Exhibit
10.65


 


FIRST AMENDMENT

TO

LOAN AND SECURITY AGREEMENT


 


This
First Amendment to Loan and Security Agreement is entered into as of June 25,
2003 (the “Amendment”), by and among COMERICA BANK - CALIFORNIA (“Bank”), MEDIA
ARTS GROUP, INC. (“Media Arts”), and THOMAS KINKADE STORES, INC. (“Kinkade
Stores”) (each of Media Arts and Kinkade Stores are individually referred to
herein as, a “Borrower” and collectively, the “Borrowers”).


 


RECITALS


 


Borrowers
and Bank are parties to that certain Loan and Security Agreement dated as of
April 15, 2002, as amended from time to time (the “Agreement”).  The parties desire to amend the Agreement in
accordance with the terms of this Amendment.


 


NOW,
THEREFORE, the parties agree as follows:


 


1.                                       Certain
defined terms in Section 1.1 of the Agreement are hereby added or amended
to read as follows:


 


‘“Borrowing Base” means
an amount equal to the sum of:


 


(a)                                  seventy
percent (70%) of Eligible Accounts before or after the Target Covenant
Compliance Period and seventy-five percent (75%) of Eligible Accounts during
any Target Covenant Compliance Period, in each case as determined by Bank with
reference to the most recent Borrowing Base Certificate delivered by Borrowers,
plus


 


(b)                                 the
aggregate amount of cash which is the subject of a control agreement entered
into for the benefit of Bank and which has been pledged to Bank by Borrowers
(and which are subject to a “hold”) on terms acceptable to Bank (i)
specifically to support Advances on the Revolving Line in the event the aggregate
Credit Extensions exceed the Borrowing Base and (ii) to support Borrowers’
obligations in respect of Letters of Credit; plus


 


(c)                                  the
aggregate amount of the advance rate (which advance rates shall be determined
by Bank in Bank’s sole discretion based on Bank policy and the risk class of
investments maintained by Borrowers with Comerica Securities, Inc.) permitted
by Bank and Comerica Securities, Inc. on cash, funds and/or investments
invested by Borrowers with Comerica Securities, Inc., which are the subject of
control agreement(s) and pledge agreement(s) (and which are subject to a
“hold”) entered into for the benefit of Bank; minus


 


(e)                                  in
each case, any current amounts due and owing to Thomas Kinkade or any
Affiliates of Thomas Kinkade by Borrowers under the License Agreement or
otherwise; and minus


 


(f)                                    in
each case, inventory and/or Accounts arising from the published or unpublished
works, derivative works, sketches, drawings, writings, paintings, art-based
home decorative accessories, collectibles, canvas and paper lithographs, vases,
trays, mugs, picture frames, ornaments and other artworks and gift products
based on the works of the Excluded Artists.’


 


‘“Responsible Officer”
means each of the Chief Executive Officer, Chief Financial Officer, and the
President of each Borrower.’


 


1

















 


‘“Revolving Line” means a
credit extension of up to Ten Million Dollars ($10,000,000), provided that
“Revolving Line” shall mean a credit extension of up to Fifteen Million Dollars
($15,000,000) during any Target Covenant Compliance Period.’


 


‘“Revolving Maturity
Date” means July 1, 2004.’


 


‘“Target Covenants” means
Borrowers’ compliance, on a consolidated basis, with each of the following
financial covenants and Slow Payment Account Reduction requirements (applicable
to measurement dates occurring after the closing date of that certain First
Amendment to Loan and Security Agreement is entered into as of June 25, 2003):


 


(a)                                  Minimum
Quarterly Profitability.  Borrowers’
Operating Income (as defined below) shall be greater than (i) One Dollar
($1.00) by the end of each fiscal quarter ending on March 31 and June 30 of
each fiscal year; and (ii) Three Million Dollars ($3,000,000) by the end of
each fiscal quarter ending on September 30 and December 31 of each fiscal
year.  In addition to the foregoing,
Borrowers shall show a Net Income (as defined below) of greater than (A) One
Dollar ($1.00) by the end of each fiscal quarter ending on March 31 and June 30
of each fiscal year, and (B) One Million Five Hundred Thousand Dollars
($1,500,000) by the end of each fiscal quarter ending on September 30 and
December 31 of each fiscal year.  As
used herein, “Operating Income” and “Net Income” means Borrowers’ operating
income and net income, respectively, each determined in accordance with GAAP.


 


(b)                                 Quick
Ratio.  Borrowers shall maintain, as
of the last day of each fiscal quarter, a ratio of Quick Assets to Current
Liabilities plus, to the extent not already included therein, all
Indebtedness (including without limitation any Contingent Obligations) owing
from Borrowers to Bank of at least 3.00 to 1.00.


 


(c)                                  Tangible
Net Worth.  Borrowers shall
maintain, as of the last day of each fiscal quarter, a Tangible Net Worth of
greater than Sixty-Eight Million Dollars ($68,000,000).


 


(d)                                 Total
Liabilities-Tangible Net Worth. 
Borrower shall maintain, as of the last day of each fiscal quarter, a
ratio of Total Liabilities to Tangible Net Worth of not more than 0.50 to 1.00.


 


(e)                                  Slow
Payment Account Reductions. 
Borrowers’ Accounts with respect to an account debtor, ten percent (10%)
of whose Accounts the account debtor has failed to pay within sixty (60) days
of the due date, and Accounts relating to notes receivable resulting from
receivable repayment plans, shall constitute less than ten percent (10%) of
Borrowers’ total accounts receivable (including notes receivable resulting from
receivable repayment plans, if any).’


 


2.                                       The
number “$2,900,000” set forth in the defined term “Permitted Indebtedness” in
Section 1.1 of the Agreement is hereby amended and replaced in its entirety to
read “$1,500,000”.


 


3.                                       The
words “each of” are hereby added following the words “Borrowers’ compliance
with” and “Borrower must comply with” in the defined term “Target Covenant
Compliance Period” in Section 1.1 of the Agreement.


 


4.                                       Section
2.1(b)(i) of the Agreement is hereby amended and restated in its entirety to
read as follows:


 


“(b)                           Letters
of Credit.


 


(i)                                     Subject
to the terms and conditions of this Agreement, Bank agrees to issue or cause to
be issued letters of credit for the account of Borrowers (each, a “Letter of
Credit”


 


2

















 


and collectively, the “Letters of Credit”) in an
aggregate outstanding face amount not to exceed the lesser of the Revolving
Line or the Borrowing Base minus, in each case, the aggregate amount of
the outstanding Advances and the FX Reserve at any time, provided that the
aggregate face amount of all outstanding Letters of Credit shall not exceed Five
Million Dollars ($5,000,000).  All
Letters of Credit shall be, in form and substance, acceptable to Bank in its
sole discretion and shall be subject to the terms and conditions of Bank’s form
of standard application and letter of credit agreement (the “Application”),
which Borrower agrees to execute, including Bank’s standard fee equal to the
greater of (i) 1.50% per annum of the face amount of each Letter of Credit,
which shall be prorated for any Letter of Credit issued for a partial year on
the date of issuance, and (ii) Six Hundred Dollars ($600) for each Letter of
Credit, provided that commercial Letters of Credit shall include any additional
standard Bank fees applicable to commercial Letters of Credit.  On any drawn but unreimbursed Letter of
Credit, the unreimbursed amount shall be deemed an Advance under Section
2.1(a).  Each standby Letter of Credit
will have an expiration date not later than twelve (12) months from the date of
issuance (but in no event later than the Revolving Maturity Date), and each
commercial Letter of Credit will have an expiration date not later than ninety
(90) days from the date of issuance (but in no event later than the Revolving
Maturity Date).  Prior to the Revolving
Maturity Date, Borrower shall secure in cash all obligations under any
outstanding Letters of Credit on terms acceptable to Bank in the event that the
Bank does not extend the Revolving Maturity Date in Bank’s sole discretion.”


 


5.                                       The
words “the Minimum Account Balance requirements set forth in Section 6.9 hereof”
in Section 4.4 of the Agreement are hereby deleted.


 


6.                                       Section
6.3(d) of the Agreement is hereby amended and replaced in its entirety to read
as follows:


 


“(d) promptly upon
receipt of notice thereof, a report of any legal actions pending or threatened
in writing against Borrower or any Subsidiary and any legal actions initiated
by Borrower or any Subsidiary that could result in damages or costs to Borrower
or any Subsidiary of Five Hundred Thousand Dollars ($500,000) or more;”


 


7.                                       The
second paragraph in Section 6.3 of the Agreement is hereby amended and replaced
in its entirety to read as follows:


 


“Borrower shall deliver
to Bank a Borrowing Base Certificate signed by a Responsible Officer in
substantially the form of Exhibit C hereto, together with aged
listings of accounts receivable and accounts payable, each in form and
substance acceptable to Bank, within twenty (20) days after the last day of
each month; provided, however, that at any time during which the
aggregate Credit Extensions are greater than or equal to $500,000, Borrower
shall deliver to Bank a Borrowing Base Certificate signed by a Responsible
Officer in substantially the form of Exhibit C hereto, together
with aged listings of accounts receivable, each in form and substance acceptable
to Bank, within one (1) day after the last day of each week.”


 


8.                                       The
fourth paragraph in Section 6.3 of the Agreement is hereby amended and replaced
in its entirety to read as follows:


 


“Bank shall have a right
from time to time hereafter to audit Borrower’s Accounts and appraise
Collateral at Borrower’s expense, provided that such audits will be conducted
no more often than every six (6) months unless an Event of Default has occurred
and is continuing.”


 


9.                                       Section
6.7 of the Agreement is hereby is hereby amended and replaced in its entirety
to read as follows:


 


“6.7                           Accounts
and Banking Relationships.  Borrower
shall maintain and shall cause each of its Subsidiaries to maintain its primary
depository, operating and investment accounts with Bank and/or Comerica
Securities, Inc., including a minimum of forty percent (40%) of the


 


3

















 


aggregate amount of all of Borrower’s cash and
investments.  Borrower may open and
maintain depository, operating and investment accounts with a Person other than
Bank and/or Comerica Securities, Inc. provided that as a condition precedent to
the inclusion in the Borrowing Base of any amounts held in any depository,
operating and investment accounts that are opened and/or maintained with a
Person other than Bank and/or Comerica Securities, Inc. any such accounts shall
be subject to the terms of a control agreement executed by Borrower and such
Person for the benefit of Bank which agreement shall be acceptable to Bank in
Bank’s sole discretion.  Borrower may
open and maintain that certain payroll account number
                                       
with Bank of America provided that the aggregate amount maintained in that
account shall not exceed $500,000 at any time. 
The value of Borrower’s cash and investments maintained in such accounts
with Persons other than Bank or Comerica Securities, Inc. shall not exceed
sixty percent (60%) of the aggregate amount of all of Borrower’s cash and
investments.”


 


10.                                 Paragraphs
(i), (ii) and (iii) of Section 6.8 of the Agreement is hereby are hereby
amended and replaced in their entirety (applicable to measurement dates
occurring after the closing date of that certain First Amendment to Loan and
Security Agreement is entered into as of June 25, 2003) to read as follows:


 


“(i)                                     Maximum
Operating Losses and Minimum Operating Income.  Borrowers’ Cumulative Operating Losses (as defined below) shall
be less than Eleven Million Five Hundred Thousand Dollars ($11,500,000) for the
six months ending June 30 of each fiscal year. 
In addition to the foregoing, Borrowers shall have an Operating Income
(as defined below) of greater than (a) One Dollar ($1.00) by the end of each
fiscal quarter ending September 30 and December 31 of each fiscal year; and (B)
One Dollar ($1.00) by the end of each fiscal year.  As used herein, “Cumulative Operating Losses” means the sum of
Borrowers’ monthly operating losses (including all deductions from revenue,
determined in accordance with GAAP), measured from January 1 of each fiscal
year through the applicable date of measurement.  As used herein, “Operating Income” means Borrowers’ operating
income determined in accordance with GAAP.”


 


(ii)                                        Quick
Ratio.  Borrowers shall maintain, as
of the last day of each fiscal quarter, a Quick Ratio of at least 1.80 to
1.00.  As used herein, “Quick Ratio”
means ratio of Quick Assets to Current Liabilities plus, to the extent
not already included therein, all Indebtedness (including without limitation
any Contingent Obligations) owing from Borrower to Bank.


 


(iii)                                     Tangible
Net Worth.  Borrowers shall
maintain, as of the last day of each fiscal quarter, a Tangible Net Worth of
greater than Fifty-Seven Million Dollars ($57,000,000) (the “Initial Minimum
Tangible Net Worth”).  The Initial Minimum
Tangible Net Worth of Borrowers shall be increased by an amount equal to forty
percent (40%) of Borrowers’ net income in each fiscal quarter (but shall not be
reduced by the amount of any net losses).”


 


11.                                 Section
6.9 of the Agreement is hereby is hereby deleted in its entirety.


 


12.                                 The
Exhibit D (Compliance Certificate) attached to the Agreement is hereby
amended and replaced in its entirety with the Exhibit D (Compliance
Certificate) attached hereto, which is hereby incorporated therein by this
reference.


 


13.                                 The
Annex A attached to the Compliance Certificate is hereby amended and
replaced in its entirety with the Annex A to the Compliance
Certificate attached hereto, which is hereby incorporated therein by this
reference.


 


14.                                 Unless
otherwise defined, all initially capitalized terms in this Amendment shall be
as defined in the Agreement.  The
Agreement, as amended hereby, shall be and remain in full force and effect in
accordance with its respective terms and hereby is ratified and confirmed in
all respects.  Except as expressly set
forth herein, the execution, delivery, and performance of this Amendment shall
not operate as a waiver of, or as an amendment of, any right, power, or remedy
of Bank under the Agreement, as in effect prior to the date hereof.  Borrowers ratify and reaffirm the continuing
effectiveness of all promissory notes, guaranties, security agreements,
mortgages, deeds of


 


4

















 


trust,
environmental agreements, and all other instruments, documents and agreements
entered into in connection with the Agreement.


 


15.                                 Borrowers
represents and warrant that the representations and warranties contained in the
Agreement are true and correct as of the date of this Amendment, and that no
Event of Default has occurred and is continuing.


 


16.                                 This
Amendment 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.


 


17.                                 As
a condition to the effectiveness of this Amendment, Bank shall have received,
in form and substance satisfactory to Bank, the following:


 


(a)                                  this
Amendment, duly executed by the Borrowers;


 


(b)                                 an
amount equal to any Bank Expenses incurred through the date of this Amendment;
and


 


(c)                                  such
other documents, and completion of such other matters, as Bank may reasonably
deem necessary or appropriate.


 


[Remainder of page intentionally
left blank.]


 


5

















 


IN
WITNESS WHEREOF, the undersigned have executed this Amendment as of the first
date above written.


 


	
   

  	
   

  	
  MEDIA ARTS
  GROUP, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Herbert D.
  Montgomery

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
  Exec. V.P. &
  CFO

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Herbert D.
  Montgomery

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  THOMAS KINKADE
  STORES, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Herbert D.
  Montgomery

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
  Exec. V.P. &
  CFO

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Herbert D.
  Montgomery

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  COMERICA BANK -
  CALIFORNIA

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Kathy
  Rosner-Galitz

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
  First Vice
  President

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Kathy
  Rosner-Galitz

  	
   

  
							



 


6

















 


EXHIBIT
D


 


COMPLIANCE
CERTIFICATE


 


TO:                            COMERICA
BANK-CALIFORNIA


 


FROM:         MEDIA ARTS GROUP, INC.
and THOMAS KINKADE STORES, INC.


 


The
undersigned authorized officer hereby certifies on behalf of MEDIA ARTS GROUP,
INC. and THOMAS KINKADE STORES, INC. that in accordance with the terms and
conditions of the Loan and Security Agreement between Borrowers and Bank (the
“Agreement”), (i) Borrowers are in complete compliance for the period
ending                               
with all required covenants except as noted below and (ii) all
representations and warranties of Borrowers stated in the Agreement are true
and correct as of the date hereof. 
Attached herewith are the required documents supporting the above
certification.  The Officer further certifies
that these are prepared in accordance with Generally Accepted Accounting
Principles (GAAP) and are consistently applied from one period to the next
except as explained in an accompanying letter or footnotes.


 


Please
indicate compliance status by circling Yes/No under “Complies” column.


 


	
  Reporting
  Covenant

  	
   

  	
  Required

  	
   

  	
  Complies

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Quarterly
  financial statements

  	
   

  	
  Quarterly within
  30 days

  	
   

  	
  Yes

  	
   

  	
  No

  
	
  Annual (CPA
  Audited)

  	
   

  	
  FYE within 120
  days

  	
   

  	
  Yes

  	
   

  	
  No

  
	
  10-K and 10-Q

  	
   

  	
  When filed with
  S.E.C.

  	
   

  	
  Yes

  	
   

  	
  No

  
	
  A/R & A/P
  Agings, Borrowing Base Cert.

  	
   

  	
  Monthly within
  20 days (Weekly within 1 day if aggregate Credit Extensions are greater than
  or equal to $500,000)

  	
   

  	
  Yes

  	
   

  	
  No

  
	
  A/R and
  Collateral Audit

  	
   

  	
  Initial and
  Semi-Annual

  	
   

  	
  Yes

  	
   

  	
  No

  
	
  IP Report

  	
   

  	
  Quarterly within
  30 days

  	
   

  	
  Yes

  	
   

  	
  No

  
	
  Total amount of
  Borrowers’ cash and investments

  	
   

  	
  Amount: 
  $           

  	
   

  	
  Yes

  	
   

  	
  No

  
	
  (a) Total amount of Borrowers’ cash and investments
  maintained with Bank and/or Comerica Securities, Inc. 

  	
   

  	
  Amount: 
  $           
  (Minimum 40%)

  	
   

  	
  Yes  

  	
   

  	
  No  

  
	
  (b) Total amount of Borrowers’ cash and investments
  maintained with Persons other than Bank and/or Comerica Securities, Inc.

  	
   

  	
  Amount: 
  $             (Maximum 60%)

  	
   

  	
  Yes

  	
   

  	
  No

  



 


	
  Financial
  Covenant

  	
   

  	
  Required

  	
   

  	
  Actual

  	
   

  	
  Complies

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Maintain on a
  Quarterly Basis:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Minimum Quick Ratio

  	
   

  	
  1.80:1.00 *A

  	
   

  	
           :1.00

  	
   

  	
  Yes

  	
   

  	
  No

  
	
  Maximum Total
  Liabilities to TNW

  	
   

  	
  0.75 :1.00  *B

  	
   

  	
           :1.00

  	
   

  	
  Yes

  	
   

  	
  No

  
	
  Tangible Net Worth

  	
   

  	
  $57,000,000  *C

  	
   

  	
  $               

  	
   

  	
  Yes

  	
   

  	
  No

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Maximum
  Cumulative Operating Losses

  	
   

  	
  Less than
  $11,500,000 for six months ending June 30 of each fiscal year  *D

  	
   

  	
  $               

  	
   

  	
  Yes

  	
   

  	
  No

  
	
  Minimum
  Operating Income

  	
   

  	
  At least $1.00
  for each Q3 and Q4 of each fiscal year *E
  

  	
   

  	
  $               

  	
   

  	
  Yes

  	
   

  	
  No

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  At least $1.00
  for each fiscal year end

  	
   

  	
  $               

  	
   

  	
  Yes

  	
   

  	
  No

  



 


1

















 












*  See Annex A attached hereto.


 


Comments Regarding Exceptions:  See Attached.


 


	
   

  	
   

  	
  BANK USE ONLY

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Received by:

  	
   

  
	
  Sincerely,

  	
   

  	
   

  	
  AUTHORIZED SIGNER

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Date:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Verified:

  	
   

  
	
  SIGNATURE           (Chief
  Executive Officer/Chief Financial Officer)

  	
   

  	
   

  	
  AUTHORIZED SIGNER

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Date:

  	
   

  
	
  TITLE

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Compliance
  Status

  	
   

  	
  Yes

  	
  No

  
	
   

  	
   

  	
   

  
	
  DATE

  
											



 


2

















 


ANNEX A


 


 


A.                                   Target
Covenant for Quick Ratio is 3.0 to 1.00.


 


B.                                     The
Target Covenant for Total Liabilities to TNW is 0.50 to 1.00.


 


C.                                     The
initial stated Tangible Net Worth of $57,000,000 shall be increased by an
amount equal to forty percent (40%) of Borrowers’ net income in each fiscal
quarter (but shall not be reduced by the amount of any net losses).  The Target Covenant for Tangible Net Worth
is $68,000,000.


 


D.                                    The
Target Covenant for Operating Income is an amount greater than $1.00 for each
of Q1 and Q2 of each fiscal year and an amount greater than $3,000,000 for each
of Q3 and Q4 of each fiscal year.


 


E.                                      The
Target Covenant for Net Income is an amount greater than $1.00 for each of Q1
and Q2 of each fiscal year and an amount greater than $1,500,000 for each of Q3
and Q4 of each fiscal year.


 


3