a material impact on the Company's ability to conduct its business. Based
on interviews with and publications from those vendors supplying the Company's
current business information systems, management believes those systems to be
date compliant such that they will not pose a significant risk to the Company's
future business operations. Future version upgrades to these systems and/or new
acquisitions will be subject to Year 2000 date compliance as a selection,
acceptance and installation criteria.
During 1998, the Company will assess any impact the Year 2000 issue may
have on other systems that support the Company's operation. These can include,
but are not limited to; supplier systems, shipper systems, environmental control
systems, manufacturing equipment, building security systems, etc. The Company
will
18
<PAGE> 19
evaluate appropriate courses of corrective action if any are needed outside of
routine maintenance or currently planned projects.
Management has not yet fully assessed the Year 2000 compliance expense and
related potential effect on the Company's earnings. However, the Company does
not currently expect any expenditure required will have a material effect on its
financial position or results of operations.
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,
--------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 69.7 70.3 68.0
----- ----- -----
Gross margin................................................ 30.3 29.7 32.0
Selling, general and administrative expenses................ 30.2 23.7 24.9
Restructuring charge........................................ 1.8 3.0 --
United Kingdom charge....................................... -- -- 0.7
Legal expenses -- unusual patent lawsuits................... 0.9 -- --
----- ----- -----
Income (loss) from operations............................... (2.6)% 3.0% 6.4%
===== ===== =====
</TABLE>
Years Ended December 31, 1997 and 1996
Net Sales. Net sales were $125.1 million for the year ended December 31,
1997, an increase of $14.5 million or 13.1% from $110.6 million for the year
ended December 31, 1996. The increase was primarily attributable to the
consolidation of Trade which was acquired in the fourth quarter of 1996 and to
an increase of $2.5 million generated by Power Bingo King's hand-held electronic
bingo systems which was acquired in the third quarter of 1997.
This increase was partially offset by i) a continuing softness in the
charitable gaming industry that caused a decrease in sales of consumable
products, particularly pulltab tickets, ii) increased competitive pricing
pressures, particularly from smaller suppliers, (iii) an adverse effect on the
third and fourth quarter sales in Ontario, Canada due to uncertainty of the
pulltab contract renewal by the Ontario Gaming Commission and (iv) a decrease in
electronic bingo hall equipment sales of $3.2 million due primarily to the sales
of System 12(TM)electronic fixed-base gaming systems in 1996 that were not
repeated in 1997.
The Company expects the softness in the industry to continue in 1998 due to
competitive pressures from other sources of gaming and entertainment. However,
the Company expects sales from Power Bingo King's hand-held electronic bingo
systems to continue to increase which the Company expects will partially offset
the softness in consumable products. Management expects pulltab ticket sales to
increase modestly in Canada as a result of being awarded a five year contract
from the Ontario Gaming 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, North America's
largest charity market place, has been solidified with the five year contract
with possible extensions.
In September 1997, the Ontario Gaming Control Commission announced the list
of the final proponents for operation and ownership of the 44 charity gaming
clubs that will replace the current system of roving Monte Carlo casinos. The
Company expects some charity gaming clubs to begin opening during the second
half of 1998 but currently is unable to anticipate the impact such gaming clubs
will have on the bingo and pulltab ticket markets in the Province of Ontario.
Cost of Goods Sold. Cost of goods sold, as a percentage of sales was 69.7%
for the year ended December 31, 1997 compared to 70.3% 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
19
<PAGE> 20
finished goods inventory of Trade and excluding the impact of Power Bingo King
since the acquisition in the third quarter of 1997, cost of goods sold, as a
percentage of sales, was 68.9% for the year ended December 31, 1997 compared to
69.3% for the year ended December 31, 1996.
This decrease was attributable in part to lower pulltab production costs
associated with the consolidation completed in the second quarter of 1997 and
the full year effect of more favorable raw material newsprint prices in 1997
compared to 1996. These decreases were partially offset by a charge of
$1,377,000, in the fourth quarter related to consolidation of product lines; by
production inefficiencies resulting from the consolidation of pulltab and paper
manufacturing operations primarily in Iowa and Texas; by ink dabber production
inefficiencies attributable to high inventory levels and lower product demand;
by pulltab ticket production inefficiencies in the third and fourth quarter in
Ontario, Canada due to lagging product demand attributable to 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 systems sales in 1996
that did not occur in 1997.
The Company expects that U.S. pulltab production costs will decline in 1998
compared to 1997 as the Company more fully realizes the benefits of the
consolidation. However, bingo paper and ink dabber production inefficiencies are
expected to unfavorably impact the first half of 1998 as a result of the
consolidation of these operations at the Texas border facilities. Bingo paper
and ink dabber production costs are expected to decline in the future as
manufacturing is consolidated in the Company's Texas border facilities.
Selling, General and Administrative Expenses. Selling, general and
administrative (SG&A) expenses were $37.7 million for the year ended December
31, 1997, an increase of $11.4 million or 43.6% from $26.3 million for the year
ended December 31, 1996. The increase is primarily attributable to the
consolidation of Trade that added SG&A expenses of $7.5 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, and (ii) $1,032,000 for modifications to
the manufacturing consolidation plan and 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.
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, 1996. The increase is attributable
to interest on the Notes as the Offering was completed in November 1996.
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
20
<PAGE> 21
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.
Years Ended December 31, 1996 and 1995
Net Sales. Net sales were $110.6 million for the year ended December 31,
1996, an increase of $754,000 or 0.7% from $109.9 million for the year ended
December 31, 1995. The increase was attributable to a combination of the
following: (i) an increase in sales of $3.3 million related to the acquisition
of Trade and (ii) an increase in electronics and bingo hall equipment sales of
$3.1 million, primarily due to $3.6 million in sales of System 12(TM) electronic
bingo and gaming units. These increases were partially offset by (a) a decrease
in sales of $1.3 million related to the shutdown of Stuart Entertainment
England; and (b) a decrease of sales of consumable products of $3.8 million,
primarily in the United States.
Cost of Goods Sold. Cost of goods sold, as a percentage of sales, was 70.3%
for the year ended December 31, 1996, an increase of 2.3 percentage points from
68.0% for the year ended December 31, 1995. Excluding the application of
purchase accounting adjustments recorded in the fourth quarter of 1996 to the
finished goods inventory of Trade and in the first quarter of 1995 to the
finished goods inventory of Bazaar, cost of sales, as a percentage of sales, for
the years ended December 31, 1996 and 1995 was 69.3% and 67.6%, respectively.
The increase is primarily attributable to production inefficiencies in the
pulltab ticket and bingo hall equipment product lines and a less favorable sales
mix in consumable products.
Selling, General and Administrative Expenses. SG&A expenses were $26.3
million for the year ended December 31, 1996, a decrease of $1.0 million or 3.9%
from $27.3 million for the year ended December 31, 1995, which includes a $1.4
million increase in SG&A from the inclusion of the operations of Trade.
Excluding the effect of the inclusion of the operations of Trade, the
decrease in SG&A expenses of $2.4 million is primarily due to four factors: (i)
the discontinued operation of Stuart Entertainment England in 1995; (ii)
consolidated synergies related to the acquisitions of Bazaar and Reliable; (iii)
improved bad debt experience; and (iv) the continued impact of a cost reduction
program implemented in 1995.
Interest Expense, Net. Interest expense, net of interest income, was $5.3
million for the year ended December 31, 1996, an increase of $889,000 or 20.0%
from $4.4 million for the year ended December 31, 1995. The increase is
primarily due to the Offering completed in November, 1996.
Restructuring Charge. The restructuring charge of $3.3 million in the
fourth quarter of 1996 was primarily due to the planned consolidation of
manufacturing operations during 1997. After the consolidation changes are
complete, the Company's U.S. bingo paper products operations will be
concentrated at its Texas border facilities and its U.S. pulltab ticket business
at its Lynnwood, Washington facility. Manufacturing operations in St.
Catherines, Ontario continue to serve the majority of the Canadian market.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal uses of cash are for the purchase and carrying of
inventory, the carrying of accounts 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>
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Working capital............................................. $ 37,578 $ 54,025
Current ratio............................................... 2.9 3.5
Total long-term debt........................................ 100,754 100,766
Stockholders' equity........................................ 16,372 30,358
Total capitalization........................................ 117,126 131,124
Debt to capitalization ratio................................ 86.0% 76.9%
Capital expenditures for property, plant and equipment...... 3,525 2,609
Capital expenditures for electronic bingo systems........... 1,587 45
</TABLE>
21
<PAGE> 22
FINANCING ACTIVITIES
In November 1996, the Company completed the Offering. Interest on the Notes
is payable semi-annually on each May 15 and November 15. The indenture governing
the Notes (the "Indenture") imposes certain covenants that limit the ability of
the Company and its subsidiaries to, among other things, (i) incur additional
indebtedness, (ii) pay dividends or make certain other restricted payments,
(iii) incur liens or (iv) incur indebtedness that is subordinated in right of
payment to any Senior Indebtedness (as defined in the Indenture) and senior in
right of payment to the Notes. Such covenants are subject to certain limitations
and exceptions.
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 thereof 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.
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 $10.0 million may be
borrowed under the Canadian Facility (see "Business -- Certain Recent
Developments -- New Credit Facility"). At December 31, 1997, the Company had not
yet drawn any amounts under the Credit Facility and $27.7 million was available
for borrowing based on its borrowing base certificates.
Prior to the Offering, the Company was party to a credit agreement (the
"Prior Credit Agreement") with Bank of America National Trust and Savings
Association, as U.S. Agent, the Chase Manhattan Bank (National Association),
Bank of America Canada, as Canadian Agent, and the Chase Manhattan Bank of
Canada with a senior secured revolving line of credit of $23.0 million and a
senior secured loan facility of $15.0 million, which included a U.S. facility
and a Canadian facility. The Prior Credit Agreement was amended and restated in
November 1996 in connection with the Trade Acquisition. In connection therewith,
the Company recorded an extraordinary loss of $933,000, after income taxes, to
write off unamortized debt issuance costs. The Prior Credit Agreement was
terminated and the Company entered into the Credit Facility in November 1997. In
conjunction with the closing of the Credit Facility, the Company recorded an
extraordinary loss of $208,000, after income taxes, to write off unamortized
debt issuance costs on the Prior Credit Agreement.
The Company believes that with its current operating plan, cash flow from
operations, excess cash on hand and the Credit Facility, it will have sufficient
cash to meet its financial obligations including interest on the Notes,
operating expenses, capital expenditures, expenses related to consolidation of
operations and working capital requirements. In addition, with the acquisition
of Power Bingo, Corp. in July 1997, the Company expects the electronics portion
of its business to generate additional cash flow.
The Company's business plan includes pursuing selective business
acquisitions and strategic alliances. The Company will continue to evaluate
additional opportunities and, as attractive opportunities develop, the Company
will consider additional acquisitions. The Company expects to meet additional
capital needs with the proceeds from sales or issuance of equity securities, the
Credit Facility and other borrowings. There can be no assurance, however, that
the Company will be successful in raising sufficient additional capital on terms
acceptable to the Company, if at all. In addition, the Company is restricted in
its ability to incur additional indebtedness pursuant to the terms of the
Indenture. The failure to raise and generate sufficient funds may require the
Company to delay or abandon some of its planned future expansion which could
have a material adverse effect on the future growth of the Company.
22
<PAGE> 23
CASH FLOWS
The cash balances at December 31, 1997, 1996 and 1995 were $7.1 million,
$13.7 million and $943,000, respectively. The changes in cash for the last three
years were:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities:
Net income (loss)................................. $(13,353) $ (2,231) $ 786
Other operating activities........................ 6,173 8,509 4,474
Working capital resources......................... 7,067 (4,814) (7,050)
-------- -------- -------
Total Operating Activities................ (113) 1,464 (1,790)
Investing Activities................................ (5,965) (38,150) (682)
Financing Activities................................ (555) 49,475 1,299
-------- -------- -------
Net change in cash and cash equivalents... $ (6,633) $ 12,789 $(1,173)
======== ======== =======
</TABLE>
Total trade receivables decreased $2.9 million from $26.0 million at
December 31, 1996 to $23.1 million at December 31, 1997. The decrease is due
primarily to trade receivables converted to notes receivable and an increase in
the allowance for doubtful accounts in the current year. Total notes receivable
(including current and long-term portions) increased from $2.4 million at
December 31, 1996 to $4.1 million at December 31, 1997. During 1997, trade
receivables totaling $2.9 million were converted to notes receivable from
non-related parties. The conversions were made to assist customers in resolving
cash flow deficiencies and to aid customers in accomplishing their long-term
growth plans. A substantial portion of the Company's sales to its customers is
made on credit terms customary in the industry. 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 feels that credit risk
is mitigated due to a large customer base, geographic dispersion and its long
standing relationships with many of its customers. In accordance with generally
accepted accounting principles, the Company has an allowance for doubtful
accounts related to its accounts and notes receivable which was increased by
$1.0 million during 1997 for the reasons discussed above. The Company
periodically reviews these allowances for reasonableness.
Inventories decreased $7.2 million from $28.1 million at December 31, 1996
to $20.9 million at December 31, 1997. The decrease is due primarily to the
Company's ongoing program to consolidate U.S. consumable manufacturing
operations, a first-quarter reduction in inventory related to a $1.5 million
purchase accounting adjustment to the finished goods inventory of Trade that was
acquired in November 1996 and a $1.4 million fourth-quarter charge to inventory
reserves related to inventory lines that are being consolidated or eliminated.
Inventory levels fluctuate on a seasonal basis and modest increases in the costs
of paper products are currently expected in 1998.
CAPITAL EXPENDITURES
The Company's capital expenditures for property, plant and equipment were
$3.5 million during 1997 compared with $2.6 million during 1996. The Company's
capital expenditure program has historically focused on the purchase of
equipment designed to increase production capacity and improve manufacturing
efficiencies. Beginning in 1996, and continuing into 1997 and 1998, a greater
portion of the Company's capital expenditures were allocated to the upgrading
and development of management information systems and communication systems.
During 1998, the Company's capital expenditure program will focus 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 placed in the market on a
lease or revenue sharing basis. The Company's $1.5 million increase in capital
expenditures for electronic bingo systems is due to the manufacture of Power
Bingo King(TM)
23
<PAGE> 24
hand-held electronic bingo 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.
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the Company's definitive proxy statement for
the Company's Annual Meeting of Shareholders to be held May 20, 1998 regarding
directors and officers of the Company and compliance with Section 16(a) of The
Exchange Act is incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Company's definitive proxy statement for
the Company's Annual Meeting of Stockholders to be held on May 20, 1998
regarding executive compensation is incorporated herein by reference in response
to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the Company's definitive proxy statement for the
Company's Annual Meeting of Stockholders scheduled to be held on May 20, 1998
regarding security ownership of certain beneficial owners and management is
incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the Company's definitive proxy statement for the
Company's Annual Meeting of Stockholders scheduled to be held on May 20, 1998
regarding certain relationships and related transactions is incorporated herein
by reference in response to this item.
24
<PAGE> 25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements. See Index to Financial Statements on page F-1
of this Report.
2. Financial Statement Schedules. See Index to Financial Statements on
page F-1 of this Report. All other schedules are omitted since they are not
required, are inapplicable, or the required information is included in the
financial statements or notes thereto.
3. Exhibits. See the Index to Exhibits appearing at the end of this
Report.
(b) Reports on Form 8-K
1. No report on Form 8-K were filed during the last quarter of the
period covered by the report.
25
<PAGE> 26
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.
By /s/ TIMOTHY R. STUART
-----------------------------------
Timothy R. Stuart,
President, Chief Operating
Officer and Director
Dated: March 31, 1998
<TABLE>
<C> <S> <C>
/s/ SANGWOO AHN Director March 31, 1998
- -----------------------------------------------------
Sangwoo Ahn
/s/ ALBERT F. BARBER Chairman of the Board and Chief March 31, 1998
- ----------------------------------------------------- Executive Officer
Albert F. Barber
/s/ PERRY J. LEWIS Director March 31, 1998
- -----------------------------------------------------
Perry J. Lewis
/s/ RONALD G. RUDY Director March 31, 1998
- -----------------------------------------------------
Ronald G. Rudy
/s/ RICHARD D. SPIZZIRRI Director March 31, 1998
- -----------------------------------------------------
Richard D. Spizzirri
/s/ IRA STARR Director March 31, 1998
- -----------------------------------------------------
Ira Starr
/s/ TIMOTHY R. STUART President, Chief Operating Officer March 31, 1998
- ----------------------------------------------------- and Director
Timothy R. Stuart
/s/ STANLEY M. TAUBE Director March 31, 1998
- -----------------------------------------------------
Stanley M. Taube
/s/ PAUL C. TUNINK Vice President-Finance, Treasurer and March 31, 1998
- ----------------------------------------------------- Chief Financial Officer
Paul C. Tunink
</TABLE>
26
<PAGE> 27
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-3
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995.............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-6
Notes to Consolidated Financial Statements.................. F-7 to F-23
Financial Statement Schedules:
Schedule II -- Valuation and Qualifying accounts.......... F-24
</TABLE>
F-1
<PAGE> 28
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, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. Our audits also included the financial statement schedule listed in
the Index at Item 14. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Stuart Entertainment, Inc. and
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
------------------------------------
Deloitte & Touche LLP
Omaha, Nebraska
March 12, 1998
F-2
<PAGE> 29
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
NET SALES................................................... $125,100 $110,636 $109,882
COST OF GOODS SOLD.......................................... 87,234 77,763 74,722
-------- -------- --------
GROSS MARGIN................................................ 37,866 32,873 35,160
OTHER EXPENSES AND INCOME:
Selling, general and administrative expenses.............. 37,721 26,269 27,330
Restructuring charge...................................... 2,261 3,280 --
United Kingdom charge..................................... -- -- 819
Legal expenses, unusual patent lawsuit.................... 1,173 -- --
Interest expense, net..................................... 12,493 5,337 4,448
-------- -------- --------
Other Expenses and Income -- Net.................. 53,648 34,886 32,597
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES........................... (15,782) (2,013) 2,563
INCOME TAX PROVISION (BENEFIT).............................. (2,637) (715) 1,777
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM..................... (13,145) (1,298) 786
EXTRAORDINARY ITEM -- Loss on extinguishment of debt,
net of taxes.............................................. 208 933 --
-------- -------- --------
NET INCOME (LOSS)........................................... $(13,353) $ (2,231) $ 786
======== ======== ========
EARNINGS (LOSS) PER SHARE -- basic and diluted:
Income (loss) before extraordinary loss................... $ (1.91) $ (0.19) $ 0.12
Extraordinary loss........................................ (0.03) (0.14) --
-------- -------- --------
Earnings (loss) per share................................. $ (1.94) $ (0.33) $ 0.12
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 30
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 7,099 $ 13,732
Trade receivables, net of allowance for doubtful accounts
of $3,091 and $2,230................................... 23,085 25,998
Current portion of notes receivable, less allowance for
doubtful accounts of $233 and $99...................... 2,269 1,296
Inventories............................................... 20,929 28,118
Income taxes recoverable.................................. -- 2,545
Deferred income taxes..................................... 3,008 2,581
Prepaid expenses and other current assets................. 1,111 989
-------- --------
Total Current Assets.............................. 57,501 75,259
PROPERTY, PLANT AND EQUIPMENT, net.......................... 26,471 29,760
GOODWILL, net of accumulated amortization of $3,244 and
$1,983.................................................... 45,655 43,726
OTHER ASSETS, net........................................... 8,197 5,850
-------- --------
$137,824 $154,595
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 89 $ 370
Trade payables............................................ 10,929 11,834
Accrued payroll and benefits.............................. 2,087 2,688
Other accrued liabilities................................. 3,180 2,893
Restructuring charge reserve.............................. 2,841 3,280
Income taxes payable...................................... 797 --
Deferred income taxes..................................... -- 169
-------- --------
Total Current Liabilities......................... 19,923 21,234
LONG-TERM DEBT.............................................. 100,665 100,396
DEFERRED INCOME TAXES....................................... 721 2,320
DEFERRED INCOME............................................. 143 287
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Common stock $.01 par value; 30,000,000 shares authorized;
6,920,140 and 6,884,376 shares outstanding............. 70 69
Additional paid-in capital................................ 27,732 27,368
Retained earnings (deficit)............................... (10,059) 3,294
Treasury stock (56,260 shares at cost).................... (189) (189)
Cumulative translation adjustment, net of deferred income
taxes.................................................. (1,182) (184)
-------- --------
Total Stockholders' Equity........................ 16,372 30,358
-------- --------
$137,824 $154,595
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 31
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED CUMULATIVE
COMMON PAID-IN EARNINGS TREASURY TRANSLATION
STOCK CAPITAL (DEFICIT) STOCK ADJUSTMENT TOTAL
------ ---------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995............. $66 $25,776 $ 4,739 $(189) $ (239) $ 30,153
Net income......................... -- -- 786 -- -- 786
Issuance of 102,609 shares from
exercise of stock options....... 1 251 -- -- -- 252
Income tax benefit on stock options
exercised....................... -- 25 -- -- -- 25
Translation adjustment, net of
deferred taxes of $276.......... -- -- -- -- 491 491
Issuance of 55,652 shares in
connection with the acquisition
of Reliable Corporation, net of
costs of $6..................... 1 313 -- -- -- 314
Paid-in capital from non-qualified
stock options issued............ -- 19 -- -- -- 19
--- ------- -------- ----- ------- --------
BALANCE, DECEMBER 31, 1995........... 68 26,384 5,525 (189) 252 32,040
Net loss........................... -- -- (2,231) -- -- (2,231)
Issuance of 111,067 shares from
exercise of stock options....... 1 412 -- -- -- 413
Issuance of 20,000 newly authorized
shares.......................... -- 108 -- -- -- 108
Issuance of warrants on 300,000
shares in connection with the
acquisition of Trade Products... -- 330 -- -- -- 330
Income tax benefit on stock options
exercised....................... -- 127 -- -- -- 127
Translation adjustment, net of
deferred taxes of $245.......... -- -- -- -- (436) (436)
Paid-in capital from non-qualified
stock options issued............ -- 7 -- -- -- 7
--- ------- -------- ----- ------- --------
BALANCE, DECEMBER 31, 1996........... 69 27,368 3,294 (189) (184) 30,358
Net loss........................... -- -- (13,353) -- -- (13,353)
Issuance of 90,800 shares in
connection with the acquisition
of Sisson....................... 1 362 -- -- -- 363
Issuance of 1,226 shares sold to
Employee Stock Purchase Plan.... -- 2 -- -- -- 2
Translation adjustment, net of
deferred taxes of $518.......... -- -- -- -- (998) (998)
--- ------- -------- ----- ------- --------
BALANCE, DECEMBER 31, 1997........... $70 $27,732 $(10,059) $(189) $(1,182) $ 16,372
=== ======= ======== ===== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 32
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(13,353) $ (2,231) $ 786
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Extraordinary item, loss from extinguishment of debt... 328 1,297 --
Payment on termination agreement....................... -- -- (1,200)
Depreciation and amortization.......................... 7,443 4,515 4,617
Amortization of debt financing fees.................... 520 468 356
Provision for doubtful accounts........................ 1,578 (80) 543
Equity in (earnings) losses of joint ventures.......... (5) 11 (129)
Restructuring charge................................... 2,261 3,280 --
Payments on restructuring charge....................... (2,700) -- --
Deferred income taxes.................................. (2,462) (587) (221)
Other non-cash expenses -- net......................... (790) (395) 508
Change in operating assets and liabilities, net of
amounts from acquisitions............................ 7,067 (4,814) (7,050)
-------- -------- -------
Net cash flows from operating activities.......... (113) 1,464 (1,790)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired........................ (4,563) (37,288) (569)
Capital expenditures for property, plant and equipment.... (3,525) (2,609) (1,226)
Capital expenditures for electronic bingo systems......... (1,587) (45) (91)
Proceeds from disposals................................... 3,106 339 138
Payments received on notes receivable..................... 1,373 1,453 1,261
Other..................................................... (769) -- (195)
-------- -------- -------
Net cash flows from investing activities.......... (5,965) (38,150) (682)
CASH FLOWS FROM FINANCING ACTIVITIES:
Costs of debt financing................................... (651) (3,873) (375)
Proceeds from borrowings under prior credit agreements.... -- -- 8,052
Payments on borrowings under prior credit agreements...... -- (20,917) --
Payments on long-term debt................................ (12) (25,812) (6,104)
Payments on LSA purchase price adjustment................. -- (455) --
Proceeds from issuance of long-term debt.................. -- 100,000 348
Proceeds from exercise of stock options................... -- 413 277
Costs of stock issuance paid.............................. -- -- (6)
Proceeds from sale and other issuances of common stock.... 2 108 (932)
-------- -------- -------
Net cash flows from financing activities.......... (661) 49,464 1,260
Effect of currency exchange rate changes on cash of
foreign subsidiaries................................... 106 11 39
-------- -------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (6,633) 12,789 (1,173)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 13,732 943 2,116
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 7,099 $ 13,732 $ 943
======== ======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 33
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(COLUMNAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF ACCOUNTING POLICIES
NATURE OF OPERATIONS -- Stuart Entertainment, Inc. and its subsidiaries
(collectively, the "Company") are primarily engaged in the manufacture and
distribution of a full line of bingo and bingo-related products, including
disposable bingo paper, pulltab tickets, ink dabbers, electronic bingo systems
and related equipment and supplies. The Company's products are sold primarily in
the United States and Canada to distributors, who resell them to non-profit
organizations which use such products for fund-raising purposes and to
commercial entities such as Indian gaming enterprises, casinos and government
sponsored entities which operate bingo games for profit. The Company is also
engaged in the manufacture and distribution of electronic gaming equipment,
primarily for the Company's bingo markets. The Company does not believe there
are any significant concentrations of credit risk.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the Company, its wholly-owned subsidiaries and its indirectly
wholly-owned subsidiaries (from the date they became indirectly wholly-owned).
All significant 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 and long-term debt are deemed to be reasonable estimates of their
fair values. Interest rates that are currently available to the Company for the
reissuance of debt with similar terms and remaining maturities are used to
estimate fair values of the notes receivable and long-term debt.
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
financial instruments purchased with a maturity of three months or less to be
cash equivalents. The Company utilizes a cash management system that includes
zero balance accounts. Negative cash balances for such accounts, resulting from
outstanding checks, are reclassified to accounts payable in the consolidated
financial statements.
EARNINGS PER SHARE -- The Financial Accounting Standard Board (FASB) issued
Statement No. 128, "Earning Per Share", which is effective for 1997 financial
statements. FASB No. 128 requires dual presentation of Basic and Diluted
earnings per share for all periods for which an income statement is presented.
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. All prior
earnings per share data have been restated in accordance with FASB No. 128.
FOREIGN CURRENCY TRANSLATION AND REMEASUREMENT -- The financial statements
and transactions of Bingo Press & Specialty Limited ("Bazaar") and Stuart
Entertainment Limited are maintained in their functional currency, Canadian
dollars and British pounds, respectively. Assets and liabilities are translated
at current exchange rates at the balance sheet date and stockholders' equity is
translated at historical exchange rates. Revenues and expenses are translated at
the average exchange rate for each period. Translation adjustments, which result
from the process of translating Canadian dollar and British pound financial
statements into U.S. dollars, are accumulated as a separate component of
stockholders' equity.
The financial statements and transactions of Stuart Entertainment S.A. de
C.V. (Stuart Entertainment Mexico) are maintained in Mexican pesos and have been
remeasured into U.S. dollars. Assets and liabilities are remeasured at the end
of period exchange rates, except for property and stockholders' equity which are
F-7
<PAGE> 34
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
remeasured at historical exchange rates. The statements of operations have been
remeasured at average exchange rates for the periods, except for depreciation
which has been remeasured at historical exchange rates. Gains and losses from
remeasurement are recognized currently in operations. For the years ended
December 31, 1997, 1996 and 1995, the Company recognized a remeasurement (gain)
loss of $(50,000), $(12,000) and $547,000, respectively.
INVENTORIES -- Inventories are stated at the lower of cost or market, with
cost determined using the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are carried
at cost, less accumulated depreciation. Depreciation is generally provided on
the straight-line method over the estimated useful lives of the respective
assets, as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 10-20 years
Equipment................................................... 3-10 years
</TABLE>
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 New Credit Facility and eight years for
the Senior Subordinated Notes.
GOODWILL -- Goodwill represents the excess of the purchase price over the
fair value of the net identifiable assets acquired in business combinations. The
Company reviews its intangible assets for impairment at least annually or
whenever events or changes in circumstances indicate that the carrying amount of
such asset may not be recoverable. In such cases, the expected future cash flows
(undiscounted and without interest charges) resulting from the use of the asset
are estimated and an impairment loss recognized if the sum of such cash flows is
less than the carrying amount of the asset. Should such an assessment indicate
that the value of the intangible asset may be impaired, an impairment loss is
recognized for the difference between the carrying value of the asset and its
estimated fair value. Goodwill is amortized on a straight-line basis over
periods ranging from ten to forty years. In 1995, the Company recognized an
impairment of goodwill, as a result of a one-time pre-tax charge related to the
discontinuation of its manufacturing operations in the United Kingdom (see Note
9).
INCOME TAXES -- The Company uses the balance sheet approach of accounting
for income taxes, whereby deferred assets and liabilities are recorded at the
tax rate currently enacted. The Company's future results may be affected by
changes in the corporate income tax rate.
RESEARCH AND DEVELOPMENT COSTS -- Research and development costs are
charged to expense as incurred. For the years ended December 31, 1997, 1996 and
1995, costs of approximately $260,000, $143,000 and $745,000, respectively, were
charged to expense.
REVENUE RECOGNITION -- The Company records revenue as products are shipped.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- In June 1997, the FASB issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income (SFAS 130). This statement established standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income is the total of net income
and all other non-owner changes in equity. The statement is effective for fiscal
years beginning after December 15, 1997. The Company expects to adopt these
disclosure requirements in the first quarter of 1998.
F-8
<PAGE> 35
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures About Segments of an Enterprise and Related Information,
which is effective for financial statements for periods beginning after December
15, 1997. This statement establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographical areas, and major customers. This statement supersedes SFAS 14,
Financial Reporting for Segments of a Business Enterprise, but retains the
requirement to report information about major customers. The Company expects to
adopt these disclosure requirements for the annual reporting period ended
December 31, 1998.
RECLASSIFICATIONS -- Certain reclassifications have been made to the 1995
and 1996 financial statements and supporting footnote disclosures in order to
present them in conformity with the 1997 financial statement presentation.
2. ACQUISITIONS
TRADE PRODUCTS, INC.:
On November 13, 1996, the Company acquired substantially all of the assets
and assumed certain liabilities of Trade Products, Inc. ("Trade") (the "Trade
Acquisition") for a purchase price of $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.
The pro forma results presented below give effect to the Trade Acquisition,
as if such transaction occurred as of the beginning of each period presented.
The unaudited pro forma information does not purport to represent the Company's
results of operations if such transaction had, in fact, occurred on such dates
and should not be viewed as predictive of the Company's financial results in the
future.
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net sales................................................... $143,112 $146,477
Loss before extraordinary loss.............................. (2,587) (1,587)
Net loss.................................................... (3,520) (1,587)
Loss per share, before extraordinary loss -- basic and
diluted................................................... (0.38) (0.24)
Loss per share -- basic and diluted......................... (0.52) (0.24)
</TABLE>
THE RELIABLE CORPORATION OF AMERICA, INC.:
On January 10, 1995, the Company acquired substantially all of the assets
and assumed substantially all existing liabilities of The Reliable Corporation
of America, Inc. ("Reliable") and two presses owned by one of Reliable's
shareholders for a purchase price of $1.3 million, subject to adjustment. The
purchase price was paid as follows: i) $200,000 paid in cash, ii) $320,000 paid
through the issuance of 55,652 shares of the Company's common stock valued at
$5.75 per share, and iii) $780,000 in the form of a promissory note with equal
principal payments over 90 months plus accrued interest at a rate of 1% over
national prime. The note was paid in November, 1996.
The Company entered into non-compete agreements with the shareholders of
Reliable. Under these agreements, the Company will make monthly payments of
approximately $5,000 for 90 months to the Reliable
F-9
<PAGE> 36
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
shareholders. The present value of the remaining payments at December 31, 1997
(using a 9% discount factor) is $203,000. The Company also entered into an
employment agreement with the President of Reliable which was subsequently
terminated by mutual consent.
3. INVENTORIES
Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Raw materials............................................... $ 5,159 $ 3,975
Work-in-process............................................. 2,038 4,316
Finished goods.............................................. 13,732 19,827
------- -------
$20,929 $28,118
======= =======
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Land and buildings.......................................... $ 1,857 $ 5,739
Electronic bingo systems.................................... 2,740 718
Equipment................................................... 40,654 39,041
------- -------
45,251 45,498
Less accumulated depreciation............................. 18,780 15,738
------- -------
$26,471 $29,760
======= =======
</TABLE>
5. OTHER ASSETS
Other assets consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred financing costs, net of accumulated amortization of
$557 and $104............................................. $3,571 $3,768
Deferred income taxes....................................... 1,714 --
Notes receivable, net of allowance for doubtful accounts of
$115
and $124.................................................. 1,515 919
Other investments and assets................................ 1,145 916
Investments in joint ventures............................... 252 247
------ ------
$8,197 $5,850
====== ======
</TABLE>
6. LONG-TERM DEBT
In November 1996, the Company completed a private placement in reliance on
Rule 144A of the Securities Act of 1933, as amended, of $100 million aggregate
principal amount of 12.5% Senior Subordinated Notes due November 15, 2004 (the
Notes). Interest on the Notes are payable semi-annually on each May 15 and
November 15, commencing May 15, 1997. The indenture governing the Notes imposes
certain limitations on the Company's ability to, among 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
F-10
<PAGE> 37
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
placement to finance the Trade Acquisition, to repay certain existing
indebtedness and for general corporate purposes.
In November 1997, the Company entered into a credit facility which consists
of two loan and security agreements, one between the Company and Congress
Financial Corporation (Central) (the "US Facility") and one between Bingo Press
& Specialty Limited, a wholly-owned subsidiary of the Company (the "Canadian
Borrower") and Congress Financial Corporation (Canada) (the "Canadian Facility")
(collectively, the "Credit Facility"). The Credit Facility 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 in the prior credit agreement.
The Company, and the Canadian Borrower (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 the Canadian Borrower,
respectively. At December 31, 1997, $27.7 million was 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,
1997, the Company had not yet drawn any amounts under the Credit Facility.
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Senior Subordinated Notes................................... $100,000 $100,000
Notes payable to others..................................... 754 766
-------- --------
100,754 100,766
Less current portion........................................ 89 370
-------- --------
$100,665 $100,396
======== ========
</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, 1997 range from approximately
one year to five years. At December 31, 1997, these notes bear interest at fixed
and variable rates ranging from 2.9% to 10.00%.
F-11
<PAGE> 38
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
FUTURE PAYMENTS:
Long-term debt matures as follows:
<TABLE>
<S> <C>
1998........................................................ $ 89
1999........................................................ 85
2000........................................................ 94
2001........................................................ 94
2002........................................................ 42
Thereafter.................................................. 100,350
--------
$100,754
========
</TABLE>
7. INCOME TAX PROVISION (BENEFIT)
Income (loss) before income tax provision (benefit) is as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- ------
<S> <C> <C> <C>
Domestic.............................................. $(13,832) $(3,766) $2,952
Foreign............................................... (1,950) 1,753 (389)
-------- ------- ------
$(15,782) $(2,013) $2,563
======== ======= ======
</TABLE>
The income tax provision (benefit) is as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------- ----- ------
<S> <C> <C> <C>
Current:
Federal................................................ $ (358) $(467) $1,139
Foreign................................................ 240 371 755
State.................................................. (57) (32) 104
------- ----- ------
(175) (128) 1,998
------- ----- ------
Deferred:
Domestic............................................... (2,478) (669) (155)
Foreign................................................ 16 82 (66)
------- ----- ------
(2,462) (587) (221)
------- ----- ------
$(2,637) $(715) $1,777
======= ===== ======
</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>
1997 1996 1995
----- ----- ----
<S> <C> <C> <C>
Statutory tax rate.......................................... (34.0)% (34.0)% 34.0%
State income taxes (net of federal benefit)................. -- (5.4) 2.3
Foreign tax rates in excess of U.S. federal rates........... 2.0 3.3 4.5
Tax asset valuation reserve................................. 11.3 (11.9) 17.0
Goodwill amortization....................................... 1.6 12.5 10.1
Non-resident interest withholding........................... 2.4 -- --
Other....................................................... -- -- 1.4
----- ----- ----
(16.7)% (35.5)% 69.3%
===== ===== ====
</TABLE>
F-12
<PAGE> 39
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Deferred tax assets and (liabilities) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss........................................ $ 4,548 $ --
Allowance for doubtful accounts........................... 992 498
Restructuring charge...................................... 874 1,202
Inventory reserves and adjustments........................ 822 484
Cumulative translation adjustment......................... 518 103
Deferred financing fees................................... 393 --
Employee benefits......................................... 290 397
Tax credits............................................... 180 --
Other..................................................... 72 --
Excess losses of U.K. venture............................. -- 518
Valuation reserve......................................... (1,778) (518)
------- -------
$ 6,911 $ 2,684
======= =======
Deferred Income Tax Liabilities:
Difference in basis of property and equipment............. $(2,563) $(2,346)
Difference in amortization periods of goodwill............ (262) --
Other..................................................... (86) (77)
Canadian inventory absorption............................. -- (169)
------- -------
$(2,911) $(2,592)
======= =======
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $6,364,000 at December 31, 1997. Those earnings are considered to
be indefinitely reinvested and, accordingly, no amount for U.S. federal and
state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends, the Company would be subject to both U.S.
income taxes (subject to an adjustment for foreign tax credit) and withholding
taxes payable to the foreign countries. Determination of the amount of
unrecognized deferred U.S. income tax liability is not practicable because of
the complexities associated with its hypothetical calculation.
Due to the non-recurring charges incurred by the Company in the fourth
quarter of 1997 the company has provided a valuation allowance against a portion
of the deferred tax assets recorded.
The Company has a net operating loss carryforward of approximately
$13,377,000 which expires in 2012, and Alternative Minimum Tax Credits of
approximately $105,000 which have no expiration date.
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
the ultimate resolution will not have a material adverse effect on the Company's
consolidated financial statements.
8. 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 Company had four inactive plans and one active stock option plan during
1997: the 1981 Incentive Stock Option Plan ("1981 ISO Plan"), the 1992 Incentive
Stock Option Plan ("1992 ISO Plan"), the 1985
F-13
<PAGE> 40
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Non-Qualified Stock Option Plan ("1985 NQSO Plan"), the 1992 Non-Qualified Stock
Option Plan ("1992 NQSO Plan") and the 1994 Performance Plan.
The Company adopted the 1981 ISO Plan and the 1992 ISO Plan in order to
grant options to certain directors, executive officers and employees, reserving
250,000 and 200,000 shares, respectively, of its common stock for issuance.
Options were granted at 100% of market value at the date of grant and became
exercisable for up to a ten-year period from the date of grant. The 1981 ISO
Plan was terminated on August 18, 1991 and, effective June 3, 1995, options are
no longer exercisable. Options are no longer granted under the 1992 ISO Plan.
The Company adopted the 1985 NQSO Plan and the 1992 NQSO Plan for certain
directors, executive officers and employees, reserving 200,000 and 100,000
shares, respectively, of its common stock for issuance. Options granted under
the 1985 NQSO Plan were exercisable for periods from five to ten years from the
date of grant while options granted under the 1992 NQSO Plan were exercisable
for a ten-year period from the date of grant. Options under both plans were
granted at prices which exceeded or were less than the fair market value of the
shares on the date of grant but were not less than par value. Options are no
longer granted under either of these plans.
The 1994 Performance Plan was adopted December 13, 1994 for certain
directors, executive officers, employees and consultants. The Company has
reserved 2,500,000 shares of its common stock for issuance. Options granted
under this plan may be either incentive stock options or non-qualified stock
options. Incentive stock options granted are exercisable for up to a ten-year
period and at an exercise price equal to the fair market value of the shares on
the date of grant. Non-qualified stock options granted are exercisable at prices
and over time periods determined by the Stock Option Committee of the Board of
Directors. All options granted under this Plan in 1997, 1996 and 1995 were
non-qualified options. At December 31, 1997 there were 1,426,017 shares
available for grant.
If compensation cost for the Company's stock-based compensation plan had
been determined based on the fair value at the grant dates for awards under the
plan consistent with the method of SFAS No. 123, Accounting for Stock-Based
Compensation, the Company's net income (loss) and earnings (loss) per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -----
<S> <C> <C> <C> <C>
Net income............................... As reported $(13,353) $(2,231) $ 786
Pro forma $(13,374) $(3,346) $ 240
Income (loss) per share -- basic and
diluted................................ As reported $ (1.94) $ (0.33) $0.12
Pro forma $ (1.95) $ (0.48) $0.04
</TABLE>
The weighted average fair market value of options granted during the year
was $2.36, $3.32 and $2.00 per option for 1997, 1996 and 1995, respectively. The
fair value of options granted under the Plans was estimated at the date of grant
using a Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Risk-free interest rate.................................... 5.6% 6.3% 6.3%
Dividend yield............................................. 0.00% 0.00% 0.00%
Expected volatility........................................ 41.0% 40.0% 40.0%
Expected life (years)...................................... 7.5 7.5 7.5
</TABLE>
F-14
<PAGE> 41
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
A summary of stock option activity is as follows during the three years
ended December 31:
<TABLE>
<CAPTION>
FIXED OPTIONS 1997 1996 1995
------------- ---------- --------- ---------
<S> <C> <C> <C>
Outstanding at beginning of year................. 2,002,083 1,882,166 1,280,250
Options granted.................................. 965,916 573,400 824,400
Options exercised................................ -- (111,067) (102,609)
Options cancelled................................ (1,962,933) (342,416) (119,875)
---------- --------- ---------
Outstanding at end of year....................... 1,005,066 2,002,083 1,882,166
========== ========= =========
Options exercisable at year end.................. 935,317 1,739,837 1,577,667
========== ========= =========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES 1996 LIFE PRICE
------------------------ -------------- ----------- ---------
<S> <C> <C> <C>
$3.00-$4.99................................ 965,916 7.5 years.. 3.00
$5.00-$6.99................................ 36,000 8.1 years.. 6.00
$7.00-$8.99................................ 3,150 0.4 years.. 0.70
--------- --------- ----
1,005,066 7.5 years.. 3.10
========= ========= ====
</TABLE>
At December 31, 1997, options for 935,317 shares were exercisable. The
remaining options become exercisable as follows: 1998 -- 68,749 shares;
1999 -- 1,000.
During 1997, 1996 and 1995, the Company recognized tax benefits of $0,
$127,000 and $25,000, 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
NQSO Plan and the 1992 NQSO Plan where the exercise price at the date of grant
was less than the market value of those shares on that date. During 1997, 1996
and 1995, the Company recognized compensation expense and additional paid-in
capital for financial statement purposes of $0, $7,000 and $19,000,
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, 1997 is 298,774.
9. 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
F-15
<PAGE> 42
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
paper for its owners. During 1997, 1996 and 1995, 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, 1997, 1996 and 1995, and in the
consolidated balance sheets as of December 31, 1997, and December 31, 1996.
STUART ENTERTAINMENT LIMITED:
During 1993, the Company and Bazaar formed a United Kingdom corporate joint
venture named Stuart Entertainment Limited for the purpose of selling bingo
supplies to the English and European markets.
During the second quarter of 1995, the Company signed a licensing and
marketing agreement with Playprint Limited, headquartered in Dublin, Ireland.
This relationship permitted the Company to discontinue its manufacturing
operation in the United Kingdom. Under the agreement, Playprint Limited pays
royalties to the Company for use of certain of the Company's trademark,
technologies and equipment for the production of bingo paper and ink markers.
The Company recorded a one-time pre-tax charge of $819,000 in 1995 related to
the costs to shutdown the manufacturing facility in the United Kingdom.
BRITISH BAZAAR COMPANY LIMITED:
The Company owns 50% of the common shares of British Bazaar Company Limited
("British Bazaar"). British Bazaar manufactures bingo paper and pull tab tickets
in the Atlantic provinces of Canada. The Company's investment in British Bazaar
is accounted for using the equity method. The Company's investment in British
Bazaar at December 31, 1997 and 1996 was $252,000 and $248,000, respectively.
For the years ended December 31, 1997, 1996 and 1995, the Company recorded
equity in earnings (loss) of $15,000, $(11,000) and $98,000, respectively, on
its investment and had sales of $416,000, $1,142,000 and $1,777,000,
respectively, to British Bazaar.
The Company guaranteed British Bazaar's operating line of credit at
December 31, 1997 and 1996 in the amount of C$350,000 ($245,000) and C$350,000
($255,000), respectively.
10. 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 Mr. Stuart $55,101 upon execution and is also
required to pay Mr. Stuart $300,000. Mr. Leonard A. Stuart, a brother of Timothy
R. Stuart, is President of Len Stuart & Associates, Ltd. 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 net income monthly of the Division is
payable as follows: (a) 50% is applied to reduce outstanding bank loans of the
Division, (b) 50% of the remaining net income is retained by the Company, and
F-16
<PAGE> 43
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(c) 50% of the remaining net income is paid to BMG. During 1997 and 1996, the
Company paid BMG $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. For the years ended December 31, 1997,
1996 and 1995, Ken Stuart earned commissions of $189,000, $189,000 and $221,000,
respectively. The agreement was terminated in 1997. In consideration for such
termination, the Company issued him a promissory note in the principal amount of
$236,250, which has been paid in full.
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. 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, 1997 was $101,000. During the years ended December 31, 1997, 1996
and 1995, sales to Bingo Video totaled $866,000, $828,000 and $912,000,
respectively.
11. EMPLOYEE BENEFIT PLANS
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 may contribute up to 15% of their
wages, not to exceed a government established maximum. Stuart's contribution is
the sum of the Company's match of the first 2% of the employee's elective
contribution and a discretionary contribution of up to 2% of the wages of all
employees eligible under the U.S. Plan. For the Trade Plan, eligible Trade
Products employees may contribute up to 20% of their wage, not to exceed a
government established maximum. Trade Products match is 25% of the eligible
employee's first 10% elective contribution. For the years ended December 31,
1997, 1996 and 1995, the Company's contributions were $238,000, $174,000, and
$157,000, respectively.
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,
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.
F-17
<PAGE> 44
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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, 1997, 1996 and 1995 the
Company's contributions were $140,000, $112,000, and $101,000, respectively.
12. 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, 1997 are approximately
as follows:
<TABLE>
<S> <C>
1998........................................................ $3,518
1999........................................................ 2,349
2000........................................................ 2,016
2001........................................................ 1,352
2002........................................................ 931
</TABLE>
Rental expense for the years ended December 31, 1997, 1996 and 1995 was
$3,436,000, $2,268,000, and $2,039,000, respectively.
In August 1997, the Company sold its building in Council Bluffs, Iowa and
entered into operating leases for a portion of the property, with terms ranging
from twelve to fifteen months. Due to the short term of the leases, the net
sales proceeds over the next book value of the facility was recognized at the
date of sale.
INVENTORY REPURCHASE AGREEMENTS:
The Company has inventory repurchase agreements with several banks to
support certain distributors in their bank financing. The agreements provide
that in the event one of the banks obtains title to the distributor's inventory
through foreclosure, the Company would be required to repurchase the Company's
own inventory up to i) $300,000 under one agreement and ii) C$305,000 ($213,000)
under two other agreements of selected inventory previously sold by the Company
to the distributor. The purchase price would be that price paid by the
distributor to the Company for such inventory. The Company would have a right of
first refusal in the event the bank received a bona fide written offer from a
third party to purchase the foreclosed inventory.
13. RESTRUCTURING CHARGE
During the fourth quarter of 1996, management authorized and committed the
Company to undertake consolidation of its United States manufacturing operations
producing pulltab tickets, bingo paper and ink dabbers. This restructuring plan
involves closing or substantially closing 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 $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
F-18
<PAGE> 45
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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 relates 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 1997. Modifications to the original
consolidation plan and unanticipated costs have resulted in costs that were not
originally charged. Management estimates that, consistent with the original 1996
consolidation plan, $1,032,000 of such additional costs will be incurred in the
future.
At December 31, 1997, $2,841,000 of restructuring charges remained in
accrued liabilities. The balance was comprised of $1,881,000 for severance and
termination benefits and contract buyout for approximately 200 officers and
employees and $960,000 of facility closure and consolidation costs to be
completed in 1998. A summary of the restructuring activity is presented below:
<TABLE>
<S> <C>
Balance at December 31, 1996................................ $ 3,280
Consolidation of U.S. Manufacturing Operations:
-- Severance and termination costs..................... (1,336)
-- Facility closure and consolidation costs............ (1,364)
-- Additional provision to complete consolidation
projects.............................................. 1,032
Severance related to workforce reduction.................. 1,229
-------
Balance at December 31, 1997................................ $ 2,841
=======
</TABLE>
As an additional part of the U.S. manufacturing consolidation plan,
management has authorized in the fourth quarter of 1997 a charge of $1,377,000
to cost of sales related to product lines being consolidated.
14. SUPPLEMENTAL CASH FLOW INFORMATION
OTHER CASH PAYMENTS AND RECEIPTS:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Cash paid for interest.................................. $12,795 $3,510 $3,551
Cash paid for income taxes.............................. 772 2,495 1,651
Income tax refunds received............................. 3,129 224 474
</TABLE>
CHANGES IN OPERATING WORKING CAPITAL ITEMS:
Changes in operating working capital items, net of amounts obtained in the
acquisitions of Trade, Bazaar and Reliable and from the consolidation of the
Company's joint ventures, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Trade receivables..................................... $(1,177) $(2,064) $(3,960)
Inventories........................................... 6,353 1,706 (4,905)
Income taxes recoverable.............................. 2,545 (2,545) 225
Prepaid expenses...................................... (99) 39 (133)
Trade payables........................................ (1,037) (2,261) 1,268
Accrued liabilities................................... (315) 853 (88)
Income taxes payable.................................. 797 (542) 543
------- ------- -------
Total Changes in Operating Capital Items.... $ 7,067 $(4,814) $(7,050)
======= ======= =======
</TABLE>
F-19
<PAGE> 46
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
During the years ended December 31, 1997, 1996 and 1995, the Company
financed the acquisition of equipment totalling $0, $118,000 and $2,092,000,
respectively, through the assumption of obligations under capital leases.
In connection with the Trade Acquisition in 1996, the Company i) issued
warrants to acquire 300,000 shares of the Company's common stock at an exercise
price of $7.75 per share, which were valued at $330,000.
In connection with the Reliable Acquisition in 1995, the Company i) assumed
Reliable's line of credit and term loan credit facility with a Michigan bank,
which totalled $1,237,000, ii) assumed another note payable of $250,000, iii)
issued a note payable to the shareholders of Reliable for $780,000 and iv)
issued 55,652 shares of the Company's common stock, which was valued at $320,000
or $5.75 per share.
15. GEOGRAPHIC FINANCIAL INFORMATION
The Company operates in one principal industry segment: the manufacturing
and selling of supplies and equipment for bingo games and related fund raising
activities. The Company's products are sold primarily to distributors for resale
to others, which are primarily non-profit organizations.
F-20
<PAGE> 47
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Geographic financial information for the years ended December 31, 1997,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
NET SALES:
United States:
Domestic Customers............................ $ 85,522 $ 68,548 $ 64,112
Foreign Customers............................. 957 688 1,398
Canada........................................... 38,621 41,400 43,110
United Kingdom................................... -- -- 1,262
-------- -------- --------
Total.................................... $125,100 $110,636 $109,882
======== ======== ========
INCOME (LOSS) BEFORE INCOME TAXES:
United States.................................... $(13,832) $ (3,766) $ 2,952
Canada........................................... (1,950) (392) 1,773
United Kingdom................................... -- 2,145 (2,162)
-------- -------- --------
Income (Loss) before Income Taxes........ $(15,782) $ (2,013) $ 2,563
======== ======== ========
ASSETS:
United States.................................... $ 84,963 $101,930 $ 45,437
Canada........................................... 49,605 49,990 48,912
United Kingdom................................... -- -- 1,731
Mexico........................................... 3,256 2,675 2,914
-------- -------- --------
Total.................................... $137,824 $154,595 $ 98,994
======== ======== ========
CAPITAL EXPENDITURES:
United States.................................... $ 3,459 $ 2,072 $ 706
Canada........................................... 1,653 582 611
-------- -------- --------
Total.................................... $ 5,112 $ 2,654 $ 1,317
======== ======== ========
DEPRECIATION AND AMORTIZATION:
United States.................................... $ 5,379 $ 2,820 $ 2,980
Canada........................................... 2,064 1,551 1,405
United Kingdom................................... -- 144 232
-------- -------- --------
Total.................................... $ 7,443 $ 4,515 $ 4,617
======== ======== ========
</TABLE>
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-21
<PAGE> 48
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1997 and 1996 (amounts in thousands, except per share
amounts):
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
1997:(1)
Net sales.................................. $30,230 $30,482 $31,719 $32,669 $125,100
Gross margin............................... 7,932 9,022 11,144 9,768 37,866
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)
======= ======= ======= ======= ========
1996:(2)
Net sales.................................. $29,304 $27,149 $27,360 $26,823 $110,636
Gross margin............................... 7,507 8,502 8,451 8,413 32,873
Income (loss) before tax provision
(benefit)............................... (5,770) 1,033 1,088 1,636 (2,013)
Income (loss) before extraordinary item.... (3,721) 631 874 918 (1,298)
Net income (loss).......................... (4,654) 631 874 918 (2,231)
Earnings (loss) per share -- basic and
diluted:
Earnings (loss) before extraordinary
item.................................. $ (0.53) $ 0.09 $ 0.13 $ 0.14 $ (0.19)
Extraordinary item...................... (0.14) -- -- -- (0.14)
------- ------- ------- ------- --------
Earnings (loss) per share-.............. $ (0.67) $ 0.09 $ 0.13 $ 0.14 $ (0.33)
======= ======= ======= ======= ========
</TABLE>
- ---------------
(1) 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.
(2) The 1996 fourth quarter results of operations were largely influenced by the
$3.3 million restructuring charge related to the consolidation of
manufacturing operations, the extraordinary loss of $933,000, net of income
taxes, to write-off unamortized debt issuance costs and a charge of $1.1
million to cost of sales related to the application of purchase accounting
to the finished goods of Trade.
F-22
<PAGE> 49
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
17. 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>
1997:
Basic EPS
Net Income.................................. $(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 Income.................................. $ (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)
============ ========= ======
1995:
Basic EPS
Net Income.................................. $ 786,000 6,654,058 $ 0.12
Effect of Dilutive Securities
Stock Option and Warrants................... -- 32,870 --
------------ --------- ------
DILUTED EPS...................................... $ 786,000 6,686,928 $ 0.12
============ ========= ======
</TABLE>
F-23
<PAGE> 50
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(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, 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
====== ====== ==== ===== ======
YEAR ENDED DECEMBER 31, 1995:
Allowance for Doubtful Accounts:
Accounts Receivable..................... $1,598 $ 643 $ -- $(155) $2,086
Notes Receivable:
Current Portion....................... 199 199
Non-Current Portion................... 423 (100) -- (199) 124
------ ------ ---- ----- ------
$2,220 $ 543 $ -- $(354) $2,409
====== ====== ==== ===== ======
Valuation Reserve for Non-Current Deferred
Income Taxes............................ $ 322 $ 436 $ -- $ -- $ 758
====== ====== ==== ===== ======
</TABLE>
- ---------------
* For the years ended December 31, 1997, 1996 and 1995, "Net Charge-Offs"
consists of write-offs of trade and notes receivable, net of subsequent
collections.
F-24
<PAGE> 51
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
----------- -----------
<C> <S>
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)
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).*
10.18 -- Loan Agreement, dated November 20, 1997, by and between
Bingo Press & Specialty Limited and Congress Financial
Corporation (Canada).*
</TABLE>
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.19 -- Agreement dated December 13, 1997, by and between the
Company, Len Stuart, & Associates, Ltd. And Leonard A.
Stuart.*
10.20 -- Letter Agreement dated December 5, 1995, between the
Company and Paul C. Tunink, as amended.*
10.21 -- Consulting Agreement and Termination of Employment
Agreement dated November 12, 1997, between the Company
and Ronald G. Rudy.*
10.22 -- Lease Agreement dated June 16, 1997 between SCI
Development Services, Incorporated and the Company.*
11 -- Statement regarding Computation of Per Share Earnings.*
21 -- Subsidiaries of the Registrant.*
23 -- Consent of Deloitte & Touche LLP.*
27.1 -- Financial Data Schedule.*
27.2 -- Financial Data Schedule.*
27.3 -- 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.
<PAGE> 1
EXHIBIT 10.17
LOAN AND SECURITY AGREEMENT
BY AND BETWEEN
CONGRESS FINANCIAL CORPORATION (CENTRAL)
AS LENDER
AND
STUART ENTERTAINMENT, INC.
AS BORROWER
DATED: NOVEMBER 20, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
SECTION 1. DEFINITIONS
SECTION 2. CREDIT FACILITIES
2.1 Revolving Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.2 Letter of Credit Accommodations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.3 Availability Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.4 Increases in Maximum Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 3. INTEREST AND FEES
3.1 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.2 Closing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.3 Unused Line Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.5 Changes in Laws and Increased Costs of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 4. CONDITIONS PRECEDENT
4.1 Conditions Precedent to Initial Loans and Letter of Credit Accommodations . . . . . . . . . . . . . 25
4.2 Conditions Precedent to All Loans and Letter of Credit Accommodations . . . . . . . . . . . . . . . 27
SECTION 5. GRANT OF SECURITY INTEREST
SECTION 6. COLLECTION AND ADMINISTRATION
6.1 Borrower's Loan Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.2 Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.3 Collection of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.4 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.5 Authorization to Make Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
6.6 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 7. COLLATERAL REPORTING AND COVENANTS
7.1 Collateral Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.2 Accounts Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.3 Inventory Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
7.4 Equipment Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
7.5 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
7.6 Right to Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
7.7 Access to Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 8. REPRESENTATIONS AND WARRANTIES
8.1 Corporate Existence, Power and Authority; Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . 40
8.2 Financial Statements; No Material Adverse Change. . . . . . . . . . . . . . . . . . . . . . . . . . 41
8.3 Chief Executive Office; Collateral Locations. . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
8.4 Priority of Liens; Title to Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
</TABLE>
(i)
<PAGE> 3
<TABLE>
<S> <C> <C>
8.5 Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.6 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.7 Compliance with Other Agreements and Applicable Laws . . . . . . . . . . . . . . . . . . . . . . . . 42
8.8 Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
8.9 Environmental Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
8.10 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
8.11 Accuracy and Completeness of Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
8.12 Survival of Warranties; Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS
9.1 Maintenance of Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
9.2 New Collateral Locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
9.3 Compliance with Laws, Regulations, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
9.4 Payment of Taxes and Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
9.5 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
9.6 Financial Statements and Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. . . . . . . . . . . . . . . . . . . . . . . 51
9.8 Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
9.9 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
9.10 Loans, Investments, Guarantees, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
9.11 Dividends and Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
9.12 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
9.13 Additional Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
9.14 Adjusted Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
9.15 Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
9.16 Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
9.17 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
SECTION 10. EVENTS OF DEFAULT AND REMEDIES
10.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
10.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver . . . . . . . . . . . . . . . 64
11.2 Waiver of Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
11.3 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
11.4 Waiver of Counterclaims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
11.5 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS
12.1 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
12.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
12.3 Partial Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
12.4 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
12.5 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
12.6 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
</TABLE>
(ii)
<PAGE> 4
INDEX TO
EXHIBITS AND SCHEDULES
Exhibit A Information Certificate
Exhibit B Form of Borrowing Base Certificate
Schedule 5.3 Investment Account Excluded From Collateral
Schedule 8.4 Existing Liens
Schedule 8.8 Employee Benefit Matters
Schedule 8.9 Environmental Matters
Schedule 8.10 Bank Accounts
Schedule 9.9 Existing Indebtedness
Schedule 9.10 Existing Loans, Advances and Guarantees
(iii)
<PAGE> 5
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement dated November 20, 1997 is entered
into by and between Congress Financial Corporation (Central), an Illinois
corporation ("Lender"), and Stuart Entertainment, Inc., a Delaware corporation
("Borrower").
W I T N E S S E T H:
WHEREAS, Borrower has requested that Lender enter into certain
financing arrangements with Borrower pursuant to which Lender may make loans
and provide other financial accommodations to Borrower; and
WHEREAS, Lender is willing to make such loans and provide such
financial accommodations on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
SECTION 1. DEFINITIONS
All terms used herein which are defined in Article 1 or Article 9 of
the Uniform Commercial Code shall have the meanings given therein unless
otherwise defined in this Agreement. All references to the plural herein shall
also mean the singular and to the singular shall also mean the plural unless
the context otherwise requires. All references to Borrower and Lender pursuant
to the definitions set forth in the recitals hereto, or to any other person
herein, shall include their respective successors and assigns. The words
"hereof", "herein", "hereunder", "this Agreement" and words of similar import
when used in this Agreement shall refer to this Agreement as a whole and not
any particular provision of this Agreement and as this Agreement now exists or
may hereafter be amended, modified, supplemented, extended, renewed, restated
or replaced. The word "including" when used in this Agreement shall mean
"including, without limitation". An Event of Default shall exist or continue
or be continuing until such Event of Default is waived in accordance with
Section 11.3 or is cured in a manner Lender, in good faith, deems satisfactory,
if such Event of Default is capable of being cured, as determined by Lender in
good faith. Any accounting term used herein unless otherwise defined in this
Agreement shall have the meanings customarily given to such term in accordance
with GAAP. For purposes of this Agreement, the
<PAGE> 6
following terms shall have the respective meanings given to them below:
1.1 "Accounts" shall mean all present and future rights of
Borrower to payment for goods sold or leased or for services rendered, which
are not evidenced by instruments or chattel paper, and whether or not earned by
performance.
1.2 "Adjusted Eurodollar Rate" shall mean, with respect to each
Interest Period for any Eurodollar Rate Loan, the rate per annum (rounded
upwards, if necessary, to the next one-sixteenth (1/16) of one (1%) percent)
determined by dividing (a) the Eurodollar Rate for such Interest Period by (b)
a percentage equal to: (i) one (1) minus (ii) the Reserve Percentage. For
purposes hereof, "Reserve Percentage" shall mean the reserve percentage,
expressed as a decimal, prescribed by any United States or foreign banking
authority for determining the reserve requirement which is or would be
applicable to deposits of United States dollars in a non-United States or an
international banking office of Reference Bank used to fund a Eurodollar Rate
Loan or any Eurodollar Rate Loan made with the proceeds of such deposit,
whether or not the Reference Bank actually holds or has made any such deposits
or loans. The Adjusted Eurodollar Rate shall be adjusted on and as of the
effective day of any change in the Reserve Percentage.
1.3 "Adjusted Net Worth" shall mean as to any Person, at any time,
in accordance with GAAP (except as otherwise specifically set forth below), on
a consolidated basis for such Person and its subsidiaries (if any), the amount
equal to the difference between: (i) the aggregate net book value of all assets
of such Person and its subsidiaries, calculating the book value of inventory
for this purpose on a first-in-first-out basis, after deducting from such book
values all appropriate reserves in accordance with GAAP (including all reserves
for doubtful receivables, obsolescence, depreciation and amortization) and (ii)
the aggregate amount of the indebtedness and other liabilities of such Person
and its subsidiaries (including tax and other proper accruals); provided, that,
for purposes hereof, Adjusted Net Worth shall be calculated without giving
effect to extraordinary gains realized after the date hereof and without giving
effect to write-downs of goodwill taken after the date hereof.
1.4 "Amortized Equipment Value" shall mean, at any time, an amount
determined by Lender by subtracting from $4,443,750, the product obtained by
multiplying $74,062.50 by the number of months elapsed after the date hereof
through and including the date of determination; provided, that if any
appraisal delivered
-2-
<PAGE> 7
to or obtained by Lender after the date hereof under Section 7.4 hereof with
respect to Equipment deemed acceptable to Lender for lending purposes indicates
that the Amortized Equipment Value exceeds seventy-five (75%) percent of the
orderly liquidation value of such acceptable Equipment, the Amortized Equipment
Value shall be reset by Lender to the amount equal to seventy-five (75%)
percent of such appraised orderly liquidation value and the Amortized Equipment
Value shall be reduced and further reduced each month thereafter on the first
day of each month (but not below zero), by the product obtained by multiplying
the Amortized Equipment Value, as so reset, by a fraction, the numerator of
which is one (1), and the denominator of which is the number equal to (x) sixty
(60) minus (y) the number of months elapsed after the date hereof.
1.5 "Applicable Margin" shall mean the respective percentage per
annum set forth in the table below for Prime Rate Loans and Eurodollar Rate
Loans, as the case may be, corresponding to the average daily Combined Excess
Availability as determined by Lender for the month immediately preceding the
month (or portion thereof) for which the Interest Rate is being determined
hereunder:
<TABLE>
<CAPTION>
Average Daily Applicable Margin Applicable Margin
Combined Excess for for
Availability Prime Rate Loans Eurodollar Rate Loans
---------------- ----------------- ---------------------
<S> <C> <C>
$0 to $4,999,999 3/4% 2 3/4%
$5,000,000 to $14,999,999 1/2% 2 1/2%
$15,000,000 or more 1/4% 2 1/4%
</TABLE>
;provided, however, if Borrower shall fail to deliver any Borrowing Base
Certificate on the date due hereunder, then, without limiting Lender's other
rights and remedies by reason thereof, if such Borrowing Base Certificate is
not delivered in accordance with the terms hereof within two (2) business days
after such date due hereunder, the Applicable Margin shall, at Lender's option,
be deemed to be three-quarters of one (3/4%) percent for Prime Rate Loans and
two and three-quarters (2 3/4%) percent for Eurodollar Rate Loans.
1.6 "Availability Reserves" shall mean, as of any date of
determination, such amounts as Lender may from time to time actually establish
and revise in good faith reducing the amount of Revolving Loans and Letter of
Credit Accommodations which would otherwise be available to Borrower under the
lending formula(s) provided for herein: (a) to reflect, without duplication,
and in amounts not in excess of a good faith
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<PAGE> 8
estimate by Lender of, the potential adverse effect of any events, conditions,
contingencies or risks which, as determined by Lender in good faith, do or may
affect either (i) the Collateral or any other property which is security for
the Obligations or its value, (ii) the assets, business or prospects of
Borrower or any Obligor or (iii) the security interests and other rights of
Lender in the Collateral (including the enforceability, perfection and priority
thereof) or (b) to reflect Lender's good faith belief that any collateral
report or financial information furnished by or on behalf of Borrower or any
Obligor to Lender is or may have been incomplete, inaccurate or misleading in
any material respect or (c) to reflect outstanding Letter of Credit
Accommodations as provided in Section 2.2 hereof, (d) in respect of any state
of facts which Lender determines in good faith constitutes an Event of Default
or may, with notice or passage of time or both, constitute an Event of Default
or (e) to effect any reserves required by Lender under Section 2.3(b) or any
other provision of this Agreement.
1.7 "Blocked Accounts" shall have the meaning set forth in Section
6.3 hereof.
1.8 "Borrowing Base Certificate" shall mean a certificate
substantially in the form of Exhibit B hereto, as such form may from time to
time be modified by Lender, in a manner consistent with the reporting
Obligations of Borrower hereunder, which is duly completed (including all
schedules thereto) and executed by the chief financial officer or other
appropriate financial officer of Borrower acceptable to Lender and delivered to
Lender.
1.9 "Business Day" or "business day" shall mean any day other than
a Saturday, Sunday, or other day on which commercial banks are authorized or
required to close under the laws of the State of Illinois or the Commonwealth
of Pennsylvania, and a day on which the Reference Bank and Lender are open for
the transaction of business, except that if a determination of a Business Day
shall relate to any Eurodollar Rate Loans, the term Business Day shall also
exclude any day on which banks are closed for dealings in dollar deposits in
the London interbank market or other applicable Eurodollar Rate market.
1.10 "Canadian Borrower" shall mean Borrower's wholly-owned
subsidiary, Bingo Press & Specialty Limited, an Ontario corporation, doing
business as Bazaar & Novelty, and its successors and assigns.
1.11 "Canadian Dollars" or "Cdn$" shall mean dollars of Canada or
other lawful currency of Canada.
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1.12 "Canadian Financing Agreements" shall mean the "Financing
Agreements" as defined in the Canadian Loan Agreement.
1.13 "Canadian Letter of Credit Accommodations" shall mean the
"Letter of Credit Accommodations" as defined in, and from time to time issued
or caused to be issued by Congress (Canada) for the account of the Canadian
Borrower under, the Canadian Loan Agreement.
1.14 "Canadian Loan Agreement" shall mean that certain Loan
Agreement, dated on or about the date hereof, between Congress (Canada) and the
Canadian Borrower, as the same now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.
1.15 "Canadian Loans" shall mean the "Loans" as defined in, and
from time to time made by Congress (Canada) to the Canadian Borrower under, the
Canadian Loan Agreement.
1.16 "Cash Equivalents" shall have the meaning set forth in Section
9.10 hereof.
1.17 "Change of Control" shall mean any "Change of Control" as
defined in the Indenture governing the Subordinated Notes, as in effect on the
date hereof.
1.18 "Code" shall mean the Internal Revenue Code of 1986, as the
same now exists or may from time to time hereafter be amended, modified,
recodified or supplemented, together with all rules, regulations and
interpretations thereunder or related thereto.
1.19 "Collateral" shall have the meaning set forth in Section 5
hereof.
1.20 "Combined Excess Availability" shall mean, at any time, as
determined by Lender, the amount equal to the sum of (a) the positive or
negative Excess Availability of Borrower at such time plus (b) the U.S. Dollar
Equivalent of the positive or negative "Excess Availability" (as defined in the
Canadian Loan Agreement) of the Canadian Borrower at such time.
1.21 "Congress (Canada)" shall mean Congress Financial Corporation
(Canada), an Ontario corporation, and its successors and assigns.
1.22 "Eligible Accounts" shall mean Accounts created by Borrower
which are and continue to be acceptable to Lender based on the criteria set
forth below. In general, Accounts shall be
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Eligible Accounts if:
(a) such Accounts are payable in the United States in
U.S. Dollars and arise from the actual and bona fide sale and delivery of goods
by Borrower or rendition of services by Borrower in the ordinary course of its
business which transactions are completed in accordance with the terms and
provisions contained in any documents related thereto;
(b) such Accounts are not unpaid more than one hundred
twenty (120) days after the date of the original invoice for them;
(c) such Accounts comply with the terms and conditions
contained in Section 7.2(c) of this Agreement;
(d) such Accounts do not arise from sales on consignment,
guaranteed sale, sale and return, sale on approval, or other terms under which
payment by the account debtor may be conditional or contingent, and such
Accounts are not owed by any account debtor with respect to whom Borrower has
agreed, under any contingency or condition, to repurchase any inventory from
such account debtor or its lender or customers;
(e) the chief executive office of the account debtor with
respect to such Accounts is located in the United States of America, or, at
Lender's option, if either: (i) the account debtor has delivered to Borrower
an irrevocable letter of credit issued or confirmed by a bank satisfactory to
Lender and payable only in the United States of America and in U.S. dollars,
sufficient to cover such Account, in form and substance satisfactory to Lender
and, if required by Lender, the original of such letter of credit has been
delivered to Lender or Lender's agent and the issuer thereof notified of the
assignment of the proceeds of such letter of credit to Lender, or (ii) such
Account is subject to credit insurance payable to Lender issued by an insurer
and on terms and in an amount acceptable to Lender, or (iii) such Account is
otherwise acceptable in all respects to Lender (subject to such lending formula
with respect thereto as Lender may determine);
(f) such Accounts do not consist of progress billings,
bill and hold invoices or retainage invoices, except as to bill and hold
invoices, if Lender shall have received an agreement in writing from the
account debtor, in form and substance satisfactory to Lender, confirming the
unconditional obligation of the account debtor to take the goods related
thereto and pay such invoice;
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(g) the account debtor with respect to such Accounts has
not asserted a counterclaim, defense or dispute and does not have, and does not
engage in transactions which may give rise to, any right of setoff against such
Accounts, other than those ordinary course deductions or allowances reflected
on the face of the invoices evidencing such Accounts and reflected as a
deduction in computing and reporting the net amount of the affected Accounts in
the Borrowing Base Certificates and all other Collateral reports delivered in
accordance with this Agreement with respect to Accounts (but the portion of the
Accounts of such account debtor in excess of the amount at any time and from
time to time owed by Borrower to such account debtor or claimed owed by such
account debtor may be deemed Eligible Accounts);
(h) there are no facts, events or occurrences which would
impair the validity, enforceability or collectability of such Accounts or
reduce the amount payable or delay payment thereunder;
(i) such Accounts are subject to the first priority,
valid and perfected security interest of Lender and any goods giving rise
thereto are not, and were not at the time of the sale thereof, subject to any
liens except those permitted in this Agreement;
(j) neither the account debtor nor any officer or
employee of the account debtor with respect to such Accounts is an officer,
employee or agent of or affiliated with Borrower directly or indirectly by
virtue of family membership, ownership, control, management or otherwise;
(k) the account debtors with respect to such Accounts are
not any Governmental Authority, unless (i) if the account debtor is the United
States of America, any State, political subdivision, department, agency or
instrumentality thereof, upon Lender's request, the Federal Assignment of
Claims Act of 1940, as amended or any similar State or local law, if
applicable, has been complied with in a manner satisfactory to Lender and (ii)
if the account debtors are North American Indian nations, tribes or tribal
authorities, or the account debtors are located or conduct business on North
American Indian lands, upon Lender's request, Lender shall have received
evidence, in form and substance satisfactory to Lender, that such account
debtor has waived any claim of sovereign immunity, which waiver shall be
unconditionally valid and enforceable by Lender against such account debtor
under all applicable laws, and the account debtor shall have consented to be
sued by Borrower and its assigns (including Lender) and consented to personal
jurisdiction in each
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state and Federal court located in the state where it is located or conducts
business, and Lender shall have received evidence, in form and substance
satisfactory to Lender, that Lender has a valid and enforceable first priority
perfected security interest in the Accounts owing by such account debtor and
Lender may collect and otherwise realize thereon in the same manner as any
other Eligible Account;
(l) there are no proceedings or actions which are
threatened or pending against the account debtors with respect to such Accounts
which, if adversely determined against any such account debtor, could
reasonably be expected to result in any material adverse change in any such
account debtor's financial condition;
(m) such Accounts of a single account debtor or its
affiliates do not constitute more than ten (10%) percent of all otherwise
Eligible Accounts (but the portion of the Accounts not in excess of such
percentage may be deemed Eligible Accounts);
(n) such Accounts are not owed by an account debtor who
has Accounts unpaid more than one hundred twenty (120) days after the date of
the original invoice for them which constitute more than fifty (50%) percent of
the total Accounts of such account debtor;
(o) such Accounts are owed by account debtors whose total
indebtedness to Borrower does not exceed the credit limit (if any) with respect
to such account debtors that Lender has elected from time to time to establish
or revise for purposes of determining Eligible Accounts of such account debtors
(but the portion of the Accounts not in excess of such credit limit may be
deemed Eligible Accounts);
(p) such Accounts do not arise from the sale of
Borrower's "Power Bingo" products or rendition of services relating thereto;
and
(q) such Accounts are owed by account debtors deemed
creditworthy at all times by Lender, as determined by Lender in good faith.
General criteria for Eligible Accounts may be established and revised from time
to time by Lender in good faith. Any Accounts which are not Eligible Accounts
shall nevertheless be part of the Collateral.
1.23 "Eligible Inventory" shall mean Inventory located in the
United States consisting of finished goods held for resale in
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the ordinary course of the business of Borrower which are acceptable to Lender
based on the criteria set forth below. In general, Eligible Inventory shall
not include (a) raw materials or work-in-process; (b) components which are not
part of finished goods; (c) spare parts for equipment; (d) packaging and
shipping materials; (e) supplies used or consumed in Borrower's business; (f)
Inventory at premises other than those owned and controlled by Borrower, except
if Lender shall have received an agreement in writing from the person in
possession of such Inventory and/or the owner or operator of such premises in
form and substance satisfactory to Lender acknowledging Lender's first priority
security interest in the Inventory, waiving security interests and claims by
such person against the Inventory and permitting Lender access to, and the
right to remain on, the premises so as to exercise Lender's rights and remedies
and otherwise deal with the Collateral; (g) Inventory subject to a security
interest or lien in favor of any person other than Lender except those
permitted in this Agreement; (h) bill and hold goods; (i) unserviceable,
obsolete or slow moving Inventory; (j) Inventory which is not subject to the
first priority, valid and perfected security interest of Lender; (k) returned,
damaged and/or defective Inventory; (l) Inventory as to which, or as to the
manufacture or sale or offering for sale of which by Borrower, there is a claim
of patent, trademark, copyright, infringement or other claim of violation of
intellectual property rights of others; (m) Inventory consisting of Borrower's
"Power Bingo" products; and (n) Inventory purchased or sold on consignment.
General criteria for Eligible Inventory may be established and revised from
time to time by Lender in good faith. Any Inventory which is not Eligible
Inventory shall nevertheless be part of the Collateral.
1.24 "Environmental Laws" shall mean all foreign, Federal, State
and local laws (including common law), legislation, rules, codes, licenses,
permits (including any conditions imposed therein), authorizations, judicial or
administrative decisions, injunctions or agreements between Borrower and any
governmental authority, (A) relating to pollution and the protection,
preservation or restoration of the environment (including air, water vapor,
surface water, ground water, drinking water, drinking water supply, surface
land, subsurface land, plant and animal life or any other natural resource), or
to human health or safety, (B) relating to the exposure to, or the use,
storage, recycling, treatment, generation, manufacture, processing,
distribution, transportation, handling, labeling, production, release or
disposal, or threatened release, of Hazardous Materials, or (C) relating to all
laws with regard to recordkeeping, notification, disclosure and reporting
requirements respecting Hazardous Materials. The term
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"Environmental Laws" includes (i) the Federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980, the Federal Superfund
Amendments and Reauthorization Act, the Federal Water Pollution Control Act of
1972, the Federal Clean Water Act, the Federal Clean Air Act, the Federal
Resource Conservation and Recovery Act of 1976 (including the Hazardous and
Solid Waste Amendments thereto), the Federal Solid Waste Disposal and the
Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and
Rodenticide Act, and the Federal Safe Drinking Water Act of 1974, (ii)
applicable state counterparts to such laws, and (iii) any common law or
equitable doctrine that may impose liability or obligations for injuries or
damages due to, or threatened as a result of, the presence of or exposure to
any Hazardous Materials.
1.25 "Equipment" shall mean all of Borrower's now owned and
hereafter acquired equipment, machinery, computers and computer hardware and
software (whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used
in connection therewith, and substitutions and replacements thereof, wherever
located.
1.26 "ERISA" shall mean the United States Employee Retirement
Income Security Act of 1974, as the same now exists or may hereafter from time
to time be amended, modified, recodified or supplemented, together with all
rules, regulations and interpretations thereunder or related thereto.
1.27 "ERISA Affiliate" shall mean any person required to be
aggregated with Borrower or any of its Subsidiaries under Sections 414(b),
414(c), 414(m) or 414(o) of the Code.
1.28 "Eurodollar Rate Loans" shall mean any Loans or portion
thereof on which interest is payable based on the Adjusted Eurodollar Rate in
accordance with the terms hereof.
1.29 "Eurodollar Rate" shall mean with respect to the Interest
Period for a Eurodollar Rate Loan, the interest rate per annum equal to the
arithmetic average of the rates of interest per annum (rounded upwards, if
necessary, to the next one-sixteenth (1/16) of one (1%) percent) at which
Reference Bank is offered deposits of United States dollars in the London
interbank market (or other Eurodollar Rate market selected by Borrower and
approved by Lender) on or about 9:00 a.m. (New York time) two (2) Business Days
prior to the commencement of such Interest Period in amounts substantially
equal to the principal amount of the Eurodollar Rate Loans requested by and
available to Borrower in accordance with this Agreement, with a maturity of
comparable
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duration to the Interest Period selected by Borrower.
1.30 "Event of Default" shall mean the occurrence or existence of
any event or condition described in Section 10.1 hereof.
1.31 "Excess Availability" shall mean the amount, as determined by
Lender, calculated at any time, equal to: (a) the lesser of (i) the amount of
the Formula Availability at such time and (ii) the Maximum Credit, less the
face amount of outstanding Letter of Credit Accommodations, minus (b) the sum
of: (i) the amount of all then outstanding and unpaid Obligations (other than
the face amount of outstanding Letter of Credit Accommodations), plus (ii) the
aggregate amount of all trade payables of Borrower which are more than sixty
(60) days past due as of such time.
1.32 "Financing Agreements" shall mean, collectively, this
Agreement and all Borrowing Base Certificates, notes, guarantees, security
agreements and other agreements, documents and instruments now or at any time
hereafter executed and/or delivered by Borrower or any Obligor in connection
with this Agreement, as the same now exist or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.
1.33 "Formula Availability" shall mean the amount, as determined by
Lender, calculated at any time, equal to the amount of Revolving Loans
available to Borrower at such time, assuming (for purposes of such calculation)
that the outstanding principal balance of Revolving Loans and Letter of Credit
Accommodations is zero and based on the applicable lending formulas under
Section 2.1 hereof, subject to the sublimits and Availability Reserves from
time to time actually established by Lender hereunder.
1.34 "GAAP" shall mean generally accepted accounting principles in
the United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Board which are applicable to the
circumstances as of the date of determination consistently applied, except
that, for purposes of Section 9.14 hereof, GAAP shall be determined on the
basis of such principles in effect on the date hereof and consistent with those
used in the preparation of the audited financial statements delivered to Lender
prior to the date hereof.
1.35 "Gaming Authority" shall mean any Governmental Authority which
regulates gaming in a jurisdiction in which
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Borrower or any of its subsidiaries conducts gaming activities or activities
relating to the design, manufacture or distribution of gaming machines,
equipment or systems or, whether or not included in the foregoing, bingo
supplies or bingo equipment.
1.36 "Gaming Laws" shall mean all laws, rules, regulations, orders,
and interpretations of any Governmental Authority relating to gaming activities
or activities relating to the design, manufacture or distribution of gaming
machines, equipment or systems or, whether or not included in the foregoing,
bingo supplies or bingo equipment.
1.37 "Gaming Licenses" shall mean all licenses, franchises, or
other authorizations required to design, manufacture or distribute gaming
machines, equipment or systems or, whether or not included in the foregoing,
bingo supplies or bingo equipment in any state or jurisdiction where Borrower
or any of its Subsidiaries conduct such business (including any North American
Indian lands where any account debtor of Borrower is located or conducts
business.)
1.38 "Governmental Authority" shall mean the United States of
America, any State of the United States of America, Canada, any Province of
Canada, any other foreign government, or a district, county or municipality or
other political subdivision, and any North American Indian nation or tribe, or
any body, department, authority, agency, public corporation or instrumentality,
of any of the foregoing.
1.39 "Guarantors" shall mean Video King Gaming Systems, Inc., a
Colorado corporation, and each other Person that guarantees payment of all or
any portion of the Obligations.
1.40 "Hazardous Materials" shall mean any hazardous, toxic or
dangerous substances, materials and wastes, including hydrocarbons (including
naturally occurring or man-made petroleum and hydrocarbons), flammable
explosives, asbestos, urea formaldehyde insulation, radioactive materials,
biological substances, polychlorinated biphenyls, pesticides, herbicides and
any other kind and/or type of pollutants or contaminants (including materials
which include hazardous constituents), sewage, sludge, industrial slag,
solvents and/or any other similar substances, materials, or wastes and
including any other substances, materials or wastes that are or become
regulated under any Environmental Law (including any that are or become
classified as hazardous or toxic under any Environmental Law).
1.41 "Information Certificate" shall mean the Information
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Certificate of Borrower constituting Exhibit A hereto containing material
information with respect to Borrower, its business and assets provided by or on
behalf of Borrower to Lender in connection with the preparation of this
Agreement and the other Financing Agreements and the financing arrangements
provided for herein.
1.42 "Interest Period" shall mean for any Eurodollar Rate Loan, a
period of approximately one (1), two (2), or three (3) months duration as
Borrower may elect, the exact duration to be determined in accordance with the
customary practice in the applicable Eurodollar Rate market; provided, that,
Borrower may not elect an Interest Period which will end after the last day of
the then-current term of this Agreement.
1.43 "Interest Rate" shall mean, as to Prime Rate Loans, the per
annum rate equal to the Prime Rate plus the Applicable Margin, and, as to
Eurodollar Rate Loans, the per annum rate equal to the Adjusted Eurodollar Rate
(based on the Eurodollar Rate applicable for the Interest Period selected by
Borrower as in effect three (3) Business Days after the date of receipt by
Lender of the request of Borrower for such Eurodollar Rate Loans in accordance
with the terms hereof, whether such rate is higher or lower than any rate
previously quoted to Borrower) plus the Applicable Margin; provided, that, the
Interest Rate(s) shall be increased by two (2%) percent per annum above the
otherwise applicable Interest Rate(s), at Lender's option, without notice, (a)
for the period (i) from and after the effective date of termination or
non-renewal hereof until Lender has received full and final payment of all
Obligations (notwithstanding entry of any judgment against Borrower) and (ii)
from and after the date of the occurrence of an Event of Default for so long as
such Event of Default is continuing, and (b) on the Revolving Loans at any time
outstanding in excess of the amounts available to Borrower under Section 2
(whether or not such excess(es) arise or are made with or without Lender's
knowledge or consent and whether made before or after an Event of Default).
1.44 "Inventory" shall mean all of Borrower's now owned and
hereafter existing or acquired raw materials, work in process, finished goods
and all other inventory of whatsoever kind or nature, wherever located.
1.45 "Letter of Credit Accommodations" shall mean the letters of
credit, merchandise purchase or other guaranties denominated in U.S. Dollars
which are from time to time either (a) issued or opened by Lender for the
account of Borrower or any Obligor or (b) with respect to which Lender has
agreed to indemnify the issuer or guaranteed to the issuer the performance
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by Borrower of its obligations to such issuer.
1.46 "Loans" shall mean the Revolving Loans.
1.47 "Material Adverse Change" shall mean a material adverse change
in the condition (financial or otherwise), operations, performance, properties,
business or affairs of the Borrower or any Obligor.
1.48 "Material Averse Effect" shall mean (a) a material adverse
change in, or a material adverse effect upon, the condition (financial or
otherwise), operations, business or affairs of Borrower or any Obligor, (b) any
existing or future impairment of the ability of Borrower or any Obligor to
perform any material Obligations under any of the Financing Agreements, or (c)
any existing or future impairment of Lender's rights or interests in any
Collateral, or Lender's ability to enforce any Obligations or realize upon any
Collateral.
1.49 "Maximum Credit" shall mean the amount of $6,666,667, subject
to increase as provided in Section 2.4 below.
1.50 "Net Amount of Eligible Accounts" shall mean the gross amount
of Eligible Accounts less (a) sales, excise or similar taxes included in the
amount thereof and (b) returns, discounts, claims, credits and allowances of
any nature at any time issued, owing, granted, outstanding, available or
claimed with respect to such Eligible Accounts; provided, that the amounts
deducted under clause (a) shall not duplicate items for which Availability
Reserves have been established by Lender.
1.51 "Obligations" shall mean any and all Revolving Loans, Letter
of Credit Accommodations and all other obligations, liabilities and
indebtedness of every kind, nature and description owing by Borrower to Lender
and/or its affiliates, including principal, interest, charges, fees, costs and
expenses, however evidenced, whether as principal, surety, endorser, guarantor
or otherwise, whether arising under this Agreement or otherwise, whether now
existing or hereafter arising, whether arising before, during or after the
initial or any renewal term of this Agreement or after the commencement of any
case with respect to Borrower under the United States Bankruptcy Code or any
similar statute (including the payment of interest and other amounts which
would accrue and become due but for the commencement of such case, whether or
not such amounts are allowed or allowable in whole or in part in such case),
whether direct or indirect, absolute or contingent, joint or several, due or
not due, primary or secondary, liquidated or unliquidated, secured or
unsecured, and however acquired by Lender.
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1.52 "Obligor" shall mean each Guarantor and each endorser,
acceptor, surety or other person liable on or with respect to the Obligations
or who is the owner of any property which is security for the Obligations,
other than Borrower.
1.53 "Overformula Amount" shall mean, at any time, as calculated by
Lender, the amount (if any) by which (A) the aggregate amount of outstanding
Obligations (other than the face amount of outstanding Letter of Credit
Accommodations) at such time, exceeds (B) the lesser of (x) the Formula
Availability and (y) the Maximum Credit less the face amount of outstanding
Letter of Credit Accommodations, at such time.
1.54 "Payment Account" shall have the meaning set forth in Section
6.3 hereof.
1.55 "Person" or "person" shall mean any individual, sole
proprietorship, partnership, corporation (including any corporation which
elects subchapter S status under the Internal Revenue Code of 1986, as
amended), limited liability company, limited liability partnership, business
trust, unincorporated association, joint stock corporation, trust, joint
venture or other entity or any government or any agency or instrumentality or
political subdivision thereof.
1.56 "Prime Rate" shall mean the rate from time to time publicly
announced by CoreStates Bank, N.A., or its successors, at its office in
Philadelphia, Pennsylvania, as its prime rate, whether or not such announced
rate is the best rate available at such bank.
1.57 "Prime Rate Loans" shall mean any Loans or portion thereof on
which interest is payable based on the Prime Rate in accordance with the terms
thereof.
1.58 "Records" shall mean all of Borrower's present and future
books of account of every kind or nature, purchase and sale agreements,
invoices, ledger cards, bills of lading and other shipping evidence,
statements, correspondence, memoranda, credit files and other data relating to
the Collateral or any account debtor, together with the tapes, disks, diskettes
and other data and software storage media and devices, file cabinets or
containers in or on which the foregoing are stored (including any rights of
Borrower with respect to the foregoing maintained with or by any other person).
1.59 "Reference Bank" shall mean CoreStates Bank, N.A., or such
other bank as Lender may from time to time designate.
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1.60 "Revolving Loans" shall mean the loans now or hereafter made
by Lender to or for the benefit of Borrower on a revolving basis (involving
advances, repayments and readvances) as set forth in Section 2.1 hereof.
1.61 "Subordinated Note Agreements" shall mean the Subordinated
Notes and the Indenture dated as of November 13, 1996 between Borrower and The
Trust Company of Washington, as the same now exist or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.
1.62 "Subordinated Notes" shall mean Borrower's Series B
12 1/2% Senior Subordinated Notes due 2004, in the aggregate principal amount
of $100,000,000, as the same now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
1.63 "U.S. Dollar Equivalent" of an amount of money in Canadian
Dollars, shall mean an amount, as determined by Lender, equal to the value in
U.S. Dollars, of such amount of Canadian Dollars, based on the spot price for
buying U.S. Dollars with Canadian Dollars, as quoted to Lender by CoreStates
Bank N.A. or other financial institution acceptable to Lender. Lender may make
such determination utilizing the closing spot price for the preceding business
day or may, from time to time, at its option, utilize a more current spot price
with respect to any determination of U.S. Dollar Equivalent for purposes
hereof.
1.64 "U.S. Dollars" or "$" or "US$" shall mean dollars of the
United States or other lawful currency of the United States.
1.65 "Value" shall mean, as determined by Lender in good faith,
with respect to Inventory, the lower of (a) cost computed on a
first-in-first-out basis in accordance with GAAP or (b) market value.
SECTION 2. CREDIT FACILITIES
2.1 Revolving Loans.
(a) Subject to and upon the terms and conditions
contained herein, Lender agrees to make Revolving Loans to Borrower from time
to time in amounts requested by Borrower up to the amount equal to the sum of:
(i) eighty (80%) percent of the Net Amount of
Eligible Accounts, plus
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(ii) the lesser of: (A) sixty (60%) percent of the
Value of Eligible Inventory or (B) $6,666,667, plus
(iii) the lesser of (A) $4,443,750 or (B) the
Amortized Equipment Value, less
(iv) any Availability Reserves.
(b) Lender may, in its discretion, from time to time,
upon not less than five (5) days prior notice to Borrower identifying the basis
for the action being taken under this provision, (i) reduce the lending formula
with respect to Eligible Accounts to the extent that Lender determines in good
faith that: (1) the dilution with respect to the Accounts for any period
(based on the ratio of (A) the aggregate amount of reductions in Accounts other
than as a result of payments in cash to (B) the aggregate amount of total
sales) has increased in any material respect or may be reasonably anticipated
to increase in any material respect above historical levels, or (2) the general
creditworthiness of account debtors has declined, or (ii) reduce the lending
formula(s) with respect to Eligible Inventory to the extent that Lender
determines that: (1) the number of days of the turnover of the Inventory for
any period has changed in any material respect or (2) the liquidation value of
the Eligible Inventory, or any category thereof, has decreased, or (3) the
nature and quality of the Inventory has deteriorated, or (iii) reduce the
amount available under Section 2.1(a)(iii) to the extent the Amortized
Equipment Value at any time exceeds seventy-five (75%) percent of the orderly
liquidation value of the Borrower's Equipment deemed acceptable by Lender for
lending purposes, as such value is set forth in an appraisal pursuant to
Section 7.4 hereof. In determining whether to reduce the lending formula(s),
Lender may, without duplication, consider events, conditions, contingencies or
risks which are also considered in determining Eligible Accounts, Eligible
Inventory or in establishing Availability Reserves.
(c) Except in Lender's discretion, the aggregate amount
of the Loans and the Letter of Credit Accommodations outstanding at any time
shall not exceed the Maximum Credit. In the event that the outstanding amount
of any component of the Loans, or the aggregate amount of the outstanding Loans
and Letter of Credit Accommodations, exceed the amounts available under the
lending formulas, the sublimits for Letter of Credit Accommodations set forth
in Section 2.2(d) or the Maximum Credit, as applicable, such event shall not
limit, waive or otherwise affect any rights of Lender in that circumstance or
on any future
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occasions and Borrower shall, upon demand by Lender, which may be made at any
time or from time to time, immediately repay to Lender the entire amount of any
such excess(es) for which payment is demanded.
(d) For purposes of applying the sublimit set forth in
Section 2.1(a)(ii)(B) hereof, Lender may treat the amount of its reliance on
Eligible Inventory to be purchased under outstanding Letter of Credit
Accommodations as a Revolving Loan based on Eligible Inventory pursuant to
Section 2(a)(ii). In determining the amount of such reliance, the outstanding
Revolving Loans and Availability Reserves shall first be attributed to any
components of the lending formulas in Section 2.1(a) that are not subject to
such sublimit, before being attributed to components of the lending formulas
subject to such sublimit.
2.2 Letter of Credit Accommodations.
(a) Subject to and upon the terms and conditions
contained herein, at the request of Borrower, Lender agrees to provide or
arrange for Letter of Credit Accommodations for the account of Borrower
containing terms and conditions acceptable to Lender and the issuer thereof.
Any payments made by Lender to any issuer thereof and/or related parties in
connection with the Letter of Credit Accommodations shall constitute additional
Revolving Loans to Borrower pursuant to this Section 2.
(b) In addition to any charges, fees or expenses charged
by any bank or issuer in connection with the Letter of Credit Accommodations,
Borrower shall pay to Lender a letter of credit fee at a rate equal to two (2%)
percent per annum on the daily outstanding balance of the Letter of Credit
Accommodations for the immediately preceding month (or part thereof), payable
in arrears as of the first day of each succeeding month, except that Borrower
shall pay to Lender such letter of credit fee, at Lender's option, without
notice, at a rate equal to four (4%) percent per annum on such daily
outstanding balance for: (i) the period from and after the effective date of
termination or non-renewal hereof until Lender has received full and final
payment of all Obligations (notwithstanding entry of a judgment against
Borrower) and (ii) the period from and after the date of the occurrence of an
Event of Default for so long as such Event of Default is continuing. Such
letter of credit fee shall be calculated on the basis of a three hundred sixty
(360) day year and actual days elapsed and the obligation of Borrower to pay
such fee shall survive the termination or non-renewal of this Agreement.
(c) No Letter of Credit Accommodations shall be
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available unless on the date of the proposed issuance of any Letter of Credit
Accommodations, the Revolving Loans available to Borrower (subject to the
Maximum Credit and any Availability Reserves) are equal to or greater than: (i)
if the proposed Letter of Credit Accommodation is for the purpose of purchasing
Eligible Inventory and the Letter of Credit Accommodation requires that all
negotiable documents of the title with respect to such Eligible Inventory shall
be consigned to the issuer of the Letter of Credit Accommodation, the sum of
(1) the percentage equal to one hundred (100%) percent minus the then
applicable percentage set forth in Section 2.1(a)(ii)(A) above of the Value of
such Eligible Inventory, plus (2) freight, taxes, duty and other amounts which
Lender estimates must be paid in connection with such Inventory upon arrival
and for delivery to one of Borrower's locations for Eligible Inventory within
the United States of America and (ii) if the proposed Letter of Credit
Accommodation is for any other purpose, an amount equal to one hundred (100%)
percent of the face amount thereof and all other commitments and obligations
made or incurred by Lender with respect thereto. Effective on the issuance of
each Letter of Credit Accommodation, an Availability Reserve shall be
established in the applicable amount set forth in Section 2.2(c)(i) or Section
2.2(c)(ii).
(d) Except in Lender's discretion, the amount of all
outstanding Letter of Credit Accommodations and all other commitments and
obligations made or incurred by Lender in connection therewith shall not at any
time exceed $3,333,333. At any time an Event of Default exists or has occurred
and is continuing, upon Lender's request, Borrower will either furnish cash
collateral to secure the reimbursement obligations to the issuer in connection
with any Letter of Credit Accommodations or furnish cash collateral to Lender
for the Letter of Credit Accommodations, and in either case, the Revolving
Loans otherwise available to Borrower shall not be reduced as provided in
Section 2.2(c) to the extent of such cash collateral.
(e) Borrower shall indemnify and hold Lender harmless
from and against any and all losses, claims, damages, liabilities, costs and
expenses which Lender may suffer or incur in connection with any Letter of
Credit Accommodations and any documents, drafts or acceptances relating
thereto, including any losses, claims, damages, liabilities, costs and expenses
due to any action taken by any issuer or correspondent with respect to any
Letter of Credit Accommodation, but excluding any losses, claims, damages,
liabilities, costs and expenses directly caused by the gross negligence or
willful misconduct of Lender, as determined by a final non-appealable judgment
of a court of competent jurisdiction. Borrower assumes all risks with respect
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to the acts or omissions of the drawer under or beneficiary of any Letter of
Credit Accommodation and for such purposes the drawer or beneficiary shall be
deemed Borrower's agent. Borrower assumes all risks for, and agrees to pay,
all foreign, Federal, State and local taxes, duties and levies relating to any
goods subject to any Letter of Credit Accommodations or any documents, drafts
or acceptances thereunder. Borrower hereby releases and holds Lender harmless
from and against any acts, waivers, errors, delays or omissions, whether caused
by Borrower, by any issuer or correspondent or otherwise with respect to or
relating to any Letter of Credit Accommodation. The provisions of this Section
2.2(e) shall survive the payment of Obligations and the termination or
non-renewal of this Agreement.
(f) Nothing contained herein shall be deemed or construed
to grant Borrower any right or authority to pledge the credit of Lender in any
manner. Lender shall have no liability of any kind with respect to any Letter
of Credit Accommodation provided by an issuer other than Lender unless Lender
has duly executed and delivered to such issuer the application or a guarantee
or indemnification in writing with respect to such Letter of Credit
Accommodation. Borrower shall be bound by any interpretation made in good
faith by Lender, or any other issuer or correspondent under or in connection
with any Letter of Credit Accommodation or any documents, drafts or acceptances
thereunder, notwithstanding that such interpretation may be inconsistent with
any instructions of Borrower. Lender shall have the sole and exclusive right
and authority, exercised in good faith, to, and Borrower shall not: (i) at any
time an Event of Default exists or has occurred and is continuing, (1) approve
or resolve any questions of non-compliance of documents, (2) give any
instructions as to acceptance or rejection of any documents or goods or (3)
execute any and all applications for steamship or airway guaranties,
indemnities or delivery orders, and (ii) at all times, (1) grant any extensions
of the maturity of, time of payment for, or time of presentation of, any
drafts, acceptances, or documents, and (2) agree to any amendments, renewals,
extensions, modifications, changes or cancellations of any of the terms or
conditions of any of the applications, Letter of Credit Accommodations, or
documents, drafts or acceptances thereunder or any letters of credit included
in the Collateral. Lender may take such actions either in its own name or in
Borrower's name.
(g) Any rights, remedies, duties or obligations granted
or undertaken by Borrower to any issuer or correspondent in any application for
any Letter of Credit Accommodation, or any other agreement in favor of any
issuer or correspondent relating to any Letter of Credit Accommodation, shall
be deemed to have been granted or undertaken by Borrower to Lender. Any duties
or
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obligations undertaken by Lender to any issuer or correspondent in any
application for any Letter of Credit Accommodation, or any other agreement by
Lender in favor of any issuer or correspondent relating to any Letter of Credit
Accommodation, shall be deemed to have been undertaken by Borrower to Lender
and to apply in all respects to Borrower.
2.3 Availability Reserves.
(a) All Revolving Loans otherwise available to Borrower
pursuant to the lending formulas and subject to the Maximum Credit and other
applicable limits hereunder shall be subject to Lender's continuing right to
establish and revise Availability Reserves. Lender shall notify Borrower of
the establishment of and any changes in Availability Reserves and the basis
therefor, as soon as practicable following each such establishment or change.
Upon Borrower's request in writing after being so advised, Lender will, if it
has not already done so, promptly confirm to Borrower, in writing, the
applicable establishment of or changes in Availability Reserves and the basis
therefor.
(b) Without limiting Lender's other rights with respect
to Availability Reserves (and without in any way affecting or impairing the
rights or remedies of Congress (Canada) under the Canadian Financing
Agreements), Lender may from time to time establish and revise Availability
Reserves in an amount sufficient to cover (i) the amount by which the
outstanding "Obligations" (as defined in the Canadian Loan Agreement) of the
Canadian Borrower to Congress (Canada) exceeds the "Maximum Credit" (as defined
in the Canadian Loan Agreement) and/or (ii) the amount by which the aggregate
amount of the Canadian Loans and Canadian Letter of Credit Accommodations
exceed the "Formula Availability" as defined in the Canadian Loan Agreement.
In the case of any Availability Reserves established under clause (ii) of this
Section 2.3(b), Lender may also treat such amount as a reduction in the Maximum
Credit hereunder.
2.4 Increases in Maximum Credit. The Maximum Credit shall be
increased, but not above $20,000,000, upon Borrower's written request(s) in
accordance with and subject to the following terms and conditions:
(a) Borrower may submit to Lender up to two (2) requests
for increases in the Maximum Credit hereunder;
(b) Each request shall be made in the form of a joint
written request by Borrower to Lender and by Canadian Borrower to Congress
(Canada) requesting an aggregate of $10,000,000 of
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increases in the Maximum Credit and/or the U.S. Dollar amount used to calculate
the Canadian Maximum Credit under the Canadian Loan Agreement; provided,
however, in the case of any requested increase(s) of the Canadian Maximum
Credit, that the Canadian Maximum Credit as so increased shall not at any time
exceed the amount of Canadian Dollars that at the effective date of such
increase or at any time thereafter shall have a U.S. Dollar Equivalent of
$10,000,000;
(c) Each request received by Lender in accordance with
this Section 2.4 shall become effective as to Borrower on the fifth (5th)
business day following the date of Lender's receipt of such request; provided,
that such request shall not become effective for any purpose hereunder:
(i) if, upon the otherwise effective date of such
requested increase, any Event of Default, or any condition or event
that, with notice or passage of time, or both, would constitute an
Event of Default, shall then exist or shall have occurred and be then
continuing, or
(ii) during the final sixty (60) days of the
initial term or any renewal year hereunder, if Lender has given notice
of non-renewal to Borrower as permitted under Section 12.1(a) hereof,
or
(iii) if such request would otherwise take effect
after Borrower has given notice of non-renewal or termination as
permitted in Section 12.1(a) or (c) hereof; and
(d) upon the effective date of each increase in the
Maximum Credit under Section 2.4, Borrower shall pay to Lender (or Lender may,
at its option, charge directly to Borrower's Revolving Loan account) a fee
equal to three-quarters of one (3/4%) percent of the amount of such increase,
which amount shall be deemed earned in full as of such effective date.
SECTION 3. INTEREST AND FEES
3.1 Interest.
(a) Borrower shall pay to Lender interest at the Interest
Rate (i) on the outstanding principal amount of the Loans and (ii) except to
the extent expressly otherwise provided herein as to certain fees, costs,
expenses and other charges, on all other non-contingent Obligations. All
interest accruing
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hereunder on and after the date of any Event of Default or termination or
non-renewal hereof shall be payable on demand.
(b) Borrower may from time to time request that Prime
Rate Loans be converted to Eurodollar Rate Loans or that any existing
Eurodollar Rate Loans continue for an additional Interest Period. Such request
from Borrower shall specify the amount of the Prime Rate Loans which will
constitute Eurodollar Rate Loans (subject to the limits set forth below) and
the Interest Period to be applicable to such Eurodollar Rate Loans. Subject to
the terms and conditions contained herein, three (3) Business Days after
receipt by Lender of such a request from Borrower, such Prime Rate Loans shall
be converted to Eurodollar Rate Loans or such Eurodollar Rate Loans shall
continue, as the case may be, provided, that, (i) no Event of Default, or event
which with notice or passage of time or both would constitute an Event of
Default exists or has occurred and is continuing, (ii) no party hereto shall
have sent any notice of termination or non-renewal of this Agreement, (iii)
Borrower shall have complied with such customary procedures as are established
by Lender and specified by Lender to Borrower from time to time for requests by
Borrower for Eurodollar Rate Loans, (iv) no more than four (4) Interest Periods
may be in effect at any one time, (v) the amount of the Eurodollar Rate Loans
for each Interest Period must be in an amount not less than $3,000,000 or an
integral multiple of $1,000,000 in excess thereof, (vi) the maximum amount of
the Eurodollar Rate Loans at any time requested by Borrower shall not exceed
the amount equal to eighty (80%) percent of the lowest principal amount of the
Revolving Loans which it is anticipated will be outstanding during the
applicable Interest Period, in each case as determined by Lender (but with no
obligation of Lender to make such Revolving Loans) and (vii) Lender shall have
determined that the Interest Period or Adjusted Eurodollar Rate is available to
Lender through the Reference Bank and can be readily determined as of the date
of the request for such Eurodollar Rate Loan by Borrower. Any request by
Borrower to convert Prime Rate Loans to Eurodollar Rate Loans or to continue
any existing Eurodollar Rate Loans shall be irrevocable. Notwithstanding
anything to the contrary contained herein, Lender and Reference Bank shall not
be required to purchase United States Dollar deposits in the London interbank
market or other applicable Eurodollar Rate market to fund any Eurodollar Rate
Loans, but the provisions hereof shall be deemed to apply as if Lender and
Reference Bank had purchased such deposits to fund the Eurodollar Rate Loans.
(c) Any Eurodollar Rate Loans shall automatically convert
to Prime Rate Loans upon the last day of the applicable Interest Period, unless
Lender has received and approved a
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request to continue such Eurodollar Rate Loan at least three (3) Business Days
prior to such last day in accordance with the terms hereof. Any Eurodollar
Rate Loans shall, at Lender's option, upon notice by Lender to Borrower,
convert to Prime Rate Loans in the event that (i) an Event of Default or event
which, with the notice or passage of time, or both, would constitute an Event
of Default, shall exist, (ii) this Agreement shall terminate or not be renewed,
or (iii) the aggregate principal amount of the Prime Rate Loans which have
previously been converted to Eurodollar Rate Loans or existing Eurodollar Rate
Loans continued, as the case may be, at the beginning of an Interest Period
shall at any time during such Interest Period exceed either (A) the aggregate
principal amount of the Loans then outstanding, or (B) the Revolving Loans then
available to Borrower under Section 2 hereof. Borrower shall pay to Lender,
upon demand by Lender (or Lender may, at its option, charge any loan account of
Borrower) any amounts required to compensate Lender, the Reference Bank or any
participant with Lender for any loss (including loss of anticipated profits),
cost or expense incurred by such person, as a result of the conversion of
Eurodollar Rate Loans to Prime Rate Loans pursuant to any of the foregoing.
(d) Interest shall be payable by Borrower to Lender
monthly in arrears not later than the first day of each calendar month and
shall be calculated on the basis of a three hundred sixty (360) day year and
actual days elapsed. The interest rate on non-contingent Obligations (other
than Eurodollar Rate Loans) shall increase or decrease by an amount equal to
each increase or decrease in the Prime Rate effective on the first day of the
month after any change in such Prime Rate is announced. The increase or
decrease shall be based on the Prime Rate in effect on the last day of the
month in which any such change occurs. In no event shall charges constituting
interest payable by Borrower to Lender exceed the maximum amount or the rate
permitted under any applicable law or regulation, and if any such part or
provision of this Agreement is in contravention of any such law or regulation,
such part or provision shall be deemed amended to conform thereto.
3.2 Closing Fee. Borrower shall pay to Lender as a closing fee
the amount of $50,000, which shall be fully earned as of and payable on the
date hereof.
3.3 Unused Line Fee. Borrower shall pay to Lender monthly an
unused line fee at a rate equal to three- eighths of one (3/8%) percent per
annum calculated upon the amount (if any) by which eighty (80%) percent of the
Maximum Credit exceeds the average daily principal balance of the outstanding
Revolving Loans and Letter of Credit Accommodations during the immediately
preceding
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month (or part thereof) while this Agreement is in effect and for so long
thereafter as any of the Obligations are outstanding, which fee shall be
payable on the first day of each month in arrears.
3.4 Servicing Fee. Borrower shall pay to Lender monthly a
servicing fee in an amount equal to $1,333 in respect of Lender's services for
each month (or part thereof) while this Agreement remains in effect and for so
long thereafter as any of the Obligations are outstanding, which fee shall be
fully earned as of and payable in advance on the date hereof and on the first
day of each month hereafter.
3.5 Changes in Laws and Increased Costs of Loans.
(a) Notwithstanding anything to the contrary contained
herein, all Eurodollar Rate Loans shall, upon notice by Lender to Borrower,
convert to Prime Rate Loans in the event that (i) any change in applicable law
or regulation (or the interpretation or administration thereof) shall either
(A) make it unlawful for Lender, Reference Bank or any participant to make or
maintain Eurodollar Rate Loans or to comply with the terms hereof in connection
with the Eurodollar Rate Loans, or (B) shall result in an increase in the costs
to Lender, Reference Bank or any participant of making or maintaining any
Eurodollar Rate Loans by an amount deemed by Lender in good faith to be
material, or (C) reduce the amounts received or receivable by Lender in respect
thereof, by an amount deemed by Lender to be material or (ii) the cost to
Lender, Reference Bank or any participant of making or maintaining any
Eurodollar Rate Loans shall otherwise increase by an amount deemed by Lender to
be material. Borrower shall pay to Lender, upon demand by Lender (or Lender
may, at its option, charge any loan account of Borrower) any amounts required
to compensate Lender, the Reference Bank or any participant with Lender for any
loss, cost or expense incurred by such person as a result of the foregoing,
including, without limitation, any such loss, cost or expense incurred by
reason of the liquidation or reemployment of deposits or other funds acquired
by such person to make or maintain the Eurodollar Rate Loans or any portion
thereof. A certificate of Lender setting forth the basis for the determination
of such amount necessary to compensate Lender as aforesaid shall be delivered
to Borrower and shall be conclusive, absent manifest error.
(b) If any payments or prepayments in respect of the
Eurodollar Rate Loans are received by Lender other than on the last day of the
applicable Interest Period (whether pursuant to acceleration, upon maturity or
otherwise), including any payments pursuant to the application of collections
under Section 6.3 or
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any other payments made with the proceeds of Collateral, Borrower shall pay to
Lender upon demand by Lender (or Lender may, at its option, charge any loan
account of Borrower) any amounts required to compensate Lender, the Reference
Bank or any participant with Lender for any additional loss, cost or expense
incurred by such person as a result of such prepayment or payment, including,
without limitation, any loss, cost or expense incurred by reason of the
liquidation or reemployment of deposits or other funds acquired by such person
to make or maintain such Eurodollar Rate Loans or any portion thereof.
SECTION 4. CONDITIONS PRECEDENT
4.1 Conditions Precedent to Initial Loans and Letter of Credit
Accommodations. Each of the following is a condition precedent to Lender making
the initial Loans and providing the initial Letter of Credit Accommodations
hereunder:
(a) Lender shall have received, in form and substance
satisfactory to Lender, all releases, terminations and such other documents as
Lender may request to evidence and effectuate the termination by the existing
lender or lenders to Borrower and its subsidiaries of their respective
financing arrangements with Borrower and its subsidiaries and the termination
and release by it or them, as the case may be, of any interest in and to any
assets and properties of Borrower and each subsidiary, duly authorized,
executed and delivered by it or each of them, including, but not limited to,
(i) UCC termination statements for all UCC financing statements previously
filed by it or any of them or their predecessors, as secured party and Borrower
or any subsidiary, as debtor and (ii) satisfactions and discharges of any
mortgages, deeds of trust or deeds to secure debt by Borrower or any subsidiary
in favor of such existing lender or lenders, in form acceptable for recording
in the appropriate government office;
(b) Lender shall have received evidence, in form and
substance satisfactory to Lender, that Lender has valid perfected and first
priority security interests in and liens upon the Collateral and any other
property which is intended to be security for the Obligations or the liability
of any Obligor in respect thereof, subject only to the security interests and
liens permitted herein or in the other Financing Agreements;
(c) all requisite corporate action and proceedings in
connection with this Agreement and the other Financing Agreements shall be
satisfactory in form and substance to Lender, and Lender shall have received
all information and copies of all documents, including records of requisite
corporate action and proceedings
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<PAGE> 31
which Lender may have requested in connection therewith, such documents where
requested by Lender or its counsel to be certified by appropriate corporate
officers or governmental authorities;
(d) no Material Adverse Change shall have occurred since
the date of Lender's latest field examination;
(e) Lender shall have received a Borrowing Base
Certificate setting forth the Revolving Loans available to Borrower as of the
end of Borrower's fiscal month ended on or about October 31, 1997, as completed
in a manner satisfactory to Lender and duly authorized, executed and delivered
on behalf of Borrower;
(f) Lender shall have completed a field review of the
Records and such other information with respect to the Collateral as Lender may
require to determine the amount of Revolving Loans available to Borrower, the
results of which shall be satisfactory to Lender, not more than three (3)
business days prior to the date hereof;
(g) Lender shall have received, in form and substance
satisfactory to Lender, all consents, waivers, acknowledgments and other
agreements from third persons which Lender may deem necessary or desirable in
order to permit, protect and perfect its security interests in and liens upon
the Collateral or to effectuate the provisions or purposes of this Agreement
and the other Financing Agreements, including acknowledgements by lessors,
mortgagees and warehousemen of Lender's security interests in the Collateral,
waivers by such persons of any security interests, liens or other claims by
such persons to the Collateral and agreements permitting Lender access to, and
the right to remain on, the premises to exercise its rights and remedies and
otherwise deal with the Collateral;
(h) Lender shall have received evidence of insurance and
loss payee endorsements required hereunder and under the other Financing
Agreements, in form and substance satisfactory to Lender, and certificates of
insurance policies and/or endorsements naming Lender as loss payee;
(i) the Combined Excess Availability, as determined by
Lender as of the date hereof, shall be not less than $5,000,000 after giving
effect to the initial Loans made or to be made and Letter of Credit
Accommodations issued or to be issued in connection with the initial
transactions hereunder and after giving effect to the initial Canadian Loans
made or to be made and Canadian Letter of Credit Accommodations issued or to be
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issued by Congress (Canada) under the Canadian Loan Agreement in connection
with the initial transactions hereunder and thereunder;
(j) Lender shall have received evidence that Borrower has
provided each Governmental Authority to whose jurisdiction it or any of its
subsidiaries is subject, with all required notices (if any) with respect to the
Financing Agreements, the Canadian Financing Agreements and all Obligations and
Collateral hereunder and thereunder;
(k) Lender shall have received, in form and substance
satisfactory to Lender, such opinion letters of counsel to Borrower and Video
King Systems, Inc. with respect to the Financing Agreements and with respect to
such other matters as Lender may request, including, without limitation, (i)
the status of the Obligations of Borrower to Lender and Congress (Canada) as
"Senior Indebtedness" and "Designated Senior Indebtedness," under the Indenture
governing the Subordinated Notes and (ii) the non-contravention of any
provision of the Subordinated Note Agreements by reason of the execution,
delivery or performance of the Financing Agreements and Canadian Financing
Agreements (including, without limitation, the loans and other financial
accommodations and guaranties hereunder and thereunder and the granting of
liens and security interests as herein and therein provided);
(l) Lender shall have received, in form and substance
satisfactory to Lender, a guarantee of payment by each Guarantor in favor of
Lender of all Obligations secured by a first and only security interest in
favor of Lender granted by each Guarantor in all of its existing and future
assets (except real property);
(m) the other Financing Agreements and all instruments
and documents hereunder and thereunder shall have been duly executed and
delivered to Lender, in form and substance satisfactory to Lender; and
(n) the Canadian Financing Agreement, and all instruments
and documents thereunder shall have been duly executed and delivered by the
Canadian Borrower and Congress (Canada), in form and substance satisfactory to
Congress (Canada), and all of the conditions precedent to the initial Loans
under the Canadian Loan Agreement contained in Sections 4.1(a) through 4.1(m)
thereof, shall have been fully satisfied.
4.2 Conditions Precedent to All Loans and Letter of Credit
Accommodations. Each of the following is an additional condition precedent to
Lender making Loans and/or providing Letter of
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Credit Accommodations to Borrower, including the initial Loans and Letter of
Credit Accommodations and any future Loans and Letter of Credit Accommodations:
(a) all representations and warranties contained herein
and in the other Financing Agreements shall be true and correct in all material
respects with the same effect as though such representations and warranties had
been made on and as of the date of the making of each such Loan or providing
each such Letter of Credit Accommodation and after giving effect thereto
(except as to those representations and warranties expressly made as of a
specified earlier date, in which case, they shall be true and correct as of
such earlier date); and
(b) no Event of Default and no event or condition which,
with notice or passage of time or both, would constitute an Event of Default,
shall exist or have occurred and be continuing on and as of the date of the
making of such Loan or providing each such Letter of Credit Accommodation and
after giving effect thereto.
SECTION 5. GRANT OF SECURITY INTEREST
To secure payment and performance of all Obligations, Borrower hereby
grants to Lender a continuing security interest in, a lien upon, and a right of
set off against, and hereby assigns to Lender as security, the following
property and interests in property of Borrower, whether now owned or hereafter
acquired or existing, and wherever located (collectively, the "Collateral"):
5.1 Accounts;
5.2 all present and future contract rights, general intangibles
(including tax and duty refunds, registered and unregistered patents,
trademarks, service marks, copyrights, trade names, applications for the
foregoing, trade secrets, goodwill, processes, drawings, blueprints, customer
lists, licenses, whether as licensor or licensee, choses in action and other
claims and existing and future leasehold interests in equipment, real estate
and fixtures), chattel paper, documents, instruments, securities and other
investment property, letters of credit, bankers' acceptances and guaranties;
5.3 except for the short term investment account identified in
Schedule 5.3 hereto, all present and future monies, securities, credit
balances, deposits, deposit accounts and other property of Borrower now or
hereafter held or received by or in
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transit to Lender or its affiliates or at any other depository or other
institution from or for the account of Borrower, whether for safekeeping,
pledge, custody, transmission, collection or otherwise, and all present and
future liens, security interests, rights, remedies, title and interest in, to
and in respect of Accounts and other Collateral, including (a) rights and
remedies under or relating to guaranties, contracts of suretyship, letters of
credit and credit and other insurance related to the Collateral, (b) rights of
stoppage in transit, replevin, repossession, reclamation and other rights and
remedies of an unpaid vendor, lienor or secured party, (c) goods described in
invoices, documents, contracts or instruments with respect to, or otherwise
representing or evidencing, Accounts or other Collateral, including returned,
repossessed and reclaimed goods, and (d) deposits by and property of account
debtors or other persons securing the obligations of account debtors;
5.4 Inventory;
5.5 Equipment;
5.6 Records; and
5.7 all products and proceeds of the foregoing, in any form,
including insurance proceeds and all claims against third parties for loss or
damage to or destruction of any or all of the foregoing.
SECTION 6. COLLECTION AND ADMINISTRATION
6.1 Borrower's Loan Account. Lender shall maintain one or more
loan account(s) on its books in which shall be recorded (a) all Loans, Letter
of Credit Accommodations and other Obligations and the Collateral, (b) all
payments made by or on behalf of Borrower and (c) all other appropriate debits
and credits as provided in this Agreement, including fees, charges, costs,
expenses and interest. All entries in the loan account(s) shall be made in
accordance with Lender's customary practices as in effect from time to time.
6.2 Statements. Lender shall render to Borrower each month a
statement setting forth the balance in the Borrower's loan account(s)
maintained by Lender for Borrower pursuant to the provisions of this Agreement,
including principal, interest, fees, costs and expenses. Each such statement
shall be subject to subsequent adjustment by Lender but shall, absent manifest
errors or omissions, be considered correct and deemed accepted by Borrower and
conclusively binding upon Borrower as an account
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stated except to the extent that Lender receives a written notice from Borrower
of any specific exceptions of Borrower thereto within thirty (30) days after
the date such statement has been mailed by Lender. Until such time as Lender
shall have rendered to Borrower a written statement as provided above, the
balance in Borrower's loan account(s) shall be presumptive evidence of the
amounts due and owing to Lender by Borrower.
6.3 Collection of Accounts.
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(a) Borrower shall establish and maintain, at its
expense, blocked accounts or lockboxes and related blocked accounts (in either
case, "Blocked Accounts"), as Lender may specify, with such banks as are
acceptable to Lender, into which Borrower shall promptly deposit and direct its
account debtors to directly remit all payments on Accounts and all payments
constituting proceeds of Inventory or other Collateral in the identical form in
which such payments are made, whether by cash, check or other manner. The
banks at which the Blocked Accounts are established shall enter into an
agreement, in form and substance satisfactory to Lender, providing that all
items received or deposited in the Blocked Accounts are the property of Lender,
that the depository bank has no lien upon, or right to setoff against, the
Blocked Accounts, the items received for deposit therein, or the funds from
time to time on deposit therein and that the depository bank will wire, or
otherwise transfer, in immediately available funds, on a daily basis, at such
time as Lender shall direct, all funds received or deposited into the Blocked
Accounts to such bank account of Lender as Lender may from time to time
designate for such purpose ("Payment Account"). Lender shall instruct the
depository banks at which the Blocked Accounts are maintained to transfer the
funds on deposit in the Blocked Accounts to such operating bank account of
Borrower as Borrower may specify in writing to Lender until such time as Lender
shall notify the depository bank otherwise. Lender may 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 at any
time that any of the following shall occur or exist: (i) an Event of Default,
or event which with notice or passage of time or both would constitute an Event
of Default, shall exist or have occurred, or (ii) Borrower shall have failed to
deliver any Borrowing Base Certificate in accordance with the terms hereof when
due hereunder or within two (2) business days thereafter, or (iii) upon
Lender's good faith belief that any information contained in any Borrowing Base
Certificate is incomplete, inaccurate or misleading, or (iv) Combined Excess
Availability shall at any time be less than $5,000,000, or (v) the aggregate
outstanding principal amount of Loans and Letter of Credit Accommodations, plus
the aggregate outstanding principal amount of "Loans" and "Letter of Credit
Accommodations" under the Canadian Financing Agreements, shall equal or exceed
$15,000,000. Borrower agrees that all payments made to such Blocked Accounts
or Payment Account or other funds received and collected by Lender, whether on
the Accounts or as proceeds of Inventory or other Collateral or otherwise,
shall be the property of Lender to be applied in payment of the Obligations.
(b) For purposes of calculating the amount of the
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Loans available to Borrower, such payments will be applied (conditional upon
final collection) to the Obligations on the business day of receipt by Lender
of immediately available funds in the Payment Account provided such payments
and notice thereof are received in accordance with Lender's usual and customary
practices as in effect from time to time and within sufficient time to credit
Borrower's loan account on such day, and if not, then on the next business day.
For the purposes of calculating interest on the Obligations, such payments or
other funds received will be applied (conditional upon final collection) to the
Obligations on the date of receipt of immediately available funds by Lender in
the Payment Account provided such payments or other funds and notice thereof
are received in accordance with Lender's usual and customary practices as in
effect from time to time and within sufficient time to credit Borrower's loan
account on such day, and if not, then on the next business day.
(c) Borrower and all of its subsidiaries, employees or
agents shall, acting as trustee for Lender, receive, as the property of Lender,
any monies, checks, notes, drafts or any other payment relating to and/or
proceeds of Accounts or other Collateral which come into their possession or
under their control and immediately upon receipt thereof, shall deposit or
cause the same to be deposited in the Blocked Accounts, or remit the same or
cause the same to be remitted, in kind, to Lender. In no event shall the same
be commingled with Borrower's own funds. Borrower agrees to reimburse Lender
on demand for any amounts owed or paid to any bank at which a Blocked Account
is established or any other bank or person involved in the transfer of funds to
or from the Blocked Accounts arising out of Lender's payments to or
indemnification of such bank or person. The obligation of Borrower to
reimburse Lender for such amounts pursuant to this Section 6.3 shall survive
the termination or non-renewal of this Agreement.
6.4 Payments. All Obligations shall be payable to the Payment
Account as provided in Section 6.3 or such other place as Lender may designate
from time to time. Lender may apply payments received or collected from
Borrower or for the account of Borrower (including the monetary proceeds of
collections or of realization upon any Collateral) to such of the Obligations,
whether or not then due, in such order and manner as Lender determines. At
Lender's option, all principal, interest, fees, costs, expenses and other
charges provided for in this Agreement or the other Financing Agreements may be
charged directly to the loan account(s) of Borrower; provided, however, that so
long as the outstanding principal amount of the Loans is zero ($0), Lender will
notify Borrower of any fees, costs, expenses or other charges due under this
Agreement, and will not debit the
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Revolving Loan account of Borrower for such fees, costs, expenses and other
charges if Lender receives payment thereof from Borrower within five (5) days
after Borrower is so notified, and, in addition, if payment is so timely
received by Lender, Lender agrees that no interest will accrue on the fees,
costs, expenses or other charges so paid; provided, further, that in the case
of the monthly servicing fee under Section 3.5, (i) such fee may be charged to
the Revolving Loan account of Borrower and interest shall accrue thereon unless
payment of such fee is received by Lender on or before the fifth (5th) day of
each month, and (ii) Lender need not give Borrower any notice under the
preceding proviso, or otherwise. Borrower shall make all payments to Lender on
the Obligations free and clear of, and without deduction or withholding for or
on account of, any setoff, counterclaim, defense, duties, taxes, levies,
imposts, fees, deductions, withholding, restrictions or conditions of any kind.
If after receipt of any payment of, or proceeds of Collateral applied to the
payment of, any of the Obligations, Lender is required to surrender or return
such payment or proceeds to any Person for any reason, then the Obligations
intended to be satisfied by such payment or proceeds shall be reinstated and
continue and this Agreement shall continue in full force and effect as if such
payment or proceeds had not been received by Lender. Borrower shall be liable
to pay to Lender, and does hereby indemnify and hold Lender harmless for the
amount of any payments or proceeds surrendered or returned. This Section 6.4
shall remain effective notwithstanding any contrary action which may be taken
by Lender in reliance upon such payment or proceeds. This Section 6.4 shall
survive the payment of the Obligations and the termination or non-renewal of
this Agreement.
6.5 Authorization to Make Loans. Lender is authorized to make the
Loans and provide the Letter of Credit Accommodations based upon telephonic or
other instructions received from anyone purporting to be an officer of Borrower
or other authorized person or, at the discretion of Lender, if such Loans are
necessary to satisfy any Obligations. All requests for Loans or Letter of
Credit Accommodations hereunder shall specify the date on which the requested
advance is to be made or Letter of Credit Accommodations established (which day
shall be a business day) and the amount of the requested Loan. Requests
received after 12:00 noon Chicago, Illinois time on any day shall be deemed to
have been made as of the opening of business on the immediately following
business day. All Loans and Letter of Credit Accommodations under this
Agreement shall be conclusively presumed to have been made to, and at the
request of and for the benefit of, Borrower when deposited to the credit of
Borrower or otherwise disbursed or established in accordance with the
instructions of Borrower or in accordance with the terms and
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conditions of this Agreement.
6.6 Use of Proceeds. All Loans made or Letter of Credit
Accommodations provided by Lender to Borrower pursuant to the provisions hereof
shall be used by Borrower only for general operating, working capital and other
proper corporate purposes and uses of Borrower not otherwise prohibited by the
terms hereof or by the Subordinated Note Agreements or any other agreement or
rule or regulation of any Gaming Authority or other Governmental Authority to
which Borrower or any subsidiary is a party or by which or to which Borrower or
any subsidiary or any of their property is bound or is subject. None of the
proceeds will be used, directly or indirectly, for the purpose of purchasing or
carrying any margin security or for the purposes of reducing or retiring any
indebtedness which was originally incurred to purchase or carry any margin
security or for any other purpose which might cause any of the Loans to be
considered a "purpose credit" within the meaning of Regulation G of the Board
of Governors of the Federal Reserve System, as amended.
SECTION 7. COLLATERAL REPORTING AND COVENANTS
7.1 Collateral Reporting.
(a) Borrower shall provide Lender with the following
documents in a form satisfactory to Lender:
(i) as soon as available, but in any event, by no later
than the seventh (7th) day after the end of each fiscal month of Borrower, a
Borrowing Base Certificate setting forth Borrower's calculation of the
Revolving Loans and Letter of Credit Accommodations available to Borrower
pursuant to the terms and conditions contained herein (x) with respect to
Accounts, as of the last business day of the month ended most recently prior to
the due date thereof and (y) with respect to Inventory, as of the last business
day of the month prior to the month ended most recently prior to such due date,
each such Borrowing Base Certificate to be duly completed and executed by the
chief financial officer or other appropriate financial officer acceptable to
Lender, together with all schedules required pursuant to the terms of the
Borrowing Base Certificate duly completed; provided, that, (I) for purposes of
clause (y) of Section 7.1(a)(i), upon Borrower's implementation of a perpetual
Inventory reporting system, each monthly Borrowing Base Certificate delivered
under this Section shall be prepared with respect to Inventory as of the last
business day of the month ended most recently prior to the due date of such
Borrowing Base Certificate, and (II) prior to the implementation of a perpetual
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Inventory reporting system, upon Lender's request, Borrower shall update the
information set forth in each monthly Borrowing Base Certificate with respect
to Inventory as of the last business day of the month ended most recently prior
to the due date thereof, as soon as such information is available (but in any
event such information shall be contained in the next succeeding Borrowing Base
Certificate); provided, further that, without limiting any other rights of
Lender, upon Lender's request, Borrower shall provide Lender on a weekly basis
with a schedule of sales, collections received and credits issued and, on a
weekly basis to the extent available, inventory reports, in each case under
this proviso upon and after any of the following: (A) an Event of Default or
event which with notice or passage of time or both would constitute an Event of
Default, shall exist or have occurred and be continuing, or (B) Borrower shall
have failed to deliver any Borrowing Base Certificate in accordance with the
terms hereof when due or within two (2) business days thereafter, or (C) upon
Lender's good faith belief that any information contained in any Borrowing Base
Certificate is incomplete, inaccurate or misleading, or (D) the Combined Excess
Availability shall be less than $5,000,000, or (E) the aggregate outstanding
principal amount of Loans and Letter of Credit Accommodations, plus the
aggregate outstanding principal amount of "Loans" and "Letter of Credit
Accommodations" under the Canadian Financing Agreements shall equal or exceed
$15,000,000;
(ii) on a monthly basis, to the extent not included in a
schedule to the monthly Borrowing Base Certificate or otherwise delivered to
Lender hereunder, (A) perpetual inventory reports, to the extent available, and
inventory reports by category and location, (B) agings of accounts receivable,
and (C) agings of accounts payable;
(iii) upon Lender's request, (A) copies of customer statements
and credit memos, remittance advices and reports, and copies of deposit slips
and bank statements, (B) copies of shipping and delivery documents, and (C)
copies of purchase orders, invoices and delivery of documents for Inventory and
Equipment acquired by Borrower; and
(iv) such other reports as to the Collateral as Lender
shall reasonably request from time to time.
(b) Nothing contained in any Borrowing Base Certificate shall be
deemed to limit, impair or otherwise affect the rights of Lender contained
herein and in the event of any conflict or inconsistency between the
calculation of the Revolving Loans and Letter of Credit Accommodations
available to Borrower as set forth in any Borrowing Base Certificate and as
determined by
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Lender, the determination of Lender in good faith (including the determination
in good faith of Letter of Credit Accommodations available based on the
provisions hereof) shall govern and be conclusive and binding upon Borrower.
Without limiting the foregoing, Borrower shall furnish to Lender any
information which Lender may reasonably request regarding the determination and
calculation of any of the amounts set forth in the Borrowing Base Certificate.
If any of Borrower's records or reports of the Collateral are prepared or
maintained by an accounting service, contractor, shipper or other agent,
Borrower hereby irrevocably authorizes such service, contractor, shipper or
agent to deliver such records, reports and related documents to Lender and to
follow Lender's instructions with respect to further services at any time that
an Event of Default exists or has occurred and is continuing.
7.2 Accounts Covenants.
(a) In addition to Borrower's other reporting Obligations
hereunder, Borrower shall notify Lender promptly and on a separate basis of:
(i) any material delay in Borrower's performance of any of its obligations to
any account debtor or the assertion of any claims, offsets, defenses or
counterclaims by any account debtor, or any disputes with account debtors, or
any settlement, adjustment or compromise thereof involving an amount greater
than $50,000, individually, or greater than $250,000, in the aggregate, (ii)
all material adverse information relating to the financial condition of any
account debtor obligated for Accounts in excess of $50,000, and (iii) any event
or circumstance which, to Borrower's knowledge would cause Lender to consider
any then existing Accounts involving an amount greater than $50,000,
individually, or greater than $250,000, in the aggregate, to no longer
constitute Eligible Accounts. No credit, discount, allowance or extension or
agreement for any of the foregoing shall be granted to any account debtor
without Lender's consent, except those granted in the ordinary course of
Borrower's business in accordance with practices and policies previously
disclosed in writing to Lender, and which are reported to Lender in accordance
with this Agreement. So long as no Event of Default exists or has occurred and
is continuing, Borrower shall settle, adjust or compromise any claim, offset,
counterclaim or dispute with any account debtor. At any time that an Event of
Default exists or has occurred and is continuing, Lender shall, at its option,
have the exclusive right to settle, adjust or compromise any claim, offset,
counterclaim or dispute with account debtors or grant any credits, discounts or
allowances with respect thereto in good faith and on a commercially reasonable
basis.
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(b) Without limiting the obligation of Borrower to
deliver any other information to Lender, Borrower shall promptly and separately
report to Lender any return of Inventory by any one account debtor if the
inventory so returned in such case has a value in excess of $50,000. At any
time that Inventory is returned, reclaimed or repossessed, the Account (or
portion thereof) which arose from the sale of such returned, reclaimed or
repossessed Inventory shall not be deemed an Eligible Account. In the event
any account debtor returns Inventory when an Event of Default exists or has
occurred and is continuing, Borrower shall, upon Lender's request, (i) hold the
returned Inventory in trust for Lender, (ii) segregate all returned Inventory
from all of its other property, (iii) dispose of the returned Inventory solely
according to Lender's instructions, and (iv) not issue any credits, discounts
or allowances with respect thereto without Lender's prior written consent.
(c) With respect to each Account: (i) the amounts shown
on any invoice delivered to Lender or schedule thereof delivered to Lender
shall be true and complete, (ii) no payments shall be made thereon except
payments made to one of the Blocked Accounts, (iii) there shall be no setoffs,
deductions, contras, defenses, counterclaims or disputes existing or asserted
with respect thereto, other than those ordinary course deductions and
allowances reflected on the face of the invoice evidencing such Account and
reflected as a deduction in computing and reporting the net amount of the
affected Account in the Borrowing Base Certificates and all other Collateral
reports delivered in accordance with this Agreement with respect to Accounts,
and (iv) none of the transactions giving rise thereto will violate any
applicable State or Federal laws or regulations in any manner that does result
in, or could reasonably be expected to result in, a Material Adverse Effect,
all documentation relating thereto will be legally sufficient under such laws
and regulations and all such documentation will be legally enforceable in
accordance with its terms.
(d) Lender shall have the right at any time or times, in
Lender's name or in the name of a nominee of Lender, to verify the validity,
amount or any other matter relating to any Account or other Collateral, by
mail, telephone, facsimile transmission or otherwise.
(e) Borrower shall deliver or cause to be delivered to
Lender, with appropriate endorsement and assignment, with full recourse to
Borrower, all chattel paper and instruments which Borrower now owns or may at
any time acquire immediately upon Borrower's receipt thereof, except as Lender
may otherwise agree.
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(f) Lender may, at any time or times that an Event of
Default exists or has occurred and is continuing, (i) notify any or all account
debtors that the Accounts have been assigned to Lender and that Lender has a
security interest therein and Lender may direct any or all account debtors to
make payment of Accounts directly to Lender, (ii) extend the time of payment
of, compromise, settle or adjust for cash, credit, return of merchandise or
otherwise, and upon any terms or conditions, any and all Accounts or other
obligations included in the Collateral and thereby discharge or release the
account debtor or any other party or parties in any way liable for payment
thereof without affecting any of the Obligations, (iii) demand, collect or
enforce payment of any Accounts or such other obligations, but without any duty
to do so, and Lender shall not be liable for its failure to collect or enforce
the payment thereof nor for the negligence of its agents or attorneys with
respect thereto and (iv) take whatever other action Lender may in good faith
deem necessary or desirable for the protection of its interests. At any time
that an Event of Default exists or has occurred and is continuing, at Lender's
request, all invoices and statements sent to any account debtor shall state
that the Accounts and such other obligations have been assigned to Lender and
are payable directly and only to Lender and Borrower shall deliver to Lender
such originals of documents evidencing the sale and delivery of goods or the
performance of services giving rise to any Accounts as Lender may require.
7.3 Inventory Covenants. With respect to the Inventory: (a)
Borrower shall at all times maintain inventory records reasonably satisfactory
to Lender, keeping correct and accurate records itemizing and describing the
kind, type, quality and quantity of Inventory, Borrower's cost therefor and
withdrawals therefrom and additions thereto; (b) Borrower shall, at its sole
cost and expense, conduct a physical count of the Inventory at least once
during each twelve (12) month period after the date hereof, and up to an
additional three (3) times during each twelve (12) month period as Lender may
request on or after an Event of Default, and at any other time or times as
Lender may request at Lender's sole cost and expense, and promptly following
such physical inventory shall supply Lender with a report in the form and with
such specificity as may be reasonably satisfactory to Lender concerning such
physical count; (c) Borrower shall not remove any Inventory from the locations
set forth or permitted herein, without the prior written consent of Lender,
except for sales of Inventory in the ordinary course of Borrower's business and
except to move Inventory directly from one location set forth or permitted
herein to another such location, including, without limitation, so long as no
Event of Default, and no event that with notice or passage of time, or both,
would constitute an
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Event of Default, exists or has occurred and is continuing and no Overformula
Amount exists or would result therefrom, the movement of Inventory, in the
ordinary course of Borrower's business from Borrower's facilities in the United
States to the manufacturing facilities of Borrower's subsidiary in Reynosa,
Mexico, identified in the Information Certificate; provided, however, such
subsidiary shall not take title to any such Inventory; (d) upon Lender's
request, Borrower shall, at its sole cost and expense, no more than once in any
twelve (12) month period, and up to an additional three (3) times during each
twelve (12) month period at any time or times as Lender may request on or after
an Event of Default, and at any other time or times as Lender may request at
Lender's sole cost and expense, deliver or cause to be delivered to Lender
written reports or appraisals as to the Inventory in form, scope and
methodology acceptable to Lender and by an appraiser acceptable to Lender,
addressed to Lender or upon which Lender is expressly permitted to rely; (e)
Borrower shall produce, use, store and maintain the Inventory with all
reasonable care and caution and in accordance with applicable standards of any
insurance and in conformity with applicable laws (including the requirements of
the Federal Fair Labor Standards Act of 1938, as amended and all rules,
regulations and orders related thereto); (f) Borrower assumes all
responsibility and liability arising from or relating to the production, use,
sale or other disposition of the Inventory; (g) Borrower shall not sell
Inventory to any customer on approval, or any other basis which entitles the
customer to return or may obligate Borrower to repurchase such Inventory,
except for inventory repurchase agreements permitted under Section 9.9(e)
hereof; (h) Borrower shall keep the Inventory in good and marketable condition;
and (i) Borrower shall not, without prior written notice to Lender, acquire or
accept any Inventory on consignment or approval.
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7.4 Equipment Covenants. With respect to the Equipment: (a) upon
Lender's request, Borrower shall, at its sole cost and expense, once during
each twelve (12) month period after the date hereof, and up to an additional
three times during each twelve (12) month period as Lender may request on or
after an Event of Default, or, at Lender's sole cost and expense, at any other
time or times, deliver or cause to be delivered to Lender written reports or
appraisals as to the orderly liquidation value of the Equipment in form, scope
and methodology acceptable to Lender and by an appraiser acceptable to Lender;
(b) Borrower shall keep the Equipment in good order, repair and marketable
condition (ordinary wear and tear excepted); (c) Borrower shall use the
Equipment in accordance with applicable standards of any insurance and in
conformity with all applicable laws; (d) Borrower shall not remove any
Equipment from the locations set forth or permitted herein, except to the
extent necessary to have any Equipment repaired or maintained in the ordinary
course of the business of Borrower or to move Equipment directly from one
location set forth or permitted herein to another such location and except for
the movement of motor vehicles used by or for the benefit of Borrower in the
ordinary course of business; (e) the Equipment is now and shall remain personal
property and Borrower shall not permit any of the Equipment to be or become a
part of or affixed to real property; and (f) Borrower assumes all
responsibility and liability arising from the use of the Equipment. Without
limiting the provisions of Section 7.4(d) above, Borrower shall not relocate
any of its Equipment to any location outside of the United States, other than
the manufacturing facilities of Borrower's subsidiary in Reynosa, Mexico;
provided, however, that: (w) no such relocation to such facilities in Reynosa,
Mexico shall be permitted unless Lender has received not less than twenty (20)
days prior written notice stating that such relocation notice is being given
under Section 7.4(d) of this Agreement and identifying, with make, model,
serial number and other identifying information, the Equipment proposed to be
relocated, (x) upon or at any time after receipt of each such relocation
notice, Lender shall be entitled to reduce the Amortized Equipment Value of
Borrower's Equipment by the product obtained by multiplying (1) seventy-five
(75%) percent of the orderly liquidation value of the Equipment to be relocated
identified in such notice as set forth in the most recent appraisal pursuant to
this Section 7.4 in respect of which the Amortized Equipment Value has been
reset by Lender as provided in the definition of Amortized Equipment Value (or
if no such reset has occurred, then as set forth in the appraisal dated October
27, 1997 by Daley-Hodkin Appraisal Corporation), by (2) a fraction, the
numerator which is the number of months elapsed after the date hereof (or, if
the Amortized Equipment Value has been reset by Lender, the number of months
elapsed after the date
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of the most recent such reset) through and including the date such reduction is
to be made by Lender, and the denominator of which is sixty (60) (or if the
Amortized Equipment Value has been reset by Lender, the denominator of which is
the number equal to sixty (60) minus the number of months elapsed after the
date hereof through and including the date of such most recent reset), (y) as
of the date of relocation, no Event of Default, and no condition or event that,
with notice or passage of time, or both, would constitute an Event of Default,
exists or has occurred and is continuing, and (z) after giving effect to the
reduction in Amortized Equipment Value calculated under clause (x) of this
proviso, as of the date of relocation, there shall be no Overformula Amount.
7.5 Power of Attorney. Borrower hereby irrevocably designates and
appoints Lender (and all persons designated by Lender) as Borrower's true and
lawful attorney-in-fact, and authorizes Lender, in Borrower's or Lender's name,
to: (a) at any time an Event of Default or event which with notice or passage
of time or both would constitute an Event of Default exists or has occurred and
is continuing (i) demand payment on Accounts or other proceeds of Inventory or
other Collateral, (ii) enforce payment of Accounts by legal proceedings or
otherwise, (iii) exercise all of Borrower's rights and remedies to collect any
Account or other Collateral, (iv) sell or assign any Account upon such terms
and for such amount as are commercially reasonable, and at such time or times
as the Lender deems advisable, (v) settle, adjust, compromise, extend or renew
an Account, (vi) discharge and release any Account, (vii) prepare, file and
sign Borrower's name on any proof of claim in bankruptcy or other similar
document against an account debtor, (viii) notify the post office authorities
to change the address for delivery of Borrower's mail to an address designated
by Lender, and open and dispose of all mail addressed to Borrower, and (ix) do
all acts and things which are necessary, in Lender's determination, to fulfill
Borrower's obligations under this Agreement and the other Financing Agreements,
and (b) at any time after one of the events referred to in clauses (i) through
(iv) of Section 6.3(a) has occurred, to (i) take control in any manner of any
item of payment or proceeds thereof, (ii) have access to any lockbox or postal
box into which Borrower's mail is deposited, (iii) endorse Borrower's name upon
any items of payment or proceeds thereof and deposit the same in the Lender's
account for application to the Obligations and (iv) endorse Borrower's name
upon any chattel paper, document, instrument, invoice, or similar document or
agreement relating to any Account or any goods pertaining thereto or any other
Collateral, and (c) at any time to (i) sign Borrower's name on any verification
of Accounts and notices thereof to account debtors and (ii) execute in
Borrower's name
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and file any UCC financing statements or amendments thereto. Borrower hereby
releases Lender and its officers, employees and designees from any liabilities
arising from any act or acts under this power of attorney and in furtherance
thereof, whether of omission or commission, except as a result of Lender's own
gross negligence or wilful misconduct as determined pursuant to a final
non-appealable order of a court of competent jurisdiction.
7.6 Right to Cure. Lender may, at its option, in good faith (a)
cure any default by Borrower under any agreement with a third party or pay or
bond on appeal any judgment entered against Borrower, if, in Lender's
commercially reasonable judgment, such action is necessary or appropriate to
preserve, protect, insure or maintain the Collateral and the rights of Lender
with respect thereto, (b) discharge taxes, liens, security interests or other
encumbrances at any time levied on or existing with respect to the Collateral,
except any of the foregoing the validity of which is being contested in good
faith by appropriate proceedings, diligently pursued by Borrower and as to
which no enforcement action has been commenced or taken against any Collateral,
and (c) pay any amount, incur any expense or perform any act which, in Lender's
commercially reasonable judgment, is necessary or appropriate to preserve,
protect, insure or maintain the Collateral and the rights of Lender with
respect thereto. Lender may add any amounts so expended to the Obligations and
charge Borrower's account therefor, such amounts to be repayable by Borrower on
demand. Lender shall be under no obligation to effect such cure, payment or
bonding and shall not, by doing so, be deemed to have assumed any obligation or
liability of Borrower. Any payment made or other action taken by Lender under
this Section shall be without prejudice to any right to assert an Event of
Default hereunder and to proceed accordingly.
7.7 Access to Premises. From time to time as requested by Lender,
at the cost and expense of Borrower, (a) Lender or its designee shall have
complete access to all of Borrower's premises during normal business hours and
after notice to Borrower, or at any time and without notice to Borrower if an
Event of Default exists or has occurred and is continuing, for the purposes of
inspecting, verifying and auditing the Collateral and all of Borrower's books
and records, including the Records, and (b) Borrower shall promptly furnish to
Lender such copies of such books and records or extracts therefrom as Lender
may request, and (c) use during normal business hours such of Borrower's
personnel, equipment, supplies and premises as may be reasonably necessary for
the foregoing and if an Event of Default exists or has occurred and is
continuing for the collection of Accounts and realization of other Collateral;
provided, however, that, prior to an Event of Default, Lender's use of
Borrower's personnel,
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equipment, supplies and premises as provided in this Section 7.7 shall be
conducted in a reasonable manner with a view to avoiding unreasonable
interference with Borrower's operations.
SECTION 8. REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants to Lender the following (which
shall survive the execution and delivery of this Agreement), the truth and
accuracy of which are a continuing condition of the making of Loans and
providing Letter of Credit Accommodations by Lender to Borrower:
8.1 Corporate Existence, Power and Authority; Subsidiaries.
Borrower is a corporation duly organized and in good standing under the laws of
its state of incorporation and is duly qualified as a foreign corporation and
in good standing in all states or other jurisdictions where the nature and
extent of the business transacted by it or the ownership of assets makes such
qualification necessary, except for those jurisdictions in which the failure to
so qualify has not, individually or in the aggregate, resulted in, and could
not reasonably be expected to result in, a Material Adverse Effect. The
execution, delivery and performance of this Agreement, the other Financing
Agreements and the transactions contemplated hereunder and thereunder are all
within Borrower's corporate powers, have been duly authorized and are not in
contravention of law or the terms of Borrower's certificate of incorporation,
or by-laws, or any indenture, agreement or undertaking to which Borrower is a
party or by which Borrower or its property are bound, except any such
contravention that, individually or in the aggregate, has not resulted in, and
could not reasonably be expected to result in, a Material Adverse Effect,
excluding from this exception, however, any contravention of the Subordinated
Note Agreements. This Agreement and the other Financing Agreements constitute
legal, valid and binding Obligations of Borrower enforceable in accordance with
their respective terms, except to the extent enforceability thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws generally affecting creditors' rights generally and by equitable
principles (regardless of whether enforcement is sought in equity or at law).
Borrower does not have any subsidiaries except as set forth on the Information
Certificate.
8.2 Financial Statements; No Material Adverse Change. All
financial statements relating to Borrower which have been or may hereafter be
delivered by Borrower to Lender have been prepared in accordance with GAAP and
fairly present the financial condition and the results of operation of Borrower
as at the
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dates and for the periods set forth therein, subject, however, in the case of
Borrower's interim unaudited financial statements delivered hereunder, to
normal year-end adjustments and the absence of footnotes and formatting of
items as required under GAAP. Except as disclosed in any interim financial
statements furnished by Borrower to Lender prior to the date of this Agreement,
there has been no Material Adverse Change since the date of the most recent
audited financial statements furnished by Borrower to Lender prior to the date
of this Agreement.
8.3 Chief Executive Office; Collateral Locations. The chief
executive office of Borrower and Borrower's Records concerning Accounts are
located only at the address set forth below and its only other places of
business and the only other locations of Collateral, if any, are the addresses
set forth in the Information Certificate, subject to the right of Borrower to
establish new locations in accordance with Section 9.2 below. The Information
Certificate correctly identifies any of such locations which are not owned by
Borrower and sets forth the owners and/or operators thereof and to the best of
Borrower's knowledge, the holders of any mortgages on such locations.
8.4 Priority of Liens; Title to Properties. The security
interests and liens granted to Lender under this Agreement and the other
Financing Agreements constitute valid and perfected first priority liens and
security interests in and upon the Collateral subject only to the liens
indicated on Schedule 8.4 hereto and the other liens permitted under Section
9.8 hereof. Borrower has good and marketable title to all of its properties
and assets subject to no liens, mortgages, pledges, security interests,
encumbrances or charges of any kind, except those granted to Lender and such
others as are specifically listed on Schedule 8.4 hereto or permitted under
Section 9.8 hereof and except for such defects of title, individually or in the
aggregate, as have not resulted in, and could not, individually or in the
aggregate, be reasonably expected to result in, a Material Adverse Effect. As
to leased real and personal property, Borrower has valid leasehold interests,
which leasehold interests are subject to no liens, mortgages, pledges, security
interests, encumbrances or charges of any kind, except as are specifically
listed on Schedule 8.4 hereto or permitted under Section 9.8 hereof.
8.5 Tax Returns. Borrower has filed, or caused to be filed, in a
timely manner all tax returns, reports and declarations which are required to
be filed by it (without requests for extension except as previously disclosed
in writing to Lender). Borrower has paid or caused to be paid all taxes due
and payable or claimed due and payable in any assessment received
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by it, except taxes the validity of which are being contested in good faith by
appropriate proceedings diligently pursued and available to Borrower.
8.6 Litigation. Except as set forth on the Information
Certificate, there is no present investigation by any governmental agency
pending, or to the best of Borrower's knowledge threatened, against or
affecting Borrower, its assets or business and there is no action, suit,
proceeding or claim by any Person pending, or to the best of Borrower's
knowledge threatened, against Borrower or its assets or its business, or
against or affecting any transactions contemplated by this Agreement, which, if
adversely determined against Borrower, could reasonably be expected to result
in a Material Adverse Effect.
8.7 Compliance with Other Agreements and Applicable Laws.
Borrower is not in default under, or in violation of any of the terms of, any
agreement, contract, instrument, lease or other commitment to which it is a
party or by which it or any of its assets are bound and, to Borrower's
knowledge, Borrower is in compliance with all applicable provisions of laws,
rules, regulations, licenses, permits, approvals and orders of any Gaming
Authority or other Governmental Authority, except any such defaults, violations
or non-compliance that, individually or in the aggregate, have not resulted in,
and could not reasonably be expected to result in, a Material Adverse Effect,
excluding from this exception, however, any defaults or violations under the
Subordinated Note Agreements.
8.8 Employee Benefits.
To the best of Borrower's knowledge:
(a) except as set forth in Schedule 8.8 hereto, Borrower
has not engaged in any transaction in connection with which Borrower or any of
its ERISA Affiliates could be subject to either a civil penalty assessed
pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the
Code, including any accumulated funding deficiency described in Section 8.8(c)
hereof and any deficiency with respect to vested accrued benefits described in
Section 8.8(d) hereof in an aggregate amount in excess of $500,000;
(b) except as set forth in Schedule 8.8 hereto, no
liability to the Pension Benefit Guaranty Corporation has been or is expected
by Borrower to be incurred with respect to any employee benefit plan of
Borrower or any of its ERISA Affiliates. There has been no reportable event
(within the meaning of Section 4043(b) of ERISA) or any other event or
condition with
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respect to any employee pension benefit plan of Borrower or any of its ERISA
Affiliates which presents a risk of termination of any such plan by the Pension
Benefit Guaranty Corporation;
(c) full payment has been made of all amounts which
Borrower or any of its ERISA Affiliates is required under Section 302 of ERISA
and Section 412 of the Code to have paid under the terms of each employee
benefit plan as contributions to such plan as of the last day of the most
recent fiscal year of such plan ended prior to the date hereof, and no
accumulated funding deficiency (as defined in Section 302 of ERISA and Section
412 of the Code), whether or not waived, exists with respect to any employee
benefit plan, including any penalty or tax described in Section 8.8(a) hereof
and any deficiency with respect to vested accrued benefits described in Section
8.8(d) hereof;
(d) the current value of all vested accrued benefits
under all employee benefit plans maintained by Borrower that are subject to
Title IV of ERISA does not exceed the current value of the assets of such plans
allocable to such vested accrued benefits, including any penalty or tax
described in Section 8.8(a) hereof and any accumulated funding deficiency
described in Section 8.8(c) hereof. The terms "current value" and "accrued
benefit" have the meanings specified in ERISA; and
(e) neither Borrower nor any of its ERISA Affiliates is
or has ever been obligated to contribute to any "multiemployer plan" (as such
term is defined in Section 4001(a)(3) of ERISA) that is subject to Title IV of
ERISA.
8.9 Environmental Compliance.
(a) Except as set forth on Schedule 8.9 hereto, to the
best of Borrower's knowledge, Borrower has not generated, used, stored,
treated, transported, manufactured, handled, produced or disposed of any
Hazardous Materials, on or off its premises (whether or not owned by it) in any
manner which at any time violates any applicable Environmental Law or any
license, permit, certificate, approval or similar authorization thereunder, and
the operations of Borrower comply with all Environmental Laws and all licenses,
permits, certificates, approvals and similar authorizations thereunder, except
for any such violations or non-compliance that, individually or in the
aggregate, have not resulted in, and could not reasonably be expected to result
in, a Material Adverse Effect.
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(b) Except as set forth on Schedule 8.9 hereto, there has
been no investigation, proceeding, complaint, order, directive, claim, citation
or notice by any governmental authority or any other person nor is any pending
or to the best of Borrower's knowledge threatened, with respect to any
non-compliance with or violation of the requirements of any Environmental Law
by Borrower or the release, spill or discharge, threatened or actual, of any
Hazardous Material or the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any Hazardous Materials or any
other environmental, health or safety matter that affects Borrower or its
business, operations or assets or any properties at which Borrower has
transported, stored or disposed of any Hazardous Materials, except with respect
to any such actual or alleged violation or non-compliance that, individually or
in the aggregate, has not resulted in, and could not reasonably be expected to,
result in a Material Adverse Effect (including, but not limited to, any
Material Adverse Effect if any such pending or threatened investigation or
proceeding were adversely determined against Borrower).
(c) Except as set forth on Schedule 8.9 hereto, Borrower
has no liability (contingent or otherwise) in connection with a release, spill
or discharge, threatened or actual, of any Hazardous Materials or the
generation, use, storage, treatment, transportation, manufacture, handling,
production or disposal of any Hazardous Materials.
(d) Except as set forth on Schedule 8.9 hereto, to the
best of Borrower's knowledge, Borrower has all licenses, permits, certificates,
approvals or similar authorizations required to be obtained or filed in
connection with the operations of Borrower under any Environmental Law and all
of such licenses, permits, certificates, approvals or similar authorizations
are valid and in full force and effect, except any of the foregoing where the
failure to obtain, file or maintain any of the foregoing as valid and in full
force and effect, individually or in the aggregate, has not resulted in, and
could not reasonably be expected to result in, a Material Adverse Effect.
8.10 Bank Accounts. All of the deposit accounts, investment
accounts or other accounts in the name of or used by Borrower maintained at any
bank or other financial institution are set forth on Schedule 8.10 hereto,
subject to the right of Borrower to establish new accounts in accordance with
Section 9.13 below.
8.11 Accuracy and Completeness of Information. All information
furnished by or on behalf of Borrower in writing to Lender in connection with
this Agreement or any of the other
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Financing Agreements or any transaction contemplated hereby or thereby,
including all information on the Information Certificate is true and correct in
all material respects on the date as of which such information is dated or
certified and does not omit any material fact necessary in order to make such
information not misleading. No event or circumstance has occurred that,
individually or in the aggregate, has resulted in, or could reasonably be
expected to result in, a Material Adverse Effect, which has not been fully and
accurately disclosed to Lender in writing.
8.12 Survival of Warranties; Cumulative. All representations and
warranties contained in this Agreement or any of the other Financing Agreements
shall survive the execution and delivery of this Agreement and shall be deemed
to have been made again to Lender on the date of each additional borrowing or
other credit accommodation hereunder and shall be conclusively presumed to have
been relied on by Lender regardless of any investigation made or information
possessed by Lender. The representations and warranties set forth herein shall
be cumulative and in addition to any other representations or warranties which
Borrower shall now or hereafter give, or cause to be given, to Lender.
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS
9.1 Maintenance of Existence. Borrower shall at all times
preserve, renew and keep in full, force and effect its corporate existence and
rights and franchises with respect thereto. Borrower shall at all times
preserve and maintain in full force and effect all permits, licenses,
trademarks, tradenames, approvals, authorizations, leases and contracts
necessary to carry on the business as presently or proposed to be conducted,
except to the extent that any failure to do so, individually or in the
aggregate, does not, and could not reasonably be expected to, result in a
Material Adverse Effect. Borrower shall give Lender ten (10) days prior
written notice of any proposed change in its corporate name, which notice shall
set forth the new name and Borrower shall deliver to Lender a copy of the
amendment to the Certificate of Incorporation of Borrower providing for the
name change certified by the Secretary of State of the jurisdiction of
incorporation of Borrower as soon as it is available.
9.2 New Collateral Locations. Borrower may open any new location
within the continental United States provided Borrower (a) gives Lender ten
(10) days prior written notice of the intended opening of any such new location
and (b) executes and delivers, or causes to be executed and delivered, to
Lender such
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agreements, documents, and instruments as Lender may deem reasonably necessary
or desirable to protect its interests in the Collateral at such location,
including UCC financing statements.
9.3 Compliance with Laws, Regulations, Etc.
(a) Borrower shall, at all times, comply with all laws,
rules, regulations, licenses, permits, approvals and orders applicable to it
and duly observe all requirements of any Governmental Authority, including the
Employee Retirement Security Act of 1974, as amended, the Occupational Safety
and Health Act of 1970, as amended, the Fair Labor Standards Act of 1938, as
amended, and all applicable statutes, rules, regulations, orders, permits and
stipulations relating to environmental pollution and employee health and
safety, including all of the Environmental Laws, and including all Gaming Laws
and all requirements of any Gaming Authority, except where the failure to so
comply does not, individually or in the aggregate, and could not reasonably be
expected to, result in a Material Adverse Effect.
(b) Borrower shall give both oral and written notice to
Lender immediately upon Borrower's receipt of any notice of, or Borrower's
otherwise obtaining knowledge of, (i) the occurrence of any event that could
reasonably be expected to result in any suspension, revocation or limitation on
any Gaming Licenses, or otherwise adversely affect the rights of Borrower to
operate its business in accordance with the Gaming Laws, or any material
liability pursuant to any Gaming Laws or (ii) any investigation, proceeding,
complaint, order, directive, claims, citation or notice with respect to any
non-compliance with or violation of any Gaming Laws by Borrower which, in the
case of clauses (i) and (ii), individually or in the aggregate, does result in,
or could (or, if adversely determined against Borrower, could) reasonably be
expected to result in, a Material Adverse Effect. Borrower shall indemnify and
hold harmless Lender, its directors, officers, employees, agents, invitees,
representatives, successors and assigns, from and against any and all losses,
claims, damages, liabilities, costs and expenses, including reasonable
attorneys' fees and legal expenses directly or indirectly arising out of or
attributable to the compliance by Borrower and/or (if applicable) by Lender
with any Gaming Laws, or actual or alleged non-compliance by Borrower with any
Gaming Laws, except that Borrower shall not be required to indemnify Lender for
any such losses, claims, damages, liabilities, costs and expenses resulting
from Lender's own gross negligence or wilful misconduct, as determined by a
final non-appealable judgment of a court of competent jurisdiction.
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(c) Copies of all environmental surveys, audits,
assessments, feasibility studies and results of remedial investigations shall
be promptly furnished, or caused to be furnished, by Borrower to Lender.
Borrower shall take prompt and appropriate action to respond to any
non-compliance with any of the Environmental Laws (except for any such
non-compliance that, individually or in the aggregate, does not, and could not
reasonably be expected to, result in a Material Adverse Effect) and shall
regularly report to Lender on such response.
(d) Borrower shall give both oral and written notice to
Lender immediately upon Borrower's receipt of any notice of, or Borrower's
otherwise obtaining knowledge of, (i) the occurrence of any event involving the
release, spill or discharge, threatened or actual, of any Hazardous Material or
(ii) any investigation, proceeding, complaint, order, directive, claims,
citation or notice with respect to: (A) any non-compliance with or violation of
any Environmental Law by Borrower or (B) the release, spill or discharge,
threatened or actual, of any Hazardous Material or (C) the generation, use,
storage, treatment, transportation, manufacture, handling, production or
disposal of any Hazardous Materials or (D) any other environmental, health or
safety matter, which affects Borrower or its business, operations or assets or
any properties at which Borrower transported, stored or disposed of any
Hazardous Materials, except that such notice to Lender shall not be required as
to any such matter if the actual or potential liability or claimed liability of
Borrower, or actual or potential expenditures by Borrower as a result of any
such matter (including any such matter if adversely determined against
Borrower), individually or in the aggregate, does not, and could not reasonably
be expected to, result in a Material Adverse Effect.
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(e) Without limiting the generality of the foregoing,
whenever Lender reasonably determines that there is non-compliance, or any
condition which requires any action by or on behalf of Borrower in order to
avoid any non-compliance, with any Environmental Law, where the failure to so
comply, individually or in the aggregate, does result in, or could reasonably
be expected to result in, a liability or expenditure of in excess of $500,000,
Borrower shall, at Lender's request and Borrower's expense: (i) cause an
independent environmental engineer acceptable to Lender and Borrower to conduct
such tests of the site where Borrower's non-compliance or alleged
non-compliance with such Environmental Laws has occurred as to such
non-compliance and prepare and deliver to Lender a report as to such non-
compliance setting forth the results of such tests, a proposed plan for
responding to any environmental problems described therein, and an estimate of
the costs thereof and (ii) provide to Lender a supplemental report of such
engineer whenever the scope of such non-compliance, or Borrower's response
thereto or the estimated costs thereof, shall change in any material respect.
(f) Borrower shall indemnify and hold harmless Lender,
its directors, officers, employees, agents, invitees, representatives,
successors and assigns, from and against any and all losses, claims, damages,
liabilities, costs, and expenses (including reasonable attorneys' fees and
legal expenses) directly or indirectly arising out of or attributable to the
use, generation, manufacture, reproduction, storage, release, threatened
release, spill, discharge, disposal or presence of a Hazardous Material,
including the costs of any required or necessary repair, cleanup or other
remedial work with respect to any property of Borrower and the preparation and
implementation of any closure, remedial or other required plans, except that
Borrower shall not be required to indemnify Lender for any such losses, claims,
damages, liabilities, costs and expenses resulting from Lender's own gross
negligence or wilful misconduct, as determined by a final non-appealable
judgment of a court of competent jurisdiction. All representations,
warranties, covenants and indemnifications in this Section 9.3 shall survive
the payment of the Obligations and the termination or non-renewal of this
Agreement.
9.4 Payment of Taxes and Claims. Borrower shall duly pay and
discharge all taxes, assessments, contributions and governmental charges upon
or against it or its properties or assets, except for taxes the validity of
which are being contested in good faith by appropriate proceedings diligently
pursued and available to Borrower. Borrower shall be liable for any tax or
penalties imposed on Lender as a result of the
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financing arrangements provided for herein and Borrower agrees to indemnify and
hold Lender harmless with respect to the foregoing, and to repay to Lender on
demand the amount thereof, and until paid by Borrower such amount shall be
added and deemed part of the Loans, provided, that, nothing contained herein
shall be construed to require Borrower to pay any income or franchise taxes
attributable to the income of Lender from any amounts charged or paid hereunder
to Lender. The foregoing indemnity shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
9.5 Insurance. Borrower shall, at all times, maintain insurance
with respect to the Collateral against loss or damage and all other insurance
of the kinds and in the amounts customarily insured against or carried by
corporations of established reputation engaged in the same or similar
businesses and similarly situated. Said policies of insurance shall be
satisfactory to Lender as to form, amount and insurer. Borrower shall furnish
certificates, policies or endorsements to Lender as Lender shall require as
proof of such insurance, and, if Borrower fails to do so, Lender is authorized,
but not required, to obtain such insurance at the expense of Borrower. All
policies shall provide for at least thirty (30) days prior written notice to
Lender of any cancellation or reduction of coverage and that Lender may act as
attorney for Borrower in obtaining, and at any time an Event of Default exists
or has occurred and is continuing, adjusting, settling, amending and canceling
such insurance. Borrower shall cause Lender to be named as a loss payee and an
additional insured (but without any liability for any premiums) under such
insurance policies and Borrower shall obtain non-contributory lender's loss
payable endorsements to all insurance policies in form and substance
satisfactory to Lender. Such lender's loss payable endorsements shall specify
that the proceeds of such insurance shall be payable to Lender as its interests
may appear and further specify that Lender shall be paid regardless of any act
or omission by Borrower or any of its affiliates. At its option, Lender may
apply any insurance proceeds received by Lender at any time to the cost of
repairs or replacement of Collateral and/or to payment of the Obligations,
whether or not then due, in any order and in such manner as Lender may
determine or hold such proceeds as cash collateral for the Obligations;
provided, however, so long as (i) no Event of Default, and no event or
condition that, with notice or passage of time, or both, exists or has occurred
and is continuing and (ii) there is Combined Excess Availability of at least
$5,000,000 after giving effect to the loss or damage to Collateral to which any
portion of the insurance proceeds relates and without regard to the insurance
proceeds themselves, then Lender shall make the insurance proceeds available to
Borrower.
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9.6 Financial Statements and Other Information.
(a) Borrower shall keep proper books and records in which
true and complete entries shall be made of all dealings or transactions of or
in relation to the Collateral and the business of Borrower and its subsidiaries
(if any), which shall be reconciled and conformed to the requirements of GAAP
no less frequently than quarterly and Borrower shall furnish or cause to be
furnished to Lender: (i) within forty (40) days after the end of each fiscal
month, other than the end of the third, sixth, ninth and twelfth fiscal months,
in each fiscal year, and within ninety (90) days after the end of the twelfth
fiscal month in each fiscal year, monthly unaudited consolidated financial
statements of Borrower and its subsidiaries (including, in each case, balance
sheets and statements of operations), fairly presenting the financial position
and the results of the operations of Borrower and its subsidiaries as of the
end of and through such fiscal month, (ii) within forty-five (45) days after
the end of each fiscal quarter, unaudited consolidated financial statements of
Borrower and its subsidiaries (including, in each case, balance sheets and
statements of operations), fairly presenting the results of operations of
Borrower and its subsidiaries as of the end of and through such fiscal quarter,
and (iii) within ninety (90) days after the end of each fiscal year, audited
consolidated financial statements of Borrower and its subsidiaries (including,
in each case, balance sheets, statements of operations, statements of cash flow
and statements of shareholders' equity), and the accompanying notes thereto,
fairly presenting the financial position and the results of the operations of
Borrower and its subsidiaries as of the end of and for such fiscal year,
together with the unqualified opinion of independent certified public
accountants, which accountants shall be an independent accounting firm of
nationally recognized standing selected by Borrower, that such financial
statements have been prepared in conformity with GAAP, and present fairly, in
all material respects, the results of operations and financial condition of
Borrower and its subsidiaries as of the end of and for the fiscal year then
ended.
(b) Borrower shall promptly notify Lender in writing of
the details of (i) any loss, damage, investigation, action, suit, proceeding or
claim relating to the Collateral or any other property which is security for
the Obligations involving an amount in excess of $50,000 or which has resulted
in, or could reasonably be expected to result in, any Material Adverse Effect
and (ii) the occurrence of any Event of Default or event which, with the
passage of time or giving of notice or both, would constitute an Event of
Default.
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(c) Borrower shall promptly notify Lender in writing in
the event that, at any time after the delivery of a Borrowing Base Certificate
by Borrower to Lender, but prior to the delivery of the next Borrowing Base
Certificate to be delivered by Borrower to Lender in accordance with the terms
hereof, the amount of Formula Availability is less than ninety (90%) percent of
the amount of Formula Availability calculated based on the information set
forth in the most recent Borrowing Base Certificate previously delivered by
Borrower to Lender pursuant to Section 7.1 hereof. Borrower will immediately
notify Lender in writing if (A) the Revolving Loans made by Lender to Borrower
and/or Letter of Credit Accommodations outstanding at any time exceed the
Formula Availability at any time under the terms and conditions hereof or (B)
the Combined Excess Availability shall be less than $5,000,000 at any time.
(d) Borrower shall promptly after the sending or filing
thereof furnish or cause to be furnished to Lender copies of all reports which
Borrower sends to its stockholders generally and copies of all reports and
prospectuses which Borrower files with the Securities and Exchange Commission,
any national securities exchange or the National Association of Securities
Dealers, Inc.
(e) Borrower shall furnish or cause to be furnished to
Lender such budgets, forecasts, projections and other information respecting
the Collateral and the business of Borrower, as Lender may, from time to time,
reasonably request; provided, that so long as no Event of Default exists or has
occurred and is continuing, the budgets, forecasts and projections required by
Lender under this Section 9.6(e) shall be limited to a twelve (12) month
financial statement projection which shall be provided to Lender once each
year. Lender is hereby authorized to deliver a copy of any financial statement
or any other information relating to the business of Borrower to any court or
other government agency or to any participant or assignee or prospective
participant or assignee. Borrower hereby irrevocably authorizes and directs
all accountants or auditors to deliver to Lender, at Borrower's expense, copies
of the financial statements of Borrower and any reports or management letters
prepared by such accountants or auditors on behalf of Borrower (unless the same
are furnished by Borrower to Lender) and to disclose to Lender, in conjunction
with Borrower (unless an Event of Default has occurred in which case such
disclosure need not be in conjunction with Borrower), such information as they
may have regarding the business of Borrower. Any documents, schedules,
invoices or other papers delivered to Lender may be destroyed or otherwise
disposed of by Lender one (1) year after the same are
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delivered to Lender, except as otherwise designated by Borrower to Lender in
writing.
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc.
Borrower shall not, directly or indirectly: (a) merge into or with or
consolidate with any other Person or permit any other Person to merge into or
with or consolidate with it; or (b) sell, assign, lease, transfer, abandon or
otherwise dispose of any stock or indebtedness to any other Person or any of
its assets to any other Person (except for (i) the issuance by Borrower (but
not any subsidiary) of its own capital stock in a transaction not otherwise
prohibited under this Agreement or the Subordinated Note Agreements, (ii) sales
of Inventory in the ordinary course of business and (iii) the disposition of
worn-out or obsolete Equipment or Equipment no longer used in the business of
Borrower upon prior written notice to Lender, so long as (A) if an Event of
Default exists or has occurred and is continuing, any proceeds are paid to
Lender and (B) such sales do not involve Equipment having an aggregate fair
market value in excess of $250,000 for all such Equipment disposed of in any
fiscal year of Borrower) and (C) whether or not an Event of Default exists or
has occurred and is continuing, an adjustment to the Amortized Equipment Value
shall be made upon such sale in the same manner as provided under Section 7.4
hereof (as if such Equipment were relocated to the facilities of Borrower's
subsidiary in Reynosa, Mexico), and no Overformula Loan shall exist after
giving affect to such adjustment); or (c) form or acquire any subsidiaries,
except in connection with investments permitted under, and upon compliance
with, Section 9.10(c) hereof; or (d) wind up, liquidate or dissolve; or (e)
agree to do any of the foregoing.
9.8 Encumbrances. Borrower shall not create, incur, assume or
suffer to exist any security interest, mortgage, pledge, lien, charge or other
encumbrance of any nature whatsoever on any of its assets or properties,
including the Collateral, except: (a) liens and security interests of Lender;
(b) liens securing the payment of taxes, either not yet overdue or the validity
of which are being contested in good faith by appropriate proceedings
diligently pursued and available to Borrower and provided no enforcement action
has been commenced or taken against any Collateral with respect thereto; (c)
non-consensual statutory liens (other than liens securing the payment of taxes)
arising in the ordinary course of Borrower's business to the extent: (i) such
liens secure indebtedness which is not overdue or (ii) such liens secure
indebtedness relating to claims or liabilities which are fully insured and
being defended at the sole cost and expense and at the sole risk of the insurer
or being contested in good faith by appropriate proceedings diligently pursued
and available to Borrower, in each case prior to the commencement of
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foreclosure or other similar proceedings; (d) zoning restrictions, easements,
licenses, covenants and other restrictions affecting the use of real property
which do not interfere in any material respect with the use of such real
property or ordinary conduct of the business of Borrower as presently conducted
thereon or materially impair the value of the real property which may be
subject thereto; (e) purchase money security interests in Equipment (including
capital leases) and purchase money mortgages on real estate not to exceed
$2,500,000 of obligations (including capitalized lease obligations) secured
thereby incurred in any fiscal year of Borrower (and including for the purposes
of such limitation, the obligations of Borrower's subsidiaries secured by any
purchase money security interests in Equipment (including capitalized leases)
and purchase money mortgages in real estate incurred during such fiscal year),
provided, that, such security interests and mortgages do not apply to any
property of Borrower other than the Equipment or real estate so acquired, and
the indebtedness secured thereby does not exceed the cost of the Equipment or
real estate so acquired, as the case may be; and (f) the security interests and
liens set forth on Schedule 8.4 hereto.
9.9 Indebtedness. Borrower shall not incur, create, assume,
become or be liable in any manner with respect to, or permit to exist, any
obligations or indebtedness, except:
(a) the Obligations (including, without limitation, all
Obligations to Lender hereunder and all obligations, liabilities and
indebtedness of Borrower to Congress (Canada) under the Canadian Financing
Agreements);
(b) trade obligations and normal accruals in the ordinary
course of business not yet due and payable, or with respect to which the
Borrower is contesting in good faith the amount or validity thereof by
appropriate proceedings diligently pursued and available to Borrower;
(c) purchase money indebtedness (including capital leases) to
the extent not incurred or secured by liens (including capital leases) in
violation of any other provision of this Agreement;
(d) indebtedness of Borrower to its subsidiaries for short
term loans in the ordinary course of business not to exceed $7,000,000 in the
aggregate at any one time outstanding, provided, that any notes or other
instruments evidencing any such indebtedness shall be pledged and delivered to
Lender;
(e) contingent obligations of Borrower under inventory
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repurchase agreements with its account debtors or their lenders or customers,
not to exceed, for the Borrower and its subsidiaries, and including the face
amount of Accounts and other accounts receivable or indebtedness owed to
Borrower and its subsidiaries by account debtors having the right to return any
goods sold by Borrower or its subsidiaries, $2,500,000 in the aggregate at any
time outstanding;
(f) unsecured indebtedness of Borrower under the Subordinated
Note Agreements, which indebtedness is subject and subordinate in right of
payment to the right of Lender to receive the prior final payment and
satisfaction in full of all of the Obligations; provided, that:
(i) the principal amount of such indebtedness shall not exceed
$100,000,000, less the aggregate amount of all repayments,
repurchases or redemptions, in respect thereof, plus interest
thereon at the rate provided for in such the Subordinated
Notes as in effect on the date hereof,
(ii) Borrower shall not, directly or indirectly, make any
payments in respect of such indebtedness, including, but not
limited to, any prepayments or other non-mandatory payments,
except that until an Event of Default, or condition or event
that, with notice or passage of time, or both, would
constitute an Event of Default, shall exist or have occurred
and be continuing, Borrower may make regularly scheduled
payments of principal and interest in accordance with the
terms of the Subordinated Notes as in effect on the date
hereof,
(iii) Borrower shall not, directly or indirectly, (A) amend,
modify, alter or change any terms of such indebtedness or any
agreement, document or instrument related thereto, or (B)
redeem, retire, defease, purchase or otherwise acquire such
indebtedness, or set aside or otherwise deposit or invest any
sums for such purpose; provided, that, so long as no Event of
Default, and no event or condition that would, with notice or
passage of time, or both, constitute on Event of Default,
exists or has occurred and is continuing, or would
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result thereby, and no Overformula Loan exists or would result
thereby, Borrower may (1) on not less than fifteen (15) days
prior written notice to Lender, redeem up to thirty-five (35%)
percent of the Subordinated Notes with (but only with) the net
proceeds received in a common stock offering of Borrower
consummated substantially contemporaneously with such
redemption of Subordinated Notes, and/or (2) make open market
purchases of the Subordinated Notes if, for the period of
thirty (30) consecutive days immediately preceding each such
purchase and after giving effect thereto, there is Combined
Excess Availability of at least $10,000,000, and
(iv) Borrower shall furnish to Lender all notices, demands, or
other materials concerning such indebtedness either received
by Borrower or on its behalf, promptly after receipt thereof,
or sent by Borrower or on its behalf, concurrently with the
sending thereof, as the case may be;
(g) indebtedness of Borrower under forward contracts permitted
under Section 9.10(e) hereof;
(h) contingent obligations of Borrower, not to exceed
$750,000 in the aggregate at any one time outstanding, incurred in the ordinary
course of business in the form of guaranties by Borrower of indebtedness to
third parties of financing provided by such third parties to distributors of
Borrower or their customers used to finance purchases from Borrower or such
distributors of Borrower's products sold in the ordinary course of business;
(i) indebtedness (other than indebtedness described in clauses
(a) through (h) above) that is otherwise permitted to be incurred under the
Indenture governing the Subordinated Notes, as in effect on the date hereof;
provided that no Event of Default, and no condition or event that, with notice
of passage of time, or both, would constitute an Event of Default, exists or
has occurred and is continuing; and further, provided, that, (i) Borrower gives
Lender at least fifteen (15) days prior written notice of the proposed
incurrence of such indebtedness, accompanied by a certificate of the chief
financial officer of Borrower certifying compliance with this provision and
setting forth supporting calculations for purposes of evidencing
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compliance with the provisions of the Indenture, as aforesaid, (ii) Borrower
may only make regularly scheduled payments of principal and interest in respect
of such indebtedness in accordance with the terms of the agreement or
instrument evidencing or giving rise to such indebtedness as in effect on the
date of issuance thereof, (iii) Borrower shall not, directly or indirectly, (A)
amend, modify, alter or change the terms of such indebtedness or any agreement,
document or instrument related thereto as in effect on the date of issuance
thereof, or (B) redeem, retire, defease, purchase or otherwise acquire such
indebtedness, or set aside or otherwise deposit or invest any sums for such
purpose, and (iv) Borrower shall furnish to Lender all demands and other
material notices in connection with such indebtedness either received by
Borrower or on its behalf, promptly after the receipt thereof, or sent by
Borrower or on its behalf, concurrently with the sending thereof, as the case
may be; and
(j) the existing indebtedness set forth on Schedule 9.9
hereto; provided, that, (i) Borrower may only make regularly scheduled payments
of principal and interest in respect of such indebtedness in accordance with
the terms of the agreement or instrument evidencing or giving rise to such
indebtedness as in effect on the date hereof, (ii) Borrower shall not, directly
or indirectly, (A) amend, modify, alter or change the terms of such
indebtedness or any agreement, document or instrument related thereto as in
effect on the date hereof, or (B) redeem, retire, defease, purchase or
otherwise acquire such indebtedness, or set aside or otherwise deposit or
invest any sums for such purpose, and (iii) Borrower shall furnish to Lender
all demands and other material notices in connection with such indebtedness
either received by Borrower or on its behalf, promptly after the receipt
thereof, or sent by Borrower or on its behalf, concurrently with the sending
thereof, as the case may be.
9.10 Loans, Investments, Guarantees, Etc. Borrower shall not,
directly or indirectly, make any loans or advance money or property to any
person, or invest in (by capital contribution, dividend or otherwise) or
purchase or repurchase the stock or indebtedness or all or a substantial part
of the assets or property of any person, or guarantee, assume, endorse, or
otherwise become responsible for (directly or indirectly) the indebtedness,
performance, obligations or dividends of any Person or agree to do any of the
foregoing, except:
(a) the endorsement of instruments for collection or deposit
in the ordinary course of business;
(b) investments in: (i) short-term direct obligations
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of the United States Government, (ii) negotiable certificates of deposit issued
by any bank satisfactory to Lender, payable to the order of the Borrower or to
bearer and delivered to Lender, and (iii) commercial paper rated A1 or P1;
provided, that, as to any of the foregoing (collectively, "Cash Equivalents"),
unless waived in writing by Lender and except for the investment account
identified on Schedule 5.3 hereto, Borrower shall take such actions as are
deemed necessary by Lender to perfect the security interest of Lender in such
investments;
(c) repurchases of inventory from account debtors of
Borrower or their lenders or customers to the extent made pursuant to
agreements permitted under Section 9.9(e) hereof and guaranties permitted under
Section 9.9(h) hereof; and
(d) investments by Borrower, otherwise permitted by the
Indenture governing the Subordinated Notes as in effect on the date hereof, in
the form of cash equity contributions or cash loans to a wholly-owned
subsidiary of Borrower that either engages in a similar line of business as
Borrower or is newly formed to acquire the assets or capital stock of a Person
engaged in a similar line of business as Borrower; provided, that (i) Lender
receives not less than fifteen (15) days prior written notice of each such
proposed investment or loan accompanied by (A) copies of all agreements,
documents and instruments proposed to be entered into in connection therewith
and (B) a certificate of the chief financial officer of Borrower certifying
compliance with this provision and setting forth supporting calculations for
purposes of evidencing compliance with the provisions of the Indenture, as
aforesaid, (ii) such subsidiary receiving such investment or loan and each of
its direct and indirect subsidiaries (including any acquired subsidiaries)
shall have executed and delivered to Lender an absolute and unconditional
guaranty of payment of all Obligations of Borrower and of the Canadian Borrower
and granted to Lender a first priority perfected security interest in and lien
upon its assets (other than real property), together with such financing
statements and agreements of the kind referred to in Section 4.1(g), all in
form and substance satisfactory to Lender and as Lender shall require, (iii) no
Event of Default, and no condition or event that would, with notice or passage
of time, or both, constitute an Event of Default, shall have occurred and be
continuing, and (iv) there shall be Combined Excess Availability of not less
than $5,000,000 at all times during the period of thirty (30) consecutive days
immediately preceding the making of such investment or loan and after giving
effect thereto and after giving effect to all transactions substantially
related thereto;
(e) investments in forward contracts for purchases of
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Canadian Dollars in amounts estimated by Borrower to be necessary for payment
of intercompany accounts or other intercompany obligations owed and payable by
Borrower to the Canadian Borrower in the ordinary course of business; and
(f) the loans, advances and guarantees set forth on Schedule
9.10 hereto; provided, that, as to such loans, advances and guarantees, (i)
Borrower shall not, directly or indirectly, (A) amend, modify, alter or change
the terms of such loans, advances or guarantees or any agreement, document or
instrument related thereto, or (B) as to such guarantees, redeem, retire,
defease, purchase or otherwise acquire the obligations arising pursuant to such
guarantees, or set aside or otherwise deposit or invest any sums for such
purpose, and (ii) Borrower shall furnish to Lender all demands or other
material notices in connection with such loans, advances or guarantees or other
indebtedness subject to such guarantees either received by Borrower or on its
behalf, promptly after the receipt thereof, or sent by Borrower or on its
behalf, concurrently with the sending thereof, as the case may be.
9.11 Dividends and Redemptions. Borrower shall not, directly or
indirectly, declare or pay any dividends on account of any shares of class of
capital stock of Borrower now or hereafter outstanding, or set aside or
otherwise deposit or invest any sums for such purpose, or redeem, retire,
defease, purchase or otherwise acquire any shares of any class of capital stock
(or set aside or otherwise deposit or invest any sums for such purpose) for any
consideration other than common stock or apply or set apart any sum, or make
any other distribution (by reduction of capital or otherwise) in respect of any
such shares or agree to do any of the foregoing; provided, that, Borrower may,
out of legally available funds therefor, declare and pay cash dividends
otherwise permitted to be paid under the terms of the Indenture governing the
Subordinated Notes, as in effect on the date hereof; provided, further, that
(i) Lender receives not less than fifteen (15) days prior written notice of
each such proposed dividend, accompanied by a certificate of the chief
financial officer of Borrower certifying compliance with this provision and
setting forth supporting calculation for purposes of evidencing compliance with
the provisions of the Indenture, as aforesaid, (ii) no Event of Default, and no
condition or event that would, with notice or passage of time, or both,
constitute an Event of Default, shall have occurred and be continuing, and
(iii) there shall be Combined Excess Availability of not less than $5,000,000
at all times during the period of thirty (30) consecutive days immediately
preceding the payment of such dividend and after giving effect thereto and
after giving effect to all transactions substantially related thereto.
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9.12 Transactions with Affiliates. Borrower shall not, directly or
indirectly, (a) purchase, acquire or lease any property from, or sell, transfer
or lease any property to, any officer, director, agent or other person
affiliated with Borrower, except in the ordinary course of and pursuant to the
reasonable requirements of Borrower's business and upon fair and reasonable
terms no less favorable to the Borrower than Borrower would obtain in a
comparable arm's length transaction with an unaffiliated person or (b) make any
payments of management, consulting or other fees for management or similar
services, or of any indebtedness owing to any officer, employee, shareholder,
director or other person affiliated with Borrower except reasonable
compensation to officers, employees and directors for services rendered to
Borrower in the ordinary course of business and consistent with Borrower's past
practices.
9.13 Additional Bank Accounts. Borrower shall not, directly or
indirectly, open, establish or maintain any deposit account, investment account
or any other account with any bank or other financial institution, other than
the Blocked Accounts and the accounts set forth in Schedule 8.10 hereto,
except: (a) as to any new or additional Blocked Accounts and other such new or
additional accounts which contain any Collateral or proceeds thereof, with the
prior written consent of Lender and subject to such conditions thereto as
Lender may establish, (b) as to any accounts used by Borrower to make payments
of payroll, taxes or other obligations to third parties, after prior written
notice to Lender, and (c) bank accounts of Borrower not containing Collateral
or proceeds of Collateral and which have an average monthly balance,
individually, in an amount less than $80,000, and less than $160,000 in the
aggregate for all such bank accounts.
9.14 Adjusted Net Worth. Borrower shall, at all times when
Combined Excess Availability is less than $5,000,000, maintain Adjusted Net
Worth of not less than $13,000,000.
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9.15 Compliance with ERISA.
(a) Borrower shall not with respect to any "employee
benefit plans" maintained by Borrower or any of its ERISA Affiliates: (i)
terminate any of such employee benefit plans so as to incur any liability to
the Pension Benefit Guaranty Corporation established pursuant to ERISA, (ii)
knowingly allow or suffer to exist any prohibited transaction involving any of
such employee benefit plans or any trust created thereunder which would subject
Borrower or such ERISA Affiliate to a tax or penalty or other liability on
prohibited transactions imposed under Section 4975 of the Code or ERISA, (iii)
knowingly fail to pay to any such employee benefit plan any contribution which
it is obligated to pay under Section 302 of ERISA, Section 412 of the Code or
the terms of such plan, (iv) knowingly allow or suffer to exist any accumulated
funding deficiency, whether or not waived, with respect to any such employee
benefit plan, (v) knowingly allow or suffer to exist any occurrence of a
reportable event or any other event or condition which presents a material risk
of termination by the Pension Benefit Guaranty Corporation of any such employee
benefit plan that is a single employer plan, which termination could result in
any liability to the Pension Benefit Guaranty Corporation or (vi) knowingly
incur any withdrawal liability with respect to any multiemployer pension plan
in an amount in excess of $500,000.
(b) As used in this Section 9.15, the terms "employee
benefit plans", "accumulated funding deficiency" and "reportable event" shall
have the respective meanings assigned to them in ERISA, and the term
"prohibited transaction" shall have the meaning assigned to it in Section 4975
of the Code and ERISA.
9.16 Costs and Expenses. Borrower shall pay to Lender on demand
all costs, expenses, filing fees and taxes paid or payable in connection with
the preparation, negotiation, execution, delivery, recording, administration,
collection, liquidation, enforcement and defense of the Obligations, Lender's
rights in the Collateral, this Agreement, the other Financing Agreements and
all other documents related hereto or thereto, including any amendments,
supplements or consents which may hereafter be contemplated (whether or not
executed) or entered into in respect hereof and thereof, including: (a) all
costs and expenses of filing or recording (including Uniform Commercial Code
financing statement filing taxes and fees, documentary taxes, intangibles taxes
and mortgage recording taxes and fees, if applicable); (b) costs and expenses
and fees for insurance premiums, environmental audits, surveys, assessments,
engineering reports and inspections, appraisal fees and search fees; (c) costs
and expenses of remitting loan proceeds, collecting checks and other
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items of payment, and establishing and maintaining the Blocked Accounts and the
Payment Account, together with Lender's customary charges and fees with respect
thereto; (d) charges, fees or expenses charged by any bank or issuer in
connection with the Letter of Credit Accommodations; (e) costs and expenses of
preserving and protecting the Collateral; (f) costs and expenses paid or
incurred in connection with obtaining payment of the Obligations, enforcing the
security interests and liens of Lender, selling or otherwise realizing upon the
Collateral, and otherwise enforcing the provisions of this Agreement and the
other Financing Agreements or defending any claims made or threatened against
Lender arising out of the transactions contemplated hereby and thereby
(including preparations for and consultations concerning any such matters); (g)
all out-of-pocket expenses and costs heretofore and from time to time hereafter
incurred by Lender during the course of periodic field examinations of the
Collateral and Borrower's operations, plus a per diem charge at the rate of
$600 per person per day for Lender's examiners in the field and office; and (h)
the reasonable fees and disbursements of counsel (including legal assistants)
to Lender in connection with any of the foregoing.
9.17 Further Assurances. At the request of Lender at any time and
from time to time, Borrower shall, at its expense, duly execute and deliver, or
cause to be duly executed and delivered, such further agreements, documents and
instruments, and do or cause to be done such further acts as may be necessary
or proper to evidence, perfect, maintain and enforce the security interests and
the priority thereof in the Collateral and to otherwise effectuate the
provisions or purposes of this Agreement or any of the other Financing
Agreements. Lender may at any time and from time to time request a certificate
from an officer of Borrower representing that all conditions precedent to the
making of Loans and providing Letter of Credit Accommodations contained herein
are satisfied. In the event of such request by Lender, Lender may, at its
option, cease to make any further Loans or provide any further Letter of Credit
Accommodations until Lender has received such certificate and, in addition,
Lender has determined in good faith that such conditions are satisfied. Where
permitted by law, Borrower hereby authorizes Lender to execute and file one or
more UCC financing statements signed only by Lender.
SECTION 10. EVENTS OF DEFAULT AND REMEDIES
10.1 Events of Default. The occurrence or existence of any one or
more of the following events are referred to herein individually as an "Event
of Default", and collectively as
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"Events of Default":
(a) Borrower (i) shall fail to pay any of the Obligations
when due or within two (2) days thereafter, or (ii) shall fail to perform any
of the terms, covenants, conditions or provisions contained in this Agreement
or any of the other Financing Agreements other than as described in Section
10.1(a)(i) and such failure shall continue for two (2) business days in the
case of a failure under Sections 7.1, 7.2, 7.3 or 7.4 hereof, or ten (10) days
in the case of a failure under any other provision; provided, that, such two
(2) business days or ten (10) day period (as the case may be) shall not apply
in the case of: (A) any failure to observe any such term, covenant, condition
or provision which is not capable of being cured at all or within such
applicable period or which has been the subject of a prior failure within a six
(6) month period or (B) an intentional breach by Borrower or any Obligor of any
such term, covenant, condition or provision, or (C) the failure to observe or
perform any of the covenants or provisions contained in Sections 6.3, 6.6, 7.7,
9.1, 9.7, 9.8, 9.9, 9.10, 9.11, 9.12 or 9.13 of this Agreement or any covenants
or agreements covering substantially the same matter as such sections in any of
the other Financing Agreements; or
(b) any representation, warranty or statement of fact
made by Borrower to Lender in this Agreement, the other Financing Agreements or
any other agreement, schedule, confirmatory assignment or otherwise shall when
made or deemed made be false or misleading in any material respect (or, if such
representation, warranty or statement of fact is itself qualified by reference
to materiality or a Material Adverse Effect, such representation, warranty or
statement of fact shall, when made or deemed made, be false or misleading in
any respect);
(c) any Obligor revokes, terminates or fails to perform
any of the terms, covenants, conditions or provisions of any guarantee,
endorsement or other agreement of such party in favor of Lender;
(d) any judgment for the payment of money is rendered
against Borrower or any Obligor in excess of $100,000 in any one case or in
excess of $300,000 in the aggregate and shall remain undischarged or unvacated
for a period in excess of thirty (30) days or execution shall at any time not
be effectively stayed, or any judgment other than for the payment of money, or
injunction, attachment, garnishment or execution is rendered against Borrower
or any Obligor or any of their assets;
(e) any Obligor (being a natural person or a general
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partner of an Obligor which is a general partnership) dies or Borrower or any
Obligor, which is a partnership, limited liability company, limited liability
partnership or a corporation, dissolves or suspends or discontinues doing
business;
(f) Borrower or any Obligor becomes insolvent (however
defined or evidenced), makes an assignment for the benefit of creditors, makes
or sends notice of a bulk transfer or calls a meeting of its creditors or
principal creditors;
(g) a case or proceeding under the bankruptcy laws of the
United States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law
or in equity) is filed against Borrower or any Obligor or all or any part of
its properties and such petition or application is not dismissed within thirty
(30) days after the date of its filing or Borrower or any Obligor shall file
any answer admitting or not contesting such petition or application or
indicates its consent to, acquiescence in or approval of, any such action or
proceeding or the relief requested is granted sooner;
(h) a case or proceeding under the bankruptcy laws of the
United States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at a law
or equity) is filed by Borrower or any Obligor or for all or any part of its
property;
(i) any default by Borrower or any Obligor under any
agreement, document or instrument relating to any indebtedness for borrowed
money owing to any person other than Lender, or any capitalized lease
obligations, contingent indebtedness in connection with any guarantee, letter
of credit, indemnity or similar type of instrument in favor of any person other
than Lender, in any case in an amount in excess of $100,000, which default
continues for more than the applicable cure period, if any, with respect
thereto, or any default by Borrower or any Obligor under any material contract,
lease, license or other obligation to any person other than Lender, which
default continues for more than the applicable cure period, if any, with
respect thereto;
(j) any Change of Control shall occur;
(k) the indictment or threatened indictment of
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Borrower or any Obligor under any criminal statute, or commencement or
threatened commencement of criminal or civil proceedings against Borrower or
any Obligor, pursuant to which statute or proceedings the penalties or remedies
sought or available include forfeiture of any of the property of Borrower or
such Obligor;
(l) there shall have occurred a Material Adverse Change;
or
(m) there shall be an event of default under any of the
other Financing Agreements or there shall be an "Event of Default" as defined
in the Canadian Loan Agreement.
10.2 Remedies.
(a) At any time an Event of Default exists or has
occurred and is continuing, Lender shall have all rights and remedies provided
in this Agreement, the other Financing Agreements, the Uniform Commercial Code
and other applicable law, all of which rights and remedies may be exercised
without notice to or consent by Borrower or any Obligor, except as such notice
or consent is expressly provided for hereunder or required by applicable law.
All rights, remedies and powers granted to Lender hereunder, under any of the
other Financing Agreements, the Uniform Commercial Code or other applicable
law, are cumulative, not exclusive and enforceable, in Lender's discretion,
alternatively, successively, or concurrently on any one or more occasions, and
shall include, without limitation, the right to apply to a court of equity for
an injunction to restrain a breach or threatened breach by Borrower of this
Agreement or any of the other Financing Agreements. Lender may, at any time or
times, proceed directly against Borrower or any Obligor to collect the
Obligations without prior recourse to the Collateral.
(b) Without limiting the foregoing, at any time an Event
of Default exists or has occurred and is continuing, Lender may, in its
discretion and without limitation, (i) accelerate the payment of all
Obligations and demand immediate payment thereof to Lender (provided, that,
upon the occurrence of any Event of Default described in Sections 10.1(g) and
10.1(h), all Obligations shall automatically become immediately due and
payable), (ii) with or without judicial process or the aid or assistance of
others, enter upon any premises on or in which any of the Collateral may be
located and take possession of the Collateral or complete processing,
manufacturing and repair of all or any portion of the Collateral, (iii) require
Borrower, at Borrower's expense, to assemble and make available to Lender any
part or all of the Collateral at any place and time designated by
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Lender, (iv) collect, foreclose, receive, appropriate, setoff and realize upon
any and all Collateral, (v) remove any or all of the Collateral from any
premises on or in which the same may be located for the purpose of effecting
the sale, foreclosure or other disposition thereof or for any other purpose,
(vi) sell, lease, transfer, assign, deliver or otherwise dispose of any and all
Collateral (including entering into contracts with respect thereto, public or
private sales at any exchange, broker's board, at any office of Lender or
elsewhere) at such prices or terms as are commercially reasonable, for cash,
upon credit or for future delivery, with the Lender having the right to
purchase the whole or any part of the Collateral at any such public sale, all
of the foregoing being free from any right or equity of redemption of Borrower,
which right or equity of redemption is hereby expressly waived and released by
Borrower and/or (vii) terminate this Agreement. If any of the Collateral is
sold or leased by Lender upon credit terms or for future delivery, the
Obligations shall not be reduced as a result thereof until payment therefor is
finally collected by Lender. If notice of disposition of Collateral is
required by law, five (5) days prior notice by Lender to Borrower designating
the time and place of any public sale or the time after which any private sale
or other intended disposition of Collateral is to be made, shall be deemed to
be reasonable notice thereof and Borrower waives any other notice. In the
event Lender institutes an action to recover any Collateral or seeks recovery
of any Collateral by way of prejudgment remedy, Borrower waives the posting of
any bond which might otherwise be required.
(c) Lender may apply the cash proceeds of Collateral
actually received by Lender from any sale, lease, foreclosure or other
disposition of the Collateral to payment of the Obligations, in whole or in
part and in such order as Lender may elect, whether or not then due. Borrower
shall remain liable to Lender for the payment of any deficiency with interest
at the highest rate provided for herein and all costs and expenses of
collection or enforcement, including reasonable attorneys' fees and legal
expenses.
(d) Without limiting the foregoing, upon the occurrence
of an Event of Default or an event which with notice or passage of time or both
would constitute an Event of Default, Lender may, at its option, without
notice, (i) cease making Loans or arranging for Letter of Credit Accommodations
or reduce the lending formulas or amounts of Revolving Loans and Letter of
Credit Accommodations available to Borrower and/or (ii) terminate any provision
of this Agreement providing for any future Loans or Letter of Credit
Accommodations to be made by Lender to Borrower.
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SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial
Waiver.
(a) The validity, interpretation and enforcement of this
Agreement and the other Financing Agreements 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).
(b) Borrower and Lender irrevocably consent and submit to
the non-exclusive jurisdiction of the Circuit Court, Cook County, Illinois and
the United States District Court for the Northern District of Illinois and
waive any objection based on venue or forum non conveniens with respect to any
action instituted therein arising under this Agreement or any of the other
Financing Agreements or in any way connected with or related or incidental to
the dealings of the parties hereto in respect of this Agreement or any of the
other Financing Agreements or the transactions related hereto or thereto, in
each case whether now existing or hereafter arising, and whether in contract,
tort, equity or otherwise, and agree that any dispute with respect to any such
matters shall be heard only in the courts described above (except that Lender
shall have the right to bring any action or proceeding against Borrower or its
property in the courts of any other jurisdiction which Lender deems necessary
or appropriate in order to realize on the Collateral or to otherwise enforce
its rights against Borrower or its property).
(c) Borrower hereby waives personal service of any and
all process upon it and consents that all such service of process may be made
by certified mail (return receipt requested) directed to its address set forth
on the signature pages hereof and service so made shall be deemed to be
completed five (5) days after the same shall have been so deposited in the U.S.
mails, or, at Lender's option, by service upon Borrower in any other manner
provided under the rules of any such courts. Within thirty (30) days after
such service, Borrower shall appear in answer to such process, failing which
Borrower shall be deemed in default and judgment may be entered by Lender
against Borrower for the amount of the claim and other relief requested.
(d) BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO
TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION
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(i) ARISING UNDER THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR
(ii) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE
PARTIES HERETO IN RESPECT OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING
AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER
NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR
OTHERWISE. BORROWER AND LENDER EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL
WITHOUT A JURY AND THAT BORROWER OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF
A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF
THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
(e) Lender shall not have any liability to Borrower
(whether in tort, contract, equity or otherwise) for losses suffered by
Borrower in connection with, arising out of, or in any way related to the
transactions or relationships contemplated by this Agreement, or any act,
omission or event occurring in connection herewith, unless it is determined by
a final and non-appealable judgment or court order binding on Lender, that the
losses were the result of acts or omissions constituting gross negligence or
willful misconduct. In any such litigation, Lender shall be entitled to the
benefit of the rebuttable presumption that it acted in good faith and with the
exercise of ordinary care in the performance by it of the terms of this
Agreement.
11.2 Waiver of Notices. Borrower hereby expressly waives demand,
presentment, protest and notice of protest and notice of dishonor with respect
to any and all instruments and commercial paper, included in or evidencing any
of the Obligations or the Collateral, and any and all other demands and notices
of any kind or nature whatsoever with respect to the Obligations, the
Collateral and this Agreement, except such as are expressly provided for
herein. No notice to or demand on Borrower which Lender may elect to give
shall entitle Borrower to any other or further notice or demand in the same,
similar or other circumstances.
11.3 Amendments and Waivers. Neither this Agreement nor any
provision hereof shall be amended, modified, waived or discharged orally or by
course of conduct, but only by a written agreement signed by an authorized
officer of Lender, and as to amendments, as also signed by an authorized
officer of Borrower. Lender shall not, by any act, delay, omission or
otherwise be deemed to have expressly or impliedly waived any of its rights,
powers and/or remedies unless such waiver shall be in writing and signed by an
authorized officer of Lender. Any such waiver shall be enforceable only to the
extent specifically set forth therein. A waiver by Lender of any right, power
and/or remedy on any one
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occasion shall not be construed as a bar to or waiver of any such right, power
and/or remedy which Lender would otherwise have on any future occasion, whether
similar in kind or otherwise.
11.4 Waiver of Counterclaims. Borrower waives all rights to
interpose any claims, deductions, setoffs or counterclaims of any nature (other
then compulsory counterclaims) in any action or proceeding with respect to this
Agreement, the Obligations, the Collateral or any matter arising therefrom or
relating hereto or thereto; without prejudice, however, to Borrower's rights to
assert by way of separate unconsolidated action, any such claims, deductions,
setoffs, or counterclaims (other than compulsory counterclaims).
11.5 Indemnification. Borrower shall indemnify and hold Lender,
and its directors, agents, employees and counsel, harmless from and against any
and all losses, claims, damages, liabilities, costs or expenses imposed on,
incurred by or asserted against any of them in connection with any litigation,
investigation, claim or proceeding commenced or threatened related to the
negotiation, preparation, execution, delivery, enforcement, performance or
administration of this Agreement, any other Financing Agreements, or any
undertaking or proceeding related to any of the transactions contemplated
hereby or any act, omission, event or transaction related or attendant thereto,
including amounts paid in settlement, court costs, and the reasonable fees and
expenses of counsel; provided, that Borrower shall not be required to indemnify
Lender for any losses, claims, damages, liabilities, costs or expenses caused
as a direct result of the gross negligence or wilful misconduct of Lender, as
determined by a final, non-appealable judgment of a court of competent
jurisdiction. To the extent that the undertaking to indemnify, pay and hold
harmless set forth in this Section may be unenforceable because it violates any
law or public policy, Borrower shall pay the maximum portion which it is
permitted to pay under applicable law to Lender in satisfaction of indemnified
matters under this Section. The foregoing indemnity shall survive the payment
of the Obligations and the termination or non-renewal of this Agreement.
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS
12.1 Term.
(a) This Agreement and the other Financing Agreements
shall become effective as of the date set forth on the first page hereof and
shall continue in full force and effect for a term ending on the date three (3)
years from the date hereof (the
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"Renewal Date"), and from year to year thereafter, unless sooner terminated
pursuant to the terms hereof. Lender may terminate this Agreement and the
other Financing Agreements effective on the Renewal Date or on the anniversary
of the Renewal Date in any year by giving Borrower at least sixty (60) days'
prior written notice, and Borrower may terminate the Agreement at any time by
giving not less than sixty (60) days' prior written notice to Lender; provided,
that, this Agreement and all other Financing Agreements and the Canadian
Financing Agreements must be terminated simultaneously. Upon the effective
date of termination or non-renewal of the Financing Agreements, Borrower shall
pay to Lender, in full, all outstanding and unpaid Obligations and shall
furnish cash collateral to Lender in such amounts as Lender determines are
reasonably necessary to secure Lender from loss, cost, damage or expense,
including reasonable attorneys' fees and legal expenses, in connection with any
contingent Obligations, including issued and outstanding Letter of Credit
Accommodations and checks or other payments provisionally credited to the
Obligations and/or as to which Lender has not yet received final and
indefeasible payment. Such payments in respect of the Obligations and cash
collateral shall be remitted by wire transfer in Federal funds to such bank
account of Lender, as Lender may, in its discretion, designate in writing to
Borrower for such purpose. Interest shall be due until and including the next
business day, if the amounts so paid by Borrower to the bank account designated
by Lender are received in such bank account later than 12:00 noon, Chicago,
Illinois time.
(b) No termination of this Agreement or the other
Financing Agreements shall relieve or discharge Borrower of its respective
duties, obligations and covenants under this Agreement or the other Financing
Agreements until all Obligations have been fully and finally discharged and
paid, and Lender's continuing security interest in the Collateral and the
rights and remedies of Lender hereunder, under the other Financing Agreements
and applicable law, shall remain in effect until all such Obligations have been
fully and finally discharged and paid, after which, at Borrower's sole cost and
expense, Lender will execute and deliver to Borrower such Uniform Commercial
Code termination statements and such other lien releases reasonably requested
by Borrower as shall be necessary to evidence the termination and release of
the security interests held by Lender in the Collateral.
(c) If for any reason this Agreement is terminated prior
to the end of the then current term or renewal term of this Agreement, in view
of the impracticality and extreme difficulty of ascertaining actual damages and
by mutual agreement of the parties as to a reasonable calculation of Lender's
lost profits
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as a result thereof, Borrower agrees to pay to Lender, upon the effective date
of such termination, an early termination fee in the amount set forth below if
such termination is effective in the period indicated:
<TABLE>
<CAPTION>
Amount Period
------ ------
<S> <C>
(i) 3% of the Maximum From the date hereof
Credit then in effect to and including
November 20, 1998
(ii) 1% of the Maximum From November 21, 1998
Credit then in effect to but not including
November 20, 2000
</TABLE>
Such early termination fee shall be presumed to be the amount of damages
sustained by Lender as a result of such early termination and Borrower agrees
that it is reasonable under the circumstances currently existing. In addition,
Lender shall be entitled to such early termination fee upon the occurrence of
any Event of Default described in Sections 10.1(g) and 10.1(h) hereof, even if
Lender does not exercise its right to terminate this Agreement, but elects, at
its option, to provide financing to Borrower or permit the use of cash
collateral under the United States Bankruptcy Code. The early termination fee
provided for in this Section 12.1 shall be deemed included in the Obligations.
12.2 Notices. All notices, requests and demands hereunder shall be
in writing and (a) made to Lender at its address set forth below and to
Borrower at its chief executive office set forth below, or to such other
address as either party may designate by written notice to the other in
accordance with this provision, and (b) deemed to have been given or made: if
delivered in person, immediately upon delivery; if by telex, telegram or
facsimile transmission, immediately upon sending and upon confirmation of
receipt; if by nationally recognized overnight courier service with
instructions to deliver the next business day, one (1) business day after
sending; and if by certified mail, return receipt requested, five (5) days
after mailing.
12.3 Partial Invalidity. If any provision of this Agreement is
held to be invalid or unenforceable, such invalidity or unenforceability shall
not invalidate this Agreement as a whole, but this Agreement shall be construed
as though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall
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be construed and enforced only to such extent as shall be permitted by
applicable law.
12.4 Successors. This Agreement, the other Financing Agreements
and any other document referred to herein or therein shall be binding upon and
inure to the benefit of and be enforceable by Lender, Borrower and their
respective successors and assigns, except that Borrower may not assign its
rights under this Agreement, the other Financing Agreements and any other
document referred to herein or therein without the prior written consent of
Lender. Lender may, after notice to Borrower, assign its rights and delegate
its obligations under this Agreement and the other Financing Agreements and
further may assign, or sell participations in, all or any part of the Loans,
the Letter of Credit Accommodations or any other interest herein to another
financial institution or other person, in which event, the assignee or
participant shall have, to the extent of such assignment or participation, the
same rights and benefits as it would have if it were the Lender hereunder,
except as otherwise provided by the terms of such assignment or participation.
12.5 Confidentiality.
(a) Lender shall use all reasonable efforts to keep
confidential, in accordance with its customary procedures for handling
confidential information and safe and sound lending practices, any non-public
information supplied to it by Borrower pursuant to this Agreement which is
clearly and conspicuously marked as confidential at the time such information
is furnished by Borrower to Lender, provided, that, nothing contained herein
shall limit the disclosure of any such information: (i) to the extent required
by statute, rule, regulation, subpoena or court order, (ii) to bank examiners
and other regulators, auditors and/or accountants, (iii) in connection with any
litigation to which Lender is a party, (iv) to any assignee or participant (or
prospective assignee or participant) so long as such assignee or participant
(or prospective assignee or participant) shall have first agreed in writing to
treat such information as confidential in accordance with this Section 12.5, or
(v) to counsel for Lender or any participant or assignee (or prospective
participant or assignee).
(b) In no event shall this Section 12.5 or any other
provision of this Agreement or applicable law be deemed: (i) to apply to or
restrict disclosure of information that has been or is made public by Borrower
or any third party without breach of this Section 12.5 or otherwise become
generally available to the public other than as a result of a disclosure in
violation hereof, (ii) to apply to or restrict disclosure of information
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that was or becomes available to Lender on a non-confidential basis from a
person other than Borrower, (iii) require Lender to return any materials
furnished by Borrower to Lender or (iv) prevent Lender from responding to
routine informational requests in accordance with the Code of Ethics for the
Exchange of Credit Information promulgated by The Robert Morris Associates or
other applicable industry standards relating to the exchange of credit
information. The obligations of Lender under this Section 12.5 shall supersede
and replace the obligations of Lender under any confidentiality letter signed
prior to the date hereof.
12.6 Entire Agreement. This Agreement, the other Financing
Agreements, any supplements hereto or thereto, and any instruments or documents
delivered or to be delivered in connection herewith or therewith represents the
entire agreement and understanding concerning the subject matter hereof and
thereof between the parties hereto, and supersede all other prior agreements,
understandings, negotiations and discussions, representations, warranties,
commitments, proposals, offers and contracts concerning the subject matter
hereof, whether oral or written. In the event of any inconsistency between the
terms of this Agreement and any schedule or exhibit hereto, the terms of this
Agreement shall govern.
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IN WITNESS WHEREOF, Lender and Borrower have caused these presents to
be duly executed as of the day and year first above written.
LENDER BORROWER
CONGRESS FINANCIAL CORPORATION STUART ENTERTAINMENT, INC.
(CENTRAL)
By: By:
------------------------- ---------------------------
Title: Title:
------------------------- ---------------------------
Address: Chief Executive Office:
150 South Wacker Drive 3211 Nebraska Avenue
Suite 2200 Council Bluffs, Iowa 51501
Chicago, Illinois 60606-4401 Attention: President
Attention: Mr. George Kalesnik
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<PAGE> 1
Exhibit 10.18
EXECUTION COPY
LOAN AGREEMENT
by and between
CONGRESS FINANCIAL CORPORATION (CANADA)
as Lender
and
BINGO PRESS & SPECIALTY LIMITED
as Borrower
Dated: November 20, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 "ACCOUNTS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.2 "ADJUSTED NET WORTH" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.3 "AMORTIZED EQUIPMENT VALUE" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.4 "APPLICABLE CANADIAN MARGIN" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.5 "AVAILABILITY RESERVES" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.6 "BIA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1.7 "BLOCKED ACCOUNTS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1.8 "BORROWING BASE CERTIFICATE" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1.9 "BUSINESS DAY" or "BUSINESS DAY" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1.10 "CANADIAN DOLLAR EQUIVALENT" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.11 "CANADIAN PRIME RATE" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.12 "CANADIAN PRIME RATE LOANS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.13 "CANADIAN REFERENCE BANK" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.14 "CASH EQUIVALENTS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.15 "CDOR RATE" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.16 "CCAA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.17 "COLLATERAL" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.18 "COMBINED EXCESS AVAILABILITY" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
1.19 "CONGRESS (CENTRAL)" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.20 "ELIGIBLE ACCOUNTS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.21 "ELIGIBLE INVENTORY" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.23 "EQUIPMENT" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.24 "EVENT OF DEFAULT" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.25 "EXCESS AVAILABILITY" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.26 "FINANCING AGREEMENTS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.27 "FORMULA AVAILABILITY" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.28 "GAAP" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.29 "GAMING AUTHORITY" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.30 "GAMING LAWS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.31 "GAMING LICENSES" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.32 "GENERAL ASSIGNMENT OF ACCOUNTS RECEIVABLE" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.33 "GENERAL SECURITY AGREEMENT" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.34 "GOVERNMENTAL AUTHORITY" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.35 "GUARANTORS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.36 "HAZARDOUS MATERIALS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.37 "HYPOTHEC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.38 "INFORMATION CERTIFICATE" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.39 "INTELLECTUAL PROPERTY SECURITY AGREEMENT" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.40 "INTEREST RATE" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.41 "INVENTORY" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.42 "LETTER OF CREDIT ACCOMMODATIONS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
1.43 "LOANS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.44 "MATERIAL ADVERSE CHANGE" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.45 "MATERIAL ADVERSE EFFECT" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.46 "MAXIMUM CREDIT" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.47 "NET AMOUNT OF ELIGIBLE ACCOUNTS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.48 "OBLIGATIONS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.49 "OBLIGOR" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.50 "OVERFORMULA AMOUNT" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.51 "PAYMENT ACCOUNT" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.52 "PENSION PLANS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.53 "PERSON" OR "PERSON" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.54 "PPSA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.55 "PRIORITY PAYABLES RESERVE" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.56 "RECORDS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.57 "REVOLVING LOANS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.58 "SPOT RATE" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.59 "SUBORDINATED NOTE AGREEMENTS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.60 "SUBORDINATED NOTES" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.61 "US BORROWER" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.62 "US DOLLARS" or " US$" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.63 "US DOLLAR EQUIVALENT" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.64 "US FINANCING AGREEMENTS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.65 "US L/C ACCOMMODATIONS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.66 "US LOAN AGREEMENT" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.67 "US LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.68 "US MAXIMUM CREDIT" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.69 "US REFERENCE BANK" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.70 "VALUE" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 2. CREDIT FACILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.1 Revolving Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.2 Letter of Credit Accommodations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.3 Availability Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.4 Increases in Maximum Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 3. INTEREST AND FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.1 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.2 Closing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.3 Unused Line Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.4 Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.5 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 4. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.1 Conditions Precedent to Initial Loans and Letter of Credit Accommodations . . . . . . . . . . . . . . . 17
4.2 Conditions Precedent to All Loans and Letter of Credit Accommodations . . . . . . . . . . . . . . . . . 19
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
SECTION 5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 6. COLLECTION AND ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.1 Borrower's Loan Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.2 Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.3 Collection of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.4 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.5 Authorization to Make Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.6 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 7. COLLATERAL REPORTING AND COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.1 Collateral Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.2 Accounts Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.3 Inventory Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
7.4 Equipment Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
7.5 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
7.6 Right to Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.7 Access to Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 8. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
8.1 Corporate Existence, Power and Authority; Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . 28
8.2 Financial Statements; No Material Adverse Change. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
8.3 Chief Executive Office; Collateral Locations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
8.4 Priority of Liens; Title to Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
8.5 Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
8.6 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
8.7 Compliance with Other Agreements and Applicable Laws . . . . . . . . . . . . . . . . . . . . . . . . . 29
8.8 Status of Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
8.9 Environmental Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
8.10 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
8.11 Accuracy and Completeness of Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
8.12 Survival of Warranties; Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
9.1 Maintenance of Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
9.2 New Collateral Locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
9.3 Compliance with Laws, Regulations, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
9.4 Payment of Taxes and Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
9.5 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
9.6 Financial Statements and Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
9.7 Sale of Assets, Consolidation, Amalgamation, Dissolution, Etc . . . . . . . . . . . . . . . . . . . . . 35
9.8 Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
9.9 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
9.10 Loans, Investments, Guarantees, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
9.11 Dividends and Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
9.12 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
9.13 Additional Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
9.14 Adjusted Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
9.15 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
9.16 Applications under the Companies' Creditors Arrangement Act . . . . . . . . . . . . . . . . . . . . . 39
9.17 Operation of Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
9.18 Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
9.19 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 10. EVENTS OF DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
10.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
10.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver . . . . . . . . . . . . . . . . 44
11.2 Waiver of Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
11.3 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
11.4 Waiver of Counterclaims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
11.5 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
12.1 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
12.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
12.3 Partial Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
12.4 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
12.5 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
12.6 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
12.7 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
12.8 Judgment Currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
INDEX TO
EXHIBITS AND SCHEDULES
<S> <C>
Exhibit A Information Certificate
Exhibit B Form of Borrowing Base Certificate
Schedule 8.4 Existing Liens
Schedule 8.8 Pension Plan Matters
Schedule 8.9 Environmental Matters
Schedule 8.10 Bank Accounts
Schedule 9.9 Existing Indebtedness
Schedule 9.10 Existing Loans, Advances and Guarantees
</TABLE>
<PAGE> 7
LOAN AGREEMENT
This Loan Agreement dated November 20, 1997 is entered into by
and between Congress Financial Corporation (Canada), an Ontario corporation
("Lender") and Bingo Press & Specialty Limited, an Ontario corporation
("Borrower").
W I T N E S S E T H:
WHEREAS, Borrower has requested that Lender enter into certain
financing arrangements with Borrower pursuant to which Lender may make loans
and provide other financial accommodations to Borrower; and
WHEREAS, Lender is willing to make such loans and provide such
financial accommodations on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
SECTION 1. DEFINITIONS
All terms used herein which are defined in the Personal Property
Security Act (Ontario) shall have the meanings given therein unless otherwise
defined in this Agreement. All references to the plural herein shall also mean
the singular and to the singular shall also mean the plural unless the context
otherwise requires. All references to Borrower and Lender pursuant to the
definitions set forth in the recitals hereto, or to any other person herein,
shall include their respective successors and assigns. The words "hereof",
"herein", "hereunder", "this Agreement" and words of similar import when used
in this Agreement shall refer to this Agreement as a whole and not any
particular provision of this Agreement and as this Agreement now exists or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced. The word "including" when used in this Agreement shall mean
"including, without limitation". References herein to any statute or any
provision thereof include such statute or provision as amended, revised,
re-enacted, and/or consolidated from time to time and any successor statute
thereto. An Event of Default shall exist or continue or be continuing until
such Event of Default is waived in accordance with Section 11.3 or is cured in
a manner Lender in good faith, deems satisfactory, if such Event of Default is
capable of being cured as determined by Lender in good faith. Any accounting
term used herein unless otherwise defined in this Agreement shall have the
meanings customarily given to such term in accordance with GAAP. Canadian
Dollars and the sign "$" mean lawful money of Canada. "US Dollars" and the
sign "US$" mean lawful money of the United States of America. For purposes of
this Agreement, the following terms shall have the respective meanings given to
them below:
1.1 "ACCOUNTS" shall mean all present and future rights of Borrower to
payment for goods sold or leased or for services rendered, which are not
evidenced by instruments or chattel paper, and whether or not earned by
performance.
1.2 "ADJUSTED NET WORTH" shall mean as to any Person, at any time, in
accordance with GAAP (except as otherwise specifically set forth below), on a
consolidated basis for such Person and its
<PAGE> 8
subsidiaries (if any), the amount equal to the difference between: (i) the
aggregate net book value of all assets of such Person and its subsidiaries,
calculating the book value of inventory for this purpose on a
first-in-first-out basis, after deducting from such book values all appropriate
reserves in accordance with GAAP (including all reserves for doubtful
receivables, obsolescence, depreciation and amortization) and (ii) the
aggregate amount of the indebtedness and other liabilities of such Person and
its subsidiaries (including tax and other proper accruals); provided that, for
purposes hereof, Adjusted Net Worth shall be calculated without giving effect
to extraordinary gains realized after the date hereof and without giving effect
to write-downs of goodwill taken after the date hereof.
1.3 "AMORTIZED EQUIPMENT VALUE" shall mean, at any time, an amount
determined by Lender by subtracting from the Canadian Dollar Equivalent at such
time of US$2,913,750 the product obtained by multiplying the Canadian Dollar
Equivalent at such time of US$45,325 by the number of months elapsed after the
date hereof through and including the date of determination; provided, that if
any appraisal delivered to or obtained by Lender after the date hereof under
Section 7.4 hereof with respect to Equipment deemed acceptable to Lender for
lending purposes indicates that the Amortized Equipment Value exceeds
seventy-five (75%) percent of the orderly liquidation value of such acceptable
Equipment, the Amortized Equipment Value shall be reset by Lender to the amount
in Canadian Dollars equal to seventy- five (75%) percent of such appraised
orderly liquidation value and the Amortized Equipment Value shall be reduced
and further reduced each month thereafter on the first day of each month (but
not below zero), by the product obtained by multiplying the Amortized Equipment
Value, as so reset (and expressed in Canadian Dollars as of the date of
determination) by a fraction, the numerator of which is one (1), and the
denominator of which is the number equal to (x) sixty (60) minus (y) the number
of months elapsed after the date hereof.
1.4 "APPLICABLE CANADIAN MARGIN" shall mean the respective percentage
per annum set forth in the table below for Canadian Prime Rate Loans
corresponding to the average daily Combined Excess Availability as determined
by Lender in US Dollars for the month immediately preceding the month (or
portion thereof) for which the Interest Rate is being determined hereunder:
<TABLE>
<CAPTION>
Average Daily Combined Excess Availability Applicable Canadian Margin for Canadian Prime
------------------------------------------ Rate Loans
---------------------------------------------
<S> <C>
0$ to US$4,999,999 1.75%
US$5,000,000 to US$14,999,999 1.50%
US$15,000,000 or more 1.25%
</TABLE>
provided, however, if Borrower shall fail to deliver any Borrowing Base
Certificate on the date due hereunder, then, without limiting Lender's other
rights and remedies by reason thereof, if such Borrowing Base Certificate is
not delivered in accordance with the terms hereof within two (2) Business Days
after such date due hereunder, the Applicable Canadian Margin shall, at
Lender's option, be deemed to be one and three- quarters of one percent (1.75%)
for Canadian Prime Rate Loans.
1.5 "AVAILABILITY RESERVES" shall mean, as of any date of
determination, such amounts as Lender may from time to time actually establish
and revise in good faith reducing the amount of
<PAGE> 9
Revolving Loans and Letter of Credit Accommodations which would otherwise be
available to Borrower under the lending formula(s) provided for herein: (a) to
reflect, without duplication, and in amounts not in excess of a good faith
estimate by Lender of, the potential adverse effect of any events, conditions,
contingencies or risks which, as determined by Lender in good faith, do or may
affect either (i) the Collateral or any other property which is security for
the Obligations or its value, (ii) the assets, business or prospects of
Borrower or any Obligor or (iii) the security interests and other rights of
Lender in the Collateral (including the enforceability, perfection and priority
thereof) or (b) to reflect Lender's good faith belief that any collateral
report or financial information furnished by or on behalf of Borrower or any
Obligor to Lender is or may have been incomplete, inaccurate or misleading in
any material respect or (c) to reflect outstanding Letter of Credit
Accommodations as provided in Section 2.2 hereof, or (d) in respect of any
state of facts which Lender determines in good faith constitutes an Event of
Default or may, with notice or passage of time or both, constitute an Event of
Default or (e) to reflect any Priority Payables Reserve or to effect any
reserves required by Lender under Section 2.3(b) or any other provision of this
Agreement.
1.6 "BIA" means the Bankruptcy and Insolvency Act (Canada).
1.7 "BLOCKED ACCOUNTS" shall have the meaning set forth in Section 6.3
hereof.
1.8 "BORROWING BASE CERTIFICATE" shall mean a certificate
substantially in the form of Exhibit B hereto, as such form may from time to
time be modified by Lender, in a manner consistent with the reporting
Obligations of Borrower hereunder, which is duly completed (including all
schedules thereto) and executed by the chief financial officer or other
appropriate financial officer of Borrower acceptable to Lender and delivered to
Lender.
1.9 "BUSINESS DAY" or "BUSINESS DAY" shall mean any day other than a
Saturday, Sunday, or other day on which commercial banks are authorized or
required to close under the laws of Canada, the Province of Ontario, the State
of Illinois or the Commonwealth of Pennsylvania, and a day on which the US
Reference Bank, the Canadian Reference Bank and Lender are open for the
transaction of business, except that if a determination of a Business Day shall
relate to any Eurodollar Rate Loans, the term Business Day shall also exclude
any day on which banks are closed for dealings in dollar deposits in the London
interbank market or other applicable Eurodollar Rate market.
1.10 "CANADIAN DOLLAR EQUIVALENT" of an amount of money in US Dollars
shall mean an amount, as determined by Lender, equal to the value in Canadian
Dollars of such amount of US Dollars, based on the Spot Rate for the purchase
of Canadian Dollars with US Dollars. Lender may make such determination
utilizing the closing Spot Rate for the preceding business day or may, from
time to time, at its option, utilize a more current Spot Rate with respect to
any determination of Canadian Dollar Equivalent for purposes hereof.
1.11 "CANADIAN PRIME RATE" shall mean, at any time, the greater of (i)
the rate from time to time publicly announced by the Canadian Reference Bank as
its prime rate in effect for determining interest rates on Canadian Dollar
denominated commercial loans in Canada, and (ii) the annual rate of interest
equal to the sum of (A) the CDOR Rate at such time and (B) one (1%) percent per
annum.
<PAGE> 10
1.12 "CANADIAN PRIME RATE LOANS" shall mean any Loans or portion
thereof denominated in Canadian Dollars and on which interest is payable based
on the Canadian Prime Rate in accordance with the terms hereof.
1.13 "CANADIAN REFERENCE BANK" shall mean Bank of Montreal, or its
successors and assigns, or such other Schedule I Canadian chartered bank as
Lender may from time to time designate.
1.14 "CASH EQUIVALENTS" shall have the meaning set forth in Section
9.10 hereof.
1.15 "CDOR RATE" shall mean, on any day, the annual rate of interest
which is the rate based on an average 30 day rate applicable to Canadian Dollar
bankers' acceptances appearing on the "Reuters Screen CDOR Page" (as defined in
the International Swap Dealer Association, Inc, definitions, as modified and
amended from time to time) as of 10:00 a.m. on such day; provided that if such
rate does not appear on the Reuters Screen CDOR Page as contemplated, then the
CDOR Rate on any day shall be the 30 day rate applicable in Canadian Dollar
bankers' acceptances quoted by any major Schedule I chartered bank selected by
Lender as of 10:00 a.m. on such day.
1.16 "CCAA" means the Companies' Creditors Arrangement Act (Canada).
1.17 "COLLATERAL" shall mean, collectively, Collateral as such term is
defined in the General Security Agreement, Collateral as such term is defined
in the Intellectual Property Security Agreement, Rights as such term is defined
in the General Assignment of Accounts Receivable, and hypothecated claims as
such term is defined in the Hypothec.
1.18 "COMBINED EXCESS AVAILABILITY" shall mean, at any time, as
determined by Lender, the amount in US Dollars equal to the sum of (a) the
positive or negative Excess Availability of Borrower at such time plus (b) the
positive or negative "Excess Availability" as defined in the US Loan Agreement
of the US Borrower at such time.
1.19 "CONGRESS (CENTRAL)" shall mean Congress Financial Corporation
(Central), an Illinois Corporation, and its successors and assigns.
1.20 "ELIGIBLE ACCOUNTS" shall mean Accounts created by Borrower which
are and continue to be acceptable to Lender based on the criteria set forth
below. In general, Accounts shall be Eligible Accounts if:
(a) such Accounts are payable in Canada in Canadian Dollars
and arise from the actual and bona fide sale and delivery of goods by Borrower
or rendition of services by Borrower in the ordinary course of its business
which transactions are completed in accordance with the terms and provisions
contained in any documents related thereto;
(b) such Accounts are not unpaid more than one hundred twenty
(120) days after the date of the original invoice for them;
(c) such Accounts comply with the terms and conditions
contained in Section 7.2(c) of this Agreement;
(d) such Accounts do not arise from sales on consignment,
guaranteed sale, sale and return, sale on approval, or other terms under which
payment by the account debtor may be conditional or contingent and such
Accounts are not owed by any account debtor with respect to whom Borrower has
<PAGE> 11
agreed, under any contingency or condition, to repurchase any inventory from
such account debtor or its lender or customers;
(e) the chief executive office of the account debtor with
respect to such Accounts is located in Canada or, at Lender's option, if
either: (i) the account debtor has delivered to Borrower an irrevocable letter
of credit issued or confirmed by a bank satisfactory to Lender and payable only
in Canada and in Canadian Dollars, sufficient to cover such Account, in form
and substance satisfactory to Lender and, if required by Lender, the original
of such letter of credit has been delivered to Lender or Lender's agent and the
issuer thereof notified of the assignment of the proceeds of such letter of
credit to Lender, or (ii) such Account is subject to credit insurance payable
to Lender issued by an insurer and on terms and in an amount acceptable to
Lender, or (iii) such Account is otherwise acceptable in all respects to Lender
(subject to such lending formula with respect thereto as Lender may determine);
(f) such Accounts do not consist of progress billings, bill
and hold invoices or retainage invoices, except as to bill and hold invoices,
if Lender shall have received an agreement in writing from the account debtor,
in form and substance satisfactory to Lender, confirming the unconditional
obligation of the account debtor to take the goods related thereto and pay such
invoice;
(g) the account debtor with respect to such Accounts has not
asserted a counterclaim, defense or dispute and does not have, and does not
engage in transactions which may give rise to, any right of setoff against such
Accounts, other than those ordinary course deductions or allowances reflected
on the face of the invoices evidencing such Accounts and reflected as a
deduction in computing and reporting the net amount of the affected Accounts in
the Borrowing Base Certificates and all other Collateral reports delivered in
accordance with this Agreement with respect to Accounts (but the portion of
the Accounts of such account debtor in excess of the amount at any time and
from time to time owed by Borrower to such account debtor or claimed owed by
such account debtor may be deemed Eligible Accounts);
(h) there are no facts, events or occurrences which would
impair the validity, enforceability or collectibility of such Accounts or
reduce the amount payable or delay payment thereunder;
(i) such Accounts are subject to the first priority, valid
and perfected security interest of Lender and any goods giving rise thereto are
not, and were not at the time of the sale thereof, subject to any liens except
those permitted in this Agreement;
(j) neither the account debtor nor any officer or employee of
the account debtor with respect to such Accounts is an officer, employee or
agent of or affiliated with Borrower directly or indirectly by virtue of family
membership, ownership, control, management or otherwise;
(k) the account debtors with respect to such Accounts are not
any Governmental Authority, unless (i) if the account debtor is the federal
government of Canada, any Province, political subdivision, department, agency
or instrumentality thereof, upon Lender's request, the Financial Administration
Act (Canada) or any similar provincial or local law, if applicable, has been
complied with in a manner satisfactory to Lender and (ii) if the account
debtors are North American Indian nations, tribes or tribal authorities, or the
account debtors are located or conduct business on North American Indian lands,
upon Lender's request Lender shall have received evidence, in form and
substance satisfactory to Lender, that such account debtor has waived any claim
of crown immunity, which waiver shall be unconditionally valid and enforceable
by Lender against such account debtor under all applicable
<PAGE> 12
laws, and the account debtor shall have consented to be sued by Borrower and
its assigns (including Lender) and consented to personal jurisdiction in each
provincial and federal court located in the province where it is located or
conducts business, and Lender shall have received evidence, in form and
substance satisfactory to Lender, that Lender has a valid and enforceable first
priority perfected security interest in the Accounts owing by such account
debtor and Lender may collect and otherwise realize thereon in the same manner
as any other Eligible Account;
(l) there are no proceedings or actions which are threatened
or pending against the account debtors with respect to such Accounts which, if
adversely determined against any such account debtor, could reasonably be
expected to result in any material adverse change in any such account debtor's
financial condition;
(m) such Accounts of a single account debtor or its
affiliates do not constitute more than ten (10%) percent of all otherwise
Eligible Accounts (but the portion of the Accounts not in excess of such
percentage may be deemed Eligible Accounts);
(n) such Accounts are not owed by an account debtor who has
Accounts unpaid more than one hundred twenty (120) days after the date of the
original invoice for them which constitute more than fifty (50%) percent of the
total Accounts of such account debtor;
(o) such Accounts are owed by account debtors whose total
indebtedness to Borrower does not exceed the credit limit (if any) with respect
to such account debtors that Lender has elected from time to time to establish
or revise for purposes of determining Eligible Accounts of such account debtors
(but the portion of the Accounts not in excess of such credit limit may be
deemed Eligible Accounts);
(p) such Accounts do not arise from the sale of Borrower's
"Power Bingo" products or rendition of services in relating thereto; and
(q) such Accounts are owed by account debtors deemed
creditworthy at all times by Lender, as determined by Lender in good faith.
General criteria for Eligible Accounts may be established and revised from time
to time by Lender in good faith. Any Accounts which are not Eligible Accounts
shall nevertheless be part of the Collateral.
1.21 "ELIGIBLE INVENTORY" shall mean Inventory located in Canada
consisting of finished goods held for resale in the ordinary course of the
business of Borrower which are acceptable to Lender based on the criteria set
forth below. In general, Eligible Inventory shall not include (a) raw
materials or work-in-process; (b) components which are not part of finished
goods; (c) spare parts for equipment; (d) packaging and shipping materials; (e)
supplies used or consumed in Borrower's business; (f) Inventory at premises
other than those owned and controlled by Borrower, except if Lender shall have
received an agreement in writing from the person in possession of such
Inventory and/or the owner or operator of such premises in form and substance
satisfactory to Lender acknowledging Lender's first priority security interest
in the Inventory, waiving security interests and claims by such person against
the Inventory and permitting Lender access to, and the right to remain on, the
premises so as to exercise Lender's rights and remedies and otherwise deal with
the Collateral; (g) Inventory subject to a security interest or lien in favour
of any person other than Lender except those permitted in this Agreement; (h)
bill and hold goods; (i) unserviceable, obsolete or slow moving Inventory; (j)
Inventory which is not subject to the first priority, valid and perfected
security interest of Lender; (k) returned, damaged and/or defective
<PAGE> 13
Inventory; (l) Inventory as to which, or as to the manufacture or sale or
offering for sale of which by Borrower, there is a claim of patent, trademark,
copyright, infringement or other claim of violation of intellectual property
rights of others; (m) Inventory consisting of Borrower's "Power Bingo"
products; and (n) Inventory purchased or sold on consignment. General criteria
for Eligible Inventory may be established and revised from time to time by
Lender in good faith. Any Inventory which is not Eligible Inventory shall
nevertheless be part of the Collateral.
1.22 "ENVIRONMENTAL LAWS" shall mean with respect to any Person all
federal (United States of America and Canada), state, provincial, district,
local, municipal and foreign laws, statutes, rules, regulations, ordinances,
orders, directives, permits, licenses and consent decrees relating to health,
safety, hazardous, dangerous or toxic substances, waste or material, pollution
and environmental matters, as now or at any time hereafter in effect,
applicable to such Person and/or its business and facilities (whether or not
owned by it), including laws relating to emissions, discharges, releases or
threatened releases of pollutants, contamination, chemicals, or hazardous,
toxic or dangerous substances, materials or wastes into the environment
(including, without limitation, ambient air, surface water, ground water, land
surface or subsurface strata) or otherwise relating to the generation,
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants, chemicals, or hazardous,
toxic or dangerous substances, materials or wastes.
1.23 "EQUIPMENT" shall mean all of Borrower's now owned and hereafter
acquired equipment, machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used
in connection therewith, and substitutions and replacements thereof, wherever
located.
1.24 "EVENT OF DEFAULT" shall mean the occurrence or existence of any
event or condition described in Section 10.1 hereof.
1.25 "EXCESS AVAILABILITY" shall mean the US Dollar Equivalent of the
amount, as determined by Lender, calculated at any time, equal to: (a) the
lesser of (i) the amount of the Formula Availability at such time and (ii) the
Maximum Credit, less the face amount of outstanding Letter of Credit
Accommodations, minus (b) the sum of: (i) the amount of all then outstanding
and unpaid Obligations (other than the face amount of outstanding Letter of
Credit Accommodations), plus (ii) the aggregate amount of all trade payables of
Borrower which are more than sixty (60) days past due as of such time.
1.26 "FINANCING AGREEMENTS" shall mean, collectively, this Agreement
and all Borrowing Base Certificates, the General Security Agreement, the
General Assignment of Accounts Receivable, the Hypothec, the Intellectual
Property Security Agreement and all notes, guarantees, security agreements and
other agreements, documents and instruments now or at any time hereafter
executed and/or delivered by Borrower or any Obligor in connection with this
Agreement, as the same now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
1.27 "FORMULA AVAILABILITY" shall mean the amount, as determined by
Lender, calculated at any time, equal to the amount of Revolving Loans
available to Borrower at such time, assuming (for purposes of such calculation)
that the outstanding principal balance of Revolving Loans and Letter of Credit
Accommodations is zero and based on the applicable lending formulas under
Section 2.1 hereof, subject to the sublimits and Availability Reserves from
time to time actually established by Lender hereunder.
<PAGE> 14
1.28 "GAAP" shall mean generally accepted accounting principles in
Canada as in effect from time to time as set forth in the opinions and
pronouncements of the relevant Canadian public and private accounting boards
and institutes which are applicable to the circumstances as of the date of
determination consistently applied, except that, for purposes of Section 9.14
hereof, GAAP shall be determined on the basis of such principles in effect on
the date hereof and consistent with those used in the preparation of the
audited financial statements delivered to Lender prior to the date hereof.
1.29 "GAMING AUTHORITY" shall mean any Governmental Authority which
regulates gaming in a jurisdiction in which Borrower or any of its subsidiaries
conducts gaming activities or activities relating to the design, manufacture or
distribution of gaming machines, equipment or systems or, whether or not
included in the foregoing, bingo supplies or bingo equipment.
1.30 "GAMING LAWS" shall mean all laws, rules, regulations, orders and
interpretations of any Governmental Authority relating to gaming activities or
activities relating to the design, manufacture or distribution of gaming
machines, equipment or systems, or whether or not included in the foregoing,
bingo supplies or bingo equipment.
1.31 "GAMING LICENSES" shall mean all licenses, franchises, or other
authorizations required to design, manufacture or distribute gaming machines,
equipment or systems or, whether or not included in the foregoing, bingo
supplies or bingo equipment in any state or jurisdiction where Borrower or any
of its Subsidiaries conduct such business (including any North American Indian
lands where any account debtor of Borrower is located or conducts business.)
1.32 "GENERAL ASSIGNMENT OF ACCOUNTS RECEIVABLE" shall mean the
general assignment of accounts receivable dated on or about the date hereof
given by Borrower in favour of Lender in respect of the Obligations.
1.33 "GENERAL SECURITY AGREEMENT" shall mean the general security
agreement dated on or about the date hereof given by Borrower in favour of
Lender in respect of the Obligations.
1.34 "GOVERNMENTAL AUTHORITY" shall mean the United States of America,
any State of the United States of America, Canada, any Province of Canada, any
other foreign government, or a district, county or municipality or other
political subdivision, and any North American Indian nation or tribe, or any
body, department, authority, agency, public corporation or instrumentality, of
any of the foregoing.
1.35 "GUARANTORS" shall mean US Borrower, Video King Gaming Systems,
Inc., a Colorado corporation, and each other Person that guarantees payment of
all or any portion of the Obligations.
1.36 "HAZARDOUS MATERIALS" shall mean any hazardous, toxic or
dangerous substances, materials and wastes, including hydrocarbons (including
naturally occurring or man-made petroleum and hydrocarbons), flammable
explosives, asbestos, urea formaldehyde insulation, radioactive materials,
biological substances, polychlorinated biphenyls, pesticides, herbicides and
any other kind and/or type of pollutants or contaminants (including materials
which include hazardous constituents), sewage, sludge, industrial slag,
solvents and/or any other similar substances, materials, or wastes and
including any other substances, materials or wastes that are or become
regulated under any Environmental Law (including any that are or become
classified as hazardous or toxic under any Environmental Law).
1.37 "HYPOTHEC" shall mean the hypothec on a universality of claims
dated the date hereof given by Borrower in favour of Lender in respect of the
Obligations.
<PAGE> 15
1.38 "INFORMATION CERTIFICATE" shall mean the Information Certificate
of Borrower constituting Exhibit A hereto containing material information with
respect to Borrower, its business and assets provided by or on behalf of
Borrower to Lender in connection with the preparation of this Agreement and the
other Financing Agreements and the financing arrangements provided for herein.
1.39 "INTELLECTUAL PROPERTY SECURITY AGREEMENT" shall mean the
intellectual property security agreement dated on or about the date hereof
given by Borrower in favour of Lender in respect of the Obligations.
1.40 "INTEREST RATE" shall mean, as to Canadian Prime Rate Loans, the
per annum rate equal to the Canadian Prime Rate plus the Applicable Canadian
Margin, provided, that, the Interest Rate shall be increased by two (2%)
percent per annum above the otherwise applicable Interest Rate, at Lender's
option, without notice, (a) for the period (i) from and after the effective
date of termination or non-renewal hereof until Lender has received full and
final payment of all Obligations (notwithstanding entry of any judgment against
Borrower) and (ii) from and after the date of the occurrence of an Event of
Default for so long as such Event of Default is continuing and (b) on the
Revolving Loans at any time outstanding in excess of the amounts available to
Borrower under Section 2 (whether or not such excess(es) arise or are made with
or without Lender's knowledge or consent and whether made before or after an
Event of Default).
1.41 "INVENTORY" shall mean all of Borrower's now owned and hereafter
existing or acquired raw materials, work in process, finished goods and all
other inventory of whatsoever kind or nature, wherever located.
1.42 "LETTER OF CREDIT ACCOMMODATIONS" shall mean the letters of
credit, merchandise purchase or other guarantees denominated in Canadian
Dollars which are from time to time either (a) issued or opened by Lender for
the account of Borrower or any Obligor or (b) with respect to which Lender has
agreed to indemnify the issuer or guaranteed to the issuer the performance by
Borrower of its obligations to such issuer.
1.43 "LOANS" shall mean the Revolving Loans.
1.44 "MATERIAL ADVERSE CHANGE" shall mean a material adverse change in
the condition (financial or otherwise), operations, performance, properties,
business or affairs of the Borrower or any Obligor.
1.45 "MATERIAL ADVERSE EFFECT" shall mean (a) a material adverse
change in, or a material adverse effect upon, the condition (financial or
otherwise), operations, business or affairs of Borrower or any Obligor, (b) any
existing or future impairment of the ability of Borrower or any Obligor to
perform any material Obligations under any of the Financing Agreements, or (c)
any existing or future impairment of Lender's rights or interests in any
Collateral, or Lender's ability to enforce any Obligations or realize upon any
Collateral.
1.46 "MAXIMUM CREDIT" shall mean, at any time, the Canadian Dollar
Equivalent at such time of US$3,333,333, subject to increase as provided in
Section 2.4 below.
1.47 "NET AMOUNT OF ELIGIBLE ACCOUNTS" shall mean the gross amount of
Eligible Accounts less (a) sales, excise or similar taxes included in the
amount thereof and (b) returns, discounts, claims, credits
<PAGE> 16
and allowances of any nature at any time issued, owing, granted, outstanding,
available or claimed with respect to such Eligible Accounts; provided that the
amounts deducted under clause (a) shall not duplicate items for which
Availability Reserves have been established by Lender.
1.48 "OBLIGATIONS" shall mean any and all Revolving Loans, Letter of
Credit Accommodations and all other obligations, liabilities and indebtedness
of every kind, nature and description owing by Borrower to Lender and/or its
affiliates, including principal, interest, charges, fees, costs and expenses,
however evidenced, whether as principal, surety, endorser, guarantor or
otherwise, whether arising under this Agreement or otherwise, whether now
existing or hereafter arising, whether arising before, during or after the
initial or any renewal term of this Agreement or after the commencement of any
proceeding with respect to Borrower under the BIA, the CCAA, or any similar
statute in any jurisdiction (including the payment of interest and other
amounts which would accrue and become due but for the commencement of such
proceeding, whether or not such amounts are allowed or allowable in whole or in
part in such proceeding), whether direct or indirect, absolute or contingent,
joint or several, due or not due, primary or secondary, liquidated or
unliquidated, secured or unsecured, and however acquired by Lender.
1.49 "OBLIGOR" shall mean each Guarantor and each endorser, acceptor,
surety or other person liable on or with respect to the Obligations or who is
the owner of any property which is security for the Obligations, other than
Borrower.
1.50 "OVERFORMULA AMOUNT" shall mean, at any time, as calculated by
Lender, the amount (if any) by which (A) the aggregate amount of outstanding
Obligations (other than the face amount of outstanding Letter of Credit
Accommodations) at such time, exceeds (B) the lesser of (x) the Formula
Availability and (y) the Maximum Credit less the face amount of outstanding
Letter of Credit Accommodations, at such time.
1.51 "PAYMENT ACCOUNT" shall have the meaning set forth in Section 6.3
hereof.
1.52 "PENSION PLANS" means each of the pension plans, if any,
registered in accordance with the Income Tax Act (Canada) which Borrower
sponsors or administers or into which Borrower makes contributions.
1.53 "PERSON" OR "PERSON" shall mean any individual, sole
proprietorship, partnership, limited partnership, corporation, limited
liability company, business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any
agency or instrumentality or political subdivision thereof.
1.54 "PPSA" shall mean the Personal Property Security Act (Ontario).
1.55 "PRIORITY PAYABLES RESERVE" shall mean, at any time, the full
amount of the liabilities at such time which have a trust imposed to provide
for payment or security interest, lien or charge ranking or capable of ranking
senior to or pari passu with security interests, liens or charges securing the
Obligations on any of the Collateral under federal, provincial, state, county,
municipal, or local law including, but not limited, to claims for unremitted
and accelerated rents, taxes, wages, workers' compensation obligations,
government royalties or pension fund obligations, together with the aggregate
value, determined in accordance with GAAP, of all Eligible Inventory which
Lender, acting reasonably, considers may be or may become subject to a right of
a supplier to recover possession thereof under any federal or provincial law,
where such supplier's right may have priority over the security interests,
liens or
<PAGE> 17
charges securing the Obligations including, without limitation, Eligible
Inventory subject to a right of a supplier to repossess goods pursuant to
Section 81.1 of the BIA.
1.56 "RECORDS" shall mean all of Borrower's present and future books
of account of every kind or nature, purchase and sale agreements, invoices,
ledger cards, bills of lading and other shipping evidence, statements,
correspondence, memoranda, credit files and other data relating to the
Collateral or any account debtor, together with the tapes, disks, diskettes and
other data and software storage media and devices, file cabinets or containers
in or on which the foregoing are stored (including any rights of Borrower with
respect to the foregoing maintained with or by any other person).
1.57 "REVOLVING LOANS" shall mean the loans now or hereafter made by
Lender to or for the benefit of Borrower on a revolving basis (involving
advances, repayments and readvances) as set forth in Section 2.1 hereof.
1.58 "SPOT RATE" shall mean, with respect to a currency, the rate
quoted by the Canadian Reference Bank as the spot rate for the purchase by the
Canadian Reference Bank of such currency with another currency.
1.59 "SUBORDINATED NOTE AGREEMENTS" shall mean the Subordinated Notes
and the Indenture dated as of November 13, 1996 between US Borrower and The
Trust Company of Washington, as the same now exist or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.
1.60 "SUBORDINATED NOTES" shall mean US Borrower's Series B 12-1/2%
Senior Subordinated Notes due 2004, in the aggregate principal amount of
US$100,000,000, as the same now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
1.61 "US BORROWER" shall mean Borrower's direct parent, Stuart
Entertainment, Inc., a Delaware Corporation, and its successors and assigns.
1.62 "US DOLLARS" or " US$" shall mean dollars of the United States of
America or other lawful currency of the United States of America.
1.63 "US DOLLAR EQUIVALENT" of an amount of money in Canadian Dollars,
shall mean an amount, as determined by Lender, equal to the value in US
Dollars, of such amount of Canadian Dollars, based on the spot price for buying
US Dollars with Canadian Dollars, as quoted to Lender by US Reference Bank.
Lender may make such determination utilizing the closing spot price for the
preceding business day or may, from time to time, at its option, utilize a more
current spot price with respect to any determination of US Dollar Equivalent
for purposes hereof.
1.64 "US FINANCING AGREEMENTS" shall mean the "Financing Agreements"
as defined in the US Loan Agreement.
1.65 "US L/C ACCOMMODATIONS" shall mean the "Letter of Credit
Accommodations" as defined in the US Loan Agreement.
1.66 "US LOAN AGREEMENT" shall mean that certain Loan and Security
Agreement, dated on or about the date hereof, between Congress (Central) and
the US Borrower, as the same now exists or may
<PAGE> 18
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced from time to time.
1.67 "US LOANS" shall mean the "Loans" as defined in the US Loan
Agreement.
1.68 "US MAXIMUM CREDIT" shall mean the "Maximum Credit" as defined in
the US Loan Agreement.
1.69 "US REFERENCE BANK" shall mean CoreStates Bank, N.A., or such
other bank as Congress (Central) may from time to time designate.
1.70 "VALUE" shall mean, as determined by Lender in good faith, with
respect to Inventory, the lower of (a) cost computed on a first-in-first-out
basis in accordance with GAAP or (b) market value.
SECTION 2. CREDIT FACILITIES
2.1 Revolving Loans.
(a) Subject to and upon the terms and conditions contained
herein, Lender agrees to make Revolving Loans by way of Canadian Prime Rate
Loans to Borrower from time to time in amounts requested by Borrower up to the
amount equal to the sum of:
(i) eighty (80%) percent of the Net Amount of
Eligible Accounts, plus
(ii) the lesser of: (A) sixty (60%) percent of the
Value of Eligible Inventory, and (B) the
Canadian Dollar Equivalent of US$3,333,333,
plus
(iii) the lesser of: (A) the Canadian Dollar
Equivalent of US$2,913,750 and (B) the
Amortized Equipment Value, less
(iv) any Availability Reserves.
(b) Lender may, in its discretion, from time to time, upon
not less than five (5) days prior notice to Borrower identifying the basis for
the action being taken under this provision, (i) reduce the lending formula
with respect to Eligible Accounts to the extent that Lender determines in good
faith that: (1) the dilution with respect to the Accounts for any period (based
on the ratio of (A) the aggregate amount of reductions in Accounts other than
as a result of payments in cash to (B) the aggregate amount of total sales) has
increased in any material respect or may be reasonably anticipated to increase
in any material respect above historical levels, or (2) the general
creditworthiness of account debtors has declined, or (ii) reduce the lending
formula(s) with respect to Eligible Inventory to the extent that Lender
determines that: (1) the number of days of the turnover of the Inventory for
any period has changed in any material respect or (2) the liquidation value of
the Eligible Inventory, or any category thereof, has decreased, or (3) the
nature and quality of the Inventory has deteriorated, or (iii) reduce the
amount available under Section 2.1(a)(iii) to the extent the Amortized
Equipment Value at any time exceeds seventy-five (75%) percent of the orderly
liquidation value of the Borrower's Equipment deemed acceptable by Lender for
lending purposes, as such value is set forth in an appraisal pursuant to
Section 7.4 hereof. In determining whether to reduce the lending formula(s),
Lender may, without duplication,
<PAGE> 19
consider events, conditions, contingencies or risks which are also considered
in determining Eligible Accounts, Eligible Inventory or in establishing
Availability Reserves.
(c) Except in Lender's discretion, the aggregate amount of
the Loans and the Letter of Credit Accommodations outstanding at any time shall
not exceed the Maximum Credit. In the event that the outstanding amount of any
component of the Loans, or the aggregate amount of the outstanding Loans and
Letter of Credit Accommodations, exceed the amounts available under the lending
formulas, the sublimits for Letter of Credit Accommodations set forth in
Section 2.2(d) or the Maximum Credit, as applicable, such event shall not
limit, waive or otherwise affect any rights of Lender in that circumstance or
on any future occasions and Borrower shall, upon demand by Lender, which may be
made at any time or from time to time, immediately repay to Lender the entire
amount of any such excess(es) for which payment is demanded.
(d) For purposes of applying the sublimit set forth in
Section 2.1(a)(ii)(B) hereof, Lender may treat the amount of its reliance on
Eligible Inventory to be purchased under outstanding Letter of Credit
Accommodations as a Revolving Loan based on Eligible Inventory pursuant to
Section 2(a)(ii). In determining the amount of such reliance, the outstanding
Revolving Loans and Availability Reserves shall first be attributed to any
components of the lending formulas in Section 2.1(a) that are not subject to
such sublimit, before being attributed to the components of the lending
formulas subject to such sublimit.
2.2 Letter of Credit Accommodations.
(a) Subject to and upon the terms and conditions contained
herein, at the request of Borrower, Lender agrees to provide or arrange for
Letter of Credit Accommodations for the account of Borrower containing terms
and conditions acceptable to Lender and the issuer thereof. Any payments made
by Lender to any issuer thereof and/or related parties in connection with the
Letter of Credit Accommodations shall constitute additional Revolving Loans to
Borrower pursuant to this Section 2.
(b) In addition to any charges, fees or expenses charged by
any bank or issuer in connection with the Letter of Credit Accommodations,
Borrower shall pay to Lender a letter of credit fee at a rate equal to two (2%)
percent per annum on the daily outstanding balance of the Letter of Credit
Accommodations for the immediately preceding month (or part thereof), payable
in arrears as of the first day of each succeeding month, except that Borrower
shall pay to Lender such letter of credit fee, at Lender's option, without
notice, at a rate equal to four (4%) percent per annum on such daily
outstanding balance for: (i) the period from and after the effective date of
termination or non-renewal hereof until Lender has received full and final
payment of all Obligations (notwithstanding entry of a judgment against
Borrower) and (ii) the period from and after the date of the occurrence of an
Event of Default for so long as such Event of Default is continuing. Such
letter of credit fee shall be calculated on the basis of a three hundred sixty
five (365) day year and actual days elapsed and the obligation of Borrower to
pay such fee shall survive the termination or non-renewal of this Agreement.
(c) No Letter of Credit Accommodations shall be available
unless on the date of the proposed issuance of any Letter of Credit
Accommodations, the Revolving Loans available to Borrower (subject to the
Maximum Credit and any Availability Reserves) are equal to or greater than:
(i) if the proposed Letter of Credit Accommodation is for the purpose of
purchasing Eligible Inventory and the Letter of Credit Accommodation requires
that all negotiable documents of title with respect to such Eligible Inventory
shall be consigned to the issuer of the Letter of Credit Accommodation, the sum
of (1) the percentage equal to one hundred (100%) percent minus the then
applicable percentage set forth in Section 2.1(a)(ii)(A) above of the Value of
such Eligible Inventory, plus (2) freight, taxes, duty and other
<PAGE> 20
amounts which Lender estimates must be paid in connection with such Inventory
upon arrival and for delivery to one of Borrower's locations for Eligible
Inventory within Canada and (ii) if the proposed Letter of Credit Accommodation
is for any other purpose, an amount equal to one hundred (100%) percent of the
face amount thereof and all other commitments and obligations made or incurred
by Lender with respect thereto. Effective on the issuance of each Letter of
Credit Accommodation, an Availability Reserve shall be established in the
applicable amount set forth in Section 2.2(c)(i) or Section 2.2(c)(ii).
(d) Except in Lender's discretion, (i) the amount of all
outstanding Letter of Credit Accommodations and all other commitments and
obligations made or incurred by Lender in connection therewith shall not at any
time exceed the Canadian Dollar Equivalent of US$1,666,667. At any time an
Event of Default exists or has occurred and is continuing, upon Lender's
request, Borrower will either furnish cash collateral to secure the
reimbursement obligations to the issuer in connection with any Letter of Credit
Accommodations or furnish cash collateral to Lender for the Letter of Credit
Accommodations, and in either case, the Revolving Loans otherwise available to
Borrower shall not be reduced as provided in Section 2.2(c) to the extent of
such cash collateral.
(e) Borrower shall indemnify and hold Lender harmless from
and against any and all losses, claims, damages, liabilities, costs and
expenses which Lender may suffer or incur in connection with any Letter of
Credit Accommodations and any documents, drafts or acceptances relating
thereto, including any losses, claims, damages, liabilities, costs and expenses
due to any action taken by any issuer or correspondent with respect to any
Letter of Credit Accommodation, but excluding any losses, claims, damages,
liabilities, costs and expenses directly caused by the gross negligence or
willful misconduct of Lender, as determined by a final non-appealable judgment
of a court of competent jurisdiction. Borrower assumes all risks with respect
to the acts or omissions of the drawer under or beneficiary of any Letter of
Credit Accommodation and for such purposes the drawer or beneficiary shall be
deemed Borrower's agent. Borrower assumes all risks for, and agrees to pay,
all foreign, federal, provincial and local taxes, duties and levies relating to
any goods subject to any Letter of Credit Accommodations or any documents,
drafts or acceptances thereunder. Borrower hereby releases and holds Lender
harmless from and against any acts, waivers, errors, delays or omissions,
whether caused by Borrower, by any issuer or correspondent or otherwise with
respect to or relating to any Letter of Credit Accommodation. The provisions
of this Section 2.2(e) shall survive the payment of Obligations and the
termination or non-renewal of this Agreement.
(f) Nothing contained herein shall be deemed or construed to
grant Borrower any right or authority to pledge the credit of Lender in any
manner. Lender shall have no liability of any kind with respect to any Letter
of Credit Accommodation provided by an issuer other than Lender unless Lender
has duly executed and delivered to such issuer the application or a guarantee
or indemnification in writing with respect to such Letter of Credit
Accommodation. Borrower shall be bound by any interpretation made in good
faith by Lender, or any other issuer or correspondent under or in connection
with any Letter of Credit Accommodation or any documents, drafts or acceptances
thereunder, notwithstanding that such interpretation may be inconsistent with
any instructions of Borrower. Lender shall have the sole and exclusive right
and authority, exercised in good faith, to, and Borrower shall not: (i) at any
time an Event of Default exists or has occurred and is continuing, (1) approve
or resolve any questions of non-compliance of documents, (2) give any
instructions as to acceptance or rejection of any documents or goods or (3)
execute any and all applications for steamship or airway guaranties,
indemnities or delivery orders, and (ii) at all times, (1) grant any extensions
of the maturity of, time of payment for, or time of presentation of, any
drafts, acceptances, or documents, and (2) agree to any amendments, renewals,
<PAGE> 21
extensions, modifications, changes or cancellations of any of the terms or
conditions of any of the applications, Letter of Credit Accommodations, or
documents, drafts or acceptances thereunder or any letters of credit included
in the Collateral. Lender may take such actions either in its own name or in
Borrower's name.
(g) Any rights, remedies, duties or obligations granted or
undertaken by Borrower to any issuer or correspondent in any application for
any Letter of Credit Accommodation, or any other agreement in favour of any
issuer or correspondent relating to any Letter of Credit Accommodation, shall
be deemed to have been granted or undertaken by Borrower to Lender. Any duties
or obligations undertaken by Lender to any issuer or correspondent in any
application for any Letter of Credit Accommodation, or any other agreement by
Lender in favour of any issuer or correspondent relating to any Letter of
Credit Accommodation, shall be deemed to have been undertaken by Borrower to
Lender and to apply in all respects to Borrower.
2.3 Availability Reserves. (a) All Revolving Loans otherwise
available to Borrower pursuant to the lending formulas and subject to the
Maximum Credit and other applicable limits hereunder shall be subject to
Lender's continuing right to establish and revise Availability Reserves.
Lender shall notify Borrower of the establishment of and any changes in
Availability Reserves and the basis therefor, as soon as practicable following
each such establishment or change. Upon Borrower's request in writing after
being so advised, Lender will, if it has not already done so, promptly confirm
to Borrower, in writing, the applicable establishment of or changes in
Availability Reserves and the basis therefor.
(b) Without limiting Lender's other rights with respect to
Availability Reserves (and without in any way affecting or impairing the rights
or remedies of Congress (Central) under the US Financing Agreements), Lender
may from time to time establish and revise Availability Reserves in an amount
sufficient to cover the Canadian Dollar Equivalent of (i) the amount by which
the outstanding "Obligations" (as defined in the US Loan Agreement) of the US
Borrower to Congress (Central) exceeds the "Maximum Credit" as defined in the
US Loan Agreement and/or (ii) the amount by which the aggregate amount of the
US Loans and US L/C Accommodations exceed the "Formula Availability" as defined
in the US Loan Agreement. In the case of any Availability Reserves established
under clause (ii) of this Section 2.3(b), Lender may also treat such amount as
a reduction in the Maximum Credit hereunder.
2.4 Increases in Maximum Credit. The Maximum Credit shall be
increased, but not above the Canadian Dollar Equivalent of US $10,000,000, upon
Borrower's written request(s) in accordance with and subject to the following
terms and conditions:
(a) Borrower may submit to Lender up to two (2) requests
for increases in the Maximum Credit hereunder;
(b) Each request shall be made in the form of a joint
written request by Borrower to Lender and by US Borrower to Congress (Central)
requesting an aggregate of US$10,000,000 of increases in the US Dollar amount
used to calculate the Maximum Credit hereunder and/or the US Maximum Credit;
provided, however, in the case of any requested increase(s) of the US Maximum
Credit, that the US Maximum Credit as so increased shall not at any time exceed
US $20,000,000;
(c) Each request received by Lender in accordance with
this Section 2.4 shall become effective as to Borrower on the fifth (5th)
business day following the date of Lender's receipt of such request; provided,
that such request shall not become effective for any purpose hereunder:
<PAGE> 22
(i) if, upon the otherwise effective date of such
requested increase, any Event of Default, or any condition or event
that, with notice or passage of time, or both, would constitute an
Event of Default, shall then exist or shall have occurred and be then
continuing, or
(ii) during the final sixty (60) days of the
initial term or any renewal year hereunder, if Lender has given notice
of non-renewal to Borrower as permitted under Section 12.1(a) hereof,
or
(iii) if such request would otherwise take effect
after Borrower has given notice of non-renewal or termination as
permitted in Section 12.1(a) or (c) hereof; and
(d) upon the effective date of each increase in the
Maximum Credit under Section 2.4, Borrower shall pay to Lender (or Lender may,
at its option, charge directly to Borrower's Revolving Loan account) a fee
equal to three-quarters of one (3/4%) percent of the amount of such increase,
which amount shall be deemed earned in full as of such effective date.
SECTION 3. INTEREST AND FEES
3.1 Interest.
(a) Borrower shall pay to Lender interest at the Interest
Rate (i) on the outstanding principal amount of the Loans and, (ii) except to
the extent expressly otherwise provided herein as to certain fees, costs,
expenses and other charges, on all other non-contingent Obligations. All
interest accruing hereunder on and after the date of any Event of Default or
termination or non-renewal hereof shall be payable on demand.
(b) Interest shall be payable by Borrower to Lender monthly
in arrears not later than the first day of each calendar month and shall be
calculated on the basis of a three hundred sixty-five (365) day year in the
case of Canadian Prime Rate Loans, and actual days elapsed. The interest rate
on non-contingent Obligations (other than Eurodollar Rate Loans) shall increase
or decrease by an amount equal to each increase or decrease in the Canadian
Prime Rate effective on the first day of the month after any change in such
Prime Rate is announced. The increase or decrease shall be based on the
Canadian Prime Rate in effect on the last day of the month in which any such
change occurs. In no event shall charges constituting interest payable by
Borrower to Lender exceed the maximum amount or the rate permitted under any
applicable law or regulation, and if any such part or provision of this
Agreement is in contravention of any such law or regulation, such part or
provision shall be deemed amended to conform thereto.
(c) For purposes of disclosure under the Interest Act
(Canada), where interest is calculated pursuant hereto at a rate based upon a
365 day year (the "First Rate"), it is hereby agreed that the rate or
percentage of interest on a yearly basis is equivalent to such First Rate
multiplied by the actual number of days in the year divided by 365.
(d) Notwithstanding the provisions of this Section 3 or any
other provision of this Agreement, in no event shall the aggregate "interest"
(as that term is defined in Section 347 of the Criminal Code (Canada)) exceed
the effective annual rate of interest on the "credit advanced" (as defined
<PAGE> 23
therein) lawfully permitted under Section 347 of the Criminal Code (Canada).
The effective annual rate of interest shall be determined in accordance with
generally accepted actuarial practices and principles over the term of the
applicable Loan, and in the event of a dispute, a certificate of a Fellow of
the Canadian Institute of Actuaries appointed by Lender will be conclusive for
the purposes of such determination.
(e) A certificate of an authorized signing officer of Lender
as to each amount and/or each rate of interest payable hereunder from time to
time shall be conclusive evidence of such amount and of such rate, absent
manifest error.
(f) For greater certainty, whenever any amount is payable
under this Agreement or any Financing Agreement by Borrower as interest or as a
fee which requires the calculation of an amount using a percentage per annum,
each party to this Agreement acknowledges and agrees that such amount shall be
calculated as of the date payment is due without application of the "deemed
reinvestment principle" or the "effective yield method". As an example, when
interest is calculated and payable monthly, the rate of interest payable per
month is 1/12 of the stated rate of interest per annum.
3.2 Closing Fee. Borrower shall pay to Lender as a closing fee the
amount of the Canadian Dollar Equivalent of US$25,000, which shall be fully
earned as of and payable on the date hereof.
3.3 Unused Line Fee. Borrower shall pay to Lender monthly an unused
line fee at a rate equal to three-eighths of one (3/8%) percent per annum
calculated upon the amount (if any) by which eighty (80%) percent of the
Maximum Credit exceeds the average daily principal balance of the outstanding
Revolving Loans and Letter of Credit Accommodations during the immediately
preceding month (or part thereof) while this Agreement is in effect and for so
long thereafter as any of the Obligations are outstanding, which fee shall be
payable on the first day of each month in arrears.
3.4 Servicing Fee. Borrower shall pay to Lender monthly a servicing
fee in an amount equal to the Canadian Dollar Equivalent of US$666.67 in
respect of Lender's services for each month (or part thereof) while this
Agreement remains in effect and for so long thereafter as any of the
Obligations are outstanding, which fee shall be fully earned as of and payable
in advance on the date hereof and on the first day of each month hereafter.
3.5 Payments. Unless otherwise specified by Lender, all interest,
fees and other payments by Borrower hereunder shall be in the currency in which
such Obligations are denominated.
SECTION 4. CONDITIONS PRECEDENT
4.1 Conditions Precedent to Initial Loans and Letter of Credit
Accommodations. Each of the following is a condition precedent to Lender making
the initial Loans and providing the initial Letter of Credit Accommodations
hereunder:
(a) Lender shall have received, in form and substance
satisfactory to Lender, all releases, terminations and such other documents as
Lender may request to evidence and effectuate the termination by the existing
lender or lenders to Borrower, US Borrower and any of their subsidiaries of
their respective financing arrangements with Borrower, US Borrower and any of
their subsidiaries and the termination and release by it or them, as the case
may be, of any interest in and to any assets and properties of Borrower, US
Borrower and each subsidiary, duly authorized, executed and delivered by it
<PAGE> 24
or each of them including, but not limited to, (i) financing change statements
and UCC termination statements providing for the discharge and/or termination
of all financing statements previously filed by it or any of them or their
predecessors, as secured party and Borrower, US Borrower or any subsidiary, as
debtor and (ii) satisfactions and discharges of any mortgages, deeds of trust
or deeds to secure debt by Borrower, US Borrower or any subsidiary in favour of
such existing lender or lenders, in form acceptable for recording in the
appropriate government office;
(b) Lender shall have received evidence (including any
releases of any other liens or security interests in the Collateral required by
Lender), in form and substance satisfactory to Lender, that Lender has valid
perfected and first priority security interests in and liens upon the
Collateral and any other property which is intended to be security for the
Obligations or the liability of any Obligor in respect thereof, subject only to
the security interests and liens permitted herein or in the other Financing
Agreements;
(c) all requisite corporate action and proceedings in
connection with this Agreement and the other Financing Agreements shall be
satisfactory in form and substance to Lender, and Lender shall have received
all information and copies of all documents, including records of requisite
corporate action and proceedings which Lender may have requested in connection
therewith, such documents where requested by Lender or its counsel to be
certified by appropriate corporate officers or governmental authorities;
(d) no Material Adverse Change shall have occurred since the
date of Lender's latest field examination;
(e) Lender shall have received a Borrowing Base
Certificate setting forth the Revolving Loans available to Borrower as of the
end of Borrower's fiscal month ended on or about October 31, 1997, as completed
in a manner satisfactory to Lender and duly authorized, executed and delivered
on behalf of Borrower;
(f) Lender shall have completed a field review of the Records
and such other information with respect to the Collateral as Lender may require
to determine the amount of Revolving Loans available to Borrower, the results
of which shall be satisfactory to Lender, not more than three (3) business days
prior to the date hereof;
(g) Lender shall have received, in form and substance
satisfactory to Lender, all consents, waivers, acknowledgments and other
agreements from third persons which Lender may deem necessary or desirable in
order to permit, protect and perfect its security interests in and liens upon
the Collateral or to effectuate the provisions or purposes of this Agreement
and the other Financing Agreements, including acknowledgements by lessors,
mortgagees and warehousemen of Lender's security interests in the Collateral,
waivers by such persons of any security interests, liens or other claims by
such persons to the Collateral and agreements permitting Lender access to, and
the right to remain on, the premises to exercise its rights and remedies and
otherwise deal with the Collateral;
(h) Lender shall have received evidence of insurance and loss
payee endorsements required hereunder and under the other Financing Agreements,
in form and substance satisfactory to Lender, and certificates of insurance
policies and/or endorsements naming Lender as loss payee;
(i) the Combined Excess Availability, as determined by Lender
as at the date hereof, shall not be less than US$5,000,000 after giving effect
to the initial Loans made or to be made and Letter
<PAGE> 25
of Credit Accommodations issued or to be issued in connection with the initial
transactions hereunder and after giving effect to the initial US Loans made or
to be made and the US L/C Accommodations issued or to be issued by Congress
(Central) under the US Loan Agreement in connection with the initial
transactions hereunder and thereunder;
(j) Lender shall have received evidence that Borrower has
provided each Governmental Authority to whose jurisdiction it or any of its
subsidiaries subject, with all required notices (if any) with respect to the
Financing Agreements, the US Financing Agreements, and all Obligations and
Collateral hereunder and thereunder;
(k) Lender shall have received, in form and substance
satisfactory to Lender, such opinion letters of counsel to Borrower and the
Obligors with respect to the Financing Agreements and such other matters as
Lender may request including, without limitation, (i) the status of the
Obligations of US Borrower to Lender and Congress (Central) as "Senior
Indebtedness" and "Designated Senior Indebtedness" under the indenture
governing the Subordinated Notes, and (ii) the non-contravention of any
provision of the Subordinated Note Agreements by reason of the execution,
delivery or performance of the Financing Agreements and the US Financing
Agreements (including, without limitation, the loans and other financial
accommodations and guarantees hereunder and thereunder and the granting of
liens and security interests as herein and therein provided);
(l Lender shall have received, in form and substance
satisfactory to Lender, a guarantee of payment by each Guarantor in favour of
Lender of all Obligations secured by a first and only security interest in
favor of Lender granted by each Guarantor in all of its existing and future
assets (except real property);
(m the other Financing Agreements and all instruments and
documents hereunder and thereunder shall have been duly executed and delivered
to Lender, in form and substance satisfactory to Lender;
(n the US Financing Agreements, and all instruments and
documents thereunder shall have been duly executed and delivered by the US
Borrower and Congress (Central), in form and substance satisfactory to Congress
(Central), and all of the conditions precedent to the initial Loans under the
US Loan Agreement contained in Sections 4.1(a) through 4.1(m) thereof, shall
have been fully satisfied.
4.2 Conditions Precedent to All Loans and Letter of Credit
Accommodations. Each of the following is an additional condition precedent to
Lender making Loans and/or providing Letter of Credit Accommodations to
Borrower, including the initial Loans and Letter of Credit Accommodations and
any future Loans and Letter of Credit Accommodations:
(a all representations and warranties contained herein and
in the other Financing Agreements shall be true and correct in all material
respects with the same effect as though such representations and warranties had
been made on and as of the date of the making of each such Loan or providing
each such Letter of Credit Accommodation and after giving effect thereto
(except as to those representations and warranties expressly made as of a
specified earlier date, in which case, they shall be true and correct as of
such earlier date); and
(b no Event of Default and no event or condition which, with
notice or passage of time or both, would constitute an Event of Default, shall
exist or have occurred and be continuing on and as of
<PAGE> 26
the date of the making of such Loan or providing each such Letter of Credit
Accommodation and after giving effect thereto.
SECTION 5. INTENTIONALLY DELETED.
SECTION 6. COLLECTION AND ADMINISTRATION
6.1 Borrower's Loan Account. Lender shall maintain one or more loan
account(s) on its books in which shall be recorded (a) all Loans, Letter of
Credit Accommodations and other Obligations and the Collateral, (b) all
payments made by or on behalf of Borrower and (c) all other appropriate debits
and credits as provided in this Agreement, including fees, charges, costs,
expenses and interest. All entries in the loan account(s) shall be made in
accordance with Lender's customary practices as in effect from time to time.
6.2 Statements. Lender shall render to Borrower each month a
statement setting forth the balance in the Borrower's loan account(s)
maintained by Lender for Borrower pursuant to the provisions of this Agreement,
including principal, interest, fees, costs and expenses. Each such statement
shall be subject to subsequent adjustment by Lender but shall, absent manifest
errors or omissions, be considered correct and deemed accepted by Borrower and
conclusively binding upon Borrower as an account stated except to the extent
that Lender receives a written notice from Borrower of any specific exceptions
of Borrower thereto within thirty (30) days after the date such statement has
been mailed by Lender. Until such time as Lender shall have rendered to
Borrower a written statement as provided above, the balance in Borrower's loan
account(s) shall be presumptive evidence of the amounts due and owing to Lender
by Borrower.
6.3 Collection of Accounts.
(a Borrower shall establish and maintain, at its expense,
blocked accounts or lockboxes and related blocked accounts (in either case,
"Blocked Accounts"), as Lender may specify, and Lender may establish and
maintain a bank account of Lender ("Payment Account") with such bank as is
acceptable to Lender, into which Borrower shall, in accordance with Lender's
instructions, promptly deposit and direct its account debtors that remit
payments by electronic funds transfers to directly remit, all payments on
Accounts and all payments constituting proceeds of Inventory or other
Collateral in the identical form in which such payments are made, whether by
cash, cheque or other manner. The banks at which the Blocked Accounts are
established shall enter into an agreement, in form and substance satisfactory
to Lender, providing that all items received or deposited in the Blocked
Accounts are the property of Lender, that the depository bank has no lien upon,
or right to setoff against, the Blocked Accounts, the items received for
deposit therein, or the funds from time to time on deposit therein and that the
depository bank will wire, or otherwise transfer, in immediately available
funds, on a daily basis, at such time as Lender shall direct, all funds
received or deposited into the Blocked Accounts to the Payment Account or such
other bank account of Lender as Lender may from time to time designate for such
purpose. Lender shall instruct the depository banks at which the Blocked
Accounts are maintained to transfer the funds on deposit in the Blocked
Accounts to such operating bank account of Borrower as Borrower may specify in
writing to Lender until such time as Lender shall notify the depository bank
otherwise. Lender may 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 at any time that any of the following
shall occur or exist: (i) an Event of Default, or event which with notice or
passage of time or both would constitute an Event of Default, shall exist or
have occurred, or (ii) Borrower shall have failed to deliver any Borrowing Base
Certificate in accordance with the terms hereof
<PAGE> 27
when due hereunder or within two (2) Business Days thereafter, or (iii) upon
Lender's good faith belief that any information contained in any Borrowing Base
Certificate is incomplete, inaccurate or misleading, or (iv) Combined Excess
Availability shall at any time be less than US$5,000,000, or (v) the US Dollar
Equivalent of the aggregate outstanding principal amount of Loans and Letter of
Credit Accommodations, plus the aggregate outstanding principal amount of
"Loans" and "Letter of Credit Accommodations" under the US Loan Agreement shall
equal or exceed US$15,000,000. Borrower agrees that all payments made to such
Blocked Accounts or Payment Account or other funds received and collected by
Lender, whether on the Accounts or as proceeds of Inventory or other Collateral
or otherwise, shall be the property of Lender to be applied in payment of the
Obligations.
(b For purposes of calculating the amount of the Loans
available to Borrower, such payments will be applied (conditional upon final
collection) to the Obligations on the Business Day of receipt by Lender of
immediately available funds in the Payment Account provided such payments and
notice thereof are received in accordance with Lender's usual and customary
practices as in effect from time to time and within sufficient time to credit
Borrower's loan account on such day, and if not, then on the next business day.
For the purposes of calculating interest on the Obligations, such payments or
other funds received will be applied (conditional upon final collection) to the
Obligations on the date of receipt of immediately available funds by Lender in
the Payment Account provided such payments or other funds and notice thereof
are received in accordance with Lender's usual and customary practices as in
effect from time to time and within sufficient time to credit Borrower's loan
account on such day, and if not, then on the next Business Day.
(c Borrower and all of its subsidiaries, employees or agents
shall, acting as trustee for Lender, receive, as the property of Lender, any
monies, cheques, notes, drafts or any other payment relating to and/or proceeds
of Accounts or other Collateral which come into their possession or under their
control and immediately upon receipt thereof, shall deposit or cause the same
to be deposited in the Blocked Accounts or remit the same or cause the same to
be remitted, in kind, to Lender. In no event shall the same be commingled with
Borrower's own funds. Borrower agrees to reimburse Lender on demand for any
amounts owed or paid to any bank at which a Blocked Account or Payment Account
is established or any other bank or person involved in the transfer of funds to
or from the Blocked Accounts or the Payment Account arising out of Lender's
payments to or indemnification of such bank or person. The obligation of
Borrower to reimburse Lender for such amounts pursuant to this Section 6.3
shall survive the termination or non-renewal of this Agreement.
6.4 Payments. All Obligations shall be payable to the Payment Account
as provided in Section 6.3 or such other place as Lender may designate from
time to time. Lender may apply payments received or collected from Borrower or
for the account of Borrower (including the monetary proceeds of collections or
of realization upon any Collateral) to such of the Obligations, whether or not
then due, in such order and manner as Lender determines. Payments and
collections received in any currency other than Canadian Dollars will be
accepted and/or applied at the sole discretion of Lender. At Lender's option,
all principal, interest, fees, costs, expenses and other charges provided for
in this Agreement or the other Financing Agreements may be charged directly to
the loan account(s) of Borrower; provided, however, that so long as the
outstanding principal amount of the Loans is zero ($0), Lender will notify
Borrower of any fees, costs, expenses or other charges due under this
Agreement, and will not debit the Revolving Loan account of Borrower for such
fees, costs, expenses and other charges if Lender receives payment thereof from
Borrower within five (5) days after Borrower is so notified, and, in addition,
if payment is so timely received by Lender, Lender agrees that no interest will
accrue on the fees, costs, expenses or other charges so paid; provided,
further, that in the case of the monthly servicing fee under Section 3.5, (i)
such fee may be charged to the Revolving Loan account of Borrower and interest
shall
<PAGE> 28
accrue thereon unless payment of such fee is received by Lender on or before
the fifth (5th) day of each month, and (ii) Lender need not give Borrower any
notice under the preceding proviso, or otherwise. Borrower shall make all
payments to Lender on the Obligations free and clear of, and without deduction
or withholding for or on account of, any setoff, counterclaim, defense, duties,
taxes, levies, imposts, fees, deductions, withholding, restrictions or
conditions of any kind. If after receipt of any payment of, or proceeds of
Collateral applied to the payment of, any of the Obligations, Lender is
required to surrender or return such payment or proceeds to any Person for any
reason, then the Obligations intended to be satisfied by such payment or
proceeds shall be reinstated and continue and this Agreement shall continue in
full force and effect as if such payment or proceeds had not been received by
Lender. Borrower shall be liable to pay to Lender, and does hereby indemnify
and hold Lender harmless for the amount of any payments or proceeds surrendered
or returned. This Section 6.4 shall remain effective notwithstanding any
contrary action which may be taken by Lender in reliance upon such payment or
proceeds. This Section 6.4 shall survive the payment of the Obligations and
the termination or non-renewal of this Agreement.
6.5 Authorization to Make Loans. Lender is authorized to make the
Loans and provide the Letter of Credit Accommodations based upon telephonic or
other instructions received from anyone purporting to be an officer of Borrower
or other authorized person or, at the discretion of Lender, if such Loans are
necessary to satisfy any Obligations. All requests for Loans or Letter of
Credit Accommodations hereunder shall specify the date on which the requested
advance is to be made or Letter of Credit Accommodations established (which day
shall be a business day) and the amount of the requested Loan. Requests
received after 12 noon Toronto time on any day shall be deemed to have been
made as of the opening of business on the immediately following business day.
All Loans and Letter of Credit Accommodations under this Agreement shall be
conclusively presumed to have been made to, and at the request of and for the
benefit of, Borrower when deposited to the credit of Borrower or otherwise
disbursed or established in accordance with the instructions of Borrower or in
accordance with the terms and conditions of this Agreement.
6.6 Use of Proceeds. All Loans made or Letter of Credit
Accommodations provided by Lender to Borrower pursuant to the provisions hereof
shall be used by Borrower only for general operating, working capital and other
proper corporate purposes and uses of Borrower not otherwise prohibited by the
terms hereof or by the Subordinated Note Agreements or by any other agreement
or rule or regulation of any Gaming Authority or other Governmental Authority
to which Borrower or any subsidiary is a party or by which or to which Borrower
or any subsidiary or any of their property is bound or is subject.
SECTION 7. COLLATERAL REPORTING AND COVENANTS
7.1 Collateral Reporting.
(a Borrower shall provide, or cause to be provided to, Lender with
the following documents in a form satisfactory to Lender:
(i as soon as available, but in any event, by no later
than the seventh (7th) day after the end of each
fiscal month of Borrower, a Borrowing Base
Certificate setting forth Borrower's calculation of
the Revolving Loans and Letter of Credit
Accommodations available to Borrower pursuant to the
terms and conditions contained herein (x) with
respect to Accounts, as of the last Business Day of
the month ended most recently prior to the due date
thereof and (y) with respect to Inventory, as of the
last business day of the month prior to the month
ended most
<PAGE> 29
recently prior to the due date thereof and (y) with
respect to Inventory, as of the last business day of
the month prior to the month ended most recently
prior to such duedate, each such Borrowing Base
Certificate to be duly completed and executed by the
chief financial officer or other appropriate
financial officer acceptable to Lender, together with
all schedules required pursuant to the terms of the
Borrowing Base Certificate duly completed; provided,
that, (I) for purposes of clause (y) of Section
7.1(a)(i), upon Borrower's implementation of a
perpetual Inventory reporting system, each monthly
Borrowing Base Certificate delivered under this
Section shall be prepared with respect to Inventory
as of the last business day of the month ended most
recently prior to the due date of such Borrowing Base
Certificate, and (II) prior to the implementation of
a perpetual Inventory reporting system, upon Lender's
request, Borrower shall update the information set
forth in each monthly Borrowing Base Certificate with
respect to Inventory as of the last business day of
the month ended most recently prior to the due date
thereof, as soon as such information is available
(but in any event such information shall be contained
in the next succeeding Borrowing Base Certificate);
provided, further that, without limiting any other
rights of Lender, upon Lender's request, Borrower
shall provide Lender on a weekly basis with a
schedule of sales, collections received and credits
issued and, on a weekly basis to the extent
available, inventory reports, in each case under this
proviso upon and after any of the following:
(A an Event of Default or event which with
notice or passage of time or both would
constitute an Event of Default, shall exist
or have occurred and be continuing or
(B Borrower shall have failed to deliver any
Borrowing Base Certificate in accordance with
the terms hereof when due or within two (2)
Business Days thereafter, or
(C upon Lender's good faith belief that any
information contained in any Borrowing Base
Certificate is incomplete, inaccurate or
misleading, or
(D the Combined Excess Availability shall be
less than US$5,000,000, or
(E the US Dollar Equivalent of the aggregate
outstanding principal amount of Loans and
Letter of Credit Accommodations, plus the
aggregate outstanding principal amount of
"Loans" and "Letter of Credit Accommodations"
under the US Financing Agreements shall equal
or exceed US$15,000,000;
(ii on a monthly basis, to the extent not included in a
schedule to the monthly Borrowing Base Certificate or
otherwise delivered to Lender hereunder,
(A perpetual inventory reports, to the extent
available, and inventory reports by category
and location,
(B agings of accounts receivable, and
(C agings of accounts payable;
<PAGE> 30
(iii upon Lender's request,
(A copies of customer statements and credit
memos, remittance advices and reports, and
copies of deposit slips and bank statements,
(B copies of shipping and delivery documents,
and
(C copies of purchase orders, invoices and
delivery documents for Inventory and
Equipment acquired by Borrower; and
(iv such other reports as to the Collateral as Lender
shall reasonably request from time to time.
(b Nothing contained in any Borrowing Base Certificate shall be
deemed to limit, impair or otherwise affect the rights of
Lender contained herein and in the event of any conflict or
inconsistency between the calculation of the Revolving Loans
and Letter of Credit Accommodations available to Borrower as
set forth in any Borrowing Base Certificate and as determined
by Lender, the determination of Lender in good faith
(including the determination in good faith of Letter of Credit
Accommodations available based on the provisions hereof) shall
govern and be conclusive and binding upon Borrower. Without
limiting the foregoing, Borrower shall furnish to Lender any
information which Lender may reasonably request regarding the
determination and calculation of any of the amounts set forth
in the Borrowing Base Certificate. If any of Borrower's
records or reports of the Collateral are prepared or
maintained by an accounting service, contractor, shipper or
other agent, Borrower hereby irrevocably authorizes such
service, contractor, shipper or agent to deliver such records,
reports and related documents to Lender and to follow Lender's
instructions with respect to further services at any time that
an Event of Default exists or has occurred and is continuing.
7.2 Accounts Covenants.
(a In addition to Borrower's other reporting Obligations
hereunder, Borrower shall notify Lender promptly and on a separate basis of:
(i) any material delay in Borrower's performance of any of its obligations to
any account debtor or the assertion of any claims, offsets, defenses or
counterclaims by any account debtor, or any disputes with account debtors, or
any settlement, adjustment or compromise thereof involving an amount greater
than the Canadian Dollar Equivalent of US$37,500, individually, or greater
than the Canadian Dollar Equivalent of US$187,500, in the aggregate, (ii) all
material adverse information relating to the financial condition of any account
debtor obligated for Accounts in excess of the Canadian Dollar Equivalent of
US$37,500, and (iii) any event or circumstance which, to Borrower's knowledge
would cause Lender to consider any then existing Accounts involving an amount
greater than the Canadian Dollar Equivalent of US$37,500, individually or
greater than the Canadian Dollar Equivalent of US$187,500, in the aggregate, to
no longer constitute Eligible Accounts. No credit, discount, allowance or
extension or agreement for any of the foregoing shall be granted to any account
debtor without Lender's consent, except those granted in the ordinary course of
Borrower's business in accordance with practices and policies previously
disclosed in writing to Lender, and which are reported to Lender in accordance
with this Agreement. So long as no Event of Default exists or has occurred and
is continuing, Borrower shall settle, adjust or compromise any claim, offset,
counterclaim or dispute with any account debtor. At any time that an Event of
Default exists or has occurred and is
<PAGE> 31
continuing, Lender shall, at its option, have the exclusive right to settle,
adjust or compromise any claim, offset, counterclaim or dispute with account
debtors or grant any credits, discounts or allowances with respect thereto in
good faith and on a commercially reasonable basis.
(b Without limiting the obligation of Borrower to deliver
any other information to Lender, Borrower shall promptly and separately report
to Lender any return of Inventory by any one account debtor if the inventory so
returned in such case has a value in excess of the Canadian Dollar Equivalent
of US$37,500. At any time that Inventory is returned, reclaimed or
repossessed, the Account (or portion thereof) which arose from the sale of such
returned, reclaimed or repossessed Inventory shall not be deemed an Eligible
Account. In the event any account debtor returns Inventory when an Event of
Default exists or has occurred and is continuing, Borrower shall, upon Lender's
request, (i) hold the returned Inventory in trust for Lender, (ii) segregate
all returned Inventory from all of its other property, (iii) dispose of the
returned Inventory solely according to Lender's instructions, and (iv) not
issue any credits, discounts or allowances with respect thereto without
Lender's prior written consent.
(c With respect to each Account: (i) the amounts shown on
any invoice delivered to Lender or schedule thereof delivered to Lender shall
be true and complete, (ii) no payments shall be made thereon except payments
made to one of the Blocked Accounts, (iii) there shall be no setoffs,
deductions, contras, defenses, counterclaims or disputes existing or asserted
with respect thereto, other than those ordinary course deductions and
allowances reflected on the face of the invoice evidencing such Account and
reflected as a deduction in computing and reporting the net amount of the
affected Account in the Borrowing Base Certificates and all other Collateral
reports delivered in accordance with this Agreement with respect to Accounts,
and (iv) none of the transactions giving rise thereto will violate any
applicable federal or provincial laws or regulations in any manner that does
result in, or could reasonably be expected to result in, a Material Adverse
Effect, all documentation relating thereto will be legally sufficient under
such laws and regulations and all such documentation will be legally
enforceable in accordance with its terms.
(d Lender shall have the right at any time or times, in
Lender's name or in the name of a nominee of Lender, to verify the validity,
amount or any other matter relating to any Account or other Collateral, by
mail, telephone, facsimile transmission or otherwise.
(e Borrower shall deliver or cause to be delivered to
Lender, with appropriate endorsement and assignment, with full recourse to
Borrower, all chattel paper and instruments which Borrower now owns or may at
any time acquire immediately upon Borrower's receipt thereof, except as Lender
may otherwise agree.
(f Lender may, at any time or times that an Event of Default
exists or has occurred and is continuing, (i) notify any or all account debtors
that the Accounts have been assigned to Lender and that Lender has a security
interest or lien therein and Lender may direct any or all account debtors to
make payment of Accounts directly to Lender, (ii) extend the time of payment
of, compromise, settle or adjust for cash, credit, return of merchandise or
otherwise, and upon any terms or conditions, any and all Accounts or other
obligations included in the Collateral and thereby discharge or release the
account debtor or any other party or parties in any way liable for payment
thereof without affecting any of the Obligations, (iii) demand, collect or
enforce payment of any Accounts or such other obligations, but without any duty
to do so, and Lender shall not be liable for its failure to collect or enforce
the payment thereof nor for the negligence of its agents or attorneys with
respect thereto and (iv) take whatever other action Lender may in good faith
deem necessary or desirable for the protection of its interests. At any time
that an Event of Default exists or has occurred and is continuing, at Lender's
request, all invoices
<PAGE> 32
and statements sent to any account debtor shall state that the Accounts and
such other obligations have been assigned to Lender and are payable directly
and only to Lender and Borrower shall deliver to Lender such originals of
documents evidencing the sale and delivery of goods or the performance of
services giving rise to any Accounts as Lender may require.
7.3 Inventory Covenants. With respect to the Inventory: (a) Borrower
shall at all times maintain inventory records reasonably satisfactory to
Lender, keeping correct and accurate records itemizing and describing the kind,
type, quality and quantity of Inventory, Borrower's cost therefor and
withdrawals therefrom and additions thereto; (b) Borrower shall, at its sole
cost and expense, conduct a physical count of the Inventory at least once
during each twelve (12) month period after the date hereof, and up to an
additional three (3) times during each twelve (12) month period as Lender may
request on or after an Event of Default, and at any other time or times as
Lender may request at Lender's sole cost and expense, and promptly following
such physical inventory shall supply Lender with a report in the form and with
such specificity as may be reasonably satisfactory to Lender concerning such
physical count; (c) Borrower shall not remove any Inventory from the locations
set forth or permitted herein, without the prior written consent of Lender,
except for sales of Inventory in the ordinary course of Borrower's business and
except to move Inventory directly from one location set forth or permitted
herein to another such location; (d upon Lender's request, Borrower shall, at
its sole cost and expense, no more than once in any twelve (12) month period,
and up to an additional three (3) times during each twelve (12) month period at
any time or times as Lender may request on or after an Event of Default, and at
any other time or times as Lender may request at Lender's sole cost and
expense, deliver or cause to be delivered to Lender written reports or
appraisals as to the Inventory in form, scope and methodology acceptable to
Lender and by an appraiser acceptable to Lender, addressed to Lender or upon
which Lender is expressly permitted to rely; (e) Borrower shall produce, use,
store and maintain the Inventory with all reasonable care and caution and in
accordance with applicable standards of any insurance and in conformity with
applicable laws; (f) Borrower assumes all responsibility and liability arising
from or relating to the production, use, sale or other disposition of the
Inventory; (g) Borrower shall not sell Inventory to any customer on approval,
or any other basis which entitles the customer to return or may obligate
Borrower to repurchase such Inventory, except for inventory repurchase
agreements permitted under Section 9.9(e) hereof; (h) Borrower shall keep the
Inventory in good and marketable condition; and (i) Borrower shall not, without
prior written notice to Lender, acquire or accept any Inventory on consignment
or approval.
7.4 Equipment Covenants. With respect to the Equipment: (a) upon
Lender's request, Borrower shall, at its sole cost and expense, once during
each twelve (12) month period after the date hereof, and up to an additional
three times during each twelve (12) month period as Lender may request on or
after an Event of Default, or, at Lender's sole cost and expense, at any other
time or times, deliver or cause to be delivered to Lender written reports or
appraisals as to the orderly liquidation value of the Equipment in form, scope
and methodology acceptable to Lender and by an appraiser acceptable to Lender;
(b) Borrower shall keep the Equipment in good order, repair, running and
marketable condition (ordinary wear and tear excepted); (c) Borrower shall use
the Equipment in accordance with applicable standards of any insurance and in
conformity with all applicable laws; (d) Borrower shall not remove any
Equipment from the locations set forth or permitted herein, except to the
extent necessary to have any Equipment repaired or maintained in the ordinary
course of the business of Borrower or to move Equipment directly from one
location set forth or permitted herein to another such location and except for
the movement of motor vehicles used by or for the benefit of Borrower in the
ordinary course of business; (e) the Equipment is now and shall remain personal
property and Borrower shall not permit any of the Equipment to be or become a
part of or affixed to real property; and (f) Borrower assumes all
responsibility and liability arising from the use of the Equipment.
<PAGE> 33
7.5 Power of Attorney. Borrower hereby irrevocably designates and
appoints Lender (and all persons designated by Lender) as Borrower's true and
lawful attorney-in-fact, and authorizes Lender, in Borrower's or Lender's name,
to: (a) at any time an Event of Default or event which with notice or passage
of time or both would constitute an Event of Default exists or has occurred and
is continuing (i) demand payment on Accounts or other proceeds of Inventory or
other Collateral, (ii) enforce payment of Accounts by legal proceedings or
otherwise, (iii) exercise all of Borrower's rights and remedies to collect any
Account or other Collateral, (iv) sell or assign any Account upon such terms
and for such amount as are commercially reasonable, and at such time or times
as the Lender deems advisable, (v) settle, adjust, compromise, extend or renew
an Account, (vi) discharge and release any Account, (vii) prepare, file and
sign Borrower's name on any proof of claim in bankruptcy or other similar
document against an account debtor, (viii) notify the post office authorities
to change the address for delivery of Borrower's mail to an address designated
by Lender, and open and dispose of all mail addressed to Borrower, and (ix) do
all acts and things which are necessary, in Lender's determination, to fulfil
Borrower's obligations under this Agreement and the other Financing Agreements,
and (b) at any time after one of the events referred to in clauses (i) through
(iv) of Section 6.3(a) has occurred, to (i) take control in any manner of any
item of payment or proceeds thereof, (ii) have access to any lockbox or postal
box into which Borrower's mail is deposited, (iii) endorse Borrower's name upon
any items of payment or proceeds thereof and deposit the same in the Lender's
account for application to the Obligations and (iv) endorse Borrower's name
upon any chattel paper, document, instrument, invoice, or similar document or
agreement relating to any Account or any goods pertaining thereto or any other
Collateral and (c) at any time to (i) sign Borrower's name on any verification
of Accounts and notices thereof to account debtors and (ii) execute in
Borrower's name and file any PPSA or other financing statements or amendments
thereto. Borrower hereby releases Lender and its officers, employees and
designees from any liabilities arising from any act or acts under this power of
attorney and in furtherance thereof, whether of omission or commission, except
as a result of Lender's own gross negligence or wilful misconduct as determined
pursuant to a final non- appealable order of a court of competent jurisdiction.
7.6 Right to Cure. Lender may, at its option, in good faith, (a) cure
any default by Borrower under any agreement with a third party or pay or bond
on appeal any judgment entered against Borrower, if, in Lender's commercially
reasonable judgment, such action is necessary or appropriate to preserve,
protect, insure or maintain the Collateral and the rights of Lender with
respect thereto, (b) discharge taxes, liens, security interests or other
encumbrances at any time levied on or existing with respect to the Collateral,
except any of the foregoing the validity of which is being contested in good
faith by appropriate proceedings, diligently pursued by Borrower and as to
which no enforcement action has been commenced or taken against any Collateral,
and (c) pay any amount, incur any expense or perform any act which, in Lender's
commercially reasonable judgment, is necessary or appropriate to preserve,
protect, insure or maintain the Collateral and the rights of Lender with
respect thereto. Lender may add any amounts so expended to the Obligations and
charge Borrower's account therefor, such amounts to be repayable by Borrower on
demand. Lender shall be under no obligation to effect such cure, payment or
bonding and shall not, by doing so, be deemed to have assumed any obligation or
liability of Borrower. Any payment made or other action taken by Lender under
this Section shall be without prejudice to any right to assert an Event of
Default hereunder and to proceed accordingly.
7.7 Access to Premises. From time to time as requested by Lender, at
the cost and expense of Borrower, (a) Lender or its designee shall have
complete access to all of Borrower's premises during normal business hours and
after notice to Borrower, or at any time and without notice to Borrower if an
Event of Default exists or has occurred and is continuing, for the purposes of
inspecting, verifying and auditing the Collateral and all of Borrower's books
and records, including the Records, and (b) Borrower shall promptly furnish to
Lender such copies of such books and records or extracts therefrom as Lender
<PAGE> 34
may request, and (c) use during normal business hours such of Borrower's
personnel, equipment, supplies and premises as may be reasonably necessary for
the foregoing and if an Event of Default exists or has occurred and is
continuing for the collection of Accounts and realization of other Collateral;
provided, however, that, prior to an Event of Default, Lender's use of
Borrower's personnel, equipment, supplies and premises as provided in this
Section 7.7 shall be conducted in a reasonable manner with a view to avoiding
unreasonable interference with Borrower's operations.
SECTION 8. REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants to Lender the following (which
shall survive the execution and delivery of this Agreement), the truth and
accuracy of which are a continuing condition of the making of Loans and
providing Letter of Credit Accommodations by Lender to Borrower:
8.1 Corporate Existence, Power and Authority; Subsidiaries. Borrower
is a corporation duly incorporated, validly existing and duly organized under
the laws of its jurisdiction of incorporation and is duly qualified or
registered as a foreign or extra-provincial corporation and in good standing in
all provinces, states or other jurisdictions where the nature and extent of the
business transacted by it or the ownership of assets makes such qualification
necessary, except for those jurisdictions in which the failure to so qualify
has not, individually or in the aggregate, resulted in, and could not
reasonably be expected to result in, a Material Adverse Effect. The execution,
delivery and performance of this Agreement, the other Financing Agreements and
the transactions contemplated hereunder and thereunder are all within
Borrower's corporate powers, have been duly authorized and are not in
contravention of law or the terms of Borrower's certificate of incorporation or
by-laws or any indenture, agreement or undertaking to which Borrower is a party
or by which Borrower or its property are bound, except any such contravention
that, individually or in the aggregate, has not resulted in, and could not
reasonably be expected to result in, a Material Adverse Effect. This Agreement
and the other Financing Agreements constitute legal, valid and binding
Obligations of Borrower enforceable in accordance with their respective terms,
except to the extent enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws generally
affecting creditors' rights generally and by equitable principles (regardless
of whether enforcement is sought in equity or at law). Borrower does not have
any subsidiaries except as set forth on the Information Certificate.
8.2 Financial Statements; No Material Adverse Change. All financial
statements relating to Borrower which have been or may hereafter be delivered
by Borrower to Lender have been prepared in accordance with GAAP and fairly
present the financial condition and the results of operation of Borrower as at
the dates and for the periods set forth therein, subject, however, in the case
of Borrower's interim unaudited financial statements delivered hereunder, to
normal year- end adjustments and the absence of footnotes and formatting of
items as required under GAAP. Except as disclosed in any interim financial
statements furnished by Borrower to Lender prior to the date of this Agreement,
there has been no Material Adverse Change since the date of the most recent
audited financial statements furnished by Borrower to Lender prior to the date
of this Agreement.
8.3 Chief Executive Office; Collateral Locations. The chief executive
office of Borrower and Borrower's Records concerning Accounts are located only
at the address set forth below and its only other places of business and the
only other locations of Collateral, if any, are the addresses set forth in the
Information Certificate, subject to the right of Borrower to establish new
locations in accordance with Section 9.2 below. The Information Certificate
correctly identifies any of such locations which are not owned by Borrower and
sets forth the owners and/or operators thereof and to the best of Borrower's
knowledge, the holders of any mortgages on such locations.
<PAGE> 35
8.4 Priority of Liens; Title to Properties. The security interests
and liens granted to Lender under this Agreement and the other Financing
Agreements constitute valid and perfected first priority liens and security
interests in and upon the Collateral subject only to the liens indicated on
Schedule 8.4 hereto and the other liens permitted under Section 9.8 hereof.
Borrower has good and marketable title to all of its properties and assets
subject to no liens, mortgages, pledges, security interests, hypothecs,
encumbrances or charges of any kind, except those granted to Lender and such
others as are specifically listed on Schedule 8.4 hereto or permitted under
Section 9.8 hereof and except for such defects of title, individually or in the
aggregate, as have not resulted in, and could not, individually or in the
aggregate, be reasonably expected to result in, a Material Adverse Effect. As
to leased real and personal property, Borrower has valid leasehold interests,
which leasehold interest are subject to no liens, mortgages, pledges, security
interests, encumbrances or charges of any kind, except as are specifically
listed on Schedule 8.4 hereto or permitted under Section 9.8 hereof.
8.5 Tax Returns. Borrower has filed, or caused to be filed, in a
timely manner all tax returns, reports and declarations which are required to
be filed by it (without requests for extension except as previously disclosed
in writing to Lender). Borrower has paid or caused to be paid all taxes due
and payable or claimed due and payable in any assessment received by it, except
taxes the validity of which are being contested in good faith by appropriate
proceedings diligently pursued and available to Borrower.
8.6 Litigation. Except as set forth on the Information Certificate,
there is no present investigation by any governmental agency pending, or to the
best of Borrower's knowledge threatened, against or affecting Borrower, its
assets or business and there is no action, suit, proceeding or claim by any
Person pending, or to the best of Borrower's knowledge threatened, against
Borrower or its assets or its business, or against or affecting any
transactions contemplated by this Agreement, which, if adversely determined
against Borrower, could reasonably be expected to result in a Material Adverse
Effect.
8.7 Compliance with Other Agreements and Applicable Laws. Borrower is
not in default under, or in violation of any of the terms of, any agreement,
contract, instrument, lease or other commitment to which it is a party or by
which it or any of its assets are bound and, to Borrower's knowledge, Borrower
is in compliance with all applicable provisions of laws, rules, regulations,
licenses, permits, approvals and orders of any Gaming Authority or other
Governmental Authority, except any such defaults, violations or non-compliance
that, individually or in the aggregate, have not resulted in, and could not
reasonably be expected to result in, a Material Adverse Effect.
8.8 Status of Pension Plans.
Except as set forth on Schedule 8.8 hereto, to the best of the
Borrower's knowledge,
(a The Pension Plans are duly registered under all
applicable provincial pension benefits legislation.
(b All obligations of Borrower (including fiduciary,
funding, investment and administration obligations) required to be performed in
connection with the Pension Plans or the funding agreements therefor have been
performed in a timely fashion. There are no outstanding disputes concerning
the assets held pursuant to any such funding agreement.
<PAGE> 36
(c All contributions or premiums required to be made by
Borrower to the Pension Plans have been made in a timely fashion in accordance
with the terms of the Pension Plans and applicable laws and regulations.
(d All employee contributions to the Pension Plans
required to be made by way of authorized payroll deduction have been properly
withheld by Borrower and fully paid into the Pension Plans in a timely fashion.
(e All reports and disclosures relating to the Pension
Plans required by any applicable laws or regulations have been filed or
distributed in a timely fashion.
(f There have been no improper withdrawals, or
applications of, the assets of any of the Pension Plans.
(g No amount is owing by any of the Pension Plans under
the Income Tax Act (Canada) or any provincial taxation statute.
(h The Pension Plans are fully funded both on an ongoing
basis and on a solvency basis (using actuarial assumptions and methods which
are consistent with the valuations last filed with the applicable governmental
authorities and which are consistent with generally accepted actuarial
principles).
(i Borrower, after diligent enquiry, has neither any
knowledge, nor any grounds for believing, that any of the Pension Plans is the
subject of an investigation, any other proceeding, an action or a claim. There
exists no state of facts which after notice or lapse of time or both could
reasonably be expected to give rise to any such proceeding, action or claim.
8.9 Environmental Compliance.
(a Except as set forth on Schedule 8.9 hereto, to the
best of Borrower's knowledge, Borrower has not generated, used, stored,
treated, transported, manufactured, handled, produced or disposed of any
Hazardous Materials, on or off its premises (whether or not owned by it) in any
manner which at any time violates any applicable Environmental Law or any
license, permit, certificate, approval or similar authorization thereunder, and
the operations of Borrower comply with all Environmental Laws and all licenses,
permits, certificates, approvals and similar authorizations thereunder, except
for any such violations or non-compliance that, individually or in the
aggregate, have not resulted in, and could not reasonably be expected to result
in, a Material Adverse Effect.
(b Except as set forth on Schedule 8.9 hereto, there has
been no investigation, proceeding, complaint, order, directive, claim, citation
or notice by any governmental authority or any other person nor is any pending
or to the best of Borrower's knowledge threatened, with respect to any
non-compliance with or violation of the requirements of any Environmental Law
by Borrower or the release, spill or discharge, threatened or actual, of any
Hazardous Material or the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any Hazardous Materials or any
other environmental, health or safety matter, that affects Borrower or its
business, operations or assets or any properties at which Borrower has
transported, stored or disposed of any Hazardous Materials, except with respect
to any such actual or alleged violation or non-compliance that, individually or
in the aggregate, has not resulted in, and could not reasonably be expected to,
result in a Material Adverse Effect (including, but not limited to, any
Material
<PAGE> 37
Adverse Effect if any such pending or threatened investigation or proceeding
were adversely determined against Borrower).
(c Except as set forth on Schedule 8.9 hereto, Borrower
has no liability (contingent or otherwise) in connection with a release, spill
or discharge, threatened or actual, of any Hazardous Materials or the
generation, use, storage, treatment, transportation, manufacture, handling,
production or disposal of any Hazardous Materials.
(d Except as set forth on Schedule 8.9 hereto, to the
best of Borrower's knowledge, Borrower has all licenses, permits, certificates,
approvals or similar authorizations required to be obtained or filed in
connection with the operations of Borrower under any Environmental Law and all
of such licenses, permits, certificates, approvals or similar authorizations
are valid and in full force and effect, except any of the foregoing where the
failure to obtain, file or maintain any of the foregoing as valid and in full
force and effect, individually or in the aggregate, has not resulted in, and
could not reasonably be expected to result in, a Material Adverse Effect.
8.10 Bank Accounts. All of the deposit accounts, investment accounts
or other accounts in the name of or used by Borrower maintained at any bank or
other financial institution are set forth on Schedule 8.10 hereto, subject to
the right of Borrower to establish new accounts in accordance with Section 9.13
below.
8.11 Accuracy and Completeness of Information. All information
furnished by or on behalf of Borrower in writing to Lender in connection with
this Agreement or any of the other Financing Agreements or any transaction
contemplated hereby or thereby, including all information on the Information
Certificate is true and correct in all material respects on the date as of
which such information is dated or certified and does not omit any material
fact necessary in order to make such information not misleading. No event or
circumstance has occurred that, individually or in the aggregate, has resulted
in, or could reasonably be expected to result in, a Material Adverse Effect,
which has not been fully and accurately disclosed to Lender in writing.
8.12 Survival of Warranties; Cumulative. All representations and
warranties contained in this Agreement or any of the other Financing Agreements
shall survive the execution and delivery of this Agreement and shall be deemed
to have been made again to Lender on the date of each additional borrowing or
other credit accommodation hereunder and shall be conclusively presumed to have
been relied on by Lender regardless of any investigation made or information
possessed by Lender. The representations and warranties set forth herein shall
be cumulative and in addition to any other representations or warranties which
Borrower shall now or hereafter give, or cause to be given, to Lender.
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS
9.1 Maintenance of Existence. Borrower shall at all times preserve,
renew and keep in full, force and effect its corporate existence and rights and
franchises with respect thereto. Borrower shall at all times preserve and
maintain in full force and effect all permits, licenses, trademarks,
tradenames, approvals, authorizations, leases and contracts necessary to carry
on the business as presently or proposed to be conducted, except to the extent
that any failure to do so, individually or in the aggregate, does not, and
could not reasonably be expected to, result in a Material Adverse Effect.
Borrower shall give Lender ten (10) days prior written notice of any proposed
change in its corporate name, which notice shall set
<PAGE> 38
forth the new name and Borrower shall deliver to Lender a certified copy of the
Articles of Amendment of Borrower providing for the name change immediately
following its filing.
9.2 New Collateral Locations. Borrower may open any new location
within Canada provided Borrower (a) gives Lender ten (10) days prior written
notice of the intended opening of any such new location and (b) executes and
delivers, or causes to be executed and delivered, to Lender such agreements,
documents, and instruments as Lender may deem reasonably necessary or desirable
to protect its interests in the Collateral at such location, including PPSA and
other financing statements and such other evidence as Lender may require of the
perfection of Lender's first priority security interests and liens where
required by Lender.
9.3 Compliance with Laws, Regulations, Etc.
(a Borrower shall, at all times, comply with all laws,
rules, regulations, licenses, permits, approvals and orders applicable to it
and duly observe all requirements of any Governmental Authority, including all
statutes, rules, regulations, orders, permits and stipulations relating to
environmental pollution and employee health and safety, including all of the
Environmental Laws, and including all Gaming Laws and all requirements of any
Gaming Authority, except where the failure to so comply does not, individually
or in the aggregate, and could not reasonably be expected to, result in a
Material Adverse Effect.
(b Borrower shall give both oral and written notice to
Lender immediately upon Borrower's receipt of any notice of, or Borrower's
otherwise obtaining knowledge of, (i) the occurrence of any event that could
reasonably be expected to result in any suspension, revocation or limitation on
any Gaming Licenses, or otherwise adversely affect the rights of Borrower to
operate its business in accordance with the Gaming Laws, or any material
liability pursuant to any Gaming Laws or (ii) any investigation, proceeding,
complaint, order, directive, claims, citation or notice with respect to any
non-compliance with or violation of any Gaming Laws by Borrower which, in the
case of clauses (i) and (ii), individually or in the aggregate, does result in,
or could (or, if adversely determined against Borrower, could) reasonably be
expected to result in, a Material Adverse Effect. Borrower shall indemnify and
hold harmless Lender, its directors, officers, employees, agents, invitees,
representatives, successors and assigns, from and against any and all losses,
claims, damages, liabilities, costs, and expenses, including reasonable legal
fees and expenses directly or indirectly arising out of or attributable to the
compliance by Borrower and/or (if applicable) by Lender with any Gaming Laws,
or actual or alleged non-compliance by Borrower with any Gaming Laws, except
that Borrower shall not be required to indemnify Lender for any such losses,
claims, damages, liabilities, costs and expenses resulting from Lender's own
gross negligence or wilful misconduct, as determined by a final non-appealable
judgment of a court of competent jurisdiction.
(c Copies of all environmental surveys, audits, assessments,
feasibility studies and results of remedial investigations shall be promptly
furnished, or caused to be furnished, by Borrower to Lender. Borrower shall
take prompt and appropriate action to respond to any non-compliance with any of
the Environmental Laws (except for any such non-compliance that, individually
or in the aggregate, does not, and could not reasonably be expected to, result
in a Material Adverse Effect) and shall regularly report to Lender on such
response.
(d Borrower shall give both oral and written notice to
Lender immediately upon Borrower's receipt of any notice of, or Borrower's
otherwise obtaining knowledge of, (i) the occurrence of any event involving the
release, spill or discharge, threatened or actual, of any Hazardous Material or
(ii) any investigation, proceeding, complaint, order, directive, claims,
citation or notice with respect to:
<PAGE> 39
(A) any non-compliance with or violation of any Environmental Law by Borrower
or (B) the release, spill or discharge, threatened or actual, of any Hazardous
Material or (C) the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any Hazardous Materials or (D)
any other environmental, health or safety matter, which affects Borrower or its
business, operations or assets or any properties at which Borrower transported,
stored or disposed of any Hazardous Materials, except that such notice to
Lender shall not be required as to any such matter if the actual or potential
liability or claimed liability of Borrower, or actual or potential expenditures
by Borrower as a result of any such matter (including any such matter if
adversely determined against Borrower), individually or in the aggregate, does
not, and could not reasonably be expected to, result in a Material Adverse
Effect.
(e Without limiting the generality of the foregoing,
whenever Lender reasonably determines that there is non-compliance, or any
condition which requires any action by or on behalf of Borrower in order to
avoid any non- compliance, with any Environmental Law, where the failure to so
comply, individually or in the aggregate, does result in, or could reasonably
be expected to result in, a liability or expenditure of in excess of the
Canadian Dollar Equivalent of US$375,000, Borrower shall, at Lender's request
and Borrower's expense: (i) cause an independent environmental engineer
acceptable to Lender and Borrower to conduct such tests of the site where
Borrower's non- compliance or alleged non-compliance with such Environmental
Laws has occurred as to such non-compliance and prepare and deliver to Lender a
report as to such non- compliance setting forth the results of such tests, a
proposed plan for responding to any environmental problems described therein,
and an estimate of the costs thereof and (ii) provide to Lender a supplemental
report of such engineer whenever the scope of such non-compliance, or
Borrower's response thereto or the estimated costs thereof, shall change in any
material respect.
(f Borrower shall indemnify and hold harmless Lender, its
directors, officers, employees, agents, invitees, representatives, successors
and assigns, from and against any and all losses, claims, damages, liabilities,
costs, and expenses (including reasonable legal fees and expenses) directly or
indirectly arising out of or attributable to the use, generation, manufacture,
reproduction, storage, release, threatened release, spill, discharge, disposal
or presence of a Hazardous Material, including the costs of any required or
necessary repair, cleanup or other remedial work with respect to any property
of Borrower and the preparation and implementation of any closure, remedial or
other required plans, except that Borrower shall not be required to indemnify
Lender for any such losses, claims, damages, liabilities, costs and expenses
resulting from Lender's own gross negligence or wilful misconduct, as
determined by a final non-appealable judgment of a court of competent
jurisdiction. All representations, warranties, covenants and indemnifications
in this Section 9.3 shall survive the payment of the Obligations and the
termination or non-renewal of this Agreement.
9.4 Payment of Taxes and Claims. Borrower shall duly pay and
discharge all taxes, assessments, contributions and governmental charges upon
or against it or its properties or assets, except for taxes the validity of
which are being contested in good faith by appropriate proceedings diligently
pursued and available to Borrower. Borrower shall be liable for any tax or
penalties imposed on Lender as a result of the financing arrangements provided
for herein and Borrower agrees to indemnify and hold Lender harmless with
respect to the foregoing, and to repay to Lender on demand the amount thereof,
and until paid by Borrower such amount shall be added and deemed part of the
Loans, provided, that, nothing contained herein shall be construed to require
Borrower to pay any income or franchise taxes attributable to the income of
Lender from any amounts charged or paid hereunder to Lender. The foregoing
indemnity shall survive the payment of the Obligations and the termination or
non-renewal of this Agreement.
<PAGE> 40
9.5 Insurance. Borrower shall, at all times, maintain insurance with
respect to the Collateral against loss or damage and all other insurance of the
kinds and in the amounts customarily insured against or carried by corporations
of established reputation engaged in the same or similar businesses and
similarly situated. Said policies of insurance shall be satisfactory to Lender
as to form, amount and insurer. Borrower shall furnish certificates, policies
or endorsements to Lender as Lender shall require as proof of such insurance,
and, if Borrower fails to do so, Lender is authorized, but not required, to
obtain such insurance at the expense of Borrower. All policies shall provide
for at least thirty (30) days prior written notice to Lender of any
cancellation or reduction of coverage and that Lender may act as attorney for
Borrower in obtaining, and at any time an Event of Default exists or has
occurred and is continuing, adjusting, settling, amending and cancelling such
insurance. Borrower shall cause Lender to be named as a loss payee and an
additional insured (but without any liability for any premiums) under such
insurance policies and Borrower shall obtain non-contributory lender's loss
payable endorsements to all insurance policies in form and substance
satisfactory to Lender. Such lender's loss payable endorsements shall specify
that the proceeds of such insurance shall be payable to Lender as its interests
may appear and further specify that Lender shall be paid regardless of any act
or omission by Borrower or any of its affiliates. At its option, Lender may
apply any insurance proceeds received by Lender at any time to the cost of
repairs or replacement of Collateral and/or to payment of the Obligations,
whether or not then due, in any order and in such manner as Lender may
determine or hold such proceeds as cash collateral for the Obligations;
provided, however, so long as (i) no Event of Default, and no event or
condition that, with notice or passage of time, or both, exists or has occurred
and is continuing and (ii) there is Combined Excess Availability of at least
US$5,000,000 after giving effect to the loss or damage to Collateral to which
any portion of the insurance proceeds relates and without regard to the
insurance proceeds themselves, then Lender shall make the insurance proceeds
available to Borrower.
9.6 Financial Statements and Other Information.
(a) Borrower shall keep proper books and records in which
true and complete entries shall be made of all dealings or transactions of or
in relation to the Collateral and the business of Borrower and its subsidiaries
(if any), which shall be reconciled and conformed to the requirements of GAAP
no less frequently than quarterly and Borrower shall furnish or cause to be
furnished to Lender: (i) within forty (40) days after the end of each fiscal
month, other than the end of the third, sixth, ninth and twelfth fiscal months,
in each fiscal year, and within ninety (90) days after the end of the twelfth
fiscal month in each fiscal year, monthly unaudited consolidated financial
statements of US Borrower and its subsidiaries, if any, (including, in each
case, balance sheets and statements of operations), fairly presenting the
financial position and the results of the operations of Borrower and its
subsidiaries as of the end of and through such fiscal month, (ii) within
forty-five (45) days after the end of each fiscal quarter, unaudited
consolidated financial statements of US Borrower and its subsidiaries
(including, in each case, balance sheets and statements of operations), fairly
presenting the results of operations of Borrower and its subsidiaries as of the
end of and through such fiscal quarter, and (iii) within ninety (90) days after
the end of each fiscal year, audited consolidated financial statements of US
Borrower and its subsidiaries (including in each case balance sheets,
statements of operations, statements of changes in financial position and
statements of shareholders' equity), and the accompanying notes thereto, fairly
presenting the financial position and the results of the operations of US
Borrower and its subsidiaries as of the end of and for such fiscal year,
together with the unqualified opinion of independent chartered accountants,
which accountants shall be an independent accounting firm of nationally
recognized standing selected by US Borrower, that such financial statements
have been prepared in conformity with GAAP, and present fairly, in all material
respects, the results of operations and financial condition of US Borrower and
its subsidiaries as of the end of and for the fiscal year then ended.
<PAGE> 41
(b) Borrower shall promptly notify Lender in writing of the
details of (i) any loss, damage, investigation, action, suit, proceeding or
claim relating to the Collateral or any other property which is security for
the Obligations involving an amount in excess of the Canadian Dollar Equivalent
of US$37,500 or which has resulted in, or could reasonably be expected to
result in, any Material Adverse Effect and (ii) the occurrence of any Event of
Default or event which, with the passage of time or giving of notice or both,
would constitute an Event of Default.
(c) Borrower shall promptly notify Lender in writing in the
event that, at any time after the delivery of a Borrowing Base Certificate by
Borrower to Lender, but prior to the delivery of the next Borrowing Base
Certificate to be delivered by Borrower to Lender in accordance with the terms
hereof, the amount of Formula Availability is less than ninety (90%) percent of
the amount of Formula Availability calculated based on the information set
forth in the most recent Borrowing Base Certificate previously delivered by
Borrower to Lender pursuant to Section 7.1 hereof. Borrower will immediately
notify Lender in writing if (A) the Revolving Loans made by Lender to Borrower
and/or Letter of Credit Accommodations outstanding at any time exceed the
Formula Availability at any time under the terms and conditions hereof or (B)
the Combined Excess Availability shall be less than US$5,000,000 at any time.
(d) Borrower shall promptly after the sending or filing
thereof furnish or cause to be furnished to Lender copies of all reports which
Borrower sends to its shareholders generally and copies of all reports and
prospectuses which Borrower files with any Canadian or provincial securities
commission or securities exchange.
(e) Borrower shall furnish or cause to be furnished to Lender
such budgets, forecasts, projections and other information respecting the
Collateral and the business of Borrower, as Lender may, from time to time,
reasonably request; provided, that so long as no Event of Default exists or has
occurred and is continuing, the budgets, forecasts and projections required by
Lender under this Section 9.6(e) shall be limited to a twelve (12) month
financial statement projection which shall be provided to Lender once each year
which shall be provided to Lender within thirty (30) days after the
commencement of each of Borrower's fiscal years; provided, further that such
requirement may be fulfilled by the inclusion of information with respect to
Borrower on a consolidated basis with US Borrower and its other subsidiaries.
Lender is hereby authorized to deliver a copy of any financial statement or any
other information relating to the business of Borrower to any court or other
government agency or to any participant or assignee or prospective participant
or assignee. Borrower hereby irrevocably authorizes and directs all
accountants or auditors to deliver to Lender, at Borrower's expense, copies of
the financial statements of Borrower and any reports or management letters
prepared by such accountants or auditors on behalf of Borrower (unless the same
are furnished by Borrower to Lender) and to disclose to Lender, in conjunction
with Borrower (unless an Event of Default has occurred in which case such
disclosure need not be in conjunction with Borrower) such information as they
may have regarding the business of Borrower. Any documents, schedules,
invoices or other papers delivered to Lender may be destroyed or otherwise
disposed of by Lender one (1) year after the same are delivered to Lender,
except as otherwise designated by Borrower to Lender in writing.
9.7 Sale of Assets, Consolidation, Amalgamation, Dissolution, Etc.
Borrower shall not, directly or indirectly: (a) amalgamate with any other
Person or permit any other Person to amalgamate with it; or (b) sell, assign,
lease, transfer, abandon or otherwise dispose of any shares or indebtedness to
any other Person or any of its assets to any other Person (except for (i) sales
of Inventory in the ordinary course of business and (ii) the disposition of
worn-out or obsolete Equipment or Equipment no longer used in the business of
Borrower upon prior written notice to Lender, so long as (1) if an Event of
Default exists or
<PAGE> 42
has occurred and is continuing, any proceeds are paid to Lender and (2) such
sales do not involve Equipment having an aggregate fair market value in excess
of the Canadian Dollar Equivalent of US$187,500 for all such Equipment disposed
of in any fiscal year of Borrower) and (3) whether or not an Event of Default
exists or has occurred and is continuing, an adjustment to the Amortized
Equipment Value shall be made upon such sale in the same manner as provided
under Section 7.4 of the US Loan Agreement mutatis mutandis (as if such
Equipment were relocated to the facilities of US Borrower's subsidiary in
Reynosa, Mexico), and no Overformula Loan shall exist after giving affect to
such adjustment; or, (c) form or acquire any subsidiaries, except in connection
with investments permitted under, and upon compliance with, Section 9.10(c)
hereof; or (d) wind up, liquidate or dissolve; or (e) agree to do any of the
foregoing.
9.8 Encumbrances. Borrower shall not create, incur, assume or suffer
to exist any security interest, mortgage, pledge, lien, charge or other
encumbrance of any nature whatsoever on any of its assets or properties,
including the Collateral, except: (a) liens and security interests of Lender;
(b) liens securing the payment of taxes, either not yet overdue or the validity
of which are being contested in good faith by appropriate proceedings
diligently pursued and available to Borrower and provided no enforcement action
has been commenced or taken against any Collateral with respect thereto; (c)
non-consensual statutory liens (other than liens securing the payment of taxes)
arising in the ordinary course of Borrower's business to the extent: (i) such
liens secure indebtedness which is not overdue or (ii) such liens secure
indebtedness relating to claims or liabilities which are fully insured and
being defended at the sole cost and expense and at the sole risk of the insurer
or being contested in good faith by appropriate proceedings diligently pursued
and available to Borrower, in each case prior to the commencement of
foreclosure or other similar proceedings; (d) zoning restrictions, easements,
licenses, covenants and other restrictions affecting the use of real property
which do not interfere in any material respect with the use of such real
property or ordinary conduct of the business of Borrower as presently conducted
thereon or materially impair the value of the real property which may be
subject thereto; (e) purchase money security interests in Equipment (including
capital leases) and purchase money mortgages on real estate not to exceed
$2,500,000 of obligations (including capitalized lease obligations) secured
thereby incurred in any fiscal year of Borrower (and including for the purposes
of such limitation, the obligations of US Borrower's and its subsidiaries
secured by any purchase money security interests in Equipment (including
capitalized leases) and purchase money mortgages in real estate incurred during
such fiscal year), provided, that, such security interests and mortgages do not
apply to any property of Borrower other than the Equipment or real estate so
acquired, and the indebtedness secured thereby does not exceed the cost of the
Equipment or real estate so acquired, as the case may be; and (f) the security
interests and liens set forth on Schedule 8.4 hereto.
9.9 Indebtedness. Borrower shall not incur, create, assume, become or
be liable in any manner with respect to, or permit to exist, any obligations or
indebtedness, except: (a) the Obligations (including, without limitation, all
Obligations to Lender hereunder and all obligations, liabilities and
indebtedness of Borrower to Congress (Central) under the US Financing
Agreements); (b) trade obligations and normal accruals in the ordinary course
of business not yet due and payable, or with respect to which the Borrower is
contesting in good faith the amount or validity thereof by appropriate
proceedings diligently pursued and available to Borrower; (c) purchase money
indebtedness (including capital leases) to the extent not incurred or secured
by liens (including capital leases) in violation of any other provision of this
Agreement; (d) indebtedness of Borrower to its subsidiaries, if any, or to US
Borrower or any of its other subsidiaries, for short term loans in the ordinary
course of business, provided that any notes or other instruments evidencing any
such indebtedness shall be pledged and delivered to Lender; (e) contingent
obligations of Borrower under inventory repurchase agreements with its account
debtors or their lenders or customers, not to exceed, for the Borrower, US
Borrower and their subsidiaries, and including the face amount of Accounts and
other accounts receivable or indebtedness owed to Borrower and its subsidiaries
<PAGE> 43
by account debtors having the right to return any goods sold by Borrower, US
Borrower or their subsidiaries, US$2,500,000 in the aggregate at any time
outstanding; (f) Intentionally Deleted; and (g) indebtedness of Borrower under
forward contracts permitted under Section 9.10(e) hereof; (h) contingent
obligations of Borrower, not to exceed US$500,000 in the aggregate at any one
time outstanding, incurred in the ordinary course of business in the form of
guarantees by Borrower of indebtedness to third parties of financing provided
by such third parties to distributors of Borrower or their customers used to
finance purchases from Borrower or such distributors of Borrower's products
sold in the ordinary course of business; and (i) indebtedness (other than
indebtedness described in clauses (a) through (h) above) that US Borrower may
otherwise permit Borrower to incur as provided under the Indenture governing
the Subordinated Notes, as in effect on the date hereof; provided that no Event
of Default, and no condition or event that, with notice of passage of time, or
both, would constitute an Event of Default, exists or has occurred and is
continuing; and further, provided, that, (i) Borrower gives Lender at least
fifteen (15) days prior written notice of the proposed incurrence of such
indebtedness, accompanied by a certificate of the chief financial officer of
Borrower certifying compliance with this provision and setting forth supporting
calculations for purposes of evidencing compliance with the provisions of the
Indenture, as aforesaid, (ii) Borrower may only make regularly scheduled
payments of principal and interest in respect of such indebtedness in
accordance with the terms of the agreement or instrument evidencing or giving
rise to such indebtedness as in effect on the date of issuance thereof, (iii)
Borrower shall not, directly or indirectly, (A) amend, modify, alter or change
the terms of such indebtedness or any agreement, document or instrument related
thereto as in effect on the date of issuance thereof, or (B) redeem, retire,
defease, purchase or otherwise acquire such indebtedness, or set aside or
otherwise deposit or invest any sums for such purpose, and (iv) Borrower shall
furnish to Lender all demands and other material notices in connection with
such indebtedness either received by Borrower or on its behalf, promptly after
the receipt thereof, or sent by Borrower or on its behalf, concurrently with
the sending thereof, as the case may be; and (j) the existing indebtedness set
forth on Schedule 9.9 hereto; provided, that, (i) Borrower may only make
regularly scheduled payments of principal and interest in respect of such
indebtedness in accordance with the terms of the agreement or instrument
evidencing or giving rise to such indebtedness as in effect on the date hereof,
(ii) Borrower shall not, directly or indirectly, (A) amend, modify, alter or
change the terms of such indebtedness or any agreement, document or instrument
related thereto as in effect on the date hereof, or (B) redeem, retire,
defease, purchase or otherwise acquire such indebtedness, or set aside or
otherwise deposit or invest any sums for such purpose, and (iii) Borrower shall
furnish to Lender all demands and other material notices in connection with
such indebtedness either received by Borrower or on its behalf, promptly after
the receipt thereof, or sent by Borrower or on its behalf, concurrently with
the sending thereof, as the case may be.
9.10 Loans, Investments, Guarantees, Etc. Borrower shall not,
directly or indirectly, make any loans or advance money or property to any
person, or invest in (by capital contribution, dividend or otherwise) or
purchase or repurchase the shares or indebtedness or all or a substantial part
of the assets or property of any person, or guarantee, assume, endorse, or
otherwise become responsible for (directly or indirectly) the indebtedness,
performance, obligations or dividends of any Person or agree to do any of the
foregoing, except: (a) the endorsement of instruments for collection or deposit
in the ordinary course of business; (b) investments in: (i) short-term direct
obligations of the United States or Canadian Government, (ii) negotiable
certificates of deposit issued by any bank satisfactory to Lender, payable to
the order of the Borrower or to bearer and delivered to Lender, and (iii)
commercial paper rated A1 or P1; provided, that, as to any of the foregoing
(collectively, "Cash Equivalents"), unless waived in writing by Lender,
Borrower shall take such actions as are deemed necessary by Lender to perfect
the security interest of Lender in such investments; and (c) repurchases of
inventory from account debtors of Borrower or their lenders or customers to the
extent made pursuant to agreements permitted under Section 9.9(e) hereof and
guarantees permitted under Section 9.9(h) hereof; and (d) investments by
<PAGE> 44
Borrower, that the US Borrower may otherwise permit Borrower to make under the
provisions of the Indenture governing the Subordinated Notes as in effect on
the date hereof, in the form of cash equity contributions or cash loans to a
wholly- owned direct subsidiary of Borrower that either engages in a similar
line of business as Borrower or is newly formed to acquire the assets or
capital stock of a Person engaged in a similar line of business as Borrower;
provided, that (i) Lender receives not less than fifteen (15) days prior
written notice of each such proposed investment or loan accompanied by (A)
copies of all agreements, documents and instruments proposed to be entered into
in connection therewith and (B) a certificate of the chief financial officer of
Borrower certifying compliance with this provision and setting forth supporting
calculations for purposes of evidencing compliance with the provisions of the
Indenture, as aforesaid, (ii) such subsidiary receiving such investment or loan
and each of its direct and indirect subsidiaries (including any acquired
subsidiaries) shall have executed and delivered to Lender an absolute and
unconditional guaranty of payment of all Obligations of Borrower and granted to
Lender a first priority perfected security interest in and lien upon its assets
(other than real property), together with such financing statements and
agreements of the kind referred to in Section 4.1(g), all in form and substance
satisfactory to Lender and as Lender shall require, (iii) no Event of Default,
and no condition or event that would, with notice or passage of time, or both,
constitute an Event of Default, shall have occurred and be continuing, and (iv)
there shall be Combined Excess Availability of not less than US$5,000,000 at
all times during the period of thirty (30) consecutive days immediately
preceding the making of such investment or loan and after giving effect thereto
and after giving effect to all transactions substantially related thereto; (d)
investments in forward contracts for purchases or sales of US Dollars in
amounts estimated by Borrower to be necessary for payment of intercompany
accounts or other intercompany obligations owed and payable by Borrower to the
US Borrower in the ordinary course of business; and (e) the loans, advances and
guarantees set forth on Schedule 9.10 hereto; provided, that, as to such loans,
advances and guarantees, (i) Borrower shall not, directly or indirectly, (1)
amend, modify, alter or change the terms of such loans, advances or guarantees
or any agreement, document or instrument related thereto, or (2) as to such
guarantees, redeem, retire, defease, purchase or otherwise acquire the
obligations arising pursuant to such guarantees, or set aside or otherwise
deposit or invest any sums for such purpose, and (ii) Borrower shall furnish to
Lender all demands and other material notices in connection with such loans,
advances or guarantees or other indebtedness subject to such guarantees either
received by Borrower or on its behalf, promptly after the receipt thereof, or
sent by Borrower or on its behalf, concurrently with the sending thereof, as
the case may be.
9.11 Dividends and Redemptions. Borrower shall not, directly or
indirectly, declare or pay any dividends on account of any shares of Borrower
now or hereafter outstanding, or set aside or otherwise deposit or invest any
sums for such purpose, or redeem, retire, defease, purchase or otherwise
acquire any shares of any class (or set aside or otherwise deposit or invest
any sums for such purpose) for any consideration other than common shares or
apply or set apart any sum, or make any other distribution (by reduction of
capital or otherwise) in respect of any such shares or agree to do any of the
foregoing, except for dividends declared and paid to US Borrower out of legally
available funds therefor, and provided (i) Lender receives not less than
fifteen (15) days prior written notice of each such proposed dividend,
accompanied by a certificate of the chief financial officer of Borrower
certifying compliance with this provision and setting forth supporting and any
required calculations for purposes of evidencing compliance with any applicable
provisions of the Indenture governing the Subordinated Notes, and (ii) no Event
of Default, and no condition or event that would, with notice or passage of
time, or both, constitute an Event of Default, shall have occurred and be
continuing.
9.12 Transactions with Affiliates. Borrower shall not, directly or
indirectly, (a) purchase, acquire or lease any property from, or sell, transfer
or lease any property to, any officer, director, agent or other person
affiliated with Borrower, except in the ordinary course of and pursuant to the
reasonable
<PAGE> 45
requirements of Borrower's business and upon fair and reasonable terms no less
favourable to the Borrower than Borrower would obtain in a comparable arm's
length transaction with an unaffiliated person or (b) make any payments of
management, consulting or other fees for management or similar services, or of
any indebtedness owing to any officer, employee, shareholder, director or other
person affiliated with Borrower except reasonable compensation to officers,
employees and directors for services rendered to Borrower in the ordinary
course of business and consistent with Borrower's past practices.
9.13 Additional Bank Accounts. Borrower shall not, directly or
indirectly, open, establish or maintain any deposit account, investment account
or any other account with any bank or other financial institution, other than
the Blocked Accounts and the accounts set forth in Schedule 8.10 hereto,
except: (a) as to any new or additional Blocked Accounts and other such new or
additional accounts which contain any Collateral or proceeds thereof, with the
prior written consent of Lender and subject to such conditions thereto as
Lender may establish, (b) as to any accounts used by Borrower to make payments
of payroll, taxes or other obligations to third parties, after prior written
notice to Lender, and (c) bank accounts of Borrower not containing Collateral
or proceeds of Collateral and which have an average monthly balance,
individually, in an amount less than US$53,000, and less than US$106,667 in the
aggregate for all such bank accounts.
9.14 Adjusted Net Worth. Borrower shall, at all times when Combined
Excess Availability is less than US$5,000,000, maintain, on a consolidated
basis with US Borrower and its other consolidated subsidiaries, Adjusted Net
Worth of not less than US$13,000,000.
9.15 Intellectual Property. In the event Borrower obtains or applies
for any material intellectual property rights or obtains any material licenses
with respect thereto, Borrower shall immediately notify Lender thereof and
shall provide to Lender copies of all written materials including, but not
limited to, applications and licenses with respect to such intellectual
property rights. At Lender's request, Borrower shall promptly execute and
deliver to Lender an intellectual property security agreement granting to
Lender a perfected security interest in such intellectual property rights in
form and substance satisfactory to Lender.
9.16 Applications under the Companies' Creditors Arrangement Act.
Borrower acknowledges that its business and financial relationships with Lender
are unique from its relationship with any other of its creditors. Borrower
agrees that it shall not file any plan of arrangement under the CCAA ("CCAA
Plan") which provides for, or would permit directly or indirectly, Lender to be
classified with any other creditor of Borrower for purposes of such CCAA Plan
or otherwise.
9.17 Operation of Pension Plans.
(a) Borrower shall administer the Pension Plans in
accordance with the requirements of the applicable pension plan texts, funding
agreements, the Income Tax Act (Canada) and applicable provincial pension
benefits legislation.
(b) Borrower shall deliver to Lender an undertaking of
the funding agent for each of the Pension Plans stating that the funding agent
will notify Lender within 7 days of Borrower's failure to make any required
contribution to the applicable Pension Plan.
(c) Borrower shall not accept payment of any amount from
any of the Pension Plans without the prior written consent of Lender.
<PAGE> 46
(d) Without the prior written consent of Lender, Borrower
shall not terminate, or cause to be terminated, any of the Pension Plans, if
such plan would have a solvency deficiency on termination.
(e) Borrower shall promptly provide Lender with any
documentation relating to any of the Pension Plans as Lender may reasonably
request. Borrower shall notify Lender within 30 days of (i) a material
increase in the liabilities of any of the Pension Plans, (ii) the establishment
of a new registered pension plan, (iii) commencing payment of contributions to
a Pension Plan to which Borrower had not previously been contributing.
9.18 Costs and Expenses. Borrower shall pay to Lender on demand all
costs, expenses, filing fees and taxes paid or payable in connection with the
preparation, negotiation, execution, delivery, recording, administration,
collection, liquidation, enforcement and defense of the Obligations, Lender's
rights in the Collateral, this Agreement, the other Financing Agreements and
all other documents related hereto or thereto, including any amendments,
supplements or consents which may hereafter be contemplated (whether or not
executed) or entered into in respect hereof and thereof, including: (a) all
costs and expenses of filing or recording (including PPSA financing statement
and other similar filing and recording fees and taxes, documentary taxes,
intangibles taxes and mortgage recording taxes and fees, if applicable); (b)
costs and expenses and fees for insurance premiums, environmental audits,
surveys, assessments, engineering reports and inspections, appraisal fees and
search fees; (c) costs and expenses of remitting loan proceeds, collecting
cheques and other items of payment, and establishing and maintaining the
Blocked Accounts, if any, and the Payment Account, together with Lender's
customary charges and fees with respect thereto; (d) charges, fees or expenses
charged by any bank or issuer in connection with the Letter of Credit
Accommodations; (e) costs and expenses of preserving and protecting the
Collateral; (f) costs and expenses paid or incurred in connection with
obtaining payment of the Obligations, enforcing the security interests and
liens of Lender, selling or otherwise realizing upon the Collateral, and
otherwise enforcing the provisions of this Agreement and the other Financing
Agreements or defending any claims made or threatened against Lender arising
out of the transactions contemplated hereby and thereby (including, without
limitation, preparations for and consultations concerning any such matters);
(g) all out-of-pocket expenses and costs heretofore and from time to time
hereafter incurred by Lender during the course of periodic field examinations
of the Collateral and Borrower's operations, plus a per diem charge equal to
the Canadian Dollar Equivalent of an amount at the rate of US$600 per person
per day for Lender's examiners in the field and office; and (h) the reasonable
fees and disbursements of counsel (including legal assistants) to Lender in
connection with any of the foregoing.
9.19 Further Assurances. At the request of Lender at any time and
from time to time, Borrower shall, at its expense, duly execute and deliver, or
cause to be duly executed and delivered, such further agreements, documents and
instruments, and do or cause to be done such further acts as may be necessary
or proper to evidence, perfect, maintain and enforce the security interests and
liens and the priority thereof in the Collateral and to otherwise effectuate
the provisions or purposes of this Agreement or any of the other Financing
Agreements. Lender may at any time and from time to time request a certificate
from an officer of Borrower representing that all conditions precedent to the
making of Loans and providing Letter of Credit Accommodations contained herein
are satisfied. In the event of such request by Lender, Lender may, at its
option, cease to make any further Loans or provide any further Letter of Credit
Accommodations until Lender has received such certificate and, in addition,
Lender has determined in good faith that such conditions are satisfied. Where
permitted by law, Borrower hereby authorizes Lender to execute and file one or
more PPSA or other financing statements or notices signed only by Canadian
Lender or Lender's representative.
<PAGE> 47
SECTION 10. EVENTS OF DEFAULT AND REMEDIES
10.1 Events of Default. The occurrence or existence of any one or
more of the following events are referred to herein individually as an "Event
of Default", and collectively as "Events of Default":
(a) Borrower (i) shall fail to pay any of the Obligations
when due or within two (2) days thereafter, or (ii) shall fail to perform any
of the terms, covenants, conditions or provisions contained in this Agreement
or any of the other Financing Agreements other than as described in Section
10.1(a)(i) and such failure shall continue for two (2) Business Days in the
case of a failure under Sections 7.1, 7.2, 7.3 or 7.4 hereof, or ten (10) days
in the case of a failure under any other provision; provided, that, such two
(2) Business Days or ten (10) day period (as the case may be) shall not apply
in the case of: (A) any failure to observe any such term, covenant, condition
or provision which is not capable of being cured at all or within such
applicable period or which has been the subject of a prior failure within a six
(6) month period or (B) an intentional breach by Borrower or any Obligor of any
such term, covenant, condition or provision, or (C) the failure to observe or
perform any of the covenants or provisions contained in Sections 6.3, 6.6, 7.7,
9.1, 9.7, 9.8, 9.9, 9.10, 9.11, 9.12 or 9.13 of this Agreement or any covenants
or agreements covering substantially the same matter as such sections in any of
the other Financing Agreements; or
(b) any representation, warranty or statement of fact made by
Borrower to Lender in this Agreement, the other Financing Agreements or any
other agreement, schedule, confirmatory assignment or otherwise shall when made
or deemed made be false or misleading in any material respect (or, if such
representation, warranty or statement of fact is itself qualified by reference
to materiality or a Material Adverse Effect, such representation, warranty or
statement of fact shall, when made or deemed made, be false or misleading in
any respect);
(c) any Obligor revokes, terminates or fails to perform any
of the terms, covenants, conditions or provisions of any guarantee, endorsement
or other agreement of such party in favour of Lender;
(d) any judgment for the payment of money is rendered against
Borrower or any Obligor in excess of the Canadian Dollar Equivalent of
US$50,000 in any one case or in excess of the Canadian Dollar Equivalent of
US$150,000 in the aggregate and shall remain undischarged or unvacated for a
period in excess of thirty (30) days or execution shall at any time not be
effectively stayed, or any judgment other than for the payment of money, or
injunction, attachment, garnishment or execution is rendered against Borrower
or any Obligor or any of their assets;
(e) any Obligor (being a natural person or a general partner
of an Obligor which is a partnership) dies or Borrower or any Obligor, which is
a general partnership, limited liability company, limited partnership, limited
liability partnership or a corporation, dissolves or suspends or discontinues
doing business;
(f) Borrower or any Obligor becomes insolvent (however
defined or evidenced), makes an assignment for the benefit of creditors, makes
or sends notice of a bulk sale or calls a meeting of its creditors or principal
creditors;
<PAGE> 48
(g) a petition, case or proceeding under the bankruptcy laws
of Canada or similar laws of any foreign jurisdiction now or hereafter in
effect or under any insolvency, arrangement, reorganization, moratorium,
receivership, readjustment of debt, dissolution or liquidation law or statute
of any jurisdiction now or hereafter in effect (whether at law or in equity) is
filed or commenced against Borrower or any Obligor or all or any part of its
properties and such petition or application is not dismissed within thirty (30)
days after the date of its filing or Borrower or any Obligor shall file any
answer admitting or not contesting such petition or application or indicates
its consent to, acquiescence in or approval of, any such action or proceeding
or the relief requested is granted sooner;
(h) a petition, case or proceeding under the bankruptcy laws
of Canada or similar laws of any foreign jurisdiction now or hereafter in
effect or under any insolvency, arrangement, reorganization, moratorium,
receivership, readjustment of debt, dissolution or liquidation law or statute
of any jurisdiction now or hereafter in effect (whether at a law or equity) is
filed or commenced by Borrower or any Obligor or for all or any part of its
property including, without limitation, if Borrower or any Obligor shall:
(i) apply for or consent to the appointment of a
receiver, trustee or liquidator of it or of all or a
substantial part of its property and assets;
(ii) be unable, or admit in writing its inability,
to pay its debts as they mature, or commit any other act of
bankruptcy;
(iii) make a general assignment for the benefit of
creditors;
(iv) file a voluntary petition or assignment in
bankruptcy or a proposal seeking a reorganization, compromise,
moratorium or arrangement with its creditors;
(v) take advantage of any insolvency or other
similar law pertaining to arrangements, moratoriums,
compromises or reorganizations, or admit the material
allegations of a petition or application filed in respect of
it in any bankruptcy, reorganization or insolvency proceeding;
or
(vi) take any corporate action for the purpose of
effecting any of the foregoing;
(i) any default by Borrower or any Obligor under any
agreement, document or instrument relating to any indebtedness for borrowed
money owing to any person other than Lender, or any capitalized lease
obligations, contingent indebtedness in connection with any guarantee, letter
of credit, indemnity or similar type of instrument in favour of any person
other than Lender, in any case in an amount in excess of the Canadian Dollar
Equivalent of US$50,000, which default continues for more than the applicable
cure period, if any, with respect thereto, or any default by Borrower or any
Obligor under any material contract, lease, license or other obligation to any
person other than Lender, which default continues for more than the applicable
cure period, if any, with respect thereto;
(j) any change in the ownership or control of Borrower;
(k) charging of Borrower or any Obligor under any criminal
statute, or commencement or threatened commencement of criminal or civil
proceedings against Borrower or any Obligor, pursuant to which statute or
proceedings the penalties or remedies sought or available include forfeiture of
any of the property of Borrower or such Obligor;
<PAGE> 49
(l) there shall have occurred a Material Adverse Change;
(m) there shall be an event of default under any of the other
Financing Agreements; or
(n) there shall be an "Event of Default" under the US Loan
Agreement or any of the US Financing Agreements; or
(o) a requirement from the Minister of National Revenue for
payment pursuant to Section 224 or any successor section of the Income Tax Act
(Canada) or Section 317, or any successor section or any other Person in
respect of Borrower of the Excise Tax Act (Canada) or any comparable provision
of similar legislation shall have been received by Lender or any other Person
in respect of Borrower or otherwise issued in respect of Borrower.
10.2 Remedies.
(a) At any time an Event of Default exists or has occurred
and is continuing, Lender shall have all rights and remedies provided in this
Agreement, the other Financing Agreements, the PPSA and other applicable law,
all of which rights and remedies may be exercised without notice to or consent
by Borrower or any Obligor, except as such notice or consent is expressly
provided for hereunder or required by applicable law. All rights, remedies and
powers granted to Lender hereunder, under any of the other Financing
Agreements, the PPSA or other applicable law, are cumulative, not exclusive and
enforceable, in Lender's discretion, alternatively, successively, or
concurrently on any one or more occasions, and shall include, without
limitation, the right to apply to a court of equity for an injunction to
restrain a breach or threatened breach by Borrower of this Agreement or any of
the other Financing Agreements. Lender may, at any time or times, proceed
directly against Borrower or any Obligor to collect the Obligations without
prior recourse to the Collateral.
(b) Without limiting the foregoing, at any time an Event of
Default exists or has occurred and is continuing, Lender may, in its discretion
and without limitation, (i) accelerate the payment of all Obligations and
demand immediate payment thereof to Lender (provided, that, upon the occurrence
of any Event of Default described in Sections 10.1(g) and 10.1(h), all
Obligations shall automatically become immediately due and payable), (ii) with
or without judicial process or the aid or assistance of others, enter upon any
premises on or in which any of the Collateral may be located and take
possession of the Collateral or complete processing, manufacturing and repair
of all or any portion of the Collateral and carry on the business of Borrower,
(iii) require Borrower, at Borrower's expense, to assemble and make available
to Lender any part or all of the Collateral at any place and time designated by
Lender, (iv) collect, foreclose, receive, appropriate, setoff and realize upon
any and all Collateral, (v) remove any or all of the Collateral from any
premises on or in which the same may be located for the purpose of effecting
the sale, foreclosure or other disposition thereof or for any other purpose,
(vi) sell, lease, transfer, assign, deliver or otherwise dispose of any and all
Collateral (including entering into contracts with respect thereto, public or
private sales at any exchange, broker's board, at any office of Lender or
elsewhere) at such prices or terms as are commercially reasonable, for cash,
upon credit or for future delivery, with the Lender having the right to
purchase the whole or any part of the Collateral at any such public sale, all
of the foregoing being free from any right or equity of redemption of Borrower,
which right or equity of redemption is hereby expressly waived and released by
Borrower, (vii) borrow money and use the Collateral directly or indirectly in
carrying on Borrower's business or as security for loans or advances for any
such purposes, (viii) grant extensions of time and other indulgences, take and
give up security, accept compositions, grant releases and discharges, and
otherwise deal with Borrower,
<PAGE> 50
debtors of Borrower, sureties and others as Lender may see fit without
prejudice to the liability of Borrower or Lender's right to hold and realize
the security interest created under any Financing Agreement, and/or (ix)
terminate this Agreement. If any of the Collateral is sold or leased by Lender
upon credit terms or for future delivery, the Obligations shall not be reduced
as a result thereof until payment therefor is finally collected by Lender. If
notice of disposition of Collateral is required by law, five (5) days prior
notice by Lender to Borrower designating the time and place of any public sale
or the time after which any private sale or other intended disposition of
Collateral is to be made, shall be deemed to be reasonable notice thereof and
Borrower waives any other notice. In the event Lender institutes an action to
recover any Collateral or seeks recovery of any Collateral by way of
prejudgment remedy, Borrower waives the posting of any bond which might
otherwise be required.
(c) Lender may apply the cash proceeds of Collateral actually
received by Lender from any sale, lease, foreclosure or other disposition of
the Collateral to payment of the Obligations, in whole or in part and in such
order as Lender may elect, whether or not then due. Borrower shall remain
liable to Lender for the payment of any deficiency with interest at the highest
rate provided for herein and all costs and expenses of collection or
enforcement, including reasonable legal costs and expenses.
(d) Without limiting the foregoing, upon the occurrence of an
Event of Default or an event which with notice or passage of time or both would
constitute an Event of Default, Lender may, at its option, without notice, (i)
cease making Loans or arranging for Letter of Credit Accommodations or reduce
the lending formulas or amounts of Revolving Loans and Letter of Credit
Accommodations available to Borrower and/or (ii) terminate any provision of
this Agreement providing for any future Loans or Letter of Credit
Accommodations to be made by Lender to Borrower.
(e) Lender may appoint, remove and reappoint any person or
persons, including an employee or agent of Lender to be a receiver (the
"Receiver") which term shall include a receiver and manager of, or agent for,
all or any part of the Collateral. Any such Receiver shall, as far as concerns
responsibility for his acts, be deemed to be the agent of Borrower and not of
Lender, and Lender shall not shall in any way be responsible for any
misconduct, negligence or non-feasance of such Receiver, his employees or
agents. Except as otherwise directed by Lender, all money received by such
Receiver shall be received in trust for and paid to Lender. Such Receiver
shall have all of the powers and rights of Lender described in this Section
10.2. Lender may, either directly or through its agents or nominees, exercise
any or all powers and rights of a Receiver.
(f) Borrower shall pay all costs, charges and expenses
incurred by Lender or any Receiver or any nominee or agent of Lender, whether
directly or for services rendered (including, without limitation, solicitor's
costs on a solicitor and his own client basis, auditor's costs, other legal
expenses and Receiver remuneration) in enforcing this Agreement or any other
Financing Agreement and in enforcing or collecting Obligations and all such
expenses together with any money owing as a result of any borrowing permitted
hereby shall be a charge on the proceeds of realization and shall be secured
hereby.
<PAGE> 51
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial
Waiver.
(a) The validity, interpretation and enforcement of this
Agreement and the other Financing Agreements and any dispute arising out of the
relationship between the parties hereto, whether in contract, tort, equity or
otherwise, shall be governed by the laws of the Province of Ontario and the
federal laws of Canada applicable therein except to the extent that the law of
another jurisdiction is specified in a Financing Agreement to be the governing
law for that Financing Agreement.
(b) Borrower and Lender irrevocably consent and submit to the
non-exclusive jurisdiction of the Ontario Court (General Division) and waive
any objection based on venue or forum non conveniens with respect to any action
instituted therein arising under this Agreement or any of the other Financing
Agreements or in any way connected with or related or incidental to the
dealings of the parties hereto in respect of this Agreement or any of the other
Financing Agreements or the transactions related hereto or thereto, in each
case whether now existing or hereafter arising, and whether in contract, tort,
equity or otherwise, and agree that any dispute with respect to any such
matters shall be heard only in the courts described above (except that Lender
shall have the right to bring any action or proceeding against Borrower or its
property in the courts of any other jurisdiction which Lender deems necessary
or appropriate in order to realize on the Collateral or to otherwise enforce
its rights against Borrower or its property).
(c) Borrower hereby waives personal service of any and all
process upon it and consents that all such service of process may be made by
registered mail (return receipt requested) directed to its address set forth on
the signature pages hereof and service so made shall be deemed to be completed
five (5) days after the same shall have been so deposited in the Canadian
mails, or, at Lender's option, by service upon Borrower in any other manner
provided under the rules of any such courts. Within thirty (30) days after
such service, Borrower shall appear in answer to such process, failing which
Borrower shall be deemed in default and judgment may be entered by Lender
against Borrower for the amount of the claim and other relief requested.
(d) BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL
BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED
WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT
OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS
RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER AND
LENDER EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR
CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT
BORROWER OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT
WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE
WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
(e) Lender shall not have any liability to Borrower (whether
in tort, contract, equity or otherwise) for losses suffered by Borrower in
connection with, arising out of, or in any way related to the transactions or
relationships contemplated by this Agreement, or any act, omission or event
occurring in
<PAGE> 52
connection herewith, unless it is determined by a final and non-appealable
judgment or court order binding on Lender, that the losses were the result of
acts or omissions constituting gross negligence or willful misconduct. In any
such litigation, Lender shall be entitled to the benefit of the rebuttable
presumption that it acted in good faith and with the exercise of ordinary care
in the performance by it of the terms of this Agreement.
11.2 Waiver of Notices. Borrower hereby expressly waives demand,
presentment, protest and notice of protest and notice of dishonour with respect
to any and all instruments and commercial paper, included in or evidencing any
of the Obligations or the Collateral, and any and all other demands and notices
of any kind or nature whatsoever with respect to the Obligations, the
Collateral and this Agreement, except such as are expressly provided for
herein. No notice to or demand on Borrower which Lender may elect to give
shall entitle Borrower to any other or further notice or demand in the same,
similar or other circumstances.
11.3 Amendments and Waivers. Neither this Agreement nor any provision
hereof shall be amended, modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by an authorized officer of
Lender, and as to amendments, as also signed by an authorized officer of
Borrower. Lender shall not, by any act, delay, omission or otherwise be deemed
to have expressly or impliedly waived any of its rights, powers and/or remedies
unless such waiver shall be in writing and signed by an authorized officer of
Lender. Any such waiver shall be enforceable only to the extent specifically
set forth therein. A waiver by Lender of any right, power and/or remedy on any
one occasion shall not be construed as a bar to or waiver of any such right,
power and/or remedy which Lender would otherwise have on any future occasion,
whether similar in kind or otherwise.
11.4 Waiver of Counterclaims. Borrower waives all rights to interpose
any claims, deductions, setoffs or counterclaims of any nature (other than
compulsory counterclaims) in any action or proceeding with respect to this
Agreement, the Obligations, the Collateral or any matter arising therefrom or
relating hereto or thereto; without prejudice, however, to Borrower's rights to
assert by way of separate unconsolidated action, any such claims, deductions,
setoffs, or counterclaims (other than compulsory counterclaims).
11.5 Indemnification. Borrower shall indemnify and hold Lender, and
its directors, agents, employees and counsel, harmless from and against any and
all losses, claims, damages, liabilities, costs or expenses imposed on,
incurred by or asserted against any of them in connection with any litigation,
investigation, claim or proceeding commenced or threatened related to the
negotiation, preparation, execution, delivery, enforcement, performance or
administration of this Agreement, any other Financing Agreements, or any
undertaking or proceeding related to any of the transactions contemplated
hereby or any act, omission, event or transaction related or attendant thereto,
including amounts paid in settlement, court costs, and the reasonable fees and
expenses of counsel; provided, that Borrower shall not be required to indemnify
Lender for any losses, claims, damages, liabilities, costs or expenses caused
as a direct result of the gross negligence or wilful misconduct of Lender, as
determined by a final, non-appealable judgment of a court of competent
jurisdiction. To the extent that the undertaking to indemnify, pay and hold
harmless set forth in this Section may be unenforceable because it violates any
law or public policy, Borrower shall pay the maximum portion which it is
permitted to pay under applicable law to Lender in satisfaction of indemnified
matters under this Section. The foregoing indemnity shall survive the payment
of the Obligations and the termination or non-renewal of this Agreement.
<PAGE> 53
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS
12.1 Term.
(a) This Agreement and the other Financing Agreements shall
become effective as of the date set forth on the first page hereof and shall
continue in full force and effect for a term ending on the date three (3) years
from the date hereof (the "Renewal Date"), and from year to year thereafter,
unless sooner terminated pursuant to the terms hereof. Lender may terminate
this Agreement and the other Financing Agreements effective on the Renewal Date
or on the anniversary of the Renewal Date in any year by giving Borrower at
least sixty (60) days' prior written notice, and Borrower may terminate the
Agreement at any time by giving not less than sixty (60) days' prior written
notice to Lender; provided, that, this Agreement and all other Financing
Agreements and the US Financing Agreements must be terminated simultaneously.
Upon the effective date of termination or non-renewal of the Financing
Agreements, Borrower shall pay to Lender, in full, all outstanding and unpaid
Obligations and shall furnish cash collateral to Lender in such amounts as
Lender determines are reasonably necessary to secure Lender from loss, cost,
damage or expense, including reasonable legal fees and expenses, in connection
with any contingent Obligations, including issued and outstanding Letter of
Credit Accommodations and cheques or other payments provisionally credited to
the Obligations and/or as to which Lender has not yet received final and
indefeasible payment. Such payments in respect of the Obligations and cash
collateral shall be remitted by wire transfer in Canadian Dollars to such bank
account of Lender, as Lender may, in its discretion, designate in writing to
Borrower for such purpose. Interest shall be due until and including the next
business day, if the amounts so paid by Borrower to the bank account designated
by Lender are received in such bank account later than 12:00 noon, Toronto
time.
(b) No termination of this Agreement or the other Financing
Agreements shall relieve or discharge Borrower of its respective duties,
obligations and covenants under this Agreement or the other Financing
Agreements until all Obligations have been fully and finally discharged and
paid, and Lender's continuing security interest in the Collateral and the
rights and remedies of Lender hereunder, under the other Financing Agreements
and applicable law, shall remain in effect until all such Obligations have been
fully and finally discharged and paid, after which, at Borrower's sole cost and
expense, Lender will execute and deliver to Borrower such PPSA termination
statements and such other lien releases reasonably requested by Borrower as
shall be necessary to evidence the termination and release of the security
interests held by Lender in the Collateral.
(c) If for any reason this Agreement is terminated prior to
the end of the then current term or renewal term of this Agreement, in view of
the impracticality and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Lender's lost
profits as a result thereof, Borrower agrees to pay to Lender, upon the
effective date of such termination, an early termination fee in the amount set
forth below if such termination is effective in the period indicated:
<TABLE>
<CAPTION>
Amount Period
------ ------
<S> <C>
(i) 3% of the Maximum Credit then in effect From the date hereof to and including November 20,
1998
(ii) 1% of the Maximum Credit then in effect From November 21, 1998 to but not including
November 20, 2000.
</TABLE>
<PAGE> 54
Such early termination fee shall be presumed to be the amount of damages
sustained by Lender as a result of such early termination and Borrower agrees
that it is reasonable under the circumstances currently existing. In addition,
Lender shall be entitled to such early termination fee upon the occurrence of
any Event of Default described in Sections 10.1(g) and 10.1(h) hereof, even if
Lender does not exercise its right to terminate this Agreement, but elects, at
its option, to provide financing to Borrower or permit the use of cash
collateral under any applicable reorganization or insolvency legislation. The
early termination fee provided for in this Section 12.1 shall be deemed
included in the Obligations.
12.2 Notices. All notices, requests and demands hereunder shall be
in writing and (a) made to Lender at its address set forth below and to
Borrower at its chief executive office set forth below, or to such other
address as either party may designate by written notice to the other in
accordance with this provision, and (b) deemed to have been given or made: if
delivered in person, immediately upon delivery; if by facsimile transmission,
immediately upon sending and upon confirmation of receipt; if by nationally
recognized overnight courier service with instructions to deliver the next
business day, one (1) business day after sending; and if by registered mail,
return receipt requested, five (5) days after mailing.
12.3 Partial Invalidity. If any provision of this Agreement is held
to be invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Agreement as a whole, but this Agreement shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.
12.4 Successors. (a) This Agreement, the other Financing Agreements
and any other document referred to herein or therein shall be binding upon and
inure to the benefit of and be enforceable by Lender, Borrower and their
respective successors and assigns, except that Borrower may not assign its
rights under this Agreement, the other Financing Agreements and any other
document referred to herein or therein without the prior written consent of
Lender. Lender may, after notice to Borrower, assign its rights and delegate
its obligations under this Agreement and the other Financing Agreements and
further may assign, or sell participations in, all or any part of the Loans,
the Letter of Credit Accommodations or any other interest herein to another
financial institution or other person, in which event, the assignee or
participant shall have, to the extent of such assignment or participation, the
same rights and benefits as it would have if it were the Lender hereunder,
except as otherwise provided by the terms of such assignment or participation.
(b) In the event the rights and interests of Lender under this
Agreement and the other Financing Agreements are assigned (other than pursuant
to a participation) to a person not affiliated with the US Lender (including to
any assignee thereof), and such US Lender provides its written consent for an
action to be taken by US Borrower or Video King Gaming Systems, Inc. under, or
its acknowledgement of the satisfaction of a requirement under, the US
Financing Agreements that requires such written consent or acknowledgement of
performance acceptable to Lender is required by the terms of the General
Security Agreements executed and delivered by such persons in their capacities
as Guarantors hereunder and covering the same action proposed to be taken or
requirement to be satisfied, or, if such consent or acknowledgement (as
applicable) is not so given, Borrower shall, within the sixty (60) day period
following the assignee Lender's determination not to provide such consent or
acknowledgement, be entitled to terminate this Agreement and the other
Financing Agreements without being required to satisfy the otherwise applicable
requirement that the US Financing Agreements also be terminated, but such
termination of this Agreement and the other Financing Agreements shall
otherwise be in accordance with Section 12.1 hereof
<PAGE> 55
12.5 Confidentiality.
(a) Lender shall use all reasonable efforts to keep
confidential, in accordance with its customary procedures for handling
confidential information and safe and sound lending practices, any non-public
information supplied to it by Borrower pursuant to this Agreement which is
clearly and conspicuously marked as confidential at the time such information
is furnished by Borrower to Lender, provided, that, nothing contained herein
shall limit the disclosure of any such information: (i) to the extent required
by statute, rule, regulation, subpoena or court order, (ii) to bank examiners
and other regulators, auditors and/or accountants, (iii) in connection with any
litigation to which Lender is a party, (iv) to any assignee or participant (or
prospective assignee or participant) so long as such assignee or participant
(or prospective assignee or participant) shall have first agreed in writing to
treat such information as confidential in accordance with this Section 12.5, or
(v) to counsel for Lender or any participant or assignee (or prospective
participant or assignee).
(b) In no event shall this Section 12.5 or any other
provision of this Agreement or applicable law be deemed: (i) to apply to or
restrict disclosure of information that has been or is made public by Borrower
or any third party without breach of this Section 12.5 or otherwise become
generally available to the public other than as a result of a disclosure in
violation hereof, (ii) to apply to or restrict disclosure of information that
was or becomes available to Lender on a non-confidential basis from a person
other than Borrower, (iii) require Lender to return any materials furnished by
Borrower to Lender or (iv) prevent Lender from responding to routine
informational requests in accordance with the Code of Ethics for the Exchange
of Credit Information promulgated by The Robert Morris Associates or other
applicable industry standards relating to the exchange of credit information.
The obligations of Lender under this Section 12.5 shall supersede and replace
the obligations of Lender under any confidentiality letter signed prior to the
date hereof.
12.6 Entire Agreement. This Agreement, the other Financing
Agreements, any supplements hereto or thereto, and any instruments or documents
delivered or to be delivered in connection herewith or therewith represents the
entire agreement and understanding concerning the subject matter hereof and
thereof between the parties hereto, and supersede all other prior agreements,
understandings, negotiations and discussions, representations, warranties,
commitments, proposals, offers and contracts concerning the subject matter
hereof, whether oral or written. In the event of any inconsistency between the
terms of this Agreement and any schedule or exhibit hereto, the terms of this
Agreement shall govern.
12.7 Headings. The division of this Agreement into Sections and the
insertion of headings and a table of contents are for convenience of reference
only and shall not affect the construction or interpretation of this Agreement.
12.8 Judgment Currency. To the extent permitted by applicable law,
the obligations of Borrower in respect of any amount due under this Agreement
shall, notwithstanding any payment in any other currency (the "Other Currency")
(whether pursuant to a judgment or otherwise), be discharged only to the extent
of the amount in the currency in which it is due (the "Agreed Currency") that
Lender may, in accordance with normal banking procedures, purchase with the sum
paid in the Other Currency (after any premium and costs of exchange) on the
Business Day immediately after the day on which Lender receives the payment.
If the amount in the Agreed Currency that may be so purchased for any reason
falls short of the amount originally due, Borrower shall pay all additional
amounts, in the Agreed Currency, as may be necessary to compensate for the
shortfall. Any obligation of Borrower not discharged by that payment shall, to
the extent permitted by applicable law, be due as a separate and independent
obligation and, until discharged as provided in this Section, continue in full
force and effect.
<PAGE> 56
IN WITNESS WHEREOF, Lender and Borrower have caused these presents to
be duly executed as of the day and year first above written.
<TABLE>
<CAPTION>
LENDER BORROWER
------ --------
<S> <C>
CONGRESS FINANCIAL CORPORATION (CANADA) BINGO PRESS & SPECIALTY LIMITED
By: By:
----------------------------- -----------------------------
Title: Title:
--------------------------- ---------------------------
Address: Chief Executive Office:
-------- ----------------------
141 Adelaide Street West, Suite 1508 301 Louth Street
Toronto, Ontario, M5H 3L9 St. Catharines, Ontario
Fax: (416) 364-6068 L2S 3V6
</TABLE>
<PAGE> 1
EXHIBIT 10.19
AGREEMENT
THIS AGREEMENT (this "Agreement") is made and entered into this 13th day of
December, 1997, by and between Len Stuart & Associates, Ltd., a Cayman Islands
corporation ("LSA"), Leonard A. Stuart ("Stuart"), an adult individual with an
address of Paradise Island Drive, Paradise Island, Bahama Islands, British West
Indies, and Stuart Entertainment, Inc., a Delaware corporation ("SEI"), with its
principal place of business at 3211 Nebraska Avenue, Council Bluffs, Iowa.
WHEREAS, LSA and SEI are parties to that certain Consulting Agreement dated
February 1, 1996 (the "Consulting Agreement");
WHEREAS, LSA and SEI desire to terminate the Consulting Agreement on the
terms contained herein;
WHEREAS, Bingo Press & Specialty Limited ("Bazaar"), a wholly-owned
subsidiary of SEI and Stuart have agreed to form a new company, the outstanding
capital stock of which will be equally owned and controlled by Bazaar and Stuart
(with equal rights and privileges, to conduct marketing activities in Canada
(the "Marketing Company"); and
WHEREAS, the parties desire to enter into this Agreement to reflect certain
agreements between the parties with respect to the Marketing Company.
NOW THEREFORE, for and in consideration of the mutual promises and
agreements contained herein, the parties agree hereto as follows:
1. TERMINATION. The Consulting Agreement shall terminate effective as of
December 13, 1997.
2. CONSIDERATION. In consideration for LSA's agreement to terminate the
Consulting Agreement, SEI agrees to pay LSA
(a)the sum of $355,101 as follows:
(i) $55,101 shall be due and payable upon execution of
this Agreement;
(ii) $300,000 shall be due, with interest, in eight
consecutive monthly installments of $38,553, payable
on the thirteenth day of each month, commencing
January 13, 1998.
(b) an amount equal to one year's salary at the present level for an
administrative assistant, similar in position to that described in Section 3.2
of the Consulting Agreement.
<PAGE> 2
3. MARKETING COMPANY.
(a) In order to facilitate the growth and operations of the
Marketing Company, SEI and Stuart desire to appoint one of SEI's senior
officers, Roy L. Lister ("Lister"), to become President of the
Marketing Company. Stuart and SEI agree that Lister will be appointed
President of the Marketing Company effective as of January 1, 1998 and
on that date Lister's employment with SEI will terminate and Lister
will become an employee of the Marketing Company.
(b) Section I of Exhibit A to this Agreement (which is
incorporated by reference herein, and to which LSA and Stuart agree to
be bound in accordance with paragraph 4(d) hereof) generally prohibits
the solicitation of SEI's employees by LSA and its affiliates.
Notwithstanding the provisions of Section I, and the obligations of LSA
described in Exhibit A hereof, SEI agrees that if on June 30, 1998
Lister is still employed by the Marketing Company, thereafter LSA
and/or Stuart may employ or offer employment to Lister. In
consideration thereof, LSA and Stuart covenant and agree that SEI's
agreement to allow LSA or Stuart to employ or offer employment to
Lister is not intended to and does not in any way limit or terminate
SEI's rights or LSA's obligations under Exhibit A to Agreement.
4. ADVISORY SERVICES.
(a) LSA will act as an advisor to SEI on such matters as SEI
shall reasonably request. The term of engagement shall commence on
December 14, 1997 and shall expire on December 13, 1999 (the "Term").
During the Term LSA shall make the services of Stuart available, at his
option, in person or by phone, to the executive management of SEI the
approximate equivalent of no more than two days in any month at such
specific times as may be mutually agreed to between LSA and SEI. LSA
may perform its duties hereunder from its office in the Bahamas.
(b) SEI shall pay LSA an annual retainer of $30,000 per year
payable at the rate of $2,500 per month. The retainer shall be paid in
arrears commencing on January 1, 1998 and on the first day of each
month thereafter during the Term.
(c) SEI shall promptly pay or reimburse LSA for all reasonable
expenses incurred in connection with the performance of the duties and
responsibilities in this Section 4, including, but not limited to,
expenses paid or incurred for travel and entertainment relating to the
business of SEI. All requests for reimbursed expenses shall be
accompanied by such underlying documents or other evidence as are
reasonably required to support the deduction of such expenses in
accordance with the rules established by SEI, and in accordance with
policies currently in effect or adopted from time to time by SEI..
2
<PAGE> 3
(d) As partial consideration for the payments described
herein, LSA agrees to be bound by the restrictive covenants contained
in Exhibit A to this Agreement.
5. TERMINATION OF SERVICES. The provision of advisory services may be
terminated as follows:
(a) by LSA at any time without cause upon 90 days advance
written notice to SEI. Upon any termination by LSA, all
obligations and liabilities of SEI to LSA (except for
those payments in 2(a)(ii) of this Agreement) will
terminate effective as of the date of termination..
(b) By SEI in the event of:
(i) LSA's willful and continued failure
substantially to perform its duties hereunder
(ii) A conviction of, or plead of guilty or nolo
contendere by Stuart to an act of fraud,
misappropriation or embezzlement or to a
felony
(iii) Stuart's commission of any act that would
cause any gaming license of SEI (or is
subsidiaries) to be revoked, suspended or not
to be renewed after proper application.
Termination by SEI under this Section 5 shall be
without liability to SEI.
6. FACSIMILE TRANSMISSION; COUNTERPARTS. Signatures on this Agreement may
be communicated by facsimile transmission and shall be binding upon the parties
transmitting the same by facsimile transmission. Counterparts with original
signatures shall be provided to the other parties within seven (7) days of the
applicable facsimile transmission; provided, however, that the failure to
provide the original counterpart shall have no effect on the validity or binding
nature of this Agreement. If executed in counterparts, this Agreement shall be
effective as if simultaneously executed.
7. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement between
the parties pertaining to the subject matter hereof and supersedes all prior
written agreements, and all prior or contemporaneous oral agreements and
understandings, express or implied. No modification to this Agreement shall be
effective unless assented to in writing by the parties hereto.
3
<PAGE> 4
8. NO THIRD PARTY BENEFICIARIES. Nothing herein contained shall confer or
is intended to confer any rights hereunder on any third party or entity which is
not a party to this Agreement.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by the respective authorized personnel as of the date and year
first above written.
STUART ENTERTAINMENT, INC., a
Delaware corporation
----------------------------------------
LEN STUART & ASSOCIATES, LTD., a
Cayman Islands corporation
----------------------------------------
Leonard A. Stuart, President
LEONARD A. STUART
----------------------------------------
Leonard A. Stuart
5
<PAGE> 1
EXHIBIT 10.20
March 23, 1998
Mr. Paul Tunink
4228 N. 139th Ave.
Omaha, NE 68164
Dear Paul:
Pursuant to our conversation, the Company has agreed to provide you with a
Severance Agreement. The terms are as follows:
General Severance Agreement
If the company terminates your employment for any reason, other than for cause,
you will receive a lump sum cash amount equal to one year's base salary. In
addition , your medical and dental insurance coverage will remain in force for
twelve months, along with the 401(K) Retirement Plan benefit.
Change in Control
This Agreement provides for the following benefits if your employment is
terminated by the Company without cause or by you for "Good Reason" (as
described below) during the one-year period following a "Change in Control".
(i) a lump sum cash amount equal to one year's base salary, an amount
not less than was in effect at the time of "Change in Control,"
plus 505 of your target bonus for the year in which the "Change in
Control" takes place; and
(ii) medical and dental insurance coverage will remain in force for
twelve months, along with the 401(K) Retirement Plan benefit.
"Good Reason" means, generally, a material adverse change in position,
responsibilities or title, a reduction in base salary, a relocation of you by
the Company or substantially more burdensome travel requirements.
<PAGE> 2
Mr. Paul Tunink
March 23, 1998
Page Two
In addition, you will be reimbursed for all legal fees and expenses incurred
with respect to any disputes arising in connection with this Severance
Agreement.
-------------------------------------
Al Barber
Chief Executive Officer Stuart
Entertainment, Inc.
ADDENDUM #1
Definitions
"Change in Control" - Change in Control occurs when MLGA Fund II, L.P., a
Delaware limited partnership, Bingo Holdings, Inc., a Delaware corporation or
any related affiliate no longer owns directly and free and clear of all liens
at least 33% of the issued and outstanding shares of stock of the Company, or
in the event of a disposition of all or substantially all the assets of the
Company.
"Cause" - Cause for this agreement means termination as a result of (i) the
conviction of a felony charge under the laws of the United States and (ii)
willful and continual failure to substantially perform duties (other than as a
result of total or partial incapacity due to a physical or mental illness).
-------------------------------------
Al Barber
Chief Executive Officer Stuart
Entertainment, Inc.
<PAGE> 1
EXHIBIT 10.21
CONSULTING AGREEMENT AND
TERMINATION OF EMPLOYMENT AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement"), made and entered into as
of the 12th day of November, 1997 (the "Effective Date"), by and between STUART
ENTERTAINMENT, INC. (the "Company"), a Delaware corporation, and RONALD G.
RUDY, an individual with his principal business address at 2807 Lincoln Way,
Lynnwood, Washington 98046 (the "Consultant");
W I T N E S S E T H:
WHEREAS, the Company and Consultant entered into a certain employment
agreement that took effect November 13, 1996 (the "Employment Agreement");
WHEREAS, the Company desires to terminate the Employment Agreement and
to hire the Consultant as a consultant to the Company; and
WHEREAS, the Consultant desires to accept such opportunity offered by
the Company;
NOW, THEREFORE, in consideration for the mutual obligations contained
herein, the Company and the Consultant, each intending to be legally bound,
hereby mutually covenant and agree as follows:
1. ENGAGEMENT.
(a) Contracting. The Company hereby contracts with the
Consultant and the Consultant hereby accepts such contract, in the
capacity to act in accordance with the terms and conditions
hereinafter set forth (the "Relationship").
(b) Term. The contract hereunder shall run for a term
commencing on October 1, 1997 (the "Contract Date"), and ending
November 30, 1999 (the "Contract Term").
(c) Location of Services. Effective upon the Contract
Date, and through the Contract Term, the Consultant's services will be
performed at the Company's offices at 2807 Lincoln Way, Lynnwood,
Washington or at such places that are appropriate and mutually agreed
upon by the Consultant and the Company.
(d) Resources. To assist Consultant in performing the
duties set forth herein, the Company will provide rent free office
space, staff and access to secretarial support at the Company's
offices in Lynnwood, Washington. Consultant's office shall be his
present office so long as the Company occupies the premises and he
shall have access to his present
<PAGE> 2
secretary so long as she is employed by the Company. Notwithstanding
the above, the parties acknowledge and agree that the responsibility
to perform the duties set forth in this Agreement is solely
Consultant's. Consultant shall be permitted to utilize the office
space and secretarial support at the Company's office to conduct
Consultant's other business interests, so long as the provision of
such secretarial support does not materially interfere with the
performance of such secretary's normal duties. Consultant shall have
the use of the conference room, so long as it does not interfere with
the operations of the Company. Consultant shall retain all benefits
related to the maintenance and associated expenses of a motor vehicle
as specified in the Employment Agreement.
2. INDEPENDENT CONTRACTOR. The Consultant shall not be an
employee of the Company and shall not be entitled to participate in any
employee benefit plans or other benefits or conditions of employment available
to employees of the Company (except for those benefits described herein). The
Consultant shall have no authority to act as an agent of the Company, except on
authority specifically so delegated, and he shall not represent to the contrary
to any person. The Consultant shall only consult on, render advice with
respect to and perform such tasks as the Consultant determines in good faith
are necessary to achieve the results specified by the Company. Although the
Company may specify the results to be achieved by the Consultant, the Company
shall not control and direct the Consultant as to the details or means by which
such results are accomplished.
3. DUTIES. During the Contract Term the Consultant shall serve
as a consultant to the Company and shall have all powers and duties assigned by
the Company's Board of Directors (the "Board") or the Board's designated
officer (the "Officer").
4. EXTENT OF SERVICES. During the Contract Term, the Consultant
shall be available upon reasonable notice from time to time to provide
consulting services to the Company either by telephone or in person.
Consultant shall make his services available to the Company at mutually
agreeable times and for an amount of time deemed appropriate by Consultant.
5. COMMUNICATION. The Consultant will report to the Chief
Executive Officer of the Company, or such person as the Chief Executive Officer
of the Company may from time to time designate, on all matters relating to this
Agreement and the Consultant's performance of his duties hereunder.
6. AGREEMENTS. The Consultant shall not be authorized or
empowered to enter into any agreements with any party on behalf of the Company.
The Company has the absolute right to refuse any offers, work or material
brought to it by the Consultant without incurring any liability to such third
party or to the Consultant.
2
<PAGE> 3
7. TERMINATION OF EMPLOYMENT AGREEMENT. Upon the payment of
$334,000, receipt of which is hereby acknowledged by Consultant, the Employment
Agreement is hereby terminated and is of no further force and effect. The
Company shall provide Consultant with a Form 1099 for the payment above and for
all payments as a consultant during 1997 and for subsequent years, and shall
provide Consultant with a W-2 reflecting only the wages paid to Consultant
during the term of the Employment Agreement. In further consideration of such
payments, Consultant agrees to be bound by the covenants and obligations of
Paragraphs 14, 16, 17, 18, 19, and 20 hereof.
8. COMPENSATION.
(a) Compensation. For services performed by the
Consultant for the Company pursuant to this Agreement during the
Contract Term, the Company shall pay the Consultant at the rate of
$2,500 per month for the Contract Term (the "Compensation"), payable
in arrears on the last day of each month.
(b) Expenses. The Company shall promptly pay or reimburse
the Consultant for all reasonable expenses incurred by him in
connection with the performance of his duties and responsibilities
hereunder, including, but not limited to, expenses paid or incurred for
travel, and entertainment relating to the business of the Company (the
general nature of which has received prior approval from the Company)
in accordance with the Company's expense authorization and approval
policy then in effect.
(c) Taxes. The Consultant shall provide the Company with
his Social Security Number so the Company is able to file the
appropriate reporting forms with the Internal Revenue Service. The
Company shall annually provide the Consultant with copies of forms so
filed. It is understood that all compensation paid to the Consultant
hereunder in respect of services rendered during the Contract Term
shall constitute revenues to the Consultant. To the extent consistent
with applicable law, the Company will not withhold any amounts
therefrom as federal income tax withholding from wages or as employee
contributions under the Federal Insurance Contributions Act or any
other state or federal laws. The Consultant shall be solely
responsible for the withholding and/or payment of any federal, state or
local income or payroll taxes.
(d) Benefits. Consultant shall remain eligible to
participate in the Company's Health and Dental Insurance Plans as
Consultant has heretofore participated,, subject to the payment of the
portion of premiums required to be paid by the Company's regular
employees.
(e) Stock Options. Consultant shall retain all stock
options granted pursuant to his Employment Agreement for so long as
Consultant remains eligible under the terms of the Company's 1994
Performance Stock Option Plan.
3
<PAGE> 4
THE CONSULTANT IS NOT ENTITLED TO WORKERS' COMPENSATION BENEFITS. THE
CONSULTANT IS OBLIGATED TO PAY FEDERAL AND STATE INCOME TAX ON ANY MONIES
EARNED PURSUANT TO THE CONTRACT RELATIONSHIP AND THE CONSULTANT SHALL INDEMNIFY
AND HOLD THE COMPANY HARMLESS FROM ANY AND ALL TAXES, INTEREST AND PENALTIES
OWED BY IT AS A RESULT OF THE CONSULTANT'S FAILURE TO TIMELY PAY ANY SUCH
TAXES.
9. INDEMNIFICATION.
(a) Consultant shall defend, indemnify, and hold the Company harmless
from and against all claims asserted by a third party (or parties) and
related damages, losses and expenses, including attorneys' fees,
arising out of or resulting from the services performed or neglected
to be performed by the Consultant, provided that any such claim,
damage, loss, or expense is caused by the gross negligence or willful
or wanton misconduct of the Consultant, anyone directly or indirectly
employed by the Consultant, or anyone for whose acts the Consultant
may be liable.
(b) The Company shall defend, indemnify, and hold Consultant harmless
from and against all claims asserted by a third party (or parties) and
related damages, losses and expenses, including attorney's fees,
arising out of or resulting from or related to the services performed
or neglected to be performed by Consultant, provided that the claim or
loss is not caused by (a) Consultant's breach of this Agreement or the
duties of Consultant under this Agreement, (b) the gross negligence of
Consultant, or (c) the willful or wanton misconduct of Consultant.
10. REPRESENTATIONS AND WARRANTIES OF THE CONSULTANT. The
Consultant hereby represents and warrants to the Company that (i) the
Consultant's execution and delivery of this Agreement and his performance of
his duties and obligations hereunder will not conflict with, or cause a default
under, or give any party a right to damages under, or to terminate, any other
agreement to which the Consultant is a party or by which he is bound, and (ii)
there are no agreements or understandings that would make unlawful the
Consultant's execution or delivery of this Agreement or his employment
hereunder.
11. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to the Consultant as follows:
(a) The Company is duly organized and established as a
corporation under the laws of the State of Delaware and has all
requisite power and authority to enter into this Agreement and to
perform its obligations hereunder. The consummation of the
transactions contemplated by this Agreement will neither violate nor
be in conflict with any agreement or instrument to which the Company
is a party or by which it is bound.
(b) The execution, delivery and performance of this
Agreement and the transactions contemplated hereby have been duly and
validly authorized by all requisite corporate action on the part of
the Company and are valid, legal and binding obligations of
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<PAGE> 5
the Company, enforceable in accordance with their terms except as may
be limited by the laws of general application relating to bankruptcy,
insolvency, moratorium or other similar laws relating to or affecting
the enforcement of creditors' rights, and rules of law governing
specific performance, injunctive relief or other equitable remedies.
12. TERMINATION.
(a) Cause. The Company may terminate the Relationship at
any time for Cause (as defined herein). For purposes of this
Agreement, "Cause" means:
(i) the Consultant commits a breach of any
material term of this Agreement and such breach constitutes
gross negligence or willful misconduct and, if such breach is
capable of being cured, the Consultant fails to cure such
breach within 30 days of notice of such breach;
(ii) the Consultant is convicted of, or pleads
guilty or nolo contendere to a felony or a crime involving
moral turpitude; or
(iii) the Consultant's commission of any
intentional act in violation of any applicable law or
regulation where the Company has a reasonable belief that such
act shall be the primary cause for a license of the Company or
its subsidiaries or affiliates to be revoked, suspended or not
be renewed after proper application, and such revocation,
suspension or non-renewal is likely to cause either (a)
additional licenses of the Company, its subsidiaries or
affiliates to be suspended, revoked or not be renewed after
proper application, or (b) a Material Adverse Change in the
operations of the Company or the Trade Products Division.
(b) Voluntary. Subject to the provisions of Section 15,
Consultant may terminate this Agreement at any time during the
Contract Term upon 30-days prior written notice to the Company.
(c) Death. This Agreement shall terminate automatically
upon the Consultant's death.
(d) Disability. This Agreement shall terminate
automatically upon the Consultant's Disability. The term "Disability"
as used in connection with termination of the employment of the
Consultant shall mean the inability of the Consultant to substantially
perform his material duties hereunder due to physical or mental
disablement which continues for a period of six (6) consecutive
months, during the Contract Term (during which six (6) month period
the Consultant's Compensation and benefits shall continue) as
determined by an independent qualified physician mutually acceptable
to the Company and the Consultant (or his personal representative).
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<PAGE> 6
(e) Without Cause. The Company may, at its option,
terminate the Relationship without Cause at any time upon written
notice to the Consultant.
(f) Date of Termination. For purposes of this Agreement,
the term "Date of Termination" shall mean (i) the date that any party
gives notice, through action or otherwise, that it intends to
terminate this Agreement pursuant to the terms hereof or the date, if
any, specified by the terminating party in such notice as the
effective date of termination.
13. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) Without Cause. If the Company shall terminate the
Consultant's engagement without Cause this Agreement shall terminate
without further obligation on the part of the Company hereunder, other
than the obligation to continue to pay the Consultant in accordance
with Section 8(a) his Compensation from the Date of Termination
through the remainder of the Contract Term, in accordance with the
Company's normal payroll payment procedures. If the Consultant
terminates this Agreement for any reason, this Agreement shall
terminate without further obligation on the part of the Company
hereunder, other than the obligation to make payments to Consultant in
accordance with Section 15 hereof.
(b) Cause. If the Relationship shall be terminated by
the Company for "Cause" the Company shall terminate this Agreement
without further obligation on the part of the Company.
(c) Death. If the Relationship is terminated by reason
of the Consultant's death, this Agreement shall terminate without
further obligation on the part of the Company hereunder, other than
the obligation to pay to the Consultant's heirs or estate the
Compensation in accordance with Section 8(a) through the remainder of
the Contract Term, in accordance with the Company's normal payroll
payment procedures.
(d) Disability. If the Relationship is terminated by
reason of the Consultant's Disability, this Agreement shall terminate
without further obligation on the part of the Company hereunder, other
than the obligation to pay to the Consultant the Compensation in
accordance with Section 8(a) through the remainder of the Contract
Term, in accordance with the Company's normal payroll payment
procedures.
14. NONCOMPETITION.
(a) The Consultant acknowledges and recognizes the highly
competitive nature of the business of the Company and its affiliates
and the Consultant accordingly covenants and agrees, that at all times
for a period of twenty-four (24) consecutive months subsequent to the
end of the Contract Term (regardless of any prior termination of the
Relationship for any reason) as follows:
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(i) The Consultant will not directly or
indirectly own, manage, operate, finance, join, control or
participate in the ownership, management, organization,
financing or control of, or be connected as an officer,
director, employee, partner, principal, agent, representative,
consultant or otherwise with any business or enterprise
engaged in a business the same as or similar to the business
of the Company except as a holder of fewer than 5% of the
outstanding shares or other equity interests of a company
whose shares or other equity interests are registered under
the Securities Exchange Act of 1934, provided, however, that
the restrictions in this subparagraph shall not apply with
respect to Consultant's ownership of an interest in a company
that is engaged in the business of real estate development or
the building and development of mini-storage units.
(ii) The Consultant will not (a) directly or
indirectly induce any employee of the Company or any of its
affiliates to engage in any activity in which the Consultant
is prohibited from engaging by this Section 14 or to terminate
his employment with the Company or any of its affiliates or
(b) directly or indirectly employ or offer employment to any
person who was employed by the Company or any of its
affiliates unless such person shall have been terminated
without cause or ceased to be employed by any such entity for
a period of at least twelve months.
(iii) The Consultant will not use or permit his
name to be used in connection with any business or enterprise
engaged in the business the same as or similar to Company or
its affiliates or any other business engaged in by Company or
any of its affiliates.
(iv) The Consultant will not use the name of the
Company or any name similar thereto, but nothing in this
clause shall be deemed, by implication, to authorize or permit
use of such name after expiration of such period.
(v) The Consultant will not (a) disclose any
customer lists or any part thereof to any person, firm,
corporation, association or other entity for any reason or
purpose whatsoever; (b) assist in obtaining any of the
Company's customers for any other similar business; (c)
encourage any customer to terminate, change or modify its
relationship with the Company; or (d) solicit or divert or
attempt to solicit or divert the Company's customers.
(vi) The Company shall have the right, subject to
applicable law, to inform any other third party that the
Company reasonably believes to be, or to be contemplating
participating with Consultant or receiving from Consultant in
violation of this Agreement and of the rights of the Company
hereunder, and that participation by any such third party with
the Consultant in activities in violation of this Section 14
may give rise to claims by the Company against such third
party.
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(vii) The Consultant will not make any public
statement, make any unprovoked statements to regulatory
agencies, nor take any such actions where the primary purpose
of such public statement, unprovoked statement or action is
intended to (a) impair the goodwill or the business reputation
of the Company or any of its affiliates or (b) benefit a
competitor of the Company or to be otherwise detrimental to
the material interests of the Company.
The primary purpose of this Section 14 is the Company's legitimate
interest in protecting its economic welfare and business goodwill. The Company
and the Consultant further agree that this covenant shall in no way be
construed as a mere limitation on competition nor shall it be construed as a
restraint on the Consultant's right to engage in a common calling.
It is expressly understood and agreed that although Consultant and the
Company consider the restrictions contained in this Section 14 to be
reasonable, if a final judicial determination is made by a court of competent
jurisdiction that the time or territory or any other restriction contained in
this Agreement is an unenforceable restriction against Consultant, 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.
The failure of the Consultant to abide by the provisions of this
Section 14 shall be deemed a material breach of this Agreement and, if
applicable, shall also cause any payments being made by the Company to
Consultant pursuant to this Agreement to immediately terminate. In the latter
event, the Company shall give notice to Consultant stating that (i) Consultant
has breached Section 14, and detailing the nature of such breach, and (ii) the
Company is terminating all payments due to Consultant, if any, (the date of
such notice is referred to herein as the "Notification Date"). Upon written
notice from the Consultant, received by the Company within five (5) days of the
Notification Date, of his intention to commence arbitration pursuant to Section
26 concerning such breach, then retroactive to the Notification Date, the
Company will pay all amounts due to Consultant pursuant to this Agreement, if
any, into an escrow account to be established at the Company's primary bank
until such time as a decision in the arbitration is made; provided, however,
that in the event Consultant fails to initiate arbitration proceedings within
thirty (30) days after the Notification Date, the money placed in escrow shall
be immediately returned to the Company. Nothing herein shall be construed as
limiting or prohibiting the Company from pursuing any other remedies at law or
in equity which it may have.
15. OBLIGATIONS UPON VOLUNTARY TERMINATION. In the event that
Consultant voluntarily terminates this contract prior to the end of the
Contract Term ("Early Termination Date"), the Company shall pay the Consultant
for the remainder of the Contract Term, an amount equal to 100% of the
Compensation provided in Section 8(a) through the remainder of the Contract
Term,
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such compensation payable in substantially equal installments on the last day
of each month. In consideration, the term of the noncompetition provisions of
Section 14 will run from the Early Termination Date through a period of
twenty-four (24) consecutive months subsequent to the end of the Contract Term.
16. PROPRIETARY INFORMATION. Through the second anniversary of
the Date of Termination, the Consultant shall not use for his personal benefit,
or disclose, communicate or divulge to, or use for the direct or indirect
benefit on any person, firm, association or company other than the Company, any
Proprietary Information. "Proprietary Information" means information relating
to the properties, prospects, products, services, customers or operations of
the Company or any direct or indirect affiliate thereof that is not generally
known, is proprietary to the Company or such affiliate and is made known to the
Consultant or learned or acquired by the Consultant while in the employ of the
Company, including, without limitation, information concerning trade secrets of
the Company, or any of the Company's affiliates and any improvements relating
to the products of the Company in accounting, marketing, selling, leasing,
financing and other business methods and techniques. However, Proprietary
Information shall not include: (i) at the time of disclosure to the Consultant
such information that was in the public domain or later entered the public
domain other than as a result of a breach of an obligation herein; or (ii)
subsequent to disclosure to the Consultant, the Consultant received such
information from a third party under no obligation to maintain such information
in confidence, and the third party came into possession of such information
other than as a result of a breach of an obligation herein. All materials or
articles of information of any kind furnished to the Consultant by the Company
or developed by the Consultant in the course of his employment thereunder are
and shall remain the sole property of the Company; and if the Company requests
the return of such information at any time during, upon or after the
termination of the Consultant's employment hereunder, the Consultant shall
immediately deliver the same to the Company.
17. OWNERSHIP OF PROPRIETARY INFORMATION. The Consultant 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. At
all times, until the second anniversary of the Date of Termination, the
Consultant will keep in the strictest confidence and trust all Proprietary
Information and will not use or disclose such Proprietary Information, or
anything relating to such information, without the prior written consent of the
Company, except as may be necessary in the ordinary course of performing his
duties under this Agreement.
18. DOCUMENTS AND OTHER PROPERTY. All materials or articles of
information of any kind furnished to the Consultant in the course of his
employment hereunder are and shall remain the sole property of the Company; and
if the Company requests the return of such information at any time during, upon
or after the termination of the Consultant's employment hereunder, the
Consultant shall immediately deliver the same to the Company. The Consultant
will not, without the prior written consent of the Company, retain any
documents, data or property, or any reproduction thereof of any description,
belonging to the Company or pertaining to any Proprietary Information.
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19. THIRD-PARTY INFORMATION. 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"). At all times, the Consultant will hold Third-Party Information
in the strictest confidence and will not disclose or use Third-Party
Information except as permitted by the agreement between the Company and such
third party.
20. INTELLECTUAL PROPERTY. Any and all products of the type sold
by the Company or competing therewith made, developed or created by the
Consultant (whether at the request or suggestion of the Company or otherwise,
whether alone or in conjunction with others, and whether during regular hours
of work or otherwise) either (a) during the period of this Agreement, or (b)
within a period which is the greater of (i) twenty-four months after the
Effective Date or (ii) twelve months after the Date of Termination, shall be
promptly and fully disclosed by the Consultant to the Board and, if such
intellectual property was made, developed or created other than pursuant to the
Consultant's employment hereunder, the Consultant shall grant the Company a
perpetual, royalty free license to such intellectual property, and if such
intellectual property was made, developed or created pursuant to the
Consultant's employment hereunder, such intellectual property shall be the
Company's exclusive property as against the Consultant, and the Consultant
shall promptly deliver to an appropriate representative of the Company as
designated by the Board all papers, drawings, models, data and other material
relating to any invention made, developed or created by him as aforesaid. The
Consultant shall, at the request of the Company and without any payment
therefor, execute any documents necessary or advisable in the opinion of the
Company's counsel to direct issuance of patents or copyrights to the Company
with respect to such Products as are to be the Company's exclusive property as
against the Consultant or to vest in the Company title to such Products as
against the Consultant. The expense of securing any such patent or copyright
shall be borne by the Company.
21. EQUITABLE RELIEF. The Consultant acknowledges that, in view
of the nature of the business in which the Company is engaged, the restrictions
contained in Sections 14 through 20, inclusive (the "Restrictions") are
reasonable and necessary in order to protect the legitimate interests of the
Company, and that any violation thereof would result in irreparable injuries to
the Company, and the Consultant therefore further acknowledges that, if the
Consultant violates, or threatens to violate, any of the Restrictions, the
Company shall be entitled to obtain from any court of competent jurisdiction,
without the posting of any bond or other security, preliminary and permanent
injunctive relief as well as damages and an equitable accounting of all
earnings, profits and other benefits arising from such violation, which rights
shall be cumulative and in addition to any other rights or remedies in law or
equity to which the Company may be entitled.
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22. NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered by hand or mailed within the continental United States
by first-class certified mail, return receipt requested, postage prepaid,
addressed as follows:
(a) if to the Board or the Company, to:
Stuart Entertainment, Inc.
3211 Nebraska Avenue
Council Bluffs, Iowa 51501
Attention: President
(b) if to the Consultant, to:
Ronald G. Rudy
12410 Marine View Drive
Edmonds, Washington 98026
Such addresses may be changed by written notice sent to the other party at the
last recorded address of that party.
23. NO ASSIGNMENT. Except as otherwise expressly provided herein,
this Agreement is not assignable by any party and no payment to be made
hereunder shall be subject to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance or other charge.
24. EXECUTION IN COUNTERPARTS. This Agreement may be executed by
the parties hereto in two or more counterparts, each of which shall be deemed
to be an original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
25. GOVERNING LAW. This Agreement shall be construed and
interpreted in accordance with and governed by the laws of the State of
Washington, other than the conflict of laws provisions of such laws.
26. ARBITRATION OF ALL DISPUTES. Any controversy or claim arising
out of or relating to this Agreement or the breach thereof (including the
arbitrability of any controversy or claim), shall be settled by arbitration in
the City of Seattle, Washington. The arbitration shall be conducted in
accordance with the rules of the American Arbitration Association. The
arbitration shall be presided over by three arbitrators who shall be selected
in accordance with the labor arbitration rules of the American Arbitration
Association. The cost of any arbitration proceeding hereunder shall be borne
equally by the Company and the Consultant, subject to the arbitrators awarding
such costs otherwise. The award of the arbitrators shall be binding upon the
parties. Except where expressly authorized by statute, a party shall only be
entitled to be awarded damages for actual
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losses suffered by the injured party plus reasonable costs (including
reasonable attorney's fees). Judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof.
27. SEVERABILITY. If any provision of this Agreement shall be
adjudged by any court of competent jurisdiction to be invalid or unenforceable
for any reason, such judgment shall not affect, impair or invalidate the
remainder of this Agreement.
28. ENTIRE AGREEMENT. This Agreement embodies the entire
agreement of the parties hereof, and supersedes all other oral or written
agreements or understandings between them regarding the subject matter hereof.
No change, alteration or modification hereof may be made except in a writing,
signed by each of the parties hereto.
29. HEADINGS DESCRIPTIVE. The headings of the several sections of
this Agreement are inserted for convenience only and shall not in any way
affect the meaning or construction of any of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the day and year first above written.
STUART ENTERTAINMENT, INC.
By
------------------------------------
Albert F. Barber, Vice Chairman and
Chief Executive Officer
CONSULTANT
By
------------------------------------
Ronald G. Rudy
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EXHIBIT 10.22
[Net Lease]
LEASE AGREEMENT
THIS LEASE AGREEMENT is made this 16th day of June, 1997, between SCI
DEVELOPMENT SERVICES INCORPORATED ("Landlord"), and the Tenant named below.
<TABLE>
<CAPTION>
<S> <C>
TENANT: STUART ENTERTAINMENT, INC
TENANT'S REPRESENTATIVE Clem Chantiam; 3211 Nebraska Avenue, Council Bluffs,
ADDRESS, AND PHONE NO.: Iowa 51501
PREMISES: That portion of the Building, containing approximately
100,000 rentable square feet during the first lease year, as
determined by Landlord, as shown on Exhibit A and 157,600
rentable square feet during the remaining Lease Term, as
determined by Landlord, as shown on Exhibit A-1.
PROJECT: McAllen Distribution Center
BUILDING Building No. 1
TENANT'S PROPORTIONATE SHARE
OF PROJECT FOR THE FIRST LEASE YEAR: 48.43%
TENANT'S PROPORTIONATE SHARE
OF PROJECT FOR LEASE YEARS 2-7: 76.32%
TENANT'S PROPORTIONATE SHARE
OF BUILDING FOR THE FIRST LEASE YEAR: 48.43%
TENANT'S PROPORTIONATE SHARE
OF BUILDING FOR LEASE YEARS 2-7: 76.32%
LEASE TERM: Beginning on the Commencement Date and ending on the last
day of the 84th full calendar month thereafter.
COMMENCEMENT DATE: See Addendum Two
INITIAL MONTHLY BASE RENT: $27,500.00
(See Addendum One)
Initial Estimated Monthly 1. Utilities; $ 833.00
Operating Expense Payments:
(estimates only and subject 2. Common Area Charges: $ 1,500.00
to adjustment to actual costs
and expenses according to the 3. Taxes: $ 9,167.00
provisions of this Lease)
4. Insurance: $ 666.00
5. Management Fee: $ 1249.00
INITIAL ESTIMATED MONTHLY OPERATING
EXPENSE PAYMENTS: $13,415.00
INITIAL MONTHLY BASE RENT AND
OPERATING EXPENSE PAYMENTS: $49,915.00
</TABLE>
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SECURITY DEPOSIT: $52,625.00
BROKER: None
ADDENDA: Addendum One - Base Rent Adjustments; Addendum Two-
Construction Addendum (Allowance); Addendum Three -
Tenant's Purchase Option; Addendum Four - Right of First
Offer; Addendum Five - One Renewal Option at Market;
Addendum Six - Acquisition of Premises Contingency;
Addendum Seven - Agreement to Subordinate Landlord's Lien
1. GRANTING CLAUSE. In consideration of the obligation of Tenant to
pay rent as herein provided and in consideration of the other terms, covenants,
and conditions hereof, Landlord leases to Tenant, and Tenant takes from
Landlord, the Premises, to have and to hold for the Lease Term, subject to the
terms, covenants and conditions of this Lease.
2. ACCEPTANCE OF PREMISES. Tenant shall accept the Premises in its
condition as of the Commencement Date, subject to all applicable laws,
ordinances, regulations, covenants and restrictions. Landlord has made no
representation or warranty as to the suitability of the Premises for the
conduct of Tenant's business, and Tenant waives any implied warranty that the
Premises are suitable for Tenant's intended purposes. Except as provided in
Paragraph 10, in no event shall Landlord have any obligation for any defects in
the Premises or any limitation on its use. The taking of possession of the
Premises shall be conclusive evidence that Tenant accepts the Premises and that
the Premises were in good condition at the time possession was taken except for
items that are Landlord's responsibility under Paragraph 10 and any punchlist
items agreed to in writing by Landlord and Tenant. Tenant shall have thirty
(30) days following the Commencement Date to prepare the punchlist items to be
repaired by Landlord; provided, however, such punchlist items shall not include
any items or repairs that were caused by, or are attributable to Tenant, its
agents, employees and invitees. The ability of Tenant to assert additional
punchlist items for thirty (30) days following the Commencement Date is not
intended to and shall not be construed to transfer to Landlord the Tenant's
obligations to maintain during the Lease Term the interior of the Premises
and/or the other portions of the Premises for which Tenant is responsible under
this Lease. As set forth on the first page of this Lease, (i) the Premises is
defined hereunder as the approximately 157,600 square feet of leased space as
outlined on Exhibit A of this Lease, (ii) the Building is the entire
approximately 206,500 square foot facility commonly known as the McAllen
Distribution Center No. 1, and (iii) the Project is the Building and any other
buildings built now or in the future by Landlord or its successor which are
contiguous to the Building and part of the McAllen Distribution Center.
3. USE. The Premises shall be used only for the purpose of receiving,
storing, shipping, and selling (but limited to wholesale sales) products,
materials, and general merchandise, including, but not limited to, bingo
printing and finishing, pull tabs, and ink markers, made and/or distributed by
Tenant, and for such other lawful purposes as may be incidental thereto. Tenant
may also use the Premises for light manufacturing of pull tab inserts, lottery
style tickets, assembly of electrical bingo blowers, flashboards, and
electronic bingo units. Tenant shall not conduct or give notice of any auction,
liquidation, or going out of business sale on the Premises. Tenant will use the
Premises in a careful, safe and proper manner and will not commit waste,
overload the floor or structure of the Premises or subject the Premises to use
that would damage the Premises. Tenant shall not permit any objectionable or
unpleasant odors, smoke, dust, gas, noise, or vibrations to emanate from the
Premises, or take any other action that would constitute a nuisance or would
disturb, unreasonably interfere with, or endanger Landlord or any tenants of
the Project. Outside storage, including without limitation, storage of trucks
and other vehicles, is prohibited without Landlord's prior written consent;
provided, however, that to the extent permitted by applicable Legal
Requirements (defined below), Tenant shall have the right to park automobiles,
trucks and/or trailers along the exterior walls of the Premises, between the
truck doors, and at the truck doors of the Premises, and in the truck court
area for the Premises, as shown on Exhibit A to this Lease, so long as such
automobiles, trucks and/or trailers are in operable condition and do not block
access to the
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premises of other tenants (if any) of the Building. Tenant, at its sole
expense, shall use and occupy the Premises in compliance with all laws,
including, without limitation, the Americans With Disabilities Act, orders,
judgments, ordinances, regulations, codes, directives, permits, licenses,
covenants and restrictions now or hereafter applicable to the Premises
(collectively, "Legal Requirements"). The Premises shall not be used as a place
of public accommodation under the Americans With Disabilities Act or similar
state statutes or local ordinances or any regulations promulgated thereunder,
all as may be amended from time to time. Tenant shall, at its expense, make any
alterations or modifications, within or without the Premises, that are required
by Legal Requirements related to Tenant's use or occupation of the Premises.
Tenant will not use or permit the Premises to be used for any purpose or in any
manner that would void Tenant's or Landlord's insurance, increase the insurance
risk, or cause the disallowance of any sprinkler credits. If any increase in
the cost of any insurance on the Premises or the Project is caused by Tenant's
use or occupation of the Premises, or because Tenant vacates the Premises, then
Tenant shall pay the amount of such increase to Landlord. Any occupation of the
Premises by Tenant prior to the Commencement Date shall be subject to all
obligations of Tenant under this Lease.
4. BASE RENT. Tenant shall pay Base Rent in the amount set forth
above. The Security Deposit shall be due and payable on the date hereof, and
the first monthly installment of Base Rent and estimated Operating Expenses
(defined below) shall be due and payable ten (10) days prior to the
Commencement Date. Tenant promises to pay to Landlord in advance, without
demand, deduction or set-off, monthly installments of Base Rent on or before
the first day of each calendar month succeeding the Commencement Date. Payments
of Base Rent for any fractional calendar month shall be prorated. All payments
required to be made by Tenant to Landlord hereunder shall be payable at such
address as Landlord may specify from time to time by written notice delivered
in accordance herewith. The obligation of Tenant to pay Base Rent and other
sums to Landlord and the obligations of Landlord under this Lease are
independent obligations. Tenant shall have no right at any time to abate,
reduce, or set-off any rent due hereunder except as may be expressly provided
in this Lease. If Tenant is delinquent in any monthly installment of Base Rent
or of estimated Operating Expenses for more than 5 days, Tenant shall pay to
Landlord on demand a late charge equal to 5 percent of such delinquent sum.
Notwithstanding the foregoing, Tenant shall not be obligated to pay the late
charge until Landlord has given Tenant 5 days written notice of the delinquent
payment, provided, however, that such notice shall not be required more than
twice in any 12-month period or more than six (6) times over the initial Lease
Term. The provision for such late charge shall be in addition to all of
Landlords other rights and remedies hereunder or at law and shall not be
construed as a penalty.
5. SECURITY DEPOSIT. The Security Deposit shall be held by Landlord as
security for the performance of Tenant's obligations under this Lease. The
Security Deposit is not an advance rental deposit or a measure of Landlord's
damages in case of Tenant's default. Upon each occurrence of an Event of
Default (hereinafter defined), Landlord may use all or part of the Security
Deposit to pay delinquent payments due under this Lease, and the cost of any
damage, injury, expense or liability caused by such Event of Default, without
prejudice to any other remedy provided herein or provided by law. Tenant
shall pay Landlord on demand the amount that will restore the Security Deposit
to its original amount. Landlord's obligation respecting the Security Deposit
is that of a debtor, not a trustee; no interest shall accrue thereon. the
Security Deposit shall be the property of Landlord, but shall be paid to Tenant
when Tenant's obligations under this Lease have been completely fulfilled.
Landlord shall be released from any obligation with respect to the Security
Deposit upon transfer of this Lease and the Premises to a person or entity
assuming Landlord's obligations under this Paragraph S.
6. OPERATING EXPENSE PAYMENTS. During each month of the Lease Term, on
the same date that Base Rent is due, Tenant shall pay Landlord an amount equal
to 1/12 of the annual cost, as estimated by Landlord from time to time, of
Tenant's Proportionate Share (hereinafter defined) of Operating Expenses for
the Project. Payments thereof for any fractional calendar month shall be
prorated. The term "Operating Expenses" means all costs and expenses incurred
by Landlord with respect to the ownership, maintenance, and operation of the
Project including, but not limited to costs of: Taxes (hereinafter defined) and
fees payable to tax consultants and attorneys for consultation and contesting
taxes; insurance; utilities; maintenance, repair and replacement of all
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portions of the Project, including without limitation, paving and parking
areas, roads, roofs, alleys, and driveways, mowing, landscaping, exterior
painting, utility lines, heating, ventilation and air conditioning systems,
lighting, electrical systems and other mechanical and building systems; amounts
paid to contractors and subcontractors for work or services performed in
connection with any of the foregoing; charges or assessments of any association
to which the Project is subject; property management fees payable to a property
manager in an amount not to exceed 1.5% of gross rents from the Project,
including any affiliate of Landlord, or if there is no property manager, an
amount not to exceed 1.5% of gross rents from the Project; security services,
if any; trash collection, sweeping and removal; and additions or alterations
made by Landlord to the Project or the Building in order to comply with Legal
Requirements (other than those expressly required herein to be made by Tenant)
or that are appropriate to the continued operation of the Project or the
Building as a bulk warehouse or light manufacturing facility in the market
area, provided that the cost of additions or alterations that are required to
be capitalized for federal income tax purposes shall be amortized on a straight
line basis over a period equal to the lesser of the useful life thereof for
federal income tax purposes or 10 years. Operating Expenses do not include
costs, expenses, depreciation or amortization for capital repairs and capital
replacements or structural repairs required to be made by Landlord under
Paragraph 10 of this Lease, debt service under mortgages or ground rent under
ground leases, costs of restoration to the extent of net insurance proceeds
received by Landlord with respect thereto, leasing commissions, or the costs of
renovating space for tenants.
If Tenant's total payments of Operating Expenses for any year
are less than Tenant's Proportionate Share of actual Operating Expenses for
such year, then Tenant shall pay the difference to Landlord within 30 days
after demand, and if more, then Landlord shall retain such excess and credit it
against Tenant's next payments. For purposes of calculating Tenant's
Proportionate Share of Operating Expenses, a year shall mean a calendar year
except the first year, which shall begin on the Commencement Date, and the last
year, which shall end on the expiration of this Lease. With respect to
Operating Expenses which Landlord allocates to the entire Project, Tenant's
"Proportionate Share" shall be the percentage set forth on the first page of
this Lease as Tenant's Proportionate Share of the Project as reasonably
adjusted by Landlord in the future for changes in the physical size of the
Premises or the Project; and, with respect to Operating Expenses which Landlord
allocates only to the Building, Tenant's "Proportionate Share" shall be the
percentage set forth on the first page of this Lease as Tenant's Proportionate
Share of the Building as reasonably adjusted by Landlord in the future for
changes in the physical size of the Premises or the Building. Landlord may
equitably increase Tenant's Proportionate Share for any item of expense or cost
reimbursable by Tenant that relates to a repair, replacement, or service that
benefits only the Premises or only a portion of the Project or Building that
includes the Premises or that varies with occupancy or use. The estimated
Operating Expenses for the Premises set forth on the first page of this Lease
are only estimates, and Landlord makes no guaranty or warranty that such
estimates will be accurate.
7. UTILITIES. Tenant shall pay for all water, gas, electricity, heat,
light, power, telephone, sewer, sprinkler services, refuse and trash
collection, and other utilities and services used on the Premises, all
maintenance charges for utilities, and any storm sewer charges or other similar
charges for utilities imposed by any governmental entity or utility provider,
together with any taxes, penalties, surcharges or the like pertaining to
Tenant's use of the Premises. Landlord may cause at Tenant's expense any
utilities to be separately metered or charged directly to Tenant by the
provider. Tenant shall pay its share of all charges for jointly metered
utilities based upon consumption, as reasonably determined by Landlord. No
interruption or failure of utilities shall result in the termination of this
Lease or the abatement of rent. Tenant agrees to limit use of water and sewer
for normal restroom use; provided, however, if such water and sewer is
separately metered, Tenant may also use water and sewer for Tenant's
manufacturing process.
8. TAXES. Landlord shall pay all taxes, assessments and governmental
charges (collectively referred to as "Taxes") that accrue against the Project
during the Lease Term, which shall be included as part of the Operating
Expenses charged to Tenant. Landlord may contest by appropriate legal
proceedings the amount, validity, or application of any Taxes or liens thereof.
All capital levies or other taxes assessed or imposed on Landlord upon the
rents payable to Landlord under this Lease and any franchise tax, any excise,
transaction, sales or privilege tax, assessment, levy or charge measured by or
based, in whole or in part, upon such rents from the Premises and/or
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the Project or any portion thereof shall be paid by Tenant to Landlord monthly
in estimated installments or upon demand, at the option of Landlord, as
additional rent; provided, however, in no event shall Tenant be liable for any
net income taxes imposed on Landlord unless such net income taxes are in
substitution for any Taxes payable hereunder. If any such tax or excise is
levied or assessed directly against Tenant, then Tenant shall be responsible
for and shall pay the same at such times and in such manner as the taxing
authority shall require. Tenant shall be liable for all taxes levied or
assessed against any personal property or fixtures placed in the Premises,
whether levied or assessed against Landlord or Tenant.
9. INSURANCE. Landlord shall maintain all risk property insurance
covering the full replacement cost of the Building. Landlord may, but is not
obligated to, maintain such other insurance and additional coverages as it may
deem necessary, including, but not limited to, commercial liability insurance
and rent loss insurance. All such insurance shall be included as part of the
Operating Expenses charged to Tenant. The Project or Building may be included in
a blanket policy (in which case the cost of such insurance allocable to the
Project or Building will be determined by Landlord based upon the insurer's
cost calculations). Tenant shall also reimburse Landlord for any increased
premiums or additional insurance which Landlord reasonably deems necessary as a
result of Tenant's use of the Premises.
Tenant, at its expense, shall maintain during the Lease Term:
all risk property insurance covering the full replacement cost of all property
and improvements installed or placed in the Premises by Tenant at Tenant's
expense; worker's compensation insurance with no less than the minimum limits
required by law; employer's liability insurance with such limits as required by
law; and commercial liability insurance, with a minimum limit of $1,000,000
per occurrence and a minimum umbrella limit of $1,000,000, for a total minimum
combined general liability and umbrella limit of $2,000,000 (together with such
additional umbrella coverage as Landlord may reasonably require) for property
damage, personal injuries, or deaths of persons occurring in or about the
Premises. Landlord may from time to time require reasonable increases in any
such limits. The commercial liability policies shall name Landlord as an
additional insured, insure on an occurrence and not a claims-made basis, be
issued by insurance companies which are reasonably acceptable to Landlord, not
be cancelable unless 30 days prior written notice shall have been given to
Landlord, contain a hostile fire endorsement and a contractual liability
endorsement and provide primary coverage to Landlord (any policy issued to
Landlord providing duplicate or similar coverage shall be deemed excess over
Tenant's policies). Such policies or certificates thereof shall be delivered to
Landlord by Tenant upon commencement of the Lease Term and upon each renewal of
said insurance.
The all risk property insurance obtained by Landlord and Tenant
shall include a waiver of subrogation by the insurers and all rights based upon
an assignment from its insured, against Landlord or Tenant, their officers,
directors, employees, managers, agents, invitees and contractors, in connection
with any loss or damage thereby insured against. Neither party nor its
officers, directors, employees, managers, agents, invitees or contractors shall
be liable to the other for loss or damage caused by any risk coverable by all
risk property insurance, and each party waives any claims against the other
party, and its officers, directors, employees, managers, agents, invitees and
contractors for such loss or damage. The failure of a party to insure its
property shall not void this waiver. Landlord and its agents, employees and
contractors shall not be liable for, and Tenant hereby waives all claims
against such parties for, business interruption and losses occasioned thereby
sustained by Tenant or any person claiming through Tenant resulting from any
accident or occurrence in or upon the Premises or the Project from any cause
whatsoever, including without limitation, damage caused in whole or in part,
directly or indirectly, by the negligence of Landlord or its agents, employees
or contractors.
10. LANDLORD'S REPAIRS. Landlord shall maintain, at its expense, the
structural soundness of the roof, foundation, the structural soundness of the
floor, and exterior walls of the Building in good repair, reasonable wear and
tear and uninsured losses and damages caused by Tenant, its agents and
contractors excluded. The term "walls" as used in this Paragraph 10 shall not
include windows, glass or plate glass, doors or overhead doors, special store
fronts, dock bumpers, dock plates or levelers, or office entries. Tenant shall
promptly give Landlord written notice of any
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repair required by Landlord pursuant to this Paragraph 10, after which Landlord
shall have a reasonable opportunity to repair.
11. TENANT'S REPAIRS. Landlord, at Tenant's expense as provided in
Paragraph 6, shall maintain in good repair and condition the parking areas and
other common areas of the Building, including, but not limited to driveways,
alleys, landscape and grounds surrounding the Premises. Subject to Landlord s
obligation in Paragraph 10 and subject to Paragraphs 9 and 15, Tenant, at its
expense, shall repair, replace and maintain in good condition all portions of
the Premises and all areas, improvements and systems exclusively serving the
Premises including, without limitation, dock and loading areas, truck doors,
plumbing, water and sewer lines up to points of common connection, fire
sprinklers and fire protection systems, entries, doors, ceilings and roof
membrane, windows, interior walls, and the interior side of demising walls, and
heating, ventilation and air conditioning systems. Such repair and replacements
include capital expenditures and repairs whose benefit may extend beyond the
Term. Heating, ventilation and air conditioning systems and other mechanical
and building systems serving the Premises shall be maintained at Tenant s
expense pursuant to maintenance service contracts entered into by Tenant. The
scope of services and contractors under such maintenance contracts shall be
reasonably approved by Landlord. At Landlord s request, Tenant shall enter into
a joint maintenance agreement with any railroad that services the Premises. If
Tenant fails to perform any repair or replacement for which it is responsible,
Landlord may perform such work and be reimbursed by Tenant within 10 days after
demand therefor. Subject to Paragraphs 9 and 15, Tenant shall bear the full
cost of any repair or replacement to any part of the Building or Project that
results from damage caused by Tenant, its agents, contractors, or invitees and
any repair that benefits only the Premises. Landlord agrees that following the
Commencement Date, Landlord shall, to the extent assignable, assign to Tenant
any contractor or manufacturer warranties relating to the Tenant Improvements
and if such warranties are not assignable, Landlord shall use commercially
reasonable efforts to enforce such warranties on behalf and for the benefit of
Tenant.
12. TENANT-MADE ALTERATIONS AND TRADE FIXTURES. Any alterations,
additions, or improvements made by or on behalf of Tenant to the Premises
("Tenant-Made Alterations") shall be subject to Landlord s prior written
consent. Tenant shall cause, at its expense, all Tenant-Made Alterations to
comply with insurance requirements and with Legal Requirements and shall
construct at its expense any alteration or modification required by Legal
Requirements as a result of any Tenant-Made Alterations. All Tenant-Made
Alterations shall be constructed in a good and workmanlike manner by
contractors reasonably acceptable to Landlord and only good grades of materials
shall be used. All plans and specifications for any Tenant-Made Alterations
shall be submitted to Landlord for its approval. Landlord may monitor
construction of the Tenant-Made Alterations. Tenant shall reimburse Landlord
for its actual out-of-pocket costs in reviewing plans and specifications and in
monitoring construction for structural Tenant-Made Alterations. Landlord s
right to review plans and specifications and to monitor construction shall be
solely for its own benefit, and Landlord shall have no duty to see that such
plans and specifications or construction comply with applicable laws, codes,
rules and regulations. Tenant shall provide Landlord with the identities and
mailing addresses of all persons performing work or supplying materials, prior
to beginning such construction, and Landlord may post on and about the Premises
notices of non-responsibility pursuant to applicable law. Tenant shall furnish
security or make other arrangements satisfactory to Landlord to assure payment
for the completion of all work free and clear of liens and shall provide
certificates of insurance for worker's compensation and other coverage in
amounts and from an insurance company satisfactory to Landlord protecting
Landlord against liability for personal injury or property damage during
construction. Upon completion of any Tenant-Made Alterations, Tenant shall
deliver to Landlord sworn statements setting forth the names of all contractors
and subcontractors who did work on the Tenant-Made Alterations and final lien
waivers from all such contractors and subcontractors. Upon surrender of the
Premises, all Tenant-Made Alterations and any leasehold improvements
constructed by Landlord or Tenant shall remain on the Premises as Landlord's
property, except to the extent Landlord requires removal at Tenant's expense of
any such items or Landlord and Tenant have otherwise agreed in writing in
connection with Landlord's consent to any Tenant-Made Alterations. Tenant shall
repair any damage caused by such removal.
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Tenant, at its own cost and expense and without Landlord's prior
approval, may erect such shelves, bins, machinery and trade fixtures
(collectively "Trade Fixtures") in the ordinary course of its business provided
that such items do not alter the basic character of the Premises, do not
overload or damage the Premises, and may be removed without injury to the
Premises, and the construction, erection, and installation thereof complies
with all Legal Requirements and with Landlord's requirements set forth above.
Tenant shall remove its Trade Fixtures and shall repair any damage caused by
such removal.
13. SIGNS. Tenant shall not make any changes to the exterior of the
Premises, install any exterior lights, decorations, balloons, flags, pennants,
banners, or painting, or erect or install any signs, windows or door lettering,
placards, decorations, or advertising media of any type which can be viewed
from the exterior of the Premises, without Landlord's prior written consent.
Upon surrender or vacation of the Premises, Tenant shall have removed all signs
and repair, paint, and/or replace the building facia surface to which its signs
are attached. Tenant shall obtain all applicable governmental permits and
approvals for sign and exterior treatments. All signs, decorations, advertising
media, blinds, draperies and other window treatment or bars or other security
installations visible from outside the Premises shall be subject to Landlord's
approval and conform in all respects to Landlord's requirements.
14. PARKING. Tenant shall have the exclusive use of that certain
parking area more particularly set forth on Exhibit A-1 to this Lease. Tenant
shall be entitled to park in common with other tenants of the Project in those
areas designated for nonreserved parking. Landlord may allocate parking spaces
among Tenant and other tenants in the Project if Landlord determines that such
parking facilities are becoming crowded. Landlord shall not be responsible for
enforcing Tenant's parking rights against any third parties.
15. RESTORATION. If at any time during the Lease Term the Premises are
damaged by a fire or other casualty, Landlord shall notify Tenant within 30
days after such damage as to the amount of time Landlord reasonably estimates
it will take to restore the Premises. If the restoration time is estimated to
exceed 4 months, either Landlord or Tenant may elect to terminate this Lease
upon notice to the other party given no later than 30 days after Landlord's
notice. If neither party elects to terminate this Lease or if Landlord
estimates that restoration will take 4 months or less, then, subject to receipt
of sufficient insurance proceeds, Landlord shall promptly restore the Premises
excluding the improvements installed by Tenant or by Landlord and paid by
Tenant, subject to delays arising from the collection of insurance proceeds or
from Force Majeure events. Tenant at Tenant's expense shall promptly perform,
subject to delays arising from the collection of insurance proceeds, or from
Force Majeure events, all repairs or restoration not required to be done by
Landlord and shall promptly re-enter the Premises and commence doing business
in accordance with this Lease. Notwithstanding the foregoing, either party may
terminate this Lease if the Premises are damaged during the last year of the
Lease Term and Landlord reasonably estimates that it will take more than one
month to repair such damage. Tenant shall pay to Landlord with respect to any
damage to the Premises the amount of the commercially reasonably deductible
under Landlord's insurance policy (currently $10,000) within 10 days after
presentment of Landlord's invoice. If the damage involves the premises of other
tenants, Tenant shall pay the portion of the deductible that the cost of the
restoration of the Premises bears to the total cost of restoration, as
determined by Landlord. Base Rent and Operating Expenses shall be abated for
the period of repair and restoration in the proportion which the area of the
Premises, if any, which is not usable by Tenant bears to the total area of the
Premises. Such abatement shall be the sole remedy of Tenant, and except as
provided herein, Tenant waives any right to terminate the Lease by reason of
damage or casualty loss.
16. CONDEMNATION. If any part of the Premises or the Project should be
taken for any public or quasi-public use under governmental law, ordinance, or
regulation, or by right of eminent domain, or by private purchase in lieu
thereof (a "Taking" or "Taken"), and the Taking would prevent or materially
interfere with Tenant's use of the Premises in Tenant's reasonable judgement or
in Landlord's judgment would materially interfere with or impair its ownership
or operation of the Project, then upon written notice by Landlord this Lease
shall terminate and Base Rent shall be apportioned as of said date. If part of
the Premises shall be Taken, and this Lease is not terminated as provided
above, the Base Rent payable hereunder during the unexpired Lease Term shall be
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reduced to such extent as may be fair and reasonable under the circumstances.
In the event of any such Taking, Landlord shall be entitled to receive the
entire price or award from any such Taking without any payment to Tenant, and
Tenant hereby assigns to Landlord Tenant's interest, if any, in such award.
Tenant shall have the right, to the extent that same shall not diminish
Landlord's award, to make a separate claim against the condemning authority
(but not Landlord) for such compensation as may be separately awarded or
recoverable by Tenant for moving expenses and damage to Tenant's Trade
Fixtures, if a separate award for such items is made to Tenant.
17. ASSIGNMENT AND SUBLETTING. Without Landlord's prior written
consent, which Landlord will not unreasonably withhold or delay, Tenant shall
not assign this Lease or sublease the Premises or any part thereof or mortgage,
pledge, or hypothecate its leasehold interest or grant any concession or
license within the Premises and any attempt to do any of the foregoing shall be
void and of no effect. For purposes of this paragraph, a transfer of the
ownership interests controlling Tenant shall be deemed an assignment of this
Lease unless such ownership interests are publicly traded. Notwithstanding the
above, Tenant may assign or sublet the Premises, or any part thereof, to any
entity controlling Tenant, controlled by Tenant or under common control with
Tenant (a "Tenant Affiliate"), without the prior written consent of Landlord.
Tenant shall reimburse Landlord for all of Landlord's reasonable out-of-pocket
expenses in connection with any assignment or sublease. Upon Landlord's receipt
of Tenant's written notice of a desire to assign or sublet the Premises, or any
part thereof (other than to a Tenant Affiliate), Landlord may, by giving
written notice to Tenant within 30 days after receipt of Tenant's notice,
terminate this Lease with respect to the space described in Tenant's notice, as
of the date specified in Tenant's notice for the commencement of the proposed
assignment or sublease.
It shall be reasonable for the Landlord to withhold its consent
to any assignment or sublease in any of the following instances: (i) an Event
of Default has occurred and is continuing that would not be cured upon the
proposed sublease or assignment; (ii) the assignee or sublessee does not have a
tangible net worth calculated according to generally accepted accounting
principles at least equal to the greater of the tangible net worth of Tenant
immediately prior to such assignment or sublease or the net worth of the Tenant
at the time it executed the Lease; (iii) the intended use of the Premises by
the assignee or sublessee is not in accordance with Article 3 of this Lease;
(iv) the intended use of the Premises by the assignee or sublessee would
materially increase the pedestrian or vehicular traffic to the Premises or the
Project; (v) occupancy of the Premises by the assignee or sublessee would, in
Landlord's opinion, violate an agreement binding upon Landlord or the Project
with regard to the identity of tenants, usage in the Project, or similar
matters; (vi) the identity or business reputation of the assignee or sublessee
will, in the good faith judgment of Landlord, tend to damage the goodwill or
reputation of the Project; (vii) in the case of a sublease, the subtenant has
not acknowledged that the Lease controls over any inconsistent provision in the
sublease; or (viii) the proposed assignee or sublessee is a governmental
agency. Tenant and Landlord acknowledge that each of the foregoing criteria are
reasonable as of the date of execution of this Lease. The foregoing criteria
shall not exclude any other reasonable basis for Landlord to refuse its consent
to such assignment or sublease. Any approved assignment or sublease shall be
expressly subject to the terms and conditions of this Lease. Tenant shall
provide to Landlord all information concerning the assignee or sublessee as
Landlord may reasonably request.
Notwithstanding any assignment or subletting, Tenant and any
guarantor or surety of Tenant's obligations under this Lease shall at all times
remain fully responsible and liable for the payment of the rent and for
compliance with all of Tenant's other obligations under this Lease (regardless
of whether Landlord's approval has been obtained for any such assignments or
sublettings). In the event that the rent due and payable by a sublessee or
assignee (or a combination of the rental payable under such sublease or
assignment plus any bonus or other consideration therefor or incident thereto)
exceeds the rental payable under this Lease, then Tenant shall be bound and
obligated to pay Landlord as additional rent hereunder all such excess rental
and other excess consideration within 10 days following receipt thereof by
Tenant.
If this Lease be assigned or if the Premises be subleased
(whether in whole or in part) or in the event of the mortgage, pledge, or
hypothecation of Tenant's leasehold interest or grant of
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any concession or license within the Premises or if the Premises be occupied in
whole or in part by anyone other than Tenant, then upon a default by Tenant
hereunder Landlord may collect rent from the assignee, sublessee, mortgagee,
pledgee, party to whom the leasehold interest was hypothecated, concessionee or
licensee or other occupant and, except to the extent set forth in the preceding
paragraph, apply the amount collected to the next rent payable hereunder; and
all such rentals collected by Tenant shall be held in trust for Landlord and
immediately forwarded to Landlord. No such transaction or collection of rent or
application thereof by Landlord, however, shall be deemed a waiver of these
provisions or a release of Tenant from the further performance by Tenant of its
covenants, duties, or obligations hereunder.
18. INDEMNIFICATION. Except for the negligence of Landlord, its
agents, employees or contractors, and to the extent permitted by law, Tenant
agrees to indemnify, defend and hold harmless Landlord, and Landlord's agents,
employees and contractors, from and against any and all losses, liabilities,
damages, costs and expenses (including attorneys' fees) resulting from claims by
third parties for injuries to any person and damage to or theft or
misappropriation or loss of property occurring in or about the Project and
arising from the use and occupancy of the Premises or from any activity, work,
or thing done, permitted or suffered by Tenant in or about the Premises or due
to any other act or omission of Tenant, its subtenants, assignees, invitees,
employees, contractors and agents. The furnishing of insurance required
hereunder shall not be deemed to limit Tenant's obligations under this
Paragraph 18.
19. INSPECTION AND ACCESS. Upon 24 hours prior notice and during
regular business hours, except in the event of an emergency, Landlord and its
agents, representatives, and contractors may enter the Premises at any
reasonable time to inspect the Premises and to make such repairs as may be
required or permitted pursuant to this Lease and for any other business
purpose. Landlord and Landlord's representatives may enter the Premises during
business hours for the purpose of showing the Premises to prospective
purchasers and, during the last year of the Lease Term, to prospective tenants.
Landlord may erect a suitable sign on the Premises stating the Premises are
available to let or that the Project is available for sale. Landlord may grant
easements, make public dedications, designate common areas and create
restrictions on or about the Premises, provided that no such easement,
dedication, designation or restriction materially interferes with Tenant's use
or occupancy of the Premises. At Landlord's request, Tenant shall execute such
instruments as may be necessary for such easements, dedications or
restrictions.
20. QUIET ENJOYMENT. If Tenant shall perform all of the covenants and
agreements herein required to be performed by Tenant, Tenant shall, subject to
the terms of this Lease, at all times during the Lease Term, have peaceful and
quiet enjoyment of the Premises against any person claiming by, through or
under Landlord.
21. SURRENDER. Upon termination of the Lease Term or earlier
termination of Tenant's right of possession, Tenant shall surrender the
Premises to Landlord in the same condition as received, broom clean, ordinary
wear and tear and casualty loss and condemnation covered by Paragraphs 15 and
16 excepted. Any Trade Fixtures, Tenant-Made Alterations and property not so
removed by Tenant as permitted or required herein shall be deemed abandoned and
may be stored, removed, and disposed of by Landlord at Tenant's expense, and
Tenant waives all claims against Landlord for any damages resulting from
Landlord's retention and disposition of such property. All obligations of
Tenant hereunder not fully performed as of the termination of the Lease Term
shall survive the termination of the Lease Term, including without limitation,
indemnity obligations, payment obligations with respect to Operating Expenses
and obligations concerning the condition and repair of the Premises.
22. HOLDING OVER. If Tenant retains possession of the Premises after
the termination of the Lease Term, unless otherwise agreed in writing, such
possession shall be subject to immediate termination by Landlord at any time,
and all of the other terms and provisions of this Lease (excluding any
expansion or renewal option or other similar right or option) shall be
applicable during such holdover period, except that Tenant shall pay Landlord
from time to time, upon demand, as Base Rent for the holdover period, an amount
equal to double the Base Rent in effect on the termination date, computed on a
monthly basis for each month or part thereof during such holding
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over. All other payments shall continue under the terms of this Lease. In
addition, Tenant shall be liable for all damages incurred by Landlord as a
result of such holding over. No holding over by Tenant, whether with or without
consent of Landlord, shall operate to extend this Lease except as otherwise
expressly provided, and this Paragraph 22 shall not be construed as consent for
Tenant to retain possession of the Premises.
23. EVENTS OF DEFAULT. Each of the following events shall be an event
of default ("Event of Default") by Tenant under this Lease:
(i) Tenant shall fail to pay any installment of Base Rent or any
other payment required herein when due, and such failure shall continue
for a period of 5 days from the date of Tenant's receipt of written
notice from Landlord of such failure; provided, however, that Landlord
shall not be obligated to provide more than two (2) such written
notices in any twelve (12) month consecutive period, and Tenant's
failure to pay any third or subsequent installment of Base Rent payable
within such twelve (12) month period within five (5) days after the due
date thereof shall constitute an Event of Default by Tenant.
(ii) Tenant or any guarantor or surety of Tenant's obligations
hereunder shall (A) make a general assignment for the benefit of
creditors; (B) commence any case, proceeding or other action seeking to
have an order for relief entered on its behalf as a debtor or to
adjudicate it a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, liquidation, dissolution or composition of it
or its debts or seeking appointment of a receiver, trustee, custodian
or other similar official for it or for all or of any substantial part
of its property (collectively a "proceeding for relief"); (C) become
the subject of any proceeding for relief which is not dismissed within
60 days of its filing or entry; or (D) die or suffer a legal disability
(if Tenant, guarantor, or surety is an individual) or be dissolved or
otherwise fail to maintain its legal existence (if Tenant, guarantor or
surety is a corporation, partnership or other entity).
(iii) Any insurance required to be maintained by Tenant pursuant
to this Lease shall be canceled or terminated or shall expire or shall
be reduced or materially changed, except, in each case, as permitted in
this Lease.
(iv) Tenant shall not occupy or shall vacate the Premises or
shall fail to continuously operate its business at the Premises for the
permitted use set forth herein, whether or not Tenant is in monetary or
other default under this Lease.
(v) Tenant shall attempt or there shall occur any assignment,
subleasing or other transfer of Tenant's interest in or with respect to
this Lease except as otherwise permitted in this Lease.
(vi) Tenant shall fail to discharge any lien placed upon the
Premises in violation of this Lease within 30 days after any such lien
or encumbrance is filed against the Premises.
(vii) Tenant shall fail to comply with any provision of this
Lease other than those specifically referred to in this Paragraph 23,
and except as otherwise expressly provided herein, such default shall
continue for more than 30 days after Landlord shall have given Tenant
written notice of such default.
24. LANDLORD'S REMEDIES. Upon each occurrence of an Event of Default
and so long as such Event of Default shall be continuing, Landlord may at any
time thereafter at its election: terminate this Lease or Tenant's right of
possession, (but Tenant shall remain liable as hereinafter provided) and/or
pursue any other remedies at law or in equity. Upon the termination of this
Lease or termination of Tenant's right of possession, it shall be lawful for
Landlord, without formal demand or notice of any kind, to re-enter the Premises
by summary dispossession proceedings or any other action or proceeding
authorized by law and to remove Tenant and all persons and property therefrom.
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If Landlord re-enters the Premises, Landlord shall have the right to keep in
place and use, or remove and store; all of the furniture, fixtures and
equipment at the Premises.
If Landlord terminates this Lease, Landlord may recover from Tenant
the sum of: all Base Rent and all other amounts accrued hereunder to the date
of such termination; the cost of reletting the whole or any part of the
Premises, including without limitation brokerage fees and/or leasing
commissions incurred by Landlord, and costs of removing and storing Tenant's or
any other occupant's property, repairing, altering, remodeling, or otherwise
putting the Premises into condition acceptable to a new tenant or tenants, and
all reasonable expenses incurred by Landlord in pursuing its remedies,
including reasonable attorneys' fees and court costs; and the excess of the then
present value of the Base Rent and other amounts payable by Tenant under this
Lease as would otherwise have been required to be paid by Tenant to Landlord
during the period following the termination of this Lease measured from the
date of such termination to the expiration date stated in this Lease, over the
present value of any net amounts which Tenant establishes Landlord can
reasonably expect to recover by reletting the Premises for such period, taking
into consideration the availability of acceptable tenants and other market
conditions affecting leasing. Such present values shall be calculated at a
discount rate equal to the 90-day U.S. Treasury bill rate at the date of such
termination.
If Landlord terminates Tenant's right of possession (but not this
Lease), Landlord may, but shall be under no obligation to, relet the Premises
for the account of Tenant for such rent and upon such terms as shall be
satisfactory to Landlord without thereby releasing Tenant from any liability
hereunder and without demand or notice of any kind to Tenant. For the purpose
of such reletting Landlord is authorized to make any repairs, changes,
alterations, or additions in or to the Premises as Landlord deems reasonably
necessary or desirable. If the Premises are not relet, then Tenant shall pay to
Landlord as damages a sum equal to the amount of the rental reserved in this
Lease for such period or periods, plus the cost of recovering possession of the
Premises (including attorneys' fees and costs of suit), the unpaid Base Rent and
other amounts accrued hereunder at the time of repossession, and the costs
incurred in any attempt by Landlord to relet the Premises. If the Premises are
relet and a sufficient sum shall not be realized from such reletting [after
first deducting therefrom, for retention by Landlord, the unpaid Base Rent and
other amounts accrued hereunder at the time of reletting, the cost of
recovering possession (including attorneys' fees and costs of suit), all of the
costs and expense of repairs, changes, alterations, and additions, the expense
of such reletting (including without limitation brokerage fees and leasing
commissions) and the cost of collection of the rent accruing therefrom] to
satisfy the rent provided for in this Lease to be paid, then Tenant shall
immediately satisfy and pay any such deficiency. Any such payments due Landlord
shall be made upon demand therefor from time to time and Tenant agrees that
Landlord may file suit to recover any sums falling due from time to time.
Notwithstanding any such reletting without termination, Landlord may at any
time thereafter elect in writing to terminate this Lease for such previous
breach.
Exercise by Landlord of any one or more remedies hereunder granted
or otherwise available shall not be deemed to be an acceptance of surrender of
the Premises and/or a termination of this Lease by Landlord, whether by
agreement or by operation of law, it being understood that such surrender
and/or termination can be effected only by the written agreement of Landlord
and Tenant. Any law, usage, or custom to the contrary notwithstanding, Landlord
shall have the right at all times to enforce the provisions of this Lease in
strict accordance with the terms hereof; and the failure of Landlord at any
time to enforce its rights under this Lease strictly in accordance with same
shall not be construed as having created a custom in any way or manner contrary
to the specific terms, provisions, and covenants of this Lease or as having
modified the same. Tenant and Landlord further agree that forbearance or waiver
by Landlord to enforce its rights pursuant to this Lease or at law or in
equity, shall not be a waiver of Landlord's right to enforce one or more of its
rights in connection with any subsequent default. A receipt by Landlord of rent
or other payment with knowledge of the breach of any covenant hereof shall not
be deemed a waiver of such breach, and no waiver by Landlord of any provision
of this Lease shall be deemed to have been made unless expressed in writing and
signed by Landlord. To the greatest extent permitted by law, Tenant waives the
service of notice of Landlord s intention to re-enter as provided for in any
statute, or to institute legal proceedings to that end, and also waives all
right of redemption in case Tenant shall be
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dispossessed by a judgment or by warrant of any court or judge. The terms
"enter," "re-enter," "entry" or "re-entry," as used in this Lease, are not
restricted to their technical legal meanings. Any reletting of the Premises
shall be on such terms and conditions as Landlord in its sole discretion may
determine (including without limitation a term different than the remaining
Lease Term, rental concessions, alterations and repair of the Premises, lease
of less than the entire Premises to any tenant and leasing any or all other
portions of the Project before reletting the Premises). Landlord shall not be
liable, nor shall Tenant's obligations hereunder be diminished because of,
Landlord's failure to relet the Premises or collect rent due in respect of such
reletting.
25. TENANT'S REMEDIES/LIMITATION OF LIABILITY. Landlord shall not be
in default hereunder unless Landlord fails to perform any of its obligations
hereunder within 30 days after written notice from Tenant specifying such
failure (unless such performance will, due to the nature of the obligation,
require a period of time in excess of 30 days, then after such period of time
as is reasonably necessary). All obligations of Landlord hereunder shall be
construed as covenants, not conditions; and, except as may be otherwise
expressly provided in this Lease, Tenant may not terminate this Lease for
breach of Landlord's obligations hereunder. All obligations of Landlord under
this Lease will be binding upon Landlord only during the period of its
ownership of the Premises and not thereafter. The term "Landlord" in this Lease
shall mean only the owner, for the time being of the Premises, and in the event
of the transfer by such owner of its interest in the Premises, such owner shall
thereupon be released and discharged from all obligations of Landlord
thereafter accruing, but such obligations shall be binding during the Lease
Term upon each new owner for the duration of such owner s ownership. Any
liability of Landlord under this Lease shall be limited solely to its interest
in the Project, and in no event shall any personal liability be asserted
against Landlord in connection with this Lease nor shall any recourse be had to
any other property or assets of Landlord.
26. WAIVER OF JURY TRIAL. TENANT AND LANDLORD WAIVE ANY RIGHT TO TRIAL
BY JURY OR TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER
SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN LANDLORD AND TENANT ARISING
OUT OF THIS LEASE OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR
DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO.
27. SUBORDINATION. This Lease and Tenant's interest and rights
hereunder are and shall be subject and subordinate at all times to the lien of
any first mortgage, now existing or hereafter created on or against the Project
or the Premises, and all amendments, restatements, renewals, modifications,
consolidations, refinancing, assignments and extensions thereof, without the
necessity of any further instrument or act on the part of Tenant. Tenant
agrees, at the election of the holder of any such mortgage, to attorn to any
such holder. Tenant agrees upon demand to execute, acknowledge and deliver
such instruments, confirming such subordination and such instruments of
adornment as shall be requested by any such holder. Tenant hereby appoints
Landlord attorney in fact for Tenant irrevocably (such power of attorney being
coupled with an interest) to execute, acknowledge and deliver any such
instrument and instruments for and in the name of the Tenant and to cause any
such instrument to be recorded. Notwithstanding the foregoing, any such holder
may at any time subordinate its mortgage to this Lease, without Tenant's
consent, by notice in writing to Tenant, and thereupon this Lease shall be
deemed prior to such mortgage without regard to their respective dates of
execution, delivery or recording and in that event such holder shall have the
same rights with respect to this Lease as though this Lease had been executed
prior to the execution, delivery and recording of such mortgage and had been
assigned to such holder. The term "mortgage" whenever used in this Lease shall
be deemed to include deeds of trust, security assignments and any other
encumbrances, and any reference to the "holder" of a mortgage shall be deemed
to include the beneficiary under a deed of trust. Provided, Tenant is not in
default under the Lease, Landlord, at the request of Tenant, agrees to
subordinate Landlord's lien arising under this Lease against Tenant's property
located on the Premises. Such subordination shall be required only if the
lender shall be a bank or other financial institution or the vendor of Tenant's
equipment or a financing entity related to such vendor and shall be subject to
such conditions as Landlord may reasonably require. Tenant shall reimburse
Landlord for all reasonable out-of-pocket expenses incurred by Landlord in
negotiating and executing such agreement with Tenant's lender.
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28. MECHANIC'S LIENS. Tenant has no express or implied authority to
create or place any lien or encumbrance of any kind upon, or in any manner to
bind the interest of Landlord or Tenant in, the Premises or to charge the
rentals payable hereunder for any claim in favor of any person dealing with
Tenant, including those who may furnish materials or perform labor for any
construction or repairs. Tenant covenants and agrees that it will pay or cause
to be paid all sums legally due and payable by it on account of any labor
performed or materials furnished in connection with any work performed on the
Premises and that it will save and hold Landlord harmless from all loss, cost
or expense based on or arising out of asserted claims or liens against the
leasehold estate or against the interest of Landlord in the Premises or under
this Lease. Tenant shall give Landlord immediate written notice of the placing
of any lien or encumbrance against the Premises and cause such lien or
encumbrance to be discharged within 30 days of the filing or recording thereof;
provided, however, Tenant may contest such liens or encumbrances as long as
such contest prevents foreclosure of the lien or encumbrance and Tenant causes
such lien or encumbrance to be bonded or insured over in a manner satisfactory
to Landlord within such 30 day period.
29. ESTOPPEL CERTIFICATES. Tenant agrees, from time to time, within 10
days after request of Landlord, to execute and deliver to Landlord, or
Landlord's designee, any estoppel certificate requested by Landlord, stating
that this Lease is in full force and effect, the date to which rent has been
paid, that Landlord is not in default hereunder (or specifying in detail the
nature of Landlord's default), the termination date of this Lease and such
other matters pertaining to this Lease as may be requested by Landlord.
Tenant's obligation to furnish each estoppel certificate in a timely fashion is
a material inducement for Landlord's execution of this Lease. No cure or grace
period provided in this Lease shall apply to Tenant's obligations to timely
deliver an estoppel certificate. Tenant hereby irrevocably appoints Landlord as
its attorney in fact to execute on its behalf and in its name any such estoppel
certificate or fails to specify Landlord's default or if Tenant fails to
execute and deliver the estoppel certificate within 10 days after Landlord's
written request thereof.
30. ENVIRONMENTAL REQUIREMENTS. Except for Hazardous Material
contained in products used by Tenant in de minimis quantities for ordinary
cleaning and office purposes, Tenant shall not permit or cause any party to
bring any Hazardous Material upon the Premises or transport, store, use,
generate, manufacture or release any Hazardous Material in or about the
Premises without Landlord's prior written consent. Tenant, at its sole cost and
expense, shall operate its business in the Premises in strict compliance with
all Environmental Requirements and shall remediate in a manner satisfactory to
Landlord any Hazardous Materials released on or from the Project by Tenant, its
agents, employees, contractors, subtenants or invitees. Tenant shall complete
and certify to disclosure statements as requested by Landlord from time to time
relating to Tenant's transportation, storage, use, generation, manufacture or
release of Hazardous Materials on the Premises. The term "Environmental
Requirements" means all applicable present and future statutes, regulations,
ordinances, rules, codes, judgments, orders or other similar enactments of any
governmental authority or agency regulating or relating to health, safety, or
environmental conditions on, under, or about the Premises or the environment,
including without limitation, the following: the Comprehensive Environmental
Response, Compensation and Liability Act; the Resource Conservation and
Recovery Act; and all state and local counterparts thereto, and any regulations
or policies promulgated or issued thereunder. The Term "Hazardous Materials"
means and includes any substance, material, waste, pollutant, or contaminant
listed or defined as hazardous or toxic, under any Environmental Requirements,
asbestos and petroleum, including crude oil or any fraction thereof, natural
gas liquids, liquefied natural gas, or synthetic gas usable for fuel (or
mixtures of natural gas and such synthetic gas). As defined in Environmental
Requirements, Tenant is and shall be deemed to be the "operator" of Tenant's
"facility" and the "owner" of all Hazardous Materials brought on the Premises
by Tenant, its agents, employees, contractors or invitees, and the wastes,
by-products, or residues generated, resulting, or produced therefrom.
Tenant shall indemnify, defend, and hold Landlord harmless from
and against any and all losses (including, without limitation, diminution in
value of the Premises or the Project and loss of rental income from the
Project), claims, demands, actions, suits, damages (including, without
limitation, punitive damages), expenses (including, without limitation,
remediation, removal, repair, corrective action, or cleanup expenses), and
costs (including, without limitation, actual attorneys' fees, consultant fees or
expert fees and including, without limitation, removal or management of any
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asbestos brought into the property or disturbed in breach of the requirements
of this Paragraph 30, regardless of whether such removal or management is
required by law) which are brought or recoverable against, or suffered or
incurred by Landlord as a result of any release of Hazardous Materials for
which Tenant is obligated to remediate as provided above or any other breach of
the requirements under this Paragraph 30 by Tenant, its agents, employees,
contractors, subtenants, assignees or invitees, regardless of whether Tenant
had knowledge of such noncompliance. The obligations of Tenant under this
Paragraph 30 shall survive any termination of this Lease.
Landlord shall have access to, and a right to perform inspections and
tests of, the Premises to determine Tenant's compliance with Environmental
Requirements, its obligations under this Paragraph 30, or the environmental
condition of the Premises. Access shall be granted to Landlord upon Landlord's
prior notice to Tenant and at such times so as to minimize, so far as may be
reasonable under the circumstances, any disturbance to Tenant's operations.
Such inspections and tests shall be conducted at Landlord's expense, unless
such inspections or tests reveal that Tenant has not complied with any
Environmental Requirement, in which case Tenant shall reimburse Landlord for
the reasonable cost of such inspection and tests. Landlord's receipt of or
satisfaction with any environmental assessment in no way waives any rights that
Landlord holds against Tenant.
31. RULES AND REGULATIONS. Tenant shall, at all times during the Lease
Term and any extension thereof, comply with all reasonable rules and
regulations at any time or from time to time established by Landlord covering
use of the Premises and the Project. The current rules and regulations are
attached hereto. In the event of any conflict between said rules and
regulations and other provisions of this Lease, the other terms and provisions
of this Lease shall control. Landlord shall not have any liability or
obligation for the breach of any rules or regulations by other tenants in the
Project.
32. SECURITY SERVICE. Tenant acknowledges and agrees that, while
Landlord may patrol the Project, Landlord is not providing any security
services with respect to the Premises and that Landlord shall not be liable to
Tenant for, and Tenant waives any claim against Landlord with respect to, any
loss by theft or any other damage suffered or incurred by Tenant in connection
with any unauthorized entry into the Premises or any other breach of security
with respect to the Premises.
33. FORCE MAJEURE. Landlord shall not be held responsible for delays
in the performance of its obligations hereunder when caused by strikes,
lockouts, labor disputes, acts of God, inability to obtain labor or materials
or reasonable substitutes therefor, governmental restrictions, governmental
regulations, governmental controls, delay in issuance of permits, enemy or
hostile governmental action, civil commotion, fire or other casualty, and
other causes beyond the reasonable control of Landlord ("Force Majeure").
34. ENTIRE AGREEMENT. This Lease constitutes the complete agreement of
Landlord and Tenant with respect to the subject matter hereof. No
representations, inducements, promises or agreements, oral or written, have
been made by Landlord or Tenant, or anyone acting on behalf of Landlord or
Tenant, which are not contained herein, and any prior agreements, promises,
negotiations, or representations are superseded by this Lease. This Lease may
not be amended except by an instrument in writing signed by both parties
hereto.
35. SEVERABILITY. If any clause or provision of this Lease is illegal,
invalid or unenforceable under present or future laws, then and in that event,
it is the intention of the parties hereto that the remainder of this Lease
shall not be affected thereby. It is also the intention of the parties to this
Lease that in lieu of each clause or provision of this Lease that is illegal,
invalid or unenforceable, there be added, as a part of this Lease, a clause or
provision as similar in terms to such illegal, invalid or unenforceable clause
or provision as may be possible and be legal, valid and enforceable.
36. BROKERS. Tenant represents and warrants that it has dealt with no
broker, agent or other person in connection with this transaction and that no
broker, agent or other person brought about this transaction, other than the
broker, if any, set forth on the first page of this Lease, and Tenant agrees to
indemnify and hold Landlord harmless from and against any claims by any other
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broker, agent or other person claiming a commission or other form of
compensation by virtue of having dealt with Tenant with regard to this leasing
transaction.
37. MISCELLANEOUS. (a) Any payments or charges due from Tenant to
Landlord hereunder shall be considered rent for all purposes of this Lease.
(b) If and when included within the term "Tenant," as used in this
instrument, there is more than one person, firm or corporation, each shall be
jointly and severally liable for the obligations of Tenant.
(c) All notices required or permitted to given under this Lease
shall be in writing and shall be sent by registered or certified mail, return
receipt requested, or by a reputable national overnight courier service,
postage prepaid, or by hand delivery addressed to the parties at their
addresses below, and with a copy sent to Landlord at 14100 East 35th Place,
Aurora, Colorado 80011). Either party may by notice given aforesaid change its
address for all subsequent notices. Except where otherwise expressly provided
to the contrary, notice shall be deemed given upon delivery.
(d) Except as otherwise expressly provided in this Lease or as
otherwise required by law, Landlord retains the absolute right to withhold any
consent or approval.
(e) At Landlord's request from time to time Tenant shall furnish
Landlord with true and complete copies of its most recent annual and quarterly
financial statements prepared by Tenant or Tenant's accountants and any
other financial information or summaries that Tenant typically provides to its
lenders or shareholders.
(f) Neither this Lease nor a memorandum of lease shall be filed by or
on behalf of Tenant in any public record. Landlord may prepare and file, and
upon request by Landlord Tenant will execute, a memorandum of lease.
(g) The normal rule of construction to the effect that any ambiguities
are to be resolved against the drafting party shall not be employed in the
interpretation of this Lease or any exhibits or amendments hereto.
(h) The submission by Landlord to Tenant of this Lease shall have no
binding force or effect, shall not constitute an option for the leasing of the
Premises, nor confer any right or impose any obligations upon either party
until execution of this Lease by both parties.
(i) Words of any gender used in this Lease shall be held and construed
to include any other gender, and words in the singular number shall be held to
include the plural, unless the context otherwise requires. The captions
inserted in this Lease are for convenience only and in no way define, limit or
otherwise describe the scope or intent of this Lease, or any provision hereof,
or in any way affect the interpretation of this Lease.
(j) Any amount not paid by Tenant within 5 days after its due date in
accordance with the terms of this Lease shall bear interest from such due date
until paid in full at the lesser of the highest rate permitted by applicable
law or 15 percent per year. It is expressly the intent of Landlord and Tenant
at all times to comply with applicable law governing the maximum rate or amount
of any interest payable on or in connection with this Lease. If applicable law
is ever judicially interpreted so as to render usurious any interest called for
under this Lease, or contracted for, charged, taken, reserved, or received with
respect to this Lease, then it is Landlord's and Tenant's express intent that
all excess amounts theretofore collected by Landlord be credited on the
applicable obligation (or, if the obligation has been or would thereby be paid
in full, refunded to Tenant), and the provisions of this Lease immediately
shall be deemed reformed and the amounts thereafter collectible hereunder
reduced, without the necessity of the execution of any new document, so as to
comply with the applicable law, but so as to permit the recovery of the fullest
amount otherwise called for hereunder.
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(k) Construction and interpretation of this Lease shall be governed by
the laws of the state in which the Project is located, excluding any principles
of conflicts of laws.
(l) Time is of the essence as to the performance of Tenant's
obligations under this Lease.
(m) All exhibits and addenda attached hereto are hereby incorporated
into this Lease and made a part hereof. In the event of any conflict between
such exhibits or addenda and the terms of this Lease, such exhibits or addenda
shall control.
38. LANDLORD'S LIEN/SECURITY INTEREST. Tenant hereby grants Landlord a
security interest, and this Lease constitutes a security agreement, within the
meaning of and pursuant to the Uniform Commercial Code of the state in which
the Premises are situated as to all of Tenant's property situate in, or upon,
or used in connection with the Premises (except merchandise sold in the
ordinary course of business) as security for all of Tenant's obligations
hereunder, including, without limitation, the obligation to pay rent. Such
personalty thus encumbered includes specifically all trade and other fixtures
for the purpose of this Paragraph and inventory, equipment, contract rights,
accounts receivable and the proceeds thereof. In order to perfect such security
interest, Tenant shall execute such financing statements and file the same at
Tenant's expense at the state and county Uniform Commercial Code filing offices
as often as Landlord in its discretion shall require; and Tenant hereby
irrevocably appoints Landlord its agent for the purpose of executing and filing
such financing statements on Tenant's behalf as Landlord shall deem necessary.
39. LIMITATION OF LIABILITY OF TRUSTEES, SHAREHOLDERS, AND OFFICERS OF
SECURITY CAPITAL INDUSTRIAL TRUST. Any obligation or liability whatsoever of
Security Capital Industrial Trust, a Maryland real estate investment trust,
which may arise at any time under this Lease or any obligation or liability
which may be incurred by it pursuant to any other instrument, transaction, or
undertaking contemplated hereby shall not be personally binding upon, nor shall
resort for the enforcement thereof be had to the property of, its trustees,
directors, shareholders, officers, employees or agents, regardless of whether
such obligation or liability is in the nature of contract, tort, or otherwise.
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IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of
the day and year first above written.
TENANT: LANDLORD:
STUART ENTERTAINMENT, INC. SCI DEVELOPMENT SERVICES
INCORPORATED
By: /s/ CLEM CHANTIAM By: /s/ ROBERT J. WATSON
- -------------------------------- -------------------------
Name: Clem Chantiam Name: Robert J. Watson
Title: Executive Vice President Title: Managing Director
Address: Address:
3211 Nebraska Avenue 14100 East 35th Place
Council Bluffs, IA 51501 Aurora, Colorado 80011
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Rules and Regulations
1. The sidewalk, entries, and driveways of the Project shall not be
obstructed by Tenant, or its agents, or used by them for any purpose
other than ingress and egress to and from the Premises.
2. Tenant shall not place any objects, including antennas, outdoor
furniture, etc., in the parking areas, landscaped areas or other areas
outside of its premises, or on the roof of the Project.
3. Except for seeing-eye dogs, no animals shall be allowed in the
offices, halls, or corridors in the Project.
4. Tenant shall not disturb the occupants of the Project or adjoining
buildings by the use of any radio or musical instrument or by the
making of loud or improper noises.
5. If Tenant desires telegraphic, telephonic or other electric connections
in the Premises, Landlord or its agent will direct the electrician as
to where and how the wires may be introduced; and, without such
direction, no boring or cutting of wires will be permitted. Any such
installation or connection shall be made at Tenant's expense.
6. Tenant shall not install or operate any steam or gas engine or boiler,
or other mechanical apparatus in the Premises, except as specifically
approved in the Lease. The use of oil, gas or inflammable liquids for
heating, lighting or any other purpose is expressly prohibited.
Explosives or other articles deemed extra hazardous shall not be
brought into the Project.
7. Parking any type of recreational vehicles is specifically prohibited
on or about the Project. Except for the overnight parking of
operative vehicles, no vehicle of any type shall be stored in the
parking areas at any time. In the event that a vehicle is disabled,
it shall be removed within 48 hours. There shall be no "For Sale" or
other advertising signs on or about any parked vehicle. All vehicles
shall be parked in the designated parking areas in conformity with
all signs and other markings. All parking will be open parking, and
no reserved parking, numbering or lettering of individual spaces will
be permitted except as specified by Landlord.
8. Tenant shall maintain the Premises free from rodents, insects and
other pests.
9. Landlord reserves the right to exclude or expel from the Project any
person who, in the judgment of Landlord, is intoxicated or under the
influence of liquor or drugs or who shall in any manner do any act in
violation of the Rules and Regulations of the Project.
10. Tenant shall not cause any unnecessary labor by reason of Tenant's
carelessness or indifference in the preservation of good order and
cleanliness. Landlord shall not be responsible to Tenant for any loss
of property on the Premises, however occurring, or for any damage done
to the effects of Tenant by the janitors or any other employee or
person.
11. Tenant shall give Landlord prompt notice of any defects in the water,
lawn sprinkler, sewage, gas pipes, electrical lights and fixtures,
heating apparatus, or any other service equipment affecting the
Premises.
12. Except as otherwise expressly set forth in Paragraph 3 of the Lease,
Tenant shall not permit storage outside the Premises, including without
limitation, outside storage of trucks and other vehicles, or dumping of
waste or refuse or permit any harmful materials to be placed in any
drainage system or sanitary system in or about the Premises.
13. All moveable trash receptacles provided by the trash disposal firm for
the Premises must be kept in the trash enclosure areas, if any,
provided for that purpose.
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14. No auction, public or private, will be permitted on the Premises or the
Project.
15. No awnings shall be placed over the windows in the Premises except with
the prior written consent of Landlord.
16. The Premises shall not be used for lodging, sleeping or cooking or for
any immoral or illegal purposes or for any purpose other than that
specified in the Lease. No gaming devices shall be operated in the
Premises.
17. Tenant shall ascertain from Landlord the maximum amount of electrical
current which can safely be used in the Premises, taking into account
the capacity of the electrical wiring in the Project and the Premises
and the needs of other tenants, and shall not use more than such safe
capacity. Landlord's consent to the installation of electric equipment
shall not relieve Tenant from the obligation not to use more
electricity than such safe capacity.
18. Tenant assumes full responsibility for protecting the Premises from
theft, robbery and pilferage.
19. Tenant shall not install or operate on the Premises any machinery or
mechanical devices of a nature not directly related to Tenant's
ordinary use of the Premises and shall keep all such machinery free of
vibration, noise and air waves which may be transmitted beyond the
Premises.
19
<PAGE> 20
20
<PAGE> 21
21
<PAGE> 22
ADDENDUM ONE
BASE RENT ADJUSTMENTS
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED JUNE 16, 1997, BETWEEN
SCI DEVELOPMENT SERVICES INCORPORATED
and
STUART ENTERTAINMENT, INC.
Base Rent shall equal the following amounts for the respective periods set
forth below:
<TABLE>
<CAPTION>
Period Monthly Base Rent Occupied Sq. Ft.
- ------ ----------------- ----------------
<S> <C> <C>
Year 1 $27,500.00 100,000
Years 2-5 $43,340.00 157,600
Years 6-7 $49,841.00 157,600
</TABLE>
Page 1 of 1
<PAGE> 23
ADDENDUM TWO
CONSTRUCTION
(ALLOWANCE)
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED JUNE 16, 1997, BETWEEN
SCI DEVELOPMENT SERVICES INCORPORATED
and
STUART ENTERTAINMENT, INC.
(a) Landlord agrees to furnish or perform those items of
construction and those improvements (the "Tenant Improvements") specified
below:
See Exhibit A to this Addendum Two
Landlord shall pay up to a maximum amount of Five Hundred Fifty-one Thousand
Six Hundred Dollars ($551,600.00) for the Tenant Improvements (the "Tenant
Allowance"). If the cost of the Tenant Improvements is greater than Five
Hundred Fifty-one Thousand Six Hundred Dollars ($551,600.00), but less than One
Million One Hundred Sixty-three Thousand and Eighty-eight Dollars
($1,163,088.00), then the difference between the additional cost of the Tenant
Improvements over the Tenant Allowance shall be amortized over the Lease Term
at a rate of 10.5% and such difference shall be added to the Monthly Base Rent.
If the cost of the Tenant Improvements is estimated to exceed One Million One
Hundred Sixty-three Thousand Eighty-eight ($1,163,088.00), such estimated
overage shall be paid by Tenant to Landlord before Landlord begins construction
and a final adjusting payment based upon the actual costs of the Tenant
Improvements shall be made when the Tenant Improvements are complete.
(b) If Tenant shall desire any changes, Tenant shall so advise
Landlord in writing and Landlord shall determine whether such changes can be
made in a reasonable and feasible manner. Any and all costs of reviewing any
requested changes, and any and all costs of making any changes to the Tenant
Improvements which Tenant may request and which Landlord may agree to shall be
at Tenant's sole cost and expense and shall be paid to Landlord upon demand and
before execution of the change order.
(c) Landlord shall proceed with and complete the construction
of the Tenant Improvements. As soon as such improvements have been
substantially completed, Landlord shall notify Tenant in writing of the date
that the Tenant Improvements were Substantially Completed. Such date, unless an
earlier date is specified as the Commencement Date in this Lease or otherwise
agreed to in writing between Landlord and Tenant, shall be the "Commencement
Date," unless the completion of such improvements was delayed due to any act or
omission of, or delay caused by, Tenant including, without limitation, Tenant's
failure to approve plans, complete submittals or obtain permits within the time
periods agreed to by the parties or as reasonably required by Landlord, in
which case the Commencement Date shall be the date such improvements would have
been completed but for the delays caused by Tenant. The Tenant Improvements
shall be deemed substantially completed ("Substantially Completed") when, in
the opinion of the construction manager (whether an employee or agent of
Landlord or a third party construction manager), the Premises are substantially
completed except for punch list items which do not prevent in any material way
the use of the Premises for the purposes for which they were intended. After
the Commencement Date Tenant shall, upon demand, execute and deliver to
Landlord a letter of acceptance of delivery of the Premises.
(d) The failure of Tenant to take possession of or to occupy
the Premises shall not serve to relieve Tenant of obligations arising on the
Commencement Date or delay the payment of rent by Tenant. Subject to applicable
ordinances and building codes governing Tenant's right to occupy or perform in
the Premises, Tenant shall be allowed to install its tenant improvements,
machinery, equipment, fixtures, or other property on the Premises during the
final stages of
Page 1 of 2
<PAGE> 24
completion of construction provided that Tenant does not thereby interfere with
the completion of construction or cause any labor dispute as a result of such
installations, and provided further that Tenant does hereby agree to indemnify,
defend, and hold Landlord harmless from any loss or damage to such property,
and all liability, loss, or damage arising from any injury to the Project or
the property of Landlord, its contractors, subcontractors, or materialmen, and
any death or personal injury to any person or persons arising out of such
installations, whether or not any such loss, damage, liability, death, or
personal injury was caused by Landlord's negligence. Any such occupancy or
performance in the Premises shall be in accordance with the provisions
governing Tenant-Made Alterations and Trade Fixtures in the Lease, and shall be
subject to Tenant providing to Landlord satisfactory evidence of insurance for
personal injury and property damage related to such Installations and
satisfactory evidence of payment arrangements with respect to installations
permitted hereunder. Delay in putting Tenant in possession of the Premises
shall not serve to extend the term of this Lease or to make Landlord liable for
any damages arising therefrom.
(e) Except for incomplete punch list items, Tenant upon the
Commencement Date shall have and hold the Premises as the same shall then be
without any liability or obligation on the part of Landlord for making any
further alterations or improvements of any kind in or about the Premises.
<PAGE> 25
ADDENDUM THREE
TENANT'S PURCHASE OPTION
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED JUNE 16, 1997, BETWEEN
STUART ENTERTAINMENT, INC.
and
SCI DEVELOPMENT SERVICES INCORPORATED
Subject to and in accordance with the terms of this Addendum Three,
Tenant shall have a one-time right and option to purchase the Premises
following the fifth (5th) lease year ("Purchase Option). Tenant shall exercise
the Purchase Option by delivering written notice to Landlord during the initial
Lease Term notifying Landlord that it intends exercise its Purchase Option
("Purchase Option Notice").
1. Purchase Price. The purchase price shall be (i) Seven Million Two
Hundred Sixty-Four Thousand Six Hundred and Seventy Dollars ($7,264,670.00) and
the amount of any unamortized Tenant Improvements relating to the Premises,
payable at closing. The intent of the parties is that the purchase price shall
be absolutely net to Landlord, with the sole exception being that Landlord
shall pay its attorneys' fees.
2. Closing. The closing shall be conducted through an escrow
established at a title company acceptable to both Landlord and Tenant. All
deliveries shall be deposited in escrow and all closing deliveries and
disbursements shall be made through the escrow. Except as otherwise set forth
in Section 14 below, the closing shall occur no later than 30 days following
the exercise of the Purchase Option.
3. Inspection. For a period of 15 days after the date of Tenant's
Purchase Option Notice to Landlord, Tenant shall be entitled to inspect the
Premises. Tenant shall indemnify and defend Landlord for any claim, damage or
liability arising out of Tenant's and its agent's and contractor's inspection.
Tenant may revoke its election to exercise the Purchase Option by notice to
Landlord within the 15-day period if Tenant is not satisfied with any aspect of
the Premises, in which case this Lease shall continue in full force and effect.
4. Title. Landlord shall convey to Tenant fee simple title to the
Premises by special warranty deed (warranting title by, through, or under
Landlord, but not otherwise) subject only to all matters of record and those
matters which a correct survey would show but free and clear of any liens or
any other exceptions created by, under, or through Landlord. Tenant shall have
the absolute right to approve title to the Property, and if title is not
satisfactory, Tenant may revoke its election to exercise the Purchase Option by
giving notice to Landlord (x) within the inspection period in Paragraph 3 above
and, (y) with respect to any title exceptions of which Tenant is notified after
such inspection period but before the Closing, at any time before the Closing.
Landlord shall assign to Tenant all its right, title and interest in and to all
contracts, warranties, permits, approvals, and other intangible property
related to the Premises except for any tradename or other similar rights
related to the Premises, which Landlord shall retain.
5. Prorations. There shall be no proration of taxes or other
expenses.
6. Lease Termination. The Lease shall be terminated as of the
closing. All rent and other payments due by Tenant to Landlord under the Lease
shall be prorated to the date of Closing and shall be deposited into the escrow
and disbursed to Landlord at closing.
7. No Warranty. Landlord makes no, and at closing Tenant shall waive
in writing satisfactory to Landlord any, warranty or representation with
respect to the Premises (other than title to the Premises as provided above)
and shall release Landlord from any right or claims, known or unknown, with
respect to the physical or environmental condition of the Premises or the
compliance of the Premises with applicable law. Tenant is relying on its own
inspection and review of the Premises. This sale shall be "AS IS, WHERE IS" and
the following language shall apply to such
Page 1 of 3
<PAGE> 26
sale and shall be included in the Deed: "ADDITIONALLY, LANDLORD, AS SELLER, AND
TENANT, AS PURCHASER, HEREBY AGREE THAT (A) PURCHASER IS TAKING THE PROPERTY
"AS IS" WITH ALL LATENT AND PATENT DEFECTS AND THAT THERE IS NO WARRANTY BY
SELLER THAT THE PROPERTY IS FIT FOR A PARTICULAR PURPOSE, (B) PURCHASER IS NOT
RELYING UPON ANY REPRESENTATION, STATEMENT OR OTHER ASSERTION WITH RESPECT TO
THE PROPERTY CONDITION, BUT IS RELYING UPON ITS EXAMINATION OF THE PROPERTY,
AND (C) PURCHASER TAKES THE PROPERTY UNDER THIS AGREEMENT UNDER THE EXPRESS
UNDERSTANDING THAT THERE ARE NO EXPRESS OR IMPLIED WARRANTIES FROM SELLER
RELATING TO THE PROPERTY. THE PROVISIONS OF THIS PARAGRAPH SHALL SURVIVE THE
CLOSING.
8. Risk of Loss. Risk of loss shall remain with Landlord, subject to
Tenant's obligations under the Lease, until the closing. If any condemnation is
instituted or threatened against the Premises or the Premises are damaged,
either party may terminate the purchase transaction, and the Lease shall
remain in full force and effect.
9. Tax-Free Exchange. Landlord may conduct the sale as a tax-free
exchange pursuant to Section 1031 of the Internal Revenue Code. Such exchange
shall be conducted through a qualified intermediary, at no cost to Tenant, and
without affecting Landlord's obligations to Tenant. Tenant shall not be
required to take title to any other property in connection with a
Section 1031 exchange.
10. Exercise is Irrevocable. Tenant's exercise of the Purchase Option
is irrevocable except as provided herein. Time is of the essence.
11. Exercise by Tenant or Tenant Affiliate Only. Only the Tenant
originally named herein or a Tenant Affiliate may exercise this Purchase
Option. The Purchase Option is not assignable except to a Tenant Affiliate to
which the Lease is assigned and shall terminate automatically upon any
termination of the Lease other than as a result of default by Landlord.
Further, no such right is exercisable if as of the date of exercise of the
right or the closing, the Lease has terminated or an Event of Default or event
("potential default") which but for the passage of time or the giving of
notice, or both, would constitute an Event of Default has occurred and is
continuing.
12. Landlord Remedy. If, having given notice of the exercise of the
Purchase Option hereunder, Tenant should fail or refuse to close the conveyance
(Landlord having complied with all of its obligations hereunder and Landlord
having good and indefeasible tide to the Premises as herein defined), Landlord
shall have, as its sole and exclusive remedy, the right to terminate Tenant's
Purchase Option and this Lease shall continue in full force and effect.
13. Commissions. Tenant shall be responsible and liable for any
commission(s) due to any brokers regarding the Purchase Option. Tenant shall
indemnify and hold Landlord harmless for any damages, claims, costs or expenses
relating to Tenant's failure to pay any such commission. Landlord shall
indemnify and hold Tenant harmless for any damages, claims, costs or expenses
relating to Landlord's failure to pay any brokerage commission that Landlord is
contractually obligated to pay.
14. Right of First Offer to Purchase. Notwithstanding anything herein
to the contrary, if Tenant timely provides Landlord with the Sale Notice (as
defined in that certain Agreement of Purchase and Sale dated of even date
herewith between Landlord and Seller ["Purchase Agreement"]), and Landlord
determines, in its sole and absolute discretion, that Landlord would like to
sell the Building, then Landlord shall offer to Tenant the right to purchase
the Building on the same terms and conditions as set forth in this Addendum
("Purchase Offer"). Such Purchase Offer shall be made by Landlord to Tenant in
a written notice (hereinafter called the ("Purchase Offer Notice") which offer
shall designate that Landlord is selling the Building. Tenant may accept the
offer set forth in the Purchase Offer Notice by delivering to Landlord an
unconditional acceptance (hereinafter called Tenant's Purchase Notice") of such
offer within ninety (90) days after delivery by Landlord of the Purchase Offer
Notice to Tenant. Time shall be of the essence with respect to the giving of
Tenant's Purchase Notice. If Tenant does not accept (or fails to timely accept)
the Purchase Offer made by Landlord pursuant to the provisions of this Addendum
with respect to the Building designated in the Purchase Offer Notice, then the
Purchase Offer and the Purchase Option set forth in this Addendum shall
terminate and be null and void. If Tenant does timely accept such
Page 2 of 3
<PAGE> 27
Purchase Offer, then Landlord and Tenant shall proceed in accordance with this
Addendum and shall close such Purchase Offer within ninety (90) days after the
date Tenant notifies Landlord that it accepts the Purchase Offer. If Tenant at
any time during the term of the Lease declines the Purchase Offer or the
Purchase Option offered by Landlord, Tenant shall be deemed to have irrevocably
waived all further rights under this Addendum, and Landlord shall be free to
sell the Building to third parties including on terms which may be less
favorable to Landlord than those offered to Tenant.
Page 3 of 3
<PAGE> 28
ADDENDUM FOUR
RIGHT OF FIRST OFFER
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED JUNE 16, 1997, BETWEEN
STUART ENTERTAINMENT, INC.
and
SCI DEVELOPMENT SERVICES INCORPORATED
(a) "Offered Space" shall mean any second generation space in the
Building that is not, as of the date of the offer, subject to a right of first
refusal or right of first offer and is not subject to a Lease Agreement.
(b) Provided that as of the date of the giving of Landlord's Notice,
(x) Tenant is the Tenant originally named herein, (y) Tenant actually occupies
all of the Premises originally demised under this Lease and any premises added
to the Premises, and (z) no Event of Default or event which but for the passage
of time in the giving of notice, or both, would constitute an Event of Default
has occurred and is continuing, if at any time during the Lease Term any lease
for any portion of the Offered Space shall expire, then Landlord, before
offering such Offered Space to anyone, other than the tenant then occupying
such space (or its affiliates), shall offer to Tenant the right to include the
Offered Space within the Premises on the substantially the same terms and
conditions as set forth in this Lease in connection with the Premises,
including, without limitation, Monthly Base Rent.
(c) Such offer shall be made by Landlord to Tenant in a written notice
(hereinafter called the "First Offer Notice") which offer shall designate the
space being offered and shall specify the terms which Landlord intends to offer
with respect to any such Offered Space. Tenant may accept the offer set forth
in the First Offer Notice by delivering to Landlord an unconditional acceptance
(hereinafter called "Tenant's Notice") of such offer within 5 business days
after delivery by Landlord of the First Offer Notice to Tenant. Time shall be
of the essence with respect to the giving of Tenant's Notice. If Tenant does
not accept (or fails to timely accept) an offer made by Landlord pursuant to
the provisions of this Addendum with respect to the Offered Space designated in
the First Offer Notice, Landlord shall be under no further obligation with
respect to such space by reason of this Addendum. If Tenant does accept such
Offered Space, then Landlord and Tenant shall enter into an amendment to this
Lease to revise the following items to include the Offered Space: Tenant's
Proportionate Share of the Project, Tenant's Proportionate Share of the
Building, the monthly Base Rent and any other relevant terms and provisions of
the Lease. The term for the Offered Space shall be coterminous with the Lease
Term.
(d) Tenant must accept all Offered Space offered by Landlord at any
one time if it desires to accept any of such Offered Space and may not exercise
its right with respect to only part of such space. In addition, if Landlord
desires to lease more than just the Offered Space to one tenant, Landlord may
offer to Tenant pursuant to the terms hereof all such space which Landlord
desires to lease, and Tenant must exercise its rights hereunder with respect to
all such space and may not insist on receiving an offer for just the Offered
Space.
(e) If Tenant at any time declines any Offered Space offered by
Landlord, Tenant shall be deemed to have irrevocably waived all further rights
under this Addendum, and Landlord shall be free to lease the Offered Space to
third parties including on terms which may be less favorable to Landlord than
those offered to Tenant.
(f) if Tenant timely exercises its right under this Addendum with
respect to any Offered Space, then Landlord agrees to furnish and perform at
Landlord's sole cost and expense (to the extent of the prorated allowances
herein below provided) the below listed Initial Improvements and Allowance
Improvements (together, "Right of First Offer Improvements"). The costs of all
Right of First Offer Improvements shall be pro rated, on a monthly basis, based
on the term remaining on the Lease as of the effective date of Tenant's Notice,
and shall be computed on a per square foot
Page 1 of 2
<PAGE> 29
basis, based on the size of the Offered Space. Costs of the Right of First
Offer Improvements shall be paid by Tenant.
Page 2 of 2
<PAGE> 30
ADDENDUM FIVE
ONE RENEWAL OPTION AT MARKET
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED JUNE 16, 1997, BETWEEN
STUART ENTERTAINMENT, INC.
and
SCI DEVELOPMENT SERVICES INCORPORATED
(g) Provided that as of the time of the giving of the Extension Notice
and the Commencement Date of the Extension Term, (x) Tenant is the Tenant
originally named herein, (y) Tenant actually occupies all of the Premises
initially demised under this Lease and any space added to the Premises, and (z)
no Event of Default exists or would exist but for the passage of time or the
giving of notice, or both; then Tenant shall have the right to extend the Lease
Term for an additional term of five (5) years (such additional term is
hereinafter called the "Extension Term") commencing on the day following the
expiration of the Lease Term (hereinafter referred to as the "Commencement Date
of the Extension Term"). Tenant shall give Landlord notice (hereinafter called
the "Extension Notice") of its election to extend the term of the Lease Term at
least six (6) months, but not more than nine (9) months, prior to the scheduled
expiration date of the Lease Term.
(h) The Base Rent payable by Tenant to Landlord during the Extension
Term shall be the greater of (i) the Base Rent applicable to the last year of
the initial Lease term and (ii) the then prevailing fair market rate for
comparable space in comparable buildings in the McAllen are, including, but not
limited to, the Project, taking into account the size of the Lease, the length
of the renewal term, market escalations, the credit of Tenant and the age,
quality, clear height and improvements/features of the Premises ("Fair Market
Rent"). The Base Rent shall not be reduced by reason of any costs or expenses
saved by Landlord by reason of Landlord's not having to find a new tenant for
such premises (including, without limitation, brokerage commissions, costs of
improvements, rent concessions or lost rental income during any vacancy
period).
(i) Landlord shall notify Tenant of its determination of the Fair
Market Rent within twenty (20) days from the date Landlord receives the
Extension Notice (which shall be made in Landlord's sole discretion and shall
in any event be not less than the Base Rent in effect as of the expiration of
the Lease Term) for the Extension Term, and Tenant shall advise Landlord of any
objection within 10 days of receipt of Landlord's notice. Failure to respond
within the 10-day period shall constitute Tenant's acceptance of such Fair
Market Rent. If Tenant objects, Landlord and Tenant shall commence negotiations
to attempt to agree upon the Fair Market Rent within 30 days of Landlord's
receipt of Tenant's notice. If the parties cannot agree, each acting in good
faith but without any obligation to agree, then the Lease Term shall not be
extended and shall terminate on its scheduled termination date and Tenant shall
have no further right hereunder or any remedy by reason of the parties' failure
to agree.
(j) The determination of Base Rent does not reduce the Tenant's
obligation to pay or reimburse Landlord for operating expenses and other
reimbursable items as set forth in the Lease, and Tenant shall reimburse and
pay Landlord as set forth in the Lease with respect to such operating expenses
and other items with respect to the Premises during the Extension Term without
regard to any cap on such expenses set forth in the Lease.
(k) Except for the Base Rent as determined above, Tenant's occupancy
of the Premises during the Extension Term shall be on the same terms and
conditions as are in effect immediately prior to the expiration of the initial
Lease Term; provided, however, Tenant shall have no further right to any
allowances, credits or abatements or any options to expand, contract, renew or
extend the Lease.
Page 1 of 2
<PAGE> 31
(l) If Tenant does not timely give the Extension Notice within the
period set forth in paragraph (a) above, Tenant's right to extend the Lease
Term for the Extension Term shall automatically terminate. Time is of the
essence as to the giving of the Extension Notice.
(m) Landlord shall have no obligation to refurbish or otherwise
improve the Premises for the Extension Term. The Premises shall be tendered on
the Commencement Date of the Extension Term in "as-is" condition.
(n) If the Lease is extended for the Extension Term, then Landlord
shall prepare and Tenant shall execute an amendment to the Lease confirming the
extension of the Lease Term and the other provisions applicable thereto (the
"Amendment").
(o) If Tenant exercises its right to extend the term of the Lease for
the Extension Term pursuant to this Addendum, the term "Lease Term" as used in
the Lease, shall be construed to include, when practicable, the Extension Term,
as applicable, except as provided above.
Page 2 of 2
<PAGE> 32
ADDENDUM SIX
ACQUISITION OF PREMISES CONTINGENCY
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED JUNE 16, 1997, BETWEEN
STUART ENTERTAINMENT, INC.
and
SCI DEVELOPMENT SERVICES INCORPORATED
Tenant acknowledges that Landlord does not currently own the Premises.
Notwithstanding anything in the Lease to the contrary, Landlord's obligations
under the Lease are conditioned and contingent upon Landlord or its nominee or
assignee acquiring fee simple title to the Premises. If the conditions set
forth in the immediately preceding sentence have not been fulfilled or waived
by Landlord within forty-five (45) calendar days following the execution of the
Lease, Landlord shall so notify Tenant in writing and the Lease shall thereupon
cease and terminate and each of the parties hereto shall be released and
discharged from all liability and responsibility under the Lease. Failure of
Landlord to notify Tenant in writing as described in the preceding sentence
also shall effect a termination of the Lease on the forty-fifth (45th) calendar
day following the execution of the Lease, and each of the parties hereto shall
be released and discharged from all liability and responsibility under the
Lease. No expenditure of any sum or incurring of any liability of Tenant for
merchandise, fixtures, equipment labor, materials or otherwise shall affect the
rights of Landlord hereunder.
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<PAGE> 33
ADDENDUM SEVEN
AGREEMENT TO SUBORDINATE LANDLORD'S LIEN
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED JUNE 16, 1997, BETWEEN
STUART ENTERTAINMENT, INC.
and
SCI DEVELOPMENT SERVICES INCORPORATED
Provided Tenant is not in default under the Lease, Landlord, at the
request of Tenant, agrees to subordinate Landlord's lien arising under the Lease
against Tenant's property located on the Premises. Such subordination shall be
required only if the leader shall be a bank or other financial institution or
the vendor of Tenant's equipment or a financing entity related to such vendor
and shall be subject to such conditions as Landlord may reasonably require.
Tenant shall reimburse Landlord for all reasonable out-of-pocket expenses
incurred by Landlord in negotiating and executing such agreement with Tenant's
lender.
Page 1 of 1
<PAGE> 34
SUBORDINATION AGREEMENT
THIS SUBORDINATION AGREEMENT (this "Agreement") is made and entered
into by and between ____________________________ ,("Landlord"), and ____________
("Lender") as of the ________ day of ____________________________, 19 _____.
W I T N E S S E T H:
Whereas, Landlord and ("Tenant") have entered into that certain lease
dated 199__, (the "Lease") pursuant to which Tenant is leasing certain premises
(the "Premises") from Landlord;
Whereas, pursuant to the Landlord's Lien/Security Agreement provision
of the Lease, Tenant has granted to Landlord a lien on all of Tenant's personal
property ("Personal Property") located in the Premises (the "Landlord's Lien");
Whereas, in connection with the Tenant obtaining a line of credit or
receiving any financing or refinancing for the purchase of any personal
property for the Premises ("Personal Property Financing") with Lender, Tenant
has requested, and Landlord has agreed, subject to certain conditions, to
subordinate the Landlord's Lien to any personal property liens of Lender.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and for other consideration, the receipt and sufficiency of which is
hereby acknowledged, Landlord, Tenant and Lender hereby agree as follows:
1. Notwithstanding the Landlord's Lien/Security Agreement
provision of the Lease, Landlord's Lien shall be subordinate
and subject to the lien placed on the Personal Property by the
Lender in connection with the Personal Property Financing.
2. Lender hereby agrees that it shall not occupy and/or possess
the Premises for more than a fourteen (14) day period.
3. Lender hereby agrees that it shall indemnify and hold Landlord
harmless from any liability, loss, cost, damage caused while
in possession of the Premises and/or expenses (including,
without limitation, Landlord's attorneys' fees) incurred by or
asserted against Landlord arising out of any action by or on
behalf of the Lender in connection with Lender's enforcement
action involving Tenant's Personal Property.
4. Lender hereby agrees that it shall be required to repair any
damage to the Premises caused by Lender, or Lender's agents,
during the period in which it is in possession of the
Premises.
5. Lender, or Lender's agents, shall not hold any auction or sale
of the Personal Property on the Premises.
6. This Agreement shall in all respects be a continuing agreement
and shall remain in full force and effect so long as the
Personal Property Financing is in effect and so long as the
Tenant (or the Lender) occupies or is in possession of the
Premises.
Page 1 of 2
<PAGE> 35
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
the Lender and the Landlord as of the day and year first written above.
LENDER:
-------------------------------------------
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
LANDLORD:
-------------------------------------------
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
Page 2 of 2
<PAGE> 36
FIRST AMENDMENT TO LEASE AGREEMENT
BY AND BETWEEN
SCI DEVELOPMENT SERVICES INCORPORATED
and
STUART ENTERTAINMENT, INC.
This First Amendment To Lease Agreement (this "First Amendment") is
made and entered into effective as of January __, 1998, by and between SCI
DEVELOPMENT SERVICES INCORPORATED (hereinafter "Lessor"), and STUART
ENTERTAINMENT, INC. (hereinafter "Lessee").
W I T N E S S E T H:
WHEREAS, Lessor and Lessee have previously entered into that certain
Lease Agreement dated June __, 1997, (hereinafter referred to as the "Lease"),
pursuant to which Lessor leases to Lessee that certain warehouse space
initially containing approximately 100,000 rentable square feet of space (the
"Premises") in Building 1 of the McAllen Distribution Center No. 1 located in
McAllen Texas; and
WHEREAS, Lessor and Lessee desire to amend the terms of the Lease to
increase the size of the Premises and to modify certain terms and provisions of
the Lease;
NOW, THEREFORE, pursuant to the foregoing, and in consideration of the
mutual covenants and agreements contained in the Lease and herein, the Lease,
effective as of the date of this First Amendment, is hereby modified and
amended as set out below:
1. All capitalized terms used herein shall have the same meaning as
defined in the Lease Agreement, unless otherwise defined this First
Amendment.
2. The definition of the term the "Premises" on Page 1 of the Lease is
hereby deleted in its entirety and replaced with the following:
"That portion of the Building, containing approximately
157,600 rentable square feet during the remaining Lease Term, as
determined by Landlord, as shown on Exhibit A."
3. The term "Tenant's Proportionate Share of Project for the first lease
year" on Page 1 of the Lease is hereby deleted in its entirety.
4. The term "Tenant's Proportionate Share of Project for the lease years
2-7" on Page 1 of the Lease is hereby deleted in its entirety and
replaced with the following:
"Tenant's Proportionate Share of the Project 72.64%"
5. The term "Tenant's Proportionate Share of Building for the first lease
year" on Page 1 of the Lease is hereby deleted in its entirety.
6. The term "Tenant's Proportionate Share of Building for the lease years
2-7" on Page 1 of the Lease is hereby deleted in its entirety and
replaced with the following:
"Tenant's Proportionate Share of the Project 72.64%"
7. The term "Lease Term" on Page 1 of the Lease is hereby deleted in its
entirety and replaced with the following:
"Beginning on the Commencement Date and ending on the last day of the
120th full calendar month thereafter."
8. The term "Initial Monthly Base Rent" on Page 1 of the Lease and
Addendum One of the Lease is hereby amended to be $43,340.00 for lease
years 1-5 and $49,841.00 for lease years 6-10.
9. The term "Initial Estimated Monthly Operating Expense Payments" on
Page 1 of the Lease is hereby amended to be as follows:
"1. Utilities: $1,313.33
<PAGE> 37
2. Common Area Charges: $ 2,364.00
3. Taxes: $14,446.67
4. Insurance: $ 1,050.67
5. Management Fee: $ 1,970.00
10. The term "Initial Total Estimated Monthly Operating Expense Payments"
on Page 1 of the Lease is hereby amended to be as follows:
"Initial Total Estimated Monthly Operating Expense Payments: $21,144.67
11. The term "Initial Monthly Base Rent and Operating Expense Payments" on
Page 1 of the Lease is hereby amended to be as follows:
"Initial Monthly Base Rent and Operating Expense Payments: $64,484.67
12. Paragraph (a) of Addendum Two to the Lease is hereby deleted in its
entirety and is replaced with the following:
(a) Landlord agrees to furnish or perform those items of construction and
those improvements (the "Tenant Improvements") specified below:
See Exhibit A to this Addendum Two
Landlord shall pay up to Five Hundred Fifty-one Thousand Six Hundred Dollars
($551,600.00) for the Tenant Improvements (the "Tenant Allowance"). If the cost
of the Tenant Improvements is greater than Five Hundred Fifty One Thousand Six
Hundred Dollars ($551,600.00), but less than One Million One Hundred Sixty-three
Thousand and Eighty-eight Dollars ($1,163,088.00), then the difference between
the additional cost of the Tenant Improvements over the Tenant Allowance shall
be amortized over the Lease Term at a rate of 10.5% and such difference shall be
added to the Monthly Base Rent. If the cost of the Tenant Improvements is
greater than One Million One Hundred Sixty-Three Thousand and Eighty-eight
Dollars ($1,163,088.00), but less than One Million Five Hundred Seventy-Six
Thousand Nine Hundred Dollars ($ 1,576,900.00), then the difference between the
additional cost of the Tenant Improvements over One Million One Hundred
Sixty-Three Thousand and Eighty-Eight Dollars ($1,163,088.00) shall be amortized
over the Lease Term at a rate of 12% and such difference shall be added to the
Monthly Base Rent. If the cost of the Tenant Improvements is estimated to exceed
One Million Five Hundred Seventy-Six Thousand Nine Hundred Dollars
($1,576,900.00), such estimated overage shall be paid by Tenant to Landlord
before Landlord begins construction and a final adjusting payment based upon the
actual costs of the Tenant Improvements shall be made when the Tenant
Improvements are complete.
13. The first sentence of Paragraph (a) of Addendum Three to the Lease is
hereby deleted in its entirety and is replaced with the following: The purchase
price shall be Seven Million Three Hundred Eighty-Seven Thousand Eight Hundred
Dollars ($7,387,800.00), payable in immediately available funds at closing.
14. Exhibit A to the Lease is hereby deleted in its entirety and is
replaced with the Exhibit A attached to this First Amendment.
15. See below (*).
IT IS HEREBY AGREED BY THE PARTIES HERETO that, with the exception of
those terms and conditions specifically modified and amended herein, the herein
referenced Lease shall remain in full force and effect in accordance with all
its terms and conditions. In the event of any conflict between the terms and
provisions of this First Amendment and the terms and provisions of the Lease,
the terms and provisions of this First Amendment shall supersede and control.
This First Amendment may be executed in any number of counterparts, each of
which shall be deemed an original, and all of such counterparts shall
constitute one agreement. To facilitate execution of this First Amendment, the
parties may execute and exchange facsimile counterparts of the signature pages
and facsimile counterparts shall serve as originals.
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment To Lease Agreement to be effective as of the day and year as first
above written.
LESSOR: LESSEE:
SCI DEVELOPMENT SERVICES STUART ENTERTAINMENT, INC.
INCORPORATED
By: By:
------------------------------ ------------------------------
Name: Name:
---------------------------- ----------------------------
Title: Title:
---------------------------- ----------------------------
Date: , 1997 Date: , 1997
----------------------- -----------------------
* - Paragraph 2 of the Lease Agreement is further amended in the 19th line by
deleting "206,500 square foot facility" and inserting in its place "210,000
square foot facility".
2
<PAGE> 1
EXHIBIT 11
STUART ENTERTAINMENT, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
------------ ----------- ----------
<S> <C> <C> <C>
Shares of common stock outstanding at beginning of
year(1)......................................... 6,828,129 6,697,062 6,538,788
Weighted-average shares issued during the year.... 40,354 77,912 115,270
------------ ----------- ----------
Average common and common equivalent shares
outstanding -- basic............................ 6,868,483 6,774,974 6,654,058
Weighted-average shares assumed issued under stock
option plans and exercise of warrants (using
treasury stock method) during the year under
diluted......................................... -- -- 32,870
------------ ----------- ----------
Average common and common equivalent shares
outstanding -- diluted.......................... 6,868,483 6,774,974 6,686,928
============ =========== ==========
Net income (loss):
Income (loss) before extraordinary item......... $(13,145,000) $(1,298,000) $ 786,000
Extraordinary item -- Loss on extinguishment of
debt, net of taxes........................... 208,000 933,000 --
------------ ----------- ----------
Net income (loss)................................. $(13,353,000) $(2,231,000) $ 786,000
============ =========== ==========
Earnings (loss) per share -- basic and diluted:
Income (loss) before extraordinary item......... $ (1.91) $ (0.19) $ 0.12
Extraordinary item.............................. (0.03) (0.14) --
------------ ----------- ----------
Earnings (loss) per share -- basic and diluted.... $ (1.94) $ (0.33) $ 0.12
============ =========== ==========
</TABLE>
- ---------------
(1) This represents total outstanding shares of common stock less treasury
shares. See Note 1 to the Consolidated Financial Statements and the
Consolidated Statement of Stockholders' Equity in Item 14 for additional
information.
<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, G.A. de C.V. Mexico
Stuart Entertainment, Ltd. UK
S.E. International, Inc. Iowa
</TABLE>
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
33-89962 and 333-20151 of Stuart Entertainment, Inc. on Form S-8 of our report
dated March 12, 1998, appearing in this Annual Report on Form 10-K of Stuart
Entertainment, Inc. for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1997 AND THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH YEAR END REPORT ON FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,099
<SECURITIES> 0
<RECEIVABLES> 28,678
<ALLOWANCES> 3,324
<INVENTORY> 20,929
<CURRENT-ASSETS> 57,501
<PP&E> 45,251
<DEPRECIATION> 18,780
<TOTAL-ASSETS> 137,824
<CURRENT-LIABILITIES> 19,923
<BONDS> 100,665
0
0
<COMMON> 70
<OTHER-SE> 16,302
<TOTAL-LIABILITY-AND-EQUITY> 137,824
<SALES> 125,100
<TOTAL-REVENUES> 125,100
<CGS> 87,234
<TOTAL-COSTS> 87,234
<OTHER-EXPENSES> 39,577
<LOSS-PROVISION> 1,578
<INTEREST-EXPENSE> 12,493
<INCOME-PRETAX> (15,782)
<INCOME-TAX> (2,637)
<INCOME-CONTINUING> (13,145)
<DISCONTINUED> 0
<EXTRAORDINARY> 208
<CHANGES> 0
<NET-INCOME> (13,353)
<EPS-PRIMARY> (1.94)
<EPS-DILUTED> (1.94)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE PERIODS ENDED AND
THE CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1995, DECEMBER 31, 1996,
MARCH 31, 1996, JUNE 30, 1996, AND SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH YEAR END REPORT ON FORM 10K.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-1-1995 JAN-1-1996 JAN-1-1996 JAN-1-1996 JAN-1-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 943 13,732 1,992 1,787 859
<SECURITIES> 0 0 0 0 0
<RECEIVABLES> 21,654 29,623 22,427 22,806 23,171
<ALLOWANCES> 2,285 2,329 1,882 1,705 1,826
<INVENTORY> 21,982 28,118 21,664 22,202 22,252
<CURRENT-ASSETS> 44,587 75,259 48,511 48,061 47,218
<PP&E> 34,212 45,498 34,310 34,476 34,806
<DEPRECIATION> 13,095 15,738 13,818 14,280 14,806
<TOTAL-ASSETS> 98,994 154,595 101,958 100,556 99,328
<CURRENT-LIABILITIES> 24,569 21,234 27,387 26,320 25,199
<BONDS> 39,586 100,396 38,641 37,121 36,175
0 0 0 0 0
0 0 0 0 0
<COMMON> 68 69 68 69 69
<OTHER-SE> 31,972 30,289 32,980 34,068 34,964
<TOTAL-LIABILITY-AND-EQUITY> 98,994 154,595 101,958 100,556 99,328
<SALES> 109,882 110,636 26,823 54,183 81,332
<TOTAL-REVENUES> 109,882 110,636 26,823 54,183 81,332
<CGS> 74,722 77,763 18,410 37,319 55,966
<TOTAL-COSTS> 74,722 77,763 18,410 37,319 55,966
<OTHER-EXPENSES> 27,606 29,629 5,907 12,252 18,521
<LOSS-PROVISION> 543 (80) (311) (329) (198)
<INTEREST-EXPENSE> 4,448 5,337 1,181 2,217 3,286
<INCOME-PRETAX> 2,563 (2,013) 1,636 2,724 3,757
<INCOME-TAX> 1,777 (715) 718 932 1,334
<INCOME-CONTINUING> 786 (1,298) 918 1,792 2,423
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 933 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 786 (2,231) 918 1,792 2,423
<EPS-PRIMARY> .12 (.33) .14 .27 .36
<EPS-DILUTED> .12 (.33) .14 .27 .36
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE PERIODS ENDED AND
THE BALANCE SHEETS AS OF MARCH 31, 1997, JUNE 30, 1997, AND SEPTEMBER 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH YEAR END REPORT ON FORM
10-K.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 15,552 11,107 13,233
<SECURITIES> 0 0 0
<RECEIVABLES> 30,564 29,627 28,800
<ALLOWANCES> 2,318 2,433 2,664
<INVENTORY> 25,106 25,106 24,733
<CURRENT-ASSETS> 76,194 69,606 72,126
<PP&E> 46,212 46,251 42,531
<DEPRECIATION> 16,862 16,938 16,962
<TOTAL-ASSETS> 154,553 148,394 149,085
<CURRENT-LIABILITIES> 23,353 18,104 21,325
<BONDS> 100,360 100,325 100,290
0 0 0
0 0 0
<COMMON> 69 69 69
<OTHER-SE> 28,529 27,560 25,046
<TOTAL-LIABILITY-AND-EQUITY> 154,553 149,085 149,085
<SALES> 32,669 64,388 94,870
<TOTAL-REVENUES> 32,669 64,388 94,870
<CGS> 22,901 43,476 64,936
<TOTAL-COSTS> 22,901 43,476 64,936
<OTHER-EXPENSES> 9,002 18,550 28,102
<LOSS-PROVISION> 0 156 344
<INTEREST-EXPENSE> 3,110 6,208 9,396
<INCOME-PRETAX> (2,344) (4,002) (7,908)
<INCOME-TAX> (922) (1,465) (2,850)
<INCOME-CONTINUING> (1,422) (2,537) (5,058)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (1,422) (2,537) (5,058)
<EPS-PRIMARY> (.21) (.37) (.74)
<EPS-DILUTED> (.21) (.37) (.74)
</TABLE>
