Credit Agreement - Levine Leichtman Capital Partners LP, Media Arts Group Inc., Thomas Kinkade Stores Inc., MAGI Entertainment Products Inc., MAGI Sales Inc. and California Coast Galleries Inc.
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
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TABLE OF CONTENTS
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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
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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
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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
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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
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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
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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):
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"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.
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"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,
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(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.
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"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,
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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;
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(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.
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"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,
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(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;
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(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
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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,
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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.
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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
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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");
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(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.
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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.
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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
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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
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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.
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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.
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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
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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.
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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:
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(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).
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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.
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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,
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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
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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
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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,
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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
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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;
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(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.
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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.
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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;
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<PAGE> 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
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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
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<PAGE> 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.
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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.
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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.
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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
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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
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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.
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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
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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:
<TABLE>
<CAPTION>
FISCAL QUARTER(S)
ENDING MINIMUM NET WORTH
----------------- -----------------
<S> <C>
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
</TABLE>
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.
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<PAGE> 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:
<TABLE>
<CAPTION>
MAXIMUM CAPITAL
FISCAL YEAR(S) ENDING EXPENDITURES
--------------------- ---------------
<S> <C>
3/31/97* $300,000
3/31/98 $2,000,000
3/31/99 and thereafter $2,200,000
</TABLE>
* 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
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<PAGE> 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.
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