<PAGE> 1
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
MEDIA ARTS GROUP, INC.
TEN ALMADEN BOULEVARD
NINTH FLOOR
SAN JOSE, CALIFORNIA 95113
The accompanying proxy is solicited by the Board of Directors of Media
Arts Group, Inc., a Delaware corporation ("Media Arts" or the "Company"), for
use at the Annual Meeting of Stockholders to be held September 27, 1996, or any
adjournment thereof, for the purposes set forth in the accompanying Notice of
Annual Meeting. The date of this Proxy Statement is September 10, 1996, the
approximate date on which this Proxy Statement and the accompanying form of
proxy were first sent or given to stockholders.
SOLICITATION AND VOTING OF PROXIES
The cost of soliciting proxies will be borne by the Company. In
addition to soliciting stockholders by mail through its regular employees, the
Company will request banks and brokers, and other custodians, nominees and
fiduciaries, to solicit their customers who have stock of the Company registered
in the names of such persons and will reimburse them for their reasonable,
out-of-pocket costs. The Company may use the services of its officers,
directors, and others to solicit proxies, personally or by telephone, without
additional compensation.
Only stockholders of record as of the close of business on July 31,
1996 will be entitled to vote at the meeting and any adjournment thereof. As of
that date, there were 9,867,032 shares of common stock of the Company, par value
$.01 per share ("Common Stock"), issued and outstanding. Stockholders may vote
in person or by proxy. Each holder of shares of Common Stock is entitled to one
(1) vote for each share of stock held on the proposals presented in this Proxy
Statement. The Company's By-Laws provide that a majority of all of the shares of
the stock entitled to vote, whether present in person or represented by proxy,
shall constitute a quorum for the transaction of business at the meeting.
All valid proxies received prior to the meeting will be voted. All
shares represented by a proxy will be voted, and where a stockholder specifies
by means of the proxy a choice with respect to any matter to be acted upon, the
shares will be voted in accordance with the specification so made. If no choice
is indicated on the proxy, the shares will be voted in favor of the proposal. A
stockholder giving a proxy has the power to revoke his or her proxy, at any time
prior to the time it is voted, by delivering to the Secretary of the Company a
written instrument revoking the proxy or a duly executed proxy with a later
date, or by attending the meeting and voting in person.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
Under the Company's By-Laws and Delaware law: (1) shares represented by
proxies that reflect abstentions or "broker non-votes" (i.e., shares held by a
broker or nominee which are represented at the meeting, but with respect to
which such broker or nominee is not empowered to vote on a particular proposal)
will be counted as shares that are present and entitled to vote for purposes of
determining the presence of a quorum; (2) the six director nominees receiving
the highest number of votes, up to the number of directors to be elected, are
elected and accordingly, abstentions, broker non-votes and withholding of
authority to vote will not affect the election of directors; and (3) proxies
that reflect abstentions as to a particular proposal will be treated as voted
for purposes of determining the approval of that proposal and will have the same
effect as a vote against that proposal, while proxies that reflect broker
non-votes will be treated as unvoted for purposes of determining approval of
that proposal and thus will not be counted as votes for or against that
proposal.
DEADLINE OF RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company that are intended to be
presented by such stockholders at the Company's next annual meeting of
stockholders must be received by the Company no later than May 13, 1997 in
order that they may be considered for possible inclusion in the proxy statement
and form of proxy relating to that meeting.
An annual report for the fiscal year ended March 31, 1996 is enclosed
with this Proxy Statement.
1
<PAGE> 2
INFORMATION ABOUT MEDIA ARTS GROUP, INC.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of June 30,
1996, with respect to the beneficial ownership of the Company's Common Stock by
(i) all persons known by the Company to be the beneficial owners of more than 5%
of the outstanding Common Stock of the Company, (ii) each director and
director-nominee of the Company, (iii) the Chief Executive Officer and the three
other most highly compensated executive officers of the Company as of March 31,
1996, whose salary and incentive compensation for the fiscal year ended March
31, 1996 exceeded $100,000 and (iv) all executive officers and directors of the
Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF
BENEFICIAL OWNERS (1) NUMBER OF SHARES PERCENTAGE OF CLASS
---------- ------- ---------------- -------------------
<S> <C> <C>
Kenneth E. Raasch (2) (3) 3,797,875 37.8
Chairman, Chief Executive Officer &
President
c/o Media Arts Group, Inc.
Ten Almaden Boulevard, 9th Fl
San Jose, CA 95113
Thomas Kinkade 3,263,043 33.0
Director
c/o Media Arts Group, Inc.
Ten Almaden Boulevard, 9th Fl
San Jose, CA 95113
Levine Leichtman Capital Partners, L.P. (4) 1,150,000 10.4
345 N. Maple Suite 304
Beverly hills, CA 90210
Hyprom S.A. (5) 916,604 9.2
Chemin Neuf 16
1028 Preverenges
Lausanne, Switzerland
Robert Wallace (6) 275,870 2.8
Director
Raymond A. Peterson (7) 116,451 1.2
Chief Financial Officer and
Senior Vice President of Finance
Daniel P. Byrne (8) 111,201 1.1
Senior Vice President of Marketing
Gary Dillabough (9) 27,418 *
Vice President of Operations
Norman A. Nason (10) 14,861 *
Director
Lowell W. Morse (11) 9,409 *
Director
Steve Gordon 5,000 *
Director
Senior Vice President of Operations
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C> <C>
As a group (10 persons) executive
officers and directors (11) 7,729,579 78.5
</TABLE>
- - -------------------------------------------------------------------------------
* less than 1 percent
(1) Except as otherwise noted, the persons named in the table have the sole
voting and investment power with respect to all shares shown as
beneficially owned by them, subject to the information contained in the
footnotes to this table.
(2) The shares owned by Mr. Raasch are held by Kenneth E. Raasch and Linda
Louise Raasch, as Trustees of the Raasch Family Trust, May 18, 1993.
(3) Includes 165,517 shares of Common Stock which may be acquired upon the
conversion of a $1,200,000 promissory note issued to Linda Louise
Raasch, the wife of Mr. Raasch, on June 30, 1995. See "Certain
Relationships and Related Transactions." Also includes 15,000 shares
subject to options held by Mr. Raasch.
(4) Includes 400,000 shares of Common Stock which may be acquired upon the
exercise of a warrant held by Levine Leichtman Capital Partners, L.P.
("LLCP") and 780,000 shares which may be acquired upon conversion of a
convertible promissory note held by LLCP.
(5) Includes an aggregate of 298,953 shares of Common Stock underlying two
warrants held by Hyprom S.A.
(6) Includes 6,500 shares subject to options held by Mr. Wallace.
(7) Includes 113,451 shares subject to options held by Mr. Peterson.
(8) Includes 110,451 shares subject to options held by Mr. Byrne.
(9) Includes 18,818 shares subject to options held by Mr. Dillabough
(10) Includes 9,681 shares subject to options held by Mr. Nason.
(11) Includes 9,409 shares subject to options held by Mr. Morse.
(12) Includes an aggregate of 396,761 shares subject to options held by the
directors and executive officers and 165,517 shares that may be
acquired beneficially by Mr. Raasch upon the conversion of a promissory
note.
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<PAGE> 4
MANAGEMENT
Directors. This section sets forth the positions with the Company as
of June 30, 1996 of the Company's current Directors.
<TABLE>
<CAPTION>
NAME POSITIONS WITH THE DIRECTOR SINCE
COMPANY
<S> <C> <C>
Kenneth E. Raasch President, Chief Executive 1990
Officer & Chairman of the
Board
Thomas Kinkade Art Director, Director 1990
Steve Gordon Senior Vice President of 1996
Operations, Director
Lowell W. Morse Director 1993
Norman A. Nason Director 1993
Robert Wallace Director 1994
</TABLE>
The ages, principal occupations and positions for the past five years,
and in certain cases prior years, of each of the directors and executive
officers of the Company are as follows:
KENNETH E. RAASCH, age 36, has been the Chairman of the Board,
President and Chief Executive Officer of the Company since its inception in
March 1990. He was the President and majority shareholder of First Med Corp,
Inc., a medical billing and management company, from August 1988 until January
1990 when it was sold to Medaphis Corp., a public company. He was President of
Trustec Financial Group, Inc., the general partner of Beta Associates, a pension
fund, for the previous two years. Mr. Raasch also serves as the exclusive
manager, agent and representative of Thomas Kinkade pursuant to the Management
Agreement between Mr. Kinkade and Mr. Raasch. See "Certain Relationships and
Related Transactions - Management Agreement between Thomas Kinkade and Kenneth
E. Raasch".
THOMAS KINKADE, age 38, has been the Art Director and a member of the
Board of Directors of the Company since its inception in March 1990. In
addition, Mr. Kinkade has provided artwork to the Company for its productions
since the Company's inception. Prior to March 1990, Mr. Kinkade was a
self-employed artist.
STEVE GORDON, age 41, has been the Senior Vice President of Operations
of the Company since December 1995 and a member of the Board of Directors of the
Company since February 1996. Prior to December 1995, Mr. Gordon was the
Director of the Danbury Mint, a division of MBI, Inc., an established direct
response collectibles company. In that capacity, he was responsible for product
lines such as dolls, plates, stamps and die cast replicas.
LOWELL W. MORSE, age 59, has been a director of the Company since April
1993. He is the President and Chairman of the Board of Directors of Cypress
Ventures, Inc., a real estate development company founded in 1988. He is also
Chairman of the Board of Directors of Morse & Associates, Inc., a real estate
management corporation, as well as founding director of Comerica Bank of
California (formerly Plaza Bank of Commerce and a subsidiary of Comerica, Inc.)
and is a director of International Family Entertainment (The Family Channel) and
the Bagel Basket, Inc.
NORMAN A. NASON, age 55, has been a director of the Company since April
1993. In 1976 he founded, and has since served as President, of Saratoga
Commercial Real Estate Brokerage Corporation and Saratoga Management
Corporation, companies that are involved in selling, leasing and managing
commercial property.
ROBERT WALLACE, age 47, has been a director of the Company since
September of 1994. Mr. Wallace is the founder and has been the Chairman and
President of Gateway Advisors, Inc., a financial advisory firm, since 1987. Mr.
Wallace also serves as a director and member of the Audit Committee of
International Family Entertainment, Inc., a New York Stock Exchange listed
company which operates one of the leading cable television networks in the
United States.
4
<PAGE> 5
RAYMOND A. PETERSON, age 50, C.P.A. has been the Chief Financial
Officer of the Company and Vice President of Finance since May 1993. He was the
Chief Executive Officer of Peterson, Sense & Company, a certified public
accounting firm, for the previous 15 years, during which time he provided
accounting, tax and financial planning services for the Company. Prior to this,
Mr. Peterson was the Corporate Tax Manager for Raychem Corporation, a Fortune
500 multi-national manufacturing corporation, where he implemented internal tax
reporting systems for use by 32 international subsidiaries, and engaged in tax
planning, research and forecasting of international corporate taxes. Prior to
that, Mr. Peterson was a Senior Tax Accountant with Peat Marwick & Mitchell
(currently, KPMG Peat Marwick).
SUSAN C. EDSTROM, age 33, has been the Vice President of Administration
and Corporate Secretary of the Company since its inception in 1990. For the two
years previous to her employment with the Company, she was a human resources
manager and administrative assistant with Magnetic Pulse, Inc.
DANIEL P. BYRNE, age 34, has been the Vice President of Marketing of
the Company since March 1992. He was employed by the Bradford Exchange, Ltd., an
established manufacturer and marketer of collectible giftware, from October 1988
until February 1992 as Manager of Product Development and Manager of Concept
Development. Mr. Byrne also served as the Product Manager of Precious Moments
Collection, a multi-million dollar product line of Enesco Corporation, a
subsidiary of Stanhome Inc., for a period of three years.
GARY DILLABOUGH, age 33, has been the Vice President of Operations of
the Company since March 1994. Previous to his employment with the Company, he
was employed by Cornish & Cary Commercial Real Estate from 1988 to 1994 as a
Senior Sales Associate.
Meetings of the Board of Directors. During the fiscal year ended March
31, 1996, the Board of Directors held six meetings. No director attended less
than 75% of the total number of meetings of the Board of Directors and of the
committees of the Board of Directors on which such director served during fiscal
1996.
The Company does not have a standing Nominating Committee, but does
have an Audit Committee and a Compensation Committee.
The Audit Committee's function is to review, with the Company's
independent public accountants, management and the Board of Directors, the
Company's financial reporting processes and internal financial controls. The
Audit Committee reviews the results of the examination of the Company's
financial statements by the independent public accounts and the independent
public accountants' opinion. The Audit Committee also approves all professional
services performed by the independent public accountants, recommends the
retention of the independent public accountants to the Board of Directors,
subject to ratification by the stockholders, and periodically reviews the
Company's accounting policies and internal accounting and financial controls.
The members of the Audit Committee are Robert Wallace, Norman A. Nason and
Lowell W. Morse. The Audit Committee held two meetings during the fiscal year
ended March 31, 1996.
5
<PAGE> 6
The Compensation Committee's primary function is to review and
recommend salary levels of, to approve bonus plans for, and approve stock option
grants to executive officers, and to set the compensation of the Chief Executive
Officer. During fiscal 1996, the Compensation Committee was composed of Lowell
W. Morse, Norman A. Nason and Robert Wallace. The Compensation Committee met
twice during the fiscal year ended March 31, 1996.
EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth information concerning the compensation
of the Chief Executive Officer of the Company and the three other most highly
compensated executive officers of the Company whose salary and incentive
compensation exceeded $100,000 for the year ended March 31, 1996.
Effective April 1, 1994, the Company changed its fiscal year end from
December 31 to March 31. Accordingly, the following table sets forth information
for the years ended March 31, 1996 (fiscal 1996), March 31, 1995 (fiscal 1995),
December 31, 1994 (fiscal 1994) and December 31, 1993 (fiscal 1993).
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM ALL OTHER
ANNUAL COMPENSATION COMPENSATION COMPENSATION
------------------- ------------ ------------
NAME AND PRINCIPAL AWARDS
POSITION OPTIONS
YEAR SALARY BONUS (SHARES)
- - -------------------------- -------- ----------- ---------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
KENNETH E. RAASCH 1996 $335,286 $ - - $ 19,027 (3)
PRESIDENT AND CHIEF 1995 363,075 - - 17,533 (3)
EXECUTIVE OFFICER 1994 360,000 89,850 15,000 18,740 (3)
1993 255,001 627,940(2) - 346,992 (4)
DANIEL P. BYRNE 1996 152,466 - - 2,065 (5)
SENIOR VICE PRESIDENT 1995 136,992 - - 3,619 (5)
OF MARKETING 1994 136,992 - 57,726 3,450 (5)
1993 86,250 20,300 52,725 2,527 (5)
RAYMOND A. PETERSON 1996 129,080(5) 10,000 5,000 3,730 (6)
CHIEF FINANCIAL 1995 122,917 - - 3,780 (6)
OFFICER AND SENIOR 1994 118,750 - 55,726 4,033 (6)
VICE PRESIDENT OF 1993 66,667 10,500 52,725 4,090 (6)
FINANCE
GARY DILLABOUGH 1996 110,012 - 18,818 -
VICE PRESIDENT 1995 (1)
OF OPERATIONS 1994 (1)
1993 (1)
</TABLE>
- - -------------------------------------------------------------------------------
(1) The total annual compensation of the named executive officer did not
exceed $100,000 for this period.
(2) Distribution made to stockholder to pay taxes on S corporation
earnings.
(3) Represents fringe benefits for an automobile allowance, medical
insurance and life insurance.
(4) Represents $331,000 earned by Mr. Raasch under his Management Agreement
with Mr. Kinkade and fringe benefits of $3,263 for an automobile
allowance, $3,729 for medical insurance and $9,000 for life insurance.
Effective April 1, 1994, Mr. Raasch assigned to the Company his rights
under the Management Agreement to receive certain license and usage
fees and other revenues. See "Certain Relationships and Related
Transactions".
(5) Represents fringe benefits for medical insurance.
(6) Represents fringe benefits for medical and life insurance.
6
<PAGE> 7
The following table provides specific information concerning grants of
options to purchase the Company's Common Stock made during the fiscal year ended
March 31, 1996 to the persons named in the Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
OPTION TERM (3)
NAME OPTIONS % OF TOTAL EXERCISE EXPIRATION 5%($) 10%($)
GRANTED OPTIONS OR BASE DATE
(#)(1) GRANTED PRICE
TO ($/SH)(2)
EMPLOYEES
IN FISCAL
YEAR
<S> <C> <C> <C> <C> <C> <C>
KENNETH E. RAASCH -
DANIEL P. BYRNE -
RAYMOND A. PETERSON 5,000 13.5% 6.25 5/1/05 - $1,452
GARY DILLABOUGH -
</TABLE>
- - -------------------------------------------------------------------------------
(1) Generally, the right to exercise an option under the Company's 1994
Employees Stock Option Plan (the "Option Plan") vests as to one-fifth
of the shares subject to the option on each anniversary of the date of
grant. The Option Plan permits the grant of both incentive stock
options within the meaning of Section 422 of the Internal Revenue Code,
as amended (the "Code"), and nonstatutory stock options. The exercise
price of incentive stock options must at least equal the fair market
value of the Common Stock of the Company on the date of grant. The
exercise price of nonstatutory stock options must equal at least 85% of
the fair market value of the Common Stock of the Company on the date of
grant. The exercise price of incentive stock options or nonstatutory
stock options granted to any person who at the time of grant owns stock
representing more than 10% of the voting power of all classes of stock
of the Company or any parent or subsidiary corporations must be at
least 110% of the fair market value of the Common Stock of the Company
on the date of grant and the term of such options cannot exceed five
years or five years and one day, respectively.
(2) All options were granted based upon market value on the date of grant
as determined by the Company.
(3) Potential gains are net of exercise price, but before taxes associated
with exercise. These amounts represent certain assumed rates of
appreciation only, based on the Securities and Exchange Commission
rules. Actual gains if any, on stock option exercises are dependent on
the future performance of the Common Stock, overall market conditions
and the option-holders' continued employment through the vesting
period. The amounts reflected in this table may not necessarily be
achieved.
7
<PAGE> 8
OPTION EXERCISES AND FISCAL 1996 YEAR-END VALUE
The following table provides the specified information concerning
exercises of options to purchase the Company's Common Stock in the fiscal year
ended March 31, 1996, and unexercised options held as of March 31, 1996, by the
persons named in the Summary Compensation Table. No persons named in the Summary
Compensation Table exercised options during the fiscal year ended March 31,
1996.
AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED OPTIONS VALUE OF UNEXERCISED
HELD AT MARCH 31, 1996 IN-THE-MONEY OPTIONS AT
MARCH 31, 1996(2)
NAME EXCERCISABLE (1) UNEXERCISABLE (1) $ EXCERCISABLE $ UNEXERCISABLE(1)
# #
<S> <C> <C> <C> <C>
KENNETH E. RAASCH 15,000 - - -
DANIEL P. BYRNE 99,906 10,545 20,036 -
RAYMOND A. PETERSON 76,816 36,635 20,036 -
GARY DILLABOUGH 9,328 9.490 - -
</TABLE>
(1) Company stock options generally vest one-fifth on the first anniversary
of the date of grant and one-fifth per year thereafter. These options
are exercisable only to the extent vested.
(2) The value of the unexercised in-the-money options is based on the
closing price of the Company's Common Stock on March 31, 1996 ($2.75
per share) and is net of the exercise price of such options.
8
<PAGE> 9
COMPENSATION OF DIRECTORS
Board members other than the Company's outside directors receive no
compensation for attending Board meetings, except for reimbursement of certain
expenses in connection with attendance at Board meetings and Committee meetings.
The Company's outside directors receive $2,500 per meeting as compensation for
their services as Directors. In addition, two of the outside directors, Norman
A. Nason and Lowell W. Morse, each received $15,000 annually for serving as a
board member, for the fiscal year ended March 31, 1996. If re-elected, the
Company has agreed to pay each such person an additional $15,000 for his
services for fiscal 1997.
In addition to cash compensation, the Company's nonemployee directors
are entitled to participate in the Company's Stock Option Plan for Outside
Directors (the "Director Plan"). The Board of Directors and the stockholders of
the Company approved the Director Plan on February 15, 1994 and reserved 50,000
shares of Common Stock for issuance thereunder. As of June 30, 1996 the
aggregate market value of such shares was $137,500. On the approval date of the
Director Plan, the Company's then current nonemployee directors, Messrs. Morse
and Nason, received an initial grant of an option to purchase 7,909 shares of
Common Stock at an exercise price of $7.11 per share. After the approval date of
the Director Plan, any new nonemployee director is entitled to receive on the
first business day following such director's appointment an initial grant of an
option to purchase 5,000 shares of Common Stock under the Director Plan.
Following an initial grant, on the business day following each annual meeting of
the Company's stockholders, each nonemployee director who will then have served
at least one year as a director of the Company is entitled to receive a grant of
an option to purchase an additional 1,500 shares of Common Stock. All options
granted under the Director Plan are non-qualified and have an exercise price per
share equal to the fair market value of the Common Stock, as determined pursuant
to the Director Plan. The options are immediately and fully exercisable as of
their respective grant dates and terminate upon the earlier of (i) the tenth
anniversary of the grant date, (ii) the expiration of the three-month period
following the termination of the participant's services as a director for any
reason other than disability or death, (iii) the first anniversary of the
termination of the participant's service by reason of disability and (iv) the
first anniversary of the participant's death. Directors' options expire upon a
merger or consolidation of the Company with or into another corporation or
acquisition by another corporation or person of all or substantially all of the
Company's assets or at least 51% of the Company's then outstanding voting stock
or a liquidation or dissolution of the Company. Options are not transferable
except by will or descent and distribution.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee during fiscal 1996 was composed of three
independent, non-employee directors of the Company, Robert Wallace, Norman A.
Nason, and Lowell W. Morse.
During fiscal 1996, no executive officer of the Company served on the
board of directors or compensation committee of another company that had an
executive officer serve on the Company's Board of Directors or its Compensation
Committee.
EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
Certain executive officers have entered into an employment agreement
with the Company. Pursuant to Mr. Raasch's employment agreement, effective
January 1, 1994 the Company engaged Mr. Raasch as President and Chief Executive
Officer for a period of five years at an annual base salary of $360,000
(effective during fiscal 1996, in connection with the Company's cost reduction
efforts, Mr. Raasch reduced his salary to $272,300). In addition, Mr. Raasch is
entitled to receive (i) a bonus each year in an amount which bears the same
pro rata relationship to his base salary as the Company's operating income
before taxes for the year bears to the forecast amount therefor reflected in
the Company's business plan for that year and (ii) a discretionary bonus to be
determined by the Board of Directors. Under Mr. Raasch's employment agreement,
the Company has also agreed to provide to Mr. Raasch the use of a Company car
and mobile telephone.
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<PAGE> 10
Mr. Byrne was engaged by the Company as Vice President of Marketing
for a period of three years effective January 1, 1994 at an annual base salary
of $138,000 ($160,000 effective February 15, 1995) pursuant to Mr. Byrne's
employment agreement with the Company. In addition to his base salary, Mr.
Byrne is entitled to receive a bonus each year in an amount which bears the
same pro rata relationship to his base salary as the Company's operating income
before taxes for the year bears to the forecast amount therefor reflected in the
Company's business plan for that year.
Mr. Peterson was engaged by the Company as Chief Financial Officer
effective January 1, 1994 for a period of five years at an annual base salary of
$100,000 ($125,000 effective May 1, 1994) pursuant to Mr. Peterson's employment
agreement with the Company. In addition to his base salary, Mr. Peterson is
entitled to receive a bonus each year in an amount which bears the same pro rata
relationship to his base salary as the Company's operating income before taxes
for the year bears to the forecast amount therefor reflected in the Company's
business plan for that year. Under Mr. Peterson's employment agreement, the
Company has also agreed to provide to Mr. Peterson the use of a Company car.
Mr. Kinkade was engaged by the Company as Art Director for a period of
five years at an annual base salary of $60,000 pursuant to Mr. Kinkade's
employment agreement effective January 1, 1994 with the Company. In addition to
his base salary, Mr. Kinkade is entitled to receive a bonus each year which
bears the same pro rata relationship to his base salary as the Company's
operating income before taxes for the year bears to the forecast amount therefor
reflected in the Company's business plan of that year. Mr. Kinkade is also
entitled to certain royalties and other payments in connection with his artwork.
See "Certain Relationships and Related Transactions".
Mr. Dillabough was engaged by the Company as Vice President of
Operations for a period of three years at an annual base salary of $90,000
pursuant to Mr. Dillabough's employment agreement with the Company effective
March 15, 1994. In addition to his base salary, Mr. Dillabough is entitled to
receive a bonus each year in an amount which bears the same pro rata
relationship to his base salary as the Company's operating income before taxes
for the year bears to the forecast amount therefor reflected in the Company's
business plan for that year.
Mr. Gordon, a director of the Company, was engaged part-time by the
Company as Head of Operations at an annual base salary of $21,000 effective
December 15, 1995. In addition to his base salary, Mr. Gordon was entitled to
receive a $50,000 bonus contingent upon the achievement of certain criteria.
Effective July 1, 1996, Mr. Gordon agreed to increase his duties to the Company
and to forego the $50,000 bonus in exchange for an increase in his annual base
salary to $60,000. In addition, TFS Limited, a consulting firm in which Mr.
Gordon has a 50% interest, was engaged on December 15, 1995 to provide certain
strategic advise to the Company for approximately one year for a monthly fee of
$12,500.
The employment agreements of Messrs. Raasch, Byrne, and Peterson
provides for the officer to receive all salary and bonus payments that would
have been payable to him under the agreement for a period of five years (or, in
the case of Messrs. Byrne and Kinkade, three years) after any "Change in
Control" which provides "Good Reason" for the officer to terminate his
employment. "Good Reason" is defined to include the assignment to the officer of
duties inconsistent with his senior executive status, a reduction in his base
salary, a relocation of the officer or the Company's principal office and the
termination of any compensation or other employee benefits plans in which he was
eligible to participate.
10
<PAGE> 11
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LICENSES
The Company entered into a ten-year worldwide license agreement with
Thomas Kinkade, a principal stockholder and director of the Company, dated as of
December 1, 1993, which grants the Company the exclusive worldwide right to
reproduce the artwork of Thomas Kinkade in the form of two dimensional art. In
particular, the Company has the exclusive right to produce, sell, distribute and
promote reproductions of Thomas Kinkade's artwork in the form of tabletop
lithographs, posters, paper and canvas lithographs and any other form of wall
art, and the right to use the name and likeness of Mr. Kinkade in promoting the
sale of its products and for general business purposes. Under the license
agreement Mr. Kinkade is obligated to deliver 16 paintings per year to the
Company for reproduction. While the license does not cover the rights to
reproduce the artwork in other media such as plates, calendars, greeting cards
or puzzles, it grants the Company a right of first refusal with respect to any
future licenses entered into by Mr. Kinkade, subject to the prior right of first
refusal which Mr. Kinkade granted to The Bradford Exchange, Ltd. The license
agreement permits Mr. Kinkade to reproduce one piece of his artwork annually for
sale and distribution in order to raise money for the City of Placerville,
California. Mr. Kinkade is not paid any royalty upon sales of products using his
artwork, and receives only a flat fee of $18,750 for each painting delivered to
the Company for reproduction. The agreement is terminable by either party after
failure by the other party for 30 days to cure a material breach of any
agreement or representation contained in the agreement, upon a change of control
of the Company, in the event Kenneth E. Raasch ceases to serve as the Company's
Chief Executive Officer or in the event of the Company's insolvency. A change of
control is defined to occur on the date when any person or group (as defined in
Rule 13(d)(3) under the Securities Exchange Act of 1934) beneficially owns (as
defined in such Rule) a number of shares of Common Stock in excess of the number
of shares of Common Stock beneficially owned by Messrs. Kinkade and Raasch,
collectively, and neither Mr. Kinkade nor Mr. Raasch are directors of the
Company. Upon termination of the agreement, the Company may not produce any new
licensed products but retains the right to sell its existing inventory of
licensed products. The Company has the right of first refusal to extend the
agreement for an additional term of five years beyond its expiration date,
exercisable at any time within one year prior to the agreement's expiration and
has the same renewal right at the end of the first such subsequent term. Mr.
Kinkade retains the original artwork produced under the license.
In addition to the license agreement, the Company has entered into a
royalty agreement with Mr. Kinkade, dated as of December 1, 1993, which grants
to the Company for ten years the right to use the name "Thomas Kinkade" in
connection with the operation of Thomas Kinkade stores owned or licensed by the
Company. Under the agreement the Company is obligated to pay Mr. Kinkade a
royalty of 5% of net sales of stores utilizing his name.
Mr. Kinkade is also employed by the Company as Art Director and
receives certain payments from dealers for personally hand finishing master
editions and supervising the hand finishing of studio proof editions. See
" - Sales of Studio Proofs and Master Editions."
MANAGEMENT AGREEMENT BETWEEN THOMAS KINKADE AND KENNETH E. RAASCH
Thomas Kinkade and Kenneth E. Raasch entered into an Amended and
Restated Management Agreement, dated as of April 1, 1994 (the "Management
Agreement"), which replaced and superseded a management agreement, dated July
26, 1991, to which Messrs. Kinkade and Raasch were parties. Pursuant to the
Management Agreement, for a three-year term, Mr. Raasch serves as Mr. Kinkade's
exclusive manager, agent and representative and is responsible for all
negotiations regarding the sale, reproduction, licensing, negotiated rights,
usage and exclusive license activity of Mr. Kinkade's artwork. In exchange for
his services, Mr. Raasch is paid 10% of the gross amount received by Mr. Kinkade
for all original paintings produced by Mr. Kinkade, except those paintings whose
sale was previously arranged by Mr. Kinkade and those paintings whose sale is
arranged through any individual who contacts Mr. Kinkade independent of Mr.
Raasch. In addition, Mr. Raasch is entitled to receive 50% of the gross amount
received by Mr. Kinkade for all licensed products, usage fees and other revenue
generated as a result of Mr. Raasch's efforts and negotiations. Effective April
1, 1994, Mr. Raasch assigned to the Company his rights under the Management
Agreement to receive 50% of the gross amount received by Mr. Kinkade for all
licensed products, usage fees and other revenues.
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Under the authority granted to him pursuant to the Management
Agreement, Mr. Raasch negotiated on Mr. Kinkade's behalf, and Messrs. Kinkade
and Raasch entered into a license agreement and royalty agreement with the
Company. See "Licenses". Each of Messrs. Raasch and Kinkade have entered into
employment agreements with the Company. See "EXECUTIVE COMPENSATION AND OTHER
MATTERS - Employment and Change of Control Arrangements." Mr. Raasch will not
represent Mr. Kinkade in future negotiations with the Company.
OWNERSHIP AND SALE OF THOMAS KINKADE GALLERY, VALLEY FAIR
Linda L. Raasch, spouse of Kenneth E. Raasch, Chairman, President and
Chief Executive Officer of the Company, was the owner of Thomas Kinkade Gallery,
Valley Fair, in San Jose, California, until June 30, 1995. The Thomas Kinkade
Gallery, Valley Fair which offers for sale framed canvas and paper lithographs
produced, sold and distributed by the Company as well as other products based
upon the artwork of Thomas Kinkade. Linda L. Raasch received no purchase
discounts from the Company as a result of her relationship to Mr. Raasch. The
Company recognized revenues of $670,000 from the sale of prints to Ms. Raasch's
gallery for the year ended March 31, 1995. At March 31, 1995 $98,000 was
receivable from Ms. Raasch's gallery.
On June 30, 1995, the Company purchased Ms. Raasch's gallery for an
aggregate purchase price of approximately $1,500,000, of which $1,200,000 was
paid in the form of an 8% subordinated convertible promissory note due October
10, 2002. The note may be converted into Common Stock at a conversion price of
$7.25 per share. The entire principal amount of the note is due at maturity,
unless converted prior to maturity. Prior to the consummation of the sale
transaction an independent appraisal of the gallery was performed and the terms
of the purchase were approved by a special committee of the Board of Directors.
SALES OF STUDIO PROOFS AND MASTER EDITIONS
Mr. Kinkade receives certain payments from the Company for personally
hand finishing master editions and supervising the hand finishing of studio
proofs. Pursuant to those arrangements, Mr. Kinkade earned $111,000 and $
1,033,000 in fiscal 1995 and 1996, respectively.
COMERICA BANK - CALIFORNIA
Mr. Lowell W. Morse, a director of the Company, is also a director of
Comerica Bank - California. Since the Company's inception, all of the commercial
banking facilities of the Company, excluding John Hine Limited, have been
provided by Comerica Bank - California. In 1991, the Company obtained a $100,000
revolving credit facility that was increased to $250,000 in 1992, to $500,000 in
January 1993, to $2,500,000 in September 1993, to $6,000,000 in December 1994,
and to a maximum of $7,000,000 in April 1995 (dependent on the amount of
eligible accounts receivable). The revolving credit facility bears interest at
the bank's prime rate plus one-half percent. As of March 31, 1996 advances under
the line were $4,168,000. In conjunction with the Company's acquisition of 51%
of John Hine Limited, the Company obtained a $2,000,000 term loan bearing
interest at the bank's prime rate plus one and one-half percent from Comerica
Bank - California to finance a portion of the acquisition cost. On July 27, 1995
the Company repaid this loan. In addition, the Company's basic banking
arrangements in California are maintained with Comerica Bank - California.
LEVINE LEICHTMAN CAPITAL PARTNERS, LLP
Effective July 26, 1995, Levine Leichtman Capital Partners, L.P.
("LLCP") entered into a credit agreement with the Company pursuant to which LLCP
purchased a $5,000,000 12.375% promissory note of the Company due June 30, 2002,
a $3,000,000 12.50% convertible promissory note of the Company due June 30, 2002
which was convertible into Common Stock at a conversion price of $6.25 per share
and a warrant to purchase 400,000 shares of Common Stock at $5.9375 per share,
exercisable until June 30, 2002. As a result, LLCP became a beneficial owner of
880,000 shares of Common Stock, making LLCP a greater than five percent
stockholder of the Company. Effective March 13, 1996, the Company entered into
an agreement with LLCP for the restructuring of the $8 million notes held by
LLCP. Under the agreement, the interest rate on the debt was raised to 13.5%
effective October 1, 1995, and LLCP received a subordinated security interest in
the Company's assets. Of the $8 million principal amount, $960,000 is
convertible into Common Stock at a conversion price of $2.00 per share and
$810,000 is convertible into Common Stock at a conversion price of $3.00 per
share. The exercise price of LLCP's warrant for 400,000 shares of Common Stock
was reduced to $2.00 per share. Thus as a result of the restructuring agreement
LLCP became the beneficial owner of 1,150,000 shares of Common Stock. In
addition, as part of the restructuring, LLCP waived all defaults then existing
under the credit agreement and certain financial ratios and other covenants were
modified.
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COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and persons who beneficially own more
than 10% of the Company's Common Stock to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission
("SEC"). Such persons are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms filed by such persons.
Based solely on the Company's review of such forms furnished to the
Company and written representations from certain reporting persons, the Company
believes that the Company's executive officers, directors and more than 10%
stockholders have complied with the filing requirements applicable to them.
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BOARD COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE
The Compensation Committee is composed of three independent,
non-employee directors of the Company, none of whom are employees of the
Company. During fiscal 1996, the Committee members were Lowell W. Morse, Robert
Wallace, and Norman A. Nason. The Compensation Committee's primary function is
to approve bonus plans for, and to approve stock option grants to executive
officers, and review the compensation of the Chief Executive Officer.
COMPENSATION PHILOSOPHY
The Compensation Committee strives to align executive compensation with
the value achieved by the executive team for the Company's stockholders. Toward
that goal, the Company's compensation program emphasized both short - term and
long - term incentives designed to attract, motivate, and retain highly
qualified executives who will effectively manage the Company and maximize
stockholder value. The Company uses salary, executive officer bonuses and stock
options to motivate executive officers to achieve the Company's business
objectives and to align the incentives of officers with the long-term interests
of stockholders. The Committee's policy is to generally target levels of equity
compensation paid to its executive officers to be competitive with such
compensation paid by comparable companies in the art industry. The Committee
reviews and evaluates the Chief Executive Officers total compensation annually
relative to corporate performance and comparative market information.
The Company has considered the potential impact of Section 162(m) of
the Internal Revenue Code ("Section 162(m)") adopted under the federal Revenue
Reconciliation Act of 1993. Section 162(m) disallows a tax deduction to any
publicly-held corporation for individual compensation exceeding $1 million in
any taxable year paid to the chief executive officer or any of the four other
most highly compensated executive officers, unless compensation is
performance-based. Since the targeted cash compensation of each of the named
executive officers is well below the $1 million threshold and the Company
believes that any options granted under the Employees Stock Option Plan
currently meet the requirement of being performance-based in accordance with the
regulations under Section 162(m), the Committee believes that Section 162(m)
will not reduce the tax deduction available to the Company. The Company's policy
is to qualify to the extent reasonable its executive officers' compensation for
deductibility under applicable tax laws.
FORMS OF COMPENSATION
Specific executive compensation elements and the factors on which they were
based are:
Salary. The Company strives to offer executive officers salaries that
are competitive with comparable companies in the art industry. The Chief
Executive Officer approves executive salaries at the time executives join the
Company. Thereafter, the Chief Executive Officer periodically reviews the
executive officers and makes adjustments to the base salaries of those officers.
Adjustments made by the Chief Executive Officer are based on individual
executive officer performance, cost of living increases and adjustments to
retain qualified personnel. The Compensation Committee reviews the compensation
of the Chief Executive Officer. For Fiscal 1996, the Committee made no
adjustment to the Chief Executive Officer's salary and the Chief Executive
Officer volunatrily reduced his salary to $272,300.
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Incentive Compensation. For fiscal 1996, the Board of Directors
approved an executive bonus plan based upon the Company and individual
performance. Under the plan, bonuses are measured each quarter and paid annually
pursuant to set percentage schedules, as adjusted by individual performance as
determined by the management. No amounts are paid unless the Company reaches
predetermined objectives. The plan is administered by the Compensation Committee
determining whether executive officers met their individual performance goals.
If the officer's performance goals are met and the Company's operating profit
meets predetermined objectives, the incentive paid is comparable with industry
standard incentive compensation, and could be higher if the Company's
performance exceeded goals. No bonus awards were granted in fiscal 1996
The Compensation Committee believes that equity ownership provides
significant additional motivation to executive officers to maximize value for
the Company's stockholders, and therefore grants stock options under the
Company's Employees Stock Option Plan at the commencement of an executive
officer's employment and, depending on that officer's performance and the
appropriateness of additional awards to retain key employees, periodically
thereafter. Stock options were granted at the prevailing market price and will
only have value if the Company's stock price increases over the exercise price.
Therefore, the Compensation Committee believes that stock options serve to align
the interests of executive officers closely with other stockholders because of
the direct benefit executive officers receive through improved stock price
performance.
LOWELL W. MORSE NORMAN A. NASON ROBERT WALLACE
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COMPARISON OF STOCKHOLDER RETURN
The following graph shows a comparison of total stockholder return for
the period commencing on August 2, 1994 and ending on March 31, 1996, calculated
on a dividend reinvested basis, the Standard & Poor's 500 Index (SP 500) and a
peer group constructed by the Company (the "Peer Group"). The Peer Group is
composed of Department 56, Inc., Marvel Entertainment Group, Inc., Score Board,
Inc., Stanhome, Inc. and Topps Co. Inc. The graph assumes that $100 was invested
in each of these three on August 10, 1994. Returns for the Peer Group are
weighted based on market capitalization at the beginning of each period
presented. Note that historic stock price performance is not necessarily
indicative of future stock price performance.
<TABLE>
<CAPTION>
TOTAL RETURNS - WITH DIVIDENDS REINVESTED - AUGUST 2, 1994 (1) TO MARCH 31, 1996
Returns Aug 2, 1994 Sep 30, 1995 Dec 31, 1994 March 31, 1995 Jun 30, 1995 Sep 30, 1995 Dec 31, 1995 Mar 31, 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MAGI 100 103 76 88 91 88 47 38
Peer Group 100 116 126 109 119 143 119 80
SP 500 100 100 100 109 118 127 134 140
</TABLE>
(1) The Company's initial public offering commenced on August 3, 1994. For
purposes of this presentation, the Company has assumed that its initial public
offering price of $7.25 would have been the closing price on August 2, 1994, the
day prior to the commencement of trading.
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PROPOSAL #1
ELECTION OF DIRECTORS
The Board of Directors currently has six members. Management has
nominated the six current directors as the candidates for election to the Board
of Directors. See "Information about Media Arts Group, Inc. - Management."
The directors elected at this meeting will serve until the next annual
meeting of stockholders or until their respective successors are elected and
qualified. It is the intention of the persons named in the Proxy to vote the
shares subject to such Proxy for the election as directors of the persons
currently serving as directors. Although it is not contemplated that any nominee
will decline or be unable to serve as director, in the event that at the meeting
or any adjournment or postponement thereof any nominee declines or is unable to
serve, the persons named in the enclosed Proxy will, in their discretion, vote
the shares subject to such Proxy for another person selected by them for
Director.
If a quorum is present and voting, the six nominees for Directors
receiving the highest number of votes, up to the number of directors to be
elected, will be elected as Directors. Absentions and shares held by brokers
that are present, but not voted because the brokers were prohibited from
exercising discretionary authority, i.e., "broker non-votes," will be counted as
present for purposes of determining if a quorum is present.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE
ELECTION OF MESSRS. KENNETH E. RAASCH, THOMAS KINKADE, STEVE GORDON,
LOWELL W. MORSE, NORMAN A. NASON AND ROBERT WALLACE.
PROPOSAL #2
APPROVAL OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected Price Waterhouse LLP, independent
accountants, to audit the financial statements of the Company for the year
ending March 31, 1997 and recommends that the stockholders ratify such
selection. In the event of a negative vote, the Board of Directors will
reconsider its selection. Price Waterhouse LLP has audited the Company's
financial statements for all periods subsequent to 1991. Representatives of
Price Waterhouse LLP are expected to be present at the Annual Meeting with the
opportunity to make a statement if they desire to do so, and are expected to be
available to respond to appropriate questions.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS APPOINTMENT OF
PRICE WATERHOUSE LLP AS THE COMPANY'S INDEPENDENT ACCOUNTANTS.
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OTHER MATTERS
The Company knows of no other matters to be submitted to the meeting.
If any other matters properly come before the meeting, it is the intention of
the persons named in the enclosed form of proxy to vote the shares they
represent as the Board of Directors may recommend.
BY ORDER OF THE BOARD OF DIRECTORS
MEDIA ARTS GROUP, INC.
SUSAN C. EDSTROM,
Secretary
San Jose, California
Dated: September 10, 1996
STOCKHOLDERS OF RECORD ON JULY 31, 1996 MAY OBTAIN COPIES OF THE COMPANY'S
ANNUAL REPORT ON FORM 10-K (EXCLUDING EXHIBITS) FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION BY WRITING TO SUSAN C. EDSTROM, MEDIA ARTS GROUP, INC., TEN
ALMADEN BOULEVARD, 9TH FLOOR, SAN JOSE, CALIFORNIA, 95113.
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