-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RmfZ6E2ZNALXoEzhUVQRgHeiO7GA9fGCCWtz0W+piBLOdlmc0HNWMOVXMZ/+28Op nn/5jJ/S7WPCBuHWmoRPhw== 0000891618-97-001041.txt : 19970310 0000891618-97-001041.hdr.sgml : 19970310 ACCESSION NUMBER: 0000891618-97-001041 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970221 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970307 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDIA ARTS GROUP INC CENTRAL INDEX KEY: 0000924645 STANDARD INDUSTRIAL CLASSIFICATION: COMMERCIAL PRINTING [2750] IRS NUMBER: 770354419 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-24294 FILM NUMBER: 97552178 BUSINESS ADDRESS: STREET 1: TEN ALMADEN BLVD STREET 2: 9TH FL CITY: SAN JOSE STATE: CA ZIP: 95113 BUSINESS PHONE: 4089474680 8-K 1 FORM 8-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________ Form 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of report (Date of earliest event reported): February 21, 1997 MEDIA ARTS GROUP, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 0-24294 77-0354419 - -------------------------------------------------------------------------------- (State of (Commission File Number) (IRS Employer Incorporation) Identification No.) 521 Charcot Avenue, San Jose, California, 95131 ---------------------------------------------------- (Address of principal executive offices) (Zip Code) (408) 324-2020 (Registrant's telephone number, including area code) ------------------------------------------------------------- (former name or former address, if changed since last report) Total Pages 116 Index to Exhibits appears on page 5 herein 2 Item 5. Other Events. On February 21, 1997, the Company and its wholly-owned subsidiaries Thomas Kinkade Stores, Inc. ("TK Stores") and California Coast Galleries, Inc. ("CCG") entered into a $10,000,000 Financing Agreement with the CIT Group/Business Credit, Inc. ("CIT"). Under the Financing Agreement, the Company, TK Stores and CCG may draw down revolving loans in an amount up to $8,000,000, subject to availability based upon their levels of eligible accounts receivable and eligible inventory. In addition, CIT will make available $2,000,000 in support of trade letters of credit issued for the account of the Company, CCG or TK Stores. The Credit Agreement is secured by a lien on the assets of the Company. Loans under the Credit Agreement will bear interest at a rate of prime plus one percent. The arrangement with CIT replaces the senior financing provided by Comerica Bank. In conjunction with the Company's new credit arrangements with CIT, on February 21, 1997, the Company's senior subordinated creditor, Levine Leichtman Capital Partners, L.P. ("LLCP"), the Company, TK Stores, CCG and the Company's wholly-owned subsidiaries MAGI Sales, Inc. ("MAGI Sales") and MAGI Entertainment Products, Inc. ("MAGI EP") entered into a Credit Agreement. Pursuant to the Credit Agreement, the Company, TK Stores, CCG, MAGI EP and MAGI Sales issued to LLCP a 13.50% Senior Subordinated Note due December 31, 2001 in the principal amount of $7,400,000 and made a principal payment of $592,500 to LLCP relating to previously issued notes in the aggregate principal amount of $8,000,000 (the "Former Notes"). The Credit Agreement and the $7,400,000 Senior Subordinated Note replace the Former Notes and related agreements. In addition, on February 21, 1997, LLCP exercised in full its warrant to purchase 400,000 shares of Common Stock of the Company, and converted in full $7,500 in principal amount of a convertible Former Note; the exercise price for the aggregate 1,150,000 shares was $.01 per share. 2 3 Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (c) The following exhibits are filed as part of this Report: 4.01 Financing Agreement dated as of February 21, 1997 by and among CIT Group/Business Credit, Inc., Media Arts Group, Inc., Thomas Kinkade Stores, Inc. and California Coast Galleries, Inc. 4.02 Credit Agreement dated as of February 21, 1997 by and among Levine Leichtman Capital Partners, L.P., Media Arts Group, Inc., Thomas Kinkade Stores, Inc., MAGI Entertainment Products, Inc., California Coast Galleries, Inc. and MAGI Sales, Inc. 21.01 List of Subsidiaries. 99.01 Press Release of the Company dated February 24, 1997. 3 4 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: February 28, 1997 MEDIA ARTS GROUP, INC. By: /s/ Raymond A. Peterson -------------------------------------- Name: Raymond A. Peterson Title: Chief Financial Officer and Senior Vice President of Finance 4 5 EXHIBIT INDEX Exhibits. Page 4.01 Financing Agreement dated as of February 21, 1997 by and among CIT Group/Business Credit, Inc., Media Arts Group, Inc., Thomas Kinkade Stores, Inc. and California Coast Galleries, Inc. 6 4.02 Credit Agreement dated as of February 21, 1997 by and among Levine Leichtman Capital Partners, L.P., Media Arts Group, Inc., Thomas Kinkade Stores, Inc., MAGI Entertainment Products, Inc., California Coast Galleries, Inc. and MAGI Sales, Inc. 61 21.01 List of Subsidiaries. 113 99.01 Press Release of the Company dated February 24, 1997. 114 5 EX-4.01 2 FINANCING AGREEMENT DATED AS OF FEBRUARY, 21 1997 1 Exhibit 4.01 FINANCING AGREEMENT The CIT Group/Business Credit, Inc. (as Lender) Media Arts Group, Inc. Thomas Kinkade Stores, Inc. And California Coast Galleries, Inc. (as Borrowers) Dated: February 21, 1997 6 2 TABLE OF CONTENTS
Page SECTION 1. Definitions 3 SECTION 2. Conditions Precedent 14 SECTION 3. Revolving Loans 19 SECTION 4. Intentionally Omitted 24 SECTION 5. Letters of Credit 24 SECTION 6. Collateral 27 SECTION 7. Representations, Warranties and Covenants 30 SECTION 8. Interest, Fees and Expenses 39 SECTION 9. Powers 41 SECTION 10. Events of Default and Remedies 42 SECTION 11. Termination 46 SECTION 12. Miscellaneous 46 SIGNATURE PAGE -S1-
EXHIBITS AND SCHEDULES Exhibit A - Form of Promissory Note (Revolving Loan) Schedule 1 - List of Inventory Locations and Chief Executive Office Schedule 2 - Trade Names Schedule 3 - Patents, Trademarks and Copyrights Schedule 4 - Permitted Encumbrances Schedule 5 - Leased Locations and Monthly Rent 7 3 The CIT Group/Business Credit, Inc., a New York corporation, (hereinafter sometimes referred to as "CITBC") with offices located at 300 South Grand Avenue, Los Angeles, CA 90071 (CITBC may be sometimes referred to herein as the "Lender"), is pleased to confirm the terms and conditions under which CITBC shall make revolving loans, advances and other financial accommodations to Media Arts Group, Inc. (herein "MAGI"), a Delaware corporation with a principal place of business at 521 Charcot Avenue, San Jose, CA 95131, California Coast Galleries, Inc. (herein "CCG"), a California corporation with a principal place of business at 521 Charcot Avenue, San Jose, CA 95131, and Thomas Kinkade Stores, Inc. (herein "TKS"), a California corporation with a principal place of business at 521 Charcot Avenue, San Jose, CA 95131 (herein individually a "Company" and collectively the "Companies"). SECTION 1. Definitions Accounts shall mean all of each of the Companies' now existing and future: (a) accounts as defined in the UCC and any and all other receivables (whether or not specifically listed on schedules furnished to CITBC), including, without limitation, all accounts created by or arising from all of the Companies' sales of goods or rendition of services to their customers (including without limitation from the lease or rental of goods), all accounts arising from sales or rendition of services made under any of the Companies' respective trade names or styles, or through any of the Companies' divisions; (b) any and all instruments, documents, contract rights and chattel paper, all as defined in the UCC; (c) unpaid seller's or lessor's rights (including rescission, replevin, reclamation and stoppage in transit) relating to the foregoing or arising therefrom; (d) rights to any goods represented by any of the foregoing, including rights to returned or repossessed goods; (e) reserves and credit balances arising hereunder; (f) guarantees or collateral for any of the foregoing; (g) insurance policies or rights relating to any of the foregoing; (h) general intangibles pertaining to any and all of the foregoing; (i) proceeds or royalties from any licensing or similar agreements, including without limitation from "Thomas Kinkade" trademarks and products; and (j) cash and non-cash proceeds of any and all the foregoing. Anniversary Date shall mean the date occurring two (2) years from the date hereof and the same date in every year thereafter. Availability shall mean at any time the positive difference between: (a) the Borrowing Base less (b) the sum of, without duplication, (i) the outstanding aggregate amount of all Obligations (other than the Letters of Credit ) of the Companies, (ii) the Availability Reserve, and (iii) at CITBC's reasonable election, all payments of any of the Companies to CITBC coming due within sixty (60) days from the date of computation. Availability Reserve shall mean (a) three (3) month reserve for unpaid rental or similar charges for any facility for which any of the Companies fail to obtain a landlord's waiver, 8 4 warehouseman's, processors or mortgagee's waiver, as applicable in form and substance satisfactory to CITBC (described in Section 2(r)), and (b) any reserve which CITBC may reasonably require from time to time pursuant to the explicit terms of this Financing Agreement, including without limitation for Letters of Credit issued pursuant to paragraph 5.1 of Section 5 hereof. Borrowing Base shall have the meaning and shall be calculated in accordance with paragraph 3.1 of Section 3 of this Financing Agreement. Business Day shall mean a day on which CITBC is open for business in New York, New York, and which is not a Saturday, Sunday or other day on which commercial banks or lending institutions in New York, New York are authorized or required by law to close. Capital Expenditures for any period shall mean the aggregate of all expenditures of the Companies during such period, that in conformity with GAAP, are required to be included in or reflected by the property, plant or equipment or similar fixed asset account reflected in the consolidated balance sheet of the Companies. Capital Lease shall mean any lease of property (whether real, personal or mixed) which, in conformity with GAAP, is accounted for as a capital lease or a Capital Expenditure on the consolidated balance sheet of the Companies. Chase Bank Rate shall mean the rate of interest per annum announced by The Chase Manhattan Bank, N.A. (or any successor thereof) from time to time as its prime rate in effect at its principal office in the City of New York. (The prime rate is not intended to be the lowest rate of interest charged by Chase Manhattan Bank to its borrowers). Chase Rate Loans shall mean loans made pursuant to this Financing Agreement at such time as they are made and/or being maintained at a rate of interest based upon the Chase Bank Rate. Closing Date shall mean the date that this Financing Agreement has been duly executed by the parties hereto and delivered to CITBC. Collateral shall mean all present and future Accounts, Equipment, Inventory, Documents of Title, General Intangibles, the pledged stock of TKS, CCG, MAGIEP and MAGIS, and Other Collateral of the Companies and the proceeds of any and all of the foregoing. Collateral Management Fee shall mean the sum of $20,000.00 which shall be paid to CITBC in accordance with paragraph 8.8 of Section 8 hereof to offset the expenses and costs of CITBC in connection with record keeping, periodic examinations, analyzing and evaluating the Collateral. 9 5 Consolidated Balance Sheet shall mean a consolidated balance sheet for the Companies and the consolidated subsidiaries of each, eliminating all inter-company transactions and prepared in accordance with GAAP. Consolidating Balance Sheet shall mean a Consolidated Balance Sheet plus individual balance sheets for MAGI, the Companies, and the subsidiaries of each, showing all eliminations of inter-company transactions and prepared in accordance with GAAP and including a balance sheet for each of the Companies exclusively. Contract Rate shall mean the rates of interest computed as applicable and as set forth in paragraphs 8.1 and 8.3 of Section 8 of this Financing Agreement. Customarily Permitted Liens shall mean: (a) liens of local or state authorities for franchise or other like taxes provided the aggregate amounts of such liens shall not exceed $100,000.00 in the aggregate for the Companies at any one time; (b) statutory liens of landlords and liens of carriers, warehousemen, mechanics, materialmen and other like liens imposed by law, created in the ordinary course of business and for amounts not yet due (or which are being contested in good faith by appropriate proceedings or other appropriate actions which are sufficient to prevent imminent foreclosure of such liens) and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP; (c) deposits made (and the liens thereon) in the ordinary course of business (including, without limitation, security deposits for leases, indemnity bonds, surety bonds and appeal bonds) in connection with workers' compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids contracts (other than for the repayment or guarantee of borrowed money or purchase money obligations), statutory obligations and other similar obligations arising as a result of progress payments under government contracts; and (d) easements (including, without limitation, reciprocal easement agreements and utility agreements), encroachments, minor defects or irregularities in title, variation and other restrictions, charges or encumbrances (whether or not recorded) affecting Real Estate. Default shall mean any event specified in Section 10 hereof, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, event or act, has been satisfied. 10 6 Default Rate of Interest shall mean a rate of interest per annum equal to the lesser of a) the Maximum Legal Rate (as defined in Paragraph 12.3 of Section 12 hereof) and b) the sum of: I)three percent (3%) and ii) the Chase Bank Rate. Depository Account shall have the meaning specified in Section 3, Paragraph 3.4 hereof. Documentation Fee shall mean i) the sum of $15,000.00 intended to compensate CITBC for the use of CITBC's in-house Legal Department and facilities in documenting, in whole or in part, the initial transaction solely on behalf of CITBC, exclusive of Out-of-Pocket Expenses, and the whole of which amount shall be included in the Loan Facility Fee, and ii) subsequent to the Closing Date, CITBC's standard fees relating to any and all modifications, waivers, releases, amendments or additional collateral with respect to this Financing Agreement, the Collateral and/or the Obligations. Documents of Title shall mean all present and future documents as defined in the UCC and any and all warehouse receipts, bills of lading, shipping documents, chattel paper, instruments and similar documents, all whether negotiable or not and all goods and Inventory relating thereto and all cash and non-cash proceeds of the foregoing. Early Termination Date shall mean the date on which the Companies terminate this Financing Agreement or the Line of Credit which date is prior to an Anniversary Date. Early Termination Fee shall: a) mean the fee CITBC is entitled to charge the Companies in the event any of the Companies terminates the Line of Credit or this Financing Agreement on a date prior to an Anniversary Date; and b) be determined by calculating the average daily loan balance under the Revolving Loan plus the average daily balance of Letters of Credit outstanding for the period from the date of this Financing Agreement to the Early Termination Date and multiplying that number by one percent (1%) per annum for the number of days from the Early Termination Date to the next succeeding Anniversary Date, provided that the Early Termination Fee shall not be due and payable if an Event of Default occurs, CITBC accelerates in writing the Obligations and the Companies repay all of the outstanding Obligations and this Financing Agreement is terminated. EBITDA shall mean, with respect to any period of the Companies and their consolidated subsidiaries for which such calculation is required, the sum of (i) Consolidated Net Income (as defined in accordance with GAAP, before all extraordinary items and non-recurring items, in accordance with GAAP); (ii) Interest Expense; (iii) provision for taxes; (iv) charges for depreciation; and (v) charges for amortization of intangible assets, all as determined in accordance with GAAP consistently applied. For purposes hereof, "intangible assets" shall include, but shall not be limited to organization costs, securities issuance costs, unamortized debt discount and expense, goodwill, covenants not to compete, patents, trademarks, franchises and capitalized research and development expense. 11 7 Eligible Accounts Receivable shall mean the gross amount of each of the Company's Accounts that are subject to a valid, exclusive, first priority and fully perfected security interest in favor of CITBC and which conform to the warranties contained herein and at all times continue to be acceptable to CITBC in the exercise of its reasonable business judgment, less, without duplication, the sum of a) any returns, discounts, claims, credits, rebills and allowances of any nature (whether issued, owing, granted or outstanding) and b) reserves for, without duplication: i) sales, services or leases to the United States of America or to any agency, department or division; ii) foreign sales, services or leases, other than sales, services or leases x) secured by stand-by letters of credit (in form and substance satisfactory to CITBC) issued or confirmed by, and payable at, banks having a place of business in the United States of America and payable in United States currency, or y) to customers residing in Canada provided such sales or transactions otherwise comply with all of the other criteria for eligibility hereunder, are payable in United States currency and such Eligible Accounts do not exceed $250,000 in the aggregate at any one time; iii) accounts that remain unpaid more than ninety (90) days from invoice date, provided that CITBC may in its reasonable discretion deem Accounts eligible which are payable on extended terms of up to 120 days, in an amount not to exceed $500,000 (of such Eligible Accounts) in the aggregate at any one time outstanding; iv) contras; v) sales, services or leases to any of the Companies, or any of their subsidiaries or affiliates; vi) bill and hold (deferred shipment) or consignment sales; vii) sales, services or leases to any customer which is A) insolvent, B) the debtor in any bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceedings under any federal or state law, C) negotiating, or has called a meeting of its creditors for purposes of negotiating, a compromise of its debts or D) financially unacceptable to CITBC or has a credit rating unacceptable to CITBC in any such case, in its reasonable business judgment; viii) all sales, services or leases to any customer if fifty percent (50%) or more of the aggregate dollar amount of all outstanding invoices, are unpaid more than ninety (90) days from invoice date; ix) any other reasons deemed necessary by CITBC in its reasonable business judgment and which are customary either in the commercial finance industry or in the lending practices of CITBC; x) any Accounts arising from the sale, lease or rental of goods for which a customer shall have objected to the quality or quantity of goods or services of the Companies, or where such customer shall have rejected, returned or refused to accept such goods or services; xi) pre-billed receivables and receivables arising from progress billing; xii) sales to or through the QVC cable television shopping network or similar channels or pursuant to direct marketing, until such time as the distributed product is resold by QVC or such other channel to its customers (provided that no reserves shall be taken with respect to products sold to QVC or such other distributor for which it has no right of return); xiii) sales by JHL or by any of the Companies or their affiliates of JHL Inventory or John Hine Studios' Inventory; and xiv) an amount representing, historically, returns, discounts, claims, credits and allowances (including without limitation the historic dilution reserve for claims or returns by QVC's customers). 12 8 Eligible Inventory shall mean, without duplication, the gross amount of each of the Companies' Inventory that is subject to a valid, exclusive, first priority and fully perfected security interest in favor of CITBC and which conforms to the warranties contained herein and which at all times continue to be acceptable to CITBC in the exercise of its reasonable business judgment, less any (a) work-in-process, (b) supplies (other than raw materials), (c) goods not present in the United States of America, (d) goods returned or rejected by the Companies' customers other than goods that are undamaged and resalable in the normal course of business, (e) goods to be returned to the Companies' suppliers, (f) goods in transit to third parties (other than goods in transit to the Companies' agents or warehouses, provided that with respect to any such goods, the Companies have title to such Inventory and possession of all delivery and warehouse receipts, and all insurance, shipping and documentation relating thereto is reasonably satisfactory to CITBC); (g) "John Hine Studios" Inventory (whether held by any of the Companies or their affiliates) including miniature figurines, cottages and houses; and (h) reserves required by CITBC in its reasonable discretion, including for Slow Moving Inventory (for purposes hereof, "Slow Moving Inventory" shall be deemed to be any Inventory held by the Companies for twelve or more months or such lesser period as the Companies may apply from time to time), special order goods, market value declines and bill and hold (deferred shipment) or consignment sales, Inventory sold pursuant to a licensing agreement or otherwise bearing trademarks or subject to copyrights of a third party licensor (for which CITBC has not received a [right of sale] licensing agreement in form and substance satisfactory to CITBC, provided that for purposes hereof, the Kinkade/CITBC Licensing Agreement is deemed satisfactory), amounts due and owing by any of the Companies to freight forwarders, for any applicable customs, duties and taxes, and any royalty payments pursuant to any applicable licensing agreements. For purposes hereof, as of the Closing Date: (i) Eligible Inventory consisting of raw materials shall include, without limitation, signed and unsigned paper lithographs not otherwise included as eligible finished goods Inventory (in marketable form in the ordinary course of business of the Companies),and, to the extent not otherwise held for retail sales in the ordinary course of business of the Companies, (blank) stretched canvas, mat boards and glass, and (ii) finished goods Eligible Inventory shall include, without limitation, up to 60% of the aggregate signed and unsigned paper lithographs (in marketable form in the ordinary course of business of the Companies), all of which otherwise comply with the terms hereof, provided that the foregoing advances against lithographs may be increased or decreased from time to time in CITBC's reasonable discretion (taking into account the Companies' actual experience). Equipment shall mean all of the Companies' present and hereafter acquired equipment as defined in the UCC and any and all machinery, motor vehicles, furnishings and fixtures, and all additions, substitutions and replacements thereof, wherever located, together with all attachments, components, parts, equipment and accessories installed thereon or affixed thereto and all proceeds of whatever sort. 13 9 ERISA shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time and the rules and regulations promulgated thereunder from time to time. Event(s) of Default shall have the meaning provided for in Section 10 of this Financing Agreement. Executive Officers shall mean the Chairman, President, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Executive Vice President(s), Senior Vice President(s), Treasurer, Controller and Secretary of any of the Companies. Financial Covenants shall mean those covenants set forth in paragraphs 7.9, 7.11 and 7.12 of Section 7 hereof. Fixed Charge Coverage Ratio shall mean, for the relevant period, the ratio determined by dividing EBITDA by the sum of (i) cash Interest Expense, (ii) Capital Expenditures made and paid for in cash, (iii) the amount of principal repaid on: (a) the Subordinated Debt, (b) Indebtedness secured by Purchase Money Liens, and (c) the John Hine Debt, and (iv) all cash Federal, state and local income tax expenses due and payable. GAAP shall mean generally accepted accounting principles in the United States of America as in effect from time to time and for the period as to which such accounting principles are to apply, provided further that in the event the Companies modify their accounting principles as applied as of the Closing Date, the Companies shall provide such statements of reconciliation as shall be in form and substance acceptable to CITBC. General Intangibles shall have the meaning set forth in the UCC and shall include, without limitation, all of the Companies' present and future right, title and interest in and to all tradenames, trademarks (together with the goodwill associated therewith), copyrights, patents, licenses, customer lists, distribution agreements, supply agreements and tax refunds (provided that CITBC's lien on the Federal Tax Refund for the fiscal year ending March 31, 1997 shall be subject to LLCP's first lien thereon, in accordance with the terms of the Subordination Agreement among CITBC, LLCP and the Companies), together with all monies and claims for monies now or hereafter due and payable in connection with any of the foregoing or otherwise, and all cash and non-cash proceeds thereof, including without limitation the proceeds of any licensing agreements between the Companies and any licensee of any of the Companies' General Intangibles or rights thereunder. Guarantors shall mean MAGIEP and MAGIS. Indebtedness shall mean, without duplication, all liabilities, contingent or otherwise, which are any of the following: (a) obligations in respect of money (borrowed or otherwise due or owing to third parties) or for the deferred purchase price of property, services or assets, other than 14 10 Inventory, or (b) lease obligations which, in accordance with GAAP, have been or should be capitalized. Interest Expense shall mean total interest obligations (paid or accrued) of the Companies, determined in accordance with GAAP on a basis consistent with the latest audited statements of the Companies. Inventory shall mean all of the Companies' present and hereafter acquired inventory as defined in the UCC, and any and all merchandise and goods, including without limitation paintings, lithographs, canvas, mat boards, frames, glass, books, videos, figurines, miniature cottages, ornaments and home decor, and all additions, substitutions and replacements thereof, wherever located, together with all goods wherever located, and materials used or usable in manufacturing, processing, packaging or shipping same; in all stages of production - from raw materials through work-in-process to finished goods - and all proceeds thereof of whatever sort. Issuing Bank shall mean the bank issuing Letters of Credit for the Companies. JHL shall mean John Hine Ltd., a United Kingdom company. John Hine Debt shall mean the obligation of MAGI to John Hine, an individual, in the principal amount as of the Closing Date of approximately L.970,756, (together with all accrued interest thereon as of any time of determination) arising from the acquisition of JHL from John Hine. Letter of Credit Guaranty shall mean the guaranty delivered by CITBC to the Issuing Bank of the respective Companies' reimbursement obligation under the Issuing Bank's reimbursement agreement, application for Letter of Credit or other like document. Letter of Credit Guaranty Fee shall mean the fee CITBC may charge the Companies under paragraph 8.3 of Section 8 of this Financing Agreement for: i) issuing the Letter of Credit Guaranty and/or ii) otherwise incurring reimbursement obligations on behalf of the Companies in obtaining Letters of Credit pursuant to Section 5 hereof. Letters of Credit shall mean all Letters of Credit issued by the Issuing Bank for or on behalf of any of the Companies with either a CITBC Letter of Credit Guaranty or for which CITBC otherwise incurs reimbursement obligations on behalf of the Companies. Line of Credit shall mean the aggregate commitment of CITBC to make loans and advances to the Companies and issue Letter of Credit Guaranties for the benefit of the Companies pursuant to Sections 3 and 5 of this Financing Agreement in the aggregate amount of $10,000,000.00. 15 11 Line of Credit Fee shall mean the fee due CITBC at the end of each month for the Line of Credit and shall be calculated by: multiplying (a) the difference between (I) the Revolving Line of Credit and (ii) the sum of (A) the average daily Revolving Loans of the Companies for said month plus (B) the average daily balance of outstanding Letters of Credit of the Companies for said month; by (b) one-half of one percent ( 1/2 of 1%) per annum for the number of days in said month based on a 360 day year. LLCP shall mean Levine Leichtman Capital Partners, L.P., a California limited partnership. Loan Documents shall mean this Financing Agreement, the Promissory Notes, the mortgages and/or deeds of trust, any other documents and the ancillary loan and security agreements executed from time to time in connection with this Financing Agreement, as the same may be renewed, amended, extended, increased or supplemented from time to time. Loan Facility Fee shall mean the fee payable to CITBC in accordance with, and pursuant to, the provisions of paragraph 8.7 of Section 8 of this Financing Agreement. MAGIEP shall mean MAGI Entertainment Products, Inc., a California corporation. MAGIS shall mean MAGI Sales, Inc., a California corporation. Net Worth means with respect to any person, at any date of determination, an amount equal to, (a) the total assets of such person as of such date minus (b) the total liabilities of such person as of such date, in each case determined in accordance with GAAP, on a consistent basis with the latest audited statements. Obligations shall mean any and all current and future loans and advances made by CITBC to the Companies, or any one of them, or to others for any of the Companies' account including, without limitation, all Revolving Loans, Letters of Credit and advances pursuant to this Financing Agreement or any of the Loan Documents; any and all indebtedness and obligations which may at any time be owing by the Companies, or any one of them, to CITBC howsoever arising, whether now in existence or incurred by any of the Companies from time to time hereafter; whether secured by pledge, lien upon or security interest in any of the Companies' assets or property or the assets or property of any other person, firm, entity or corporation; whether such indebtedness is absolute or contingent, joint or several, matured or unmatured, direct or indirect and whether the Companies, or any one of them, are liable to CITBC for such indebtedness as principal, surety, endorser, guarantor or otherwise. Obligations shall also include indebtedness owing to CITBC by any of the Companies under this Financing Agreement, any other Loan Documents or under any other agreement or arrangement now or hereafter entered into between any of the Companies and CITBC; indebtedness or obligations incurred by, or imposed on, CITBC as a result of environmental claims (other than as a result 16 12 of the physical actions comprising gross negligence of CITBC on the Real Estate) arising out of any of the Companies' operations, premises or waste disposal practices or sites; any of the Companies' liability to CITBC as maker or endorser on any promissory note or other instrument for the payment of money; any of the Companies' liability to CITBC under any instrument of guaranty or indemnity, or arising under any guaranty, endorsement or undertaking which CITBC may make or issue to others for the Companies' account, including any accommodation extended with respect to applications for Letters of Credit, CITBC's acceptance of drafts or CITBC's endorsement of notes or other instruments for the Companies' account and benefit. Operating Leases shall mean all leases of property (whether real, personal or mixed) other than Capital Leases. Other Collateral shall mean all now owned and hereafter acquired deposit accounts maintained with any bank or financial institutions; all cash and other monies and property in the possession or control of CITBC; all books, records, ledger cards, disks and related data processing software at any time evidencing or containing information relating to any of the Collateral described herein or otherwise necessary or helpful in the collection thereof or realization thereon; and all cash and non-cash proceeds of the foregoing. Out-of-Pocket Expenses shall mean all of CITBC's present and future reasonable out-of-pocket expenses incurred relative to this Financing Agreement or any other Loan Documents, whether incurred heretofore or hereafter, which expenses shall include, without being limited to, the cost of record searches, all costs and expenses incurred by CITBC in opening bank accounts, depositing checks, receiving and transferring funds, and any charges imposed on CITBC due to "insufficient funds" of deposited checks and CITBC's standard fee relating thereto, any amounts paid by CITBC to, or incurred by or charged to CITBC by, the Issuing Bank under the Letter of Credit Guaranty or the Companies' reimbursement agreement, application for Letter of Credit or other like document which pertain either directly or indirectly to such Letters of Credit, and CITBC's standard fees relating to the Letters of Credit and any drafts thereunder, any applicable reasonable counsel fees and disbursements, title insurance premiums, real estate survey costs, fees and taxes relative to the filing of financing statements, costs of preparing and recording mortgages/deeds of trust against Real Estate and all expenses, costs and fees set forth in paragraph 10.3 of Section 10 of this Financing Agreement. Perfection Certificate shall mean the Perfection Certificate signed by the Companies and delivered to CITBC, in form and substance satisfactory to CITBC in connection with this Financing Agreement. Permitted Encumbrances shall mean: i) liens expressly permitted, or consented to in writing, by CITBC ; ii) Purchase Money Liens; iii) Customarily Permitted Liens; iv) liens granted CITBC by the Companies; v) liens of judgment creditors provided such liens do not exceed, in 17 13 the aggregate for the Companies, at any time, $100,000.00 (other than liens which have been discharged, bonded or insured to the reasonable satisfaction of CITBC); vi) liens of LLCP (subject to the Subordination Agreement dated on or about the Closing Date between LLCP and CITBC); vii) liens for taxes not yet due and payable or which are being diligently contested in good faith by the Companies by appropriate proceedings and which liens are not x) other than with respect to Real Estate, senior to the liens of CITBC or y) for taxes due the United States of America or any state thereof having similar priority statutes; and viii) liens held by licensees of the Companies' General intangibles. Permitted Indebtedness shall mean: i) current Indebtedness maturing in less than one year and incurred in the ordinary course of business for raw materials, supplies, equipment, services, taxes or labor; ii) Indebtedness secured by the Purchase Money Liens; iii) Indebtedness of the Companies which is subordinated to the prior payment and satisfaction of the Companies' Obligations to CITBC by means of a subordination agreement in form and substance satisfactory to CITBC; iv) Indebtedness arising under the Letters of Credit and this Financing Agreement; v) deferred taxes and other expenses incurred in the ordinary course of business; vi) the Subordinated Debt; vii) other Indebtedness existing on the date of execution of this Financing Agreement and listed in the most recent financial statement delivered to CITBC or otherwise disclosed to CITBC in writing prior to the Closing Date; and viii) any restructuring or refinancing of the foregoing (excluding Subordinated Debt or any Indebtedness in excess of $200,000 absent the prior written consent of CITBC), provided that any such restructuring or refinancing, shall not be on terms substantially less favorable to the Companies than the terms of such original Indebtedness and shall not be in excess of the original principal amount thereof. Promissory Note shall mean the note in the form of Exhibit A attached hereto, delivered by the Companies to CITBC to evidence the Revolving Loans pursuant to Section 3 of this Financing Agreement. Purchase Money Liens shall mean liens on any item of equipment provided that i) each such lien shall attach only to the property to be acquired, ii) a description of the property so acquired is furnished to CITBC, and iii) the debt incurred in connection with such acquisitions shall not exceed in the aggregate $1,000,000.00 in any fiscal year. Real Estate shall mean any of the Companies' fee and/or leasehold interests in real property, including such property which, subsequent to the Closing Date, may be encumbered, mortgaged, pledged or assigned to CITBC or its designee. Revolving Line of Credit shall mean the aggregate commitment of CITBC to make loans and advances to the Companies pursuant to Section 3 of this Financing Agreement and issue Letters of Credit Guaranties pursuant to Section 5 hereof, in the aggregate amount of $10,000,000. 18 14 Revolving Loans shall mean the loans and advances made, from time to time, to or for the account of any of the Companies by CITBC pursuant to Section 3 of this Financing Agreement. Revolving Loans Account shall have the meaning specified in Section 3, paragraph 3.6 hereof. Subordinated Debt shall mean the debt due a Subordinating Creditor (and the notes evidencing such) which has been subordinated, by a Subordination Agreement, to the prior payment and satisfaction of the Obligations of the Companies to CITBC in form and substance satisfactory to CITBC. Subordinating Creditor shall mean each of LLCP and Linda Raasch. Subordination Agreement shall mean an agreement among the Companies, a Subordinating Creditor and CITBC pursuant to which the Subordinated Debt held by the applicable Subordinating Creditor is subordinated to the prior payment and satisfaction of the Companies' Obligations to CITBC in form and substance satisfactory to CITBC. Tax Refund shall mean the anticipated Federal tax refund for fiscal year ending March 31, 1997 (for the carryback of losses for the prior two fiscal years of the Companies). UCC shall mean the Uniform Commercial Code as in effect in the State of California and as the same maybe amended from time to time. SECTION 2. Conditions Precedent The obligation of CITBC to make loans hereunder is subject to the satisfaction of, or waiver of, immediately prior to or concurrently with the making of such loans, the following conditions precedent: a) Lien Searches - CITBC shall have received tax, judgment and Uniform Commercial Code searches satisfactory to CITBC for all locations presently leased or owned by the Companies. b) UCC Filings - Any documents (including without limitation, financing statements) required to be filed in order to create, in favor of CITBC, for the benefit of CITBC a first and exclusive perfected security interest in the Collateral (with respect to which a security interest may be perfected by a filing under the Uniform Commercial Code), subject to Permitted 19 15 Encumbrances and subject to the concurrent payment of Comerica's obligations, shall have been properly filed in each office in each jurisdiction required in order to create in favor of CITBC a perfected lien on such Collateral. CITBC shall have received acknowledgment copies of all such filings (or, in lieu thereof, CITBC shall have received other evidence satisfactory to CITBC that all such filings have been made); and CITBC shall have received evidence that all necessary filing fees and all taxes or other expenses related to such filings have been paid in full. c) Examination & Verification - CITBC shall have completed to the satisfaction of CITBC an examination and verification of the Accounts, Inventory, Equipment, books and records of the Companies. d) Guaranties - The Guarantors shall have executed and delivered to CITBC guaranties, in form acceptable to CITBC, guaranteeing all present and future Obligations of the Companies to CITBC. e) Opinions - Counsel for the Companies and the Guarantors shall have delivered to CITBC opinions satisfactory to CITBC opining, inter alia, that, subject to the i) filing, priority and remedies provisions of the Uniform Commercial Code, ii) provisions of the Bankruptcy Code, insolvency statutes or other like laws, iii) the equity powers of a court of law and iv) such other matters as may be agreed upon with CITBC: a) the Guaranties of the Guarantors are valid, binding and enforceable according to their terms; and b) the Loan Documents including without limitation this Financing Agreement and the Guaranties are x) valid, binding and enforceable according to their terms, y) are duly authorized, executed and delivered and z) do not violate any terms, provisions, representations or covenants in the charter or by-laws of the Companies or the Guarantors or, to the best knowledge of such counsel, of any loan agreement, mortgage, deed of trust, note, security or pledge agreement or indenture to which the Companies or the Guarantors are a signatory or by which the Companies or the Guarantors or their assets are bound. f) Pledge Agreement - The Companies shall or the Companies shall cause the appropriate person to a) execute and deliver to CITBC a pledge and security agreement and stock powers pledging to CITBC as additional collateral for the Obligations of the Companies not less than 100% of the issued and outstanding stock of TKS and CCG, and 100% of the stock of any subsidiary of the Companies, in each case to the extent registered in the name of any Company or any subsidiary or affiliate thereof (provided further that no such additional shares shall be issued hereafter to an individual or entity which has not pledged such shares to CITBC absent CITBC's written consent thereto) and, b) deliver to CITBC the applicable stock certificates, if any, and stock powers of the Companies and any of their subsidiaries or take such other actions as CITBC may reasonably request in connection therewith. This condition shall survive closing. 20 16 g) Additional Documents - The Companies shall have executed and delivered to CITBC all loan documents necessary to consummate the lending arrangement contemplated between the Companies and CITBC. h) Subordination Agreement - Each of the Subordinating Creditors shall have executed and delivered to CITBC a Subordination Agreement, in form and substance satisfactory to CITBC, subordinating the debt due the Subordinating Creditor by the Companies to the prior payment and satisfaction of the Obligations of the Companies to CITBC, provided that Linda Raasch shall execute a Subordination Agreement within 30 days of the Closing Date in form and substance substantially similar to the agreement with LLCP. I) Board Resolution - CITBC shall have received a copy of the resolutions of the Board of Directors of the Companies and the Guarantors (as the case may be) authorizing the execution, delivery and performance of (i) this Financing Agreement, (ii) the Guaranties, and (iii) any related agreements, in each case certified by the Secretary or Assistant Secretary of the Companies and the Guarantors (as the case may be) as of the date hereof, together with a certificate of the Secretary or Assistant Secretary of the Companies and the Guarantors (as the case may be) as to the incumbency and signature of the officers of the Companies and/or the Guarantors executing such agreements, this Financing Agreement and any certificate or other documents to be delivered by it pursuant hereto, together with evidence of the incumbency of such Secretary or Assistant Secretary. j) Corporate Organization - CITBC shall have received (i) a copy of the Certificate of Incorporation of the Companies and the Guarantors certified by the Secretary of State of their incorporation, and (ii) a copy of the By-Laws (as amended through the date hereof) of the Companies and certified by the Secretary or Assistant Secretary of the Companies. k) Officer's Certificate - CITBC shall have received an executed Officer's Certificate of each of the Companies, satisfactory in form and substance to CITBC, certifying that (i) the representations and warranties contained herein are true and correct in all material respects on and as of the date hereof; (ii) the Companies are in compliance with all of the terms and provisions set forth herein; and (iii) no Default or Event of Default has occurred. l) Absence of Default - No Default or Event of Default of the Companies shall have occurred. m) Appraisals - CITBC shall have received appraisals on the Companies' Inventory which appraisals shall be by an appraiser acceptable to CITBC and shall be reviewed to its satisfaction. n) Legal Restraints/Litigation - At the date of execution of this Financing Agreement, there shall be no x) litigation, investigation or proceeding (judicial or administrative) pending 21 17 or, to the best knowledge of the Companies after due inquiry threatened against the Companies or the Guarantors or their assets, by any agency, division or department of any county, city, state or federal government arising out of this Financing Agreement, y) injunction, writ or restraining order restraining or prohibiting the consummation of the financing arrangements contemplated under this Financing Agreement or z) to the best knowledge of the Companies, suit, action, investigation or proceeding (judicial or administrative) pending or threatened against the Companies or the Guarantors or their assets, which, in the opinion of CITBC, if adversely determined could have a material adverse effect on the business, operation, assets, financial condition or Collateral of the Companies and/or the Guarantors (other than the litigation relating to the claims of Richard Archer Perkins, John Hine and JHL). o) Disbursement Authorization - The Companies shall have delivered to CITBC all information necessary for CITBC to issue wire transfer instructions on behalf of the Companies for the initial and subsequent loans and/or advances to be made under this Agreement including, but not limited to, disbursement authorizations in form acceptable to CITBC. p) Lock Box Agreements - As of the Closing Date, the Companies shall enter into lock box agreements for each of their collection accounts in form and substance satisfactory to CITBC. q) Depository Account - The Depository Account shall be established in form and substance satisfactory to CITBC. r) Third Party Waivers - Subject to the succeeding sentence, the Companies shall use their respective best efforts to provide applicable third party documents to CITBC within thirty (30) days after the Closing Date so that CITBC has a first lien, subject to Permitted Encumbrances, on Accounts Receivable, Inventory, Chattel Paper and any Equipment at locations which any of the Companies use, lease or occupy , all in form and substance satisfactory to CITBC in its reasonable business judgement. As to Eligible Inventory located in any facility which is not owned by the Companies, including at any leased premises, third party processor or warehouse at which Eligible Inventory is located and for which CITBC has not received a waiver, in form and substance satisfactory to CITBC within thirty (30) days after the Closing Date, CITBC may establish an Availability Reserve for up to three months rent or processing charges for any such premises. Notwithstanding anything to the contrary herein, for purposes of Section 3 and 6 hereof, this condition precedent shall not terminate as of the Closing Date. s) Minimum Closing Availability - Based upon CITBC's completion of an updated examination of the Companies' Accounts and Inventory, after giving effect to any Revolving Loans made by CITBC on the Closing Date, the Companies shall have a minimum additional aggregate Availability for further Revolving Loans of at least $1,000,000 as evidenced by the 22 18 borrowing base certificate delivered by the Companies to CITBC on the Closing Date. It is understood that such requirement contemplates that all of the Companies' debts and obligations are current and that all payables are being handled as in the normal course of the Companies' business and consistent with their past practice (excluding debts and obligations relating to Richard Archer Perkins, John Hine and JHL). t) Financial Information - Prior to the Closing Date, the Companies shall have prepared and delivered to CITBC cash budget projections for the Companies for the next consecutive twelve month period (commencing on the Closing Date), which shall be in form and substance satisfactory to CITBC. u) Insurance - The Companies shall have delivered to CITBC a certificate from each of their insurance carriers in form and substance satisfactory to CITBC evidencing that the coverage required by paragraph 7.5 of Section 7 hereof; and the endorsements thereof, in form and substance satisfactory to CITBC, listing CITBC, as loss payee or mortgagee, as the case may be, are in full force and effect, all as set forth in Section 7 of this Financing Agreement. v) Fees and Expenses - On the Closing Date, the Companies shall have reimbursed CITBC for all Out-of-Pocket Expenses for which a request for payment shall have been made at or prior to the Closing Date and shall have paid the Collateral Management Fee due at Closing and the Loan Facility Fee. w) Absence of Material Adverse Change - No material adverse change shall have occurred in the financial condition, business, prospects, profitability, assets (including without limitation the Collateral) or operations of the Companies, or any one of them, and/or the Guarantors or their subsidiaries. x) Perfection Certificate - CITBC shall have received a Perfection Certificate from the Companies in form acceptable to CITBC. y) Execution and Delivery of Loan Documents - CITBC shall have received a signed Promissory Note and the other Loan Documents. z) Intercreditor Agreement - CITBC shall have received an Intercreditor Agreement with LLCP in form and substance satisfactory to CITBC. aa) Pay-Out of Existing Lender - The Companies' existing loans with Comerica Bank shall be repaid in full with the proceeds of the initial disbursement of funds hereunder and Comerica's liens on any assets or properties of the Companies shall be terminated on or before the Closing Date. In connection therewith CITBC shall receive a fully executed Pay-Out Letter, in form and substance satisfactory to CITBC, and UCC-3 or UCC-2 termination statements. 23 19 bb) Kinkade Licensing Agreement - CITBC shall enter into a licensing agreement with Thomas Kinkade and the Companies which shall provide, inter alia, that CITBC (or its agent or assignee) may sell any Inventory which is subject to the Companies' Licensing Agreement with Thomas Kinkade, in form and substance satisfactory to CITBC. cc) Credit Card Receivables Assignment - The Companies shall deliver a fully executed Credit Card Receivables Assignment Letter, in form and substance satisfactory to CITBC, within five (5) business days after the Closing Date. Upon the execution of this Financing Agreement and the initial disbursement of loans hereunder, except as otherwise set forth herein, for purposes of each subsequent extension of credit hereunder, all of the above conditions precedent shall have been deemed satisfied or waived. 2.1 Conditions to Each Extension of Credit Except to the extent expressly set forth in this Financing Agreement, the agreement of CITBC to make any extension of credit requested to be made by it to the Companies on any date (including without limitation, the initial extension of credit) is subject to the satisfaction of the following conditions precedent: a) Representations and Warranties - Each of the representations and warranties made by the Companies in or pursuant to this Financing Agreement shall be true and correct in all material respects on and as of such date as if made on and as of such date (except to the extent that such representations and warranties expressly relate solely to an earlier date). b) No Default - No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the extension of credit requested to be made on such date. c) Borrowing Base - Except as may be otherwise agreed to from time to time by CITBC and the Companies in writing, after giving effect to the extension of credit requested to be made by the Companies on such date, the aggregate outstanding Revolving Loans and Letters of Credit owing by the Companies will not exceed the lesser of (i) the Revolving Line of Credit or (ii) the Borrowing Base then applicable to the Companies. Each borrowing by the Companies hereunder shall constitute a representation and warranty by the Companies as of the date of such loan or advance that each of the representations, 24 20 warranties and covenants contained in the Financing Agreement have been satisfied and are true and correct in all material respects, except as the Companies and CITBC shall otherwise agree herein or in a separate writing. SECTION 3. Revolving Loans 3.1 CITBC agrees, subject to the terms and conditions of this Financing Agreement from time to time, and within x) the Availability and y) the Revolving Line of Credit, but subject to CITBC's right to make "Overadvances", to make loans and advances to the Companies on a revolving basis (i.e. subject to the limitations set forth herein, the Companies may borrow, repay and re-borrow Revolving Loans). Such loans and advances to the Companies shall be in amounts up to: a) eighty-five percent (85%) of the outstanding Eligible Accounts Receivable of the Companies, and b) the sum of (i) fifty percent (50%) of the Companies' finished goods Eligible Inventory, plus (ii) thirty percent (30%) of the Companies' raw materials Eligible Inventory, of the Companies as determined at the lower of cost or market, provided that advances to the Companies against Eligible Inventory shall not exceed $5,000,000 in the aggregate at any one time (herein the "Borrowing Base"). All requests for loans and advances must be received by an officer of CITBC no later than 10:00 a.m. Pacific time of the day on which such loans and advances are required. Should CITBC for any reason honor requests for advances in excess of the limitations set forth herein, such advances shall be considered "Overadvances" and shall be made in CITBC's sole discretion, subject to any additional terms CITBC deems necessary. 3.2 (a) In furtherance of the continuing assignment and security interest in the Companies' Accounts, the Companies will, upon the creation of Accounts, execute and deliver to CITBC in such form and manner as CITBC may reasonably require, solely for CITBC's convenience in maintaining records of collateral, such confirmatory schedules of Accounts as CITBC may reasonably request, and such other appropriate reports designating, identifying and describing the Accounts as CITBC may reasonably require. In addition, upon CITBC's request the Companies shall provide CITBC with copies of agreements with, or purchase orders from, the Companies' customers, and copies of invoices to customers, proof of shipment or delivery and such other documentation and information relating to said Accounts and other collateral as CITBC may reasonably require. Failure to provide CITBC with any of the foregoing shall in no way affect, diminish, modify or otherwise limit the security interests granted herein. The Companies hereby authorize CITBC to regard the Companies' printed name or rubber stamp signature on assignment schedules or invoices as the equivalent of a manual signature by one of the Companies' authorized officers or agents. (b) The obligation of the Companies to repay the principal amount of the Revolving Loans made pursuant to this Section 3 and pursuant to any Letter of Credit Guaranty issued pursuant to Section 5 by CITBC and to pay interest thereon shall be evidenced in part by the 25 21 Promissory Note in the form of Exhibit C attached hereto. The Companies' outstanding Obligations applicable thereto may be set forth in the balance column on the grid page attached to said note or on the separate ledgers maintained by CITBC. All such advances, whether or not so recorded, shall be due as part of said note. The executed Promissory Note shall be delivered to CITBC on the Closing Date. 3.3 Each of the Companies hereby represents and warrants that: each Account is based on an actual and bona fide sale and delivery of goods or rendition of services to customers, made by the Companies in the ordinary course of their business; the goods and Inventory being sold and the Accounts created are the exclusive property of the Companies and are not and shall not be subject to any lien, consignment arrangement, encumbrance, security interest or financing statement whatsoever, other than the Permitted Encumbrances; the invoices evidencing such Accounts are in the name of a Company; and the customers of the Companies have accepted the goods or services, owe and are obligated to pay the full amounts stated in the invoices according to their terms, without dispute, offset, defense, counterclaim or contra, except for disputes and other matters arising in the ordinary course of business with respect to which the Companies have complied with the notification requirements pursuant to paragraph 3.5 of this Section 3. Each of the Companies confirms to CITBC that any and all taxes or fees relating to their business, their sales, the Accounts or goods relating thereto, are their sole responsibility and that same will be paid by the Companies when due (unless they are being diligently contested in good faith by appropriate proceeding in accordance with paragraph 7.6 hereof) and that none of said taxes or fees represent a lien on or claim against the Accounts. Each of the Companies also warrants and represents that it is a duly and validly existing corporation and is qualified in all states where the failure to so qualify would have an adverse effect on the business of the Companies or the ability of the Companies to enforce collection of Accounts due from customers residing in that state. Each of the Companies agrees to maintain such books and records regarding Accounts as CITBC may reasonably require and agrees that the books and records of the Companies will reflect CITBC's interest in the Accounts. In accordance with paragraph 7.2 hereof, all of the books and records of the Companies will be available to CITBC at normal business hours, including any records handled or maintained for the Companies by any other company or entity. 3.4 The Companies may and will enforce, collect and receive all amounts owing on the Accounts for CITBC's benefit and on CITBC's behalf, but at the Companies' expense; such privilege shall terminate automatically upon the institution by or against the Companies of any proceeding under any bankruptcy or insolvency law or, at the election of CITBC, upon the occurrence of any other Event of Default and until such Event of Default is waived in writing by CITBC or cured to CITBC's satisfaction. The Companies shall direct all of their account debtors and credit card processors to deposit any and all proceeds of Collateral into the Depository Account (as defined below), and any checks, cash, notes, chattel paper or other instruments or property received by the Companies with respect to any sales of Inventory and/or Accounts shall be held by the Companies in trust for CITBC for the benefit of CITBC, 26 22 separate from the Companies' own property and funds, and turned over promptly, to CITBC with proper assignments or endorsements by deposit to the special depository account in CITBC's name designated by CITBC for such purposes (the "Depository Account"), provided that with respect to TKS and CCG, commencing March 3, 1997, any and all such proceeds shall be transfered no less frequently than weekly or such shorter period as CITBC may advise the Companies from time to time such that the amount of cash and cash equivalents on hand in any TKS and CCG premises and deposit accounts does not exceed $100,000 in the aggregate at any one time and provided further that such retained amounts shall be used solely for petty cash purposes of TKS's and CCG's retail operations in the ordinary course of business of such Companies. All amounts received by CITBC in payment of Accounts will be credited to the Companies' Revolving Loan Account one Business Day after CITBC's receipt of "collected funds" at CITBC's bank account in New York, New York if received no later than 1:00 p.m. Eastern Standard Time or on the next succeeding Business Day if received after 1:00 pm. No checks, drafts or other instrument received by CITBC shall constitute final payment to CITBC unless and until such instruments have actually been collected. 3.5 Each of the Companies agrees to notify CITBC promptly of any matters materially affecting the value, enforceability or collectibility of any material Account and of all material customer claims, disputes, offsets, defenses, counterclaims, returns, rejections and all reclaimed or repossessed merchandise or goods and, in any event the aggregate amount thereof shall be set forth, in any applicable daily, weekly and monthly collateral reporting statements, as in effect from time to time. Each of the Companies agrees to issue credit memoranda promptly (with duplicates to CITBC upon request after the occurrence of an Event of Default) upon accepting returns or granting allowances, and may continue to do so until CITBC has notified the Companies that an Event of Default has occurred and that all future credits or allowances are to be made only after CITBC's prior written approval. Upon the occurrence of an Event of Default and until such time as such Event of Default is waived or cured to CITBC's satisfaction and on notice from CITBC, the Companies agree that all returned, reclaimed or repossessed merchandise or goods shall be set aside by the Companies, marked with CITBC's name (as secured party) and held by the Companies for CITBC's account. 3.6 (a) CITBC shall maintain an account on its books in the Companies' names (herein the "Revolving Loan Account") in which the Companies will be charged with loans and advances made by CITBC to any of the Companies or for their account, and with any other Obligations, including any and all costs, expenses and reasonable attorney's fees which CITBC may incur, in accordance with the terms hereof, in connection with the exercise by or for CITBC of any of the rights or powers herein conferred upon CITBC, or in the prosecution or defense of any action or proceeding to enforce or protect any rights of CITBC in connection with this Financing Agreement, the other Loan Documents or the Collateral assigned hereunder. The Companies will be credited with all amounts received by CITBC from the Companies or from others for the Companies' account, including, as above set forth, all amounts received by CITBC in payment of assigned Accounts and such amounts will be 27 23 applied to payment of the Obligations. In no event shall prior recourse to any Accounts or other security granted to or by the Companies be a prerequisite to CITBC's right to demand payment of any Obligation. Further, it is understood that CITBC shall have no obligation whatsoever to perform in any respect any of the Companies' contracts, lease agreements or obligations relating to the Accounts. (b) In order to utilize the collective borrowing powers of MAGI, TKS and CCG, (collectively the "Collective Borrowers") in the most efficient and economical manner, and in order to facilitate the handling of the accounts of the Collective Borrowers on CITBC's books, the Collective Borrowers have requested, and CITBC has agreed to handle accounts of the Collective Borrowers on CITBC's books on a combined basis, all in accordance with the following provisions: (I) In lieu of maintaining separate accounts on CITBC's books in the name of each of the Collective Borrowers, CITBC shall maintain one account under the name: Media Arts Group, Inc. (herein the "Collective Account"). Confirmatory assignments of Accounts will continue to be made to CITBC by each of the Collective Borrowers. Loans and advances made by CITBC to any of the Collective Borrowers will be charged to the Collective Account indicated above, along with any charges and expenses under this Financing Agreement. The Collective Account will be credited, with all amounts received by CITBC from any of the Collective Borrowers or from others for their account including all amounts received by CITBC in payment of Accounts assigned to CITBC as provided in this Financing Agreement; (ii) Each month CITBC will render to the Collective Borrowers one extract of the combined Collective Account, which shall be deemed to be an account stated as to each of the Collective Borrowers and which will be deemed correct and accepted by all of the Collective Borrowers unless CITBC receives a written statement of exceptions from them within thirty (30) days after such extract has been rendered by CITBC. It is expressly understood and agreed by each of the Collective Borrowers that CITBC shall have no obligation to account separately to any of the Collective Borrowers; (iii) Requests for loans and advances may be made by MAGI as agent for the Collective Borrowers and CITBC is hereby authorized and directed to accept, honor and rely on such instructions and requests, subject to the limitations and provisions set forth in this Financing Agreement. It is expressly understood and agreed by each of the Collective Borrowers that CITBC shall have no responsibility to inquire into the correctness of the apportionment, allocation, or disposition of (x) any loans and advances made to any of the Collective Borrowers or (y) any of CITBC's expenses and charges relating thereto. All loans and advances are made for the Collective Account; (iv) The Collective Borrowers jointly and severally unconditionally guarantee to CITBC the prompt payment in full of (A) all loans and advances made and to be made by 28 24 CITBC to any of them under this Financing Agreement, as well as (B) all other Obligations of the Collective Borrowers to CITBC are joint and several; (v) All Accounts assigned to CITBC by any of the Collective Borrowers and any other collateral security now or hereafter given to CITBC by any of the Collective Borrowers (be it Accounts or otherwise), shall secure all loans and advances made by CITBC to any of the Collective Borrowers, and shall be deemed to be pledged to CITBC as security for any and all other Obligations of the Collective Borrowers to CITBC as set forth under this Financing Agreement or any other agreements between CITBC and any of the Collective Borrowers; (vi) It is understood that the handling of the accounts of the Collective Borrowers in a combined fashion, as more fully set forth herein, is done solely as an accommodation to the Collective Borrowers and at their request, and that CITBC shall incur no liability to the Collective Borrowers as a result hereof. To induce CITBC to do so, and in consideration thereof, each of the Collective Borrowers hereby agrees to indemnify CITBC and hold CITBC harmless against any and all liability, expense, loss or claim of damage or injury, made against CITBC by any of the Collective Borrowers or by any third party whosoever, arising from or incurred solely by reason of (1) the method of handling the accounts of the Collective Borrowers as herein provided, (2) CITBC relying on any instructions of any of the Collective Borrowers, or (3) any other action taken by CITBC in accordance with this subparagraph (b) of Paragraph 6 of Section 3 of this Financing Agreement; and (vii) The foregoing request was made because the Collective Borrowers are engaged in an integrated operation that requires financing on a basis permitting the availability of credit from time to time to each of the Collective Borrowers as required for the continued successful operation of each of the Collective Borrowers and the integrated operation. Each of the Collective Borrowers expects to derive benefit, directly or indirectly, from such availability since the successful operation of each of the Collective Borrowers is dependent on the continued successful performance of the functions of the integrated group. In addition, the Companies have informed CITBC that: (a) in order to increase the efficiency and productivity of each of the other Collective Borrowers, MAGI has centralized in itself a cash management system which entails, in part, central disbursement and operating accounts in which it provides the working capital needs of each of the other Collective Borrowers and manages and timely pays the accounts payable of each of the other Collective Borrowers; (b) MAGI is further enhancing the operating efficiencies of the other Collective Borrowers by purchasing, or causing to be purchased, in its name for its account all materials, supplies, inventory and services required by the other Collective Borrower which will result in reducing the operating costs of the other Collective Borrowers; and 29 25 (c) Since all of the Collective Borrowers are now engaged in an integrated operation that requires financing on an integrated basis and since each Collective Borrower expects to benefit from the continued successful performance of such integrated operations and in order to best utilize the collective borrowing powers of each Collective Borrower in the most effective and cost efficient manner and to avoid adverse effects on the operating efficiencies of each Collective Borrower and the existing back-office practices of the Collective Borrowers, each Collective Borrower has requested that all Revolving Loans and advances be disbursed solely upon the request of MAGI and to bank accounts managed solely by it and that it will manage for the benefit of each Collective Borrower the expenditure and usage of such funds. 3.7 After the end of each month, CITBC shall promptly send the Companies a statement showing the accounting for the charges, loans, advances and other transactions occurring between CITBC and the Companies during that month. The monthly statements shall be deemed correct and binding upon each of the Companies and shall constitute an account stated between the Companies and CITBC unless CITBC receives a written statement of the exceptions within thirty (30) days of the date of the monthly statement. 3.8 In the event the total balance of Revolving Loans (after giving effect to all amounts which may be charged to the Companies' Revolving Loan Account hereunder) plus outstanding Letters of Credit exceed the Borrowing Base or the Revolving Line of Credit (herein the amount of any such excess shall be referred to as the "Excess"), such Excess shall be due and payable to CITBC for the benefit of CITBC immediately upon CITBC's demand therefor. SECTION 4. Intentionally Omitted SECTION 5. Letters of Credit In order to assist the Companies in establishing or opening documentary and standby Letters of Credit with an Issuing Bank to cover the purchase of inventory from sources outside of the continental United States, the Companies have requested CITBC to join in the applications for such Letters of Credit, and/or guarantee payment or performance of such Letters of Credit and any drafts or acceptances thereunder through the issuance of the Letters of Credit Guaranty, thereby lending CITBC's credit to the Companies and CITBC has agreed to do so. These arrangements shall be handled by CITBC subject to the terms and conditions set forth below. 5.1 The purpose and extent of the standby Letters of Credit and changes or modifications to any documentary or standby Letter of Credit by the Companies and/or the Issuing Bank of the terms and conditions thereof shall in all respects be subject to the prior approval of CITBC in the exercise of its reasonable discretion provided however, that: a) in 30 26 no event may the aggregate amount of all such outstanding documentary and standby Letters of Credit exceed, in the aggregate, at any one time $2,000,000.00 (the "Letter of Credit Line of Credit"); b) the Letters of Credit and all documentation in connection therewith shall be in form and substance satisfactory to the Companies, CITBC and the Issuing Bank; c) the Letters of Credit Line of Credit shall be deemed to be a subline within the Revolving Line of Credit and all Letters of Credit shall be (i) within the Revolving Line of Credit, (ii) within Availability and (iii) reserved dollar for dollar from Availability as an Availability Reserve; and (d) absent CITBC's consent to the contrary, such Letters of Credit shall expire on or before any applicable Anniversary Date. 5.2 CITBC shall have the right, without notice to the Companies, to charge the Companies' Revolving Loan Account on CITBC's books with the amount of any and all indebtedness, liability or obligation of any kind incurred by CITBC under the Letters of Credit Guaranty pursuant to this Financing Agreement at the earlier of a) payment by CITBC under the Letters of Credit Guaranty, or b) the occurrence of an Event of Default and acceleration of the Obligations hereunder (upon such charge, CITBC shall not charge the Companies the fees due pursuant to paragraph 8.3 hereof). Any payment by CITBC pursuant to any Letter of Credit Guaranty or any fees, charges or amounts charged to the Companies' Revolving Loan Account pursuant to this Section 5 or paragraphs 8.3 and 8.4 hereof shall be deemed a Revolving Loan hereunder and shall incur interest at the rate provided in Section 8, paragraph 8.1 of this Financing Agreement. 5.3 Each of the Companies jointly and severally unconditionally indemnifies CITBC and holds CITBC harmless from any and all loss, claim or liability incurred by CITBC arising from any transactions or occurrences relating to Letters of Credit established or opened for the Companies' account, the collateral relating thereto and any drafts or acceptances thereunder, and all obligations and liabilities thereunder, including any such loss or claim due to any action taken by any Issuing Bank, other than for any such loss, claim or liability arising out of the gross negligence or willful misconduct by CITBC under the Letters of Credit Guaranty. Each of the Companies further agrees to jointly and severally hold CITBC harmless from any errors or omission, negligence or misconduct by the Issuing Bank. Each of the Companies' unconditional obligations to CITBC hereunder shall not be modified or diminished for any reason or in any manner whatsoever, other than as a result of CITBC's gross negligence or willful misconduct. Each of the Companies agrees that any charges incurred by CITBC for the Companies account by the Issuing Bank shall be conclusive on CITBC and may be charged to the Companies' Revolving Loan Account. Nothing herein shall be deemed to limit the Companies' rights with respect to the Issuing Bank. 5.4 CITBC shall not be responsible for: the existence, character, quality, quantity, condition, packing, value or delivery of the goods purporting to be represented by any documents; any difference or variation in the character, quality, quantity, condition, packing, value or delivery of the goods from that expressed in the documents; the validity, sufficiency 31 27 or genuineness of any documents or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, insufficient, fraudulent or forged; the time, place, manner or order in which shipment is made; partial or incomplete shipment, or failure or omission to ship any or all of the goods referred to in the Letters of Credit or documents; any deviation from instructions; delay, default, or fraud by the shipper and/or anyone else in connection with the goods or the shipping thereof; or any breach of contract between the shipper or vendors and the Companies. Furthermore, without being limited by the foregoing, CITBC shall not be responsible for any act or omission with respect to or in connection with any such goods, absent its gross negligence or willful misconduct. 5.5 Each of the Companies agrees that any action taken by CITBC, if taken in good faith, or any action taken by any Issuing Bank, under or in connection with the Letters of Credit, the guarantees, the drafts or acceptances, or the related goods, shall be binding on the Companies and shall not put CITBC in any resulting liability to the Companies, absent CITBC's gross negligence or willful misconduct. In furtherance thereof, CITBC shall have the full right and authority to clear and resolve any questions of non-compliance of documents; to give any instructions as to acceptance or rejection of any documents or goods; to execute any and all steamship or airways guaranties (and applications therefor), indemnities or delivery orders; to grant any extensions of the maturity of, time of payment for, or time of presentation of, any drafts, acceptances, or documents; and to agree to any amendments, renewals, extensions, modifications, changes or cancellations of any of the terms or conditions of any of the applications, Letters of Credit, drafts or acceptances; all in CITBC's sole name, and the Issuing Bank shall be entitled to comply with and honor any and all such documents or instruments executed by or received solely from CITBC, all without any notice to or any consent from the Companies. 5.6 Without CITBC's express consent and endorsement in writing, each of the Companies agrees in respect of Letters of Credit for which Letter of Credit Guaranties have been issued by CIT hereunder: a) not to execute any and all applications for steamship or airway guaranties, indemnities or delivery orders; to grant any extensions of the maturity of, time of payment for, or time of presentation of, any drafts, acceptances or documents; or to agree to any amendments, renewals, extensions, modifications, changes or cancellations of any of the terms or conditions of any of the applications, Letters of Credit , drafts or acceptances; and b) after the occurrence of an Event of Default which is not cured within any applicable grace period, if any, or waived by CITBC, not to i) clear and resolve any questions of non-compliance of documents, or ii) give any instructions as to acceptance or rejection of any documents or goods. 5.7 Each of the Companies agrees that any necessary import, export or other licenses or certificates for the import or handling of shipped goods will have been promptly procured; all foreign and domestic governmental laws and regulations in regard to the shipment and importation of the shipped goods, or the financing thereof will have been promptly and fully 32 28 complied with; and any certificates in that regard that CITBC may at any time request will be promptly furnished. In this connection, each of the Companies warrants and represents that all shipments made under any such Letters of Credit are in accordance in all material respects with the laws and regulations of the countries in which the shipments originate and terminate, and are not prohibited by any such laws and regulations. Each of the Companies assumes all risk, liability and responsibility for, and agrees to pay and discharge, all present and future local, state, federal or foreign taxes, duties, or levies. Any embargo, restriction, laws, customs or regulations of any country, state, city, or other political subdivision, where the shipped goods are or may be located, or wherein payments are to be made, or wherein drafts may be drawn, negotiated, accepted, or paid, shall be solely the Companies' risk, liability and responsibility. 5.8 Upon any payments made to the Issuing Bank under the Letter of Credit Guaranty, CITBC shall acquire by subrogation, any rights, remedies, duties or obligations granted or undertaken by the Companies to the Issuing Bank in any application for Letters of Credit , any standing agreement relating to Letters of Credit or otherwise, all of which shall be deemed to have been granted to CITBC and apply in all respects to CITBC and shall be in addition to any rights, remedies, duties or obligations contained herein. SECTION 6. Collateral 6.1 As security for the prompt payment in full of all loans and advances made and to be made to the Companies from time to time by CITBC pursuant hereto, as well as to secure the payment in full of the other Obligations, subject to Permitted Encumbrances, each of the Companies hereby pledges and grants to CITBC a first and exclusive continuing general lien upon and security interest in all of its and their respective: (a) present and hereafter acquired Inventory; (b) present and hereafter acquired Equipment; (c) present and future Accounts; (d) present and future Documents of Title; (e) present and future General Intangibles; (f) now or hereafter issued capital stock of TKS, CCG, MAGIEP and MAGIS owned of record by the Companies; (g) Other Collateral; 33 29 (h) any Real Estate pledged as collateral security (subsequent to the Closing Date); and (i) the proceeds of any and all of the foregoing. 6.2 The security interests granted hereunder shall extend and attach to: (a) All Collateral which is presently in existence and which is owned by any of the Companies or in which any of the Companies have any interest, whether held by the Companies or others for their account, and, if any Collateral is Equipment, whether the applicable Company's interest in such Equipment is as owner or lessee or conditional vendee; (b) All Equipment whether the same constitutes personal property or fixtures, including, but without limiting the generality of the foregoing, all dies, jigs, tools, benches, tables, accretions, component parts thereof and additions thereto, as well as all accessories, motors, engines and auxiliary parts used in connection with or attached to the Equipment; and (c) All Inventory and any portion thereof which may be returned, rejected, reclaimed or repossessed by either CITBC or the Companies from the Companies' customers, as well as to all supplies, goods, incidentals, packaging materials, labels and any other items which contribute to the finished goods or products manufactured or processed by the Companies, or to the sale, promotion or shipment thereof. 6.3 Each of the Companies agrees to safeguard, protect and hold all Inventory for CITBC's account and make no disposition thereof, provided that the Companies may sell and/or lease their Inventory in the ordinary course of the business of the Companies or pursuant to otherwise arms length transactions and on fair and reasonable terms and as further provided herein. Absent the occurrence of an Event of Default and notice from CITBC to the Companies to the contrary, as provided for below, any Inventory may be sold and shipped by the Companies to their customers in the ordinary course of the Companies' business, on open account and on terms currently being extended by the Companies to their customers, provided that all proceeds of all sales (including cash, accounts receivable, checks, notes, instruments for the payment of money and similar proceeds) are forthwith transferred, endorsed, and turned over and delivered to CITBC for the benefit of CITBC in accordance with paragraph 3.4 of Section 3 of this Financing Agreement. CITBC shall have the right to withdraw this permission upon notice from CITBC to the Companies at any time upon the occurrence of an Event of Default and until such time as such Event of Default is waived or cured to CITBC's satisfaction, in which event no further disposition shall be made of the Inventory by the Companies without CITBC's prior written approval. Cash sales or sales of Inventory in which a lien upon, or security interest in, Inventory is retained by such Companies shall be made by the Companies only with the approval of CITBC, and the proceeds of such sales or sales of inventory for cash shall not be commingled with the Companies' other property, but shall be 34 30 segregated, held by the Companies in trust for CITBC as CITBC's exclusive property, and shall be delivered immediately by the Companies to CITBC in the identical form received by the Companies by deposit to the Depository Account. Upon the sale, exchange, or other disposition of Inventory, as herein provided, the security interest in each of the Companies' Inventory provided for herein shall, without break in continuity and without further formality or act, continue in, and attach to, all proceeds, including any instruments for the payment of money, accounts receivable, contract rights, documents of title, shipping documents, chattel paper and all other cash and non-cash proceeds of such sale, exchange or disposition. As to any such sale, exchange or other disposition, CITBC shall have all of the rights of an unpaid seller, including stoppage in transit, replevin, rescission and reclamation. Notwithstanding the foregoing the Companies may make cash sales of Inventory, provided that (i) the same arise from retail sales in the ordinary course of business and (ii) the proceeds of such sales are turned over to CITBC by deposit in the Depository Account. 6.4 Each of the Companies agrees at their own cost and expense to keep the Equipment in as good and substantial repair and condition as the same is now or at the time the lien and security interest granted herein shall attach thereto, reasonable wear and tear excepted, making any and all repairs and replacements when and where necessary. Each of the Companies also agrees to safeguard, protect and hold all Equipment for CITBC's account and make no disposition thereof unless the Companies first obtain the prior written approval of CITBC. Any sale, exchange or other disposition of any Equipment shall only be made by the Companies with the prior written approval of CITBC, and the proceeds of any such sales shall not be commingled with the Companies' other property, but shall be segregated, held by the Companies in trust for CITBC for the benefit of CITBC as CITBC's exclusive property, and shall be delivered immediately by the Companies to CITBC in the identical form received by the Companies by deposit to the Depository Account. Upon the sale, exchange, or other disposition of the Equipment, as herein provided, the security interest provided for herein shall, without break in continuity and without further formality or act, continue in, and attach to, all proceeds, including any instruments for the payment of money, accounts receivable, contract rights, documents of title, shipping documents, chattel paper and all other cash and non-cash proceeds of such sales, exchange or disposition. As to any such sale, exchange or other disposition, CITBC shall have all of the rights of an unpaid seller, including stoppage in transit, replevin, rescission and reclamation. Notwithstanding anything hereinabove contained to the contrary, the Companies may sell, exchange or otherwise dispose of obsolete Equipment or Equipment no longer needed in the Companies' operations, provided, however, that (a) the then book value of the Equipment so disposed of does not exceed $100,000 in the aggregate for the Companies in any fiscal year and (b) the proceeds of such sales or dispositions are delivered to CITBC in accordance with the foregoing provisions of this paragraph, except that the Companies may retain and use such proceeds to purchase forthwith replacement Equipment which the Companies determine in their reasonable business judgment to have a collateral value at least equal to the Equipment so disposed of or sold, provided, however, that the 35 31 aforesaid right shall automatically cease upon the occurrence of an Event of Default which is not cured within any applicable grace period or waived. 6.5 The rights and security interests granted to CITBC hereunder are to continue in full force and effect, notwithstanding the termination of this Financing Agreement or the fact that the Revolving Loan Account maintained in the Companies' name on the books of CITBC may from time to time be temporarily in a credit position, until the final payment in full to CITBC of all Obligations and the termination of this Financing Agreement. Any delay, or omission by CITBC to exercise any right hereunder, shall not be deemed a waiver thereof, or be deemed a waiver of any other right, unless such waiver shall be in writing and signed by CITBC. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. 6.6 To the extent that the Obligations are now or hereafter secured by any assets or property other than the Collateral or by the guarantee, endorsement, assets or property of any other person, then CITBC shall have the right in its sole discretion to determine which rights, security, liens, security interests or remedies CITBC shall at any time pursue, foreclose upon, relinquish, subordinate, modify or take any other action with respect to, without in any way modifying or affecting any of them, or any of CITBC's rights hereunder. 6.7 Any reserves or balances to the credit of the Companies and any other property or assets of the Companies in the possession of CITBC may be held by CITBC as security for any Obligations and applied in whole or partial satisfaction of such Obligations when due. The liens and security interests granted herein and any other lien or security interest CITBC may have in any other assets of the Companies, shall secure payment and performance of all now existing and future Obligations. CITBC may in its discretion charge any or all of the Obligations to the Revolving Loan Account of the Companies when due. 6.8 The Companies shall use their best efforts to give to CITBC for the benefit of CITBC from time to time such mortgage, deed of trust or assignment on Real Estate acquired after the date hereof as CITBC shall require to obtain a valid first lien thereon subject only to those exceptions of title as set forth in future title insurance policies that are satisfactory to CITBC and to the Permitted Encumbrances. 6.9 The Companies shall give to CITBC for the benefit of CITBC, and/or shall cause the appropriate party to give to CITBC, from time to time such pledge or security agreements with respect to General Intangibles (now or hereafter acquired) and capital stock (now or hereafter issued to and held by the Companies) of TKS, CCG, MAGIEP, JHL and MAGIS as CITBC shall require to obtain valid first liens thereon. In furtherance of the foregoing, the Companies shall provide timely notice to CITBC of any additional material United States patents, trademarks, tradenames, service marks, copyrights, brand names, trade names, logos and other trade designations acquired or applied for subsequent to the Closing Date pursuant to 36 32 filings under U.S. federal law and the Companies shall execute such documentation as CITBC may reasonably require to obtain and perfect its lien thereon. The Companies may enter into licensing agreements with respect to their General Intangibles in the ordinary course of their business and on fair and reasonable terms, provided that any such licensing agreements shall not adversely affect CITBC's security interest therein. SECTION 7. Representations, Warranties and Covenants 7.1 Each of the Companies hereby warrants and represents and/or covenants that: i) the fair value of the Companies' assets on a consolidated basis exceed the book value of the Companies' liabilities; ii) each of the Companies is generally able to pay its debts as they become due and payable; and iii) each of the Companies does not have unreasonably small capital to carry on its business as it is currently conducted absent extraordinary and unforeseen circumstances. Each of the Companies further warrants and represents that: a) except for the Permitted Encumbrances, the security interests granted herein constitute and shall at all times constitute the first and only liens on the Collateral; b) Schedule 1 hereto correctly and completely sets forth each of the Companies' chief executive office and all of the Companies' Collateral locations and after filing of financing statements in the applicable filing clerks office in the states listed on the Perfection Certificate, this Financing Agreement, to the best of the Companies' knowledge after due inquiry, creates a valid, perfected, first priority lien on the Collateral, except for the Permitted Encumbrances; c) except for the Permitted Encumbrances, each of the Companies is or will be at the time additional Collateral is acquired by it, the absolute owner of the Collateral with full right to pledge, sell, consign, transfer and create a security interest therein, free and clear of any and all claims or liens in favor of others; d) each of the Companies will at their expense forever warrant and, at CITBC's reasonable request, defend the same from any and all claims and demands of any other person other than the Permitted Encumbrances; e) each of the Companies will not grant, create or permit to exist, any lien upon or security interest in the Collateral, or any proceeds thereof, in favor of any other person other than the holders of the Permitted Encumbrances; f) the representations and warranties in the Perfection Certificate are true and correct; and g) the Equipment does not comprise a part of the Inventory of any of the Companies and that the Equipment is and will only be used by any of the Companies in their business and will not be held for sale or lease, or removed from their premises, or otherwise disposed of by any of the Companies without the prior written approval of CITBC except as otherwise permitted in paragraph 6.4 of Section 6 of this Financing Agreement. 7.2 Each of the Companies agrees to maintain books and records pertaining to the Collateral in such detail, form and scope as CITBC shall reasonably require. Each of the Companies agrees that CITBC or its agents may enter upon the Companies' premises at any time during normal business hours, and from time to time, for the purpose of inspecting the Collateral, and any and all records pertaining thereto. Each of the Companies agrees to afford CITBC thirty (30) days prior written notice of any change in the location of any Collateral, 37 33 other than in the ordinary course of business and to locations, that as of the date hereof, are known to CITBC and at which CITBC has filed financing statements and otherwise fully perfected its liens thereon, subject to Permitted Encumbrances. Each of the Companies is also to advise CITBC promptly, in sufficient detail, of any material adverse change relating to the type, quantity or quality of the Collateral or to the security interests granted to CITBC therein. 7.3 Each of the Companies agrees to: execute and deliver to CITBC, from time to time, solely for CITBC's convenience in maintaining a record of the Collateral, such written statements, and schedules as CITBC may reasonably require, designating, identifying or describing the Collateral pledged to CITBC hereunder. Any of the Companies' failure, however, to promptly give CITBC such statements, or schedules shall not affect, diminish, modify or otherwise limit CITBC's security interests in the Collateral. 7.4 Each of the Companies agrees to comply with the requirements of all state and federal laws in order to grant to CITBC valid and perfected first security interests in the Collateral, subject only to the Permitted Encumbrances. CITBC is hereby authorized by the Companies to file any financing statements covering the Collateral whether or not such Companies' signature appears thereon. Each of the Companies agrees to do whatever CITBC may reasonably request, from time to time, by way of: searching records, filing notices of liens, financing statements, amendments, renewals and continuations thereof; cooperating with CITBC's custodians; keeping stock records; transferring proceeds of Collateral to CITBC's possession; and performing such further acts as CITBC may reasonably require in order to effect the purposes of this Financing Agreement. 7.5 (a) Each of the Companies agrees to maintain insurance on its Real Estate, Equipment and Inventory (wherever located), if any, under such policies of insurance, with such insurance companies, in such reasonable amounts and covering such insurable risks as are at all times reasonably satisfactory to CITBC. CITBC acknowledges and accepts the insurance coverage in effect as of the Closing Date as being satisfactory (solely with respect to the Closing Date). All policies covering the Real Estate, Equipment and Inventory are, subject to the rights of any holders of Permitted Encumbrances holding claims senior to CITBC, to be made payable to CITBC, for the benefit of CITBC in case of loss, under a standard non-contributory "mortgagee", "lender" or "secured party" clause and are to contain such other provisions as CITBC may reasonably require to fully protect CITBC's interest in the Real Estate, Inventory and Equipment and to any payments to be made under such policies. All original policies or true copies thereof are to be delivered to CITBC, premium prepaid, with the loss payable endorsement in CITBC's favor, and shall provide for not less than thirty (30) days prior written notice to CITBC of the exercise of any right of cancellation. At the Companies' request, or if any of the Companies fail to maintain such insurance, CITBC may, in its reasonable business judgement arrange for such insurance, but at the Companies' expense and without any responsibility by CITBC's part and CITBC for: obtaining the insurance, the solvency of the insurance companies, the adequacy of the coverage, or the 38 34 collection of claims. Upon the occurrence of an Event of Default which is not waived or cured to CITBC's satisfaction, CITBC shall, subject to the rights of any holders of Permitted Encumbrances holding claims senior to CITBC, have the sole right, in the name of CITBC or the Companies, to file claims under any insurance policies, to receive, receipt and give acquittance for any payments that may be payable thereunder, and to execute any and all endorsements, receipts, releases, assignments, reassignments or other documents that may be necessary to effect the collection, compromise or settlement of any claims under any such insurance policies. (b)(i) In the event of any loss or damage by fire or other casualty, insurance proceeds relating to Inventory of any Company shall first reduce the Revolving Loan Account, provided that upon the occurrence of an Event of Default CITBC may apply such proceeds as it may reasonably deem appropriate; ii) In the event any part of any of the Companies' Real Estate or Equipment is damaged by fire or other casualty and the insurance proceeds for such damage or other casualty (the "Proceeds") are less than or equal to $100,000.00, the Companies may in their discretion either apply such proceeds to the restoration or replacement thereof or such proceeds shall reduce such Company's outstanding Obligations and be applied to the Revolving Loan Account. iii) As long as an Event of Default has not occurred (which is not cured to CITBC's satisfaction), the Companies have sufficient business interruption insurance to replace the related lost profits of any of the Companies' facilities, and the Proceeds are in excess of $100,000.00, such Companies may elect (by delivering written notice to CITBC) to apply all such proceeds to replace, repair or restore such Real Estate or Equipment to substantially the equivalent condition prior to such fire or other casualty as set forth herein. If the Companies do not, or cannot, elect to use the Proceeds as set forth above, CITBC may, subject to the rights of any holders of Permitted Encumbrances holding claims senior to CITBC, apply the Proceeds to the payment of the Obligations in such manner and in such order as CITBC may reasonably elect. If the Companies elect to so use the Proceeds, proceeds of insurance on Equipment and Real Estate in excess of $100,000.00 will be applied to the reduction of the Revolving Loans. Prior to the commencement of any restoration, repair or replacement of Real Estate, the Companies shall provide CITBC with a restoration plan and a total budget certified by an independent third party experienced in construction costing. If there are insufficient Proceeds to cover the cost of restoration as so determined, the Companies shall be responsible for the amount of any such insufficiency, and shall demonstrate evidence of such prior to the commencement of restoration. 7.6 Each of the Companies agrees to pay, when due, all taxes, assessments, claims and other charges (herein "taxes") lawfully levied or assessed upon any of the Companies or the Collateral and if such taxes remain unpaid after the date fixed for the payment thereof 39 35 unless: (i) such taxes are being diligently contested in good faith by the Companies by appropriate proceedings, (ii) the Companies establish such reserves as may be required by GAAP or, in the alternative or in addition thereto, CITBC establishes an Availability Reserve in such amount as CITBC may determined in its reasonable discretion, or (iii) or if any lien shall be claimed thereunder x) for taxes due the United States of America or any state thereof having similar tax priority status, or y) which in CITBC's opinion might create a valid obligation having priority over the rights granted to CITBC herein, CITBC may, on the Companies' behalf, pay such taxes, and the amount thereof shall be an Obligation secured hereby and due to CITBC on demand. 7.7 Each of the Companies: (a) agrees to comply with all acts, rules, regulations and orders of any legislative, administrative or judicial body or official, which the failure to comply with would have a material and adverse impact on the Collateral, or any material part thereof, or on the operation of any of the Companies' business; provided that the Companies may contest any acts, rules, regulations, orders and directions of such bodies or officials in any reasonable manner which will not, in CITBC's reasonable opinion, materially and adversely affect CITBC's rights or priority in the Collateral; (b) shall qualify to do business or shall provide CITBC with reasonable evidence that they are exempt from any such qualifications and/or filing requirement for any state requiring the filing of a business activity report or similar document in order for the Companies to file a claim or other judicial remedy with respect to any of their account debtors in such state, provided that the aggregate amount of such Accounts in any such state exceed $10,000; (c) agrees to comply with all environmental statutes, acts, rules, regulations or orders as presently existing or as adopted or amended in the future applicable to the ownership and/or use of their real property and operation of their business which the failure to comply with would have a material and adverse impact on the Collateral, or any material part thereof, or on the operation of the business of the Companies. Each of the Companies jointly and severally hereby indemnifies CITBC, and agrees to defend and hold CITBC harmless from and against any and all loss, damage, claim, liability, injury or expense which CITBC may sustain or incur (other than solely as a result of the physical actions comprising gross negligence of CITBC on the Companies' premises) in connection with: any claim or expense asserted against CITBC as a result of any environmental pollution, hazardous material or environmental clean-up of any of the Companies' Real Estate or any claim or expense which results from any of the Companies' operations (including, but not limited to, any of the Companies' off-site disposal practices); any claim or expense relating to any of the Companies' Inventory and/or Equipment and each of the Companies further agrees that this indemnification shall survive termination of this Financing Agreement as well as the payment of all Obligations or amounts payable hereunder; and (d) shall not be deemed to have breached any provision of paragraph 7.7 (c) if (i) the failure to comply with the requirements of this paragraph 7.7 resulted from good faith error or innocent omission, (ii) the Companies promptly commence and diligently pursue a cure of such breach, (iii) such failure is cured within fifteen (15) business days following the Companies' receipt of notice of such failure, and (iv) such failure has not resulted in a material 40 36 adverse effect on the business, financial condition or operations of any of the Companies or on the Collateral. Upon receipt by any of the Companies of any notice of non-compliance with any applicable environmental rules or regulation, of any required expenditures for compliance, any spill or omission or other regulated "event", or any claim resulting from any of the Companies' business or practices or relating to the Collateral, the applicable Companies shall establish such reserves as may be required by GAAP or, in the alternative or in addition thereto, CITBC may establish an Availability Reserve in such amount as CITBC may require in its reasonable discretion (based on projected costs of remediation as set forth in any applicable environmental audit). 7.8 Until termination of this Financing Agreement and payment and satisfaction of all Obligations due hereunder, the Companies agree that, unless CITBC shall have otherwise consented in writing, the Companies will furnish to CITBC: (a) within ninety (90) days after the end of each fiscal year of the Companies, an audited Consolidated Balance Sheet and (unaudited) Consolidating Balance Sheet attached thereto (the latter shall be certified by the chief financial officer of each Company as at the close of such year), and statements of profit and loss, cash flow and reconciliation of surplus of the Companies, their affiliates and all subsidiaries of each for such year, audited by independent public accountants selected by the Companies and reasonably satisfactory to CITBC, provided that the Companies shall provide CITBC with an internal draft year end consolidated balance sheet, statement of profit and loss and cash flow within sixty (60) days of each fiscal year end; (b) within forty-five (45) days after the end of each fiscal quarter that is not the last quarter of a fiscal year, a Consolidated Balance Sheet and Consolidating Balance Sheet as at the end of such period and statements of profit and loss, cash flow and surplus of the Companies and their subsidiaries of each, certified by an authorized financial or accounting officer of the Companies; (c) within forty-five (45) days after the end of each month that is not the last month of a fiscal year a Consolidated Balance Sheet as at the end of such period and statements of profit and loss, cash flow and surplus of the Companies and all subsidiaries for such period, certified by an authorized financial or accounting officer of the Companies; and (d) from time to time, such further information regarding the business affairs and financial condition of the Companies as CITBC may reasonably request, including without limitation (a) the accountant's management practice letter and (b) annual cash flow projections in form satisfactory to CITBC. Each financial statement which the Companies are required to submit hereunder must be accompanied by an officer's certificate, signed by the President, Vice President, Controller, or Treasurer, pursuant to which any one such officer must certify that: (i) the financial statement(s) fairly and accurately represent(s) the Companies' financial condition at the end of the particular accounting period, as well as the Companies' operating results during such accounting period, subject to year-end audit adjustments; (ii) during the particular accounting period (y) there has been no Default or Event of Default under this Financing Agreement, provided however that, if any such officer has knowledge that any such Default or Event of Default has occurred during such period, the existence of and a detailed description of same shall be set forth in such officer's certificate and (z) the Companies have not received any 41 37 notice of cancellation with respect to their property insurance policies; and (iii) the exhibits attached to such financial statement(s) constitute detailed calculations showing compliance with all financial covenants contained in this Financing Agreement. 7.9 The Companies shall maintain at all times during the periods below, Net Worth of not less than the following amounts during the following periods: a) MAGI shall maintain a Net Worth on a stand alone basis of not less than $14,000,000 at all times. b) TKS and CCG shall maintain a combined Net Worth of not less than $50,000 at all times. c) The Companies and their consolidated subsidiaries shall maintain, on a consolidated basis, a Net Worth of not less than the following amounts at all times during each of the following fiscal quarters:
Fiscal Quarter Net Worth (i) Closing Date through March 31, 1997 $2,000,000 (ii) April 1, 1997 through June 30, 1997 $2,100,000 (iii) July 1, 1997 through September 30, 1997 $2,800,000 (iv) October 1, 1997 through December 31, 1997 $4,300,000 (v) January 1, 1998 through March 31, 1998 $4,500,000 (vi) April 1, 1998 through June 30, 1998 $4,700,000 (vii) July 1, 1998 through September 30, 1998 $5,500,000 (viii) October 1, 1998 through December 31, 1998 $6,900,000 (ix) January 1, 1999 and at all times thereafter $7,000,000
7.10 Until termination of the Financing Agreement and payment and satisfaction of all Obligations due hereunder, each of the Companies agrees that, without the prior written consent of CITBC, except as otherwise herein provided, the Companies or any one of them, will not: A. Mortgage, assign, pledge, transfer or otherwise permit any lien, charge, security interest, encumbrance or judgment (whether as a result of a purchase money or title retention transaction, or other security interest, or otherwise), to exist on any of the Collateral, any other assets or goods, capital stock, whether real, personal or mixed, whether now owned or hereafter acquired, except for the Permitted Encumbrances; B. Incur or create any Indebtedness other than the Permitted Indebtedness; C. Borrow any money on the security of the Companies' Collateral from sources other than CITBC except for Permitted Indebtedness; 42 38 D. Sell, lease, assign, transfer or otherwise dispose of i) Collateral, except for the use of cash in the ordinary course of business or as otherwise specifically permitted by this Financing Agreement or ii) either all or substantially all of the Companies' assets, which do not constitute Collateral; E. Merge, consolidate or otherwise alter or modify their corporate name, principal place of business, structure, status or existence, or enter into or engage in any operation or activity materially different from that presently being conducted by the Companies or acquire all or substantially all of the stock or assets of any corporation or entity, except that the Companies may (i) merge with each other and/or (ii) change their corporate name or address, provided that in any instance under clause (i) and (ii), (x) the Companies shall give CITBC thirty (30) days prior written notice thereof and (y) the applicable Companies shall execute and deliver prior to or simultaneously with any such action any and all documents and agreements requested by CITBC (including, without limitation, any and all U.C.C. financing statements) to confirm (A) the assumption by the surviving corporation of all Obligations to CITBC of the other Company so merged, (B) the continuation and preservation of all security interests and liens granted to CITBC hereunder, and (C) that such surviving corporation adopts, ratifies and confirms its agreement to be bound by and comply with this Financing Agreement; F. Assume, guarantee, endorse, or otherwise become liable upon the obligations of any person, firm, entity or corporation, except by the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business and except for obligations of other Companies with respect to leased obligations; G. Except for inter-company loans or distributions set forth in (H) below, declare or pay any dividend of any kind on, or purchase, acquire, redeem or retire, any of the capital stock or equity interest, of any class whatsoever, whether now or hereafter outstanding, and MAGI and the Companies shall not make any cash payments pursuant to any now or hereafter issued warrants or warrant agreements and any "put" or "call" rights thereunder, including without limitation any warrant or similar agreements with LLCP, and/or pursuant to any convertible notes issued to John Hine, JHL or any affiliate thereof, except that: (a) TKS or CCG may declare and pay dividends on their capital stock to MAGI and the Companies may redeem the capital stock owned by its or their retired, deceased or terminated officers or shareholders which MAGI is contractually obligated to redeem, provided that, in no event shall the aggregate amount of such dividends under this clause (a) exceed $100,000.00 in the aggregate in any fiscal year; (b) pay income or franchise taxes of the Companies due as a result of the filing of a consolidated, combined or unitary tax return in which the operations of the Companies are included, provided further that, in any instance under this subparagraph G, i) the Companies, or any one of them, are not then in breach or violation of this Financing Agreement, ii) after giving effect to such payment, no Default or Event of Default has occurred hereunder, and iii) each of the Companies has sufficient working capital to pay its debts as they come due; H. Make any advance or loan to, or any investment in, any firm, entity, person or corporation, provided that the Companies may make (a) inter-company loans in an amount not to exceed $1,000,000 in the aggregate at any one time outstanding and (b) loans and advances 43 39 to their employees in the ordinary course of their business in an amount not to exceed $250,000 in the aggregate at any one time outstanding; or I. Make any cash payments to John Hine, JHL or any affiliates thereof. 7.11 Without the prior written consent of CITBC, the Companies will not: a) enter into any Operating Lease if after giving effect thereto the aggregate obligations, on a consolidated basis, with respect to Operating Leases of the Companies during any fiscal year would exceed $3,000,000 or b) contract for, purchase, make expenditures for, lease pursuant to a Capital Lease or otherwise incur obligations, on a consolidated basis, with respect to Capital Expenditures (whether subject to a security interest or otherwise) during any period below in the aggregate amount in excess of: a) $300,000.00 for the fiscal quarter ending March 31, 1997; b) $2,000,000.00 for the fiscal year ending March 31, 1998; and c) $2,200,000.00 for the fiscal year ending March 31, 1999, and for each fiscal year ending thereafter. 7.12 The Companies shall maintain a Fixed Charge Coverage Ratio (calculated at the end of each fiscal quarter indicated below for the applicable period) of at least:
Period Ratio a) For the two (2) fiscal quarters ending March 31, 1997 1.05 to 1.0 b) For the three (3) fiscal quarters ending June 30, 1997 1.05 to 1.0 c) For the four (4) fiscal quarters ending September 30, 1997 1.05 to 1.0 d) and the four (4) fiscal quarters ending December 31, March 31, June 30, September 30 and thereafter 1.05 to 1.0
For purposes hereof the calculation of the Fixed Charge Coverage Ratio shall not include: (I) the $150,000 fee payment and the $592,500 principal payment to LLCP made on or about the Closing Date by the Companies; (ii) any amount received pursuant to the Tax Refund and (iii) the $2,000,000 principal payment which is anticipated to be made to LLCP in accordance with paragraph 10.1 (h) hereof. 7.13 Notwithstanding any provision to the contrary contained herein, in the event that the Companies' aggregate Availability for each day of the thirty (30) day period immediately preceding any applicable calculation date for any of the above Financial Covenants is $2,500,000 or more, such Financial Covenants shall not be effective solely for any such 44 40 calculation date and the Companies shall have no obligation hereunder to comply with such Financial Covenants with respect to such calculation date. The foregoing contemplates that the Companies' accounts payable and any other Indebtedness is current in the ordinary course of business of each Company (excluding debts and obligations relating to Richard Archer Perkins, John Hine and JHL). 7.14 The Companies shall maintain life insurance on (a) Thomas Kinkade in the amount of not less than $5,000,000.00 and (b) Ken Raasch in the amount of not less than $1,000,000, and assign to CITBC within thirty (30) days of the Closing Date, all rights under the aforesaid life insurance policies as additional collateral for the Obligations. 7.15 Each of the Companies agrees to advise CITBC in writing of: a) all expenditures (actual or anticipated) in excess of $150,000.00 for x) environmental clean-up, y) environmental compliance or z) environmental testing and the impact of said expenses on such Company's working capital; and b) any notices any of the Companies receive from any local, state or federal authority advising the Companies of any environmental liability (real or potential) stemming from any of the Companies' operations, their premises, their waste disposal practices, or waste disposal sites used by any of the Companies and to provide CITBC with copies of all such notices. 7.16 Without the prior written consent of CITBC, each of the Companies agrees that they will not enter into any transaction, including, without limitation, any purchase, sale, lease, loan or exchange of property with any of the Companies or their subsidiaries or affiliates, provided that the Companies may extend or amend any such transactions in effect as of the Closing Date and enter into sale and service transactions in the ordinary course of their business and pursuant to the reasonable requirements of such Company with such other Company or its subsidiaries or affiliates upon fair and reasonable terms or less favorable to such Company, subsidiary or affiliate than could be obtained in a comparable arms-length transaction with an unrelated third party, provided further that no Default or Event of Default exists or will occur hereunder prior to and after giving effect to such transaction. 7.17 CCG shall merge with TKS on or before April 30, 1997 and TKS shall be the survivor thereof, all in form and substance satisfactory to CITBC. SECTION 8. Interest, Fees and Expenses 8.1 a) Interest on the Revolving Loans shall be payable monthly as of the end of each month and with respect to Chase Bank Rate Loans shall be an amount equal to the lesser of (a) the Maximum Legal Rate or (b) the Chase Bank Rate plus one percent (1%) per annum on the average of the net balances owing by the Companies to CITBC in the Companies' Revolving 45 41 Loan Account at the close of each day during such month. In the event of any change in said Chase Bank Rate, the rate hereunder shall change, as of the first of the month following any change, so as to remain one percent (1%) above the Chase Bank Rate. The rate hereunder shall be calculated based on a 360-day year. CITBC shall be entitled to charge the Companies' Revolving Loan Account at the rate provided for herein when due until all Obligations have been paid in full. b) Subject to compliance with each of the conditions set forth below, and for periods ending subsequent to September 30, 1997, the Companies will be entitled to interest rate concessions (each an "Interest Rate Concession") as outlined below: (x) if the Companies maintain an EBITDA of more than $8,000,000 for any consecutive twelve (12) month period tested at the end of each fiscal quarter, the interest rates set forth in subparagraph (a) above will be reduced by one-quarter of one percent (1/4 of 1%) as of the effective date indicated below and only after the CITBC's receipt of the Companies' financial statements (as more fully provided in Section 7, Paragraph 7.8 hereof) for such twelve (12) month period, provided that the Companies shall be entitled to only one (1) 1/4 of 1% Interest Rate Concession under this clause (x), provided further that in the event that the Companies shall, at any time after the effective date of any Interest Rate Concession hereunder, fail to maintain the EBITDA (calculated and tested in accordance with the provisions hereof) required to achieve any such Interest Rate Concession, the rate in subparagraph (a) above shall be increased (as of the effective date determined below) by one quarter of one percent (1/4 of 1%); and (y) if the Companies maintain an EBITDA of more than $10,000,000 for any consecutive twelve (12) month period tested at the end of each fiscal quarter, the interest rates set forth in subparagraph (a) above will be further reduced by one quarter of one percent (1/4 of 1%) as the effective date indicated below and only after CITBC's receipt of the Companies' financial statements (as more fully provided in Section 7, Paragraph 7.8 hereof) for such twelve (12) month period, provided that the Companies shall be entitled to only one (1) 1/4 of 1% Interest Rate Concession under this clause (y), provided further that in the event that the Companies shall, at any time after the effective date of any Interest Rate Concession hereunder, fail to maintain the EBITDA (calculated and tested in accordance with the provisions hereof) required to achieve any such Interest Rate Concession, the rate in subparagraph (a) above shall be increased (as of the effective date determined below) by one quarter of one percent (1/4 of 1%);. In addition to the foregoing requirements, each Interest Rate Concession is subject to the Companies' compliance with each of the following conditions: i) timely receipt of the Companies' financial statements referred to above; 46 42 ii) the absence of any Default or Event of Default on the date of receipt of such financial statements and the absence of any Default or Event of Default on the effective date of any Interest Rate Concession; iii) as to the spread over the Chase Bank Rate, the Interest Rate Concession will be effective on the first day of the month occurring after receipt of such financial statements; and iv) in no event may the total of all Interest Rate Concessions exceed one-half of one percent ( 1/2 of 1%). 8.2 Intentionally Omitted 8.3 In consideration of the Letter of Credit Guaranty of CITBC, the Companies shall pay CITBC the Letter of Credit Guaranty Fee which shall be an amount equal to (a) one and one half percent (1.5%) per annum, payable monthly, on the face amount of each standby Letter of Credit less the amount of any and all amounts previously drawn under such Letter of Credit, and (b) one and one half percent (1.5%) of the face amount of each documentary Letter of Credit, payable upon issuance, in each case to the extent CITBC has issued a Letter of Credit Guaranty in connection therewith. 8.4 Any charges, fees, commissions, costs and expenses charged to CITBC for the Companies' account by any Issuing Bank in connection with or arising out of Letters of Credit issued pursuant to this Financing Agreement or out of transactions relating thereto will be charged to the Companies' Revolving Loan Account in full when charged to or paid by CITBC and when made by any such Issuing Bank shall be conclusive on CITBC. 8.5 The Companies shall jointly and severally reimburse or pay CITBC, as the case may be, for: (i) all Out-of-Pocket Expenses of CITBC and (ii) any applicable Documentation Fee (other than such portion paid pursuant to Section 8.7). 8.6 Upon the last Business Day of each month, commencing with February 28, 1997, the Companies shall jointly and severally pay CITBC the Line of Credit Fee. 8.7 To induce CITBC to enter into this Financing Agreement and to extend to the Companies the Revolving Loans and Letters of Credit Guaranties, the Companies shall jointly and severally pay to CITBC a Loan Facility Fee in the amount of $75,000.00 (which amount includes the Documentation Fee in subparagraph (i) of the definition thereof) payable upon execution of this Financing Agreement, provided that the $50,000 Commitment Fee previously paid by the Companies to CITBC shall be either returned to the Companies or credited against the foregoing Loan Facility Fee. 8.8 On the Closing Date and each anniversary of the Closing Date thereafter, the Companies shall jointly and severally pay to CITBC the Collateral Management Fee. 47 43 8.9 The Companies shall jointly and severally pay CITBC's standard charges for, and the fees and expenses of, CITBC personnel used by CITBC for reviewing the books and records of the Companies and for verifying, testing protecting, safeguarding, preserving or disposing of all or any part of the Collateral provided, however, that the foregoing shall not be payable until the occurrence of an Event of Default if the Companies are paying a Collateral Management Fee. 8.10 Each of the Companies hereby (i) confirms that it is jointly and severally liable for any and all Obligations hereunder, and (ii) authorizes CITBC to charge the Companies' Revolving Loan Account or other such other account maintained with CITBC with the amount of any and all Obligations and/or payments due hereunder as such payments become due; all irrespective of whether any such amount is due from such Company. The Companies confirm that any charges which CITBC may so make to the Companies' Revolving Loan Account as herein provided will be made as an accommodation to the Companies and solely at CITBC's discretion. SECTION 9. Powers Each of the Companies hereby constitutes CITBC or any person or agent CITBC may designate as their attorney-in-fact, at the Companies' cost and expense, to exercise all of the following powers, which being coupled with an interest, shall be irrevocable until all of the Companies' Obligations to CITBC have been paid in full: (a) To receive, take, endorse, sign, assign and deliver, all in the name of CITBC or any of the Companies, any and all checks, notes, drafts, and other documents or instruments relating to the Collateral; (b) To receive, open and dispose of all mail addressed to any of the Companies and to notify postal authorities to change the address for delivery thereof to such address as CITBC may designate; (c) To request from customers indebted on Accounts at any time, in the name of CITBC or any of the Companies or that of CITBC's designee, information concerning the amounts owing on the Accounts; (d) To transmit to customers indebted on Accounts notice of CITBC's interest therein and to notify customers indebted on Accounts to make payment directly to CITBC for the Companies' account; and 48 44 (e) To take or bring, in the name of CITBC or any of the Companies, all steps, actions, suits or proceedings deemed by CITBC necessary or desirable to enforce or effect collection of the Accounts. Notwithstanding anything hereinabove contained to the contrary, the powers set forth in (b), (d) and (e) above may only be exercised after the occurrence of an Event of Default and until such time as such Event of Default is waived in writing by CITBC or cured to CITBC's satisfaction. In addition, absent the occurrence of a Default or Event of Default, the powers set forth in (c) above will only be exercised in the name of the Companies or a certified public accountant designated by CITBC. SECTION 10. Events of Default and Remedies 10.1 Notwithstanding anything hereinabove to the contrary, CITBC may terminate this Financing Agreement immediately upon the occurrence of any of the following (herein "Events of Default"): a) cessation of the business of the Companies, or any one of them or the calling by the Companies of a meeting of the creditors of the Companies, or any one of them for purposes of compromising its or their debts and obligations, excluding the Companies negotiation of their Indebtedness allegedly due to John Hine, Richard Archer Perkins and/or shareholders or creditors of JHL; b) the failure of the Companies, or any one of them, to generally meet its or their debts as they mature (excluding debts relating to JHL and John Hine); c) (i) the commencement by any of the Companies or the Guarantors of any bankruptcy, insolvency, arrangement (including a general assignment for the benefit of creditors), reorganization, receivership or similar proceedings under any federal or state law; and (ii) the commencement against any of the Companies or the Guarantors of any bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceeding under any federal or state law by creditors of the Companies or any one of them, as applicable, which proceeding shall not have been controverted within ten (10) days or shall not have been dismissed and vacated within thirty (30) days of commencement, or any of the actions sought in any such proceeding shall occur or the Companies (or Company, as applicable) shall take action to authorize or effect any of the actions in any such proceeding; d) breach by the Companies, or any one of them, in any material respect of any warranty, representation or covenant contained herein (other than those referred to in sub-paragraph e below), the Loan Documents or in any other written agreement between the Companies and CITBC, provided that such breach by such Companies of any of the warranties, representations or covenants referred in this clause (d) shall not be deemed to be 49 45 an Event of Default unless and until such breach shall remain unremedied to CITBC's satisfaction for a period of thirty (30) days from the date of notice of such breach; e) breach by the Companies, or any one of them, of any warranty, representation or covenant of Section 3, the first two sentences of Paragraph 3.3, and Paragraph 3.4; Section 6, Paragraphs 6.3 and 6.4 (other than the first sentence of paragraph 6.4); Section 7, Paragraphs 7.1, 7.5, 7.6, and 7.9 through 7.12; f) failure of any of the Companies to pay any of the Obligations within five (5) Business Days of the due date thereof, provided that nothing contained herein shall prohibit CITBC from charging such amounts to the Companies' Revolving Loan Account on the due date thereof; g) the Companies, or any one of them, shall I) engage in any "prohibited transaction" as defined in ERISA, ii) have any "accumulated funding deficiency" as defined in ERISA, iii) have any Reportable Event as defined in ERISA, iv) terminate any Plan, as defined in ERISA or v) be engaged in any proceeding in which the Pension Benefit Guaranty Corporation shall seek appointment, or is appointed, as trustee or administrator of any Plan, as defined in ERISA, and with respect to this sub-paragraph (g) such event or condition x) remains uncured for a period of thirty (30) days from date of occurrence and y) could, in the reasonable opinion of CITBC, subject the Companies to any tax, penalty or other liability material to the business, operations or financial condition of any of the Companies; h) without the prior written consent of CITBC, the Companies shall x) amend or modify the Subordinated Debt, y) make any payment on account of the Subordinated Debt, except for regularly scheduled payments of principal and interest (absent prepayment or acceleration), as expressly permitted in the Subordination Agreement, provided that the Companies may pay (i) a $11,500 fee and a principal payment of approximately $592,000 on or about the Closing Date, provided that the Companies' availability is in an amount of $1,000,000 or more after giving effect to any such payments (the foregoing contemplates that the Companies' payables are current in the ordinary course of their business), and (ii) a payment of up to $2,000,000 A) after receipt of the Tax Refund, provided that such payment does not exceed the amount of the Tax Refund, or B) on or about December 15, 1997, provided that, after giving effect to the foregoing payment the Companies' aggregate Availability is in an amount of $4,000,000 or more (the foregoing contemplates that each of the Companies' accounts payable and other Indebtedness is current in the ordinary course of business (excluding debts and obligations relating to Richard Archer Perkins, John Hine and JHL)), or z) fail to deliver or cause to be delivered any now or hereafter issued capital stock of TKS, CCG, MAGIEP and MAGIS; i) upon the occurrence of an event of default which would permit the Indebtedness due thereunder to be accelerated pursuant to (i) any of the Subordinated Debt, or (ii) any document or agreement of the Companies, or any one of them, evidencing Indebtedness of any of the Companies in excess of the amount of $100,000; j) (I) Ken Raasch ceases for any reason whatsoever (other than as a result of death or disability) to be actively engaged in the management of the Companies, (ii) Thomas Kinkade ceases for any reason whatsoever (other than as a result of death or disability) to be 50 46 actively engaged as a director of and art director to the Companies, or (iii) upon the occurrence of a "change of control" (as set forth in the Senior Secured Subordinated Note and agreements between LLCP and the Companies); k) upon the occurrence of any material breach pursuant to the Companies' worldwide licensing agreement with Thomas Kinkade or upon (i) termination thereof, or (ii) any modification or amendment thereof in any material adverse manner to the Companies; or l) the Companies failure to file applicable federal tax returns on or before July 10, 1997 with respect to the Tax Refund. 10.2 Upon the occurrence of a Default and/or an Event of Default, CITBC may, at its option, declare that, all loans, advances and extensions of credit provided for in paragraph 3.1 of Section 3, 4 and 5 of this Financing Agreement shall be thereafter in CITBC's sole discretion and the obligation of CITBC to make Revolving Loans and/or open Letters of Credit shall cease unless such Default or Event of Default is waived in writing by CITBC or cured to CITBC's satisfaction, and upon the occurrence of an Event of Default CITBC may, at its option, declare that: i) all Obligations shall become immediately due and payable; ii) CITBC may charge the Companies the Default Rate of Interest on all then outstanding or thereafter incurred Obligations in lieu of the interest provided for in Section 8 of this Financing Agreement provided that in respect to clause "(ii)" above a) CITBC has given the Companies written notice of the Event of Default, provided, however, that no notice is required if the Event of Default is the Event listed in paragraphs 10.1(a), (b) or (c) of this Section 10 and b) the Companies have failed to cure the Event of Default within ten (10) days after x) CITBC deposited such notice in the United States mail or y) immediately upon the occurrence of the Event of Default listed in paragraph 10.1(a), (b) or (c) of this Section 10; and iii) CITBC may immediately terminate this Financing Agreement upon notice to the Companies, provided, however, that no notice of termination is required if the Event of Default is the Event listed in paragraph 10.1(a), (b) or (c) of this Section 10. The exercise of any option is not exclusive of any other option which may be exercised at any time by CITBC. 10.3 Immediately upon the occurrence of any Event of Default, CITBC may, at its option, and to the extent permitted by law and subject to the rights of any holders of Permitted Encumbrances holding claims senior to CITBC: (a) remove from any premises where same may be located any and all documents, instruments, files and records, and any receptacles or cabinets containing same, relating to the Accounts, or CITBC may use, at the Companies' expense, such of the Companies' personnel, supplies or space at the Companies' places of business or otherwise, as may be necessary to properly administer and control the Accounts or the handling of collections and realizations thereon; (b) bring suit, in the name of the Companies or CITBC, and generally shall have all other rights respecting said Accounts, including without limitation the right to: accelerate or extend the time of payment, settle, compromise, release in whole or in part any amounts owing on any Accounts and issue credits in the name of any of the Companies or CITBC; (c) sell, assign and deliver the Collateral and any returned, reclaimed or repossessed merchandise, with or without advertisement, at public 51 47 or private sale, for cash, on credit or otherwise, at CITBC's sole option and discretion, and CITBC may bid or become a purchaser at any such sale, free from any right of redemption, which right is hereby expressly waived by each of the Companies; (d) foreclose the security interests created herein by any available judicial procedure, or to take possession of any or all of the Inventory and Equipment and/or Other Collateral without judicial process, and to enter any premises where any Inventory and Equipment and/or Other Collateral may be located for the purpose of taking possession of or removing the same and (e) exercise any other rights and remedies provided in law, in equity, by contract or otherwise. CITBC shall have the right, without notice or advertisement, to sell, lease, or otherwise dispose of all or any part of the Collateral whether in its then condition or after further preparation or processing, in the name of any of the Companies or CITBC, or in the name of such other party as CITBC may designate, either at public or private sale or at any broker's board, in lots or in bulk, for cash or for credit, with or without warranties or representations, and upon such other terms and conditions as CITBC in their sole discretion may deem advisable, and CITBC shall have the right to purchase at any such sale. If any Inventory and Equipment shall require rebuilding, repairing, maintenance or preparation, CITBC shall have the right, at its option and in its reasonable business judgement, to do such of the aforesaid as is necessary, for the purpose of putting the Inventory and Equipment in such saleable form as CITBC shall deem appropriate. Each of the Companies agrees, at the request of CITBC, to assemble the Inventory and Equipment and to make it available to CITBC at premises of any of the Companies or elsewhere and to make available to CITBC the premises and facilities of the Companies for the purpose of CITBC's taking possession of, removing or putting the Inventory and Equipment in saleable form. However, if notice of intended disposition of any Collateral is required by law, it is agreed that ten (10) days notice shall constitute reasonable notification and full compliance with the law. The net cash proceeds resulting from CITBC's exercise of any of the foregoing rights, (after deducting all charges, costs and expenses, including reasonable attorneys' fees) shall be applied by CITBC to the payment of the Companies' Obligations, whether due or to become due, in such order as CITBC may elect, and the Companies shall remain liable to CITBC for any deficiencies, and CITBC in turn agrees to remit to the Companies or their successors or assigns, any surplus resulting therefrom. The enumeration of the foregoing rights is not intended to be exhaustive and the exercise of any right shall not preclude the exercise of any other rights, all of which shall be cumulative. The mortgage, deed of trust or assignment on Real Estate shall govern the rights and remedies of CITBC with respect thereto. SECTION 11. Termination Except as otherwise permitted herein, the Companies and CITBC may terminate this Financing Agreement and the Line of Credit only as of the initial or any subsequent Anniversary Date and then only by giving the other at least sixty (60) days prior written notice of termination. Notwithstanding the foregoing CITBC may terminate the Financing 52 48 Agreement immediately upon the occurrence of an Event of Default, provided, however, that if the Event of Default is an event listed in paragraph 10.1(a) (b) (c) of Section 10 of this Financing Agreement, CITBC may regard the Financing Agreement as terminated and notice to that effect is not required. This Financing Agreement, unless terminated as herein provided, shall automatically continue from Anniversary Date to Anniversary Date. Notwithstanding the foregoing, the Companies may terminate this Financing Agreement and the Line of Credit prior to any applicable Anniversary Date upon sixty (60) days' prior written notice to CITBC and payment of the Early Termination Fee. All Obligations shall become due and payable as of any termination hereunder or under Section 10 hereof and, pending a final accounting, CITBC may withhold any balances in the Companies' Revolving Loan Account (unless supplied with an indemnity satisfactory to CITBC) to cover all of the Companies' Obligations, whether absolute or contingent. All of CITBC's, liens and security interests shall continue after any termination until all Obligations have been paid and satisfied in full. SECTION 12. Miscellaneous 12.1 Each of the Companies hereby waives diligence, demand, presentment and protest and any notices thereof as well as notice of nonpayment. No delay or omission of CITBC or the Companies to exercise any right or remedy hereunder, whether before or after the happening of any Event of Default, shall impair any such right or shall operate as a waiver thereof or as a waiver of any such Event of Default. No single or partial exercise by CITBC of any right or remedy precludes any other or further exercise thereof, or precludes any other right or remedy. 12.2 THIS WRITTEN AGREEMENT, THE LOAN DOCUMENTS AND THE OTHER DOCUMENTS REFERENCED HEREIN OR CONTEMPLATED HEREBY REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES, SUPERSEDES ANY PRIOR AGREEMENTS AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO, MAY ONLY BE MODIFIED IN WRITING SIGNED BY THE PARTIES HERETO, AND SHALL BIND THE RESPECTIVE PARTIES HERETO AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. 12.3 In no event shall the Companies, or any one of them, upon demand by CITBC for payment of any indebtedness relating hereto, by acceleration of the maturity thereof, or otherwise, be obligated to pay interest and fees in excess of the amount permitted by law. Regardless of any provision herein or in any agreement made in connection herewith, CITBC shall never be entitled to receive, charge or apply, as interest on any indebtedness relating hereto, any amount in excess of the maximum amount of interest permissible under applicable 53 49 law (herein "Maximum Legal Amount"). It is the intent of the Companies and CITBC to conform strictly to all applicable state and federal usury laws. All agreements between the Companies and CITBC whether now existing or hereafter arising and whether written or oral, are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of the maturity hereof or otherwise, shall the amount contracted for, charged or received by CITBC for the use, forbearance, or detention of the money loaned hereunder or otherwise, or for the payment or performance of any covenants or obligations contained herein or in any other document evidencing, securing or pertaining to the Obligations evidenced hereby which may be legally deemed to be for the use, forbearance or detention of money, exceed the maximum amount which any of the Companies is legally entitled to contract for, charge or collect under applicable state or federal law. If from any circumstance whatsoever fulfillment of any provision hereof or of such other documents, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by law, then the obligation to be fulfilled shall be automatically reduced to the limit of such validity, and if from any such circumstance CITBC shall ever receive as interest or otherwise an amount in excess of the maximum that can be legally collected, then such amount which would be excessive interest shall be applied to the reduction of the principal indebtedness hereof and any other amounts due with respect to the Obligations evidenced hereby, but not to the payment of interest and if such amount which would be excessive interest exceeds the Obligations and all other non interest indebtedness described above, then such additional amount shall be refunded to the Companies. This paragraph shall control every other provision hereof and any other agreement made in connection herewith. 12.4 If any provision hereof or of any other agreement made in connection herewith is held to be illegal or unenforceable, such provision shall be fully severable, and the remaining provisions of the applicable agreement shall remain in full force and effect and shall not be affected by such provision's severance. Furthermore, in lieu of any such provision, there shall be added automatically as a part of the applicable agreement a legal and enforceable provision as similar in terms to the severed provision as may be possible. 12.5 EACH PARTY HERETO HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF THIS FINANCING AGREEMENT. EACH OF THE COMPANIES HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO SERVICE OF PROCESS BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED. 12.6 Except as otherwise herein provided, any notice or other communication required hereunder shall be in writing, and shall be deemed to have been validly served, given or delivered when hand delivered or sent by confirmed telegram, telecopy or telex, or three days after deposit in the United States mails, with proper first class postage prepaid and addressed to the party to be notified as follows: 54 50 (A) if to CITBC, at: The CIT Group/Business Credit, Inc. 300 South Grand Avenue Los Angeles, CA 90071 Attn: Regional Manager (B) if to the Companies at: c/o Media Arts Group, Inc. 521 Charcot Avenue San Jose, CA 95131 Attn: Bud Peterson or to such other address as any party may designate for itself by like notice. 12.7 THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS FINANCING AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA. 12.8 The Companies have made and will, from time to time, make available to CITBC certain non-public and confidential financial and other business information (the "Confidential Information") relating to their businesses. CITBC agrees to maintain the confidentiality of all Confidential Information provided to CITBC by or on behalf of the Companies or any of their subsidiaries, and to disclose such information only (a) to officers, directors or employees of CITBC or to CITBC's legal or financial advisors or its affiliates or assigns, in each case to the extent necessary to carry out this Financing Agreement and the other Loan Documents in the ordinary course of its business and consistent with its practices, (b) to any other person to the extent the disclosure of such information to such person is required in connection with the examination of CITBC's records by appropriate authorities, or pursuant to court order, subpoena or other legal process, or otherwise as required by law or regulation, and (c) to participants or potential participants or co-lenders, but only after such participants or potential participants have executed a written confidentiality agreement substantially in the form of this paragraph 12.8. CITBC shall not be required to maintain the confidentiality of any portion of the Confidential Information which (a) becomes generally available to the public other than by CITBC's unauthorized disclosure, (b) is know by CITBC or its agents, affiliates, directors, officers, advisors or representatives prior to disclosure by the Companies or (c) becomes available to CITBC from a source other than the Companies, provided that the disclosure of Confidential Information to CITBC by such source does not violate a confidentiality agreement or duty imposed on such source of which CITBC has actual knowledge. 55 51 12.9 This Financing Agreement embodies the whole agreement of the parties and may not be modified except in writing, and no course of dealing between CITBC and any of the Companies shall be effective to change or modify this Financing Agreement. CITBC's failure to exercise any right hereunder shall not be construed as a waiver of the right to exercise the same or any other right at any other time and from time to time thereafter, and such rights shall be considered as cumulative rather than alternative. No knowledge of any breach or other nonobservance by any of the Companies of the terms and provisions of this Financing Agreement shall constitute a waiver thereof, nor a waiver of any obligations to be performed by the Companies hereunder. Upon a default by the Companies, CITBC may elect to non-judicially or judicially foreclose against any real or personal property security CITBC holds for the Obligations, or any part thereof, or exercise any other remedy against the Companies or the Collateral. No such action by CITBC will release or limit the liability of the Companies hereunder, even if the effect of that action is to deprive the Companies of the right to collect reimbursement from any of the other Companies for any sums paid to CITBC. The Companies hereby acknowledge and agree that the Companies are knowingly waiving in advance as a result of the provisions hereof a complete or partial defense it or they may later have had arising from CCP Section 580d or 580a based upon the CITBC's subsequent election to conduct a private nonjudicial foreclosure sale, even though such election would destroy, diminish or affect either the Companies' rights against the principal obligor or the Companies' rights to pursue the principal obligor for reimbursement, subrogation, contribution or indemnity. Without limiting the foregoing or any provision hereof, the Companies hereby expressly waive any and all rights, estoppels and benefits which might otherwise be available from time to time under California Civil Code Sections 2809, 2810, 2819, 2839, 2845, 2849, 2850, 2899 and 3433, and California Code of Civil Procedure Sections 580a, 580b, 580d and 726, or any of such sections. Each of the Companies represents and warrants to CITBC that the execution, delivery and performance of this Financing Agreement, and of any documents securing the obligations under this Financing Agreement, (a) are not done with actual intent to hinder, delay or defraud creditors, (b) are not done at a time when the fair value of their consolidated assets, are less than their consolidated debts, (c) are not done at a time when any such Company intends or believes or reasonably should believe that it will incur debts beyond its ability to pay as such debts mature or otherwise become due and (d) based upon the Companies' historical needs and future projections, are not done at a time when they are engaged in business or a transaction, or are about to engage in business or a transaction, for which their property is unreasonably small capital or for which their remaining assets are unreasonably small in relation to their 56 52 business or transaction absent extraordinary and unforeseen circumstances. Each of the Companies hereby confirms that each of the waivers set forth herein are made with full knowledge of their significance and consequences and after due deliberation. 57 53 IN WITNESS WHEREOF, the parties hereto have caused this Financing Agreement to be executed and delivered by their proper and duly authorized officers as of the date set forth above. This Financing Agreement shall take effect as of the date set forth above after being accepted below by an officer of CITBC after which, CITBC shall forward to the Companies a fully executed original for its files. Very truly yours, The CIT Group/Business Credit, Inc. as Lender By /s/ Jeff Simon --------------------------------- Vice President Read and Agreed to: Media Arts Group, Inc. By /s/ Kenneth Raasch --------------------------------- Title: President Thomas Kinkade Stores, Inc. By /s/ Kenneth Raasch --------------------------------- Title: President California Coast Galleries, Inc. By /s/ Kenneth Raasch --------------------------------- Title: President Executed and Accepted at Los Angeles, CA The CIT Group/Business Credit, Inc. as Lender By /s/ Jeff Simon --------------------------------- Vice President 58 54 EXHIBIT A REVOLVING CREDIT NOTE February 21, 1997 $10,000,000 FOR VALUE RECEIVED, the undersigned, Media Arts Group, Inc., Thomas Kinkade Stores, Inc., and California Coast Galleries, Inc. (the "Companies"), hereby absolutely and unconditionally promise to pay to the order of The CIT Group/Business Credit, Inc., (herein "CITBC"), with offices located at 300 South Grand Avenue, Los Angeles, CA 90071, in lawful money of the United States of America and in immediately available funds, the principal amount of Ten Million Dollars ($10,000,000), or such other principal amount advanced pursuant to Section 3, paragraph 3.1 and Section 5, paragraph 5.1 of the Financing Agreement (as herein defined), such Revolving Loan advances shall be repaid on a daily basis as a result of the application of the proceeds of collections of the Accounts and the making of additional Revolving Loans as described in Section 3. The Revolving Loans may be borrowed, repaid and reborrowed by the Companies. A final balloon payment in an amount equal to the outstanding aggregate balance of principal and interest remaining unpaid, if any, under this Note as shown on the books and records of CITBC shall be due and payable on the termination of the Financing Agreement, as set forth in Section 11 thereof. The Companies further absolutely and unconditionally jointly and severally promise to pay to the order of CITBC at said office, interest, in like money, on the unpaid principal amount owing hereunder from time to time from the date hereof on the dates and at the rates specified in Section 8, of the Financing Agreement. If any payment on this Note becomes due and payable on a day other than a business day, the maturity thereof shall be extended to the next succeeding Business Day, and with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. This Note is one of the Promissory Notes referred to in the Financing Agreement, dated as of the date hereof, as the same may be amended and restated and in effect from time to time, among the Companies and CITBC, (the "Financing Agreement"), and is subject to, and entitled to, all of the terms, provisions and benefits thereof and is subject to optional and mandatory prepayment, in whole or in part, as provided therein. All capitalized terms used herein shall have the meaning provided therefor in the Financing Agreement, unless otherwise defined herein. The date and amount of the advance(s) made hereunder may be recorded on the grid page or pages which are attached hereto and hereby made part of this Note or the separate ledgers maintained by CITBC. The aggregate unpaid principal amount of all advances made pursuant hereto may be set forth in the balance column on said grid page or such ledgers maintained by CITBC. All such advances, whether or not so recorded, shall be due as part of this Note. 59 55 The Companies confirm that any amount received by or paid to CITBC in connection with the Financing Agreement and/or any balances standing to their credit on any of their accounts on CITBC's books under the Financing Agreement may in accordance with the terms of the Financing Agreement be applied in reduction of this Note, but no balance or amounts shall be deemed to effect payment in whole or in part of this Note unless CITBC shall have actually charged such account or accounts for the purposes of such reduction or payment of this Note. Upon the occurrence of any one or more of the Events of Default specified in the Financing Agreement or upon termination of the Financing Agreement, all amounts then remaining unpaid on this Note may become, or be declared to be, immediately due and payable as provided in the Financing Agreement. MEDIA ARTS GROUP, INC. /s/ Kenneth Raasch -------------------------- Title: President THOMAS KINKADE STORES, INC. /s/ Kenneth Raasch -------------------------- Title: President CALIFORNIA COAST GALLERIES, INC. /s/ Kenneth Raasch -------------------------- Title: President 60 EX-4.02 3 CREDIT AGREEMENT DATED AS OF FEBRUARY 21, 1997 1 Exhibit 4.02 CREDIT AGREEMENT (AMENDING AND RESTATING THE SECURITIES PURCHASE AGREEMENT DATED AS OF JULY 7, 1995, AS AMENDED) by and among LEVINE LEICHTMAN CAPITAL PARTNERS, L.P., as Lender and MEDIA ARTS GROUP, INC., THOMAS KINKADE STORES, INC., MAGI ENTERTAINMENT PRODUCTS, INC., MAGI SALES, INC. and CALIFORNIA COAST GALLERIES, INC., as Obligors Dated as of February 21, 1997 61 2 TABLE OF CONTENTS
Page ---- RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.1 Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.2 Use of Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.3 Cross-References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.4 Certain Matters of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2. CLOSING AND RELATED MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.1 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.2 Consolidation of Original Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.3 Mutual Releases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3. REPRESENTATIONS AND WARRANTIES OF OBLIGORS . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.1 Organization and Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.2 Subsidiaries and Other Related Companies . . . . . . . . . . . . . . . . . . . . . . . 14 3.3 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.4 Due Execution and Delivery; Binding Obligations . . . . . . . . . . . . . . . . . . . 14 3.5 No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.6 Governmental Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.7 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.8 Validity and Issuance of the Acquired Stock . . . . . . . . . . . . . . . . . . . . . 16 3.9 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.10 Material Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.11 Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.12 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.13 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.14 Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.15 Labor Agreements and Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.16 Employee Benefit Plans; ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.17 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.18 Compliance With Charter, Laws and Contracts, etc. . . . . . . . . . . . . . . . . . . 19 3.19 Litigation; Adverse Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.20 Governmental Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.21 Licenses, Permits and Authorizations . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.22 Properties and Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3.23 SEC Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3.24 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3.25 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3.26 Deposit Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3.27 Sources and Uses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3.28 Inventory Locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4. REPRESENTATIONS AND WARRANTIES OF LENDER . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.1 Organization and Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
62 3 4.3 Due Execution and Delivery; Binding Obligations . . . . . . . . . . . . . . . . . . . 21 4.4 No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.5 Investment Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.6 Accredited Investor Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.7 Governmental Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5. CLOSING CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.1 Documents and Related Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.2 Warrant and Note Amendment Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.3 Representations and Warranties; No Default; Other Matters . . . . . . . . . . . . . . 22 5.4 Restructuring and Prepayment Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.5 CIT Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.6 Transactions Permitted By Applicable Laws . . . . . . . . . . . . . . . . . . . . . . 22 5.7 No Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 5.8 No Material Judgment Or Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 5.9 Budget For Fiscal Year Ending March 31, 1998 . . . . . . . . . . . . . . . . . . . . . 23 6. CONDITIONS TO THE OBLIGATIONS OF OBLIGORS . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.2 Purchase Permitted By Applicable Laws . . . . . . . . . . . . . . . . . . . . . . . . 23 6.3 No Material Judgment or Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 7. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 7.1 Payments with Respect to the Consolidated Note . . . . . . . . . . . . . . . . . . . . 24 7.2 Limitation On Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . 24 7.3 Limitation on Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 7.4 Limitation on Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 7.5 Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 7.6 Limitation on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 7.7 Information Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 7.8 Books, Records and Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 7.9 Visitation Rights for Board Meetings. . . . . . . . . . . . . . . . . . . . . . . . . 27 7.10 Maintenance of Property, Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 27 7.11 Corporate Franchises; Material Rights . . . . . . . . . . . . . . . . . . . . . . . . 27 7.12 Compliance With Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 7.13 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 7.14 Transactions With Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 7.15 Restriction On Fundamental Changes; Right of First Refusal . . . . . . . . . . . . . . 28 7.16 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 7.17 Amendments to Documents Relating to Permitted Senior Indebtedness . . . . . . . . . . 28 7.18 Notice of Agreements Affecting Stock . . . . . . . . . . . . . . . . . . . . . . . . . 29 7.19 Segregation of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 7.20 Restrictions on Payments On Account of Restricted Indebtedness . . . . . . . . . . . . 29 7.21 Certain Matters Regarding the Tax Refund Proceeds and Related Tax Return . . . . . . . 29 7.22 Change of Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.23 Key Person Life Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.24 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 8. COVENANTS RELATING TO ACQUIRED STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 9. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
63 4 9.1 Transfer Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 9.2 Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 9.3 Indemnification Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 9.4 Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 10. DEFAULTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 10.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 10.2 Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 10.3 Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 10.4 Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 11. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 11.1 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 11.2 Consent to Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 11.3 Form, Registration, Transfer and Exchange of Securities; Lost Securities . . . . . . . 34 11.4 Persons Deemed Owners; Participation . . . . . . . . . . . . . . . . . . . . . . . . . 34 11.5 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . 34 11.6 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 11.7 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 11.8 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 11.9 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 11.10 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 11.11 Descriptive Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 11.12 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 11.13 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 11.14 Payment of Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 11.15 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 11.16 Conflict of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 11.17 Agreement to Subordinate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 11.18 Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 11.19 No Strict Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 11.20 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 11.21 WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 12. CROSS-GUARANTY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 12.1 Cross-Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 12.2 Waivers by Obligors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 12.3 Benefit of Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 12.4 Subordination of Subrogation, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . 40 12.5 Election of Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 12.6 Additional Real Property Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 12.7 Limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 12.8 Contribution with Respect to Guaranty Obligations . . . . . . . . . . . . . . . . . . 42 12.9 Liability Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
64 5 INDEX OF ANNEXES, EXHIBITS AND SCHEDULES Annex A - Schedule of Documents Annex B - Financial Covenants Exhibit A - CIT Subordination Agreement Exhibit B - Consolidated Note Exhibit C - Intellectual Property Assignment Exhibit D - Investment Monitoring Agreement Amendment Exhibit E - Security Agreement Exhibit F - Warrant and Note Amendment Agreement Disclosure Schedule 65 6 CREDIT AGREEMENT (AMENDING AND RESTATING THE SECURITIES PURCHASE AGREEMENT DATED AS OF JULY 7, 1995, AS AMENDED) This Credit Agreement (Amending and Restating the Securities Purchase Agreement dated as of July 7, 1995, as Amended) (this "Agreement") is entered into as of February 21, 1997 by and among: 1. Levine Leichtman Capital Partners, L.P., a California limited partnership, as lender (the "Lender"), and 2. a. Media Arts Group, Inc., a Delaware corporation ("Media Arts"), for itself and as successor by merger to Lightpost Publishing, Inc., a California corporation ("Lightpost") and John Hine Studios, Inc., a Texas corporation ("JH Texas"), b. Thomas Kinkade Stores, Inc., a California corporation ("TKSI"), c. MAGI Entertainment Products, Inc., a California corporation ("MAGI Entertainment"), d. MAGI Sales, Inc. a California corporation ("MAGI Sales"), and e. California Coast Galleries, Inc. ("CCG"; Media Arts, TKSI, MAGI Entertainment, MAGI Sales and CCG may be referred to herein collectively as "Obligors" and individually as an "Obligor"). RECITALS A. Lender, Obligors (other than CCG and MAGI Sales), Lightpost and JH Texas are parties to a Securities Purchase Agreement dated as of July 7, 1995 (the "Original Purchase Agreement"; capitalized terms used in these Recitals that are not otherwise defined in these Recitals are as defined in the Original Purchase Agreement). B. Pursuant to the Original Purchase Agreement, among other things, Lender purchased: 1. a Senior Subordinated Note due June 30, 2002 in the principal amount of $4,000,000 (subject to RECITAL C.3, the "Original $4 Million Note") and a Convertible Redeemable Senior Subordinated Note due June 30, 2002 in the principal amount of $3,000,000 (subject to RECITAL C.3, the "Original $3 Million Convertible Note") from Media Arts, Lightpost, TKSI and MAGI Entertainment, 2. a Senior Subordinated Note due June 30, 2002 in the principal amount of $1,000,000 (subject to RECITAL C.3, the "Original $1 Million Note"; subject to RECITAL C.3, the Original $4 Million Note, the Original $3 Million Convertible Note and the Original $1 Million Note shall be referred to collectively as the "Original Notes") from JH Texas, and 3. a warrant to purchase an aggregate of 400,000 shares of Common Stock (subject to RECITAL C.3, the "Original Warrant"). C. The Original Purchase Agreement was amended pursuant to the First Amendment to Securities Purchase Agreement dated as of March 12, 1996 (the "First Amendment"; the Original 66 7 Purchase Agreement as so amended will be referred to as the "Existing Purchase Agreement"). In connection with the First Amendment, among other things, 1. Lender waived certain Events of Default and the parties executed a mutual release with respect to certain claims described therein, 2. MAGI Sales was added as a party to the Existing Purchase Agreement, 3. the Original Notes and the Original Warrant were amended (and all further references to such documents shall be to such documents as they were amended on March 12, 1996), and 4. Lender was granted a lien and security interest in the assets of Lightpost, JH Texas, and all of the Obligors other than CCG. D. Since the time at which the First Amendment was entered into, 1. Lightpost and JH Texas have merged with and into Media Arts, with Media Arts the surviving corporation, 2. Media Arts acquired CCG as a wholly owned subsidiary of Media Arts (and has informed Lender that it intends to merge CCG with and into TKSI prior to May 1997, and 3. Media Arts has informed Lender that the senior loan to all Obligors other than CCG from Comerica Bank-California ("Comerica") will be refinanced and replaced with a new senior revolving credit facility from The CIT Group/Business Credit, Inc. ("CIT"). E. Various Events of Default under the Existing Purchase Agreement have occurred and have been continuing since on or about June 30, 1996. F. In connection with the refinancing of the existing Comerica loan by CIT and the transactions described herein, Lender and Obligors have agreed to restructure the obligations under the Existing Purchase Agreement and the Original Notes, amend and restate the Existing Purchase Agreement in its entirety as provided herein, and to enter into the transactions contemplated herein and in the Related Agreements (as defined below). NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree, and the Existing Purchase Agreement is hereby amended and restated as of the Closing Date (as defined below) in its entirety, as follows: AGREEMENT 1. DEFINITIONS. 1.1 Defined Terms. The following terms, when used in this Agreement, including its PREAMBLE and RECITALS, shall have the following meanings (such meanings to be equally applicable to the singular and plural forms thereof): 67 8 "Acquired Stock" means the Common Stock being acquired by Lender upon the exercise of the Original Warrant and the conversion option under the Existing $3 Million Convertible Note, as more fully described in the Warrant and Note Amendment Agreement. "Affiliate" means, when used with reference to any specified Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such specified Person. For the purposes of this definition, "control," when used with respect to any specified Person, means the power to direct or cause the direction of management or policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative of the foregoing. Notwithstanding the foregoing, the term Affiliate shall not include, with respect to any Obligor, Lender, Levine Leichtman Capital Partners, Inc. or any other Person (or any of the officers, directors, partners or employees of any of the foregoing Persons) solely because of any such Person's record or beneficial ownership of the Securities. "Agreement" means this Credit Agreement as originally in effect on the Closing Date, and as it may be amended from time to time thereafter. "Bankruptcy Law" means Title 11, U.S. Code or any similar Federal or state law for the relief of debtors. "Board of Directors" means the board of directors of any Person. "Business Day" means any day except Saturday, Sunday and any day which either is a legal holiday under the laws of the State of California or is a day on which banking institutions located in such state are authorized or required by law or other governmental action to close. "Capital Lease Obligation" means any lease obligation of a Person incurred with respect to any property (whether real, personal or mixed) acquired or leased by such Person and used in its business that is required to be recorded as a capitalized lease in accordance with GAAP. "Capital Stock" means any and all shares, interests, participations or other equivalents (however designated) of corporate stock. "CIT" is defined in RECITAL D.3. "CIT Credit Facility" means the revolving credit facility being provided to Media Arts, CCG and TKSI pursuant to the CIT Documents. "CIT Documents" means, collectively, (i) that certain Financing Agreement of even date herewith by and among Media Arts, CCG, TKSI and CIT, and (ii) all other "Loan Documents" (as defined therein). "CIT Subordination Agreement" means an intercreditor and subordination agreement by and between CIT and Lender and acknowledged by Obligors in substantially the form of EXHIBIT A. "Closing" is defined in SECTION 2.1. "Closing Date" means February 21, 1997. "Collateral" is defined in the Security Agreement. 68 9 "Comerica" is defined in RECITAL D.3. "Common Stock" means the common stock of Media Arts. "Consolidated Financial Statement" is defined in SECTION 3.9. "Consolidated Note" means the Consolidated, Amended and Restated 13.50% Senior Subordinated Note Due December 31, 2001 of even date herewith in substantially the form of EXHIBIT B. "Convertible Securities" is defined in SECTION 3.7(C)(I). "Custodian" means any receiver, trustee, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law. "Default" means any event which is, or after notice or lapse of time or both would be, an Event of Default. "Disclosure Schedule" is defined in the introductory paragraph of SECTION 3. "ERISA" means the Employee Retirement Income Security Act of 1974, including the rules and regulations promulgated thereunder. "Event of Default" is defined in SECTION 10.1. "Existing Purchase Agreement" is defined in RECITAL C. "First Amendment" is defined in RECITAL C. "GAAP" means generally accepted accounting principles and practices set forth in the opinions and pronouncements of the Accounting Principles Board and 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 may be approved by a significant segment of the accounting profession that are applicable to the circumstances as of the date hereof, applied on a consistent basis. "Guarantee" means (i) any guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner, of any obligation and (ii) any agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or performance (or payment of damages in the event of non-performance) of any obligation, including, without limiting the foregoing, any indemnification agreement, warranty and any agreement to pay amounts drawn down by letters of credit. Notwithstanding anything herein to the contrary, a Guarantee shall not include any agreement solely because such agreement creates a Lien on the assets of any Person. The amount of a Guarantee shall be deemed to be the maximum amount of the obligation guaranteed for which the guarantor could be held liable under such Guarantee. "Holder" means the Person in whose name any Security is registered on any Obligor's books. "Indebtedness" means (without duplication), when used with reference to any Person, 69 10 (i) any indebtedness, contingent or otherwise, in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), or evidenced by bonds, notes, debentures or similar instruments or letters of credit or representing the unpaid balance of the purchase price of any property or services (except any such balance that constitutes a trade payable in the ordinary course of business that is not overdue by more than 100 days or is being contested in good faith), if and to the extent any of the foregoing indebtedness would appear as a liability upon a balance sheet of such Person prepared on a consolidated basis in accordance with GAAP, (ii) the principal component of any Capital Lease Obligations of such Person, (iii) the maximum fixed repurchase price of any Redeemable Stock of such Person, (iv) obligations secured by a Lien to which any property or asset, including leasehold interests and any other tangible or intangible property rights, owned by such Person is subject, whether or not the obligations secured thereby have been assumed by such Person, and (v) Guarantees of items which would be included within this definition (regardless of whether such items would appear upon such balance sheet); provided, that for purposes of computing Indebtedness outstanding at any time, such items shall be excluded to the extent that they would otherwise be eliminated as intercompany items in consolidation. For purposes of the foregoing, the maximum fixed repurchase price of any Redeemable Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Stock as if such Redeemable Stock were repurchased on any date on which Indebtedness shall be required to be determined pursuant to this Agreement, and if such price is based upon or measured by the fair market value of such Redeemable Stock (or any equity security for which it may be exchanged or converted), such fair market value shall be determined in good faith by the Board of Directors of such Person. Any such determination may be challenged in good faith by the Holder of the Consolidated Note, and any dispute shall be resolved by an investment bank or appraisal company of recognized national standing selected by such Holder and reasonably acceptable to such Person and whose decision shall be binding. If the parties cannot agree on a mutually acceptable investment bank or appraisal company, then the Holder and such Person shall each choose one such investment bank or appraisal company and such firms shall jointly select a third investment bank or appraisal company which shall make the determination. The costs of any such determination shall be borne by such Person; provided, that in the event the determination by such investment bank or appraisal company is not more than 10% higher than the determination made by the Board of Directors of such Person, then the Holder requesting such independent determination shall bear the cost thereof. "Initial Scheduled Payment" is the $2,000,000 principal payment that is scheduled to be made on the Initial Date (as such term is defined in the Consolidated Note). "Intellectual Property Assignment" means the Amended and Restated Assignment for Security of Patents, Trademark and Copyrights in favor of Lender of even date herewith in substantially the form of EXHIBIT C, as the same may be amended from time to time hereafter. 70 11 "Investment Monitoring Agreement" means the Investment Monitoring Agreement dated as of September 10, 1996 as amended on the date hereof pursuant to the Investment Monitoring Agreement Amendment, and as may be amended from time to time hereafter. "Investment Monitoring Agreement Amendment" means the First Amendment to Investment Monitoring Agreement of even date herewith in substantially the form of EXHIBIT D. "Investments" is defined in SECTION 7.6. "JH Texas" is defined in the PREAMBLE. "John Hine Obligation" means the obligation of Media Arts to John Hine, an individual, in the principal amount as of the Closing Date of approximately L.970,756, together with all accrued interest thereon as of any time of determination, arising from the acquisition from John Hine of John Hine U.K. "John Hine U.K." means John Hine Limited, a corporation organized under the laws of the United Kingdom. "John Hine U.K. Obligation" means the existing net intercompany obligation of Media Arts to John Hine U.K. arising from the acquisition of inventory by JH Texas from John Hine U.K. "Kinkade Inventory Agreement" means the agreement of even date herewith by and between Thomas Kinkade, Kenneth E. Raasch, CIT and Lender with respect to the Inventory of Obligors subject to the Kinkade License. "Kinkade License" means the License Agreement dated as of December 1, 1993 between Thomas Kinkade, Kenneth E. Raasch and Lightpost Group, Inc, as predecessor in interest to Media Arts. "Lender" is defined in the PREAMBLE. "Lien" means any lien, pledge, mortgage, claim, covenant, restriction, security interest, charge or encumbrance of any kind, including Capital Lease Obligations having substantially the same economic effect. "Lightpost" is defined in the PREAMBLE. "MAGI Entertainment" is defined in the PREAMBLE. "MAGI Sales" is defined in the PREAMBLE. "Material Adverse Effect" means, with respect to any Person, a material adverse effect on the condition (financial or otherwise), business, results of operations or properties of such Person. "Media Arts" is defined in the PREAMBLE. "Obligations" means all loans, advances, debts, liabilities and obligations, for the performance of covenants, tasks or duties or for payment of monetary amounts (whether or not such performance is then required or contingent, or such amounts are liquidated or determinable) owing by any Obligor to Lender, and all covenants and duties regarding such amounts, of any kind or nature, present or future, 71 12 whether or not evidenced by any note, agreement or other instrument, arising under this Agreement or any of the Related Agreements. This term includes all principal, interest (including all interest which accrues after the commencement of any case or proceeding in bankruptcy after the insolvency of, or for the reorganization of any Obligor, whether or not allowed in such proceeding), fees, expenses, attorneys' fees and any other sum chargeable by Lender to any Obligor under this Agreement or any of the Related Agreements. "Obligor" is defined in the PREAMBLE; provided, that from and after the effective time of the merger of CCG with and into TKSI, CCG shall no longer be an "Obligor," and all of the rights and obligations of CCG shall become rights and obligations of TKSI. "Option Rights" is defined in SECTION 3.7(C)(II). "Original $1 Million Note" is defined in RECITAL B.2. "Original $3 Million Convertible Note" is defined in RECITAL B.1. "Original $4 Million Note" is defined in RECITAL B.1. "Original Notes" is defined in RECITAL B.2. "Original Purchase Agreement" is defined in RECITAL A. "Original Warrant" is defined in RECITAL B.3. "Other Permitted Indebtedness" means Indebtedness represented by (i) Capital Lease Obligations or (ii) purchase money Indebtedness incurred to acquire property or equipment in the ordinary course of business, in an aggregate amount, as of any time of determination, of up to $1,000,000 minus the amount of the Indebtedness of the type described in SECTION 7.4(A)(I) as of such time of determination. "Other Permitted Liens" means, with respect to any Person, any Lien arising by reason of: (i) any attachment, judgment, decree or order of any court, so long as such Lien is being contested in good faith and is either adequately bonded or execution thereon has been stayed pending appeal or review, and any appropriate legal proceedings which may have been duly initiated for the review of such attachment, judgment, decree or order shall not have been finally terminated or the period within which such proceedings may be initiated shall not have expired; (ii) taxes, assessments or governmental charges not yet delinquent or which are being contested in good faith; (iii) security for payment of workers' compensation or other insurance; (iv) security for the performance of leases; (v) deposits to secure public or statutory obligations or in lieu of surety or appeal bonds entered into in the ordinary course of business; 72 13 (vi) operation of law in favor or carriers, warehousemen, landlords, mechanics, materialmen, laborers, employees or suppliers, incurred in the ordinary course of business for sums which are not yet delinquent or are being contested in good faith by negotiations or by appropriate proceedings which suspend the collection thereof; (vii) any interest or title of a lessor under any lease (other than a Capital Lease Obligation); (viii) easements, rights-of-way, zoning and similar covenants and restrictions and other similar encumbrances or title defects which, in the aggregate, are not material in amount and which do not in any case materially interfere with the ordinary course of the business of such Person; and (ix) licenses of Intellectual Property Collateral (as defined in the Security Agreement) in favor of third parties in the ordinary course of business. "Perkins Obligation" means the existing potential indemnification obligation of Media Arts in favor of John Hine and John Hine U.K. with respect to their respective obligations to Richard Archer Perkins. "Permitted Investments" means: (i) direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury of the United States of America) or obligations the timely payment of the principal of and interest on which are fully guaranteed by the United States of America; (ii) obligations, debentures, notes or other evidence of indebtedness issued or guaranteed by the Export-Import Bank of the United States, the Federal Housing Administration or any other agency or instrumentality of the United States; (iii) interest-bearing demand or time deposits (including certificates of deposit) which are either (A) insured by the Federal Deposit Insurance Corporation or (B) held in Comerica or any United States, Australian, Canadian, European or Japanese commercial banks having general obligations rated at least "AA" or equivalent by Standard & Poor's Corporation or Moody's Investor Service and having capital and surplus of at least $500,000,000 or the equivalent; (iv) commercial paper rated (on the date of acquisition thereof) at least A-1 or P-1 or equivalent by Standard & Poor's Corporation or Moody's Investor Service, respectively (or an equivalent rating by another nationally recognized credit rating agency of similar standing if neither of such corporations is then in the business of rating commercial paper), maturing not more than 270 days from the date of creation thereof; or (v) any advances, loans or extensions of credit or any stock, bonds, notes, debentures or other securities as Lender may from time to time approve in its sole and absolute discretion. "Permitted Liens" is defined in SECTION 7.3. 73 14 "Permitted Senior Indebtedness" means any Indebtedness incurred by one or more of the Obligors pursuant to any secured credit facility or facilities that (i) permits borrowings up to an amount determined by reference to a specified borrowing base, which shall not exceed 85% of such Obligor's eligible accounts receivable plus 50% of such Obligor's eligible inventory, and (ii) expressly provides that borrowings under such facility or facilities are senior in right of payment to the payment of principal of and interest on the Consolidated Note. So long as the CIT Documents have not been amended in a manner that is prohibited pursuant to SECTION 7.17, the CIT Credit Facility shall constitute "Permitted Senior Indebtedness" hereunder. "Person" means any individual, sole proprietorship, partnership, joint venture, trust, incorporated organization, association, corporation, limited liability company, limited liability partnership, public benefit corporation, or government (whether Federal, state, county, city or otherwise, including without limitation, any instrumentality, political subdivision, agency, body or department thereof). "Pre-Closing Prepayment" means a prepayment of $592,500 of principal amount of the Original Notes (allocated among the Original Notes as Lender may determine in its sole and absolute discretion) to be made immediately prior to the issuance of the Consolidated Note pursuant to the Warrant and Note Amendment Agreement. "Purchase Money Liens" means Liens (including the interest of a lessor under a Capital Lease Obligation having substantially the same economic effect) on any item of equipment acquired (including by means of entering into a Capital Lease Obligation) or constructed after the Closing Date that secures Indebtedness permitted to be incurred under SECTION 7.4 that is incurred for the purpose of financing the acquisition or construction of such item. "Raasch Obligation" means the obligations of Media Arts to Linda Raasch, an individual, arising pursuant to that certain 8% Subordinated Convertible Promissory Note in the face amount of $1,200,000. "Raasch Subordination Agreement" means the Subordination Agreement (Raasch) dated as of July 25, 1995 of Linda Raasch in favor of Lender with respect to the Raasch Obligation. "Redeemable Stock" means, with respect to any Person, that portion of any equity security of such Person that, by its terms or otherwise, is, or at the option of the holder thereof may be, required to be redeemed or repurchased prior to June 30, 2002. "Registration Rights Agreement" means the Registration Rights Agreement dated as of July 25, 1995, as amended by Amendment No. 1 to Registration Rights Agreement dated as of March 12, 1996, as it may be amended from time to time hereafter. "Related Agreements" means: (i) the Consolidated Note, (ii) the Security Agreement, (iii) the Intellectual Property Assignment, (iv) the Registration Rights Agreement, 74 15 (v) the CIT Subordination Agreement, (vi) the Raasch Subordination Agreement, (vii) the Investment Monitoring Agreement, (viii) the Warrant and Note Amendment Agreement, and (ix) the Kinkade Inventory Agreement, in all cases as such agreements or instruments may be amended from time to time in accordance with their terms. "Released Claims" is defined in SECTION 2.3(a). "Releasing Party" is defined in SECTION 2.3(a). "Restricted Indebtedness" means, collectively, the John Hine Obligations, the John Hine U.K. Obligation, and the Perkins Obligation. "Restricted Payment" means, with respect to each Obligor and each Subsidiary of any Obligor: (i) any dividend or distribution, direct or indirect, on account of any shares of any class of Capital Stock of such Person now or hereafter outstanding, (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of Capital Stock of such Person, or any outstanding warrants, options or other rights to acquire Stock of such Person, now or hereafter outstanding, (iii) any payment or prepayment of principal of, premium, if any, or interest, fees or other charges on or with respect to, and any redemption, purchase, retirement, defeasance, sinking fund or similar payment with respect to Indebtedness that is subordinated in right of payment to the Consolidated Note; or (iv) any payment, distribution, contribution or transfer of property of any kind to John Hine U.K. or any of its Subsidiaries, provided, that the following shall not constitute Restricted Payments: (a) interest payments to Linda Raasch permitted under the Raasch Subordination Agreement; (b) the issuance of any equity securities by such Person upon the exercise or conversion, whether mandatory or optional, of any Option Rights or Convertible Securities; (c) any dividend or distribution, direct or indirect, on account of any shares of any class of Capital Stock of such Person now or hereafter outstanding which is payable solely in shares of Common Stock; 75 16 (d) the payment of or exchange of Indebtedness that is subordinate in right of payment to the Consolidated Note solely with Common Stock; and (e) the payment of any dividend by any Obligor or any Subsidiary of any Obligor other than Media Arts. "Security" means the Consolidated Note and the Acquired Stock. "Security Agreement" means the Amended and Restated Pledge and Security Agreement of even date herewith in substantially the form of EXHIBIT E, as the same may be amended from time to time hereafter. "Senior Lender" means any holder of Permitted Senior Indebtedness. "Subsidiary" means, with respect to any Person, any other Person of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, officers or trustees thereof is at the time owned in the aggregate, directly or indirectly, by such Person and its Subsidiaries; provided, that in no event shall "Subsidiary" include, with respect to Media Arts, John Hine U.K. or any of its Subsidiaries. "Tax Refund Account" means a deposit account to be opened by Media Arts for purposes of the deposit of the Tax Refund Proceeds. "Tax Refund Proceeds" means the Federal tax refund of Media Arts for the fiscal years ended March 31, 1995 and March 31, 1996 with respect to the carryback of losses for the fiscal year ended March 31, 1997. "Taxes" means any income, excise, sales, use, stamp or franchise taxes and any other taxes, fees, duties, levies, withholdings or other charges of any nature whatsoever imposed by any taxing authority, together with any interest and penalties and additions to tax. "TKSI" is defined in the PREAMBLE. "Transferee" means any direct or indirect transferee of all or any part of any Securities. "Warrant and Note Amendment Agreement" means the Warrant and Note Amendment Agreement of even date herewith in substantially the form of EXHIBIT F hereto. 1.2 Use of Defined Terms. Unless otherwise defined or the context otherwise requires, terms for which meanings are provided in this Agreement shall have such meanings when used in any Exhibits, Schedules or Annexes hereto, and in each notice and other communication delivered from time to time in connection with this Agreement or any Related Agreement. 1.3 Cross-References. Unless otherwise specified, references in this Agreement and in each other Related Agreement to any Section are references to such Section of this Agreement or such other Related Agreement, as the case may be, and unless otherwise specified, references in any Section or definition to any clause are references to such clause of such Section or definition. 1.4 Certain Matters of Construction. All Schedules, Exhibits, Annexes and any other attachments hereto, or expressly identified by this Agreement, are incorporated herein by reference, and taken together, shall constitute but a single agreement. Unless otherwise expressly set 76 17 forth herein, or in a written amendment referring to such Schedules, all Schedules referred to herein shall mean the Schedules as in effect as of the Closing Date. The Recitals shall be construed as part of this Agreement. For purposes of this Agreement and the other Related Agreements, the following additional rules of construction shall apply, unless specifically indicated to the contrary: (a) wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and the plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, the feminine and the neuter; (b) the term "or" is not exclusive; (c) the term "including" (or any form thereof) shall not be limiting or exclusive; (d) all references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations; and (e) all references to any instruments or agreements, including references to any of the Related Agreements, shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof. 2. CLOSING AND RELATED MATTERS 2.1 Closing. The Closing of the transactions contemplated herein (the "Closing") shall take place at the offices of Murphy, Weir & Butler, 2049 Century Park East, Suite 2100, Los Angeles, California on the Closing Date. 2.2 Consolidation of Original Notes. The Original Notes, as amended by the Warrant and Note Amendment Agreement and as the principal amount thereof shall have been reduced in connection with the actions contemplated by the Warrant and Note Amendment Agreement, shall be consolidated, amended and restated on the Closing Date, and shall be evidenced by the Consolidated Note which shall be issued in favor of Lender at the Closing upon the delivery to Media Arts of the Original Notes. The terms for payment of principal and interest on the obligations evidenced by the Consolidated Note, and all of the other terms relating thereto, are as set forth in the Consolidated Note. 2.3 Mutual Releases. (a) Release. Lender on the one hand, and each of the Obligors on the other hand (each such Person, a "Releasing Party"), hereby releases and forever discharges the other, together with their respective control Persons, officers, partners, directors, agents, representatives, employees and attorneys and each of their respective heirs, executors, administrators, successors and assigns from any and all liabilities, claims, demands, actions, causes of action or suits of any kind or nature whatsoever, whether known or unknown, suspected or unsuspected, which such Releasing Party ever had or now has against any such Person that could have been asserted in connection with or arising out of (i) Lender's investment in the Obligors pursuant to the Original Purchase Agreement and the Existing Purchase Agreement and the "Related Agreements" executed in connection therewith, or (ii) any acts or omissions taken subsequent to the date of the Original Purchase Agreement and prior to the date hereof, including the occurrence of any Defaults or Events of Default (as such terms are defined in the Existing Purchase Agreement as of the relevant time of determination) during such period (collectively, the "Released Claims"). (b) Acknowledgement. The parties acknowledge that they may hereafter discover facts in addition to or different from those which they now know or believe to be true with respect to the subject matter of this Agreement, but they do each affirm that it is their intention to fully, finally and forever settle and release any and all Released Claims notwithstanding any such discovery or nullification or voidance of this Agreement. (c) Exclusions. Notwithstanding the foregoing SECTIONS 2.3(A) AND 2.3(B), the parties agree that the releases contained therein do not extend to any liabilities, claims, demands, 77 18 actions, causes of action or suits of any kind or nature whatsoever, that may arise out of any Defaults or Events of Default that may exist upon the effectiveness of this Agreement or which may occur after the date hereof, including by virtue of any breach of any representation, warranty or covenant contained in this Agreement. (d) Power to Release. The parties each represent and warrant to the other that they are the sole owners of the claims which they are releasing, and that they have full power to give the releases provided for herein. The parties each further represent and warrant to the other that they have not assigned or transferred any of the claims released herein, and each agrees to indemnify and hold the other harmless from and against any liability, loss, cost or expense, including attorneys' fees, incurred as a result of any claim asserted by any other person, arising in whole or in part from the same events as the claims released herein. 78 19 3. REPRESENTATIONS AND WARRANTIES OF OBLIGORS. Obligors hereby jointly and severally represent and warrant to Lender that, except as set forth in the disclosure schedule attached hereto (the "Disclosure Schedule"), the following statements are true and correct as of the date hereof (and such representations and warranties shall survive the execution and delivery of this Agreement): 3.1 Organization and Good Standing. Each Obligor is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, and has all requisite corporate power and authority to own (or hold under lease) and operate its material properties, to carry on its business as now conducted, to enter into this Agreement and each Related Agreement to which it is a party, to issue and deliver the Consolidated Note (and in the case of Media Arts, to issue, sell and deliver the Acquired Stock) and to consummate the transactions contemplated hereby and in the Related Agreements. Each Obligor is duly qualified as a foreign corporation to do business and is in good standing wherever necessary to carry on its present business and operations, except in such jurisdictions in which the failure to so qualify or be in good standing would not, individually or in the aggregate, have a Material Adverse Effect on Obligors, taken as a whole. 3.2 Subsidiaries and Other Related Companies. The Disclosure Schedule (Section 3.2) (i) sets forth (A) a complete list of each direct and indirect Subsidiary of Media Arts and (B) the interest of Media Arts in John Hine U.K. and a complete list of each direct and indirect Subsidiary of John Hine U.K., and (ii) indicates the jurisdiction in which each entity described in the immediately preceding CLAUSE (i) is incorporated. 3.3 Authorization. The execution, delivery and performance of this Agreement and of each of the Related Agreements, the issuance and delivery of the Consolidated Note and the issuance, sale and delivery of the Acquired Stock, and the consummation of the transactions contemplated hereby and in the Related Agreements have been duly authorized by all necessary corporate action on the part of each Obligor (to the extent they are parties thereto). 3.4 Due Execution and Delivery; Binding Obligations. This Agreement and the Related Agreements have been duly executed and delivered by Obligors. This Agreement and the Related Agreements are the legal, valid and binding obligations of Obligors party thereto, enforceable against Obligors party thereto in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or conveyance or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability and except as rights of indemnity or contribution may be limited by Federal or state securities or other laws or the public policy underlying such laws. 3.5 No Violation. The execution, delivery and performance by Obligors of this Agreement and of each of the Related Agreements to which they are parties, the issuance and delivery of the Consolidated Note and the issuance, sale and delivery of the Acquired Stock, the creation of the Liens contemplated in the Related Agreements, and the consummation of the transactions contemplated hereby and in the Related Agreements do not violate (i) the charter or bylaws of any Obligor, (ii) any material law, rule, regulation or ordinance applicable to any Obligor or any Subsidiary of any Obligor or any order, ruling, judgment or decree of any court or other governmental agency binding on any 79 20 Obligor or any Subsidiary of any Obligor, or (iii) any term of any material indenture, mortgage, lease, agreement or instrument to which any Obligor or any Subsidiary of any Obligor is a party. 3.6 Governmental Consents. The execution and delivery by Obligors of this Agreement and of each Related Agreement to which they are parties, the issuance and delivery of the Consolidated Note and the issuance, sale and delivery of the Acquired Stock, the creation of the Liens contemplated in the Related Agreements, and the consummation of the transactions contemplated hereby and in the Related Agreements, do not and will not require as of the Closing Date any authorization, registration or filing with, or consent or approval of, any Federal, state or other governmental authority or regulatory body other than filings under applicable Federal and state securities laws. 3.7 Capitalization. (a) The Disclosure Schedule (Section 3.7) sets forth, in addition to the various exceptions to the representations and warranties contained in this SECTION 3, (i) the total authorized Capital Stock of Media Arts as of the date hereof, (ii) the number and class of all shares of Capital Stock of Media Arts which have been issued and are outstanding as of the date hereof (or the nearest practicable date, but in all cases including the Acquired Stock), (iii) the total authorized Capital Stock of each Subsidiary of Media Arts, and of John Hine U.K., as of the date hereof, and (iv) the number and class of all shares of Capital Stock of each Subsidiary of Media Arts, and of John Hine U.K. and its Subsidiaries, which have been issued and are outstanding as of the date hereof and the ownership of such shares of Capital Stock. (b) All of the issued and outstanding shares of Capital Stock of Media Arts and of each Subsidiary of Media Arts have been duly authorized and validly issued, are fully paid and nonassessable and are free of any preemptive or other similar rights to subscribe for or to purchase any such Capital Stock. (c) Except as described in the Disclosure Schedule (Section 3.7), there are: (i) no outstanding securities or obligations of any Person convertible or exchangeable into any shares of Capital Stock of Media Arts or any Subsidiary of Media Arts ("Convertible Securities"); (ii) no outstanding warrants, rights or options to subscribe for or purchase, or obligations to issue, any such shares of Capital Stock of Media Arts or any Subsidiary of Media Arts or any Convertible Securities of Media Arts or any Subsidiary of Media Arts ("Option Rights"); 80 21 (iii) no voting trusts or other agreements or undertakings with respect to the voting of the Capital Stock of (A) any Subsidiary of Media Arts or, (B) to the best knowledge of Obligors, Media Arts; (iv) no obligations on the part of Media Arts or any Subsidiary of Media Arts to purchase or redeem any outstanding shares of its Capital Stock, Convertible Securities or Option Rights; and (v) no agreements granting any Person any rights of first offer or first refusal or "drag-along," "tag-along" or similar rights with respect to any transfer of any Capital Stock, Convertible Securities or Option Rights issued by Media Arts or any Subsidiary of Media Arts. (d) All shares of Capital Stock, Convertible Securities and Option Rights that have been issued by Media Arts or any Subsidiary of Media Arts prior to the date hereof have been issued and offered without violation of any applicable Federal or state securities law. (e) Neither the amendment of the Original Warrant and the Original Notes pursuant to the Warrant and Note Amendment Agreement, nor the issuance of the Acquired Stock as provided therein, requires or has resulted in or caused any adjustment to the applicable share purchase price under, or the number of shares purchasable pursuant to, any Convertible Securities or Option Rights relating to the Capital Stock of Media Arts, other than certain adjustments with respect to the warrants identified as the "Dunning Warrants" and the "Hyprom Warrants" in the Disclosure Schedule (Section 3.7). 3.8 Validity and Issuance of the Acquired Stock. Upon the payment of the purchase price for the Acquired Stock in accordance with the Original Warrant and Note Amendment Agreement, the Acquired Stock will be duly and validly issued, fully paid and nonassessable. 3.9 Financial Statements. Obligors have delivered to Lender the unaudited consolidated balance sheets of Media Arts and its Subsidiaries as of December 31, 1996 and the related consolidated statements of operations and stockholders' equity for the nine-month period ended December 31, 1996 (the "Consolidated Financial Statement"). The Consolidated Financial Statement (i) is in accordance with the books and records of Media Arts and its Subsidiaries, (ii) presents fairly the consolidated financial position of Media Arts and its Subsidiaries as of the dates indicated and their respective results of operations for the periods indicated, and (iii) has been prepared in conformity with GAAP consistently applied throughout the periods indicated; provided, that such statement is subject to normal year end adjustments and does not include footnotes. 3.10 Material Liabilities. No Obligor, nor any Subsidiary of any Obligor, has any liabilities or obligations, absolute or contingent (individually or in the aggregate), except (i) liabilities and obligations reflected in the Consolidated Financial Statement, (ii) liabilities and obligations which have been incurred subsequent to December 31, 1996 in the ordinary course of business and (iii) liabilities and obligations which, either individually or in the aggregate, have not had and could not have a Material Adverse Effect on Obligors, taken as a whole. The Disclosure Schedule (Section 3.10) contains a description of all ongoing obligations and liabilities of Obligors with respect to discontinued operations, including the operations of JH Texas. 81 22 3.11 Changes. Except as set forth in the Disclosure Schedule (Section 3.11), since December 31, 1996 there has not been: (a) any damage, destruction or loss to any asset of any Obligor or any Subsidiary of any Obligor, whether or not covered by insurance, which could have a Material Adverse Effect on Obligors, taken as a whole. (b) any waiver by any Obligor or any Subsidiary of any Obligor of a valuable right or of a material debt owed to it; (c) any satisfaction or discharge of any Lien or payment of any obligation by any Obligor or any Subsidiary of any Obligor, except in the ordinary course of business; (d) any change or amendment to a material contract or arrangement by which any Obligor or any Subsidiary of any Obligor, or any of their respective properties or assets is bound or subject; (e) any change in the assets, liabilities, financial condition or operations of any Obligor or any Subsidiary of any Obligor, except changes in the ordinary course of business which individually or in the aggregate could not have a Material Adverse Effect on Obligors, taken as a whole. (f) any change in the contingent obligations of any Obligor or any Subsidiary of any Obligor, by way of Guarantee, or otherwise, except in the ordinary course of business; (g) any declaration or payment of any dividend or other distribution of assets of any Obligor to its stockholders (other than dividends of or distributions by any of Media Arts' direct Subsidiaries to Media Arts), or the adoption or consideration of any plan or arrangement with respect thereto; (h) any Investment in John Hine U.K. or any of its Subsidiaries by any Obligor; (i) any resignation or termination or employment of any key employee of any Obligor or any Subsidiary of any Obligor; or (j) any other event or condition of any character which could have a Material Adverse Effect on Obligors, taken as a whole. 3.12 Inventories. The Disclosure Schedule (Section 3.12) contains an accurate list of each Obligor's inventory as of January 31, 1997. All inventories of raw materials, work in process and finished goods of each Obligor and of each Subsidiary of each Obligor consist of items of a quality and quantity useable and saleable in the ordinary course of business, except for such items which have been written down on the books of Obligors to fair saleable value. The present quantities of inventories are reasonable in the present circumstances and all items included in inventories are the property of an Obligor or a Subsidiary of an Obligor, free and clear of all Liens other than Permitted Liens. 82 23 3.13 Accounts Receivable. The Disclosure Schedule (Section 3.13) contains a summary aging of accounts receivable of Obligors as of January 31, 1997, reflecting agings in categories of 30, 60, 90 and more than 90 days after the date of invoice. All accounts receivable of each Obligor and of each Subsidiary of each Obligor (i) are legal, valid and binding obligations of the parties shown on the books of the Obligors as the obligor with respect thereto, (ii) are not subject to discount (other than as reflected in the reserves taken in recording the accounts receivable on the books of Obligors and their Subsidiaries, which reserves are adequate), rebate, offset, or return privileges, and (iii) arose from valid sales in the ordinary course of business. No Obligor is aware of any customer which has indicated an unwillingness or an inability to pay any amount included in the accounts receivables of such Obligor. Except as set forth in the Disclosure Schedule (Section 3.13), as of the date hereof no Obligor places any products with third parties on consignment or in any similar arrangement. 3.14 Accounts Payable. The Disclosure Schedule (Section 3.14) contains a summary aging of accounts payable of Obligors as of January 31, 1997, reflecting agings in categories of 30, 60, 90 and more than 90 days after the date of invoice. All accounts payable of each Obligor and of each Subsidiary of each Obligor are legal, valid and binding obligations of the Obligors and were incurred in the ordinary course of business. 3.15 Labor Agreements and Actions. No Obligor and no Subsidiary of any Obligor is bound by or subject to any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or sought to represent any of the employees, representatives or agents of such Obligor or such Subsidiary. There is no strike or other labor dispute involving any Obligor or any Subsidiary of any Obligor pending or, to any Obligor's knowledge, threatened. No Obligor is aware of any labor organization activity involving the employees of such Obligor or any Subsidiary of such Obligor or of any officer or key employee, or any group of officers or key employees, that intends to terminate their employment with such Obligor or any subsidiary of such Obligor. After due inquiry of Kenneth E. Raasch, Daniel P. Byrne, and Raymond A. Peterson, Obligors have no knowledge of any fact or circumstance which would or could, with the passage of time or otherwise, cause this representation and warranty to be no longer true and correct. 3.16 Employee Benefit Plans; ERISA. All pension, retirement, bonus, profit sharing, stock option, employee and other benefit plans or arrangements maintained by any Obligor or any Subsidiary of any Obligor, or to which any Obligor or any Subsidiary of any Obligor contributes or is required to contribute, to the extent required, comply with the provisions of and have been administered and maintained in compliance with the provisions of ERISA and all other applicable laws. 3.17 Taxes. Each Obligor and each Subsidiary of such Obligor has timely filed all Federal, state and other Tax returns required to have been filed and has paid all Taxes which have become due and payable. Each Obligor and each Subsidiary of each Obligor has withheld and paid all Taxes required to be withheld and paid in connection with amounts paid or owing to any employee, creditor, independent contractor, stockholder or other third party. No Obligor has been advised that any Tax returns, Federal, state or other, have been or are being audited. There are no agreements, waivers or other arrangements providing for an extension of time with respect to the assessment of any Taxes or deficiency against any Obligor or any Subsidiary of any Obligor, nor are there any actions, suits, proceedings or claims now pending against any Obligor or any Subsidiary of any Obligor in respect of any Taxes or assessments. There is no pending or, to Obligors' knowledge, threatened investigation of any Obligor or any Subsidiary of any Obligor by any Federal, state, foreign or local 83 24 authority relating to any Taxes or assessments, or any claims for additional taxes or assessments asserted by any such authority. No Obligor is a party to or bound by any tax sharing, tax indemnity or tax allocation agreement or other similar arrangement. 3.18 Compliance With Charter, Laws and Contracts, etc. No Obligor and no Subsidiary of any Obligor is in violation of any of the terms of (i) its charter or bylaws as in effect on the date hereof, (ii) any law, rule, regulation, or ordinance applicable to such Obligor or such Subsidiary (including laws relating to the discharge of pollutants into the environment and the storage and handling of hazardous materials), or any order, ruling, judgment or decree of any court or other governmental agency binding on such Obligor or such Subsidiary, or (iii) any indenture, mortgage, lease, contract, agreement or instrument to which such Obligor or such Subsidiary is a party (including, without limitation, the Kinkade License), and, in each case, there does not exist any event or circumstance, that, with the giving of notice or the lapse of time or both, would constitute any such violation except, in the case of the foregoing CLAUSES (II) and (III) only, such violations which, individually or in the aggregate would not have a Material Adverse Effect on Obligors, taken as a whole. The Kinkade License has not been amended and is in full force and effect in accordance with its terms, and Media Arts has succeeded to the rights of Lightpost thereunder. Without limiting the generality of the foregoing, there does not exist any "Event of Default" under the terms of any of the CIT Documents nor is there any fact or circumstance which, with the passage of time or the giving of notice or both would or could constitute such an "Event of Default" thereunder. 3.19 Litigation; Adverse Facts. Except as set forth in the Disclosure Schedule (Section 3.19), (i) there are no actions, suits, proceedings or investigations at law or in equity ("Litigation") pending before or by any Federal, state, municipal or governmental department, court, board, bureau, agency or instrumentality or threatened against or affecting any Obligor or any Subsidiary of any Obligor, and (ii) no Litigation, if adversely determined, could, individually or in the aggregate have a Material Adverse Effect on Obligors, taken as a whole, or impair the ability of Obligors to perform fully on a timely basis any material obligation which they have or will have under this Agreement or any Related Agreement, nor is there any judgment, decree, injunction, rule or order of any public body against any Obligor or any Subsidiary of any Obligor having any such effect. No Obligor is aware of any fact or circumstance which could give rise to any Litigation which could, individually or in the aggregate, have a Material Adverse Effect on Obligors, taken as a whole. 3.20 Governmental Regulation. No Obligor and no Subsidiary of any Obligor is subject to regulation under the Investment Companies Act of 1940 or to any Federal or state statute or regulation limiting its ability to incur Indebtedness for money borrowed or to create Liens on any of its properties or assets to secure such Indebtedness. No Obligor and no Subsidiary of any Obligor has extended credit for the purposes of purchasing or carrying "margin stock" within the meaning of Regulation G of the Board of Governors of the Federal Reserve System or Regulation U of such Board. 3.21 Licenses, Permits and Authorizations. Each Obligor, and each Subsidiary of each Obligor, has all licenses, franchises, permits, consents, registrations, certificates and other approvals of all governmental or regulatory agencies, whether Federal, state or local, material to the conduct of the business of Obligors, taken as a whole. 3.22 Properties and Assets. Each Obligor and each Subsidiary of each Obligor has good and valid title to their respective assets, free and clear of all Liens of any kind other than Permitted 84 25 Liens. Each Obligor and each Subsidiary of each Obligor enjoys peaceful and undisturbed possession of all its leasehold interests. 3.23 SEC Filings. Media Arts has made all filings required to be made by it under the Securities Act of 1933 and the Securities Exchange Act of 1934 and all applicable state securities laws during the one year period prior to the date hereof. All such filings complied in all material respects with the requirements of such Federal and state securities laws. 3.24 Disclosure. In connection with the acquisition by Lender of the Securities, to the best knowledge of Media Arts, none of (i) this Agreement or any of the Related Agreements (including any Schedules hereto or thereto) or documents delivered pursuant thereto or (ii) the reports filed by Media Arts with the Securities and Exchange Commission pursuant to the requirements of the Securities Exchange Act of 1934 for the period commencing April 1, 1995 or (iii) any information conveyed to Lender by Kenneth E. Raasch or Raymond A. Peterson since December 1, 1996 is or was, when made, untrue with respect to any material fact or omits or omitted a material fact necessary in order to make the statement not misleading. 3.25 Insurance. The Disclosure Schedule (Section 3.25) lists all insurance policies of any nature maintained, as of the Closing Date, for current occurrences by each Obligor, as well as a summary of the terms of each such policy. 3.26 Deposit Accounts. The Disclosure Schedule (Section 3.26) lists all banks and other financial institutions at which any Obligor maintains deposits and/or other accounts as of the Closing Date, and such Schedule correctly identifies the name, address and telephone number of each depository, the name in which the account is held, a description of the purpose of the account, and the complete account number. 3.27 Sources and Uses. The Disclosure Schedule (Section 3.27) contains a description of Obligors' sources and uses of funds as of the Closing Date, including the loans of CIT and all fees, costs and expenses relating to the transactions contemplated hereby and in the CIT Documents. 3.28 Inventory Locations. The Disclosure Schedule (Section 3.28) lists and describes all real property leased and subleased to each Obligor at which inventory is located, and lists the term and rent payable thereunder. Obligors have delivered to Lender a true and complete copy of the lease with respect to its headquarters at 521 Charcot Avenue in San Jose. 4. REPRESENTATIONS AND WARRANTIES OF LENDER. Lender hereby represents and warrants to Obligors that the following statements are true and correct as of the date hereof: 4.1 Organization and Good Standing. Lender is a limited partnership, duly organized, validly existing and in good standing under the laws of the State of California, and has all requisite power and authority to enter into this Agreement and each Related Agreement to which it is a party and to consummate the transactions contemplated hereby. 85 26 4.2 Authorization. The execution, delivery and performance of this Agreement and of each of the Related Agreements to which Lender is a party, and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of Lender. 4.3 Due Execution and Delivery; Binding Obligations. This Agreement has been duly executed and delivered by Lender. This Agreement and the Related Agreements to which Lender is a party are the legal valid and binding obligations of Lender enforceable against Lender in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or conveyance or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability and except as rights of indemnity or contribution may be limited by Federal or state securities or other laws or the public policy underlying such laws. 4.4 No Violation. The execution, delivery and performance by Lender of this Agreement, and of each of the Related Agreement to which Lender is a party, and the consummation of the transactions contemplated hereby and thereby do not violate (i) the organizational agreements of Lender as in effect on the date hereof, (ii) any law, rule, regulation or ordinance applicable to Lender or any order, ruling, judgment or decree of any court or other governmental agency binding on Lender or (iii) any term of any material indenture, mortgage, lease, agreement or instrument to which Lender is a party. 4.5 Investment Intent. Lender is acquiring the Acquired Stock for investment purposes and not with a view to or for sale in connection with any distribution thereof. The foregoing notwithstanding, the disposition of the Securities shall at all times be and remain within Lender's control, so long as such disposition complies with applicable laws and regulations. Lender understands that the Securities have not been registered under the Securities Act or registered or qualified under any state securities law in reliance on specific exemptions therefrom, which exemptions may depend upon, among other things, the bona fide nature of Lender's investment intent as expressed herein. 4.6 Accredited Investor Status. Lender is an "accredited investor" (as such term is defined in Rule 501 of Regulation D under the Securities Act). By reason of its business and financial experience, Lender has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the investment in the Securities and is able to bear the economic risk of such investment. Lender is aware of Obligors' business affairs and financial condition and has acquired sufficient information about Obligors to reach an informed and knowledgeable decision to acquire the Securities. Lender has had the opportunity to ask questions and receive answers concerning Obligors which it deems necessary to evaluate the risks and merits related to such decision. 4.7 Governmental Consents. The execution and delivery by Lender of this Agreement and each of the Related Agreements to which it is a party, and the consummation of the transactions contemplated hereby, do not and will not require any authorization, registration or filing with, or consent or approval of, any Federal, state or other governmental authority or regulatory body other than filings under Federal and state securities laws. 86 27 5. CLOSING CONDITIONS. The obligation of Lender to consummate the transactions contemplated hereby is subject to the satisfaction, prior to or at the Closing, of the following conditions; provided, that any or all of the following conditions may be waived, in whole or in part, by Lender in its sole and absolute discretion: 5.1 Documents and Related Materials. Lender shall have received this Agreement duly executed by Obligors and delivered to Lender, and all of the other documents, instruments, certificates, opinions, agreements and other materials listed in the Schedule of Documents attached as ANNEX A, each in form and substance satisfactory to Lender. 5.2 Warrant and Note Amendment Agreement. The transactions described in the Warrant and Note Amendment Agreement shall have occurred immediately prior to the issuance of the Consolidated Note, and in connection therewith, among other things: (a) Lender shall have acquired and shall have received certificates evidencing the Acquired Stock; and (b) Media Arts shall have paid the Pre-Closing Prepayment, and all interest on the Original Notes that has accrued through and including the Closing Date, to Lender by wire transfer of immediately available funds. 5.3 Representations and Warranties; No Default; Other Matters. The representations and warranties of Obligors contained in this Agreement shall be true and correct in all material respects at and as of the Closing Date after giving effect to the transactions contemplated by this Agreement, and there shall exist on the Closing Date, after giving effect to such transactions, no Event of Default or Default. Obligors shall have delivered to Lender a Closing Certificate signed by the Chief Executive Officer and the Chief Financial Officer of each Obligor, dated the Closing Date, satisfying the requirements of Item 3.11 of the Schedule of Documents. 5.4 Restructuring and Prepayment Fees. Media Arts shall have paid by wire transfer of immediately available funds (i) a $150,000 restructuring fee to Levine Leichtman Capital Partners, Inc., (ii) a $11,500 prepayment fee to Lender, and (iii) all out-of-pocket costs and expenses incurred by Lender in connection with the negotiation, documentation and closing of the transactions contemplated herein (including the reasonable fees and expenses of Lender's special counsel, Murphy, Weir & Butler and special securities counsel, Riordan & McKinzie). 5.5 CIT Credit Facility. The transactions contemplated in the CIT Documents shall have closed (and the CIT Credit Facility shall comply with the definition of "Permitted Senior Indebtedness" as such term is defined herein). As of the Closing Date, after giving effect to the payments to Lender contemplated hereunder and the payment of all of the fees and costs relating to this Agreement and the CIT Credit Facility, Borrower shall have consolidated cash and unused borrowing availability under the CIT Credit Facility of not less than $1,000,000 in the aggregate. 5.6 Transactions Permitted By Applicable Laws. The consummation of the transactions contemplated hereby and in the Related Agreements shall comply with all applicable requirements of Federal and state securities laws. The consummation of the transaction contemplated hereby shall not 87 28 be prohibited by or violate any law, governmental regulation or similar constraint and shall not subject any party to any Tax, penalty or liability, under or pursuant to any applicable law or governmental regulation, and shall not be enjoined (temporarily or permanently) under, or prohibited by or contrary to, any injunction, order or decree. 5.7 No Material Adverse Effect. There shall not have occurred any event or circumstance which, individually or in the aggregate, could have a Material Adverse Effect on Obligors, taken as a whole. 5.8 No Material Judgment Or Order. There shall not be any judgment or order of a court of competent jurisdiction or any ruling of any agency of the Federal or any state or local government which, in the reasonable judgment of Lender, would prohibit the delivery of the Securities or subject Lender to any material penalty in connection with such delivery. 5.9 Budget For Fiscal Year Ending March 31, 1998. Lender shall have received Media Arts' final consolidated monthly budget with respect to the fiscal year ending March 31, 1998, including a balance sheet and income statement and such additional information reasonably requested by Lender. 6. CONDITIONS TO THE OBLIGATIONS OF OBLIGORS. The obligation of Obligors to consummate the transactions contemplated hereby is subject to the satisfaction, prior to or on the Closing Date, of the following conditions; provided, that any or all of the following conditions may be waived, in whole or in part, by Media Arts in its sole and absolute discretion (which waiver shall be binding on all Obligors): 6.1 Representations and Warranties. The representations and warranties of Lender contained in this Agreement shall be true in all material respects at and as of the Closing Date after giving effect to the transactions contemplated by this Agreement. 6.2 Purchase Permitted By Applicable Laws. The consummation of the transactions contemplated hereby and in the Related Agreements shall otherwise comply with all applicable requirements of Federal and state securities laws. The consummation of the transactions contemplated hereby shall not be prohibited by or violate any law, governmental regulation or similar constraint and shall not subject any party to any Tax, penalty or liability under or pursuant to any applicable law or governmental regulation, and shall not be enjoined (temporarily or permanently) under, or prohibited by or contrary to, any injunction, order or decree. 6.3 No Material Judgment or Order. There shall not be any judgment or order of a court of competent jurisdiction or any ruling of any agency of the Federal or any state or local government which, in the reasonable judgment of Media Arts would prohibit the delivery of the Securities or subject any Obligor to any material penalty in connection with such delivery. 88 29 7. COVENANTS. Obligors covenant that so long as any principal, interest or other amounts remain outstanding under the Consolidated Note, they will perform all of the covenants in this SECTION 7. 7.1 Payments with Respect to the Consolidated Note. Obligors shall pay the principal of, interest on and other amounts due pursuant to the terms of the Consolidated Note on the dates and in the manner provided therein. 7.2 Limitation On Restricted Payments. Obligors shall not make (whether directly or indirectly), and shall not permit any of their Subsidiaries to make (whether directly or indirectly), any Restricted Payment. 7.3 Limitation on Liens. Obligors shall not, and shall not permit, cause or suffer any of their respective Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien of any kind upon any property or assets now owned or hereafter acquired. Notwithstanding the foregoing, the following Liens (the "Permitted Liens") may be created, incurred, assumed and permitted to exist (all of which are described in the Disclosure Schedule (Section 7.3) to the extent they exist as of the Closing Date): (a) Liens existing as of the date hereof with respect to Capital Lease Obligations, and extensions, renewals and replacements of such Liens, provided that any such extension, renewal or replacement Lien shall be limited to the property or assets covered by the Lien being extended, renewed or replaced and such new Lien shall not secure an obligation greater than the obligation secured by the Lien being extended, renewed or replaced immediately prior to such extension, renewal or replacement; (b) Other Permitted Liens; (c) Liens securing Permitted Senior Indebtedness; (d) Liens securing Other Permitted Indebtedness; (e) Liens granted to Lender, whether pursuant to the Security Agreement, the Intellectual Property Assignment or otherwise, provided, that, until such time at which the Initial Scheduled Payment has been made, in no event may any Lien other than the Lien of Lender exist with respect to the Tax Refund Proceeds or the Tax Refund Account. 7.4 Limitation on Indebtedness. (a) Obligors shall not, and shall not permit, cause or suffer any of their respective Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Indebtedness, except for the following, all of which is described in the Disclosure Schedule (Section 7.4) to the extent that it exists as of the Closing Date: 89 30 (i) certain Indebtedness existing as of the date hereof relating to Capital Lease Obligations; (ii) Indebtedness under the Consolidated Note; (iii) Permitted Senior Indebtedness and Guarantees thereof; (iv) Indebtedness consisting of (A) trade payables incurred in the ordinary course of business payable to Thomas Kinkade pursuant to the Kinkade License or otherwise or (B) other trade payables incurred in the ordinary course in an aggregate amount of up to $150,000; (v) Other Permitted Indebtedness; (vi) Indebtedness owed to any other Obligor; (vii) the Raasch Indebtedness, but only so long as it remains expressly subordinated to the Obligations pursuant to the Raasch Subordination Agreement; and (viii) the Restricted Indebtedness (and the Disclosure Schedule (Section 7.4) shall include the amount of accrued interest thereon). (b) Except to the extent otherwise permitted pursuant to the immediately preceding SECTION 7.4(A), no Obligor shall create, incur, assume or issue, directly or indirectly, or guarantee or in any manner become, directly or indirectly, liable for or with respect to the payment of any Indebtedness which is subordinate or junior in right of payment to any Permitted Senior Indebtedness of such Obligor and senior or pari passu in any respect in right of payment or in maturity to the Consolidated Note. 7.5 Financial Covenants. Obligors shall not breach or fail to comply with any of the Financial Covenants set forth in ANNEX B. 7.6 Limitation on Investments. Obligors shall not make or suffer to exist, and shall not permit or cause any of their respective Subsidiaries to, directly or indirectly, make or suffer to exist any capital contributions, advances or loans to (including any guarantees of loans to), or investment in or purchases of Capital Stock (other than pursuant to a stock-for-stock exchange or pursuant to a transaction in which Capital Stock is acquired in exchange for Indebtedness permitted under SECTION 7.4(A)) in, any Person (collectively, "Investments"), other than (i) Permitted Investments, (ii) Investments by any Obligor in any other Obligor, (iii) advances to non-director employees pursuant to transactions approved by the Board of Directors of the relevant Obligor or Subsidiary making such advance so long as the aggregate amount of all such advances does not exceed $100,000 and no single employee receives advances in excess of $25,000, (iv) Investments which represent Capital Expenditures otherwise permitted hereunder, and (v) promissory notes of Kenneth Raasch and Thomas Kinkade in favor of Media Arts in the principal amounts of $43,000 and $45,000, respectively relating to certain fringe benefits (provided, that Media Arts shall use its best efforts to eliminate these items from its balance sheet as soon as possible). 90 31 7.7 Information Covenants. Obligors shall furnish to Lender: (a) Monthly Financial Statements. Within 30 days after the last day of each monthly accounting period in each fiscal year (in draft form with respect to the final monthly period of each fiscal quarter), the consolidated and consolidating balance sheet of Media Arts as at the end of such monthly period, and the related statements of operations, stockholders' equity and cash flows for Media Arts for such monthly period and for the elapsed portion of the fiscal year ended with the last day of such monthly period, and including comparative figures for the related periods in the prior fiscal year. (b) Quarterly Financial Statements. Within 45 days after the close of each quarterly accounting period in each fiscal year (other than the fourth fiscal quarter), the consolidated and consolidating balance sheet of Media Arts as at the end of such quarterly period, and the related statements of operations, stockholders' equity and cash flows for Media Arts for such quarterly period and for the elapsed portion of the fiscal year ended with the last day of such quarterly period, and including comparative figures for the related periods in the prior fiscal year, all of which shall be certified by the Chief Financial Officer of Media Arts subject to normal year-end audit adjustments. (c) Annual Financial Statements. Within 90 days after the close of each fiscal year, the consolidated and consolidating balance sheet of Media Arts as at the end of such fiscal year, and the related statements of operations, stockholders' equity and cash flows for Media Arts for such fiscal year (which consolidated financial statements shall be audited and accompanied by an unqualified audit report from Media Arts' independent certified public accountants, who shall be one of the six largest national accounting firms), setting forth comparative figures for the prior fiscal year. (d) Officer's Certificates. At the time of the delivery of the financial statements provided for in the foregoing SECTIONS 7.7(B) AND (C), a certificate signed by the Chief Financial Officer of Media Arts which (i) shall include computations of the Financial Covenants set forth in ANNEX B and (ii) shall indicate, to the best knowledge of such officer, whether or not a Default or an Event of Default has occurred during the period covered by such financial statements and, if so, shall specify the nature and extent thereof and indicate whether such Default or Event of Default is continuing. (e) Other Reports and Filings. Promptly, copies of all financial information, proxy materials and other information and reports, if any, which any Obligor files with the Securities and Exchange Commission or any governmental agencies substituted therefor. (f) Notice of Default or Litigation. Promptly, and in any event within two Business Days after an officer of any Obligor obtains actual knowledge thereof, notice of (i) the occurrence of any event, act or condition which constitutes a Default or Event of Default, (ii) any litigation or governmental proceeding pending against any Obligor or any Subsidiary of any Obligor which could have a Material Adverse Effect on Obligors, taken as a whole, and (iii) any other event which is likely to have such a Material Adverse Effect. (g) Other Information. From time to time, such other information or documents (financial or otherwise) as Lender may reasonably request. 91 32 7.8 Books, Records and Inspections. Each Obligor shall, and shall cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all requirements of law shall be made of all dealings and transactions in relation to its business and activities. Each Obligor shall, and shall cause each of its Subsidiaries to, permit officers and designated representatives or agents of Lender to visit and inspect any of the properties of such Obligor or such Subsidiary of such Obligor, and to examine the books of account of such Obligor and such Subsidiary and discuss the affairs, finances and accounts of such Obligor and such Subsidiaries with, and be advised as to the same by, its officers and independent accountants, all at such reasonable times and intervals and to such reasonable extent as Lender may request; provided, that any such visit, inspection, examination or discussion shall be during normal business hours and shall not interfere unreasonably with such Obligor's or Subsidiary's business; and provided further, that all confidential information obtained pursuant to any such visit, inspection, examination or discussion shall be treated in accordance with SECTION 11.15. 7.9 Visitation Rights for Board Meetings. Without limiting the generality of SECTION 7.8, Lender shall also receive notice of and be entitled to have a representative (who shall be an employee of Levine Leichtman Capital Partners, Inc.) attend as an observer all meetings of the Boards of Directors of each Obligor and of each Subsidiary of each Obligor and of all committees of all such Boards of Directors. Notice of such meetings shall be given to Lender in the same manner and at the same times as to members of such Boards of Directors or such committees (which shall be at least 48 hours prior to such meeting unless otherwise agreed to by Lender). Lender shall be provided with copies of (i) a meeting agenda, if any is prepared, (ii) all information which is provided to the members of any such Board of Directors or committee thereof (whether prior to, at, or subsequent to any such meetings) at the same time as such materials are provided to the members of such Boards of Directors or such committees, as the case may be, and (iii) copies of the minutes of all such meetings within 10 days thereafter. 7.10 Maintenance of Property, Insurance. Each Obligor shall, and shall cause each of its Subsidiaries to (i) keep all property useful and necessary in its business in good working order and condition, (ii) maintain with financially sound and reputable insurance companies insurance on all its property, and (iii) furnish to Lender, upon written request, full information as to the insurance carried. If any Obligor at any time or times hereafter shall fail to obtain or maintain any of the policies of insurance required above or to pay all premiums relating thereto, Lender may at any time or times thereafter obtain and maintain such policies of insurance and pay such premiums and take any other action with respect thereto which Lender deems advisable. Lender shall have no obligation to obtain insurance for any Obligor or pay any premiums therefor. By doing so, Lender shall not be deemed to have waived any Default or Event of Default arising from any Obligor's failure to maintain such insurance or pay any premiums therefor. All sums so disbursed, including attorneys' fees, court costs and other charges related thereto, shall be payable on demand by Obligors to Lender and shall be additional Obligations hereunder secured by the Collateral. 7.11 Corporate Franchises; Material Rights. Each Obligor shall, and shall cause each of its Subsidiaries to use reasonable efforts to, do or cause to be done, all things necessary to preserve and keep in full force and effect the existence and the material rights, franchises, agreements, contracts, 92 33 licenses and patents of such Obligor and each Subsidiary of such Obligor (including, without limitation, the Kinkade License). 7.12 Compliance With Law. Each Obligor shall, and shall cause each of its Subsidiaries to, comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to ERISA and labor matters, and environmental standards and controls). 7.13 Taxes. Each Obligor shall, and shall cause each of its Subsidiaries to, pay when due all Taxes, except as contested in good faith and by appropriate proceedings if adequate reserves (in the good faith judgment of the management of such Obligor) have been established with respect thereto. 7.14 Transactions With Affiliates. Except for the transactions described in the Disclosure Schedule (Section 7.14), and except for renewals and extensions of existing licensing agreements on terms no less favorable to Obligors than the existing agreements (without any implication that any such transactions or agreements would otherwise violate this covenant), Obligors shall not make or suffer to exist, and shall not permit or cause any of their respective Subsidiaries to, directly or indirectly, make or suffer to exist, any transaction with any Affiliate on terms that are less favorable to such Obligor or such Subsidiary than those that might be obtained in an arm's length transaction at the time from a Person who is not an Affiliate. 7.15 Restriction On Fundamental Changes; Right of First Refusal. No Obligor shall (i) enter into any merger or consolidation, except in a transaction solely involving another Obligor, (ii) liquidate, wind-up or dissolve, (iii) convey, lease, sell, transfer or otherwise dispose of, in one transaction or a series of transactions, all or substantially all of such Obligor's business or assets, except in a transaction solely involving another Obligor, (iv) change its capital or legal structure or amend its charter or by-laws, in each case in any way that would have an adverse impact on Lender, or (v) issue, or reserve for issuance, pursuant to employee equity incentive plans, Common Stock which, in the aggregate (including shares issued prior to the date hereof pursuant to such equity incentive plans), exceeds 10% of the outstanding Capital Stock of Media Arts. Media Arts shall not issue any equity securities in a private placement for cash unless Lender is offered a right to participate in such private placement to the extent necessary to maintain Lender's equity interest in Media Arts computed on a fully diluted basis. 7.16 ERISA. Each Obligor shall deliver to Lender promptly, but in no event more than three Business Days after any executive officer of such Obligor obtains knowledge of the occurrence of any "reportable event," as such term is defined in Section 4043 of ERISA, or "prohibited transaction", as such term is defined in Section 4975 of the Internal Revenue Code of 1986, in connection with any plan or trust thereunder, a written notice specifying the nature thereof, what action such Obligor has taken, is taking or proposes to take with respect thereto and a copy of any notice delivered by such Obligor to the Pension Benefit Guaranty Corporation with respect thereto, and, when known, any further action taken or threatened by the Internal Revenue Service, the Department of Labor or the Pension Benefit Guaranty Corporation with respect thereto. 7.17 Amendments to Documents Relating to Permitted Senior Indebtedness. Without the prior written consent of Lender, Obligors shall not amend any CIT Document (or any other agreement 93 34 relating to Permitted Senior Indebtedness to which any Obligor may be a party at any time) to (i) provide for a term loan or other credit facility which requires scheduled or other principal payments of principal prior to the stated maturity of such loan or facility, (ii) provide for any overformula (meaning an amount in excess of the borrowing base provided therein) or other overadvance or similar facility (except to the extent expressly permitted pursuant to a written agreement between Lender and the holder of the relevant Permitted Senior Indebtedness), or (iii) provide for an increase in the interest rate or aggregate commitment or an increase in the applicable lending percentages to a level greater than the levels provided in the definition of "Permitted Senior Indebtedness." Obligors shall promptly notify Lender of any permitted amendment, extension, waiver, or modification entered into or given under the CIT Documents or any other agreement relating to Permitted Senior Indebtedness, and of any negotiations or discussions with respect thereto, and shall provide Lender with detailed information concerning any Indebtedness incurred by any Obligor for the purpose of refinancing the Indebtedness of such Obligor under the CIT Documents or any other Permitted Senior Indebtedness. 7.18 Notice of Agreements Affecting Stock. Media Arts shall give Lender prompt notice of any of the following agreements of which Media Arts becomes aware after the date hereof to which any of the securities holders of Media Arts is or becomes a party: voting agreements, voting trusts, irrevocable proxies or other agreements affecting the voting rights of shares of the Capital Stock of Media Arts or any agreements to which any Obligor is a party or by which it is bound providing for any call or put option, right of first refusal or offer or other rights to acquire or dispose of any shares of the Capital Stock of Media Arts or any Convertible Securities or Option Rights. 7.19 Segregation of Funds. So long as the principal balance of the Consolidated Note is equal to or greater than $5,400,000, Media Arts shall maintain a separate bank account, in its name, and shall use its reasonable efforts to deposit into such account each Friday during each month funds such that the amount on deposit in such account equals or exceeds the aggregate amount of all accrued but unpaid interest on the Consolidated Note as of such date (and, to the extent any principal payments are required to be made on or prior to the last day of such month, such deposits shall also include a pro rata amount of such principal payment, determined such that the entire principal payment will be on deposit as of the last day of such month). Media Arts shall notify Lender within two Business Days if at any time it withdraws any amounts from such account for any reason, the result of which is that the amount in such account is less than the aggregate amount of accrued but unpaid interest with respect to the Consolidated Note as of the date on which the most recent deposit was required to be made. 7.20 Restrictions on Payments On Account of Restricted Indebtedness. Notwithstanding anything to the contrary herein, Obligors may not make any payment on account of the Restricted Indebtedness without the written consent of Lender. Any settlement of any of the Restricted Indebtedness shall include complete mutual releases that extend to all Obligors and all of their respective Subsidiaries and Affiliates, and notice thereof (together with the relevant documentation) shall promptly be given to Lender in writing. 7.21 Certain Matters Regarding the Tax Refund Proceeds and Related Tax Return. Media Arts shall (i) file its Federal tax return for the fiscal year ended March 31, 1997 no later than June 30, 1997 (and shall notify Lender in writing immediately upon such filing and provide Lender with a copy of such tax return), (ii) use its best efforts to cause the Tax Refund Proceeds to be paid to it as soon as possible, (iii) take all steps necessary to ensure that Lender has a first priority Lien on the Tax Refund Account and upon the Tax Refund Proceeds, and that the Tax Refund Account and Tax Refund 94 35 Proceeds are not subject to any other Lien except as otherwise permitted pursuant to the PROVISO to SECTION 7.3, (iv) cause the Tax Refund Proceeds to be deposited directly into the Tax Refund Account (or if it cannot have the Tax Refund Proceeds direct-deposited, deposit the Tax Refund Proceeds into the Tax Refund Account immediately upon receipt thereof), (v) immediately provide Lender with any material information Media Arts may receive or learn of regarding the anticipated receipt of the Tax Refund Proceeds or any delays or potential delays relating thereto, and (vi) immediately notify Lender via facsimile of the receipt of the Tax Refund Proceeds. Once the Initial Scheduled Payment has been made, Media Arts shall transfer the balance remaining in the Tax Refund Account, if any, to any other of its deposit accounts and may close the Tax Refund Account (or use it for some other purpose). 7.22 Change of Fiscal Year. No Obligor shall change its Fiscal Year. 7.23 Key Person Life Insurance. Obligors shall maintain "key person" life insurance policies with respect to Thomas Kinkade (in an amount of not less than $5,000,000) and Kenneth Raasch (in an amount of not less than $1,000,000), and shall assign such policies to Lender; provided that any such assignment may be junior and subject to an assignment of such policies as security for any Permitted Senior Indebtedness. 7.24 Further Assurances. Each Obligor shall, at its cost and expense, upon request of Lender, duly execute and deliver, or cause to be duly executed and delivered, to Lender such further instruments and do and cause to be done such further acts as may be necessary or proper in the reasonable opinion of Lender to carry out more effectually the provisions and purposes of this Agreement or any Related Agreement. 8. COVENANTS RELATING TO ACQUIRED STOCK. Media Arts covenants that, as long as at least 500,000 shares of Acquired Stock (i) continue to constitute Registrable Securities, as such term is defined in the Registration Rights Agreement, and (ii) are held by Lender, Media Arts shall (i) deliver to Lender the information and reports described in SECTION 7.7; (ii) extend to Lender the visitation and inspection rights set forth in SECTION 7.9; and (iii) honor the covenants set forth in SECTION 7.8, SECTIONS 7.10 through 7.14, inclusive, SECTION 7.16 and SECTION 7.18 hereof. The benefits of this SECTION 8 are for the sole benefit of Lender and are not assignable to any Transferee of any Registrable Securities. 9. INDEMNIFICATION. 9.1 Transfer Taxes. Obligors shall pay any and all stamp, transfer and other similar taxes (together in each case with interest and penalties, if any) payable or determined to be payable in connection with the execution and delivery of this Agreement or the issuance of the Securities and shall hold Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying, or omission to pay, such taxes. 9.2 Losses. Whether or not the transactions contemplated by this Agreement are consummated, Obligors, jointly and severally, shall indemnify Lender, its Affiliates, and its employees, officers, directors, agents, attorneys, successors and assigns (the "Indemnified Parties") against, and hold each Indemnified Party harmless from, all losses, claims, damages, liabilities, expenses and costs, 95 36 including without limitation, the costs of preparing for, and attorneys' fees and other fees and expenses incurred in, investigating or defending any matter (collectively, "Losses") incurred by such Indemnified Party (i) in connection with or arising from any breach of any warranty, or the inaccuracy of any representation made by any Obligor or the failure of any Obligor to fulfill any of its agreements or undertakings under this Agreement or any Related Agreement (or any other document or instrument executed herewith or pursuant hereto) or the transactions to which they relate, or (ii) pursuant to any investigation or proceeding against any Obligor or any Indemnified Party brought by any third-party, arising out of or in connection with this Agreement or any Related Agreement (or any other document or instrument executed herewith or pursuant hereto) or the transactions to which they relate. Obligors shall either pay directly all Losses which they are required to pay hereunder or shall reimburse any Indemnified Party within 10 days after any request for such payment. The obligation of Obligors to the Indemnified Parties hereunder shall be separate obligations to each Indemnified Party, and the liability of Obligors to such Indemnified Parties hereunder shall not be extinguished solely because any Indemnified Party is not entitled to indemnity hereunder. The obligations of Obligors under this SECTION 9.2 shall survive the payment or prepayment of the Consolidated Note, at maturity, upon redemption or otherwise, any transfer of the Consolidated Note or any interest therein and the termination of this Agreement and the Related Agreements. 9.3 Indemnification Procedures. Any Person entitled to indemnification hereunder shall (i) give prompt written notice to Obligors of any claim with respect to which it seeks indemnification and (ii) permit Obligors to assume the defense of such claim with counsel reasonably satisfactory to the relevant Indemnified Party; provided, that any Person entitled to indemnification hereunder shall have the right to employ separate counsel and to participate in the defense of such claim, but the fees and expenses of such counsel shall be at the expense of such Person unless (a) Obligors have agreed to pay such fees or expenses, (b) Obligors have failed to assume the defense of such claim or to employ counsel reasonably satisfactory to such Person within 10 days of the written notice of such claim to Obligors or (c) in the reasonable judgment of any such Person, based upon the written advice of counsel, a conflict of interest may exist between such Person and Obligors with respect to such claim (in which case, if the Person notifies Obligors in writing that such Person elects to employ separate counsel at the expense of Obligors, Obligors shall not have the right to assume the defense of such claim on behalf of such Person). No Obligor will be subject to any liability for any settlement made without its consent (but such consent may not be unreasonably withheld). No Indemnified Party may, without the consent (which consent will not be reasonably withheld) of each Obligor consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to the Obligor of a release from all liability in respect of such claim or litigation. 9.4 Contribution. If the indemnification provided for in SECTION 9.2 is unavailable to Lender or any other Indemnified Party in respect of any Losses, then Obligors, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by the Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of Obligors, on the one hand, and such Indemnified Party on the other, in connection with the actions, statements or omissions which resulted in such Losses, as well as any other relevant equitable considerations. The relative fault of Obligors, on the one hand, and such Indemnified Party, on the other, shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been taken by, or relates to information supplied by, either Obligors or such Indemnified Party, and 96 37 the parties' relative intent, knowledge, access to information and opportunity to correct or prevent any such action, statement or omission. The parties hereto agree that it would not be just and equitable if contribution pursuant to this SECTION 9.4 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. 10. DEFAULTS AND REMEDIES. 10.1 Events of Default. An "Event of Default" occurs if: (a) Obligors fail to make any payment of principal on the Consolidated Note when due, whether at maturity, upon prepayment, acceleration, or otherwise; (b) Obligors fail to make any payment of accrued interest with respect to the Consolidated Note within five Business Days after such payment becomes due, whether such payment is a regularly scheduled monthly payment or otherwise; (c) any Obligor fails to comply with (A) any of the agreements or covenants contained in SECTIONS 7.2, 7.3, 7.4, 7.5, 7.6, 7.9, 7.15, 7.17, 7.20, or 7.21 hereof and such failure continues for a period of more than ten days, or (B) any of the other agreements or covenants in, or provisions of, this Agreement, the Consolidated Note, or any other Related Agreement and the failure continues for a period of 30 days after such failure is known to any Obligor; provided, that any failure of any Obligor to comply with the agreements or covenants in SECTION 7.19 shall in no event be or become an Event of Default; (d) any representation or warranty made by any Obligor under, relating to or in connection with this Agreement or any Related Agreement shall be false or misleading in any material respect when made; (e) any Permitted Senior Indebtedness is declared to be due and payable prior to its stated maturity, or an event of default shall occur with respect to any Permitted Senior Indebtedness; (f) any Indebtedness of any Obligor or any Subsidiary of any Obligor for borrowed money having an outstanding principal amount of $100,000 or more under one or more agreements (but excluding the Restricted Indebtedness), whether such Indebtedness now exists or shall hereafter be created, is declared to be due and payable prior to its stated maturity; (g) any judgment or order for the payment of money in excess of $500,000 shall be rendered against any Obligor or any Subsidiary of any Obligor and shall not be discharged or paid and either (A) an enforcement proceeding shall have been commenced by any creditor upon such judgment or order or (B) there shall be any period of 30 consecutive days, during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; 97 38 (h) any material provision of any the Security Agreement or the Intellectual Property Assignment shall for any reason cease to be valid or enforceable in accordance with its terms, the Security Agreement or the Intellectual Property Agreement shall be repudiated, revoked, renounced or terminated, including by operation of law, or any Lien created under the Security Agreement or the Intellectual Property Assignment shall cease to be a valid and perfected Lien, second in priority only to the Lien of CIT granted pursuant to the CIT Documents (or the Lien of any other holder of Permitted Senior Indebtedness) except as otherwise provided in the Security Agreement or the Intellectual Property Assignment with respect to any material portion of the Collateral purported to be covered thereby and such condition continues for a period of 30 days; provided, that with respect to the Tax Refund Account and the Tax Refund Proceeds, Lender's lien shall be a first priority Lien until the Initial Scheduled Payment has been made. (i) any Obligor or any Subsidiary of any Obligor pursuant to or within the meaning of any Bankruptcy Law commences a voluntary case or proceeding, consents to the entry of an order for relief against it in an involuntary case or proceeding, consents to the appointment of a Custodian of it or for all or substantially all of its property, makes a general assignment for the benefit of its creditors, or generally is unable to pay its debts as they become due; or (j) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that is for relief against any Obligor or any Subsidiary of any Obligor in an involuntary case or proceeding, appoints a Custodian of any Obligor or any Subsidiary of any Obligor or for all or substantially all of its property, or orders the liquidation of any Obligor or any Subsidiary of any Obligor. 10.2 Acceleration. If an Event of Default (other than an Event of Default specified in CLAUSE (i) or (j) of SECTION 10.1) occurs and is continuing, Lender, by written notice to Obligors, may declare all unpaid principal of and accrued interest on the Consolidated Note to be due and payable as specified below. Upon a declaration of acceleration, such principal and accrued interest shall become immediately due and payable. If an Event of Default specified in CLAUSE (i) or (j) of SECTION 10.1 occurs, all principal of and interest on the Consolidated Note then outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of Lender. 10.3 Other Remedies. If any Event of Default shall occur and be continuing, Lender may, subject to the restrictions set forth in the CIT Subordination Agreement, proceed to protect and enforce its rights under this Agreement and the Consolidated Note by exercising such remedies as are available in respect thereof under this Agreement under applicable law, either by suit in equity or by action at law, or both, whether for the collection of the payment of principal of or interest on the Consolidated Note or to enforce the specific performance of any covenant or other agreement contained in this Agreement. No remedy conferred in this Agreement upon Lender is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law or in equity or by statute or otherwise. 10.4 Waiver of Past Defaults. Lender, by notice to Obligors, may waive an existing Default or Event of Default and its consequences with respect to the Consolidated Note; provided, that no such waiver will extend to any subsequent or other Default or Event of Default or impair any right of Lender which may arise as a result of such Default or Event of Default. 98 39 11. MISCELLANEOUS. 11.1 Payments. Before disposing of the Consolidated Note or any portion thereof, Lender shall make a notation thereon (or on a schedule attached thereto) of the amount of all payments previously made with respect thereto. 11.2 Consent to Amendments. This Agreement may be amended and any Obligor may take any action herein prohibited, or omit to perform any act herein required to be performed by it, if, and only if, prior to taking any such action or omitting to perform any such act, Obligors shall have obtained the written consent of Lender to such amendment, action, or omission to act. No course of dealing between any Obligor and Lender nor any delay in exercising any rights hereunder or under the Securities shall operate as a waiver of any rights of any Holder thereof. 11.3 Form, Registration, Transfer and Exchange of Securities; Lost Securities. Media Arts shall keep at its principal office a register in which it shall provide for the registration of the Securities and of transfers thereof or any portion thereof. Upon surrender for registration of transfer of the Securities at such principal office in accordance with the provisions hereof, Obligors shall, at their expense and within three Business Days of such surrender, execute and deliver one or more new Securities of like tenor and of a like aggregate principal amount, in the case of the Consolidated Note, and a like aggregate number of shares of Common Stock, in the case of the Acquired Stock, which new Securities shall be registered in the name of the relevant Transferee or Transferees. At the option of the Holder (or nominee) of any Security, such Security may be exchanged for a Security of like tenor and of a like aggregate principal amount, in the case of any Note, and a like aggregate number of shares of Common Stock, in the case of the Acquired Stock, in each case, upon surrender of the Security to be exchanged at the principal office of Media Arts. Whenever any Security is so surrendered for exchange, the Obligors shall, at their expense and within three Business Days of such surrender, execute and deliver the Security which the holder making the exchange is entitled to receive. Every Security surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by a written instrument of transfer duly executed, by the holder or such holder's attorney duly authorized in writing. Any note issued in exchange for any note or upon transfer thereof shall carry the rights to unpaid interest and interest to accrue which were carried by the note so exchanged or transferred, so that neither gain nor loss of interest shall result from any such transfer or exchange. Upon receipt of written notice from any Holder (or nominee) of any Security and, in the case of any loss, theft or destruction, upon receipt of an indemnity agreement, or other indemnity reasonably satisfactory to the Obligors from such holder, or in the case of any mutilation, upon surrender and cancellation of such Security, the Obligors shall, within three Business Days of such receipt or surrender, make and deliver a new Security, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Security. 11.4 Persons Deemed Owners; Participation. Prior to due presentment for registration of transfer, Obligors may treat the Person in whose name any Security is registered as the owner and Holder of such Security for all purposes whatsoever, and Obligors shall not be affected by notice to the contrary. Subject to the preceding sentence and to the provisions of SECTION 11.8, any Holder may from time to time grant participation in all or any part of such Security to any Person on such terms and conditions as may be determined by such Holder in its sole and absolute discretion. 99 40 11.5 Survival of Representations and Warranties. All representations, warranties, covenants and agreements contained herein or made in writing by or on behalf of Obligors pursuant to or in connection herewith shall survive the execution and delivery of this Agreement, the issuance and delivery of the Consolidated Note and the issuance, sale and delivery of the Acquired Stock, the Closing and any investigation by Lender. 11.6 Entire Agreement. This Agreement and the Related Agreements constitute the full and entire agreement and understanding between Lender and the Companies, and supersede all prior agreements and understandings relating to the subject matter hereof, including, without limitation (i) the Existing Purchase Agreement and (ii) the letter agreement dated February 6, 1997 by and between Media Arts and Lender. 11.7 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provisions in any other jurisdiction. 11.8 Successors and Assigns. All covenants and agreements in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including, without limitation, any Transferee). Lender may assign any of its rights under this Agreement to any Transferee in connection with any assignment of all or any portion of any Security and upon such assignment such Transferee shall be entitled to all of the rights of Lender hereunder (except for the rights and benefits granted in SECTION 8) and under any applicable Related Agreement to the same extent as if such Transferee were an original party hereof; provided, that Lender may not assign any of its rights hereunder or under the Consolidated Note to any direct competitor of any Obligor. Notwithstanding any other provision of this Agreement and the Related Agreements, (i) the visitation and information rights set forth in SECTION 7.9 shall inure to the sole and exclusive benefit of Lender and may not be assigned or delegated by Lender to any other Person, (ii) in the event of any transfer to a Transferee of any but not all of the Securities (to the extent the Holders thereof retain rights under this Agreement), the rights conferred under SECTIONS 10.4 and 11.2, and the rights of Lender to waive any conditions or covenants set forth in this Agreement shall be exercised solely and exclusively by Lender and Lender's determination shall bind Lender and all such other Transferees and (iii) Obligors shall at no time be obligated to give notices or provide information hereunder to more than an aggregate of five Holders. 11.9 Notices. Except as otherwise provided herein, whenever it is provided herein that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon any party by another party, or whenever any party desires to give or serve upon another party any communication with respect to this Agreement, each such notice, demand, request, consent, approval, declaration or other communication shall be in writing and shall be deemed to have been validly served, given or delivered: (a) upon the earlier of actual receipt and three (3) days after deposit in the United States Mail, registered or certified mail, return receipt requested, with proper postage prepaid; 100 41 (b) upon transmission, when sent by telecopy or other similar facsimile transmission (with such telecopy or facsimile promptly confirmed by telecopy answerback); (c) one Business Day after deposit with a reputable overnight courier with all charges prepaid; or (d) when delivered, if hand-delivered by messenger, all of which shall be addressed to the party to be notified and sent to the address or facsimile number indicated below or to such other address (or facsimile number) as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. (i) If to Lender, at: c/o Levine Leichtman Capital Partners, Inc. 345 North Maple Drive, Suite 304 Beverly Hills, CA 90210 Attention: Arthur E. Levine, President Telecopy: (310) 275-1441 with a copy to: Murphy, Weir & Butler 2049 Century Park East, Suite 2100 Los Angeles, CA 90067 Attention: Jean B. LeBlanc, Esq. Telecopy: (310) 788-3777 (ii) If to Obligors, at: Media Arts Group, Inc. 521 Charcot Avenue San Jose, CA 95131 Attention: Chief Executive Officer Telecopy: (408) 232-4821 with a copy to: Latham & Watkins 505 Montgomery Street, Suite 1900 San Francisco, CA 94111 Attention: Ora T. Fruehauf, Esq. Telecopy: (415) 395-8095 11.10 Accounting Terms. For purposes of this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to them by GAAP and all accounting 101 42 determinations hereunder or pursuant hereto shall be made, and all financial statements required to be delivered by Obligors hereunder shall be prepared in accordance with GAAP applied on a consistent basis. 11.11 Descriptive Headings. The descriptive headings of the several paragraphs of this Agreement are for convenience of reference only and do not constitute a part of this Agreement and are not to be considered in construing or interpreting this Agreement. 11.12 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. 11.13 Remedies. In the event that any Obligor fails to observe or perform any covenant or agreement to be observed or performed under this Agreement or any Related Agreement, Lender may proceed to protect and enforce its rights by suit in equity or action at law, whether for specific performance of any term contained in this Agreement or any Related Agreement or for an injunction against the breach of any such term or in aid of the exercise of any power granted in this Agreement or any Related Agreement or to enforce any other legal or equitable right, or to take any one or more of such actions. Except as otherwise provided in the Consolidated Note with respect to the costs of collection and enforcement thereof, and as provided in SECTION 11.14 hereof with respect to certain specific proceedings, in the event of any litigation relating to this Agreement or any Related Agreement, each party shall bear its own fees, costs, and expenses, including without limitation fees and expenses of attorneys and accountants and, all fees, costs and expenses of appeals. None of the rights, powers or remedies conferred under this Agreement shall be mutually exclusive, and each such right, power or remedy shall be cumulative and in addition to any other right, power or remedy whether conferred by this Agreement or now or hereafter available at law, in equity, by statute or otherwise. 11.14 Payment of Fees and Expenses. The Companies shall pay third party service providers directly, or shall reimburse Lender upon demand for, all out-of-pocket costs and expenses of every type and nature in connection with: (i) the preparation, negotiation, execution and delivery of this Agreement and the Related Agreements, and any amendment, waiver, supplement, consent or release relating hereto or thereto and the documents and instruments referred to herein and therein, (ii) exercising any rights of any kind under or relating to the rights and benefits granted in this Agreement or any Related Agreement, including without limitation the taking of any action to protect, collect or enforce the Consolidated Note or Lender's rights with respect to this Agreement, or the Collateral, whether or not such costs or expenses are incurred in connection with a lawsuit, arbitration or other proceeding (including a bankruptcy or other insolvency proceeding and in any appellate proceedings), provided, however that Lender shall be entitled to such reimbursement in connection with any lawsuit, arbitration or other proceeding only if Lender substantially prevails on its claims, (iii) in connection with any refinancing or restructuring of the Consolidated Note in the nature of a "work out" or in any insolvency or bankruptcy proceeding, (iv) in connection with monitoring or administering Lender's investment in Obligors or otherwise evaluating, observing or assessing Obligors or their affairs, including any audits, inspections or appraisals, provided, however, that Obligors shall be responsible for not more than $50,000 per fiscal year of expenses pursuant to this CLAUSE (IV), except in the event that any Obligor is involved in a bankruptcy or other insolvency proceeding, in which case such $50,000 limit will not apply, (v) verifying or perfecting any security interest granted to Lender, or (vi) any effort by Lender to protect, assemble, complete, collect, sell, liquidate or otherwise dispose of 102 43 any Collateral, including in connection with a case under any Federal, state or foreign bankruptcy or other similar insolvency law and including, in each of the foregoing cases, the attorneys' and other professional and service providers' fees and costs arising from such services. 11.15 Confidentiality. Lender agrees to keep confidential any information provided to it hereunder and to use such information only in connection with Lender's review of Obligors' operations. Lender shall not, directly or indirectly, publish or disclose any such information to any Person and shall take all necessary actions and precautions to protect the confidentiality of such information; provided, however, that nothing herein shall be construed to prevent Lender from disclosing any portion of such information: (a) to any of Lender's employees, agents, attorneys, accountants, partners, affiliates, or others affiliated with Lender who have a need to know and are informed of the confidential nature of such information and of Lender's obligation to protect the confidentiality of such information as provided in this SECTION 11.15; (b) upon the order or request of any court or administrative agency or as otherwise required by law; (c) that is in the public domain by reason of prior publication not attributable to any act or omission of Lender or any of its partners, officers, agents, representatives or employees; (d) that has been obtained from any Person (other than any Affiliate of Lender) who was not similarly bound; (e) in connection with (but only to the extent necessary for) the exercise of any remedy hereunder or, as determined in Lender's sole judgment, under any Related Agreement; or (f) with the consent of Media Arts. If Lender is ordered or required to disclose information pursuant to CLAUSE (b) of the preceding sentence, Lender shall, within two Business Days of actual knowledge thereof, notify Media Arts of such order or requirement and the terms thereof prior to such disclosure and shall cooperate to the extent practicable to minimize the disclosure of such information and shall use reasonable efforts to obtain proprietary or confidential treatment of such information by such court or administrative agency, and will, to the extent such remedies are available, seek protective orders limiting the dissemination and use of the information. This Agreement does not alter the rights of Media Arts to challenge any law requiring any such disclosure. The confidentiality obligations of Lender shall remain in full force and effect for a period expiring on the second anniversary of such date that it is no longer is eligible to receive non-public information hereunder. 11.16 Conflict of Terms. Except as otherwise provided in this Agreement or any of the Related Agreements by specific reference to the applicable provisions of this Agreement, if any provision contained in this Agreement is in conflict with, or inconsistent with, any provision in any of the Related Agreements, the provision contained in this Agreement shall govern and control. 103 44 11.17 Agreement to Subordinate. Lender hereby covenants to (i) subordinate the Consolidated Note to any Permitted Senior Indebtedness incurred by any Obligor (other than Indebtedness incurred pursuant to the CIT Documents) on customary and reasonable terms and conditions and (ii) upon request, execute any and all documents necessary to evidence such subordination at any time. 11.18 Reinstatement. This Agreement shall remain in full force and effect and continue to be effective should any petition be filed by or against any Obligor for liquidation or reorganization, should any Obligor become insolvent or make an assignment of the benefit of any creditor or creditors or should a Custodian be appointed for all or any significant part of any Obligor's assets, and shall continue to be effective or to be reinstated, as the case may be, if at any time payment and performance of the Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of the Obligations, whether as a "voidable preference," "fraudulent conveyance," or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the Obligations shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned. 11.19 No Strict Construction. The parties hereto have participated jointly in the negotiation and drafting of this Agreement and the Related Agreements to which they are a party. In the event an ambiguity or question of intent or interpretation arises, such documents shall be construed as if drafted jointly by the parties hereto who are parties thereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of any such document. 11.20 GOVERNING LAW. THIS AGREEMENT AND EACH OF THE RELATED AGREEMENTS SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO AGREEMENTS MADE IN AND TO BE PERFORMED IN THE STATE OF CALIFORNIA, WITHOUT REGARD TO CHOICE OF LAW PRINCIPLES. 11.21 WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO, THIS AGREEMENT OR ANY OF THE RELATED AGREEMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. 104 45 12. CROSS-GUARANTY. 12.1 Cross-Guaranty. Each Obligor hereby agrees that such Obligor is jointly and severally liable for, and hereby absolutely and unconditionally guarantees to Lender and its successors and assigns, the full and prompt payment (whether at stated maturity, by acceleration or otherwise) and performance of, all Obligations owed or hereafter owing to Lender by each other Obligor. Each Obligor agrees that its guaranty obligation hereunder is a continuing guaranty of payment and performance and not of collection, and that its obligations under this SECTION 12 shall be absolute and unconditional, irrespective of, and unaffected by, (a) the genuineness, validity, regularity, enforceability or any future amendment of, or change in, this Agreement, any Related Agreement or any other agreement, document or instrument to which any Obligor is or may become a party; (b) the absence of any action to enforce this Agreement (including this SECTION 12) or any Related Agreement or the waiver or consent by Lender with respect to any of the provisions thereof; (c) the existence, value or condition of, or failure to perfect its Lien against, any security for the Obligations or any action, or the absence of any action, by Lender in respect thereof (including the release of any such security); (d) the insolvency of any Obligor; or (e) any other action or circumstances which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being agreed by each Obligor that its obligations under this SECTION 12 shall not be discharged until the payment and performance, in full, of the Obligations has occurred. Each Obligor shall be regarded, and shall be in the same position, as principal debtor with respect to the Obligations guaranteed hereunder. 12.2 Waivers by Obligors. Each Obligor expressly waives all rights it may have now or in the future under any statute, or at common law, or at law or in equity, or otherwise, to compel Lender to marshall assets or to proceed in respect of the Obligations guaranteed hereunder against any other Obligor, any other party, or against any security for the payment and performance of the Obligations before proceeding against, or as a condition to proceeding against, such Obligor. It is agreed among each Obligor and Lender that the foregoing waivers are of the essence of the transaction contemplated by this Agreement and the Related Agreements and that, but for the provisions of this SECTION 12 and such waivers, Lender would decline to enter into this Agreement. 12.3 Benefit of Guaranty. Each Obligor agrees that the provisions of this SECTION 12 are for the benefit of Lender and its successors, transferees, endorsees and assigns, and nothing herein contained shall impair, as between any other Obligor and Lender, the obligations of such other Obligor under this Agreement and the Related Agreements. 105 46 12.4 Subordination of Subrogation, Etc. Notwithstanding anything to the contrary in this Agreement or in any Related Agreement, and except as set forth in SECTION 12.8, each Obligor hereby expressly and irrevocably subordinates to payment of the Obligations any and all rights at law or in equity to subrogation, reimbursement, exoneration, contribution, indemnification or set off and any and all defenses available to a surety, guarantor or accommodation co-obligor until the Obligations are indefeasibly paid in full in cash. Each Obligor acknowledges and agrees that this waiver is intended to benefit Lender and shall not limit or otherwise affect such Obligor's liability hereunder or the enforceability of this SECTION 12, and that Lender and its successors and assigns are intended third party beneficiaries of the waivers and agreements set forth in this SECTION 12. 12.5 Election of Remedies. If Lender may, under applicable law, proceed to realize its benefits under this Agreement or any Related Agreements giving Lender a Lien upon any Collateral, whether owned by any Obligor or by any other Person, either by judicial foreclosure or by non-judicial sale or enforcement, Lender may, at its sole option, determine which of its remedies or rights it may pursue without affecting any of its rights and remedies under this SECTION 12. If, in the exercise of any of its rights and remedies, Lender shall forfeit any of its rights or remedies, including its right to enter a deficiency judgment against any Obligor or any other Person, whether because of any applicable laws pertaining to "election of remedies" or the like, each Obligor hereby consents to such action by Lender and waives any claim based upon such action, even if such action by Lender shall result in a full or partial loss of any rights of subrogation which each Obligor might otherwise have had but for such action by Lender. Any election of remedies which results in the denial or impairment of the right of Lender to seek a deficiency judgment against any Obligor shall not impair any other Obligor's obligation to pay the full amount of the Obligations. In the event Lender shall bid at any foreclosure or trustee's sale or at any private sale permitted by law or this Agreement or any Related Agreements, Lender may bid all or less than the amount of the Obligations and the amount of such bid need not be paid by Lender but shall be credited against the Obligations. The amount of the successful bid at any such sale, whether Lender or any other party is the successful bidder, shall be conclusively deemed to be the fair market value of the Collateral and the difference between such bid amount and the remaining balance of the Obligations shall be conclusively deemed to be the amount of the Obligations guaranteed under this SECTION 12, notwithstanding that any present or future law or court decision or ruling may have the effect of reducing the amount of any deficiency claim to which Agent or any Lender might otherwise be entitled but for such bidding at any such sale. In addition, each Obligor waives all rights and defenses arising out of an election of remedies by Lender, even though the election of remedies, such as a nonjudicial foreclosure with respect to security for the Obligations, has destroyed any Obligor's rights of subrogation and reimbursement against the principal by the operation of Section 580d of the California Code of Civil Procedure or otherwise. 12.6 Additional Real Property Waivers. Each Obligor waives all rights and defenses that it may have because the Obligations are secured by real property. This means, among other things: (i) Lender may collect from such Obligor without first foreclosing on any real or personal property collateral pledged by any other Obligor; and (ii) if Lender forecloses on any real property collateral pledged by any Obligor, (A) the amount of the Obligations may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price, and (B) Lender may collect from such Obligor even if Lender, by foreclosing on the real property collateral, has destroyed any right such Obligor may have to collect from any other Obligor. This is an unconditional and irrevocable waiver of any rights and defenses each Obligor may have because the Obligations are secured by real property. These rights and defenses include, but are not limited to, any 106 47 rights or defenses based upon Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure. 12.7 Limitation. Notwithstanding any provision herein contained to the contrary, each Obligor's liability under this SECTION 12 (which liability is in any event in addition to any Advances (as defined below) that were made to such Obligor) shall be limited to an amount not to exceed as of any date of determination the greater of: (a) the net amount of all Advances to any other Obligor that were re-loaned or otherwise transferred to, or for the benefit of, such Obligor; and (b) the amount which could be claimed by Lender from such Obligor under this SECTION 12 without rendering such claim voidable or avoidable under Section 548 of Chapter 11 of the Bankruptcy Code or under any applicable state Uniform Fraudulent Transfer Act, Uniform Fraudulent Conveyance Act or similar statute or common law after taking into account, among other things, such Obligor's right of contribution and indemnification from each other Obligor under SECTION 12.8. As used in this Agreement, "Advances" means the amounts that were paid by Lender to or for the benefit of Obligors for the purchase of the Original Notes and the Original Warrant. 12.8 Contribution with Respect to Guaranty Obligations. (a) To the extent that any Obligor shall make a payment under this SECTION 12 of all or any of the Obligations other than Advances that were made to such Obligor (any such payment, a "Guarantor Payment") which, taking into account all other Guarantor Payments then previously or concurrently made by Obligors, exceeds the amount which such Obligor would otherwise have paid if each Obligor had paid the aggregate Obligations satisfied by such Guarantor Payment in the same proportion that such Obligor's "Allocable Amount" (as defined below) (as determined immediately prior to such Guarantor Payment) bore to the aggregate Allocable Amounts of each of the Obligors as determined immediately prior to the making of such Guarantor Payment, then, following indefeasible payment in full in cash of the Obligations, such Obligor shall be entitled to receive contribution and indemnification payments from, and be reimbursed by, each other Obligor for the amount of such excess, pro rata based upon their respective Allocable Amounts in effect immediately prior to such Guarantor Payment. (b) As of any date of determination, the "Allocable Amount" of any Obligor shall be equal to the maximum amount of the claim which could then be recovered from such Obligor under this SECTION 12 without rendering such claim voidable or avoidable under Section 548 of Chapter 11 of the Bankruptcy Code or under any applicable state Uniform Fraudulent Transfer Act, Uniform Fraudulent Conveyance Act or similar statute or common law. (c) This SECTION 12.8 is intended only to define the relative rights of Obligors and nothing set forth in this SECTION 12.8 is intended to or shall impair the obligations of Obligors, jointly and severally, to pay any amounts as and when the same shall become due and payable in accordance with the terms of this Agreement, including SECTION 12.1. Nothing contained in this SECTION 12.8 shall limit the liability of any Obligor to repay the Advances made directly or indirectly to 107 48 that Obligor and accrued interest, fees and expenses with respect thereto for which such Obligor shall be primarily liable. (d) The parties hereto acknowledge that the rights of contribution and indemnification hereunder shall constitute assets of the Obligor to which such contribution and indemnification is owing. (e) The rights of the indemnifying Obligors against other Obligors under this SECTION 12.8 shall be exercisable upon the full and indefeasible payment of the Obligations. 12.9 Liability Cumulative. The liability of Obligors under this SECTION 12 is in addition to and shall be cumulative with all liabilities of each Obligor to Lender under this Agreement and the Related Agreements to which such Obligor is a party, without any limitation as to amount. 108 49 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized representatives as of the date first written above. "OBLIGORS": "MEDIA ARTS" "TKSI" MEDIA ARTS GROUP, INC. THOMAS KINKADE STORES, INC. By:/s/ Kenneth E. Raasch By: /s/ Kenneth E. Raasch ---------------------------- ---------------------------- Kenneth E. Raasch Kenneth E. Raasch President and CEO President and CEO "MAGI ENTERTAINMENT" "MAGI SALES" MAGI ENTERTAINMENT PRODUCTS, INC., MAGI SALES, INC. By: /s/ Kenneth E. Raasch By: /s/ Kenneth E. Raasch ---------------------------- ---------------------------- Kenneth E. Raasch Kenneth E. Raasch President and CEO President and CEO "CCG" "LENDER" CALIFORNIA COAST GALLERIES, INC. LEVINE LEICHTMAN CAPITAL PARTNERS, INC. on behalf of By: /s/ Kenneth E. Raasch LEVINE LEICHTMAN CAPITAL ---------------------------- PARTNERS, L.P. Kenneth E. Raasch President and CEO By:/s/ Arthur E. Levine ---------------------------- Arthur E. Levine, President 109 50 ANNEX B to Credit Agreement Dated as of February 21, 1997 FINANCIAL COVENANTS Obligors shall not breach any of the following financial covenants, each of which shall be calculated in accordance with GAAP, consistently applied: 1. Minimum Net Worth. a. Media Arts shall maintain, on a stand alone basis, a Net Worth of not less than $14,000,000 at all times. b. TKSI and CCG shall maintain a combined Net Worth of not less than $50,000 at all times. c. Obligors shall maintain, on a consolidated basis, Net Worth of not less than the following amounts at all times during each of the following fiscal quarters:
FISCAL QUARTER(S) ENDING MINIMUM NET WORTH ----------------- ----------------- 3/31/97 $2,000,000 6/30/97 $2,100,000 9/30/97 $2,800,000 12/31/97 $4,300,000 3/31/98 $4,500,000 6/30/98 $4,700,000 9/30/98 $5,500,000 12/31/98 $6,900,000 3/31/99 and thereafter $7,000,000
2. Minimum Fixed Charge Coverage Ratio. Obligors shall maintain a Fixed Charge Coverage Ratio of at least 1.05 to 1.0 as of (a) 3/31/97 on a two fiscal quarter basis, (b) 6/30/97 on a three fiscal quarter basis, (c) 9/30/97 on a four fiscal quarter basis, and (d) the last day of each fiscal quarter thereafter on a four fiscal quarter basis. For purposes hereof the calculation of the Fixed Charge Coverage Ratio shall not include: (i) the $150,000 fee payment made to Levine Leichtman Capital Partners, Inc., the $11,500 fee payment made to Lender, and the $592,500 principal payment made to Lender, all of which were made on or about the Closing Date; or (ii) the $2,000,000 payment to Lender to be made on the Initial Payment Date. 110 51 3. Operating Leases. Obligors will not enter into any leases of property (whether real, personal or mixed, but excluding Capital Leases) if after giving effect thereto the aggregate obligations, on a consolidated basis, with respect to all such leases during any fiscal year would exceed $3,000,000. 4. Capital Expenditures. Obligors will not contract for, purchase, make expenditures for, lease pursuant to a Capital Lease or otherwise incur obligations with respect to Capital Expenditures (whether subject to a security interest or otherwise) during any fiscal year in an aggregate amount exceeding the amount shown for such period below:
MAXIMUM CAPITAL FISCAL YEAR(S) ENDING EXPENDITURES --------------------- --------------- 3/31/97* $300,000 3/31/98 $2,000,000 3/31/99 and thereafter $2,200,000
* only Capital Expenditures during the fourth fiscal quarter of the fiscal year ending 3/31/97 are counted for purposes of this covenant. 5. Availability. So long as the principal balance of the Consolidated Note is less than $5,400,000, and notwithstanding any provision to the contrary contained in this Agreement, in the event that Obligors' aggregate Availability for each day of a thirty (30) day period immediately preceding any applicable calculation date for any of the covenants set forth in SECTIONS 1 THROUGH 4 above is $2,500,000 or more, such covenants shall not be effective solely for any such calculation date and Obligors shall have no obligation hereunder to comply with such financial covenants with respect to such calculation date. The foregoing contemplates that Obligors' accounts payable and any other Indebtedness is current in the ordinary course of business of each Obligor (excluding the Perkins Obligation, the John Hine Obligation and the John Hine U.K. Obligation. 6. Definitions. As used in this Agreement, the following terms shall have the following meanings: "Availability" is defined in the CIT Documents as in effect on the date hereof. "Capital Expenditures" for any period shall mean the aggregate of all expenditures of Obligors during such period, that in conformity with GAAP, are required to be included in or reflected by the property, plant or equipment or similar fixed asset account reflected in the consolidated balance sheet of Obligors. "EBITDA" means, with respect to Obligors on a consolidated basis for any period, the sum of the following for such period: (i) Consolidated Net Income (as defined in accordance with GAAP, before all extraordinary items and changes for discontinued operations, in accordance with GAAP); (ii) Interest Expense; (iii) provisions for taxes; (iv) charges for depreciation; and (v) charges 111 52 for amortization of intangible assets, all as determined in accordance with GAAP consistently applied. For purposes hereof, "intangible assets" shall include, but shall not be limited to organization costs, securities issuance costs, unamortized debt discount and expense, goodwill, covenants not to compete, patents, trademarks, franchises and capitalized research and development expenses. "Fixed Charge Coverage Ratio" means, with respect to Obligors on a consolidated basis for any period, the ratio determined by dividing EBITDA for such period by the sum of the following for such period: (i) cash Interest Expense, (ii) Capital Expenditures made and paid for in cash, (iii) the amount of principal repaid on (a) the Obligations, (b) Indebtedness of the type described in CLAUSE (ii) of the definition of "Other Permitted Indebtedness," (c) the John Hine Obligation or the Raasch Obligation (provided that nothing in this definition shall be construed to permit principal payments with respect to such obligations), and (iv) all Federal, state and local income tax expenses due and payable. "Interest Expense" means total interest obligations (paid or accrued) of the Obligors on a consolidated basis, determined in accordance with GAAP on a basis consistent with the latest audited statements of Obligors. "Net Worth" means, with respect to any Person at any date of determination, an amount equal to (a) the total assets of such Person as of such date minus (b) the total liabilities of such Person as of such date, in each case determined in accordance with GAAP, on a consistent basis with the latest audited statements. 112 EX-21.01 4 LIST OF SUBSIDIARIES 1 Exhibit 21.01 MEDIA ARTS GROUP, INC. List of Subsidiaries 1. Thomas Kinkade Stores, Inc., a California corporation 2. MAGI Entertainment Products, Inc., a California corporation 3. California Coast Galleries, Inc., a California corporation 4. MAGI Sales, Inc., a California corporation 5. John Hine Limited, a U.K. company 113 EX-99.01 5 COMPANY PRESS RELEASE DATED FEBRUARY 24, 1997 1 Exhibit 99.01 NEWS FOR RELEASE: Monday February 24, 1997 CONTACT: Sue Edstrom Media Arts Group, Inc. (408) 324 2020 MEDIA ARTS GROUP FOLLOWS UP RECORD THIRD QUARTER WITH NEW FINANCING SAN JOSE, CA - Media Arts Group, Inc. (NASDAQ: ARTS) today announced the completion of a new $10 million Senior Revolving Credit Facility with The CIT Group/Business Credit which increased the Company's borrowing capacity over its former senior credit facility by approximately $4 million. The CIT Group/Business Credit, a wholly owned subsidiary of the CIT Group, specializes in senior secured financing for middle market companies. Founded in 1908, the CIT Group, Inc. is an $18 billion asset-based lender which offers loans and leasing products to businesses and consumers, and financial advisory services throughout the U.S. through eight strategically-focussed business units. The Company's ability to borrow will depend upon its level of eligible trade receivables and inventory. "Our new relationship with CIT combined with record sales and net income for the recently completed December quarter places us in a strong position for financial stability and future growth" said Ken Raasch, President and CEO. As previously reported, income from continuing operations for the December 1996 quarter was $1.8 million (18 cents per share) on sales of $15.5 million in comparison to income from continuing operations of $1.4 million (14 cents per share) on sales of $12.2 million for the December 1995 quarter. In conjunction with the new financing the Company repaid approximately $600,000 of principal on its $8 million Senior Subordinated Debt and agreed to make an additional $2 million principal payment in September 1997 using the proceeds of an expected $2 million income tax refund. The Company also issued approximately 1.1 million shares to the Senior Subordinated Lender on its exercise in full of warrants and conversion of convertible notes at a per share price of 1 cent per share. Interest rates on the Company's Senior and Senior Subordinated Debt were reduced as part of the refinancing, however the non-cash amortization expense of additional debt discount is expected to offset the reduction in interest rates. Sales for the nine months ended December 31, 1996 were $35.5 million, an increase of 21% compared to $29 million reported for the same period in the prior year. Income from continuing operations were $2.0 million or 20 cents per share and $1.8 million or 18 cents per share for the same periods. Significant factors contributing to the growth were a 19% increase in same store sales of the Company owned galleries and an increase in the range of pricepoints of Thomas Kinkade products, as well as the negative impact in the prior year of the transition from independent sales representatives to an in-house sales force. The Company's customer base has continued to expand through programs such as the "Signature Gallery Program" which gives individual entrepreneurs the opportunity to open up a dedicated "Thomas Kinkade Signature Gallery." "Our targeted expansion through this program is on track, with 20 stores being opened or converted to date, and we expect 24 licensed galleries to have been opened by the end of fiscal 1998," said Raasch. The Signature Galleries are free standing stores that sell Thomas Kinkade products exclusively. These new stores will not only provide additional distribution for Thomas Kinkade products, but will also effectively increase the Thomas Kinkade brand name awareness in new regions of the country. The Company's distribution currently includes its own retail galleries, licensed Thomas Kinkade Signature Galleries, independent galleries and dealers, and mass marketers such as QVC. New distribution channels being 114 2 developed by the Company include the Christian market. "Media Arts Group's goal is to develop products for people's homes that create a warm, positive, loving environment. These products reflect Christian values, and we believe that the Christian market has a large untapped potential for our products," said Raasch. "As an example, Harvest House recently published a book authored by Thomas Kinkade, titled 'Simpler Times', which has quickly become a best seller in the Christian market." Based on the success of that book, Harvest House has signed a subsequent agreement to publish 6 additional books and other ancillary products using Kinkade's art. The Company is continuing to seek increased international distribution. In December 1996, Thomas Kinkade attended his first international art exhibition scheduled at Daimaru, a leading department store in Tokyo. Twenty original paintings were on display for the introduction of Kinkade's art to the Japanese market. Daimaru also promoted Thomas Kinkade products as part of their Christmas campaign which had a theme of "Thomas Kinkade's Christmas". In addition, the Company entered into a distribution agreement with James Lumbers Publishing, a leading Canadian art distributor. Lumbers is actively opening galleries in Canada and is marketing Thomas Kinkade products through promotions, exhibitions, and trade shows. While seeking to increase distribution of Thomas Kinkade products is one of the Company's major goals, management continues to seek opportunities to reduce and control costs in all areas. Various cost cutting measures have been implemented during the last twelve months, including reductions in headcount, changes in manufacturing practices and consolidation of the Company's San Jose corporate and distribution facilities. In addition, management has focused on improving financial performance through such means as tighter control over product returns and stricter application of credit terms. "Significant progress has been made in reducing costs, however we must continue to seek further efficiencies and maintain our current cost cutting programs," said Raasch. "In addition, the substantial completion of the disposal of John Hine Limited has allowed our management team to focus their energy on the more profitable Thomas Kinkade brand-name products." The foregoing comments include forward looking statements and actual results may vary. Among the factors that could impact these expectations are the continued expansion of the Signature Stores and other distribution channels for Thomas Kinkade products, as well as the continued control of operating expenses. These and other factors are discussed in the Company's Form 10-K and Annual Report to Shareholders. Based in San Jose, Media Arts Group, Inc. designs, manufactures, distributes and licenses fine quality gift and collectible art work and other art memorabilia primarily in the United States. 115 3 CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended December 31, December 31, ----------------------- ----------------------- 1996 1995 1996 1995 ----------- ---------- ---------- ----------- Net sales . . . . . . . . . . . . . . . . . . . . $ 15,471 $ 12,189 $ 35,512 $ 29,355 Gross profit . . . . . . . . . . . . . . . . . . 10,243 8,248 22,530 19,537 Operating expenses . . . . . . . . . . . . . . . 6,335 5,324 17,212 15,514 Income from continuing operations . . . . . . . . 1,804 1,422 1,967 1,824 Loss from discontinued operations . . . . . . . . - (740) (13,630) (1,902) Net income (loss) . . . . . . . . . . . . . . . . $ 1,804 $ 682 $ (11,663) $ (78) ========== ========== ========= ========= Income from continuing operations per common share . . . . . . . . . . . . . . . . . $ 0.18 $ 0.14 $ 0.20 $ 0.18 Loss from discontinued operations . . . . . . . . - (0.07) (1.38) (0.19) Net income (loss) per common share . . . . . . . $ 0.18 $ 0.07 $ (1.18) $ (0.01) ========== ========== ========= =========
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