SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
__X__ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 X for the fiscal year ended October 31, 1999, or
_____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NO. (0-20820)
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SHUFFLE MASTER, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1448495
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10901 VALLEY VIEW ROAD
EDEN PRAIRIE, MINNESOTA 55344
(Address of principal executive offices) (Zip Code)
612-943-1951
(Registrant's telephone number, including area code)
--------------------------------
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.01 per share
--------------------------------
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. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __X__
As of January 21, 2000, 7,154,393 shares of Common Stock of the registrant
were outstanding. The aggregate market value of Common Stock beneficially owned
by non-affiliates on that date was $59,471,000 based upon the last reported sale
price of the Common Stock at that date by The Nasdaq Stock Market.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference
information from the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held March 24, 2000 (Fiscal 1999 Proxy Statement).
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TABLE OF CONTENTS
PART I
PAGE
Item 1. Business 1
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 7A. Quantitative and Qualitative Factors about Market Risk 21
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 41
PART III
Item 10. Directors and Executive Officers of the Registrant 41
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners and Management 41
Item 13. Certain Relationships and Related Transactions 41
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 41
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PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements. Such statements reflect
and are subject to risks and uncertainties that could cause actual results to
differ materially from expectations. Factors that could cause actual results to
differ materially from expectations include, but are not limited to, the
following: changes in the level of consumer or commercial acceptance of the
Company's existing products and new products as introduced; competitive
advances; acceleration and/or deceleration of various product development and
rollout schedules; higher than expected manufacturing, service, selling,
administrative, product development and/or rollout cost; current and/or
unanticipated future litigation; regulatory and jurisdictional issues involving
Shuffle Master or its products specifically, and for the gaming industry in
general; general and casino industry economic conditions; the financial health
of the Company's casino and distributor customers both nationally and
internationally; and the risks and factors described from time to time in the
Company's reports filed with the Securities and Exchange Commission.
GENERAL
Shuffle Master, Inc. (the Company) was incorporated in Minnesota in
1983. The Company develops, manufactures and markets automatic card shuffling
equipment (shufflers), and gaming products such as table games and slot machine
game software for the gaming industry. Additionally, the Company distributes
casino chip sorting machines and accessories under a distribution agreement with
TCS America, Inc. The Company's growth strategy is to develop or acquire
innovative gaming products and systems, including productivity enhancing
equipment, new table and slot games, and game processing hardware and software
technology, and market these products worldwide.
Casino gaming is found in 31 states in the United States (including
states in which such gaming is found only on Indian lands, card rooms or
off-shore cruises) as well as in numerous countries worldwide. The Company
estimates that there are approximately 17,000 table games in North America, and
over 10,000 additional tables worldwide. Casino gaming grew tremendously over
the last decade, and the Company believes both the North American and
international markets for gaming-related products will continue to expand.
However, the mix of table games and slot machines varies considerably by casino
and jurisdiction.
The Company develops and markets shuffler products suitable for use with
the vast majority of table games. The initial model in the Company's shuffler
product line was first placed in casinos in January 1992. As of October 31,
1999, 5,736 of the Company's shufflers have been placed in casinos or other
legal gaming establishments, including 2,253 units on lease and 3,483 units
sold.
The Company also develops and markets table games and licenses these
products to casinos. Current revenue generating table games include the Let It
Ride(R) basic game, Let It Ride Bonus(R) game and Three Card Poker(R) game. The
Let It Ride(R) basic game was introduced in October 1993. Let It Ride The
Tournament(R) was launched in May 1995, and in August 1997, the Company
introduced the Bonus version of the game. The Bonus version has since replaced
the Tournament version in all but one jurisdiction. In May 1999, the Company
acquired the Three Card Poker(R) table card game from its developer and
distributor. As of October 31, 1999, there were approximately 845 of the
Company's table games installed in casinos, including approximately 424 Let It
Ride Bonus(R) tables, approximately 233 Let It Ride(R) basic game tables and
approximately 188 Three Card Poker(R) tables.
In addition to table games in its line of gaming products, the Company
also develops and markets games for slot machines. As of October 31, 1999, the
Company actively marketed Let's Make A Deal(TM), Five Deck Poker(TM) and Let It
Ride Bonus Video(R) as video slot machine game products, with The Three
Stooges(TM) in market test stage and Press Your Luck(TM) under development. As
of October 31, 1999, the Company had 526 slot machine games installed in
casinos, with Let's Make A Deal(TM) accounting for 320 of the total. During
fiscal 1999, the Company made progress in the development of its slot game
business in a number of areas:
* In March 1999, the Company, in a joint marketing agreement with Bally
Gaming, Inc., introduced the Let's Make A Deal(TM) video slot game, based on the
popular television game show. As of October 31, 1999, approvals to market this
game had been secured in three United States gaming jurisdictions.
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ITEM 1. BUSINESS (CONTINUED)
* In March 1999, the Company entered into a joint marketing alliance with
Acres Gaming, Inc. to develop and market a slot game based on the sounds and
images of the The Three Stooges(TM). The game was first shown at the World
Gaming Congress & Expo in September 1999, and is expected to be launched into
the market in the first quarter of fiscal 2000.
* In July 1999, the Company entered into a license agreement to secure the
rights to and create a video slot game version of Press Your Luck(TM), based on
the popular television game show appearing in the early 1980's.
* In July 1999, the Company also began internally developing game systems
that incorporate PC hardware and gaming-specific software on which the Company's
and other slot games may be operated.
THE COMPANY'S PRODUCTS
GAME EQUIPMENT
SHUFFLERS. The Company's shuffler products, marketed under the trademark
Shuffle Master Gaming(R), are automatic card shuffling machines designed to be
used with table games in casinos and other legal gaming establishments. The
Company's shufflers offer several benefits to the Company's casino customers,
including enhanced security and increased productivity. Opportunity for card
manipulation by dealers is significantly reduced, resulting in increased
security. Because shufflers shuffle or sort one or more decks while a game is
being played, down time related to dealer shuffling is also significantly
reduced, with the potential for a corresponding increase in playing time and
"win" for the casino.
Shuffler lease and sales revenue accounted for approximately 59% of the
Company's revenue in fiscal 1999. The Company has developed three types of
shufflers:
* SINGLE DECK. The Company's single deck shufflers automatically shuffle a
deck of playing cards and deposit the deck into a holding tray that is
integrated into the shuffler unit. A second deck is shuffled while a game is
dealt from the first deck. When the game is completed and the first deck has
been used, the second deck is automatically moved into the holding tray for use
in the next hand.
The initial model single deck shuffler and its variations are designated
as the BG series. BG shufflers include a model designed for hand held dealing
and a model which, after shuffling, counts out cards to be distributed by the
dealer. The latter model, the BG-3, was the most widely placed single deck
shuffler until the introduction of the ACE(TM) single deck model during fiscal
1999. Single deck shufflers are used with specialty card games such as the
Company's own Let It Ride(R) and Three Card Poker(R) games and other non-Shuffle
Master games such as Caribbean Stud Poker(R) and Pai Gow Poker. Since the
Company's single deck machines shuffle a "fresh" deck prior to each hand, the
security of these games is enhanced by reducing the opportunity for dealer card
manipulation. The Company's single deck shufflers also minimize dealer errors in
delivering the proper number of cards and speed up game play.
During fiscal 1999, the Company began production and marketing of the
ACE(TM), its next generation single deck card delivery system. Unlike the BG
models, the ACE(TM) does not shuffle cards in a traditional manner. Instead, it
sorts cards into shelves on a vertically moving elevator in random order
according to computer generated instructions. Software instructs the ACE(TM) to
put the appropriate number of randomly selected cards in each shelf as necessary
to create the required hands for the specific game being played. Shelves then
dispense the hands in random order. Hands are delivered more quickly than the
Company's BG model single deck shufflers. The ACE(TM) is smaller, has fewer
moving parts, is expected to require less service, has a universal power supply
for international electrical currents, is easily programmable by casino pit
personnel to be used with a variety of single deck games and tracks and displays
usage and hands played data for the casino operator. It can be used for the
Company's specialty card games as well as other non-Shuffle Master single deck
specialty games.
* MULTI-DECK BATCH. The Company's MD series multi-deck card shufflers
shuffle a batch of two to eight decks of cards at a time, primarily for
blackjack or mini-baccarat table games. When the shuffling of a batch is
complete, the dealer then manually unloads the shuffled decks and places them in
a standard card shoe. Although a different design than single deck systems, the
multi-deck shuffler also shuffles a second batch of cards while the first batch
is played. The majority of blackjack games are played with multiple decks of
cards. Certain jurisdictions require that blackjack be played with four or more
decks. The Company estimates that blackjack tables represent approximately 70%
of casino table games, excluding poker rooms.
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ITEM 1. BUSINESS (CONTINUED)
* MULTI-DECK CONTINUOUS. During fiscal 1999, The Company completed the
initial development of its next generation multiple deck card delivery system,
the King(TM), that continuously "reshuffles" cards (using the same sorting
process as the ACE(TM)) as they are played at table games. Designed for use with
multi-deck blackjack and mini-baccarat table games, the King(TM) is based on the
same basic design and chassis as the ACE(TM). The continuous model uses a larger
elevator with more shelves and an integrated mechanical shoe. Cards played in
any given hand are collected by the dealer at the completion of the hand,
reloaded into the machine and immediately sorted in random order. Cards are then
mechanically delivered into the shoe when sensors in the shoe call for
additional cards. The speed of the shuffling and delivery action allows the shoe
to operate with only a small buffer of cards. The machine can shuffle cards
quickly enough to keep up with the normal pace of dealing hands. It is possible
for cards dealt in one hand to be re-dealt in the next hand, which eliminates
card counting and tracking. The Company expects that casino demand for its
continuous shufflers will be driven by interest in improved game security and
table productivity. The Company believes that its continuous shuffler will
appeal to some casinos more than others and expects that this model will coexist
with and complement its multi-deck batch shuffler model. As of December 31,
1999, some minor additional design work was required, with market introduction
of the King(TM) expected in the second quarter of fiscal 2000.
DISTRIBUTED EQUIPMENT. In January 1999, the Company entered into an
agreement with TCS America, Inc. ("TCS") whereby the Company will distribute,
service and share in the profits from the lease and sale in the U.S. and the
Caribbean of TCS' Chipper Champ(R) chip sorting product line and other TCS
products. Chipper Champ machines sort chips at roulette tables and serve both to
save labor and add security by detecting counterfeit chips. Other TCS products
distributed by the Company include roulette winning number displays, roulette
wheel analysis products and air rails used to move smoke away from gaming
tables.
GAMING PRODUCTS
TABLE GAMES. The Company first began offering table games to increase
demand for its shuffler line. Driven by the success of Let It Ride(R), table
games accounted for approximately 33% of the Company's revenue in fiscal 1999.
The Company markets the following table games to casinos:
* LET IT RIDE(R). The basic Let It Ride(R) table game is a patented five
card stud poker game in which players are paid according to a fixed payout
schedule. Players place three separate, equal bets and are dealt three cards
face down. Two community cards are also dealt face down in front of the dealer.
After looking at their cards, players have the option to withdraw their first
bet. The dealer then turns over one of the community cards, which becomes a
common fourth card to all players at the table, and the players each have the
opportunity to withdraw their second bet (the third bet always remains on the
table, and cannot be withdrawn). The dealer then turns over the second community
card, which becomes a common fifth and final card to all players, and winning
hands are paid according to the predetermined payout schedule.
The basic Let It Ride(R) game was approved by the Nevada Gaming Control
Board in August 1993 and the Company began licensing it to casinos in October
1993. As of October 31, 1999, the basic Let It Ride(R) table game was approved
for play in 31 United States gaming jurisdictions in 24 states, seven Canadian
provinces and 14 other foreign countries.
* LET IT RIDE BONUS(R). The Let It Ride Bonus(R) game was introduced in
August 1997 and provides a format that adds a bonus paytable to the basic Let it
Ride(R) table game. It is played in the same manner as the basic game except
that the player has an option to make a $1 side wager, also known as the bonus
bet. The bonus bet qualifies the player to be eligible to receive large bonus
payouts from a separate payout schedule, in addition to the underlying payouts
of the basic game. Participation data gathered in 1999 shows that participation
in the bonus bet in major gaming venues was in excess of 85%. As of October 31,
1999, the Let It Ride Bonus(R) game was approved for use in 28 United States
gaming jurisdictions in 21 states, including all major gaming markets, three
Canadian provinces, and five other foreign countries.
* LET IT RIDE THE TOURNAMENT(R). This version of Let It Ride was launched in
May 1995. In Let It Ride The Tournament(R) players were eligible for both bonus
payouts and the opportunity to advance to a multi-round playoff. Formerly
offered on a company-sponsored jurisdiction-wide basis in Nevada and
Mississippi, the Tournament is now offered only as requested by casino
customers, and is currently operated on a continual basis in one tribal casino.
The Company generates revenue from this casino on a monthly fixed fee. The
casino is solely responsible for payout of the Tournament cash awards.
* THREE CARD POKER(R). The Company acquired the rights to Three Card
Poker(R), a patented table game, in May 1999 from its developer and distributor,
Derek Webb and Prime Table Games. In this game, players place wagers on three
card stud hands, with options to bet against the dealer, bet on the value of
their own hand or both. Winning hands are paid according to a pre-
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ITEM 1. BUSINESS (CONTINUED)
determined payout schedule and bonus payouts may be earned on certain hands when
wagering against the dealer. When acquired, Three Card Poker(R) was approved for
play in eight United States gaming jurisdictions. As of October 31, 1999, the
Three Card Poker(R) game was approved for use in 20 United States gaming
jurisdictions in 13 states.
For fiscal year 1999, all of the Company's table game products were
licensed to casinos for a fixed monthly fee.
In December 1999, the Company settled patent litigation regarding its
Let It Ride The Tournament(R), Let It Ride Bonus(R) and Three Card Poker(R)
table games. See Item 3. - Legal Proceedings.
SLOT GAMES. The Company develops and markets game concepts and software
programs for use on slot machines, either on its own or through agreements with
third parties. Actively marketed products include Let's Make A Deal(TM), Five
Deck Poker(TM), and Let It Ride Bonus Video(R). The Company is developing or
testing additional products for future commercialization, including The Three
Stooges(TM) and Press Your Luck(TM). The Company is not involved in the
manufacture of gaming machines, although it does occasionally purchase and sell
or lease such machines in connection with its game marketing efforts. Slot
revenue accounted for approximately 4% of the Company's revenue in fiscal 1999.
Descriptions of revenue-generating slot products follow:
* LET'S MAKE A DEAL(TM). The Company and Bally Gaming, Inc. jointly
introduced this video slot game version based on the popular television game
show after receiving approval from the Nevada Gaming Control Board in March
1999. In October 1999, the Company received approval from gaming authorities in
Connecticut and New Jersey as well. As of October 31, 1999 Let's Make A Deal(TM)
games were installed in approximately 40 casinos in Nevada.
* FIVE DECK POKER(TM). Originally purchased in 1997 as part of the
acquisition of a slot games library from Dr. Mark Yoseloff (now a director and
executive officer of the Company), Five Deck Poker(TM) is a variation of video
draw poker that deals cards in each of the five card positions on the screen
from a separate and independent deck. The possibility of suited hands that are
not available in single deck video poker, such as a suited three of a kind,
allows a greater variety of winning poker hands and greater frequency of middle
pay hands. The game was originally marketed to Nevada casinos in a wide-area
progressive format under the brand name "Five Deck Frenzy(TM)" by the Company
and IGT through a joint marketing agreement. In October 1999, the Company and
IGT discontinued the Five Deck Frenzy(TM) video slot game and converted the
remaining games into Five Deck Poker(TM) video slot games. As of October 31,
1999, Five Deck Poker(TM) games were installed in 16 casinos in New Jersey,
Nevada, Connecticut and Minnesota.
* LET IT RIDE BONUS VIDEO(R). In 1995, the Company entered into an
agreement with Bally Gaming, Inc. ("Bally"), which was subsequently acquired by
Alliance Gaming Corporation, to develop and manufacture a video bonus version of
the Let It Ride(R) game for use on machines manufactured by Bally. The Company
markets Let It Ride Bonus Video(R) directly to casinos, usually for a fixed
monthly fee. As of October 31, 1999, Let It Ride Bonus Video(R) games were
installed in four casinos.
SIGNIFICANT PRODUCT RELATED AGREEMENTS
* JOINT MARKETING ALLIANCE WITH IGT. In September 1996, the Company entered
into an agreement with IGT forming a joint marketing alliance to develop and
market the Five Deck Frenzy(TM) video poker game in a wide-area progressive
video format. The Company and IGT operated Five Deck Frenzy(TM) progressive
systems in Nevada from fiscal 1997 through 1999, with profits from the video
poker game alliance split equally.
* LICENSING AGREEMENT WITH IGT. In October 1998, the Company entered into a
licensing agreement with IGT that allows the Company to develop and market its
games for use on IGT slot machine platforms. In exchange for the license the
Company pays IGT a royalty based on a percentage of revenue generated by the
Company's games, which are installed on IGT slot machines. The Company is
currently marketing Five Deck Poker(TM) under this agreement.
* LET'S MAKE A DEAL(TM) LICENSE AGREEMENT WITH BALLY GAMING, INC. In April
1998, the Company entered into a joint marketing agreement with Bally Gaming,
Inc. to develop and market a video slot version of Let's Make A Deal(TM), the
popular and long-running television game show hosted by Monty Hall. The
Company's fiscal 1998 slot revenue included $1.0 million of licensing income
related to the signing of this agreement, which provides that the two companies
will share equally in development costs, capital, and operating profits from the
game. Let's Make A Deal(TM) was introduced into casinos in the second quarter of
fiscal 1999.
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ITEM 1. BUSINESS (CONTINUED)
* DISTRIBUTION AGREEMENT WITH TCS AMERICA, INC. In January 1999, the Company
entered into a profit sharing and distribution agreement with TCS America, Inc.
("TCS") that provides the Company the exclusive right in the United States and
Caribbean to distribute, sell, lease and service gaming related equipment
manufactured by TCS. Equipment covered by this agreement includes TCS' Chipper
Champ(R) and Chipper Champ Plus(R) casino chip sorting machines as well as TCS'
roulette number display systems. The Company's fiscal 1999 other revenue
included $1,047,000 in lease, sale and service revenue related to this
agreement. As of October 31, 1999, the Company shared in lease revenue from the
placement of 116 Chipper Champ(R) machines.
* THE THREE STOOGES(TM) LICENSE AGREEMENT WITH ACRES GAMING, INC. In March
1999, the Company entered into a game development and marketing agreement with
Acres Gaming, Inc. to jointly develop, market and distribute a casino slot game
using the sounds and images of The Three Stooges(TM) enabled by Acres' Bonusing
Technology(TM) and plasma flat panel video screens. The two companies will share
profits equally. In November 1999, The Three Stooges(TM) slot game received
final approval by the Nevada Gaming Control Board for casino installation in
Nevada.
CUSTOMERS AND MARKETING
The Company created the market for shufflers with the introduction of
its innovative product line in 1992, focusing its early marketing efforts on Las
Vegas and Reno, Nevada casinos. Today the Company's shuffler products are
broadly placed in casinos throughout North America, with increasing presence
internationally. As of October 31, 1999, the Company had placed its game
equipment and gaming products in over 630 casinos throughout the world.
The Company leases and sells its shufflers to casinos and other lawful
gaming establishments. As part of its strategy to maintain and expand its market
position in the automatic shuffler business, the Company has made a commitment
to maintain a high level of service to its customers. For casinos within the
Company's service areas, the Company provides regular preventive maintenance
service and on-demand repair service on its leased equipment. The Company also
provides service training to its lease customers' personnel as well as a
reasonable number of back-up shuffler units to the lessee. To customers that
purchase shufflers, the Company offers a service contract that provides service
benefits similar to that on leased units, or a parts warranty contract.
The Company's table game product line includes Let It Ride(R) and Three
Card Poker(R). The Let It Ride(R) table game was introduced to the gaming market
in Nevada in 1993, and has become an established specialty game due to its broad
appeal to players who enjoy a more casual, social card game, or who are new to
or intimidated by table games. In North America, the Company markets the
different versions of the game directly to casinos. In selected international
jurisdictions, the Company markets the basic version of the game through its
international distributor, Technical Casino Supplies, Ltd. In May 1999, the
Company acquired Three Card Poker(R), which is marketed in the same manner as
the Company's other table games. Three Card Poker(R) is currently marketed only
in United States gaming jurisdictions.
In North America, Shuffle Master sells and services its shuffler, table
game and slot products through its own direct sales force and service
department. As of October 31, 1999, the Company had 12 sales employees and 60
service employees, with 42 service employees in 18 field locations and 18
service employees based in the Company's Las Vegas facility.
Outside of North, Central and South America, the Company markets its
shuffler and selected other products primarily through its international
distributor, Technical Casino Supplies, Ltd. ("TCS"). This exclusive
distribution relationship was established in February 1998. TCS is a privately
held international gaming products manufacturing and marketing company with
headquarters in London, England. TCS has field sales offices located in Spain,
Australia, South Africa and the United States.
In addition to the Company's agreement to have TCS distribute the
Company's products internationally, the Company entered into an agreement in
fiscal 1999 with TCS' subsidiary, TCS America, Inc., to distribute, in the
United States and the Caribbean, products manufactured by TCS.
Slot games marketed under the licensing agreement with IGT are sold and
installed by Shuffle Master sales and service personnel. The Company, at its
expense, provides conversion kits for retrofit of gaming machines already owned
by the casino. Under the agreement, the Company may also offer its games in
connection with the sale of new gaming machines, which it may purchase through
IGT, or which may be sold directly to the casino by IGT. In such cases the
Company will market its game software product separately from the gaming
machine, with chip sets and glass provided by the Company at its own expense.
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ITEM 1. BUSINESS (CONTINUED)
Sales efforts for Let's Make A Deal(TM) are led by Bally Gaming, Inc.'s
sales force with the Company providing secondary sales and marketing support.
Bally also manufactures and distributes Let's Make A Deal(TM) video slot
machines, which are sold or leased to casino customers or are provided free of
charge under certain game revenue sharing arrangements.
The marketing plan for The Three Stooges(TM) slot game calls for the
Company to take the lead role in service, sales, marketing and administrative
responsibilities.
In order to market its products, the Company is subject to
jurisdictional licensing requirements, and must obtain approvals for all of its
products. The Company intends to apply for future approvals or clearances where
it believes sufficient demand for products exists. See additional discussion
under "Regulation."
EXPORT SALES
In fiscal 1999, 1998, and 1997, the Company had export shuffler sales
and shuffler lease revenue, primarily to Canada and Australia, which totaled
17%, 24%, and 17%, respectively, of total revenue.
PRODUCT SUPPLY OPERATIONS
The Company's product supply operations consist primarily of the
procurement, assembly, warehousing and shipment of shufflers, Let It Ride
Bonus(R) tables, slot game software chip sets and machine glass panels, and
associated parts and equipment. Parts include off-the-shelf items as well as
components manufactured to the Company's specifications. The Company also
manufactures some parts at its in-house machine shop. Parts are used for product
assembly as well as service needs. Slot product supply operations include
procuring slot machines for lease or sale as required for the business, and will
typically involve procuring and stocking parts needed to retrofit casino-owned
machines for new game software. The Company also supplies products, parts and
accessories related to its distribution agreement with TCS America, Inc. The
Company strives to ensure that multiple suppliers exist for critical components,
and periodically solicits bids from various suppliers to ensure competitive
pricing. Final assembly and quality control checks are conducted by the
Company's employees in Las Vegas, Nevada.
RESEARCH AND DEVELOPMENT
The Company believes that one of its strengths involves developing new
products from the conceptual stage through commercialization. This allows the
Company to develop and test not only its own products, but those of others as
well. The Company believes it has achieved a reputation for innovation and
service, based on its development and the market success of its shuffler and Let
It Ride(R) products. Because of this reputation, the Company is frequently
presented with gaming-related products and concepts from third parties, which
the Company screens, evaluates and, in some cases, negotiates to license or
acquire.
SHUFFLERS. The Company employs a staff of electrical, mechanical and
software engineers to improve and upgrade its existing products and to develop
new products. The engineering staff is uniquely experienced in card shuffling
requirements and solutions and, excluding the conceptual beginning of the first
single deck shuffler, has been instrumental in the development of all of the
Company's shuffler products. During fiscal 1999, substantial progress was made
on the development of the Company's next generation shuffler products, resulting
in full production of the ACE(TM) single deck shuffler, and advancing the
King(TM) continuous shuffler toward production. Resources will continue to be
allocated to such projects to support the Company's efforts to maintain and
enhance its market leader position.
GAMING PRODUCTS. In fiscal 1999, the Company's gaming product
development group worked on developing game concepts and gaming related
technology internally, and evaluating third party game products. The Company's
development efforts include work in market research, creative game design, game
programming, prototype development, and statistical paytable evaluation and
design. With significant emphasis on new gaming products as a future revenue
source, the Company expects to increase the resources devoted to game and gaming
technology development.
Overall, the Company is committed to developing innovative products for
the gaming market, as well as continuously testing and upgrading its existing
products. The Company anticipates that research and development will continue to
account for a significant portion of its total expenditures. Research and
development expenses were $3,468,000, $2,462,000, and $1,693,000, in fiscal
1999, fiscal 1998, and fiscal 1997, respectively.
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ITEM 1. BUSINESS (CONTINUED)
COMPETITION
GAME EQUIPMENT. Automatic card shufflers and chip sorting machines have
been developed by several other companies, and Shuffle Master believes that
those companies are continually working to obtain regulatory approval and
commercial placement of their equipment. In the past year, several competitive
shuffler products have been placed in casinos in modest quantities, including
those offered by Casinos Austria Research and Development (an Austrian company
marketing the Shuffle Star continuous shuffler), Gaming Products (an Australian
company marketing the Quick Draw continuous shuffler) and Casinovations (a U.S.
company marketing a multi-deck batch shuffler). While firm information on all
competitive placements is not practically obtainable, the Company believes that
no product has achieved world wide placements in excess of 600 units. The
Shuffle Star has no substantive presence in the U.S., while Casinovations has
little presence outside the U.S. The Quick Draw product can be found in a small
number of casinos in the U.S. and Australia. In general terms, competition has
achieved placements by offering products at prices that are often lower than the
Company's prices. The Company believes that it has the only complete line of
shuffler products, including single deck, batch multi-deck and continuous
multi-deck shufflers, and that its products provide higher levels of reliability
and security. In addition, the Company's shuffler products are supported by a
national and international service network that other companies cannot easily
duplicate. These beliefs notwithstanding, the Company cannot provide assurances
that a competitive product will not gain substantial placements in the future.
GAMING PRODUCTS. The success of table games such as Let It Ride
Bonus(R), Let It Ride(R) basic and Three Card Poker(R) and slot games such as
the Company's Let's Make A Deal(TM), Three Stooges(TM), Press Your Luck(R) and
Five Deck Poker(TM), depend not only on casinos deciding to use such products
but also on acceptance by players. Player acceptance of a game often correlates
to the frequency and amount of money returned during play, as well as the
availability and appeal of the game compared to other games.
In general, there are continual efforts by small companies and
entrepreneurs to develop and market table games, although few are successful and
many do not compete directly with the Company's products. The Company's major
competitor in specialty games is Mikohn Gaming Corp., who markets the Caribbean
Stud Poker game through its Progressive Games, Inc. subsidiary. The Company
believes that there are approximately 900 Caribbean Stud Poker tables worldwide.
The marketing of slot games to the casino industry is highly
competitive. A number of the Company's slot game competitors and potential
competitors have greater manufacturing and marketing capabilities and have
greater research, development, financial and personnel resources than the
Company.
PATENTS AND TRADEMARKS
PATENTS. Since 1989, the Company has been awarded sixteen United States
utility patents and one United States design patent related to its shuffler and
game technologies. Products protected by these patents include the BG single
deck shuffler series, the MD multi-deck shuffler series, the ACE(TM) single deck
shuffler, Let It Ride(R) stud poker, Five Deck Poker(TM), and a variety of new
games that have not yet been introduced. Most of these patents have a life of 20
years from the date the patent application was filed. No patent will expire
before the year 2007.
In 1999, the Company completed a number of intellectual property
acquisitions to strengthen its position as a technology leader in card shufflers
and proprietary table games. Early in the year, a group of patents was acquired
that protects a table game chip detection technology. In mid-fiscal 1999, the
company acquired the rights to the popular Three Card Poker(R) casino table
game. In December 1999, the Company acquired the U.S. and foreign rights in
Canada, Europe and Australia to certain card sorting and shuffling technology
that will strengthen its position as the leader in card handling technology.
One new U.S. patent was issued to the Company in fiscal 1999, and it
expects to receive at least two new patents in early calendar 2000. The number
of new patent applications filed in 1999 rose dramatically over the previous
year, and it is expected that the number of patents that issue in the next year
will rise also. Patent applications filed in 1999 seek protection for
innovations in card handling technology, slot game system architecture and game
play methods. Previously filed utility patent applications protecting the design
of the ACE(TM) and King(TM) card shufflers are pending in the United States
Patent Office. No assurance can be given that any such patents will issue, or
that the patents currently held or new patents that may issue will be valid or
will provide any competitive protection for the Company's products.
TRADEMARKS. The Company owns nineteen federal trademark registrations in
the United States for Let It Ride(R), Let It Ride Bonus(R), Let It Ride The
Tournament (R), Three Card Poker(R), its distinctive Fanned Card design, it's
Three Card design,
7
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
Shuffle Master Gaming(R) and others. The Company currently has 46 pending U.S.
trademark applications, as well as numerous foreign trademark applications and
registrations. The Company obtained its first Community Trademark Registration
(for Let It Ride(R)) in 1999 that recognizes the Company's trademark rights
throughout most of Western Europe. The Company has sought protection for a
number of names it plans to use in the future.
INFRINGEMENT AND INTELLECTUAL PROPERTY PROTECTION. The Company is not
aware that any of its card handling products infringe the patents and other
intellectual property rights of others. In addition to patents, the Company
protects much of its intellectual property with copyrights, trademarks and
non-disclosure agreements. No assurance can be given that the Company will be
successful in maintaining the confidentiality of its proprietary information. In
the absence of a valid patent, copyright, trademark or trade secret protection,
the Company would be vulnerable to competitors who would lawfully attempt to
copy the Company's products. The Company recently entered into a settlement
agreement with Mikohn Gaming Corp. and its wholly owned subsidiary, Progressive
Games, Inc. (see Item 3. - Legal Proceedings).
EMPLOYEES
As of December 31, 1999, the Company had 141 full-time and one temporary
employee. The Company is not subject to any collective bargaining agreement and
believes that its employee relations are good.
REGULATION
OVERVIEW. The manufacture, sale, lease, license and distribution of the
Company's products require various licenses, permits and approvals, and the
Company is subject to laws and regulations by authorities in most jurisdictions
in which its products are 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 and its management, can be lengthy and expensive.
Generally, each product must also be reviewed and approved by each gaming
authority. The detail and extent of the review process depends upon the
classification of the product by the respective gaming authority as a new game,
game variation, associated equipment, gaming equipment or gaming device. In
general, gaming regulatory authorities may deny applications for licenses, other
approvals or findings of suitability for any cause they may deem reasonable.
The Company is licensed as a manufacturer and distributor of gaming
devices, as a slot route operator and an operator of inter-casino linked systems
in Nevada. The Company is a gaming related casino service industry licensee in
New Jersey and holds supplier, manufacturer and/or distributor licenses in
numerous other jurisdictions throughout North America. Most Company licenses
must be renewed annually. The Company has never been denied a license, permit or
approval necessary to do business in any jurisdiction. Although approvals for
the Company's current products have been granted by gaming regulatory agencies,
there can be no assurance that the Company, its current or future products or
its management personnel will receive nor maintain any necessary gaming
licenses, other approvals or findings of suitability.
SHUFFLERS. The Company has obtained approvals for its shuffler products
in 45 jurisdictions in North America and has filed for approval of its shuffler
products and related software in certain other jurisdictions. The Company's card
shufflers and related software are classified and approved as associated
equipment in Mississippi, Louisiana, Illinois, and a number of other
jurisdictions and as gaming equipment in Nevada, New Jersey, Missouri and Iowa.
Associated equipment is equipment that is not classified as a gaming device or
gaming equipment, but due to its integral relationship to the conduct of
licensed gaming, regulatory authorities have discretion to require manufacturers
and distributors to meet licensing or suitability requirements prior to or
concurrent with the use of such equipment in the respective jurisdiction. Gaming
equipment is defined in New Jersey as "any electronic, electrical, or mechanical
contrivance or machine used in connection with gaming or any game." Although the
classification of the shufflers vary among jurisdictions, most, if not all,
jurisdictions require specific hardware and software approvals and certain
licenses or permits to be held by companies, their key personnel, and service
technicians in connection with the manufacture, distribution, service, and
repair of such equipment.
8
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
TABLE GAMES AND RELATED EQUIPMENT. The Company has developed the Let It
Ride(R) basic and the Let It Ride Bonus(R) games. The basic Let It Ride(R) game
is approved in all major gaming markets in North America and numerous other
gaming jurisdictions. The Let It Ride Bonus(R) table game, including the rules
of play and related equipment, is approved in 31 jurisdictions in North America
and the Company has filed for additional approvals in certain other
jurisdictions. Apparatus related to the Let It Ride Bonus(R) table game is
regulated in Nevada, Mississippi, New Jersey and most other jurisdictions as
associated equipment. Three Card Poker(R) is approved for use in twenty
jurisdictions in North America and submitted for approval in certain others.
Similar approvals are required before the Company's table games and apparatus
related to such table games can be marketed in other jurisdictions. The Company
conducts business only in those jurisdictions where it has secured required
approvals for its products.
SLOT GAMES. Most, if not all, gaming authorities classify the Company's
video slot game machines and software as gaming devices. A gaming device is
generally defined as a video slot or video machine or mechanical, electrical
device the operation of which, upon payment of consideration, entitles a person
to receive something of value. Although the regulations may vary somewhat for
each jurisdiction in which the Company distributes its video slot products,
there are approval, reporting, and notice requirements common to all major
gaming markets in North America. Additionally, video slot game machines and
software are classified as gambling devices under federal law. The Company is
registered pursuant to the Federal Gambling Devices Act of 1962 (the "Federal
Act"). The Federal Act makes it unlawful for a person or business entity to
manufacture, deliver, receive, operate, lease or sell gambling devices in
interstate or foreign commerce unless that person or entity has first registered
with the Attorney General of the United States. A gambling device is generally
defined under the Federal Act as any "so-called video slot machine or mechanical
device or machine, including certain essential parts." In order to manufacture,
sell, deliver or operate certain of its current and proposed products, the
Company must renew its federal registration annually. In addition, various
record keeping and equipment identification requirements are imposed by the
Federal Act. Violation of the Federal Act may result in seizure and forfeiture
of the equipment, as well as other penalties.
GENERAL REGULATION OF STOCKHOLDERS OF PUBLICLY-TRADED CORPORATIONS. In
most jurisdictions, any beneficial owner of the Company's common stock is
subject, on a discretionary basis, to being required to file applications with
gaming regulatory authorities, and undergo investigation to be found suitable or
qualified as such. The gaming laws and regulations of most jurisdictions provide
that beneficial owners of 5% or more of the Company's common stock are subject
to certain reporting procedures and may be subject to background investigations,
including submission of personal and financial information required in order to
be licensed, qualified or found suitable as such.
ADDITIONAL NEVADA REGULATORY MATTERS. The Company is subject to the
Nevada Gaming Control Act (the "Nevada Act"), and to the licensing and
regulatory control of the Nevada State Gaming Control Board (the "Nevada
Board"), the Nevada Gaming Commission (the "Nevada Commission"), and various
local, city and county regulatory agencies (collectively, the "Nevada Gaming
Authorities").
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the character of persons having any direct or
indirect involvement with gaming to prevent unsavory or unsuitable persons from
having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) application of appropriate accounting practices and procedures;
(iii) maintenance of effective control over the financial practices and
financial stability of licensees, including procedures for internal fiscal
affairs and the safeguarding of assets and revenues; (iv) record-keeping and
reporting to the Nevada Gaming Authorities; (v) fair operation of games; and
(vi) the raising of revenues through taxation and licensing fees.
The Company has registered with the Nevada Commission as a
publicly-traded corporation in addition to being licensed as a manufacturer and
distributor of gaming devices, a slot route operator and an operator of
inter-casino linked systems. Such licenses are not transferable and require
periodic payment of fees. The Nevada Gaming Authorities may limit, condition,
suspend or revoke a license, registration, approval or finding of suitability
for any cause deemed reasonable by such licensing agency. If it were determined
that gaming laws were violated by the Company, the approvals and licenses it
holds could be limited, conditioned, suspended or revoked, and the Company and
the persons involved could be subject to substantial fines for each separate
violation of the gaming laws at the discretion of the Nevada Commission. Each
type of gaming device, slot game, table game or associated equipment
manufactured, distributed, leased, licensed or sold in Nevada must first be
approved by the Nevada Board and the Nevada Commission and the Company must
regularly submit detailed financial and operating reports to the Nevada
Commission. Certain loans, leases, sales of securities and similar financing
transactions must also be reported to or approved by the Nevada Commission.
Changes in legislation or in judicial or regulatory interpretations could occur
which could adversely affect the Company.
9
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
Officers, directors and certain key employees of the Company are
required to be found suitable by the Nevada Commission, and employees associated
with gaming must obtain work permits which are subject to immediate suspension
under certain circumstances. An application for suitability may be denied for
any cause deemed reasonable by the issuing agency. Changes in certain key
positions must be reported to the issuing agency. In addition to its authority
to deny an application for a license, the Nevada Commission has jurisdiction to
disapprove a change in position by an officer, director or key employee. The
Nevada Commission has the power to require licensed gaming companies to suspend
or dismiss officers, directors or other key employees and to sever relationships
with other persons who refuse to file appropriate applications or who the
authorities find unsuitable to act in such capacities.
The Nevada Commission may also require anyone having a material
relationship or involvement with the Company to be found suitable or licensed,
in which case those persons are required to pay the costs and fees of the Nevada
Board in connection with the investigation. Any person who acquires more than 5%
of the Company's voting securities must report the acquisition to the Nevada
Commission; any person who becomes a beneficial owner of 10% or more of the
Company's voting securities will be required to apply for a finding of
suitability. Under certain circumstances, an "Institutional Investor," as such
term is defined in the regulations of the Nevada Commission, which acquires more
than 10% but not more than 15% of the Company's voting securities, may apply to
the Nevada Commission for a waiver of such finding of suitability requirements,
provided the Institutional Investor holds the voting securities for investment
purposes only. An Institutional Investor will not be deemed to hold voting
securities for investment purposes unless the voting securities were acquired
and are held in the ordinary course of business as an Institutional Investor and
not for the purpose of causing, directly or indirectly, the election of a
majority of the Board of Directors of the Company, any change in the Company's
corporate charter, bylaws, management, policies or operations of the Company, or
any of its gaming affiliates, or any other action which the Nevada Commission
finds to be inconsistent with holding the Company's voting securities for
investment purposes only.
Any person who fails or refuses to apply for a finding of suitability or
a license within 30 days after being ordered to do so by the Nevada Commission
may be found unsuitable. The same restrictions apply to a record owner if the
record owner, after request, fails to identify the beneficial owner. Any
security holder found unsuitable and who holds, directly or indirectly, any
beneficial ownership of the common stock beyond such period of time as may be
prescribed by the Nevada Commission may be guilty of a gross misdemeanor. The
Company is subject to disciplinary action if, after it receives notice that a
person is unsuitable to be a security holder or to have any other relationship
with the Company, the Company: (i) pays that person any dividend or interest
upon voting securities of the Company; (ii) allows that person to exercise,
directly or indirectly, any voting right conferred through securities held by
that person; or (iii) gives remuneration in any form to that person. If a
security holder is found unsuitable, the Company may itself be found unsuitable
if it fails to pursue all lawful efforts to require such unsuitable person to
relinquish his or her voting securities for cash at fair market value.
Additionally, the Clark County (Nevada) authorities have taken the position that
they have the authority to approve all persons owning or controlling the stock
of any corporation controlling a gaming license.
The Nevada Commission has also advised the Company that it may, in its
discretion, require holders of a debt or equity security of a corporation
registered under the Nevada Act to file applications, be investigated and be
found suitable to own the debt or equity security of a registered corporation.
The applicant security holder is required to pay all costs of such
investigation. If the Nevada Commission determines that a person is unsuitable
to own such security, then pursuant to the regulations of the Nevada Commission,
the registered corporation may be sanctioned, including the loss of its
approvals, if, without the prior approval of the Nevada Commission, it: (i) pays
to the unsuitable person any dividends, interest or any distribution whatsoever;
(ii) recognizes any voting right by such unsuitable person in connection with
such securities; (iii) pays the unsuitable person remuneration in any form; or
(iv) makes any payment to the unsuitable person by way of principal, redemption,
conversion, exchange, liquidation or similar transaction.
The Company is required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Commission at any time, and to file with the
Nevada Commission, at least annually, a list of its stockholders. The Nevada
Commission has the power to require the Company's stock certificates to bear a
legend indicating that the securities are subject to the Nevada Act and the
regulations of the Nevada Commission. However, to date, the Nevada Commission
has not imposed such a requirement on the Company.
The Company may not make certain public offerings of its securities
without the prior approval of the Nevada Commission. Also, changes in control of
the Company through merger, consolidation, acquisition of assets, management or
consulting agreements or any form of takeover cannot occur without prior
investigation by the Nevada Board and approval of the Nevada Commission.
10
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
Approvals are required from the Nevada Commission before the Company can
make exceptional repurchases of voting securities above the current market price
thereof and before a corporate acquisition opposed by management can be
consummated. Nevada's gaming regulations also require prior approval by the
Nevada Commission if the Company were to adopt a plan of recapitalization
proposed by the Company's Board of Directors in opposition to a tender offer
made directly to its shareholders for the purpose of acquiring control of the
Company.
OTHER JURISDICTIONS. All jurisdictions that have legalized gaming
require various licenses, permits and/or approvals for and reporting of certain
transactions by manufacturers and distributors of gaming devices, table games
and associated equipment. In general, such requirements are similar to those of
Nevada.
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 management
personnel in other jurisdictions 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, or 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
distributing its products for use in the respective jurisdiction or may be
required to provide its products through other licensed entities at a reduced
profit to the Company.
11
<PAGE>
ITEM 2. PROPERTIES
The Company leases an approximately 32,000 square foot facility in Las
Vegas, Nevada for substantially all of its business activities, except shuffler
machine research and development, which operates out of an approximately 7,400
square foot facility in Eden Prairie, Minnesota. The Company continues to
maintain its corporate office in Eden Prairie, Minnesota, following completion
of the consolidation of its facilities in Las Vegas, Nevada. The Company also
leases space for service centers in various locations in the United States and
Canada. The Company believes that its existing properties are suitable and
adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
On December 28, 1999 the Company settled all of its litigation with
Progressive Games, Inc. ("PGI"), a wholly owned subsidiary of Mikohn Gaming
Corporation ("Mikohn"). The Company made a one-time payment of $2,750,000 to PGI
and consented to the validity, enforceability and infringement of certain PGI
patents. This settlement amount was accrued as an expense in the consolidated
financial statements as of October 31, 1999.
The Company had been involved in litigation with PGI and its
predecessor, D&D Gaming, Inc. ("D&D") since 1995. D&D and subsequently PGI sued
the Company and its Let It Ride The Tournament(R) and Let It Ride Bonus(R)
casino customers in United States District Court in Nevada, Mississippi,
Connecticut, New Jersey, Illinois, Indiana, and Missouri, alleging that the
Company's Let It Ride The Tournament(R) and Let It Ride Bonus(R) table games and
apparatus infringed certain of their patents. D&D and PGI requested injunctive
relief and damages. Pursuant to the order of the Judicial Panel on
Multi-district Litigation, all of the then pending actions were transferred to
the Southern District of Mississippi for coordinated or consolidated pretrial
proceedings.
The Company agreed to defend and indemnify all of its Let It Ride The
Tournament(R) and Let It Ride Bonus(R) casino licensees who were sued due to
their use of the Let It Ride The Tournament(R) and Let It Ride Bonus(R) table
games and apparatus.
In May 1999, PGI sued the Company, alleging that the Company's then
recently introduced Bahama Bonus(TM) table game infringed certain of PGI's
patents. PGI requested injunctive relief and damages.
In August 1999, PGI sued the Company as an additional defendant in a
pending lawsuit originally brought by PGI against Prime Table Games, Inc., Derek
Webb and Hannah O'Donnell. In this case, PGI claimed that the Company's Three
Card Poker(R) table game infringed certain of PGI's patents. The Company, as
part of its purchase agreement to acquire the rights of the Three Card Poker(R)
game, agreed to defend and indemnify Prime Table Games, Inc., Derek Webb and
Hannah O'Donnell for claims arising out of their use of the Three Card Poker(R)
game.
As part of the settlement in December 1999, the Company entered into
cross-license and cross-supplier agreements with PGI/Mikohn in settlement of all
outstanding issues with respect to the Let It Ride Bonus(R), Let It Ride The
Tournament(R), Bahama Bonus(TM) and Three Card Poker(R) games. The cross-license
agreements provide that all future revenue of Let It Ride Bonus(R), Let It Ride
The Tournament(R) and Three Card Poker(R) will be royalty-free to the Company
and that PGI and Mikohn shall have the exclusive rights to the Bahama Bonus(TM)
table game worldwide except for Nevada, where the Company has retained exclusive
rights subject to its obligation to pay PGI/Mikohn pre-negotiated royalties on
Bahama Bonus(TM) table game revenue. The Company will pay pre-negotiated
royalties for other games it may market utilizing a side bet with a fixed
payout. PGI/Mikohn will pay the Company future royalties of approximately
$580,000 per year over the next five years for the rights to use the Company's
multi-tiered game wagering patent and certain other patents and intellectual
property.
As part of the settlement PGI has released and will dismiss all claims
against Prime Table Games, Derek Webb, Hannah O'Donnell and the Company's casino
licensees named in the litigation, which satisfies the Company's indemnification
obligation.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended October 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK LISTING
The Company's common stock is traded on The Nasdaq Stock Market under
the symbol SHFL. As of January 21, 2000, there were 406 shareholders of record.
The following table sets forth quarterly high and low prices for trades of the
Company's common stock for the years ended October 31, 1999 and 1998:
1999 1998
-------------------------- ---------------------------
HIGH LOW HIGH LOW
-------------------------- ---------------------------
First quarter $ 9.13 $ 6.50 $ 8.75 $ 6.00
Second quarter 8.25 6.50 11.50 7.75
Third quarter 10.25 6.75 10.31 7.50
Fourth quarter 9.69 7.56 9.06 5.94
DIVIDEND POLICY
The Company has not paid dividends on its common stock but rather
retained earnings to provide for the Company's growth. No cash dividends are
expected to be paid on the common stock in the foreseeable future.
TRANSFER AGENT
The Company's transfer agent and registrar is Norwest Bank Minnesota,
N.A., Shareowner Services, 161 North Concord Exchange, South St. Paul, Minnesota
55075, (800) 468-9716.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE AND RATIO AMOUNTS 1999 1998 1997 1996 1995
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED OCTOBER 31,
INCOME STATEMENT
Revenue $ 28,926 $ 27,124 $ 28,736 $ 22,587 $ 9,833
Income from Operations 5,286 4,313 6,686 5,550 1,494
Net Income from Continuing Operations 3,598 3,343 5,122 2,768 2,338
Net Income 3,598 3,343 5,122 2,768 2,403
Weighted Average Shares Outstanding, assuming dilution 7,961 9,753 10,850 11,293 9,765
AS OF OCTOBER 31,
BALANCE SHEET
Cash and Cash Equivalents, and Investments $ 5,641 $ 8,472 $ 16,306 $ 26,478 $ 20,828
Working Capital 7,427 11,352 20,736 27,845 23,297
Total Assets 30,605 28,293 40,726 45,297 37,751
Long-term Debt 677 1,217 1,718 -- --
Shareholders' Equity 21,402 21,895 34,111 39,139 35,099
Common Shares Outstanding 7,475 8,015 9,968 11,177 11,048
Current Ratio 1.9 3.2 5.4 5.7 9.8
PER COMMON SHARE
Earnings from Continuing Operations $ .45 $ .34 $ .47 $ .25 $ .24
Earnings from Discontinued Operations -- -- -- -- --
Earnings per Common Share, basic .45 .34 .47 .25 .25
Earnings per Common Share, assuming dilution .45 .34 .47 .25 .25
Book Value 2.86 2.73 3.42 3.50 3.18
Dividends Declared -- -- -- -- --
</TABLE>
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS OVERVIEW
The Company's first product was an automatic card shuffler system
introduced to the gaming market in 1992. Since its introduction, the Company's
shufflers have generally become required equipment for many table games. The
Company generated 59%, 60%, and 69%, of its revenue in fiscal 1999, 1998, and
1997, respectively, from the lease and sale of automatic shufflers. The Company
has approval for its single deck shufflers and its multi-deck batch shuffler in
all major gaming jurisdictions in North America and continues to seek to obtain
the necessary approvals in other jurisdictions. The Company has also obtained
approval in Nevada and Mississippi for its new multi-deck continuous shuffler,
the King(TM), and is in the process of obtaining additional approvals.
In fiscal 1995, the Company introduced Let It Ride The Tournament(R), a
five card stud poker table game, in which the Company shared revenues with its
casino customers. The Tournament version of Let It Ride(R) allowed players to
place a $1 entry fee (also called a side bet) to be eligible for immediate bonus
payouts with a chance to qualify for Let It Ride The Tournament(R) playoffs. The
Company derived revenue from a percentage of the $1 side bet. In the fourth
quarter of fiscal 1997, the Company converted Let It Ride The Tournament(R)
tables to Let It Ride Bonus(R) tables. The Bonus game continues to offer the $1
side bet, which provides for large immediate payouts but affords no playoff
opportunity. Revenue for the Let It Ride Bonus(R) game is generated through a
monthly licensing fee ranging from $995 to $1,995 for each table placed in
casinos. The Let It Ride Bonus(R) table game is approved in 31 jurisdictions. As
of October 31, 1999, 657 Let It Ride(R) table games were installed in casinos,
including 424 Bonus tables and 233 basic version tables. The basic version of
Let It Ride(R), for which the Company receives monthly license fees up to $795
per table, is similar to the Bonus game except that there is no $1 side bet
option.
In fiscal 1997, the Company acquired a slot game library, which included
a wide-area progressive video poker game called Five Deck Frenzy(R). In
September 1997, the Company entered into a joint marketing agreement with
International Game Technology ("IGT") to market Five Deck Frenzy(R). The Company
developed a second game from the Five Deck concept called Five Deck Poker(TM).
This game is marketed under a separate joint marketing agreement with IGT
entered into in October 1998. Five Deck Poker(TM) is similar to Five Deck
Frenzy(R) except that Five Deck Poker(TM) is a stand-alone game not connected to
a wide-area progressive system. In October 1999, the Company and IGT decided to
discontinue Five Deck Frenzy(R) and converted the remaining games into Five Deck
Poker(TM) games.
In the second quarter of fiscal 1998, the Company entered into an
agreement with Bally Gaming, Inc. ("Bally") for the development, manufacture and
marketing of a casino video slot game version of Let's Make A Deal(TM). The
Company granted Bally an exclusive license for the use of Let's Make A Deal(TM)
intellectual property in gaming machines in certain jurisdictions. In fiscal
1998, the Company recorded $1,000,000 of licensing income in connection with the
signing of this agreement, under which revenue and expenses related to the
development and distribution of the game are shared equally by the Company and
Bally. The Company and Bally introduced Let's Make A Deal(TM) to the gaming
market in the second quarter of fiscal 1999, and at October 31, 1999, there were
320 Let's Make A Deal(TM) video slot games in Nevada casinos.
In the first quarter of fiscal 1999, the Company entered into a joint
marketing agreement with TCS America, Inc. ("TCS") to lease and sell chip
sorting machines (the Chipper Champ(TM) and Chipper Champ Plus(TM)) and
accessories in the United States and the Caribbean. The Company agreed to share
equally the capital cost and revenue and expenses of leasing or selling TCS's
products. The Company initially purchased an interest in 102 Chipper Champ(TM)
machines and, as of October 31, 1999, shared in the cost and revenue of 116
machines.
In the third quarter of fiscal 1999, the Company acquired Three Card
Poker(R), a poker table game, from its developer and distributor, adding 153
table games to its table lease base. Revenue is generated by the Three Card
Poker(R) game through a monthly license fee of up to $795 for each table placed
in casinos. As of October 31, 1999, 188 tables were installed in casinos.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
ROYALTY SETTLEMENT
On December 28, 1999 the Company settled all of its litigation with
Progressive Games, Inc. ("PGI"), a wholly owned subsidiary of Mikohn Gaming
Corporation ("Mikohn"). The Company made a one-time payment of $2,750,000
($1,760,000 or $.22 per diluted share, after tax) to PGI and consented to the
validity, enforceability and infringement of certain PGI patents. This
settlement amount was accrued as an expense in the consolidated financial
statements as of October 31, 1999. The Company will not pay future royalties for
Let It Ride Bonus(R), Let It Ride The Tournament(R) or Three Card Poker(R). It
will pay pre-negotiated royalties if it markets other table games utilizing a
side bet with a fixed payout.
Under separate license agreements, PGI/Mikohn will pay the Company
future royalties of approximately $580,000 per year over the next five years for
the rights to use the Company's coin sensing patents, the Company's multi-tiered
game wagering patent and the Company's intellectual property related to its
Bahama Bonus(TM) table game. The Company and PGI/Mikohn also entered into a
mutually beneficial cross-supplier agreement.
FACILITIES RELOCATION AND OTHER CHARGES
In the third quarter of fiscal 1998, the Company recorded a pre-tax
charge of $2,650,000 ($1,680,000 or $.17 per diluted share, after tax), due to
the relocation of the Company's administrative functions and manufacturing
operations from Minneapolis, Minnesota to Las Vegas, Nevada, and decreases in
the valuation of certain assets. Relocation related charges of $1,435,000 were
recorded for employee severance, facility related asset write-offs and
write-downs, and office lease cancellation costs. The Company determined that it
would terminate 47 employees in its production, administrative and research and
development departments, resulting in severance and termination benefit charges
of $1,050,000. The Company recorded a write-down of $940,000 against inventories
of certain older model single deck shufflers and component parts, in advance of
the planned introduction of the new ACE(TM) single deck shuffler model. This
charge was included in the cost of products. Additionally, miscellaneous assets
totaling $275,000 were written off and recorded in selling, general and
administrative expenses.
In fiscal 1999, the Company determined that eight engineers would not be
terminated and that it would retain a portion of its Minnesota office lease due
to the growth and direction of its research and development efforts.
Additionally, nine administrative employees elected to relocate and to not
accept severance benefits. As a result, $199,000 in severance benefits and
$14,000 in office lease cancellation charges were not used and were reversed in
fiscal 1999.
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUE AND COST OF PRODUCTS
Revenue for fiscal 1999 was $28,926,000, an increase of $1,802,000, or
6.6% from the prior year. During fiscal 1999, the Company continued to emphasize
shuffler lease installations, which resulted in lower sales revenue. Shuffler
lease revenue was $11,168,000 in fiscal 1999 compared to $9,807,000 in the prior
year, an increase of 13.9%. The installed base of shufflers on lease increased
to 2,253 at October 31, 1999, from 1,880 units at October 31, 1998, an increase
of 373 units, or 19.8%. Lease revenue increased at a lower rate than the volume
increase due to both the Company's strategy of leasing shufflers to certain
customers on a part-time basis and the effect of competitive pricing in certain
jurisdictions. As of October 31, 1999 the installed lease base of single deck
shufflers on lease was 1,404 units, an increase of 290 units, or 26%, between
the years. This increase was attributable to the placement of 735 ACE(TM)
shufflers on lease in fiscal 1999, offset by a net reduction of 445 BG
shufflers, the majority of which were exchanged for ACE(TM) shufflers. In
addition, there were 839 multi-deck shufflers installed on lease as of October
31, 1999, an increase of 73 units, or 9.5%, from October 31, 1998. Shuffler
sales were $4,740,000, compared to $6,521,000 in fiscal 1998. Unit sales totaled
541 in fiscal 1999 compared to 903 last year. Current year unit sales included
sales of 430 new units and 111 units converted to a sale from a lease, as
compared to 743 new unit sales and 160 conversions in the prior year. The
average revenue per shuffler sold increased to $8,761 from $7,246 in fiscal 1999
due to a change in the mix of shufflers sold toward domestic sales of
higher-priced multi-deck and ACE(TM) shufflers.
Revenue from the Let It Ride(R) table game increased by $1,762,000 to
$9,626,000 in fiscal 1999. Included in this category for fiscal 1999 was revenue
from Let It Ride Bonus(R), Let It Ride(R) basic, sales of associated equipment
for Let It Ride Bonus(R) and Three Card Poker(R), a table game that the Company
acquired in the third fiscal quarter. Total installed Bonus tables
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
increased from 375 at October 31, 1998, to 424 at October 31, 1999. Let It
Ride(R) basic tables in casinos decreased to 233 at October 31, 1999, from 250
tables as of October 31, 1998. Substantially all of the net decrease in basic
tables resulted from casinos converting basic tables to Let It Ride Bonus(R)
tables in New Jersey after the motion to vacate the injunction prohibiting the
use of the Let It Ride Bonus(R) tables was granted in the fourth fiscal quarter.
Three Card Poker(R) contributed an incremental $433,000 in revenue in fiscal
1999 as table counts increased from 153 units at acquisition in May 1999 to 188
units at October 31, 1999.
Slot revenue decreased by $610,000 to $1,097,000 in fiscal 1999. The
decrease was due to the inclusion in fiscal 1998 of revenue from a license fee
of $1,000,000 from Bally under an exclusive license arrangement for Let's Make A
Deal(TM) intellectual property. In the second fiscal quarter of 1999, the
Company and Bally jointly introduced the Let's Make A Deal(TM) video slot game
and the Company's share of the game's revenue for the year was $333,000. Slot
revenue also included revenue from Five Deck Poker(TM), Five Deck Frenzy(R) and
Let It Ride Bonus Video(R).
Other revenue increased to $1,189,000 from $192,000 due to revenue
earned from the lease of Chipper Champ(R) chip sorting machines and the sale of
accessories under the Company's joint marketing agreement with TCS America,
Inc., which was entered into in the first fiscal quarter.
Gross margin improved to 68.4% in fiscal 1999 from 64.7% in fiscal 1998.
Excluding the one-time inventory write-down charge of $940,000 and the
$1,000,000 of licensing income from Bally Gaming, Inc., gross margin would have
been 67.0% in fiscal 1998. Gross margin increased due to a shift in product mix
in 1999 toward higher margin shuffler and table lease revenue, which comprised
71.9% of revenue in fiscal 1999 and 65.2% of revenue in fiscal 1998.
Additionally, gross margin on shuffler sales in 1999 increased twelve percentage
points from 1998 and field service and installation costs decreased 1% to 10.2%
of revenue in fiscal 1999 due to the increase in total revenue for the year.
These margin increases were offset by lower margin revenue under the TCS
agreement and from video products. Gross margin in 1998 included the recording
of the $1,000,000 license fee under the Bally agreement.
OPERATING EXPENSES
Selling, general and administrative expenses decreased by $843,000 or
9.0% to 8,493,000 in fiscal 1999 compared to $9,336,000 in the prior year.
Advertising and promotion expenses decreased by $292,000 to $609,000 in fiscal
1999 due to decreased promotional, event and trade show activity. Legal fees
decreased by $205,000 to $835,000 in fiscal 1999 as litigation activity
diminished prior to the settlement with PGI. Rent expense and salary expense
decreased by a net of $126,000 and $100,000, respectively, in 1999. Cost savings
related to the facilities relocation initiated in the third fiscal quarter of
1998 have been partly offset by expansion of staff to meet the growth
requirements of the business since the time of relocation.
Research and development expenses increased by $1,006,000, or 40.9%, to
$3,468,000 in fiscal 1999. Approximately $426,000 of the increase was due to
increased consulting and contract programming for new game and system
development. Legal expenses related to securing and maintaining domestic and
international patents and trademarks increased by $280,000. Development costs
related to the introduction of the Let's Make A Deal(TM) and The Three
Stooges(TM) slot games increased by approximately $112,000 in fiscal 1999.
Finally, amortization expense of intellectual property increased $183,000 in
1999 to $765,000, due primarily to the introductions of the Let's Make A
Deal(TM) video slot game and the Three Card Poker(R) table game during the
second and third fiscal quarters.
OTHER INCOME AND EXPENSE
Other income, net, was interest income for both years. Interest income
decreased to $418,000 from $971,000 in fiscal 1999 due to the decrease in cash
and investments of $2,831,000 from the prior year end. Interest expense was
$81,000 and $91,000 in fiscal 1999 and 1998, respectively.
NET INCOME AND EARNINGS PER COMMON SHARE
The provision for income taxes was based on an effective tax rate of
36.0% in fiscal 1999 compared to 35.6% in fiscal 1998. The current year
provision includes a 2.7% benefit from the foreign sales corporation compared to
3.0% in fiscal 1998, due to a decrease in qualified export revenue as a
percentage of total revenue. The provision for state income taxes, net of
federal tax benefits, decreased to 3.6% from 3.8% in the prior year as the
Company slightly decreased its revenue and profits in states requiring filing
and payment of income-based taxes.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Net income was $3,598,000, or $.45 per diluted share, compared to
$3,343,000, or $.34 per diluted share last year. Current year net income
included royalty settlement expenses of $2,750,000 ($1,760,000 after taxes. or
$.22 per share). Fiscal 1998 net income included expenses of $2,650,000
($1,680,000 after taxes, or $.17 per share) due to the consolidation of the
Company's facilities and write-downs and write-offs of certain assets. Weighted
average common shares - assuming dilution, decreased to 7,961,000 shares in the
current year compared to 9,753,000 in the prior year due to the repurchase of
585,000 shares in fiscal 1999 and 2,000,000 shares in fiscal 1998.
FISCAL 1998 COMPARED TO FISCAL 1997
REVENUE AND COST OF PRODUCTS
Revenue for fiscal 1998 was $27,124,000, a decrease of $1,612,000, or
5.6% from the prior year. Shuffler sales were $6,521,000 compared to $9,020,000
in fiscal 1997. During fiscal 1998, the Company refocused its shuffler placement
strategy to emphasize lease installations, which resulted in lower sales
revenue. Unit sales totaled 903 in fiscal 1998 compared to 1,193 in the prior
year. Fiscal 1998 unit sales included sales of 743 new units and 160 units
converted to a sale from a lease, compared to 526 new unit sales and 667
conversions in the prior year. The average revenue per shuffler sold decreased
to $7,246 from $7,560 in fiscal 1997 due to an increase in units sold at lower
distributor pricing for most international sales. In addition, even though the
Company increased the selling price of shufflers by approximately 15% effective
February 1, 1998, over 40% of total unit sales occurred in the first quarter of
fiscal 1998, prior to the price increase. Shuffler lease revenue was $9,807,000
in fiscal 1998 compared to $10,840,000 in the prior year. The installed base of
shufflers on lease increased to 1,880 at October 31, 1998, from 1,600 units at
October 31, 1997. Although the lease base increased by 280 units, or 17.5%, the
lease revenue did not show a similar increase since over 200 units were
installed in the second half of fiscal 1998. In addition, during fiscal 1998,
the Company began a part-time lease program whereby its customers could lease
shufflers at a price below the standard monthly lease price if the casino
customer met certain requirements. The installed lease base of multi-deck
shufflers increased by 33% from October 31, 1997, while single deck shufflers on
lease increased by 9% between the years.
Revenue from the Let It Ride(R) table game increased by $252,000 to
$7,864,000 in fiscal 1998. Included in this category for fiscal 1998 was revenue
from Let It Ride Bonus(R), Let It Ride(R) the basic game, and sales of
associated equipment for Let It Ride Bonus(R). During the fourth quarter of
fiscal 1997, the Company converted substantially all of its Let It Ride The
Tournament(R) tables to Let It Ride Bonus(R) tables. Total installed Bonus
tables increased from 220 at October 31, 1997, to 375 at October 31, 1998.
Revenue increased slightly as increases in installed units were offset by lower
average per table revenue, while operating profits improved substantially as a
result of significant cost reductions. The per table revenue for Let It Ride
Bonus(R) is a fixed monthly fee compared to a higher variable monthly fee
charged for Let It Ride The Tournament(R) tables. Let It Ride(R) basic tables in
casinos decreased to 250 at October 31, 1998, from 325 tables as of October 31,
1997. Substantially all of the net decrease resulted from casinos converting
basic tables to Let It Ride Bonus(R) tables. However, Let It Ride(R) basic
revenue increased between the years due to the price increase effective November
1997.
Slot revenue increased by $1,183,000 to $1,707,000 in fiscal 1998.
Fiscal 1998 slot revenue included $1,000,000 received from Bally Gaming, Inc.
under an exclusive license arrangement for the Let's Make A Deal(TM)
intellectual property. Slot revenue also included revenue from Five Deck
Frenzy(R) and Let It Ride Bonus Video(R). Other revenue increased to $1,225,000
from $740,000 in the prior year due to a $475,000 increase in revenue recognized
on warranty and service contracts sold to customers that purchased shufflers.
Gross margin improved to 64.7% in fiscal 1998 from 63.5% in fiscal 1997.
Excluding the one-time inventory valuation charge of $940,000, gross margin
would have been 68.2% in fiscal 1998. The margin percentage on Let It Ride(R)
table games improved during fiscal 1998, due to the conversion to Let It Ride
Bonus(R). The direct expenses required to support Let It Ride The Tournament(R)
are not required to support the Bonus game. The margin also improved due to the
recording of the license fee revenue of $1,000,000 under the Bally Gaming, Inc.
agreement with insignificant related product expenses. Field service costs to
support the installed base of shufflers and Let It Ride Bonus(R) tables
decreased as a percentage of revenues by 3.2% between the years, which also
improved the gross margin. The Company streamlined its field service support
activities and closed certain of its underutilized field service offices during
fiscal 1998.
OPERATING EXPENSES
Selling, general and administrative expenses decreased by $528,000, or
5.4% to $9,336,000 in fiscal 1998 compared to $9,864,000 in the prior year.
Staffing related expenses decreased by $1,087,000 between the years, including a
$502,000
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
decrease to $163,000 for employee bonus expense. Fiscal 1997 also included
compensation for employees terminated during the year. The remaining decrease
resulted from an overall reduction in staffing levels. Legal fees decreased by
$140,000 to $1,040,000 in fiscal 1998 compared to $1,180,000 in the prior year.
Fiscal 1997 included legal fees for a lawsuit that was settled in August 1997.
Patent related legal fees also decreased between the years. Bad debt expense
increased to $171,000 in fiscal 1998 compared to $47,000 in fiscal 1997. The
Company experienced a significant loss due to a casino customer in Atlantic
City, New Jersey filing for bankruptcy protection. Consulting fees increased by
$184,000 in fiscal 1998 from product-related contracts, human resource and
investment banker fees. The Company retained CIBC Oppenheimer late in fiscal
1998 to explore strategic alternatives. International sales expenses increased
by $136,000 resulting from a change in the Company's international distributor.
Fiscal 1998 selling, general and administrative expenses included $275,000 of
miscellaneous asset write-offs for certain fixed assets and intangibles.
Operating expenses also included a separate charge of $1,435,000 related to the
facilities relocation.
Research and development expenses increased by $769,000, or 45.4%,
between the years. Approximately $372,000 of the increase resulted from
increased staffing levels in slot game software development. Amortization
expense of the intangible assets associated with slot game intellectual property
acquired in fiscal 1997 increased by $282,000 in fiscal 1998 compared to fiscal
1997, due to a full year of amortization in fiscal 1998 and only three months of
amortization in the prior year. Prototype materials and outside engineering fees
increased by $138,000 in the year ended October 31, 1998, due to research
efforts in the development of the new generation single deck shuffler and a
continuous shuffler.
OTHER INCOME AND EXPENSE
Other income, net, was interest income for both years. Interest income
decreased to $1,069,000 from $1,215,000 in fiscal 1997 due to the decrease in
cash and investments of $7,834,000 from the prior year end. Interest expense was
$91,000 and $69,000 in fiscal 1998 and 1997, respectively.
NET INCOME AND EARNINGS PER COMMON SHARE
The provision for income taxes was based on an effective tax rate of
35.6% in fiscal 1998 compared to 34.6% in fiscal 1997. The fiscal 1998 provision
included a 3.0% benefit from the foreign sales corporation compared to .9% in
fiscal 1997, due to a significant increase in qualified export revenue. The
provision for state income taxes, net of federal benefits, increased to 3.8%
from 1.4% in the prior year as the Company increased its revenues and profits in
states requiring filing and payment of income-based taxes.
Net income was $3,343,000, or $.34 per diluted share, compared to
$5,122,000, or $.47 per diluted share in fiscal 1997. Fiscal 1998 net income
included expenses of $2,650,000 before taxes ($1,680,000, or $.17 per share
after taxes) due to the consolidation of the Company's facilities and valuation
adjustments on certain assets. Weighted average common shares - assuming
dilution, decreased to 9,753,000 shares in fiscal 1998 compared to 10,850,000 in
the prior year due to the repurchase of 2,000,000 shares in fiscal 1998 and
1,241,000 shares in fiscal 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS
In August 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and is
effective for the Company's year ending October 31, 2000. Management believes
that adoption of this statement will not have a material impact on its financial
condition or results of operations.
YEAR 2000
The Year 2000 readiness issue arises from the inability of older
software in computer information systems or other devices with date-sensitive
functions to properly recognize and accurately process date-sensitive
information on and after January 1, 2000. This problem is expected to exist in
computer programs that have defined dates using a two-digit year. If the Company
or its customers, suppliers, or other third parties rely on systems that are at
risk for this problem and fail to make necessary corrections, the result could
be failure or malfunction of certain computer systems and other devices
dependent upon date-sensitive functions. For companies so affected, this problem
could cause disruptions of operations, including, among other things, a
temporary inability to operate or distribute equipment or products, process
transactions, send invoices, or engage in other normal business activities.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
While Shuffle Master's assessment of Year 2000 issues is ongoing, the
new year is approximately one month old as of the filing date of this report and
the Company has not experienced any effects from Year 2000 issues. A summary of
the Company's preparation for Year 2000 issues, as well as certain disclaimers,
is presented below.
During fiscal 1997 the Company completed: 1) a business system
conversion involving all of its core financial and operating applications
software, 2) an upgrade of processors or complete systems in substantially all
of its servers and personal computers, 3) an upgrade of its network software and
most of its personal computer applications software and, 4) an upgrade of its
main phone system and voice mail software. These conversions and upgrades were
made for reasons unrelated to the Year 2000 issue, but are Year 2000 ready.
Based on these changes, the Company does not believe that the Year 2000 issue
has or will significantly affect its internal operations.
In early fiscal 1999, the Company determined that it has date-sensitive
functions in the operating system software for its Let It Ride Bonus(R) game
equipment. The Company updated the software to allow operation without concern
for calendar dates. The required updates are now 100% complete. The Company
obtained all necessary regulatory approvals for the upgraded software during
1999. The Company's first generation single deck and multi-deck shuffler
products operate without date-sensitive functions. The Company's newer shuffler
products, including the ACE(TM) and the King(TM), use software that references
dates for service reporting functions only and have been designed to operate
during and after the Year 2000. The Company also markets or will market games
for operation on IGT, Bally Gaming and Acres Gaming systems, and was informed by
these companies that such machines and systems were Year 2000 ready.
The Company has evaluated its key vendors' and service providers' Year
2000 readiness to determine the extent to which such relationships may affect
the Company's operations. In the event that Year 2000 issues were to have been
identified with key vendors, the Company expected to be able to manage purchases
and inventories to minimize the Year 2000 issue related delays in parts supply.
In addition, a significant portion of the Company's revenue is recurring in
nature and is not, in the short term, materially dependent on new unit
production. Management believes that the Company's exposure to third party Year
2000 risks is not significant and is diminishing rapidly with passage of time.
However, there can be no assurance that systems of other companies on which the
Company may rely were converted or that such failure to convert would not have
an adverse effect on the Company's operations. It appears that none of the
Company's casino customers experienced any Year 2000 problems, however, such
operations are collectively many times the size of the Company and the Company
does not have the resources to undertake a complete evaluation.
In view of its fiscal 1997 systems upgrades, no significant expenses
were incurred in fiscal 1999 to address Year 2000 issues. The Company also does
not expect that it will incur any significant expenses related to Year 2000
issues during the remainder of fiscal 2000.
LIQUIDITY & CAPITAL RESOURCES
At October 31, 1999, the Company had cash, cash equivalents and
investments of $5,641,000 compared to $8,472,000 at October 31, 1998. Working
capital decreased to $7,427,000 at October 31, 1999, compared to $11,352,000 at
October 31, 1998, and the current ratio decreased to 1.9 at October 31, 1999,
from 3.2 at the end of the prior year. The use of $4,592,000 for the repurchase
of common stock during fiscal 1999 contributed to the decrease in cash, working
capital and the current ratio at October 31, 1999. The inclusion in accrued
expenses as of October 31, 1999 of the $2,750,000 royalty settlement paid to PGI
in December 1999, and amounts owed to Bally under the Company's joint marketing
agreement with Bally also decreased working capital and the current ratio.
Cash provided by operating activities was $8,617,000 in fiscal 1999. The
significant items comprising such cash provided in fiscal 1999 were net income
of $3,598,000 and non-cash charges for depreciation, amortization and valuation
provisions of $5,025,000. Deferred income taxes, net, increased by $1,250,000,
principally due to fiscal 1999 income tax deduction deferrals for the royalty
settlement with PGI and the excess of book over tax depreciation and
amortization. Changes in operating assets and liabilities included an increase
in inventories of $2,689,000 from October 31, 1998, to October 31, 1999. The
Company purchased raw materials related to the production of its new continuous
multi-deck shuffler, the King(TM), and slot machine finished goods in
anticipation of placing Let's Make A Deal(TM) video slot games. Accounts payable
and accrued expenses increased by $3,495,000 due to the accrual of the royalty
settlement with PGI and amounts owed to Bally under the Company's joint
marketing agreement with Bally.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Investing activities used $4,935,000 of cash during fiscal 1999. The
investments balance decreased by $1,743,000 as the Company sold investments and
used the proceeds to fund share repurchases. Investments in leased and available
for lease assets totaled $3,042,000 and included the purchase of $1,106,000 in
slot games, $1,082,000 in Chipper Champ(TM) chip sorting machines under the
Company's joint marketing agreement with TCS America, Inc., and the transfer of
$854,000 in shufflers and table games from inventory. The Company also invested
$3,384,000 in intellectual property, including the Three Card Poker(R) table
game and other licenses and patents for slot and shuffler products.
Cash flows from financing activities used $4,770,000 in fiscal 1999. The
Company repurchased 585,000 shares of its common stock at a total cost of
$4,592,000 during fiscal 1999. At October 31, 1999, there was an outstanding
authorization for share repurchases of up to 151,500 of common stock, at
specific price limits set by the Board of Directors.
The Company does not have any long-term debt or capital leases, except
for the debt incurred by the Company to acquire intellectual property from a
related party. As of October 31, 1999, the long-term balance remaining under
this acquisition was $677,000 compared to $1,217,000 as of October 31, 1998, a
reduction of $540,000 due to payments made in cash and stock during fiscal 1999.
The Company believes its existing cash and investments, and cash
provided by operations will be sufficient to finance the Company's current
operations and new product development for the foreseeable future. Additionally,
the Company secured a two year, $10,000,000 revolving line of credit from U.S.
Bank, N.A. in September 1999 to provide quick access to funds that might be
required for working capital needs related to product rollouts, product or
intellectual property acquisitions and share repurchases.
At October 31, 1998, the Company had available cash, cash equivalents
and investments of $8,472,000 compared to $16,306,000 at October 31, 1997.
Working capital decreased to $11,352,000 at October 31, 1998, compared to
$20,736,000 at October 31, 1997, and the ratio decreased to 3.2 to 1 at October
31, 1998, from 5.4 at the end of the prior year. The decrease in cash, working
capital and the current ratio at October 31, 1998, resulted from the use of
$15,942,000 for the repurchase of common stock
Cash provided by operating activities was $9,571,000 in fiscal 1998. The
significant items comprising such cash provided in fiscal 1998 were net income
of $3,343,000, non-cash charges for depreciation, amortization and valuation
provisions of $4,236,000, and the provision for the facilities relocation and
other charges of $2,650,000. Deferred income taxes, net, increased by $737,000,
principally due to fiscal 1998 income tax deduction deferrals for the facilities
relocation related expenses and the charge-off for the inventory valuation
provision. Changes in operating assets and liabilities include a reduction of
$1,481,000 in accounts receivable due to a significant decrease in receivables
related to sales of shufflers. Inventories increased by $314,000 from October
31, 1997, to October 31, 1998. The Company increased production quantities of
its multi-deck shuffle early in its fiscal 1998 fourth quarter to ensure product
availability as all production was essentially shut down late in the fourth
quarter because of the relocation of the Company's manufacturing operations.
Investing activities provided $8,000,000 of cash during fiscal 1998. The
investments balance decreased by $9,345,000 as the Company sold investments and
used the proceeds to fund share repurchases. The Company received cash of
$378,000 on a note receivable in fiscal 1998. Purchase of property and equipment
totaled $668,000 in fiscal 1998, and included approximately $270,000 of
leasehold improvements for the Las Vegas facility, which included office
expansion and the construction of production space to accommodate the facility
consolidation.
Cash flows from financing activities used $16,060,000 in fiscal 1998,
including the repurchase of 2,000,000 shares of its common stock at a total cost
of $15,942,000 during fiscal 1998.
IMPACT OF INFLATION
To date, inflation has not had a material effect on the Company's
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS PAGE
Independent Auditors' Report 23
Consolidated Income Statements for the
years ended October 31, 1999, 1998, and 1997 24
Consolidated Balance Sheets as of October 31, 1999 and 1998 25
Consolidated Statements of Changes in Shareholders' Equity
for the years ended October 31, 1999, 1998, and 1997 26
Consolidated Statements of Cash Flows for the years
ended October 31, 1999, 1998, and 1997 27
Notes to Consolidated Financial Statements 28-39
Quarterly Financial Data 40
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Shuffle Master, Inc.:
We have audited the accompanying consolidated balance sheets of Shuffle
Master, Inc. (the Company) as of October 31, 1999 and 1998, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended October 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 Shuffle Master, Inc. as of
October 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended October 31, 1999, in conformity
with generally accepted accounting principles.
Minneapolis, Minnesota
December 29, 1999 DELOITTE & TOUCHE LLP
23
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE:
Shuffler lease $ 11,168 $ 9,807 $ 10,840
Shuffler sales and service 5,846 7,554 9,613
Table games 9,626 7,864 7,612
Slot games 1,097 1,707 525
Other 1,189 192 146
------------ ------------ ------------
28,926 27,124 28,736
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of products 9,142 9,578 10,493
Selling, general and administrative 8,493 9,336 9,864
Research and development 3,468 2,462 1,693
Royalty settlement 2,750 -- --
Office relocation expenses (213) 1,435 --
------------ ------------ ------------
23,640 22,811 22,050
------------ ------------ ------------
Income from operations 5,286 4,313 6,686
Other income, net 337 880 1,146
------------ ------------ ------------
Income before income taxes 5,623 5,193 7,832
Provision for income taxes 2,025 1,850 2,710
------------ ------------ ------------
NET INCOME $ 3,598 $ 3,343 $ 5,122
============ ============ ============
EARNINGS PER COMMON SHARE, BASIC $ .45 $ .34 $ .47
============ ============ ============
EARNINGS PER COMMON SHARE,
ASSUMING DILUTION $ .45 $ .34 $ .47
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES, BASIC 7,921 9,691 10,798
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES,
ASSUMING DILUTION 7,961 9,753 10,850
============ ============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24
<PAGE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
AS OF OCTOBER 31, 1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,476 $ 2,564
Investments 4,165 5,908
Accounts receivable, net 3,482 3,702
Note receivable from related party 74 342
Inventories 4,524 2,305
Deferred income taxes 1,470 850
Other current assets 762 827
------------ ------------
Total current assets 15,953 16,498
SYSTEMS AND EQUIPMENT LEASED AND HELD FOR LEASE 5,309 5,103
PROPERTY AND EQUIPMENT, NET 2,628 3,065
INTANGIBLE ASSETS, NET 5,717 3,098
NON-CURRENT DEFERRED INCOME TAXES 595 --
OTHER ASSETS 403 529
------------ ------------
TOTAL ASSETS $ 30,605 $ 28,293
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,607 $ 1,002
Accrued liabilities 4,632 1,955
Current portion of long-term obligation to related party 546 529
Customer deposits and unearned revenue 1,741 1,660
------------ ------------
TOTAL CURRENT LIABILITIES 8,526 5,146
DEFERRED INCOME TAXES PAYABLE -- 35
LONG-TERM OBLIGATION TO RELATED PARTY 677 1,217
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 30,000 shares authorized; 7,475 and
8,015 shares issued and outstanding 75 80
Additional paid-in capital 7,280 11,366
Retained earnings 14,047 10,449
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 21,402 21,895
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 30,605 $ 28,293
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25
<PAGE>
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1996 11,177 $ 112 $ 37,043 $ 1,984 $ 39,139
Common stock repurchased (1,241) (12) (10,384) -- (10,396)
Common stock options exercised 16 -- 111 -- 111
Other 16 -- 135 -- 135
Net income -- -- -- 5,122 5,122
------------ ------------ ------------ ------------ ------------
BALANCE, OCTOBER 31, 1997 9,968 100 26,905 7,106 34,111
Common stock repurchased (2,000) (20) (15,922) -- (15,942)
Common stock options exercised 25 -- 194 -- 194
Other 22 -- 189 -- 189
Net income -- -- -- 3,343 3,343
------------ ------------ ------------ ------------ ------------
BALANCE, OCTOBER 31, 1998 8,015 80 11,366 10,449 21,895
Common stock repurchased (585) (5) (4,587) -- (4,592)
Common stock options exercised 23 -- 156 -- 156
Options issued for services -- -- 156 -- 156
Other 22 -- 189 -- 189
Net income -- -- -- 3,598 3,598
------------ ------------ ------------ ------------ ------------
BALANCE, OCTOBER 31, 1999 7,475 $ 75 $ 7,280 $ 14,047 $ 21,402
============ ============ ============ ============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,598 $ 3,343 $ 5,122
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 4,416 3,739 3,760
Office relocation and other charges (213) 2,650 --
Provision for bad debts 139 171 47
Provision for inventory obsolescence 470 326 516
Deferred income taxes (1,250) (737) (45)
Stock options issued for services 156 -- --
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts and notes receivable 81 1,481 (1,834)
Notes receivable from related party 268 (23) (349)
Inventories (2,689) (314) (774)
Other current assets 65 (285) (246)
Accounts payable and accrued liabilities 3,495 (296) (436)
Customer deposits and unearned revenue 81 (286) 611
Other -- (198) (1,874)
------------ ------------ ------------
Net cash provided by operating activities 8,617 9,571 4,498
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (10,080) (22,199) (112,790)
Proceeds from the sales and maturities of investments 11,823 31,544 120,575
Proceeds received on note receivable -- 378 --
Investment in products leased and held for lease (3,042) (212) (1,795)
Purchases of property and equipment (378) (668) (1,527)
Purchases of intangible assets (3,384) -- (765)
Other 126 (843) (16)
------------ ------------ ------------
Net cash provided by investing activities (4,935) 8,000 3,682
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of common stock (4,592) (15,942) (10,396)
Payments on long-term obligation to related party (523) (312) (275)
Proceeds from issuance of common stock 345 194 111
Other -- -- (7)
------------ ------------ ------------
Net cash provided by financing activities (4,770) (16,060) (10,567)
------------ ------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,088) 1,511 (2,387)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,564 1,053 3,440
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,476 $ 2,564 $ 1,053
============ ============ ============
NON-CASH TRANSACTION:
Acquisition of intangible assets for debt and equity securities $ -- $ -- $ 2,670
============ ============ ============
Payment of obligation to related party with common stock $ 189 $ 189 $ 142
============ ============ ============
CASH PAID FOR:
Income taxes $ 2,704 $ 2,017 $ 3,179
============ ============ ============
Interest $ 81 $ 91 $ 69
============ ============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS:
Shuffle Master, Inc. (the "Company") is a supplier of shuffler products
and proprietary table and slot games and software to the gaming industry. The
foundation of the Company's business has been the development, manufacturing and
marketing of automatic card shufflers. The Company's current shuffler offering
includes multi-deck and single deck shufflers available to casinos through a
purchase or lease option. The Company markets its shuffler products in all
domestic gaming jurisdictions directly and internationally through a
distributor.
In fiscal 1993, the Company developed a proprietary, five card stud
poker table game called Let It Ride(R) and offered the game to casinos in a
basic version. Let It Ride The Tournament(R) was introduced in fiscal 1995. In
fiscal 1997, the Let It Ride The Tournament(R) table game format was
discontinued and replaced with the Let It Ride Bonus(R) format. Let It Ride
Bonus(R) allows the casino players to make a $1 side bet which provides for
larger immediate, predetermined payouts in addition to the basic payouts. The
basic version of Let It Ride(R) is similar to the Bonus game except that it does
not offer the $1 side bet. The Company generates revenues from installed Bonus
and basic tables through a monthly fixed fee to its casino customers.
In fiscal 1997, the Company introduced a wide-area progressive video
poker game called Five Deck Frenzy(R) through a joint venture agreement with
IGT. The Company and IGT shared equally in the profits generated by Five Deck
Frenzy(R). A second related game called Five Deck Poker(TM) is currently
marketed by the Company under a separate joint marketing agreement with IGT.
In fiscal 1998, the Company entered into an agreement with Bally Gaming,
Inc. to develop, manufacture and market a casino video slot game version of
Let's Make A Deal(TM). The Company received a $1,000,000 license fee under this
agreement in fiscal 1998 and began earning operating revenue following the
introduction of Let's Make A Deal(TM) in fiscal 1999.
In fiscal 1999, the Company purchased the Three Card Poker(R) table game
from its developer and distributor. The Company also entered into an agreement
with Acres Gaming, Inc. to develop, manufacture and market a casino slot game
based on The Three Stooges(TM). The Company has since discontinued its Five Deck
Frenzy(R) joint venture agreement with IGT and converted those games to Five
Deck Poker(TM) games.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated.
INVENTORIES:
Inventories are stated at the lower of cost (which approximates
first-in, first-out cost) or market.
LEASING OPERATIONS:
Shufflers leased to customers pursuant to operating leases and shufflers
held for lease are stated at cost. Depreciation on leased shufflers is
calculated using the straight-line method over three to four years. The Company
provides maintenance on its shufflers on lease as part of its normal lease
agreement. Leases generally require prepayment of two months lease payments
which are included on the consolidated balance sheets as customer deposits.
REVENUE RECOGNITION:
The Company recognizes sales revenue on the shipment of a shuffler
system. If a customer purchases an existing leased shuffler system, revenue is
recorded on the effective date of the purchase. Shuffler lease revenue is
generated on a monthly basis, generally through indefinite term operating
leases. Table and slot revenue is generated by monthly fixed and revenue
participation license and royalty fees as well as equipment sales and leasing.
The Company also recognizes revenue through the sale of service and warranty
contracts on its sold shufflers. Prepaid service and warranty contracts are
included in the
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
consolidated balance sheets as unearned revenue. Revenue on service and warranty
contracts is recognized on a straight line basis over the life of the contract.
RESEARCH AND DEVELOPMENT:
Research and development costs are expensed as incurred.
CONCENTRATION OF CREDIT RISK:
The Company has a concentration of credit risk in so far as all of its
receivables are with customers in the gaming industry. The Company has no
material concentration of accounts receivable among any of its casino customers.
PROPERTY AND EQUIPMENT:
Property and equipment is stated at cost. Depreciation and amortization
is recorded using the straight-line method over the estimated useful life of the
asset of three to five years, or lease terms for leasehold improvements.
INTANGIBLE ASSETS:
Intangible assets include purchased intellectual property for games,
patents, trademarks, copyrights and licenses. Intangible assets are amortized
over a period of three to ten years.
INVESTMENT IN JOINT VENTURES:
The Company uses the equity method for accounting for its investment in
joint ventures.
EARNINGS PER COMMON SHARE:
Basic earnings per common share is calculated using income available to
common shareholders divided by the weighted average number of common shares
outstanding during the year. Diluted earnings per common share is similar to
basic except that the weighted average number of common shares outstanding is
increased to give effect to all potential dilutive common shares outstanding
during the period.
IMPAIRMENT OF LONG-LIVED ASSETS:
Management periodically reviews the carrying value of long-lived assets
for potential impairment by comparing the carrying value of these assets to the
estimated undiscounted future cash flows expected to result from the use of
these assets. Should the sum of the related, expected future net cash flows be
less than the carrying value, an impairment loss would be recognized. An
impairment loss would be measured by the amount by which the carrying value of
the asset exceeds the fair value of the asset with fair value being determined
using discounted cash flows. As of October 31, 1999, management has determined
that there was no impairment of long-lived assets.
RECENTLY ISSUED ACCOUNTING STANDARDS:
In August 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and is
effective for the Company's year ending October 31, 2000. Management believes
that adoption of this statement will not have a material impact on its financial
condition or results of operations.
USE OF ESTIMATES:
Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenue
and expenses. Actual results could vary from the estimates that were used.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECLASSIFICATIONS:
Certain reclassifications have been made to the October 31, 1998 and
1997 Consolidated Financial Statements to conform to the October 31, 1999
financial statement presentation. These reclassifications had no effect on the
operating results for the years ended October 31, 1998 and 1997, as previously
reported.
2. FINANCIAL INSTRUMENTS:
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include short-term investments with original
maturities of three months or less.
INVESTMENTS:
The Company classifies all of its securities as available-for-sale. The
Company records investments at fair market value, which, as of October 31, 1999
and 1998, approximated amortized cost. All of the investments will mature within
one year from October 31, 1999.
Investments at fair value consisted of the following:
AS OF OCTOBER 31, 1999 1998
- - ------------------ ---------- ----------
(IN THOUSANDS)
United States Government and Agency Obligations $ 2,232 $ 4,111
Corporate Bonds 1,933 1,797
---------- ----------
$ 4,165 $ 5,908
========== ==========
FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS:
The estimated fair value of accounts receivable, notes receivable, and
accounts payable approximates the carrying value due to the relatively
short-term nature of the instruments. The estimated fair value of the note
payable approximates carrying value since the imputed interest rate is close to
the borrowing rate currently available to the Company.
3. OTHER FINANCIAL STATEMENT DATA:
The following provides additional disclosures for selected information from the
consolidated financial statements:
AS OF OCTOBER 31, 1999 1998
- - ----------------- ---------- ----------
(IN THOUSANDS)
ACCOUNTS RECEIVABLE:
Trade receivables $ 3,617 $ 3,827
Less: Allowance for doubtful accounts (135) (125)
---------- ----------
$ 3,482 $ 3,702
========== ==========
INVENTORIES:
Raw materials and component parts $ 2,598 $ 1,404
Work-in-process 564 366
Finished goods 1,362 535
---------- ----------
$ 4,524 $ 2,305
========== ==========
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. OTHER FINANCIAL STATEMENT DATA (CONTINUED):
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
PRODUCTS LEASED AND HELD FOR LEASE:
Products leased:
Game equipment $ 6,697 $ 5,555
Gaming products 3,231 2,061
------------ ------------
9,928 7,616
------------ ------------
Products held for lease:
Game equipment 2,242 1,361
Gaming products 741 1,561
------------ ------------
2,983 2,922
------------ ------------
12,911 10,538
Less: Accumulated depreciation (7,602) (4,965)
------------ ------------
5,309 5,573
Less: Valuation allowance -- (470)
------------ ------------
$ 5,309 $ 5,103
============ ============
PROPERTY AND EQUIPMENT:
Office furniture and computer equipment $ 2,005 $ 2,295
Leasehold improvements 2,045 1,858
Production equipment 359 314
Other 553 624
------------ ------------
4,962 5,091
Less: Accumulated depreciation (2,334) (2,026)
------------ ------------
$ 2,628 $ 3,065
============ ============
INTANGIBLE ASSETS:
Purchased slot games $ 3,370 $ 3,370
Purchased table games 3,000 --
Other 685 290
------------ ------------
7,055 3,660
Less: Accumulated amortization (1,338) (562)
------------ ------------
$ 5,717 $ 3,098
============ ============
ACCRUED LIABILITIES:
Royalty settlement $ 2,750 $ --
Compensation 939 610
Income taxes 542 151
Facilities relocation and related charges 154 933
Other 247 261
------------ ------------
$ 4,632 $ 1,955
============ ============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1999 1998 1997
- - ---------------------- ------------ ------------ ------------
<S> <C> <C> <C>
(IN THOUSANDS)
COST OF PRODUCTS:
Game equipment $ 6,220 $ 6,757 $ 6,743
Gaming products 2,922 2,821 3,750
------------ ------------ ------------
$ 9,142 $ 9,578 $ 10,493
============ ============ ============
OTHER INCOME, NET:
Interest income $ 418 $ 971 $ 1,215
Interest expense (81) (91) (69)
------------ ------------ ------------
$ 337 $ 880 $ 1,146
============ ============ ============
</TABLE>
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. FACILITIES RELOCATION AND OTHER CHARGES:
In the third quarter of fiscal 1998, the Company recorded a pre-tax
charge of $2,650,000 ($1,680,000 or $.17 per diluted share, after tax), due to
the relocation of the Company's administrative functions and manufacturing
operations from Minneapolis, Minnesota to Las Vegas, Nevada, and decreases in
the valuation of certain assets. Relocation related charges of $1,435,000 were
recorded for employee severance, facility related asset write-offs, and office
lease cancellation costs. The Company determined that it would terminate 47
employees in its production, administrative and research and development
departments, resulting in severance and termination benefit charges of
$1,050,000. The Company recorded a write-down of $940,000 against inventories of
certain single deck shufflers and component parts, in advance of the planned
introduction of the next generation of single deck shuffler model. This charge
was included in the cost of products. In addition, miscellaneous assets totaling
$275,000 were written off and recorded in selling, general and administrative
expenses. The cash and non-cash components of the charge approximated $1,170,000
and $1,480,000, respectively.
In fiscal 1999 the Company determined that eight engineers would not be
terminated and that it would retain a portion of its Minnesota office lease due
to the growth and direction of its research and development efforts.
Additionally, nine administrative employees elected to relocate and to not
accept severance benefits. As a result, $199,000 in severance benefits and
$14,000 in office lease cancellation charges were not used and were reversed in
fiscal 1999. The remaining severance liability of $154,000 as of October 31,
1999 represents severance benefits to be paid to two former employees in fiscal
2000.
<TABLE>
<CAPTION>
LIABILITY
1998 AS OF OCTOBER
CHARGE UTILIZED NOT USED 31, 1999
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Write-down of assets $ 1,423 $ 1,423 $ -- $ --
Employee severance and termination benefits 1,050 697 199 154
Other 177 163 14
------------ ------------ ------------ ------------
$ 2,650 $ 2,283 $ 213 $ 154
============ ============ ============ ============
</TABLE>
5. INCOME TAXES:
Deferred income taxes are recorded to reflect the income tax
consequences in future years between the financial reporting and income tax
bases of assets and liabilities using current tax laws and statutory rates.
Income tax expense is the sum of the tax currently payable and the change in
deferred taxes during the period.
The components of the provision for income taxes are as follows for the
years ended October 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
CURRENT:
Federal $ 2,817 $ 2,185 $ 2,541
State 388 307 124
Foreign 70 95 --
------------ ------------ ------------
3,275 2,587 2,665
DEFERRED (1,250) (737) 45
------------ ------------ ------------
$ 2,025 $ 1,850 $ 2,710
============ ============ ============
</TABLE>
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred tax assets and liabilities consisted of the following as of
October 31:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998
------------ ------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Royalty settlement $ 990 $ --
Joint venture 263 213
Inventory write-down and asset valuation allowances 54 233
Accrued vacation 45 60
Facilities relocation and related charges 37 283
Other 81 61
------------ ------------
$ 1,470 $ 850
============ ============
NON-CURRENT DEFERRED TAX ASSETS (LIABILITIES):
Depreciation $ 244 $ (197)
Intangibles amortization 238 88
Research and experimental 58 78
Options paid for services 55 --
Other -- (4)
------------ ------------
$ 595 $ (35)
============ ============
</TABLE>
The Company recognized no valuation allowance as of October 31, 1999 and
1998 to offset its deferred tax assets. Management believes that it is more
likely than not that the Company will realize the full benefit of its deferred
tax assets on the basis of its evaluation of the Company's anticipated
profitability over the years when the underlying temporary differences are
expected to become tax deductions.
The reconciliation of the federal statutory rate to the effective income
tax rate for the years ended October 31 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Federal income tax at the statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 3.6 3.8 1.4
Benefit due to foreign sales corporation (2.7) (3.0) (.9)
Other 1.1 .8 .1
------------ ------------ ------------
Effective tax rate 36.0% 35.6% 34.6%
============ ============ ============
</TABLE>
6. CREDIT AGREEMENT
In September 1999, the Company entered into a $10,000,000 revolving
credit agreement with a bank for working capital needs, stock repurchases, new
product rollouts and the acquisition of new games. Borrowing under the credit
agreement must be repaid no later than October 6, 2002, though the Company may
annually request that the maturity of the credit agreement be extended by
another year.
Additionally, current borrowings are limited in amount to the lesser of
$10,000,000 or twice the Company's earnings before interest, taxes,
depreciation, and amortization for the most recent cumulative four quarters. The
Company may borrow funds, provided, however, that it maintains certain current
debt service coverage and interest coverage ratios. The interest rate on
borrowings under the credit agreement will be, at the Company's option, either
the bank's prime rate or LIBOR, either adjusted for a premium determined by the
Company's leverage ratio as of the most recent quarter. Borrowings under the
credit agreement are secured by substantially all accounts receivable,
inventory, and products leased and held for lease. The Company had no
outstanding borrowings under the credit agreement as of October 31, 1999.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES:
The Company leases office, production, warehouse and service facilities,
and service vans under operating leases. The facility leases are for a period of
four to ten years, have renewal options of three to fifteen years, and include
an allocation of real estate taxes and other operating expenses. Total rent
expense under operating leases was $525,000, $707,000, and $632,000 for the
years ended October 31, 1999, 1998, and 1997, respectively.
Estimated future minimum lease payments under operating leases as of October 31,
1999, are as follows:
YEAR ENDED OCTOBER 31,
- - ----------------------
(IN THOUSANDS)
2000 $ 471
2001 392
2002 339
2003 293
2004 234
Thereafter 571
----------
$ 2,300
==========
LITIGATION:
On December 28, 1999 the Company settled all of its litigation with
Progressive Games, Inc. ("PGI"), a wholly owned subsidiary of Mikohn Gaming
Corporation ("Mikohn"). The Company made a one-time payment of $2,750,000
($1,760,000 or $.22 per diluted share, after tax) to PGI and consented to the
validity, enforceability and infringement of certain PGI patents. This
settlement amount was accrued as an expense in the consolidated financial
statements as of October 31, 1999. The Company will not pay future royalties for
Let It Ride Bonus(R), Let It Ride The Tournament(R) and Three Card Poker(R). It
will pay pre-negotiated royalties if it markets other table games utilizing a
side bet with a fixed payout.
Under separate license agreements, PGI/Mikohn will pay the Company
future royalties of approximately $580,000 per year over the next five years for
the rights to use the Company's coin sensing patents, the Company's multi-tiered
game wagering patent and the Company's intellectual property related to its
Bahama Bonus(TM) table game. The Company and PGI Mikohn also entered into a
mutually beneficial cross-supplier agreement.
As part of the settlement PGI has released and will dismiss all claims
against Prime Table Games, Derek Webb, Hannah O'Donnell and the Company's casino
licensees named in the litigation, which satisfies the Company's indemnification
obligation.
8. STOCK OPTIONS AND WARRANTS:
STOCK OPTIONS:
In November 1993, the Company's Board of Directors adopted the 1993
Stock Option Plan. The plan permits the granting of incentive stock options
meeting the requirements of Section 422 of the Internal Revenue Code, and
nonqualified options which do not meet the requirements of Section 422. In March
1999, shareholders approved the addition of 250,000 shares to the plan,
increasing the total of shares of the Company's common stock reserved for
issuance under the plan to 1,210,000 shares.
In November 1993, the Company's Board of Directors adopted the Outside
Directors' Option Plan for the purpose of compensating outside directors with
grants of stock options. There will be an annual option grant of 3,000 shares to
each eligible director at a price equal to the fair market value on the date of
the grant. Each option is immediately exercisable and expires seven years from
the grant date. A total of 150,000 shares of the Company's stock have been
reserved for issuance under the plan.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In October 1997, the Board of Directors granted an option to purchase
94,000 shares of the Company's common stock at $8.75 per share to the former
Chairman of the Board. These options were granted outside of the existing stock
option plans.
In December 1998, the Board of Directors granted to a consultant an
option to purchase 40,000 shares at $7.00 per share.
A summary of stock option activity and weighted average exercise
prices follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31, 1999 1998 1997
- - ----------------------- ------------------------ ------------------------ ------------------------
EXERCISE EXERCISE EXERCISE
(SHARES IN THOUSANDS) SHARES PRICE SHARES PRICE SHARES PRICE
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of year 1,124 $ 8.93 982 $ 9.13 648 $ 9.81
Granted 127 7.25 272 8.45 422 8.52
Exercised (23) 6.59 (25) 7.79 (22) 7.09
Forfeited (33) 8.68 (105) 9.89 (66) 12.57
------------------------ ------------------------ ------------------------
Outstanding at end of year 1,195 $ 8.80 1,124 $ 8.93 982 $ 9.13
======================== ======================== ========================
Exercisable end of year 885 $ 9.00 647 $ 9.00 451 $ 9.01
======================== ======================== ========================
</TABLE>
The following table summarizes information concerning options
outstanding and options exercisable as of October 31, 1999:
(SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- - ------------------------------ --------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C>
$3 - $6 76 4.6 $ 5.76 76 $ 5.76
$6 - $9 811 6.0 8.08 551 8.15
$9 - $12 251 6.9 10.74 201 10.94
$12 - $15 57 5.6 14.65 57 14.65
----------------------------------------- -----------------------
1,195 6.1 $ 8.80 885 $ 9.00
========================================= =======================
</TABLE>
Effective November 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). As permitted by SFAS 123,
the Company has elected to continue following the guidance of APB No. 25 for
measurement and recognition of stock-based transactions with employees and
directors. No compensation cost has been recognized for stock options issued
under the 1993 Stock Option Plan and the Outside Directors' Option Plan since
the exercise price for all options granted was at least equal to the fair value
of the common stock on the date of grant. If compensation cost for the Company's
stock option plans had been determined based on the fair value at the grant
dates for grants during fiscal 1999, 1998, and 1997, consistent with the method
provided in SFAS 123, the Company's net income and earnings per share would have
been as follows:
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1999 1998 1997
- - ---------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Net income (IN THOUSANDS):
As reported $ 3,598 $ 3,343 $ 5,122
Pro forma 3,181 2,987 4,076
Earnings per common share, basic:
As reported $ .45 $ .34 $ .47
Pro forma .40 .31 .38
Earnings per common share, assuming dilution:
As reported $ .45 $ .34 $ .47
Pro forma .40 .31 .38
Weighted average fair value of options granted during the year $ 5.13 $ 5.69 $ 6.11
</TABLE>
The fair value of options granted during fiscal 1999, 1998, and 1997 was
estimated on the date of grant using the Black-Sholes option-pricing model with
the following weighted average assumptions and results:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1999 1998 1997
- - ---------------------- ------------ ------------- --------------
<S> <C> <C> <C>
Dividend yield None None None
Expected volatility 60.9% 58.6% 52.6%
Risk-free interest rate 6.2% 5.5% 6.5%
Expected life of options 8.14 years 9.75 years 9.77 years
</TABLE>
The Black-Sholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock based compensation has
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can significantly affect the
fair value estimate, in management's opinion, use of the existing models for
valuation does not necessarily provide a reliable single measure of the fair
value of its employee stock based compensation.
WARRANTS:
As of October 31, 1999, all warrants outstanding to purchase common
stock had expired. No warrants were exercised in fiscal 1999.
9. COMMON STOCK REPURCHASE:
In October 1998, the Company's Board of Directors approved a resolution
to repurchase up to $2,000,000 of its outstanding common stock. In July 1999,
the Board rescinded unutilized authorizations under this resolution and approved
a new authorization to repurchase up to 500,000 shares. The Company repurchased
585,000 shares of its common stock under these two resolutions at a total cost
of $4,592,000. During fiscal 1998, the Company repurchased 2,000,000 shares at a
total cost of $15,942,000. As of October 31, 1999, the amount remaining under
the July 1999 board authorization was 151,500 shares. In November 1999, the
Board of Directors approved an additional resolution to repurchase up to
$2,000,000 of its outstanding common stock.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EARNINGS PER COMMON SHARE:
Effective December 15, 1997, the Company adopted the Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128).
Earnings per common share amounts for fiscal 1997 has been restated to conform
with the requirements of SFAS 128.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1999 1998 1997
- - ---------------------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
<S> <C> <C> <C>
NET INCOME $ 3,598 $ 3,343 $ 5,122
============ ============ ============
BASIC:
Weighted average shares outstanding 7,873 9,621 10,706
Shares to be issued under asset purchase 48 70 92
------------ ------------ ------------
Weighted average common shares, basic 7,921 9,691 10,798
============ ============ ============
Earnings per common share, basic $ .45 $ .34 $ .47
============ ============ ============
ASSUMING DILUTION:
Weighted average common shares, basic 7,921 9,691 10,798
Dilutive impact of options outstanding 40 62 52
------------ ------------ ------------
Weighted average common shares and potential dilutive\
shares outstanding 7,961 9,753 10,850
============ ============ ============
Earnings per common share, assuming dilution $ .45 $ .34 $ .47
============ ============ ============
</TABLE>
11. SHAREHOLDER RIGHTS PLAN:
PREFERRED STOCK:
On June 26, 1998, the Board of Directors designated and established
100,031 shares of no par value Series A Junior Participating Preferred Stock
(Preferred Stock). Holders of Preferred Stock are entitled to one hundred votes
on any matters submitted to vote by the shareholders of the Company, an
aggregate dividend of one hundred times any dividend declared on common stock
and a liquidation preference of one hundred times any liquidation payment amount
to common shareholders. No shares of Preferred Stock have been issued.
SHAREHOLDER RIGHTS PLAN:
On June 26, 1998, the Board of Directors of the Company adopted a
shareholder rights plan and declared a dividend distribution of one preferred
stock purchase right (a Right) for each outstanding common share to shareholders
of record on July 10, 1998. Additionally, the Board of Directors further
authorized and directed the issuance of one Right for each share of common stock
that shall become outstanding between July 10, 1998, and the earliest of the
Distribution Date, Redemption Date and the Final Expiration Date, all as defined
in the plan.
Each Right will entitle the registered holder (unless the holder is an
Acquiring Person, as defined) to purchase from the Company one one-hundredth of
a share of Preferred Stock at $18 per one one-hundredth of a share of Preferred
Stock, subject to adjustments (the Purchase Price). The Rights generally become
exercisable if a person or group acquires, or tenders for, 20% or more of the
Company's common shares. In such event, upon exercise of the Right, the holder
of a Right may receive common shares having a value of two times the Purchase
Price.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Rights will expire on June 26, 2008, unless they become exercisable
or are amended before that date, but may be redeemed by the Company for $.01 per
Right. After a person or group becomes an Acquiring Person, the Rights may not
be redeemed and may only be amended in limited circumstances.
12. RELATED PARTY TRANSACTIONS:
In fiscal 1997, the Company advanced $300,000 to its President, Chief
Executive Officer and Chairman of the Board. The note receivable is secured by
17,000 shares of the Company's common stock, bears interest at seven percent and
matures in November 2002. As of October 31, 1999, the balance of the note
receivable was $374,000, including $74,000 in accrued interest due by February
2000. The non-current portion of this notes receivable is recorded in other
assets in the balance sheet.
The Company has a non-interest bearing obligation to an Executive Vice
President and director related to the purchase of certain intellectual property,
payable in cash and common stock. The cash portion of the obligation has been
discounted at a rate of seven percent, and is payable as follows:
YEAR ENDING OCTOBER 31,
- - -----------------------
(IN THOUSANDS)
2000 $ 546
2001 580
2002 97
----------
1,223
Less: current portion (546)
----------
$ 677
==========
13. DEFINED CONTRIBUTION PLAN:
The Company sponsors a defined contribution plan which qualifies under
Section 401(k) of the Internal Revenue Code and covers employees who meet
certain age and service requirements. The Company may make matching
contributions to the plan based on a percentage of employee compensation and
actual contributions. In 1999 the Company elected to make a matching
contribution of 50% of employee contributions up to 4% of compensation, totaling
$71,000. However, no matching contributions were made to the plan during the
fiscal years ended October 31, 1998 and 1997.
14. EXPORT SALES:
In fiscal 1999, 1998, and 1997, the Company had export shuffler sales
and shuffler lease revenue, primarily to Canada and Australia, which totaled
17%, 24%, and 17%, respectively, of total revenue.
15. SEGMENT REPORTING:
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131
established standards for reporting information about operating segments in
annual financial statements and required selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. The Company's chief operating decision
maker is the Chief Executive Officer.
The Company operates in two business segments: game equipment and gaming
products. The game equipment segment primarily designs, manufactures and
installs shufflers for sale or lease. It also distributes, installs and services
casino chip sorting machines and accessories for sale or lease. The gaming
products segment includes the design, manufacture, installation and service of
proprietary table games and slot games. Gaming products are either sold or
produce recurring revenue through fixed or participation leases. The Company
does not allocate corporate expenses to its business segments.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1999 1998 1997
- - ----------------------- ------------ ------------ ------------
(IN THOUSANDS)
REVENUE
<S> <C> <C> <C>
Game equipment $ 18,203 $ 17,361 $ 20,454
Gaming products 10,723 9,763 8,282
------------ ------------ ------------
28,926 27,124 28,736
============ ============ ============
OPERATING INCOME
Game equipment 9,896 8,250 10,888
Gaming products 1,155 4,084 3,023
Corporate (5,765) (8,021) (7,225)
------------ ------------ ------------
5,286 4,313 6,686
============ ============ ============
DEPRECIATION AND AMORTIZATION
Game equipment 1,948 1,536 1,637
Gaming products 1,609 1,154 1,239
Corporate 859 1,049 884
------------ ------------ ------------
4,416 3,739 3,760
============ ============ ============
ASSETS
Game equipment 8,644 6,472 9,783
Gaming products 10,388 7,736 9,225
Corporate 11,573 14,085 21,718
------------ ------------ ------------
30,605 28,293 40,726
============ ============ ============
CAPITAL EXPENDITURES
Game equipment 1,960 -- 1,795
Gaming products 4,466 212 3,435
Corporate 378 668 1,527
------------ ------------ ------------
$ 6,804 $ 880 $ 6,757
============ ============ ============
</TABLE>
39
<PAGE>
QUARTERLY FINANCIAL DATA
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------
IN THOUSANDS, EXCEPT PER COMMON SHARE January 31 April 30 July 31 October 31
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1999
<Revenue $ 5,978 $ 6,958 $ 7,951 $ 8,039
Gross Profit 4,240 4,755 5,291 5,497(2)
Operating Income (Loss) 1,512 1,888 2,289 (403)
Net Income (Loss) 1,033 1,269 1,501 (205)
Earnings (Loss) per Common Share, basic (3) .13 .16 .19 (.03)
Earnings (Loss) per Common Share, assuming dilution (3) .13 .16 .19 (.03)
FISCAL 1998
Revenue $ 7,291 $ 7,132 $ 5,491 $ 7,210
Gross Profit 4,747 5,106 2,817 4,876
Operating Income 1,899 2,269 (1,724)(1) 1,869
Net Income 1,379 1,627 (941) 1,278
Earnings (Loss) per Common Share, basic(3) .14 .16 (.09) .15
Earnings (Loss) per Common Share, assuming dilution(3) .14 .16 (.09) .15
</TABLE>
(1) The third quarter of fiscal 1998 included $2,650,000 of charges
related to the relocation of the Company's administrative
functions and manufacturing operations, and certain inventory
and fixed asset valuation adjustments. See notes to consolidated
financial statements.
(2) The fourth quarter of 1999 included $2,750,000 of charges
related to the settlement of the Company's litigation with
Progressive Games, Incorporated and the payment of past
royalties. See notes to consolidated financial statements.
(3) The sum of the quarterly earnings per common share does not
equal the amount reported for the fiscal year as quarterly
calculations are made independently during the fiscal year.
40
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors of the Registrant.
The information under the caption "Election of Directors" in the
Company's Fiscal 1999 Proxy Statement is incorporated herein by
reference.
(b) Executive Officers of the Registrant.
The information under the caption "Executive Officers" in the
Company's Fiscal 1999 Proxy Statement is incorporated herein by
reference.
(c) Compliance With Section 16 (a) of the Exchange Act.
The information under the caption "Section 16 (a) Beneficial
Ownership Reporting Compliance" in the Company's Fiscal 1999
Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Executive Compensation,"
"Compensation of Directors," "Report of Compensation Committee on Executive
Compensation" and "Stock Performance Graph" in the Company's Fiscal 1999 Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Fiscal 1999 Proxy Statement
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Relationships and Related
Transactions" in the Company's Fiscal 1999 Proxy Statement is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements and
independent auditors' report are filed as part of this
Report on Form 10-K.
Independent Auditors' Report
Consolidated Income Statements for the years ended
October 31, 1999, 1998, and 1997
Consolidated Balance Sheets as of October 31, 1999 and
1998
Consolidated Statements of Shareholders' Equity for the
years ended October 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the years
ended October 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
Quarterly Financial Data (unaudited)
41
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
2. Financial Statement Schedules
All financial statement schedules are omitted as the
required information is inapplicable or the information
is presented in the consolidated financial statements or
related notes.
3. Exhibits
3.1 Articles of Incorporation of Shuffle Master,
Inc. as amended July 15, 1992, and June 23, 1995
(Incorporated by reference to the same exhibit
number in the Company's Report on Form 10-K for
the year ended October 31, 1995)
3.2 Bylaws of Shuffle Master, Inc. (Incorporated by
reference to the same exhibit number included in
the Company's Registration Statement on Form
S-18, Registration No. 33-53994C)
10.1 Shuffle Master, Inc. 1993 Stock Option Plan
(Incorporated by reference to exhibit 10.8
included in the Company's Registration Statement
on Form SB-2, Registration No. 33-72224)
10.2 Shuffle Master, Inc. Outside Directors' Option
Plan (Incorporated by reference to exhibit 10.7
included in the Company's Registration Statement
on Form SB-2, Registration No. 33-72224)
10.3 Office lease dated August 9, 1995, between
Shuffle Master, Inc. and Airport Center
Associates, a joint venture of Airport Partners,
and Copley Investors Limited Partnership
(Incorporated by reference to exhibit 10.6 in
the Company's Report on Form 10-K for the year
ended October 31, 1995)
10.4 Employment Contract, by and between Shuffle
Master, Inc. and Mark Yoseloff, dated March 7,
1997 (Incorporated by reference to exhibit 10.1
in the Company's Report on Form 10Q for the
quarter ended July 31, 1997)
10.5 Purchase Agreement, by and between Shuffle
Master, Inc., and Well Suited L.L.C., and Mark
Yoseloff, dated March 7, 1997 (Incorporated by
reference to exhibit 10.2 in the Company's
Report on Form 10Q for the quarter ended July
31, 1997)
10.6 Purchase/License Agreement, by and between
Shuffle Master, Inc., and Visual Communications
Consultants, Inc. dba Advanced Gaming Concepts,
and Mark Yoseloff, dated March 7, 1997
(Incorporated by reference to exhibit 10.3 in
the Company's Report on Form 10Q for the quarter
ended July 31, 1997)
10.7 Termination of Employment Arrangement for Joseph
J. Lahti, as excerpted from the October 27, 1997
minutes of the Board of Directors meeting
(Incorporated by reference to exhibit 10.10 in
the Company's Report on Form 10K for the year
ended October 31, 1997)
10.8 Shareholder Rights Plan, dated June 26, 1998
(Incorporated by reference to the Company's
Report on Form 8K dated June 26, 1998)
10.9 Revolving Credit Note, dated September 30, 1999,
by and between Shuffle Master, Inc. and
affiliates and U.S. Bank National Association.
10.10 Credit Agreement, dated September 30, 1999, by
and between Shuffle Master, Inc. and affiliates
and U.S. Bank National Association.
10.11 Security Agreement, dated September 30, 1999, by
and between Shuffle Master, Inc. and affiliates
and U.S. Bank National Association.
10.12 Settlement Agreement, dated December 28, 1999,
by and between Shuffle Master, Inc., Progressive
Games, Inc. and Mikohn Gaming Corporation.
10.13 Non-exclusive License Agreement (Exhibit 4),
dated December 28, 1999, by and between Shuffle
Master, Inc. and Progressive Games, Inc.
10.14 Non-exclusive License Agreement (Exhibit 5),
dated December 28, 1999, by and between Shuffle
Master, Inc. and Progressive Games, Inc.
10.15 Exclusive License Agreement (Exhibit 6), dated
December 28, 1999, by and between Shuffle
Master, Inc., Progressive Games, Inc. and Mikohn
Gaming Corporation.
10.16 Non-exclusive License Agreement (Exhibit 7),
dated December 28, 1999, by and between Shuffle
Master, Inc., Progressive Games, Inc. and Mikohn
Gaming Corporation.
42
<PAGE>
10.17 Cross Supplier Agreement (Exhibit 8), dated
December 28, 1999, by and between Shuffle
Master, Inc. and Mikohn Gaming Corporation.
23.1 Independent Auditors' Consent
27.0 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of
the year ended October 31, 1999.
43
<PAGE>
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.
SHUFFLE MASTER, INC.
Dated: January 31, 2000 By: /s/ Joseph J. Lahti
------------------------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Joseph J. Lahti President, Chief Executive Officer, January 31, 2000
- - ----------------------- and Chairman of the Board
Joseph J. Lahti
/s/ Gary W. Griffin Chief Financial Officer January 31, 2000
- - -----------------------
Gary W. Griffin
/s/ Gerald W. Koslow Corporate Controller January 31, 2000
- - -----------------------
Gerald W. Koslow
/s/ Mark L. Yoseloff Executive Vice President and January 31, 2000
- - ----------------------- Director
Mark L. Yoseloff
/s/ Patrick R. Cruzen Director January 31, 2000
- - -----------------------
Patrick R. Cruzen
/s/ Thomas A. Sutton Director January 31, 2000
- - -----------------------
Thomas A. Sutton
44
EXHIBIT 10.9
REVOLVING CREDIT NOTE
$10,000,000.00 September 30, 1999
FOR VALUE RECEIVED, the undersigned, SHUFFLE MASTER, INC., a Minnesota
corporation, SHUFFLE MASTER OF MISSISSIPPI, INC., a Mississippi Corporation and
SHUFFLE MASTER INTERNATIONAL LIMITED, a corporation organized under the laws of
the Country of Barbados (collectively the "Borrowers") jointly and severally
promise to pay to the order of U.S. BANK NATIONAL ASSOCIATION (together with its
successors and assigns, the "Lender") such sums as Lender may hereafter loan or
advance or re-loan to the Borrowers from time to time pursuant to the Credit
Facility as described in the Credit Agreement, hereinafter defined, the unpaid
balance of which shall not exceed in the aggregate the Maximum Permitted Balance
at any time, together with interest on the principal balance outstanding from
time to time at the rate or rates set forth in the Credit Agreement.
A. Incorporation of Credit Agreement.
1. Reference is made to the Credit Agreement dated concurrently
herewith (the "Credit Agreement"), executed by and among the Borrowers and
Lender. Terms defined in the Credit Agreement and not otherwise defined herein
are used herein with the meanings defined for those terms in the Credit
Agreement. This is the Revolving Credit Note ("Revolving Credit Note") referred
to in the Credit Agreement, and any holder hereof is entitled to all of the
rights, remedies, benefits and privileges provided for in the Credit Agreement
as originally executed or as it may from time to time be supplemented, modified
or amended. The Credit Agreement, among other things, contains provisions for
acceleration of the maturity hereof upon the happening of certain stated events
upon the terms and conditions therein specified.
2. The outstanding principal indebtedness evidenced by this
Revolving Credit Note shall be payable as provided in the Credit Agreement and
shall be paid in full on the Maturity Date.
3. Interest shall be payable on the outstanding daily unpaid
principal amount of each Borrowing
Page 1 of 4
<PAGE>
hereunder from the date thereof until payment in full and shall accrue and be
payable at the rates and on the dates set forth in the Credit Agreement both
before and after Default and before and after maturity and judgment, with
interest on overdue interest to bear interest at the Default Rate, to the
fullest extent permitted by applicable law.
4. The amount of each payment hereunder shall be made to the Lender
at the Lender's office as specified in the Credit Agreement at the time or times
set forth therein, in lawful money of the United States of America and in
immediately available funds.
5. Borrowings hereunder shall be made in accordance with the terms,
provisions and procedures set forth in the Credit Agreement.
B. Default. The "Late Charges and Default Rate" provisions contained in
Section 2.09 and the "Events of Default" provisions contained in Article VII of
the Credit Agreement are hereby incorporated by this reference as though fully
set forth herein. Upon the occurrence of a Default or Event of Default,
Borrowers' right to convert or exercise its Interest Rate Option for a IBOR
Loan, or the continuation thereof, shall immediately, without notice or demand,
terminate.
C. Waiver. Borrowers waive diligence, demand, presentment for payment,
protest and notice of protest.
D. Collection Costs. In the event of the occurrence of an Event of
Default, the Borrowers agree to pay all reasonable costs of collection,
including a reasonable attorney's fee, in addition to and at the time of the
payment of such sum of money and/or the performance of such acts as may be
required to cure such default. In the event legal action is commenced for the
collection of any sums owing hereunder the undersigned agrees that any judgment
issued as a consequence of such action against Borrowers shall bear interest at
a rate equal to the Default Rate until fully paid.
E. Interest Rate Limitation. Notwithstanding any provision herein or in
any document or instrument now or hereafter securing this Revolving Credit Note,
the total liability for payments in the nature of interest shall not
Page 2 of 4
<PAGE>
exceed the limits now imposed by the applicable laws of the State of Nevada or
the United States of America.
F. Security. This Revolving Credit Note is secured by the Security
Agreement described in the Credit Agreement.
G. Governing Law. This Revolving Credit Note has been delivered in Las
Vegas, Nevada, and shall be governed by and construed in accordance with the
laws of the State of Nevada.
H. Partial Invalidity. If any provision of this Revolving Credit Note
shall be prohibited by or invalid under any applicable law, such provision shall
be ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision of any other provision of this
Revolving Credit Note.
I. No Conflict with Credit Agreement. This Revolving Credit Note is
issued under, and subject to, the terms, covenants and conditions of the Credit
Agreement, which Credit Agreement is by this reference incorporated herein and
made a part hereof. No reference herein to the Credit Agreement and no provision
of this Revolving Credit Note or the Credit Agreement shall alter or impair the
obligations of Borrower, which are absolute and unconditional, to pay the
principal of and interest on this Revolving Credit Note at the place, at the
respective times, and in the currency prescribed in the Credit Agreement. If any
provision of this Revolving Credit Note conflicts or is inconsistent with any
provision of the Credit Agreement, the provisions of the Credit Agreement shall
govern.
<PAGE>
IN WITNESS WHEREOF, this Revolving Credit Note has been executed as of
the date first hereinabove written.
SHUFFLE MASTER, INC.,
a Minnesota corporation
By /s/ Gary W. Griffin
-------------------------------------
Name Gary W. Griffin
-----------------------------------
Page 3 of 4
<PAGE>
Title Secretary/Treasurer
----------------------------------
SHUFFLE MASTER OF
MISSISSIPPI, INC.,
a Mississippi corporation
By /s/ Gary W. Griffin
-------------------------------------
Name Gary W. Griffin
-----------------------------------
Title Vice President
----------------------------------
SHUFFLE MASTER INTERNATIONAL
LIMITED, a corporation
organized under the laws of
the Country of Barbados
By /s/ Gary W. Griffin
-------------------------------------
Name Gary W. Griffin
-----------------------------------
Title Vice President/Treasurer
----------------------------------
Page 4 of 4
EXHIBIT 10.10
CREDIT AGREEMENT
THIS CREDIT AGREEMENT ("Credit Agreement") is made and entered into
as of the 30th day of September, 1999, by and among SHUFFLE MASTER, INC., a
Minnesota corporation ("SMI Minn"), SHUFFLE MASTER OF MISSISSIPPI, INC., a
Mississippi corporation ("SMI Miss") and SHUFFLE MASTER INTERNATIONAL LIMITED, a
corporation organized under the laws of the country of Barbados ("SMIL" and
together with SMI Minn and SMI Miss, collectively the "Borrowers") and U.S. BANK
NATIONAL ASSOCIATION (herein together with its successors and assigns the
"Lender").
R_E_C_I_T_A_L_S:
WHEREAS:
A. In this Credit Agreement all capitalized words and terms shall
have the respective meanings and be construed herein as hereinafter provided in
Section 1.01 of this Credit Agreement and shall be deemed to incorporate such
words and terms as a part hereof in the same manner and with the same effect as
if the same were fully set forth.
B. SMI Miss and SMIL are wholly owned Subsidiaries of SMI Minn.
Borrowers operate a business which develops, manufactures and markets automatic
card shuffling equipment, table games and video/slot machine game software for
sale and lease to casino operations at various locations primarily throughout
the United States (collectively the "Business Operation") but includes other
locations throughout the world.
C. Borrowers desire to establish the Credit Facility for the
purposes of providing working capital for the Business Operation, including,
without limitation, new product rollout, building inventory and receivables and
the acquisition of new games including the intellectual property associated
therewith.
D. Lender is willing to establish the Credit Facility for the uses
and purposes hereinafter set forth and on the terms and subject to the
conditions, covenants and understandings hereinafter set forth and contained in
each of the Loan Documents.
NOW, THEREFORE, in consideration of the foregoing, and other
valuable considerations as hereinafter described, the parties hereto do promise,
covenant and agree as follows:
<PAGE>
ARTICLE I
DEFINITIONS
Section 1.01. Definitions. For the purposes of this Credit
Agreement, each of the following terms shall have the meaning specified with
respect thereto, unless a different meaning clearly appears from the context:
"Adjusted DSC Ratio" shall, as of the end of any Fiscal Quarter,
mean with reference to the Borrower Consolidation:
EBITDA for the Fiscal Quarter under review, together with the most
recently ended three (3) preceding Fiscal Quarters
Divided by (/) the sum of Interest Expense (expensed and
capitalized), plus funded Distributions, plus principal payments
required to be made on all interest bearing Indebtedness, plus
payments required to be made on Capitalized Lease Liabilities in
each instance during the Fiscal Quarter under review, together with
the most recently ended three (3) preceding Fiscal Quarters.
"Affiliate(s)" of any Person means any other Person which, directly
or indirectly, controls, is controlled by or is under common control with such
Person. A Person shall be deemed to be "controlled by" any other Person if such
other Person possesses, directly or indirectly, power to:
(a) vote ten percent (10%) or more of the equity securities
(on a fully diluted basis) having ordinary voting power for the
election of directors or managing general partners; or
(b) direct or cause the direction of the management and
policies of such Person whether by contract or otherwise.
"Aggregate Commitment" shall mean reference to the aggregate amount
committed by Lender for advance to or on behalf of Borrowers as Borrowings under
the Credit Facility in the initial principal amount of Ten Million Dollars
($10,000,000.00), subject to the additional reductions and/or limitations for
advance as set forth or incorporated in the definition of Maximum Permitted
Balance.
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"Applicable Margin" means for any Base Rate Loan, or IBO Loan during
the period commencing on the Closing Date and continuing until the Maturity
Date, the applicable percentage amount to be added to the Base Rate or the IBO
Rate, as the case may be, as set forth in the table below based on the Leverage
Ratio of the Borrower Consolidation as of each Fiscal Quarter end, together with
the immediately preceding three (3) Fiscal Quarters on a four (4) Fiscal Quarter
basis, any change in the applicable percentage amount by reason thereof to be
effective as of the 1st day of the third month immediately following each such
Fiscal Quarter end:
LEVERAGE BASE RATE IBO RATE
RATIO MARGIN MARGIN
--------------------------------------------
Less than 0.000% 1.875%
1.50 to 1.00
--------------------------------------------
Greater than 0.25% 2.00%
or equal to
1.5 to 1.0
but less
than 2.0 to
1.0
--------------------------------------------
Greater than 0.50% 2.125%
or equal to
2.0 to 1.0
--------------------------------------------
"Assets" shall mean the total assets of Borrowers determined in
accordance with GAAP.
"Authorized Officer Certificate" shall have the meaning set forth in
Section 3.05(iv).
"Authorized Officer(s)" shall mean, relative to the Borrowers, those
of the respective officers whose signatures and incumbency shall have been
certified to Lender as required in Section 3.05(iv) of the Credit Agreement with
the authority and responsibility to deliver Notices of Borrowing,
Continuation/Conversion Notices, Pricing Certificates, Compliance Certificates
and all other requests, notices, reports, consents, certifications and
authorizations on behalf of Borrowers.
"Available Borrowings" shall mean, at any time, and from time to
time, the aggregate amount available to Borrowers for a Borrowing under the
Credit Facility not exceeding the
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amount of the Maximum Availability, as of each date of determination.
"Bank Facility Termination" shall mean indefeasible payment in full
of all sums owing under the Revolving Credit Note and each of the other Loan
Documents and the irrevocable termination of the obligation of Lender to advance
Borrowings.
"Banking Business Day" shall mean a day upon which the principal
administrative offices (or any successor offices) of Lender and, with respect to
the making of IBOR Loans, banking associations in Nevada, Oregon, New York and
London, England, are open to conduct regular banking business.
"Bankruptcy Code" shall mean the United States Bankruptcy Code, as
amended, 11 U.S.C. Section 101, et seq.
"Base Rate" shall mean the rate of interest per annum which Lender
from time to time identifies and publicly announces as its "prime rate" or
"reference rate" and is not necessarily, for example, the lowest rate of
interest which Lender collects from any borrower or group of borrowers.
"Base Rate Loan" shall mean reference to that portion of the unpaid
principal balance of the Credit Facility bearing interest with reference to the
Base Rate, plus the Applicable Margin.
"Borrower Consolidation" shall mean collective reference to
Borrowers on a consolidated basis.
"Borrowers" shall have the meaning set forth in the Preamble of this
Credit Agreement.
"Borrowing(s)" shall mean such amounts as Borrowers may request from
Lender from time to time to be advanced under the Credit Facility by Notice of
Borrowing in the manner provided in Section 2.03.
"Breakage Charges" shall have the meaning set forth in Section
2.07(c) of the Credit Agreement.
"Business Operation" shall have the meaning ascribed to such term in
Recital Paragraph B.
"Capital Proceeds" shall mean the net proceeds (after deducting all
reasonable expenses incurred in connection therewith) available to Borrowers
from: (i) partial
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<PAGE>
or total condemnation or destruction of any part of the Collateral, (ii)
insurance proceeds (other than rent insurance and business interruption
insurance) received in connection with damage to or destruction of any part of
the Collateral, (iii) the sale or other disposition of any portion of the
Collateral in accordance with the provisions of this Credit Agreement (not
including, however, any proceeds received by Borrowers from a sale of FF&E if
such FF&E is replaced by items of equivalent value and utility, in each case
such exclusion to apply only during any period in which no Event of Default has
occurred and is continuing), and (v) any other extraordinary receipt of proceeds
not in the ordinary course of business and treated, for accounting purposes, as
capital in nature.
"Capitalized Lease Liabilities" means all monetary obligations of
Borrowers under any leasing or similar arrangement which, in accordance with
GAAP, would be classified as capitalized leases, and, for purposes of this
Credit Agreement, the amount of such obligations shall be the capitalized amount
thereof, determined in accordance with GAAP, and the stated maturity thereof
shall be the date of the last payment of rent or any other amount due under such
lease prior to the first date upon which such lease may be terminated by the
lessee without payment of a penalty.
"Cash" shall mean, when used in connection with any Person, all
monetary and non-monetary items owned by that Person that are treated as cash in
accordance with GAAP, consistently applied.
"Change of Control" shall mean the date on which:
(a) Any "person" or "group" (as such terms are defined in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended) owns or controls, more than forty-eight percent (48%) of
the common voting stock of SMI Minn; or
(b) During any period of twenty-four (24) consecutive months
commencing after the Closing Date, individuals who at the beginning
of such period constituted SMI Minn's Board of Directors (together
with any new or replacement directors whose election by SMI Minn's
Board of Directors or whose nomination for election by SMI Minn's
shareholders, was approved by a vote of at least a majority of the
directors then still in office who
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<PAGE>
were either directors at the beginning of such period or whose
election or nomination for election was previously so approved)
cease for any reason to constitute a majority of the directors then
in office.
"Closing Certificate" shall have the meaning ascribed to such term
in Section 3.05(v).
"Closing Date" shall mean October 4, 1999, subject to the
satisfaction of each condition precedent required under Article IIIA of this
Credit Agreement.
"Collateral" shall mean collective reference to all of Borrowers'
right, title and interest in and to: (i) the parts, work-in-process, inventory,
software, accounts receivable, rights to payment, leases, instruments, security
interests and other interests of the Borrowers which are subject to the security
interest created by the Security Agreement; and (ii) any and all other property
and/or intangible rights, interest or benefits inuring to or in favor of the
Borrowers which are in any manner assigned, pledged, encumbered or otherwise
hypothecated in favor of Lender to secure payment of the Credit Facility.
"Compliance Certificate" shall mean a compliance certificate as
described in Section 5.04(d) which is more particularly described on "Exhibit
E", affixed hereto and by this reference incorporated herein and made a part
hereof.
"Contingent Liability(ies)" shall mean, as to any Person, any
obligation of such Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness, leases or dividends ("primary obligations") of
any other Person (the "primary obligor") in any manner, whether directly or
indirectly, including, without limitation, any obligation of such Person,
whether or not contingent, (a) to purchase any such primary obligation or any
property constituting direct or indirect security therefor, (b) to advance or
supply funds (i) for the purchase or payment of any such primary obligation or
(ii) to maintain working capital or equity capital of the primary obligor or
otherwise to maintain the net worth or solvency of the primary obligor, (c) to
purchase property, securities or services primarily for the purpose of assuring
the owner of any such primary obligation of the ability of the primary obligor
to make payment of such primary obligation, (d) to make payment in respect of
any net liability arising in connection with any Interest Rate Hedges, foreign
currency
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<PAGE>
exchange agreement, commodity hedging agreement or any similar agreement or
arrangement in any such case if the purpose or intent of such agreement is to
provide assurance that such primary obligation will be paid or discharged, or
that any agreements relating thereto will be complied with, or that the holders
of such primary obligation will be protected (in whole or in part) against loss
in respect thereof or (e) otherwise to assure or hold harmless the holder of
such primary obligation against loss in respect thereof; provided, however, that
the term Contingent Liability shall not include endorsements of instruments for
deposit or collection in the ordinary course of business. The amount of any
Contingent Liability shall be deemed to be an amount equal to the stated or
determinable amount of the primary obligation in respect of which such
Contingent Liability is made or, if not stated or determinable, the reasonably
anticipated liability in respect thereof (assuming such Person is required to
perform thereunder) as determined by such Person in good faith.
"Continuation/Conversion Notice" shall mean a notice of continuation
or conversion of or to an IBO Loan and certificate duly executed by an
Authorized Officer, substantially in the form of that certain exhibit marked
"Exhibit C", affixed hereto and by this reference incorporated herein and made a
part hereof.
"Convert, Conversion and Converted" shall refer to a Borrowing at or
continuation of a particular interest rate basis or conversion of one interest
rate basis to another pursuant to Section 2.06(c).
"Credit Agreement" shall mean this Credit Agreement executed by and
among Borrowers and Lender setting forth the terms and conditions of the Credit
Facility, together with all Schedules, Exhibits and attachments hereto, as it
may be amended, modified, extended, renewed or restated from time to time.
"Credit Facility" shall mean the agreement of Lender to fund
Borrowings as a reducing revolving line of credit, subject to the terms and
conditions set forth in this Credit Agreement and the Revolving Credit Note, up
to the Maximum Permitted Balance as reduced from time to time in accordance with
the terms of this Credit Agreement and the Revolving Credit Note.
"Current Assets" shall mean all Assets of a Person that, in
accordance with GAAP, would be included as current
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<PAGE>
assets on a balance sheet as of a date of calculation, provided, however, that
notwithstanding the foregoing, for the purpose of this Credit Agreement the term
"Current Assets" shall also be deemed to include equipment leased by Borrowers
to casino operators and equipment and inventory held by Borrowers for lease
and/or sale.
"Current Liabilities" shall mean all Liabilities of a Person that,
in accordance with GAAP, would be included as current liabilities on a balance
sheet as of a date of calculation.
"Current Ratio" shall mean the ratio resulting by dividing Current
Assets by Current Liabilities calculated as of any given date of determination.
"DSC Ratio" as of the end of any Fiscal Quarter shall mean with
reference to the Borrower Consolidation:
EBITDA during the Fiscal Quarter under review, together with the
most recently ended three (3) preceding Fiscal Quarters,
Divided by (/) the sum of Interest Expense (expensed and
capitalized), plus principal payments required to be made on all
interest bearing Indebtedness, plus payments required to be made on
Capitalized Lease Liabilities, in each instance during the Fiscal
Quarter under review together with the most recently ended three (3)
preceding Fiscal Quarters.
"Default" shall mean the occurrence or non-occurrence, as the case
may be, of any event that with the giving of notice or passage of time, or both,
would become an Event of Default.
"Default Rate" shall have the meaning set forth in Section 2.09(b).
"Designated Deposit Account" shall mean a deposit account to be
maintained by SMI Minn with Lender, as from time to time designated in writing
by an Authorized Officer.
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<PAGE>
"Dispute" shall have the meaning set forth in Section 9.11(a).
"Distributions" shall mean and collectively refer to any and all
cash dividends, loans, management fees, payments, advances or other
distributions, fees or compensation of any kind or character whatsoever made by
SMI Minn to its shareholders and/or any Related Parties but shall not include
consideration paid for tangible and intangible assets in an arms length exchange
for fair market value, trade payments made and other payments for liabilities
incurred in the ordinary course of business or compensation to officers,
directors and employees of Borrowers in the ordinary course of business.
"Distributor Permits" shall mean collective reference to every
license, permit or other authorization required to own, operate and otherwise
conduct the Borrowers' Business Operation, including, without limitation, all
licenses granted by the Nevada Gaming Authorities and all other applicable
Governmental Authorities.
"Documents" shall have the meaning set forth in Section 9.11(a).
"EBITDA" shall mean with reference to any Person, for any Fiscal
Period under review, the sum of (i) Net Income for that period, plus (ii)
Interest Expense for that period, plus (iii) the aggregate amount of federal and
state taxes on or measured by income for that period (whether or not payable
during that period), plus (iv) depreciation, amortization and all other non-cash
expenses for that period, in each case determined in accordance with GAAP and,
in the case of items (ii), (iii) and (iv) only to the extent deducted in the
determination of Net Income for that period.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time.
"Event of Default" shall mean any event of default as defined in
Section 7.01 hereof.
"FIRREA" shall mean the Financial Institutions Reform, Recovery and
Enforcement Act of 1989.
"Fiscal Quarter" shall mean the consecutive three (3) month periods
during each Fiscal Year beginning on
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<PAGE>
November 1, February 1, May 1 and August 1 and ending on January 31, April 30,
July 31 and October 31, respectively.
"Fiscal Year" shall mean the fiscal year period beginning November 1
of each calendar year and ending on the following October 31.
"Fiscal Year End" shall mean October 31 of each calendar year.
"Funded Debt" shall mean for any period the daily average of the
Funded Outstandings for such period, plus the total as of the last day of such
period of both the long-term and current portions (without duplication) of all
other Indebtedness and Capitalized Lease Liabilities, plus all Contingent
Liabilities.
"Funded Outstandings" shall mean the unpaid principal amount
outstanding on the Credit Facility as of any given date of determination.
"Funding Date" shall mean each date upon which Lender funds
Borrowings requested by an Authorized Officer in accordance with the provisions
of Section 2.03.
"Funding Leverage Ratio" calculated in connection with each Notice
of Borrowing shall mean the ratio resulting by dividing Funded Debt determined
as of the end of the most recently ended Fiscal Quarter after giving pro forma
effect of the amount requested for Borrowing as if outstanding as of the end of
such Fiscal Quarter, divided by (/) the lesser of: (i) EBITDA for the most
recently ended Fiscal Quarter, together with the most recently ended prior three
(3) preceding Fiscal Quarters, or (ii) EBITDA for the most recently ended two
(2) consecutive Fiscal Quarters multiplied (x) by 2.
"GAAP" shall mean generally accepted accounting principles,
consistently applied.
"Government Securities" means readily marketable (a) direct full
faith and credit obligations of the United States of America or obligations
guaranteed by the full faith and credit of the United States of America and (b)
obligations of an agency or instrumentality of, or corporation owned, controlled
or sponsored by, the United States of America that are generally considered in
the securities industry to be implicit obligations of the United States of
America.
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<PAGE>
"Governmental Authority" or "Governmental Authorities" shall mean
any federal, state, regional, county or municipal governmental agency, board,
commission, officer or official whose consent or approval is required or whose
regulations must be followed as a prerequisite to the continued operation of the
Business Operation.
"IBO Rate" means, relative to any IBOR Loan Interest Period for any
IBOR Loan, the per annum rate (reserve adjusted) as published on the applicable
Banking Business Day in "Telerate System Reports" by the British Bankers
Association for interest settlement rates relating to London Interbank Offerings
as of 11:00 a.m., London, England time, two (2) Banking Business Days prior to
the beginning of the applicable IBOR Loan Interest Period for delivery on the
first day of such IBOR Loan Interest Period, for the number of months comprised
therein and in a minimum amount and multiples as set forth in this Credit
Agreement to which rate shall be added the Applicable Margin.
"IBOR Loan" shall mean each portion of the total unpaid principal
under the Credit Facility which bears interest at a rate determined by reference
to the IBO Rate plus the Applicable Margin.
"IBOR Loan Interest Period" shall mean each portion of the Credit
Facility bearing interest with reference to a IBO Rate which shall in each
instance be fixed for either a one (1), two (2), three (3) or six (6) month
period.
"Indebtedness" shall mean, as to any Person, without duplication,
(a) all indebtedness (including principal, interest, fees and charges) of such
Person for borrowed money, (b) the deferred purchase price of property or
services (other than accrued expenses, tax liability, deferred taxes, and trade
accounts payable less than ninety (90) days past due and other accrued or
deferred liabilities incurred in the ordinary course of business) which in
accordance with GAAP would be shown on the liability side of the balance sheet
of such Person, (c) the face amount of all letters of credit issued for the
account of such Person and all drafts drawn thereunder, (d) all obligations
under conditional sale or other title retention agreements relating to property
purchased by such Person, (e) all liabilities of the type described in clauses
(a) through (d) or (f) of this definition secured by (or for which the holder of
any such liability has an existing right, contingent or otherwise, to be secured
by) any lien or encumbrance on any property owned by such Person,
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whether or not such liabilities have been assumed by such Person, (f) all
Capitalized Lease Liabilities of such Person, and (g) all Contingent Liabilities
of such Person in respect of any indebtedness, obligations or liabilities of any
other Person of the type referred to in clauses (a)-(f) of this definition.
"Indemnified Party" and "Indemnified Parties" shall have the meaning
ascribed to such terms in Section 5.10.
"Interest Expense" shall mean with respect to any Person, as of the
last day of any fiscal period under review, the sum of (i) all interest, fees,
charges and related expenses paid or payable (without duplication but including
capitalized interest) for that fiscal period by such Person to a lender in
connection with borrowed money (including any obligations for fees, charges and
related expenses payable to the issuer of any letter of credit) or the deferred
purchase price of assets that are considered "interest expense" under GAAP, plus
(ii) the portion of the up front costs and expenses for Interest Rate Hedges (to
the extent not included in (i)) fairly allocated to such interest rate hedges as
expenses for such period, plus (iii) the portions of Capital Lease Liabilities
that should be treated as interest in accordance with GAAP.
"Interest Period(s)" shall have the meaning set forth in Section
2.06(d) of the Credit Agreement.
"Interest Rate Hedge" shall mean collective reference to any one or
more interest rate swap agreements, interest rate cap agreements, basis swaps,
forward rate agreements and interest collar or floor agreements and all other
interest rate protection products or arrangements designed to protect against
fluctuations in interest rates or currency exchange rates for the purpose of
hedging the interest rates on the Credit Facility.
"Interest Rate Option" shall have the meaning ascribed to such term
in Section 2.06(b) of the Credit Agreement.
"Investment" shall mean, when used in connection with any Person,
any investment by or of that Person, whether by means of purchase or other
acquisition of stock or other securities of any other Person or by means of a
loan, advance creating a debt, capital contribution, guaranty or other debt or
equity participation or interest in any other Person,
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including any partnership and joint venture interests of such Person. The amount
of any Investment shall be the amount actually invested without adjustment for
subsequent increases or decreases in the value of such Investment.
"Laws" means, collectively, all international, foreign, federal,
state and local statutes, maritime laws, treaties, rules, regulations,
ordinances, codes and administrative or judicial precedents.
"Lender" shall mean U.S. Bank National Association and its
successors and assigns.
"Leverage Ratio" as of the end of any Fiscal Quarter shall mean the
ratio resulting by dividing Funded Debt for the Fiscal Quarter under review by
EBITDA for the Fiscal Quarter under review together with the most recently ended
three (3) preceding Fiscal Quarters.
"Liabilities" shall mean the total liabilities of the Borrower
Consolidation determined on a consolidated basis, in accordance with GAAP.
"Loan Documents" shall mean the collective reference to this Credit
Agreement, the Revolving Credit Note, the Security Agreement and all other
instruments and agreements required to be executed by or on behalf of Borrowers,
or any other Person in connection with the Credit Facility for the benefit of
Lender, as the same may be amended, modified, supplemented, replaced, renewed or
restated from time to time.
"Margin Stock" shall have the meaning provided in Regulation U of
the Board of Governors of the Federal Reserve System.
"Material Adverse Change" shall mean any change which is material
and adverse to the Collateral or the condition (financial or otherwise) or
business operations of the Borrowers taken as a whole.
"Material Adverse Effect" means any set of circumstances or events
which (a) has or would reasonably be expected to have any material adverse
effect whatsoever upon the validity or enforceability of any Loan Document, (b)
is or would reasonably be expected to result in a Material Adverse Change, (c)
materially impairs or would reasonably be expected to materially impair the
ability of the Borrowers to perform their obligations under the Credit Agreement
or any other Loan
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<PAGE>
Document, or (d) materially impairs or would reasonably be expected to
materially impair the ability of the Lender, to enforce its legal remedies
pursuant to the Loan Documents.
"Maturity Date" shall mean October 6, 2001, as may be extended from
time to time for one (1) year periods in the manner and subject to the terms of
Section 2.13 of the Credit Agreement.
"Maximum Availability" shall mean the Maximum Permitted Balance less
the Funded Outstandings.
"Maximum Permitted Balance" shall mean the maximum amount of
principal which may be outstanding on the Credit Facility from time to time
which shall be the lesser of: (a) Ten Million Dollars ($10,000,000.00), or (b)
the amount to which the Maximum Permitted Balance is voluntarily permanently
reduced by Borrowers pursuant to Section 2.01(c) or is otherwise reduced or
limited pursuant to Sections 2.04, 5.09 or 8.02.
"Net Income" shall mean with respect to any Person for any fiscal
period, the net income of such Person during such fiscal period determined in
accordance with GAAP, consistently applied.
"Nevada Gaming Authorities" means collective reference to the Nevada
Gaming Commission, the State Gaming Control Board or any agency of any state,
county, city or other political subdivision which has jurisdiction over the
Borrowers and its Business Operation.
"Notice of Borrowing" shall have the meaning set forth in Section
2.03.
"Pension Plan" means any "employee pension benefit plan" that is
subject to Title IV of ERISA and which is maintained for employees of Borrowers
or any of its ERISA Affiliates.
"Permitted Encumbrances" shall mean, at any particular time, (i)
liens for taxes, assessments or governmental charges not then due, payable and
delinquent, (ii) liens for taxes, assessments or governmental charges not then
required to be paid pursuant to Section 5.07, so long as:
(a) with respect to such liens as are being discharged,
released and/or contested, as the case
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may be, in the manner described therein, written notice of all lien
contests and all other items involving amounts in excess of Fifty
Thousand Dollars ($50,000.00) in the aggregate is promptly given to
Lender, and
(b) with respect to any other liens involving amounts in
excess of Fifty Thousand Dollars ($50,000.00) in the aggregate, if
any, as are being contested in good faith by appropriate
proceedings, Borrowers have given written notice thereof to Lender
and have maintained adequate reserves in accordance with GAAP for
the payment thereof,
(iii) liens in favor of Lender created or contemplated by the Security
Agreement, (iv) liens in favor of Lender or consented to in writing by Lender,
which consent shall not be unreasonably withheld, (v) statutory liens of
landlords and liens of carriers, warehousemen, mechanics, customs and revenue
authorities and materialmen and other similar liens imposed by law incurred in
the ordinary course of business which could not reasonably be expected to cause
a Material Adverse Effect, (vi) liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security, or to secure the performance of
tenders, statutory obligations, surety and appeal bonds, bids, leases,
government contracts, trade contracts, performance and return-of-money bonds and
other similar obligations; (vii) leases, concessions or subleases granted to
others not interfering in any material respect with the ordinary conduct of the
business of Borrowers; and (viii) liens on assets of the Borrower Consolidation
which are not Collateral.
"Person" means an individual, firm, corporation, trust, association,
partnership, joint venture, tribunal or other entity.
"Policies of Insurance" shall mean the insurance to be obtained and
maintained by SMI Minn throughout the term of this Credit Agreement as provided
by Section 5.05 herein.
"Pricing Certificate" shall have the meaning set forth in Section
5.04(b).
"Principal Prepayments" shall have the meaning set forth in Section
2.07(a) of this Credit Agreement.
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"Related Parties" shall mean collective reference to each Affiliate
or Subsidiary which is owned or controlled, in whole or part, by the Borrowers.
"Reportable Event" shall mean a reportable event as defined in Title
IV of ERISA, except actions of general applicability by the Secretary of Labor
under Section 110 of ERISA.
"Revolving Credit Fee" shall have the meaning ascribed to such term
in Section 2.08(a) of this Credit Agreement.
"Revolving Credit Note" shall mean the Revolving Credit Note, a copy
of which is marked "Exhibit A", affixed hereto and by this reference
incorporated herein and made a part hereof, to be executed by Borrowers on the
Closing Date, payable to the order of Lender, evidencing the Credit Facility, as
the same may be amended, modified, supplemented, replaced, renewed or restated
from time to time.
"Revolving Credit Period" shall mean the period commencing on the
Closing Date, and terminating on the Maturity Date.
"Schedule of Significant Litigation" shall mean the Schedule of
Significant Litigation, a copy of which is set forth as Schedule 3.10, affixed
hereto and by this reference incorporated herein and made a part hereof, setting
forth the information described in Section 3.10 with respect to each Significant
Litigation.
"Security Agreement" shall mean the Security Agreement to be
executed by Borrowers on or before the Closing Date in favor of Lender,
encumbering the Collateral therein described for the purpose of securing the
Credit Facility and Borrowers' payment and performance under each of the Loan
Documents as such Security Agreement may be amended, modified, extended, renewed
or restated from time to time.
"Significant Litigation" shall mean each action, suit, proceeding,
litigation and controversy involving Borrowers involving claims in excess of
Five Hundred Thousand Dollars ($500,000.00) or which if determined adversely to
the interests of Borrowers, could have a Material Adverse Effect.
"Subsidiary" shall mean, on the date in question, any Person of
which an aggregate of 50% or more of the stock
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of any class or classes (or equivalent interests) is owned of record or
beneficially, directly or indirectly, by another Person and/or any of its
Subsidiaries, if the holders of the stock of such class or classes (or
equivalent interests) (a) are ordinarily, in the absence of contingencies,
entitled to vote for the election of a majority of the directors (or individuals
performing similar functions) of such Person, even though the right so to vote
has been suspended by the happening of such a contingency, or (b) are entitled,
as such holders, to vote for the election of a majority of the directors (or
individuals performing similar functions) of such Person, whether or not the
right so to vote exists by reason of the happening of a contingency.
"Taxes" shall have the meaning set forth in Section 2.11.
"Voluntary Permanent Reduction" shall have the meaning set forth in
Section 2.01(c).
Section 1.02. Interpretation and Construction. In this Credit
Agreement, unless the context otherwise requires:
(i) Articles and Sections mentioned by number only are the
respective Articles and Sections of this Credit Agreement as so numbered;
(ii) Words importing a particular gender mean and include
every other gender, and words importing the singular number mean and include the
plural number and vice versa;
(iii) All times specified herein, unless otherwise
specifically referred, shall be the time in Las Vegas, Nevada;
(iv) Any headings preceding the texts of the several Articles
and Sections of this Credit Agreement, and any table of contents or marginal
notes appended to copies hereof, shall be solely for convenience of reference
and shall not constitute a part of this Credit Agreement, nor shall they affect
its meaning, construction or effect;
(v) If any clause, definition, provision or Section of this
Credit Agreement shall be determined to be apparently contrary to or conflicting
with any other clause, definition, provision or Section of this Credit Agreement
then the clause, definition, provision or Section containing
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the more specific provisions shall control and govern with respect to such
apparent conflict. The parties hereto do agree that each has contributed to the
drafting of this Credit Agreement and in all Loan Documents and that the
provisions herein contained shall not be construed against either Borrowers or
Lender as having been the person or persons responsible for the preparation
thereof;
(vi) The terms "herein", "hereunder", "hereby", "hereto",
"hereof" and any similar terms as used in the Credit Agreement refer to this
Credit Agreement; the term "heretofore" means before the date of execution of
this Credit Agreement; and the term "hereafter" means after the date of the
execution of this Credit Agreement;
(vii) All accounting terms used herein which are not otherwise
specifically defined shall be used in accordance with GAAP consistently applied;
(viii) If any clause, provision or Section of this Credit
Agreement shall be ruled, invalid or unenforceable by any court of competent
jurisdiction, such holding shall not invalidate or render unenforceable any of
the remaining provisions hereof;
(ix) This Credit Agreement and all matters relating hereto
shall be governed by and construed and interpreted in accordance with the laws
of the State of Nevada; and
(x) Each reference to this Credit Agreement or any other Loan
Document or any of them, as used in this Credit Agreement or in any other Loan
Document shall be deemed a reference to this Credit Agreement, such Loan
Document, as applicable, as the same may be amended, modified, supplemented,
replaced, renewed or restated from time to time; and
(xi) Every affirmative duty, covenant and obligation of
Borrowers hereunder shall be equally applicable to each of the Borrowers
individually and where the context would result in the best interests or rights
of Lender shall be construed to mean "Borrowers or any of them" or "Borrowers
and each of them", as applicable, provided, however, that all financial
covenants and other financial accounting, pricing and reporting requirements
shall apply only to the Borrower Consolidation.
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Section 1.03. Use of Defined Terms. Unless otherwise defined or the
context otherwise requires, terms for which meanings are provided in this Credit
Agreement shall have such meanings when used in the Revolving Credit Note and in
each Loan Document and other communication delivered from time to time in
connection with this Credit Agreement or any other Loan Document.
Section 1.04. Cross-References. Unless otherwise specified,
references in this Credit Agreement and in each other Loan Document to any
Article or Section are references to such Article or Section of this Credit
Agreement or such other Loan Document, as the case may be, and, unless otherwise
specified, references in any Article, Section or definition to any clause are
references to such clause of such Article, Section or definition.
Section 1.05. Exhibits and Schedules. All Exhibits and Schedules to
this Credit Agreement, either as originally existing or as the same may from
time to time be supplemented, modified, amended or restated are incorporated
herein by this reference.
ARTICLE II
AMOUNT AND TERMS OF THE CREDIT FACILITY
Section 2.01. The Credit Facility.
a. Subject to the conditions and upon the terms hereinafter
set forth and in accordance with the terms and provisions of the Revolving
Credit Note, Lender agrees to lend and advance Borrowings to Borrowers, up to
the Maximum Permitted Balance, in such amounts as Borrowers may request by
Notice of Borrowing duly executed by an Authorized Officer and delivered to
Lender from time to time during the Revolving Credit Period as provided in
Section 2.03.
b. Borrowers may borrow, repay and reborrow the Available
Borrowings up to the Maximum Permitted Balance from time to time, provided that
at all times the Maximum Availability shall be no less than zero (0). Provided
further, however, amounts of Funded Outstandings bearing interest with reference
to a IBO Rate shall be subject to Breakage Charges incident to prepayment as
provided in Section 2.07(c) hereinbelow and such prepayment may only be made
upon two (2) Banking Business Days prior written notice to Lender. The Credit
Facility shall be for a term commencing
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on the Closing Date and terminating on the Maturity Date, on which date the
entire outstanding balance of the Credit Facility shall be fully paid and Bank
Facility Termination shall occur.
c. Borrowers may voluntarily reduce the Maximum Permitted
Balance from time to time (a "Voluntary Permanent Reduction") on the following
conditions:
(i) that each such Voluntary Permanent Reduction be in
the minimum amount of One Million Dollars ($1,000,000.00) and in
increments of Five Hundred Thousand Dollars ($500,000.00) and made
in writing by an Authorized Officer, effective on the fifth (5th)
Banking Business Day following receipt by Lender; and
(ii) that each such Voluntary Permanent Reduction shall
be irrevocable and a permanent reduction to the Maximum Permitted
Balance.
d. In the event any Voluntary Permanent Reduction reduces the
Maximum Permitted Balance to less than the sum of the Funded Outstandings,
Borrowers shall immediately, cause the Funded Outstandings to be reduced by such
amount as may be necessary to cause the Funded Outstandings to be equal to or
less than the Maximum Permitted Balance.
Section 2.02. Use of Proceeds of the Credit Facility. Available
Borrowings may only be used for the purposes of:
a. On the Closing Date (collectively the "Closing
Disbursements") paying in full the Revolving Credit Fee and the costs and
expenses of Henderson & Morgan, LLC, attorneys for Lender, incurred as of the
Closing Date.
b. During the Revolving Credit Period funding working capital
needs of Borrowers relating to the Business Operation, including, without
limitation, new product rollout, building inventory and receivables and
acquisition of new games, including the intellectual property associated
therewith, together with new business and asset acquisition and stock
repurchases.
Section 2.03. Notice of Borrowings. An Authorized Officer shall give
Lender no later than 11:00 a.m. on a
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Banking Business Day at Lender's office specified in Section 2.07, three (3)
full Banking Business Days prior written notice in the form of the Notice of
Borrowing ("Notice of Borrowing"), a copy of which is marked "Exhibit B",
affixed hereto and by this reference incorporated herein and made a part hereof,
for each proposed Borrowing to be made during the Revolving Credit Period with
reference to a IBO Rate and at least two (2) full Banking Business Days prior
notice for all other Borrowings, specifying the date and amount of each proposed
Borrowing. Not later than 11:00 o'clock a.m. on the Funding Date specified,
Lender shall disburse the amount of such Borrowing into the Designated Deposit
Account maintained with Lender. No Borrowing may exceed the Available
Borrowings. Each Borrowing shall be in a minimum amount of One Hundred Thousand
Dollars ($100,000.00) and in increments of Fifty Thousand Dollars ($50,000.00).
Borrowers shall be entitled to no more than five (5) Borrowings during each
calendar month.
Section 2.04. Limitation on Available Borrowings. Notwithstanding
anything herein contained to the contrary, no Borrowing shall be advanced under
the Credit Facility that would cause the Funding Leverage Ratio, calculated as
of the most recently ended Fiscal Quarter after giving pro forma effect to the
amount of such Borrowing as if funded as of such Fiscal Quarter end, to exceed
2.0 to 1.0.
Section 2.05. Conditions of Borrowings. Borrowings will only be made
so long as Borrowers are in full compliance with each of the requirements and
conditions precedent set forth in Article III B of this Credit Agreement.
Provided, however, Lender may advance Borrowings notwithstanding the existence
of less than full compliance with the requirements of Article III B and
Borrowings so made shall be deemed to have been made under the Credit Facility.
Section 2.06. The Note and Interest Rate Options.
a. The Credit Facility shall be further evidenced by the
Revolving Credit Note payable to the order of Lender. Lender shall record the
date and amount of each Borrowing together with the applicable IBOR Loan
Interest Period in the case of portions of the unpaid principal under the Credit
Facility bearing interest with reference to a IBO Rate, and the amount of each
repayment of principal made thereunder by Borrowers and the entry of such
records shall be conclusive absent manifest error; provided, however, the
failure to make such a record or notation with respect to any
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Borrowing or repayment thereof, or an error in making such a record or notation,
shall not limit or otherwise affect the obligations of Borrowers hereunder or
under the Revolving Credit Note.
b. Interest shall accrue on the entire outstanding principal
balance of the Credit Facility at a rate per annum equal to the Base Rate plus
the Applicable Margin, unless, Borrowers request a IBOR Loan pursuant to Section
2.03 or elect pursuant to Section 2.06(c) hereinbelow to have interest accrue on
a portion or portions of the outstanding principal balance at a IBO Rate
("Interest Rate Option"), in which case interest on such portion or portions
shall accrue at a rate per annum equal to such IBO Rate plus the Applicable
Margin, as long as: (i) each such IBOR Loan is in a minimum amount of Five
Hundred Thousand Dollars ($500,000.00) and in minimum increments of One Hundred
Thousand Dollars ($100,000.00), and (ii) no more than five (5) IBOR Loans may be
outstanding at any one time. As of the Closing Date, the Applicable Margin for
the Base Rate Loan shall be zero (0) and the Applicable Margin for IBOR Loans
shall be 1.875%. Interest accrued on each Base Rate Loan shall be due and
payable on the fifth day of the month following the Closing Date, on the fifth
day of each successive month thereafter, and on the Maturity Date. For each IBOR
Loan, interest shall be due and payable within five (5) days of the end of each
Interest Period applicable thereto, but in any event no less frequently than
within five (5) days of the end of each three (3) month period during the term
of such IBOR Loan. Except as qualified above, the outstanding principal balance
hereunder may be a Base Rate Loan or one or more IBOR Loans, or any combination
thereof, as Borrowers shall specify.
c. At any time and from time to time during the Revolving
Credit Period, Borrowers may Convert from one Interest Rate Option to another
Interest Rate Option by giving irrevocable notice to Lender of such Conversion
by 10:00 A.M., Las Vegas, Nevada Time, on a day which is at least three (3)
Banking Business Days prior to the proposed date of such Conversion to each IBOR
Loan or two (2) Banking Business Days prior to the proposed date of such
Conversion to each Base Rate Loan. Each such notice shall be made by an
Authorized Officer by telephone or telex and thereafter immediately confirmed in
writing by delivery to Lender of a Continuation/Conversion Notice specifying the
date of such Conversion, the amounts to be so Converted and the initial Interest
Period if the Conversion is to a IBOR Loan. Upon receipt of such
Continuation/Conversion Notice, Lender shall
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promptly set the applicable interest rate (which in the case of a IBOR Loan
shall be the IBO Rate plus the Applicable Margin as of the second Banking
Business Day prior to the first day of the applicable Interest Period) and the
applicable Interest Period if the Conversion is to a IBOR Loan and shall confirm
the same in writing to Borrowers. Each Conversion shall be on a Banking Business
Day. No IBOR Loan shall be converted to a Base Rate Loan or renewed on any day
other than the last day of the current Interest Period relating to such amounts
outstanding unless Borrowers pay any applicable Breakage Charges. If Borrowers
fail to give a Continuation/Conversion Notice for the continuation of a IBOR
Loan as a IBOR Loan for a new Interest Period in accordance with this Section
2.06(c), such IBOR Loan shall automatically become a Base Rate Loan at the end
of its then current Interest Period.
d. Each interest period (each individually an "Interest
Period" and collectively the "Interest Periods") for a IBOR Loan shall commence
on the date such IBOR Loan is made or the date of Conversion of any amount or
amounts of the outstanding Borrowings hereunder to a IBOR Loan, as the case may
be, and shall end on the date which is one (1), two (2), three (3) or six (6)
months thereafter. However, no Interest Period may extend beyond the Maturity
Date. Each Interest Period for a IBOR Loan shall commence and end on a Banking
Business Day. If any Interest Period would otherwise expire on a day which is
not a Banking Business Day, the Interest Period shall be extended to expire on
the next succeeding Banking Business Day, unless the result of such extension
would be to carry such Interest Period into another calendar month, in which
event such Interest Period shall end on the immediately preceding Banking
Business Day.
e. The applicable IBO Rate and Base Rate shall be determined
by the Lender, and notice thereof shall be given promptly to Borrowers. Each
determination of the applicable Base Rate and IBO Rate shall be conclusive and
binding upon the Borrowers, in the absence of manifest or demonstrable error.
The Lender shall, upon written request of Borrowers, deliver to Borrowers a
statement showing the computations used by the Lender in determining any rate
hereunder.
f. Computation of interest on Base Rate Loans and IBOR Loans
shall be calculated on the basis of a year of three hundred sixty (360) days and
the actual number of days elapsed. The applicable Base Rate shall be effective
the same
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day as a change in the Base Rate is announced by Lender as being effective.
g. If with respect to any Interest Period, (a) the Lender
reasonably determines (which determination shall be binding and conclusive on
Borrowers) that by reason of circumstances affecting the inter-bank eurodollar
market adequate and reasonable means do not exist for ascertaining the
applicable IBO Rate, or (b) the IBO Rate as determined by Lender will not
adequately and fairly reflect the cost to Lender of maintaining or funding, for
such Interest Period, an IBOR Loan, then so long as such circumstances shall
continue: (i) Lender shall promptly notify Borrowers thereof, (ii) Lender shall
not be under any obligation to make a IBOR Loan or Convert a Base Rate Loan into
a IBOR Loan for which such circumstances exist, and (iii) on the last day of the
then current Interest Period, the IBOR Loan for which such circumstances exist
shall, unless then repaid in full, automatically Convert to a Base Rate Loan.
h. Notwithstanding any other provisions of the Revolving
Credit Note or this Credit Agreement, if, after the Closing Date, any law, rule,
regulation, treaty, interpretation or directive (whether having the force of law
or not) or any change therein shall make it unlawful for Lender to make or
maintain IBOR Loans, (i) the commitment and agreement to maintain IBOR Loans
shall immediately be suspended, and (ii) unless required to be terminated
earlier, IBOR Loans, if any, shall be Converted on the last day of the then
current Interest Period applicable thereto to Base Rate Loans. If it shall
become lawful for Lender to again maintain IBOR Loans, then Borrowers may once
again request Conversions to the IBO Rate.
Section 2.07. Place and Manner of Payment.
a. All amounts payable by Borrowers to the Lender shall be
made to Lender pursuant to the terms of this Credit Agreement and the Revolving
Credit Note and shall be made on a Banking Business Day in lawful money of the
United States of America and in immediately available funds.
b. All such amounts payable by Borrowers shall be made to
Lender at its office located at U.S. Bank, Corporate Banking Department, 2300 W.
Sahara, Suite 120, Las Vegas, Nevada 89102, Denette Corrales, A.V.P., or such
other location as Lender may designate in writing from time to time. If such
payment is received by Lender prior to 11:00 o'clock
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a.m., Lender shall credit Borrowers with such payment on the day so received. If
such payment is received by Lender after 11:00 o'clock a.m., Lender shall credit
Borrowers with such payment as of the next Banking Business Day. If the
Revolving Credit Note or any payment required to be made thereon or hereunder,
is or becomes due and payable on a day other than a Banking Business Day, the
due date thereof shall be extended to the next succeeding Banking Business Day
and interest thereon shall be payable at the then applicable rate during such
extension.
c. The outstanding principal owing under the Credit Facility
and the Revolving Credit Note may, subject to Section 2.07(a), be prepaid at any
time in whole or in part without penalty, provided, however, that any portion or
portions of the unpaid principal balance which is accruing interest at an IBO
Rate may only be prepaid on the last day of the applicable Interest Period
unless Borrowers give three (3) days prior written notice to Lender and
additionally pay concurrently with such prepayment such additional amount or
amounts as will compensate Lender for any losses, costs or expenses which it may
incur as a result of such payment, including, without limitation, any loss
(including loss of anticipated profits), cost or expense incurred by the
liquidation or reemployment of deposits or other funds acquired by Lender to
fund or maintain such IBOR Loan ("Breakage Charges"). A certificate of Lender as
to amounts payable hereunder shall be conclusive and binding on Borrowers for
all purposes, absent manifest or demonstrable error. Any calculation hereunder
shall be made on the assumption that Lender has funded or will fund each IBOR
Loan in the London interbank market; provided that Lender shall not have any
obligation to actually fund any IBOR Loan in such manner.
Section 2.08. Revolving Credit Fees. On the Closing Date, Borrowers
shall pay a non-refundable fee (the "Revolving Credit Fee") to Lender in the
amount of Twenty-Five Thousand Dollars ($25,000.00).
Section 2.09. Late Charges and Default Rate.
a. If any payment due under the Revolving Credit Note is not
paid within ten (10) Banking Business Days after receipt by Borrowers of written
notice of such nonpayment from Lender, Borrowers promise to pay a late charge in
the amount of three percent (3%) of the amount of such delinquent payment and
Lender need not accept any late payment
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made unless it is accompanied by such three percent (3%) late payment charge.
b. In the event of the existence of an Event of Default,
commencing on the first (1st) Banking Business Day following the receipt by
Borrowers of written notice of the occurrence of such Event of Default from
Lender, the total of the unpaid balance of the principal and the then accrued
and unpaid interest owing under the Revolving Credit Note shall commence
accruing interest at a rate equal to three percent (3%) over the Base Rate (the
"Default Rate") until such time as all payments and additional interest are
paid, together with the curing of any Events of Default which may exist, at
which time the interest rate shall revert to that rate of interest otherwise
accruing pursuant to the terms of the Revolving Credit Note.
c. In the event of the occurrence of an Event of Default,
Borrowers agree to pay all reasonable costs of collection, including a
reasonable attorneys' fee, in addition to and at the time of the payment of such
sum of money and/or the performance of such acts as may be required to cure such
default. In the event legal action is commenced for the collection of any sums
owing hereunder or under the terms of the Revolving Credit Note, the Borrowers
agree that any judgment issued as a consequence of such action against Borrowers
shall bear interest at a rate equal to the Default Rate until fully paid.
Section 2.10. Security for the Credit Facility. As security for the
due and punctual payment and performance of the terms and provisions of this
Credit Agreement, the Revolving Credit Note and all of the other Loan Documents,
the Security Agreement shall be executed and delivered to Lender, as of the
Closing Date, by the Borrowers.
Section 2.11. Net Payments. All payments under this Credit
Agreement, the Revolving Credit Note and/or any other Loan Document shall be
made without set-off or counterclaim and in such amounts as may be necessary in
order that all such payments, after deduction or withholding for or on account
of any future taxes, levies, imposts, duties or other charges of whatsoever
nature imposed by the United States or any Governmental Authority, other than
franchise taxes or any tax on or measured by the gross receipts or overall net
income of Lender pursuant to the income tax laws of the United States or any
State, or the jurisdiction where Lender's principal office is located
(collectively "Taxes"),
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shall not be less than the amounts otherwise specified to be paid under this
Credit Agreement and the Revolving Credit Note. A certificate as to any
additional amounts payable to the Lender under this Section 2.11 submitted to
the Borrowers by the Lender shall show in reasonable detail an accounting of the
amount payable and the calculations used to determine in good faith such amount
and shall be conclusive absent manifest or demonstrable error. Any amounts
payable by the Borrowers under this Section 2.11 with respect to past payments
shall be due within ten (10) Banking Business Days following receipt by the
Borrowers of such certificate from the Lender. With respect to each deduction or
withholding for or on account of any Taxes, the Borrowers shall promptly furnish
to the Lender such certificates, receipts and other documents as may be required
(in the reasonable judgment of the Lender) to establish any tax credit to which
the Lender may be entitled.
Section 2.12. Increased Costs. If after the date hereof the
adoption, or any change in, of any applicable law, rule or regulation relating
to IBOR Loans (including without limitation Regulation D of the Board of
Governors of the Federal Reserve System and any successor thereto), or any
change in the interpretation or administration thereof by any Governmental
Authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by Lender with any request or directive
relating to IBOR Loans (whether or not having the force of law) of any such
Governmental Authority, central bank or comparable agency:
a. Shall subject Lender to any tax, duty or other charge with
respect to IBOR Loans, the Revolving Credit Note or Lender's obligation to make
any IBOR Loans, or shall change the basis of taxation of payments to Lender of
the principal of, or interest on, IBOR Loans or any other amounts due under the
Revolving Credit Note in respect of IBOR Loans or Lender's obligation to fund
IBOR Loans (except for changes in the rate of tax on the overall net income of
such Lender imposed by the United States or any Governmental Authority pursuant
to the income tax laws of the United States or any State, or the jurisdiction
where Lender's principal office is located); or
b. With respect to any IBOR Loan, shall impose, modify or deem
applicable any reserve imposed by the Board of Governors of the Federal Reserve
System, special deposit, capitalization, capital adequacy or similar
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requirement against assets of, deposits with or for the account of, or credit
extended by, Lender; or
c. Shall impose on Lender any other condition affecting IBOR
Loans, the Revolving Credit Note or Lender's obligation to make any IBOR Loans;
and the result of any of the foregoing is to increase the cost to (or in the
case of Regulation D or reserve requirements referred to above or a successor
thereto, to impose a cost on) Lender (or any Eurodollar office of such Lender)
of making or maintaining IBOR Loans, or to reduce the rate of return on capital
of Lender or the amount of any sum received or receivable by Lender under the
Revolving Credit Note, then within ten (10) Banking Business Days after demand
by Lender (which demand shall be accompanied by a certificate setting forth in
reasonable detail an accounting of the amount payable and the calculations used
to determine in good faith such amount) the Borrowers shall pay directly to
Lender such additional amount or amounts as will compensate Lender for such
increased cost (or in the case of Regulation D or reserve requirements or
capital adequacy referred to above or a successor thereto, such costs which may
be imposed upon Lender) or such reduction of the rate of return on capital or of
any sum received or receivable under the Revolving Credit Note. Lender agrees to
use its reasonable efforts to minimize such increased or imposed costs or such
reduction.
Section 2.13. Extension of Maturity Date. The entire balance of the
principal sum, together with the unpaid interest thereon accrued, shall be fully
due and payable on the Maturity Date. Provided, however, on or before three
hundred sixty-five (365) days prior to the Maturity Date, but in no event prior
to four hundred ten (410) days prior to the Maturity Date, or any extension
thereof, Borrowers through an Authorized Officer may request a one (1) year
extension of the Maturity Date which may or may not be granted in the sole and
absolute discretion of Lender. Such extension, if granted by the Lender must be
evidenced by written approval of Lender delivered to Borrowers on or before
forty-five (45) days following receipt of such request for extension by the
Lender. Failure of Lender to deliver written approval of such extension request
within such forty-five (45) day period shall be deemed a rejection thereof.
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ARTICLE III
CONDITIONS PRECEDENT TO THE CLOSING DATE
A. Closing Conditions. The obligations of Lender hereunder are
subject to the following conditions precedent, each of which shall be satisfied
prior to October 8, 1999 (unless Lender in its sole and absolute discretion,
shall agree otherwise). The occurrence of the Closing Date is subject to and
contingent upon Lender having received, in each case in form and substance
reasonably satisfactory to Lender, or in the case of an occurrence, action or
event, the occurrence of each of the following:
Section 3.01. Credit Agreement. Four (4) executed counterparts of
this Credit Agreement.
Section 3.02. The Revolving Credit Note. The Revolving Credit Note
duly executed by the Borrowers payable to the order of Lender.
Section 3.03. Security Agreement. The Security Agreement duly
executed by Borrowers in favor of Lender.
Section 3.04. Notice of Borrowing. A duly completed Notice of
Borrowing executed by Borrowers in connection with the Closing Disbursement.
Section 3.05. Articles of Incorporation, Bylaws, Corporate
Resolution, Certificate of Good Standing and Closing Certificate. Lender shall
have received from each of the Borrowers: (i) a Certificate of Good Standing
issued by the State or County of Organization and with respect to SMI Minn a
Certificate of Qualified Foreign Corporation issued by the Secretary of State of
the State of Nevada and dated within thirty (30) calendar days of the Closing
Date and telephonically confirmed as of the Closing Date, (ii) a copy of the
articles of incorporation and by-laws certified as of the Closing Date to be
true, correct and complete by a duly Authorized Officer of the Borrowers, (iii)
an original Certificate of Corporate Resolution and Certificate of Incumbency
executed by the Secretary of each of the Borrowers and attested to by its
respective President, Vice President, or Treasurer authorizing each of the
Borrowers to enter into all documents and agreements to be executed by them
pursuant to this Credit Agreement and further authorizing and empowering the
officer or officers who will execute such documents and agreements with the
authority and power to
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execute such documents and agreements on behalf of the corporations, (iv)
designation by corporate resolution and an original certificate ("Authorized
Officer Certificate"), substantially in the form of the Authorized Officer
Certificate marked "Exhibit F", affixed hereto and by this reference
incorporated herein and made a part hereof, of the officers of Borrowers who are
authorized to give Notices of Borrowing, Continuation/Conversion Notices,
Pricing Certificates, Compliance Certificates, and all other notices, requests,
reports, consents, certifications and authorizations on behalf of the Borrowers
(each individually an "Authorized Officer" and collectively the "Authorized
Officers") and (v) an original closing certificate ("Closing Certificate"),
substantially in the form of the Closing Certificate marked "Exhibit G", affixed
hereto and by this reference incorporated herein and made a part hereof, duly
executed by an Authorized Officer of Borrowers.
Section 3.06. Opinion of Counsel. The opinion of counsel to the
Borrowers dated as of the Closing Date and addressed to the Lender, together
with its successors and assigns, substantially in the form of the legal opinion
marked "Exhibit H", affixed hereto and by this reference incorporated herein and
made a part hereof.
Section 3.07. Insurance. Copies of the declaration pages of each of
the insurance policies certified to be true and correct by an Authorized
Officer, together with original binders evidencing Borrowers as named insured,
and original certificates of insurance, loss payable endorsements naming Lender
as loss payee and additional insured, as required by the applicable insurance
provisions set forth in Section 5.06 of this Credit Agreement.
Section 3.08. Payment of Fees. Payment by Borrowers of the Revolving
Credit Fee as provided in Section 2.08(a) hereinabove from the Closing
Disbursements under the Credit Facility.
Section 3.09. Reimbursement for Expenses and Fees. Reimbursement by
Borrowers for all reasonable fees and out-of-pocket expenses incurred by Lender
in connection with the Credit Facility, including, but not limited to, appraisal
fees, reasonable attorney's fees of Henderson & Morgan, LLC (not to exceed
Fifteen Thousand Dollars ($15,000.00)) and all other like fees and expenses
remaining unpaid as of the Closing Date to the extent then due and payable on
the Closing Date, each of which payments shall be made from the Closing
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Disbursements under the Credit Facility, provided that the amount then invoiced
shall not thereafter preclude Borrowers' obligation to pay such costs and
expenses relating to the closing of the Credit Facility following the Closing
Date or to reimburse Lender for the payment thereof.
Section 3.10. Schedule of all Significant Litigation. A Schedule of
Significant Litigation (Schedule 3.10), in each instance setting forth the names
of the other parties thereto, a brief description of such litigation, whether or
not such litigation is covered by insurance and, if so, whether the defense
thereof and liability therefor has been accepted by the applicable insurance
company indicating whether such acceptance of such defenses with or without a
reservation of rights, the commencement date of such litigation and the amount
sought to be recovered by the adverse parties thereto or the amount which is
otherwise in controversy.
Section 3.11. Financial Statements. Audited financial statements of
Borrowers for the last Fiscal Year for which such financial statements are
available, together with a statement from an Authorized Officer of the Borrowers
to the effect that no Material Adverse Change has occurred with respect to the
Borrower Consolidation since the date of the financial statements most recently
given to Lender.
Section 3.12. No Injunction or Other Litigation. No law or
regulation shall prohibit, and no order, judgment or decree of any Governmental
Authority shall, and no litigation shall be pending or threatened which in the
reasonable judgment of the Lender would or would reasonably be expected to,
enjoin, prohibit, limit or restrain the execution and delivery of this Credit
Agreement or the making of the Base Rate Loans or the IBOR Loans or the
performance by the Borrowers of any other obligations in respect thereof.
Section 3.13. Additional Documents and Statements. Such additional
documents, affidavits, certificates and opinions as Lender may reasonably
require to insure compliance with this Credit Agreement. The statements set
forth in Section 3.15 shall be true and correct.
B. Conditions Precedent to all Borrowings. The obligation of Lender
to make any Borrowing requested to be made on any Funding Date is subject to the
occurrence of each of the following conditions precedent as of such Funding
Date:
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Section 3.14. Notice of Borrowing. With respect to any Borrowing,
the Lender shall have received in accordance with Section 2.03 on or before such
Funding Date an original and duly executed Notice of Borrowing or facsimile copy
thereof, to be promptly followed by an original.
Section 3.15. Certain Statements. On the Closing Date and as of the
Funding Date the following statements shall be true and correct:
a. The representations and warranties with respect to the
Borrowers contained in Article IV hereof (other than representations and
warranties which expressly speak only as of a different date which shall be true
and correct as of such date) are true and correct on and as of the Funding Date
and as of the Closing Date in all material respects as though made on and as of
that date, except to the extent that such representations and warranties are not
true and correct as a result of a change which is permitted by this Credit
Agreement or by any other Loan Document, or which is otherwise consented to by
Lender;
b. Since the date of the most recent financial statements
referred to in Section 3.11 and 5.04(b), no Material Adverse Event shall have
occurred; and
c. No event has occurred or as a result of any Borrowings
contemplated hereby would occur and is continuing, or would result from the
making thereof, which constitutes a Default or Event of Default hereunder.
Section 3.16. Distributor Permits. Borrowers shall have all
Distributor Permits material to or required for the conduct of the Business
Operation in each of the jurisdictions in which Borrowers conduct business and
such Distributor Permits shall not then be suspended, enjoined or prohibited
(for any length of time) by any Nevada Gaming Authority or any other
Governmental Authority.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
To induce Lender to enter into this Credit Agreement, Borrowers make
the following representations and warranties:
Section 4.01. Organization; Power and Author ization. SMI Minn is a
corporation duly organized and validly existing under the laws of the State of
Minnesota and is duly
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qualified to conduct its business in the State of Nevada. SMI Miss is a
corporation duly organized and validly existing under the laws of the State of
Mississippi. SMIL is a corporation duly organized and validly existing under the
laws of the Country of Barbados. Each Borrower (i) has all requisite power,
authority and legal right to execute and deliver each document, agreement or
certificate to which it is a party or by which it is bound in connection with
the Credit Facility, to consummate the transactions and perform its obligations
hereunder and thereunder, and to own its properties and assets and to carry on
and conduct its business as presently conducted or proposed to be conducted, and
(ii) has taken all necessary action to authorize the execution, delivery and
performance of this Credit Agreement, the Revolving Credit Note and the other
Loan Documents to which it is a party or by which it is bound and to consummate
the transactions contemplated hereunder and thereunder.
Section 4.02. No Conflict With, Violation of or Default Under Laws
or Other Agreements. Neither the execution and delivery of this Credit
Agreement, the Revolving Credit Note or any other Loan Document, or any other
agreement, certificate or instrument to which any Borrower is a party or by
which it is bound in connection with the Credit Facility, nor the consummation
of the transactions contemplated hereunder or thereunder, or the compliance with
or performance of the terms and conditions herein or therein, is prevented by,
limited by, conflicts in any material respect with, or will result in a material
breach or violation of, or a material default (with due notice or lapse of time
or both) under, or the creation or imposition of any lien, charge, or
encumbrance of any nature whatsoever upon any of their respective property or
assets by virtue of, the terms, conditions or provisions of (a) the Articles of
Incorporation, Bylaws or other documents of organization or charter of any
Borrower, (b) any indenture, evidence of indebtedness, loan or financing
agreement, or other agreement or instrument of whatever nature to which it is a
party or by which it is bound, or (c) any provision of any existing law, rule,
regulation, order, writ, injunction or decree of any court or Governmental
Authority to which any Borrower is subject where such breach could reasonably be
expected to result in a Material Adverse Change.
Section 4.03. Litigation. Except as disclosed on the Schedule of
Significant Litigation delivered in connection with Section 3.10, to the best
knowledge of Borrowers, after due inquiry and investigation, there is no action,
suit,
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proceeding, inquiry, hearing or investigation pending or threatened, in any
court of law or in equity, or before any Governmental Authority, which could
reasonably be expected to (a) result in any Material Adverse Change in the
Business Operation, or (b) result in any Material Adverse Effect. To the best
knowledge of Borrowers, after due inquiry and investigation, Borrowers are not
in violation of or default with respect to any order, writ, injunction, decree
or demand of any such court or Governmental Authority where such default could
reasonably be expected to result in a Material Adverse Change.
Section 4.04. Agreements Legal, Binding, Valid and Enforceable. This
Credit Agreement, the Revolving Credit Note, the Security Agreement and all
other Loan Documents, when executed and delivered by Borrowers in connection
with the Credit Facility will constitute legal, valid and binding obligations of
Borrowers enforceable against Borrowers in accordance with their respective
terms, except as may be limited by bankruptcy, insolvency, reorganization,
moratorium and other laws of general application relating to or affecting the
enforcement of creditors' rights and the exercise of judicial discretion in
accordance with general principles of equity (regardless of whether enforcement
is considered in a proceeding in equity or at law).
Section 4.05. Information and Financial Data Accurate; Financial
Statements; No Adverse Change. All information and financial and other data
previously furnished in writing by Borrowers in connection with the Credit
Facility was true, correct and complete in all material respects as of the date
furnished (unless subsequently corrected prior to the date hereof), and there
has been no Material Adverse Change with respect thereto to the date of this
Credit Agreement since the dates thereof. No information has been omitted which
would make the information previously furnished in such financial statements to
Lender misleading or incorrect in any material respect to the date of this
Credit Agreement. Any and all financial statements heretofore furnished to
Lender by Borrowers: (i) present fairly the financial position of Borrowers as
at their respective dates and the results of operations and changes in cash
flows for the periods to which they apply, and (ii) have been prepared in
conformity with GAAP applied on a consistent basis throughout the periods
involved. Since the date of the financial statements referred to in this Section
4.05, there has been no Material Adverse Change in the financial condition,
business or operations of the Borrowers.
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Section 4.06. Governmental Approvals. All consents, approvals,
orders or authorizations of, or registrations, declarations, notices or filings
with any Governmental Authority and any other Person, which may be required in
connection with the valid execution and delivery of this Credit Agreement and
the other Loan Documents by Borrowers and the carrying-out or performance of any
of the transactions required or contemplated hereunder, or thereunder, by
Borrowers have been obtained or accomplished and are in full force and effect.
All consents, approvals, orders or authorizations of, or registrations,
declarations, notices or filings with any Governmental Authority and any other
Person, the failure of which could reasonably be expected to have a Material
Adverse Effect, which may be required by Borrowers in connection with the
operation of the Business Operation have been obtained or accomplished and are
in full force and effect.
Section 4.07. Payment of Taxes. Borrowers have duly filed or caused
to be filed all federal, state and local tax reports and returns which are
required to be filed by them and have paid or made provisions for the payment
of, all material taxes, assessments, fees and other governmental charges which
have or may have become due pursuant to said returns or otherwise pursuant to
any assessment received by Borrowers except such taxes, assessments, fees or
other governmental charges, if any, as are being contested in good faith by
Borrowers by appropriate proceedings and for which Borrowers have maintained
adequate reserves for the payment thereof in accordance with GAAP.
Section 4.08. Title to Properties. Borrowers have good and
marketable title to: (a) all of their respective properties and assets reflected
in the most recent financial statements referred to in Section 4.05 hereof as
owned by them (except those properties and assets disposed of since the date of
said financial statements in the ordinary course of business or those properties
and assets which are no longer used or useful in the conduct of its businesses),
including, but not limited to, Borrowers' interest in patents, trademarks,
tradenames, servicemarks, and licenses relating to or pertaining to the
Collateral and the Business Operation, and (b) all properties and assets
acquired by it subsequent to the date of the most recent financial statements
referred to in Section 4.05 hereof. All such properties and assets are not
subject to any liens, encumbrances or restrictions except Permitted
Encumbrances.
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Section 4.09. No Untrue Statements. All statements, representations
and warranties made by Borrowers in this Credit Agreement, any other Loan
Document and any other agreement, document, certificate or instrument previously
furnished or to be furnished by Borrowers to Lender pursuant to the provisions
of this Credit Agreement, (i) are and shall be true, correct and complete in all
material respects, at the time they were made, (ii) do not and shall not contain
(at the time they were made) any untrue statement of a material fact, and (iii)
do not and shall not omit to state (at the time they were made) a material fact
necessary in order to make the information contained herein or therein not
misleading or incomplete. Borrowers understand that all such statements,
representations and warranties shall be deemed to have been relied upon by
Lender as a material inducement to establish the Credit Facility.
Section 4.10. Brokerage Commissions. No person is entitled to
receive any brokerage commission, finder's fee or similar fee or payment in
connection with the extensions of credit contemplated by this Credit Agreement
as a result of any agreement entered into by Borrowers. No brokerage or other
fee, commission or compensation is to be paid by Lender with respect to the
extensions of credit contemplated hereby as a result of any agreement entered
into by Borrowers, and Borrowers agree to jointly and severally indemnify Lender
against any such claims for brokerage fees or commissions and to pay all
expenses including, without limitation, reasonable attorney's fees incurred by
Lender in connection with the defense of any action or proceeding brought to
collect any such brokerage fees or commissions.
Section 4.11. No Defaults. Borrowers are not in violation of or in
default with respect to any applicable laws and/or regulations which materially
and adversely affect the business, financial condition or operations of the
Business Operation. Without limiting the generality of the foregoing, Borrowers
are not in violation or default (nor is there any waiver in effect which, if not
in effect, would result in a violation or default) in any material and adverse
respect under any agreement or instrument of whatever nature to which they, or
any of them, are a party or by which they, or any of them, are bound, which in
any case could reasonably be expected to have a Material Adverse Effect.
Section 4.12. Employee Retirement Income Security Act of 1974. No
Reportable Event has occurred and is continuing with respect to any Pension Plan
under ERISA, that
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gives rise to liabilities that materially adversely affect the financial
condition or operations of Borrowers.
Section 4.13. Distributor Permits and Approvals. All Distributor
Permits required to be held by Borrowers are current and in good standing and
Borrowers presently hold all Distributor Permits necessary for the continued
operation of the Business Operation in all applicable jurisdictions.
Section 4.14. Subsidiaries. As of the Closing Date: (a) SMI Miss and
SMIL are each wholly owned Subsidiaries of SMI Minn, and (b) Borrowers do not
have any Subsidiaries which are not Borrowers hereunder.
Section 4.15. Compliance with Statutes, etc. Borrowers are in
compliance with all applicable statutes, regulations and orders of, and all
applicable restrictions imposed by, all Governmental Authorities, domestic or
foreign, in respect of the conduct of its business and the ownership of its
property, except such noncompliance as would not, in the aggregate, have a
Material Adverse Effect.
Section 4.16. Trademarks, Patents, Licenses, Franchises, Formulas
and Copyrights. Borrowers own all the patents, trademarks, permits, service
marks, trade names, copyrights, licenses, franchises and formulas, or has a
valid license or sublicense of rights with respect to the foregoing, and has
obtained assignments of all leases and other rights of whatever nature,
necessary for the present conduct of its business, without any known conflict
with the rights of others which, or the failure to obtain which, as the case may
be, could reasonably be expected to result in a Material Adverse Effect on the
business, operations, property, assets or condition (financial or otherwise) of
Borrowers, other than as may be disclosed in Schedule 3.10.
Section 4.17. Contingent Liabilities. As of the Closing Date,
Borrowers have incurred no material Contingent Liabilities (any Contingent
Liability in excess of Five Hundred Thousand Dollars ($500,000.00) being deemed
material) other than those described on Schedule 4.17.
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ARTICLE V
GENERAL COVENANTS OF BORROWERS
To induce the Lender to enter into this Credit Agreement and
establish the Credit Facility, Borrowers covenant to Lender as follows:
Section 5.01. Permits; Licenses and Legal Requirements. Borrowers
shall comply in all material respects with and keep in full force and effect, as
and when required, all Distributor Permits and all material permits, licenses
and approvals obtained from any Governmental Authorities which are required for
the conduct of the Business Operation.
Section 5.02. No Change in Character of Business or Location of
Chief Executive Office. Until Bank Facility Termination (a) the chief executive
office of Borrowers shall be located at 1106 Palms Airport Drive, Las Vegas,
Nevada 89119, (b) the Business Operation shall be operated by Borrowers, and (c)
Borrowers shall not effect a material change in the nature and character of
their business as presently conducted and as presently contemplated and
disclosed to Lender.
Section 5.03. Preservation and Maintenance of Properties and Assets.
Until Bank Facility Termination, (a) Borrowers shall operate, maintain and
preserve all material rights, privileges, franchises, licenses, Distributor
Permits and other properties and assets necessary to conduct their Business
Operation, in accordance with all applicable governmental laws, ordinances,
approvals, rules and regulations and requirements, including, but not limited
to, zoning, sanitary, pollution, building, environmental and safety laws and
ordinances, rules and regulations promulgated thereunder, and (b) Borrowers
shall not without first receiving Lender's approval, not to be unreasonably
withheld, consolidate with, remove, demolish, materially alter, discontinue the
use of, sell, transfer, assign, hypothecate or otherwise dispose of to any
Person, any part of their properties and assets necessary for the continuance of
their business, as presently conducted and as presently contemplated, other than
in the normal course of business or as otherwise permitted pursuant to this
Credit Agreement.
Section 5.04. Financial Statements; Reports; Certificates and Books
and Records. Until Bank Facility Termination, the Borrower Consolidation shall,
unless the
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Lender otherwise consents, at their sole expense, deliver to Lender the
following:
a. As soon as practicable, and in any event within forty-five
(45) days after the end of each Fiscal Quarter, except the fourth (4th) Fiscal
Quarter, the balance sheet of the Borrower Consolidation, prepared on a
consolidated and consolidating basis, as at the end of such Fiscal Quarter, and
the statement of operations for such Fiscal Quarter. Such financial statements
shall be certified by an Authorized Officer of Borrowers as fairly presenting
the financial condition, results of operations and cash flows of the Borrower
Consolidation in accordance with GAAP (other than footnote disclosures),
consistently applied, as at such date and for such periods, subject only to
normal year-end accruals and audit adjustments;
b. As soon as practicable, and in any event within forty-five
(45) days after the end of each Fiscal Quarter, a pricing certificate in the
form marked "Exhibit D", affixed hereto and by this reference incorporated
herein and made a part hereof (the "Pricing Certificate") setting forth a
preliminary calculation of the Leverage Ratio as of the last day of such Fiscal
Quarter, and providing reasonable detail as to the calculation thereof, which
calculations shall be based on the preliminary unaudited financial statements of
the Borrower Consolidation for such Fiscal Quarter, and as soon as practicable
thereafter, in the event of any material variance in the actual calculation of
the Leverage Ratio from such preliminary calculation, a revised Pricing
Certificate setting forth the actual calculation thereof;
c. As soon as practicable, and in any event within one hundred
twenty (120) days after the end of each Fiscal Year, the consolidated balance
sheet of the Borrower Consolidation as at the end of such Fiscal year and the
statements of operations, stockholders' equity and cash flows for such Fiscal
Year, all in reasonable detail. Such financial statements shall be prepared in
accordance with GAAP, consistently applied, and such balance sheet and
statements shall be accompanied by a report of independent public accountants of
recognized standing selected by Borrowers and reasonably satisfactory to the
Lender (it being understood that any "Big 5" accounting firm shall be
automatically deemed satisfactory to the Lender), which report shall be prepared
in accordance with generally accepted auditing standards as at such date, and
shall not be subject to any qualifications or exceptions as to the scope of the
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audit nor to any other qualification or exception determined by the Lender in
its good faith business judgment to be adverse to the interests of the Lender;
d. As soon as practicable, and in any event within forty-five
(45) days after the end of each Fiscal Quarter, Borrowers shall, at Borrowers'
sole expense, deliver to Lender a fully and accurately completed Compliance
Certificate signed by an Authorized Officer;
e. Promptly after the same are available, copies of each
annual report, proxy or financial statement or other report or communication
sent to the stockholders of SMI Minn, and copies of all annual, regular,
periodic and special reports and registration statements, including, without
limitation all 10Q and 10K Reports, which SMI Minn may file or be required to
file with the Securities and Exchange Commission under Section 13 or 15(d) of
the Securities Exchange Act of 1934, as amended;
f. Until Bank Facility Termination, Borrowers shall keep and
maintain complete and accurate books and records in accordance with GAAP,
consistently applied. Borrowers shall permit Lender and any authorized
representatives of Lender to have reasonable access to and to inspect, examine
and make copies of the books and records, any and all accounts, data and other
documents of Borrowers at all reasonable times upon the giving of reasonable
notice of such intent; and
g. Until Bank Facility Termination, Borrowers shall furnish to
Lender any financial information or other information bearing on the financial
status of the Borrowers which is reasonably requested by Lender.
Section 5.05. Notice of Default by Borrower. In the event of the
occurrence of any Default or Event of Default, or in the event any Material
Adverse Change occurs, Borrowers shall promptly, and in any event within five
(5) Banking Business Days after actual knowledge thereof, notify Lender in
writing of such occurrence.
Section 5.06. Insurance. Borrowers shall obtain, or cause to be
obtained, and shall maintain or cause to be maintained, at all times throughout
the term of the Credit Facility, at their own cost and expense, and shall
deposit with Lender policies or certified copies of policies of fire and hazard
insurance with extended coverage, reasonably
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acceptable to Lender, issued by a company or companies authorized to issue such
insurance within the State of Nevada or other States in which the Collateral is
located, insuring all buildings, improvements, inventory and contents in an
amount equal to the maximum full insurable value of such buildings,
improvements, furnishings, fixtures, inventory and equipment (such policies
shall not contain a co-insurance provision whereby Borrowers in the event of
loss become a co-insurer, other than deductibles reasonably acceptable to
Lender), with property damage, public liability and such other insurance
coverage as required by the Lender. All policies shall provide that the insurer
shall notify Lender in writing not less than twenty (20) days prior to the
cancellation of any such policy. The property damage and public liability
insurance policies shall name Lender as additional insured and shall contain
minimum limits of coverage reasonably acceptable to Lender. Certified copies of
policies, or certificates thereof, shall be delivered to and held by Lender and
shall contain a loss payable endorsement naming Lender as an additional loss
payee.
Section 5.07. Taxes. Throughout the term of the Credit Facility,
Borrowers shall prepare and timely file or cause to be prepared and timely filed
all federal, state and local tax returns required to be filed by them, and
Borrowers shall pay and discharge prior to delinquency all material taxes,
assessments and other governmental charges or levies imposed upon them, or in
respect of any of their properties and assets except such taxes, assessments and
other governmental charges or levies, if any, as are being contested in good
faith by Borrowers in the manner which is set forth for such contests by Section
4.07 herein.
Section 5.08. Permitted Encumbrances Only. Until Bank Facility
Termination, Borrowers shall not create, incur, assume or suffer to exist any
mortgage, deed of trust, pledge, lien, security interest, encumbrance,
attachment, levy, distraint, or other judicial process and burdens of any kind
and nature on or with respect to the Collateral, except the Permitted
Encumbrances.
Section 5.09. Advances. Until Bank Facility Termination, if
Borrowers should fail (i) to perform or observe, or (ii) to cause to be
performed or observed, any covenant or obligation of Borrowers under this Credit
Agreement or any of the other Loan Documents, the failure of which could
reasonably be expected to have a Material Adverse Effect, then Lender, may (but
shall be under no obligation to) take such steps as are necessary to remedy any
such non-
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performance or non-observance and provide for payment thereof. All amounts
advanced by Lender pursuant to this Section 5.08 shall become an additional
obligation of Borrowers to Lender secured by the Security Agreement and other
Loan Documents, shall reduce the amount of Available Borrowings and shall become
due and payable by Borrowers on the next interest payment date, together with
interest thereon at a rate per annum equal to the Default Rate (such interest to
be calculated from the date of such advancement to the date of payment thereof
by Borrowers).
Section 5.10. Further Assurances. Borrowers and Lender will, at the
expense of the Borrowers, do, execute, acknowledge and deliver, or cause to be
done, executed, acknowledged and delivered, such amendments or supplements
hereto or to any of the Loan Documents and such further documents, instruments
and transfers as any such party may reasonably require for the curing of any
defect in the execution or acknowledgement hereof or in any of the Loan
Documents, or in the description of the Collateral.
Section 5.11. Indemnification. Borrowers agree to and do hereby
jointly and severally indemnify, protect, defend and save harmless Lender and
its directors, trustees, officers, employees, agents, attorneys and shareholders
(individually an "Indemnified Party" and collectively the "Indemnified Parties")
from and against any and all losses, damages, expenses or liabilities of any
kind or nature from any investigations, suits, claims, demands or other
proceedings, including reasonable counsel fees incurred in investigating or
defending such claim, suffered by any of them and caused by, relating to,
arising out of, resulting from, or in any way connected with this Credit
Agreement, with any other Loan Document or with the transactions contemplated
herein and thereby; provided, however, Borrowers shall not be obligated to
indemnify, protect, defend or save harmless an Indemnified Party if, and to the
extent, the loss, damage, expense or liability was caused by (a) the negligence
or misconduct of such Indemnified Party, or (b) the breach of this Credit
Agreement or any other Loan Document by such Indemnified Party or the breach of
any laws, rules or regulations by an Indemnified Party (other than those
breaches of laws arising from any Borrower's default). In case any action shall
be brought against any Indemnified Party based upon any of the above and in
respect to which indemnity may be sought against Borrowers, Lender shall
promptly notify Borrowers in writing, and Borrowers shall assume the defense
thereof, including the employment of counsel selected by
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Borrowers and reasonably satisfactory to Lender, the payment of all costs and
expenses and the right to negotiate and consent to settlement. Upon reasonable
determination made by an Indemnified Party that such counsel would have a
conflict representing such Indemnified Party and Borrowers, the applicable
Indemnified Party, upon the prior approval of Borrowers, shall have the right to
employ, at the expense of Borrowers, separate counsel in any such action and to
participate in the defense thereof. Borrowers shall not be liable for any
settlement of any such action effected without their consent, which consent
shall not be unreasonably withheld, but if settled with Borrowers' consent, or
if there be a final judgment for the claimant in any such action, Borrowers
agree to indemnify, defend and save harmless such Indemnified Parties from and
against any loss or liability by reason of such settlement or judgment. In the
event that any Person is adjudged by a court of competent jurisdiction not to
have been entitled to indemnification under this Section 5.11, it shall repay
all amounts with respect to which it has been so adjudged, together with
applicable attorney's fees. If and to the extent that the indemnification
provisions contained in this Section 5.11 are unenforceable for any reason, the
Borrowers hereby agree to make the maximum contribution to the payment and
satisfaction of such obligations that is permissible under applicable law. The
provisions of this Section 5.11 shall survive the termination of this Credit
Agreement and the repayment of the Bank Facilities.
Section 5.12. Compliance With Other Loan Documents. Borrowers shall
comply with each and every term, condition and agreement contained in the Loan
Documents.
Section 5.13. Suits or Actions Affecting Borrowers. Until Bank
Facility Termination, Borrowers shall promptly advise Lender in writing within
ten (10) days of Borrowers' knowledge of (a) any Significant Litigation claims,
litigation, proceedings or disputes (whether or not purportedly on behalf of
Borrowers) against, or to the actual knowledge of Borrowers, threatened or
affecting Borrowers, (b) any material labor controversy resulting in or
threatening to result in a strike against the Business Operation, or (c) any
proposal by any Governmental Authority to acquire any of the material assets or
business of Borrowers.
Section 5.14. Maintenance of Designated Deposit Account. Until Bank
Facility Termination, Borrowers shall maintain the Designated Deposit Account at
the principal
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office of Lender to facilitate the operational process of the Credit Facility.
Section 5.15. Notice to State Gaming Control Board. Borrowers shall
make all required reports and disclosures with respect to the Credit Facility to
the Nevada State Gaming Control Board and all other applicable Governmental
Authorities.
Section 5.16. Change of Name. No Borrower shall change its name
without first giving sixty (60) days prior written notice to Lender.
Section 5.17. Compliance with Statutes, etc. Borrowers will comply
in all material respects with all applicable statutes, regulations and orders
of, and all applicable restrictions imposed by, all Governmental Authorities,
domestic or foreign, in respect of the conduct of its business and the ownership
of their respective property (including applicable statutes, regulations, orders
and restrictions relating to environmental standards and controls).
ARTICLE VI
FINANCIAL COVENANTS
Until Bank Facility Termination, Borrowers agree, as set forth
below, to comply or cause compliance with the following Financial Covenants.
Section 6.01. Current Ratio Requirement. Commencing as of the
Closing Date, the Borrower Consolidation shall maintain a Current Ratio of no
less than 1.5 to 1.0 calculated as of each Fiscal Quarter end.
Section 6.02. Leverage Ratio. Commencing on the Closing Date, the
Borrower Consolidation shall maintain a maximum Leverage Ratio no greater than
2.0 to 1.0 calculated as of the end of each Fiscal Quarter.
Section 6.03. DSC Ratio. Commencing on the Closing Date, the
Borrower Consolidation shall maintain a minimum DSC Ratio no less than 1.50 to
1.0 calculated as of the end of each Fiscal Quarter.
Section 6.04. Adjusted DSC Ratio. Commencing on the Closing Date,
the Borrower Consolidation shall maintain a
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minimum Adjusted DSC Ratio no less than 1.0 to 1.0 calculated as of the end of
each Fiscal Quarter.
Section 6.05. Restriction on Transfer of Control. Until Bank
Facility Termination: (a) SMI Minn shall not cause or permit to occur any Change
of Control, and (b) SMI Miss and SMIL shall remain wholly owned Subsidiaries of
SMI Minn.
Section 6.06. Contingent Liabilities. The Borrower Consolidation
shall not incur any Contingent Liabilities.
Section 6.07. Other Liens. Borrowers shall not grant, consent to or
otherwise agree to liens, encumbrances or negative pledges with respect to any
of its assets or any of the Collateral, other than (a) liens permitted under the
terms of this Credit Agreement as Permitted Encumbrances, and (b) liens created
or evidenced by the Security Agreement.
Section 6.08. No Subsidiaries. Borrowers shall not own or create any
Subsidiaries after the Closing Date without the prior written consent of Lender,
which consent shall not be unreasonably withheld.
Section 6.09. Consolidation, Merger, Sale of Assets, etc. Borrowers
will not without Lender's prior written consent, which shall not be unreasonably
withheld, wind up, liquidate or dissolve their affairs or enter into any
transaction of merger or consolidation, or convey, sell, lease or otherwise
dispose of (or agree to do any of the forgoing at any future time) all or any
material part of its property or assets, except that (i) the Borrowers may make
sales of inventory in the ordinary course of business and (ii) the Borrowers
may, in the ordinary course of business, sell and lease inventory and may sell
manufacturing equipment which is uneconomic or obsolete.
Section 6.10. Investment Restrictions. Other than Investments held
by Borrowers as of the date of this Credit Agreement or as otherwise permitted
herein or approved in writing by Lender, which approval shall not be
unreasonably withheld, Borrowers shall not make any Investments (whether by way
of loan, stock purchase, capital contribution, or otherwise) other than the
following:
a. Direct obligations of the United States Government;
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b. Prime commercial paper (AA rated or better);
c. Certificates of Deposit or Repurchase Agreement issued by a
commercial bank having capital surplus in excess of One Hundred Million Dollars
($100,000,000.00);
d. Money market or other funds of nationally recognized
institutions investing solely in obligations described in (a), (b) and (c)
above;
e. Loans and advances to employees in the ordinary course of
business not exceeding Two Hundred Thousand Dollars ($200,000.00) in the
aggregate at any one time; and
f. Investments and capital expenditures in the Business
Operation, including those contemplated in Section 2.02(b).
Section 6.11. ERISA. Borrowers shall not:
a. At any time, permit any Pension Plan which is maintained by
any Borrower or to which any Borrower is obligated to contribute on behalf of
its employees, in such case if to do so would constitute a Material Adverse
Effect, to:
(i) engage in any non-exempt "prohibited transaction",
as such term is defined in Section 4975 of the Code;
(ii) incur any material "accumulated funding
deficiency", as that term is defined in Section 302 of ERISA; or
(iii) suffer a termination event to occur which may
reasonably be expected to result in liability of any Borrower to the
Pension Plan or to the Pension Benefit Guaranty Corporation or the
imposition of a lien on the Collateral pursuant to Section 4068 of
ERISA.
b. Fail, upon any Borrower becoming aware thereof, promptly to
notify the Lender of the occurrence of any "reportable event" (as defined in
Section 4043 of ERISA) or of any non-exempt "prohibited transaction" (as defined
in Section 4975 of the Code) with respect to any Pension Plan which is
maintained by any Borrower or to which Borrower is
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obligated to contribute on behalf of its employees or any trust created
thereunder.
c. At any time, permit any Pension Plan which is maintained by
any Borrower or to which any Borrower is obligated to contribute on behalf of
its employees to fail to comply with ERISA or other applicable laws in any
respect that would result in a Material Adverse Effect.
Section 6.12. Margin Regulations. No part of the proceeds of the
Credit Facility will be used by Borrowers to purchase or carry any Margin Stock
or to extend credit to others for the purpose of purchasing or carrying any
Margin Stock. Neither the making of such loans, nor the use of the proceeds of
such loans will violate or be inconsistent with the provisions of Regulations G,
T, U or X of the Board of Governors of the Federal Reserve System.
ARTICLE VII
EVENTS OF DEFAULT
Section 7.01. Events of Default. Any of the following events and the
passage of any applicable notice and cure periods shall constitute an Event of
Default hereunder:
(a) Any representation or warranty made by Borrowers pursuant
to or in connection with this Credit Agreement, the Revolving Credit Note or any
other Loan Document or in any report, certificate, financial statement or other
writing furnished by Borrowers in connection herewith, shall prove to be false,
incorrect or misleading in such a way as to result in a Materially Adverse
Effect when made unless cured within thirty (30) days after notice by Lender to
Borrower, if such representation or warranty is capable of being cured.
(b) Borrowers shall have defaulted in the payment of any
principal or interest on the Revolving Credit Note for a period of three (3)
Banking Business Days from the date of notice of default;
(c) Borrowers shall default in the due performance or
observance of any term, covenant or agreement on its part to be performed or
observed pursuant to the Security Agreement for a period of ten (10) Banking
Business Days after written notice thereof is delivered to Borrowers by
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Lender of such failure (or such shorter period following such notice as may be
required in any Loan Document);
(d) Borrowers shall have defaulted in the payment of any late
charge, expenses, indemnities or any other amount owing under any Loan Document
for a period of five (5) Banking Business Days after notice thereof to Borrowers
from Lender;
(e) Borrowers shall fail duly and punctually to perform or
comply with any other term, covenant, condition or promise contained in this
Credit Agreement, the Revolving Credit Note or any other Loan Document and such
failure shall continue for ten (10) Banking Business Days after written notice
thereof is delivered to Borrowers by Lender of such failure (or such shorter
period following such notice as may be required in any Loan Document).
(f) Any Borrower shall commence a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with respect to
it or its debts under the Bankruptcy Code or any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official, for all or
substantially all of its property, or shall consent to any such relief or to the
appointment or taking possession by any such official in any involuntary case or
other proceeding against it;
(g) An involuntary case or other proceeding shall be commenced
against any Borrower seeking liquidation, reorganization or other relief with
respect to itself or its debts under the Bankruptcy Code or any bankruptcy,
insolvency or other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official, for all or substantially all of its property, and such involuntary
case or other proceeding shall remain undismissed and unstayed for a period of
ninety (90) days;
(h) Any Borrower makes an assignment of all or substantially
all of its assets for the benefit of its creditors or admits in writing its
inability to pay its debts generally as they become due;
(i) Any Borrower shall fail to pay when due in accordance with
its terms and provisions any other Indebtedness of such Borrower which failure
would have a
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Material Adverse Effect and continues beyond the period of grace, if any,
therefor;
(j) The occurrence of any Reportable Event as defined under
the ERISA, which Lender determines reasonably and in good faith constitutes
proper grounds for the termination of any employee pension benefit plan or
pension plan of any Borrower covered by ERISA by the Pension Benefit Guaranty
Corporation or for the appointment by an appropriate United States District
Court of a trustee to administer any such plan, which occurs and continues for
thirty (30) days after written notice of such determination shall have been
given to Borrowers by Lender;
(k) Any order, judgment or decree shall be entered against any
Borrower decreeing its involuntary dissolution or split up and such order shall
remain undischarged and unstayed for a period in excess of thirty (30) days, or
any Borrower shall otherwise dissolve or cease to exist;
Section 7.02. Default Remedies. Upon the occurrence of any Event of
Default, Lender may declare the unpaid balance of the Revolving Credit Note,
together with the interest thereon, to be fully due and payable, and, in
addition, may exercise any or all of the following remedies:
(a) The Lender may terminate its obligation to make any
advances for Borrowings and may declare all outstanding unpaid Indebtedness
hereunder and under the Revolving Credit Note and other Loan Documents together
with all accrued interest thereon immediately due and payable without
presentation, demand, protest or notice of any kind. This remedy will be deemed
to have been automatically exercised on the occurrence of any event set out in
Sections 7.01(f), (g) or (h) with respect to any Borrower.
(b) The Lender may exercise any and all remedies available to
Lender under the Loan Documents.
(c) The Lender may exercise any other remedies available to
Lender at law or in equity, including requesting the appointment of a receiver
to perform any acts required of Borrowers under this Credit Agreement, and
Borrowers hereby specifically consent to any such request by Lender.
For the purpose of carrying out this section and exercising these
rights, powers and privileges in connection
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with the realization of any Collateral, Borrowers hereby irrevocably constitute
and appoint Lender as their true and lawful attorney-in-fact to execute,
acknowledge and deliver any instruments and do and perform any acts such as are
referred to in this paragraph in the name and on behalf of Borrowers. Lender may
exercise one or more of Lender's remedies simultaneously and all its remedies
are nonexclusive and cumulative. Lender shall not be required to pursue or
exhaust any Collateral or remedy before pursuing any other Collateral or remedy.
Lender's failure to exercise any remedy for a particular default shall not be
deemed a waiver of (i) such remedy, nor its rights to exercise any other remedy
for that default, nor (ii) its right to exercise that remedy for any subsequent
default.
Section 7.03. Application of Proceeds. All payments and proceeds
received and all amounts held or realized from the sale or other disposition of
the Collateral which are to be applied hereunder towards satisfaction of
Borrowers' obligations under this Credit Agreement, shall be applied in the
following order of priority:
a. First, to the payment of all reasonable fees, costs and
expenses (including reasonable attorney's fees and expenses) incurred by Lender,
its agents or representatives in connection with the realization upon any of the
Collateral;
b. Next, to the payment in full of any other amounts due under
this Credit Agreement or any other Loan Documents (other than the Revolving
Credit Note);
c. Next, to the balance of interest remaining unpaid on the
Revolving Credit Note;
d. Next, to the balance of principal remaining unpaid on the
Revolving Credit Note;
e. Next, to the payment of any other amounts owing to Lender
which is necessary to cause Bank Facility Termination; and
f. Next, the balance, if any, of such payments, proceeds, or
amounts to whomever may be entitled thereto.
Section 7.04. Notices. In order to entitle Lender to exercise any
remedy available hereunder, it shall not be
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necessary for Lender to give any notice, other than such notice as may be
required expressly herein or otherwise by law.
Section 7.05. Agreement to Pay Attorney's Fees and Expenses. Subject
to the provisions of Section 9.16, upon the occurrence of an Event of Default,
as a result of which Lender shall require and employ attorneys or incur other
expenses for the collection of payments due or to become due or the enforcement
or performance or observance of any obligation or agreement on the part of
Borrowers contained herein, Borrowers shall, on demand, pay to Lender the actual
and reasonable fees of such attorneys (including actual and reasonable allocated
costs of in-house legal counsel) and such other reasonable expenses so incurred
by Lender.
Section 7.06. No Additional Waiver Implied by One Waiver. In the
event any agreement contained in this Credit Agreement should be breached by
either party and thereafter waived by the other party, such waiver shall be
limited to the particular breach so waived and shall not be deemed to waive any
other breach hereunder.
Section 7.07. Licensing of Lender. In the event of the occurrence of
an Event of Default hereunder or under any of the Loan Documents and it shall
become necessary, or in the opinion of Lender advisable, for an agent,
supervisor, receiver or other representative of Lender to become licensed under
the provisions of the laws of any jurisdiction in which the Borrowers engage in
business or rules and regulations adopted pursuant thereto, as a condition to
receiving the benefit of any Collateral encumbered by the Security Agreement or
other Loan Documents for the benefit of Lender or otherwise to enforce its
rights hereunder or thereunder, Borrowers do hereby give their consent to the
granting of such license or licenses and agrees to execute such further
documents as may be required in connection with the evidencing of such consent.
Section 7.08. Exercise of Rights Subject to Applicable Law. All
rights, remedies and powers provided by this Article VII may be exercised only
to the extent that the exercise thereof does not violate any applicable
provision of the laws of any Governmental Authority and all of the provisions of
this Article VII are intended to be subject to all applicable mandatory
provisions of law that may be controlling and to be limited to the extent
necessary so that they will not render this Credit Agreement invalid,
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unenforceable or not entitled to be recorded or filed under the provisions of
any applicable law.
Section 7.09. Discontinuance of Proceedings. In case Lender shall
have proceeded to enforce any right, power or remedy under this Credit
Agreement, the Revolving Credit Note, the Security Agreement or any other Loan
Document by foreclosure, entry or otherwise, and such proceedings shall have
been discontinued or abandoned for any reason or shall have been determined
adversely to Lender, then and in every such case Borrowers and Lender shall be
restored to their former positions and rights hereunder with respect to the
Collateral, and all rights, remedies and powers of Lender shall continue as if
such proceedings had not been taken, subject to any binding rule by the
applicable court or other tribunal in any such proceeding.
ARTICLE VIII
DAMAGE, DESTRUCTION AND CONDEMNATION
Section 8.01. No Abatement of Payments. If all or any part of the
Collateral shall be materially damaged or destroyed, or if title to or the
temporary use of the whole or any part of any of the Collateral shall be taken
or condemned by a competent authority for any public use or purpose, or by
exercise of the power of eminent domain, there shall be no abatement or
reduction in the amounts payable by Borrowers hereunder or under the Revolving
Credit Note, and Borrowers shall continue to be obligated to make all payments
required hereunder and under the Revolving Credit Note.
Section 8.02. Distribution of Capital Proceeds Upon Occurrence of
Fire or Casualty. Except as provided hereafter, all monies in excess of Two
Hundred Fifty Thousand Dollars ($250,000.00) up to the amount of Funded
Outstandings received from fire, flood and hazard extended insurance policies
covering any of the Collateral shall be paid directly to Lender. Unless an Event
of Default has occurred hereunder and is then continuing such amount shall be
released to Borrowers for repair or replacement of the property destroyed or to
reimburse Borrowers for the costs of such repair or replacement incurred prior
to the date of such release. In the event an Event of Default has occurred and
remains continuing, the amount so collected may be applied by Lender to reduce
the outstanding balance of the Credit Facility, and the entire amount received
shall be applied in the manner set
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forth in Section 7.03 and Borrowers shall not be entitled to any further
Borrowings hereunder as to the amount so applied.
ARTICLE IX
GENERAL TERMS AND CONDITIONS
The following terms and conditions shall be applicable throughout
the term of this Credit Agreement:
Section 9.01. Failure to Exercise Rights. Nothing herein contained
shall impose upon Lender or Borrowers any obligation to enforce any terms,
covenants or conditions contained herein. Failure of Lender or Borrowers, in any
one or more instances, to insist upon strict performance by Borrowers or Lender
of any terms, covenants or conditions of this Credit Agreement or the other Loan
Documents, shall not be considered or taken as a waiver or relinquishment by
Lender or Borrowers of their right to insist upon and to enforce in the future,
by injunction or other appropriate legal or equitable remedy, strict compliance
by Borrowers or Lender with all the terms, covenants and conditions of this
Credit Agreement and the other Loan Documents. The consent of Lender or
Borrowers to any act or omission by Borrowers or Lender shall not be construed
to be a consent to any other or subsequent act or omission or to waive the
requirement for Lender's or Borrowers' consent to be obtained in any future or
other instance.
Section 9.02. Notices and Delivery. Unless otherwise specifically
provided herein, any consent, notice or other communication herein required or
permitted to be given shall be in writing and may be personally served,
telecopied or sent by courier service or United States mail and shall be deemed
to have been given when delivered in person or by courier service, upon receipt
of a telecopy (or on the next Banking Business Day if such telecopy is received
on a non- Banking Business Day or after 5:00 p.m. on a Banking Business Day) or
four (4) Banking Business Days after deposit in the United States mail
(registered or certified, with postage prepaid and properly addressed). Notices
to Lender pursuant to Article II shall not be effective until received by
Lender. For the purposes hereof, the addresses of the parties hereto (until
notice of a change thereof is delivered as provided in this Section 9.02) shall
be as set forth below each party's name on the signature pages hereof, or, as to
each party, at such other address as may be designated by such party in a
written notice to all of the other parties. All deliveries to
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be made to Lender shall be made at the address specified for notice on the
signature page hereto or such other address as may be designated by Lender in a
written notice.
Section 9.03. Modification in Writing. This Credit Agreement and the
other Loan Documents constitute the entire agreement between the parties and
supersede all prior agreements, whether written or oral with respect to the
subject matter hereof, including, but not limited to, any term sheets furnished
by Lender to Borrowers. Neither this Credit Agreement, nor any other Loan
Documents, nor any provision herein, or therein, may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against whom enforcement of the change, waiver, discharge or
termination is sought.
Section 9.04. Other Agreements. If the terms of any documents,
certificates or agreements delivered by Borrowers in connection with this Credit
Agreement are inconsistent with the terms of the Loan Documents, Borrowers shall
use their best efforts to amend such document, certificate or agreement to the
satisfaction of Lender to remove such inconsistency.
Section 9.05. Counterparts. This Credit Agreement may be executed by
the parties hereto in any number of separate counterparts with the same effect
as if the signatures hereto and hereby were upon the same instrument. All such
counterparts shall together constitute but one and the same document.
Section 9.06. Rights, Powers and Remedies are Cumulative. None of
the rights, powers and remedies conferred upon or reserved to Lender or
Borrowers in this Credit Agreement are intended to be exclusive of any other
available right, power or remedy, but each and every such right, power and
remedy shall be cumulative and not alternative, and shall be in addition to
every right, power and remedy herein specifically given or now or hereafter
existing at law, in equity or by statute. Any forbearance, delay or omission by
Lender or Borrowers in the exercise of any right, power or remedy shall not
impair any such right, power or remedy or be considered or taken as a waiver or
relinquishment of the right to insist upon and to enforce in the future, by
injunction or other appropriate legal or equitable remedy, any of said rights,
powers and remedies given to Lender or Borrowers herein. The exercise of any
right or partial exercise thereof by Lender or Borrowers shall not preclude the
further exercise
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thereof and the same shall continue in full force and effect until specifically
waived by an instrument in writing executed by Lender.
Section 9.07. Continuing Representations. All agreements,
representations and warranties made herein shall survive the execution and
delivery of this Credit Agreement, the making of the Credit Facility hereunder
and the execution and delivery of each other Loan Document until and final
payment of all sums owing under the Credit Facility and the Credit Facility has
been irrevocably terminated.
Section 9.08. Successors and Assigns. All of the terms, covenants,
warranties and conditions contained in this Credit Agreement shall be binding
upon and inure to the sole and exclusive benefit of the parties hereto and their
respective successors and assigns.
Section 9.09. Time of Essence. Time shall be of the essence of this
Credit Agreement.
Section 9.10. Choice of Law and Forum. This Credit Agreement and
each of the Loan Documents shall be governed by and construed in accordance with
the internal laws of the State of Nevada without regard to principles of
conflicts of law. Borrowers further agree that the full and exclusive forum for
the determination of any action relating to this Credit Agreement, the Loan
Documents, or any other document or instrument delivered in favor of Lender
pursuant to the terms hereof shall be either an appropriate Court of the State
of Nevada or the United States District Court or United States Bankruptcy Court
for the District of Nevada.
Section 9.11. Arbitration.
a. Other than an action or legal proceeding instituted by
Lender for the purpose of exercising any remedy under the Security Agreement,
upon the request of any party, whether made before or after the institution of
any legal proceeding, any action, dispute, claim or controversy of any kind
(e.g., whether in contract or in tort, statutory or common law, legal or
equitable) ("Dispute") now existing or hereafter arising between the parties in
any way arising out of, pertaining to or in connection with the Credit
Agreement, Loan Documents or any related agreements, documents, or instruments
(collectively the "Documents"), may, by summary proceedings (e.g., a plea in
abatement or motion to stay
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further proceedings), bring an action in court to compel arbitration of any
Dispute.
b. All Disputes between the parties shall be resolved by
binding arbitration governed by the Commercial Arbitration Rules of the American
Arbitration Association. Judgment upon the award rendered by the arbitrators may
be entered in any court having jurisdiction.
c. No provision of, nor the exercise of any rights under this
arbitration clause shall limit the rights of any party, and the parties shall
have the right during any Dispute, to seek, use and employ ancillary or
preliminary remedies, judicial or otherwise, for the purposes of realizing upon,
preserving, protecting or foreclosing upon any property, real or personal, which
is involved in a Dispute, or which is subject to, or described in, the
Documents, including, without limitation, rights and remedies relating to: (i)
foreclosing against any real or personal property collateral or other security
by the exercise of a power of sale under the Security Agreement or other
security agreement or instrument, or applicable law, (ii) exercising self-help
remedies (including setoff rights) or (iii) obtaining provisional or ancillary
remedies such as injunctive relief, sequestration, attachment, garnishment or
the appointment of a receiver from a court having jurisdiction before, during or
after the pendency of any arbitration. The institution and maintenance of an
action for judicial relief or pursuit of provisional or ancillary remedies or
exercise of self-help remedies shall not constitute a waiver of the right of any
party, including the plaintiff, to submit the Dispute to arbitration nor render
inapplicable the compulsory arbitration provision hereof.
Section 9.12. Waiver of Jury Trial. TO THE MAXIMUM EXTENT PERMITTED
BY LAW, BORROWERS AND LENDER EACH MUTUALLY HEREBY EXPRESSLY WAIVE ANY RIGHT TO
TRIAL BY JURY OF ANY ACTION, CAUSE OF ACTION, CLAIM, DEMAND, OR PROCEEDING
ARISING UNDER OR WITH RESPECT TO THIS CREDIT AGREEMENT, THE REVOLVING CREDIT
NOTE OR ANY OF THE LOAN DOCUMENTS, OR IN ANY WAY CONNECTED WITH, RELATED TO, OR
INCIDENTAL TO THE DEALINGS OF BORROWERS AND LENDER WITH RESPECT TO THIS CREDIT
AGREEMENT, THE REVOLVING CREDIT NOTE OR ANY OF THE LOAN DOCUMENTS, OR THE
TRANSACTIONS RELATED HERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING, AND IRRESPECTIVE OF WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE.
TO THE MAXIMUM EXTENT PERMITTED BY LAW, BORROWERS AND LENDER EACH MUTUALLY AGREE
THAT ANY SUCH ACTION, CAUSE OF ACTION, CLAIM, DEMAND, OR PROCEEDINGS SHALL BE
DECIDED BY A COURT TRIAL WITHOUT A JURY AND THAT THE
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DEFENDING PARTY MAY FILE AN ORIGINAL COUNTERPART OF THIS SECTION WITH ANY COURT
OR OTHER TRIBUNAL AS WRITTEN EVIDENCE OF THE CONSENT OF THE COMPLAINING PARTY TO
THE WAIVER OF ITS RIGHT TO TRIAL BY JURY.
Section 9.13. Scope of Approval and Review. Any inspection of the
Business Operation shall be deemed to be made solely for Lender's internal
purposes and shall not be relied upon by the Borrowers or any third party. In no
event shall Lender be deemed or construed to be joint venturers or partners of
Borrowers.
Section 9.14. Severability of Provisions. In the event any one or
more of the provisions contained in this Credit Agreement shall be invalid,
illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall not in any way
be affected or impaired thereby.
Section 9.15. Cumulative Nature of Covenants. All covenants
contained herein are cumulative and not exclusive of each other covenant. Any
action allowed by any covenant shall be allowed only if such action is not
prohibited by any other covenant.
Section 9.16. Costs to Prevailing Party. If any action or
arbitration proceeding is brought by any party against any other party relating
to this Credit Agreement or any of the Loan Documents, the prevailing party
shall be entitled to recover such costs and attorney's fees as the court in such
action or proceeding may adjudge reasonable.
Section 9.17. Setoff. In addition to any rights and remedies of the
Lender provided by law, if any Event of Default exists, Lender is authorized at
any time and from time to time, without prior notice to the Borrowers, any such
notice being waived by the Borrowers to the fullest extent permitted by law, to
set-off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held by Lender to or for the credit or the
account of Borrowers against any and all obligations of Borrowers under the
Credit Facility now or hereafter existing, irrespective of whether or not the
Lender shall have made demand under this Credit Agreement or any Loan Document
and although such amounts owed may be contingent or unmatured. Lender agrees
promptly to notify the Borrowers after any such setoff and application made by
Lender; provided, however, that the failure to give such notice shall not affect
the validity of
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such set-off and application. The rights of Lender under this Section 9.17 are
in addition to the other rights and remedies (including other rights of setoff)
which Lender may have.
Section 9.18. Confidentiality. Lender agrees to hold any non-public
information that it may receive from Borrowers pursuant to this Credit Agreement
(or pursuant to any other Loan Document) in confidence and consistent with their
respective policies for handling material non-public information, except for
disclosure: (a) to legal counsel and accountants for Borrowers or Lender; (b) to
the other professional advisors to Borrowers or Lender, provided that the
recipient has accepted such information subject to a confidentiality agreement
substantially similar to this Section 9.18; (c) to regulatory officials having
jurisdiction over Lender; (d) to any Gaming Authority having regulatory
jurisdiction over Borrowers, provided that Lender agrees to endeavor to notify
Borrowers of any such disclosure; and (e) as required by law or legal process or
in connection with any legal proceeding, provided that Lender uses reasonable
efforts to notify Borrowers prior to any such disclosure. For purposes of the
foregoing, "non-public information" shall mean any information respecting
Borrowers reasonably considered by Borrowers to be material and not available to
the public, other than (i) information previously filed with any governmental
agency and available to the public, (ii) information which is available to the
general public at the time of use or disclosure, (iii) information which becomes
available to the general public, other than by manner of unauthorized disclosure
or use, or (iv) information previously published in any public medium from a
source other than, directly or indirectly, Lender. Nothing in this Section shall
be construed to create or give rise to any fiduciary duty on the part of Lender
to Borrowers.
Section 9.19. Schedules Attached. Schedules are attached hereto and
incorporated herein and made a part hereof as follows:
Schedule 3.10 - Schedule of Significant Litigation
Schedule 4.17 - Schedule of Contingent Liabilities
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Section 9.20. Exhibits Attached. Exhibits are attached hereto and
incorporated herein and made a part hereof as follows:
Exhibit A - Revolving Credit Note - Form
Exhibit B - Notice of Borrowing - Form
Exhibit C - Continuation/Conversion Notice - Form
Exhibit D - Pricing Certificate - Form
Exhibit E - Compliance Certificate - Form
Exhibit F - Authorized Officer's Certificate - Form
Exhibit G - Closing Certificate - Form
Exhibit H - Legal Opinion - Form
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IN WITNESS WHEREOF, the parties hereto have caused this Credit
Agreement to be executed as of the day and year first above written.
BORROWERS:
SHUFFLE MASTER, INC.,
a Minnesota corporation
By /s/ Gary W. Griffin
----------------------------------
Name Gary W. Griffin
---------------------------------
Title Secretary/Treasurer
--------------------------------
SHUFFLE MASTER OF
MISSISSIPPI, INC.,
a Mississippi corporation
By /s/ Gary W. Griffin
----------------------------------
Name Gary W. Griffin
---------------------------------
Title Vice President
--------------------------------
SHUFFLE MASTER
INTERNATIONAL LIMITED, a
corporation organized under
the laws of the Country of
Barbados
By /s/ Gary W. Griffin
----------------------------------
Name Gary W. Griffin
---------------------------------
Title Vice President/Treasurer
--------------------------------
Address:
1106 Palms Airport Drive
Las Vegas, Nevada 89119
Telephone: (702) 270-5179
Facsimile: (702) 260-6691
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LENDER:
U.S. BANK NATIONAL
ASSOCIATION
By /s/ Denette Corrales
-----------------------------------
Denette Corrales,
Assistant Vice President
Address:
2300 W. Sahara, Ste. 120
Las Vegas, NV 89102
Telephone: (702) 386-3698
Facsimile: (702) 386-3916
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EXHIBIT 10.11
SECURITY AGREEMENT
THIS SECURITY AGREEMENT ("Agreement") is made and entered into as of
September 30, 1999, by and between SHUFFLE MASTER, INC., a Minnesota
corporation, SHUFFLE MASTER OF MISSISSIPPI, INC., a Mississippi Corporation and
SHUFFLE MASTER INTERNATIONAL LIMITED, a corporation organized under the laws of
the Country of Barbados, parties of the first part (hereinafter collectively
referred to as "Debtors") and U.S. BANK NATIONAL ASSOCIATION, party of the
second part (hereinafter referred to as "Secured Party").
R_E_C_I_T_A_L_S:
A. Reference is made to that certain Credit Agreement (as it may be
hereafter renewed, extended, amended, restated or otherwise modified, the
"Credit Agreement") executed concurrently, or substantially concurrent, herewith
by and between Debtors and Secured Party.
B. Pursuant to the Credit Agreement, and subject to the terms and
conditions specified therein, the Secured Party has agreed to provide a
revolving line of credit facility in favor of Debtors with a maximum principal
amount of Ten Million Dollars ($10,000,000.00) available for Borrowings
thereunder (together with all extensions, renewals, amendments, substitutions
and other modifications thereof, the "Credit Facility"), all as more
particularly set forth by the Credit Agreement.
C. In this Agreement all capitalized words and terms not otherwise
defined herein shall have the respective meanings and be construed herein as
provided in Section 1.01 of the Credit Agreement and any reference to a
provision of the Credit Agreement shall be deemed to incorporate that provision
as a part hereof in the same manner and with the same effect as if the same were
fully set forth herein.
D. The provisions of Section 1.02 of the Credit Agreement shall be
applied to this Agreement in the same manner as applied therein to the Credit
Agreement.
E. As a condition of its entry into the Credit Agreement, and its
commitment to provide the Credit Facility for the benefit of Debtors (subject to
the terms of the Credit Agreement and the other Loan Documents), the Secured
Party has required, among other things, that Debtors grant the security
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interests, and undertake the obligations, contemplated by this Agreement.
NOW, THEREFORE, in order to induce the Secured Party to enter into the
Credit Agreement, and to provide the Credit Facility, and for other good and
valuable consideration, the receipt and adequacy of which hereby is
acknowledged, Debtors and Secured Party hereby agree as follows:
ARTICLE I
SECURITY INTEREST AND COLLATERAL
Section 1.01. Creation of Security Interest.
(a) For valuable consideration, Debtors hereby assign, pledge
and grant to Secured Party a continuing security interest in, and lien upon, all
presently existing and hereafter acquired Collateral (as defined below), as
security for the timely payment and performance of each and every Secured
Obligation (as also defined below). This Agreement is a continuing and binding
agreement pursuant to its terms and all the rights, powers, privileges and
remedies hereunder shall apply to any and all Secured Obligations, including
those arising under successive transactions which shall either continue the
Secured Obligations, increase or decrease them, or from time to time create new
Secured Obligations after all or any prior Secured Obligations have been
satisfied, and notwithstanding the bankruptcy of any Borrower, Debtors or any
other Person or any other event or proceeding affecting any Person.
(b) The security interest which is granted hereunder is
subject to the right of Debtors to sell, lease or otherwise dispose of
Collateral in the ordinary course of business, free and clear of the lien
hereof, provided, and to the extent, that such sale or other disposition is
permitted under the terms of the Credit Agreement.
Section 1.02. Description of Collateral. All references herein to the
"Collateral" shall be to all right, title and interest of Debtors, whether now
owned or existing, or hereafter acquired or arising, in, to and under any of the
following:
(a) All present and future supplies, inventory and merchandise
which is used in connection with, or in the conduct of, the business of Debtors
or in which Debtors have
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or hereafter acquire an interest, including, without limitation, all present and
future: (i) goods held for sale or lease, goods to be furnished under a contract
of service and goods which have been furnished under a contract of service (all
of which present and future goods include, without limitation, slot machines,
table games, automatic card shuffling machines, gaming devices, software and
other goods to be used as gaming equipment and supplies); (ii) raw materials,
work in process, parts and components; and (iii) packing materials, supplies,
containers and other materials used or consumed in Debtors' business;
(b) All bills of lading, warehouse receipts or documents of
title relating to any of the Collateral described by Paragraph (a) above;
(c) All present and future accounts, accounts receivable,
rentals, deposits, rights to payment, instruments, documents, chattel paper,
security agreements, guaranties, undertakings, leases, surety bonds, insurance
policies and notes and drafts;
(d) All accessions, appurtenances, components, repairs, repair
parts, spare parts, replacements, substitutions, additions, issue and/or
improvements to or of or with respect to any of the foregoing;
(e) All rights, remedies, powers and/or privileges of Debtors
with respect to any of the foregoing; and
(f) Any and all proceeds and products of any of the foregoing,
including, without limitation, all money, accounts, deposit accounts, documents,
instruments, chattel paper, leases, goods, insurance proceeds, investment
property, and any other tangible or intangible property received upon the sale
or disposition of any of the foregoing.
Section 1.03. Secured Obligations. This Agreement secures, and the
Collateral is security for, the following (collectively, the "Secured
Obligations"):
(a) Payment when due, whether at stated maturity, by required
prepayment, declaration, acceleration, demand or otherwise (including payment of
amounts that would become due but for the operation of the automatic stay under
Section 362(a) of the Bankruptcy Code, 11 U.S.C. ss. 362(a)), of: (i) the
principal sum which is, at any time, advanced and
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unpaid under the Credit Facility not to exceed Ten Million Dollars
($10,000,000.00) at any one time, all on a revolving line of credit basis; (ii)
interest and other charges accrued on said principal sum, or accrued on interest
and other charges then outstanding under the Credit Facility (all including,
without limitation, interest and other charges that would accrue on such
obligations, but for the filing of a petition in bankruptcy with respect to
Debtors); and (iii) any other obligations of Debtors under the Note referred to
below; all according to the terms of a Revolving Credit Note dated concurrently,
or substantially concurrent, herewith made by Debtors and payable to the order
of Secured Party according to the tenor and effect of said Revolving Credit
Note, and all renewals, extensions, amendments, restatements, replacements,
substitutions and other modifications thereof (hereinafter collectively referred
to as the "Note").
(b) Payment and performance of every obligation, covenant,
promise and agreement of Debtors herein contained or incorporated herein by
reference, including, without limitation, the obligation of Debtors to repay any
sums paid or advanced by Secured Party pursuant to the terms hereof, together
with interest thereon.
(c) Payment of the expenses and costs incurred or paid by
Secured Party in the preservation and enforcement of the rights and remedies of
Secured Party and the duties and liabilities of Debtors hereunder, including,
but not by way of limitation, reasonable attorney's fees, court costs, witness
fees, expert witness fees, collection costs, and reasonable costs and expenses
paid by Secured Party in performing for Debtors' account any obligation of said
Debtors.
(d) Payment of any sums which may hereafter be owing by
Debtors to Secured Party or any of its affiliates, under the terms of any
interest rate swap agreement, interest rate cap agreement, basis swap agreement,
forward rate agreement, interest collar agreement or interest floor agreement to
which Debtors may be a party, or under any other agreement or arrangement to
which Debtors may be a party, which in each case is designed to protect Debtors
against fluctuations in interest rates or currency exchange rates with respect
to any indebtedness secured by this Agreement.
(e) Payment of additional sums and interest thereon which may
hereafter be loaned to Debtors pursuant to the Credit Agreement when evidenced
by a promissory note or notes which recite that this Agreement is security
therefor.
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(f) Performance and payment of every obligation, warranty,
representation, covenant, agreement and promise of Debtors which is contained in
the Credit Agreement.
Section 1.04. For Security Purposes Only. The assignment, pledge, and
grant of a security interest in Debtors' interest(s) in the Collateral,
hereunder, is for security purposes only and shall not make Secured Party
responsible for, or otherwise affect or modify, any duty, obligation or
liability of Debtors under any of the Collateral, or under any transaction
related thereto.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 2.01. Certain Representations and Warranties. The Debtors
represent and warrant to Secured Party as follows:
(a) All representations and warranties made in the Credit
Agreement by Borrowers are incorporated herein by reference as part hereof in
the same manner and with the same effect as if the same were fully set forth
herein.
(b) This Agreement creates a security interest in the
Collateral subject only to the Permitted Encumbrances (as defined in the Credit
Agreement).
Section 2.02. Maintenance of Collateral. Except to the extent that any
of the following would be prohibited under, or would constitute a violation of,
the terms and conditions of the Credit Agreement, Debtors agree: (i) to properly
care for and keep the Collateral in good condition and repair; (ii) not to
commit or permit any waste or deterioration of the Collateral (ordinary wear and
tear, casualty and condemnation excepted); (iii) not to commit, suffer or permit
any act to be done, or condition to exist, in connection with any of said
Collateral in material violation of any law, covenant, condition or restriction
now, or hereafter, affecting said Collateral (iv) to perform all obligations
which it may have under the Collateral; and (v) except as otherwise permitted in
the Credit Agreement, to do all other acts, in a timely and proper manner,
which, from the character or use of the Collateral, may be reasonably necessary
to maintain and preserve its value, the specific enumerations herein not
excluding the general.
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Section 2.03. Preservation of Rights. Debtors shall, at their own
expense, protect, warrant and defend their rights in the Collateral, as
represented in Section 2.01 (and the rights of the Secured Party therein),
against the claims and demands of all persons whomsoever.
Section 2.04. Other Assurances. Debtors shall execute and deliver to
Secured Party all such instruments and documents, each in a form and substance
which is satisfactory to Secured Party, and shall do and accomplish such other
acts as Secured Party may, from time to time, deem necessary or advisable to
provide further assurances of the rights and security interests that are granted
hereunder or to carry out or facilitate the intended purpose of this Agreement.
Section 2.05. Maintenance of Name, etc. Debtors will not change their
names, identity or structure (collectively an "Identity Change") in any material
manner unless: (i) such Identity Change is permissible under the Credit
Agreement; and (ii) Debtors shall have given the Secured Party at least thirty
(30) days' prior written notice thereof.
Section 2.06. Records. When and while amounts under the Credit
Agreement and this Security Agreement are owed to Lenders by Debtors, Debtors at
their own cost and expense, Debtors shall: (i) keep and maintain satisfactory
and complete records pertaining to the Collateral in such detail, form and scope
as Secured Party shall reasonably require, consistent with Secured Party's
interests hereunder; and (ii) at any time, and from time to time, at Secured
Party's commercially reasonable request before an Event of Default and, at any
time after an Event of Default, mark the Collateral and/or Debtors' ledger
cards, books of account and other records relating to the Collateral with
appropriate notations satisfactory to Secured Party disclosing that they are
subject to Secured Party's security interests hereunder. Upon the occurrence and
during the continuation of any Event of Default (as defined by the Credit
Agreement), Debtors shall deliver and turn over or make available for copying
any and all such books and records to Secured Party or its representative at any
time upon demand of Secured Party. At any time and from time to time, whether or
not any Event of Default has occurred, but upon reasonable request and notice
from Secured party, Debtors shall permit any representative of Secured Party to
inspect such books and records and shall provide photocopies thereof to Secured
Party.
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ARTICLE III
SECURED PARTY'S RIGHTS
REGARDING COLLATERAL
Section 3.01. General Rights. At any time, and from time to time,
without notice or demand, and whether or not an Event of Default has occurred
(except as otherwise set forth herein), Secured Party may take any of the
following actions to the extent that such actions may be necessary or desirable
to protect the security hereunder:
(a) Upon reasonable notice and at reasonable times enter upon
any premises on which Collateral is situated and examine the same.
(b) Where applicable after the occurrence of an Event of
Default: (i) notify obligors on the Collateral that the Collateral has been
pledged and assigned to Secured Party; (ii) request from obligors under the
Collateral, in the name of Debtors or in the name of Secured Party, information
concerning the Collateral and the amounts owing thereof; and (iii) cause the
Collateral to be registered in the name of Secured Party, as legal holder.
(c) Secured Party shall at all reasonable times, and on
reasonable request and notice, have full access to and the right to audit any
and all of Debtors' books and records pertaining to the Collateral, and to
confirm and verify the value of the Collateral and to do whatever else Secured
Party reasonably may deem necessary or desirable to protect its interests.
Any of the foregoing actions which are undertaken by Secured Party after the
occurrence of an Event of Default shall be at the expense of Debtor. However,
Secured Party shall be under no duty or obligation whatsoever to take any of
such actions or to take any other action to preserve, maintain or protect, the
Collateral or any of it, or to preserve any rights of or against any prior or
other parties in connection with the Collateral, to exercise any voting rights
or managerial rights with respect to any Collateral, whether or not an Event of
Default shall have occurred, or to make or give any presentments, demands for
performance, notices of non-performance, protests, notices of protests, notices
of dishonor or notices of any other nature whatsoever in connection with the
Collateral or the Secured Obligations.
Section 3.02. Collections on the Collateral.
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(a) Notwithstanding the security interest in the Collateral
which is granted pursuant to Section 1.01 hereof, and except as otherwise
provided hereunder or in any Loan Document, Debtors shall have the right to use
and to continue to make collections on and receive any payments which may be
made to, or for the benefit of, Debtors under any of the Collateral so long as
no Event of Default shall have occurred and be continuing.
(b) Upon the occurrence and during the continuance of an Event
of Default, at the option of Secured Party, and except as prohibited by
applicable law, Debtors' right to make collections on and receive dividends and
other proceeds of the Collateral and to use or dispose of such collections and
proceeds shall be suspended and not be reinstated until the curing of the Event
of Default and any and all dividends, proceeds and collections, including all
partial or total prepayments, then held or thereafter received on or on account
of the Collateral will be held or received by Debtors in trust for Secured Party
and immediately delivered in kind to Secured Party.
(c) Any remittance received by Debtors from any Person shall
be presumed to relate to the Collateral and to be subject to the security
interests which are granted to Secured Party hereunder.
(d) Upon the occurrence and during the continuance of an Event
of Default, Secured Party shall have the right at all times to receive, issue
receipt for, endorse, assign, deposit and deliver, in the name of Secured Party
or in the name of Debtors, any and all checks, notes, drafts and other
instruments for the payment of money constituting proceeds of or otherwise
relating to the Collateral; and Debtors hereby authorize Secured Party to affix,
by facsimile signature or otherwise, the general or special endorsement of
Debtors, in such manner as Secured Party shall deem advisable, to any such
instrument in the event the same has been delivered to or obtained by Secured
Party without appropriate endorsement, and Secured Party and any collection bank
are hereby authorized to consider such endorsement to be a sufficient, valid and
effective endorsement by Debtors, to the same extent as though it were manually
executed by the duly authorized officer of Debtors, regardless of by whom or
under what circumstances or by what authority such facsimile signature or other
endorsement actually is affixed, without duty of inquiry or responsibility as to
such matters, and Debtors hereby expressly waive demand, presentment, protest
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and notice of protest or dishonor and all other notices of every kind and nature
with respect to any such instrument.
Section 3.03. Possession of Collateral by Secured Party.
(a) Upon the occurrence and during the continuance of an Event
of Default, all the Collateral now, heretofore or hereafter delivered to Secured
Party shall be held by Secured Party in its possession, custody and control. Any
or all of the Collateral delivered to Secured Party, which is held in an
account, may be held in an interest bearing or non-interest bearing account, in
Secured Party's sole and absolute discretion, and Secured Party will apply any
such interest to payment of the Secured Obligations or other expenses related to
the Credit Agreement. Nothing herein shall obligate Secured Party to invest any
Collateral or obtain any particular return thereon.
(b) Upon the occurrence and during the continuance of an Event
of Default, whenever any of the Collateral is in Secured Party's possession,
custody or control, Secured Party may use, operate and consume the Collateral,
whether for the purpose of preserving and/or protecting the Collateral, or for
the purpose of performing any of Debtors' obligations with respect thereto, or
otherwise. Secured Party may at any time deliver or redeliver the Collateral or
any part thereof to Debtors, and the receipt of any of the same by Debtors shall
be complete and full acquittance for the Collateral so delivered, and Secured
Party thereafter shall be discharged from any liability or responsibility
therefor.
(c) So long as Secured Party exercises reasonable care with
respect to any Collateral in its possession, custody or control, Secured Party
shall have no liability for any loss of or damage to such Collateral, and in no
event shall Secured Party have liability for any diminution in value of
Collateral occasioned by economic or market conditions or events. Secured Party
shall be deemed to have exercised reasonable care within the meaning of the
preceding sentence if the Collateral in the possession, custody or control of
Secured Party is accorded treatment substantially equal to that which Secured
Party accords its own property, it being understood that Secured Party shall not
have any responsibility for (a) ascertaining or taking action with respect to
calls, conversions, exchanges, maturities, tenders or other matters relating to
any Collateral, whether or not
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Secured Party has or is deemed to have knowledge of such matters, or (b) taking
any necessary steps to preserve rights against any Person with respect to any
Collateral.
ARTICLE IV
DEFAULT
Section 4.01. Remedies. Upon the occurrence and during the continuance
of an Event of Default (as defined in the Credit Agreement), Secured Party shall
have, in any jurisdiction where enforcement hereof is sought: (i) in addition to
all other rights and remedies that Secured Party may have under applicable law,
in equity, under this Agreement or under any other Loan Document; and (ii) in
addition to all rights and remedies of a Secured Party under Article IX of the
Uniform Commercial Code as enacted in the State of Nevada pursuant to NRS
104.9101 et seq. (as it may be amended or recodified from time to time, the
"Commercial Code"); the following rights and remedies, all of which may be
exercised with or without notice to Debtors and without affecting the
obligations of Debtors hereunder or under any other Loan Document, or the
enforceability of the liens and security interests created hereby unless
required by law or specifically required hereunder:
(a) To foreclose the liens and security interests created
hereunder or under any other agreement relating to any Collateral by any
available judicial procedure or without judicial process;
(b) To enter any premises where any Collateral may be located
for the purpose of securing, protecting, inventorying, appraising, inspecting,
repairing, preserving, storing, preparing, processing, taking possession of or
removing the same;
(c) To sell, assign, lease or otherwise dispose of any
Collateral or any part thereof either at public or private sale or at any
broker's board, in lot or in bulk, for cash, on credit or otherwise, with or
without representation or warranties and upon such terms as shall be acceptable
to Secured Party;
(d) To notify obligors on the Collateral that the Collateral
has been assigned to Secured Party and that all payments thereon are to be made
directly and exclusively to Secured Party;
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(e) To collect by legal proceedings or otherwise all
dividends, distributions, interest, principal or other sums now or hereafter
payable upon or on account of the Collateral;
(f) To enter into any extension, reorganization, deposit,
merger or consolidation agreement, or any other agreement relating to or
affecting the Collateral, and in connection therewith Secured Party may deposit
or surrender control of the Collateral and/or accept other property in exchange
for the Collateral;
(g) To settle, compromise or release, on terms acceptable to
Secured Party, in whole or in part, any amounts owing on the Collateral and/or
disputes with respect thereto;
(h) To amend the terms of, extend the time of payment, make
allowances and adjustments to, and issue credits in connection with, the
Collateral in the name of Secured Party or in the name of Debtors;
(i) To enforce payment and prosecute any action or proceeding
with respect to any or all of the Collateral and take or bring, in the name of
Secured Party or in the name of Debtors, any and all steps, actions, suits or
proceedings deemed by Secured Party necessary or desirable to effect collection
of or to realize upon the Collateral, including any judicial or nonjudicial
foreclosure thereof or thereon, and Debtors specifically consent to any
nonjudicial foreclosure of any or all of the Collateral or any other action
taken by Secured Party which may release any obligor from personal liability on
any of the Collateral, and Debtors waive any right not expressly provided for in
this Agreement to receive notice of any public or private judicial or
nonjudicial sale or foreclosure of any security or any of the Collateral; and
any money or other property received by Secured Party in exchange for or on
account of the Collateral, whether representing collections or proceeds of
Collateral (and whether resulting from voluntary payments or foreclosure
proceedings or other legal action taken by Secured Party or Debtors) may be
applied to the Secured Obligations by Secured Party (without notice to Debtors)
in such order and manner as Secured Party in its sole discretion shall
determine, unless otherwise provided by the Credit Agreement or by any other
Loan Documents;
(j) To insure, process and preserve the Collateral;
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(k) To exercise all rights, remedies, powers or privileges
provided under any of the Loan Documents or the Collateral;
(l) To remove, from any premises where the same may be
located,the Collateral and any and all documents, instruments, files and
records, and any receptacles and cabinets containing the same, relating to the
Collateral, and Secured Party may, at the cost and expense of Debtors, use such
of Debtors' supplies, equipment, facilities and space at Debtors' places of
business as may be necessary or appropriate to properly administer, process,
store,control, prepare for sale or disposition and/or sell or dispose of the
Collateral or to properly administer and control the handling of collections and
realizations thereon, and Secured Party shall be deemed to have a rent-free
tenancy of any premises of each Debtor for such purposes and for such periods of
time as reasonably required by Secured Party;
(m) To receive, open and dispose of all mail addressed to any
Debtor and notify postal authorities to change the address for delivery thereof
to such address as Secured Party may designate; provided that Secured Party
agrees that it will promptly deliver over to Debtors such opened mail as does
not relate to the Collateral; and
(n) To exercise all other rights, powers, privileges and
remedies of an owner of the Collateral; all at Secured Party's sole option and
as Secured Party in its sole discretion may deem advisable. Debtors will, at
Secured Party's request, assemble the Collateral and make it available to
Secured Party at places which Secured Party may designate, whether at the
premises of Debtors or elsewhere, and will make available to Secured Party, free
of cost, all premises, equipment and facilities of Debtors for the purpose of
Secured Party's taking possession of the Collateral or storing same or removing
or putting the Collateral in salable form or selling or disposing of same.
Section 4.02. Possession. Upon the occurrence and during the
continuance of an Event of Default, Secured Party also shall have the right,
without notice or demand, either in person, by agent or by a receiver to be
appointed by a court of competent jurisdiction (and Debtors hereby expressly
consent upon the occurrence and during the continuance of an Event of Default to
the appointment of such a receiver), and without regard to the adequacy of any
security for the Secured Obligations, to take possession of the Collateral or
any part
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thereof and to collect and receive the rents, issues, profits, income and
proceeds thereof. Secured Party's taking possession of the Collateral shall not
cure or waive any Event of Default or notice thereof or invalidate any act done
pursuant to such notice. The rights, remedies and powers of any receiver
appointed by a court shall be as ordered by said court.
Section 4.03. Conduct of Sale.
(a) Any public or private sale or other disposition of the
Collateral may be held at any office of Secured Party, or at Debtors' place of
business, or at any other place permitted by applicable law, and without the
necessity of the Collateral being within the view of the prospective purchasers.
Secured Party may direct the order and manner of sale of the Collateral, or
portions thereof, as it in its sole and absolute discretion may determine, and
Debtors expressly waive any right to direct the order and manner of sale of any
Collateral. Secured Party or any Person on Secured Party's behalf may bid and
purchase at any such sale or other disposition. The net cash proceeds resulting
from the collection, liquidation, sale, lease or other disposition of the
Collateral shall be applied, first, to the expenses (including reasonable
attorneys' fees and disbursements) of retaking, holding, storing, processing and
preparing for sale or lease,selling, leasing, collecting, liquidating and the
like, and then to the satisfaction of the Secured Obligations in such order as
shall be determined by Secured Party in its sole and absolute discretion, all
unless otherwise provided by the Credit Agreement or any other Loan Documents.
Debtors and any other Person then obligated therefor shall pay to Secured Party
on demand any deficiency with regard thereto which may remain after such sale,
disposition, collection or liquidation of the Collateral.
(b) Unless the Collateral is perishable or threatens to
decline speedily in value or is of a type customarily sold on a recognized
market, Secured Party will send or otherwise make available to Debtors
reasonable notice of the time and place of any public sale thereof or of the
time at, or after, which any private sale thereof is to be made. The requirement
of sending reasonable notice conclusively shall be met if such notice is mailed,
first class mail, postage prepaid, to Debtors at the address set forth in the
Credit Agreement, or delivered or otherwise sent to Debtors, at least ten (10)
days before the date of the sale. Debtors expressly waive any right to receive
notice of
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any public or private sale of any Collateral or other security for the Secured
Obligations except as expressly provided for in this paragraph.
(c) Upon consummation of any sale of Collateral hereunder,
Secured Party shall have the right to assign, transfer and deliver to the
purchaser or purchasers thereof the Collateral so sold. Each such purchaser at
any such sale shall hold the Collateral so sold absolutely free from any claim
or right upon the part of Debtors or any other Person except a third party
lienholder permitted under the Loan Documents, and Debtors hereby waive (to the
extent permitted by applicable laws) all rights of redemption, stay and
appraisal which it now has or may at any time in the future have under any rule
of law or statute now existing or hereafter enacted. If the sale of all or any
part of the Collateral is made on credit or for future delivery, Secured Party
shall not be required to apply any portion of the sales price to the Secured
Obligations until such amount actually is received by Secured Party, and any
Collateral so sold may be retained by Secured Party until the sale price is paid
in full by the purchaser or purchasers thereof. Secured Party shall not incur
any liability in case any such purchaser or purchasers shall fail to pay for the
Collateral so sold, and, in case of any such failure, the Collateral may be sold
again.
ARTICLE V
MISCELLANEOUS
Section 5.01. Attorney-in-Fact. Debtors hereby irrevocably nominate and
appoint Secured Party as its attorney-in-fact for the following purposes: (a) to
do all acts and things which Secured Party may deem necessary or advisable upon
the occurrence and during the continuance of an Event of Default, to preserve,
process, develop, maintain and protect the Collateral; (b) upon the occurrence
and during the continuance of an Event of Default, to do any and every act which
Debtors are obligated to do under this Agreement, at the expense of the Debtors,
and without any obligation to do so; and (c) upon the occurrence and during the
continuance of an Event of Default, to execute any and all papers and
instruments and do all other things necessary or desirable to preserve and
protect the Collateral and to protect Secured Party's security interests
therein; provided, however, that Secured Party shall be under no obligation
whatsoever to take any of the foregoing actions, and, absent bad faith or actual
malice, Secured Party shall have no liability or responsibility for any act
taken or omission with respect
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thereto. Debtors hereby consent and agree that, where applicable, the issuers
of, the obligors on, or the parties to any of the Collateral, shall be entitled
to accept the provisions of this Agreement as conclusive evidence of the right
of Secured Party to effect any transfer or exercise any right hereunder or with
respect to any such Collateral, notwithstanding any other notice or direction to
the contrary heretofore or hereafter given by Debtors or any other Person to
such issuers, obligors or parties.
Section 5.02. Costs and Expenses. Debtors agree after an Event of
Default or as otherwise provided in the Credit Agreement to pay to Secured Party
all costs and expenses (including, without limitation, reasonable attorneys'
fees and disbursements) incurred by Secured Party in the enforcement or
attempted enforcement of this Agreement, whether or not an action is filed in
connection therewith, and in connection with any waiver or amendment of any term
or provision hereof. All reasonable advances, charges, costs and expenses,
including reasonable attorneys' fees and disbursements, incurred or paid by
Secured Party in exercising any right, privilege, power or remedy conferred by
this Agreement (including, without limitation, the right to perform any Secured
Obligation of Debtors under the Loan Documents), or in the enforcement or
attempted enforcement thereof, shall be secured hereby and shall become a part
of the Secured Obligation and shall be paid to the Secured Party by Debtors,
immediately upon demand, together with interest thereon at the rate(s) provided
for under the Credit Agreement.
Section 5.03. Statute of Limitations and Other Laws. Until the Secured
Obligations shall have been paid and performed in full, and all obligations of
Secured Party to advance funds under the Credit Facility have been
unconditionally and indefeasibly terminated, the power of sale and all other
rights, remedies, and privileges which are granted hereunder shall continue to
exist and may be exercised by Secured Party at any time and from time to time
irrespective of the fact that any of the Secured Obligations may have become
barred by any statute of limitations. Debtors expressly waive the benefit of any
and all statutes of limitation, and any and all laws providing for exemption of
property from execution or for valuation and appraisal upon foreclosure, to the
maximum extent permitted by applicable law.
Section 5.04. Other Agreements. The rights and remedies of Secured
Party upon the occurrence and continuance
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of an Event of Default (whether such rights and remedies are conferred by
statute, by rule of law, by this Agreement, the Loan Documents or otherwise) may
be exercised by Secured Party, in the sole discretion of Secured Party, either
alternatively, concurrently, or consecutively in any order. The exercise by
Secured Party of any one or more of such rights and remedies shall not be
construed to be an election of remedies nor a waiver of any other rights and
remedies which may be available to Secured Party.
Section 5.05. Understandings With Respect to Waivers and Consents.
Debtors warrant and agree that each of the waivers and consents set forth herein
are made after consultation with legal counsel and with full knowledge of their
significance and consequences, with the understanding that events giving rise to
any defense or right waived may diminish, destroy or otherwise adversely affect
rights which Debtors otherwise may have against Secured Party or others, or with
respect to the Collateral, and that, under the circumstances, the waivers and
consents herein given are reasonable and not contrary to public policy or law.
If any of the waivers or consents herein are determined to be contrary to any
applicable law or public policy, such waivers and consents shall be effective to
the maximum extent permitted by law.
Section 5.06. Release of Debtors. This Agreement shall be released when
all Secured Obligations have been paid in full in cash or otherwise performed in
full and when all obligations which Secured Party may have to advance funds
under the Credit Facility, have been unconditionally and indefeasibly
terminated. Upon such release, Secured Party shall return any pledged Collateral
to Debtors, or to the Person or Persons legally entitled thereto, and shall
endorse, execute, deliver, record and file all instruments and documents, and do
all other acts and things, reasonably required for the return of the Collateral
to Debtors, or to the Person or Persons legally entitled thereto, and to
evidence or document the release of Secured Party's interests arising under this
Agreement, all as reasonably requested by, and at the sole expense of, Debtors.
Section 5.07. Indemnity. Secured Party shall not be obligated to
perform or discharge any obligation or duty to be performed or discharged by
Debtors with respect to the Collateral or hereunder. Debtors hereby agree to
indemnify Secured Party for, and to save them harmless from, any and all
liability arising from the Collateral or this Agreement. This
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Agreement shall not place responsibility for the control, care, management,
operation or repair of the Collateral upon Secured Party; nor shall this
Agreement cause Secured Party to be responsible or liable for any negligence in
the management, operation, upkeep, repair or control of the Collateral which
results in loss, injury or death to any tenant, guest, licensee, employee or
stranger (provided that this Section 5.07 shall not act to relieve Secured Party
from liability which results from Secured Party's own negligence or misconduct).
Section 5.08 Governing Law. This Agreement shall be governed by, and
shall be construed and enforced in accordance with, the internal laws of the
State of Nevada without regard to conflict of law principles.
Section 5.09. Counterparts. This Agreement may be executed in any
number of separate counterparts with the same effect as if the signatures hereto
and hereby were upon the
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same instrument. All such counterparts shall together constitute one and the
same document.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written above.
DEBTORS: SECURED PARTY:
SHUFFLE MASTER, INC., U.S. BANK NATIONAL
a Nevada corporation ASSOCIATION
By /s/ Gary W. Griffin By /s/ Denette Corrales
------------------------- -----------------------
Name Gary W. Griffin Name Denette Corrales
----------------------- ---------------------
Title Secretary/Treasurer Title Assistant Vice President
---------------------- ------------------------
SHUFFLE MASTER OF
MISSISSIPPI, INC., a
Mississippi corporation
By /s/ Gary W. Griffin
-------------------
Name Gary W. Griffin
---------------
Title Vice President
--------------
SHUFFLE MASTER INTERNATIONAL
LIMITED, a corporation
organized under the laws of
the Country of Barbados
By /s/ Gary W. Griffin
-------------------
Name Gary W. Griffin
---------------
Title Vice President/Treasurer
------------------------
18
EXHIBIT 10.12
SETTLEMENT AGREEMENT
THIS SETTLEMENT AGREEMENT is made and entered into this 28th
day of December, 1999, between SHUFFLE MASTER, INC. ("SHFL"), a Minnesota
corporation, PROGRESSIVE GAMES, INC. ("PGI"), a Delaware corporation, and MIKOHN
GAMING CORPORATION ("MIKN"), a Nevada corporation.
W I T N E S S E T H
WHEREAS, PGI, a wholly owned subsidiary of MIKN, is the owner
of the United States patents and rights related thereto identified and described
in Exhibit 1 attached hereto (the "PGI Patents"); and
WHEREAS, PGI and SHFL are parties to lawsuits identified in
Exhibit 2 attached hereto concerning the PGI Patents and PGI is a plaintiff
against numerous defendants, which are customers of SHFL alleged to have
infringed the PGI Patents, in the lawsuits identified in Exhibit 3 attached
hereto (the lawsuits identified in Exhibits 2 and 3 are collectively referred to
herein as the "Lawsuits"); and
WHEREAS, the parties are desirous of settling and resolving
the Lawsuits on the terms set forth herein; and
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and
conditions set forth below and other good and valuable consideration, the
receipt and sufficiency of which all parties acknowledge, it is agreed as
follows:
1 LICENSE AGREEMENTS.
Upon the execution of this Agreement, the relevant parties shall
execute and deliver the License Agreements attached hereto as Exhibits 4 through
7 and the Cross-Supplier Agreement attached as Exhibit 8.
2 CONSENT DECREES.
Upon the execution of this Agreement, the PGI and SHFL shall execute
and deliver Consent Decrees with respect to each of the Lawsuits in the form of
Exhibit 9 attached hereto (the "Consent Decrees"). PGI and SHFL shall thereafter
take all appropriate action to cause the Consent Decrees to be filed with the
appropriate courts, the intended result being a complete termination of the
Lawsuits as between PGI and SHFL.
3 STIPULATED DISMISSAL.
Upon the execution of this Agreement, PGI and SHFL shall execute and
deliver a stipulated dismissal, in the form of Exhibit 10 attached hereto,
dismissing all claims and
[SETTLEMENT AGREEMENT] 1
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counterclaims in the Lawsuits between PGI and SHFL without prejudice and all
claims and counterclaims in the Lawsuits against all parties other than SHFL and
PGI with prejudice. The stipulated dismissals shall not be filed with any court
until all Consent Decrees are filed and entered.
4 MUTUAL RELEASE.
Effective upon the execution of this Agreement, PGI and SHFL hereby
releases and forever discharges the other, together with its past, present and
future officers, directors, shareholders, employees, agents, representatives,
customers, subsidiaries, parent companies and affiliates, and their successors,
heirs and assigns, from any and all claims, demands, damages, actions, causes of
action, suits, debts, liabilities and obligations, liens, costs and expenses of
any nature, character and description, known or unknown, accrued or not yet
accrued, anticipated or unanticipated, arising from or related to the leasing,
licensing, operation, making, using, selling or offering for sale of the live
casino table card games known as "Let It Ride", "Let It Ride Bonus", "Let It
Ride - The Tournament", "Bahama Bonus" and "Three Card Poker" and all claims
raised or which could have been raised in the Lawsuits which are not disposed of
by the Consent Decrees.
5
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6 REPRESENTATIONS AND WARRANTIES OF SHFL.
Effective on the date hereof, SHFL hereby represents and warrants that:
6.1 SHFL is a corporation duly organized and existing under the laws of
Minnesota.
6.2 SHFL has the corporate power and authority to execute, deliver and
perform this Agreement, and the other instruments and documents required or
contemplated herein. Such execution, delivery and performance have been duly
authorized by all necessary action on the part of SHFL, do not and will not
require the approval of the shareholders of SHFL and do not and will not
contravene the Certificate of Incorporation or By-Laws of SHFL.
6.3 The execution, delivery and performance of this Agreement by SHFL
will not result in any violation by SHFL of any law, rule or regulation
applicable to SHFL. SHFL is not a party to, or subject to or bound by, any
agreement, judgment, injunction or decree of any court or governmental authority
which may restrict or interfere with the performance of this Agreement. This
Agreement is a valid and binding obligation of SHFL enforceable in accordance
with its terms.
[SETTLEMENT AGREEMENT] 2
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6.4 SHFL has no knowledge of any present condition or contingency which
SHFL can reasonably expect may adversely affect its ability to perform its
obligations under this Agreement.
7 REPRESENTATIONS AND WARRANTIES OF PGI.
Effective on the date hereof, PGI hereby represents and warrants that:
7.1 PGI is a corporation duly organized and existing under the laws of
Delaware.
7.2 PGI has the corporate power and authority to execute, deliver and
perform this Agreement, and the other instruments and documents required or
contemplated herein. Such execution, delivery and performance have been duly
authorized by all necessary action on the part of PGI, do not and will not
require the approval of the shareholders of PGI and do not and will not
contravene the Certificate of Incorporation or By-Laws of PGI.
7.3 The execution, delivery and performance of this Agreement by PGI
will not result in any violation by PGI of any law, rule or regulation
applicable to PGI. PGI is not a party to, or subject to or bound by, any
agreement, judgment, injunction or decree of any court or governmental authority
which may restrict or interfere with the performance of this Agreement. This
Agreement is a valid and binding obligation of PGI enforceable in accordance
with its terms.
7.4 PGI has no knowledge of any present condition or contingency which
PGI can reasonably expect may adversely affect its ability to perform its
obligations under this Agreement.
8 REPRESENTATIONS AND WARRANTIES OF MIKN.
Effective on the date hereof, MIKN hereby represents and warrants that:
8.1 MIKN is a corporation duly organized and existing under the laws of
Nevada.
8.2 MIKN has the corporate power and authority to execute, deliver and
perform this Agreement, and the other instruments and documents required or
contemplated herein. Such execution, delivery and performance have been duly
authorized by all necessary action on the part of MIKN, do not and will not
require the approval of the shareholders of MIKN and do not and will not
contravene the Certificate of Incorporation or By-Laws of MIKN.
8.3 The execution, delivery and performance of this Agreement by MIKN
will not result in any violation by MIKN of any law, rule or regulation
applicable to MIKN. MIKN is not a party to, or subject to or bound by, any
agreement, judgment, injunction or decree of any court or governmental authority
which may restrict or interfere with the performance of this Agreement. This
Agreement is a valid and binding obligation of MIKN enforceable in accordance
with its terms.
8.4 MIKN has no knowledge of any present condition or contingency
which MIKN
[SETTLEMENT AGREEMENT] 3
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can reasonably expect may adversely affect its ability to perform its
obligations under this Agreement.
9 COOPERATION.
SHFL, PGI and MIKN shall cooperate with one another in obtaining any
governmental approvals, licenses or permits necessary to consummate the
transactions contemplated by this Agreement.
10 ADDITIONAL AGREEMENTS.
SHFL, PGI and MIKN agree to execute any additional instruments or
agreements necessary to effectuate the intent of this Agreement or to comply
with any law or government regulation applicable to this Agreement or the
parties.
11 ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the
successors and assigns of SHFL, PGI and MIKN.
12 NO PRIOR AGREEMENTS.
This Agreement, including the exhibits and any agreements reflected
therein, contain the entire agreement of the parties, and supersedes any and all
prior contemporaneous agreements or understandings, written or oral.
13 COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each of
which when executed and delivered shall be an original but all such counterparts
shall constitute one and the same agreement. Any signature page of this
Agreement may be detached from any counterpart without impairing the legal
effect of any signatures thereof, and may be attached to another counterpart,
identical in form thereto, but having attached to it one or more additional
signature pages.
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[SETTLEMENT AGREEMENT] 4
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16
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17 TERMS OF AGREEMENT ARE CONFIDENTIAL.
The terms of this Agreement and all negotiations concerning this
Agreement are confidential and shall not be disclosed to any other person or
entity not a party to this Agreement unless required by law. The foregoing
notwithstanding, the parties may each issue a press release announcing
settlement of the Lawsuits provided the form of the press release is approved by
the other party.
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[SETTLEMENT AGREEMENT] 5
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IN WITNESS WHEREOF, the undersigned shall be deemed to have
executed this Agreement as of the date specified on page one hereof.
SHUFFLE MASTER, INC. PROGRESSIVE GAMES, INC.
By /s/ Mark L. Yoseloff By /s/ Charles H. McCrea, Jr.
-------------------- --------------------------
Its Exec. V. Pres. Its Ex. V.P. & Secretary
-------------------- --------------------------
MIKOHN GAMING CORPORATION
By /s/ Charles H. McCrea, Jr.
--------------------------
Its Ex. V.P. & Secretary
--------------------------
[SETTLEMENT AGREEMENT] 6
EXHIBIT 4
NON-EXCLUSIVE LICENSE AGREEMENT
THIS AGREEMENT is entered into as of the 28th day of December, 1999
(the "Effective Date"), by and between PROGRESSIVE GAMES, INC., a Delaware
corporation ("LICENSOR") and SHUFFLE MASTER, INC., a Minnesota corporation
("LICENSEE").
W I T N E S S E T H:
WHEREAS, LICENSEE desires a license under certain patents owned or held
by LICENSOR to develop, market, lease, license and/or operate certain live
casino table card games; and
WHEREAS, LICENSOR desires to grant such license on the terms and
conditions set forth herein.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and conditions
set forth below and other good and valuable consideration, the receipt and
sufficiency of which all parties acknowledge, it is agreed as follows:
1 DEFINITIONS.
For the purposes of this Agreement, the terms set forth below shall be
defined as follows:
1.1 "Affiliate" shall mean a parent, subsidiary or other entity owned
or controlled by LICENSOR or LICENSEE as the case may be.
1.2
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1.3
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1.4
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1.5
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1.6
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1.7 "Charges" shall have the meaning ascribed in Section 4.3 below.
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 4)] 1
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1.8 "Effective Date" shall have the meaning ascribed in the first
paragraph of this Agreement.
1.9 "Game" shall mean a live casino table card game.
1.10
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1.11
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1.12
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1.13
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1.14 "Manufacturing Costs" shall mean direct labor and direct material
costs.
1.15 "Non-Electronic Game" shall have the meaning ascribed in Section
4.5 below.
1.16 "Notice of Dispute" shall have the meaning ascribed in Section
13.2.1.
1.17 "Notice to Arbitrate" shall have the meaning ascribed in Section
13.2.2.
1.18 "Offer" shall mean promote, market, lease, sell or otherwise make
available for use.
1.19 "Other Intellectual Property" shall mean all intellectual property
of LICENSOR of every nature and kind except the Patents.
1.20
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[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 4)] 2
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1.21 "Person" shall mean an individual, corporation, partnership or
other entity.
1.22 "Product Line" shall have the meaning ascribed in Section 10
below.
1.23
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1.24 "Quarterly Period" shall mean the 3-month periods ending March 31,
June 30, September 30 and December 31.
1.25 "Royalty" shall have the meaning ascribed in Section 4 below.
1.26 "Royalty Report" shall have the meaning ascribed in Section 5.2
below.
1.27
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1.28
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1.29
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[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 4)] 3
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1.30 "United States" shall include all states, territories and
possessions thereof and the District of Columbia.
1.31
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2 LICENSE GRANT.
Subject to the terms, conditions and limitations herein, LICENSOR
hereby grants LICENSEE a non-exclusive license under the Patents to make, have
made, install, service, license, offer to lease and lease Licensed Products in
the Territory.
3 LIMITATIONS.
3.1
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3.2
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3.3
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3.4
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3.5
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3.6
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[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 4)] 4
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3.7 The license granted in this Agreement creates no license, express
or implied, to any Other Intellectual Property.
4
4.1
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4.1.1
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4.1.2
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4.1.2.1
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4.1.2.2
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4.1.3
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4.1.4
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4.1.4.1
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4.1.4.2
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4.1.5
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4.1.6
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4.1.7
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4.1.8
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[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 4)] 5
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4.2
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4.3
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4.4
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4.5
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4.6
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4.7
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[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 4)] 6
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5 PAYMENT AND ACCOUNTING RECORDS.
5.1 All Royalties shall be paid in full within 30 days of each
Quarterly Period. Royalties may be calculated using weighted averages adjusted
annually.
5.2 Within 30 days after each Quarterly Period in respect of which
Royalties are due under Section 4, LICENSEE shall prepare and send to LICENSOR a
report setting forth a computation of the Royalty due hereunder and the Gross
Revenue earned through the Licensed Products by LICENSEE and its Affiliates
during such Quarterly Period in each gaming jurisdiction within the Territory
(the "Royalty Report").
5.3 LICENSEE shall keep accurate records in respect to all revenues
generated from Licensed Products by LICENSEE and its Affiliates and shall
maintain such records for at least 4 years from the date of the Royalty Report.
LICENSOR shall have the right, at its sole cost and expense, not more than once
each year, to have LICENSEE's records reviewed, in respect to revenues earned
from the Licensed Products in the Territory at times which are reasonably
convenient to LICENSEE, using a retained independent certified public accounting
firm. Any Royalty Reports rendered by LICENSEE to LICENSOR prior to the date of
such review as to which LICENSOR raises no reasonable written objection within
ninety (90) days after the commencement of such review shall be deemed
conclusive and binding, provided LICENSEE has not unreasonably impeded such
review. If LICENSOR shall dispute the accuracy of any Royalty Report, the
dispute shall be resolved by a panel of three independent certified public
accountants, one selected by LICENSEE at its sole cost and expense, one selected
by LICENSOR at its sole cost and expense, and the third selected by the
previously selected accountants, the cost and expense of the third panel member
shall be borne equally by LICENSEE and LICENSOR; provided, however that if the
panel of accountants shall determine that the Royalties due hereunder in respect
of Gross Revenue during any Quarterly Period were in excess of 5% of the amount
of Royalties reported by LICENSEE for such Quarterly Period, LICENSEE shall bear
the cost and expense of such panel. The determination of said panel by majority
vote shall be conclusive and binding on the parties hereto.
5.4 At the termination of this Agreement, LICENSEE shall render a final
Royalty Report to LICENSOR within thirty (30) days after the end of the
Quarterly Period in which such termination occurs.
6 WARRANTY; ENFORCEMENT; INDEMNIFICATION.
6.1 LICENSOR warrants as follows:
6.1.1 LICENSOR is a corporation duly organized and existing
under the laws of Delaware and is the lawful owner of the Patents, which are
valid and enforceable.
6.1.2 LICENSOR has the corporate power and authority to
execute, deliver and perform this Agreement. Such execution, delivery and
performance have been duly authorized
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 4)] 7
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by all necessary action on the part of LICENSOR, do not and will not require the
approval of the shareholders of LICENSOR and do not and will not contravene the
Certificate of Incorporation or By-Laws of LICENSOR.
6.1.3 The execution, delivery and performance of this
Agreement by LICENSOR will not result in any violation by LICENSOR of any law,
rule or regulation applicable to LICENSOR. LICENSOR is not a party to, or
subject to or bound by, any agreement, judgment, injunction or decree of any
court or governmental authority which may restrict or interfere with the
performance of this Agreement. This Agreement is a valid and binding obligation
of LICENSOR enforceable in accordance with its terms.
6.1.4 LICENSOR has no knowledge of any present condition or
contingency which LICENSOR can reasonably expect may adversely affect its
ability to perform its obligations under this Agreement.
6.2
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6.3
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7 TERM AND TERMINATION.
7.1
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7.2
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7.2.1
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[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 4)] 8
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7.2.2
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7.2.3
.
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7.3
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7.4
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7.5 All remedies provided in this Agreement are cumulative and not
exclusive and may be exercised in conjunction with any other remedies a party
may have in law or equity.
8
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9 INDEMNITY BY LICENSEE.
9.1 Subject to the provisions of Sections 6.2 and 6.3, LICENSEE shall
indemnify, defend, and hold harmless LICENSOR, its officers, directors,
employees and agents, from and against any and all claims, suits, losses
damages, costs, fees, and expenses (including attorneys' fees) resulting from or
arising out of the use of the Patents by LICENSEE, its customers, agents, or
employees, or the negligence or misconduct of LICENSEE in performance of its
obligations under this Agreement.
9.2 LICENSEE's obligations, set forth in this Section, shall survive
the termination of this Agreement.
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10.1
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[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 4)] 9
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10.2
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11 RELATIONSHIP OF PARTIES.
The relationship between LICENSOR and LICENSEE is that of independent
contractors. Neither party, nor its agents and employees, shall under any
circumstances be deemed an agent or representative of the other and neither
shall have authority to act for and/or bind the other in any way, or represent
that it is in any way responsible for acts of the other. This Agreement does not
establish a joint venture, agency or partnership between the parties.
12 CONFIDENTIALITY.
12.1 The terms of this Agreement and all negotiations concerning this
Agreement are confidential and shall not be disclosed to any other person or
entity not a party to this Agreement unless required by law or regulatory
authority.
12.2
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13 GENERAL PROVISIONS.
13.1 Notice. Any notice, request, demand, or other communication that
is required or permitted under this Agreement shall be deemed properly given if
it is deposited in the U.S. mail, certified, return receipt requested, postage
prepaid, properly addressed as follows:
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 4)] 10
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13.1.1 If to LICENSOR:
Progressive Games, Inc.
1045 Palms Airport Drive
Las Vegas, Nevada 89119
Attention: President
With a copy to:
Progressive Games, Inc.
1045 Palms Airport Drive
Las Vegas, Nevada 89119
Attention: General Counsel
13.1.2 If to LICENSEE:
Shuffle Master, Inc.
1106 Palms Airport Drive
Las Vegas, Nevada 89119
Attention: President
With a copy to:
Shuffle Master, Inc.
1106 Palms Airport Drive
Las Vegas, Nevada 89119
Attention: General Counsel
13.2 Dispute Resolution. Except for disputes involving Royalty payments
resolved under Section 5.3 of this Agreement, any disputes that may arise under
or concerning this Agreement, including but not limited to any dispute
concerning the enforceability or interpretation of any provision herein, shall
be resolved as follows:
13.2.1 If a dispute arises under this Agreement, any party may
give written notice to the other that it desires to meet in person to attempt to
resolve the dispute ("Notice of Dispute"). Within thirty (30) days after service
of a Notice of Dispute, appropriate representatives of the parties shall meet in
person and attempt in good faith to resolve the dispute.
13.2.2 If the parties fail to reach a resolution of a dispute
within thirty (30) days after service of the Notice of Dispute, either party may
request arbitration. Such request shall be in writing, served on the other party
in accordance with the provisions of Section 13.1 and shall
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 4)] 11
<PAGE>
designate an arbitrator ("Notice to Arbitrate").
13.2.3 The Notice to Arbitrate must set forth verbatim all of
the provisions of this Section 13.2 or it shall not be deemed effective.
13.2.4 Within ten (10) days after receipt of the Notice to
Arbitrate, the receiving party shall designate a second arbitrator. If a second
arbitrator is not timely designated, the dispute shall be submitted to the first
arbitrator for resolution. Within 10 days after the appointment of the second
arbitrator, the two arbitrators shall select a third arbitrator. If the two
arbitrators cannot agree on a third arbitrator, either party may commence
proceedings before the American Arbitration Association to appoint the third
arbitrator. Upon the appointment of the third arbitrator, the arbitration panel
shall be deemed duly constituted.
13.2.5 Once a panel of arbitrators is constituted, the panel
shall be required to render a final decision resolving the dispute within 60
days.
13.2.6 The arbitration panel shall be required to award the
prevailing party its costs and attorneys fees.
13.3 Governing Law. This Agreement shall be governed by the and
construed in accordance with the substantive law of the state of Nevada, without
giving effect to any conflicts or choice of laws principles that otherwise might
be applicable.
13.4 Forum Designation. Any action brought by either party against the
other party for claims arising out of this Agreement shall be brought in a court
of competent jurisdiction in the State of Nevada.
13.5 Divisibility. If any provision of this Agreement is found to be
prohibited by law and invalid, or for any other reason if any provision is held
to be unenforceable, in whole or in part, such provision shall be ineffective to
the extent of the prohibition or unenforceability without invalidating or having
any other adverse effect upon any other provision of this Agreement.
13.6 Entire Agreement. This Agreement, including the documents and the
instruments referred to herein and attached hereto, constitutes the entire
agreement between the parties relating to its subject matter and supersedes all
prior or contemporaneous negotiations or agreements, whether oral or written,
relating to the subject matter hereof. No extension, modification or amendment
of this Agreement shall be binding upon a party unless such extension,
modification or amendment is set forth in a written instrument, which is
executed and delivered on behalf of such party.
////
////
////
////
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 4)] 12
<PAGE>
////
////
////
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, including the Exhibits attached hereto and incorporated herein by
reference, as of the date first written above.
SHUFFLE MASTER, INC. PROGRESSIVE GAMES, INC.
By: /s/ Mark L. Yoseloff By: /s/ Charles H. McCrea, Jr.
-------------------- --------------------------
Its: Exec. V. Pres. Its: Ex. V.P. & Secretary
-------------------- --------------------------
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 4)] 13
EXHIBIT 5
NON-EXCLUSIVE LICENSE AGREEMENT
THIS AGREEMENT is entered into as of the 28th day of December, 1999
(the "Effective Date"), by and between PROGRESSIVE GAMES, INC., a Delaware
corporation ("LICENSOR") and SHUFFLE MASTER, INC., a Minnesota corporation
("LICENSEE").
W I T N E S S E T H:
WHEREAS, LICENSEE desires a license under certain patents owned or held
by LICENSOR to develop, market, lease, license and/or operate certain live
casino table card games; and
WHEREAS, LICENSOR desires to grant such license on the terms and
conditions set forth herein.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and conditions
set forth below and other good and valuable consideration, the receipt and
sufficiency of which all parties acknowledge, it is agreed as follows:
1 DEFINITIONS.
For the purposes of this Agreement, the terms set forth below shall be
defined as follows:
1.1
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
1.2
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
1.3
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
1.4 "Effective Date" shall have the meaning ascribed in the first
paragraph of this Agreement.
1.5 "Game" shall mean a live casino table card game.
1.6
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
1.7
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
1.8 "Notice of Dispute" shall have the meaning ascribed in Section
12.2.1.
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 5)] 1
<PAGE>
1.9 "Notice to Arbitrate" shall have the meaning ascribed in Section
12.2.2.
1.10 "Offer" shall mean promote, market, lease, sell or otherwise make
available for use.
1.11 "Other Intellectual Property" shall mean all intellectual property
of LICENSOR of every nature and kind except the Patents.
1.12
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
1.13 "Person" shall mean an individual, corporation, partnership or
other entity.
1.14 "Product Line" shall have the meaning ascribed in Section 9 below.
1.15 "Royalty" shall have the meaning ascribed in Section 4 below.
1.16
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
1.17
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 5)] 2
<PAGE>
1.18
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
1.19 "United States" shall include all states, territories and
possessions thereof and the District of Columbia.
1.20
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
2 LICENSE GRANT.
Subject to the terms, conditions and limitations herein, LICENSOR
hereby grants LICENSEE a non-exclusive license under the Patents to make, have
made, install, service, license, offer to lease and lease the Licensed Product
in the Territory.
3 LIMITATIONS.
3.1
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
3.2
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
3.3
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
3.4
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 5)] 3
<PAGE>
3.5
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
3.6 The license granted in this Agreement creates no license, express
or implied, to any Other Intellectual Property.
4
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
5 WARRANTY; ENFORCEMENT; INDEMNIFICATION.
5.1 LICENSOR warrants as follows:
5.1.1 LICENSOR is a corporation duly organized and existing
under the laws of Delaware and is the lawful owner of the Patents, which are
valid and enforceable.
5.1.2 LICENSOR has the corporate power and authority to
execute, deliver and perform this Agreement. Such execution, delivery and
performance have been duly authorized by all necessary action on the part of
LICENSOR, do not and will not require the approval of the shareholders of
LICENSOR and do not and will not contravene the Certificate of Incorporation or
By-Laws of LICENSOR.
5.1.3 The execution, delivery and performance of this
Agreement by LICENSOR will not result in any violation by LICENSOR of any law,
rule or regulation applicable to LICENSOR. LICENSOR is not a party to, or
subject to or bound by, any agreement, judgment, injunction or decree of any
court or governmental authority which may restrict or interfere with the
performance of this Agreement. This Agreement is a valid and binding obligation
of LICENSOR enforceable in accordance with its terms.
5.1.4 LICENSOR has no knowledge of any present condition or
contingency which LICENSOR can reasonably expect may adversely affect its
ability to perform its obligations under this Agreement.
5.2
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 5)] 4
<PAGE>
5.3
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
6
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
7
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
8 INDEMNITY BY LICENSEE.
8.1 Subject to the provisions of Sections 5.2 and 5.3, LICENSEE shall
indemnify, defend, and hold harmless LICENSOR, its officers, directors,
employees and agents, from and against any and all claims, suits, losses
damages, costs, fees, and expenses (including attorneys' fees) resulting from or
arising out of the use of the Patents by LICENSEE, its customers, agents, or
employees, or the negligence or misconduct of LICENSEE in performance of its
obligations under this Agreement.
8.2 LICENSEE's obligations, set forth in this Section, shall survive
the termination of this Agreement.
9
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
9.1
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 5)] 5
<PAGE>
9.2
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
10 RELATIONSHIP OF PARTIES.
The relationship between LICENSOR and LICENSEE is that of independent
contractors. Neither party, nor its agents and employees, shall under any
circumstances be deemed an agent or representative of the other and neither
shall have authority to act for and/or bind the other in any way, or represent
that it is in any way responsible for acts of the other. This Agreement does not
establish a joint venture, agency or partnership between the parties.
11 CONFIDENTIALITY.
11.1 The terms of this Agreement and all negotiations concerning this
Agreement are confidential and shall not be disclosed to any other person or
entity not a party to this Agreement unless required by law or regulatory
authority.
11.2
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
12 GENERAL PROVISIONS.
12.1 Notice. Any notice, request, demand, or other communication that
is required or permitted under this Agreement shall be deemed properly given if
it is deposited in the U.S. mail, certified, return receipt requested, postage
prepaid, properly addressed as follows:
12.1.1 If to LICENSOR:
Progressive Games, Inc.
1045 Palms Airport Drive
Las Vegas, Nevada 89119
Attention: President
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 5)] 6
<PAGE>
With a copy to:
Progressive Games, Inc.
1045 Palms Airport Drive
Las Vegas, Nevada 89119
Attention: General Counsel
12.1.2 If to LICENSEE:
Shuffle Master, Inc.
1106 Palms Airport Drive
Las Vegas, Nevada 89119
Attention: President
With a copy to:
Shuffle Master, Inc.
1106 Palms Airport Drive
Las Vegas, Nevada 89119
Attention: General Counsel
12.2 Dispute Resolution. Any disputes that may arise under or
concerning this Agreement, including but not limited to any dispute concerning
the enforceability or interpretation of any provision herein, shall be resolved
as follows:
12.2.1 If a dispute arises under this Agreement, any party may
give written notice to the other that it desires to meet in person to attempt to
resolve the dispute ("Notice of Dispute"). Within thirty (30) days after service
of a Notice of Dispute, appropriate representatives of the parties shall meet in
person and attempt in good faith to resolve the dispute.
12.2.2 If the parties fail to reach a resolution of a dispute
within thirty (30) days after service of the Notice of Dispute, either party may
request arbitration. Such request shall be in writing, served on the other party
in accordance with the provisions of Section 12.1 and shall designate an
arbitrator ("Notice to Arbitrate").
12.2.3 The Notice to Arbitrate must set forth verbatim all of
the provisions of this Section 12.2 or it shall not be deemed effective.
12.2.4 Within ten (10) days after receipt of the Notice to
Arbitrate, the receiving party shall designate a second arbitrator. If a second
arbitrator is not timely designated, the dispute shall be submitted to the first
arbitrator for resolution. Within 10 days after the appointment of the second
arbitrator, the two arbitrators shall select a third arbitrator. If the two
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 5)] 7
<PAGE>
arbitrators cannot agree on a third arbitrator, either party may commence
proceedings before the American Arbitration Association to appoint the third
arbitrator. Upon the appointment of the third arbitrator, the arbitration panel
shall be deemed duly constituted.
12.2.5 Once a panel of arbitrators is constituted, the panel
shall be required to render a final decision resolving the dispute within 60
days.
12.2.6 The arbitration panel shall be required to award the
prevailing party its costs and attorneys fees.
12.3 Governing Law. This Agreement shall be governed by the and
construed in accordance with the substantive law of the state of Nevada, without
giving effect to any conflicts or choice of laws principles that otherwise might
be applicable.
12.4 Forum Designation. Any action brought by either party against the
other party for claims arising out of this Agreement shall be brought in a court
of competent jurisdiction in the State of Nevada.
12.5 Divisibility. If any provision of this Agreement is found to be
prohibited by law and invalid, or for any other reason if any provision is held
to be unenforceable, in whole or in part, such provision shall be ineffective to
the extent of the prohibition or unenforceability without invalidating or having
any other adverse effect upon any other provision of this Agreement.
12.6 Entire Agreement. This Agreement, including the documents and the
instruments referred to herein and attached hereto, constitutes the entire
agreement between the parties relating to its subject matter and supersedes all
prior or contemporaneous negotiations or agreements, whether oral or written,
relating to the subject matter hereof. No extension, modification or amendment
of this Agreement shall be binding upon a party unless such extension,
modification or amendment is set forth in a written instrument, which is
executed and delivered on behalf of such party.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, including the Exhibits attached hereto and incorporated herein by
reference, as of the date first written above.
SHUFFLE MASTER, INC. PROGRESSIVE GAMES, INC.
By: /s/ Mark L. Yoseloff By: /s/ Charles H. McCrea, Jr.
-------------------- --------------------------
Its: Exec. V. Pres. Its: Ex. V.P. & Secretary
-------------------- --------------------------
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 5)] 8
EXHIBIT 6
EXCLUSIVE LICENSE AGREEMENT
THIS AGREEMENT is entered into as of the 28th day of December, 1999
(the "Effective Date"), by and between SHUFFLE MASTER, INC., a Minnesota
corporation ("LICENSOR") and PROGRESSIVE GAMES, INC., a Delaware corporation and
MIKOHN GAMING CORPORATION, a Nevada corporation (collectively "LICENSEE").
W I T N E S S E T H:
WHEREAS, LICENSEE desires a license of certain trademarks, copyrights
and related intellectual property concerning the live casino table card game
known as Bahama Bonus owned or held by LICENSOR; and
WHEREAS, LICENSOR desires to grant such license on the terms and
conditions set forth herein.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and conditions
set forth below and other good and valuable consideration, the receipt and
sufficiency of which all parties acknowledge, it is agreed as follows:
1 DEFINITIONS.
For the purposes of this Agreement, the terms set forth below shall be
defined as follows:
1.1 "Affiliate" shall mean a parent, subsidiary or other entity owned
or controlled by LICENSOR or LICENSEE as the case may be.
1.2
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
1.3 "Game" shall mean a live casino table card game.
1.4
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
1.5
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
1.6 "LIRB License Agreement" shall mean that certain Non-Exclusive
License Agreement of even date hereof by and between Progressive Games, Inc., as
Licensor, and Shuffle Master, Inc., as Licensee, which is attached as Exhibit 4
to that certain Settlement Agreement of even date hereof by and between
Progressive Games, Inc., Mikohn Gaming Corporation and Shuffle Master, Inc.
[EXCLUSIVE LICENSE AGREEMENT (EX. 6)] 1
<PAGE>
1.7 "Notice of Dispute" shall have the meaning ascribed in Section
12.2.1.
1.8 "Notice to Arbitrate" shall have the meaning ascribed in Section
12.2.2.
1.9 "Offer" shall mean promote, market, lease, sell or otherwise make
available for use.
1.10 "Other Intellectual Property" shall mean all intellectual property
of LICENSOR of every nature and kind except the Intellectual Property.
1.11 "Person" shall mean an individual, corporation, partnership or
other entity.
1.12 "Product Line" shall have the meaning ascribed in Section 9 below.
1.13 "Royalty" shall have the meaning ascribed in Section 4 below.
1.14 "Territory" shall mean the entire world except for the state of
Nevada.
2 LICENSE GRANT.
Subject to the terms, conditions and limitations herein, LICENSOR
hereby grants LICENSEE an exclusive license to make, have made, install,
service, license, offer to lease and lease the Licensed Product in the
Territory.
3 LIMITATIONS.
3.1
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
3.2
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
3.3
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
3.4
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
3.5 The license granted in this Agreement creates no license, express
or implied, to any Other Intellectual Property.
[EXCLUSIVE LICENSE AGREEMENT (EX. 6)] 2
<PAGE>
4
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
5 WARRANTY; ENFORCEMENT.
5.1 LICENSOR warrants as follows:
5.1.1 LICENSOR is a corporation duly organized and existing
under the laws of Minnesota.
5.1.2 LICENSOR has the corporate power and authority to
execute, deliver and perform this Agreement. Such execution, delivery and
performance have been duly authorized by all necessary action on the part of
LICENSOR, do not and will not require the approval of the shareholders of
LICENSOR and do not and will not contravene the Certificate of Incorporation or
By-Laws of LICENSOR.
5.1.3 The execution, delivery and performance of this
Agreement by LICENSOR will not result in any violation by LICENSOR of any law,
rule or regulation applicable to LICENSOR. LICENSOR is not a party to, or
subject to or bound by, any agreement, judgment, injunction or decree of any
court or governmental authority which may restrict or interfere with the
performance of this Agreement. This Agreement is a valid and binding obligation
of LICENSOR enforceable in accordance with its terms.
5.1.4 LICENSOR has no knowledge of any present condition or
contingency which LICENSOR can reasonably expect may adversely affect its
ability to perform its obligations under this Agreement.
5.2
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
[EXCLUSIVE LICENSE AGREEMENT (EX. 6)] 3
<PAGE>
6 TERM AND TERMINATION.
6.1
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
6.2
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
6.2.1
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
6.2.2
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
6.2.3
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
6.3
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
6.4
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
6.5
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
6.6 All remedies provided in this Agreement are cumulative and not
exclusive and may be exercised in conjunction with any other remedies a party
may have in law or equity.
7
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
[EXCLUSIVE LICENSE AGREEMENT (EX. 6)] 4
<PAGE>
8 INDEMNITY BY LICENSEE.
8.1 Subject to the provisions of Sections 5.2, LICENSEE shall
indemnify, defend, and hold harmless LICENSOR, its officers, directors,
employees and agents, from and against any and all claims, suits, losses
damages, costs, fees, and expenses (including attorneys' fees) resulting from or
arising out of the use of the Intellectual Property by LICENSEE, its customers,
agents, or employees, or the negligence or misconduct of LICENSEE in performance
of its obligations under this Agreement.
8.2 LICENSEE's obligations, set forth in this Section, shall survive
the termination of this Agreement.
9
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
9.1
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
9.2
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
10 RELATIONSHIP OF PARTIES.
The relationship between LICENSOR and LICENSEE is that of independent
contractors. Neither party, nor its agents and employees, shall under any
circumstances be deemed an agent or representative of the other and neither
shall have authority to act for and/or bind the other in any way, or represent
that it is in any way responsible for acts of the other. This Agreement does not
establish a joint venture, agency or partnership between the parties.
[EXCLUSIVE LICENSE AGREEMENT (EX. 6)] 5
<PAGE>
11 CONFIDENTIALITY.
The terms of this Agreement and all negotiaitons concerning this
Agreement are confidential and shall not be disclosed to any other person or
entity not a party to this Agreement unless required by law or regulatory
authority.
12 GENERAL PROVISIONS.
12.1 Notice. Any notice, request, demand, or other communication that
is required or permitted under this Agreement shall be deemed properly given if
it is deposited in the U.S. mail, certified, return receipt requested, postage
prepaid, properly addressed as follows:
12.1.1 If to LICENSOR:
Shuffle Master, Inc.
1106 Palms Airport Drive
Las Vegas, Nevada 89119
Attention: President
With a copy to:
Shuffle Master, Inc.
1106 Palms Airport Drive
Las Vegas, Nevada 89119
Attention: General Counsel
12.1.2 If to LICENSEE:
Mikohn Gaming Corporation
1045 Palms Airport Drive
Las Vegas, Nevada 89119
Attention: President
With a copy to:
Mikohn Gaming Corporation
1045 Palms Airport Drive
Las Vegas, Nevada 89119
Attention: General Counsel
12.2 Dispute Resolution. Any disputes that may arise under or
concerning this
[EXCLUSIVE LICENSE AGREEMENT (EX. 6)] 6
<PAGE>
Agreement, including but not limited to any dispute concerning the
enforceability or interpretation of any provision herein, shall be resolved as
follows:
12.2.1 If a dispute arises under this Agreement, any party may
give written notice to the other that it desires to meet in person to attempt to
resolve the dispute ("Notice of Dispute"). Within thirty (30) days after service
of a Notice of Dispute, appropriate representatives of the parties shall meet in
person and attempt in good faith to resolve the dispute.
12.2.2 If the parties fail to reach a resolution of a dispute
within thirty (30) days after service of the Notice of Dispute, either party may
request arbitration. Such request shall be in writing, served on the other party
in accordance with the provisions of Section 12.1 and shall designate an
arbitrator ("Notice to Arbitrate").
12.2.3 The Notice to Arbitrate must set forth verbatim all of
the provisions of this Section 12.2 or it shall not be deemed effective.
12.2.4 Within ten (10) days after receipt of the Notice to
Arbitrate, the receiving party shall designate a second arbitrator. If a second
arbitrator is not timely designated, the dispute shall be submitted to the first
arbitrator for resolution. Within 10 days after the appointment of the second
arbitrator, the two arbitrators shall select a third arbitrator. If the two
arbitrators cannot agree on a third arbitrator, either party may commence
proceedings before the American Arbitration Association to appoint the third
arbitrator. Upon the appointment of the third arbitrator, the arbitration panel
shall be deemed duly constituted.
12.2.5 Once a panel of arbitrators is constituted, the panel
shall be required to render a final decision resolving the dispute within 60
days.
12.2.6 The arbitration panel shall be required to award the
prevailing party its costs and attorneys fees.
12.3 Governing Law. This Agreement shall be governed by the and
construed in accordance with the substantive law of the state of Nevada, without
giving effect to any conflicts or choice of laws principles that otherwise might
be applicable.
12.4 Forum Designation. Any action brought by either party against the
other party for claims arising out of this Agreement shall be brought in a court
of competent jurisdiction in the State of Nevada.
12.5 Divisibility. If any provision of this Agreement is found to be
prohibited by law and invalid, or for any other reason if any provision is held
to be unenforceable, in whole or in part, such provision shall be ineffective to
the extent of the prohibition or unenforceability without invalidating or having
any other adverse effect upon any other provision of this Agreement.
[EXCLUSIVE LICENSE AGREEMENT (EX. 6)] 7
<PAGE>
12.6 Entire Agreement. This Agreement, including the documents and the
instruments referred to herein and attached hereto, constitutes the entire
agreement between the parties relating to its subject matter and supersedes all
prior or contemporaneous negotiations or agreements, whether oral or written,
relating to the subject matter hereof. No extension, modification or amendment
of this Agreement shall be binding upon a party unless such extension,
modification or amendment is set forth in a written instrument, which is
executed and delivered on behalf of such party.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, including the Exhibits attached hereto and incorporated herein by
reference, as of the date first written above.
SHUFFLE MASTER, INC. MIKOHN GAMING CORPORATION
By: /s/ Mark L. Yoseloff By: /s/ Charles H. McCrea, Jr.
-------------------- --------------------------
Its: Exec. V. Pres. Its: Ex. V.P. & Secretary
-------------------- --------------------------
PROGRESSIVE GAMES, INC.
By: /s/ Charles H. McCrea, Jr.
--------------------------
Its: Ex. V.P. & Secretary
--------------------------
[EXCLUSIVE LICENSE AGREEMENT (EX. 6)] 8
EXHIBIT 7
NON-EXCLUSIVE LICENSE AGREEMENT
THIS AGREEMENT is entered into as of the 28th day of December, 1999
(the "Effective Date"), by and between SHUFFLE MASTER, INC., a Minnesota
corporation ("LICENSOR") and PROGRESSIVE GAMES, INC., a Delaware corporation and
MIKOHN GAMING CORPORATION, a Nevada corporation (collectively "LICENSEE").
W I T N E S S E T H:
WHEREAS, LICENSEE desires a license under certain patents owned or held
by LICENSOR to develop, market, lease, license and/or operate certain live
casino table card games; and
WHEREAS, LICENSOR desires to grant such license on the terms and
conditions set forth herein.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and conditions
set forth below and other good and valuable consideration, the receipt and
sufficiency of which all parties acknowledge, it is agreed as follows:
1 DEFINITIONS.
For the purposes of this Agreement, the terms set forth below shall be
defined as follows:
1.1 "Affiliate" shall mean a parent, subsidiary or other entity owned
or controlled by LICENSOR or LICENSEE as the case may be.
1.2 "Effective Date" shall have the meaning ascribed in the first
paragraph of this Agreement.
1.3 "Game" shall mean a live casino table card game.
1.4
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
1.5 "LIRB License Agreement" shall mean that certain Non-Exclusive
License Agreement of even date hereof by and between Progressive Games, Inc., as
Licensor, and Shuffle Master, Inc., as Licensee, which is attached as Exhibit 4
to that certain Settlement Agreement of even date hereof by and between
Progressive Games, Inc., Mikohn Gaming Corporation and Shuffle Master, Inc.
1.6 "Notice of Dispute" shall have the meaning ascribed in Section
1.2.1.
1.7 "Notice to Arbitrate" shall have the meaning ascribed in Section
12.2.2.
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 7)] 1
<PAGE>
1.8 "Offer" shall mean promote, market, lease, sell or otherwise make
available for use.
1.9 "Other Intellectual Property" shall mean all intellectual property
of LICENSOR of every nature and kind except the Patents.
1.10
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
1.11 "Person" shall mean an individual, corporation, partnership or
other entity.
1.12 "Product Line" shall have the meaning ascribed in Section 9 below.
1.13 "Royalty" shall have the meaning ascribed in Section 4 below.
1.14
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
1.15 "United States" shall include all states, territories and
possessions thereof and the District of Columbia.
2 LICENSE GRANT.
Subject to the terms, conditions and limitations herein, LICENSOR
hereby grants LICENSEE a non-exclusive license under the Patents to make, have
made, install, service, license, offer to lease and lease Licensed Products in
the Territory.
3 LIMITATIONS.
3.1
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 7)] 2
<PAGE>
3.2
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
3.3 The license granted in this Agreement creates no license, express
or implied, to any Other Intellectual Property.
4
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
5 WARRANTY; ENFORCEMENT.
5.1 LICENSOR warrants as follows:
5.1.1 LICENSOR is a corporation duly organized and existing
under the laws of Minnesota and is the lawful owner of the Patents, which are
valid and enforceable.
5.1.2 LICENSOR has the corporate power and authority to
execute, deliver and perform this Agreement. Such execution, delivery and
performance have been duly authorized by all necessary action on the part of
LICENSOR, do not and will not require the approval of the shareholders of
LICENSOR and do not and will not contravene the Certificate of Incorporation or
By-Laws of LICENSOR.
5.1.3 The execution, delivery and performance of this
Agreement by LICENSOR will not result in any violation by LICENSOR of any law,
rule or regulation applicable to LICENSOR. LICENSOR is not a party to, or
subject to or bound by, any agreement, judgment, injunction or decree of any
court or governmental authority which may restrict or interfere with the
performance of this Agreement. This Agreement is a valid and binding obligation
of LICENSOR enforceable in accordance with its terms.
5.1.4 LICENSOR has no knowledge of any present condition or
contingency which LICENSOR can reasonably expect may adversely affect its
ability to perform its obligations under this Agreement.
5.2
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 7)] 3
<PAGE>
6 TERM AND TERMINATION.
6.1
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6.2
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6.2.1
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
6.2.2
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6.2.3
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
6.3
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
6.4
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
6.5
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 7)] 4
<PAGE>
6.6 All remedies provided in this Agreement are cumulative and not
exclusive and may be exercised in conjunction with any other remedies a party
may have in law or equity.
7
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
8 INDEMNITY BY LICENSEE.
8.1 Subject to the provisions of Section 5.2, LICENSEE shall indemnify,
defend, and hold harmless LICENSOR, its officers, directors, employees and
agents, from and against any and all claims, suits, losses damages, costs, fees,
and expenses (including attorneys' fees) resulting from or arising out of the
use of the Patents by LICENSEE, its customers, agents, or employees, or the
negligence or misconduct of LICENSEE in performance of its obligations under
this Agreement.
8.2 LICENSEE's obligations, set forth in this Section, shall survive
the termination of this Agreement.
9
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
9.1
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
9.2
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
10 RELATIONSHIP OF PARTIES.
The relationship between LICENSOR and LICENSEE is that of independent
contractors.
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 7)] 5
<PAGE>
Neither party, nor its agents and employees, shall under any circumstances be
deemed an agent or representative of the other and neither shall have authority
to act for and/or bind the other in any way, or represent that it is in any way
responsible for acts of the other. This Agreement does not establish a joint
venture, agency or partnership between the parties.
11 CONFIDENTIALITY.
The terms of this Agreement and all negotiaitons concerning this
Agreement are confidential and shall not be disclosed to any other person or
entity not a party to this Agreement unless required by law or regulatory
authority.
12 GENERAL PROVISIONS.
12.1 Notice. Any notice, request, demand, or other communication that
is required or permitted under this Agreement shall be deemed properly given if
it is deposited in the U.S. mail, certified, return receipt requested, postage
prepaid, properly addressed as follows:
12.1.4 If to LICENSOR:
Shuffle Master, Inc.
1106 Palms Airport Drive
Las Vegas, Nevada 89119
Attention: President
With a copy to:
Shuffle Master, Inc.
1106 Palms Airport Drive
Las Vegas, Nevada 89119
Attention: General Counsel
12.1.5 If to LICENSEE:
Mikohn Gaming Corporation
1045 Palms Airport Drive
Las Vegas, Nevada 89119
Attention: President
With a copy to:
Mikohn Gaming Corporation
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 7)] 6
<PAGE>
1045 Palms Airport Drive
Las Vegas, Nevada 89119
Attention: General Counsel
12.2 Dispute Resolution. Any disputes that may arise under or
concerning this Agreement, including but not limited to any dispute concerning
the enforceability or interpretation of any provision herein, shall be resolved
as follows:
12.2.1 If a dispute arises under this Agreement, any party may
give written notice to the other that it desires to meet in person to attempt to
resolve the dispute ("Notice of Dispute"). Within thirty (30) days after service
of a Notice of Dispute, appropriate representatives of the parties shall meet in
person and attempt in good faith to resolve the dispute.
12.2.2 If the parties fail to reach a resolution of a dispute
within thirty (30) days after service of the Notice of Dispute, either party may
request arbitration. Such request shall be in writing, served on the other party
in accordance with the provisions of Section 12.1 and shall designate an
arbitrator ("Notice to Arbitrate").
12.2.3 The Notice to Arbitrate must set forth verbatim all of
the provisions of this Section 12.2 or it shall not be deemed effective.
12.2.4 Within ten (10) days after receipt of the Notice to
Arbitrate, the receiving party shall designate a second arbitrator. If a second
arbitrator is not timely designated, the dispute shall be submitted to the first
arbitrator for resolution. Within 10 days after the appointment of the second
arbitrator, the two arbitrators shall select a third arbitrator. If the two
arbitrators cannot agree on a third arbitrator, either party may commence
proceedings before the American Arbitration Association to appoint the third
arbitrator. Upon the appointment of the third arbitrator, the arbitration panel
shall be deemed duly constituted.
12.2.5 Once a panel of arbitrators is constituted, the panel
shall be required to render a final decision resolving the dispute within 60
days.
12.2.6 The arbitration panel shall be required to award the
prevailing party its costs and attorneys fees.
12.3 Governing Law. This Agreement shall be governed by the and
construed in accordance with the substantive law of the state of Nevada, without
giving effect to any conflicts or choice of laws principles that otherwise might
be applicable.
12.4 Forum Designation. Any action brought by either party against the
other party for claims arising out of this Agreement shall be brought in a court
of competent jurisdiction in the State of Nevada.
12.5 Divisibility. If any provision of this Agreement is found to be
prohibited by law
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 7)] 7
<PAGE>
and invalid, or for any other reason if any provision is held to be
unenforceable, in whole or in part, such provision shall be ineffective to the
extent of the prohibition or unenforceability without invalidating or having any
other adverse effect upon any other provision of this Agreement.
12.6 Entire Agreement. This Agreement, including the documents and the
instruments referred to herein and attached hereto, constitutes the entire
agreement between the parties relating to its subject matter and supersedes all
prior or contemporaneous negotiations or agreements, whether oral or written,
relating to the subject matter hereof. No extension, modification or amendment
of this Agreement shall be binding upon a party unless such extension,
modification or amendment is set forth in a written instrument, which is
executed and delivered on behalf of such party.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, including the Exhibits attached hereto and incorporated herein by
reference, as of the date first written above.
SHUFFLE MASTER, INC. MIKOHN GAMING CORPORATION
By: /s/ Mark L. Yoseloff By: /s/ Charles H. McCrea, Jr.
-------------------- --------------------------
Its: Exec. V. Pres. Its: Ex. V.P. & Secretary
-------------------- --------------------------
PROGRESSIVE GAMES, INC.
By: /s/ Charles H. McCrea, Jr.
--------------------------
Its: Ex. V.P. & Secretary
--------------------------
[NON-EXCLUSIVE LICENSE AGREEMENT (EX. 7)] 8
EXHIBIT 8
CROSS SUPPLIER AGREEMENT
This Agreement is entered into as of this 28th day of December, 1999
("Effective Date"), by and between MIKOHN GAMING CORPORATION ("MIKN"), a Nevada
corporation, and SHUFFLE MASTER, INC. ("SHFL"), a Minnesota corporation.
W I T N E S S E T H:
WHEREAS, MIKN has need for certain products manufactured and/or
distributed by SHFL and SHFL has need for certain products manufactured and/or
distributed by MIKN; and
WHEREAS, SHFL desires to sell certain products to MIKN which MIKN
desires to purchase on the terms and conditions set forth in this Agreement; and
WHEREAS, MIKN desires to sell certain products to SHFL which SHFL
desires to purchase on the terms and conditions set forth in this Agreement.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and conditions
set forth herein and other good and valuable consideration, the sufficiency and
adequacy of which are hereby acknowledged by all parties, it is agreed as
follows:
1 DEFINITIONS.
For purposes of this Agreement, the terms set forth below shall be
defined as follows:
1.1 "Affiliate" shall mean a parent, subsidiary or other entity owned
or controlled by MIKN or SHFL as the case may be.
1.2 "Buyer" means the party buying Products from the Supplier.
1.3 "Confidential Information" shall have the meaning ascribed in
Section 13 below.
1.4 "Effective Date" shall have the meaning ascribed in the first
paragraph of this Agreement.
1.5 "Games" shall mean live casino table card games.
1.6 "Limited Warranty" shall have the meaning ascribed in Section 10
below.
1.7 "MIKN Product" means a Product manufactured and/or distributed by
MIKN.
1.8 "Notice of Dispute" shall have the meaning ascribed in Section
17.2.1.
1.9 "Notice to Arbitrate" shall have the meaning ascribed in Section
17.2.2.
[CROSS SUPPLIER AGREEMENT (EX. 8)] 1
<PAGE>
1.10 "Preferred Supplier" means a Supplier that is Buyer's supplier of
first choice. Buyer shall, in good faith, give the Preferred Supplier the first
opportunity to meet Buyer's requirements, which may be dictated by customer
requirements.
1.11 "Product" means a MIKN Product or a SHFL Product or both.
1.12 "Purchase Order" shall have the meaning ascribed in Section 6
below.
1.13 "Purchase Price" shall have the meaning ascribed in Section 3.1
below.
1.14 "SHFL Product" means a Product manufactured and/or distributed by
SHFL.
1.15 "Supplier" means the party selling Products to the Buyer.
1.16 "Term" shall have the meaning ascribed in Section 4 below.
1.17 "Territory" means North America.
2 THE PRODUCTS.
2.1 MIKN shall be the exclusive Supplier to SHFL of the following MIKN
Products in the Territory: progressive controllers and progressive displays for
Games. The foregoing notwithstanding, if SHFL requires progressive controllers
or progressive displays which MIKN cannot supply, after giving MIKN the right of
first refusal to supply the desired Product to SHFL's specifications at a
competitive price, SHFL may purchase such Products elsewhere or manufacture them
itself. SHFL shall cooperate with MIKN in providing appropriate licenses of
SHFL's intellectual property on reasonable terms in the event any such
intellectual property is required by MIKN to meet SHFL's requirements.
2.2 MIKN shall be the non-exclusive but Preferred Supplier to SHFL of
the following MIKN Products worldwide: progressive controllers and progressive
displays for Games, signs, slot glass and electronics.
2.3 SHFL shall be the exclusive Supplier to MIKN of the following SHFL
Products in the Territory: automatic card shuffling machines. The foregoing
notwithstanding, if MIKN requires shufflers with built in card reading
capability or other capabilities which SHFL cannot supply, after giving SHFL the
right of first refusal to supply the desired Product to MIKN's specifications at
a competitive price, MIKN may purchase such shufflers elsewhere or manufacture
them itself. MIKN shall cooperate with SHFL in providing appropriate licenses of
MIKN's intellectual property on reasonable terms in the event any such
intellectual property is required by SHFL to meet MIKN's requirements.
2.4 Subject to existing distribution agreements, SHFL shall be the
non-exclusive but Preferred Supplier to MIKN of the following SHFL Products
worldwide: automatic card
[CROSS SUPPLIER AGREEMENT (EX. 8)] 2
<PAGE>
shuffling machines, coin sensors/acceptors and associated equipment for Games.
2.5 This Agreement creates no license, express or implied, to any
intellectual property of the parties.
3 PRICING; MOST FAVORED NATION.
3.1 All prices for Products shall be the lowest price in the Territory
charged by the Supplier to any customer or distributor of Supplier ("Purchase
Price").
3.2 If, after the Effective Date of this Agreement, the Supplier grants
to any third party, other than an Affiliate of Supplier, a price which is more
favorable to the third party than the price provided to Buyer, then Buyer shall
be entitled to the more favorable price. Such new price shall be effective as of
the effective date of the lower price given to the third party.
4 TERM AND TERMINATION.
This Agreement shall commence on the Effective Date, shall remain in
effect for a period of five (5) years and shall renew automatically for periods
of one (1) year (the "Term") unless terminated by either party giving written
notice at least 90 days prior to the expiration of the Term.
5
5.1
[XXXX] TEXT DELETED CONFIDENTIAL TREATMENT REQUESTED
5.2
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6 ORDERING PROTOCOL.
Buyer may order Products from Supplier by submitting to Supplier a
written purchase order which specifies the Products to be purchased, the price
for each such Product and the total amount due to Supplier for such order (the
"Purchase Order"). Purchase Orders may be submitted by facsimile. An order from
Buyer shall be considered to be accepted by Supplier when the Purchase Order has
been signed by an authorized officer or representative of Supplier and Supplier
has provided Buyer with written notification that such order has been accepted.
All sales of Products to Buyer shall be subject to the provisions of this
Agreement. Additional or different provisions on any Purchase Order or other
business forms submitted by Buyer to Supplier shall have no force or effect
regardless of whether Supplier accepts and/or fills orders submitted by Buyer on
such forms.
[CROSS SUPPLIER AGREEMENT (EX. 8)] 3
<PAGE>
7 PAYMENT TERMS.
The Purchase Price for all Products purchased shall be paid 50% with
the order and the balance paid within thirty (30) days after delivery. All sums
not paid when due shall bear interest at the rate of 1% per month (12% per
annum) until paid in full.
8 TAXES, DUTIES AND FREIGHT.
Buyer shall pay all taxes, duties and any other fees or assessments
which may be assessed or imposed on the Products by any federal, state or local
governmental authority as a result of the purchase or sale of such Products by
Buyer. Buyer shall pay directly or reimburse Supplier for all freight and
shipping charges.
9 FAIR REPRESENTATION; GOOD QUALITY.
9.1 Buyer shall always demonstrate and represent the Products fairly
and shall make no false or misleading representations to customers or other
persons with regard to the Products of Supplier.
9.2 Supplier shall furnish only good quality Products which are
manufactured, tested, packaged and shipped in accordance with industry
standards.
9.3 Supplier shall furnish to Buyer details of technical
specifications, features and functions of all Products generally made available
to end-users of the Products. Buyer shall be responsible for obtaining from
Supplier all sales literature, catalogs, information on Products and parts,
specification sheets, instructions and procedures necessary to furnish the
proper assistance to its customers.
10 LIMITED WARRANTY; INFRINGEMENT INDEMNITY.
10.1 Supplier will keep Buyer informed of Supplier's warranty or
warranties applicable to the Products as may be in effect from time to time, and
will extend the appropriate warranty to each end-user who purchases a Product
from Buyer (the "Limited Warranty"). Buyer agrees to furnish a copy of the
Limited Warranty to the end-user upon delivery of the Product.
10.2 Supplier makes no warranties or representations as to performance
of Products or as to service to Buyer except as set forth in Supplier's Limited
Warranty accompanying the Products. Upon reasonable notice, Supplier reserves
the right to change the warranty and service policy set forth in such Limited
Warranty. The Limited Warranty accompanying the Products is in lieu of all other
warranties, express or implied, including, but not limited to, warranties of
merchantability or fitness for a particular purpose. No affirmation of fact,
including, but not limited to, statements regarding suitability for use or
performance of the Product shall be deemed to be a warranty of Supplier for any
purpose. The liability of Supplier, if any, for damages relating to allegedly
defective Products shall, under any legal or equitable theory, be limited to
[CROSS SUPPLIER AGREEMENT (EX. 8)] 4
<PAGE>
the actual price paid by the end-user for such Products. In no event shall
Supplier be liable for direct, indirect, special, or consequential damages,
including without limitation loss of profits, arising out of any breach of this
agreement.
10.3 Any other provision in this Agreement or any Limited Warranty
accompanying the Products to the contrary notwithstanding, the Limited Warranty
does not cover the following:
10.3.1 repair or replacement of Products damaged by accidents,
tampering, transportation, neglect, misuse, mishandling, alterations which may
include, without limitation, any deviation from circuit design, installation or
removal of features, or any other modification (unless approved by Supplier in
advance and in writing);
10.3.2 repair or replacement of Products damaged from unusual
physical or electrical stress or use of the Products for purposes other than
those for which they were designed; or
10.3.3 repair or replacement of Products damaged from rain,
wind, hail, lightning, storms, floods, fires, earthquakes or other acts of God,
vandalism or civil unrest.
10.4 MIKN will defend and indemnify SHFL against third party claims of
infringement by MIKN Products. SHFL will defend and indemnify MIKN against third
party claims of infringement by SHFL Products.
11 TRADEMARKS AND TRADE NAMES.
All uses by Buyer in its advertising or elsewhere of Supplier's name or
any trademark of Supplier (or any mark or name closely resembling such names(s))
now or hereafter owned or licensed by Supplier shall be subject to the prior
written consent of Supplier. Buyer shall not acquire any proprietary right,
title, or interest in or to any such trademark(s) or trade name(s). Buyer shall
not change, remove, obliterate, delete from, add to or otherwise alter any
logos, trademark(s) and/or trade names(s) affixed to the Products, and shall not
add any additional designation, without the prior written consent of Supplier.
12 PROPRIETARY RIGHTS.
12.1 All Supplier software programs, designs, inventions and product
manuals are the exclusive property of Supplier. No part of any Supplier design,
product manual or software program (including without limitation any compression
technology contained in any software program) may be copied, reproduced,
transmitted, stored in a retrieval system, or translated into any foreign
language, without the prior written permission of Supplier.
12.2 Supplier reserves all rights to the look, feel, and design or its
products. Any attempt to copy, reproduce, modify, encrypt, decompile, reverse
engineer or otherwise attempt to interpret existing code or engineering concepts
or designs of any Supplier Product without the
[CROSS SUPPLIER AGREEMENT (EX. 8)] 5
<PAGE>
prior written consent of Supplier is strictly prohibited.
13 NON-DISCLOSURE.
MIKN and SHFL each hereby acknowledges that as a result of the
relationships established by this Agreement, each of them may have access to or
may become aware of trade secrets, processes and/or confidential, non-public
information regarding the other party (hereinafter "Confidential Information")
and that such confidential Information is a valuable and unique asset of such
party. MIKN and SHFL each hereby agrees to treat all Confidential Information
with the same degree of care with which it treats its own confidential
information, and not to disclose, in whole or in part, any Confidential
Information to any other person, firm, corporation, association or other entity
unless required by law or regulation or order of a court of competent
jurisdiction. MIKN and SHFL each also agree not to use the Confidential
Information of the other except as permitted under this Agreement.
14 RELATIONSHIP OF PARTIES.
The relationship between MIKN and SHFL is that of independent
contractors. Neither party, nor its agents and employees, shall under any
circumstances be deemed an agent or representative of the other and neither
shall have authority to act for and/or bind the other in any way, or represent
that it is in any way responsible for acts of the other. This Agreement does not
establish a joint venture, agency or partnership between the parties.
15 COMPLIANCE WITH LAWS.
Each party undertakes to the other not to violate any law or regulation
including, without limitation, any gaming law or regulation or to engage in any
act or omission which tends to bring discredit upon the gaming industry or
otherwise jeopardizes the other party's ability to engage in the legal gaming
business.
16 TERMINATION.
16.1 Supplier may terminate and/or cancel this Agreement without
further liability or obligation to Buyer if:
16.1.1 Buyer is in default of any provision hereof requiring
Buyer to pay money to Supplier and such default is not cured with ten (10) days
after Supplier gives Buyer written notice thereof;
16.1.2 Buyer is in default of any material provision hereof
(other than the non-payment of money) and such default is not cured within
thirty (30) days after Supplier gives Buyer written notice thereof; or
16.1.3 Buyer becomes insolvent or seeks protection,
voluntarily or involuntarily,
[CROSS SUPPLIER AGREEMENT (EX. 8)] 6
<PAGE>
under any bankruptcy law.
16.2 Supplier may terminate this Agreement if it appears in the
reasonable judgment of Supplier that, due to the relationship between Buyer and
Supplier created by this Agreement, Supplier may be subjected to significant
disciplinary action or lose or become unable to obtain or reinstate any federal,
state and/or foreign registration, license or approval material to Supplier's
business or the business of any Affiliate of Supplier.
16.3 All remedies provided in this Agreement are cumulative and not
exclusive and may be exercised in conjunction with any other remedies a party
may have in law or equity.
16.4 Sections 5, 10 and 13 shall survive the termination of this
Agreement.
17 GENERAL PROVISIONS.
17.1 Notice. Any notice, request, demand, or other communication that
is required or permitted under this Agreement shall be deemed properly given if
it is deposited in the U.S. mail, certified, return receipt requested, postage
prepaid, properly addressed as follows:
17.1.1 If to MIKN:
Mikohn Gaming Corporation
1045 Palms Airport Drive
Las Vegas, Nevada 89119
Attention: President
With a copy to:
Mikohn Gaming Corporation
1045 Palms Airport Drive
Las Vegas, Nevada 89119
Attention: General Counsel
17.1.2 If to SHFL:
Shuffle Master, Inc.
1106 Palms Airport Drive
Las Vegas, Nevada 89119
Attention: President
[CROSS SUPPLIER AGREEMENT (EX. 8)] 7
<PAGE>
With a copy to:
Shuffle Master, Inc.
1106 Palms Airport Drive
Las Vegas, Nevada 89119
Attention: General Counsel
17.2 Dispute Resolution. Any disputes that may arise under or
concerning this Agreement, including but not limited to any dispute concerning
the enforceability or interpretation of any provision herein, shall be resolved
as follows:
17.2.1 If a dispute arises under this Agreement, any party may
give written notice to the other that it desires to meet in person to attempt to
resolve the dispute ("Notice of Dispute"). Within thirty (30) days after service
of a Notice of Dispute, appropriate representatives of the parties shall meet in
person and attempt in good faith to resolve the dispute.
17.2.2 If the parties fail to reach a resolution of a dispute
within thirty (30) days after service of the Notice of Dispute, either party may
request arbitration. Such request shall be in writing, served on the other party
in accordance with the provisions of Section 13.1 and shall designate an
arbitrator ("Notice to Arbitrate").
17.2.3 If the parties fail to reach a resolution of a dispute
after meeting and conferring as required under Section 17.2.1, either party may
request arbitration. Such request ("Notice to Arbitrate") shall be in writing,
served on the other party in accordance with the provisions of Section 17.1 and
shall designate an arbitrator.
17.2.4 The Notice to Arbitrate must set forth verbatim all of
the provisions of this Section 17.2 or it shall not be deemed effective.
17.2.5 Within ten (10) days after receipt of the Notice to
Arbitrate, the receiving party shall designate a second arbitrator. If a second
arbitrator is not timely designated, the dispute shall be submitted to the first
arbitrator for resolution. Within 10 days after the appointment of the second
arbitrator, the two arbitrators shall select a third arbitrator. If the two
arbitrators cannot agree on a third arbitrator, either party may commence
proceedings before the American Arbitration Association to appoint the third
arbitrator. Upon the appointment of the third arbitrator, the arbitration panel
shall be deemed duly constituted.
17.2.6 Once a panel of arbitrators is constituted, the panel
shall be required to render a final decision resolving the dispute within 60
days.
17.2.7 The arbitration panel shall be required to award the
prevailing party its costs and attorneys fees.
[CROSS SUPPLIER AGREEMENT (EX. 8)] 8
<PAGE>
17.3 Governing Law. This Agreement shall be governed by the and
construed in accordance with the substantive law of the state of Nevada, without
giving effect to any conflicts or choice of laws principles that otherwise might
be applicable.
17.4 Forum Designation. Any action brought by either party against the
other party for claims arising out of this Agreement shall be brought in a court
of competent jurisdiction in the State of Nevada.
17.5 Divisibility. If any provision of this Agreement is found to be
prohibited by law and invalid, or for any other reason if any provision is held
to be unenforceable, in whole or in part, such provision shall be ineffective to
the extent of the prohibition or unenforceability without invalidating or having
any other adverse effect upon any other provision of this Agreement.
17.6 Entire Agreement. This Agreement, including the documents and the
instruments referred to herein and attached hereto, constitutes the entire
agreement between the parties relating to its subject matter and supersedes all
prior or contemporaneous negotiations or agreements, whether oral or written,
relating to the subject matter hereof. No extension, modification or amendment
of this Agreement shall be binding upon a party unless such extension,
modification or amendment is set forth in a written instrument, which is
executed and delivered on behalf of such party.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, including the Exhibits attached hereto and incorporated herein by
reference, as of the date first written above.
SHUFFLE MASTER, INC. MIKOHN GAMING CORPORATION
By: /s/ Mark L. Yoseloff By: /s/ Charles H. McCrea, Jr.
-------------------- --------------------------
Its: Exec. V. Pres. Its: Ex. V.P. & Secretary
-------------------- --------------------------
[CROSS SUPPLIER AGREEMENT (EX. 8)] 9
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-88124, No. 33-88180 and No. 333-09623 on Form S-8 of our report dated
December 23, 1999, relating to the financial statements as of and for the years
ended October 31, 1999, 1998, and 1997, appearing in this Annual Report on Form
10-K of Shuffle Master, Inc. for the year ended October 31, 1999.
Minneapolis, Minnesota
January 31, 2000 DELOITTE & TOUCHE LLP
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<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 1,476
<SECURITIES> 4,165
<RECEIVABLES> 3,617
<ALLOWANCES> 135
<INVENTORY> 4,524
<CURRENT-ASSETS> 15,953
<PP&E> 4,962
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<TOTAL-ASSETS> 30,605
<CURRENT-LIABILITIES> 8,526
<BONDS> 677
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<COMMON> 75
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<TOTAL-LIABILITY-AND-EQUITY> 30,605
<SALES> 28,926
<TOTAL-REVENUES> 4,740
<CGS> 929
<TOTAL-COSTS> 9,142
<OTHER-EXPENSES> 6,005
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81
<INCOME-PRETAX> 5,623
<INCOME-TAX> 2,025
<INCOME-CONTINUING> 3,598
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