Restructuring Agreement

EXECUTION COPY


RESTRUCTURING AGREEMENT
REGARDING PRE-NEGOTIATED
PLAN OF REORGANIZATION


STUART ENTERTAINMENT, INC.


AND


MEMBERS OF AD HOC COMMITTEE OF HOLDERS OF


$100,000,000 OF 12 1/2% SENIOR SUBORDINATED NOTES DUE 2004


DATED: MAY 21, 1999 NEW YORK, NEW YORK 2


TABLE OF CONTENTS
Page


Article 1 Definitions............................................................................................ 1
Article 2 General Terms of Restructuring......................................................................... 3

Section 2.1 Treatment of Constituencies........................................................... 3
Section 2.2 Securities Considerations.............................................................
Article 3 Treatment of Notes, Existing Common Stock, the Senior Credit Facility and Trade Claims................. 4

Section 3.1 Exchange of Notes for Common Stock.................................................... 4
Section 3.2 Cancellation of Existing Common Stock................................................. 4
Section 3.3 Senior Credit Facility................................................................ 4
Section 3.4 Forbearance by Noteholders............................................................ 5
Section 3.5 Transfer by Noteholders............................................................... 5
Section 3.6 Trade Claims.......................................................................... 5
Article 4 Existing Stockholder Warrants.......................................................................... 5

Section 4.1 The Warrants.......................................................................... 5
Section 4.2 Purchase Price........................................................................ 5
Section 4.3 Adjustments........................................................................... 5
Section 4.4 Reservation of Shares................................................................. 6
Article 5 Management and Employees............................................................................... 6

Section 5.1 Executive Options..................................................................... 6
Section 5.2 Equity Incentive Options.............................................................. 6
Section 5.3 Transaction Payment................................................................... 7
Section 5.4 Other Employees....................................................................... 7
Section 5.5 Board of Directors.................................................................... 7
Section 5.6 Employment and Severance Agreements................................................... 7
Section 5.7 Management Compensation............................................................... 8
Section 5.8 The Employee Stock Bonus Plan......................................................... 8
Article 6 Gaming Regulation...................................................................................... 8

Section 6.1 Gaming Regulatory Considerations...................................................... 8
Section 6.2 Compliance Person..................................................................... 8
Article 7 Bankruptcy Process..................................................................................... 8

Section 7.1 Bankruptcy Filing..................................................................... 8
Section 7.2 Plan of Reorganization and Related Documents.......................................... 9
Section 7.3 Support of the Plan................................................................... 9
Section 7.4 No Improper Solicitation.............................................................. 9


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Page
Section 7.5 Noteholder Committee.................................................................. 10
Section 7.6 Conduct of Business Pending the Closing Date.......................................... 10
Section 7.7 Public Announcements.................................................................. 10
Article 8 Closing Conditions..................................................................................... 11

Section 8.1 Conditions to Noteholder Obligations.................................................. 11
Section 8.2 Conditions to Stuart Obligations...................................................... 12
Article 9 Other Agreements ...................................................................................... 13

Section 9.1 Election to be a Private Company...................................................... 13
Section 9.2 Alternative Transactions.............................................................. 13
Article 10 Miscellaneous......................................................................................... 13

Section 10.1 Successors and Assigns................................................................ 13
Section 10.2 Settlement............................................................................ 14
Section 10.3 Notices............................................................................... 14
Section 10.4 Amendments............................................................................ 15
Section 10.5 Applicable Law........................................................................ 15
Section 10.6 Headings.............................................................................. 15
Section 10.7 Counterparts.......................................................................... 15
Section 10.8 Entire Agreement...................................................................... 15
Section 10.9 Time Is of the Essence................................................................ 16
Section 10.10 Additional Noteholders................................................................ 16
Section 10.11 Term of Agreement..................................................................... 16
Section 10.12 Professional Fees..................................................................... 16


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This RESTRUCTURING AGREEMENT dated as of May 21, 1999 (this "Agreement") is by and between STUART ENTERTAINMENT, INC., a Delaware corporation ("Stuart"), and CONTRARIAN CAPITAL MANAGEMENT, L.L.C. ("Contrarian") (together with any other holder of Notes that may become a party to the Agreement pursuant to Section 10.10, the "Noteholders").


RECITALS


WHEREAS, pursuant to that certain Indenture dated as of November 13, 1996 (the "Indenture") by and among Stuart and Marine Midland Bank, a national banking association (the "Trustee"), as trustee thereunder, Stuart has issued $100,000,000 principal amount of its 12 1/2% Senior Subordinated Notes due 2004 (the "Notes"); and


WHEREAS, Stuart will not make the May 15, 1999 interest payment due with respect to the Notes and will, as a result, after the applicable 30-day cure period, be in default of its obligations with respect to the Notes; and


WHEREAS, the parties have determined that it would be in their mutual best interests to restructure Stuart's debt and equity securities in the manner provided below.


AGREEMENT


NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby covenant and agree as follows:


ARTICLE 1


DEFINITIONS


For purposes of this Agreement, the following terms shall have the following meanings:


"Agreement" shall mean this Restructuring Agreement.


"Alternative Transaction" shall have the meaning set forth in Section 9.2.


"Approvals" shall have the meaning set forth in Section 8.1(d).


"Bankruptcy Code" shall mean the Bankruptcy Reform Act of 1978, Title 11, United States Code, as now in effect or hereafter amended, Sections 11 U.S.C. 101 et seq.


"Bankruptcy Court" shall mean the United States Bankruptcy Court for the District of Delaware.


"Chapter 11 Case" shall have the meaning set forth in Article 2. 5
"Closing" shall mean the completion of the transactions to occur on the Closing, Date as provided herein.


"Closing Date" shall mean the date on which the Closing occurs.


"Confirmation Date" shall mean the date upon which the Bankruptcy Court enters its order confirming the Plan.


"Conversion Event" shall mean the date upon which the effectiveness of the Plan occurs, including the conversion of the Notes to New Common Stock of Stuart.


"EBITDA" shall mean, during each applicable fiscal year, for Stuart and its subsidiaries, determined in accordance with GAAP consistently applied, the net income (or loss) for such period, plus, to the extent reflected in the statement of net income for such period, the sum of (a) the income tax of Stuart and its subsidiaries, (b) the interest expense of Stuart and its subsidiaries, (c) depreciation expense of Stuart and its subsidiaries, and (d) amortization of Stuart and its subsidiaries on a consolidated basis.


"Employee Stock Plan" shall have the meaning set forth in Article 2.


"Equity Incentive Options" shall have the meaning set forth in Section 5.2.


"Executive" shall mean any person who is a member of the Executive Management Group.


"Executive Management Group" shall consist of Joseph M. Valandra (Chief Executive Officer), Lawrence X. Taylor, III (Chief Financial Officer), Ernie Marshand (Chief Operating Officer), Jimmy D. Helton (Senior Vice President - Strategic Planning and Analysis), and Clem Chantiam (Senior Vice President).


"Executive Options" shall mean the options to be issued to the Executive Management Group under Section 5.1 hereof on the Closing Date.


"Existing Common Stock" shall mean the common stock, $0.01 par value, of Stuart issued and outstanding immediately prior to the Closing Date.


"Existing Stockholder Warrants" shall mean the warrants to be issued to holders of the Existing Common Stock under Article 4 hereof on the Closing Date.


"GAAP" shall mean generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession.


"Indenture" shall have the meaning set forth in the Recitals to this Agreement.


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"New Common Stock" shall mean the common stock, $0.01 par value per share, to be authorized under the Company's amended and restated certificate of incorporation to be filed with the Delaware Secretary of State effective upon the Closing.


"Noteholders" shall have the meaning set forth in the Preamble to this Agreement.


"Notes" shall have the meaning set forth in the Recitals to this Agreement.


"Official Noteholder Committee" shall have the meaning set forth in Section 7.5.


"Operating Pleading" shall have the meaning set forth in Section 7.1.


"Petition Pleadings" shall have the meaning set forth in Section 7.1


"Plan" shall mean the pre-negotiated plan of reorganization to be proposed by Stuart consistent with this Agreement.


"Plan Related Documents" shall have the meaning set forth in Section 7.2.


"Restructuring" shall have the meaning set forth in Article 2.


"Retention Bonus" shall mean the approximately $227,500 in bonuses payable to certain employees on December 31, 1999.


"Senior Credit Facility" shall mean the senior secured working capital facility in the principal amount of $30,000,000, which indebtedness is senior to the Notes and secured by essentially all the assets of Stuart and its subsidiaries.


"Trade Claims" shall mean all claims against Stuart as of the commencement of its Chapter 11 Case incurred in the purchase, lease or use of goods and services in the ordinary course of Stuart's business, excluding therefrom any claim arising out of the rejection of any unexpired lease or executory contract and any claim arising under or related to the Notes.


"Trustee" shall have the meaning set forth in the Recitals to this Agreement.


ARTICLE 2


GENERAL TERMS OF RESTRUCTURING


Section 2.1 Treatment of Constituencies. The parties to this Agreement have agreed in principle to a restructuring of Stuart which shall be implemented by a Chapter 11 filing by Stuart in the United States Bankruptcy Court for the District of Delaware, Wilmington, Delaware (the "Restructuring"). Specifically, Stuart shall file a petition for relief under Chapter 11 of the Bankruptcy Code (the "Chapter 11 Case") and shall propound a pre-negotiated plan of reorganization that provides for, among other things: (a) the conversion of the Notes into shares of New Common Stock and the cancellation of the Notes; (b) the cancellation of the Existing Common Stock, and any options, warrants or other rights to acquire any Existing


3 7 Common Stock of Stuart; (c) the granting to holders of Existing Common Stock warrants to acquire a total of 10% of the New Common Stock on a pro rata basis, as described in Article 4; (d) the establishment of an Employee Stock Bonus Plan (the "Employee Stock Plan") as described in Article 5; (e) the payment of the Retention Bonus to certain employees and the issuance of the Executive Options and the Equity Incentive Options to the Executive Management Group; and (f) the restructuring of the Senior Credit Facility. The summary of the Restructuring set forth in this Article 2 is qualified in its entirety by the other provisions of this Agreement, which provide a more detailed description of the terms and conditions of the Restructuring.


Section 2.2 Securities Considerations. Stuart intends to maintain its status as a registered reporting company under the Securities Exchange Act of 1934 throughout the Chapter 11 Case and, subject to the provisions of Section 9.1 hereof, following the Closing Date. Subject to Section 9.1 hereof, Stuart also intends to secure a listing for trading of the New Common Stock on a recognized national securities exchange or automated quotation system either concurrent with or as soon as practicable after the Closing Date. If Stuart and the Noteholders elect to maintain Stuart's status as a registered reporting company under the Securities Exchange Act of 1934 following the Closing Date as set forth in Section 9.1, the Plan will provide for the issuance of round-lots of New Common Stock to a sufficient number of Stuart employees pursuant to the Employee Stock Plan to satisfy the Nasdaq Small Cap Market or Nasdaq National Market quantitative shareholder requirements.


ARTICLE 3


TREATMENT OF NOTES, EXISTING COMMON STOCK, THE SENIOR CREDIT FACILITY AND TRADE CLAIMS


Section 3.1 Exchange of Notes for Common Stock. On the Closing Date: (a) the Notes, including principal, interest, fees and other charges with respect thereto, shall be cancelled and extinguished and, in exchange therefor, subject to the provisions of Section 9.1 hereof, Noteholders shall receive their pro rata share of one hundred percent (100%) of the New Common ...